Our two-part article on non-con and true sale issues in insurance contexts continues with a deeper dive into the considerations that distinguish these issues from similar remoteness principles in a Bankruptcy Code context. In Part One, we explained some of the basics of state insurance law that bear on these issues and how these can give rise to different approaches in opinion-giving; in this Part Two, we identify some practical obstacles that arise in these kinds of contexts and opinions.
A Pennsylvania Hypothetical
Consider a hypothetical situation in which a Pennsylvania-domiciled insurer is the sponsoring entity in a securitization whose documentation is governed by New York law. Pennsylvania counsel might be asked to render a legal opinion to the effect that the special-purpose entity (SPE) to which the insurer has conveyed assets will not be consolidated with the insurer if it is placed in receivership, and/or that the conveyance of the assets will be respected as a sale in such a receivership. This opinion would be based on an analysis of Pennsylvania insurance law and cases decided thereunder.
Two threshold issues framing the opinion process might be as follows:
In addition, the fact that insurers are subject to a comprehensive state-law-based regulatory scheme can figure prominently in non-con and true sale opinions. The licensing status of an insurer, a regulator’s approval of a particular transaction, evolving regulatory standards on insurer-affiliate relationships and other regulatory factors can play a role in constructing a reasoned discussion on non-consolidation and true sale issues.
Considerations Regarding New York Insurers
In contexts involving New York-domiciled insurers, additional nuance arises because of specific cases and other legal authority in the state over the years that inform the analysis.
Non-Con
In the non-con context involving a New York-domiciled insurer as a sponsor, counsel should take note of Corcoran v. Frank B. Hall & Co., Inc., 149 A.D.2d 165, 545 N.Y.2d 278 (App. Div. 1st Dept. 1989), which potentially places additional strain on a conclusion of corporate separateness. In this case, the New York insurance superintendent (now known as the superintendent of financial services) in his role as liquidator petitioned the court to consolidate the insurer with certain other entities related to the parent of the insurer. The parent company argued that the superintendent as receiver acts in the place of the insurer itself, and no insurer or other entity can petition a court to pierce its own corporate veil.
The court held otherwise, concluding that, although a “viable” corporate entity could not bring a derivative case to pursue its own consolidation, “where ... the corporate entity is in receivership or insolvent, the receiver’s suit is for the benefit of the company’s creditors and not its shareholders. In [such a] case, therefore, ... a trustee can bring an action piercing the corporate veil.” Such an explicit endorsement of the superintendent’s power to seek equitable consolidation also has been echoed in the courts of other states in similar contexts. (See, e.g., Brown v. ANA Insurance Group, 994 So.2d 1265 (La. 2008); Garamendi v. Executive Life Ins. Co., 17 Cal. App.4th 504 (App. Dist. Div. 3 1993).)
True Sale
True sale opinions for a New York insurer similarly should take into account insurance-specific authority. An opinion (Opinion No. 87-53, Sept. 21, 1987) published in 1987 by the Office of General Counsel (OGC) of the New York Insurance Department (now known as the Department of Financial Services) addressed the attributes of a professed sale-and-leaseback arrangement between a New York-domiciled insurer as seller and an SPE as buyer of certain real property. The seller recorded the transaction as a sale on its statutory filings submitted to the Insurance Department. Although the facts are discussed only elliptically, it seems that the seller leased the “sold” real estate back from the buyer and that the purchase price consisted of an assignment of the seller’s rental payments. The seller had the right to repurchase the property at the end of a 12-year rental period by assuming a mortgage loan issued to the buyer.
The OGC concluded that the transaction did not constitute a “sale” insofar as the following “incidents of ownership” remained with the seller. The OGC took account of the following factors:
Admittedly the OGC opinion relates to real property, rather than the financial assets usually in question in a structured finance context. In addition, a number of the items mentioned in the list above either would not be applicable in every context or would not have a self-evident meaning across different transactions (e.g., “buyer and seller may merge”). Moreover, OGC opinions lack the force of law and are issued informally to specific parties in defined circumstances. Still, the letter provides some textual guidance for what constitutes a “true sale” in an insurance company context and should be analyzed in light of a particular transaction’s facts and circumstances.
Can Collateral Be Reached by the Regulators?
Another OGC opinion (Opinion No. 2000-67, May 11, 2000) relates to security interests granted by an insurer. The correspondent had asked whether a New York-domiciled insurer could post collateral in connection with an unspecified “derivative transaction.” The OGC responded that, while an insurer could post collateral in such a circumstance, the pledge “should not be viewed as insulating those assets from attachment by the Superintendent in the event” of a receivership of the insurer. This suggests that collateral can be “pierced” by the regulator in a receivership, complicating any discussion of the boundaries of an insurer’s insolvency estate.
The OGC opinion cites for this proposition a Depression-era New York Court of Appeals decision, In the Matter of the Application of Van Schaick to Rehabilitate the Title and Mortgage Guarantee Co. of Buffalo, 264 N.Y. 69 (1934). On closer reading, however, Van Schaick does not articulate so broad a holding. At issue in the case was a New York insurer that had issued “certificates” to investors, supported by mortgages and other assets in the insurer’s portfolio. The underlying assets were “deposited” with a trust company, which apparently administered the certificate-issuance program and held the assets for the benefit of the respective classes of investors. When the insurer went into rehabilitation, the superintendent sought an order authorizing him to administer these assets and directing the trust company to deliver such assets to the superintendent. The trust company challenged the order on constitutional grounds. New York’s highest court rejected the challenge, holding that the superintendent as receiver may “administer the property of [the insurer] even though a creditor has a lien on some of such property.” In other words, the superintendent may collect receivables on the underlying assets for purposes of paying the certificate holders.
Notwithstanding the suggestion to the contrary in the OGC’s 2000 opinion, Van Schaick does not authorize the superintendent to “attach,” or recover into the estate, an asset that has been pledged to secure an obligation to a lender. Nevertheless, the opinion remains on the books, and should be navigated and considered when constructing a transaction or rendering an opinion.
Conclusion
In structuring and executing securitization or similar transactions involving regulated insurers, the parties and counsel should consider whether any assets or conveyances in the transaction are at any risk for re-characterization under a state insurance receivership. Although this analysis has much in common with, and incorporates components found in, bankruptcy law, the overlay of state-specific insurance law and the use of regulatory discretion need to be carefully weighed. Idiosyncrasies of state insurance law, insofar as they relate to the powers of the regulator in a receivership, criteria for de-recognition of an asset and other matters, can introduce variables into structured finance transactions that might not otherwise appear. Only with a combined understanding of creditors’ rights and insurance law can these risks be properly mitigated.