The opinion of the court was delivered by: Plunkett, District Judge.
MEMORANDUM OPINION AND ORDER
Plaintiff, Philip R. O'Connor (the "Liquidator"), brings
this diversity action on behalf of Reserve Insurance Company
("Reserve"). Reserve has been found insolvent, pursuant to the
provisions of the Illinois Insurance Code ("Insurance Code")
and the Final Order of Liquidation entered by the Circuit
Court of Cook County in People ex rel. Mathias v. Reserve
Insurance Co., 79 Ch 2828. Defendants include twenty-six
insurance companies which acted as reinsurers of Reserve's
liability under various reinsurance contracts (sometimes
referred to as the "Reinsurers"); American Reserve Insurance
Brokers International, Inc. ("ARIB"), which served as the
manager under the contracts prior to Reserve's liquidation and
shortly thereafter; Montgomery and Collins, Inc. of Texas
("Montgomery"), which purchased ARIB's rights as manager of the
contracts after entry of Reserve's order of liquidation; and
Petroleum Insurance, Inc. ("Petroleum"), an affiliate of
Montgomery, which obtained from Montgomery the right to serve
as manager under the contracts.
Presently before the court are the parties' cross-motions
for partial summary judgment. For purposes of their motions,
all Defendants have adopted, pursuant to the court's request,
the argument set forth in the memorandum and the statement of
facts and exhibits filed by the Insurance Company of North
America, and certain other Defendants.
The court will grant a motion for summary judgment "if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and
that the moving party is entitled to judgment as a matter of
law." Fed.R.Civ.P. Rule 56(c). For the reasons stated below,
Defendants' motions for partial summary judgment are granted,
and, accordingly, the Liquidator's cross-motion is denied.
The relevant facts as we understand them, although complex,
do not appear to be in dispute. On May 29, 1979, an order of
liquidation was entered by the Circuit Court of Cook County,
naming the Director of Insurance of the State of Illinois the
Liquidator of Reserve. The Liquidator has title to Reserve's
property and is authorized to deal with the property and
business of the company.
For several years prior to the entry of the liquidation
order, Reserve was a party to several reinsurance contracts
which shared insured property risks in the petroleum and
petrochemical industries. In June 1975, Reserve entered into
a "Quota Share Contract of Reinsurance" (the "3100 Treaty")
with certain reinsurers whereby a portion of the risk on
petroleum and petrochemical insurance policies written by
Reserve would be carried by the reinsurers. In July 1976,
Reserve entered into a "First Surplus Reinsurance Agreement"
(the "3200 Treaty") which established a reinsurance
arrangement for risks written above a
certain dollar amount under the 3100 Treaty. ARIB acted as the
manager under both the 3100 and the 3200 treaties.
Effective January 1, 1979, the 3100 and 3200 reinsurance
contracts were replaced by a new contract of reinsurance
between various reinsurers, with ARIB as the manager (the
"3400 pool"). Reserve was a party to the 3400 pool both as a
reinsurer of risks undertaken by other insurance companies and
as a reinsured on its own risks. By an agreement dated June
25, 1979, Montgomery purchased ARIB's interest as manager
under the reinsurance contracts, and thereafter Petroleum
became the new manager under the agreements. (The Liquidator
refers to the three companies collectively as the "Manager").
While a participant in the reinsurance pool, Reserve wrote
many insurance policies covering property risks in the
petroleum and petrochemical industries and ceded to the
reinsurers under the 3100, 3200, and 3400 treaties their share
of the risk insured by such policies. Reserve also accepted
reinsurance risks on policies written by other insurance
companies which were members of the pool. The reinsurance pool
was governed by a written contract and operated as follows.
ARIB collected the insurance premium from the policyholder.
ARIB then used approximately 30% of the premium to pay
commissions to the producing agent or broker and the ceding
company. ARIB retained the remaining 70% which was credited to
the ceding company and the reinsurers in proportion to their
assumption of the risk. As losses were incurred, ARIB paid the
loss payments to claimants out of those retained funds.
Each quarter ARIB provided the reinsurers with an accounting
of net written premiums, losses, loss adjustment expenses,
salvage, etc. If the net written premiums plus salvage
recovered exceeded losses and expenses, ARIB paid out the net
amount to the pool participants. If losses and expenses
exceeded the net written premiums and salvage recoveries, the
participants paid the difference to ARIB as manager.
Defendants claim, and the Liquidator does not dispute, that
from January 1, 1979 to the date of Reserve's insolvency the
losses exceeded the net premiums in the pool and Reserve
failed to make the necessary payments during that period.
Sometime after January 1, 1979, ARIB ceased issuing Reserve
policies. The Liquidator contends that in April and May 1979,
ARIB cancelled a large number of Reserve's policies because
ARIB was concerned about Reserve's failing financial
condition. During that time, ARIB issued new policies in the
name of one of the other ceding companies. The Liquidator
asserts that this cancellation and rewriting of policies,
prior to Reserve's insolvency, was unauthorized and unlawful.
On the basis of the foregoing facts, the Liquidator alleges
that he is entitled to recover, among other things, (1)
certain reinsurance proceeds for losses incurred by Reserve's
policyholders prior to liquidation but not paid as of the date
of the liquidation order (Count 1); (2) certain monies which
the reinsurers and the manager owe Reserve for claims of
policyholders which ARIB paid with Reserve's funds prior to
liquidation (Count II); (3) Reserve's proportionate share of
premiums written (less losses and other expenses) which
Reserve earned under the 3400 reinsurance agreement (Count
III); (4) the unearned premiums which the Manager or the
reinsurers are holding and which relate to Reserve policies
which were cancelled on May 30, 1979 as a result of Reserve's
insolvency (Count IV); (5) the unearned premiums on Reserve
policies to which the Liquidator would have been entitled had
the Manager not cancelled such polices during the months prior
to the liquidation order (Count V); and (6) the unearned
commissions on policies cancelled by the liquidation order and
cancelled by ARIB, allegedly without authority, during the
months prior to the liquidation order (Count VI).
The Liquidator's cross-motion moves the court, pursuant to
Fed.R.Civ.P. Rule 56, for partial summary judgment: (1)
adjudging and declaring that the amounts the Liquidator is
entitled to recover from Defendants may not be reduced by
Reserve's debts, or, in the alternative, adjudging and
declaring that the amounts the Liquidator is entitled to
recover under Counts I, IV, V, VI, and VIII of the complaint
may not be reduced by Reserve's debts; (2) adjudging and
declaring that Defendants' "mass cancellations" of Reserve
policies prior to May 29, 1979 were unauthorized and wrongful
or resulted in a voidable preference; and (3) adjudging and
declaring that the Liquidator is entitled to recover from
Defendants under Counts V and VI of the complaint. We address
each of the issues in turn.
Defendants contend that they are entitled to reduce the
amount of any debt they may owe the Liquidator by debts
Reserve owes to Defendants under the reinsurance
agreements.*fn2 The Liquidator opposes Defendant's motions,
arguing (1) that Defendants may not assert their set-off claim
in this forum, but only in the liquidation court pursuant to
provisions of the Insurance Code and the liquidation order,
and (2) that even if Defendants' set-off claims may be
considered by this court, certain of those claims do not meet
the requirements set out in the statute. See Ill.Rev.Stat. ch.
73, § 818 (1983).
1. The jurisdiction issue
The heart of the Liquidator's argument is that the Insurance
Code provides an exclusive procedure for the filing and
determination of claims against an insolvent insurer, and that
this procedure encompasses the assertion of set-offs.
Furthermore, it is the Liquidator's position that the
injunctions contained in the liquidation order pursuant to
Ill.Rev.Stat. ch. 73, § 801 (1983) present a bar to Defendants'
set-offs in this forum.*fn3 Thus, the Liquidator argues,
set-offs must be brought in the liquidation ...