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eceive full payment of the insurer's obligations prior to satisfaction of the
obligations of other creditors.
California Federal Home Loan Mortgage Corp. v. Superior Court, 224 Cal. App. 3d 218
(1990). After TMIC Insurance Company became insolvent, Freddie Mac filed a
claim for amounts which represented insured loans in default. Freddie Mac
asserted that its claim was entitled to a priority above both general creditors
and policyholders. Specifically, Freddie Mac argued that it was entitled to Class
4 status as a claim "having preference by the laws of the United States."
Freddie Mac based its argument on the Federal Insolvency Statute (31 U.S.C. §
3713). The Court of Appeal held that Freddie Mac was not entitled to a priority
under § 3713 because that section only applies when Treasury funds are at risk.
Because no Treasury funds are at risk when Freddie Mac guarantees a loan,
there was no priority under § 3713. Therefore, Freddie Mac's claim was only
entitled to priority as a general creditor.
Sunburst Bank v. Executive Life Ins. Co., 24 Cal. App. 4th 1156 (Ct. App. 1994),
cert. denied sub nom., NationsBank v. Executive Life Ins. Co., 513 U.S. 1147
(1995). Claims against an insolvent insurer arising from contracts issued by
the insurer and obtained by two banks from the FDIC, which had obtained
the contracts from a failed bank, were not entitled to priority under federal
statute providing that claims of the U.S. government are to be paid first. The
court did not decide, but assumed arguendo, that the FDIC would have such
priority. Nonetheless, the court found that because the FDIC failed to assign
to the banks any rights of its own (as opposed to the rights of the failed
banks), the assignment did not expressly or implicitly confer on the banks
any claim of priority the FDIC might have had.
Texas Commerce Bank v. Garamendi, 11 Cal. App. 4th 460 (1992). The
conservator of Executive Life Insurance Company determined that certain
guaranteed investment contracts ("Muni GICs") sold in connection with
municipal bond issues did not constitute insurance contracts for purposes of
the liquidation priority statutes. Thus, holders of such contracts would be
relegated to general creditor status, rather than policyholder status, in a
liquidation. The trial court disagreed with the Commissioner, finding that the
Muni GICs were insurance annuities, and that holders of the contracts were
entitled to policyholder status. The Court of Appeals affirmed the trial court,
concluding that: (1) the Muni GICs were insurance annuities under § 101 of the
Insurance Code; and (2) § 10541, which purports to characterize agreements
like Muni GICs as non‐insurance contracts, was inapplicable to the contracts in
question as it was enacted after the contracts were issued. The court refused
to apply the statute retroactively.
Florida
Florida Dep’t of Ins. v. Blackburn (In re Blackburn), 209 B.R. 4 (Bankr. M.D.
Fla. 1997). A natural person, as well as an artificial, non‐natural person such
as a corporation, can be an “affiliate” of an insurance company as such term
is used in provision of Florida insurer insolvency statute allowing a receiver
to recover distributions made to affiliates within five years before liquidation
petition. The court also held that an officer’s or director’s breach of duties
inherent in their office does not create a debt which is non‐dischargeable in
bankruptcy.
Illinois Boozell v. United States, 979 F. Supp. 670 (N.D. Ill. 1997). The Illinois
Insurance Commissioner as Liquidator of Reserve Insurance Company
brought a complaint against the United States, seeking a declaratory
judgment that the general federal priority statute interfered with the
Commissioner's administration of the insolvent insurer's assets. The United
States, which sought to recover seven non‐contingent claims from the
insolvent insurer's estate, counterclaimed that the Illinois state priority