In Re: Windhaven Top Insurance Holdings, LLC, et al.
Filing
16
OPINION Signed by Judge Colm F. Connolly on 3/27/2023. (nmf)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE: WINDHAVEN TOP INSURANCE
HOLDINGS, LLC, et al.,
Chapter 7
Bankr. No. 20-10524 (JTD)
(Jointly Administered)
Debtors.
RISK & REGULATORY CONSULTING, :
LLC, in its capacity as SPECIAL DEPUTY :
RECEIVER OF WINDHAVEN NATIONAL:
INSURANCE CO:tvfi>ANY,
Appellant,
v.
Civ. No. 21-1534-CFC
ATALAYA CAPITAL MANAGE1\.1ENT,
et al.,
Appellees.
Gregory L. Arbogast, Keith M. Lusby, GEBHARDT & SMITH LLP, Wilmington,
Delaware.
Counsel for Appellant, Risk & Regulatory Consulting, LLC, in its capacity
as Special Deputy receiver of Windhaven National Insurance Company.
Mark E. Felger, Barry M. Klayman, Gregory F. Fischer, COZEN O'CONNOR,
Wilmington, Delaware.
Counsel for Appellee, Jeffrey L. Burtch, as Chapter 7 Trustee.
OPINION
March 27, 2023
Wilmington, Delaware
CONNOLLY, UNITEDS'fAT.S D
I.
INTRODUCTION
This appeal arises from the chapter 7 cases I of Windhaven Top Insurance
Holdings, LLC and certain affiliates (together, "Debtors"). Appellant Risk &
Regulatory Consulting, LLC ("RRC") is special deputy receiver of non-debtor
Windhaven National Insurance Company ("WNIC"), a domestic insurer subject to
Texas liquidation proceedings pending in the District Court of Travis County,
Texas ("Texas Court"). Debtors rendered various administrative services to WNIC
and other insurers. When the parties became financially distressed in 2019,
Debtors filed voluntary petitions for relief under the Bankruptcy Code. Because
WNIC is a domestic insurer, it was not eligible for relief under the Bankruptcy
Code. See 11 U.S.C. § 109(b)(2). Instead, WNIC was placed into receivership and
liquidation pursuant to the Texas Insurer Receivership Act, codified at Texas
Insurance Code§§ 443.001, et seq. ("Texas Insurance Code").
1
The docket of the chapter 7 cases, captioned In re Windhaven Top Insurance
Holdings, LLC, No. 20-10524 (JTD) (Bankr. D. Del.), is cited herein as B.D.I. _."
The appendix (D.I. 10-1) filed in support of appellant's opening brief is cited
herein as "A "
The underlying dispute between RRC and the trustee appointed in the
Debtors' chapter 7 cases ("Trustee")2 concerns the ownership of funds in the
possession of the Debtors at the time the bankruptcy cases were filed. RRC filed a
motion in the Bankruptcy Court seeking relief from the Bankruptcy Code's
automatic stay provision, 11 U.S.C. § 362(a), and authority to commence litigation
in the Texas Court to settle the dispute regarding ownership of the funds and
enforce RRC' s asserted rights under the Texas Insurance Code. The stay relief
motion relied on the reverse preemption doctrine under the McCarran-Ferguson
Act, 15 U.S.C. §§ 1011-1015,3 which generally provides that if a specific state law
promulgated "for the purpose of regulating the business of insurance" conflicts
with a generally applicable federal law, the state law c~ntrols. See 15 U.S.C. §
1012(b). RRC argued that the dispute over the ownership of funds triggered
reverse preemption under the McCarran-Ferguson Act because various Texas
2
By Stipulation filed November 21, 2022 (D.1. 13), appellees Atalaya Capital
Management LP, Atalaya Special Opportunities Fund VII LP, and Midtown
Madison Management LLC have withdrawn from the appeal.
3 "The McCarran-F erguson Act has been interpreted as overturning traditional
federal rules of preemption and allowing state insurance statutes to 'reverse
preempt' federal statutes that affect state regulation of the insurance industry." In
re First Assured Warranty Corp., 383 B.R. 502, 531 (Banlcr. D. Colo. 2008) (citing
Genordv. Blue Cross & Blue Shield ofMichigan (Genord), 440 F.3d 802,805 (6th
Cir. 2006), cert denied, 549 U.S. 1030 (2006) (discussing McCarran-Ferguson Act
and "reverse preemption"); Ruthardt v. U.S., 303 F.3d 375, 380 (1st Cir. 2002)
(describing application of the McCarran-Ferguson Act as " 'reverse preemption'of federal law by state law-by Congress' consent")).
2
Insurance Code provisions conflicted with aspects of the Bankruptcy Code, and
where resolution of a dispute between two parties implicates reverse preemption
under the McCarran-Ferguson Act, "cause" exists under§ 362(d)(l) of the
Bankruptcy Code to modify the automatic stay to permit the disputes to be
adjudicated in the applicable state law forum.
In its Order (D.1. 1-1) and accompanying Opinion, In re Windhaven Top
Insurance Holdings, LLC, 636 B.R. 596 (Bankr. D. Del. 2021), each issued on
October 15, 2021, the Bankruptcy Court determined that the parties' dispute did
not implicate the McCarran-Ferguson Act and denied the Lift Stay Motion. For
the reasons set forth herein, the Court affirms the Order.
II.
BACKGROUND
A.
The Parties and the MGA Agreements
WNIC was a domestic property and casualty insurance company domiciled
in the state of Texas and mainly wrote non-standard automobile insurance policies.
WNIC is a wholly-owned subsidiary of Debtor, Windhaven National Holding
Company. (A016). Windhaven National Holding Company also owned a number
of other affiliated entities, whose primary purpose was to render administrative
services to WNIC and other insurers. (A006). These affiliated entities are all
Debtors in the jointly administered bankruptcy proceedings.
3
Debtors, Wind.haven Insurance Services, LLC and Wind.haven Select, LLC,
served as managing general agents or "MGAs." {Al83). The MGAs were
responsible for performing various administrative responsibilities for WNIC
related to the underwriting of policies, including collecting premiums. {Al83-84).
The rights and obligations ofWNIC and the MGAs are governed by the
terms and conditions of two separate Managing General Agency Agreements or
"MGA Agreements." {Al83). The MGA Agreements are subject to regulation by
the state of Texas under the Texas Insurance Code and the Texas Administrative
Code. (A008-18). Among the terms that agreements between insurers and MGAs
must include is a provision that "all funds and invested assets of the insurer are the
exclusive property of the insurer, held for the benefit of the insurer and are subject
to the control of the insurer." 28 Tex. Admin. Code§ 7.204(a)(2)(D)(viii).
Further, under applicable law, the MGAs "hold[] money on behalf of an insured or
insurer in a fiduciary capacity ...." Tex. Ins. Code§ 4053.106. The MGA
Agreements contain the above statutorily required terms.
The following terms of the MGA Agreements provide that the MGAs hold
premiums collected on behalf of WNIC in trust and in a fiduciary capacity for the
benefit of WNIC:
Section 7 .1 - "The Managing General Agent shall accept
and hold all premiums collected and other funds relating
to the business written under this Agreement in a
fiduciary capacity."
4
Section 7.4 - "The Managing General Agent shall not
commingle any premium or escrow funds with its
personal accounts or other agency funds or funds held by
the Managing General Agent in any other capacity."
Section 7.6- "The Managing General Agent shall act as
trustee for the Company on the Premium Escrow
Account."
(A077). In consideration for rendering these administrative services, the MGAs
received a commission they retained from the collected premiums. (A070).
Significantly, the MGA Agreements are clear that "[t]he privilege of retaining
commissions shall not be construed as changing the fiduciary capacity [of collected
premiums]." (A077 at§ 7.1).
The statutory and contractual provisions requiring the MGAs to hold
WNIC's funds in a fiduciary capacity become significant when an insurer is placed
into liquidation. (A023). Whereas the Texas Insurance Code generally permits a
person to setoff debits and credits against an insurer in liquidation, it forbids setoff
if the funds are held in a fiduciary capacity. (A026-27). Specifically, the Texas
Insurance Code provides that, "[a] setoff may not be allowed in favor of any
person if ... the obligation of the person is as a trustee or a fiduciary ...." Tex.
Ins. Code§ 443.209(b)(3)(A).
5
B.
The Liquidation and Bankruptcy Filings
In 2019, WNIC and the Debtors became financially distressed. Because
WNIC is a domestic insurer, it was not eligible for relief under the Bankruptcy
Code. 11 U.S.C. § 109(b)(2). Instead, WNIC was placed into receivership and
liquidation under the Texas Insurer Receivership Act. (A006). On or about
February 21, 2020, the State of Texas filed its Original Petition, Application for
Order Appointing Liquidator and Request for Injunctive Relief with the Texas
Court at the request of the Texas Commissioner of Insurance. (A019). On
February 27, 2020, the Texas Court entered an Agreed Temporary Restraining
Order ("TRO"). (Id.) The TRO expressly enjoined and restrained dozens of
specifically named persons and entities (including the MGAs) from:
[mjaking any claim, charge or offset, or commencing
[]or prosecuting any action, appeal, or arbitration,
including administrative proceedings, or obtaining any
preference, judgment, attachment, garnishment, or other
lien, or making any levy against Defendant or
Defendant's Property, except as permitted by Tex. Ins.
Code Chapter 443.
(A095) (emphasis added). Upon commencement of the receivership proceeding,
the Texas Insurer Receivership Act imposed an automatic stay of actions against
WNIC, in effect for the duration of the receivership proceedings, and a stay of
actions against WNIC's property is in effect for as long as the property belongs to
the receivership estate. Tex. Ins. Code§ 443.008(c), (t).
6
On March 5, 2020, the Texas Court entered its Order Appointing Liquidator,
Permanent Injunction and Notice of Automatic Stay (the "Liquidation Order"),
whereby it appointed the Texas Commissioner of Insurance ("Liquidator") as
Liquidator of WNIC's property for the benefit of policyholders and creditors.
(AO 19). The Liquidator thereafter appointed RRC as the Special Deputy Receiver.
(A006). Under Texas Insurance Code§ 443.154(a), RRC is authorized to exercise
all of the Liquidator's powers with respect to the WNIC receivership, subject only
to limitations imposed by the Liquidator. Tex. Ins. Code§ 443.154(a).
In connection with the Liquidation Order, the Texas Court issued a
permanent injunction pursuant to Texas Insurance Code§ 443.008(a), enjoining,
among other things, all claimants or creditors of WNIC from asserting claims or
causes of action against WNIC except as permitted by the Texas Insurance Code.
(A019).
The Liquidation Order vests the Liquidator "with title to all of Defendant's
property as defined in Tex. Ins. Code§ 443.004(a)(20)." (Al00). It further directs
and authorizes the Liquidator to "take possession and control of [WNIC's]
Property, wherever located" pursuant to Tex. Ins.·Code § 443.151(a). (Al00-01).
Accordingly, what comprises WNIC's receivership estate broadly includes:
property of any kind or nature, ... including but not
limited to money, funds, cash, ... account deposits,
statutory deposits, special deposits, . . . funds held in
shared escrow or trust accounts, ... whether owned
7
individually, jointly, or severally, wherever located, and
all rights, claims or causes of action belonging to
Defendant, whether asserted or not ... (collectively,
Defendant's Property). The Liquidator's title shall extend
to Defendant's Property regardless of the name in which
such items are held, or where such items are located.
(Id.) The Texas Court further ordered that the automatic stay take effect pursuant
to Tex. Ins. Code§ 443.008 with respect to, among other things, actions against
WNIC or its property effective on the commencement of the proceeding. (Id.)
The Court also issued a permanent injunction under Tex. Ins. Code§ 443.008 to
"carry out the provisions of Tex. Ins. Code Chapter 443, and prevent irreparable
injury, loss and damage to the general public and [WNIC]'s creditors." (A102).
The injunction enjoins all claimants from "asserting claims or causes of action
against [WNIC], except as permitted by the Insurer Receivership Act." (Id.)
Between March 5, 2020 and April 3, 2020, each of the Debtors filed
voluntary petitions for relief under the Bankruptcy Code. (A182). These cases
have been jointly administered in the Bankruptcy Court. (Id).
C.
The Disputed Funds
Various disputes between RRC and the Trustee arose concerning the
following funds (collectively, the "Disputed Funds"): (1) approximately
$3,000,000 currently held in Premium Escrow Accounts nominally titled in the
names of the MGAs, which they hold as trustees and fiduciaries, for the benefit of
WNIC, (2) approximately $57,200 held in a refund account which Windhaven
8
Services, LLC holds as a fiduciary for the benefit of certain ofWNIC's policy
holders, (3) an additional $338,923.27 belonging to WNIC that appears to have
been inadvertently deposited into a premium escrow account of another insurance
company, which funds are similarly held by the debtors as trustees and fiduciaries
for the benefit of WNIC, and (4) more than $3,000,000 of payments by consumers
for insurance policies issued by WNIC, held by a credit card processor in the name
of one of the Debtors, in a fiduciary capacity per the MGA Agreements.
RRC asserts that the Disputed Funds are not property of the bankruptcy
estates because they are held by the Debtors in a fiduciary capacity for the benefit
ofWNIC. The Trustee has commenced an adversary proceeding seeking a
determination that the Disputed Funds ( as well as certain tax refunds not
referenced in the Lift Stay Motion) are property of the bankruptcy estates. Burtch
v. Risk & Regulatory Consulting, LLC, Adv. No. 22-50232 (JTD) (Bankr. D. Del.).
D.
Lift Stay Motion
On September 11, 2020, RRC filed its Motion for Relieffrom the Automatic
Stay to Litigate Certain Disputes in the District Court of Travis County, Texas
(A004-Al 16) (the "Lift Stay Motion"). Through the Lift Stay Motion, RRC
sought relief from the automatic stay to commence litigation in the Texas Court to
determine ownership of Disputed Funds and enforce its asserted rights under the
Texas Insurance Code. RRC asserted that the Bankruptcy Code is reverse
9
preempted by the Texas Insurance Code and, as such, cause existed to modify the
automatic stay. The Trustee filed an objection (Al 17-A135), and Atalaya Special
Opportunities Fund VII LP filed ajoinder to the Trustee's objection (A136-138).
RRC filed its reply on October 13, 2020 (A139-A144), and the Bankruptcy Court
held oral argument on October 14, 2020 (A152:21-Al 79:4), ultimately taking the
matter under advisement (Al 78:14-15).
E.
The Opinion and Order
On October 15, 2021, the Bankruptcy Court issued the Opinion and Order
denying the Lift Stay Motion. The Bankruptcy Court concluded that the dispute is,
"at its core, ... a contractual dispute between the parties ... ," and that the
Bankruptcy Court had exclusive jurisdiction to determine the ownership of the
property held by the Debtors at the time of the filing of the bankruptcy petitions.
In re Windhaven, 636 B.R. at 603. The Bankruptcy Court further concluded that
such a determination, based on its interpretation of the applicable MGA
Agreements, was not reverse preempted by the McCarran-Ferguson Act because
such a determination of property ownership does not invalidate, impair, or
supersede the Texas Insurance Code. Id.
On October 27, 2021, RRC filed a timely notice of appeal. (A204). The
appeal is fully briefed. (D.I. 10, 11, 12). No party requested oral argument.
10
ID.
JURISDICTION AND STANDARD OF REVIEW
The Order denying RRC' s Lift Stay Motion is final, and this Court has
jurisdiction over the appeal pursuant to 28 U.S.C. § 158. The sole issue on appeal
is whether the Bankruptcy Court erred by concluding that the McCarran-Ferguson
Act was not implicated by the disputes between the parties. (D.I. 10 at 4).
Whether a state regulatory scheme is invalidated, impaired, or superseded by a
federal law is a question of law that is reviewed de novo. Weiss v. First Unum Life
Ins. Co., 482 F.3d 254,263 (3d Cir. 2007) (citing Humana Inc. v. Forsyth, 525
U.S. 299, 311-14 (1999)).
IV.
PARTIES' CONTENTIONS
RRC argues that the Bankruptcy Court mischaracterized the dispute as
merely requiring a determination as to what constitutes property of the estate,
which did implicate the Texas Insurance Code. (D.I. 10 at 20-23 & 31-34).
According to RRC, the Bankruptcy Court failed to recognize "the myriad of Texas
Insurance Code statutes regulating the business of insurance which governed the
disputes between the parties." (Id. at 24). Specifically, RRC argues that the
Bankruptcy Court ignored the Texas Insurance Code's anti-setoff statute and
priority scheme (id. at 24-26 & 37-38), which, RRC asserts, is central to the
parties' dispute, as well as jurisdictional provisions intended to foreclose litigation
over receivership property in venues other than the Texas Court (id. at 27-30).
11
The Trustee maintains that the Bankruptcy Court correctly decided that the
McCarran-Ferguson Act does not operate to divest the federal court's exclusive
jurisdiction under 28 U.S.C. § 1334(e) to determine what is and is not property of
the bankruptcy estates. (D.I. 11 at 8). The Trustee argues that RRC has failed to
state grounds for reverse preemption under the McCarran-Ferguson Act because
there is no inconsistency between the Bankruptcy Court's jurisdiction over
property of the bankruptcy estate under the Bankruptcy Code and the Texas
Court's jurisdiction over property of the receivership estate under the Texas
Insurance Code. (Id. at 9-17). The Trustee further asserts that the parties' dispute
does not implicate the Texas Insurance Code's limitations on rights of setoff or its
priority scheme. (Id. at 17-20). While RRC cites a handful of out-of-district
decisions holding that a bankruptcy court's determination of certain property
disputes would conflict with state insurance law, the Trustee asserts that the
Bankruptcy Court's decision here falls in line with decisions from this district and
others holding that the Bankruptcy Court's "exclusive jurisdiction over
determinations related to property of the estate does not support reversepreemption," and the fact that "a federal action may have a financial impact on the
assets of the insolvent insurer's estate does not necessarily indicate a state's
liquidation proceeding is 'impaired."' (See id. at 14 (quoting In re Patriot Nat'!,
12
Inc., 623 B.R. 696, 709-10 (D. Del. 2020); and In re First Assured Warranty
Corp., 383 B.R. 502, 541 n.38 (Banlcr. D. Colo. 2008)).
V.
ANALYSIS
A.
The McCarran-Ferguson Act
The Supremacy Clause of the United States Constitution provides that, in
general, federal law preempts any conflicting state law. The McCarran-Ferguson
Act creates an exception to the general rule of federal supremacy with respect to
laws enacted "for the purpose of regulating the business of insurance." It states:
(a) State regulation. The business of insurance, and
every person engaged therein, shall be subject to the laws
of the several States which relate to the regulation or
taxation of such business.
(b) Federal regulation. No Act of Congress shall be
construed to invalidate, impair, or supersede any law
enacted by any State for the purpose of regulating the
business of insurance, or which imposes a fee or tax upon
such business, unless such Act specifically relates to the
business of insurance ....
15 U.S.C. § 1012. The McCarran-Ferguson Act thus precludes application of a
federal statute in face of state law "enacted ... for the purpose of regulating the
business of insurance," if the federal measure does not "specifically relat[e] to the
business of insurance," and would "invalidate, impair, or supersede" the state's
law. Department of Treasury v. Fabe, 508 U.S. 491,501 (1993).
13
The parties did not dispute that the relevant Texas statutes were "enacted for
the purpose of regulating the business of insurance," or that the Bankruptcy Code
does not specifically relate to the business of insurance. The sole issue before the
Bankruptcy Court was therefore whether exercise of its exclusive jurisdiction to
determine what is and is not property of the Debtors' estates would "invalidate,
impair, or supersede" any Texas law that related to the WNIC liquidation.
The Supreme Court defined each of these terms in its Humana decision
"Invalidate" ordinarily means "to render ineffective, generally without providing a
replacement rule or law." Humana, 525 U.S. at 307. "Supersede" ordinarily means
"to displace (and thus render ineffective) while providing a substitute rule." Id. In
Humana, the Court clarified the concept of "impairment" under 15 U .S.C. §
10 l 2{b) by stating:
When federal law does not directly conflict with state
regulation, and when application of the federal law would
not frustrate any declared state policy or interfere with a
State's administrative regime, the McCarran-Ferguson
Act does not preclude its application.
Id. at 310.
B.
The Opinion Misapplies the McCarran-Ferguson Act Test
The Bankruptcy Court was required to ascertain whether: "(1) the federal
statute in question does not specifically relate to the business of insurance, (2) the
state statute was enacted for the purpose of regulating the business of insurance,
14
and (3) the federal statute would invalidate, impair or supersede the state statute."
See In re PRS Ins. Grp., Inc., 294 B.R. 609, 612 (Bankr. D. Del. 2003) ajf'd, 2005
WL 4121639 (D. Del. Mar. 31, 2005).
The parties did not dispute that the Bankruptcy Code does not specifically
relate to the business of insurance, or that the relevant Texas statutes were "enacted
for the purpose of regulating the business of insurance." In re Windhaven, 636
B.R. at 602. The sole remaining issue for the Bankruptcy Court to consider was
the preemption analysis under the third prong of the McCarran-Ferguson Act
test-"whether the bankruptcy court's jurisdiction over the MGA Agreements
invalidates, impairs, or supersedes state law"-such that the Bankruptcy Court
might consider the issue raised by the Lift Stay Motion: "under the MGA
Agreements, who is entitled to funds in the Premium Escrow Accounts held by the
Debtors and the fund held by the non-party credit card processor in the name of the
Debtors." Id.
Rather than conduct the preemption analysis and consider whether such an
exercise would "invalidate, impair, or supersede" the various Texas Insurance
Code statutes cited by RRC, tlie Opinion simply rejects RRC's assertion:
RRC asserts that this is a matter of the Texas Insurance
Code; however, what the Court is tasked with
interpreting is the MGA Agreements. The Texas
Insurance Code does not govern all aspects of insurance
companies but only the business of insurance.
15
Id. The Bankruptcy Court's analysis then turned to whether the dispute between
the Trustee and RRC "pertains to the business of insurance." See In re Windhaven,
636 B.R. at 603. The Bankruptcy Court concluded that the funds dispute "does not
go to the business of insurance, policyholders, or public interest," and that it was
merely a contract dispute between two parties that did not implicate the McCarranFerguson Act. Id.
I agree with RRC that the Bankruptcy Court's focus on the nature of the
dispute between the parties obfuscates the applicable test. The test is not whether a
dispute between two parties relates to the business of insurance, but instead
whether the applicable state statute was enacted for the purpose of regulating the
business of insurance. Once the Bankruptcy Court (correctly) concluded that the
Texas Insurance Code provisions-including the anti-setoff and claim priority
provisions cited by RRC-regulated the business of insurance, the analysis should
have instead turned to a preemption analysis, i.e., whether there was any conflict
between the Texas Insurance Code provisions and the Bankruptcy Code.
This is further illustrated by the Bankruptcy Court's extensive discussion of
Fabe in holding that the Bankruptcy Code did not impair or supersede provisions
of the Texas Insurance Code. See In re Windhaven, 636 B.R. at 602-03. Fabe,
however, dealt exclusively with the second McCarran-Ferguson Act elementwhether the underlying state insurance statute was enacted for the purpose of
16
regulating insurance-an element the Bankruptcy Court had already concluded
was satisfied. See Fabe, 508 U.S. at 505-08. Fabe addressed the prong of the test
that RRC and the Trustee did not dispute.
The Bankruptcy Court did not examine whether its determination "under the
MGA Agreements, [as to] who is entitled to [the Disputed] funds" may invalidate,
impair, or supersede the Texas Insurance Law provisions cited by RRCincluding, but not limited to, Texas Insurance Code§ 443.209's anti-setoff statute
and§ 443.301 's claim priority statute. Indeed, RRC's main argument is that the
parties' dispute is centered on the Trustee's alleged intention to collect a debt owed
by WNIC by means of setoff, which, even if permitted under the MGA
Agreements, may invalidate the Texas Insurance Code's anti-setoff provision
applicable to fiduciaries. (See D.I. 10 at 1-3, 16-17, 24-25). Such a result, RRC
argues, would also impair the Texas Insurance Code's priority scheme by
prioritizing claims of general unsecured creditors like the Trustee over claims of
policyholders. (See id. at 25-26, 3 7-3 8).
Courts-including this Court-have relied on a state law's priority scheme
in concluding that reverse preemption is applicable. For example, inln re PRS
Insurance Group, Inc., both the Bankruptcy Court and this Court on appeal
concluded that reverse preemption warranted dismissal of a preference action
commenced by a bankruptcy trustee against an insolvent insurer in liquidation in
17
Delaware. See In re PRS Ins. Grp., 294 B.R. at 612-13. Both Courts reached this
conclusion because the trustee's affirmative attempt to recover funds would violate
the priorities of the Ohio insurance liquidation statute. See id.
Accordingly, I turn to examine whether the Bankruptcy Court's exclusive
jurisdiction to determine whether the Disputed Funds are property of the estate
may invalidate, impair, or supersede the Texas Insurance Law provisions cited by
RRC. 4
C.
The Bankruptcy Court's Exclusive Jurisdiction to Determine
Whether Disputed Funds Are Property of the Estate Is Not
Reverse Preempted by the McCarran-Ferguson Act
1.
Texas Insurance Code§§ 443.00S(c) and (d)-Jurisdictional
Statute
RRC argues that a conflict between state and federal jurisdictional statutes
constitutes grounds for reverse preemption under the McCarran-Ferguson Act:
One conflict between the Bankruptcy Code and the Texas
Insurance Code is that the Texas Insurance Code vests
the Texas Court with exclusive jurisdiction over all
property of the insurer, wherever located. Tex. Ins.
Code§ 443.005(c) and (d). Conversely, the Bankruptcy
Code vests jurisdiction in the Bankruptcy Court to
litigate these matters. See 28 U.S.C. § 157.
4
These issues were raised in the Bankruptcy Court, and affirmance is warranted on
any basis that finds support in the record. In re LMI Legacy Holdings, Inc. 625
B.R. 268, 289-90 (D. Del. 2020) (citing Geness v. Cox, 902 F .3d 344, 356 (3d Cir.
2018)).
18
(D.I. 10 at 27) (emphasis added). As the Trustee points out, 28 U.S.C. § 1334 is
the statutory basis for jurisdiction over the bankruptcy estate, while 28 U.S.C. §
157 authorizes district courts to refer bankruptcy proceedings, including "matters
concerning the administration of the estate," to the bankruptcy courts. Under 28
U.S.C. § 1334(e)(l), the Bankruptcy Court has exclusive jurisdiction over property
of the bankruptcy estate:
(e) The district court in which a case under title 11 is
commenced or is pending shall have exclusive
jurisdiction( 1) of all the property, wherever located, of the debtor as
of the commencement of such case, and of property of
the estate ...
28 U.S.C. § 1334(e)(l) (emphasis added). I agree the state and federal
jurisdictional statutes present no conflict: the Texas Court has jurisdiction over
property of the receivership estate, and the Bankruptcy Court has jurisdiction over
property of the bankruptcy estates.
Indeed, it is well-established that the federal courts' exclusive jurisdiction
under 28 U.S.C. § 1334(e) "includes jurisdiction to decide whether disputed
property is, in fact, property of the estate." In re Washington Mut., Inc., 461 B.R.
200,217 (Banlcr. D. Del. 2011), vacated in part, 2012 WL 1563880 (Banlcr. D.
Del. Feb. 24, 2012); In re New Century Holdings, Inc., 387 B.R. 95, 105 (Banlcr.
D. Del. 2008), as amended (June 17, 2008) ("[A] determination of what is property
19
of the estate and concurrently, of what is available for distribution to creditors of
that estate, is precisely the type of proceeding over which the bankruptcy court has
exclusive jurisdiction.") (quoting In re Ascher, 128 B.R. 639, 643 (Bankr. N.D. Ill.
1991)); In re Marathe, 459 B.R. 850, 854 (Bankr. M.D. Fla. 2011) ("[T]he
Bankruptcy Court has exclusive jurisdiction over property of the bankruptcy estate,
and over disputes regarding whether specific property is property of the estate.")
(citing In re Cox, 433 B.R. 911, 920 (Bankr. N.D. Ga. 2010)).
In denying the Lift Stay Motion, the Bankruptcy Court cited this Court's In
re Patriot National, Inc. decision for the proposition that the McCarran-F erguson
Act does not affect the jurisdictional analysis, and "the federal court retains
jurisdiction to determine of [sic] the rights to the Disputed Funds, even if the
Disputed Funds never become property of the Debtors' estates." Windhaven Top
Ins. Holdings, LLC, 636 B.R. at 604; see also Patriot Nat'/, Inc., 623 B.R. at 709
("Case law is clear that the McCarran-F erguson Act does not deprive a federal
court of its valid jurisdiction, and that 'a federal court's determination of rights to
that property, without more, does not invalidate, impair or supersede state
insurance law ... "') (quoting In re Ames Dep't Stores, Inc., 542 B.R. 121, 151
(Bankr. S.D.N.Y. 2015)).
20
While RRC is able to cite a few cases5 that are inconsistent with the
Bankruptcy Court's decision, these decisions are from outside the Third Circuit.
The Bankruptcy Court's decision is consistent with "a long line of cases hold[ing]
that a bankruptcy court's retention of and potential exercise of, exclusive
jurisdiction over determinations related to property of the estate does not support
reverse preemption under the McCarran-Ferguson Act." In re Patriot Nat 'l, Inc.,
623 B.R. at 709-10 (citing Ames, 542 B.R. at 151); In re Agway, Inc., 357 B.R.
195, 203-04 (Bankr. N.D.N.Y. 2006); In re PRS Ins. Grp., Inc., 331 B.R. 580, 588
(Bankr. D. Del. 2005); In re Frontier Ins. Grp., LLC, 517 B.R. 496, 506 (Bankr.
S.D.N.Y. 2014)); In re First Assured Wa"anty Corp., 383 B.R. 502, 541 n.38
(Bankr. D. Colo. 2008) (rejecting reasoning of Advanced Cellular and Amwest, and
holding that "[t]he fact that a federal action may have a financial impact on the
assets of the insolvent insurer's estate does not necessarily indicate a state's
liquidation proceeding is 'impaired."').
5 See
D.I. 10 at 19, 23 (citing In re Med. Care Mgmt. Co., 361 B.R. 863,866
(Bankr. M.D. Tenn. 2003) (reverse preemption under the McCarran-Ferguson Act
constituted grounds for relief from the automatic stay to allow commissioner of
insurance to continue pre-petition avoidance action against the debtor)); id. at 3536 (citing Advanced Cellular Systems, Inc. v. Mayol, 235 B.R. 713 (Bankr. D. P.R.
1999) (turnover action in bankruptcy court impaired or impeded grant of exclusive
jurisdiction over insurance liquidation to state court); Wagner v. Amwest Ins.
Group (In re Amwest Ins. Group), 285 B.R. 447 (Bankr. C.D. Cal. 2002)
(McCarran-Ferguson Act reverse-preemption barred bankruptcy court from
interpreting tax allocation agreement to determine ownership of tax refund).
21
RRC further argues that the Bankruptcy Court's reliance on In re Pa'triot
National, Inc. was misplaced because the Trustee is seeking something more than a
determination of what is and is not property of the bankruptcy estates. According
to RRC:
The Bankruptcy Court will not simply be asked to make
a determination of whether the disputed funds constitute
property of the bankruptcy estate. [RRC] respectfully
submits that question is without reasonable dispute. The
funds are collected premiums, funds which are held in
trust for the benefit of WNIC under the terms of the
MGA Agreements and the Texas Insurance Code. The
funds are- indisputably-property of the WNIC estate.
The trustee has a claim against the WNIC estate for
unpaid pre-petition commissions. That fact is also not
really in dispute. The gravamen of the dispute between
the parties is whether the trustee can recover on account
of his claim against the funds he presently holds in trust
for the benefit of WNIC. In other words, what needs to
be adjudicated is the trustee's affirmative claim for
recovery of commissions owed to the MGAs and the
disposition of the funds which are, at present,
receivership property.
(D.1. 10 at 32-33). RRC appears not so much concerned with demonstrating that
federal jurisdictional statute would invalidate, impair, or supersede the Texas
jurisdictional statute; rather, RRC is concerned that there is no federal jurisdiction
at all, because "[a]ll of the subject funds are property of the WNIC estate." Id. I
disagree. There is a genuine dispute regarding ownership of the disputed funds,
and the Bankruptcy Court has exclusive jurisdiction to determine whether those
disputed funds are property of the estate.
22
I conclude that Texas Insurance Code§ 443.00S(c) and (d) are not
invalidated, impaired, or superseded by the Bankruptcy Court's exercise of its
exclusive jurisdiction to determine whether the Disputed Funds are property of the
Debtors' estates. 6
2.
Texas Insurance Code § 443.209 - Anti-Setoff Statute
According to RRC, "the Bankruptcy Court simply ignored that the very
essence of the dispute between the parties centers around Texas Insurance Code
§ 443 .209," which governs rights of setoff in Texas insurance liquidation
proceedings. (D.I. 10 at 24). Section 443.209 provides, in relevant part, that "[a]
setoff may not be allowed in favor of any person if ... the obligation of the person
is as a trustee or a fiduciary ... " Tex. Ins. Code§ 443.209. The Texas Insurance
Code does not define "setoff," but does include the term within its definition of
"transfer." Tex. Ins. Code § 443.004. "Setoff is a contractual or equitable right
that 'allows entities that owe each other money to apply their mutual debts against
each other, thereby avoiding the absurdity of making A pay B when B owes A.' "
6
Because the present dispute did not involve property of the receivership estate or
actions against WNIC itself, RRC's arguments regarding the automatic stay and
state court injunctions are also misplaced. (See D.I. 10 at 8 (citing TRO
prohibiting various actions "against Defendant [WNIC] or Defendant's
Property."); id. at 9 (citing Tex. Ins. Code§ 443.008, which imposes stay of
"actions against WNIC" and "actions against WNIC's property"); id. (citing
Liquidation Order, vesting RRC "with title to all of [WNIC's] property ... ")).
23
In re Orexigen Therapeutics, Inc., 596 B.R. 9, 14 (Banlcr. D. Del. 2018) (quoting
Citizens Bank ofMarylandv. Strumpf, 516 U.S. 16, 18 (1995)) (internal citation
and quotation marks omitted). In other words, the effect of a setoff is to reduce the
amount of an otherwise legally enforceable debt by an amount equal to another
legally enforceable debt.
The Trustee argues that he is not attempting to reduce the amount of any
lawful debt owing to WNIC, and is therefore not asserting a right of setoff.
According to Trustee, under the terms of the MGA Agreements, the MGAs
collected premiums on WNIC policies, and were obligated to "remit the balance of
the accounts (premium minus commissions, losses and loss adjustment expenses),
plus fronting fees and premium truces ... " to WNIC on a periodic basis. (MGA
Agreement, §5.2, Appendix, A050 and A074). The MGA Agreements provide that
WNIC was only entitled to premiums net of commissions, and the Trustee argues
this net amount was therefore the "debt" that was owed to WNIC.
RRC disagrees with the Trustee's characterization, arguing that the dispute
indeed concerns the Trustee's asserted right of setoff-as expressly noted in the
Opinion. In re Windhaven, 636 B.R. at 601 ("The Trustee, however, asserts a right
of setoff and refuses to tum the Disputed Funds over to the RRC. ")
RRC's substantive argument is well taken. The primary dispute between the
Trustee and RRC is whether the Truste~ can recover on account of his claim by
24
setting off against the escrow funds he holds, or whether all of the funds must be
turned over to WNIC for distribution to all creditors in accordance with the Texas
Insurance Code's priority scheme. While the Texas Insurance Code generally
permits a person to setoff debits and credits against an insurer in liquidation, it
forbids setoff ifthe funds are held in a fiduciary capacity. (A026-27; Tex. Ins.
Code § 443 .209). Any resolution of the parties' disputes must include
consideration of§ 443.209, as the statute may be "dispositive, insofar as it
overrides the pre-liquidation contractual right of setoff' on which the Trustee's
position relies. (D.I. 10 at 2).
RRC's substantive argument, however, is not before the Court, and the
Bankruptcy Court's exclusive jurisdiction to determine whether the Disputed
Funds constitute property of the estate does not itself invalidate, impair, or
supersede the anti-setoffprovision. Rather, the Bankruptcy Court is wellpositioned to make a determination as to whether the Disputed Funds are property
of the Debtors' estates based on its interpretation of the MGA Agreements as well
as the requirements of the Texas Insurance Code. See Lawski v. Frontier
Insurance Group, LLC (In re Frontier Insurance Group, LLC), 517 B.R. 496, 506
(Ban1cr. S.D.N.Y. 2014) ("a federal court's ordinary determination of property
rights, interpretation of contracts, or interpretation of state statutes does not
'impair' state law, even when a federal court's decision has a financial impact on
· 25
the insolvent insurer's estate.") (quoting In re First Assured Warranty Corp., 383
B.R. at 541); see also In re Ames Dep't Stores, Inc., 542 B.R. at 150 n.126 (same).
The Opinion itself states as much. See In re Windhaven, 636 B.R. at 604 ("As a
result, this Court is not reverse pre-empted from determining whether the Disputed
Funds are part of the estate, because at its base the Court will be interpreting the
MGA Agreements (even though various provisions of the MGA Agreements are
mandated by the Texas Insurance Code).").
I conclude therefore that Texas Insurance Code§ 443.209 is not invalidated,
impaired, or superseded by the Bankruptcy Court's exercise of its exclusive
jurisdiction to determine property of the Debtors' estates.
3.
Texas Insurance Code § 443.301 - Claim Priority Statute
RR.C also points to Texas Insurance Code§ 443.301, the statute that
establishes the priorities afforded different types of claims in Texas insurance
liquidation proceedings, as grounds for reverse preemption. (D.I. 10 at 25-26).
The Texas Insurance Code's priority scheme prioritizes claims of policyholders
over claims of general unsecured creditors (like the Trustee). Allowing the Trustee
to effect a setoff to collect on his claim, RRC argues, "would run contrary to the
Texas Insurance Code's priority scheme." (Id. at 26).
I agree that permitting an improper setoff has the potential to affect how
receivership property is administered and could upset the priority scheme set forth
26
in the Texas Insurance Code. But as discussed above, the exercise of the
Bankruptcy Court's exclusive jurisdiction to determine whether the Disputed
Funds constitute property of the estate does not itself invalidate, impair, or
supersede the anti-setoff provision, and the Bankruptcy Court is well positioned to
interpret and apply the Texas Insurance Code in making that determination. lfno
improper setoff is permitted, the Texas Insurance Code's priority scheme remains
unaffected.
VI.
CONCLUSION
In sum, the only substantive dispute is whether the Disputed Funds are
property of the Debtors' estates-a substantive dispute that is not at issue in this
appeal. The issue on appeal is whether the Bankruptcy Court correctly held that
there were no grounds for reverse preemption under the McCarran-Ferguson Act.
The Texas statutes related to jurisdiction, setoff, and priorities of claims do not
conflict with the Texas Insurance Code. Because the Bankruptcy Court correctly
analyzed the applicability of the McCarran-Ferguson Act, it also correctly
determined that RRC had failed to establish cause for relief from the automatic
stay. 7
7
According to RRC, "[t]he sole issue on appeal is whether the Bankruptcy Court
erred by concluding that the [McCarran-Ferguson Act] was not implicated by the
disputes between the parties." (D.1. 10 at 4). As RRC does not allege any other
errors, it appears that RRC concedes that, absent reverse preemption under the
27
The Court will issue a separate Order consistent with this Opinion.
McCarran-Ferguson Act, there was no error in the Bankruptcy Court's refusal to
grant relief from the automatic stay.
28
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