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In re Rehabilitation of Mutual Benefit Life Insurance Co.

Decided: July 8, 1992.

IN THE MATTER OF THE REHABILITATION OF MUTUAL BENEFIT LIFE INSURANCE COMPANY


On appeal from the Superior Court of New Jersey, Chancery Division, Mercer County.

O'Brien, Havey and Conley. The opinion of the court was delivered by Conley, J.s.c. (temporarily assigned).

Conley

The opinion of the court was delivered by

CONLEY, J.S.C. (temporarily assigned).

On leave granted, First Tennessee Bank National Association, Maryland National Bank and Citizens and Southern National Bank of South Carolina appeal two interlocutory orders of the Chancery Division entered December 12, 1991 restraining them from foreclosing against certain out-of-state property in which Mutual Benefit Life Insurance has an interest both directly and through a wholly owned subsidiary and the financing for which it is a guarantor. Appellants are out-of-state indenture trustees of bonds issued in connection with these properties. The restraints were issued in response to a proceeding commenced by the Commissioner of Insurance, with the consent of Mutual Benefit Life (MBL) and pursuant to N.J.S.A. 17B:32-1 to 23, for the rehabilitation of MBL. We affirm.

By order entered July 16, 1991, the Commissioner was appointed as MBL's Rehabilitator and authorized to exercise "all the powers and authority expressed or implied under the provisions of N.J.S.A. 17B:32-1 et seq. " In order to preserve the business and property of MBL pending rehabilitation, the order further authorized the Commissioner to: (1) take possession of MBL's real and personal property "of any nature"; (2) conduct its business; and (3) remove the causes and conditions which had made rehabilitation necessary. The order restrained "all . . . persons or entities of any nature" from, among other things: (1) bringing or maintaining any action against MBL; (2) making or executing any levy upon MBL's property; (3) selling, transferring, wasting or otherwise disbursing or disposing of or encumbering the assets and property of any nature of MBL except as directed by the Rehabilitator or ordered by the court; and (4) interfering in any way with the Commissioner's discharge

of his duties as Rehabilitator. There was a separate provision specifically enjoining "[a]ll secured creditors or parties, pledgees, lien holders, collateral holders, or other persons claiming secured, priority or preferred interests in any property or assets of MBL including any governmental entity" from taking any steps "whatsoever" to transfer, sell, encumber, attach, dispose or exercise "purported" rights in or against any property or assets of MBL.

On August 7, 1991, the trial Judge entered an order reaffirming the Commissioner's authority to act as Rehabilitator until further order of the court. The restraints in the July 16 order were continued on an interlocutory basis, with certain modifications relating to policy loans and the Rehabilitator's efforts to sell MBL's "group business." The August 7, 1991 order included a separate paragraph governing "hardship distributions" and a separate paragraph enabling parties in interest to file "any application for relief" with the Commissioner and, if dissatisfied with the Commissioner's decision, to obtain review thereof by the trial Judge.

Following this order, the Commissioner sought a determination as to whether the July 16 and August 7 restraints applied to real estate partnerships in which MBL and its subsidiary had an interest and for which MBL had guaranteed partnership indebtedness. Pursuant thereto, on October 16, 1991, an order to show cause returnable October 30, 1991 was entered with further temporary restraints specifically enjoining all indenture trustees acting on behalf of bondholders from "commencing or continuing foreclosure actions or other litigation against, or interfering with the property of: (i) real estate partnerships owned in whole or in part by the Mutual Benefit Life Insurance Company in Rehabilitation, or by its wholly owned subsidiary, Muben Realty Company, and (ii) real estate partnerships for which Mutual Benefit Life Insurance Company is a guarantor of partnership indebtedness . . . ."

On the return date, appellants and a number of other out-of-state banks, acting in their capacity as trustees for the bondholders who had financed real estate projects located outside New Jersey, opposed the motion.*fn1 Following extensive arguments on the motion, the trial Judge issued a written opinion in which he granted respondent's motion, concluding that the trustees were temporarily restrained from instituting any action with respect to: (1) property owned by a partnership in which MBL or Muben Realty Company (Muben) had an interest or (2) property owned by a partnership the indebtedness for which MBL had issued a guaranty. An order imposing such restraints was entered on December 12, 1991.

Also on December 12, 1991, a supplemental order was entered specifying that appellants could take action against MBL property in accordance with the relief provisions of the August 7, 1991 order. It further specified that appellants could commence actions under statutes similar to N.J.S.A. 17B:32-16 (§ 3 of the Uniform Insurers Liquidation Act), allowing claims against insurers to be presented to ancillary receivers in other states where such are appointed.

The critical facts are as follows. MBL, one of the largest insurance companies in the United States with over 400,000 policy holders, is domiciled in New Jersey and regulated by the New Jersey Commissioner of Insurance. Over the years it has invested $5 billion in real estate projects located throughout the United States. It holds and manages these investments through wholly-owned subsidiaries. Representing approximately

50% of its investment portfolio, the Commissioner asserts these projects have been adversely affected by the economy.

Forty-four of MBL's various real estate projects in 15 states are financed by bonds issued by various state agencies for the construction of low and moderate income housing. In thirty-three of these projects, MBL, as a limited partner, and its wholly-owned subsidiary Muben, as a general partner, hold 50% or 100% ownership interests through limited partnerships. In the remaining eleven projects, MBL and Muben hold second mortgages through limited partnerships. MBL is a guarantor on the loan indebtedness of all forty-four partnerships.

Appellants are the indenture trustees for bonds issued by state agencies or housing authorities in Tennessee, Maryland and South Carolina, the proceeds of which were used to finance the real estate projects in question. In addition to MBL's guarantees, the housing authorities obtained mortgages on the properties to secure the authorities' loans to the partnerships. The authorities then assigned their rights under the mortgages and guarantees to appellants under the trust indentures.

Each guaranty, given by MBL "in consideration of the promises and in order to enhance the marketability of the Bonds and thereby achieve interest cost and other savings to the Developer and Guarantor and as an inducement to the purchase of the Bonds by all who shall at any time become owners of the Bonds," is "independent, absolute, irrevocable and unconditional . . . ." In the event of default, the guaranty provides:

In the event of the exercise of the guaranty, the trustees are required to give notice to MBL at "520 Broad Street, Newark, New Jersey."

Entered into by MBL "for the benefit of the Administration and its successors or assigns," each guaranty specifically authorizes not only the Administration, but its successors and assignors to "enforce performance and observance of the Guaranty to the same extent as if they were parties signatory hereto." In recognition that the guaranty is given by "a corporation organized and existing under the laws of the State of New Jersey," each guaranty contains a specific representation that MBL:

Each guaranty, significantly, specifically provides that the "execution, delivery and performance" of the guaranty would not conflict with "any existing law, rule, regulation, ordinance, judgment, order, decree or other legal requirement to which the Guarantor is subject." Obviously aware of the interrelationship between MBL as guarantor and its role in the partnerships with Muben, the guaranty further acknowledges that "Muben Realty Company, a general partner of the Developer, is a wholly owned subsidiary of a holding company of the Guarantor." 0 Critically, the guaranty states "[t]his Guaranty shall be governed by the substantive laws of the State of New Jersey."

The specifics of each transaction involving MBL and appellants are as follows:

First Tennessee Bank National Association

First Tennessee Bank National Association (First Tennessee) is the trustee under a trust indenture dated April 1, 1990 between the Health, Education and Housing Facility Board of Shelby County, Tennessee (Shelby) and Arbors of Hickory

Ridge, Ltd., (Hickory), developer of the Arbors of Hickory Ridge Apartments. Hickory is a Tennessee limited partnership in which Muben is the sole general partner and MBL the sole limited partner. Hickory executed a loan agreement with Shelby evidencing an indebtedness of $17,190,000, secured by a deed of trust and a security agreement (with assignment of leases and rents) on the apartments, in favor of Shelby and MBL. MBL guaranteed the $17,190,000 loan to ...


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