Pioneer Annuity Life Ins. Co. by Childers v. National Equity Life Ins. Co., 1

• Decision Date: 19 July 1988
• Docket Number: CA-CIV,No. 1,1
• Citation: 765 P.2d 550,159 Ariz. 148
• Parties: PIONEER ANNUITY LIFE INSURANCE COMPANY, an Arizona corporation, by S. David CHILDERS, Director of Insurance and Receiver, and Roy E. Gill, Deputy Receiver for Pioneer Annuity Life Insurance Company, Petitioners-Appellees, v. NATIONAL EQUITY LIFE INSURANCE COMPANY, and Vincente B. Jasso, its Receiver, Respondents-Appellants. 9662.
• Court: Arizona Court of Appeals

Page 550

765 P.2d 550

159 Ariz. 148

PIONEER ANNUITY LIFE INSURANCE COMPANY, an Arizona corporation, by S. David CHILDERS, Director of Insurance and Receiver, and Roy E. Gill, Deputy Receiver for Pioneer Annuity Life Insurance Company, Petitioners-Appellees, v. NATIONAL EQUITY LIFE INSURANCE COMPANY, and Vincente B. Jasso, its Receiver, Respondents-Appellants.

No. 1 CA-CIV 9662.

Court of Appeals of Arizona,

Division 1, Department D.

July 19, 1988.

Review Denied Jan. 10, 1989.

[159 Ariz. 150] Nicholas C. Guttilla, Phoenix, for petitioners-appellees.

Robert K. Corbin, Atty. Gen. by Michael R. Schaffert, and Sara Begley Morrissey, Asst. Attys. Gen., Phoenix, for petitioner-appellee State Dept. of Ins.

Fennemore Craig by Timothy Berg, James J. Trimble, Phoenix, for respondents-appellants.

OPINION

RICHARD M. DAVIS, Judge Pro Tem. ^* .

We are required here to resolve in a summary judgment context a dispute between the receivers of two insolvent insurance companies which were part of an insurance holding company system. Two matters are in issue in this proceeding pursuant to the uniform insurers liquidation act, the elements of which are specified in A.R.S. § 20-631. In the first, the appellant receiver for the subsidiary contends that the traceable proceeds of $1,200,000 paid to the appellee parent holding company ostensibly for reinsurance and used by the parent to purchase another subsidiary should be subject to a constructive trust in his favor. In the second controversy, the appellant receiver contends that an instrument purporting to be a mortgage executed by appellee's president should be enforced against the parent. We will deal with the two matters separately, viewing the facts as we must, in the light most favorable to appellant's positions. Wagenseller v. Scottsdale Memorial Hosp., 147 Ariz. 370, 710 P.2d 1025 (1985).

THE COLORADO LIFE PROCEEDS

(Petition 9)

The appellee Pioneer Annuity Life Insurance Company (Pioneer), an Arizona corporation, is the holding company. Jack Rich owned all of the stock of Pioneer. In February, 1982, Pioneer acquired 96% of the stock of National Equity Life Insurance Company (NELIC), a New Mexico corporation. Ralph Hicks, NELIC's president, owned the remaining 4%. After Pioneer acquired NELIC, Jack Rich, two other Pioneer officers and directors, and Ralph Hicks constituted NELIC's board of directors.

In October, 1982, Pioneer set about to acquire substantially all of the stock of Colorado Life Insurance Co. (Colorado Life), for $1,200,000. At about the same time, Pioneer and NELIC entered into a reinsurance agreement, whereby NELIC as the ceding company paid to Pioneer a $1,200,000 premium and Pioneer as the assuming or reinsuring company ¹ agreed to pay to NELIC 34.1673% of certain claims paid by NELIC on its single premium annuity contracts. Pioneer also agreed to pay to NELIC $175,000 as a commission allowance, to make certain other contingent payments, and to establish a reserve to meet its reinsurance obligations. The $1,200,000 paid by NELIC to Pioneer was ultimately used to purchase the Colorado Life stock.

The reinsurance or "coinsurance" agreement between NELIC and Pioneer was to all appearances a regular and standard form of agreement of a kind that is increasingly common in the industry. It was signed by Ralph Hicks for NELIC. Both companies had a number of other ceding or assuming reinsurance agreements with other companies.

NELIC's receiver alleges in this litigation, however, that Pioneer engaged in a pattern of "looting" NELIC, and that this particular reinsurance agreement was simply a disguised means by which Pioneer depleted NELIC to obtain the money to acquire another subsidiary. Two other alleged instances of looting or attempted looting are cited in the affidavits submitted by NELIC. In one, Pioneer and Jack Rich in 1982 sold to NELIC's Oasis Leasing subsidiary a quantity of furniture for approximately $515,000 cash. The indicated liquidation value of the furniture in 1986 was only about $63,000. In the other, in 1984, all NELIC directors except Ralph Hicks agreed to waive notice of a meeting at which they voted to forgive an indebtedness of Pioneer to NELIC in the amount of approximately $260,000. Hicks would not sign the waiver of notice because, as he stated in an affidavit, there was no consideration flowing to NELIC in exchange for forgiving the Pioneer indebtedness.

Pioneer defaulted on its reinsurance agreement obligations to NELIC, and both companies were placed in receivership in 1985--Pioneer in Arizona and NELIC in New Mexico. In his petition No. 9, Pioneer's receiver asked for permission to sell the Colorado Life stock as a part of the process of liquidating Pioneer. NELIC's New Mexico receiver petitioned the court to impose a constructive trust on the stock or its proceeds for the benefit of the NELIC receivership. The trial court permitted sale of the stock for $950,000, deferring resolution of NELIC's claim. It ultimately granted Pioneer's motion for summary judgment on NELIC's claim on the theory that NELIC's $1,200,000 reinsurance premium became part of Pioneer's general funds and was usable for any legitimate purpose, including the Colorado Life acquisition.

NELIC's receiver ² contends on appeal that he raised an issue of fact as to whether Rich and his Pioneer associates on the NELIC board breached their fiduciary duties to NELIC, including NELIC's creditor-policyholders and contractholders, so as to entitle NELIC's receiver to the imposition of a constructive trust of the Colorado Life proceeds. NELIC's position, more explicitly articulated on appeal than in the trial court, is that Rich and Pioneer dictated the reinsurance agreement to NELIC but never intended to perform its obligations to NELIC thereunder. NELIC has downplayed on appeal an argument advanced in the trial court that Pioneer's duty to create a reserve resulted in the creation of an express trust.

Pioneer's receiver takes the basic view that NELIC is a general as opposed to a priority creditor and advances a series of reasons why in his view a trust should not be imposed. He contends that this was a standard reinsurance agreement, the effect of which was correctly determined by the trial judge; that there was no express trust, as was urged more strenuously by NELIC in the trial court; that the comprehensive liquidation scheme of the uniform insurers liquidation act has supplanted the common law and does not allow for the creation of flexible, inchoate, "super priority" remedies such as a constructive trust; that there was no relevant fiduciary duty or cognizable breach of any such duty by Pioneer; and that apart from any of the foregoing, the rights of the parties became fixed, pursuant to A.R.S. § 20-635, on May 8, 1985, when Pioneer was placed in receivership. While we agree with a number of the general principles advanced by Pioneer's receiver, or aspects thereof, we conclude that none of them should bar NELIC from an opportunity to attempt to prove its allegations, which in our view certainly encompass unjust enrichment and at least approach the realm of actually fraudulent conduct.

We will first state our points of agreement with appellee.

We agree with appellee and the trial judge that Pioneer's duty to establish a reserve to meet its reinsurance obligations did not create an express trust consisting of the Colorado Life stock. While generalities about the nature of "reserves" are difficult, since their characteristics may vary with relevant industry norms and particularized accounting and legal considerations, the norm in the insurance industry is that premiums, including reinsurance premiums, become part of the general assets of the insurer. We quote from Mowbray and Blanchard, Insurance 394 (5th Edition, 1961):

Reserves and Assets. Since reserves constitute by far the largest part of the liabilities of an insurer, it follows that they are the principal determinant of the amount of assets that the insurer must have in order to remain solvent. But there is no "reserve fund" held to meet the obligations measured by the total reserves or those measured by any particular reserve. The total assets of the insurer are available without division to meet the total liabilities.

(Emphasis added.)

We find nothing in the Pioneer-NELIC agreement to an opposing effect. This conclusion does not, however, negate appellant's basic charge, which is essentially that the agreement was entered into on a pro forma basis, without realistic intention to perform, to provide funds for the Colorado Life purchase.

We also agree with appellee that generally speaking a party to a reinsurance contract is not entitled to secured or priority creditor status under the uniform insurers liquidation act. The reason is that these and similar laws were designed primarily for the protection of individual insurance consumers--individual insureds and their beneficiaries. Foremost Life Ins. Co. v. Department of Insurance, 274 Ind. 181, 409 N.E.2d 1092 (1980); State v. Arizona Pension Planning, 154 Ariz. 56, 59, 739 P.2d 1373, 1376 (1987).

Nor, we agree, is the creation of common law or equitable priorities, or "super priorities," generally favored in liquidation proceedings. See State ex rel. Low v. Imperial Ins. Co., 140 Ariz. 426, 682 P.2d 431 (App.1984). This same view also finds expression and application in the bankruptcy cases. See In re North American Coin & Currency, Ltd., 767 F.2d 1573 (9th Cir.1985) where a constructive trust was sought and denied.

Giving full effect to the principles of Rule 56, Arizona Rules of Civil Procedure, however, these points do not, in our view, go far enough to justify summary judgment.

Appellant alleges a clear conflict of interest. Rich and Pioneer controlled NELIC. They were in a position to have NELIC do their bidding. The courts have always given close scrutiny to contracts between corporations with common officers and directors. Tucson...