*1 S014036. Nov. [No. 1992.] Petitioner, COMPANY,
PRUDENTIAL REINSURANCE COUNTY, THE SUPERIOR COURT OF LOS ANGELES Respondent; Commissioner, etc., GARAMENDI, JOHN as Insurance Real Party Interest.
Counsel Adams, Hazeltine, Mitchell, & Duque Robert Margaret M. John L. Levy, Viola, Lai, Chrisbens, Wilson, Elser, Moskowitz, Vicki W. W. F. Christopher Dicker, Manisero, Blanc, Gilburne, Edelman & Patrick M. Thomas R. Kelly, Johnston, Klouse, Kronstadt, Austin, Williams & R. Gary John A. & Sidley Chaffetz, Letson, Chun, Mount, Peter R. Janet M. Hoon Mendes & Valerie Gordon, LeBoeuf, Lamb, MacRae, Hufstedler, A. & Sanford Leiby Kingsley, Miller, Olson, Porter, Kaus & John P. & Daniel Beardsley, Arnold M. Lewis & P. Gary Poon for Petitioner. Cave, McRoberts, Stano,
Bryan, McPheeter & Martin J. E. Foley, Phillip Goodman, Blaine, Daniel J. Richard Conway, E. Jack H. A. Ber- Craig rington, Ronald S. Gass and John J. Amici Nangle as Curiae on behalf of Petitioner.
No appearance for Respondent. Rubinstein, Rubinstein & McCain, Karl Perry, L. Kathleen Melissa S. M. Kooistra, Brooks, Dana Carli John Van de K. Lungren, and Daniel E. Kamp Jue, General, Mamer, B. T. Attorneys Kerry Raymond Edmond B. Jack General, for Real Interest. Deputy Attorneys Party Perrochet, Horvitz, & & Levy, Barry Levy, Spiegel Horvitz Ellis J. R. Lisa McDiarmid, Brown, Kimball, Bogorad, Richard A. L. S. Spencer Cynthia Babbin, E. Diane J. R. Alexander and Charles Erd- Lautrup, Jeffrey Hugh II mann as Amici Curiae on of Real Interest. Party behalf Opinion
LUCAS, (all C. J. further Code section 620 references statutory Insurance stated) are to this code unless otherwise defines a reinsurance contract as “one which insurer a third insure him procures loss person such liability reason of a original insurance.” under reinsur- Typically, contract, ance insurer “cedes” primary portion a for its premiums and the on policies, losses those policies, to reinsurer. transaction,
In a reinsurance policyholders pay premiums original their insurer, who, turn, a reinsurer a pays of the initial as percentage premiums If, consideration for reinsuring a a specified original risk. after part loss, the original insurer must compensate its the reinsurer in policyholders, turn indemnifies the insurer. The advantage reinsurance is to secure to the original insurer risk adequate distribution a by transferring portion of risk Hall, assumed to another insurer. & Liability The Reinsurer’s (Semple in the Event the Insolvency Ceding Property Casualty (hereafter Insurer Hall) & Semple (1986) 21 Tort & Ins.L.J. 407 agreement [“A one by which the reinsurer indemnifies the ceding company losses paid”].)
We granted review to determine as a matter of first whether impression *6 reinsurance debts and credits generated between a reinsurer and the original insurer, under contracts, terms their reciprocal reinsurance bemay set 1031, off pursuant to section when the insurer original becomes insolvent. Section provides 1031 in pertinent “In part all that: cases of mutual debts or mutual credits between in the person under liquidation Section 1016 and any such person, credits and debts shall set off and the be balance only shall be allowed or . . paid. .”
Section 1031 allows setoff of all mutual debts and credits in the course of liquidation proceedings patterned after federal Bankruptcy Act 108, (11 of 1898 U.S.C. 553), and reenacted repealed § as 11 U.S.C. § an identical New York has (N.Y. statute that been adopted several states by 7427). The federal Law, 1985), as recodified (Consol. § former 420
Ins. § right in derived from equitable were turn New York provisions in federal early adopted and later England, in century 17th setoff established v. (Downey context. the insurance setoff allowing equitable court cases 484]; see also P.2d 335-336 (1951) 102 Humphreys Cal.App.2d [227 [allowing (2 Otto) 362 L.Ed. (1876) 483] U.S. v. Kimball Scammon unrelated insured against insurer’s deposits to setoff insolvent banker losses].)1 to the pertaining there remain questions setoff is
Assuming permitted, the insurer. and other claims liquidation relative of setoff priorities in section rule of section 1031 is provided An exception general when (a) (hereafter 1031(a)), which does not allow section subdivision does not other person to such liquidation “obligation person in the share as a claimant such setoff to claiming entitle such other person consider we must also Accordingly, such person liquidation.” assets of if has insufficient setoff claims the estate 1031(a) whether section allows the California and claims of all satisfy fully primary policyholders assets claims, setoff, have (CIGA) absent Guarantee Association whose Insurance general of reinsurers and other (under section over those priority claimants considered priority Because reinsurers are not creditors.2 after remaining priority money the amount of setoff insolvency proceeding, statutory prefer- before would be less than that available claimants paid ence is to other claimants. given construed as reasonably be
We conclude that section
ability
insurer’s
to set off on the insolvent
a reinsurer’s
conditioning
part
as
of interstate
1Although
government
power
regulate
has the
insurance
the federal
(U.S.
1162]),
commerce
L.Ed.
64 S.Ct.
Assn.
priorities. we higher explain, full the those in classes. As priority claims of pay statutory of state and federal courts setoff majority addressing Thus, this we hold that the reinsurance contracts adopt position. reciprocal here created “mutual and debts” under section 1031. issue credits 1031(a) We also conclude not setoff this preclude that section does has a legal case. Plaintiff reinsurer shown contractual and entitlement to the insurer, status of creditor the two of the insolvent and contract between entities does make setoff on the ultimate financial contingent ability the original insurer its all estate to first claimants pay higher priority classes. we that
Finally, determine any policy favoring considerations payment under insureds original policies may not override the unequivocal language of section 1031 or favoring To setoff in this policies setoff. disallow case intent, only would not subvert clear but would also lead to an legislative consumer, increased cost of insurance for the because an insurer’s offsetting debts spreads risk incurred often insurer and allows smaller insurers to remain in (See business. Stamp v. Insurance Co. North America (7th Cir. 908 F.2d [offsetting debts risk acts as spreads mutual security for performance].) Background
I. 2, 1982, On February (Commissioner) Commissioner of Insurance placed (Mission) Mission Insurance Company and its affiliated insurance companies into (§ due to conservatorship (d) insolvency. subd. [vest- title ing to assets in Commissioner when transaction insurer’s of business is later, hazardous to Several policyholders].) weeks the Commissioner ob- tained an order pursuant authorizing section liquidation Mission companies. The Commissioner was appointed liquidator, there- after demanded all reinsurers of Mission in full the pay amounts owed under their reinsurance contracts. The reinsurers refused to make such pay- ments, claiming that under section were entitled set they off the amounts owed by for Mission and “unearned proceeds premi- (or ums” amounts insureds prepaid coverage days months ahead), insurers, owed to them the insolvent against they debts owed the insolvent insurers under reinsurance contracts executed prior insol- vency. The Commissioner commenced the action underlying reinsurers, and brought present motion summary judgment against peti- tioner Prudential (Prudential Reinsurance Company Reinsurance) to compel setoff, payment, without owed moneys the Mission companies. granted trial court the Commissioner’s motion on summary judgment ground section allows when the assets of the only *8 in full all the claims asserted estate are sufficient to liquidating pay the setoff asserting classes than the claimant higher claimants priority words, makes the the court concluded that section 1031 right. financial ability of setoff on the ultimate statutory right contingent classes in full all claimants section 1033 priority estate to liquidation pay than the setoff claimant. higher and federal court that
The Court of followed the rule of state Appeal every and issued a peremp- has considered the reinsurer’s to right statutory its order granting writ of mandate the trial court to vacate tory ordering Prudential Reinsur- enter a new order summary judgment allowing to review of this ance the of setoff. The Commissioner seeks our right judgment. of Appeal
As we we of the Court explain, adopt thoughtful analysis 1031 and 1033 allows and conclude that of sections plain reading and credits after the insolvent insurer and a reinsurer to set off debts of a Because we with the Court of appointment liquidator. agree Appeal debts, Prudential entitled we affirm the Reinsurance is to set off Mission’s of Appeal’s judgment. Court
II. Discussion A. The Reinsurance Contracts contracts, to shift a indemnity,
Reinsurance as contracts of operate original of the risk of loss under the insurance from the insurer part policy Practice, 11.01, (1 the reinsurer. Cal. Insurance Law & Reinsurance § 11-6, insured, however, 11-7.) The the original remains with pp. privity insurer, Thus, (Ibid.) and the reinsurer owes no duties to the insured. insured has no contract or bad faith actions original pursue 623; (§ Corp. (1986) the reinsurer. Ascherman v. General Reinsurance 1].) Cal.App.3d Cal.Rptr.
Reinsurance contracts are classified as either “facultative” or “treaty.” if Reinsurance is facultative it covers the on an individual reinsured’s risk policy. majority reinsurance contracts are under a which placed treaty, covers the (1 reinsured’s risk for an entire class Cal. Insurance of policies. Practice, 11.02, Law & 11-22.) at p. case,
In the Prudential under present Reinsurance is the reinsurer reinsurance treaties. The refer A” parties as “Relation these treaties contracts; these contracts reinsure the The other reinsur- Mission companies. ance contracts at issue here are called and reinsure “Relation B” contracts
1127 Gibraltar, Prudential Reinsurance as Mission is subsidiary, and its principals. contracts; the reinsurer under all latter a related company, but one these remaining reinsurer under the Company, Mission National Insurance is the contract. A”
The setoff clauses of the “Relation contracts substance that provide Mission, reinsureds), named and Prudential (as other Mission subsidiaries that thereto offset (as reinsurer) Reinsurance agree may any parties all reinsurance debts or them “under the or any owed same between them.” of the clauses agreement acknowledge Some thereto, that in the a rights event of controlled party by section 1031. the “Relation B” contracts also Prudential Similarly, grant Reinsurance the to set due Mission express right moneys against off from due Mission amounts under same or other reinsurance contract mind, between we Keeping background them. this now turn to issues before us.
B. Mutuality above, in
As noted 1935 the a Legislature right of set- granted statutory off under “in section 1031 cases all of mutual debts or mutual credits.”
The
to setoff is the
key
requirement of mutuality.
Benjamin
Justice
mutual,
Cardozo defined mutuality as follows: “To be
must be
debts]
[the
due to and from the same
(Beecher
persons
capacity.”
same
v. Peter A.
831,
Vogt Mfg.
(1920)
al„
833];
Co.
468
N.Y.
Marick
N.E.
see
et
[125
Excess, Surplus Lines and
Developments (1991)
Reinsurance: Recent
26 Tort
231,
&
244.)
Ins. LJ.
Later cases
required
subject
be mutual in
debts
First,
three
with,
respects.
the debts must be owed contemporaneously
or
of,
prior
words,
to issuance
order. In other
liquidation
preinsolvency
off,
debts
bemay
set
but a
off
preinsolvency
debt
not be set
debt
after
arising
appointment
(See,
of a liquidator.
v.
e.g., Stamp
Insurance
America,
1379;
Co. North
supra, 908 F.2d at
v.
Downey Humphreys,
102 Cal.App.2d at p.
Next, such debts must
between
exist
the same
persons or entities
order
to establish mutuality
(Matter
of identities.
(N.Y. 1992)
Midland Ins. Co.
1.
The Commissioner first the reinsurance be obligations contends Reinsurance, Gibraltar, tween Prudential its and Mission did not subsidiary, meet the because the debts contemporaneous requirement mutuality, for losses) owed are by reinsurers to Mission on insured (namely, payments debts, (name while postliquidation those owed to the reinsurers Mission ly, past-due premiums) debts. Commissioner reasons preliquidation that the reinsurance and the return of not be proceeds policy premiums may set off because those debts are debts that will not due until be postliquidation loss claims are allowed or As the Court of policyholders’ liquidated. observed, however, herein the Commissioner’s assertion not Appeal sup section 1031 or case ported by law. 1935,
Prior to the enactment of
sections 1031 and 1033
California and
federal decisions
addressing
common law doctrine of
setoff
equitable
held that debts and credits of an insolvent insurer amounted mutual
for
if
obligations
setoff even
were
purposes
equitable
obligations
until
technically
payable
estate.
closing
insolvency
669,
For
Carr v. Hamilton
example,
receivership pursuant to set all due the agent premiums off insurer claims due policyhold- ers. also retained funds due agent up as earned commissions date *11 Thereafter, of the insolvency. the agent demanded that the liquidator pay him all amounts the premium for written less earned com- newly policies, missions which were routinely set off. The claimed the agent that initial policy premiums became “unearned because the order premiums” insolvency effected a breach of those by the insurer. policies setoff,
After the trial court allowed the Court of affirmed on Appeal the ground that between agreement and the that their agent insurer other, cross-claims should mutually compensate each established the neces- sary relationship between the of debtor and parties—that creditor—to permit the setoff. (Downey v. Humphreys, supra, 335-336.) In at Cal.App.2d pp. that, so holding, Downey court reasoned “At the time was [the insurer] insolvent, 19, 1933, adjudicated the time the April at was liquidator 28, 1933, June appointed, the statute providing proceedings against insurance delinquent companies (Stats. was silent to the right as of setoff. 1919, 265, 1933, as p. 1420.) amended Stats. In 1935 the statute p. was amended to provide for of (Stats. setoff mutual debts mutual credits. 544.) The statute based was on the York New law and was but the enactment of the rule. The prevailing Act provides Bankruptcy [Citations]. for a setoff of mutual (11 debts mutual 108.)” credits. U.S.C.A. § (Downey, supra, 102 Cal.App.2d
“A receiver occupies no position better than that which was occupied by the party for whom he acts. . . The . right to be determined by [of setoff] the condition things as existed at the they moment the was party adjudged If insolvent. the right time, was setoff available to defendant at that [the did not defeat it. fact insurer] that the [Citations.] policyholders received their unearned premiums did not create unlawful preference.” (Downey 335-336; v. Humphreys, supra, 102 Cal.App.2d see also O’Connor v. (N.D.Ill. Insurance Co. North America 611, 619 F.Supp. [accord].)
The Commissioner asserts that even Downey Humphreys, supra, under v. 335-336, Cal.App.2d setoff if pages must be disallowed the debts were not debited and credited to the of a prior appointment liquidator. clear, however, Downey court made it that the liquidator succeeds assets, insolvent insurer’s interest in subject legislatively limita- imposed tions existing against insolvent prior (Ibid.) liquidation. Californiа
Although courts have not right addressed of setoff statutory since Downey other jurisdictions have more discussed the recently issue, and we look to them for guidance. For O’Connor example, Insurance Co. (O’Connor), North America supra, 622 F.Supp. court considered the issue whether debts owed under reciprocal reinsurance contracts between a reinsurer and an insolvent insurer are subject to a of setoff under an Illinois statute that is similar substantially to the right granted under section 1031.
The O’Connor court addressed the mu- requirement contemporaneous alia, under the tuality Illinois Insurance Code which inter provides, debts “between the and another company would be company” subject to as as the long (Ill.Rev.Stat. debts were (1983).) mutual. ch. O’Connor, of an liquidator insolvent insurer asserted that debts owed *12 to it involving reinsurance proceeds, as well as unearned that premiums followed the insurer, cancellation of the policies on of the insolvency amounted to post-liquidation debts that could not be set off by debts reinsurers, owed by insolvent insurer to the because those debts amounted to preliquidation debts. The O’Connor liquidator concluded that did mutuality debts, not exist when the reinsurers’ debts were postliquidation whereas the insolvent insurers’ debts were (O’Connor, debts. preliquidation supra, 622 618.) at F.Supp. p. Hamilton,
Like the courts Carr v. supra, 129 U.S. v. Downey Humphreys, supra, 102 Cal.App.2d O’Connor court relied on bank- law in ruptcy rejecting observed, the liquidator’s contention. The court if “Even Liquidator is correct his assertion that the debts for reinsur- ance proceeds and unearned were premiums not due at the time of liquida- tion, that fact has no on bearing whether Defendants use these may debts for set-off ‘The purposes. right of set-off be asserted in may the bankruptcy even proceedings though at the time the is filed petition one of the debts involved due, is absolutely but owing not presently or where a definite ” has liability accrued but is as yet (O’Connor, unliquidated.’ supra, 622 F.Supp. from 4 quoting (14th j[ Collier on ed. Bankruptcy 68.10[2].) Finally, O’Connor court concluded that the reinsurers and the insol- vent insurer “entered into a reinsurance which defined all contract of the incur insolvent insurer] Any liability obligations. [the rights parties’ ceding or commis- return unearned premiums proceeds reinsurance pay reinsurance executed in the previously a result of provisions arises as sions (O’Connor, supra, to make these payments.” them require agreement reinsurance held that because 618-619.) The court at pp. 622 F.Supp. “prov- debts were the reinsurer’s insolvency, existed to the prior contracts date of insol- on the payable Act and became under the Bankruptcy able” Hence, preliqui- debts were the reinsurance determined that the court vency. contemporaneous Code’s the Illinois Insurance dation debts that satisfied 619.) (O’Connor, supra, F.Supp. mutuality requirement. O’Con- distinguish in the case attempts The Commissioner present O’Connor, liability insurer’s rise to the nor holding. giving all claims contrast, the Commissioner By were filed order. prior case, observes, obliga- majority” in the the “vast present order, could not be therefore the debts after the liquidation tions arose mutual. however, O’Connor court deter-
As the Court of Appeal explained, before on whether the debts were existence mined that mutuality depends of insol- not whether individual claims arose before date insolvency, Thus, if executed prior the reinsurance debts arose from contracts vency. are considered the date of debts from those contracts arising liquidation, Bank Cali- Ainsworth v. (See debts to setoff. also preliquidation subject fornia, supra, 119 Cal. Stamp O’Connor view debt is shared of contemporaneous America, the court
Insurance Co. North F.2d which insurer to a reinsurance the setoff of debts owed an insolvent approved *13 observed, Stamp Code does not the court “The pool. Initially, Bankruptcy (d). Like other 109(b)(2), 11 most to insurance U.S.C. apply companies. § states, in under the super- Illinois handles the failure of insurers state court as the firm’s assets vision of the state’s chief who takes title to regulator, setoff, Stamp (Id. the 1377.) at In the trustee liquidator.” p. approving had been mutuality court found that the requirement contemporaneous noted, valued The “A even it has not been though met. court debt exist the obliga- fide about and even there is a bona conclusively though dispute (Id. understanding mutuality.” tion to is the usual about pay. This [Citation.] 1380.) at p. O’Connor, Kline’s Justice
In an the authority to diminish attempt asserts "O'Connor proceeds herein on the unstated assumption, dissent it is must because legally illogical, incorrect and that setoff be allowed 1132 (Dis. post, 1167.) at
permitted.” opn., To the O’Connor’s reason p. contrary, with ing to setoff has been respect endorsed decisions. subsequent First, rather than O’Connor’s District reject reasoning, Northern Court in Illinois denied the liquidator’s motion to reconsider O’Connor O’Con- (N.D.Ill. nor v. Insurance 1987) Co. North America 668 In F.Supp. 1183. so the court observed doing, that there is “also a reason for significant policy decision], upholding O’Connor has a to the benefit [the [The reinsurer] contracts, of its reinsurance which defined the parties’ rights liabilities with to the monies respect Reinsurance contracts are construed dispute. law, accordance with general principles including duty of contract an implied good faith. . . . Once the reinsured goes [of] into liquidation, purpose the reinsurance agreements vitiated. reinsured’s on the liability poli ceases, and, cies and the reinsurer is bound to return unearned premiums presumably, other form of consideration to which it is not entitled. . . . Any result would not be in accordance with what the must have parties intended upon (Id. into the entering reinsurance contracts.” p. reconsideration].) motion [denying addition, herein,
In as noted above and contrary Stamp dissent court followed the O’Connor holding allowing reinsurers to exercise their America, statutory (Stamp setoff rights. supra, v. Insurance Co. North F.2d at p. Again, Justice Kline’s dissent misreads the law. applicable This dissent criticizes O’Connor court’s reliance on Professor Collier’s 1978 treatise for the that federal proposition law that bankruptcy recognizes “one creditor bemay getting (O’Connor, more than other creditors” paid 619). F.Supp. criticism is misplaced. Contrary dissent, Collier’s 15th edition treatise states the exact principle almost 553.02, (4 verbatim. (15th Collier on Bankruptcy 1992) 553-12.) ed. f addition, Collier “In recognizes that setoff . . . permitting Congress wisely has hedged under privilege granted bankruptcy] Code with [federal certain stated qualifications, [namely, recently forbidding occur- preferences ring days before filing so as to insolvency] (Ibid.) abuse.” As prevent observes, Justice Kline’s dissent herein later noted “qualifications” Collier and outlined by (11 Code Bankruptcy section U.S.C. applicable this case.3
Based on the foregoing, we reject Commissioner’s contention reinsurance obligations between Prudential Reinsurance and Mission were *14 not contemporaneous preliquidation debts to setoff. subject 3Following argument, oral counsel for the requested Commissioner the court consider Foster v. Mutual Fire (1992)_Pa._[614 Foster). Ins. (hereafter A.2d We have read 1086] the case and conclude it is persuasive. Contrary to setoff statute at issue section in Foster expressly prohibits reinsurer premium (Foster, setoff of obligations. Pa. _p. p. 1096].) A.2d at [614 Insolvency The Clause
2. contain an “insol contracts to all reinsurance Section 922.2 requires the reinsurer collect from clause” allowing liquidator vency become if had not due the ceding compаny amount that would have been part states pertinent The clause this case insolvency insolvent. heretofore agreement every “reinsurance each provided by hereto shall be payable by parties or hereafter entered into and between receiver, liquidator, or to its directly Company the Reinsurer the Com of the liability or successor on the basis statutory conservator or Company insolvency without diminution because pany receiver, statutory successor of because the conservator liquidator, claim. . . .” has failed to all or a Company pay portion In and the very requirement a recent case setoff addressing statutory a reinsurer’s statutory the New York Court of mutuality, Appeals upheld N.E.2d (Midland, supra, of offset an insolvent insurer. observe, 1186.) As counsel the Midland case is of plaintiff’s particular after the New York setoff significance because section 1031 was modeled Law, (N.Y. (Consol. 1985); Downey statute at see v. issue. Ins. 335-336; Humphreys, supra, 102 see also State Cal.App.2d pp. Califor Texaco, ex nia rel. Van de Inc. 46 Cal.3d Kamp given 762 P.2d after Texas statute same Cal.Rptr. patterned 385] [statute courts].) construction as Texas
The Midland court was faced with the whether a reinsurer could issue offset amounts it was owed Midland under reinsurance contracts separate at the time Midland objected was into placed liquidation. liquidator mutual, the setoff on the grounds insolvency that the debts were not setoff, clause contained in were one of the contracts and the debts prevented not owed to and from the same person.
The New York Court of under New York allowed Appeals (a). Insurance Law section subdivision addressing liquidator’s argument that the clause contained in reinsurance contract insolvency one offset, prevented the the court reinsurance con- “[although observed that contracts, tracts clauses indemnity they commonly contain which, even the absence aof insurer’s primary payment policyholders, permit liquidator to collect from the of reinsurance reinsurer the amount that would have due if had not proceeds become the ceding company become insolvent. statutes by providing clauses encourage [offset] such that unless the reinsurance the pri- contract clause contains an insolvency insurer not consider the claim a mary asset or reinsurance as an *15 rights those The loss of ceded section the amount 922.2]. deduction for [see in the reserves if insurer must maintain the primary is substantial because ceded, obtaining reasons for of the primary full reinsurance one amount of (Midland, supra, pp.1188-1189.) 590 N.E.2d reinsurance is defeated.” Trans-America System v. Receivers relies on Melco Commissioner 43], insolvency that the So.2d to contend Ins. Co. 268 Ala. hence, and, be- prevents clause mutuality destroys contemporaneous diminution “without it recoverables cause of reinsurance requires payment addition, interprets herein Kline’s dissent because of Justice insolvency.” to insurer to be paid due the insolvent money section 922.2 as requiring any Prudential Reinsur- notwithstanding without subtraction liquidator any As insolvency. losses prior ance’s contractual to offset Mission right below, misun- Kline’s dissent and Justice both Commissioner explained clause. insolvency derstand purpose unpaid entitled to set off held that a reinsurer was not Melco court insolvent, in reinsur- clause insolvency due because the from premiums when the insolvency, ance requires payment proceeds contracts after 53.) Both Pruden- (Melco, 105 So.2d at supra, operative. clause becomes out that the herein correctly point Reinsurance and the Court of Appeal tial Melco analysis inapposite.4 Midland, observed, to section statutory provisions comparable
As
“en-
were
in reinsurance contracts
clause
require
insolvency
922.2
Deposit
&
Co.
Fidelity
decision
acted
Court’s
response
Supreme
held,
language
on the
(1937)
1135 enacted to was however, the statute the conclusion that supports its history, N.E.2d (Midland, supra, 590 of offset.” [statutory] right a reinsurer’s destroy 1191-1192.) at pp. above,
Thus, insolvency and the 922.2 the of section purpose as noted obligations rights with the same provide liquidator clause is to Certainly, contract. the reinsurance to the terms of insolvent insurer pursuant from paying shield the reinsurers this case does not setoff away to walk the reinsurer or allow directly liquidator obligations favored creditors and other more leaving policyholders fully compensated, Indeed, will occur insolvency” no “dimunition because holding bag. of this setoff. light rather, 1031;
Therefore, it with section section 922.2 does not conflict “on the valid claims the reinsurer from refusing pay simply prevents loss, and the reinsured that its was to grounds obligation indemnify the diminished that the incurred the amount of only reinsured loss Practice, supra, (1 Law & made Cal. Insurance payments” liquidator. 407; 11-52; Hall, 21 & L.J. 11.05(6)(c) supra, at & Tort Ins. Semple p. § Com’n, (C.D.Cal. 527 American Re-Insurance Co. v. Insurance Etc. 444, 452.). F.Supp.
Melco, effect of an supra, 105 So.2d did not discuss the statute, California, state and the federal and sister contrary case is 335-336; O’Connor, (See Downey supra, law. 102 Humphreys, Cal.App.2d Midland, Melco]; N.E.2d supra, supra, at F.Supp. [rejecting observed, 1191-1192.) errone- at As the O’Connor court the Melco court pp. believed that a ously give preference “to allow offset would be full receiving reinsurer over other creditors because the reinsurer would its claim while receive fractional payment only on other creditors would in full if a . . . It is true that the reinsurer would be set-off payment. paid but, course, anytime that is the case a set-off is permitted, permitted. actions whole set-off section is to make clear that such point statutory than are even one creditor be more permissible, though getting paid (O’Connor, italics origi- creditors.” 622 F.Supp. nal.)5 context,
In a related Justice dissent herein suggests statutory Kline’s setoff scheme was not intended to be used to create preference post, reinsurers over (See other creditors of insolvent insurer. dis. opn., questionable 5The Melco decision has effect on the issues before us because in decided, years Legislature after Melco was of setoff statutory the Alabama enacted a (Ala. substantially (1986).) identical to that of section 1031. Ins. Code 27-32-29 1157-1158.) rights Such when reinsurers’ pp. reasoning begs question (§ 1031) subordinate because there is a setoff statute statutorily *17 allows setoff insurer specifically liquidation proceedings.
In the bank- statutory ignores refuting liquidator’s argument Midland observed that offsets ruptcy priorities, although “permitting distribution conflict with the of for the rata statutory purpose providing pro creditors, the insolvent’s estate the has resolved the com- Legislature to concerns and as a lawful peting recognized species preference. offsets Indeed, valid, if why an offset is otherwise there would seem to be no reason balance, if allowance should it the ‘only its be considered a is preference: the the after set-off is deducted which can be held to form any, justly part ” 1191, (Midland, supra, quoting assets of insolvent.’ 590 N.E.2d at p. 148].) Armstrong Scott v. L.Ed. 13 S.Ct. U.S. Co., (2d Justice Ardra Ltd. Finally, Kline’s reliance on Corcoran v. Ins. Cir. 842 F.2d that we “enhance the for the should proposition Insurance, of the Commissioner of as power liquidator, protect [policy- (Dis. post, reinsurers” overreaching misplaced. opn., holders] 1155-1156.) The an order of the pp. Corcoran decision affirmed simply United remanding States District Court for the Southern District action state court for a under determination of remedies available to the parties their reinsurance entered. No- contracts after a order had been liquidation where does the case that the affects a suggest liquidator’s appointment Midland, (See creditor’s substantive of offset. also 590 N.E.2d at fn. Mutuality Identity Capacity 3. and de Commissioner next asserts that the order of liquidation and
stroyed debtor-creditor between the Mission relationship companies Commissioner, Prudential Reinsurance. as a result of According order, the reinsurance as a liquidation debts owed to Commissioner trustee for the benefit of the Mission and are no owed to companies, longer Mission; there is no the trustee mutuality obliga because has no contractual tion to Prudential find Reinsurance. We with the Court and agree of Appeal, the Commissioner’s contention without merit. observed,
As the Court of section 1031 mutu- Appeal frames its broadly ality criterion terms of “all cases of mutual credits debts or mutual between the under person person section 1016 liquidation and other (Italics added.) . . . .” It is well settled that once has occurred insolvency and a liquidator has been to assume all the appointed the insolvent rights of insurer, which the he does so to all defenses setoffs subject legal orders. insolvent was time subject liquidation at the words, (§ 1031.) of the insolvent into the shoes liquidator steps insurer, them. The and defenses as he finds taking relevant claims at the of mutual debts liquidator’s does status appointment disrupt (Downey Humphreys, supra, time the is issued. liquidation order Therefore, 335-337.) construction of Commissioner’s Cal.App.2d pp. section 1031 would never an offset because permit appointment would effect in the transform liquidator always change parties, always insurer, debts owed creditors. to the insolvent as trustee for the insolvent’s This reasoning would section 1031. nullify
In concluding that mutual credits and debts from mutual arising reinsurance contracts in section 1031 setoffs insurance may permit liquida tion proceedings, Court of limited of the setoff Appeal application doctrine to true contractual debtor-creditor between relationships principal so, insurers. doing it Prudential Reinsurance’s that its rejected assertion Gibraltar, subsidiary, should be to set off debts owed Prudential permitted Reinsurance under the “Relation A” contracts even Gibraltar is not a though to those party contracts. The Court of concluded that because Gibral Appeal tar does not owe reinsurance proceeds to the Mission premiums compa contracts, nies as a under A” principal reinsurer the “Relation it has no mutual credits or debts with those Rein which Prudential companies upon surance may claim a section 1031 setoff what it owes to Mission as their reinsurer.
The Court of Appeal also observed that because Prudential Reinsurance was reinsured by Mission and Mission National Insurance but Company, not other Mission companies, remaining Mission are not companies principal reinsurers mutual having reinsurance debts and credits with Pru- dential Reinsurance.
We agree with the Court of Appeal. we refuse to Accordingly, expand section 1031 setoff of in debts the absence of an mutual express agreement that the would subsidiary be deemed a mutual debtor-creditor of the parent. (See, e.g., 401; In re Berger (7th Steel Company Cir. 327 F.2d Black & Mfg. Decker Co. v. Union Trust Co. 53 OhioApp. 356 N.E.2d 929].) We conclude that such unwarranted of the setoff expansion doc- trine would permit an increase in exponential the amount subsidiaries could set off to the detriment of liquidation estates.
C. 1031(a) Section above,
As discussed 1031(a), under section no allowed setoff is when the “obligation of the in person liquidation to such other does person as a claimant not entitle such other suсh setoff to share person claiming the assets of construes this person such Commissioner liquidation.” insurer’s subdivision as of setoff on the insolvent conditioning right in favor of the all that are to its own ability satisfy obligations superior Under the party asserting interpretation setoff. Commissioner’s statute, of Mission Prudential Reinsurance is “entitled” to share the assets if superior Mission has satisfied its to all claimants only obligations (See fn. at to Prudential Reinsurance under section 1033. priority words, ante.) In collection unless the estate has sufficient assets—after it, all pay priority of all debts owed to without allowance of setoffs—to full, claimants no setoff claimant who is a member of lower-priority claim. ranks take estate assets of its section 1031 setoff by way Commissioner, would be effect an unauthor- According taking such ized preference.
The Court of that under the Appeal rejected argument, concluding this construction, cannot be Commissioner’s a claimant’s to assert a setoff determined until all the marshalled and the insolvent’s assets have been claims of all superior Appeal classes have been submitted. As Court *19 observed, 1031(a) indepen- “entitlement” under section should be considered of Mission’s other If Prudential Reinsurance dently obligations to claimants. is owed a it “entitled” to that satisfies the is requirements mutuality, debt in (§ 1031(a).) share Mission’s assets. erred in Commissioner now contends that the Court of so Appeal 1031(a) section a claimant of setoff
interpreting asserting right because must in be a creditor of the insurer to already liquidation. According Commissioner, creditor, if the claimant is a it entitled to share is facto ipso insolvent, 1031(a) in the assets of the and section is redundant. simply observed, however, As the Court of if we were to Appeal adopt 1031(a), Commissioner’s proffered statutory construction of section would be nullified provision because “setoffs would be essentially permitted in only cases where the estate is sufficient to classes pay higher priority full and most likely be sufficient to also the setoff claimant full pay [j[] without If resort to setoff. had meant setoff Legislature gear to entitlement to the estate’s financial we it have capacity, presume would [sjection worded 1031 to make that intention sufficiently clear.” Finally, Legislature, Commissioner’s assertion that when it ranks, amended section 1033 to create the priorities separate priority intended to original from diminution of loss protect policyholders their claimants, recoveries due to setoffs lowеr by is contravened priority by (Stats. enacted were and 1033 When sections 1031 legislative history. claimants three classes referred to 544-545), section pp. ch. CIGA, the same all shared reinsurers and only—original policyholders, if the Accordingly, claims.” under “all other classified that was priority to assets were sufficient unless there deny intended to Legislature classes, result would in higher priority the claims of all claimants satisfy sum, 1031(a) nothing is section in the statute. made explicit have been to that is prerequisite mutuality requirement more than a restatement setoff. of a section 1031 the assertion Equitable Considerations Policy
D. Public public is that considerations final contention The Commissioner’s claim they off debts to set reinsurers’ preclude should policy equity the allow- claims The Commissioner the Mission companies. to be owed of the debt satisfaction reinsurers to obtain complete ance of a setoff permits satisfac- owed, relegated partial are while Mission they policyholders claims, result, expressly scheme recovery he tion This subverts only. 1033, which, as discussed codified section Legislature adopted above, to the claims superior ranks the claims of generally policyholders one that more general he adds the insurers. To this specific argument, the lion’s reinsurers—bear it unfair that policyholders—as opposed that the even more broadly while insolvency, implying share of Mission’s insurers to original entire of reinsurance was developed permit business avoid their to California obligations policyholders. Commissioner,
CIGA, asserts that as amicus curiae support ignores specific language exercise their setoff allowing rights reinsurers to *20 relies on an excep 1033 that denies them CIGA priority. section expressly tion to section 1033 discussed below. after (a) expense in priority,
Ranked fifth section subdivision taxes, administration, to federal and claims entitled certain unpaid charges, Guarantee Asso- “(5) All the California Insurance claims of preference, function a similar . and associations or entities performing ciation . . states, all premiums refund of unearned with claims for together other that are not covered an insolvent insurer claims of policyholders A subparagraph “All claims.” claims. . . .” Ranked sixth and last are addition, by paragraph fifth rank that “Claims excluded of the provides, of subdivision claims for refund of unearned ... (except premiums) [ ] (c) Paragraph of section . be excluded from this priority.” 1063.1 . . shall alia, “‘[cjovered that (c) of subdivision of section 1063.1 inter provides, arising out include insurer any obligations claims’ shall not insolvent of any reinsurance contracts. . . .” CIGA claims that the exclusion provi- (a)(5) sion of section Legislature’s subdivision is evidence of the express intention that a reinsurer’s claim the ranked insolvent’s assets be inferior to the claims of policyholders. conclusion, however,
Such a is clear without reference to section (a)(5). A subdivision reinsurer’s claim is not a claim of CIGA or of an function, association or an a similar entity performing otherwise uncovered claim asserted aby of the insolvent. To the extent policyholder the reinsurer submits a claim for a refund of unearned that claim premiums, is not subject to exclusion. Accordingly, the exclusion of a apparent reinsurer’s claim (a)(5) from subdivision change: effects no substantive that claim was within the already residual sixth rank—“All other claims.”
It is true that the claims of policyholders are entitled to generally priority Nonetheless, over the claims of reinsurers. the Legislature has created an exception to general rules situations which the claimant priority debts; and the insolvent have mutual that is codified section exception 1031. We cannot its broad ignore mandate. context,
In a related the Commissioner and Justice Kline’s dissent assert that because the doctrine of setoff is based on it should equitable principles, be denied when it would “harm the we public.” explain, As there is no evidence that the section 1031 setoff “harms the public” and the cases on which Justice Kline and the Commissioner their rely support arguments are distinguishable. First, in Federal Deposit Corp. (9th Ins. v. Bank America Cir. (hereafter
F.2d 831 Deposit), Federal the court a setoff of a debt disapproved similar to the reinsurance debts under consideration this case. Federal Deposit, a Rican Puerto chartered bank issued a subordinated note to capital America, the Bank of which sought to set off the insolvent’s with deposits the Bank of America balance due that It held on note. was the law of Puerto Rico controlled and that no setoff was because permissible the subscription note was expressly subordinated to general creditors of insolvent. The setoff clause was invalid under Puerto Rican law but *21 transaction was nevertheless improperly the Puerto Rican Sec- approved by retary of the Treasury.
In law, deciding case under Puerto Rican the Federal court Deposit observed that the portion of the subordinated agreement capital that provided setoff, there shall be no waiver of the right of violated the language Puerto stated, Rican statute and regulations under promulgated it. The court
1141 “ the depositors with obligations right subject notes shall be ‘capital ” F.2d supra, (Federal Deposit, issuing bank.’ and other creditors of 7, italics.) The court 839, 111(o), original Laws Ann. tit. P.R. quoting at p. “ restriction, ‘The capital providing: clarifies this the regulation noted that deposi to its liabilities rights in all to the bank’s subordinate notes shall be credit, tors, any letters and and under bankers acceptances liabilities ” (Id. at 839- pp. of banking operations.’ characteristic obligations current 4, 4, italics.) 840, original & tit. No. Regs. P.R.R. quoting Deposit of Federal reasoning rejected herein Appeal Court of statutory reference Puerto Rican law without because it concerned 1031, focused discussion and because the setoff setoff or to section right debts, in California. are not allowed which analogous subscription on stock 42, 1047].) We P. (§ (c); 186 Cal. Kaye subd. v. [198 Metz Deposit inapposite. that Federal is with the Court of agree Appeal Wells Kruger on rely and Justice Kline’s dissent also Commissioner 449, 521 (1974) 11 P.2d Fargo Cal.Rptr. Bank Cal.3d 352 [113 266], under Code of Civil right in which exercised its setoff A.L.R.3d a bank a (cross-demands money) against deposi- former for Procedure section com- for unemployment tor’s account that consisted of checking payments benefits, in the had been deposited and state which pensation disability held that We account and source of income. depositor’s only comprised were from protected and benefits depositor’s unemployment disability that a creditor’s the bank. we by doing, rejected “assumption so (Kruger, limited statute.” by of setoff is absolute when except explicitly creditor 368.) We the settled rule that a reasoning based our on set and that property, unemploy- is not allowed to off a debt exempt (Ibid.) We are such compensation disability property. ment benefits com- “legislative objective unemployment concluded that the providing worker and his unemployed benefits—to furnish the pensation disability with stream cost of their subsistence— of income to family defray fail if it to obviously apply past would creditors could seize that income observed, (Id. Kruger materially debts.” As the Court of Appeal from the Ins. Ltd. v. distinguishable (See matter. also Bluewater present Balzano, supra, 823 when P.2d 1365 setoff disallowed [equitable proscribed statute].) decided those
Kruger was on the basis of a public policy prоtecting subsistence, who welfare and and it require disability benefits for their (See was those were Jess v. Herrmann benefits that taken setoff. also (1979) 26 Cal.3d 604 P.2d Cal.Rptr. 208] [setoff cross-judgments injuries policy fault on comparative public disallowed *22 contrast, case, in grounds].) By present original insureds have no interest (§ in right 623), or a contract of reinsurance rights against no (§ 922.2). reinsurer
The Commissioner and Kline Justice also assert the statutes were adopted protect the interests of and the in policyholders public general and setoff would abrogate Such is not the case. As protection. observed, Midland “An reason important recognized offset has been as desirable is that it (Midland, a form of provides security to insurers.” 1191.) 590 N.E.2d at p. Offsetting debts not risk but also acts as only spreads mutual for security performance. “Such security especially important for insurers; smaller if the firms could not count on the large netting balances to satisfy obligations, they would be more to exclude smaller likely tottering firms—making new harder and entry failures of firms precipitating in If difficulty. . . . . . . one member fails the other members’ exposure becomes the gross rather than the net obligation, then the mutual security useful; the offsetting debts is destroyed. less [Reinsurance] become[s] premium charged to bear risk will (Stamp rise.” v. Insurance Co. North America, supra, F.2d at p. Justice
Finally, Kline’s dissent charges us with reinsurers over favoring in insureds an economic contest over the limited resources the estate of an insolvent insurance carrier. We plead reinsurers this guilty. prevail case because our Legislature has their expressly broadly recognized setoff, right with the along similar of others who have dealt with insolvent carriers. Our conclusion this with respect is accordance those of the United States Court of for the Appeals Seventh Circuit and the New York Court of Appeals, both of which have construed statutory schemes contrast, similar to ours. the dissent would what it labels employ equitable considerations to favor “invariably over unsophisticated” policyholders “highly sophisticated” reinsurers.
We do not the issue be perceive one of relative levels of commercial Nor is sophistication. it one that calls for judicial favoritism of one group of claimants over another on supposed “equitable” grounds having nothing Instead, do with the historic concerns equity jurisprudence this area. issue is one calling construction of a comprehensive broadly phrased statute permitting setoff and no admitting for reinsurance relation exception ships. types economic made arguments are best dissent addressed to the Legislature. unwilling to engage complex “[W]e economic regulation under the guise of judicial (Harris v. decisionmaking.” Capital Growth Investors XIV 52 Cal.3d Cal.Rptr. 1168 [278 873].) 805 P.2d
III. Conclusion insolvent, Reinsur- Prudential Mission declared Once the Commissioner the against premiums to set off unearned statutory right ance had a legal, did was appointed The mere fact that a liquidator amount it owed Mission. the Court of Appeal’s we affirm Accordingly, affect that right. or impair judgment. Baxter, J.,
Panelli, J., Arabian, J., concurred. excellent dissent- KENNARD, J., Dissenting. in Justice Kline’s concur I however, I additional point: write to make one ing separately, opinion. part section 1031 renders the of Insurance Code majority’s interpretation statutory of of that statute to meaningless, contrary accepted principles construction. in (section 1031)
Insurance Code section 10311 creditors of insurers gives The a first general right subject exceptions. of setoff to liquidation specified that, insurer and of section 1031 states as between insolvent paragraph in the mutual be set off any person, except other debts credits shall (a) (a), (b), (c). in subdivision of Only situations described subdivisions section 1031 is relevant here. (a) if entity claiming
Subdivision of section 1031 a setoff prohibits setoff is not entitled in the of the insolvent “to share as a claimant assets” words, in insurer. other are entitled to share those entities that only What, then, insolvent does insurer’s assets exercise of setoff. in the statute mean an a claimant the assets” of entitlement “to share as the insolvent insurer? (a)
According only subdivision of section 1031 means majority, (or setoff) a reinsurer other to exercise a must a any party seeking possess not, under major- claim the insolvent insurer. The reinsurer does against view, receive, in, the insolvent have to or share ity’s actually any portion assets. As the this majority readily acknowledges, interpretation insurer’s person person person. set off and share assessment levied 1Section 1031 states in full: “In all cases of mutual debts or mutual credits between the such other liquidation as a claimant in the capital in [5] liquidation liquidation to the balance (c) person stock of the to such other obligation where under Section 1016 and only such other such other person assets person shall be allowed of such other does such person person following liquidation.” not entitle such other person or to was person any facts paid, purchаsed by, pay (Italics liquidation. exist: a balance but no person, added.) fi[] person set-off (a) person claiming such credits and debts upon or transferred [1] The (b) shall liquidation obligation subscription be obligation allowed to, such set-off such other for shares shall be pay person favor (a) of setoff—that a restatement of the conditions merely
makes subdivision *24 is, insurer credits” the insolvent the existence of “mutual debts and between it, sum, “In As the seeking majority puts and the to exercise a setoff. party 1031(a) mutuality require- than a restatement of the nothing section is more (Maj. 1031 setoff.” ment that is a to the assertion of a section prerequisite view, ante, (a) of section majority’s Under the subdivision opn., p. and 1031 is redundant superfluous. construc- statutory conclusion violates these majority’s precepts whenever possible and give meaning significance
tion: to independent word, Inc. v. Fair (see, Dyna-Med, and in a e.g., each sentence statute phrase, 1379, Cal.3d 1386-1387 Employment Housing [241 & Com. 43 67, 1323]); any part that makes interpretation 743 P.2d to avoid an Cal.Rptr. 1387; accord, (1991) 53 (id. Young Woodsv. meaningless of a statute 45]; Assn. v. P.2d Cal.3d Cal.Rptr. [279 Mfrs. California P.2d (1979) 24 Cal.Rptr. Public Utilities Com. Cal.3d (Woods with each other 836]); to harmonize statutes both and internally and 323). Young,supra, done, (a) of It as the has to read subdivision necessary, majority is not rule to which it as the identical as the having meaning general section 1031 notes, is, correctly There the Insurance Commissioner as exception. meaning and gives another construction of section 1031 that independent and (a) internally section 1031 both subdivision harmonizes purpose construction, Under with other scheme. this components statutory (a) that have claims against subdivision bars setoff those entities in the insolvent insurer’s assets. actually insolvent insurer but do not share “to section 1031 this its Reading way gives words—particularly phrase It meaning. share as a claimant the assets”—their and traditional ordinary (a) defined situation. recognizes subdivision setoffs prohibits clearly and, demonstrated Finally, it harmonizes section 1031 both as internally ably (dis. 1145-1150), post, statutory Justice Kline with the scheme opn., pp. brief, of which it is a reading this of section 1031 is part. preferable statutory when the neutral criteria used for majority’s judged by traditionally I construction. no sound it. perceive rejecting basis for Mosk, J., concurred. ele-
KLINE, J.,* Dissenting. allowance of setoff—which majority’s vates the economic interests of reinsurers over the legislatively preferred * Two, Justice, District, assigned by the Presiding Appeal, Appellate Court of First Division Acting Chairperson of the Judicial Council. and other cred- claimants rights injured equitably superior policyholders, insol- of the insurance misunderstanding from a fundamental itors—results clear intent. legislative statutes contravenes vency justifi- of many reinsurer setoff will result the disallowance Permitting who individual many policyholders, able claims and have a ruinous effect on As a injury. consequence, believed were reasonably they protected against of claimants and the will bear costs injured public policyholders, fairly much more that tiie intended to and which would Legislature impose, reinsurers, *25 the risk of the be on which were to assume imposed, paid turn their advantage. are now insolvency they unconscionably permitted within the majority self-regulation industry The will also opinion discourage and exacerbate the of insurance now growing problem plaguing this nation.
I. in that this case because our majority says reinsurers prevail “[t]he Legislature has and their of setoff. . . .” expressly broadly recognized right ante, (Maj. done no such It is the opn., Legislature thing. has court, intention of this that the day to that of the carries opposed Legislature, for the reinsurers. “
It is elemental that in the intent of the ascertaining Legislature, ‘every statute should be construed with reference to the whole of law of system ” which it (Select so that all be have part may harmonized and effect.’ 640, 672], (1959) Base Materials v. Board Equal. 51 Cal.2d 645 P.2d [335 795, (1954) v. L.A. 42 quoting etc. Retirement Board Cal.2d 799 [270 Stafford accord, 12]; Moyer (1973) P.2d Comp. Appeals v. Workmen’s Bd. 10 Cal.3d “ 222, 144, 1224].) in Cal.Rptr. 514 P.2d ‘Words must be construed [110 context, harmonized, and statutes must be both and with each internally ” other, 315, (Woods to the extent possible.’ Young 53 Cal.3d 613, 455], Cal.Rptr. 807 P.2d Assn. v. Public quoting [279 California Mfrs. 836, 676, 836].) Utilities Com. 24 Cal.3d 598 P.2d Cal.Rptr. 1033,1 Insurance Code and sections 1031 which were simultaneously 1935, enacted in are both contained in division article of the part Code, reason, Insurance which relates to insolvency. For this and because both statutes pertain an rights of creditors of insolvent insurance company, they cannot be considered in clearly isolation from one another. Nonetheless, the insurance accepting bald claim that “the industry’s setoff is outside antecedent to 1033’s distribution priorities,” § statutory
1All references are to the Insurance Code unless otherwise indicated. a reconciliation “there is no reason to legal public policy attempt therefore 1031,”2 a vacuum. 1033 with examines section majority of § and by in which section 1031 appears, context By resolutely ignoring words, the from its into that statute a that does not reading purpose appear intendment.3 legislative has distorted majority profoundly 1031, which refer to reinsurers or other Section does not specifically creditors, that “mutual debts class of is a statute particular general providing company liquidation or mutual credits” between an insolvent insurance allowed, only set off and the balance “any be person” of such other person that “no set-off shall be allowed favor provided (a) The to such other where . . . obligation insurer] H] [insolvent as a entitle such other such set-off share person person claiming does not claimant the assets of such person liquidation.” statute that does refer to reinsurer Section 1033 is a much more specific (a) which is set claims. Subdivision of section pertinent portion below,4 forth in the the order which claims margin prescribes *26 six insolvent are The divides claims into insurer to be allowed. statute it, classes, each entitled order. Credi- priority following over class tors a class be after the assets of the insolvent insurer given paid only Insurance, Association of 2Brief of amici curiae American Council of Life Reinsurance America, Association, Insurers, and the Na American Insurance the Alliance of American Independent tional Association of Insurers. granted majority misrepresents ruling, stating 3The also court’s that “The trial court the trial Commissioner’s a summary judgment ground motion on the that section 1031 allows all the claims only liquidating pay setoff when the assets of the estate are sufficient to in full asserting right.” by priority higher asserted claimants in classes than the claimant ante, 1125-1126.) of the trial (Maj. opn., pp. Although judgment this is the effect of the judge up reasoning court it was not the rationale. The trial summed his as follows: “All acknowledge legislative grant counsel that a setoff amounts to a of an otherwise disfavored preference equal all preference. As such a is inconsistent with the otherwise treatment of sought As to be any applicable priority, strictly others within it therefore must be construed. claimants, here, a applied prefer priority priority it would also six creditor to all five result purpose irreconcilable with the of Article 14 of the Insurance Code.” As the trial court noted, correctly overriding purpose protect “The of Article 14 is insureds first." language order in which claims employs following 4Section 1033 to determine the insolvent insurer are to be allowed: against an “(a) given preference allowed in a article be in the proceeding Claims under this shall following оrder: “(1) Expense of administration. “(2) [i.e., Unpaid charges the costs of the provisions due under the of Section 736 commissioner’s examination the books of the insolvent insurer]. “(3) Taxes due to the State of California. “(4) having preference Claims the United States laws of this state. the laws of , “(5) for together All claims of the California Guarantee Association . . . with claims refund of unearned that are premiums policyholders and all claims of an insolvent insurer not covered claims. to all have been rata pro distributed classes of creditors with higher have and such creditors been priority, paid highest full. priority claims are relating expense those of administration. The second relate highest to the cost of of the Commissioner’s examination books (§ 736.) of the papers insolvent insurer. The third and fourth priorities relate to taxes and other claims under federal and unpaid having preference other state statutes. fifth priority—which significance has particular this case—relates to the claims of the California Insurance Guarantee Asso- associations, (CIGA) ciation and similar with claims for refund of “together unearned premiums and all claims of that are not “covered policyholders” claims” within the meaning of section The sixth and 1063.1. last priority under section 1033 includes other claims.” the claims Among explic- “[a]ll excluded itly from the fifth priority therefore the lowest placed priority “any obligations the insolvent insurer arising any out contracts,” because these are not “covered claims” within the meaning (c) paragraph subdivision of section 1063.1.
Because the exclusion of reinsurer claims is so obviously inimical to its case, it, view of this the majority belittles stating “the exclu apparent sion of a reinsurer’s claim (a)(5) from subdivision effects no substantive ante, change.” (Maj. opn., Reinsurer claims were already rank, within the residual sixth the majority explains, because a reinsurer’s claim “is not a claim of CIGA ... otherwise uncovered claim (I asserted aby policyholder bid.) insolvent.”5 This analysis com pletely misses the point, which is the explicit manner which the Legisla ture expressed its specific intent to subordinate the rights of reinsurers to *27 those of policyholders.
The setoff allowed the majority under section 1031 frustrates this manifest legislative because purpose it provides reinsurers the very priority that the Legislature (See prevented. Baker v. Gold Liquors (1974) Seal 417 467, 243, 249, U.S. 473 2504]; L.Ed.2d [41 94 S.Ct. People v. etc. California 241, Trust Co. 168 Cal. 1181].) 248 P. There is [141 no basis for this unduly expansive of interpretation section 1031. By the use permitting of “Claims excluded by pаragraph (3) (except claims [ ] for refund of premiums). unearned . . (c) subdivision Section 1063.1 [i.e., “arising claims out of . . . contract”] shall be excluded this priority. from “(6) All (Italics added.) claims.” majority 5The says also that the exclusion apply does not the extent the reinsurer “[t]o submits a claim for a ante, refund of premiums.” unearned (Maj. opn., 1140.) p. This statement baffling. The reinsurer claims against a reinsured are for a percentage of the premium reinsured, earned received the not a refund of premiums. unearned Such reinsurer claims arise entirely out of the reinsurance contract and are therefore clearly excluded from the fifth class.
setoff to diminish the amount of to the reinsurance payable liquidator, statute, majority given has which does not mention reinsurer general reinsurers, claims and was never intended to benefit to provide any particular over detailed de a more statute—section precedence 1033—specifically interests, to subordinate their to a signed with matter within respect where both statutes. This violates the fundamental that purview principle is a there conflict the more statute over the more specific general. controls Sutherland, 51.02, 1992) (2B (5th 121.) As Construction ed. Statutory p. § “ reiterated, ‘A this court recently to a specific provision relating particular will subject govern a general provision, though general even provision standing alone would broad enough subject be to include to which (Woods specific provision Young, supra, relates.’” v. 53 Cal.3d People quoting Tanner Cal.3d Cal.Rptr. Indeed, 328].) Legislature P.2d has “when itself declared that a general inconsistent, and. particular are latter provision [a] is paramount So former. that a intent will particular general control a one that is inconsis Proc., (Code tent with it.” Civ. §
The precedence majority accords 1031 also the rule section violates that statutes should not insolvency be construed to create creditor prefer- ences not expressly specified by Legislature, as such “are preferences Sutherland, (3A with regarded extreme disfavor.” Construction Statutory 69.07, 469; (4th 1986) 1992) ed. (15th 3 Collier Bankruptcy on ed. § 507.02[2], 507-11 are to fixed by Congress. be Courts [“Priorities also, .”}; discussion, free to fashion their own rules . . . see post, pp. 1167-1168.) If a be denied merely provides that a bankrupt’s (see, creditor a another preference over e.g., rank Walkerv. Wilkin- equal 850, 853, (5th son Cir. 296 Fed. cert. den. 265 U.S. L.Ed. 596 [68 1198, 44 639]), S.Ct. a setoff that gives advantage an to one creditor at the of a expense higher co-creditоr rank is more obviously improper. order priorities section is one prescribed by of the most important in which ways achieves the Legislature chief purpose statutes: equitable distribution of the assets of an insolvent insurance company. We should respect the legislative prescription. majority’s “ adoption of the view of the Court of ‘entitlement’ under Appeal section *28 1031(a) should be considered independently of insolvent [the insurer’s] ante, obligations 1138, to other claimants” (maj. added) opn., italics p. dixit, pursuant to section is no 1033 more than an ipse for which there is no scheme, law, in the support regulatory relevant case or reason. Acknowledging “that the claims of entitled to policyholders generally ante, over the priority claims of 1140), reinsurers” (maj. opn., at p. “[nonetheless, majority contends that the Legislature has created an excep- to the general tion rules priority situations the claimant and which
1149 debts; the insolvent have mutual is codified section 1031.” exception (Ibid.) The notion that section 1031 codifies an “exception” priorities specified section 1033 even it though does not to do so expressly purport is untenable even from the fact that it a apart gives general statute prece- dence over a conflicting specific statute. all, construction,
First of as a rule general of statutory courts cannot create to rules of exceptions general the absence application explicit Theatres, (Stockton legislative Inc. v. Palermo intention to do so. (1956) 47 469, 7].) Cal.2d 476 “A P.2d may court not insert into a statute [304 not intended qualifying provisions Legislature not rewrite a statute to conform to an (Bruce assumed intent legislative v. apparent. Gregory (1967) 666, 265, 65 Cal.2d Cal.Rptr. .)” 423 P.2d . [56 . 193]. (Burnsed v. State Bd. 213, Control (1987) 189 Cal.App.3d 217 [234 316]; Sutherland, 2A Cal.Rptr. Statutory (5th 1.992) Construction ed. 47.11, 165.) The p. § Legislature has provided no reason to believe it 1031, intended discussion, section which is merely post, (see permissive 1150-1151), 1033, pp. to constitute an exception to section which is manda opposite conclusion is indeed far more justifiable, tory. as a specific statute such as section 1033 may be “treated as an exception” general statute, 1031, like section with which it would otherwise be conflict. (Rose v. State 713, 505]; 19 Cal.2d 723-724 P.2d [123 of California English Corp. Manor Vallejo Sanitation & v. Flood Control Dist. 996, Cal.App.3d 315], 1000-1001 Cal.Rptr. [117 Furthermore, the provision of section 1033 giving claims of policy- holders and certain other creditors over priority the claims of reinsurers 1033, (§ (a)(5)) subd. 1979, wаs added 384, to that statute in (Stats. ch. 45 years 1445), § enactment section 1031. precedence given after to section 1031 thus also violates the rule that if new provisions cannot be reconciled with scheme, earlier provisions an entire the new provisions should prevail. matter, two “[W]here statutes deal with the same subject more recent enactment prevails as the latest expression the legislative Sutherland, (2B will.” 51.02, Statutory (5th Construction ed. Board, omitted); fn. L.A. etc. Retirement Cal.2d Stafford 798; Woodard v. Southern Cal. Permanente Medical Group (1985) 171 Cal.App.3d 514].) The Cal.Rptr. majority’s conclusion that the general provisions of section 1031 constitute an “exception” to the specific grant of policyholder over priority reinsurers enacted a half nearly century later not only ignores the rules ordinarily employed by appellate courts to determine legislative purpose, but ascribes to the Legislature an it intention clearly repudiated when it last addressed the issue.
Equally untenable is the majority’s alternative view that the reinsurers *29 have a “contractual entitlement” that supersedes section 1033 because “the
contract between reinsurer and the insolvent does not make [the insurer] contingent on ultimate financial of the ability original insurer or its ante, estate to first all pay higher claimants classes.” priority (Maj. opn., 1125.) at p. Clearly, two cannot contract a third parties deprive party statutory rights. This court has pointed out on more than one occasion that circumvented, defeated, “the substantive law of this state cannot be enlarged, or modified which the any provision insurer have elected to place its contract derogation of or conflict (Malmgren therewith.” v. South- 29, western (1927) 512]; A. Ins. Co. 201 Cal. P. Wildman v. [255 31, Employees’ (1957) Government Ins. 359].) Co. 48 Cal.2d P.2d [307 The inordinately broad and effect the dispositive majority opinion accords section 1031 reflects not only its indifference to related statutes that specif- reinsurers, ically address and subordinate the rights but the majority’s basic misunderstanding of setoff concept generally.
II.
Section 1031 derives not
“from the
simply
of setoff
equitable right
ante,
established
17th century England”
1124),
(maj. opn.,
but more
p.
venerably from the concept
compensatio,
or
compensation,
known to
Comment,
preclassic
(See,
Roman procedural
law.
generally,
Automatic
Extinction
Compensatio
Cross-Demands:
From Rome to
California
224;
53 Cal.L.Rev.
Loyd,
Development
(1916) 64 U.Pa.L.Rev.
of Set-off
541.) From the beginning, compensation and setoff have been permitted only
when,
case,
due
particular circumstances of the
it is fair to do so.
Compensation is never
under the
permitted
civil law “where its operation
would involve a
and a
deception
disappointment of the just expectation and
confidence of the party against
(3
whom it is set up.”
Story, Commentaries
1877,
on Equity
(14th
Jurisprudence
1918)
ed.
479.)
“a set-off
Similarly,
§
is
ordinarily
it,
allowed
equity
when the
only
party, seeking
benefit of
can show some equitable ground for being protected against his adversary’s
demand; the mere existence
1872,
of cross
(Id.,
demands is not sufficient.”
As
United States Supreme Court has explained, courts do not
circumstances,
allow setoff
under
“except
very special
and where the proofs
are clear and the equity
very
(Scammon
strong.
v. Kimball
92 U.S.
(2
Otto)
485],
added; accord,
L.Ed.
[23
italics
Deposit
Federal
cert,
Corp.
Ins.
v. Bank
(9th
831, 836-837,
America
Cir.
701 F.2d
den.
Judicial discretion to deny setoff that would have unfair consequences exists if, even like section the applicable statute that setoff provides
1151
to be manda
statutory language
“shall” be allowed.
Although
appears
held
tory,
mandatory,
“it has been
that the
of set-off is
right
permissive,
court, which
and that its
lies within the discretion of the trial
application
exercises such
under the
of
general principles
equity.
discretion
[Citation.]”
1985)
(O’Connor
(N.D.Ill.
622
v. Insurance Co. North America
F.Supp.
of
611, 616; accord,
Bevill,
(3d
Mgmt.
Matter
Bresler & Schulman Asset
Cir.
54, 57;
1990)
(6th
1984)
County
896 F.2d
Melamed
Lake
Nat. Bank
Cir.
1404;
447,
1399,
(1915)
727 F.2d
Cumberland
Co. v. De Witt
237 U.S.
Glass
1042, 1045-1046,
636].)
455
L.Ed.
35 S.Ct.
[59
Thus,
issue,
in
at
California cases which the
to setoff
been
has
“
by
setoff,
general princi
court was
‘not
governed,
the statute
but
”
ples
equity.’
(Pendleton
(1922)
Com.
58
v. Hellman
etc. Bank
Cal.App.
448,
702],
Fourth Nat.
P.
Nashville Trust Co. v.
Bank
quoting
[208
822,
words,
(1892)
In
added.)
91 Tenn.
italics
S.W.
[18
824]
is
magic
no
enactment of a rule derived from
statutory
equity,
“[t]here
whereby
receiving
legislative
this
of its
deprived
sanction
principle
451;
(58
equitable qualities.”
see also
v. Bank
Cal.App.
Gonsalves
(1940)
America
118].)
Cal.2d
P.2d
[105
The two
recent
most
this court
opinions of
setoff—Jess v.
involving
Herrmann
Jess v. involved cross-actions injuries for personal arising vehicles, out of a collision between thе which parties’ both and defendant plaintiff were After injured. deductions comparative neg- $60,000 ligence, (Jess) the plaintiff was awarded and an award damages $5,600 was made to the (Herrmann). defendant court trial invoked a Proc., (Code 431.70, and, rule mandatory setoff Civ. over the §§ objection of both offset parties, the two awards and rendered judgment for $54,400. plaintiff in the only amount of Concluding that the trial court erred off setting the parties’ respective judgments, this court the judg- vacated ment and remanded. court doing so the observed that “both the public policy California’s financial law responsibility and considerations of fairness a rule clearly support of one barring party’s recovery against the other. . [E]quitable . . would considerations best be served remand- ing the matter to the trial court so it may ascertain the actual parties’ *31 coverage
insurance and thereafter resolve the setoff issue with full knowl- Herrmann, 142, (Jess edge of such v. coverage.” supra, 26 Cal.3d at p. fn. omitted.) that,
The unfairness that concerned the court was both assuming parties insured, were adequately Jess’s from recovery Herrmann’s insurer would be $54,400 limited to but Herrmann would be denied whatsoever recovery from Jess’s insurer. In that common situation setoff “diminishes both injured parties’ actual and accords recovery both insurance a companies correspond- Indeed, ing context, fortuitous windfall at their insureds’ in expense. this application of a mandatory setoff rule the in produces anomalous situation which a liability insurer’s under responsibility its as much policy depends on the extent of the suffered injury its own insured as on the amount of sustained damages by the person (Jess its insured has negligently injured.” v. Herrmann, 138, supra, seen, 26 Cal.3d at in p. italics As will original.) be setoff has anomalous in equally results the present case. Bank, 352,
Kruger v. WellsFargo supra, 11 Cal.3d also shows that setoff will not be allowed where it would result in an or frustrate inequity strong public policy. The in plaintiff Kruger sued the defendant bank on the theory setoff,
that it had
exercised
improperly
its
a
right
credit card delin
quency, against plaintiff’s checking account which
statuto
comprised only
reversed,
rily exempt
unemployment
state disability benefits. This court
denying setoff.
Despite
statute granting bankers a lien on customer
“for the
deposits
balance due to the banker . .
in
. from the customer
Code,
course of the
(Civ.
3054),
business”
the court
that “the
emphasized
absolute,”
creditor’s right to setoff is not
but
be restricted
by judicial
limitations
necessary
(11
a state
uphold
367.)
Cal.3d at
policy.
opinion rеasons that “to permit bankers’ setoffs against
unemployment
disability benefits will frustrate the Legislature’s
in
objectives
providing
such
benefits and
them
protecting
(Ibid.)
from seizure by creditors.”
Kruger
emphasizes
numerous occasions on which California courts have
limited the
right
setoff
order to effectuate state
policies.6
setoff
allowed
majority
case
present
is no less inimical
insureds,
state
important
policy
protecting
as will be described.
This
Bank,
court’s
opinion Kruger
352,
v. Wells
11
Fargo
supra,
Cal.3d
was relied
upon by
Ninth Circuit in Federal Deposit
Corp.
Ins.
v. Bank of
6The court cited
following
cases:
(1897)
McKean v.
Savings
German-American
Bank
656];
Preliminarily, of observed that the subordination appeals of the note required was Rican law by Puerto “for the of the protection depositors (Federal and creditors of Deposit, supra, Banco Credito” 701 F.2d at p. as well as the when general the of the public; Treasury Secretary the suspended insolvent bank’s to “his obligation note was pay purpose creditors, to prevent, for benefit of further of the diminution assets of Crédito, Thus, Banco thereby its and рrotecting depositors creditors. at that Bank point, of America was a relegated position to behind the and depositors general of creditors Banco Crédito—an eventuality obviously contemplated
as Bank possible when (Id., America bought subordinated note.” at p. 836.) The court noted that effect of the offset towas defeat the “[t]he note, purpose of the subordination of the to the tune capital of approximately that, one million dollars. Not only but the effect was also to Bank of put America Crédito, ahead all of the depositors creditors of Banco amount, rather than its being rights. subordinate to their Bank of million; America kept depositors (Ibid.) creditors of it.” got none setoff, Denying the Ninth Circuit to this pointed emphasis court’s on the Tobriner, equitable nature of setoff. “As Justice a speaking for unanimous Court, remarked, California Supreme ‘The to creditor’s setoff is not absolute, but be restricted judicial limitations imposed uphold state policy protecting rights Kruger [Citing debtor.’ v. Wells Bank, Fargo supra, Cal.3d at p. Setoff will when not be it permitted 367.] would be inequitable (Federal contrary public do so.” policy to Deposit, supra, 836-837.) F.2d at pp.
“The for which purpose sought Banco Crédito the loan from Bank of America,” the Ninth recognized, strengthen Circuit “was to its capital posi tion, (Federal and Bank of America knew it.” Deposit, supra, 701 F.2d at p. 837.) “To Bank permit of America to offset Banco Credito’s deposits against its on the liability subordinated note the intended deprives beneficiaries of loan, creditors, tanto, the subordinated Banco Crédito’s depositors pro law, the very that the protection and the subordination of the provisions agreement, were (Ibid.) to create.” designed Precisely the same rationale warrants denial of setoff the instant case. Section 1033 provides protec tions of the comparable those Puerto Rican law that required subordina Further, discussion, (see tion of the 1160), note. as later explained post, at p. has effect of increasing of the insurer surplus primary and thereby represents to and others that said policyholders insurer is able to this, meet its financial obligations. Reinsurers are much aware very as they are aware that California law them to the relegates lowest creditor priority. allowance of reinsurer setoff permits betrayal represen *33 tation to and policyholders grants reinsurers a windfall had they no reason able to right expect.
The majority’s to Federal attempt distinguish Deposit, supra, on the ground that it contains no “reference the to of setoff” and statutory right because stock in debts are not allowed subscription California (maj. opn., ante, fails The a dismally. application of statute is inconsequen- tial; as already explained, statutes or even authorizing setoff have mandating never been permitted to the to enlarge right that beyond permitted by the applicable equitable Such principles. statutes do not “enable a to party make a set-off cases where the of or did principles legal equitable set-off not authorize previously (Sawyer Hoag (1873) it.” 84 U.S. 622 [21 731, 736].) L.Ed. The of stock propriety debts is subscription analytically irrelevant the opinion Deposit Federal and its precedential value to this case.
III. offers majority two reasons the allowance of setoff in this case does not offend public under the policy: insurance statutes insolvency “origi- nal insureds have no interest or in a contract (§ 623), of reinsurance and no rights against ante, the (§ 922.2) 1142];” reinsurer [maj. opn., and (2) the interests of and policyholders the general public by are advanced reinsurance, spreading risk through will this if not occur effectively the offsetting of debts is disallowed. The Court of Appeal offered additional reason that the losses of primary policyholders will by be covered CIGA, which is financed insurance industry. understood, consid- do scrutiny. Properly
These contentions not bear other (and Court Appeal erations identified and the majority allowance, denial, considerations) not the of setoff. relevant compel A. declaring statutes reliance on majority’s provisions (§ 623) have no interest contract of reinsurance original insureds a ironic, 922.2) (§ because
and cannot proceed directly against reinsurer other these statutes were intended to creditors policyholders protect insurer against insolvent reinsurers. The reason third no ordinarily rights agree- have parties ments, which ostensibly are rather than indemnity liability, contracts (see, flows not their lack simply privity from Annot. generally, 1485),7 A.L.R. but of such preserve from need benefits agreements creditors, to all policyholders or particular claimants creditors. Funds, (Nutter, Insolvencies, Proceeds, Insurer Guaranty and Reinsurance Q. 374.)8 Fed’n. Ins. Couns. The statement at the end of section 922.2 which the majority or emphasizes—that original poli- insured “[t]he cyholder shall not have any rights the reinsurer which are not set specifically forth cоntract never intended to reinsurance”—was a facilitate preference reinsurers vis-á-vis policyholders reinsured; creditors with respect assets an insolvent it simply that, ensures absent the reinsurance cut-through endorsement agreement *34 8, (see ante), fn. all have the policyholders rights same and that their rights and of those other creditors as against the assets of the insolvent insurer cannot be the abrogated by reinsurance agreement.
Moreover, as
Supreme
the
Court Colorado has
the
recognized, “because
public interest is
in reinsurance
such
implicated
contracts . . .
contracts may
not be considered
(Bluewater
. . . .”
pure indemnity contracts
Ins. Ltd. v.
1365,
interest,
(Colo. 1992) 823
1368.)
P.2d
Due
public
Balzano
to this
because
third
policyholders
have
direct
no
of action
parties
right
reinsurers,
against
this court should
the
enhance the
Commissioner
power of
Insurance,
as
to
liquidator,
the
rein-
protect
public against overreaching
surers by enforcing section 922.2. As
out in
pointed
Corcoran v. Ardra Ins.
rule,
law,
7The
which has
source
its
in French
was
country
first established in this
Mutual
Safety
Ins. Co. v. Hone
The court Corcoran v. Ardra is not supra, Ins. 842 F.2d alone that the comprehending favoring considerations equitable policy- holders and injured claimants over reinsurers are unaffected fact they directly are not to the reinsurance and cannot parties agreement proceed reinsurers. For Cas. Indent. example, Glacier Gen. Assur. Co. v. (D.Mont. Exchange 1977) 435 held that the equitable it was F.Supp. of rescission will not where the would be to remedy be allowed effеct discharge reinsurance would fall obligations, unfairly because burden claimants, (Id., “on the policyholders or or some state-created fund.” at p. 861.) The court was properly the fact that unimpressed by policyholders were claimants not to the contract and had direct parties rights against no reinsurer, because, it, light character of issue before equitable (Id., court “cannot blind itself to the fact that third involved.” parties America, 862.) at p. Similarly, O’Connor v. Insurance Co. North which the relies in a different connection F.Supp. majority upon (see post, 1166-1169), pp. the court the need to “consider recognized contract, concerns of who are not a who persons necessarily parties to but (622 nonetheless also have claims against assets of insolvent’s estate.” too, F.Supp. at fn. Here direct fact that have no policyholders under the rights does not relieve this court agreement duty them, protect duty imposed only by equities but several specific provisions of the Insurance Code. 922.2,
Section which prevents policyholders from proceeding directly *35 reinsurers, was enacted in against of the United response opinion States in Supreme Fidelity Deposit Court & Co. v. Pink 302 U.S. 213, 162], In L.Ed. 58 S.Ct. that case the reinsurer refused to the pay of an insolvent liquidator insurance the in the company on basis of a clause reinsurance agreement that the reinsurer’s providing liability would arise actual only upon the payment by given insurer—an the insur- impossibility er’s insolvency. By upholding the contractual the provision, Court Supreme permitted reinsurers to avoid an complete payment to insolvent reinsured. To result, reverse this New York enacted in 1939 legislation designed require, to in among the event the things, of of the insolvency ceding company, were to be proceeds directly to the paid liquidator of, (1939 N.Y. not insolvent insurer. liability by, actual the upon payment Laws, agree- Such the reinsurance ch. an clause” “insolvency statutes, which now mandated similar state of universally ment is almost by 922.2 is an example. section different
Though chiefly problem section 922.2 was to address a designed case,9 the the the is based idea that presented from that this statute on reinsurer’s determined the occurrence of the event liability ought by to be reinsured, the insured not of the reinsured. by solvency the by “[Sjince the it reinsurer has received a for designed to premium compensate the there assuming risks incident to a contract of indemnity against liability, to seems be no reason for thе reinsurer of the allowing gain because (Note, reinsured’s the insolvency.” Distribution Proceeds a Reinsurance Upon Policy Insolvency the Reinsured Harv.L.Rev. risk, 98-99.) Unlike were policyholders, paid money who to avoid reinsurers it; paid accept they should be to walk permitted away fully compen- sated, leaving cred- policyholders, claimants other more favored injured holding bag. itors The reinsurer setoff allowed in this by majority case aas result of the of the insolvency reinsured will deprive policyholders $300 other preferred creditors of about million.10 The myste- majority’s rious conclusion that “no ‘diminution because of will insolvency’ occur ante, light of this setoff’ (maj. is opn., judicial self-deception. By ignoring general of the statute—which was purpose to prevent reinsurers from turning to their insolvency own miscon- advantage—and by the reason ceiving a language from preventing particular policyholder proceeding against a directly reinsurer—which was to protect rights all other policyholders and creditors—the has majority opinion given section 922.2 precisely opposite effect it was intended to have. interests of policyholders rein- insolvent insurer’s contract of
surance are under protected section which requires Commissioner Insurance, as to marshall liquidator, the assets of the company insolvent creditors, 1033, which, seen, for the benefit of all and section as we have provides policyholders certain other creditors over reinsurers priority *36 majority conflicts this “superpriority federal claim of the United States Government 1033. With 9A 10It Government case, derivative may government, also result respect discussed, statute,” purpose is insolvent and—. not if post, at page 1160. any, only 31 United States Code federal which are in the third denial of tax and other claims of the with section claims that . . shall be paid [5] clause, (iii) section but which does address and fourth act be first apparently frustrated, 3713(a)(1), when—[!](A) bankruptcy is committed[.]” priorities as well State the setoff allowed which problem a person indebted to specified with California and the provides the so-called presented section by that “A 1158 out,
the allowance of claims. As this court has setoff cannot be pointed where it allowed would “disturb the just equal distribution assets” Co., (People etc. Trust of an unsettled estate. v. Cal. 168 California A setoff that effect is because it having inequitable improper pro rata distribution only “would not prevent among credi [the estate’s] tors, but, on the contrary, give would the creditor the benefit of claiming setoff an undue over preference other creditors of the estate to the extent of (Ibid:, full Sawyer Hoag, supra, of his payment claim. accord [Citation.]” 84 736].) U.S. 622 L.Ed. [21
Reinsurers are entities whose highly sophisticated complex commercial arrangements largely unregulated by government.11 on the Policyholders, hand, are often individuals without unsophisticated expertise independently assess financial of a strength primary insurer otherwise protect themselves insurer insolvency. Such be devas- persons may tated absence unexpected of adequate protection against catastrophic loss.12
B.
The majority’s policy justification for setoff is that it will facilitate risk-
spreading
permit smaller insurers to remain in business. The majority
reasons that reinsurer setoff “not only spreads risk but also acts as mutual
committee
congressional
11A
has described
solvency
reinsurance as “the ‘black hole’ of
regulation.” (Failed
Insolvencies,
Company
Promises: Insurance
Rep. by the Subcom. on
Oversight
Commerce,
Investigations
&
Energy
of the House Com. on
&
Rep.,
H.R.
Commit
(101st
tee
Cong.,
Sess.)
(1990)
Print 101-P
Promises].)
2d
Failed
As the
[hereinafter
noted,
supreme
many
courts of
have
relatively unregulated
states
nature of the reinsurance
business is one of the reasons the
obligations
of an insolvent insurer are almost
universally assigned
priority
a lower
obligations
than an insolvent’s
policyholders
under
,W.2d 1,
primary policies. For example,
(Tenn. 1986)
v. Cherokee Ins. Co.
704 S
Neff
Supreme
Tennessee
Court observed that “contracts of
subjected
reinsurance are not
and requirements
[,]...
strictures
of most of the insurance statutes
although the statutes do
place certain
obligations
financial
on companies that seek credit
agree
under reinsurance
premiums
ments for losses or unearned
liability.
on their
. . .
reinsurers want
[I]f
statute,
protections and advantages of the
they must also assume
obligations
the liabilities and
provisions,
of these
including the attendant tax burden.
place
To do otherwise would
reinsur
a wholly preferred
ance in
position to direct policies,
clearly
which would be
contrary to the
(Id.,
6;
statutory scheme . . . .”
at p.
accord In re Liquidations
(1988)
Reserve Ins. Co.
538];
I11.2d 555
N.E. 2d
State ex
Long
(1987)
[524
rel.
v. Beacon
N.C.App.
Ins. Co.
508];
S.E.2d
Foremost
Department
[359
Ins. Co. v.
Ins.
It is true probably that the disallowance of reinsurer setoff would increase the cost of reinsurance and that this increase would be on to the passed insurance-buying public. Diffusion of the increased cost among millions of is, however, consumers much more bearable and than equitable visiting the equivalent cost upon much smaller group policyholders and others with claims against insolvent insurers.
The misguided public policy theory posited by which majority, inconsistent with the legislative assignment of the lowest priority congressional 13A inquiry into the insolvency of the Company Mission Insurance concluded that the chief $240 reason “a company with less than million in capital surplus write [could] enough bad $1.6 business to cause a billion failure” was its “excessive use of reinsurance.” Promises, (Failed at p. report committee point states that at one more than 600 reinsurers were involved reinsuring Mission’s direct Very business. few were admitted to do business in California and percent were foreign companies, based in Europe, the Middle East, Africa, Australia, (Id., 12-13.) India and elsewhere. at pp. It was claimed “that unlicensed reinsurers conspired to use gain Mission as a front to access to premiums lucrative in the United States marketplace.” (Id., p. 14.) *38 reinsurers, claims of also reflects an the incomplete function appreciation risk, of reinsurance. In addition to spreading significantly expands underwriting capacity of the reinsured. Insurance companies law required by to maintain a certain level of the amount surplus, roughly by 700.02, which their (§§ 700.025.)14 assets exceed their liabilities. The sur- plus requirement a limit imposes on amount of new business insurer write, can as each new policy adds liabilities its balance sheet and thereby decreases the insurer’s surplus. “Reinsurance decreases liabilities on the sheet, reinsured’s balance thus raising surplus allowing greater volume of new policies (1 to be written.” Cal. Insurance Law & Practice [4][e], 11-15.) 11.01 p. § Because the financial of a insurer stability primary is measured chiefly by its surplus, reinsurance enhances the of such stability an insurer in 11.01[4][d], eyes (Id., both and the regulators public. 11-14.) Reinsurance therefore not only but induces of the permits expansion business of underwriting both the reinsured and the reinsurer.
The deductions from liabilities that have this salutary economic effect on the reinsurance business are authorized sections by 922.1 and 922.15. The not, however, deductions are Their automatically available. use is explicitly conditioned on the protection policyholders inclusion of the insolvency Thus, clause (§ 922.2.) reinsurance agreement. the insolvency clause should be construed “not to thwart only the kind of windfall sanctioned by Pink, [Fidelity discussion, ante, & Deposit Co. [supra, 302 U.S. v.] 224] [see 1156-1157], at pp. but also to foil the associated evil of the abuse of the statutorily granted credit for reserves which looms cases of insolvency. [][] . . . The credit ... is granted only because the reinsurance makes up difference, maintaining the reserve at a If prescribed minimum. offsets were permitted ... the quid pro quo (Bluewater would be destroyed.” Ins. Ltd. v. Balzano, supra, 1371.)15 823 P.2d at
Allowing reinsurer setoff a reinsurer permits reap considerable benefit of section 922.2 without the attendant burdens consumers and other creditors assumed it would bear. The reinsurer is or should aware be that 700.02, 14Pursuant to “surplus section means the excess of admitted assets over the sum of (1) liabilities reported, for losses expenses, taxes and all other indebtedness and reinsurance law, outstanding provided risks as (2) paid-in capital, in the case of an insurer issuing having stock, or outstanding minimum capital shares of paid-in capital required, any in the case of other insurer.” 15The Commissioner interpretation Insurance’s of the insolvency clause in this manner cannot easily be Noting dismissed. that there is degree “a ambiguity insolvency clause,” Balzano, the court in Bluewater Ins. Ltd. judgment deferred to the of the Colorado Insurance Commissioner that the clause barred setoff in reinsurer circumstances here, similar presented to those because such a “construction of the clause is consistent with what reasonably required allowed or by other of the reinsurance provisions and, reason, statute (823 merits deference.” P.2d at p. and other creditors on reinsurance evaluat- policyholders reasonably rely ing ability of the insurer to meet its primary obligations justifiably assume it will if them for reason the insurer is unable to protect primary do so. earlier As setoff should not be “where its explained, permitted would involve a and a operation just deception disappointment *39 (3 expectation confidence of the whom it is set party against up.” Story, unfair, Equity Jurisprudence, supra, Setoff is not but p. only § the contrary declared that policy reinsurance shall “provide adequate for the safeguards (§ policyholders, creditors and the subd. public.” noted, (e).) As by financial providing security beyond to reinsurers that allowed by will Legislature, setoff the reinsurance of encourage marginal insurers, which should be discouraged. of setoff also availability may cause reinsurers who believe a in reinsured is financial trouble to loss delay so payments that the event of it will be in insolvency stronger position creditors, than other a practice that might force insolvency primary insurers dependent upon reinsurance payables.
The unusual that often relationship exists between primary insurers and their setoff, reinsurers may also invite of the exploitation availability the disadvantage of the public. “While professional reinsurers be inde may pendent companies, they frequently subsidiaries or affiliates of primary insurance within companies a holding (1 company family.” Cal. Insurance Practice, Lаw & [3][b], out, 11-9.) 11.01 p. § As earlier pointed “[mjost large primary insurers maintain their own divisions to handle their reinsurance needs (Id., 11.01[3][c], exclusively.” 11-10.) The “treaties” in the present case provide an excellent illustration of the close unusually business Gibraltar, that relationship typically exists. Not only is one of the two contracts, reinsurers under the A” “Relation subsidiary of reinsurer, Reinsurance, Prudential but these two reinsurers are themselves reinsured under the “Relation B” contracts Mission Insurance Company affiliate, and its Mission National Insurance Company, insurers. primary Thus the affiliated Mission companies provide both primary policies of insurance to the public and reinsurance contracts to other insurers or reinsurers.
Allowing setoff of debts incurred under the B” “Relation contracts to which Mission companies were parties subsidizes largely com- unregulated mercial transactions between parties whose common interests are in some measure inimical to those of policyholders. such Allowing setoff will not only encourage self-serving consumers, arrangements harmful to but dis- serve the overall long-term interests of the insurance one industry. As thoughtful written, commentator has availability setoff “diminishes the reinsurer’s incentive to continually scrutinize and assess the financial
integrity scrutiny of its reinsurance This lack of on an partners. ongoing basis in the tends to mask degree reduces the self-regulation industry existence of weak This lack financially capacity marketplace. fl[] if compounded in the a reinsurer is scrutiny present permitted [as case] offset but rights only among among all its reinsurance contracts also contracts in which reinsurer also have ceded business to the insolvent (Jernigan, Restricting insurer.” The Case (July Offsets ed.).) Best’s Rev. 55 of offset is allowance (Prop./Cas. unwise particularly light extraordinary growth ominous very A insurance congressional insolvencies now this nation.16 taking place of insurance study insolvencies states abuse has been a “[reinsurance key factor and that every studied the Subcommittee” of interest in reinsurance have been common arranging fairly “[conflicts *40 Promises, (Failed 69.) . . . .” supra, at p. response inevitable of reinsurance of the companies holding to the will to enter
majority be into insurance or to issue reciprocal agreements policies of insurance when have only offsetting policies they potentially the original from insurers with which business. this they do manner will be able insulate the they themselves risk of loss largely from due to insolvency, it individuals shifting instead unfortunate who insurer, claimants, purchased from the policies injured insolvent as well as other and the creditors public. insurance-buying
Reinsurance companies do not need this Because protection. of their information,17 expertise and superior access to already reinsurers much better than position and others the policyholders strengths to assess and of the weaknesses and primary protect insurer themselves accordingly. For they can decline example, to reinsure insurers financially unstable increase the cost of reinsurance commensurate with increased risk. by 16A study Independent 1989 National states Association Insurers that “over 150 property/casualty companies insurance have nearly become insolvent since with half of during them occurring past years. companies designated 5 The number of regulatory for attention Commissioners by the National Association of Insurance because of financial problems has more than quadrupled past years, in the 10 and the cost of insurance insolven Promises, cies is growing supra, alarming (Failed at an rate.” reinsurance, provides 17Section 622 that “Where an insurer obtains he must communicate insured, representations all the and also all the original knowledge he information possesses, previously whether or subsequently acquired, which are material the risk.” (Italics also, added.) See Staring, The Law Reinsurance Contracts in in Relation to California Anglo-American 1, 5-8; Common Law I. Firemen’s F. Co. v. Aachen & U.S.F.L.Rev. Munich F. I. Co. 53]; 2 Cal.App. Glacier Gen. Assur. Co. P.2d v. Cas. [84 Indem. Exchange, 435 F.Supp. 857.
C. avoids, Appeal Court of majority Acknowledging reality to cover the diminish available reinsurer would assets effect conceded rejected nevertheless The Court of Appeal policyholders. losses of primary this for reason that setoff should argument public the Commissioner’s policy for would it losses policyholder because believed such be disallowed “[tjhis will be shared that expense by most be covered CIGA18 part The implication this state . . . .” the insurers business doing all among the insurance will be made whole at expense policyholders true. simply and that the will not industry, public pay, all, industry. borne the insurance CIGA’s will not be expenses First of of operation” that CIGA’s specifically “plan Insurance Code provides (see member insurer is whereby “shall contain each provisions § required length reasonably of time a sum recoup over a reasonable under insurer this recoup calculated tо the assessments member paid surcharge charged policies to by way premiums article on insurance added; 1063.14, see (§ (a), which article subd. italics also applies.” this out, Because, “CIGA 1063.145.) as Chief Justice has elsewhere pointed insureds, in the form of increased effect loss spreads among (Isaacson v. Ins. Guarantee costs to the insurance-buying public” California 297]), it is the (1988) 44 Cal.3d P.2d Cal.Rptr. Assn. *41 insurance, Californians the insurance industry, millions of who not purchase reinsurers, and the meager least of all who bear costs of the sometimes benefits available from CIGA. is, effectively insurance-buying
The CIGA—that the majority requires its rein- absorb the an insolvent insurance to public—to company debts of surer, will in a having portion because setoff result CIGA all or pay payables. claims that would otherwise have been satisfied reinsurance by limited to the Legislature clearly intended to this. “CIGA is prevent defined in as payment part ‘obliga of ‘covered claims’ which are relevant insurer, tions an insolvent and out of an by arising . . . law imposed insurance were policy unpaid by insolvent insurer . . . which 1063.1, Code, (Ins. (In (c) (1).)” Imperial insolvent insurer . . . .’ re subd. § 664], omitted.) Ins. fn. Co. Cal.App.3d Cal.Rptr. “ ‘[cjovered (c)(3) of section claims’ shall Subdivision 1063.1 states that any obligations arising any include the insolvent insurer out reinsurance (Italics added.) contracts . . . .” If were doubt CIGA any Legislature’s there about the intent to insulate and consumers from a under a liability for insurer’s primary obligations CIGA, Associa a Insurance Guarantee description Barger, 18For detailed see California tion 45 State Bar J. 475. contract, reinsurance it is earlier explained, eliminated section 1033. As by (a)(5) arising subdivision of that statute that claims out of explicitly provides excluded priority, contract shall be from any penultimate thus them the lowest The setoff allowed placing priority. by majority reinsurers, though will the insurance to bail out require buying public latter are in a far themselves. better to assess risk position protect
Moreover, from the fact that CIGA’s entirely apart expenses really consumers, wholly borne CIGA does not event protect policyhold- ers and associations injured legislation creating guarantee claimants. maximum limits on the amounts that can be out on a places paid policy underwritten an insolvent insurer.19CIGA will not an insured or pay injured claimant amounts that exceed this Amounts excess of ceiling. recovered, all, if ceiling can be from the and reinsurance only liquidator; (Bluewater usually most substantial asset available to the liquidator. Bolzano, 1367-1368; 1 supra, Ins. Ltd. v. 823 P.2d at Cal. Insurance Law pp. Practice, Insolvencies, 11-54; Nutter, 11.06[1], supra, & Guar- Insurer Funds, Proceeds, Q. anty Reinsurance 1979 Fed’n. of Ins. Couns. at p.
The manner which reinsurers of amounts over escape payment guaran- tee “If association has been described ceilings following way. association, claimant settles with the she forfeits guaranty any possibility an amount obtaining over the The claimant’s alternative is to ceiling. only settlement, and, wins, if reject she to collect the proceed judgment association guaranty to collect compensation up ceiling attempt the balance from the liquidator. rarely Claimants will choose the latter Further, alternative if they risking because would be a defense verdict. even win, were to claimants would have incurred they likely significant litigation and recover little from the at some time expenses very liquidator Thus, even distant future. claimants with potential damages significantly *42 than the will settle higher ceiling with the association. Such guaranty first, cause paradoxical settlements results: the claimant is not injured fully second, the reinsurers on the risk the compensated; ceiling above escape third, without the paying anyone; failure of the claimant to a claim bring for amounts over the liquidation association the guaranty ceiling deprives creditors, and therefore all liquidator, of reinsurance general proceeds short, above the ceiling. guaranty associations reinsurers and protect help only pays 19CIGA certain arising policy covered claims out of an insurance to a maximum $500,000 1063.1, (§ per (c)(1), (6).) of Guaranty claim. subd. The California Health Insurance $200,000 Association pays policies on covered a (adjusted to maximum of for inflation as 1066.2, necessary) per injured (§ (c).) person. subd. Insurance Guaranty California Life $250,000 pays Association on covered policies to maximum of in life insurance death 1067.02, any (§ (c)(2).) benefits for one life. subd. the of purpose them receive a windfall. This result contradicts peculiar clauses, and the associations guaranty statutory insolvency purpose and Insurer (Comment, Reinsurance goals general.” of public policy Original Insured or Insolvency: Recovery By The Problem Direct 893-894, omitted.) fns. Injured Claimant 29 UCLA L.Rev. contends, the overarch- As the setoff contravenes correctly Commissioner of the insurance laws: ing purpose effectuating payment policyholders’ init losses. There is no reason to allow persuasive public equitable policy this case.
IV. Thе result the neither Hum majority Downey reaches is compelled by phreys (Downey), P.2d nor Cal.App.2d 484] case. did controlling Downey not involve a reinsurer or statutes anal case; ogous to those to this all pertinent Downey nor were the equities to those comparable Downey of this case. was an action liquidator affiliated insurance unremitted and companies against agent recover unearned insurance premiums. The on companies April became insolvent 1933. Prior to that date the defendant had agent issued on behalf policies and collected companies from the which he did premiums policyholders insolvencies, When remit. he learned of the all of the agent “replaced existing written in policies insolvent by getting other com companies] [the ‘to panies blanket’ within 15 new accept coverage wrote days He policies. used the . . [premium . he had on hand on payments] April thereafter, which he collected payments] [additional replacing (Id., 329.) insurance.” at The court permitted agent to set off the he amount of the premiums collected on the basis of legal factors not equitable present here. Setoff because, was approved Downey among other fact that the things, “[t]he policyholders received their unearned did not create an premiums unlawful preference.” (Downey, supra, As the Cal.App.2d court an insurer explained, has no to an unearned the first premium place. “ ‘A company cannot recover premiums portion term of insurance after has taken it place. Nor can maintain an action *43 him, against an agent for the of recovery premiums received the consid by ” 337, eration for which (Id., has failed.’ Johnson v. Button quoting 151, (1917) 153], 120 Va. 1404.) 339 S.E. 22 turn quoting Cyc. [91 Downey policyholders’ were rights legally to those of the superior and the liquidator insolvent and it was not them a companies unfair to allow 1166
preference over other creditors. setoff case has approved present effect: it defeats of and other creditors that opposite rights policyholders are statute by superior competing rights of reinsurers. that, 323,
It noting, Downey, supra, bears like 102 finally, Cal.App.2d (1889) most of the cases the majority (e.g., relies Carr v. Hamilton 129 upon 669, 295]; (1897) U.S. 252 L.Ed. 9 S.Ct. Ainsworth v. Bank [32 of California State, 952]; Í19 Dept, Cal. 470 P. Barnett Bank v. Ins. (Fla.Ct.App. [51 of 142) 507 So.2d While articulate certain these cases inapposite. broad light to setoff do not shed on the principles applicable generally, they unusual considerations to setoff under statutory equitable peculiar recip rocal reinsurance and are limited and not agreements therefore of use controlling. of the New York Court of Matter opinions Appeals of 58, 1186], (1992) Midland Ins. Co. N.Y.2d 253 79 N.Y.S.2d 590 N.E.2d [582 America, Stamp supra, and the Seventh Circuit in v. Insurance Co. North of 1375, 908 F.2d which the relies majority most relate upon heavily, primarily to the esoteric issue of which is not central case. mutuality,20 to present
Though it does involve a reinsurer’s
with an
right to setoff
connection
America,
insurance
supra,
O’Connor v. Insurance
insolvency,
Co. North
of
(O’Connor)
622
611
does
deserve the
it
F.Supp.
weight assigned
majority. O’Connor
a setoff it
will
permits
acknowledges
give the reinsurer
over other
priority
creditors on
basis of the observation
Collier on
that
Bankruptcy
the federal
statute
setoff contem-
bankruptcy
authorizing
that “one creditor
plated
be
more than other creditors.”
may
getting paid
(O’Connor, supra,
4
(14th
F.Supp.
citing Collier on Bankruptcy
20“Whether a reinsurer’s debts are
prior
liquidation,
“owed”
and therefore mutual
in time
reinsured,
preliquidation
with the
debts of the
usually turns on whether a court believes the
reinsurer’s debts are
mature.
sufficiently
Liquidators argue
contingent
that such debts are
until
Reinsurers,
payment
occurs and
compelled by
liquidator
an order of the
or a court.
hand, argue
on the other
temporal mutuality
that
giving
satisfied because the event
rise to
liability
upon
agreement,
occurred
the execution of the
prior
insolvency.
satisfactorily
The case law does not
resolve
deny
the issue. Some courts have tended to
ground
on the
that the
Melco
unripe prior
insolvency.
(See, e.g.,
reinsurer’s debt is
to actual
System
v. Receivers
Trans-America Ins. Co.
(1958)
43].)
1167 does mutual debts of setting that the off 68.02[1].) stated 1978) Collier ed. <][ However, of the same section (Ibid.)21 to an invalid “preference.” amount not mutual, setoff that, undeniably that are even to claims as Collier emphasizes court, in disсretion of rests . . . application never “Its mandatory: is (4 Bankruptcy Collier on equity.” general principles under the exercised (15th ed. 68.02[1], Bankruptcy in 4 Collier on 1978) (14th repeated ed. 1[ this to 553.02, service g[ 553-13.) gives lip O’Connor 1992) Although p. even discuss 616), does not (622 opinion F.Supp. p. guiding principle reinsurers grant reason to identify single equitable let a alone equities, on the proceeds creditors. O’Connor and other over priority policyholders must be that setoff illogical, incorrect and legally unstated assumption, it permitted. allowed because is
O’Connor, indifferent not only equities is supra, 622 F.Supp. usually The chief factor that relating priorities. but also to the law to creditor in is bankruptcy the context of determines the of a creditor’s claim priority unsecured, rarely a factor that is secured whether his or her interest is claims As between the with insurance insolvencies. significant connection creditors, to section Code is similar Bankruptcy of unsecured the Federal order of descending (eight), that it divides claims into classes of the order (11 507.) One the most features important U.S.C. priority. § Code, (3 Collier out points as by Bankruptcy established priorities 507-11), is its exclu- (15th 1992) Collier on ed. Bankruptcy 507.02[2] fact Despite sive nature. There is no to alter the statute. judicial power “ in their equitable ‘that themselves bankruptcy proceedings purely general in accord with the character . . . are to be administered [and] granting and court . . . principles practices equity[,]’ [t]he mandate which it deems set aside the clear priority equitable congressional (In re Columbia Ribbon that no such shall be accorded. priority [Citation.]” gravamen opinion The statement from Professor Collier’s treatise that is the in O’Connor is (1992) treatise the observation qualified in the most recent edition of that to have been too broad. provision “that the earlier setoff is now considered [since amended] cases, preference to the detriment many The result was that in too certain creditors received a 553, as has Consequently, of other creditors and the debtor’s estate. U.S.C. § amended] [11 acts, beyond restrictions restricted the of setoff what was done in earlier and contains (4 ways parallel Collier on preference some to those found in the section U.S.C. § 547].” 553.02, 553-10, (15th omitted.) Bankruptcy ed. fns. acknowledgment compared Collier’s setoff is mild inequities that often result from persuasively that of some other commentators. It has been contended that the allowance of ” “ “unsound,” bankruptcy justice equity’ setoff in the context ‘natural and inimical primarily “organized legislative reflects the halls” of banks and other powerful voice Why Bankruptcy Prior- (McCoid, institutional creditors that benefit from the doctrine. Setoff: 15, 43; also, Note, Bankruptcy: Is the Creditor (1989) ity'? see Va.L.Rev. Setoff Preferred or Secured? Banks versus Creditors Their Murray, 50 U.Colo.L.Rev. Against Customers: Accounts Customers’ 82 Com.L.J. Set-Offs
1168 999, Act is 1941) 1002.) “The (3d Bankruptcy Cir. 117 F.2d theme of Co. 215, Paper Corp., 313 U.S. (Sampsell Imperial of distribution’ v. ‘equality 1293, 1298, if is to be 904]); 61 one claimant 219 L.Ed. S.Ct. [85 others, clear the statute.” should be from purpose over preferred 25, 23, 29, L.Ed. 73 S.Ct. (Nathanson v. Labor Board 344 U.S. 29 [97 80].) altering
A would have the effect of setoff cannot be allowed that Bank creditors established under the assigned eight classes of priorities all code to ensure that attempts Code. Because ruptcy bankruptcy “[t]he Co., (In Cartage re C-L creditors situated receive treatment” similarly equal 1490, 1990) 1492), setoff is (6th Inc. it has been said that Cir. 899 F.2d disturb, but context where “it does proper bankruptcy only class . . . .” of distribution creditors of the same promotes, equality among Wilkinson, 850, 853, U.S. 596 (Walker supra, F. cert. den. 265 [68 296 1198, 639].) 44 If federal setoff L.Ed. S.Ct. a federal court cannot use the federal bankruptcy statute to alter creditors under the priorities assigned scheme, the doctrine there is no reason it should be to use certainly permitted is, That established under a state scheme. upset priorities regulatory however, O’Connor, 611, supra, accomplished, what 622 precisely F.Supp. indifference to section counterpart as a result of its Illinois complete Code, 205; 73, (Ill. 817(1)), which the ch. par. Ins. Ill.Rev.Stat. for court did not even bother to cite.22It seems to me entirely inappropriate lacking for a federal trial “guidance” judge completely this court to look state law. governing respect O’Connor, determi- supra, opinion F.Supp. justifies defining
nation of the Tenth Circuit that “whether or not state statute [a require reinsurer’s and what its applicable provisions offset] and, proceeding, matters which are related to a state inseparably liquidation such, (Grimes decided in v. Crown as should not be a federal court. . . .” (10th cert. den. U.S. 1096 Ins. Co. Cir. 857 F.2d Life Co., Ltd., 934,109 also, 1568]; v. Ardra Ins. L.Ed.2d S.Ct. see Corcoran [103 31, 37.) 842 F.2d supra, grants beneficia by policyholders, 22Section 205 the Illinois Insurance Code “[c]laims
ries, liability general insureds and priority claims insureds” over 11other claims “[a] arising creditors . . . out of Supreme .” The Illinois Court has held that claims creditors, general policy contracts are claims of and therefore subordinate to the claims of Co., (In Liquidations Reserve Ins. re injured holders and claimants and others. 538].) I11.2d 555 N.E.2d reasons, decision of Court I reverse the For the would foregoing Appeal. *46 J.,
Mosk, J., Kennard, concurred.