Medina County Courthouse

Tuesday, October 05, 2010

Insurance Company Liquidation Statute Does Not Authorize Interest to Preferred Claimants, Creditors

When Funds Remain After Principal of Company's Debts Has Been Repaid

Hudson v. Petrosurance, Inc., Slip Opinion No. 2010-Ohio-4505.
Franklin App. No. 08AP-1030, 2009-Ohio-4307. Judgment of the court of appeals affirmed, and cause remanded to the trial court.
Pfeifer, Lundberg Stratton, O'Connor, O'Donnell, Lanzinger, and Cupp, JJ., concur.
Brown, C.J., concurs separately.

(Sept. 29, 2010) The Supreme Court of Ohio held unanimously today that the Ohio statutes governing liquidation of an insolvent insurance company do not authorize the Superintendent of Insurance to pay interest to an insurer’s creditors and other preferred claimants on allowed claims before paying the funds remaining in the estate to the insurer’s shareholders.

In an opinion authored by Justice Terrence O’Donnell, the Court affirmed a decision by the 10th District Court of Appeals, and held that R.C. Chapter 3903 establishes nine prioritized classes of claims that can be filed against an insolvent insurer’s estate by preferred claimants and creditors during the liquidation process, but no provision in the statute expressly authorizes the payment of interest to any claimant.

In 1990, the Franklin County Court of Common Pleas declared the Ohio-based Oil & Gas Insurance Company (OGICO) insolvent and ordered the state’s Superintendent of Insurance to assemble and liquidate the company’s assets and distribute the proceeds according to a schedule of priorities set forth in the statute. The sole shareholder of OGICO was a separate business entity, Petrosurance, Inc.

After extended federal and state proceedings and negotiations with various groups of claimants, the Superintendent paid and obtained releases for all approved claims that had been asserted against OGICO by the first eight classes of claims, and was in possession of approximately $13 million in funds remaining in OGICO’s liquidation estate.

In April 2007, the Superintendent filed a complaint in the Franklin County Court of Common Pleas seeking a declaratory judgment that Petrosurance had no right to the assets remaining in her possession, and that those assets should be distributed as interest on a pro-rata basis to the preferred claimants and other creditors whose claims had been allowed. Petrosurance filed a counterclaim asserting entitlement to the remaining funds as the sole shareholder in OGICO, and therefore the sole Class Nine claimant under the liquidation statute. The trial court granted summary judgment in favor of the Superintendent, finding that interest could be paid to creditors and preferred claimants on the principal of their claims. Petrosurance appealed. On review, the 10th District Court of Appeals reversed the trial court’s grant of summary judgment in favor of the Superintendent, held that the liquidation scheme set forth in R.C. Chapter 3903 does not authorize the payment of interest to creditors and preferred claimants of an insolvent insurer, and ordered the trial court to undertake new proceedings to determine whether Petrosurance was entitled to recover the funds remaining in the Superintendent’s possession under the provisions of the insurance liquidation statute. The Superintendent sought and was granted Supreme Court review of the 10th District’s ruling.

In today’s decision, Justice O’Donnell wrote: “R.C. 3903.42 establishes nine prioritized classes of claimants and provides that ‘[e]very claim in each class shall be paid in full or adequate funds retained for such payment before the members of the next class may receive any payment.’ … The Liquidation Act is silent as to the payment of interest, but the General Assembly could have expressly provided for payment of interest on claims against an insurer’s estate, if it had chosen to do so. We decline to add words to the statute or interpret the legislative silence as authorization to pay interest, as such a construction would materially affect the priority of payments to claimants as set forth in R.C. 3903.42.”

“In other statutory contexts, the legislature has indicated its intent to authorize payment of interest to claimants with plain, direct, and express language. For example, R.C. 1125.24, the statute establishing the priority of distribution of the assets of an insolvent bank, provides that ‘[i]nterest shall be given the same priority as the claim on which it is based, but no interest shall be paid on any claim until the principal of all claims within the same class has been paid or provided for in full.’ (Emphasis added.) In contrast, the legislative silence in R.C. 3903.42 cannot fairly be read to authorize payment of interest in insurer liquidations. Our role as a court is to apply statutes as written, and we conclude that the General Assembly did not intend to authorize the Superintendent of Insurance, acting as liquidator of an insurance company, to pay interest to creditors and other preferred claimants of an insolvent insurance company before paying remaining funds to company shareholders.”

“(W)e reject the superintendent’s proposition of law that interest should be paid to creditors and other preferred claimants to make them whole before the owners of the company may recover from assets of the liquidation estate. Also, because the plain meaning of the statute directs payment of these remaining funds to shareholders, we decline to follow the practice in other jurisdictions of distributing assets remaining after principal claims have been paid to creditors. … Accordingly, we affirm the judgment of the court of appeals, which reversed the grant of summary judgment to the superintendent and held that R.C. Chapter 3903 does not permit the payment of interest in an insurer liquidation, and that the superintendent erroneously refused to file Petrosurance’s proof of claim. …
We further recognize, as did the appellate court that, the trial court, based on its erroneous conclusion that the superintendent could pay interest to creditors before making any payment to Petrosurance, never considered Petrosurance’s entitlement to the remaining funds held by the superintendent. Accordingly, the matter is remanded to the trial court to permit Petrosurance an opportunity to submit its proof of claim and for the trial court to determine its entitlement to the remaining funds in accordance with R.C. Chapter 3903 and its disposition of this matter in accordance with our opinion.”

Justice O’Donnell’s opinion was joined by Justices Paul E. Pfeifer, Evelyn Lundberg Stratton, Maureen O’Connor, Judith Ann Lanzinger and Robert R. Cupp.

Chief Justice Eric Brown entered a concurring opinion stating that in his view “(t)he superintendent has presented an appealing policy argument” that she should be permitted to pay interest on amounts previously paid to creditors and other claimants, when adequate funds remain after satisfaction of their original claims, before distributing any remaining funds to shareholders of the defunct company. He observed that the National Association of Insurance Commissioners, in an amicus brief, had stated that “The Ohio Liquidation statutes are designed and should be implemented to protect the interests of injured claimants over the interests of shareholders and owners whose actions likely caused the insolvency.” Chief Justice Brown concluded, however, that “it is within the province of the legislative branch, rather than the judicial branch, to determine public policy relative to the liquidation of insurance companies.” He therefore wrote separately “to urge the members of the General Assembly to consider amending R.C. Chapter 3903 to expressly authorize the liquidator of an insurance company to pay interest on previously allowed claims, when surplus funds exist, prior to distributing funds to shareholders.”

Benjamin C. Mizer, 614.446.8980, for Mary Jo Hudson, Superintendent of Insurance and Liquidator of OGICO.

Peter L. Cassady, 513.621.2100, for Petrosurance, Inc.

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