New York Supreme Court Judge John M. Galasso has ordered legal counsel for three Executive Life of New York (ELNY) structured settlement shortfall payees in civil contempt for filing an ELNY class action lawsuit in the United States District Court Southern District of New York (federal court) in violation of existing ELNY anti-lawsuit injunction orders.
Despite issuing the contempt order, Judge Galasso acknowledged:
- "This Court is not empowered to dismiss the federal complaint outright"; and
- "The results of the pending [s]tate appeal may also impact the viability of the federal action."
ELNY Class Action and Appeal
Attorney Edward Stone and representatives of the Christensen & Jensen law firm, the attorneys subject to the contempt order, filed the ELNY class action lawsuit November 8, 2012 in federal court against the Superintendent and his predecessors, in their “non-regulatory” capacities as ELNY Receivers, claiming breach of fiduciary duty and fraudulent omission among other allegations. The class action complaint also named Metropolitan Life Insurance Company and Credit Suisse Group, AG as defendants.
Attorneys for the Superintendent filed a Notice of Motion January 18, 2013 with the United States District Court to:
- Stay the ELNY class action lawsuit pursuant to the Burford abstention doctrine; or, alternatively,
- Dismiss the ELNY class action complaint in its entirety with prejudice pursuant to Federal Rule of Civil Procedure (FRCP) 12(b)(6).
Questions concerning immunity and due process, which are also raised in the pending ELNY appeal, were not subjects of the contempt proceeding. Oral arguments in the ELNY appeal have concluded and a decision is expected shortly.
Judge Galasso's January 25, 2013 contempt order also imposes a fine, payable by the ELNY shortfall payees’ legal counsel to Benjamin M. Lawsky, Superintendent of New York's Department of Financial Services (Superintendent), for costs, disbursements and reasonable attorney’s fees the Superintendent has incurred defending the federal class action and for pursuing the contempt application plus potential additional legal expenses if the Superintendent achieves a favorable result in the ELNY appeal.
The ELNY contempt order indicates Judge Galasso will determine the amount of the fine without a hearing upon receipt of an affidavit in support of the Superintendent's attorney’s fees, costs and disbursements along with a proposed judgment. For purposes of the ELNY contempt fine, the Superintendent's attorney fees will be capped at $5000.
Three ELNY injunctions were at issue in the contempt proceeding: injunctions contained in the ELNY Rehabilitation Order (1991) and the ELNY Rehabilitation Plan Approval (1992) as well as an injunction in Judge Galasso's April 16, 2012 ELNY Liquidation Order. The injunction in the Liquidation Order states:
"All persons are enjoined and restrained from commencing or further prosecuting any actions at law or other proceedings against ELNY or its assets, the Receiver or the New York Liquidation Bureau, or their present or former employees, attorneys, or agents, with respect to this proceeding or the discharge of their duties under Insurance Law Article 74."
The ELNY Liquidation Order also discharged the Superintendent, as Rehabilitator, and his agents, employees, etc., from any liability for their acts prior to the approval of the ELNY Rehabilitation Plan in the performance of their duties related to the ELNY rehabilitation. That discharge was in addition to any statutory or other immunity to which they might be entitled.
Judge Galasso's Reasoning
- The Superintendent's motion for contempt must be considered within the context of the Court enforcing its own directives.
- Counsel for plaintiffs should to be held in contempt if, by commencing the federal lawsuit against the Superintendent, an order has been disobeyed.
- New York insurance law permits a judge to issue injunctions or orders during an Article 74 rehabilitation or liquidation to prevent interference with the Receiver or the plan.
- The ELNY orders are a matter of public record, clearly expressed and unequivocal.
- The Superintendent, and his predecessors are prejudiced by being sued.
ELNY class action contention that no harm or waste will inure to the
ELNY estate as a result of the federal action is not supported by the
ELNY shortfall payees' arguments that:
- The federal claims are against the Superintendent and his predecessors in their personal capacity; and/or
- The federal complaint does not seek damages payable from the ELNY estate assets or prevent the ELNY Liquidation Order from proceeding as directed.
- On their face, the allegations in the federal complaint are neither "ultra vires" nor illegal.
- Naming the Superintendent and his predecessors, in their non-regulatory capacity, as defendants in the federal complaint without clearly prosecuting them in their individual capacities "appears to be a deliberate obfuscation in an effort to avoid a charge of violating the mandates of the state injunctions still in force." (emphasis added)
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