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BOOZELL v. UNITED STATES

September 25, 1997

MARK BOOZELL, Illinois Director of Insurance, as Liquidator of Reserve Insurance Company, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant/Counter Claimant.



The opinion of the court was delivered by: CASTILLO

 This lawsuit involves the liquidation of the Reserve Insurance Company ("Reserve"), an Illinois insurer that has been in state court receivership proceedings since 1979. In this complaint against the United States the Illinois Insurance Commissioner, Mark Boozell ("Boozell"), seeks declaratory relief which he asserts is essential to a fair and orderly liquidation of Reserve. Boozell claims that the general federal priority statute, codified in 31 U.S.C. § 3713, interferes with his agency's administration of Reserve's assets because of the uncertainties created by the federal government's statutory assertion that it can assert priority claims at any time during the liquidation.

 Boozell contends that existing case law establishes that the potential claims of the United States that were contingent on the date of Reserve's liquidation do not fall within the federal priority statute. Boozell also claims that the United States' non-contingent liability claims should be exempted from the federal priority statute, because giving such claims priority would impair the protection that the Illinois liquidation priority statute accords to policyholders of an insolvent insurer and thus violate the McCarran-Ferguson Act, 15 U.S.C. § 1012(b).

 Count I of Boozell's complaint seeks to establish that certain of the federal claims against Reserve are not "claims of the United States" within the meaning of the general federal priority statute in 31 U.S.C. § 3713. Count II of his complaint seeks to establish that, in essence, the total liability of the Reserve estate to the federal government does not exceed the amount approved by the state liquidation court for the federal claims, and that the priority of the federal claims in the Reserve proceeding are subject to determination by the state liquidation court.

 The United States in turn has filed a two count counterclaim against Boozell, seeking a declaration that the Illinois state priority statute is partially preempted by the federal priority statute, and that the surviving provisions of state law cannot be severed and enforced separately from those held preempted. Alternatively, assuming the state law somehow survives preemption, Count II of the counterclaim asks the Court to rule that the federal claims against the Reserve estate are entitled to payment as policyholder claims under 215 ILCS 5/205(1)(d).

 Presently pending before this Court are the parties' respective cross-motions for summary judgment. After careful evaluation of the pleadings in this matter, this Court requested oral argument from the parties primarily because the Court was concerned about this issues of justiciability in this case. This opinion will proceed to address that issue as well as all of the pending motions presently before this Court.

 RELEVANT FACTS

 Reserve was a property and casualty insurance company organized under the laws of Illinois. *fn1" As a property and casualty insurer, Reserve in general protected its policyholders from loss of property and liability to others arising from certain casualty events, such as automobile accidents. Reserve was licensed to write all lines of property and casualty insurance, and it wrote more than $ 90 million of such insurance in 1977. (Best's Insurance Reports, Property-Casualty, at 1051-1054 (1978), Boozell Ex. 3; Affidavit of Richard S. Darling ("Darling Affidavit") P 10, Boozell Ex. 1).

 On May 29, 1979, the Circuit Court of Cook County, Illinois (the "Liquidation Court"), entered an order of liquidation against Reserve with a finding of insolvency, and the Illinois Director of Insurance was named liquidator of Reserve (the "Liquidator"). (Final Order of Liquidation with a Finding of Insolvency, Darling Affidavit Exhibit A, Boozell Ex. 1). Under the Illinois Insurance Code, the Liquidator was obligated to liquidate the property, business and affairs of Reserve, follow prescribed procedures to identify and value claims against the Reserve estate, and declare dividends on all allowed claims out of the funds in his possession in accordance with priorities established by the Illinois Insurance Code. See 215 ILCS 5/193, 5/205, 5/208, 5/209 and 5/210.

 Identifying Claimants

 The process of identifying claimants was initiated on May 30, 1979, when the Liquidation Court entered an order establishing a procedure for filing claims against the Reserve estate and setting a deadline of May 1, 1980, by which time claimants were required to file proofs of claim (the "bar date"). (Order Fixing the Time and Procedure for filing Claims against the Reserve Estate, Darling Affidavit Exhibit B, Boozell Ex. 1). In compliance with this order, the Liquidator reviewed Reserve's records to identify potential creditors of Reserve and subsequently sent proof of claim forms to all person thus identified as potential creditors. (Affidavit of Gerald Thompson, Boozell Ex. 4). The Liquidator sent about 500,000 proofs of claim to potential creditors, and about 131,000 proofs of claim were subsequently filed with the Liquidator. (Darling Affidavit P 13, Boozell Ex. 1).

 In the years after Reserve was placed in liquidation, the Liquidator pursued claims against certain firms and individuals who were alleged to have contributed to the insolvency of Reserve. See Schacht v. Brown, 711 F.2d 1343 (7th Cir. 1983) (review of Liquidator's claims). Settlements of this litigation in 1991 infused sufficient funds into the Reserve estate to make it certain for the first time that the Reserve estate would have sufficient assets to make distributions other than to pay administrative expenses. The Liquidator thereafter undertook a review of timely filed proofs of claim to identify and value any claims against the Reserve estate at or above the policyholder level of priority. The Liquidator has obtained about $ 66.4 million in funds to distribute to creditors of the Reserve estate, and he has identified liabilities of the Reserve estate at or above the policyholder priority level totaling about $ 111.4 million. (Darling Affidavit PP 14-15, Boozell Ex. 1).

 The United States' Claims

 Under the Illinois Insurance Code, any person who has a cause of action against an insured under an insurance policy issued by an insurer in liquidation has the right to file a so-called "liability claim" in the liquidation proceeding. 215 ILCS 5/205(1)(d), 5/209(6). Liability claims are entitled to the same priority in distributions of estate assets as claims of policyholders, insured and other persons enforcing policyholder rights. Id. at 5/205(1)(d).

 Only eight of the 136 identified actual or potential liability claims of the United States are based on causes of action that had accrued as of May 29, 1979, the date when Reserve was placed in liquidation. In the case of the remaining 128 claims, no insured loss had occurred as of May 29, 1979. (Jackson Affidavit PP 9-10, Boozell Ex. 5). All such actual or potential liability claims were contingent on one or more events occurring, if ever, after the liquidation date.

 Timely proofs of claim were filed with respect to seven of the eight non-contingent claims of the United States identified by the Liquidator. *fn2" Certain of these claims were covered and paid in part by insurance guaranty associations. The Director has recommended to the Liquidation Court that these seven claims be allowed in amounts due after subtracting amounts paid to the United States by the insurance guaranty associations. (Jackson Affidavit P 9, Boozell Ex. 5).

 The Illinois Insurance Code allows an insured to file contingent claims in a liquidation proceeding, but it requires that such contingent claims be liquidated on or before a date set by the Liquidation Court. 215 ILCS 5/209(4)(a). The Liquidation Court initially set May 1, 1983, as the final date for the liquidation of contingent claims against Reserve but extended this date to December 29, 1989. The contingent liability claims of the United State identified by the Liquidator were not liquidated by the final date set by the Liquidation Court. (Darling Affidavit PP 12, 16, Boozell Ex. 1). Moreover, with respect to each of the 128 identified contingent claims, either a proof of claim was not timely filed, or no proof of claim was ever filed. The Liquidator recommended to the Liquidation Court that these 128 claims be denied. (Jackson Affidavit P 10, Boozell Ex. 5).

 In accordance with orders entered by the Liquidation Court, notice of the Liquidator's recommendation were sent to all claimants, including the United States, providing an opportunity to object to the recommendations. The Liquidator did not receive any objections to the recommendations allowing or denying the identified actual or potential claims of the United States. (Jackson Affidavit PP 11-13, Boozell Ex. 5). The Liquidation Court approved the Liquidator's recommendations with respect to the identified actual and potential claims of the United States. (United States' Responses to Plaintiff's Requests for Admissions P 10-13, Boozell Group Ex. 2).

 In the course of the instant lawsuit, Boozell has sought to confirm that the actual and potential claims identified by the Liquidator are all the actual and potential claims of the United States against Reserve presently known to the United States. While the United States does not have any information that would indicate that there are any federal claims other than those identified by the Liquidator, the United States has been unable to confirm that these 136 actual or potential claims are all the claims that the United States has against the Reserve estate. (United States' Responses to Plaintiff's Requests for Admissions P 6, Boozell Group Ex. 2; United States' Responses to the Plaintiff's Interrogatories P 1, Boozell Group Ex. 2; Riley Affidavit ...


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