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Commissioner of Insurance v. Munich American Reinsurance Co.3/5/1999
Suffolk
December 10, 1998
Insurance, Insolvency of insurer. Insurance Company, Insolvency. Contract, Reinsurance agreement. Set-Off.
Certification of questions of law to the Supreme Judicial Court by the United States District Court for the District of Massachusetts.
A Judge of the United States District Court for the District of Massachusetts has certified two questions to this court, pursuant to S.J.C. Rule 1:03, as appearing in 382 Mass. 700 (1981). These questions are posed in connection with a complaint for declaratory relief filed by the Commissioner of Insurance as permanent receiver of two insolvent Massachusetts insurance companies, American Mutual Liability Insurance Company (AMLICO) and American Mutual Insurance Company of Boston (AMI). The receiver sought a determination whether, under Massachusetts law, a reinsurer, such as the defendant Munich American Reinsurance Company (MARC), may properly offset against amounts owed to an insolvent insurer's estate the amounts (properly shown on proofs of claim filed with the receiver) that the insolvent insurer owed to the reinsurer.
The receiver commenced an action in the Supreme Judicial Court for the county of Suffolk, and MARC removed it to the United States District Court. After a hearing on cross motions for summary judgment, the Judge determined that he would certify two questions to this court. The questions are:
"1. Whether under Massachusetts law a creditor of an insolvent Massachusetts insurer in liquidation may offset amounts owed to the insolvent insurer against amounts owed to the creditor from the insolvent insurer. "2. Whether under the terms of the contracts between them and pursuant to Massachusetts law, MARC may offset amounts owed, respectively, to AMLICO and AMI (insolvent Massachusetts insurers in liquidation) against amounts owed, respectively, from AMLICO and AMI."
The first question concerns the effect, if any, on MARC's right of setoff of the priorities set forth in G. L. c. 175, Sect. 180F, for distribution of an insolvent insurer's assets to creditors. We shall conclude that common-law setoff permits MARC to an offset in the circumstances, that there is no statutory prohibition against application of that common-law rule, and that, as to the second question, nothing in the reinsurance contracts limits or eliminates MARC's right to a setoff.
1. The general principle has long been established that a setoff is appropriate between mutual debtor-creditors, even if one of them is insolvent at the time the right to the setoff is asserted. Greene v. Hatch, 12 Mass. 195, 198 (1815) (to do otherwise would be "exceedingly unjust"). See Massachusetts Motor Vehicle Reinsurance Facility v. Commissioner of Ins., 379 Mass. 527, 538 (1980); Friedman v. Commissioner of Banks, 291 Mass. 108, 111 (1935) ("In the ordinary case of set-off by a depositor against an insolvent bank there is no preference created thereby"); Bachrach v. Commissioner of Banks, 239 Mass. 272, 273 (1921). See also Scott v. Armstrong, 146 U.S. 499, 510 (1892); Carr v. Hamilton, 129 U.S. 252, 255-256 (1889). The obligations must be mutual, that is, "the same part in both claims." Friedman v. Commissioner of Banks, supra at 112. Thus, for example, a trustee may not off set amounts an insolvent bank owes to him as trustee against amounts that he personally owes to the insolvent bank. Cosmopolitan Trust Co. v. Wasserman, 251 Mass. 514, 516 (1925). Similarly, a person may not set off amounts that he owes to an insolvent bank as an individual against amounts that the bank owes to a partnership in which the individual is a partner. Id. at 516-517. To allow such a setoff "would give
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