Rehabilitation of Scottish Re: No per se liquidation standard for insurance rehabilitation plans

Corporate / M&A Decisions update series

In In re Rehabilitation of Scottish Re (U.S.), Inc., C.A. No. 2019-0175-JTL (Del. Ch. Apr.18, 2022), the Delaware Court of Chancery ruled, as a matter of first impression, that in a delinquency proceeding for an insurance company under Delaware law, there is no per se requirement that a rehabilitation plan meet a “liquidation standard” to obtain court approval. Under the “liquidation standard,” a rehabilitation plan must provide claimants at least “liquidation value,” or the value they would have received in a liquidation proceeding. The court found that neither statutory nor common law creates a bright line rule that mandates this standard. However, liquidation value remains significant because a claimant only has standing to advance a constitutional objection to a rehabilitation plan if it receives less than liquidation value. Therefore, claimants must receive information sufficient to enable them to assess if they will receive liquidation value under any rehabilitation plan.

Scottish Re (U.S.), Inc. (SRUS) is a licensed provider of health and life insurance that exclusively provides reinsurance and coinsurance. SRUS stopped taking new business in 2008, but has maintained its pre-existing financial commitments with a number of cedents and retrocessionaires. Years before the instant action, SRUS began experiencing financial difficulties related to its yearly renewable term life insurance policies. To fulfill its continued obligations, SRUS, as a wholly owned subsidiary, previously relied on financial support from its parent companies. When those parent companies filed for bankruptcy in 2018, SRUS’ financial picture worsened.

By early 2019, the Insurance Commissioner of the State of Delaware (the Commissioner) determined that SRUS was in financial distress and commenced a delinquency proceeding. The Court of Chancery subsequently placed the company into receivership and appointed the Commissioner as the statutory receiver for the company. On June 30, 2020, the Commissioner filed a proposed plan of rehabilitation, though no final plan has yet to be submitted to the court.

Once SRUS’ claimants reviewed the proposed plan, a series of disputes emerged regarding the nature and types of information that the Commissioner planned to provide to claimants. Briefing these issues revealed a deeper issue that divided the parties: the parties did not agree on whether or not the liquidation standard should apply to the rehabilitation plan. A group of 57 cedents and five retrocessionaires argued that the court could not approve any plan that did not provide, at a minimum, liquidation value to the claimants. The Commissioner and a separate group of seven retrocessionaires disagreed.

The Court of Chancery recognized that this was an issue of first impression. After considering relevant Delaware statutory law, case law, secondary sources, and public policy, the court determined that, in a delinquency proceeding under Delaware law, neither statutory nor common law requires the Commissioner to meet the liquidation standard in order to obtain court approval of a rehabilitation plan. In particular, the court noted that Delaware’s statutory scheme for evaluating a proposed rehabilitation was silent on whether the liquidation standard applied, unlike other statutory frameworks cited by the claimants. The court also noted that the balance of policy considerations counseled in favor of action on this issue from the General Assembly instead of the court.

Evaluating decisions from other jurisdictions to have considered the issue, the court emphasized that each of these authorities derived from a pair of Depression-era decisions from the U.S. Supreme Court and the Supreme Court of California, both arising out of the rehabilitation of Pacific Mutual Life Insurance Company of California. See Carpenter v. Pac. Mut. Life Ins. Co. (Carpenter I), 74 P.2d 761 (Cal. 1937), aff’d sub nom. Neblett v. Carpenter (Carpenter II), 305 U.S. 297 (1938). After conducting a close read of these decisions, the court determined that these decisions “were about standing.” The decisions did not hold that a rehabilitation plan must meet the liquidation standard or that a court may not approve a rehabilitation plan that did not meet that standard. Rather, the Pacific Mutual decisions held that a rehabilitation plan that satisfied the liquidation standard could not give rise to constitutional challenges.

Accordingly, the court held that a claimant would have standing to object if it could show that the plan fails to provide it with liquidation value, in which case the court would consider the objection on its merits. The court therefore required the Commissioner to provide sufficient information about the rehabilitation plan to enable claimants to determine whether they should object.

 

Authored by Ryan M. Philp, Allison M. Wuertz, and Lisa Femia.

Contacts
Ryan Philp
Partner
New York
David Michaeli
Counsel
New York
Allison Wuertz
Senior Associate
New York
Jon Talotta
Global Co-Lead
Northern Virginia
Michael Hefter
Partner
New York
William Regan
Partner
New York

 

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