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In an unusual decision involving an insolvent insurance company, a Manhattan Supreme Court judge has declined to grant full faith and credit to a ruling by the 5th U.S. Circuit Court of Appeals. In In the Matter of the Rehabilitation of Frontier Insurance Company, 405090/01, Justice Edward Lehner determined that the 5th Circuit decision did not carry weight in the insurer’s bankruptcy proceeding taking place in New York. The circuit decision upheld a liquidated claim won by Callon Petroleum Co., a creditor of the insolvent insurer, in a Louisiana federal court against Frontier Insurance Co, a New York-based insurer. The U.S. Constitution calls for federal courts to grant full faith and credit to the decisions of other domestic courts to avoid in-state favoritism and judicial haggling. Congress has broadened the requirement to state courts. Because of the long-standing precedent in the American judiciary, Lehner took note to explain that the McCarran-Ferguson Act, a law that allows state administrators to govern the insurance industry rather than federal regulators, led him to this conclusion within the limited context of the case. The jurisdictional battle has its roots in the Louisiana federal suit filed in May 2001 by Callon against Frontier claiming the insurer was liable for a $2.7 million bond. In August 2001, the New York State Insurance Department and Frontier reached an agreement for Frontier to enter into voluntary rehabilitation whereby the superintendent took control of the property casualty insurance company. In a proceeding in New York state court, the superintendent was officially certified to lead Frontier’s rehabilitation. Soon after, the Louisiana district court ruled in Callon’s favor. In September 2002, Callon filed an application in New York to establish the $2.7 million claim it won in Louisiana in the bankruptcy taking place in Lehner’s court. The application, had the court granted it, would have locked in Callon’s victory in Louisiana without it having to relitigate the merits of its claim before the New York court. The superintendent countered with a filing in Louisiana to vacate the judgment favoring Callon, which the district court denied. One year after that, the superintendent appealed to the 5th Circuit. That panel affirmed the lower court’s ruling based on diversity jurisdiction and scolded the superintendent for failing to object on a timely basis. Soon after, Callon moved to reargue its claim before Lehner in an attempt to have its judgment transferred to the bankruptcy proceeding. Lehner has now denied Callon’s motion. A federal statute requires state courts to give full faith and credit to decisions made by federal courts, he wrote. This statute was derived from the full faith and credit provision in the Constitution, thereby giving it great weight. The judge weighed this established legal doctrine against the manner in which insurers are regulated. The McCarran-Ferguson Act handed much of the regulatory oversight of the insurance industry to the states. “The statute was designed to restore the supremacy of the States in the realm of insurance regulation,” the judge wrote. ANOTHER STATUTE Another statute adopted by many states, the Uniform Insurers Liquidation Act, tried to develop “a uniform system for the orderly and equitable administration of the assets and liabilities of defunct multistate insurers” among states, the judge added. Both Louisiana and New York adopted the model statute. The two pieces of legislation read together, wrote Justice Lehner, required claimants residing in other states that adopted the Uniform Insurers act to file their claims in New York. Once a proceeding begins in a state that has adopted the Uniform Insurers Liquidation Act, he held, “such a claim is to be referred to the court supervising the proceeding.” In this case, that is the New York court. “Since the public policy behind the enactment of [the Uniform Insurers Liquidation Act] mandates that claims against the insurer be handled in a uniform and consistent manner, directing that the Callon claim be allowed without consideration of the merits because of the Superintendent’s delay would not be in accord with such policy,” Lehner held, referring to the 5th Circuit’s reliance on the superintendent’s failure to make timely arguments. Keeping in mind the strong preference for U.S. courts to grant full faith and credit to domestic judicial decisions, Lehner explained the narrow scope of his ruling. “I find that, solely for the present purposes of this proceeding,” he wrote, “I need not grant full faith and credit to the Fifth Circuit holding as the requirement for full faith and credit emanates from an act of Congress, which act does not specifically relate to the business of insurance.” Jennifer Alampi of Wilson, Elser, Moskowitz, Edelman & Dicker represented Callon Petroleum Company. William Costigan of Costigan & Company represented the insurance superintendent.

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