While most attorneys are familiar with the automatic litigation stay under Section 362 of the federal Bankruptcy Code, few may be aware of the different procedures for pursuing claims against distressed insurers. A recent Delaware Court of Chancery decision, In the Matter of the Liquidation of Freestone Insurance, C.A. No. 9574-VCL (Del. Ch. July 7), illustrates the unique landscape for such claims in which federal bankruptcy law—and its automatic stay provisions—are supplanted by state laws, including the Uniform Insurers Liquidation Act (Uniform Act).In Freestone, Vice Chancellor J. Travis Laster addressed the issue of whether the court should lift a discretionary anti-suit injunction imposed in an insurer liquidation barring parties from pursuing claims against the liquidated insurer outside the statutory claims process pursuant to the Uniform Act. The case arose during the liquidation of Freestone Insurance Co., a Delaware-domiciled insurer, and related to reinsurance agreements under which Freestone, as reinsurer, was obligated to fund a trust account to cover reinsured claims underwritten by a fronting insurer.
During Freestone’s liquidation, the fronting insurer sued the trustee bank holding the trust account in a separate South Carolina proceeding, alleging that the bank had permitted Freestone to substitute assets of inferior value as collateral into the reinsurance trust account. The bank, in response, filed two notices of claim against Freestone in the liquidation proceeding pursuant to the claims process and then sought to name Freestone as a third-party defendant in the South Carolina action. By naming Freestone, the bank hoped to obtain a judgment that would establish its status as a general creditor in the Delaware liquidation, as prejudgment contingent claims would not share in the distribution of assets under the Uniform Act’s priority scheme for payment of claims.
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