(CN) - New York is trying to silence concerns over the mismanagement of Executive Life Insurance Company of New York that jeopardizes $920 million worth of funds, a group of beneficiaries say.
The state's superintendent of insurance took over Executive Life, or ELNY, in 1991 after the collapse of parent entity Executive Life Insurance Company of California.
New York placed the company in rehabilitation, transferred some of its assets to MetLife, and hired Credit Suisse to manage the remaining assets.
In December 2011, the superintendent notified annuitants that their benefits would shrink
by as much as 66 percent because ELNY's liabilities exceeded its assets by more than $1.6 billion.
Nassau County Supreme Court Judge John Galasso declared ELNY insolvent
in April 2012, and approved the state-proposed liquidation plan for the company. The judge appointed the superintendent of the New York State Department of Financial Services, formerly ELNY's rehabilitator, as ELNY's liquidator.
Under the restructuring plan, 15 percent of ELNY's policyholders stand to lose more than $920 million in benefits. Some benefits will be reduced by as much as 66 percent. Although an ELNY hardship fund has been created, it has not yet been funded.
Galasso, who refused to consider any amended or alternative restructuring plan, noted that the proposed restructuring offered ELNY payees their only chance to receive the highest possible present value for their annuity benefits.
The shortfall payees, most of whom are recipients of large structured settlement annuities stemming from serious injuries and wrongful death lawsuits, appealed the decision.
They claimed that the state mismanaged the previously healthy and well capitalized ELNY, failed to supervise it during the rehabilitation, and repeatedly filed false and misleading financial statements.
What's more, the payees said that the state denied them access to crucial data and excluded them from the process of designing a fair liquidation plan.
In November 2012, the shortfall payees filed a class action against the superintendent and his predecessors, as well as MetLife and Credit Suisse, alleging breach of fiduciary duty, fraudulent concealment, and other claims.
A month later, the state countered with a lawsuit seeking to hold the payees and their attorneys in contempt.
Edward Stone, one of the attorneys for the shortfall payees, characterized the lawsuit as an "intimidation tactic" to get his clients to drop the legal action against the state, and an attempt to avoid open conversation about the 21 years of state-supervised rehabilitation.
"We want to get people to sit at the table and track what's really going on here, but nobody really wants to talk," Stone told Courthouse News.
"The payees will not sign the restructuring agreement until they get a response for the appeal, which is due any day now."
New York said the ELNY class action lawsuit violates an injunction provision in the ELNY liquidation order signed by Judge Galasso. But the shortfall payees countered that the suit was not filed against the ELNY estate or its assets, and therefore did not violate the injunction.
Stone said the state should not be entitled to an absolute grant of immunity for the past 21 years.
"What is most shocking to victims is that the structured settlement funds set aside for future medical expenses and care were wasted by folks charged with protecting their interests," Stone said in a statement. "When New York State took over ELNY in 1991, the company was financially in the black, but decades of neglect and fiscal mismanagement by the NYLB [New York Liquidation Bureau] led to this horrible scenario for victims. For the state to give these suffering victims a legal ultimatum and then sue them for asking for justice is unconscionable in my view. Billion dollar deficits are not created overnight."
The liquidation plan creates a new company, GABC, based in Washington, D.C., to collect and administer payments. New York's superintendent of financial services would supervise the entity, owned and controlled by state life insurance guaranty funds.
New York designed the captive insurance company in D.C. to avoid regulation and oversight, the shortfall payees and their attorneys claim.
Stone represents beneficiaries in different states, some of whom were severely injured or lost loved ones in car- and work-related accidents years ago.
One of his clients, Dana Estes, of Southern California, suffered third- and fourth-degree burns over 65 percent of his body as a toddler when a defective water heater ignited gasoline vapors in the garage of his family's home. He says the projected 58 percent cut to his benefits would affect his family and their plans.
"I have had the luxury of not having a job or a paid career per se," Estes told Courthouse News. "What I do is I volunteer my time to a nonprofit, which assists other burn victims, mostly children. I have a family, a wife and son, and we are looking to foster a child. The money is very important for us because we are looking to expand our family."
Stone said many other shortfall payees depend on ELNY payments for basic living expenses and medical care.
But the outcome of the ELNY liquidation hangs on the results of the continuing litigation.
"If we must, we will take this fight to the highest levels of our nation's legal systems to obtain justice for nearly 1,500 ELNY victims scattered across all 50 states and three foreign nations," said Roger Christensen, a representative of the Utah-based Christensen & Jensen, which also represents shortfall payees, in a statement. "The superintendent is now asking us to be held in contempt for what he and his predecessors should have been doing all along, protecting these good people. They put their trust in the leadership of New York state and were betrayed."