636 B.R. 596
Bankr. D. Del.2021Background
- Multiple affiliated Windhaven entities filed Chapter 7 in Delaware in March–April 2020; a Chapter 7 Trustee was appointed.
- Windhaven National Insurance Company (WNIC) is a non-debtor insurer in liquidation in Texas receivership; RRC is its Special Deputy Receiver.
- Windhaven Services, LLC and Windhaven Insurance Services, LLC (the MGAs) had MGA agreements with WNIC requiring separate premium escrow accounts and stating collected premiums were held in a fiduciary capacity for WNIC; MGAs retained commission and certain interest.
- Approximately $6+ million in disputed funds (premium escrow accounts, a refund account, mis-deposited funds, and amounts held by a credit-card processor) are claimed by RRC as held in trust for WNIC; the Trustee contends the funds are estate property and asserts setoff rights.
- RRC moved for relief from the automatic stay to allow the Texas Receivership Court to decide rights to the Disputed Funds, arguing the Texas Insurance Code (via McCarran–Ferguson) reverse-preempts the Bankruptcy Code; the Trustee opposed and sought to litigate in Delaware.
Issues
| Issue | Plaintiff's Argument (RRC) | Defendant's Argument (Trustee) | Held |
|---|---|---|---|
| Whether McCarran–Ferguson reverse-preempts the Bankruptcy Code here | Texas Insurer Receivership Act regulates the business of insurance and therefore reverse-preempts conflicting federal bankruptcy law | Bankruptcy Code does not specifically relate to insurance; this dispute requires contract interpretation of MGA agreements and federal court can adjudicate property rights | No reverse-preemption; federal court may determine whether funds are estate property because the dispute centers on contract interpretation under the MGAs |
| Whether "cause" exists to lift the automatic stay under 11 U.S.C. § 362(d)(1) | Reverse-preemption and RRC's interest justify lifting stay so Texas court can decide; Texas Commissioner has an interest | Litigating in Texas would impose additional expense on the estate; RRC has not shown hardship or a meaningful probability of success | No cause shown; stay not lifted — Trustee would be harmed and RRC failed to show sufficient hardship or likelihood of success |
| Whether the Court should permissively abstain under 28 U.S.C. § 1334(c)(1) | Comity and the Texas Receivership Court’s expertise in Texas Insurance Code favor abstention | Bankruptcy court should retain jurisdiction because resolution affects the estate and is centered on contract interpretation | Permissive abstention denied after balancing the 12 factors; weighted factors (estate administration, state-law predominance, core v. non-core) do not support abstention |
| Whether disputed funds are outside the estate as trust/fiduciary property (§ 541(d)) | Funds are held in a fiduciary capacity for WNIC under the MGAs and therefore are not estate property | Trustee asserts funds are estate property and subject to setoff; court must interpret MGAs to decide | Court retains jurisdiction to adjudicate property rights under the MGA agreements; no categorical exclusion ruled — determination to be reached by interpreting the contracts |
Key Cases Cited
- Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979) (scope of McCarran–Ferguson Act and when state law regulates the "business of insurance")
- U.S. Dep't of Treasury v. Fabe, 508 U.S. 491 (1993) (state insolvency priorities protecting policyholders may escape federal preemption)
- Sec. & Exch. Comm'n v. Nat'l Sec. Inc., 393 U.S. 453 (1969) (distinguishing laws that "regulate the business of insurance")
- In re Downey Fin. Corp., 428 B.R. 595 (Bankr. D. Del. 2010) (factors for lifting the automatic stay and analysis of prejudice to the estate)
- In re The SCO Group, Inc., 395 B.R. 852 (Bankr. D. Del. 2007) (circumstances in which a slight probability of success may support stay relief)
- In re Maxus Energy Corp., 560 B.R. 111 (Bankr. D. Del. 2016) (application of permissive abstention factors and balancing analysis)