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American Motorists Insurance Co. v. North Plainfield Board of Education

Superior Court of New Jersey, Appellate Division

November 12, 2013



Argued October 30, 2013

On appeal from the Superior Court of New Jersey, Law Division, Somerset County, Docket No. L-543-05.

Robert C. Epstein argued the cause for appellant (Greenberg Traurig, LLP, attorneys; Mr. Epstein, on the briefs).

John F. Casey argued the cause for respondent (Wolff & Samson PC, attorneys; Mr. Casey and Darren Grzyb, on the brief).

Before Judges Fuentes, Fasciale and Haas.


We granted leave to appeal from an order dismissing without prejudice a counterclaim filed by defendant North Plainfield Board of Education (the "Board") against plaintiff American Motorists Insurance Company ("AMIC"). Judge Edward M. Coleman entered the order pursuant to the Uniform Insurers Liquidation Act (the "Act"), N.J.S.A. 17:30C-1 to -31, and permitted the Board to file its counterclaim in a rehabilitation proceeding pending in Illinois. We affirm.

The underlying dispute between the parties flowed from a school construction project (the "project") in which the Board terminated the services of its general contractor (the "GC"). AMIC, the GC's surety, entered into an agreement with the Board to finish the project and filed a book-account complaint against the Board seeking progress payments that the Board withheld. The Board counterclaimed alleging that it was entitled to liquidated damages as a set-off against any potential award obtained by AMIC.

AMIC then became insolvent. The Illinois judge presiding over the rehabilitation proceedings issued a rehabilitation order, appointed the Illinois Director of Insurance as the Rehabilitator, and enjoined all claims against AMIC other than those in the Illinois rehabilitation proceedings. In response, AMIC moved before the Law Division to dismiss the Board's counterclaim, arguing that the reciprocity provisions in the Act precluded the court from adjudicating the Board's counterclaim in New Jersey. The Board opposed the motion contending that its counterclaim constituted a "mutual debt" and was therefore exempt under the Act. As a result, the Board argued that the Illinois court's rehabilitation order did not bar it from proceeding on its counterclaim in New Jersey.

Judge Coleman conducted oral argument, dismissed the counterclaim without prejudice, and issued a comprehensive written opinion. The judge agreed with AMIC, rejected the Board's contention that the Act was inapplicable, and concluded that the Board's counterclaims must proceed in Illinois pursuant to the Act.

On appeal, the Board maintains that the Act is inapplicable because its counterclaim constitutes a mutual debt. The Board also argues that the judge misapplied the principles of full faith and credit and comity. We review legal conclusions of the trial court de novo, without any special deference. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan , 140 N.J. 366, 378 (1995). Against this standard, we see no error and affirm substantially for the reasons expressed by Judge Coleman. We add the following remarks.

"'The Act provides for a uniform, orderly and equitable method of making and processing claims against defunct insurers and provides for a fair procedure to distribute the assets of defunct insurers.'" Superintendent of Ins. of N.Y. v. Int'l Equip. Leasing, 247 N.J.Super. 119, 121 (App. Div.) (citation omitted), certif. denied, 126 N.J. 389 (1991). Upon adoption of the Act, New Jersey "specifically recognized the benefits of centralizing the management over delinquency proceedings in the courts of one state." Ballesteros v. N.J. Prop. Liab. Ins. Guar. Assoc ., 530 F.Supp. 1367, 1371 (D.N.J.), aff'd 696 F.2d 980 (3d Cir. 1982). Illinois also recognized the importance of uniform treatment of claimants against financially troubled insurers. 215 Ill. Comp. Stat. Ann. 5/221.10. New Jersey and Illinois are considered "reciprocal states" regarding the Act. See N.J.S.A. 17:30C-1f (stating that "'[r]eciprocal state' means any state other than this State in which . . . the provisions of the [the Act] . . . are in force"); see also 215 Ill. Comp. Stat. Ann. 5/221.1(1)(b) (defining "reciprocal states" in a similar manner).

Under both states' versions of the Act, title to all property of an insolvent insurer vests with the Commissioner or Director of Insurance as of the date of entry of a rehabilitation order. N.J.S.A. 17:30C-15b; 215 Ill. Comp. Stat. Ann. 5/191. Parties must bring all claims against that insurer in the State where the rehabilitation proceeding is pending, unless an ancillary receiver has been appointed. Int'l Equip. Leasing, supra, 247 N.J.Super. at 125. Here, no ancillary receiver has been appointed in New Jersey. Thus, the Board must bring its counterclaim in Illinois, where the rehabilitation proceeding is pending. "The sole exception to the requirement that the [rehabilitating] court maintain exclusive jurisdiction involves mutual debts between the insurer and the claimant." Id . at 126 (citing N.J.S.A. 17:30C-27). We see no mutuality of debts using New Jersey or Illinois law.

Relying on Illinois law, the Board argues that mutual debts and credits be "set off or counterclaimed." 215 Ill. Comp. Stat. Ann. 5/206. Under Illinois case law, mutuality requires that debts be owed in the same capacity and at the same time. E.g., Lincoln Towers Ins. Agency, Inc. v. Boozell, 291 Ill.App.3d 965, 684 N.E.2d 900, 904-05, 225 Ill.Dec. 909 (Ill.App.Ct. 1997), appeal denied, 175 Ill.2d 529, 689 N.E.2d 1140, 228 Ill.Dec. 719 (1997); Reliance Ins. Co. v. Shriver, Inc., 224 F.3d 641, 648 (7th Cir. 2000).

The Board analogizes this case to bankruptcy proceedings, wherein any pre-bankruptcy debts may be set off only by other pre-bankruptcy credits, but not by claims arising after the filing. There is, then, a distinction between pre-liquidation debts and post-liquidation debts. Illinois case law makes clear that the pre-liquidation debts must be "absolutely owing" or a "definite liability [must have already] accrued." Stamp v. Ins. Co. of N. Am ., 908 F.2d 1375, 1380 (7th Cir. 1990) (citation omitted). The Board is unable to show that its liquidation claim was "absolutely ow[ed]" prior to the entry of the RO. Thus, no mutuality exists under Illinois law.

The Board's counterclaim is also not exempt from the Act under New Jersey law. N.J.S.A. 17:30C-27 provides:

a. In all cases of mutual debts or mutual credits between the insurer and another person in connection with any action or proceeding under this act, such credits and debts shall be set off and the balance only shall be allowed or paid, except as provided in subsection b. below.
. . . .
b. No offset shall be allowed in favor of any such person where
(1) The obligation of the insurer to such person would not at the date of the entry of any liquidation order, or at such other date determined by the court for fixing the rights and liabilities with respect to the estate of the insurer, have entitled him to share as a claimant in the assets of the insurer.
[(Emphasis added).]

Pursuant to Subsection b(1), the Board would be permitted to assert a claim for liquidated damages in New Jersey if it had proved that, prior to the entry of the RO, it was entitled to payment. See Newman v. Hatfield Wire & Cable Co ., 113 N.J.L. 484, 490-91 (E. & A. 1934) (indicating that set-off is available only when a party can show that the party had a right to the money prior to insolvency). Therefore, the Board's counterclaim does not qualify as a mutual debt.

Judge Coleman dismissed the Board's counterclaim after analyzing the Act and controlling case law. Although the Board argues that the judge misapplied the principles of comity and full faith and credit, Judge Coleman correctly indicated that these doctrines bolstered his conclusion. Thus, the Board's argument is misplaced as the judge relied on the plain text of the Act. After a thorough review of the record and consideration of the controlling legal principles, we conclude that the Board's remaining arguments are without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).


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