Commissioner of Ins. v. Arcilio

• Decision Date: 10 January 1997
• Docket Number: Docket No. 187813
• Citation: 561 N.W.2d 412,221 Mich.App. 54
• Parties: INSURANCE COMMISSIONER OF MICHIGAN, Petitioner-Appellee, v. Reynaldo ARCILIO, Isadore Levy, and Anthony V. Montalto, Respondents-Appellants.
• Court: Court of Appeal of Michigan — District of US

Page 412

561 N.W.2d 412

221 Mich.App. 54

INSURANCE COMMISSIONER OF MICHIGAN, Petitioner-Appellee, v. Reynaldo ARCILIO, Isadore Levy, and Anthony V. Montalto,

Respondents-Appellants.

Docket No. 187813.

Court of Appeals of Michigan.

Submitted May 9, 1996, at Lansing.

Decided Jan. 10, 1997, at 9:00 a.m.

Released for Publication April 4, 1997.

Bodman, Longley & Dahling LLP by James J. Walsh, Detroit, and Cadwalader, Wickersham & Taft by Michael I. Sonkin and Gregory M. Petrick, New York City, for the Commissioner of Insurance.

Sinas, Dramis, Brake, Boughton, McIntyre & Reisig, P.C. by Bernard Finn, Lansing, Milberg Weiss Bershad Hynes & Lerach by Melvin I. Weiss, Jerome M. Congress, and Brad N. Friedman, New York City, and Arthur R. Miller, Cambridge, MA, for Reynaldo Arcilio, Isadore Levy, and Anthony V. Montalto.

Before HOLBROOK, P.J., and SAAD and W.J. GIOVAN ^*, JJ.

PER CURIAM.

On August 11, 1994, pursuant to this state's insurers rehabilitation and liquidation act (IRLA), M.C.L. § 500.8101 et seq.; M.S.A. § 24.18101 et seq., the Commissioner of Insurance petitioned the Ingham Circuit Court for an order of rehabilitation and an ex parte order for seizure of the assets of Confederation Life Insurance Company (CLIC), the United States branch of a Canadian insurance company whose state of entry was Michigan. ¹ The court granted the petition on August 16, 1994, placing CLIC's business in the United States in rehabilitation and appointing petitioner as rehabilitator.

As a condition of being permitted to sell insurance in the United States, CLIC-Canada was required to establish and maintain on deposit in a trust sufficient assets to satisfy the liabilities owed to policyholders in this country. See M.C.L. § 500.431a-c; M.S.A. § 24.1431(a)- "(c). Precipitating CLIC's financial instability was the 1991 removal of more than $600 million in government securities and cash from the trust by the financial management division of CLIC-Canada. CLIC-Canada allegedly accomplished the scheme by replacing the funds with promissory notes and then filing statements with the Michigan Insurance Bureau that failed to disclose the condition of the trust.

On September 27, 1994, the Ingham Circuit Court entered an amended and restated order of rehabilitation, which elaborated on petitioner's powers and responsibilities as rehabilitator. The restated order granted petitioner exclusive control of all CLIC's assets in the United States, including causes of action, and contained a general injunction against "bringing, maintaining or further prosecuting any action at law, suit in equity, special or other proceeding against Confederation [CLIC-Canada] or Confederation U.S., the Estate in Rehabilitation or against the Commissioner and his successors in office." In addition, the order prohibited any person from "disturbing or interfering in any manner with the Rehabilitator's occupation, use, possession, title and rights to the Estate in Rehabilitation, and from disturbing or interfering in any manner with the conduct of the rehabilitation...." The order also provided:

Those persons, corporations, partnerships, associations and all other entities are hereby enjoined and restrained from wasting transferring, selling, concealing, terminating, cancelling, destroying, disbursing, disposing of, or assigning any assets, contracts, causes of action, funds, records or other property of any nature of Confederation....

Subsequently, in October 1994, Reynaldo Arcilio, Isadore Levy, and Anthony V. Montalto, none of whom are residents of Michigan, filed three separate class actions against CLIC's former directors and officers, as well as an independent auditor and several private insurance-rating agencies, seeking monetary damages for common-law fraud, negligent misrepresentation, and unlawful federal securities transactions. ² One action was filed in the Supreme Court of the State of New York in New York County, a second was filed in the United States District Court for the Northern District of Georgia, and a third was filed in the Georgia Superior Court in Cobb County. In each of the class actions, the plaintiffs purported to represent policyholders who purchased or renewed policies or annuities issued by CLIC or by Confederation Life Insurance and Annuity Company (CLIAC), a wholly owned subsidiary of CLIC based in Atlanta, Georgia, during the period from May 27, 1993, through August 12, 1994. According to the complaint in the federal court action, Arcilio and Montalto purchased whole life insurance policies from CLIC, while Levy purchased a single-premium deferred annuity. These persons have conceded that their goal in bringing these lawsuits was to reach the proceeds of four directors' and officers' liability policies (D & O policies) that, in total, provided $50 million of coverage in Canadian funds.

On May 3, 1995, petitioner moved for an injunction pursuant to M.C.L. § 500.8105; M.S.A. § 24.18105 ³ on the grounds that the cause of action against CLIC's former officers and directors was an asset of the rehabilitation estate, that the $50 million of coverage provided by the D & O policies was a potential source of funding for all policyholders, and that the suits by respondents Arcilio, Levy, and Montalto were disruptive to the administration of the estate. ⁴ On June 26, 1995, the Ingham Circuit Court entered an injunction enjoining "all persons or entities" from commencing or continuing "any claims or actions" against CLIC's former or present directors and officers, its independent auditor Ernst & Young, or Harris Trust & Savings Bank "for actions arising out of business or transactions with" CLIC, and enjoining any attempt to represent CLIC "policyholders or creditors in any class actions or in any other lawsuit in any forum." The court specifically exempted from the scope of the injunction the pursuit of claims "personal to such persons or entities alone and which cannot be pursued by the Rehabilitator." Also exempted from the scope of the injunction were respondents' federal securities claims, provided those claims were brought in respondents' individual capacities. Respondents sought rehearing, which the lower court denied. This Court granted respondents' application for leave to appeal.

I

A

Respondents first argue that the Ingham Circuit Court was precluded either by the Supremacy Clause of the United States Constitution, art. VI, cl. 2, or by United States Supreme Court precedent from enjoining their federal court action based on individual and class-action claims of common-law fraud and misrepresentation. We find no merit to this claim.

Chapter 81 of the Insurance Code of 1956 governs the supervision, rehabilitation, and liquidation of delinquent insurers. M.C.L. § 500.8101 et seq.; M.S.A. § 24.18101 et seq. Congress has declared, through its enactment of the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., that "[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance ... unless such Act specifically relates to the business of insurance...." 15 U.S.C. § 1012(b). Recently, in United States Dep't of Treasury v. Fabe, 508 U.S. 491, 507, 113 S.Ct. 2202, 2211, 124 L.Ed.2d 449 (1993), the Supreme Court stated that § 2(b) of the McCarran-Ferguson Act reverses the normal relationship between state and federal law with regard to the regulation of insurance, establishing "a rule that state laws enacted 'for the purposes of regulating the business of insurance' do not yield to conflicting federal statutes unless a federal statute specifically requires otherwise." Id. Thus, a state law, such as Michigan's IRLA, that has as its purpose the regulation of the business of insurance preempts conflicting federal law.

Respondents argue that this case is controlled by Donovan v. City of Dallas, 377 U.S. 408, 84 S.Ct. 1579, 12 L.Ed.2d 409 (1964), and its progeny. In Donovan, the United States Supreme Court held, at 412, 84 S.Ct. at 1582:

Early in the history of our country a general rule was established that state and federal courts would not interfere with or try to restrain each other's proceedings. That rule has continued substantially unchanged to this time. An exception has been made in cases where a court has custody of property, that is, proceedings in rem or quasi in rem. In such cases this Court has said that the state or federal court having custody of such property has exclusive jurisdiction to proceed. Princess Lida v Thompson, 305 US 456, 465-468; 59 SCt 275 [280-81]; 83 LEd 285 (1939). In Princess Lida this Court said "where the judgment sought is strictly in personam, both the state court and the federal court, having concurrent jurisdiction, may proceed with the litigation at least until judgment is obtained in one of them which may be set up as res judicata in the other." Id. at 466, .

See also General Atomic Co v. Felter, 434 U.S. 12, 18, 98 S.Ct. 76, 54 L.Ed.2d 199 (1977).

Respondents assert that the Ingham Circuit Court could not enjoin their pursuit of common-law claims of fraud and negligent misrepresentation in federal court because those claims were brought against CLIC's former directors and officers and others, not against CLIC itself, and because the source of recovery, i.e., the proceeds of the D & O policies, is not a part of the rehabilitation res. Hence, respondents assert that their federal claims are in personam and the exception for in rem or quasi in rem claims expressed in Donovan is inapplicable. While these arguments have superficial appeal, we are not persuaded.

Section 8113(1) of the IRLA, M.C.L. § 500.8113(1); M.S.A. § 24.18113(1) under which petitioner was appointed as rehabilitator, authorizes the "rehabilitator to take immediate possession of the assets of the insurer, and to administer them under the court's general supervision." Once an order of rehabilitation is issued by the court, ...