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Insurer faces liquidation after Chapter 11 filing dismissed

The South Carolina Department of Insurance is seeking to liquidate a commercial auto risk-retention group after securing the termination of the insurer's unusual Chapter 11 bankruptcy petition.

U.S. Bankruptcy Judge Karen Owens on March 2 ordered the dismissal of the case brought by Transportation Insurance Services Risk Retention Group Inc., one of numerous affiliates of trucking company Celadon Group Inc. One day later, South Carolina Insurance Director Raymond Farmer filed a petition in the Richland County, S.C., Court of Common Pleas to seek his appointment as liquidator of a company that allegedly had "wil[l]fully violated the insurance laws of this state" and was insolvent.

Transportation Insurance Services, which insured certain of Celadon's commercial auto liability risks, filed its Chapter 11 petition along with its parent in December 2019. The South Carolina regulator sought to intervene in the bankruptcy case in January 2020 for the purpose of seeking its dismissal, arguing that the insurer did not meet the criteria of a debtor under the federal bankruptcy code. Domestic insurance companies are among the select types of entities that are precluded under federal bankruptcy law from becoming Chapter 7 or 11 debtors, and the regulator argued that risk-retention groups like Transportation Insurance Services "are not excepted" from that provision.

Ahead of a hearing on the motion scheduled for Feb. 28, the regulator alleged that representatives of the debtor proposed a stipulation of the dismissal of the case. But that stipulation "contained additional terms and conditions to dismissal to which the Department is not able to give its assent," the regulator said. The docket in the U.S. Bankruptcy Court for the District of Delaware shows no official response or objection to the motion.

"As in other states, South Carolina law affords greater protection to policyholders (and third-party claims against policies) than it does to general creditors," the text of a bankruptcy court order proposed by the South Carolina Department of Insurance states. "This furthers South Carolina's congressionally recognized interest in protecting policyholders, which lies at the core of its power to regulate the business of insurance."

While the regulator's motion to intervene remained pending, Transportation Insurance Services filed its schedules of assets and liabilities with the bankruptcy court. The document included a list of 65 individuals and entities listed as "creditors who have nonpriority unsecured claims" incurred between 2015 and 2019 of "unknown amounts." The basis for all 65 of those entries was listed as auto liability claims.

The South Carolina regulator argued that the state's Rehabilitation and Liquidation Act, under which it must bring delinquency proceedings regarding a domestic insurer in the Court of Common Pleas, "ensures adequate protection of policyholders and third-party claimants on policies."

Its petition for the liquidation of Transportation Insurance Services alleges that it received no prior notice of the Chapter 11 filing. Further, based on conversations with representatives of the insurer's captive manager, the regulator alleged that the company and its parent "provided little to no information or instructions in connection with the bankruptcy proceedings or their effect on [Transportation Insurance Services'] operations."

The regulator also alleged that it has been unable to determine who is in charge of the insurer's daily operations, nor has it discerned "what measures, if any, have been taken to protect policyholders, third-party claimants against those policies, and the public." That circumstance is further magnified by the fact that the policies of the insurer, given its status as a risk-retention group, are not protected by guarantee association coverage.

Transportation Insurance Services' surplus on a pro forma basis as calculated by the regulator has declined to a deficit of $575,319 from a previously reported positive sum of $846,529 as of Sept. 30, 2019, as it no longer considers the more than $1.4 million in receivables from parent, subsidiaries and affiliates to be collectible.

"This leaves [Transportation Insurance Services] with insufficient funds to pay claims of members of the public who are injured and/or whose property has been damaged as a result of a collision with an insured vehicle," the South Carolina regulator alleged in arguing that the company's further transaction of business would be "hazardous, financially or otherwise."

Transportation Insurance Services will have 30 days from the date on which it is served with the petition to respond. If it fails to respond, the South Carolina regulator may move for default judgment to effect the liquidation order.