429 Mass. 140 | Mass. | 1999
A judge of the United States District Court for the District of Massachusetts has certified two questions to this court, pursuant to S.J.C. Rule 1:03, as appearing in 382 Mass.
The receiver commenced an action in the Supreme Judicial Court for the county of Suffolk, and MARC removed it to the United States District Court. After a hearing on cross motions for summary judgment, the judge determined that he would certify two questions to this court. The questions are:
“1. Whether under Massachusetts law a. creditor of an insolvent Massachusetts insurer in liquidation may offset amounts owed to the insolvent insurer against amounts owed to the creditor from the insolvent insurer.
“2. Whether under the terms of the contracts between them and pursuant to Massachusetts law, MARC may offset amounts owed, respectively, to AMLICO and AMI (insolvent Massachusetts insurers in liquidation) against amounts owed, respectively, from AMLICO and AMI.”
The first question concerns the effect, if any, on MARC’s right of setoff of the priorities set forth in G. L. c. 175, § 180F, for distribution of an insolvent insurer’s assets to creditors.
1. The general principle has long been established that a setoff is appropriate between mutual debtor-creditors, even if one of them is insolvent at the time the right to the setoff is asserted. Greene v. Hatch, 12 Mass. 195, 198 (1815) (to do otherwise would be “exceedingly unjust”). See Massachusetts Motor Vehicle Reinsurance Facility v. Commissioner of Ins., 379 Mass. 527, 538 (1980); Friedman v. Commissioner of Banks, 291 Mass. 108, 111 (1935) (“In the ordinary case of set-off by a depositor against an insolvent bank there is no preference created thereby”); Bachrach v. Commissioner of Banks, 239 Mass. 272, 273 (1921). See also Scott v. Armstrong, 146 U.S. 499, 510 (1892); Carr v. Hamilton, 129 U.S. 252, 255-256 (1889). The obligations must be mutual, that is, “the same parties] in both claims.” Friedman v. Commissioner of Banks, supra at 112.
Passing by, for the moment, the possibility that the relationship between insurer and reinsurer may call for a different result, we conclude that a creditor of an insolvent insurer may apply amounts that it owes to the insolvent insurer as an offset against amounts that the insolvent insurer owes to it. There is nothing explicit or implicit in the statutory scheme for the liquidation of insolvent insurers (G. L. c. 175, §§ 180A-180L) that makes common-law principles of setoff inapplicable. Authority that we have cited in our discussion of common-law setoff addresses statutorily regulated liquidations of banks and insurance companies without any suggestion that rules of setoff would be different in a receivership or liquidation. See, e.g., Massachusetts Motor Vehicle Reinsurance Facility v. Commissioner of Ins., 379 Mass. 527, 532 & n.9 (1980) (receivership not governed by G. L. c. 175, §§ 180A-180L, the Massachusetts version of the Uniform Insurers Liquidation Act). Any idea that, in such cases, the creditor who is allowed a setoff receives an improper preference is either explicitly or implicitly rejected. See Scott v. Armstrong, 146 U.S. 499, 510 (1892) (“Where a set-off is otherwise valid, it is not perceived how its allowance can be considered a preference, and it is clear that it is only the balance, if any, after the set-off is deducted which can justly be held to form part of the assets of the insolvent”); Scammon v. Kimball, 92 U.S. 362, 366 (1875) (insurance company bankruptcy); Rossi Bros. v. Commissioner of Banks, supra. Cf. Greene v. Hatch, 12 Mass. 195, 198 (1815) (“it would have been exceedingly unjust to compel [the creditor] to pay the whole sum, and then receive a small dividend on the very money he had paid, perhaps the only money to be divided”).
2. We turn then to the question whether there should be a different rule concerning setoff if the creditor of an insolvent insurer is a reinsurer of that insolvent insurer. Statutory provisions governing the liquidation of insolvent insurers in liquida
The argument that the reinsurer would receive an improper preference through setoff, while reasonable (see Bluewater Ins. Ltd. v. Balzano, 823 P.2d 1365, 1374 [Colo. 1992]), has been generally rejected in this country. It was rejected in 1998 when the Legislature added Massachusetts to the rest of the States having legislation allowing reinsurers to have setoffs in insurer insolvencies. St. 1998, c. 258, § 1, amending G. L. c. 175, § 180C. That statute, which was enacted after the questions were certified to us, expressly disclaims any retroactive application (St. 1998, c. 258, § 2). It leaves the priorities of G. L. c. 175, § 180F, intact and allows setoffs to reinsurers. The pattern of our cases concerning equitable setoffs, when one party is insolvent and common-law principles apply, is consistent with the public policy expressed in the new statute. See Transit Cas. Co. v. Selective Ins. Co., 137 F.3d 540, 544-545 (8th Cir. 1998) (“to allow set-off aligns Missouri . . . with almost all other states. . . . Indeed, since Transit’s insolvency, Missouri has enacted a set-off provision, an indication that set-offs likely did not violate public policy prior to the enactment”); Stamp v. Insurance Co. of N. Am., 908 F.2d 1375, 1380 (7th Cir. 1990) (“if the large firms could not count on the netting of balances to satisfy obligations, they would be more likely to exclude smaller or tottering firms — making new entry harder and precipitating failures of firms in difficulty”); Prudential Reinsurance Co. v. Superior Court, 3 Cal. 4th 1118, 1139-1142 (1992); Matter of
The receiver relies on insolvency clauses in certain of the reinsurance agreements. An insolvency clause provides that, in the event of the ceding insurer’s insolvency, reinsurance will be paid directly to the ceding insurer or its receiver “without diminution because of the insolvency of the Company.” This provision is included in such an agreement “to overcome the holding of Fidelity & Deposit Co. v. Pink, 302 U.S. 224, 227-229 (1937), that a standard reinsurance treaty ‘against loss’ renders the reinsurer liable only upon proof of payment of losses by the insurer.” Massachusetts Motor Vehicle Reinsurance Facility v. Commissioner of Ins., 379 Mass. 527, 534 n.10 (1980). Such a provision, in a statute or in a reinsurance agreement, is intended to increase the reinsured company’s capacity to write insurance and is not designed to destroy a reinsurer’s right of setoff. See G. L. c. 175, § 20A (4); Prudential Reinsurance Co. v. Superior Court, supra at 1135; Matter of the Liquidation of Midland Ins. Co., supra at 263-264; Olson, Reinsurers’ Liability to the Insolvent Reinsured, 41 Notre Dame Law. 13, 22-23 (1965-1966).
We answer both certified questions in the affirmative.
The Federal judge summarized those priorities as follows:
“(1) Expenses of administration;
“(2) Compensation of employees other than officers for services rendered within three months prior to the commencement of [the liquidation proceeding] . . . ;
“(3) Claims for taxes and debts due to federal or any state or local government which are secured by liens perfected prior to the commencement of delinquency proceedings;
“(4) Claims by policyholders, beneficiaries, and insureds arising from'and within the coverage of and not in excess of the applicable limits of insurance policies and insurance contracts issued by the company, and claims presented*142 by the [guaranty funds of Massachusetts and other states]; provided that the workers’ compensation claims afforded a preference in section forty-six A shall be treated as preferred only as respects all other claims in this clause; and
“(5) All other claims.”
Setoff may not be appropriate when another person is also a creditor or debtor with respect to the same debt. See Commonwealth v. Shoe & Leather Dealers’ Fire & Marine Ins. Co., 112 Mass. 131, 135 (1873) (setoff appropriate “provided no other person was interested on either side as creditor or debtor”). Contrary to the suggestion in Massachusetts Motor Vehicle Reinsurance Facility v. Commissioner of Ins., 379 Mass. 527, 539 (1980), we do not view the case just cited as authority for the proposition that allowance of an equitable setoff against the assets of an insolvent company would give a claimant an improper priority over other creditors of the same class.
