Did New York State Supreme Court Judge John M. Galasso violate the Supremacy Clause of Article VI of the United States Constitution when he ordered three Executive Life of New York (ELNY) structured settlement shortfall payees and their legal counsel in civil contempt for filing a federal class action lawsuit against ELNY's Receiver in the United States District Court Southern District of New York in violation of existing ELNY anti-lawsuit injunction orders?
This constitutional question is one of three issues the ELNY shortfall payees have raised in appealing Judge Galasso's January 25, 2013 Contempt Order , which also imposed a $5000 fine and threatened additional fines, plus imprisonment of their legal counsel, if the shortfall payees did not dismiss their Federal action - which they did (without prejudice) on February 7, 2013.
In their prior federal class action lawsuit, the shortfall payees asserted causes of action against ELNY's Receivers, in personam, for breach of fiduciary duty and fraudulent concealment, for not conducting the ELNY rehabilitation in good faith, for self-dealing, for material misstatements, and for fraudulently concealing and failing to disclose material information regarding ELNY financial status. See: ELNY allegation timeline.
S2KM's prior blog post (Part 1) about the shortfall payees' appellate brief summarized background developments resulting in the appeal of Judge Galasso's Contempt Order including the alleged statutory responsibilities of, and mismanagement by, ELNY's Receivers and the strategic options available to ELNY shortfall payees following Judge Galasso's April 16, 2012 ELNY Liquidation Order.
In his Liquidation Order, Judge Galasso found ELNY to be insolvent, approved a Restructuring Agreement proposed by ELNY's Receiver and NOLHGA, converted the ELNY proceeding from rehabilitation to liquidation and appointed the Receiver as ELNY's liquidator. The Liquidation Order also contained broad immunity and injunction provisions proposed by ELNY's Receiver. The injunction provision provided the basis for Judge Galasso's subsequent Contempt Order.
Under the ELNY Restructuring Agreement, payments to 1456 structured settlement payees will be cut by $920 million (present value) even following contributions by state life and health guaranty associations and various life insurance companies. During the hearing that proceeded the Liquidation Order, Judge Galasso refused to entertain efforts by ELNY shortfall payees and their legal counsel to determine how and why ELNY had suffered such significant losses.
This blog post highlights and summarizes the following issues raised by the ELNY shortfall payees in their appeal of Judge Galasso's Contempt Order with the New York Supreme Court, Appellate Division, Second Department which they view as a necessary step before re-filing their Federal class action.
- Did the ELNY Liquidation Court exceed it subject matter jurisdiction or otherwise err by interfering with the shortfall payees' constitutional right to bring a class action lawsuit against the ELNY Receiver in Federal court?
- Did the ELNY Liquidation Court err in holding the shortfall payees in contempt for violating its injunction order when the order does not clearly and unequivocally bar personal capacity lawsuits against the Receiver?
- Did the ELNY liquidation court err in holding that the shortfall payees conceded the order barred personal capacity lawsuits by appealing the order and using this alleged concession as the basis to hold the shortfall payees in contempt?
The ELNY shortfall payees argue the ELNY Liquidation Court violated the Supremacy Clause of Article VI of the United States Constitution when it interfered with their federal class action lawsuit. In his order, Judge Galasso recognized he did not have authority to dismiss the federal lawsuit outright, but concluded he could punish the shortfall payees for bringing and continuing the federal action by holding them in contempt, fining them $5000, and threatening them with further fines.
To support their appeal, the ELNY shortfall payees cite two U.S. Supreme Court cases: Donovan v. City of Dallas (1964) which held "[s]tate courts are completely without power to to restrain federal court proceedings"; and General Atomic Company v. Felter (1997) which held "[a] plaintiff's right to pursue an in personam action in federal court cannot be restricted by a state court." Among other cases, they also cite Johnstown Min. Co. v. Morse (1904) in which a New York court stated: "[t]his prohibition applies whether the state court restrains the federal court proceeding directly by, for instance, ordering the federal case be dismissed, or whether that interference is indirect by compelling a party to dismiss the case by threatening or holding them in contempt."
Because Judge Galasso allegedly had no authority to enjoin their federal class action lawsuit, the ELNY shortfall payees maintain he could not properly use an injunction order to hold them and their counsel in contempt which, along with the threat of fines, effectively prevents them from pursuing their federal action. Because this issue is jurisdictional, the ELNY shortfall payees further maintain it can be raised at any time, even on appeal.
Personal Capacity Lawsuits
To be enforceable, a contempt order cannot be ambiguous and/or vague. Contrary to Judge Galasso's ruling, the shortfall payees argue the ELNY injunction does not "clearly and unequivocally" bar lawsuits that are not against ELNY assets but rather seek to collect damages from the ELNY Receiver in his personal capacity. They point out the injunctive language does not prohibit all actions against the Receiver, but only actions "with respect to this proceeding or the discharge of [his] duties under [New York] Insurance Law Article 74."
Based on New York case law and the language of Article 74, the shortfall payees argue ELNY's Receiver operated beyond his Article 74 duties because he did not "act in good faith, with care and prudence commensurate with the situation as it exist[ed] at the time." As a result, they maintain a personal capacity lawsuit is appropriate. In addition, according to the shortfall payees, barring all claims against the ELNY Receiver is inconsistent with Article 74's express purpose of protecting policyholders and payees.
Alleged Shortfall Payee Concession
In their appeal of Judge Galasso's Liquidation Order, the shortfall payees unsuccessfully asked the appellate court to either construe the injunction language narrowly or, alternatively, to reverse the Order because the injunction language violated Article 74. During the contempt proceeding, the Receiver argued the shortfall payees were judicially estopped from arguing that the injunction language should be interpreted more narrowly because of their alternative appellate argument that the language violated Article 74 by enjoining personal capacity suits. Judge Galasso agreed with the Receiver.
Judicial estoppel, according to the shortfall payee's brief, rests on the principle that "a litigant should not be permitted ... to lead a court to find a fact one way and then contend in another judicial proceeding that the same fact should be found otherwise." However, they maintain, submission of alternative legal arguments (as opposed to inconsistent factual pleadings) is not a basis for judicial estoppel. Therefore, by appealing the injunction language in the ELNY Liquidation Order, the shortfall payees argue they did not concede that the Liquidation Order barred their federal action and Judge Galasso erred in using this "concession" to hold the shortfall payees in contempt.
For S2KM's complete Executive Life reporting, see the structured settlement wiki.