Kentucky Cent. Life Ins. Co. v. Stephens
| Decision Date | 11 May 1995 |
| Docket Number | 94-SC-742-TG,Nos. 94-SC-743-T,s. 94-SC-743-T |
| Citation | 897 S.W.2d 583 |
| Parties | KENTUCKY CENTRAL LIFE INSURANCE COMPANY, Appellant, v. Don W. STEPHENS, Commissioner of the Kentucky Department of Insurance, Appellee. KENTUCKY CENTRAL LIFE INSURANCE COMPANY, Appellant, v. Don W. STEPHENS, Commissioner of the Kentucky Department of Insurance, Appellee. |
| Court | United States State Supreme Court — District of Kentucky |
Charles S. Cassis, Brown, Todd & Heyburn, Louisville, Paul E. Sullivan, Thomas C. Walker, Susan Mohler, Kathryn Kendrick, Brown, Todd & Heyburn, Lexington, for Kentucky Cent. Life Ins. Co. Steven L. Beshear, Janet A. Craig, Stites & Harbison, Lexington, Robert Michael Connolly, Louisville, Judith A. Villines, Stites & Harbison, Frankfort, for Don Stephens, Com'r of the Kentucky Dept. of Ins.
James H. Newberry, Jr., Susan C. Sears, Newberry, Hargrove & Rambicure, Lexington, Kevin Griffith, Charles T. Richardson, Baker & Daniels, Indianapolis, IN, for National Organization of Life and Health Ins. Guar. Associations, Illinois Life & Health Ins. Guar. Ass'n, and Texas Life, Accident, Health & Hosp. Service Ins. Guar. Ass'n.
Caroline Scott, Texas Dept. of Ins., Austin, TX, Bradley R. Hume, Woodward, Hobson & Fulton, Louisville, Dan Morales, Atty. Gen. of Texas, Jorge Vega, Diane Barlow Sparkman, Office of the Atty. Gen., Austin, TX, for Rebecca Lightsey, Com'r Texas Dept. of Ins.
Charles S. Cassis, Brown, Todd & Heyburn, Louisville, for Kentucky Cent. Life Ins. Co.
In this insurance liquidation proceeding, the Franklin Circuit Court approved the sale of Kentucky Central Life Insurance Company's (KCL) assets, including the company's insurance business, and ordered KCL's liquidation. The current board of directors of KCL seeks reversal and remand upon the basis that the decision failed to comply with the Kentucky insurer's rehabilitation and liquidation laws and was made in contravention of the constitutional rights of KCL and its shareholders. 1
KCL was incorporated in Kentucky in 1902 and commenced operating as a domicile life insurance company selling various types of life insurance and annuity products. By 1990, KCL had approximately $55.3 billion of life insurance in force. By 1992, it was authorized to sell insurance in 49 states and the District of Columbia. It had expanded into the universal life insurance business, and also had moved into what is described as an aggressive mortgage loan and real estate investment program. Its assets approximated $2.1 billion on a consolidated basis. This included its subsidiary operations engaged in the businesses of property and casualty insurance underwriting and television and radio broadcasting. There were some 450,000 individual policyholders and pension plan participants and approximately 1,000 employees.
In the late 1980's controversy arose between the heirs of Garvice Kincaid, a substantial KCL stockholder, and the then-KCL board of directors. In 1990, the Department of Insurance scheduled quadrennial examinations of KCL for several past years. Concerned with substantial and risky investments in mortgage loans and real estate, the Department obligated KCL to put in place a $40 million reserve for loan and real estate losses. The National Association of Insurance Commissioners (NAIC) established a working group to monitor KCL's mortgage loan and real estate portfolio, investments which represented 40 percent of the company's entire portfolio. A declining real estate market and the informal procedures utilized made valuation of KCL's assets uncertain. Insurance industry rating groups lowered KCL's ratings and as policyholders became aware of the condition, policies were submitted for their cash values. By February 1993, the average daily surrender amount was nearly $1 million. In both 1992 and 1993, the Kentucky Insurance Commissioner was meeting with KCL and reporting periodically to NAIC. KCL was directed to undertake an effort to attract investors for an infusion of additional cash. Interested investors declined after completing due diligence on KCL. On February 11, 1993, the state of California issued a cease and desist order against KCL. Texas followed on February 12, 1993, and on this same day, the Kentucky Insurance Commissioner (Commissioner) announced his intentions to take control of the company. In quick succession, at least 43 additional states and the District of Columbia suspended KCL's privileges. The president and board members concurred and thereafter resigned their positions. In time, the Kincaid heirs (voting stockholders) were elected to positions of directorship of the company.
Subsequent to Franklin Circuit Court's placing KCL in rehabilitation, the Commissioner obtained a court order imposing a moratorium on the surrendering of policies which was deemed necessary to stop the "run." The Commissioner employed qualified experts to assist him with rehabilitation of the company. Ernst & Young was primarily engaged to evaluate the real estate and mortgage loan portfolio and the company's accounting procedures. Charles Carroll (an Ernst & Young partner) acted as the Commissioner's primary advisor and was recognized as a specialist in insurance company acquisition, rehabilitation, and mergers. Both Bankers Trust and Creamer Realty were engaged to evaluate and manage KCL's mortgage loans and real estate assets.
The issues raised by KCL--deprivation of both KCL's and its shareholders' constitutional rights and a failure by the Commissioner to comply with the insurers' rehabilitation and liquidation law--are answered in part by a substantive recitation of the facts in the record.
The Commissioner's primary concern was the design of a plan which would secure policyholder values. His experts proposed four options to further the primary goals, inclusive of rehabilitation. The options considered were: (1) an infusion of capital from outside investors; (2) an assumption reinsurance agreement which would provide that a viable insurer would receive some company assets in return for the assumption of primary liability for the policies; (3) immediate liquidation; and (4) indemnity reinsurance with another insurer whereby KCL would remain a primary obligor and a reinsurer would become secondarily liable in return for transfer of KCL assets. The experts did not, however, recommend either the third or fourth option plans.
A detailed offer and bidding process which concerned only options one and two was developed. Throughout all processes, no capital-infusion-type bid was received. Chronologically the record reflects that it was ascertained during this period that the true valuation of KCL's real estate and mortgage loan assets disclosed a $141 million deficit, which subsequently resulted in disposal of part of the assets by group sales. KCL was perceived to be deeply insolvent.
A self-rehabilitation committee of KCL employees was established and the Commissioner, although not statutorily obligated, permitted the committee to operate and to undertake independent efforts to establish some means of rehabilitation. A member of the current KCL board of directors participated on the committee and the Commissioner provided actuarial assistance. The committee actively, but unsuccessfully, contacted potential investors. KCL has asserted that the committee's efforts were unsuccessful because the Commissioner denied its request for audited financial statements, but the record discloses otherwise.
In February 1994, the Commissioner sought approval of a reorganization and reinsurance plan and a petition for liquidation. Notice of hearings was sent to all shareholders, creditors, and policyholders. The shareholders, interested in the rehabilitation, utilized a representative, The Firemark Group, which was among the groups that signed confidentiality agreements and reviewed the data room documents prior to any of the bidding processes. Subsequently, after the filing of the petition for liquidation, the board exercised its statutory right to defend against the liquidation. The trial court granted the board's request to take formal discovery, but directed that it be done on an expedited basis. Although the board previously had access to the data room since May 1993, (via its representative, The Firemark Group) it was again afforded access to the thousands of documents contained therein. The board's request for further documents was granted. The board's counsel had access to all the witnesses that it sought to interview. The court limited questioning to four hours per witness, but in fact unrestricted questioning was permitted. The testimony in question was both recorded and transcribed and such transcripts were used by the board at the subsequent hearing. The hearing before the trial court proceeded despite the board's attempt to extend/delay the proceeding. The board's counsel was permitted to cross-examine, at length, all witnesses produced by the Commissioner. The board subpoenaed witnesses and called all witnesses it desired. The record discloses that the court permitted the board to employ an accounting firm for its use and to hire other experts at KCL's expense. The court allowed KCL to present, in detail, its alternative plan contending to be a self-rehabilitation program.
It is asserted that no genuine effort was made to rehabilitate KCL. Such an argument lacks strength in view of the Commissioner's efforts to procure infusions of cash, along with the consideration of alternative plans of self-rehabilitation offered by KCL's employees. Consider further that when the open bid process plans were devised, the primary step sought an infusion of capital without success. An adequate record exists upon which to base the trial court's finding that further attempts to rehabilitate KCL would substantially increase the risk of loss to policyholders and creditors and would be futile.
The purpose of Subtitle 33 of Chapter 304 of the Kentucky Revised Statutes (KRS 304.33-010) is the...
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