Mcpherson v. U.S. Physicians Mut.

Decision Date31 January 2003
Docket NumberNo. WD 59264.,WD 59264.
Citation99 S.W.3d 462
PartiesA.W. McPHERSON, Deputy Director of the Missouri Insurance Department, Acting as Statutory Receiver, Respondent, v. U.S. PHYSICIANS MUTUAL RISK RETENTION GROUP, Defendant, Elisabeth R. Sauer and Elisabeth R. Sauer, P.C., Appellants.
CourtMissouri Court of Appeals

Stephen B. Millin, Jr., Kansas City, MO, for Appellant.

Karl Zobrist, Kansas City, MO, for Respondent.

Before LOWENSTEI P.J., SMART and NEWTON, JJ.

B>OverviewB>

HAROLD L. LOWENSTEIN, Judge.

This case touches on the seeming tension between the statutory powers possessed by receivers to wind up insolvent insurance companies and the general supervisory powers of Missouri trial courts overseeing the administration of the receivership of these companies. This case stems from a decision by a trial judge to order an audit in a four year old pending petition and case for liquidation of a Missouri insurer. A primary question is whether a court supervising an insurance receivership can surcharge1 one of its officers (here a special deputy receiver or SDR) who, after a court initiated statutory audit, has been found to have overcharged the receivership estate they were administering. This is an issue of first impression2 raised by the appeals of Elisabeth Sauer and her law firm, Sauer P.C. (collectively, either "Sauer" or SDR). Sauer was surcharged by the supervising court, Judge Lee Wells, for overcharging a receivership in her role as special deputy receiver ("SDR") for insolvent defendant, U.S. Physicians Mutual Risk Retention Group (hereafter referred to as USPM). USPM insured healthcare providers. Sauer argues, among other things, that the court lacked the power, statutory or otherwise, to order surcharge. Secondarily, the SDR questions the power of the supervising trial court to order an extensive "business" or "performance" audit of a pending liquidation. The named respondent is A.W. McPherson, Deputy Director of the Missouri Department of Insurance and the statutory receiver of the insolvent insurer, who had appointed Sauer.3 Throughout the remainder of this opinion the designation Receiver, Director and Department will be synonymous. This court holds that, though the trial court had the inherent power to surcharge and to order an audit that did more than examine numbers, its judgment must nonetheless be reversed because the court abused its discretion in failing to recuse itself.

B>Legal BackgroundB>

Missouri's Insurance law is generally contained in Chapter 375 and 376, RSMo 2000.4

In 1909, Missouri adopted its first comprehensive insurer insolvency statute. The current Insolvency Code § 375.1150 et. seq., is based on the Insurers Supervision, Rehabilitation and Liquidation Act, which went into effect in 1991.5 Under the Insolvency Code, the Director of the Missouri Department of Insurance has a duty to regulate insurance companies for the benefit of consumers. Sometimes this requires the Director, as statutory receiver, to liquidate insolvent insurance companies. An insurer is insolvent when "it is unable to pay its obligations when they are due, or when its admitted assets do not exceed its liabilities plus the greater of: a. Any capital or surplus required by law for its organization or b. The total par or stated value of its authorized and issued capital stock." § 375.1152(13)(b). When the Director of the Department of Insurance determines an insurer is "beyond salvaging," the Director may petition the circuit court for an order to liquidate or wind-up the affairs of the company. § 375.1175. See also § 375.570. Under § 375.1176.1, the court will order the director to take possession and control of the assets of the insurer, and subject to the supervision of the court, wind-up the affairs of the company.

The Department's ample regulatory and administrative tasks prevent the Director from personally supervising every liquidation. Consequently, the Director, as statutory receiver, may — and often does with court approval — appoint SDRs who stand in the shoes of the Director, to windup the insurance companies. § 375.1176.2. See also § 375.650. In some receiverships, such as the one here, the SDR and the counsel are one in the same, where in others, the posts are held by separate persons or entities.

Although SDRs have the same powers as the Receiver, they do not have carte blanche; their administration is monitored by the supervising court, which must preapprove many SDR actions, including compensating staff and paying administrative expenses, selling and disposing of the

insolvent's assets, creating claim procedures for creditors, and bar dates for the insureds to file claims, distributing any remaining assets, and abandoning the prosecution or defense of claims deemed unprofitable. As important to the case at bar, the supervising court, pursuant to § 375.1230, has the power to order an audit of the receivership to ensure that the administration is properly proceeding.6 In addition, it has a veto power over the appointment of an SDR and, like the Director, may unilaterally remove an SDR. This court's oversight helps minimize agency costs. As will be pointed out later, the SDR and counsel were paid on an agreed upon hourly charge.

As an attorney acting in the role of Receiver's counsel (Sauer the individual or as the only principal of Sauer, P.C.) was an officer of the supervising court. In re Westfall, 808 S.W.2d 829, 836 (Mo. banc 1991). Sauer, as SDR was also an officer of the court. § 375.650(2). So Sauer P.C., as Receiver's counsel, or Sauer as SDR, was an officer or agent, of the court. As officers or agents of the court, Sauer had a fiduciary duty to comply with the supervising court's orders. Vert v. Metro. Life Ins. Co., 342 Mo. 629, 117 S.W.2d 252, 256 (1938). SDR, as the Receiver's employee, see Transit Cas. Co. ex rel. Pulitzer Publ'g Co. v. Transit Cas. Co. ex rel. Intervening Employees, 43 S.W.3d 293, 303 (Mo. banc 2001), was an agent of the Receiver's and, thus, a fiduciary, as was Receiver's counsel, Sauer P.C., Klerrone v. Best, 941 S.W.2d 493, 495 (Mo. banc 1997).

Sauer as SDR had broad powers over the receivership estate, see § 375.1182, thus making her a trustee, a fiduciary of all parties interested in the receivership. See Taylor v. Mayo, 110 U.S. 330, 334-35, 4 S.Ct. 147, 28 L.Ed. 163 (1884) ("A trustee may be defined generally as a person in whom some estate interest or power in or affecting property is vested for the benefit of another."); Broussard v. Mason, 187 Mo.App. 281, 173 S.W. 698, 702 (1915). As attorney, as officer of the court, as trustee for the parties interested in the receivership estate, and as agent of the Receiver, Sauer's fiduciary obligations were quite stringent. As Learned Hand noted:

It is ... an error to suppose that good faith will excuse derelict and negligent administration of an estate [by a Receiver]. More is required than honesty; a receiver is a fiduciary, he undertakes to care for the property and manage it for creditors, to act with assiduity and with reasonable competence. If he is inert, if his conduct does not match with the least exacting standards of competence, he will be charged.... We are unwilling to set a standard [that] shall exonerate honest administration, however sluggish, however indifferent, however inconsiderate. Creditors are entitled to something more, and gentlemen who accept such positions must understand that they are to be alert and active in the business, though it proves exacting. If they are not willing to give their time to it, they had best not accept, for if they fail, they will be held accountable.

In re C.M. Piece Dyeing Co., 89 F.2d 37, 40 (2nd Cir.1937). See also Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928) (Cardozo, J.).

B>FactsB>

On February 17, 1994, the trial court ordered the liquidation of USPM at the request of the Director. Attempts to liquidate USPM in-house failed, so Elisabeth R. Sauer, who had handled and was already serving as an SDR for other insurance receiverships, was appointed to be the SDR under § 375.1176(2). Judge Wells' court was the one supervising the USPM receivership. The court approved Sauer's employ and ordered her hourly billing rates and for the Director to pay Sauer out of USPM funds.

Sauer was originally retained as both SDR and counsel to the Receiver. At the time of the appointment, she was a solo practitioner, but in late March or early April 1994, formed Sauer P.C., which henceforth became counsel to the Receiver. The pattern of events leading to this appeal is sometimes difficult to follow.

Following a narrative of the facts, and before the analysis of the points relied on, a shortened chronology of events is presented.

Winding up the affairs of a medical malpractice insurance company is not a simple nor quickly finished task. In the case of the estate here, USPM, in addition to trial and settlement of existing claims against the insureds, there was suspicion of impropriety against the last officers and directors of the company.

During her administration of the USPM receivership, Sauer never revealed and the Department never asked how much Sauer was paying associates and paralegals. One of her workers, David Andre, was hired through a temporary agency, Of Counsel, Inc. Sauer believed that Andre's status was as an independent contractor, not her employee. Of Counsel paid Andre an hourly wage for services Andre billed to Of Counsel. While Sauer paid Of Counsel $59 per hour for Andre's services, Sauer billed the Department at the rate of $100 an hour. Sauer chose $100 an hour because Andre had more experience than an associate Sauer was paying $85 an hour and because Sauer wanted to build in the cost of overhead and training expenses related to hiring Andre. When Andre's contract with Of Counsel expired, Sauer hired Andre at $46.50 an hour...

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