(CN) - A judge has sanctioned lawyers who violated an anti-suit injunction by challenging benefit cuts at Executive Life of New York.
New York placed Executive Life Insurance Company of New York, or ELNY, in rehabilitation in 1991, after California took over ELNY's parent company, Executive Life of California. After two decades of state-controlled rehabilitation, New York's superintendent of insurance proposed a plan to liquidate the company, whose liabilities had come to exceed its assets by more than $1.6 billion.
The plan called for ELNY's assets to be transferred to an out-of-state captive insurance company, and included benefit cuts of up to 66 percent for 1,500 annuitants.
The beneficiaries affected by the cuts challenged the liquidation plan, arguing that it was discriminatory, and that the state had excluded them from the process of designing the plan. They claimed the state had mismanaged the company for two decades, and had kept them in the dark about the proposed benefit cuts until the last minute.
Nassau County Supreme Court Judge John Galasso approved the liquidation plan in April 2012, and appointed the superintendent of the New York State Department of Financial Services, formerly ELNY's rehabilitator, as ELNY's liquidator. The beneficiaries, most of whom are recipients of large structured settlement annuities stemming from serious injuries and wrongful death lawsuits, appealed Galasso's order.
In November 2012, the shortfall payees filed a federal complaint against the superintendent and his predecessors, as well as Met Life and Credit Suisse Group AG. They claimed that mismanagement depleted the ELNY estate during the state-supervised rehabilitation to the point where liquidation became the only choice. Among other things, the lawsuit claimed that the New York Liquidation Bureau had allowed MetLife to take over and manage ELNY's most valuable assets without a bidding process, decreasing their value.
New York argued that the shortfall payees had violated anti-suit injunctions contained in two older rehabilitation orders, and in the liquidation order approved by Judge Galasso in 2012. It asked the state court to hold the payees' attorneys in contempt and order them to pay for costs and attorneys' fees.
But the payees and their counsel countered that they had not violated the court's orders, because the federal lawsuit did not go after the ELNY estate or its assets.
Judge Galasso disagreed, finding that the federal lawsuit violated injunctions that were still in effect, including a rehabilitation approval order that discharged the superintendent and his agents "from any liability for their acts prior to the approval of the rehabilitation plan in the performance of their duties incident to the rehabilitation of ELNY."
The shortfall payees' counsel admitted they had knowledge of the court's previous orders, and filed the federal action in violation of those orders, the Jan. 25 ruling states.
"In any event even if counsel are 'hedging their bets,' this court is not empowered to dismiss the federal complaint outright," Galasso wrote. "Moreover, the results of the pending state appeal may also impact the viability of the federal action."
Galasso ordered the attorneys to pay costs, disbursements and up to $5,000 in attorneys' fees that the state incurred in defending the federal action and in applying for contempt.
Edward Stone, the New York attorney representing some of the shortfall payees, said Galasso had overstepped his authority and interpreted the injunctions too broadly.
"According to the judge, the superintendent is entitled to broader immunity than the President of the United States," Stone told Courthouse News. "I don't know how he can interpret it that way. If you're entitled to blanket immunity it means you can steal and you don't get punished for it."
Stone said the shortfall payees were disappointed in the judge's decision, but not surprised.
"The judge said he had a gun to his head, which is very unusual during a hearing," Stone added. "A lot of people seem very committed to sweeping this under the rug. Judge Galasso said the hearing was not the place to address what went on during ELNY's rehabilitation."
The shortfall payees, who stand to lose more than $920 million in benefits, claim the state caused ELNY to lose millions of dollars by allowing the investment of a large portion of its assets in risky stocks, in violation of insurance laws. They claim the New York Liquidation Bureau's deficient systems for tracking and collecting reinsurance and the lack of an outside audit of its operations contributed to ELNY's failure.
Stone said the state judge had no authority to evaluate the merits of the beneficiaries' federal case. He said the shortfall payees are planning to amend their federal complaint to name the individual superintendents as defendants. The new filing will also clarify that the beneficiaries are not suing for conduct the superintendents undertook in good faith, as rehabilitators.
"It could not be more clear that a state court cannot enjoin a federal action or use contempt proceedings to preclude citizens' attempts to have their claims heard in federal court," attorney Roger Christensen, who also represents the payees, said in a letter to the district court.
The payees will also appeal the contempt order, their attorneys said.
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