In Re: PB Life and Annuity Co., Ltd.

Background

PB Life and Annuity Co., Ltd. (PBLA), Northstar Financial Services (Bermuda) Ltd., Omnia Ltd., and PB Investment Holdings Ltd. were debtors in Bermuda insolvency proceedings that the U.S. Bankruptcy Court for the Southern District of New York recognized as foreign main proceedings under Chapter 15. Their joint provisional liquidators, John Johnston and Rachelle Frisby, brought an adversary proceeding in the bankruptcy court against more than 970 defendants, including four North Carolina insurance companies: Colorado Bankers Life Insurance Company, Bankers Life Insurance Company, Southland National Insurance Corporation, and Southland National Reinsurance Corporation.

The complaint asserted numerous fraud, contract, tort, and breach-of-fiduciary-duty claims. It also sought, among other relief, avoidance of alleged fraudulent transfers and indebtedness, a declaration that certain loan agreements were invalid, damages, recovery of property, and an injunction against implementing a memorandum of understanding. The liquidators alleged that the defendants’ conduct contributed to the debtors’ insolvency.

The four insurance companies had been placed in a North Carolina rehabilitation proceeding, an insurance receivership supervised by a North Carolina court. That court’s order barred people from bringing or pursuing lawsuits against the companies or their property without first obtaining permission from the North Carolina court. The liquidators filed the adversary proceeding without first obtaining that permission.

Bankruptcy Court Ruling and Appeal

The insurance companies moved to stay, or pause, the adversary proceeding as to them. They relied on the McCarran-Ferguson Act, a federal law that generally prevents federal laws from overriding state laws regulating insurance. The liquidators responded that the federal Bankruptcy Code’s automatic stay controlled under the Constitution’s rule that federal law takes priority over conflicting state law.

The bankruptcy court granted the motion to stay. It concluded that the first two parts of the applicable three-part test were satisfied: the federal law did not specifically regulate insurance, and the North Carolina law was enacted to regulate insurance. The remaining question was whether applying federal bankruptcy law would “invalidate, impair, or supersede” North Carolina insurance law. The bankruptcy court concluded that allowing the adversary proceeding to continue without North Carolina court permission would conflict with and undermine the state court’s injunction and supervisory role.

The liquidators appealed the bankruptcy court’s March 10, 2023 stay order to the district court. After the appeal began, they sought permission from the North Carolina court to proceed against the insurance companies, but that request was denied.

District Court’s Analysis

The parties agreed that the three-part test controlled and that the first two elements were met. The district court therefore addressed only whether continuing the adversary proceeding might invalidate, impair, or supersede North Carolina’s insurance laws.

The liquidators argued that the dispute primarily concerned ownership of assets and the validity of contracts, not insurance regulation. They also argued that federal bankruptcy law overrode the North Carolina anti-lawsuit injunction. The insurance companies argued that the requested damages, injunction, declaration, and recovery of property would interfere with their court-supervised rehabilitation and liquidation proceedings and with the state-law priority system.

The district court explained that disputes over whether assets belong to a bankruptcy estate generally do not trigger displacement of federal law merely because an insolvent insurer is involved. But it distinguished situations in which state law makes the state court the exclusive forum for proceedings involving an insolvent insurer or its assets and authorizes an injunction to enforce that exclusivity.

The court held that this case fell within that exception. The North Carolina injunction required prior permission before any lawsuit against the insurance companies could be brought or pursued. Allowing the adversary proceeding to continue without that permission would bypass the North Carolina court’s supervisory and gatekeeping role and would interfere with the state’s insurance rehabilitation and liquidation system. The court therefore concluded that the McCarran-Ferguson Act required federal bankruptcy law to give way to the relevant North Carolina law.

The district court declined to decide whether the adversary proceeding was actually only a contract dispute because that characterization did not affect the result. It held that the anti-lawsuit injunction independently required the stay.

Disposition

The district court AFFIRMED the bankruptcy court’s stay order. It directed the Clerk of Court to terminate the appeal and close the case. The opinion did not decide the underlying fraud, contract, tort, or fiduciary-duty claims.