Liquidation of Sec. Cas. Co., In re

• Decision Date: 29 March 1989
• Docket Number: No. 66827,66827
• Citation: 130 Ill.Dec. 446,127 Ill.2d 434,537 N.E.2d 775
• Parties: , 130 Ill.Dec. 446, 57 USLW 2586 In re Liquidation of SECURITY CASUALTY COMPANY (John E. WASHBURN, Director of Insurance, Appellant, v. Peter DYSON, et al., Appellees).
• Court: Illinois Supreme Court

Page 775

537 N.E.2d 775 127 Ill.2d 434, 130 Ill.Dec. 446, 57
USLW 2586 In re Liquidation of SECURITY CASUALTY COMPANY (John E.
WASHBURN, Director of Insurance, Appellant, v.
Peter DYSON, et al., Appellees). No. 66827. Supreme Court of Illinois. March 29, 1989. See publication Words and Phrases for other judicial constructions and definitions.

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[127 Ill.2d 435] [130 Ill.Dec. 447] Samuel K. Skinner, James R. Stinson and Robert T. Biskup, Sidley & Austin, Chicago, for appellant Director of Ins.

R.R. McMahan, Rowe W. Snider and Timothy M. Maggio, Lord, Bissell & Brook, Chicago, for intervenor-appellant Ill. Ins. Guaranty Fund.

Marc J. Chalfen, DeHaan & Richter, P.C., Chicago, Karl L. Rubinstein, Jeffrey L. Wood, Robert H. Nunnally, Jr., Murray J. Rossini, Rubinstein & Perry, Dallas, Texas, for intervenor-appellant Tex. Property and Casualty Guaranty Assn.

William G. Swindal, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, for intervenor-appellant nonresident guaranty funds.

[127 Ill.2d 436] James E. O'Halloran, O'Halloran, Walker, Kosoff & Miller, John O. Demaret, John O. Demaret & Associates, Northbrook, Richard M. Meyer, Milberg, Weiss, Bershad, Specthrie & Lerach, New York City, for appellees.

Kahn, Robinson & Curley, Chicago, Carole J. Olson, Kansas City, Mo., for amicus curiae Nat. Assn. of Ins. Commissioners.

Justice MILLER delivered the opinion of the court:

The question presented by this appeal concerns the priority to be accorded to the claims of defrauded shareholders of an insurance company that is undergoing liquidation pursuant to the Illinois Insurance Code (Ill.Rev.Stat.1987, ch. 73, pars. 613 through 1065.906). A class of shareholders of Security America Corporation was permitted to intervene in liquidation proceedings brought by the Director of Insurance against Security Casualty Company, a domestic company and a wholly owned subsidiary of Security America. The Security America shareholders had established, in a separate action in Federal court, the commission of securities law violations by Security America and its directors in connection with a public offering and sale of Security America stock. The shareholders filed a proof of claim in the liquidation proceedings, requesting the imposition of a constructive trust on proceeds of the Security America stock offering that were in the possession of Security Casualty. A judge of the circuit court of Cook County agreed with the shareholders and imposed a constructive trust on almost $8 million of the Security Casualty estate; the circuit judge denied the shareholders' request for prejudgment interest on their claim. The Insurance Code accords claims of shareholders lowest priority in [127 Ill.2d 437] distribution from the

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[130 Ill.Dec. 448] assets of a company in liquidation, and the effect of the circuit court's decision was to advance the shareholders' claims ahead of all others. The present appeal, challenging the imposition of the constructive trust, is brought by the Director of Insurance, in his capacity as liquidator of Security Casualty Company, and by the Illinois Guaranty Fund, the Texas Property and Casualty Guaranty Association, and certain other nonresident State insurance guaranty funds and associations, intervenors in the proceedings below. As cross-relief, the shareholders contend that the circuit judge erred in denying their request for prejudgment interest. We allowed the parties' motion for a direct appeal to this court under Rule 302(b) (107 Ill.2d R. 302(b)).

The facts giving rise to the instant appeal are not in dispute. In 1980 the Department of Insurance informed Security Mutual Casualty Company, a domestic entity, that the company would face sanctions, and would possibly be liquidated, if it failed to increase its capital by year-end. Security Mutual was a direct writer of automobile insurance policies and also was a reinsurer under a variety of treaties. To raise the required capital, the directors of Security Mutual decided to "demutualize" the company and convert it to stock ownership. Under the demutualization plan developed by management, Security Mutual was to change its name to Security Casualty Company; a holding company, Security America Corporation, was to be formed; and Security America was to sell stock to the public and use the proceeds to purchase all the shares of Security Casualty. The public offering of Security America stock was made in November 1980, and some 2.75 million shares were sold at a price of $6 per share, raising $16.5 million. After paying underwriting and brokerage fees, Security America transferred the net proceeds, about $14.2 million, to Security Casualty in exchange for all the shares of stock of Security Casualty. The two companies [127 Ill.2d 438] were controlled by the same management, and Security America had no business activities apart from its ownership of Security Casualty.

On August 14, 1981, the Director filed a complaint in the circuit court of Cook County seeking liquidation or rehabilitation of Security Casualty. The Director alleged that Security Casualty was insolvent and had a negative net worth of $20 million. The board of directors of Security Casualty voted to submit voluntarily to rehabilitation proceedings, and on August 17, 1981, an agreed order was entered appointing the Director rehabilitator of the company. About two months later, on October 14, 1981, the Director filed an amended complaint for liquidation of the company with a finding of insolvency. Security Casualty opposed the action, denying that it was insolvent and moving for dismissal of the complaint. On December 4, 1981, the circuit court entered an order of liquidation with a finding of insolvency and authorized the Director to liquidate Security Casualty. Later that month the circuit court entered an order setting a deadline of July 31, 1982, for the submission of claims against the estate of Security Casualty.

Before the rehabilitation proceedings were initiated, shareholders of Security America Corporation had brought actions against the company alleging fraud in the sale of its shares. The Securities and Exchange Commission halted trading in Security America stock on April 20, 1981, and a number of suits were filed by Security America shareholders in the months following. The actions were consolidated in the United States District Court for the Northern District of Illinois in a proceeding entitled In re Security America Corporation Securities Litigation, No. 81-C-3910 (hereinafter, the Federal action). The shareholders subsequently filed a consolidated complaint, asserting violations of several Federal and State securities laws. The gravamen of the shareholders' action was [127 Ill.2d 439] that the registration statement and prospectus used in connection with Security America's stock sale contained misstatements and omissions of material fact concerning the business activities and financial condition of Security America and its subsidiary, Security Casualty. Named as defendants in the shareholders' action were Security America Corporation and its directors,

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[130 Ill.Dec. 449] the Director of Insurance, in his capacity as liquidator of Security Casualty, the underwriters of the Security America stock offering, and the accounting firm that had certified the financial statements appearing in the registration statement and prospectus. In May 1982 the Federal district judge certified the class and certain class representatives. The class consisted of investors who had purchased Security America stock during the period from November 20, 1980, the date of the initial...