New Hampshire Supreme Court Refuses Relief For Home's Lawyers
As the storm clouds gather over once might insurance companies, law firms representing insurers should bear in mind the on-going lessons of the insolvency of Home. Lawyers representing an insurer in perilous financial circumstances face the dilemma of trying to protect their client’s interests even in the face of looming insolvency while trying to avoid being left holding the bag with a large unpaid bill. Such was the unhappy fate of the Sheiness law firm of Houston, Texas in the latest opinion of the New Hampshire Supreme Court arising out of the June 2003 insolvency of the Home Insurance Company.
Sheiness Scott Grossman & Cohn LLP had been engaged by Home in 2002 to defend it against efforts Home’s insured J.T. Thorpe to impose a 524(g) bankruptcy to resolve its asbestos liabilities. Despite rampant rumors that Home might collapse any date, the firm could took on the case and put a great deal of time and effort into it over a period of a few months, ultimately minimizing what might otherwise have been a far more serious problem for Home.
As of the date that Home was declared insolvent, the firm was owed $74,7845. SSGC duly placed a claim for this amount with Home’s liquidator in New Hampshire. The liquidator approved the claim but assigned it a Class V residual priority and observed that the limited funds in the estate made it unlikely that anything but Class I and Class II claims would be paid.
In its appeal to the New Hampshire Supreme Court, SSGC advanced two arguments. First, that its fees were in fact Class I costs of administration, which are stated by RSA 402-C:44, I to include “reasonable attorney’s fees.” In the alternative, it advanced an equitable argument, suggesting that a refusal to reimburse lawyers who had loyally served the interests of the insurers prior to insolvency would create a disincentive in the future for other firms called to provide similar services and make it harder for insurers to protect their interests.
As to the first argument, the Supreme Court held that RSA 402-C:44 clearly distinguished between legal services incurred in connection with the administration of the insurer’s liquidation and pre-liquidation legal services. The court found that the language of the statute, which speaks in terms of an “estate” and “administration,” clearly contemplated work done after liquidation had already begun.
Despite the law firm’s argument that denying them payment would create a disincentive for any future law firm to ever continue to defend insurers that were in financial peril, the court observed that it could not discern “any principled way to distinguish between the fee for SSGC’s pre-liquidation legal representation and the fees of other pre-liquidation professionals falling within the residual classification of RSA 402-C:44, V.
The court’s comments clearly suggest its concern that allowing SSGC’s claim would open the floodgates to other law firm claimants and substantially dilute the funds available to pay claims that may be brought by other Home creditors, including large policyholders and state Guaranty Funds. At the same time, one can only see this as rough justice for a law firm that did was it was ethically bound to do on behalf of a client in trouble.
