Maryland Insurance Guaranty Ass'n v. Muhl

WILNER, Judge. This dispute is between the Maryland Insurance Guaranty Association (MIGA) and the State Insurance Commissioner, acting as receiver for the insolvent Maryland Indemnity Insurance Company (Md. Indemnity). It involves the status of certain claims made by MIGA and others in the insolvency proceeding. Md. Indemnity was declared insolvent and placed in receivership by the Circuit Court for Baltimore City effective December 16, 1977.

Pursuant to Md.Code Ann. art. 48A, § 145, the Commissioner was appointed as receiver and directed by the court to liquidate the business of the compa ³⁶¹ ny in accordance with applicable provisions of the State Insurance Code. MIGA is an unincorporated association created by the General Assembly in 1971 “to provide a mechanism for the prompt payment of covered claims under certain insurance policies and to avoid financial loss to claimants or policyholders because of the insolvency of an insurer____” Art. 48A, § 504(a). It stands in the shoes of the insolvent insurer and, subject to applicable policy limits and conditions, is liable for “covered claims” that could have been brought against that insurer. § 508(a). To the extent that it incurs loss and expense, it may seek reimbursement from the assets of the insolvent insurer by making a claim in the receivership proceeding. § 511.

See a related discussion in Maryland Life & Health Ins. v. Perrott, 301 Md. 78 , 482 A.2d 9 (1984). In accordance with its governing statute (art. 48A, §§ 504-519) and its plan of operation, MIGA undertook the adjustment, defense, and payment of claims made against Md. Indemnity, eventually paying claims and incurring expenses of some $2.7 million. MIGA, in turn, filed a claim in the Md. Indemnity liquidation proceeding, seeking a priority status pursuant to art. 48A, § 158A. Section 158A does indeed purport to give the claims of MIGA and certain other claimants a priority over all other claims except those for expense of administration, wages, and taxes.

The receiver rejected MIGA’s asserted priority status, however, on the basis that § 158A, which was enacted in 1978 and thus took effect after the order for liquidation, did not apply. That is the first area of dispute. Art. 48A, § 161(b) provides, in relevant part, that after entry of an order for liquidation, the Commissioner must notify all persons having claims against the insolvent insurer to file such claims with the Commissioner “at a place and within the time specified in the notice, or that such claims shall be forever barred.” The time specified in the notice “shall be as fixed by the court for filing of claims____” ³⁶² Section 149(2) of art. 48A requires that all claims filed in Maryland shall be filed with the receiver “on or before the last date for filing as specified in this subtitle.” Pursuant to court order, the Commissioner gave public notice to all potential claimants to file their claims with his special deputy by June 30, 1978 — the date specified in the court order. That date, then, by reason of § 149(2), became “the last date” for filing claims.

During the liquidation process, a number of claims were filed by or on behalf of persons allegedly injured through the negligence of individuals insured by Md. Indemnity. Those claims, based on Md. Indemnity’s contractual liability for the negligent acts of its insureds, were referred to MIGA by reason of MIGA’s vicarious statutory liability. To the extent that those claimants had available to them uninsured motorist benefits under their own insurance policies, however, MIGA rejected the claims as premature; it took the position that the claimants had to exhaust their uninsured motorist coverage before making claims against MIGA. See art. 48A, § 512(a), which seems rather clearly to support that view.

Notwithstanding § 512(a), the Commissioner disagreed with MIGA’s position on that and a number of other issues. On May 9, 1978, he filed in the liquidation proceeding a petition for declaratory decree seeking, among other things, a declaration that MIGA was obligated to pay those claims without regard to any uninsured motorist coverage in the claimants’ own policies. On November 1, 1979, the court resolved that controversy by determining that claimants with uninsured motorist coverage must first exhaust that coverage and were entitled to seek recompense from MIGA only for the unreimbursed part of the claim. No appeal was apparently taken from that decree, and so, acting in accordance with it, the various insurers began paying uninsured motorist benefits to their insureds.

They thereafter attempted to file claims in the liquidation proceeding for recompense. ³⁶³ These claims, by the insurers, were filed long after the June 30, 1978, deadline stated in the Commissioner’s notice, and MIGA took the position that they were therefore barred. The Commissioner disagreed. He did not regard those claims as even being in existence prior to the November, 1979 decree, and thus viewed the barring of the claims as inequitable. That is the second area of dispute.

To resolve these issues, the Commissioner filed, in the liquidation proceeding, another petition for declaratory decree. In Count One, he asked for a declaration that § 158A of art. 48A “does not apply to a liquidation proceeding commenced before [its] effective date” and that MIGA “is therefore not entitled to a priority in the distribution of the Receivership’s assets over the general creditors.” In Count Two, he asked the court to construe §§ 149(2) and 161(b) of art. 48A and clarify the rights of the parties “as regard claims filed or presented after [June 30, 1978] but which claims were not cognizable or ascertainable and thus not properly presentable prior to [that date].” The court gave each side part of the loaf. On Count One, it ruled in favor of the Commissioner, declaring that § 158A could not be applied in the pending proceeding because it affected substantive and vested rights. That made MIGA a general creditor.

On Count Two, it sided with MIGA, concluding that claims filed after June 30, 1978, were barred. As a result of those rulings, we have cross-appeals. I. Application Of § 158A Art. 48A, § 156 provides: “The rights and liabilities of the insurer and of its creditors, policyholders, stockholders, members, subscribers and all other persons interested in its estate shall, unless otherwise directed by the court, be fixed as of the date on which the order directing the liquidation of the insurer is filed in the office of the clerk of the court which made the order, subject to the provisions of this subtitle with respect to the rights of claimants holding contingent claims.” (Emphasis added.) ³⁶⁴ As of the date of the liquidation order — December 16, 1977 — a claim by MIGA for reimbursement would not have been entitled to any priority over the claims of other general creditors holding non-contingent claims. The only priorities at that time were for special deposit claims (§ 150(3)), secured claims (§ 150(4)), certain wages owed to the officers and employees of the insolvent insurer (§ 158), taxes, and expenses of administration.

By 1978 Md. Laws, ch. 798, however, effective July 1, 1978, the General Assembly enacted § 158A, which gives a priority status to three other types of claims: (1) subject to applicable policy limits, those of policyholders, beneficiaries, and insureds arising from and within the coverage of policies issued by the insolvent insurer, (2) liability claims against insureds that are within the coverage and policy limits of policies issued by the insolvent insurer, and (3) claims of MIGA, its counterpart for health and life insurance (Maryland Life and Health Insurance Guaranty Association), and any similar organization in another State. If § 158A is applicable, we are told, MIGA will get virtually all of the unsecured assets of Md. Indemnity and the other creditors will receive little or nothing. In Janda v. General Motors, 237 Md. 161 , 205 A.2d 228 (1964), the Court of Appeals set forth four principles for determining whether a statute is to be applied “retrospectively or prospectively”: (1) ordinarily, “a change affecting procedure only, and not substantive rights ... applies to all actions ... whether accrued, pending or future, unless a contrary intention is expressed”; (2) ordinarily, “a statute affecting matters or rights of substance will not be given a retrospective operation as to transactions, matters and events not in litigation at the time the statute takes effect” unless the Legislature expressly directs otherwise or unless its “manifest intention ... could not otherwise be gratified”; ³⁶⁵ (3) even if the Legislature so intended, a statute “will not be applied retrospectively to divest or adversely affect vested rights ... ”; and (4) a statute which “affects or controls a matter still in litigation when it became law will be applied by the court reviewing the case at the time the statute takes effect although it was not yet law when the decision appealed from was rendered, even if matters or claims of substance (not constitutionally protected), as distinguished from matters procedural or those affecting the remedy are involved, unless the Legislature intended the contrary.” Id,., 168-69, 205 A.2d 228 . Having stated these principles, the Janda Court immediately recognized that “[t]he various categories of matters procedural or those concerning the remedy, and matters of substance, vested or accrued, or not vested or accrued, as well as rights protected by the due process clause, tend to overlap in many instances and are not always easy to accurately recognize or to delineate or define in a given instance.” Id., 170 , 205 A.2d 228 .

In T & R Joint Ven. v. Office, Plan. & Zon., 47 Md.App. 395 , 424 A.2d 384 (1980), we had occasion to review Janda and its progeny. We observed that some of the decisions were not easy to reconcile, and concluded that: “Janda really involves an admixture of both retro- and pro-spectivity; and when seen in that light, some of the facially illogical results flowing from it become a bit easier to understand and accept. It involves retroactive application in the sense that the issue before the court is ultimately resolved on the basis of principles that were not in being, or were not controlling, at the time the action was commenced (or at the time the underlying transaction occurred). But to the extent that it merely requires the court to apply the law currently in effect to a matter still before it, and thus not yet settled, the applica ³⁶⁶ tion is more in the nature of a prospective and current one.

Much of this, of course, is semantics. All of the discussion about retroactivity, of form or procedure versus substance, ultimately comes down to two things: (1) did the body that enacted the new law (whether legislative, executive/administrative, or judicial) give any clear indication as to whether or how it should be applied to pending matters, and (2) would it be basically unfair to so apply it?” Id., 406-07, 424 A.2d 384 . We found compelling the analysis of the Supreme Court in Bradley v. School Board of Richmond, 416 U.S. 696, 711, 717 , 94 S.Ct. 2006, 2016, 2019 , 40 L.Ed.2d 476 (1974), that “a court is to apply the law in effect at the time it renders its decision, unless doing so would result in manifest injustice or there is statutory direction or legislative history to the contrary” and that the issue of “manifest injustice” centered on three factors — “(1) the nature and identity of the parties, (2) the nature of their rights, and (3) the nature of the impact of the change in law upon those rights.” T & R Joint Ven., 47 Md.App. at 407 , 424 A.2d 384 . This is not really a different test; it continues to focus first on any discernible legislative intent and second on the effect of applying the statute to existing proceedings or transactions.

The second consideration is simply expressed in more general terms and does not turn solely upon the sometimes hairsplitting determinations of what “rights” are “substantive” as opposed to “procedural” or “remedial” and what rights, whether or not “substantive,” are “vested.” Although in at least two later cases (Spielman v. State, 298 Md. 602 , 471 A.2d 730 (1984), and Vytar Associates v. City of Annapolis, 301 Md. 558 , 483 A.2d 1263 (1984)), the Court of Appeals has mentioned the “substantive” and “vested” rights criteria, it has not rejected the approach taken by the Supreme Court in Bradley or by us in T & R Joint Ven., and we therefore continue to adhere to it. See ³⁶⁷ Courtney v. Richmond, 55 Md.App. 382, 390-91 , 462 A.2d 1223 (1983). The first criterion in any analysis is legislative intent: did the Legislature intend the statute to be applied in a pending proceeding — in this case, a proceeding in which the order of liquidation was entered and the “rights and liabilities” of all persons interested in the insolvent estate became “fixed” prior to the effective date of the law? We find no clear expression of legislative intent one way or the other with respect to § 158A.

It carried the normal effective date of July 1, and there is no language in either the statute itself or in the sparse legislative history indicative of any particular intent in this regard. Although the bill was enacted in the next regular legislative session following the declaration of Md. Indemnity’s insolvency, that may have been a mere coincidence. The language of the statute seems to have been drafted by or for the National Committee on Insurance Guaranty Funds and proposed by that Committee in 1977 to the National Association of Insurance Commissioners. See 1977 NAIC Proceedings, Vol.

II, p. 366. Similar legislation was enacted in other States between 1977 and 1980. See Mass.Code, ch. 175, § 180F; NJ.Code, § 17:30C-26; R.I.Code § 27-14-22. There thus being no clear articulation of legislative intent, we turn to examine the effect of applying the statute to the instant proceeding.

As a prelude, we note the case of Mass. Motor Vehicle, Etc. v. Com’r of Ins., 379 Mass. 527 , 400 N.E.2d 221 (1980). The issue there was whether the receiver of an insolvent insurer or the Massachusetts counterpart to MIGA was entitled to proceeds owed to the insurer by a reinsurer. The insurer had been declared insolvent in 1974.

The Court pointed out in n. 9 at 224 that the case was not governed by the Uniform Insurers Liquidation Act (the Maryland counterpart of which is found in art. 48A, §§ 132, 145-148, 150, and 151). It then mentioned the Massachusetts version of § 158A (c. 175, § 180F, see ante), also enacted in 1978, allowing the Mass. Insurers Insolvency Fund “a preferred creditor status in insurer insolvencies,” and stated flatly, ³⁶⁸ “If the [reinsurance] proceeds were an asset of [the insolvent insurer], the 1978 amendment would grant the Fund preferred status against those proceeds and all other assets in insolvencies governed by the Uniform Act.” That statement certainly suggests a belief by the Court that, if the proceeding had been governed by the Uniform Act, of which the 1978 amendment was considered to be a part, the amendment would be applicable, and, notwithstanding its enactment long after the commencement of the proceeding, would give the Fund a priority status. In context, of course, that statement is clearly not a holding, but merely dicta offered ex cathedra and without any discussion of the issue raised here.

We do not know if the point was even argued before the Court. Under the circumstances, we do not regard it as helpful precedent. The Commissioner’s position is grounded on § 156 which, as noted, states that, “unless otherwise directed by the court,” the “rights and liabilities” of the creditors and others interested in the insolvent estate are “fixed” as of the date the liquidation order is filed. Ignoring the caveat, he regards those rights as irretrievably fixed and thus views any attempt to create new preferences after that date as affecting substantive and vested rights.

Au contraire, says MIGA: the reordering of priorities or preferences in a pending insolvency proceeding is remedial only and does not affect substantive or vested rights. Most of the cases in this area arose under the pre-1978 Federal bankruptcy laws, which espoused the same principle as § 156, i.e., “the rights of the creditors of a bankrupt become fixed on the date of the filing of the bankruptcy petition.” In re Hansen Bakeries, 103 F.2d 665, 666-67 (3d Cir.1939); In re Tampa Wholesale Electric, Inc., 409 F.2d 501 (5th Cir.1969). In enacting the current bankruptcy law, Congress made clear that, as a general rule, the new law would not apply to pending proceedings — that a case commenced under the former law “and all matters and proceedings in or relating to any such case, shall be conducted and ³⁶⁹ determined under [the former law] as if this Act had not been enacted.” P.L. 95-598, § 403(a). That was not always the case under the former law, however.

In enacting certain amendments to the 1898 statute, Congress indicated a contrary intent, that the amendments should apply to pending proceedings. Given that intent, the question was raised of whether those amendments could validly be so applied where the effect of doing so would be to reorder the priorities among creditors. An early case adopting the view that the new law could be so applied is City of Chelsea v. Dolan, 24 F.2d 522 (1st Cir.), cert. denied 277 U.S. 606 , 48 S.Ct. 602 , 72 L.Ed. 1012 (1928). The debtor was adjudicated bankrupt in April, 1926; it owed taxes to the City of Chelsea and wages to its employees but did not have sufficient resources to pay both.

As of the date of adjudication, taxes had a priority over wages; however, a new law, which became effective in August,