In re First Assured Warranty Corp.
| Citation | 383 B.R. 502 |
| Decision Date | 06 March 2008 |
| Docket Number | No. 06-13669 MER.,06-13669 MER. |
| Parties | In re FIRST ASSURED WARRANTY CORPORATION, Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado |
Alice A. White, Douglas Jessop, J. Brian Fletcher, K. Lane, Cutler, Megan M. Handley, Neal K. Dunning, Denver, CO, for Debtor.
THIS MATTER comes before the Court on the Motion to Dismiss Chapter 11 Proceeding, the Amended Motion for Relief from Stay, the Motion to Excuse Turnover of Property by a Custodian and the Motion to Prohibit Use of Cash Collateral, each filed by J.P. Schmidt, Insurance Commissioner of the State of Hawaii and the Responses thereto by the Debtor and its shareholders.1 The Court has reviewed the pleadings, the testimony, the arguments of counsel, the legal authority cited by the parties and makes the following findings of fact and conclusions of law.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b)(1). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), (G) and (0) as it involves matters concerning the administration of the estate, turnover of estate property, lifting the automatic stay and the adjustment of the debtor-creditor or equity security holder relationship.
First Assured Warranty Corporation ("First Assured" or the "Debtor") filed its voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code on June 16, 2006. On June 4, 2006, J.P. Schmidt, Insurance Commissioner of the State of Hawaii (the "Commissioner"), filed his Motion to Dismiss Chapter 11 Proceeding (the "Motion to Dismiss"). One day later, the Commissioner filed, his Amended Motion for Relief From Stay (the "Stay Motion"). The Debtor filed objections to both the Motion to Dismiss and the Stay Motion.
On July 12, 2006, the Commissioner and the Debtor stipulated to combining the hearing on the Motion to Dismiss and the final hearing on the Stay Motion into one evidentiary hearing. The parties agreed the matters could be heard outside the time deadlines provided by the Bankruptcy Code. In addition, the parties also agreed the Court would hear oral arguments on the Commissioner's Motion to Excuse Turnover of Property by a Custodian (the "Excuse Turnover Motion") and Motion to Prohibit Use of Cash Collateral (the "Cash Collateral Motion") and the Debtor's objections thereto at the same hearing. On August 17, 18, 29, and 30, 2006, the Court convened a hearing on these matters, after which the parties were asked to provide the Court with written closing statements and responses.
At the conclusion of the hearing, the Court made specific findings pursuant to 11 U.S.C. § 1112(b)(3)2 that there were compelling circumstances preventing the Court from rendering its decision on the Motion to Dismiss within fifteen days after the commencement of the hearing. Additionally, the parties consented to the Court rendering its decision on the Stay Notion at the same time as the Court rendered its decision on the Motion to Dismiss.
First Assured was incorporated in Colorado in 1996 and was engaged in the business of selling extended automobile service warranties to the general public. The extended automobile warranties, also known as Vehicle Service Contracts ("VSCs" or "Vehicle Service Contracts"), were either sold by First Assured through automobile dealers and agents or marketed via the internet through First Assured's wholly-owned subsidiary, 1SourceAutoWarranty.com, Inc. ("1Source" )3
Some of the states in which First Assured conducted business required a vehicle service provider to provide proof of insurance or otherwise to demonstrate an ability to pay warranty claims before it could sell VSCs. Thus, in 1998, PrimeGuard Insurance Company, Inc. ("PrimeGuard")4 was created to provide contractual liability coverage to its members, First Assured and 1Source. Prime Guard is a Hawaii-domiciled, risk retention captive insurance company which is licensed and registered with the Hawaii Insurance Division and subject to the Commissioner's regulation and oversight.5
Initially, PrimeGuard provided "first-dollar" coverage for its members. Under this arrangement, First Assured (or 1Source) would sell a VSC to a consumer and remit a significant portion of the monies collected to PrimeGuard. PrimeGuard held these monies in a reserve account to pay liabilities related to any future loss liability for VSCs. PrimeGuard was responsible for reimbursing First Assured for any claims it paid on behalf of VSC holders from the first dollar going forward. Although First Assured was obligated to pay approved and covered claims, a policyholder could also seek payment from PrimeGuard directly if First Assured failed to pay on a claim.
For reasons not clearly explained at trial, in April of 2001 PrimeGuard and First Assured switched their insurance policy from "first-dollar" to "excess loss" coverage. See Commissioner's Exhibit 23. Under "excess loss" coverage, First Assured paid all approved and covered VSC claims without reimbursement from PrimeGuard. First Assured kept and maintained most of the monies paid by VSC holders in its own loss reserve accounts (the "Loss Reserve") established for claim payment purposes.6 Under this new arrangement, PrimeGuard was only required to pay on a VSC claim to the extent the claim exceeded the First. Assured Loss Reserve. However, an individual policyholder could still seek payment from PrimeGuard under certain conditions if First Assured did not pay its claim. For this reason PrimeGuard was still responsible for maintaining some kind of reserve of its own in order to satisfy any claims First Assured might not pay.7
The switch from "first-dollar" coverage to "excess loss" coverage was approved by the Commissioner and memorialized between First Assured and PrimeGuard in a Program Administrator Agreement which became effective on April 1, 2001 (the "Program Agreement"). See Commissioner's Exhibits 28 and 32. In addition to the Program Agreement, on July 24, 2003, PrimeGuard and First Assured entered into a Loss Reserve Escrow Agreement (the "Escrow Agreement") apparently to clarify the parties' responsibilities with regard to the Loss Reserve account.
Pursuant to the Commissioner's oversight responsibilities with regard to PrimeGuard, First Assured agreed to submit an annual audited financial statement, as well as to allow PrimeGuard's Captive Insurance Administrator, Craig Watanabe ("Watanabe") and his staff to perform annual operational audits to determine PrimeGuard and First Assured's compliance with their Program Agreement and applicable Hawaii insurance law. See Commissioner's Exhibit 16. On September 22, 2003, the Commissioner issued a new directive (Memorandum 2003-5C) which imposed additional filing requirements for PrimeGuard, including a semiannual actuarial valuation of the First Assured Loss Reserve. See Commissioner's Exhibit 53.
On May 16, 2004, William C. Koppenheffer, the Commissioner's Chief Examiner ("Koppenheffer"), prepared an examination of PrimeGuard covering January 1, 2001, through December 31, 2003 (the "Examination").8 See Commissioner's Exhibit 1D. The purpose of the Examination was to assess the financial condition of PrimeGuard and to determine whether it was in compliance with applicable law and regulations. Id. One of the key findings of the Examination revealed PrimeGuard, through First Assured, was not holding sufficient reserve funds as required by Hawaii law. Specifically, the Examination determined PrimeGuard needed to increase its "surplus" by at least $938,864. Id. at p. 14. On June 15, 2005, Eric Miller, PrimeGuard's President, sent a letter to the Commissioner disputing the Examination and the finding that PrimeGuard's surplus needed to increase. Id. p. 16. However, on June 21, 2005, the Commissioner adopted Koppenheffer's findings as set forth in the Examination. See Commissioner's Exhibit 1G.
On September 1, 2005, PrimeGuard provided the Commissioner its own actuarial report for June 30, 2005. The findings of PrimeGuard's report confirmed the Loss Reserve held by First Assured was approximately $1.0 million less than what was required. See Commissioner's Exhibit 105, p. 15. The Commissioner then began a formal investigation of PrimeGuard to determine the sufficiency of the Loss Reserve.
On October 12, 2005, the Commissioner issued his Summary Order of Supervision Proceedings, in which Koppenheffer was appointed the Supervisor of PrimeGuard (the "Supervision Order"). See Commissioner's Exhibit 1G. In part, the language contained in the Supervision Order placed PrimeGuard and First. Assured, as well as their respective directors, officers, managers, agents, employees, etc., under the supervision of the Commissioner and specifically required PrimeGuard to establish a loss reserve "trust" account sufficient to fund all future claims. Id. PrimeGuard, through its President and Vice President, stipulated to the entry of the Supervision Order. See Commissioner's Exhibit 1G (Exhibit 3 attached thereto). Although the Commissioner asserts the terms of the Supervision Order applied to First Assured and 1Source, they were not named as "parties" to that Order.
Approximately one month later, on November 14, 2005, the Commissioner filed a petition in the Hawaii Circuit Court of the First Circuit (the "Hawaii Court"), to seize certain PrimeGuard assets. See Commissioner's Exhibit 2. The Hawaii Court issued an order granting the Commissioner's request on an ex parte basis that same day (the "Seizure Order"). Watanabe testified the petition for seizure was filed in part because the Commissioner was concerned the Loss Reserve was severely underfunded and...
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