"People should know when they are conquered." - Quintus in "Gladiator"
"It ain't over till it's over." - Yogi Berra
Following 22 years of "Rehabilitation" supervised by various New York State Superintendents of Insurance and Financial Services, as Receivers, Executive Life Insurance Company of New York (ELNY) was officially liquidated August 8, 2013 pursuant to an Order of Liquidation signed by Nassau County New York State Supreme Court Judge John M. Galasso on April 16, 2012.
As part of his Liquidation Order, Judge Galasso also approved a Restructuring Agreement, as proposed by ELNY's Receiver and NOLHGA, whereby ELNY's remaining assets and ongoing liabilities have now been transferred to a successor company, Guaranty Associations Benefit Company (GABC), a not-for-profit Washington D.C.-based captive insurance company.
As a result of ELNY's liquidation and restructuring, approximately 1456 structured settlement payees will experience payment shortfalls totaling approximately $920 million (present value) following contributions from state life and health insurance guaranty associations and various life insurance companies.
ELNY Receivers' Responsibilities
Significantly, ELNY's 1991 Rehabilitation Order did not result because of ELNY's insolvency. Instead, then New York Insurance Superintendent Salvatore Curiale's stated concern was a "run" on ELNY assets by policyholders.
Beginning with ELNY's 1991 Rehabilitation Order and continuing to ELNY's August 8, 2013 liquidation date, Superintendent Curiale and his successor New York Superintendents of Insurance and Financial Services managed ELNY's Rehabilitation (in their capacity as Receivers not regulators) with day-to-day management responsibilities assigned to their agent, the New York Liquidation Bureau (NYLB).
As ELNY's Receiver, these Superintendents undertook fiduciary responsibilities toward ELNY's policyholders and payees. Their duties, pursuant to Article 74 of New York's Insurance law, included: conducting ELNY's business, safeguarding ELNY's assets, and removing the causes and conditions that made ELNY's rehabilitation necessary.
Until December 17, 2010, however, when Judge Galasso issued an ex parte Order to Show Cause seeking an ELNY liquidation plan, ELNY's Receivers had not filed a single report with the court or made any efforts to inform policyholder or payees about ELNY's declining financial position. As of December 31, 2010, ELNY's audited financial statements show ELNY had assets of $905,945,200 compared with liabilities of $2,474,317,342, resulting in a negative surplus of $1,568,372,142.
During ELNY's March 2012 Liquidation Hearing, Judge Galasso ruled against ELNY shortfall payees' attempts to determine how and why ELNY had suffered such losses reasoning such issues were beyond the scope of the hearing. To further protect the Receiver, Judge Galasso's April 16, 2012 ELNY Liquidation Order contained immunity and injunction provisions proposed by ELNY's Receiver.
Although the Receiver represented these provisions did not immunize him from liability outside his Article 74 duties, structured settlement shortfall payees expressed concern the broad language of the immunity and injunction provisions could insulate the Receiver from liability beyond the scope of Article 74. They also believed, contrary to the Receiver's representations, that Article 74 prohibits not just bad faith conduct but also conduct without appropriate care and prudence.
ELNY Shortfall Payees' Options
Faced with significant payment reductions resulting from ELNY's liquidation and restructuring agreement, ELNLY's structured settlement shortfall payees were left with three options:
- Accept their payment reductions under the ELNY Restructuring Agreement and do nothing; or,
- Appeal Judge Galasso's Order and ask the Appellate Court to send ELNY's Receiver back to drawing board; or,
- Bring a separate legal action against the Receiver personally for bad faith conduct, breach of fiduciary duty and fraudulent concealment or waste.
The ELNY structured settlement shortfall payees chose options 2 and 3.
Option 2 failed. The Appellate Division of the Supreme Court of the State of New York, Second Department denied the ELNY shortfall payees' appeal of Judge Galasso's Order on February 6, 2013. New York State Court of Appeals denied a subsequent motion by ELNY shortfall payees for Leave to Appeal the Second Department decision on May 3, 2013.
Option 3 faces a significant judicial roadblock - a Contempt Order with the threat of fines plus imprisonment of legal counsel.
Prior to this Contempt Order, several ELNY structured settlement shortfall payees pursued Option 3 by filing a federal class action lawsuit November 8, 2012 in the U.S. District Court for the Southern District of New York against the ELNY Receiver (New York Superintendent of Financial Services Benjamin Lawsky) in his personal capacity. In response, the Receiver filed a motion December 7, 2012 asking the Liquidation Court (Judge Galasso) to find the shortfall payees in contempt for violating the injunction provision of the ELNY Liquidation Order.
Judge Galasso issued a Contempt Order on January 25, 2013. He also imposed a $5000 fine and threatened additional fines plus imprisonment of legal counsel if the ELNY structured settlement shortfall payees did not dismiss their Federal action which they did (without prejudice) on February 7, 2013.
Bottom line: so long as Judge Galasso's Contempt Order and continuing threat of additional fines and imprisonment of legal counsel remain in effect, ELNY structured settlement shortfall payees are effectively barred from pursuing Federal legal action against ELNY's Receiver for alleged mismanagement of ELNY's assets during ELNY's 22 year Rehabilitation.
Appeal of Contempt Order
As a result, ELNY's shortfall payees are currently pursuing an appeal challenging "each and every part" of Judge Galasso's January 25, 2013 Contempt Order as a necessary step before re-filing their Federal action against the Receiver and his agents.
On August 9, 2013, Attorney Edward Stone filed a preliminary brief with the New York Supreme Court, Appellate Division, Second Department on behalf of ELNY structured settlement shortfall payees Jeanice Dolan, Keith Vincent, Daniel Malin and their attorneys.
The appellate brief filed on behalf of the ELNY shortfall payees addresses three legal issues:
- Did the ELNY Liquidation Court exceed it subject matter jurisdiction or otherwise err by interfering with shortfall payees' constitutional right to bring suit against the Receiver in Federal court?
- Did the ELNY Liquidation Court err in holding the shortfall payees in contempt for violating its injunctive Order when the order does not clearly and unequivocally bar personal capacity suits 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?
S2KM will summarize the ELNY shortfall payees' arguments for each of these issues in a subsequent blog post. For S2KM's complete ELNY reporting, see the structured settlement wiki.