El Paso Elec. Co. v. Texas Dept. of Ins.
| Decision Date | 21 February 1997 |
| Docket Number | No. 95-0943,95-0943 |
| Citation | 937 S.W.2d 432 |
| Parties | 40 Tex. Sup. Ct. J. 181 EL PASO ELECTRIC COMPANY; Coopers & Lybrand; Kemp, Smith, Duncan & Hammond, P.C.; Maury Page Kemp and Jean Jones Kemp, Petitioners, v. TEXAS DEPARTMENT OF INSURANCE, Respondent. |
| Court | Texas Supreme Court |
Charles T. Newton, Houston, Robert C. Walters, Dallas, Fred B. Werkenthin, Thomas T. Rogers, Austin, Randy Lee, El Paso, Jack D. Maroney, Michael J. Crowley, Austin, for Petitioners.
Thomas H. Watkins, David C. Mattax, Dan Morales, Austin, for Respondent.
PHILLIPS, Chief Justice, delivered the opinion of the Court, joined by HECHT, CORNYN, ENOCH, OWEN, BAKER and ABBOTT, Justices.
Chapter 105 of the Texas Civil Practice and Remedies Code allows a litigant to recover fees and expenses when a state agency brings a frivolous claim. We must decide whether a claim prosecuted by the State Insurance Liquidator, acting in his capacity as receiver for an insolvent insurance company, is a claim by a state agency within the meaning of Chapter 105. The court of appeals, holding that the receiver was acting in essentially a private capacity on behalf of the insurer and its creditors, affirmed the trial court's refusal to award fees and expenses. 903 S.W.2d 133. Because we conclude that the receiver acted on behalf of the State Board of Insurance for purposes of Chapter 105, we reverse the judgment of the court of appeals and remand this cause to the trial court for further proceedings.
El Paso Electric Company purchased $70 million in annuities from First Service Life Insurance Company in the mid-1980s. First Service used this money to acquire United States Treasury instruments, which it pledged as collateral to secure El Paso Electric's annuities. First Service later encountered severe financial problems, and in June 1988 the Commissioner of Insurance appointed a conservator to take charge of the company. See TEX.INS.CODE art. 21.28-A, § 5.
After the conservator disputed the validity of El Paso Electric's security interest, 1 El Paso Electric sued the conservator (as representative for First Service) in the 345th District Court in Travis County, seeking a declaratory judgment that it possessed an enforceable security interest in the Treasury instruments. The conservator counterclaimed, alleging that El Paso Electric had perpetrated a conspiracy to unlawfully collateralize the annuities.
A few months later, in January 1989, First Service was placed into receivership by order of the 53rd District Court of Travis County. As required by the Insurance Code, the court appointed the State Insurance Liquidator as receiver. By operation of law, the receiver succeeded to all property, contracts and rights of action of First Service, including the pending counterclaim against El Paso Electric. The receiver continued prosecuting the counterclaim, even adding claims in February 1990 against the law firm of Kemp, Smith, Duncan & Hammond, the accounting firm of Coopers & Lybrand, and two former officers of First Service, Maury Kemp and Jean Kemp. The receiver alleged that these defendants participated with El Paso Electric in the purported conspiracy against First Service.
In May 1992, the trial court granted partial summary judgment for El Paso Electric on the principal issues, ruling that its security interest was enforceable and that it had not engaged in an illegal transaction. Five months later, the receiver voluntarily dismissed the counterclaim as to all defendants with prejudice.
Meanwhile, each of the counter-defendants filed a Chapter 105 motion to recover their fees and expenses in defending the counterclaim, contending that it was frivolous and that it was prosecuted by the conservator and receiver "for the State Board of Insurance." The State Board of Insurance (the "Board") intervened in the proceedings to defend against the Chapter 105 motions, contending that the conservator and receiver did not act on behalf of any state agency. The trial court accepted this argument, denying all relief under Chapter 105. The trial court did not reach the issue of whether the counterclaim was in fact frivolous.
The counter-defendants perfected an appeal limited to the Chapter 105 issue. The court of appeals affirmed the trial court's judgment, concluding that the receiver and conservator, in prosecuting the counterclaim, acted in a private representative capacity on behalf of First Service and its creditors, not on behalf of the Board. 903 S.W.2d at 136-37. The counter-defendants then sought writ of error from this Court.
Chapter 105 of the Texas Civil Practice and Remedies Code allows a litigant to recover fees from a state agency under the following circumstances:
A party to a civil suit in a court of this state brought by or against a state agency in which the agency asserts a cause of action against the party, either originally or as a counterclaim or cross claim, is entitled to recover, in addition to all other costs allowed by law or rule, fees, expenses, and reasonable attorney's fees incurred by the party in defending the agency's action if:
(1) the court finds that the action is frivolous, unreasonable, or without foundation; and
(2) the action is dismissed or judgment is awarded to the party.
TEX.CIV.PRAC. & REM.CODE § 105.002. "State agency" is defined as follows:
"State agency" means a board, commission, department, office, or other agency that:
(A) is in the executive branch of state government;
(B) was created by the constitution or a statute of this state; and
(C) has statewide jurisdiction.
TEX.CIV.PRAC. & REM.CODE § 105.001(3). The Board and its statutory successor the Department of Insurance (the "Department") are clearly state agencies within this definition. 2 We must determine whether the conduct of the receiver and the conservator is attributable to the Board or the Department for purposes of Chapter 105. We analyze first the role of the receiver, then that of the conservator.
Article 21.28 of the Texas Insurance Code sets forth a comprehensive scheme for the liquidation, rehabilitation, and reorganization of insolvent insurers. Although the Legislature modified this statute during the course of the proceedings in the trial court, the fundamental operation did not change. The 1989 version of article 21.28 provided for the appointment of receivers as follows:
Sec. 2. (a) Receiver Taking Charge. Whenever under the law of this State a court of competent jurisdiction finds that a receiver should take charge of the assets of an insurer domiciled in this State, the liquidator designated by the State Board of Insurance as hereinafter provided for shall be such receiver. The liquidator so appointed receiver shall forthwith take possession of the assets of such insurer and deal with the same in his own name as receiver or in the name of the insurer as the court may direct.
TEX.INS.CODE art. 21.28, § 2(a) (Vernon Supp.1989) (emphasis added). Thus, the receivership court had no discretion to name someone other than the Board's designated liquidator as receiver. See State Bd. of Ins. v. Betts, 158 Tex. 612, 315 S.W.2d 279, 283 (1958). This liquidator was appointed by the Board and was subject to removal only by the Board. See TEX.INS.CODE art. 21.28, § 12(a) (Vernon Supp.1989). Moreover, the liquidator's compensation, as well as that of any special deputy liquidators, counsel, clerks, and assistants, was determined by the Board. Id. § 12(b). While this compensation was generally paid as a priority distribution from the funds of the insolvent insurer, id., the Legislature also provided, until 1994, for general appropriations to assist the liquidator in performing receivership duties. Id. § 12A.
The Legislature modified article 21.28 in 1991, eliminating the office of liquidator. See Act of Aug. 30, 1991, 72nd Leg., 2nd C.S., ch. 12, 1991 Tex.Gen.Laws 252 (eff. Jan. 1, 1992). Instead, the current version of the statute, effective by the time the receiver dismissed the counterclaim, provides that "the commissioner of insurance or a person designated by the commissioner under contract shall act as receiver." TEX.INS.CODE art. 21.28, § 2(a). While the term "liquidator" was not eliminated from the statute, it simply became a synonym for "receiver". See art. 21.28, § 1(d). The powers and duties of the receiver under the 1992 amendments are, in relevant respects, the same as before.
As with the 1989 version, the court has no discretion under the revised statute to appoint someone other than the Commissioner or the Commissioner's designated special deputy as receiver. The Commissioner controls the activities of any special deputy receivers and may terminate their service at will. See TEX.INS.CODE art. 21.28, § 12(h). Also, the Commissioner determines the compensation of the special deputy receivers. Id. § 12(b).
Section 12A, providing for legislative appropriations to assist the receiver in performing the receiver's statutory duties, was also carried forward in the 1992 statute, effective until 1994. Moreover, the Legislature created a new subsection providing that the receiver and the receiver's assistants are, for payroll accounting purposes, "employees of the State Board of Insurance." TEX.INS.CODE art. 21.28, § 12A(b).
Despite the provisions in both the current statute and the 1989 version placing the receiver under the control of the Board, 3 the Department argues that the receiver for an insolvent insurer assumes a separate legal identity. The Department contends that the receiver essentially acts as a private trustee, representing the interests of the insurer and its creditors, not the interests of the State. As such, the receiver's actions cannot be attributable to the Board for purposes of Chapter 105.
The Department points to the language of article 21.28 commanding the receiver to take charge of the insurer's assets "in the person's own name as...
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