Beyond Structured Settlements

"Shut It Down!"

"It is time to shut down the New York Liquidation Bureau", argues attorney and insurance expert Peter Bickford in his opinion article titled "ELNY Debacle Exposes Serious Problems" which is featured as the cover story in the February 18, 2013 issue of Insurance Advocate magazine.

Bickford's article is accompanied by a second Insurance Advocate opinion article written by Edward S. Stone, an attorney who represents 40 ELNY structured settlement shortfall payees.

In his article, titled "ELNY Opinion Unjust to Victims", Stone accuses Benjamin M. Lawsky, Superintendent of New York's Department of Financial Services and his predecessors (Superintendent), the New York Liquidation Bureau (NYLB) and their agents of "concealment, fraud, waste and mismanagement".

Bickford's article further asserts the ELNY liquidation impacts the entire insurance industry, "including the guaranty fund structure and the growing nationwide debate on State v. Federal regulation of insurance." Bickford states: "[t]he attacks against continued state regulation of the business of insurance is focused primarily on solvency and unless the states can show that they have appropriate standards and ability to enforce those standards the attacks could result in a sea change in regulation."

Bickford maintains the Superintendent should recognize the "hollowness" of his recent legal victories: Judge John Galasso's civil contempt order and the denial of an appeal challenging Judge Galasso's ELNY liquidation order approving the ELNY restructuring agreement. The ELNY liquidation "fully exposed the Bureau for its decades-long covert mismanagement of insolvent insurance companies" according to Bickford.

What Bickford finds most surprising about the ELNY liquidation is:

• "[T]he unwillingness of the administration, the courts, the legislature and the industry to admit the scope of the ELNY disaster and the failings of the insolvency process, and to take appropriate action to remedy these systemic problems"; and
• "[T]he lengths that the administration and the courts have gone to in order to preserve the myth of the Bureau’s fiduciary role without fiduciary accountability, or to protect it from any form of meaningful external investigation or scrutiny."

Bickford's bottom line: it is time to shut down the NYLB! 

Bickford's argument, which echoes and expands criticism of the NYLB published in LifeHealthPro's 2012 article titled "The Complete ELNY Saga - 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", runs as follows:

• The NYLB is not defined under New York insurance law.
• The NYLB is not a state agency and not subject to either audit by the State Comptroller or the Freedom of Information Act according to a decision (Dinallo v. DiNapoli) by New York highest state court.
• The NYLB is not required to file any plan or reports with the courts supervising receivership estates or to provide any status reports to policyholders or creditors.
• Once under NYLB control, an insurer is no longer subject to regulatory oversight and no longer files any reports or financial statements.
• The NYLB's lack of accountability over decades has made it a breeding ground for corruption and abuse.

In future Insurance Advocate articles, Bickford promises to "explore how the process should and can work efficiently and truly for the benefit of the victims of an insolvency, and what course the legislature with the support of the regulators and the industry could take to successfully and meaningfully restructure the insolvency process."

Stone's article includes a comprehensive ELNY background summary. Stone's conclusions:

• "The blanket immunity and broad injunctive relief granted in the ELNY liquidation permits the Superintendent, the NYLB and their agents to hide the fraud, waste and mismanagement that doomed ELNY behind the pretext of court supervision.
• "The contempt sanctions issued against the victims and their attorneys for doing the Superintendent’s job are a blatant attempt to intimidate the plaintiffs into abandoning their claims.
• "Sadly, instead of helping the victims of this tragedy, the Superintendent is choosing to blame and punish them – and he’s using ELNY’s assets and the court system to do it."

For S2KM's comprehensive ELNY reporting and an Executive Life timeline, see the structured settlement wiki.

Structured Settlements in 2012 - 4

Executive Life of New York

At one time or another, each of us may have become acquainted with individuals who have overcome personal injuries and successfully transformed their disabilities and special needs into special lifetime accomplishments. Kyle Walsh, profiled in a 2012 S2KM blog post, is one such individual. The late Randy Snow, featured in a 2008 S2KM blog series, was another.

Structured settlements are supposed to provide economic security for people with serious injuries and disabilities - to help them rebuild their lives and, in many cases, to achieve special lifetime accomplishments. Instead of an all-cash personal injury settlement, structured settlement recipients accept a promise of future periodic payments.

What happens, if and when, that promise is broken? What happens when a structured settlement funding company, and the regulators and guaranty system responsible for protecting the structured settlement recipients, fail to make and/or insure full payment?

These questions are highlighted by the Executive Life of New York (ELNY) liquidation - the dominant structured settlement story of 2012 and one of the most important developments in the history of the United States structured settlement industry.

The story of ELNY, as well as its affiliate Executive Life of California (ELIC), and their parent company, First Capital Corporation (FEC), is long and complex. For background of events prior to ELNY's 1991 receivership, S2KM recommends Gary Schulte's 1992 book "The Fall of First Executive".

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent. When then New York's Insurance Commissioner Salvatore Curiale seized control of ELNY on April 16, 1991 and placed it in receivership, he stated: "The company is currently neither in an insolvent or impaired condition. . . . I have not petitioned the Court to make a finding of insolvency. ELNY is a company well able to meet its current obligations."

Exactly twenty-one years later, on April 16, 2012, following 11 days of hearings at the Nassau County New York Supreme Court, presiding Judge John M. Galasso approved an Order of Liquidation and a Restructuring Agreement for ELNY as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, and the National Organization of Life and Health Guaranty Funds (NOLHGA).

The result of the ELNY Liquidation Order and Restructuring Plan, even following contributions from state guaranty funds and voluntary life insurance company contributions, is a $900 million shortfall allocated entirely (and arguably inequitably) to more than 1400 ELNY payees out of a total of approximately 9700 current ELNY payees. The remaining ELNY payees expect to receive 100 percent of their promised future payments. The average individual shortfall is estimated to exceed $600,000 present value. Although an ELNY Hardship Fund has been created, it has not yet been funded.

An appeal was filed May 30, 2012, on behalf of 18 ELNY structured settlement shortfall payees, challenging the ELNY liquidation order and restructuring agreement on the basis of due process. The appeal also alleges that immunities and injunctions granted under the liquidation order are improper. Oral arguments occurred on November 15, 2012 in Brooklyn before the Appellate Division of the Supreme Court of the State of New York, Second Department. No decision has been announced.

Another legal challenge to the ELNY liquidation order occurred June 14, 2012 when attorneys for several liability insurers filed a Motion asking Judge John Gallasso to "clarify and/or correct" his April 16, 2012 ELNY Memorandum Decision. The motion indirectly raises the issue of whether qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the ELNY liquidation? Judge Galasso denied the Motion without further explanation. 

In a subsequent development, somewhat related to the liability insurers' motion, the ELNY website announced an ELNY Facilitation Plan to assist owners of ELNY structured settlement annuities (SSAs) make supplemental payments to ELNY SSA payees and to coordinate those payments with the ELNY benefit payments scheduled to be made by the Guaranty Association Benefits Company (GABC) under the ELNY Restructuring Plan approved by Judge Galasso on April 16, 2012 as part of the ELNY liquidation order.

The same attorneys who filed the ELNY appeal, Edward Stone and representatives of the Christensen & Jensen law firm, filed a class action lawsuit November 8, 2012, on behalf of ELNY shortfall victims, against Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, and his predecessor ELNY Rehabilitators, as well as MetLife and Credit Suisse. The class action allegations provide a critical litany of mismanagment and non-disclosure during the 21 years ELNY's estate was being supervised by these defendants.

In response, attorneys representing Benjamin M. Lawsky, in his capacity as ELNY's Receiver, filed a Notice of a Motion with the Nassau County New York State Supreme Court requesting oral argument on January 4, 2013 at 9:30 a.m. or as soon thereafter as the parties may be heard:

• to enjoin three ELNY structured settlement shortfall payees and their legal counsel from proceeding with a class action lawsuit in the United States District Court Southern District of New York;
• to hold in contempt of court the shortfall payees' legal counsel; and
• to require their payment of the related costs and attorney's fees incurred by the Superintendent.

Although the ELNY liquidation has so far received limited coverage in the mainstream media, specialty insurance experts and analysts have not been silent. Examples:

• Peter Bickford - In his article titled "The Elephant in the Court Room" (summarized here by S2KM), Bickford argues New York’s receivership system has failed ELNY, its policyholders and beneficiaries, as well as the insurance industry and its customers due to a lack of basic accountability standards. Although the ELNY restructuring plan may solve the immediate ELNY problem (at the expense of the remaining ELNY shortfall victims), Bickford maintains it does not address the broader, underlying systemic defects inherent in the New York life insurance receivership system. Without an act of the New York legislature, according to Bickford, "there will be no life insurance guaranty fund coverage in New York" following ELNY. Bickford's article also provides succinct summaries of objections raised by ELNY shortfall victims and ELNY legal issues which he states "could linger in the courts for years"
• LifeHealthPro - In an article titled "The Complete ELNY Saga: 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", (summarized here by S2KM), the authors assign primary blame for ELNY insolvency to the NYLB which they describe 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". In a companion article (reviewed here by S2KM), writer Warren Hersch asks: "is the structured settlement process in need of reform"?  In a follow-up oped article titled "Governor Cuomo I'm Calling You Out", (summarized here by S2KM), Bill Coffin, LifeHealthPro's Group Editor, charges New York Governor Andrew Cuomo with personal responsibility to clean up the "ELNY debacle".

The final results of the ELNY liquidation will depend upon the outcome of the continuing litigation highlighted in this article. It also remains to be seen what reforms, if any, will result from the failed ELNY receivership process.

In conclusion, it should also be noted that ELIC-related litigation continued in 2012 (Garamendi v. Altus Finance S.A.) when a federal jury in Los Angeles rejected a claim by California's Insurance Commissioner that, but for a conspiracy by French investor group Artemis S.A.:

• ELIC's original conservator (then California insurance commissioner John Garamendi) would have accepted an alternative bid in 1991 by state insurance guaranty associations; and
• The alternative bid would have retained profits from ELIC's junk bond portfolio for the benefit of policyholders including ELIC structured settlement recipients.

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

This blog post completes S2KM's series "Structured Settlements in 2012":

• Part 1 - Primary market
• Part 2 - Settlement planning
• Part 3 - Secondary market
• Part 4 - Executive Life of New York

ELNY Allegation Timeline

The Executive Life of New York (ELNY)  class action lawsuit , filed November 8, 2012 by attorney Edward Stone and representatives of the Christensen & Jensen law firm, on behalf of ELNY shortfall victims, against Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, and his predecessor ELNY Rehabilitators (Superintendent and/or Rehabilitator), MetLife and Credit Suisse, substantially expands the historical allegations of post-1991 ELNY mismanagement and non-disclosure. 

What follows is S2KM's re-configuration of selected allegations from the class action complaint into an ELNY "allegation timeline".

For persons seeking more comprehensive understanding of alleged mismanagement of ELNY during its 21 year rehabilitation, S2KM recommends reading the ELNY class action complaint which is posted on the structured settlement wiki. The following S2KM blog posts provide additional critiques of the New York Liquidation Bureau's (NYLB) role in ELNY insolvency:

• Elephant in the ELNY Courtroom - S2KM's summary of Peter Bickford's article.
• NYLB Role in ELNY Disaster -  highlighting allegations in the National Underwriter article "The Complete ELNY Saga"

ELNY Class Action Allegation Timeline

April 16, 1991

• New York's Insurance Superintendent Salvatore Curiale states: "[ELNY] isn't insolvent and has ample cash on hand to pay life insurance death benefits and meet annuity payments."
• Curiale further states: "The company is currently neither in an insolvent or impaired condition. . . . I have not petitioned the Court to make a finding of insolvency. ELNY is a company well able to meet its current obligations."

April 23, 1991

• ELNY Rehabilitation Court enters an Order of Rehabilitation which prohibits "all" persons, including the Rehabilitator, from "doing or permitting to be done any act or thing which might waste the assets" of ELNY.
• Under ELNY's Order of Rehabilitation, no more than 30 percent of ELNY's assets can be invested in common stock at any given time. This 30 percent cap is 50 percent higher than the percentage allowed by active insurance companies.
• Consistent with normal practice, Superintendent Curiale, ELNY's Rehabilitator, delegates most of his ELNY rehabilitation duties to the New York Liquidation Bureau [NYLB], directed by a Special Deputy Superintendent who in 1991 is Kevin Foley.

May 17, 1991 - In a letter to ELNY policyholders, the Superintendent confirms the sole basis for ELNY's rehabilitation has been the risk of policy surrenders. The letter further states the Superintendent is "presently analyzing the assets and liabilities of ELNY[.]"

June 7, 1991 - NYLB files a petition, which the Rehabilitation Court approves to retain First Boston Corporation (First Boston) as ELNY's exclusive financial advisor.

• The court also approves an investment advisory and management agreement with a First Boston affiliate providing for the payment of multi-million dollar fees.
• First Boston (and its successor/purchaser Credit Suisse) subsequently invests ELNY's assets in violation of its contractual obligations, in violation of the court's order, in violation of its representations to the NYLB and the court, and in violation of its fiduciary duties to ELNY shortfall payees.
• Instead, First Boston and Credit Suisse engage in a pattern of risky investments that generate high management fees and place ELNY's assets at considerable risk.
• Note: Credit Suisse acquired First Boston Corporation in 1990 but did not phase out the First Boston name until 2006.

June 1991 - The Superintendent contacts the Life Insurance Guaranty Corporation of New York (LIGCNY) to discuss the disposition of ELNY. MetLife, the largest domiciled insurance company in New York, has a lead position in LIGCNY and receives information about ELNY that is not available to other insurers generally or to the public.

Between June and November 1991

• NYLB enters into discussions with MetLife. Deputy Superintendent Foley is the principal person representing NYLB in these discussions.
• Under an agreement ultimately approved by the Rehabilitation Court, MetLife receives more than $1.5 billion of ELNY's traditional whole life, term life and single premium deferred annuity books of business plus $1.5 billion of ELNY's highest-quality assets.
• NYLB takes several steps to prevent competitive bids from other insurers.
• The products transferred to MetLife include 52,748 single premium deferred annuities and 80,891 life insurance policies. This large book of business allows MetLife to increase its assets by more than $1 billion at essentially no risk.
• In addition to receiving cash, MetLife is allowed to pick and choose from among ELNY's bonds and to charge "substantially higher surrender charges" than allowed under the ELNY contracts.
• Part of the agreement with MetLife includes retention of MetLife to service ELNY's remaining SPIAs (including structured settlement annuities) with a monthly fee of $5.50 per payee if payments begin before the last day of any month and $2.50 per payee if payments have not begun.
• Under this arrangement, ELNY's true liabilities are ascertainable only by NYLB and MetLife, the only entities with access to the annuity contracts.

October 9, 1991 - In a letter to ELNY policyholders and annuitants, the Superintendent reiterates the original ELNY takeover was due to surrender requests and further states: "it remains our belief that ELNY policyholders, annuitants and contract holders will receive 100% of the amounts due them under any of the options chosen as part [of] the rehabilitation plan. ... Please be assured that your money is being well protected and conservatively invested by the Rehabilitator."

January 21, 1992 - In a letter to ELNY policyholders and annuitants, the Superintendent states he is proposing a transfer of assets to MetLife and that "[t]he contemplated exchange and reinsurance agreements [with MetLife] would place you in a substantially similar position as you were at the time of the entry of the Rehabilitation Order."

March 26, 1992 - To implement the agreements with First Boston and MetLife, NYLB submits a proposed ELNY Rehabilitation Plan which the court approves.

• First Boston represents to the court the only possible course of action is to transfer virtually all of ELNY's investment grade assets to MetLife in exchange for MetLife assuming ELNY's obligations to only part of its policyholders.
• First Boston and NYLB represent that with First Boston's management of ELNY's assets, it is more than 90% certain the remaining ELNY assets will be sufficient to meet 100% of ELNY's obligations.
• Superintendent Curiale represents that, following "an extensive and detailed analysis ... Petitioner, as Rehabilitator, determined that the transaction proposed in the Plan would not impose any unwarranted or unreasonable risks on ELNY's SPIA holders, creditors or shareholders."
• Deputy Superintendent Foley states that, after the transfer, "we will make continued full payment" to annuitants, that he is "fully confident that these payments can and will be made," and that it is a "100 percent guarantee."
• NYLB represents that ELNY's remaining assets and liabilities will be approximately equal after the transfer of assets to MetLife. In fact, after the highest-value assets are transferred to MetLife, ELNY's remaining assets are less that its fixed liabilities by at least $300 million.
• From 1992 until 2010, the NYLB never files any reports with or otherwise updates the ELNY Rehabilitation Court with respect to ELNY's annuities.

April 13, 1992 - In a letter to ELNY policyholders and annuitants, the Superintendent states the proposed transfer of assets to MetLife "best protects all classes of ELNY policyholders and provides security, value, fairness, timeliness and practicality."

During 1992 - The Superintendent conducts "an extensive and detailed," "careful and exhaustive," "comprehensive" "full study" of ELNY's assets and liabilities and afterward reaffirms that ELNY is solvent.

• Following the transfer to MetLife, ELNY retains 23,666 annuity contracts in force and approximately $3.3 billion of assets.
• Foley acknowledges, under the deal, MetLife received "extremely high quality assets" and ELNY was left with lower-quality assets.
• Foley predicts the ELNY rehabilitation process will take "four or five years" or possibly less.
• NYLB asks Milliman & Robertson [M&R] to render actuarial opinions regarding the sufficiency of ELNY's remaining assets based upon certain assumptions and investment strategies.
• M&R does not audit or independently verify any of the information or assumptions provided to it.
• Based upon the assumptions provided by NYLB and First Boston, NYLB represents:
  • "[T]he investment strategy adopted by [the Superintendent] does not impose any unreasonable risks on ELNY's SPIA holders, creditors or shareholders."
  • "[I]n more than 90 percent of 500 randomly generated interest rate scenarios under ... base case assumptions, ELNY's SPIA obligations are satisfied in full."
  • "Under the M&R study, the projected cash flows from the remaining assets [are] sufficient to meet 95% of the SPIA obligations under approximately 99% of the scenerios tested using ... base case default, recovery, yield and rate of return assumptions."

1996 - NYLB for the first time refuses unrestricted access by the New York State Comptroller's office (Comptroller) to its records and personnel.

• The Comptroller reports: "During our work, Department and Bureau officials prevented auditors from examining relevant records related to the liquidation of one estate and employee personnel-related records. Our audit was precluded from interviewing agency managers and operating personnel without senior management present, thereby creating an environment where those individuals could not speak freely."
• Prior to its takeover of ELNY, NYLB had generally cooperated with audits requested by the Comptroller's office.
• For example, no limitations were placed on the Comptroller in 1976, 1984, or 1990.
• In 1994, the Comptroller performed a follow up audit limited to items that had not been reviewed in 1990.

1998 - Common stock comprises 38 percent of ELNY's portfolio exceeding the 30 percent limit set by the 1991 Order of Rehabilitation. 

1999

• A NYLB representative states it could take up to 100 years before ELNY is finally liquidated.
• Former Deputy Superintendent Foley begins employment with MetLife as its Vice President of External and Internal Communications.

2000

• Common stock comprises as much as 44 percent of ELNY's investment portfolio.
• ELNY's common stock portfolio loses hundreds of millions of dollars, nearly one-third of its value.

2001

• In a meeting with a potential ELNY investor representative, the then Deputy Superintendent states: "Why would we want to sell [ELNY] when we can sit here and clip coupons all day."
• ELNY's common stock portfolio drops another 13 percent.

2002 - ELNY's common stock portfolio drops another 19 percent.

2004 - The NYLB refuses a Comptroller request to perform a comprehensive audit to include a review of ELNY's assets and liabilities.

July 23, 2004 - The Comptroller issues subpoenas related to the proposed NYLB audit.

November 17, 2004 - The Superintendent files suit to quash the subpoenas.

June 30, 2005 - A New York Supreme Court quashes the subpoenas, and the Comptroller appeals.

Late 2005 or early 2006

• Then-New York Attorney General Eliot Spitzer campaigns for Governor on an anti-corruption platform.
• NYLB officials approach NOLHGA and the two entities begin working on a plan to liquidate ELNY without informing the Rehabilitation Court or ELNY's policyholders and annuitants of ELNY's insolvency.
• Under this plan, more than 1400 ELNY annuitants would suffer reduced payments of up to 66 percent.

August 2006 - Then-Special Deputy Superintendent Jody Hall, who has responsibility for NYLB, is fired for suspected corruption. She later pleads guilty and is convicted.

November 2006 - Governor-elect Spitzer identifies an investigation of the NYLB as an important priority for his administration.

2007

• On at least three occasions prior to 2007, groups of potential investors advise the Superintendent of an interest in purchasing ELNY's assets and liabilities. On each occasion, the Superintendent directly interposes impediments to the performance of due diligence and other investment-related activities.
• NYLB personnel begin contacting insurance companies and others, such as purchasers of structured settlement payment rights, demanding they contribute money to shore up ELNY or face punitive actions by the New York Department of Insurance.

January 2007 - Governor Spitzer appoints Mark Peters as the new Superintendent.

March 6, 2007 - The New York Appellate Division rules the Comptroller can enforce its subpoenas against NYLB.

May 2007 - Superintendent Peters announces NYLB will be subjected to a "top to bottom" audit by an independent auditor for the first time in NYLB history. The auditors discover the NYLB's financial records are in complete disarray requiring the NYLB to "reconstruct" the financial records of all 60 estates under its supervision.

October 11, 2007 - In Dinallo v. DiNapoli , the New York Court of Appeals holds that, in his capacity as rehabilitator/liquidator of insurance companies, the Superintendent is not a state officer. Therefore, acting as the Superintendent's agent, the NYLB is not a state agency and is not subject to audit by the New York State Comptroller.

December 2007

• NYLB personnel inform Governor Spitzer that a deal has been reached with insurance companies and others assuring 100 percent payment to ELNY policyholders and/or annuitants.
• Unknown to Governor Spitzer, no deal has been reached. Instead, the NYLB is still working privately with NOLHGA on the plan to liquidate ELNY.
• Governor Spitzer announces an "agreement in principle" for ELNY, subject to approval by ELNY's Rehabilitation Court. The agreement is designed to:
  • Continue paying all ELNY annuitants 100% of their benefits;
  • Provide protection for approximately 11,000 ELNY annuity recipients including structured settlement recipients.
• The announced plan, whereby various insurers and guarantee associations apparently agree to pay $650 to $750 million to help fund $2 billion of future ELNY payments, never materializes.

October 2008 - Independent auditors discover NYLB has been understating ELNY's shortfall by more than $1 billion for years. Examining ELNY's estate as of December 31, 2006, the auditor concludes ELNY's liabilities exceed its assets by $1.26 billion.

March 18, 2009 - without notification to ELNY policyholders and annuitants, Judge Daniel Martin signs an Order allowing NYLB to:

• Replace Credit Suisse as ELNY's investment advisor with Wellington Management Company and Goldman Sachs Asset Management; and
• "[F]rom time to time amend the [Investment] Guidelines set by the Rehabilitator in consultation with his new financial advisors if the Rehabilitator deems it beneficial to ELNY."

December 17, 2010 - State Supreme Court Judge Galasso orders the Superintendent to present the Court with a proposed order and plan of liquidation for ELNY on or before July 1, 2011 after the Superintendent confers with the New York Life Insurance Company Guaranty Corporation and other interested parties.

June 23, 2011 - The Superintendent files a motion to postpone the deadline for filing a proposed order and plan of liquidation for ELNY from July 1, 2011 to August 10, 2011 "in order to present a comprehensive and consensual proposed Plan of Liquidation that maximizes the potential benefits for ELNY's structured settlement and other annuitants."

August 8, 2011 - Counsel for the Superintendent advises the court the Superintendent 'is not in a position to submit a consensual proposed order and plan of liquidation on or before August 10, 2011" as previously promised. Instead, he anticipates the Superintendent doing so on or about August 26, 2011.

October 3, 2011 - Governor Andrew Cuomo creates the New York Department of Financial Services by consolidating the New York Insurance and Banking Departments. The Superintendent of Financial Services becomes the court appointed fiduciary and Receiver/Rehabilitator of ELNY as well as other impaired and insolvent insurance companies in New York.

December 2011 - NYLB:

• Files an ex parte motion stating its intent to liquidate ELNY.
• Notifies ELNY shortfall payees for the first time that their benefits will be cut.

March 2012 - Following a hearing, Judge Galasso determines ELNY is insolvent and approves the liquidation plan and restructuring agreement upon which NYLB and NOLHGA have been collaborating since 2006.

• Under the plan, ELNY shortfall payees face a potential loss of benefits exceeding $920 million.
• During the hearing, NYLB successfully prevents shortfall payees from exploring the causes of ELNY's insolvency.
• The order approving the ELNY liquidation plan and restructuring agreement is currently being appealed.

 

ELNY Appeal - Injunction 2

Eighteen Executive Life of New York (ELNY) structured settlement shortfall payees (shortfall payees), as Objectors and Appellants, have challenged the Order of Liquidation and Approval of the ELNY Restructuring Agreement approved by Judge John M. Galasso on April 16, 2012 by filing an appeal with the Appellate Division of the Supreme Court of the State of New York, Second Department,

In prior blog posts, S2KM:

• Summarized the ELNY shortfall payees' preliminary appellate brief:
  
  • Due process allegations (ELNY Appeal - Due Process 1)
  • Arguments against the judicial immunity granted to the Superintendent of the New York State Department of Financial Services (Superintendent), (ELNY Appeal - Immunity 1)
  • Arguments against the judicial injunctive protection granted to the Superintendent (ELNY Appeal - Injunction 1)
• Provided additional due process analysis (ELNY Due Process Issue);
• Featured analysis of the ELNY Immunity Issue by New York attorney Peter Bickford.
• Summarized arguments in appellate briefs filed by the Superintendent and NOLHGA, as a non-party respondent, as well as the reply brief filed by the ELNY shortfall payees:
  • ELNY Appeal - Due Process 2
  • ELNY Appeal - Immunity 2.

This S2KM blog post summarizes the injunction arguments in the Superintendent's brief and the ELNY shortfall payees' reply brief. NOLHGA's appellate brief was limited to due process issues.

Superintendent

• The Supreme Court properly granted and continued its prior injunctions prohibiting lawsuits against the Superintendent.
• The Supreme Court had jurisdiction to continue and to grant the injunctions.
• New York Insurance Law Section 7419(b) grants trial courts broad discretion to issue anti-suit injunctions during liquidation and rehabilitation proceedings.
• Section 7419(b) does not preclude courts from enjoining claims seeking to hold the Superintendent personally liable for malfeasance or breach of fiduciary duty.
• The ELNY shortfall payees' challenge to the injunctions was not properly preserved in the Supreme Court.
• The injunctions protecting the Superintendent and his agents were first issued in 1991 as part of the ELNY rehabilitation order.
• The ELNY shortfall payees failed to appeal the 1991 and 1992 ELNY orders containing the injunction against the Superintendent and his agents.
• Because those injunctions are final and non-appealable, the shortfall payees are precluded from seeking to overturn those injunctions now.
• The proper avenue for ELNY shortfall payees to challenge the scope of the injunctions is to file a motion to modify with the Supreme Court.
• The shortfall payees never objected to the scope of the injunctions during the ELNY liquidation hearing nor demonstrated that the interests of justice required modification.
• Because the shortfall payees did not seek modification below, their attempt to raise this issue for the first time on appeal is not appropriate.
• The Supreme Court did not abuse its discretion by issuing and continuing its prior injunctions.
• The shortfall payees' assertions are based upon the false premise that the Superintendent and his agents were acting in their individual capacities in the ELNY rehabilitation.
• The ELNY shortfall payees are now asking the Appellate Court to allow ELNY policyholders and creditors to file lawsuits against the Superintendent outside of the receivership court and process.
• This request by the ELNY shortfall payees is directly contrary to the public interest in the single management of a liquidation that New York insurance law is intended to protect.

ELNY Shortfall Payees

• The Supreme Court lacked jurisdiction and statutory authority to permanently enjoin claims against the Superintendent in his personal capacity.
• Without addressing common law, the Superintendent's sole argument supporting subject matter jurisdiction is that New York Insurance Law authorizes the injunction.
• The ELNY shortfall payees agree that, if Section 7419 does authorize an injunction against personal-capacity claims, then the Supreme Court possessed subject matter jurisdiction.
• As a threshold issue, however, the Superintendent argues that the standard for reviewing the injunction order should be "abuse of discretion". That is incorrect.
• The dispositive issue on appeal is statutory interpretation. Can the words "prevents interference with the superintendent" authorize the injunction of claims against the Superintendent in his personal capacity?
• The Supreme Court's exercise of discretion becomes an issue only if the New York statute authorizes such an injunction.
• Section 7419 of the New York Insurance Law does not authorize permanent injunctions against personal-capacity claims.
• The Superintendent claims the statutory reference to injunctions as "the court deems necessary to prevent interference with the superintendent or the proceeding" insulates the Superintendent from liability for his own personal conduct.
• This interpretation is inconsistent with the Insurance Law and requires the Appellate Court to read the words "interferance with the superintendent" in isolation, ignoring all other words in Article 74.
• None of the cases cited by the Superintendent support the proposition that Section 7419 authorizes an injunction against personal-capacity claims - as opposed to official-capacity claims.
• The words and the distinction are taken directly from multiple New York appellate cases, and they are dispositive.
• Even if Article 74 authorized an injunction, it would be an abuse of discretion for Judge Galasso to use that authority to ban claims for which the Superintendent is not immune.
• Because New York law limits the immunity granted to private receivers, it is an abuse of discretion to grant unrestricted immunity in the guise of a blanket injunction.
• The Superintendent's claim that the ELNY shortfall payees are seeking an "unfettered right for all policy holders and creditors of ELNY to commence actions against the [Superintendent] outside of the receivership court" is incorrect.
• The ELNY shortfall payees merely ask that the scope of the injunction be consistent with New York law.
• The shortfall payees could not have appealed the original 1991 ELNY rehabilitation order. They lacked standing because they had not incurred any loss of benefits in 1991.
• Their basis for seeking appellate relief only occurred once Judge Galasso entered the ELNY liquidation order and injunction causing their loss of property.

For S2KM's complete and continuing ELNY reporting, plus copies of the shortfall payees' appellate briefs and an Executive Life timeline, 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 - Due Process 1

In a prior blog post, S2KM summarized the appellate brief filed August 17, 2012 on behalf of 18 structured settlement shortfall payees (objector/appellants) who are appealing the Executive Life Insurance Company of New York (ELNY) liquidation plan and restructuring agreement approved by New York Supreme Court Judge John M. Galasso on April 16, 2012.

This blog post provides a more detailed summary of due process allegations contained in the objectors' appellate brief. For additional related background information, see also "The ELNY Due Process Issue".

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.

The objecting ELNY shortfall payees allege they were denied due process because the procedures afforded the ELNY shortfall payees were unfair and prejudicial. More specifically they allege:

• The notices sent to the ELNY shortfall payees were inadequate and misleading.
  • Although the ELNY shortfall victims had a substantial interest in the ELNY liquidation hearing, they were not parties to the proceeding. They were never served with any petitions, orders, or filings.
  • Instead, Supreme Court Judge John M. Galasso permitted the New York Superintendent of Financial Services (Superintendent), as Receiver (Receiver), to send a single letter of notification.
    • The letters were sent from a Minnesota address and had an outward appearance of junk mail.
    • Hundreds of notices were returned undelivered presumably because the Receiver's records were outdated.
    • Many ELNY shortfall payees received their notices during the December holidays.
    • The notice was difficult for non-lawyers to understand and many shortfall payees experienced difficulty finding qualified legal counsel on such short notice.
  • The notice was misleading because it reassured shortfall victims that a $100 million ELNY hardship fund had been created without fully disclosing limitations related to the hardship fund.
  • The objectors were not given adequate time to object to the proposed ELNY liquidation plan ("three weeks for some recipients").
  • The notice stated ELNY shortfall payees waived their right to object after a January 16, 2012 deadline and therefore served to dissuade potential objectors who concluded they could not comply within the deadline.
  • Having imposed these court-endorsed impediments to the objection process, however, the Superintendent, as ELNY's Receiver, subsequently cited the low number of objections received (130 objections out of 1,456 affected shortfall payees) as evidence that the proposed ELNY liquidation and restructuring plan was fair.
• The time allowed for ELNY shortfall payees to prepare for the ELNY liquidation hearing, and their lack of access to information, were unreasonable.
  • S2KM Note: for perspective, here are excerpts from the Executive Life timeline available on the structured settlement wiki:
    • 1991 - ELNY enters rehabilitation and its plan for rehabilitation is subsequently court approved in 1992. Neither the 1991 ELNY rehabilitation order nor the 1992 order approving the ELNY rehabilitation plan declared ELNY to be insolvent. The Superintendent and his agent, the New York Liquidation Bureau (NYLB), as ELNY's Receiver, have managed ELNY's business continuously from 1991 to the present.
    • 2002 - ELNY's unpublished and unaudited financial statements, obtained by attorney Peter Bickford as a result of Freedom of Information Law requests, show that ELNY's surplus turned into a deficit in 2002.
    • 2007 - New York Governor Eliot Spitzer announces an "agreement in principle" for ELNY designed to continue paying all ELNY annuitants 100% of their benefits. The announced plan, however, whereby various insurers and guarantee associations agree to pay $650 to $750 million to fund approximately $2 billion of future ELNY payments, never materializes.
    • 2009 - Audited financial statements indicate ELNY has a deficit in excess of $1.5 billion. The National Organization of Life and Health Guaranty Associations (NOLHGA) estimates the majority of ELNY's guaranty association costs (e.g. 66-75%) will likely be borne by New York's two life insurance guaranty associations and that 20-30 state guaranty associations may eventually participate in a final ELNY liquidation plan.
    • 2010 - A New York State Supreme Court Judge orders the Superintendent to present the Court with a proposed order and plan of liquidation for ELNY which the Superintendent eventually files with the court on September 1, 2011.
    • December 7, 2011 - The NYLB, acting as the Superintendent's agent, mails letters to individual ELNY annuity payees notifying them for the first time about the proposed ELNY liquidation and Restructuring Agreement and alerting them of anticipated shortfalls for specific ELNY annuity contracts.
    • January 16, 2012 - deadline for ELNY liquidation Answering Papers (objections) to be served on the Superintendent in response to the petition.
    • March 15-30, 2012 - hearing before Judge Galasso of the New York State Supreme Court to consider the Superintendent's Petition for an Order of Liquidation and Approval of a Restructuring Agreement for ELNY.
  • Although the Superintendent (and his agents), as Receiver, spent years preparing for the ELNY liquidation and restructuring plan, the Superintendent provided ELNY shortfall payees with inadequate time to: 1) review and comprehend their complicated legal dilemma and proposed ELNY restructuring plan; 2) find an attorney qualified and willing to represent their interests; and 3) prepare a response.
  • Had the ELNY shortfall payees been given adequate notice (at least as early as 2010), they could have begun taking steps to protect themselves. For example: they could have: 1) sought counsel; 2) pooled resources to hire consultants; 3) exercised their rights as annuity payees; 4) made appropriate demands on the Receiver; and 5) offered a meaningful response at the Order to Show Cause hearing.
  • Despite requests and objections, the Superintendent, as Receiver, withheld material information from the shortfall payees and their attorneys. Without these documents, attorneys for the shortfall payees were not able to verify and/or effectively question the assumptions or conclusions of the Receiver’s expert.
  • Conversely, years prior to the ELNY liquidation hearing, the Superintendent not only notified NOLHGA and various insurance companies about the pending ELNY liquidation, he also shared documents with them and invited and accepted their input into the drafting of the proposed ELNY liquidation plan.
  • However, when attorneys for the shortfall payees sought to submit their own alternative liquidation and restructuring plan for comparison, both the Receiver and Judge Galasso refused their input - with the Receiver repeatedly citing the absence of an alternative plan as evidence that his plan was viable and fair.
• Judge Galasso selectively applied procedural rules to the detriment of the ELNY shortfall payees.
  • Despite objections, Judge Galasso permitted the Superintendent, as Receiver, to establish critical components of its case through hearsay and speculative testimony.
  • As one example, Judge Galasso characterized as a "gun to my head" repeated threats by attorneys representing the Superintendent, as Receiver, and NOLHGA that voluntary contributions from insurance companies for an ELNY hardship fund would "go out the door" if Judge Galasso refused to approve the Superintendent's plan. This threat, however, was completely unsupported by admissible evidence and one of the Superintendent's own witnesses admitted such predictions were speculative.
  • In addition, Judge Galasso permitted the Superintendent's attorneys to admit into evidence binders of exhibits never served on the payees as well as a revised version of the Superintendent's restructuring plan not filed until March 6, 2012, less than 10 days before the hearing and more than six weeks after the objection period had ended.
  • By comparison, Judge Galasso repeatedly denied requests by attorneys for the ELNY shortfall payees for documents which the Superintendent had shared with NOLHGA and various insurance companies and their counsel.
  • There was no justification for Judge Galasso to allow the Superintendent and his attorneys to play "hide the ball" - refusing to share documents with shortfall payees to whom the Superintendent, as Receiver, owed an affirmative duty of disclosure while sharing those same documents with other parties including NOLHGA, various insurance companies and their attorneys.

 September 7, 2012 is the deadline for the Superintendent (Respondent), as Receiver, to serve and file his appellate brief. NOLHGA has requested and is expected to file its own appellate brief. For S2KM's complete and continuing ELNY liquidation 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.

Elephant in the ELNY Court Room

Due to a lack of basic accountability standards, New York’s receivership system has failed Executive Life of New York (ELNY), its policyholders and beneficiaries, as well as the insurance industry and its customers, according to New York attorney Peter Bickford in a new article titled "The Elephant in the Court Room".

Bickford, whose legal specialties include insurance and reinsurance operational, regulatory and solvency issues, has written previously about the "flawed receivership process" in New York that he maintains has resulted in ELNY's liquidation and restructuring. See, for example, "The Trouble with ELNY".

Bickford's newest article expands this critique and provides a valuable summary analysis of the ELNY failed rehabilitation and subsequent liquidation hearing.

Bickford observes that the 1992 ELNY rehabilitation plan, "like the Titanic, was doomed the moment it left port". For reasons never satisfactorily explained, the ELNY rehabilitation plan differentiated between ELNY's traditional life and annuity business and its single premium annuities individual annuities (SPIAs) including all ELNY structured settlement annuities.

Pursuant to its rehabilitation plan, ELNY's traditional business was transferred to Metropolitan Life, along with ELNY's strongest statutory reserve assets, and these policyholders "received an equivilent (sic) policy from Met Life and suffered no material financial consequences." Although administered by Met Life, the structured settlement annuities and other SPIAs were left in ELNY along with its weakest ("junk bond") assets.

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent. According to annual reports of the New York Liquidation Bureau (NYLB), which Bickford obtained through Freedom of Information Law requests, ELNY's cash flow went negative in 2002 - ten years following court approval of its Rehabilitation Plan and ten years before its Liquidation Order and Restructuring Plan were approved by New York State Supreme Court Judge John Galasso.

Bickford points out that even before ELNY's first external audit in 2006 (resulting in a substantial increase in reserves), the NYLB acknowledged that the reserve standard used in its annual statements “substantially understate[d] reserves when compared to reserves that would be required to satisfy regulatory requirements for a going concern insurance carrier.”

Bickford asks: "why weren’t proper accounting and reserve levels required or maintained, particularly for an entity that was solvent at the time it was taken into rehabilitation to protect it and its policyholders?"

The explanation, according to Bickford, results from fundamental flaws in New York's life insurance receivership process. "Counter intuitively" Bickford states, "when a company is placed in rehabilitation in New York the company ceases to be regulated":

• "The rigorous statutory requirements for filings, reports or certifications imposed on other licensed companies are no longer imposed on estates in rehabilitation;"
• "[T]here are no periodic regulatory reviews, examinations or communications;"
• "[T]here is no regulatory oversight of the operations, assets or finances; and"
• "[T]here is no mechanism for regulatory oversight of financial condition or compliance with the insurance law or regulations."

If ELNY had not been in rehabilitation, Bickford maintains "it is highly unlikely that the regulators would have allowed it to get to the point where the estate is today." Assuming ELNY had become insolvent outside of rehabilitation, Bickford asserts "the company’s officers and directors, its independent auditors, actuaries and other agents, could all potentially — and probably would — have been held accountable for their actions or inactions contributing to its failure."

Although New York Insurance Law, according to Bickford, does not provide immunity for the Superintendent or his agents in his separate, non-regulatory role as receiver, Judge Galasso granted judicial immunity, as requested by the Superintendent, in the ELNY Liquidation Order. In addition, Judge Galasso accepted the totality of the Superintendent's arguments and approved the ELNY Restructuring Agreement as proposed by the Superintendent and NOLHGA.

The result of the ELNY Liquidation Order and Restructuring Plan, even following contributions from state guaranty funds and voluntary life insurance company contributions, is a $900 million shortfall allocated entirely (and arguably inequitably) to approximately 1550 ELNY payees (including all structured settlement payees) out of a total of approximately 9700 current ELNY payees. The remaining, approximately 8150 current ELNY payees expect to receive 100 percent of their promised future payments.

To what extent will defendants and liability insurers supplement the ELNY structured settlement shortfalls? The answer is uncertain and depends, in part, on an issue S2KM addressed in a prior blog post: do qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the ELNY liquidation?

Bickford's article provides a succinct summary of objections raised by ELNY shortfall victims and their attorneys to the ELNY liquidation proceedings and ELNY restructuring plan:

• "Given the complexity and consequence of the proposed plan, the notice provided to payees was inadequate and untimely;
• "The plan will be administered and overseen by the very people that caused the shortfall — the rehabilitator and his agents;
• "The people most affected by the plan, the shortfall payees, were not consulted in the development of the plan and have not been given any reasonable opportunity to consider and propose an alternative plan;
• "The requested judicial immunity for the rehabilitator and everyone connected with the plan and its implementation is unprecedented and unwarranted given the failed history of the rehabilitation;
• "By placing the full burden of the shortfall on a small percentage of the payees, the plan is neither fair nor equitable, and creates an improper subclass of claimants; and
• "Collectively these objections, including a denial of any right to opt out of the plan, constitute an unconstitutional taking of property without due process." Note: for a summary of the due process issue, see this prior S2KM blog post.

Bickford's article further highlights the following legal issues which he states "could linger in the courts for years":

• "The propriety of the court including the rehabilitator’s request for judicial immunity for himself and his agents in the signed liquidation order;
• "Whether the up front netting of the guaranty funds’ subrogation rights (so that no guaranty fund actually pays its full cap on any claim) contradicts the legislative intent of the caps;
• "Whether the plan results in an improper sub-class of claimants — the shortfall annuitants;
• "The scope of claim-over rights of shortfall annuitants against policy owners, insurance brokers, attorneys or others involved in the original settlements;
• "The role and rights of factors that acquired claim payments from annuitants; and
• "The scope of responsibility of the rehabilitator and his agents as fiduciaries for all ELNY policyholders and payees for the failed rehabilitation."

Bickford's article concludes with a critical observation: although the ELNY Restructuring Plan may solve the immediate ELNY problem (at the expense of the remaining ELNY shortfall victims), it does not address the broader, underlying systemic defects inherent in the New York life insurance receivership system.

For additional articles by Peter Bickford, see his website. For S2KM's complete and continuing ELNY reporting, see the structured settlement wiki.

ADDENDUM (July 4, 2012): Bickford's article adds one additional observation that should be highlighted. ELNY's liquidation will apparently exhaust the New York life insurance guaranty fund. Without an act of the New York legislature, according to Bickford, "there will be no life insurance guaranty fund coverage in New York" following ELNY. For additional information about the role of state guaranty funds in the life insurer liquidation process, see this prior S2KM blog post.

ELNY Liquidation Order

S2KM's summary of Judge John M. Galasso's Memorandum Decision for Executive Life of New York (ELNY) left open the question of whether Judge Galasso had granted judicial immunity to the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver.

Immunity Issue

The corresponding Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by Judge on April 16, 2012 confirms the grant of immunity as follows:

"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 ..."

A copy of both Judge Galasso's ELNY Decision and the ELNY Liquidation Order are posted on the structured settlement wiki.

Although expected, this judicial grant of immunity is controversial because, according to some legal experts:

• New York insurance laws do not specifically grant legal immunity to the Superintendent, as Receiver.
• ELNY was not judicially determined to be insolvent until Judge Galasso signed the April 16, 2012 Order.
• The Superintendent and its agents, including the NYLB, have "managed" ELNY since it first entered Rehabilitation in 1991.

For background about the immunity issue, see "The Trouble with ELNY", S2KM's review of an article by Peter Bickford.

Factoring Companies

Neither the ELNY Memorandum Decision nor the Liquidation Order address another controversial ELNY issue: whether participating state guaranty associations (PGAs) will provide coverage for ELNY structured settlement annuities where payment rights have been transferred to factoring companies and subsequently sold to investors as securities.

One result of protecting factoring companies and ELNY structured settlement payment right investors could be a reduction in funds available to other ELNY shortfall victims. Some industry experts have estimated that payment rights from as many as 1000 of ELNY's 4168 structured settlement annuities (SSAs) have been transferred to factoring companies and their investors.

According to Schedule 1.15 of the ELNY Restructuring Agreement, 1459 SSAs will experience shortfalls ("uncovered amounts") as a result of ELNY's liquidation and restructuring even assuming state guaranty association contributions and enhancements.

No Closing Date Set

Neither the ELNY Memorandum Decision nor the Liquidation Order identify a closing date for the ELNY Restructuring Agreement. Until that date, the Receiver is directed to continue full payment of all benefits for all ELNY contracts. The Court will retain subject matter jurisdiction over the Restructuring Agreement and ELNY successor company, Guaranty Association Benefits Company (GABC).

The ELNY Liquidation Order requires that all claims against ELNY must be presented to the Receiver within four months of ELNY's Liquidation Date. However, all ELNY policyholders and "holders of Claim-Overs" who appear on ELNY's books and records as of Liquidation Date are deemed to have satisfied this requirement.

The ELNY Liquidation Order requires the Receiver to provide notice of the Order to all ELNY creditors, policyholders and other interested parties and provides a Notice Form as an Exhibit.