In re Rehabilitation of Manhattan Re-Insurance Co., C.A. No. 2844-VCP (Del. Ch. Oct. 4, 2011). Read opinion here.
Whether the Court of Chancery has original and exclusive jurisdiction over insurance rehabilitation proceedings.
If so, whether that exclusive jurisdiction permits the Court, in its discretion, to divest jurisdiction over certain claims to an arbitration panel where the parties agreed to submit to arbitration prior to one of the parties becoming insolvent.
This summary was prepared by a former associate of Eckert Seamans.
Manhattan Re-Insurance Company, a Delaware insurance company, and American Motorists Insurance Company (AMICO), an Illinois insurance company, are successors-in-interest to a number of reinsurance contracts entered into during the 1970s by both companies’ predecessors. The contracts included a mandatory arbitration provision requiring them to submit “any irreconcilable dispute between [the parties] in connection with the[ese] Agreement[s]” to a three-member arbitration panel.
The contracts also required AMICO to maintain a letter of credit (LOC) for Manhattan Re, which Manhattan Re could draw on if AMICO defaulted on its obligations to third-party claimants. When AMICO notified Manhattan Re that it was unable to extend its LOC, Manhattan drew down the full amount of the LOC – more than $7 million – and put that money in a separate account called the AMICO Fund.
In 2007, Manhattan Re became insolvent and subsequently proposed rehabilitation. The Court of Chancery appointed a receiver to handle the rehabilitation. In its plan of rehabilitation, the receiver proposed that Manhattan Re use the AMICO Fund as unrestricted assets to satisfy the claims of all creditors. AMICO objected to the plan, contending that the AMICO Fund is restricted cash collateral that can only be used to pay AMICO’s reinsurance obligations as the reinsurer for Manhattan Re. Additionally, AMICO “moved to refer the parties to arbitration for a binding determination of ‘the proper amount of the AMICO Fund and the specific rights and obligations of the [r]eceiver and AMICO with respect thereto,” and for a preliminary injunction prohibiting the receiver from distributing those funds during the arbitration.
As a matter of first impression, the Court considered Delaware’s Uniform Insurers Liquidation Act (UILA), found within 18 Del. C. §§ 5901-5932, and determined that the legislature intended to give the Court of Chancery “original and exclusive jurisdiction over the in rem proceedings of the rehabilitation, [but] does not give the Court of Chancery exclusive jurisdiction over all claims brought against the insolvent insurer,” such as in personam claims.
The Court noted that while the statute does not explicitly confer exclusive jurisdiction on the Court of Chancery, the statutory scheme suggests that the Court’s in rem jurisdiction is exclusive, and the jurisdiction over collateral proceedings is permissive; the main goal being the orderly liquidation or rehabilitation of the insurer.
AMICO’s claims against Manhattan Re were in personam claims, which the Court held could be referred to arbitration (pursuant to the original contracts executed in the 1970s between both parties’ successors). The Court could have decided to adjudicate the claims; however, because the parties previously agreed to arbitrate in a valid contract, and an arbitration panel is a “court” of competent jurisdiction, there was no reason to interfere with the terms negotiated and agreed by the parties. Further, the receiver assumes the position of the company and is obligated to honor the agreements of its predecessor.
The Court ruled that the receiver could continue to resolve the claims against Manhattan Re during the pendency of the arbitration, but stayed consideration of the receiver’s plan of rehabilitation until the arbitration was complete.