Beyond Structured Settlements

ELNY Class Action Filed

Attorney Edward Stone and representatives of the Christensen & Jensen law firm have filed a class action lawsuit on behalf of Executive Life of New York (ELNY) shortfall victims in the United States District Court Southern District of New York.

The Complaint names Jeanice Dolan, Daniel A. Malin, Keith Vincent, and other similarly situated ELNY shortfall victims, as plaintiffs, and Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, in his non-regulatory capacity as ELNY's Receiver, including predecessor ELNY Receivers (Rehabilitator), Metropolitan Life Insurance Company (MetLife) and Credit Suisse Group, AG (Credit Suisse) as defendants.

Causes of Action vs. Rehabilitator

• Breach of Fiduciary Duties - by:
  • "violating a court order with respect to asset allocation,
  • "employing a high risk tax inefficient investment strategy that created impermissible preferences,
  • "wasting precious assets by paying [New York Liquidation Bureau] expenses that were excessive and not related to the management of the ELNY estate - much of which was outsourced,
  • "failing to audit MetLife records and reconcile data with the social security death master file and
  • "not seeking a purchaser who could and would honor ELNY's policy obligations."
• Fraudulent Omission - by "fraudulently concealing and failing to disclose material information to plaintiffs."

Causes of Action vs. MetLife

• Aiding and Abetting Breach of Fiduciary Duties - by:
  • "engaging in 'bid rigging' with the Rehabilitator in order to strip ELNY's highest-quality assets and committing related misconduct,
  • "benefiting from the deal,
  • "apparently providing inducements for the deal (e.g. a lucrative future employment opportunity for the Rehabilitator's [r]epresentative),
  • "aiding in the concealment of the misrepresentations made to obtain approval of the deal,
  • "receiving "ill-gotten gains ... equaling hundreds of millions of dollars, including profits made from the receipt of ELNY's Single Premium Deferred Annuity and traditional life insurance books of business and renewals,"
  • receiving "profits made on surrender charges to former ELNY policyholders", and
  • receiving "profits made on the investment of high-quality assets received under the deal."
• Breach of Contract / Unjust Enrichment - by:
  • receiving "unearned compensation from ELNY, at the expense of ELNY’s annuitants" and
  • failing to fulfill contractual services resulting "in the inappropriate expenditure of funds, such as the payments made on behalf of deceased individuals whose benefits terminated at death."

Causes of Action vs. Credit Suisse

• Aiding and Abetting Breach of Fiduciary Duty - by:
  • "affirmatively implementing an imprudent and unsuitable investment strategy that was incompatible with the nature of the liabilities dependent upon ELNY's assets," and
  • "actively participating in the violation of court-ordered limitations on investment activities."
• Breach of Fiduciary Duty - by failing to:
  • "consider the long-term investment needs of ELNY and the Plaintiffs;
  • "select investments suitable with such needs and to maintain an asset allocation that was consistent with that strategy;
  • "comply with court-ordered limitations or parameters regarding the investment of ELNY's assets; and
  • "act with utmost loyalty to the Plaintiffs and ELNY, and not to act in their own self-interest adversely to the Plaintiffs and ELNY."

Requested Damages and Relief

• "Damages equaling the full present value of each Class Member's annuity issued by ELNY, less any amount determined to be owing to Plaintiff under the terms of ELNY's liquidation;
• "Damages equaling the amount of each defendant's unjust enrichment and ill-gotten gains;
• "Attorney fees and litigation expenses, to the extent permitted by contract or law;
• "Pre- and post-judgment interest, to the extent provided by contract or law; and
• "Such other equitable relief as the Court deems appropriate."

In addition, the Complaint demands a jury trial and seeks:

• The action to be certified as a class action;
• Plaintiffs to be appointed as representatives of the class;
• Counsel to be appointed counsel for the class; and
• An order to be issued providing for reasonable notice to be given members of the class.

Note: although filed by the same attorneys, this ELNY class action lawsuit is a separate cause of action from the ELNY appeal challenging the Executive Life of New York (ELNY) Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by New York State Supreme Court Judge John M. Galasso on April 16, 2012. Oral arguments for the ELNY appeal were heard today by the Appellate Division of the Supreme Court of the State of New York, Second Department.

For S2KM's complete and continuing coverage of the ELNY liquidation, see the structured settlement wiki.

NYLB Role in ELNY Disaster

The comprehensive analysis of the Executive Life of New York (ELNY) liquidation published last week by the National Underwriter Life & Health magazine on its LifeHealth Pro website describes a "slow-motion disaster of gross mismanagement" the magazine claims will result in severe collateral damage not only to hundreds of ELNY structured settlement shortfall victims but also to the life insurance industry more generally.

In its lead article, titled "The Complete ELNY Saga - 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", the National Underwriter report intersperses profiles of five ELNY structured settlement shortfall victims with an historical summary of the 21 year ELNY rehabilitation and liquidation process.

The historical summary concludes:

• "[T]he ELNY rehabilitation, restructuring and liquidation have been nothing short of disastrous. Not only did regulators fail to protect a company from being dis-mantled by its insolvent parent, it failed to adequately manage the company from Day One. It failed its self-appointed fiduciary duty to serve ELNY’s payees. It failed to act with integrity, and it failed to uphold the social compact between insurers and their customers that if the money needs to be there, it will be there. Always. Without fail. Without exception."
• "At every single turn with ELNY, there was failure after failure to uphold the public’s trust. The state of New York, and especially the New York Liquidation Bureau, so badly disrupted the leap of faith between insurer and insured that the ripples will be felt for years to come, as every one of ELNY’s shortfall payees tells anyone who will listen that insurance and annuities are not worth it. That the money will not be there when it is needed, that the government will not protect the public." (emphasis added)
  

The National Underwriter article challenges the conventional explanation of ELNY's downfall which S2KM reported previously in "The Fall of First Executive".  Instead, it assigns primary blame to the New York Liquidation Bureau (NYLB), the non-government entity to which the New York Insurance Superintendent delegated ELNY management responsibilities beginning in 1991.

Describing the NYLB as "a rogue agency known for its codes of secrecy and characterized by many who spoke for this story as ineffective and mismanaged at best, and a snake pit of corruption at worst", the article highlights many examples of alleged mismanagement and lack of disclosure related to the ELNY liquidation:

• Failure to prepare and/or maintain any financial reports for ELNY for the years 1990, 1991 and 1992.
• The 1991 decision to sell almost all of ELNY's non-structured settlement business along with its non-junk bond investment portfolio to MetLife.
• Predicating the rehabilitation plan on unrealistic assumptions such as 30-year U.S. government treasuries maintaining an average interest rate of nine-and-a-half percent.
• Selling ELNY's high yield bond portfolio for a steep discount in 1991 at the bottom of the "junk bond" market.
• Reinvesting the proceeds in an unsafe percentage of common stocks vs. more conservative bonds.
• Increasing ELNY gross liabilities by $500 million between 1999 and 2000 based upon questionable assumptions and without due diligence.
• Reporting discrepancies and irregularities including incorrect numbers of policyholders and thousands of purported policyholder birth dates after ELNY entered rehabilitation.
• Excessive NYLB staffing with dozens of administrators for ELNY despite contracted services for ELNY's claims (MetLife), asset management (Credit Suisse) and accounting (Milliman & Robertson).
• Alleged corruption resulting in the dismissal of NYLB superintendent Jody Hall in 2006 at a time when Hall allegedly "was making persistent efforts to examine the elusive financial records on ELNY". Note: the National Underwriter provides additional related details in a companion article titled "The Aborted New York Liquidation Bureau Investigation".
• NYLB's alleged "culture of secrecy" exemplified by:
  • Disclaimers on ELNY financial reports stating that conclusions drawn by anyone except NYLB would be “materially misleading.”
  • Conditional bonuses, paid out of estates under NYLB management, requiring NYLB retirees to sign non-disclosure agreements prohibiting comments about non-public NYLB information.
• A damning description of the NYLB in its own 2007 annual report stating that the Bureau:
  • Had "little viable management structure or professional culture at the most senior level,” and
  • Needed "to address untimely payment of claims, poor employee evaluation methods, gross financial mismanagement in the case of ELNY, and a complete lack of auditing."

In the context of NYLB's alleged "gross mismanagement", the National Underwriter article finds it especially offensive that Judge John Galasso granted the NYLB complete judicial immunity as part of his ELNY liquidation order with support from the Superintendent of New York State Department of Financial Services and NOLHGA.

Attorney Edward Stone filed a Notice of Appeal May 30, 2012 on behalf of 18 ELNY structured settlement shortfall victims as objectors with the Appellate Division of the Supreme Court of the State of New York, Second Department, challenging Judge Galasso's order. Oral arguments for the appeal are scheduled for November 15, 2012.

The National Underwriter article concludes: "the final chapter has not closed on ELNY, and there still is time to fix the problem without causing so much collateral damage." It urges the New York state government and/or the insurance industry to dedicate funds to fully restore ELNY and its shortfall victims.

For related S2KM reporting, see the structured settlement wiki and, more specifically:

• New York Liquidation Bureau
• ELNY Liquidation Order
• Elephant in the ELNY Court Room 
• ELNY Appeal - Objectors' Brief
• The ELNY Due Process Issue
• The ELNY Immunity Issue

ELNY Appeal - Injunction 1

As reported earlier by S2KM, attorney Edward Stone filed a Notice of Appeal May 30, 2012 with the Appellate Division of the Supreme Court of the State of New York, Second Department, on behalf of 18 Executive Life of New York (ELNY) structured settlement shortfall payees, as Objectors and Appellants, challenging the Order of Liquidation and Approval of the ELNY Restructuring Agreement approved by Judge John M. Galasso on April 16, 2012.

The Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY Receiver and Respondent, and attorney Stone, on behalf of Appellant/Objector ELNY shortfall payees, subsequently and jointly agreed to and requested calendar preference and an accelerated briefing schedule for this Appeal.

Status of Appeal:

• The Appellant/Objectors' served and filed their brief and the record on appeal on Friday, August 17, 2012. For S2KM's summary, see: ELNY Appeal - Objectors' Brief.
• The Superintendent/Respondent served and filed its brief on Friday, September 7 ,2012. In addition, the National Association of Life and Health Guaranty Associations (NOLHGA) also served and filed a supporting brief the same day.
• Appellant/Objectors served and filed a reply brief on Friday September 14, 2012.
• The Appellate Court is expected to schedule oral argument "as soon as practicable".

Copies of the Objectors' brief and reply brief are posted on the structured settlement wiki.

In prior blog posts, S2KM:

• Summarized the Appellant/Objectors' due process allegations (ELNY Appeal - Due Process 1);
• Provided additional related due process analysis (ELNY Due Process Issue);
• Reported on the ELNY Immunity Issue featuring analysis by New York attorney Peter Bickford.
• Summarized the Appellant/Objectors' arguments against granting immunity to the Superintendent (ELNY Appeal - Immunity 1)

This blog post summarizes the Appellant/Objectors' allegations that no statutory or common law basis existed for Judge John Galasso's "extraordinarily broad grant of injunctive relief" to protect the Superintendent and his agents, including the New York Liquidation Bureau (NYLB).

The objecting structured settlement shortfall payees have requested the Appellate Court to reverse the following sentence contained in the ELNY liquidation order:

"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.

To support their objection and request, the Appellant/Objectors maintain:

• The liquidation court lacked subject matter jurisdiction to enter an injunction unrelated to the collection or disposition of ELNY assets.
• The injunction is not authorized by Article 74 of the New York Insurance Law.
• The injunction is not supportable on any non-statutory basis.

Subject matter jurisdiction

• Subject matter jurisdiction is “the authority of the courts to adjudicate classes of cases.”
• Subject matter jurisdiction may be limited by statute (e.g. Article 74 of the New York Insurance Law).
• A court cannot entertain actions in which it lacks subject matter jurisdiction.
• In this case, the New York Supreme Court had before it the ELNY estate – and only the ELNY estate.
• Under Article 74, subject matter jurisdiction in a liquidation proceeding is limited to the collection and disposition of the insurer’s assets.
• As a liquidation court, the New York Supreme Court does not have jurisdiction to prospectively adjudicate claims or issue orders not involving the estate’s assets.
• During the ELNY liquidation hearing, the Superintendent incorrectly suggested that all claims against him and/or against his agents, regardless of capacity, constituted claims against the estate.
• Injunctions granted to the Superintendent as regulator, however, do not apply to his role as Receiver where he stands in the shoes of management and should be subject to the same standard of care and responsibility.
• Claims against the Superintendent and/or his agents acting in their personal capacities as ELNY's Receiver, therefore, are not claims against the ELNY estate.
• The Superintendent also argued that similar injunctions were included in interim orders during the rehabilitation proceeding.
• However, the same rationale upon which the injunctive provision is void and unauthorized by law should also invalidate similar provisions in interlocutory orders.
• Because Judge Galasso's injunctive protection for the Superintendent, as ELNY's Receiver, and for his agents, in their personal capacities extends beyond ELNY's assets in liquidation, it exceeds the New York Supreme Court’s subject matter jurisdiction and should be void.

Article 74

• Unlike immunity, Article 74 of the New York Insurance Law contains a provision involving injunctions. However, it is inapplicable to the Receiver’s request.
• The injunctive provision are concerned with enjoining actions against the assets of ELNY, not those of the Superintendent, as ELNY's Receiver.
• Article 74 Subsection (a) limits injunctions to those which prohibit persons other than the Receiver “from the transaction of its [the insurer’s] business or the waste or disposition of its [the insurer’s] property.”
• Article 74 Subsection (b) permits injunctions as necessary to prevent “waste of the assets of the insurer, or the commencement or prosecution of any actions . . . against the insurer, its assets or any part thereof.”
• An action against the Receiver in his personal capacity is not the same as an action against the insurer or the insurer’s assets.
• Barring all claims against the Receiver is inconsistent with Article 74’s express purpose of protecting policyholders.
• A Receiver is judicially immune from liability if he acts in good faith and with appropriate care and prudence.
• Therefore, the only actions that are effectively enjoined by Judge Galasso's liquidation order are those where the Superintendent, as ELNY's Receiver, breached fiduciary or other duties.
• As a result, Judge Galasso's broad injunction is unsupported by, and inconsistent with, New York Insurance Law.

Non-Statutory Basis

• The Superintendent did not present any evidence that his property rights would be irreparably harmed absent the injunction.
• Instead, without evidence or argument, the Superintendent simply asked for unlimited injunctive relief, and Judge Galasso granted the request.
• As argued above, a lawsuit against the Superintendent in his personal capacity is not the same as a claim against ELNY or its assets.
• Even if the Superintendent might be inconvenienced by claims against him in his personal capacity, mere annoyance and litigation expense, even substantial and unrecoverable cost, does not constitute "irreparable injury” sufficient to authorize an injunction.
• The Superintendent also argued that interlocutory orders issued in 1991 and 1992 as part of ELNY's rehabilitation proceeding contained similar language.
• Those injunctions, however, were by definition temporary, not permanent.
• Any past bar to the filing of claims by ELNY shortfall payees is immaterial where such claims did not accrue until Judge Galasso's liquidation order resulted in a loss of benefits
• Regardless, prior injunctive provisions possess the same jurisdictional and statutory defects as the injunctive provision in the ELNY liquidation order.

For S2KM's complete and ELNY reporting, see the structured settlement wiki.

ELNY Appeal - Immunity 1

As earlier reported by S2KM, attorney Edward Stone filed a Notice of Appeal May 30, 2012 with the Appellate Division of the Supreme Court of the State of New York, Second Department, on behalf of 18 Executive Life of New York (ELNY) structured settlement shortfall payees, as Objectors and Appellants, challenging the Order of Liquidation and Approval of the ELNY Restructuring Agreement approved by Judge John M. Galasso on April 16, 2012.

For a copy of the ELNY liquidation order, as well as an Executive Life timeline, see the structured settlement wiki.

The Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY Receiver and Respondent, and attorney Stone, on behalf of Appellant/Objector ELNY shortfall payees, subsequently and jointly agreed to and requested calendar preference and an accelerated briefing schedule for this Appeal:

• Appellant/Objectors' brief and the record on appeal were served and filed on Friday, August 17, 2012. For S2KM's summary, see: ELNY Appeal - Objectors' Brief.
• The deadline for the Superintendent/Respondent's brief to be served and filed is Friday, September 7 ,2012.
• The deadline for the Appellant/Objectors' reply brief, if any, to be served and filed is Monday, September 14, 2012, with oral argument to be set by the Court as soon as practicable thereafter.

Conclusions of the Appellant/Objectors' Brief

• The expedited procedure of the ELNY liquidation hearing was so flawed, and the prejudice to the ELNY shortfall payees so great, as to violate constitutional principles of due process. Further, no statutory or common law basis existed for Judge Galasso's extraordinarily broad grant of immunity and injunctive relief to protect the Superintendent and his agents, including the New York Liquidation Bureau (NYLB).
• If the appellate court determines a violation of due process occurred, the ELNY shortfall payees have requested the appellate court to reverse Judge Galasso's Liquidation Order in its entirety. In the alternative, the ELNY shortfall payees have requested the appellate court to reverse specific paragraphs of the Liquidation Order granting the injunction and immunity.

 In prior blog posts, S2KM summarized the Appellant/Objectors' due process allegations (ELNY Appeal - Due Process 1) and provided additional related analysis (ELNY Due Process Issue). S2KM has also reported previously on the ELNY Immunity Issue featuring analysis by New York attorney Peter Bickford.

This blog post provides a more detailed summary of the allegations in the Appellant/Objectors appellate brief arguing that no statutory or common law basis existed for Judge Galasso's "extraordinarily broad grant of immunity" for the Superintendent and his agents. A copy of the Appellant/Objectors' brief is posted on the structured settlement wiki.

Judicial Immunity

The ELNY liquidation order signed by Judge Galasso on April 16, 2012 confirms the following grant of immunity:

"Judicial immunity is extended to the Receiver and his successors in office, the New York Liquidation Bureau, and their respective attorneys, agents and employees, and such immunity is extended to them for any cause of action of any nature against them, individually or jointly, for any action or omission by any one or more of them when acting in good faith, in accordance with this Order, or in the performance of their duties pursuant to Insurance Law Article 74 ..."

The objecting ELNY structured settlement shortfall payees allege: 1) Judge Galasso and the ELNY liquidation court lacked subject matter jurisdiction to grant judicial immunity to the Superintendent (along with his employees, agents and attorneys), acting as ELNY's Receiver, in their personal capacities; and 2) the scope of the judicial immunity provision is unsupported by and unprecedented under New York law. What follows is a summary of their arguments.

1. Subject matter jurisdiction

• Subject matter jurisdiction is “the authority of the courts to adjudicate classes of cases.”
• Subject matter jurisdiction may be limited by statute (e.g. Article 74 of the New York Insurance Law).
• A court cannot entertain actions in which it lacks subject matter jurisdiction.
• In this case, the New York Supreme Court had before it the ELNY estate – and only the ELNY estate.
• Under Article 74, subject matter jurisdiction in a liquidation proceeding is limited to the collection and disposition of the insurer’s assets.
• As a liquidation court, the New York Supreme Court does not have jurisdiction to prospectively adjudicate claims or issue orders not involving the estate’s assets.
• During the ELNY liquidation hearing, the Superintendent incorrectly suggested that all claims against him and/or against his agents, regardless of capacity, constituted claims against the estate.
• Statutory immunity granted to the Superintendent as regulator, however, does not apply to his role as receiver where he stands in the shoes of management and should be subject to the same standard of care and responsibility.
• As evidence of its own private status, the NYLB, which managed ELNY's day to day operations as the Superintendent's agent during ELNY's 20 plus years of rehabilitation, has acknowledged in prior cases that it retains errors and omissions insurance.
• Claims against the Superintendent and/or his agents acting in their personal capacities as ELNY's Receiver, therefore, are not claims against the ELNY estate.
• The Superintendent also argued that similar immunity language was included in interim orders during the rehabilitation proceeding.
• However, the same rationale upon which the judicial immunity provision is void and unauthorized by law should also invalidate similar provisions in interlocutory orders.
• Because Judge Galasso's judicial grant of immunity to the Superintendent, as ELNY's Receiver, and to his agents, in their personal capacities extends beyond ELNY's assets in liquidation, it exceeds the New York Supreme Court’s subject matter jurisdiction and should be void.

2. New York legal authority

• Judge Galasso's grant of immunity for the Superintendent and his agents is not provided for by statute, and exceeds the proper scope of immunity for a private court-appointed receiver.
• Under common law, judges are immune from liability when acting within their judicial power and authority.
• Receivers are generally considered an arm of the court and are entitled to immunity for conduct related to their receivership duties.
• Unlike a judge, however, judicial immunity applies only when a receiver acts “in good faith and with appropriate care and prudence.”
• Prior to 1909, private individuals acting as court appointed receivers managed the liquidation of impaired insurance companies in New York.
• In 1909, the New York legislature assigned the role of receiver for impaired insurance companies to the Superintendent of Insurance.
• The 1909 legislation was not intended to change the common law with respect to the Superintendent’s role as receiver.
• In prior cases, the Superintendent has successfully argued that it is not a governmental agency when acting as receiver.
• Therefore, there is no legal basis for the Superintendent, as ELNY's Receiver, to claim greater immunity than any other private court-appointed receiver.
• During the Order to Show Cause hearing, the NYLB, as agent for the Superintendent, indicated that it was seeking the same “good faith” immunity normally afforded to receivers.
• However, the NYLB submitted, and Judge Galasso signed, far broader language "purporting to confer immunity for any action taken in conducting the business of the insurer, in both official and personal capacities, regardless of whether his actions were in good faith or with appropriate care and prudence, and even regardless of whether such actions were in violation of court orders."
• The ELNY structured settlement shortfall payees have no problem with immunity for acts taken “in good faith” and "with appropriate care and prudence” or for "acts specifically authorized by a court order".
• Judge Galasso's order, however, eliminated any limitations on immunity inherent in those clauses with the final disjunctive phrase, “or in the performance of their duties pursuant to Insurance Law Article 74.”
• As ELNY's Receiver, the Superintendent's Article 74 duties are broad and general and include, among other things, “conduct[ing] the business of the insurer.”
• Granting immunity to the Superintendent for performing duties permitted by Article 74 means that literally any act or omission related to the management of ELNY or its assets is immunized, whether or not undertaken in good faith, including acts that violate a court order.
• The 1992 ELNY Rehabilitation Order expressly prohibits the wasting of ELNY’s assets by anyone, including the Superintendent, as ELNY's Receiver.
• Under the immunity provision in the ELNY liquidation order, however, the Superintendent could claim immunity for the violation of that order, because any such waste would have occurred during the performance of the Receiver’s duties under Article 74.
• Judge Galasso's immunity order sanctions a wide range of potential breaches of the Superintendent/Receiver’s fiduciary duties to the ELNY shortfall payees.
• For example, the Superintendent could claim immunity for overcompensating himself and his agents, fraudulently concealing ELNY’s financial condition, managing ELNY assets for his benefit or that of vendors, and/or incompetently investing ELNY assets in risky ventures.
• Therefore, Judge Galasso erred because the ELNY liquidation order confers immunity for virtually every act or omission the Superintendent has ever undertaken while managing ELNY, whether in an official or personal capacity, or whether in bad faith or violation of a court order.

For S2KM's complete ELNY reporting, see the structured settlement wiki.

ELNY Appeal - Objectors' Brief

Approximately 1456 Executive Life Insurance Company of New York (ELNY) shortfall victims, who collectively anticipate a $920 million present value loss under the proposed ELNY liquidation plan and restructuring agreement approved by New York Supreme Court Judge John Galasso on April 16, 2012, were denied their constitutional rights to due process according to an appeal filed August 17, 2012 with the Appellate Division (Second Department) of the New York Supreme Court.

The appeal, filed by attorney Edward Stone and the Christensen & Jensen law firm on behalf of 18 of the shortfall victims (objectors), also alleges Judge Galasso erred in granting immunity and injunctive protection to the New York Superintendent of Financial Services (Superintendent) in his capacity as ELNY's receiver (Receiver).

The objectors' appellate brief requests the appellate court to reverse the ELNY liquidation order in its entirety or, in the alternative, to reverse the paragraphs granting immunity and injunctive relief to the Superintendent and his agents including the New York Liquidation Bureau (NYLB).

Due Process

The appellate brief alleges the objecting ELNY shortfall victims were denied their due process to a fair hearing because of a lack of reasonable notice and necessary information and the selective application of civil practice law and rules.

Due process, according to authorities cited in the objectors' appellate brief, requires:

• At a minimum, notice and an opportunity to be heard before a person is deprived of a property interest; and
• Balancing (1) the interests of the parties to the dispute; (2) the adequacy of the contested procedures to protect those interests; and (3) the government’s stake in the outcome.

Looking first at the interests of the parties to the dispute, the objectors maintain:

• The shortfall payees have a "substantial interest" in a fair hearing because of: 1) their anticipated shortfalls and related financial and medical hardships; 2) their concerns about the future management of their remaining ELNY assets under a viable plan; and 3) their concerns that the Superintendent, whom they allege was responsible for their ELNY shortfalls, will continue to exercise supervisory responsibilities under the proposed ELNY restructuring plan.
• When acting in their capacity as receiver, the Superintendent and the NYLB are not acting as government agencies. Their interests are limited to protecting the policyholders, creditors, and the public including the ELNY shortfall payees. Their interests in a fair hearing should be extremely high - the same as the shortfall payees. Conversely, the burden of a fair hearing on the Superintendent and the NYLB would have been minimal.
• The government also has a high interest in a fair ELNY hearing in order to protect the integrity of the statutory receivership system as well as the financial well-being of 1456 individuals some of whom could become public charges as a result of their ELNY benefit reductions.

The ELNY shortfall victims were denied due process, according to the objectors, because the procedures afforded the ELNY shortfall victims were unfair and prejudicial:

• The notices were inadequate and misleading.
• The time allowed, and the lack of access to information, were unreasonable.
• Judge Galasso selectively applied procedural rules to the detriment of the ELNY shortfall payees.

Judicial Immunity

The objectors allege Judge Galasso and the ELNY liquidation court lacked subject matter jurisdiction and otherwise erred in granting judicial immunity to the Superintendent (along with his employees, agents and attorneys), acting as ELNY's receiver, in their personal capacities because:

• The New York Supreme Court, as a liquidation court, does not have jurisdiction under Article 74 of the New York insurance statute to prospectively adjudicate claims or issue orders not involving ELNY's assets. Claims against the Superintendent, as Receiver, or others in their personal capacities are not claims against the ELNY estate.
• The scope of the ELNY Liquidation Order’s immunity provision is unsupported by and unprecedented under New York law which provides immunity for acts taken “in good faith” and "with appropriate care and prudence.” Conversely, the ELNY liquidation order confers immunity for virtually every act or omission the Superintendent has ever undertaken, whether in an official or personal capacity, or whether in bad faith or violation of a court order.

Permanent Injunctive Relief

The objectors allege Judge Galasso and the ELNY liquidation court lacked jurisdiction and otherwise erred in granting permanent injunctive relief to the Superintendent (along with his employees, agents and attorneys), acting as ELNY's receiver, in their personal capacities because:

• The injunction provision of Article 74 of New York's insurance law applies to an action against the insurer (ELNY) or the insurer's assets not to an action against the Superintendent, as ELNY receiver, in his personal capacity.
• A receiver is judicially immune from liability if he acts in good faith and with appropriate care and prudence. Therefore, the only actions effectively enjoined by Judge Galasso's liquidation order are actions where the Superintendent, as ELNY's receiver, breached his fiduciary or other duties.
• The Superintendent did not offer any evidence that his property rights would be irreparably harmed absent the injunction.

Briefing Schedule and Additional ELNY Reporting

As reported in S2KM's recent ELNY Update, the Superintendent, as ELNY Receiver and Respondent, and attorney Stone, on behalf of Appellant/Objectors, have jointly agreed and requested calendar preference and an accelerated briefing schedule for this Appeal:

• September 7, 2012 - deadline for Respondent's brief to be served and filed.
• September 14, 2012 - deadline for Appellants' reply brief, if any, to be served and filed, with oral argument to be set by the Court as soon as practicable thereafter.

For additional background information about issues addressed in the objectors' appellate brief, see:

• The ELNY Due Process Issue; and
• The ELNY Immunity Issue - featuring Peter Bickford's analysis.

For S2KM's complete reporting about the ELNY liquidation, including a copy of the objectors/petitioners' appellate brief, see the structured settlement wiki.

ELNY Update - 1

Judge John M. Galasso issued his Executive Life of New York (ELNY) Memorandum Decision and signed the Order of Liquidation and Approval of the ELNY Restructuring Agreement on April 16, 2012.  As of today:

• The ELNY Restructuring Agreement has not been finalized or funded.
• The ELNY Hardship Fund has not been funded.
• A group of ELNY structured settlement shortfall victims has filed a Notice of Appeal challenging the ELNY Liquidation Order and Restructuring Agreement.
• Several liability insurers who previously purchased ELNY structured settlement annuities have filed a Motion asking Judge John Galasso to "clarify and/or correct" his Memorandum Decision concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities.
• The future funding status of the New York life and health insurance guaranty fund is undecided and awaits state legislative action.
• Many legal issues, as identified by Peter Bickford in his article "The Elephant in the Court Room" could linger in the courts for years:
  • Due process issues including a denial of any right for ELNY shortfall victims to opt out of the restructuring plan;
  • The judicial grant of immunity for the Superintendent of the New York State Department of Financial Services, as ELNY's Receiver, and his agents, including the New York Liquidation Bureau (NYLB), and their potential scope of responsibilities for the failed ELNY rehabilition.
  • The up front netting of the state guaranty funds’ subrogation rights so that no guaranty fund will actually pay its full cap on any ELNY claim.
  • Whether the ELNY restructuring plan results in an improper sub-class of claimants under New York insurance law — the ELNY shortfall annuitants.
  • Potential claims of structured settlement shortfall payees against policy owners, structured settlement brokers, attorneys or others involved in the original settlements.
  • The role, rights and obligations of factoring companies that previously acquired payment rights from ELNY structured settlement payees.
  • Whether, and to what degree, the Superintendent, as receiver, and his agents are responsible.as fiduciaries for the failed ELNY rehabilitation.

Notice of Appeal

Attorney Edward Stone filed a Notice of Appeal May 30, 2012 with the Appellate Division of the Supreme Court of the State of New York, Second Department, on behalf of 18 ELNY structured settlement shortfall victims, as Objectors and Appellants, challenging the Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by Judge Galasso on April 16, 2012. For additional information about this Notice of Appeal, see this prior S2KM blog post.

Attorneys representing the Superintendent, as Rehabilitator of ELNY and Respondent, and attorney Stone, representing the 18 structured settlement shortfall victims, have jointly agreed and requested calendar preference and an accelerated briefing schedule for this Appeal as follows:

• Appellants' brief and the record on appeal to be served and filed on or before Friday, August 17, 2012;
• Respondent's brief to be served and filed on or before Friday, September 7 ,2012; and
• Appellants' reply brief, if any, to be served and filed on or before Monday, September 14, 2012, with oral argument to be set by the Court as soon as practicable thereafter.

Motion to Clarify and/or Correct

Attorneys representing several liability insurers who previously purchased ELNY structured settlement annuities filed a Motion June 14, 2012 asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities.

Attorney Stone, on behalf of two structured settlement shortfall victims, filed an Affirmation in Opposition on July 9, 2012. Attorneys for the liability insurers in turn filed a Reply in Support of the Motions on July 13, 2012. Judge Galasso is scheduled to consider the Motion on July 16, 2012.

For additional background about the Motion, see this prior S2KM blog post.  For copies of the Motion, Affirmation in Opposition and Reply in Support, see the structured settlement wiki.

ELNY Shortfall Payments

Who has responsibility to make up the difference in annuity shortfall payments under the Executive Life of New York (ELNY) Liquidation Plan approved by New York State Supreme Court Judge John Galasso on April 16, 2012?

Attorneys representing several liability insurers who previously purchased ELNY structured settlement annuities have filed a Motion asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities.

The ELNY Memorandum Decision states in relevant part: "certain insurance companies such as Travelers, the Fireman's Fund Companies and Hartford have assured the Court that they will make up the difference to those identified shortfall payees for any settlement obligation where they purchased an ELNY annuity on behalf of an injured party."

In their June 14, 2012 Motion, attorneys Seiger Gfeller Laurie, representing those liability insurers, as well as Jefferson Insurance Company, Allianz Global Risks US Insurance Company dba Allianz Global Corporate and Specialty North America, John Hancock Property and Casualty Insurance Company and John Hancock Indemnity Company, ask the Court to "amend its decision to omit what the Court likely intended as an aside, or background, which is not material to the Court's approval" of the ELNY Liquidation Plan.

The Motion attempts to distinguish two types of structured settlement funding alternatives: "buy and hold" vs. qualified assignments. The Motion maintains that "at no time" did the liability insurers "undertake liability following qualified assignments - liability was extinguished pursuant to the qualified assignment arrangements."

The Motion further attempts to clarify statements made during the ELNY Liquidation hearings by Fireman's Fund attorney Peter Vodola. According to the Motion, Vodola's promise on behalf of Fireman's Fund that structured settlement shortfall payees "will receive a hundred percent of their benefits regardless of what happens here" was specifically limited to ELNY annuitants "who are entitled to payments under annuities owned by Fireman's Fund."

At least one ELNY shortfall victim has already requested that Fireman's Fund make up the difference on a structured settlement funded with a qualified assignment.  The Motion highlights as an Exhibit an April 25, 2012 letter written by attorney Edward Stone to Fireman's Fund's Chief Counsel on behalf of ELNY shortfall victim Jeanice Dolan.

Stone's letter states that Dolan anticipates a 47 percent payment reduction under the ELNY Liquidation Plan resulting in a present value loss of $815,162.62. After quoting the Memorandum Decision language the Motion seeks to "clarify and/or correct", Stone's letter requests Fireman's Fund to compensate Dolan for her ELNY shortfall.

Stone has indicated to S2KM he plans to file opposition papers and a cross motion.

A copy of the Motion to Clarify and/or Correct the Court's Memorandum Decision is posted on the structured settlement wiki.

ELNY Notice of Appeal

Attorney Edward Stone has filed a Notice of Appeal with the Appellate Division of the Supreme Court of the State of New York, Second Department, challenging the Executive Life of New York (ELNY) Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by New York State Supreme Court Judge John M. Galasso on April 16, 2012.

The appeal, filed May 30, 2012 on behalf of 18 ELNY structured settlement shortfall victims as objectors:

• Alleges Judge Galasso "erroneously denied objectors' request to reject the proposed agreement of restructuring in connection with the [ELNY] liquidation";
• Further alleges Judge Galasso's order:
  • "[I]mproperly grants and/or continues certain injunctions and immunities and discriminates against the objectors";
  • "[C]reates impermissible sub-classes of claimants"; and
  • "[R]eflects the courts erroneous denial of objectors' requests to adjourn the hearing ... due to a lack of proper notice of such hearing."
• Seeks to compel:
  • The Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's rehabilitator, "to provide certain discovery necessary to, among other things, allow objectors to demonstrate why the plan should not be approved and submit a viable competing restructuring plan";
  • Judge Galasso "to unseal certain documents submitted to the court by the rehabilitator"; and
• Further seeks to allow the objectors "to present evidence (in the form of live testimony by certain witnesses) rebutting the receiver's experts and otherwise showing that the proposed-liquidation plan should not have been approved."

In an exclusive interview with S2KM, Attorney Stone characterized the appeal as "the next step in a crusade by some of the ELNY shortfall victims against an unfair and discriminatory restructuring plan".

Stone added: "Judge Galasso's decision came as no surprise as the Liquidation proceedings were carefully orchestrated to yield a predetermined result" according to Stone. No one who attended the hearing actually believed that the objectors had a chance to prevent the Superintendent from pushing through its plan."

Stone alleges:

• Objectors were "denied the right to call witnesses and were repeatedly rebuffed in their efforts to obtain critical data used by the Superintendent's actuaries to project future liabilities."
• Judge Galasso "ordered injunctions and immunities to continue what appears to be a massive coverup. The New York Liquidation Bureau took a solvent life insurance company and rendered it insolvent at the expense of the shortfall victims. Why is the Bureau entitled to a free pass after decades of waste and mismanagement?"

Stone said he hopes the New York State Supreme Court Appellate Division will "set the record straight" and provide ELNY shortfall victims access to the data used by the Superintendent and NOLHGA to formulate the proposed ELNY restructuring plan approved by Judge Galasso.

"I am convinced that my team can quickly come up with a better plan that is less discriminatory if we are allowed access to original source materials containing the real ELNY payment schedules," Stone stated. "This data should have been made available to the shortfall victims."

For S2KM's complete and continuing reporting about the Executive Life of New York Liquidation, see the structured settlement wiki.

ELNY Losses by State

The anticipated shortfalls resulting from the liquidation of Executive Life of New York (ELNY) are expected to total $920,641,977 on a present value basis - assuming promised state guarantee association payments and enhancements but prior to any possible payments from the ELNY Hardship Fund and/or from structured settlement defendants who negotiated and promised to pay future periodic payments funded with ELNY annuities.

To make matters worse for anticipated ELNY shortfall payees, most of whom are personal injury victims, the entire anticipated $920,641,977 shortfall will be allocated among approximately 15 percent of the ELNY annuitants - an average present value loss of more than $600,000 per annuitant. The remaining ELNY annuitants are not expected to experience any reduction in their payments.

How are the anticipated ELNY shortfall distributed by state based upon the current residence of ELNY shortfall payees?

Daniel Hindert, co-author of "Structured Settlements and Periodic Payment Judgments" (S2P2J), provided a state-specific analysis of total anticipated ELNY shortfall losses as part of his presentation ("How the ELNY Liquidation Impacts Settlement Planners") at the Society of Settlement Planners (SSP) 2012 Annual Meeting. Hindert based his SSP comments on a spreadsheet analysis of Schedule 1.15, now posted on the structured settlement wiki, which was compiled by attorney Edward Stone and his audit team.

According to Stone's spreadsheet analysis, here are the 10 states whose residents will suffer the largest cumulative ELNY losses:

1. California

• $343,098,363 - Annuity present value
• $173,929,372 - Benefits cut
• 51% - Percentage cut

2. New York

• $217,671,882 - Annuity present value
• $94,996,566 - Benefits cut
• 44% - Percentage cut

3. Michigan

• $191,758,830 - Annuity present value
• $91,966,861 - Benefits cut
• 48% - Percentage cut

4. Florida

• $176,892,255 - Annuity present value
• $89,379,868 - Benefits cut
• 51% - Percentage cut

5. New Jersey

• $157,708,648 - Annuity present value
• $69,892,957 - Benefits cut
• 44% - Percentage cut

6. Texas

• $107,503,620 - Annuity present value
• $44,750,691 - Benefits cut
• 42% - Percentage cut

7. Pennsylvania

• $76,571,781 - Annuity present value
• $32,737,043 - Benefits cut
• 43% - Percentage cut

8. Ohio

• $74,494,174 - Annuity present value
• $34,796,854 - Benefits cut
• 47% - Percentage cut

9. Washington

• $53,108,488 - Annuity present value
• $26,861,644 - Benefits cut
• 51% - Percentage cut

10. Georgia

• $44,179,076 - Annuity present value
• $20,097,401 - Benefits cut
• 45% - Percentage cut

ELNY Hardship Fund

Will the Executive Life of New York (ELNY) Hardship Fund discriminate against individual ELNY shortfall victims if they attempt to appeal the Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by Judge John Galasso on April 16, 2012?

Some ELNY shortfall victims and their attorneys think so. They interpret statements on the ELNY Hardship Fund website as a threat, intentional or unintentional, to prevent them from exercising their constitutional right to appeal. As background for their concerns, see:

• The ELNY Due Process Issue
• The ELNY Immunity Issue
• Mixed ELNY Reactions

The ELNY Hardship Fund statements in question:

"The life insurance industry has voluntarily committed to establishing a $100 million 'Hardship Fund' to assist those people most affected by ELNY’s liquidation. While the Hardship Fund will not fully address the problems arising from ELNY’s liquidation, it aims to mitigate the financial impact on those payees with the greatest need. The Hardship Fund, while not part of the restructuring plan approved by the court, is contingent upon its final approval. In the event Judge Galasso’s decision is appealed and the liquidation order is rejected, the conditions for establishing the Hardship Fund will not be met and no payments from it will be available." (emphasis added).

AND

"Payees who are expected to have their benefit payments reduced will receive an application packet from JAMS. It will include a questionnaire and request for certain documentation such as medical records and information about sources of income. Additional information and conditions may be required to complete the application. With the information you provide, JAMS will determine how to distribute the Hardship Fund’s resources, based on eligibility guidelines as developed by JAMS." (emphasis added).

These statements are repeated in an "Informal Notice" from JAMS, the ELNY Hardship Fund Administrator, mailed to ELNY shortfall victims on April 27, 2012.

The question now being asked by some ELNY victims and their attorneys: "Will the 'eligibility guidelines', developed by JAMS with input from contributing life insurance companies, discriminate against (blackball) ELNY shortfall victims who attempt to appeal Judge Galasso's Order."

Speaking for the ELNY structured settlement shortfall victims he represents, attorney Edward Stone states: "These statements represent another strong arm tactic to try to prevent ELNY shortfall victims from pursuing their constitutional rights."

To protect against Hardship Fund recriminations, the following quotes from ELNY structured settlement shortfall victims are printed anonymously:

• "The 'hardship fund' is a joke intended to save face for the annuity industry which has completely failed to stand behind the annuitants, each of whom was promised 'guaranteed lifetime benefits.' Only 1500 out of the 10,000 ELNY annuitants are suffering losses under this absurd plan. They should be spreading the losses equally among all 10,000 persons who bought these annuities. No hardship fund will correct that injustice. Rather than have JAMS churning fees deciding winners and losers, where absolutely every shortfall payee is suffering a severe hardship, better to save the JAMS overhead and simply give each of the 1500 annuitants $66,600, and close down the fund."
• "The message in the Hardship Fund letter is loud and clear: if we appeal and win, funds allotted to the Hardship Fund will no longer be available. We are unequivocally being asked to accept our losses on their terms. Big brother in this context is a big bully stripping 1,500 of us of our constitutional rights and denying us the ability to defend the financial security we were once promised."
• "I am one of the ELNY shortfall victims. My settlement resulted from medical malpractice when I was a baby.  I was born prematurely, and suffered severe visual impairments due to negligence.  I also have hearing impairments.  I am going to lose 53% of what was promised to me all those years ago.  I am terrified to figure out how in the world I am going to take care of myself and 3 minor children when the check drop hits.  I will need to get public assistance in order for us to survive. If they want to be really fair, divide the Hardship Fund equally among us 1500 shortfall victims and call it good.  That would be the right thing to do."

If you are an ELNY shortfall victim and wish to add your thoughts about the ELNY Hardship Fund anonymously to this blog post, add a comment using the link below or send an email with your comments to [email protected]. 

For S2KM's complete reporting about the ELNY liquidation, see the structured settlement wiki.