In re Legion Indem. Co.

229 N.E.3d 343

2023 IL App (1st) 211370

IN RE LIQUIDATION OF LEGION INDEMNITY COMPANY

(Dana Popish Severinghaus, in Her Official Capacity as Director of the Department of Insurance, Acting Solely in Her Capacity as the Statutory and Court-Affirmed Liquidator of Legion Indemnity Company, Liquidator-Appellee,

v.Catalina Holdings (Bermuda) Limited, Claimant-Appellant).

No. 1-21-1370

Appellate Court of Illinois, First District, Fifth Division.

Filed May 12, 2023

Appeal from the Circuit Court of Cook County, No. 02 CH 6695, Honorable Celia G. Gamrath, Judge presiding.

Neal R. Novak and Jennifer E. Arnold, of Novak Law Offices, of Chicago, for appellant.

J. Kevin Baldwin, Daniel A. Guberman, and Dale A. Coonrod, of Special Deputy Receiver’s Office, and Patrick Morales-Doyle and Ryan J. Gehbauer, of Thompson Coburn LLP, both of Chicago, for appellee.

OPINION

JUSTICE NAVARRO delivered the judgment of the court, with opinion.

¶ 1 After being found insolvent, Legion Indemnity Company (Legion) began undergoing court-ordered liquidation. During the liquidation proceedings, the director of the Department of Insurance, acting solely in his capacity as the statutory and court-affirmed liquidator of Legion (Director), demanded arbitration against Catalina Holdings (Bermuda) Limited (Catalina), who had assumed responsibility for multiple reinsurance treaties entered into with Legion, for amounts allegedly owed under the treaties. Catalina counterclaimed for unpaid premiums. The arbitration panel rejected the claims on behalf of Legion and awarded Catalina the unpaid premiums as well as attorney fees, costs, and interest, if the award was not timely paid. After having that award confirmed by a federal court and converted into a judgment, Catalina filed claims in the circuit court to have its award paid. Ultimately, the circuit court allowed Catalina’s claims and determined that the unpaid premiums as well as the attorney fees, costs, and arbitration interest were claims of a general creditor. As a result, Catalina’s claims were afforded the seventh highest priority in the Illinois Insurance Code’s priority distribution scheme of assets from the estate of an insurance company undergoing liquidation. See 215 ILCS 5/205(1) (West 2020). In addition to allowing Catalina’s claims, the court denied Catalina statutory postjudgment interest under section 2-1303 of the Code of Civil Procedure (735 ILCS 5/2-1303 (West 2020)).

¶ 2 Catalina now appeals the circuit court’s order, contending that, based on the plain language of the Insurance Code’s priority distribution scheme, its claim solely for attorney fees, costs, and arbitration interest should be deemed a cost and expense of administration (215 ILCS 5/205(1)(a) (West 2020)), the highest priority of the Insurance Code’s priority distribution scheme. Additionally, Catalina posits that it was entitled to statutory postjudgment interest on its arbitration award that was converted into a judgment under section 2-1303 of the Code of Civil Procedure (735 ILCS 5/2-1303 (West 2020)). For the reasons that follow, we affirm the circuit court of Cook County.

¶ 3 I. BACKGROUND

¶ 4 A, Legion’s Liquidation

¶ 5 Legion was an insurance company licensed in the state of Illinois. Between 1998 and 2001, Legion entered into multiple quota-share reinsurance treaties with Alea Group Limited and related entities (the Alea Entities), under which the Alea Entities agreed to reinsure and indemnify Legion for a portion of certain business written or assumed by Legion. In April 2002, the Director believed that Legion was financially impaired and filed a complaint for an order of conservation against it.¹ Based on the complaint, the circuit court entered an order of conservation against Legion, resulting in the Director taking possession and control of Legion. Subsequently, the Director filed a complaint seeking an order of liquidation with a finding that Legion was insolvent.

¶ 6 In April 2003, the circuit court found that Legion was insolvent and entered an order of liquidation. That order affirmed the Director as the statutory liquidator and provided him with various powers listed in the Insurance Code.² See, e.g., 215 ILCS 5/191, 193 (West 2002). One such power included the Director’s ability to "bring any action, claim, suit, or proceeding *** against any other person with respect to that person’s dealings with [Legion]." Id. § 193(3). The court’s order also vested the Director "with the right, title and interest in all funds recoverable under any insurance policies, and any treaties and agreements of excess insurance or reinsurance" entered into by Legion. In addition, the Director had various obligations, including providing timely written notice to reinsurers of the pendency of a claim against Legion indicating the policy or bond reinsured. Id. § 193(8)(b). As a result of the court’s order of liquidation, an estate was created comprised of all the assets and liabilities of Legion. Id. § 191.

¶ 7 Throughout the next several years, there were various court-ordered claim deadlines. Eventually, more than 2200 proofs of claims were timely filed in the liquidation proceedings, consisting primarily of priority (g) claims (claims of general creditors). Meanwhile, all priority (a) claims—those for costs and expenses of administration—were paid on an ongoing basis. By January 2015, the circuit court had approved a 100% distribution on all timely filed claims in the liquidation proceedings. Because Legion’s estate had sufficient assets remaining, the court set a new deadline for any additional claims to be filed in the matter. Over the next few years, the court continued to approve distributions to claims based on the priority distribution scheme of the Insurance Code.

¶ 8 B. Catalina and Legion

¶ 9 In 2009 and 2014, Catalina bought the Alea Entities. Based on these acquisitions, Catalina assumed responsibility for the various reinsurance treaties that the Alea Entities had entered into with Legion. These reinsurance treaties contained mandatory and binding arbitration clauses for any dispute arising out of the reinsurance agreements except for issues involving injunctive relief. Additionally, these clauses provided that the arbitrators "may award interest and costs."

¶ 10 In 2014, the Director sent Catalina a commutation offer claiming a balance of approximately $1 million owed to Legion’s estate under the various reinsurance treaties. According to Catalina, this offer was the first time it had received any communication of an issue regarding the reinsurance treaties with Legion. After Catalina refused to pay, the Director demanded arbitration to recover the alleged money owed based on the arbitration clauses in the reinsurance treaties. The Director also sought an award of attorney fees and costs. In response, Catalina counter-claimed, arguing that it was owed unpaid premiums from Legion under the reinsurance treaties and sought an award of attorney fees and costs.

¶ 11 In June 2018, following an arbitration hearing, a panel issued an "Initial Final Award," determining that Legion failed to comply with the Insurance Code as well as the reinsurance treaties concerning obligations to provide notice to Catalina within a reasonable time after each proof of claim was filed in the liquidation proceedings. Because of this failure, the panel concluded that Legion’s claims were time-barred and Catalina was relieved of all obligations to pay any amounts owed. Additionally, the panel concluded that Catalina proved it was entitled to unpaid premiums and awarded it $76,602.63. Lastly, the panel noted that, given the circumstances, it was "unreasonable for [Catalina] to bear the costs of having to respond to and defend" the arbitration brought by Legion and granted Catalina "an adverse award of fees and costs incurred" due to proceedings. On July 31, 2018, the arbitration panel issued its "Final Award" that reaffirmed and incorporated its initial final award. The panel also awarded Catalina $437,501.04 in attorney fees and costs to be paid by Legion. Further, the panel ordered Legion to pay Catalina the amounts owed within 30 days, otherwise interest would accrue at 6% per annum, compounded quarterly, until Catalina was paid in full. Catalina subsequently filed a petition to confirm the arbitration award in the United States District Court for the Northern District of Illinois. On April 6, 2020, the district court confirmed the award and converted it into a judgment in favor of Catalina and against the Director, as liquidator of Legion.

¶ 12 Catalina sought to have the Director pay the entire judgment outside of the liquidation proceedings. But the Director’s attorney informed Catalina that the Director could not pay the judgment without court approval and Catalina had to file a proof of claim with the Office of the Special Deputy Receiver (OSDR), a nonprofit corporation representing the Director under the Insurance Code. See 215 ILCS 5/202 (West 2020). In June 2020, Catalina submitted four proof of claim forms with the OSDR totaling $76,602.63. Those four claims were based on the reinsurance treaties and corresponded to the unpaid premiums owed to Catalina, as determined by the arbitration panel.

¶ 13 The following month, Catalina issued a citation to discover assets against the Director in a separate case outside the liquidation proceedings. According to the Director, because Catalina could only enforce the arbitration judgment through the original liquidation proceedings, he requested Catalina dismiss the citation and follow the proper procedure. In October 2020, because Catalina had not voluntarily dismissed its citation, the Director accepted service of the citation and moved to dismiss it. The circuit court granted the motion finding, in part, the Insurance Code expressly provided that only the liquidation court had jurisdiction to distribute assets of the estate of an insurance company undergoing liquidation.³

¶ 14 C. The...