Garamendi v. Executive Life Ins. Co.

• Decision Date: 23 July 1993
• Docket Number: No. BO66871,BO66871
• Citation: 17 Cal.App.4th 504,21 Cal.Rptr.2d 578
• Court: California Court of Appeals Court of Appeals
• Parties: John GARAMENDI, as Insurance Commissioner, etc., Plaintiff and Respondent, v. EXECUTIVE LIFE INSURANCE COMPANY, Defendant; Morgan Stanley Mortgage Capital, Inc., Real Party in Interest and Appellant; Signature Group et al., Real Parties in Interest and Respondents.

Page 578

21 Cal.Rptr.2d 578

17 Cal.App.4th 504

John GARAMENDI, as Insurance Commissioner, etc., Plaintiff and Respondent, v. EXECUTIVE LIFE INSURANCE COMPANY, Defendant;

Morgan Stanley Mortgage Capital, Inc., Real Party in Interest and Appellant;

Signature Group et al., Real Parties in Interest and Respondents.

No. BO66871.

Court of Appeal, Second District, Division 3, California.

July 23, 1993.

Review Denied Oct. 28, 1993.

Irell & Manella, Alexander F. Wiles, Evan A. Jenness and Christopher S. Harman, Los Angeles, for real party in interest and appellant.

Daniel E. Lungren, Atty. Gen., Rubinstein & Perry, Karl L. Rubinstein, Dana Carli Brooks, Charles S. Bronitsky and Kathleen M. McCain, San Francisco, for plaintiff and respondent and real parties in interest and respondents.

CROSKEY, Associate Justice.

This appeal by Morgan Stanley Mortgage Capital, Inc. ("Morgan Stanley"), involves one component of the immense and complex litigation over the rehabilitation of Executive Life Insurance Company ("ELIC"). While separate litigation goes forward to determine other important issues We hold that, when an "identity of interest" exists between an insolvent insurance company and a partnership in which the insurance company has a substantial ownership interest, a trial court overseeing the company's insolvency may validly exercise in rem jurisdiction over such partnership's assets where reasonably necessary to promote the insolvent company's rehabilitation. We therefore shall affirm the trial court's order. ²

such as creditor priorities, ¹ this action raises the issue of whether the trial court had jurisdiction, in ELIC's insolvency proceedings, to make an order relating to the assets of certain partnerships through which ELIC had made investments of its premium income.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Parties and the Relevant Court Orders

ELIC is a California insurance company. Its insolvency proceedings commenced on April 11, 1991. ³ On that date, the trial court issued an order entitled "Order Appointing Conservator, Establishment of Procedures, Issuance of Injunctions And Related Orders" (the "April 11 order"). The statutory basis for this order was Insurance Code section 1011, subdivision (d), which provides for the Insurance Commissioner of the State of California ("Commissioner") to take possession of an insurance company's assets if the company is in such a condition as to be a hazard to its policyholders, creditors or the public. ⁴ The April 11 order appointed the Commissioner as conservator of ELIC, enjoined the transfer, hypothecation, or other dissipation of ELIC's assets, and enjoined the initiation, prosecution, or continuation of all proceedings against ELIC in any other forum. ELIC's partnership interests were included in the schedule of ELIC's property. ⁵

Prior to the appointment of the conservator, ELIC had carried on an investment strategy which included forming and participating The Signature Group ("Signature") and TSG Holdings, L.P. ("TSG") are two California limited partnerships (collectively, "The Signature Partnerships"), which were formed by ELIC as part of its real estate investment strategy. However, they themselves are not in the business of insurance. ELIC has a total of approximately $65 million invested in them, primarily from premium income.

in numerous general and limited partnerships, joint ventures and other business enterprises. Certain of these entities were used solely for real estate investments, which investments were acquired with funds principally provided by ELIC and substantially derived from premiums paid by policy-holders. ELIC invested more than $650 million through such affiliated entities. ⁶

ELIC has a 92% interest in Signature and is both a limited and a general partner. The only other partner is JORAD Associates ("JORAD"), a California general partnership, which is the managing general partner of Signature. ⁷ The sole partners in TSG are Signature and Credit America Corporation, a California corporation wholly owned by Signature.

Morgan Stanley is a Delaware corporation and is engaged in the business of investment banking. As we discuss in more detail below, Morgan Stanley claims to be a secured creditor of the Signature Partnerships. In such capacity, it objects to the orders made by the trial court in the ELIC insolvency proceedings which purport to affect the assets of those partnerships.

At the time of trial, Security Pacific Bank ("Security Pacific") was one of ELIC's principal banks and was one of 13 banks expressly enjoined in the April 11 order from "permit[ting] any withdrawal, offset, transfer or other disposition of [any of the funds or securities or any other property of ELIC] except upon the prior written instructions of the Conservator or order of [the] Court." ⁸

2. The Purchase-Repurchase Agreements

In 1990, Morgan Stanley and the Signature Partnerships entered into a series of reverse-repurchase transactions in which Morgan Stanley bought from the Signature Partnerships certain mortgage notes and related documents, which the Signature Partnerships agreed to repurchase on an agreed future date for $50 million. By these agreements, the Signature Partnerships sold the mortgage notes to Morgan Stanley in exchange for a specified payment and agreed to repurchase them at a later time for the agreed sum. Formally, Morgan Stanley actually purchased the mortgage notes and was to be the owner of The subject mortgage notes were placed in the custody of Security Pacific National Bank for the duration of the agreement. On June 1, 1991 and October 18, 1991, the Signature Partnerships' obligations on the two purchase-repurchase agreements matured. They endeavored to negotiate an extension of the agreements, and the agreements were indeed extended while negotiations went forward. However, the parties were apparently unable to agree on the final terms for an extension, and on October 30, 1991, the Signature Partnerships' general counsel wrote to Security Pacific, demanding that the mortgage notes not be released to Morgan Stanley or any other party without the Signature Partnerships' express written consent. By that letter, counsel also advised Security Pacific to assure itself that the notes were not subject to the April 11 order before taking any action respecting them. On November 14, 1991, Morgan Stanley demanded that Security Pacific surrender possession of the notes. Security Pacific refused, citing the April 11 order.

the notes until they were repurchased. However, the arrangement was, in reality and in effect, a secured loan from Morgan [17 Cal.App.4th 511] Stanley to the Signature Partnerships, for which the mortgage notes constituted the security. ⁹

3. The Federal Action

In response, Morgan Stanley, on November 17, 1991, filed suit against the Signature Partnerships and Security Pacific in the United States District Court for the Central District of California. Morgan Stanley, claiming diversity jurisdiction, alleged causes of action for breach of the repurchase agreement, conversion, inducing breach of contract, and declaratory relief.

A week later, on November 25, the Commissioner moved to intervene and requested that the federal action be dismissed. He argued that the April 11 order, enjoining actions against the assets of ELIC, applied to Morgan Stanley's federal action against the assets of the Signature Partnerships.

On January 31, 1992, the District Court granted the Commissioner's motion, citing Safeway Trails, Inc. v. Stuyvesant Ins. Company (M.D.No.Carolina 1962) 211 F.Supp. 227, in which the court dismissed a federal action where a state receivership court had assumed in rem jurisdiction over assets of an insurance company. (211 F.Supp. at pp. 229, 239.) The District Court noted that the assets of the Signature Partnerships were not explicitly listed in the April 11 order as assets of ELIC, but held that the state court was best suited to define the scope of the in rem jurisdiction it had asserted. The District Court also noted that Morgan Stanley had notice of the state insolvency proceedings, having been served with the Conservator's "Motion for Instructions Regarding Stay ..." and the court's order on that motion. (See footnote 5, ante.) The dismissal appears to have been based upon the expectation that the state court would exercise jurisdiction over the dispute between Morgan Stanley and the Signature Partnerships, as well as asserting jurisdiction over their assets.

4. Final Proceedings in State Court

On February 13, 1992, the Commissioner moved in the trial court to assume jurisdiction over Morgan Stanley's claim against the Signature Partnerships which had been asserted in the federal action. That motion was granted on the same date. Morgan Stanley subsequently moved to vacate the order of February 13, 1991, and to dissolve the injunctions contained in the April 11 order, insofar as they applied to Morgan Stanley's claims. That motion was denied on March 19, 1992. This timely appeal followed.

CONTENTIONS ON APPEAL

Morgan Stanley raises two principal contentions: (1) California law prohibited the

trial court from exercising in rem jurisdiction over the property of a partnership that was an entity legally separate from ELIC and (2) federal law prohibited the trial court from applying state insolvency laws to the Signature Partnerships because they were not in the business of insurance.

DISCUSSION

1. Standard of Review

Ordinarily, an order granting or denying a preliminary injunction or granting or denying a motion to dissolve an injunction is reviewed under the abuse of discretion standard. (Cohen v. Board of Supervisors (1985) 40 Cal.3d 277, 286, 219 Cal.Rptr. 467, 707 P.2d 840.) However, where the grant or denial of a preliminary injunction is dependent upon construction of a statute, and the matter is purely a question of law, the standard of review is not whether discretion was...