Supreme Court, Orange County, April 23, 2018

Feldman, Kleidman, Coffey, Sappe & Regenbaum, LLP, Fishkill (Marsha S. Weiss of counsel), for Barbara Spreitzer, FNP, and another, defendants.

Wingate, Russotti, Shapiro & Halperin, LLP, New York City (Lauren Pennisi of counsel), for plaintiffs.

Sholes & Miller, LLP, Poughkeepsie (Angela Thompson-Tinsley of counsel), for Orange Regional Medical Center, defendant.

Catania, Mahon, Milligram & Rider, PLLC, Newburgh (Steve Milligram of counsel), for Joseph Racanelli, M.D., defendant.

Francine L. Semaya, New York City, for Raymond G. Farmer, Director of the South Carolina Department of Insurance, nonparty liquidator.

It is ordered that the motion is decided as follows:^[FN1]

Procedural History

The issues presented by the motion made in the above-captioned action affect at least 15 medical malpractice actions pending throughout the Ninth Judicial District (comprised of Westchester, Putnam, Rockland, Orange and Dutchess Counties) in which a defendant obtained medical malpractice insurance from the Oceanus Insurance Company. Because Oceanus is not a party to these medical malpractice actions, and the court's case management system does not record nonparties, it is possible that there are additional actions which have yet to be identified. The numerous medical malpractice actions which{**60 Misc 3d at 276} have been identified are set forth at the conclusion of this decision and order.

Oceanus was formed in 2004 as a "risk retention group" and was domiciled in South Carolina. It has conducted business in numerous states, including New York. On August 29, 2017, Oceanus filed for liquidation in South Carolina.^[FN2] On September 21, 2017, Hon. L. Casey Manning of the Court of Common Pleas, Fifth Judicial Circuit of the State of South Carolina, Richmond County, entered an order in civil action No. 2017-CP-40-05195, denominated as an "Order Commencing Liquidation Proceedings & Granting An Injunction & Automatic Stay of [*2]Proceedings" (the order).^[FN3] At the same time, the South Carolina court's appointed liquidator issued a "Notice of Cancellation of All Policies," which advised all policyholders that, due to the order, "Oceanus will no longer defend or pay for the defense of its insured, and therefore any insured in such situation should make arrangements to employ independent counsel to defend themselves against any legal action which would otherwise be covered under the Oceanus policy."

Thereafter, counsel for several defendants in actions pending in the Ninth Judicial District (collectively, the Oceanus defendants) contacted the court, by letter or otherwise, to request that actions be stayed during the pendency of the liquidation proceedings in South Carolina. In order to promote fairness and ensure that a consistent approach was taken in the Ninth Judicial District with respect to these cases, by Administrative Directive dated October 7, 2017, Hon. Alan D. Scheinkman, J.S.C., then Administrative Judge of the Ninth Judicial District, created the "Oceanus Part" to centralize and hear any applications regarding the order.

An initial hearing regarding requests for stays of actions pending against the Oceanus defendants was held before Justice Scheinkman on October 31, 2017. The court heard argument from counsel for plaintiffs and the Oceanus defendants and counsel for the liquidator. At that time, the court indicated that if any plaintiffs wished to consent to a stay, discontinuance of proceedings, or severance of the claims against the Oceanus defendants, the court would approve such a stipulation. The court further advised the parties that in the absence of such a stipulation, a motion to stay the proceedings would{**60 Misc 3d at 277} be required. The court established a briefing schedule for any such motions. Further, in the interest of judicial economy and recognizing that a decision in one action would create a precedent for all others in the Ninth Judicial District, the court granted leave for any interested party to submit papers in support of or in opposition to any motion for a stay, irrespective of whether a motion was made in the same action in which the interested party was a named party.

Before the instant motion was fully submitted, on January 1, 2018, Justice Scheinkman was appointed Presiding Justice of the Appellate Division, Second Department, and accordingly, he was no longer available to hear the motion. By directive of Hon. Michael V. Coccoma, Deputy Chief Administrative Judge for courts outside New York City, serving as Acting Administrative Judge of the Ninth Judicial District, the undersigned was designated to preside over the Oceanus Part and any pending applications related to the Oceanus liquidation.

On February 2, 2018, a further hearing was held before the court. On February 8, 2018, Judge Manning issued a subsequent order in the liquidation proceedings.

The South Carolina Orders

The order provides that Oceanus is "officially declared insolvent" and that it is[*3]"dissolved." The order, inter alia, prohibits the "waste of the insurer's assets," "[t]he institution or further prosecution of any actions or proceedings," "obtaining of preferences, judgments, attachments, garnishments, or liens against the insurer, its assets, or its policyholders," "levying of execution against the insurer, its assets, or its policyholders," and "[a]ny other threatened or contemplated action that might lessen the value of the insurer's assets or prejudice the rights of policyholders, creditors, or shareholders, or the administration of any proceeding under Chapter 27 of Title 38 of the South Carolina Code."

The order appointed Raymond G. Farmer, the Director of the South Carolina Department of Insurance, as liquidator of Oceanus. It conferred on him various powers and responsibilities for handling Oceanus' assets and liabilities, and established a "Bar Date" by which proofs of claim must be filed. That date was March 20, 2018.

The order reads in pertinent part as follows:

"Notice is hereby given that pursuant to S.C. Code Ann. §§ 38-7-70 & -430 (2015), the Court grants an injunction and automatic stay applicable to all{**60 Misc 3d at 278} persons and proceedings, other than the Liquidator, which shall be permanent and survive the entry of the Order and which prohibits:

"1) The transaction of further business;

"2) The transfer of property;

"3) Interference with the Liquidator or with a proceeding under Chapter 27 of Title 38 of the Code;

"4) Waste of the insurer's assets;

"5) Dissipation and transfer of bank accounts;

"6) The institution or further prosecution of any actions or proceedings;

"7) The obtaining of preferences, judgments, attachments, garnishments, or liens against the insurer, its assets, or its policyholders;

"8) The levying of any execution against the insurer, its assets, or its policyholders;

"9) The making of any sale or deed for nonpayment of taxes or assessments that would lessen the value of the assets of the insurer;

"10) The withholding from the receiver or books, accounts, documents, or other records relating to the business of the insurer; or

"11) Any other threatened or contemplated action that might lessen the value of the insurer's assets or prejudice the rights of policyholders, creditors, or shareholders, or the administration of any proceeding under Chapter 27 of Title 38 of the south Carolina Code" (order at 9-10).

On February 8, 2018, Judge Manning issued a subsequent order, apparently in response to the hearings held in New York and elsewhere (the clarification order).

The clarification order states as follows:

"It has been brought to the attention of this Court that there is some confusion among the Bench and Bar in other jurisdictions as to whether the injunction and automatic stay set forth in the Order which is 'applicable to all persons and proceedings' and which prohibits, among other things, 'the institution of further prosecution of any actions or proceedings' includes prohibiting actions against the policyholders of Oceanus which would be the insured physicians which are also referred to as covered providers and additional named insureds of Oceanus Insurance Company.{**60 Misc 3d at 279}

"So as to clarify my Order of September 21, 2017, this Order is to confirm that the automatic stay prohibiting 'the institution of further prosecutions of any actions or proceedings' includes prohibiting actions or proceedings against policyholders, covered providers and additional named insureds of Oceanus Insurance Company."

The Parties' Contentions

The Oceanus defendants argue, inter alia, that the order and clarification order (collectively, the South Carolina orders) should be enforced as a matter of federal and state law. They assert that pursuant to the Full Faith and Credit Clause of the United States Constitution, the South Carolina orders should be honored by this court and all proceedings stayed involving the Oceanus defendants until such time as the liquidation proceedings are concluded.

The Oceanus defendants further contend that the Uniform Insurers Liquidation Act (hereinafter UILA) has been enacted by both New York and South Carolina. They argue that the UILA requires New York courts to honor and enforce injunctions issued in an order of rehabilitation or liquidation of a reciprocal state in which the UILA has been adopted, such as South Carolina. The Oceanus defendants also assert that New York courts have abided by orders enjoining prosecution of actions against insurers placed into rehabilitation or liquidation.

The Oceanus defendants also claim that the South Carolina orders should be accorded comity in all New York actions in which Oceanus is legally obligated to defend a party. Finally, the Oceanus defendants state that even if the court does not stay the present action pursuant to the UILA, the Full Faith and Credit Clause, or the principle of comity, the action should be stayed as a matter of judicial efficiency and economy. They assert that the purpose of the stay is to ensure that all policyholders and other creditors of Oceanus are treated fairly and equally and to ensure the orderly, efficient and equitable distribution of the assets of the estate. At oral argument, counsel for the liquidator argued that in the event a stay is not ordered, the estate would be impacted since the Oceanus defendants would be entitled to file claims for out-of-pocket legal fees, in addition to the original claim amounts.

Plaintiffs' counsel and opponents to a stay argue, inter alia, that the State of South Carolina has no legitimate interest in cases against Oceanus' policyholders in New York and that{**60 Misc 3d at 280} permitting the actions to proceed would not violate South Carolina's prohibition against wasting [*5]Oceanus assets because Oceanus would not be providing its policyholders with a defense or entering judgments against Oceanus. Plaintiffs further argue that the due process rights of plaintiffs in the New York actions have been violated by South Carolina's issuance of an injunction and automatic stay without an opportunity to be heard. They further complain that the Oceanus defendants assumed the risk of defending actions notwithstanding Oceanus' insolvency by purchasing "discounted" coverage from a risk retention group instead of traditional medical malpractice insurance policies.

Analysis

CPLR 2201 provides that the court in which an action is pending may grant a stay of proceedings in a proper case upon such terms as may be just.

"A stay of an action can easily be a drastic remedy, on the simple basis that justice delayed is justice denied. It should therefore be refused unless the proponent shows good cause for granting it. Nothing but good cause would make for a 'proper case.' Some excellent reason would have to be demonstrated before a judge is asked to bring to a halt a litigant's quest for a day in court" (David D. Siegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C2201:7 at 11 [1991 ed]).

The Full Faith and Credit Clause of the United States Constitution provides that "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State" (US Const, art IV, § 1). Pursuant to the Full Faith and Credit Clause, a judgment of a state court "should have the same credit, validity, and effect, in every other court of the United States, which it had in the state where it was pronounced" (Miller v Miller, 152 AD3d 662, 664 [2d Dept 2017]). Movants correctly assert that generally, a "stay by a court in another state enjoining and restraining all claims against insureds of an insolvent liability insurer is entitled to full faith and credit, and has the effect of suspending all proceedings against the insured as of its effective date" (Dambrot v REJ Long Beach, LLC, 39 AD3d 797, 799 [2d Dept 2007]; Beecher v Lewis Press Co., 238 AD2d 927, 927-928 [4th Dept 1997]).

The doctrine of comity is distinguished from full faith and credit "in that the latter is an explicit constitutionally based{**60 Misc 3d at 281} provision involving relationships only among the States, whereas comity is based not on a constitutional provision, but on concepts such as harmony, accommodation, policy, and compatibility, in . . . an interstate context" (Morrison v Budget Rent A Car Sys., 230 AD2d 253, 265 [2d Dept 1997] [citations omitted]).

New York has enacted the UILA (Insurance Law §§ 7408-7415). South Carolina enacted South Carolina Code Annotated § 38-27-10 et seq. Insurance Law § 7408 (b) (6) defines a "Reciprocal state" as "any state other than this state in which in substance and effect the provisions of this act are in force, including the provisions requiring that the insurance commissioner or equivalent insurance supervisory official be the receiver of a delinquent insurer." The UILA defines a delinquency proceeding as any proceeding commenced against an insurer for the purposes of liquidating, rehabilitating, reorganizing, or conserving such insurer (Insurance Law § 7408 [b] [2]). The UILA provides that "[d]uring the pendency of delinquency proceedings in this or any reciprocal state no [*6]action or proceeding in the nature of an attachment, garnishment, or execution shall be commenced or maintained in the courts of this state against the delinquent insurer or its assets" (Insurance Law § 7414). The purpose of the UILA is to provide "a uniform system for the orderly and equitable administration of the assets and liabilities of defunct multistate insurers" (Matter of Levin v National Colonial Ins. Co., 1 NY3d 350, 356 [2004]).

Pursuant to the UILA, New York courts have granted the motion of an insurance carrier or insured to stay New York litigation pursuant to the rehabilitation order of another state's court which stayed the commencement or continuation of any action or proceeding against nonparty insurer or any of its insureds (A.J. Pegno Constr. Corp. v Highlands Ins. Co., 39 AD3d 273 [1st Dept 2007] [insurer a party]; A.B. Med. Servs. PLLC v Highlands Ins. Co., 4 Misc 3d 1020[A], 2004 NY Slip Op 50978[U] [Civ Ct, NY County 2004] [insurer a party]; Century Indem. Co. v Brooklyn Union Gas Co., 2003 NY Slip Op 30200[U] [Sup Ct, NY County 2003] [nonparty insurer's motion granted]). In Century Indem., the court held that the nonparty insurer was entitled to a stay under the principle of comity and since reciprocity was required under the UILA. Further, the court in Century Indem. determined that a temporary relief from litigation expenses is a valid objective. In A.J. Pegno Constr. Corp. and A.B. Med. Servs. PLLC, litigation{**60 Misc 3d at 282} was stayed in actions brought directly against an insurer in rehabilitation by its insureds pursuant to the UILA, the Full Faith and Credit Clause, and the principle of interstate comity.

However, there is no statutory automatic stay of litigation pursuant to the UILA (see Matter of Frontier Ins. Co., 27 AD3d 274 [1st Dept 2006], lv denied 7 NY3d 713 [2006]). Rather, the UILA provides that a court may issue injunctions or orders as deemed necessary to, inter alia, prevent "waste of the assets of the insurer, or the commencement or prosecution of any actions" (Insurance Law § 7419 [b]). The court has considerable discretion considering the scope of injunctions prohibiting commencement or prosecution of litigation during rehabilitation of an insolvent insurer (Matter of Frontier Ins. Co., 57 AD3d 1302, 1304 [3d Dept 2008]).

Here, for the reasons that follow, moving defendants have not demonstrated that a stay of all proceedings involving the Oceanus defendants in New York is mandated under the Full Faith and Credit Clause, the principle of interstate comity or the UILA.

Initially, the court notes that the Oceanus defendants have cited no authority for their premise that a stay issued in another state for the benefit of a risk retention group, as distinguished from an insurance company, is entitled to full faith and credit, comity or reciprocity under the UILA. Unlike a traditional insurance company, a risk retention group is owned and operated by its members which are its insureds. The federal Liability Risk Retention Act of 1986 (15 USC § 3901 et seq.) (LRRA) governs risk retention groups. In enacting the LRRA, Congress desired "to decrease insurance rates and increase the availability of coverage by promoting greater competition within the insurance industry" (Preferred Physicians Mut. Risk Retention Group v Pataki, 85 F3d 913, 914 [2d Cir 1996] [citation omitted]). "[T]he legislative history of the Act makes clear that Congress intended to exempt [risk retention [*7]groups] broadly from state law 'requirements that make it difficult for risk retention groups to form or to operate on a multi-state basis' " (id. at 915-916 [citations omitted]). The LRRA preempts "any State law, rule, regulation, or order to the extent that such law, rule, regulation or order would . . . (1) make unlawful, or regulate, directly or indirectly, the operation of a risk retention group" (15 USC § 3902 [a] [1]). The authority of the domiciliary, or chartering, state is empowered to "regulate the formation and operation" of risk retention groups (15 USC § 3902 [a] [1]).

{**60 Misc 3d at 283}By state law, risk retention groups are "authorized to engage in the business of insurance" in New York (Insurance Law § 5902 [n] [3] [A]). However, the LRRA "provides for broad preemption of a non-domiciliary state's licensing and regulatory laws" (State of Fla., Dept. of Ins. v National Amusement Purch. Group, Inc., 905 F2d 361, 363-364 [11th Cir 1990]). An important distinction between risk management groups and insurance companies is that Insurance Law § 5906 exempts risk management companies from the requirement of contributing to an insurance insolvency fund and eliminates the availability of such funds for the victims of tortfeasors as follows:

"(a) No risk retention group shall be required or permitted to join or contribute financially to any insurance insolvency security fund, or similar mechanism, in this state, nor shall any risk retention group, or its insureds or claimants against its insureds receive any benefit from any such fund for claims arising under the insurance policies issued by such risk retention group.

"(b) When a purchasing group obtains insurance covering its members' risks from an insurer not authorized in this state or a risk retention group, no such risks wherever resident or located shall be covered by any insurance insolvency security fund or similar mechanism in this state" (Insurance Law § 5906 [a]-[b]).

As explained by the United States Court of Appeals, the LRRA recognizes the difference between risk retention groups and insurance companies as follows:

"Plainly, §§ 3902 (a) (2) and (3) [of the LRRA] are not directed toward placing risk retention groups 'on equal footing' with traditional insurers. To the contrary, both of those provisions excuse risk retention groups from certain requirements that states may and typically do impose upon insurers licensed within that state" (Wadsworth v Allied Professionals Ins. Co., 748 F3d 100, 107 [2d Cir 2014]).

Indeed, certain sections of the insurance law do not apply to risk retention groups. For example, Insurance Law § 3420, which grants an injured party the right to sue the tortfeasor's insurer under limited circumstances in a direct action, has been held inapplicable to foreign risk retention groups (id.).

Thus, a balancing of the equities favors the alleged victims of medical malpractice in New York who have no redress{**60 Misc 3d at 284} against a guaranty fund rather than a provider who opted for less expensive insurance premiums. Indeed, physicians who purchased "insurance" from Oceanus were on notice that they did so at their own peril. That risk was clearly set forth on the declaration sheet on policies issued by Oceanus in a warning in capital and bold letters to the physicians as follows: "THIS POLICY IS ISSUED BY YOUR RISK RETENTION GROUP. YOUR RISK RETENTION GROUP MAY NOT BE SUBJECT TO ALL OF THE INSURANCE LAWS AND REGULATIONS OF YOUR STATE. STATE INSURANCE INSOLVENCY GUARANTY FUNDS ARE NOT AVAILABLE FOR YOUR RISK RETENTION GROUP."^[FN4]

The Oceanus defendants' conclusory assertions to the contrary, full faith and credit, comity or the UILA do not mandate that they may avoid the consequences of retaining a risk retention group in lieu of a licensed New York State medical malpractice insurer to the detriment of the alleged victims of medical malpractice. Clearly, the significant prejudice that would befall ailing and elderly plaintiffs if a lengthy stay is imposed outweighs the prejudice to the Oceanus defendants in being required to defend the New York actions. It is manifestly unfair and unjust to plaintiffs to mandate that they wait to resume prosecution of their actions simply because, unbeknownst to them, their medical treatment providers took a risk on a nondomiciliary risk retention group.

Further, the cases relied on by movants involved stays of insurers in reciprocal states in which the stays were of a limited duration (see e.g. Dambrot v REJ Long Beach, LLC, 39 AD3d 797 [2d Dept 2007]; Beecher v Lewis Press Co., 238 AD2d 927, 927-928 [4th Dept 1997]). Here, it is uncontroverted that the South Carolina court purports to permanently enjoin any actions or executions in New York involving New York residents against Oceanus or its policyholders. During the hearing held on February 2, 2018, counsel for the liquidator confirmed that it will "take three to five years to get through all the claims that are pending in the Oceanus matter and to resolve all claims."^[FN5] While it could be argued that the risk retention group should be entitled to a temporary stay, there is no reasonable justification, articulated or otherwise, to extend full faith and credit, comity or the UILA to an order which purports to{**60 Misc 3d at 285} permanently stay actions in New York. A finding to the contrary would permit an insurer's or a risk retention group's insolvency to permanently infringe upon the rights of those injured in New [*9]York to pursue legal action in New York.^[FN6]

By this finding, this court does not suggest that the South Carolina court lacks jurisdiction over claims involving the assets and liabilities of Oceanus. However, Oceanus is not a party to these various medical malpractice actions pending in New York's Ninth Judicial District. Therefore, this court is not persuaded that the Full Faith and Credit Clause, or comity mandates enforcement of those parts of the South Carolina orders which purport to impose a stay since South Carolina has no jurisdiction over the parties and the proceedings pending in New York (see V.L. v E.L., 577 US &mdash, 136 S Ct 1017, 1020 [2016]; Ho v McCarthy, 90 AD3d 710, 711 [2d Dept 2011]; Morrison v Budget Rent A Car Sys., 230 AD2d 253, 265 [2d Dept 1997]). "As a matter of full faith and credit, review by the courts of this State is limited to determining whether the rendering court had jurisdiction, an inquiry which includes due process considerations" (Fiore v Oakwood Plaza Shopping Ctr., 78 NY2d 572, 577 [1991]). Moreover, "New York is not constitutionally required to give full faith and credit to a foreign judgment which is not final under that State's laws" (Matter of Pearson v Pearson, 69 NY2d 919, 920 [1987]).

Further, full faith and credit does not require application of a foreign state's law where such application would violate the forum state's own legitimate public policy (Franchise Tax Bd. of Cal. v Hyatt, 578 US &mdash, 136 S Ct 1277 [2016]). Here, imposing a stay would improperly enforce an order that violates the strong public policy of this state of protecting victims of medical malpractice (Greschler v Greschler, 51 NY2d 368 [1980]). Court of Appeals Judge Jasen once explained as follows:

"While it is generally the rule in this State that where the basic public policy of the forum would be offended a court can refuse to recognize the validity of a foreign judgment, the public policy exception to the doctrine of comity is usually invoked only in{**60 Misc 3d at 286} the rare instance 'where the original claim is repugnant to fundamental notions of what is decent and just in the State where enforcement is sought.' Thus, for this court to refuse full recognition to a lawful foreign judgment, it must be demonstrated that the decree violates 'some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.' Public policy should not be 'determinable by mere reference to the laws of the forum alone' or 'in the decisions of our courts in the Victorian era.' Rather, public policy should be predicated upon 'the prevailing attitudes of the community'. It follows that foreign judgments generally should be upheld unless enforcement would result in the recognition of a 'transaction which is inherently vicious, [*10]wicked or immoral, and shocking to the prevailing moral sense' " (id. at 377).

In the instant action, enforcement of the purported stays contained in the South Carolina orders would subject plaintiffs to such a severe hardship that it would violate the fundamental principles of justice and shock the core values of our justice system.

Finally, this court notes that as a practical matter, there is no reasonable justification for prolonging the resolution of the New York actions. Counsel for the liquidator has advised the court that only a fraction of the claims against Oceanus will be paid and that the claimants' share will be determined in the context of the liquidation proceedings. Therefore, no judgment creditor will obtain or lose priority over any other by virtue of a stay or the continuation of proceedings in New York and no judgment obtained in New York shall be determinative of a claimant's share of the liquidation estate. In other words, it is inevitable that the Oceanus defendants will be out-of-pocket for defense costs, and potentially, for judgments not satisfied by claims paid by the liquidator.^[FN7] The issue then is only whether the Oceanus defendants should assume that burden now or three to five years from now, and whether plaintiffs should be required to wait three to five years for their day in court.{**60 Misc 3d at 287}

This court is aware that at least one esteemed colleague in another county has recently ruled to the contrary.^[FN8] However, I respectfully disagree with my colleague and note that these recent decisions do not distinguish between risk retention groups and traditional insurers, nor do they discern the difference between the usual short-term stays (i.e., 180 days) in insurance liquidation proceedings and the claimed permanent stay in matters involving Oceanus. The decisions also understate the significant prejudice to plaintiffs in staying proceedings indefinitely, the risk that the Oceanus defendants assumed when retaining risk retention group coverage and the absence of a guaranty fund to compensate plaintiffs due to the insolvency of such groups. Under the particular circumstances presented, justice delayed will be certain to result in justice denied and therefore, this court declines to grant the request for the extreme action of staying all matters involving Oceanus (CPLR 2201).

All other arguments raised and evidence submitted by the parties have been considered by the court notwithstanding the specific absence of reference thereto.

In view of the foregoing, it is ordered the motion seeking a stay of proceedings, or alternatively severance is denied in all respects; and it is further ordered that the cross-order to show cause is denied as moot.