Montana court rules on legal status of a PCC

Despite the rapid growth of the use of protected cell companies (PCCs) in many jurisdictions globally, there have been very few court cases that have tested the legal detail of this type of company.

A June 2015 ruling by Montana Federal Court will make for interesting reading to captives professionals in all parts of the world. Although the ruling was in a US court, other jurisdictions will have looked on with interest.

By way of background, Nigel Feetham, partner at law firm Hassans, points out that Guernsey was the first jurisdiction globally to introduce PCCs. It did so in 1997 but many other jurisdictions followed soon after, including Cayman, Bermuda, Gibraltar and Malta.

In more recent years a segregated company regime has been implemented in many states of the US, in the UK, Dublin and Luxembourg. There are now probably thousands of such companies conducting business internationally, although they have been especially popular in the insurance field, Feetham says.

Yet, surprisingly, there have been less than a handful of reported court cases on the subject anywhere in the world and, until recently, none where a court has considered in detail the legal status of a protected cell company. Accordingly, the recent decision of the Montana Federal Court may now be regarded as the leading global judicial authority on the subject of PCCs. That case is Pac Re 5-AT v AmTrust NA, No. CV-14-131-BLG-CSO, 2015 US Dist. LEXIS 65541 (D. MT, May 13, 2015). The question before the court was essentially who was the proper party to a contractual dispute concerning a PCC.

"The argument that the proper party to the arbitration could be anyone other than the PCC itself was doomed to failure from the outset."

“In a declaratory judgment action arising out of a demand for arbitration by one party to another under a captive reinsurance agreement, the court held that the protected cell under the applicable local legislation was not a separate legal person from the PCC, did not have capacity to sue or be sued in its own name, and that since the protected cell had acted on behalf of the cell on a captive reinsurance agreement, accordingly the PCC was a proper party to the dispute,” Feetham explains.

As Judge Ostby pointed out, although the underlying issues in the arbitration were complex, the issue before the court was relatively simple.

“A number of arguments were put before the court by both sides,” Feetham says. “One side argued that the relevant cell was the only proper party to arbitration because the cell, as a protected cell, had segregated assets and liabilities from the PCC and the other protected cells.

“The other party argued that the PCC was a proper party to the arbitration on the basis that the cell was a non-existent legal entity, and as a result, the PCC was liable for the obligations it incurred in the cell’s name.”

It was also argued that because Montana’s protected cell statute indicated that a protected cell was not a separate legal person from the PCC, the company was the proper party to be named in any litigation. “The court had no difficulty in reaching its decision,” Feetham says. “The court analysed the legal status of a PCC in detail and held that a protected cell did not have a separate legal identity, and absent a statutory grant to the contrary, a protected cell did not have the capacity to sue and be sued independent of the PCC.

“Consequently, the motion for summary judgment was granted to the cedant and the captive reinsurer was held to be the proper party to the arbitration.” Feetham says that the court’s logic was correct and that any argument that the proper party to the arbitration could be anyone other than the PCC itself was doomed to failure.

“Based on the clear words of the relevant statute and reasoned analysis of the concept of the ‘protected cell’, the argument that the proper party to the arbitration could be anyone other than the PCC itself was doomed to failure from the outset,” he says.

“For years, however, the industry has been concerned that a court might view the cellular structure as a complex Gordian knot and use its judicial sword to cut through it without proper legal consideration of the situation presented.

“Instead in this case, it is gratifying to see that Judge Ostby (unlike Alexander the Great) patiently and intelligently untangled the knot by hand, in accord with long-standing insurance industry practice while leaving the cellular structure intact.”