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What is the Liquidation Bureau ?

Wednesday, 28 December 2011

It is easier to state what the liquidation bureau is not. According to the New York Court
of Appeals, it is not a state agency (and therefore not subject to audit by the state
comptroller). According to the records of the Secretary of State, it is not a corporation.
And according to the Insurance Law . . . : well, let’s just say its status is undefined.
Before 1993 there were no statutory references to a liquidation bureau in the Insurance
Law, including the receivership article, Article 74. In 1993, subsection (g) was added to
Section 7405 (“Order of liquidation; rights and liabilities”) requiring the superintendent
as receiver to prepare an annual report on the status of each company in liquidation or
rehabilitation. The last sentence of this new section states: "This report shall be separate
and apart from other reports issued by the liquidation bureau of the department in the
normal course of its business." This is the only reference in the Insurance Law (actually
the only reference in the entire New York Consolidated Laws) to a liquidation bureau.
The Bureau's existence may be assumed, but its status and mandate are not defined
anywhere in the law. The home page of the Liquidation Bureau’s web site states:
“The New York Liquidation Bureau (NYLB) is a unique entity. [No debate
there!] Receiving no funding from taxpayers, it carries out the responsibilities of
the Superintendent of Insurance as Receiver, and acts on his behalf in the
discharging of his statutorily defined duties to protect the interests of the
policyholders and creditors of insurance companies that have been declared
impaired or insolvent.”
The bureau's web site also states that it has “performed this function since 1909, when the
New York State Legislature passed the law mandating that the Superintendent assume the
separate responsibility of Receiver.” However, the law does not establish a bureau to
carry out this function. The law requires that the superintendent be designated as
rehabilitator or liquidator to take control of the assets of an insolvent company and
liquidate or manage the estate. It also permits the appointment of deputies and assistants
to support the superintendent in this role as receiver. It was clearly anticipated that these
appointments would come from the key employees of the insolvent company itself  --
those with the greatest knowledge of the business and operations of the company being
liquidated -- and would be engaged only for the duration of the receivership process.3
© 2008-2009 Peter H. Bickford
The hiring of employees of the insolvent company, and the temporary nature of these
appointments, was succinctly summarized in a 1915 report to the New York State
Constitutional Convention Commission on the Organization and Functions  of the
Government of the State of New York (at page 118) -- just a few years after the statute
referred to in the Bureau's web site:
“The practice is to retain such of the employees of each company which
comes into liquidation as may be necessary to attend to the details of its
affairs, and to dispense with them as rapidly as consistent with the proper
conduct of its business.”
The current statute is consistent with this historical record of the temporary nature of the
receivership of insurance companies. Rather than authorizing the establishment of a
permanent bureau, current Section 7422 authorizes the superintendent to appoint deputies
and others to assist in the performance of the receivership function, "and all expenses of
conducting any proceeding under this article shall be fixed by the superintendent, subject
to the approval of the court, and shall be paid out of the funds or assets of such insurer."
Article 74 clearly views each insolvency as a separate proceeding with the superintendent
acting as receiver under the supervision and control of a Supreme Court judge for that
estate. Nowhere in the law is there any provision for the establishment of a permanent
agency or bureau to carry out this function, and there is no central judicial oversight
designated to coordinate the handling of all pending receivership proceedings
The limited role and temporary nature of the agents assisting the receiver for a particular 
estate has evolved into a permanent liquidation bureau, particularly over the past thirty
years. This evolution occurred without a statutory, judicial or regulatory mandate to do
so. As the number and size of insolvencies increased dramatically in the late 1970s and
into the 1980s, the liquidation bureau grew into its own self-operating permanent
bureaucracy, flying under the radar and accountable to no one – not the legislature, not
the courts, and not the regulators.
The Bureau today has half as many employees (over 450 employees) as the entire New
York Insurance Department, and most of them are protected by union contracts. The
Bureau also purports to have a budget of over $100 million, but this "budget" is not 4
© 2008-2009 Peter H. Bickford
subject to any independent oversight. Although Section 7422 requires court approval of
expenses for an estate, there is no requirement in the law – including the much-touted
new legislation that would require annual audits – that the supervising court be provided
with any regular, interim financial or status report. More significantly, no one court
would be looking at the bureau or its budget as a whole.
The current administration has made a lot of noise about reforming the bureau and
making it more “transparent.” It is doing this, however, by making the bureau even more
permanent, contrary to the mandate of Article 74 and the statutory receivership scheme.
Is there an existing example of how the system could and should work under the existing
statutory authority?  The answer is yes!

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