Integrity Ins. Co., Matter of

• Court: New Jersey Superior Court – Appellate Division
• Writing for the Court: SCALERA
• Citation: 573 A.2d 928,240 N.J.Super. 480
• Parties: In the Matter of the Liquidation of INTEGRITY INSURANCE COMPANY. Kenneth D. MERIN, Commissioner of Insurance of the State of New Jersey, and his successors as Commissioners of Insurance of the State of New Jersey, in his capacity as Liquidator of Integrity Insurance Company, Plaintiff-Respondent, and Clark Equipment Company, a Delaware Corporation, Intervenor-Plaintiff, v. YEGEN HOLDINGS CORP., f/k/a Yegen Associates, Inc., a New Jersey corporation, the Integrity Financial Group, Inc. f/k/a The Integrity Group, Inc., a New Jersey corporation, Christian C. Yegen, Lawrence E. Stern, Eugene M. McGee, Jr., Irwin S. Markowitz, Carol Lerer, Jason W. Semel, John W. Nolan, W. Shellman Morse, Robert W. Stubbs, Robert E. Dennis, Sam L. Monk, James P. Murphy, Brian S. Frisch, Laura C. Talbott, Richard J. Svoboda, Henry C. Savino, Bradley D. Wiley, William R. Fisher, Jr., Albert L. Weiss, Arthur S. Nicholas, Leandro S. Galban, Jr., Mallory Factor, Robert J. Lockhart, Kenneth R. MacLeod, Joel H. Schleifstein, and Touche Ross & Company, a New York partnership, Defendants-Appellants.
• Decision Date: 06 March 1990

Page 480

240 N.J.Super. 480 573 A.2d 928 In the Matter of the Liquidation of INTEGRITY INSURANCE COMPANY.
Kenneth D. MERIN, Commissioner of Insurance of the State of
New Jersey, and his successors as Commissioners of Insurance
of the State of New Jersey, in his capacity as Liquidator of
Integrity Insurance Company, Plaintiff-Respondent,
and
Clark Equipment Company, a Delaware Corporation, Intervenor-Plaintiff,
v.
YEGEN HOLDINGS CORP., f/k/a Yegen Associates, Inc., a New
Jersey corporation, the Integrity Financial Group, Inc.
f/k/a The Integrity Group, Inc., a New Jersey corporation,
Christian C. Yegen, Lawrence E. Stern, Eugene M. McGee, Jr.,
Irwin S. Markowitz, Carol Lerer, Jason W. Semel, John W.
Nolan, W. Shellman Morse, Robert W. Stubbs, Robert E.
Dennis, Sam L. Monk, James P. Murphy, Brian S. Frisch, Laura
C. Talbott, Richard J. Svoboda, Henry C. Savino, Bradley D.
Wiley, William R. Fisher, Jr., Albert L. Weiss, Arthur S.
Nicholas, Leandro S. Galban, Jr., Mallory Factor, Robert J.
Lockhart, Kenneth R. MacLeod, Joel H. Schleifstein, and
Touche Ross & Company, a New York partnership, Defendants-Appellants. Superior Court of New Jersey,
Appellate Division. Argued Jan. 18, 1990.
Decided March 6, 1990.

[573 A.2d 930]

Page 484

John J. Francis, Jr., Kew Gardens, N.Y., and Mark E. Davidson, New York City, of the New York bar, for defendants-appellants Touche Ross & Company (Shanley and Fisher, attorneys, Shea and Gould of the New York bar, of counsel, and with John J. Francis, Morristown, on the brief).

Page 485

Stanley Weiss, for the remaining defendants-appellants (Carpenter, Bennett and Morrissey, attorneys, Stanley Weiss and Thomas J. Lennon, of counsel; LeBoeuf, Lamb, Leiby and MacRae, attorneys, Frederick B. Lacey and Thomas W. Greelish, Newark, of counsel; Greenbaum, Rowe, Smith, Ravin, Davis and Bergstein, attorneys, Paul A. Rowe, Woodbridge, of counsel; Walter A. Lesnevich, Tenafly, attorney; Gern, Dunetz, Davison, Bortech and Weinstein, attorneys, Ronald L. Davison, Roseland, of counsel.)

Steven S. Radin, for plaintiff-respondent Liquidator of Integrity Ins. Co. (Sills, Cummis, Zuckerman, Radin, Tischman, Epstein and Gross, Newark, attorneys, Steven S. Radin, of counsel, Davis J. Howard, Anthony J. Monaco and Shalom D. Stone, Newark, on the brief).

An amicus curiae brief was filed by the intervenor-plaintiff Clark Equipment Co. and by Burlington County, (Riker, Danzig, Scherer and Hyland, attorneys, Shawn L. Kelly, of counsel, Warren J. Martin, Jr., Morristown, on the brief).

Page 484

Before Judges DREIER, SCALERA and WEFING.

Page 485

The opinion of the court was delivered by

SCALERA, J.A.D.

This case involves the liquidation of Integrity Insurance Company (Integrity) in which the New Jersey Commissioner of Insurance was appointed as Liquidator (Liquidator) pursuant to the provisions of the New Jersey Insurers Liquidation Act (Act), N.J.S.A. 17:30C-1 et seq. In this opinion, we undertake to set forth the extent to which the Liquidator may act in that capacity and to establish the procedures which are to be followed whenever he asserts claims of the insolvent estate and other claimants against third parties.

On December 30, 1986, the Commissioner commenced rehabilitation delinquency proceedings against Integrity pursuant to the Act, N.J.S.A. 17:30C-6, and a consent order was entered. On March 24, 1987, however, the trial court terminated that proceeding ( N.J.S.A. 17:30C-7), declared Integrity to be insolvent and directed the Commissioner, as statutory Liquidator, to

Page 486

dissolve the company in accordance with the Act. (This is referred to herein as the so-called "liquidation order"). N.J.S.A. 17:30C-9 and 10.

Paragraph 16(i) of that liquidation order provided that the Liquidator was empowered to

573 A.2d 931] prosecute any action which may exist on behalf of the creditors, policyholders or shareholders of Integrity against any officer or director of Integrity, or any other person

The trial court thereby sought to grant to the Liquidator all of the express and implied statutory powers delineated in the Act, including the authority to commence litigation on behalf of Integrity, its creditors, policyholders, claimants and other beneficiaries of the estate.

In addition, the order provided that the Liquidator had to give notice of the entry thereof to all potential claimants, including policyholders, state insurance commissioners, guaranty associations and insurance agents and to specify the procedure by which they could file proofs of claim against the estate of Integrity. N.J.S.A. 17:30C-9a and 20. In response thereto, the Liquidator received over 25,000 proofs of claim from policyholders and creditors. Thereafter, although the Act did not require him to do so, the Liquidator secured a further order allowing him to provide all interested parties with the right to request and receive notice of future proceedings. Approximately 400 policyholders responded to that notification and their names were placed on a separate list.

On April 28, 1988, 18 of those policyholders, led by Clark Equipment Company (Clark), moved to have the trial court appoint a policyholders' committee to represent all policyholders in the liquidation process and asked that it be financed from the Integrity estate. On September 22, 1988, the trial court denied that application for the reasons set forth in its published opinion. In re Liquidation of Integrity Ins., 231 N.J.Super. 152, 159, 555 A.2d 50 (Ch.Div.1988). In essence, the denial was grounded on the provisions of the Act which enabled the court to fashion "such ... relief as the nature of the case and

Page 487

interests of the policyholders, creditors, stockholders, members, subscribers or the public may require" as provided in N.J.S.A. 17:30C-4d. Liquidation of Integrity Ins. Co., 231 N.J.Super. at 156, 555 A.2d 50. While Clark did not seek to appeal from that denial, the issue of its intervention is, nevertheless, implicated in our discussion. We also note that no one questions the trial court's appointment of the Liquidator or the general procedure attendant upon such action, except as may be specifically noted herein.

Meanwhile, on May 4, 1988, the Liquidator commenced the instant collateral suit in this action on behalf of Integrity, its creditors, policyholders, claimants and beneficiaries to recover damages from Touche Ross & Company (Touche) as Integrity's accountant and auditor, the Integrity Financial Group, Inc. as public owner of 100% of Integrity's stock, Yegen Holding Corporation as private owner of 80% of the Integrity Financial Group, Inc.'s stock (Yegen defendants), and 25 individuals who, at various times, had been associated with Integrity as directors and officers (D & O defendants.)

The complaint asserted various causes of action against the Yegen defendants for common law negligence, negligent misrepresentation, breach of fiduciary duties, common law fraud, waste, depletion and diversion of Integrity's corporate assets, violation of N.J.S.A. 17:27A-4(c) and N.J.S.A. 2C:41-1 et seq.; against the D & O defendants for violation of N.J.S.A. 14A:6-14 and N.J.S.A. 14A:7-14; and against Touche for breach of contract, malpractice, negligence, negligent misrepresentation, gross negligence, and recklessness. The amended complaint further charged Touche with fraud and aiding and abetting the misconduct of its codefendants. Both Touche and the Yegen defendants were also charged with violating New Jersey's anti-racketeering and consumer fraud statutes, N.J.S.A. 2C:41-1 et seq., and N.J.S.A. 56:8-1 et seq.

The essence of the allegations set forth in the pleadings was,

Page 488

that as a result of mismanagement and fraud, the Yegen Defendants caused Integrity to become statutorily insolvent in 1981 or 1982 and then, with the active participation of Touche, concealed the company's true economic condition by preparing and disseminating materially [573 A.2d 932] false financial statements. But for such concealment, New Jersey's Insurance Department ... would have shut down the company in 1982 or 1983 instead of 1987; policyholders would not have purchased insurance from Integrity during these years; and, creditors would not have extended credit to Integrity during these years without obtaining adequate security.

Although most of the asserted causes of action concededly "belong" to Integrity, two of the counts of the complaint seek a recovery based on alleged misrepresentations made by defendants to the creditors, policyholders, and other Integrity beneficiaries. The Liquidator premises his authority and standing to assert such claims on the provisions of the Act and paragraph 16(i) of the liquidation order.

On October 31, 1988, the defendants moved to dismiss these two counts on the ground that the Liquidator lacked standing to prosecute these claims because they "belonged" personally to the policyholders, creditors, and other parties who allegedly relied upon the misrepresentations. On April 10, 1989, the trial court denied these motions, but refused to address at that time, whether any recovery by the Liquidator in this action would constitute a general asset of the estate or pass directly to "some creditor, policyholder or claimant."

On March 17, 1989, Clark moved to intervene in this action and suggested in its brief to the trial court the appropriateness of proceeding with a class action. It noted that, in the absence of such, the defendants might justifiably complain that a determination by the court might not be binding or have res judicata effect. On April 10, 1989, the trial court partially granted Clark leave to intervene for the purposes of "monitoring" the proceeding only and in order to receive notice of all steps taken in the action. He further granted Clark the opportunity to object to any proposed settlement by the Liquidator. However, Clark was denied any right to negotiate a settlement of the claim which it...