Defendant National Distillers & Chemical Corporation, now known as Quantum Chemical Corporation ("Quantum"), appeals from a final judgment entered in the United States District Court for the Southern District of New York pursuant to Fed.R.Civ.P. 54(b), John S. Martin, Jr., Judge, ordering Quantum to pay plaintiff Don W. Stephens, as Liquidator of Quantum's wholly-owned subsidiary Delta America Re Insurance Company ("Delta"), $12,293,161, plus interest, as reimbursement for dividends paid to Quantum by Delta during a period in which Delta was in fact insolvent. At the time the dividends were paid, Delta's insolvency had not been discovered, primarily because of the difficulty of calculating and monitoring the accuracy of loss reserves established by insurance companies. For purposes of the motion leading to the decision appealed here, the parties stipulated that while Delta's estimates of its reserves were in error, the errors were made in good faith. In entering judgment in favor of the Liquidator, the district court adopted a decision of the Franklin County, Kentucky, Circuit Court in an earlier phase of this case, which had ruled that Delta's actual insolvency was dispositive. The district court thus held that, notwithstanding the good faith of the insurer and the shareholder in, respectively, paying and receiving dividends without knowledge of the insurer's insolvency, the insurer's actual insolvency "renders [the dividends] illegal under Kentucky law and subject to repayment." Stephens v. American Home Assurance Co., 811 F. Supp. 937, 957 (S.D.N.Y.1993). The judgment of the district court was based on this interpretation of Kentucky law.

The fundamental issues on this appeal are whether the fact of Delta's insolvency, even if in good faith unknown at the time the pertinent dividends were paid, rendered the dividends unlawful under Kentucky law; and, if so, whether notwithstanding Quantum's good faith and lack of knowledge of Delta's insolvency, Kentucky law requires that Quantum repay the dividends. In Stephens v. National Distillers & Chemical Corp., 6 F.3d 63 (2d Cir.1993), familiarity with which is assumed, we certified the following questions to the Supreme Court of the Commonwealth of Kentucky pursuant to Kentucky Rule of Civil Procedure 76.37:

1. In determining whether dividends of a reinsurance corporation were properly paid under Kentucky law, can information received by the corporation after the date of payment be used to retroactively determine its financial condition at the time of payment?

2. If the answer to question 1 is "yes", are shareholders of the reinsurance company directly liable for return of dividends paid during a period when the corporation was in fact insolvent, but the dividends were received in good faith?

The Kentucky Supreme Court accepted the certification and answered the first question in the negative, stating that it need not reach the merits of the second question. See National Distillers & Chemical Corp. v. Stephens, 912 S.W.2d 30 (Ky.1995). That Court held "the lawfulness of dividend distribution is to be determined at the time of payment," and not "at some time later when additional financial information begins to surface." Id. at 32. The Court stated that so long as a reinsurance corporation follows generally accepted accounting principles, statutory accounting principles, and the requirements of the Kentucky Insurance Code, "retroactive evaluations play no role in ascertaining the legitimacy of any foregone dividend payments." Id.

In light of this authoritative interpretation of Kentucky law, which is contrary to the conclusion reached by the district court in the present action, the judgment of the district court is vacated, and the matter is remanded for such further proceedings as may be appropriate.

No costs.