Executive Life Ins. Co., In re

• Decision Date: 15 February 1995
• Docket Number: No. B078462,B078462
• Citation: 38 Cal.Rptr.2d 453,32 Cal.App.4th 344
• Court: California Court of Appeals Court of Appeals
• Parties: In re EXECUTIVE LIFE INSURANCE COMPANY in Conservation of Assets. Charles QUACKENBUSH, as Insurance Commissioner, etc., Plaintiff and Respondent, v. AURORA NATIONAL LIFE ASSURANCE COMPANY et al., Defendants and Respondents, Commercial National Bank in Shreveport et al., Defendants and Appellants.

Page 453

38 Cal.Rptr.2d 453

32 Cal.App.4th 344

In re EXECUTIVE LIFE INSURANCE COMPANY in Conservation of Assets Charles QUACKENBUSH, as Insurance Commissioner, etc., Plaintiff and Respondent, v. AURORA NATIONAL LIFE ASSURANCE COMPANY et al., Defendants and Respondents Commercial National Bank in Shreveport et al., Defendants and Appellants.

No. B078462.

Court of Appeal, Second District, Division 4, California.

Feb. 15, 1995.

As Modified on Denial of Rehearing March 15, 1995.

Review Denied May 11, 1995.

Pillsbury Madison & Sutro, Philip S. Warden, John W. Grenfell, Kevin M. Fong, Mark Schallert, Robert L. Wallan and Maureen C. Dellinger, San Francisco, for appellants Commercial Nat. Bank in Shreveport, First Interstate Bank of Denver, N.A., First Tennessee Bank Nat. Ass'n, NationsBank of Texas, N.A., Norwest Bank Minnesota, N.A., and Sunburst Bank.

Weinberg & Green, Charles O. Monk II, Arthur F. Fergenson, Sherry H. Flax, Matthew G. Dobson, Baltimore, MD, Fried, Frank, Harris, Shriver & Jacobson, Jed S. Rakoff, Howard W. Goldstein, Stephen D. Alexander, New York City, Manatt, Phelps & Phillips and Robert E. Hinerfeld, Los Angeles, for appellants Howard, Weil, Labouisse, Friedrichs, Inc., Rauscher Pierce Refnes, Inc., Morgan Stanley & Co., Inc., Morgan Keegan & Co., Inc., and Rotan Mosle, Inc.

Thelen, Marrin, Johnson & Bridges, Gary L. Fontana, Jonathan E. Polonsky, Christine C. Franklin, Valarie H. Macht and Thomas P. Higgins, San Francisco, for appellant Texas Commerce Bank Nat. Ass'n.

Haight, Brown & Bonesteel, Roy G. Weatherup and Jon M. Kasimov, Santa Monica, for appellants Wallace Albertson, Melvine Fuchs and Carole H. Fuchs.

Daniel E. Lungren, Atty. Gen., Edmond B. Mamer, Deputy Atty. Gen., Janice E. Kerr, Gen. Counsel of Dept. of Ins., Lorraine Johnson, Sr. Counsel, Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, Jerome B. Falk, Jr., Steven L. Mayer, Peter J. Busch, Laurence F. Pulgram, San Francisco, Rubinstein & Perry, Karl L. Rubinstein and Dana Carli Brooks, Los Angeles, for petitioner and respondent Ins. Com'r Charles Quackenbush.

Pachulski, Stang, Ziehl & Young, Larry W. Gabriel and Iain A.W. Nasatir, Los Angeles, for respondents State Street Bank and Trust Co., Chelsea Industries, Inc., British Gas Exploration and Production, Inc., Underwriters Laboratories, Inc., and Group Annuity Participant Protection Ass'n.

McNitt, Edwards & Schraner, Roger L. McNitt, Andrew G. Loeb and Kenneth A. Zak, San Diego, for respondent Nat. Structured Settlements Trade Ass'n.

Brobeck, Phleger & Harrison, Kent M. Roger, G. Larry Engel, Esther H. Pang, and David M. Higgins, San Francisco, for respondent CoCARE.

Lillick & Charles, Stephen Oroza and John M. Rosenthal, San Francisco, for respondent Banker Trust Co. of California.

Daar & Newman, Jeffery J. Daar and Rodney W. Loeb, Los Angeles, for respondents Temecula Valley Unified School Dist. and Seattle-First Nat. Bank.

Irell & Manella, Peter J. Gregora, Kenneth R. Heitz, Kevin A. Frankel and Robert Offer, Los Angeles, for respondent Aurora Nat. Life Assur. Co.

Hopkins & Sutter, William Carlisle Herbert, Christopher W. Zibart, Mary Kay McCalla, William T. Casey, James M. Falvey, Chicago, IL, Parker, Milliken, Clark, O'Hara & Samuelian, Nowland C. Hong, Claire D. Johnson and Michael S. Simon, Los Angeles, for respondent Nat. Organization of Life and Health Ins. Guar. Associations.

Buchalter, Nemer, Fields & Younger, Jack I. Samet, Stephen K. Lubega, Cheryl A. Orr, J. Karren Baker, John Ingersoll, Los Angeles, for respondent Electronic Data Systems Corp.

THOMPSON, Associate Justice. ^*

This is the fourth opinion of the Court of Appeal spawned by insolvency proceedings involving Executive Life Insurance Company (ELIC), a series which threatens to eclipse in scope, if not in time, the thirty-year history of similar past litigation involving Pacific Mutual Life Insurance Company of California. ¹ In Texas Commerce Bank v. Garamendi (1992) 11 Cal.App.4th 460, 14 Cal.Rptr.2d 854 and Commercial Nat. Bank v. Superior Court (1993) 14 Cal.App.4th 393, 17 Cal.Rptr.2d 884 we recounted some of the background of these proceedings. We further summarize the background here to set the context of this opinion and to define various acronyms employed in it.

ELIC, a California-based life insurance company, had in the 1980's issued conventional life insurance policies and annuities and also innovative annuity-like products known as Guaranteed Investment Contracts (GICs). These included contracts funding (1) pension and profit sharing plans (Pension-GICs), (2) bond liability of municipalities (Muni-GICs), and (3) structured settlements reached in tort cases; as well as single premium immediate annuities certain (SPIAs) and single premium deferred annuities (SPDAs).

As required by law, ELIC established reserves representing its future liabilities on these contracts. The reserves were funded by investments, primarily in high yield fixed income securities with no, or very low, credit ratings. By 1991 the market in these high risk bonds had crashed. A large proportion of the bonds in ELIC's portfolio were in default, and the remainder had suffered serious declines in value so that ELIC reserves were grossly inadequate. The reserves faced a further serious deterioration because of the equivalent of a "run on the bank." Policyholders whose contracts permitted were cashing out their contracts with ELIC, requiring ELIC to dispose of its better investments to raise necessary cash.

As mandated by Insurance Code sections 1010 et seq., ² the Insurance Commissioner (Commissioner) seized the assets of ELIC and placed the company in conservatorship on April 11, 1991. The Commissioner is an officer of the state (Caminetti v. Pac. Mutual L. Ins. Co. (1943) 22 Cal.2d 344, 354, 139 P.2d 908) who, when he or she is a conservator, exercises the state's police power to carry forward the public interest and to protect policyholders and creditors of the insolvent insurer. (Carpenter v. Pacific Mut. Life Ins. Co. (1937) 10 Cal.2d 307, 330-331, 74 P.2d 761.) "The public has a grave and important interest in preserving the business [of the insolvent insurer] if that is possible." (Id. at p. 329, 74 P.2d 761.) Hence while the Commissioner as conservator has the power either to rehabilitate the insolvent insurer (§ 1043) or to liquidate it (§ 1016), liquidation is a last resort. (Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d at p. 329, 74 P.2d 761.)

In exercising this power, the Commissioner is vested with broad discretion. (Commercial Nat. Bank v. Superior Court, supra, 14 Cal.App.4th at p. 402, 17 Cal.Rptr.2d 884.) This discretion is subject to statutory limitations (see ibid. at p. 409, 17 Cal.Rptr.2d 884) and the requirement that the exercise of discretion be neither arbitrary nor improperly discriminatory. (Carpenter, supra, 10 Cal.2d at p. 329, 74 P.2d 761.) The Commissioner as conservator of the insolvent insurer is also a trustee for the benefit of all creditors and other persons interested in the insolvency estate. (§ 1057.)

Complying with Carpenter 's preference for rehabilitation, the Commissioner, after negotiations with interested parties, crafted a "rehabilitation plan" for ELIC. This plan provided for new policies to be issued to policyholders of ELIC by a successor insurer, with these policyholders entitled to "opt out" and receive the liquidation value of their claims if they wished. In ruling upon a petition for writ of mandate in Commercial Nat. Bank v. Superior Court, supra, we disapproved three discrete aspects of the voluminous and detailed plan. (14 Cal.App.4th at p. 398, 17 Cal.Rptr.2d 884.) "[W]ith the hope and expectation that the deficiencies [discussed in the opinion] will be corrected and a new plan submitted that can be approved[,]" (ibid.) we ordered that a peremptory writ of mandate issue requiring the trial court to "vacate its order/judgment ... and to proceed according to law." (Id. at p. 421, 17 Cal.Rptr.2d 884.)

In response to the peremptory writ, and after the Commissioner negotiated settlements with all of the many interested policyholder groups except one, he adopted a Modified Plan. He sought and obtained court approval of the settlements and the Modified Plan. The impact of our decision in Commercial National Bank upon the original rehabilitation plan, the validity of some aspects of the modified rehabilitation plan, the validity of the settlements, and the propriety of the professional fees approved by the court are the primary subjects of this appeal. The following are the appellants: Commercial National Bank in Shreveport and some other similarly situated banks (Commercial National), who are indentured trustees of Muni-GICs purchased in 1986; Texas Commerce Bank-El Paso (Texas Commerce), which is the indentured trustee of a Muni-GIC purchased in 1986; Wallace Albertson, Melvine Fuchs and Carole H. Fuchs (the Albertson appellants), who are holders of ELIC contracts; and Howard, Weil, Labouisse, Friedrichs Incorporated and four other similarly situated entities (Underwriters), who are underwriters of ELIC issues. Underwriters are defendants in class action lawsuits for Securities Act violations and related claims arising out of their activities in connection with the sale of ELIC contracts. Underwriters participated in all proceedings in the trial court as "interested parties similar to amicus curiae."

For convenience we later refer to appellants collectively unless context requires that we designate more specifically. Respondents are the Commissioner; Aurora National Life Assurance Company (Aurora), the purchaser of ELIC's insurance business; and other interested parties to whom we similarly refer as "respondents" unless context requires otherwise. ³

We first reject the claim of appellants that the sale of the ELIC bond portfolio must be rescinded. Addressing appellants' challenge to the court's approval of the...