Koken v. Fidelity Mut. Life Ins. Co.
| Decision Date | 22 May 2002 |
| Parties | M. Diane KOKEN, Insurance Commissioner of the Commonwealth of Pennsylvania, v. FIDELITY MUTUAL LIFE INSURANCE COMPANY. |
| Court | Pennsylvania Commonwealth Court |
Thomas A. Leonard, Richard A. Limburg and E. Perry Warner, Philadelphia, for petitioner.
Gary R. Leadbetter, Norristown, for respondent.
Robert H. Levin, Philadelphia, for policyholder's Committee.
Clare Ann Fitzgerald, Philadelphia for Capital Analysts.
Michael W. McTigue, Jr., Philadelphia, for Tri-Links Inv. Trust, Kesington Intern. Ltd. and Springfield Assoc., LLC. Opinion by President Judge COLINS.
Before the Court for disposition is the request of the Insurance Commissioner of Pennsylvania, as statutory Rehabilitator of the Fidelity Mutual Life Insurance Company (Fidelity Mutual),1 for approval of her Third Amended Plan of Rehabilitation, as modified (Plan).2 Objections to the Plan have been filed by the Policyholders' Committee that was appointed by the Court early on in these proceedings.
Only the most cursory history of these lengthy and complicated proceedings is necessary to our purposes here. Suffice it to say that, on the basis of its precarious financial position, Fidelity Mutual was placed in rehabilitation, at the request of the Insurance Commissioner and Fidelity Mutual, by Order of November 6, 1992. The Rehabilitator submitted her original rehabilitation plan to the Court on June 30, 1994, some two years after these proceedings began. That plan was later amended but proved not to be feasible. A second amended plan was filed June 25, 1996. That plan was voluntarily withdrawn by the Rehabilitator. On June 30, 1998, the Rehabilitator filed the petition for preliminary confirmation of the Plan we consider here.
On filing of the Rehabilitator's petition for preliminary confirmation of the Plan, we entered an order establishing requirements for notifying persons affected and fixing October 23, 1998 as the last date for lodging objections to the Plan as proposed. Objections were filed by the Policyholders' Committee, several individual policyholders, a former agent of Fidelity Mutual, former officers and directors, as well as by unsecured corporate creditors, and by Arthur Andersen, LLP. The Court then entered an order directing discovery and establishing pre-hearing procedures. Notice of hearings on the proposed Plan and objections thereto was effected by mail and by publication in newspapers of general circulation.3 Hearings were held July 16, 19, August 9 and 10, and September 21, 1999.
At the same time she sought preliminary approval of her Plan, the Rehabilitator proposed paying policyholders $60 million in policyholder dividends. That proposal was challenged by an unsecured creditor of Fidelity Mutual, Tri-Links Investment Trust, which had also objected to the Plan. In June 2000, the Rehabilitator amended her petition to seek approval to pay dividends in the amount of $70 million in the year 2001, on settlement of Tri-Link's objection to the Plan. Consequently, the Court approved Tri-Link's settlement with the Rehabilitator and granted her amended dividend and dividend access petitions, allowing payment of up to $70 million in dividends in 2001. The Rehabilitator thereafter petitioned for approval to pay $65 million in policyholder dividends for the year 2002. The Court granted that petition in August 2001.
Shortly thereafter, we entered an Order terminating, as of October 1, 2001, the moratorium on policy surrenders, policy loans and withdrawals of accumulated dividends that was imposed when Fidelity Mutual was placed in rehabilitation.4 Allowed claims of unsecured creditors with interest have begun to be paid as of that date. With certain modifications proposed by the Rehabilitator in order to resolve some of the Policyholders' Committee's objections, the Plan is now before us for review and disposition.5
Broadly speaking,6 the Rehabilitator proposes in this Plan that Fidelity Mutual's policy obligations, as well as certain other specified liabilities, will be assumed by an acquired stock life insurance company, known as Fidelity Life Insurance Company (FLIC);7 that an outside investor will infuse capital into the company by purchasing common shares of stock of FLIC's holding company, Fidelity Insurance Group (Group), in a competitive bidding process; and that all claims against Fidelity Mutual, Group and FLIC, the Commissioner, the Insurance Department, the Rehabilitator, officers, employees and agents of these entities, other than claims provided for in the Plan, will be discharged at closing. An injunction provision proposed in the Plan would prohibit legal actions or any other pursuit of claims that have been discharged.
Accordingly, the Plan provides that the acquired stock life insurance company, FLIC, will in turn acquire virtually all the assets of Fidelity Mutual; and that FLIC will then assume by reinsurance Fidelity Mutual's obligations under its life insurance and other contracts in force on the day of closing. Since FLIC will not be a mutual company, Fidelity Mutual's contracts in force will be modified to delete provisions relating to voting rights and surplus participation. Any cash value contracts in force at closing will be governed by certain provisions designed to approximate equivalent values after closing.
General unsecured creditors will receive the allowed principal amounts of their claims plus simple six percent (6%) annual interest. Interest will be paid from the original rehabilitation date or claim accrual onward, through closing, until the principal is paid. The Plan's classification of claims follows the same priority of distribution as that required by the Law when an insurance company is to be liquidated.8
At closing, Fidelity Mutual will surrender its shares of Group, the holding company of FLIC. Group will issue shares of preferred and common stock to Fidelity Mutual's mutual members, according to a formula that purports to compensate them for the loss of their voting rights in the old mutual company and takes into account their contributions to surplus. The holders of certain retirement funding products marketed by Fidelity Mutual will receive plan credits rather than stock.
Group will then sell shares of common stock, through a Court-approved competitive bidding process, sufficient to render the buyer of that stock the majority stockowner of Group. As majority stockowner, the investor will have the right to appoint a majority of the boards of directors of both Group and its subsidiary FLIC for a period of two years after closing. The Rehabilitator and the Policyholders' Committee will appoint the remaining members to those boards. Group will contribute the proceeds of its common stock sale to FLIC. FLIC will assume Fidelity Mutual's additional obligations, including those under its policy for indemnification of officers, directors and agents of Mutual Fire. The investor will be required to submit a business plan to the Insurance Commissioner, detailing its plan to operate FLIC as a going concern.
The Plan as proposed includes provisions for the discharge and release of all claims, except those obligations imposed under the Plan, against Fidelity Mutual, Group, FLIC, the Insurance Commissioner and Department, the Rehabilitator or her deputies, and all officers, employees and agents of those entities during the rehabilitation. Section 14.05 of the Plan enjoins legal actions or other pursuit of claims that have been discharged and released.
As mentioned, the Policyholders' Committee filed objections to certain provisions of the Plan, while generally supporting it overall. Certain individual policyholders and unsecured creditors also objected to the Plan. Numerous individuals—as well as all the corporate unsecured creditors— who had objected to the plan withdrew those objections as a result of settlement of their claims against Fidelity Mutual. This Court dismissed the objections of Arthur Andersen, LLP by Memorandum and Order of July 9, 1999, and we dismissed the objections of former officers and directors by Memorandum and Order of November 23, 1999. Thus, we are left to consider the objections of the Policyholders' Committee and those of certain individual objectors. We will weigh the Policyholders' Committee's objections and the Rehabilitator's response to them before turning to the individual objections seriatim. We will begin, though, with a discussion of our standard of review, which marks the first, and perhaps most fundamental, point of departure between Rehabilitator and the Policyholders' Committee.
The Policyholders' Committee, recognizing our Supreme Court's enunciation of it in Foster v. The Mutual Fire, Marine and Inland Insurance Company, 531 Pa. 598, 614 A.2d 1086 (1992), cert. denied 506 U.S. 1080, 113 S.Ct. 1047, 122 L.Ed.2d 356 (1993), and cert. denied 506 U.S. 1087, 113 S.Ct. 1066, 122 L.Ed.2d 371 (1993) (Mutual Fire), acknowledges that the standard for reviewing a plan of rehabilitation requires that we determine whether the Rehabilitator has abused her discretion "in formulating the [p]lan of [r]ehabilitation." Id., 531 Pa. at 610, 614 A.2d at 1092. Nonetheless, it is the Policyholders' Committee's position that not all matters provided for in this, or for that matter, any rehabilitation plan are subject to such a standard of review. The Committee submits that matters not within an administrative agency's expertise in a particular field are not subject to such deference by a reviewing court, but should be looked at more closely. For this proposition, the Committee cites Drain v. Covenant Life Insurance Company, 551 Pa. 570, 712 A.2d 273 (1998), a case determining whether the Insurance Commissioner or a judicial tribunal had jurisdiction over a complaint that,...
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