For some years, companies in the United Kingdom have utilized a statutory process called solvent schemes of arrangement. These schemes amount to what in the United States is called a “cram down” voluntary reorganization of financially distressed, but solvent, debtors. They impose upon creditors reductions in the amount owed to them outside the U.S. Bankruptcy Code. Rhode Island adopted a similar statutory scheme, which became effective in 2004. The constitutionality of such a scheme in the United States has long been questioned, but stood unaddressed because no companies had, until recently, attempted to use the Rhode Island statute.
GTE Reinsurance Company, in runoff since 1990, proposed a commutation plan under the Rhode Island statute regarding its remaining potential property-casualty related liabilities and, in 2010, initiated a proceeding in the Rhode Island Superior Court to implement the plan. Two of GTE’s cedents objected. One challenged Rhode Island’s Voluntary Restructuring of Solvent Insurers Act as unconstitutional under the Contract Clause and Due Process Clause of the Rhode Island and federal Constitutions. The court rejected the challenges, crediting the large majority of cedents that voted in favor of the plan, and noting that, while some rights under the contracts between the objectors and GTE would be impaired by the commutation, they would not be “substantially impaired” – the standard for a constitutional contract clause challenge. The court also found the Act had a legitimate public purpose and employed reasonable and necessary means to carry out that purpose. It rejected the due process argument for essentially the same reasons, noting that a “Contract Clause inquiry is more searching than the rational basis review employed in a due process challenge.” Expect to see further court involvement in these issues, whether in an appeal of this case or otherwise.