




2015 VT 4







In re Ambassador Insurance Co.,
Inc. (National Indemnity Co., Appellant) (2013-184)
 
2015 VT 4
 
[Filed 23-Jan-2015]
 
NOTICE:  This opinion is subject
to motions for reargument under V.R.A.P. 40 as well as formal revision before
publication in the Vermont Reports.  Readers are requested to notify the
Reporter of Decisions by email at: JUD.Reporter@state.vt.us or by mail at: Vermont
Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801, of any errors
in order that corrections may be made before this opinion goes to press.
 
 



2015 VT 4



 



No. 2013-184



                                                                    



In re Ambassador Insurance
  Company, Inc.


Supreme Court




(National Indemnity Company, Appellant)


 




 


On Appeal from




 


Superior Court, Washington Unit,




 


Civil Division




 


 




 


December Term, 2013




 


 




 


 




Geoffrey
  W. Crawford, J.




 



Andre D. Bouffard of Downs Rachlin Martin PLLC, Burlington,
for Appellant.
 
Jacqueline A. Hughes and Daniel C. Burke of Storrow Buckley
Hughes, LLP, Montpelier, and
  David R. Cassetty, Special Assistant Attorney General,
Montpelier, for Appellee.
 
 
PRESENT:    Reiber, C.J., Dooley, Skoglund, Robinson, JJ.,
and Morris, Supr. J. (Ret.),
                     Specially Assigned
 
 
¶ 1.            
ROBINSON, J.   This appeal arises from the liquidation of
Ambassador Insurance Company, Inc., a property and casualty insurance company
incorporated in Vermont.  Appellant National Indemnity Company (NICO), assignee
to two claims under excess liability policies issued by Ambassador, appeals a
superior court order setting a deadline by which all policyholders must file
final proofs of claim.  NICO argues that the court’s deadline is unreasonable
and that the court failed to consider available alternatives to a final claim
date.  We reverse.
I.                   
 
a.      
Ambassador’s Liquidation
¶ 2.            
The material facts as of the time of the October 2012 superior court
hearing in this matter are undisputed.  This is the fourth appeal to this Court
involving the liquidation of Ambassador, an insurance company.  Ambassador was incorporated
and domiciled in Vermont with a principal place of business in New Jersey.  It
acted as a surplus-lines insurer, insuring high-risk commercial entities and
individuals who were unable to obtain insurance from a licensed insurer.  In
November 1983, the superior court placed Ambassador, which by that time was in
a “hazardous financial condition,” into receivership.  In re Ambassador Ins.
Co., 147 Vt. 344, 345, 515 A.2d 1074, 1075 (1986) (Ambassador I). 
The receiver, the commissioner of the Department of Banking and Insurance,[1]
discovered the company had grossly underfunded its liability reserves, failed
to keep track of policy transactions and cancellations, lost its reinsurance
coverage, and was insolvent by at least $43 million using statutory accounting
methods, and at least $25 million using less conservative liquidated-value
accounting principles.[2] 
Id. at 345, 515 A.2d at 1076.  Concluding that Ambassador could not be
rehabilitated, the superior court ordered liquidation.  Id. at 346, 515
A.2d at 1076.  On appeal, this Court affirmed the decision to liquidate.  Id.
at 349, 515 A.2d at 1078.
¶ 3.            
In 1987, following the appeal to this Court, the superior court issued a
liquidation order.  The liquidation order provides standards and processes for
administering the liquidation estate, including the process for making
distributions to Ambassador’s creditors.  The order set a deadline of March 1,
1988 for filing claims and accompanying proofs of loss.  In addition to
providing for the filing of actual known claims, the order allowed claimants to
file potential claims based on circumstances within a claimant’s knowledge
reasonably expected to give rise to claims.  The order also provided for
policyholder-protection claims that allowed policyholders to preserve the right
to assert claims against Ambassador in the future even if the policyholder did
not know or have reason to know of the existence of an actual or potential claim
at that time.
¶ 4.            
Distribution under the order is controlled by a since-repealed provision
in Vermont law relating to liquidation of insolvent insurance companies, 8
V.S.A. § 3595 (repealed 1991), providing for five levels of priority in
distribution to unsecured creditors.  The first three levels include
administration expenses, employee compensation, and certain taxes and debts.  Id.
§ 3595(b).  The fourth priority level is reserved for claims arising under
insurance policies and contracts.  Id.  The fifth priority level encompasses
all other claims.  Id.
¶ 5.            
In the course of the liquidation process, the liquidator, who was
appointed by the commissioner,[3]
recovered $104 million in reinsurance coverage, in addition to other
miscellaneous recoveries.  The liquidator also secured a judgment against
Ambassador’s auditor for professional malpractice.  See Thabault v. Chait,
541 F.3d 512, 515-18 (3d Cir. 2008).  On the basis of this judgment, in 2008,
the liquidator recovered $205 million for Ambassador.  The new infusion of
funds in 2008 allowed Ambassador to pay in full priority-four policyholders who
had previously received only partial distributions, bringing the total paid to
claimants to approximately $347 million.  As of May 2012, all court-approved
priority-four claims had been paid in full, with interest.
¶ 6.            
Ambassador now has nearly $92 million in assets.  The liquidator
estimates that Ambassador has $26 million in known unsatisfied obligations to
priority-four claimants remaining.[4] 
This figure does not include $20 million in claims by NICO that are the subject
of ongoing litigation, as discussed below.
¶ 7.            
The remaining unliquidated priority-four claims against the Ambassador
estate involve asbestos and environmental policies.  The liquidator testified
that Ambassador has received specific claim information for some, but not all,
claims made under previously filed policyholder-protection claims and that
almost all of these claims are for unstated value.  Ambassador currently has
185 open claim files for actual unliquidated priority-four claims, as
contrasted with policyholder-protection claims for unknown future claims.  Many
of the open claims files comprise multiple specific claims.  The collective
policy limits on these claims that have been asserted but not yet liquidated
total approximately $160 million.  Ambassador’s reserves for these claims are
approximately $18 million.  This sum represents the liquidator’s professional
judgment about the amount of reserves to assign to those liabilities.  In
addition, the liquidator estimates that the amount of unknown, unasserted
potential future claims is around $13 million.[5]
¶ 8.            
As of May 2012, Ambassador had $32 million in court-approved priority-five
claims.[6] 
The liquidation order provides that priority-five claims cannot be paid until
all priority-four claims have been paid, with interest.
b.     
NICO’s Claims Against Ambassador
¶ 9.            
Prior to the initiation of these liquidation proceedings, Ambassador
issued two occurrence-based excess liability policies to A.P. Green Industries,
Inc. for successive policy years, covering the period from December 1982 to
June 1984.  The policies insured A.P. Green against business-related losses and
each policy provided $10 million of excess coverage in A.P. Green’s fourth
layer of coverage.  In other words, Ambassador’s policies would provide additional
coverage if the approximately $26 million of coverage in A.P. Green’s
underlying three layers of insurance was exhausted.  A.P. Green was in the
business of manufacturing, distributing, and installing products containing
asbestos.
¶ 10.        
In the early 1980s, a number of plaintiffs began filing tort actions
against A.P. Green alleging injury from asbestos exposure.  Although it did not
originally appear that Ambassador’s layer of excess coverage would be
implicated by such claims, A.P. Green filed a proof-of-claim in the Ambassador
liquidation proceeding for policyholder-protection on both of its Ambassador
policies.
¶ 11.        
A.P. Green came into financial difficulty as asbestos-related claims continued
to mount against it in the 1990s.  By 2001, it appeared that Ambassador’s layer
of coverage for A.P. Green might be implicated.  At that point, A.P. Green had
settled about 200,000 asbestos-related claims, totaling approximately $446
million.  It had unfunded settlements and judgments in 49,500 asbestos-related
claims, of approximately $492 million, and another 235,000 pending
asbestos-related claims.
¶ 12.        
In 2001, A.P. Green assigned its claims against Ambassador to NICO in
exchange for $1 million immediate cash.  As part of the assignment, NICO agreed
to pay A.P. Green half of any amount recovered over $3 million, after
expenses.  Following the assignment, NICO submitted a claim to liquidator for
$20 million—the full amount available under the two policies.
¶ 13.        
In 2002, A.P. Green filed for Chapter 11 bankruptcy.  Since the commencement
of A.P. Green’s bankruptcy, all asbestos claims were stayed and funneled into
two asbestos trusts.  NICO has represented that as of September 2012, A.P.
Green’s plans for reorganization were in the final stages of confirmation.  The
proposed reorganization plan provides for payment of liquidated but unpaid
claims as well as review, determination, and payment of unliquidated claims. 
Because of A.P. Green’s bankruptcy and the stay on the asbestos claims against
A.P. Green, many of those claims have not yet been adjudicated or settled.  As
a consequence, the full extent of A.P. Green’s liability to claimants for
exposures during the period of the Ambassador policies remains undetermined.
¶ 14.        
Following A.P. Green’s assignment of its claims to NICO, NICO sought
payment for the $20 million policy limits of the liability coverage from
Ambassador, claiming that the three underlying layers of A.P. Green’s excess
coverage had been exhausted.  After a dispute about the priority level of
NICO’s claims, this Court concluded that NICO’s claims, as assignee, are
fourth-priority policyholder claims.  In re Ambassador Ins. Co., 2008 VT
105, ¶ 24, 184 Vt. 408, 965 A.2d 486.  As of the time of the superior court
hearing on the present issue, the liquidator and NICO were litigating these
claims.
c.      
Final Claim Date
¶ 15.        
At a status conference in May 2010 regarding Ambassador’s ongoing
liquidation, the superior court requested that the liquidator prepare a report
detailing a possible procedure for bringing the liquidation to a close.  In
response, Ambassador’s liquidator filed a motion with the superior court to
establish a deadline by which all claimants, including those who previously
filed policyholder-protection claims, would need to file final and complete
proofs of claim.  In his motion, the liquidator argued that the 1987
liquidation order, Vermont’s statutory scheme for liquidation, and precedents
from other jurisdictions support the establishment of a final claim date. 
These authorities, he contended, favor expeditious completion of the
liquidation and supported the liquidator’s discretion and authority to
determine when it is appropriate to “cut off claims that still are not absolute
in favor of final distribution to those with fixed claims.”  The liquidator
further argued that a final claim date was appropriate in this case because
without it, the liquidation would go on indefinitely, Ambassador’s total
liability to priority-four claimants would never be known, and priority-five
claimants with absolute claims could not be paid.
¶ 16.        
Notice of the liquidator’s motion was sent to approximately 80,000
interested parties, including policyholders, potential claimants, insurance
commissioners throughout the U.S., and guaranty funds.  Notice was also
published in newspapers of both national and local circulation.  NICO and A.P.
Green filed one of four objections with the superior court.[7] 
The Ambassador insureds who objected to the establishment of a final claim date
argued first that the court lacked statutory authority to set a bar date for
claims.  They argued that setting such a date would favor priority-five
claimants at the expense of priority-four claimants whose claims could not yet
be liquidated, and even if the court had authority to set such a date, setting
it too soon would unreasonably limit claimants’ ability to submit proof of
their claims.
¶ 17.        
In November 2012, the superior court issued an order setting December
31, 2013 as the deadline by which any policyholder, including insureds who had
asserted policyholder-protection claims, would be required to submit a final
proof of claim complying with the more stringent requirements for an actual
proof of claim.  The court concluded that it had authority to set a final claim
date, explaining that just as the court had discretion to approve distributions
and to establish a policyholder-protection process, which was not otherwise
provided for by the liquidation statute, so too did it have the authority to
bring that process to a close.  Moreover, it noted that the existence of
priority-five claims implies that there must be some process for closing
priority-four claims so that priority-five claimants can be paid.
¶ 18.        
Having concluded that it had the authority to do so, the court proceeded
to set a deadline approximately one year from the date of the order.  The court
offered three reasons for its selection of the December 31, 2013
deadline—approximately thirteen months from the date of the court’s order. 
First, it noted that several of the policyholders who objected to the bar date
represented that their claims were close to some impending event that would
bring the claims into sharper focus.  The court’s expressed intention was “to
open the insolvent estate to as many legitimate claims as possible.”  It
reasoned that one year would provide sufficient time for the investigation and
negotiation of claims that were known but not yet fully developed.  Second, the
court noted that one year should provide sufficient time for any appellate
review of the bar date.[8]
 Third, the court noted that a more accelerated final claim date would be
inappropriate in light of the ongoing litigation over whether A.P. Green’s
underlying layers of coverage had been exhausted.  NICO appealed to this Court.
II.
¶ 19.        
We first address the reasonableness of the final claim date set by the superior
court.  On appeal, NICO argues that the final claim date does not strike a
reasonable balance between the need to wind up the liquidation and the rights
of policyholders with unliquidated claims.  NICO contends that because
Ambassador is now solvent, the liquidator can continue to cover all costs of
administration in addition to paying claims and immediate closure of the
liquidation is therefore not warranted.  Closure at this time, NICO argues,
would deny payment to higher-priority creditors in favor of lower-priority
creditors, contrary to the policy in insolvency proceedings of protecting the
rights of policyholders.
¶ 20.        
Ambassador argues that the court has discretion to set a final claim
date and the court did not abuse that discretion because it considered the
competing equitable factors in this case, including the length of the
liquidation and the distributions already made to thousands of policyholders. 
Overall, Ambassador argues, the balance between expeditious completion of this
lengthy liquidation and protection of unliquidated claims favors closure of the
liquidation proceeding.
¶ 21.        
The primary issue on appeal is not whether the trial court had the legal
authority to set a final claim date.[9]
 Nor is it whether the liquidation estate should remain open forever, with no
deadline for presenting liquidated claims.  Rather, the question is whether,
given the unique circumstances of this case, the trial court erred in setting December
31, 2013 as a final date for submission of proofs of liquidated claims.  In Ambassador
I, we recognized that the trial court has broad discretion to determine
whether liquidation of an insolvent company is necessary.  147 Vt. at 346-47,
515 A.2d at 1076.  It is also commonly accepted that the liquidator has discretion
in administering an insolvent estate, subject to the limitations in the
liquidation statute.  See In re Exec. Life Ins. Co., 38 Cal.Rptr.2d 453,
459 (Ct. App. 1995) (stating commissioner is “vested with broad discretion” in
administration of liquidation); Angoff v. Holland-Am. Ins. Co. Trust,
937 S.W.2d 213, 217 (Mo. Ct. App. 1996) (“A receiver has broad discretion in
conducting and managing a liquidation.”).  We therefore review a trial court’s
order establishing a final claim date for abuse of discretion.  In re
Burlington Bagel Bakery, 150 Vt. 20, 22, 549 A.2d 1044, 1045 (1988) (“When
a matter is left to the trial court’s discretion, its action will not be
reversed by this Court unless it appears that the court withheld or abused its
discretion.”); see also Kreidler v. Cascade Nat’l Ins. Co., 321 P.3d 281,
287 (Wash. Ct. App. 2014) (concluding that trial court’s order confirming
receiver’s final determination in insurer insolvency is subject to review for
abuse of discretion).
¶
22.        
The trial court’s discretion in setting a final claim date in
this case is bounded by several intertwined legal considerations.  First, any
final claim date must be consistent with the terms and goals of the liquidation
order.  With respect to the distribution of Ambassador’s assets, the order
states that the liquidator “shall make distributions in a manner that will
assure the proper recognition of priorities and a reasonable balance between
the expeditious completion of the liquidation and the protection of
unliquidated and undetermined claims, including third-party claims.”  The order
states that “the priority of distribution as set forth in 8 V.S.A. § 3595 shall
control.”  (Emphasis added).  It contemplates that the liquidator will collect
and distribute “all assets that can be economically collected and distributed,”
and that the only funds that may be transferred pursuant to discharge of the
liquidator are those “that are uneconomic to distribute.”  The order further
contemplates that even after the liquidator has been discharged, upon the
discovery of additional assets, the liquidation proceeding may be reopened. 
The order thus evinces both a resolve to distribute all estate assets that can
be economically collected and distributed, and a commitment to the proper
recognition of priorities.
¶
23.        
Second, any final claim date must be consistent with the critical
goal of the liquidation process: the protection of the public in general and
policyholders in particular.  Liquidators are officers of the state who are
required to protect policyholders, other creditors, and the public interest in
the administration of an estate in liquidation.  See In re Liquidation of
Integrity Ins. Co., 935 A.2d 1184, 1194 (N.J. 2007) (Long, J., dissenting)
(stating that “heart” of New Jersey Rehabilitation and Liquidation Act is
mandate “[t]hat the broadest protection be afforded to the public and
various claimants and beneficiaries” (quotation omitted)); Exec. Life Ins.
Co., 38 Cal.Rptr.2d at 459 (recognizing that commissioner, as liquidator,
is “an officer of the state who
. . . exercises the state’s
police power to carry forward the public interest and to protect policyholders
and creditors of the insolvent insurer”) (citation omitted).  The policyholders
in this case paid good money for the insurance they purchased.  Members of the
public who have sustained injuries for which the policyholders are liable may also
suffer if the contracted-for insurance is not available to the policyholder.  When
an insurer is insolvent, frustration of some policyholders’ contractual
expectations and a lack of coverage for some injured innocent third parties may
be inevitable, but courts and liquidators should be loath to cut off valid
claims in the face of ample funds to pay those claims without good reason.  See
PrimeHealth Corp. v. Ins. Com’r, 758 A.2d 539, 546 (Md. Ct. Spec. App.
2000) (commissioner appointed as receiver for insurance company has “duty to act with a broader view toward minimizing
inevitable financial harm to all policy holders, creditors, and the
general public”) (emphasis added) (quotation omitted).
¶
24.        
Two particular factual
circumstances in this case also have significant bearing on the trial court’s
exercise of discretion with respect to a cutoff date.  First, much of the insurance
written by Ambassador—including the A.P. Green policies to which NICO is
assignee—involved excess coverage for long-tail claims.  Injury caused by the risks
insured by Ambassador—including disease caused by asbestos exposure—often does
not declare itself until years, even decades, after the underlying exposure. 
See, e.g., Borel v. Fibreboard Paper Prods. Corp., 493 F.2d 1076, 1083 (5th
Cir. 1973) (noting that asbestosis does not generally manifest itself until ten
to twenty-five or more years after initial exposure); M. Veed, Cutting
the Gordian Knot: Long-Tail Claims in Insurance Insolvencies, 34 Tort &
Ins. L.J. 167, 169 (Fall 1998) (acknowledging that asbestos and environmental
policies may have tails upwards of fifty years). 
If Ambassador was not in liquidation, and was instead operating as a going
business, Ambassador would still face considerable exposure for known but
unliquidated claims pursuant to the A.P. Green policies, as well as claims
based on yet-to-be discovered injuries arising during the coverage period of those
policies.  Ambassador would still be holding reserves to cover such claims,
with no artificial bar date above and beyond the applicable statutes of
limitations, and A.P. Green would still reasonably rely on the coverage it had
purchased in the early 1980s to satisfy those claims.
¶
25.        
The reasonably expected time span
between the coverage periods and the perfection of claims against Ambassador
pursuant to that coverage is further extended because of Ambassador’s status as
an excess insurer.  For example, Ambassador is only obligated to provide
coverage to A.P. Green after three prior layers of insurance are
exhausted.  Moreover, as we noted in Towns v. Northern Security Insurance
Co., occurrence policies like those issued by Ambassador to A.P. Green are
meant to provide more expansive coverage than cheaper claims-based policies,
which restrict the insurer’s risk to coverage of claims made during the policy
period.  2008 VT 98, ¶ 29, 184 Vt. 322, 964 A.2d 1150.  The policies in
question were designed to have very long tails.
¶ 26.        
This factor alone points to the likely reasonableness of a liquidation
proceeding that lasts for decades.  The length of this liquidation proceeding
is not out of line relative to the liquidations of other insurance companies that
insured long-tail risks and became insolvent in the mid-1980s, including
Transit Casualty Co., Integrity Insurance Co., and Midland Insurance Co.  See Transit
Cas. Co., 280 S.W.3d at 622 (fourteen years, beginning in 1987 and ending
in 2001); Integrity Ins. Co., 935 A.2d at 1185 (nearly twenty-one years,
beginning in 1987, and counting as of 2007); In re Liquidation of Midland
Ins. Co., 947 N.E.2d 1174, 1176 (N.Y. 2011) (twenty-five years, beginning
in 1986, and counting as of 2011).
¶ 27.        
A second factor further impacts the final-claim-date analysis.  In the
typical liquidation, the insurance company is insolvent, meaning it lacks
sufficient assets to meet its debts.  In such cases, the limited assets
relative to the outstanding debt generally force an end to the liquidation proceeding:
at some point, the insolvent estate runs out of money, or its assets drop to a
point where it becomes uneconomic to continue administering the estate.  In
this case, on the other hand, to the liquidator’s credit, the liquidator has
recovered quite substantial assets on Ambassador’s behalf.  The liquidator has
approximately $92 million in Ambassador assets— more than enough to pay the $26
million in known fourth-priority claims, the approved fifth-priority claims,
and the reasonable costs of administration.  As the liquidator acknowledged in
his testimony, Ambassador is not currently insolvent, although it may become
insolvent in the future.
¶ 28.        
This factor distinguishes this case from the other long-tail insurance
cases noted above.  In the case of Integrity Insurance Co., a liquidation
spanning over twenty years that began in 1987, the company was $800 million in
debt when the liquidator proposed a plan for winding down the liquidation.  Integrity
Ins. Co., 935 A.2d at 1186.  That plan included a final cutoff date for claims
using estimation and final distribution.  Id. at 1186-87.  In that case,
the New Jersey Supreme Court noted that when an insolvent insurer finds it has
a surplus, the applicable New Jersey statute allowed payment for contingent claims
if the liquidation is conducted “upon the basis that such insurer is solvent,”
a provision it dismissed as irrelevant to Integrity.  Id. at 1190.  The court
rejected a plan to wind up the twenty-one year old liquidation proceeding by
paying policyholders amounts based on actuarial estimation rather than actual
proven claims, even though its rejection of the plan would result in continued
administrative costs.  Id. at 1191.[10]
¶ 29.        
Similarly, in the case of Midland Insurance Co., the company was still
about $47 million insolvent after twenty-five years of liquidation when the
liquidator moved for a final deadline for amendments to proofs of claim.  In
re Liquidation of Midland Ins. Co., No. 41294/1986, 2011 WL 2652564, at *1
(N.Y. Sup. Ct. June 27, 2011).
¶ 30.        
Given these factors, we conclude that the trial court’s final claim date
does not strike a “reasonable balance between the expeditious completion of the
liquidation and the protection of unliquidated and undetermined claims.”  When
determining whether a final claim date achieves this reasonable balance, courts
should consider, among other factors: (1) the company’s remaining assets; (2) the
nature and amount of its remaining liabilities; (3) the administration costs of
the estate; and (4) the extent to which delay in termination of the liquidation
proceedings results in a delay of full payment to priority claim holders. 
Here, these factors weigh against the final claim date of December 31, 2013 set
by the trial court.
¶ 31.        
As noted above, Ambassador has ample resources to meet its known
obligations to priority-four claimants ($26 million), to pay the $20 million in
claims asserted by NICO, if they are established, to pay claimants with known
but not yet liquidated priority-four claims (estimated in Ambassador’s reserves
to be around $18 million), to sustain its administrative costs for at least
five years, and even to pay the bulk of known obligations to priority-five claimants. 
Given this circumstance, we cannot conclude that, as required by the
liquidation order, “all assets that can be economically collected and
distributed have been collected and distributed.”  PC 29.  In particular,
the liquidator has not yet distributed “all assets that can be economically
collected and distributed.”  Ambassador has sufficient funds to pay additional
known and not yet liquidated, and even yet-unknown priority-four claims.  
¶ 32.        
At the same time, Ambassador’s prospective priority-four liabilities are
substantial.  This is not a case in which we can reasonably conclude that the
lion’s share of the insolvent insurer’s obligations is substantially known and
established by now, such that it would be uneconomical to extend the
liquidation to keep the door open for a small number of exceptional claims.  As
noted above, given the latency of the diseases covered by the policies in
question, Ambassador’s status as a fourth-layer excess provider in the case of
the A.P. Green policies, the circumstance of A.P. Green’s own bankruptcy and
the delays that created in resolution of the claims against A.P. Green, it
seems very likely on the basis of the A.P. Green policies alone that
substantial obligations for covered risks remain unliquidated and unsatisfied. 
Likewise, the environmental risks covered by Ambassador have similarly long
tails.  It is not as though policyholders have had since 1987 to establish
their claims.  Their claims are only ripening now.  There is no evidence that
the bulk of the delay in claimants’ submissions of qualifying proofs of claim
is a result of foot-dragging or a lack of diligence; the long tail on these
claims is intrinsic to the covered risks.
¶ 33.        
Lastly, relative to the remaining assets in the estate, Ambassador’s
ongoing operating expenses are modest.  Its average annual operating expenses
during the five year period preceding the October 2012 hearing were $1.6
million.  Prospectively, the liquidator estimates that Ambassador’s yearly
operating expenses will be approximately $2 million.  There is nothing in the
record to suggest that the liquidator’s continuing operating costs are so out
of proportion to the prospective claims they are likely to pay as to render
continuation of the liquidation uneconomic.  Cf. Integrity Ins. Co., 935
A.2d at 1191 (rejecting proposed final liquidation of estate that included IBNR
claims using estimation methods despite ongoing prospective cost of
administering estate, estimated to be $4.5 million per year with respect to
insolvent estate).
¶ 34.        
Moreover, it is not the case that the interests of other priority-four
claimants here would be substantially compromised by continuation of the
liquidation.  As of May 2012, all court-approved priority-four claims had been
paid in full, plus interest.  Cf. id. at 1187 (noting that keeping liquidation
open until substantially all contingent claims became absolute would delay the
full and final dividend to claimants and policyholders).  In this case, no
priority-four claimants are currently prejudiced by allowing additional time
for those with known but unliquidated claims to perfect their claims, or for
those with yet-unknown claims protected by policyholder-protection claims to
make actual claims.
¶ 35.        
We recognize that this liquidation has continued for quite some
time—nearly three decades—but the length of the liquidation is not in and of
itself sufficient to justify cutting off valid but not fully ripe claims under
the Ambassador policies when funds remain to pay those claims and the estate
can be administered economically.  The significance of the passage of time
since the initial liquidation order is especially limited in this case where
the liquidation estate received an infusion of over $200 million in 2008.  The
mere duration of the liquidation process in and of itself is not a basis for
bringing it to a close, thereby frustrating the goal of protecting policyholders
and other creditors, in the absence of specific factors warranting closure.  A
lack of sufficient funds to meet additional claims, a likelihood that further
substantial claims will not be forthcoming, administrative costs disproportionate
to the remaining assets to be collected or distributed, or prejudice to other
priority claimants as a result of ongoing delay are all examples of the kinds
of factors that may support a cutoff date.  None of them apply here.
¶ 36.        
Our reversal of the trial court’s cutoff-date order is supported by
another consideration: the court’s order does not accomplish its own stated
goal.  The trial court wrote, “The court’s intention is to open the insolvent
estate to as many legitimate claims as possible.”  The trial court appears to
have contemplated that a bar date of December 31, 2013 would provide the
policyholders who objected to the bar date sufficient time to perfect their
claims by investigating and negotiating claims that are known now but not fully
developed.  At the time of oral argument, several weeks before the final bar
date, the litigation between NICO and Ambassador concerning NICO’s claim was
ongoing.  Given the continuing dispute as to whether A.P. Green’s claims had
already pierced Ambassador’s layer of coverage, as well as A.P. Green’s
bankruptcy and its impact on the resolution of additional claims against A.P.
Green that might implicate the Ambassador coverage if it was not already in
play, we have serious doubts about the accuracy of the trial court’s assumption
that one year would provide sufficient time for perfection of the
known-but-not-liquidated claims, and the record does not provide any specific
support for this assumption. 
¶ 37.        
Given Ambassador’s recent recovery, closure at this stage would
undermine the general purpose of protecting policyholders whose claims could be
covered in full by the available funds.  See Comm’r
v. Mass. Accident Co., 50 N.E.2d 801, 805
(Mass. 1943) (noting that “large, if not the largest, interest in almost any
insurance company must be that of policyholders who have not yet suffered loss,
and that the solvency of the company and whether it should be allowed to
continue business should depend upon its probable ability to meet the future
claims of such policyholders”).  We are mindful that given the nature of the
risks insured, Ambassador’s policyholders likely still face substantial
exposure for risks covered by Ambassador policies.  We are especially concerned
about the known claims that have not been perfected due to extrinsic factors
reflecting no lack of diligence on the part of the policyholder.  See id. (“It would be an anomaly if an adjudication of insolvency
should itself have the effect of restoring the company to a sort of solvency
through the immediate elimination of one of the principal blocks of its
liabilities.”).
¶ 38.        
We acknowledge that the trial court’s final-claim date would allow
payouts to priority-five claimants, but reject the proposition that a desire to
pay priority-five claims in full itself provides a reason to close the door to
unperfected priority-four claims.  Given the statutorily mandated priority
scheme adopted in the liquidation order, any payment to lower priority
claimants before Ambassador satisfies its obligations to higher-priority
claimants would be a windfall to those lower-priority claimants.  In the case
of insolvent insurance companies, just as in the case of bankruptcies,
unsecured creditors of the lowest level of priority often recover cents on the
dollar, if they recover anything at all.  The notion that a priority-five
claimant should be entitled to full payment while a priority-four claimant such
as A.P. Green should be left without its contracted-for protection as a
policyholder because of the long-tail nature of the risks for which it
purchased coverage is squarely at odds with the distribution priorities
reflected in the liquidation order and is unsupported by any authority.  
¶ 39.        
We do not intend to leave the
liquidator or the trial court with the Hobson’s choice of “extinguish[ing]
millions of dollars of occurrence-based coverage purchased by policyholders or . . .
run[ning] out the Estate for years while hemorrhaging administrative costs and
delaying payments to claimants with presently documented claims.”  Integrity
Ins. Co., 935 A.2d at 1192 (Long, J., dissenting).  The estate’s finite
assets should stave off any concern that the liquidation will proceed
“indefinitely,” and the liquidation order contemplates such a time when “all
assets that can be economically collected and distributed have been
collected and distributed.”  (Emphasis added).  But that time has not yet
arrived.  While we conclude that a final claim date is not appropriate at this
time, nothing bars the liquidator from returning to the superior court and
requesting a claim date when more is known about Ambassador’s priority-four
liability—knowledge that is forthcoming—or when Ambassador’s assets have been depleted
to the extent that continued administration of the liquidation estate is no
longer economic. 
¶ 40.        
Moreover, as the trial court noted, the circumstances of this case are
dynamic and we may be close to more certainty with respect to Ambassador’s
liability to at least some priority-four claimants.  The question of whether
A.P. Green’s claims have reached Ambassador’s layer of coverage is currently
before a court-appointed master but has not yet been resolved.  Additionally,
A.P. Green’s own bankruptcy proceedings are moving forward and will further
illuminate the extent of its asbestos-related claims.  In an affidavit
submitted to the trial court, the president of A.P. Green indicated that, as of
September 2012, A.P. Green’s reorganization plan was close to final
confirmation.  The plan provides for review, determination, and payment of the
thousands of asbestos-related claims that have been pending but unreviewed
since the commencement of A.P. Green’s bankruptcy in 2002.  These circumstances
provide some reasonable assurance that the process of resolving the known and
outstanding fourth-priority claims against the estate is continuing to move
forward.
III.
¶ 41.        
NICO also argues on appeal that (1) the trial court should have
considered a final claim date only for unreported claims or allowed the
liquidator to use actuarial estimation for unliquidated claims, and (2) in
deciding the liquidator’s motion for a final claim date, the court should have
applied the liquidation statute enacted in 1991.
¶ 42.        
These two arguments are related.  Neither the liquidation statute in
force at the time of the liquidation order in this case, nor the new statute
enacted in 1991, nor Ambassador’s liquidation order explicitly addresses a
final claim date or the use of claims estimation in winding down the liquidation. 
As the trial court noted, the liquidation statute in force at the time
Ambassador’s liquidation was ordered, 8 V.S.A. §§ 3591-3603 (repealed
1991), did not address the termination of liquidation at all.  The new statute
enacted in 1991 does contain a provision addressing the termination of
liquidation proceedings, but it merely echoes the liquidation order’s language,
albeit in different terms, providing that the liquidator may apply for
discharge “[w]hen all assets justifying the expense of collection and
distribution have been collected and distributed.”  8 V.S.A. § 7085.
¶ 43.        
NICO argues that the 1991 statute governs questions concerning the
termination of Ambassador’s liquidation proceeding, and that provisions in that
statute, 8 V.S.A. §§ 7076-77, address unliquidated claims.  Specifically,
NICO cites 8 V.S.A. § 7076(b) for the proposition that contingent claims
can participate in distributions in a liquidation proceeding.  NICO reasons
that if the statute provides for payment of contingent claims, the liquidator
has a duty to accept determinations of their value by claim estimation or some
other reasonable method because there must be some way of determining the
claims’ value.  In the alternative, NICO argues that wholly apart from the 1991
statute, the court has the authority to amend the liquidation order, especially
in light of the 2008 recovery of $205 million, to allow for resolution of the
liquidation proceedings using estimation methods to determine the value of and
to pay unliquidated claims.[11]
¶ 44.        
Ambassador responds that language in the liquidation order explicitly
states that the substantive rights of Ambassador policyholders were fixed as of
the date of the order’s entry and the 1991 statute therefore does not apply. 
Ambassador further argues that the trial court did not abuse its discretion by
refusing to use claims estimation or to set a final claim date for only
unreported claims.  It notes that when the Legislature enacted the 1991
liquidation statute it could have but did not allow claims estimation as a
basis for payment of unliquidated claims and that there is no case law
supporting a court’s reliance on estimation where there is no statutory
authorization.  And Ambassador argues that if estimation is required for
remaining claims, Ambassador’s reinsurers will most certainly take the position
that they have no obligation to pay based on estimates, and the estate will
become involved in long-term, expensive and unnecessary litigation.
¶ 45.        
We decline to reach the issues raised by the parties as to estimation
for two reasons.  First and foremost, because we conclude that the liquidator
has not yet distributed all assets that “can be economically collected and
distributed” and that the trial court’s bar date was premature, we need not
address NICO’s arguments regarding unliquidated or contingent claims at this
time.  Second, although the question of the court’s authority to amend the
liquidation order to allow the use of estimation methods in winding down the
estate is primarily a legal one, the legal analysis may require some
understanding of the reliability of the actuarial methods that would be
relied-upon, as well as of the implications of using this method on reinsurers’
obligations.  There is an insufficient basis, both in terms of evidence in the
record and in terms of briefing, to enable us to review this question.
Reversed.
 
 



 


 


FOR THE COURT:




 


 


 




 


 


 




 


 


 




 


 


Associate
  Justice



 




[1] 
The department subsequently became the Department of Banking, Insurance,
Securities and Health Care Administration (BISHCA), and in 2012 became the Department
of Financial Regulation.
 


[2] 
By the time the court ordered liquidation in 1984, the liquidated-value figure
had risen to $42.5 million.  Ambassador I, 147 Vt. at 345, 515 A.2d at 1076.


[3]
 We refer to both the commissioner acting in her capacity as liquidator and the
individual appointed by the commissioner to act as liquidator as “the
liquidator.”
 


[4] 
This figure is net of reinsurance recoveries available to cover certain
liabilities.
 


[5]
 This type of claim is sometimes described as “incurred but not reported” (IBNR).
 


[6]
 In its brief and at oral argument, the Department of Financial Regulation represented
that the priority-five claims total approximately $32 million.  In his
testimony below, the liquidator testified that the priority-five claims
consisted of a $32 million claim on a reinsurance policy, and an additional $5
million in obligations to lawyers, adjusters, and others incurred before the
receivership.  The discrepancy does not substantially affect our analysis.


[7] 
Ambassador policyholders C.P. Chemicals, Phibro-Tech, Inc. and Phibro Animal
Health Corp. also filed objections to the liquidator’s motion for a final claim
date. They argued that a final claim date would prejudice their claims, which
are currently being disputed or awaiting regulatory action.  These policyholders
do not appeal the superior court order; NICO is the only original objector that
appealed the superior court’s order.


[8]
 This prediction proved to be incorrect.
 


[9]
 We agree with the trial court that a court supervising the liquidation of an
insolvent insurer has the authority to set a reasonable deadline for filing
final proofs of claim as long as that deadline is not in conflict with any
statutory requirements.  None of the parties dispute this conclusion on appeal,
and it is supported by case law from other states.  See, e.g., MSEJ, LLC v.
Transit Cas. Co., 280 S.W.3d 621, 624 (Mo. 2009) (recognizing that Missouri
statute empowers court to “set reasonable time standards for the resolution of
a receivership”); Lorain Cnty. Bd. of Comm’rs v. U.S. Fire Ins. Co., 610
N.E.2d 1061, 1064 (Ohio Ct. App. 1992) (“It is commonly accepted that upon the
liquidation of an insolvent insurer, a firm date must be set after which no
more claims against the company will be received.”).


[10]
 In contrast to the liquidator here, the liquidator in In re Liquidation of
Integrity Insurance Co. favored a liquidation plan that relied on actuarial
estimation methods to include IBNR claims in the distribution, and took the
position that a cutoff date barring contingent claims “would
be manifestly unfair to many policyholders and third parties with contingent
claims who would lose any recourse to
the assets of Integrity’s estate. Further, this approach would have a serious
impact on the insurance-consuming public because many of the contingent claims
would be paid, in part or in full, by state insurance guaranty associations.” 
691 A.2d 898, 900 (N.J. Super. Ct. Ch. Div. 1996).


[11]
 NICO did not raise this second argument below, and did not brief it, but
advocated this position at oral argument.


