Minor v. Stephens
| Decision Date | 11 May 1995 |
| Docket Number | Nos. 94-SC-813-T,94-SC-805-TG and 94-SC-814-TG,s. 94-SC-813-T |
| Citation | 898 S.W.2d 71 |
| Parties | Joe MINOR, Walter E. Jorgenson, Gerald Lundergan, and Charles F. Helm, Jr., Appellants, v. Don W. STEPHENS, Commissioner of the Kentucky Department of Insurance, Appellee. PLAZA B.V. and Lagalee Finance, Inc., Appellants, v. Don W. STEPHENS, Commissioner of the Kentucky Department of Insurance, Appellee. |
| Court | United States State Supreme Court — District of Kentucky |
Ronald A. Newcomer, Lexington, Karl L. Rubinstein, Robert H. Nunnally, Jr., Rubinstein & Perry, Los Angeles, CA, for Joe Minor, Walter E. Jorgenson, Gerald Lundergan, and Charles F. Helm, Jr.
William P. Curlin, Jr., Hazelrigg & Cox, Frankfort, Mitchell A. Karlan, Gibson, Dunn & Crutcher, New York City, for Plaza B.V. and Lagalee Finance, Inc.
Steven L. Beshear, Janet A. Craig, Stites & Harbison, Lexington, Robert Michael Connolly, Charles J. Cronan, IV, 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 Nat. Organization of Life and Health Ins. Guar. Ass'n,
Illinois Life & Health Ins. Guar. Ass'n, and Texas Life, Acc., Health & Hosp. Service Ins. Guar. Ass'n.
This case arises out of the claims of nonvoting shareholders of Kentucky Central Life Insurance Company (KCL), which company had been placed into rehabilitation/liquidation proceedings by the Kentucky Commissioner of Insurance. 1
The factors and issues of this case are the same or similar to those set forth in Kentucky Central Life Insurance Company v. Don W. Stephens, Commissioner of the Kentucky Department of Insurance, Ky., 897 S.W.2d 583 (1995) released this date, which sets out the background and the course which these litigants have pursued.
The action referenced aforesaid was litigated by the board of directors of KCL, however, the nonvoting shareholders herein were afforded a limited status despite KCL's virtual representation of them whereby their interests (being the same as that of the board) were represented by a party to the litigation.
The nonvoting shareholders declare the trial court erred by denying their motion for the appointment of an official committee to protect their interests. Their motion for appointment was denied, as was the collateral motion seeking to intervene. Appellants cite no statutory authority to support their position. Within the plethora of pleadings, the shareholders have distinctly acknowledged that rehabilitation and liquidation of an insolvent insurance company is a special statutory proceeding and that the application and utilization of special statutory rules may be left largely to the supervision of the trial judge in the exercise of sound judicial discretion. Subtitle 33 of Chapter 304 of the Kentucky Revised Statutes does not authorize the appointment of a shareholders' committee, although the trial court may, under extraordinary conditions, grant such a request.
The shareholders cite Ainsworth v. Old Security Life Ins. Co., 694 S.W.2d 838 (Mo.App.1985), which permitted the sole stockholder of a corporation in receivership to intervene where the receiver's attorney sought to claim substantial additional compensation for services rendered by the attorney to the receiver. Therein, the shareholder was, in effect, the alter ego of the corporation. Ainsworth is distinguishable since the defunct corporation had a substantial sum in the amount of $20 million for distribution after payment of all claims and administrative expenses, and the receivership action was not treated as a special statutory proceeding.
Also distinguishable is Commonwealth ex rel. Chidsey v. Keystone Mutual Casualty Co., 366 Pa. 149, 76 A.2d 867 (1950). In that case, leave to intervene was granted to the insurance company's mutual policyholders committee. A mutual insurance company relegates to a policyholder simultaneous attributes that a shareholder ordinarily enjoys. Therein there is a difference and distinction, as a mutual insurance company is a cooperative enterprise and the policyholders, as members, occupy the distinctly unique position of being both insurers and insureds. Upon insolvency of such a mutual company, policyholders, as members, are liable for their proportionate share of indebtedness. The policyholders' committee was permitted to intervene because, as a mutual insurance company, the proceeding may impose liability upon them, but such is not the situation herein.
The shareholders herein have failed to establish the necessity and purpose for such a committee. KCL's board of directors, which is permitted by statute to resist liquidation, advanced the cause of both the company and the shareholders in its motions and arguments at the hearing. The appellants have contended that as they have not been informed as to the progress of the case, a shareholder's committee was needed to protect their interests. The statutes are designed to provide a comprehensive, efficient, and orderly procedure for liquidating insurance companies while protecting the rights of interested parties. Statutorily, the Commissioner is the appointed person in exclusive control over the proceedings, with guidance and approval provided by the court.
The nonvoting shareholders do not assert that the board of directors of KCL failed to protect their interests or any special aspect thereof. KRS 304.33-180(1) states that the board of directors has leave to protest liquidation. Statutory authority is granted to no other party. The trial court did not approve the shareholders' various motions to intervene and conduct discovery, but did permit the shareholders to meaningfully participate to the extent that their counsel, through the board of directors, joined in the May 1994 proceedings. Nonvoting shareholders were extended rights of a party who might give notice of an intent to appear pursuant to the court's order of February 9, 1994. Additionally, they were granted access to all documents and other information which KCL had or would have access to. The shareholders were granted the right to offer their own expert witness and submit alternative proposals. The hearing extended from May 3, 1994, to May 26, 1994, with the record left open for additional depositions and briefs to be filed on behalf of all persons participating in the hearing, and with proposed findings of fact and conclusions of law to be tendered by the board of directors and shareholders and the Commissioner. The shareholders' allegation that they were not informed of the progress of the case or given an opportunity to participate is without validity.
The Commissioner is best qualified to perform the rehabilitation/liquidation process as he has no special interest in the outcome except to administer the matter for the maximum benefit of all interested parties. The Commissioner's accountability, fiduciary duties to all interested parties, and the orders entered by the court make it reasonably clear that safeguards existed which enabled detection of any violations of duty which could have imperiled the shareholders' interests. In the Matter of the Liquidation of Integrity Ins. Co., 231 N.J.Super. 152, 555 A.2d 50 (Ch.1988).
The shareholders maintain that the trial court erred by failing to determine that the Commissioner neglected a statutory duty to rehabilitate KCL. The Commissioner, by his petition to Franklin Circuit Court, submitted the grounds for liquidation of KCL pursuant to KRS 304.33-180(1), having arrived at the conclusion that the insurer was irretrievably insolvent. This determination flowed from the evidentiary record that developed during the course pursued by the Commissioner, such course being a rehabilitation route which sought an infusion of capital which would have permitted KCL to resume more normal operations. In the course of rehabilitation efforts, the Commissioner acted on advice from legal, accounting and actuarial experts. Initially, the Commissioner created a detailed offer and bid process for KCL's insurance business, which consisted of two alternatives. The first (pure rehabilitation) was for an infusion of capital from outside investors. The second was for the purchase, through assumption reinsurance of all or substantially all of KCL's life insurance business. No investor willing to infuse capital submitted a bid on KCL's assets. The trial court's findings of fact enumerated as Nos. 29 through 35 are decisional as to this less than persuasive argument.
The shareholders rely upon In the Matter of the Liquidation of American Mutual Liability Ins. Co., 417 Mass. 724, 632 N.E.2d 1209 (1994), to advance an argument that this was not an "abuse of discretion standard" case, but one in which the Commissioner must demonstrate that his actions were fair and reasonable. That case started with a "one-justice" review seeking court approval of settlement of claims against an insolvent insurer's former accountant and auditor. The accountant's claim for professional services, bears little relationship to a policyholder's priority/rights, being a distinguishable classification. The trial court herein correctly denied intervention and the formation of an official committee of nonvoting shareholders.
In essence, the shareholders state that the Commissioner/circuit court attempted to end the self-rehabilitation effort by pronouncing that the JP plan is fair in all respects to policyholders, creditors, and shareholders. Thus, the findings of the circuit court are argued to be erroneous. The shareholders assert that the plan credits policyholders on their account values based upon an arbitrary index--100 basis points above the five-year treasury rate, 7.33 percent as of December 13, 1994, on Universal Life policies, and 25 basis points above the five-year treasury rate for annuities....
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