Principal Growth Strategies, LLC v. AGH Parent LLC
| Decision Date | 09 January 2023 |
| Docket Number | C.A. No. 2019-0431-JTL |
| Parties | PRINCIPAL GROWTH STRATEGIES, LLC, et al., Plaintiffs, v. AGH PARENT LLC, et al., Defendants. |
| Court | Court of Chancery of Delaware |
Brett D. Fallon, FAEGRE DRINKER BIDDLE & REATH LLP, Wilmington, Delaware; Warren E. Gluck, Richard A. Bixter, Jr., HOLLAND & KNIGHT LLP, New York, New York; Attorneys for Plaintiffs.
R. Craig Martin, Amy Evans, DLA PIPER LLP (US), Wilmington, Delaware; Ellen E. Dew, DLA PIPER LLP (US), Baltimore, Maryland; Aidan M. McCormack, R. Brian Seibert, Steven M. Rosato, DLA PIPER LLP (US), New York, New York; Attorneys for Defendants Senior Health Insurance Company of Pennsylvania (in Rehabilitation) and Fuzion Analytics, Inc.
LASTER, V.C.
A Pennsylvania-domiciled insurance company is in rehabilitation under the jurisdiction of a Pennsylvania court. A management company that is a wholly owned subsidiary of the Pennsylvania-domiciled insurance company is not part of the rehabilitation proceeding. The plaintiffs have sued the insurance company and the management company, who have asked the court to stay this action in deference to the rehabilitation proceeding.
This court explained in In re Liquidation of Freestone Insurance Co. , 143 A.3d 1234 (Del. Ch. 2016), that a combination of considerations associated with state-court insurance delinquency proceedings calls for presumptively limiting the ability of parties to litigate against the delinquent insurer in other forums. In Freestone , this court was presiding over the insurance delinquency proceeding, and the issue was whether to lift a broad anti-suit injunction to permit litigation to proceed against the delinquent insurer in another state. A stay application presents the same issue, albeit in a setting where this court is presiding over the collateral litigation rather than the delinquency proceeding.
The Freestone decision identified a series of factors for the court to consider when deciding whether to depart from the presumption against permitting collateral proceedings to go forward against the delinquent insurer. Those factors support a stay in this case as to the delinquent insurer.
They do not support a stay as to the management company. The motion for a stay is therefore granted as to the insurance company and otherwise denied.
The factual background is drawn from the operative complaint, the documents that it incorporates by reference, and the submissions made by the parties in connection with the motion to stay.1
Senior Health Insurance Company of Pennsylvania ("SHIP") is a Pennsylvania-domiciled life and health insurance company. Its origins date to 1887, when its corporate predecessor, the Home Beneficial Society, started providing insurance. By the 1980s, the company was known as American Travelers Insurance Company, and it had entered the then-nascent business of providing long-term care insurance, which covers the services provided by nursing homes, assisted living facilities, and adult day care centers. In 1996, the conglomerate Conseco, Inc. acquired the company and renamed it Conseco Senior Health Insurance Company ("Conseco Health"). Conseco Health was licensed in forty-six states (excluding Connecticut, New York, Rhode Island, and Vermont), the District of Columbia, and the U.S. Virgin Islands.
In 2002, Conseco filed for reorganization under Chapter 11 of the United States Bankruptcy Code. In 2003, Conseco, Inc. emerged from bankruptcy as CNO Financial Group. That same year, Conseco Health went into runoff, meaning that it stopped writing new policies for long-term care insurance and limited its operations to the administration and servicing of existing policies. Directly or through its predecessors, Conseco Health had issued approximately 645,000 long-term care policies. Approximately half of the policyholders paid a premium; the others either were on premium waivers or had previously chosen a nonforfeiture option, under which a policyholder stops paying premiums in exchange for coverage equal to the premiums previously paid less any benefits previously received. The runoff was expected to be solvent, meaning that the premiums already paid or to be paid on the policies would be sufficient to cover all expenses, including benefits.
In 2008, the Pennsylvania Insurance Commissioner oversaw a transaction in which CNO transferred the ownership of Conseco Health to the Senior Health Care Oversight Trust (the "Oversight Trust"), and the company adopted its current name. At the time, the runoff was expected to remain solvent.
In 2012, SHIP's management team decided that they had gained considerable experience managing a distressed long-term care insurer and might be able to market that expertise to other distressed insurers. They caused the Oversight Trust to form a new entity called Fuzion Analytics, Inc., that would pursue that business.
Over time, Fuzion began managing more and more of SHIP's operations and affairs. In 2014, SHIP conveyed substantially all of its infrastructure, including its contractual arrangements with its executives and employees, to Fuzion in exchange for $367,806. The conveyance resulted in SHIP having no facilities and no employees. Going forward, SHIP relied exclusively on Fuzion and other vendors to perform all of its business functions.
By 2014, changes in the long-term care industry had caused the claims expectations for SHIP's policies to increase by over $200 million. SHIP needed to increase its reserves to match its expected claims. Fuzion thought that a reinsurer could help SHIP increase its reserves by managing the assets to generate greater returns.
Around that time, an investment fund complex that did business under the name "Platinum Partners" began targeting distressed insurers as part of a reinsurance scheme. Platinum Partners’ central entity was Platinum Management (NY) LLC, which sponsored and managed various hedge funds.
Platinum Management had caused two of its hedge funds to make risky and illiquid investments (the "Platinum Funds"). The investments performed poorly, and by 2012, the Platinum Funds needed liquidity. Platinum Management saw the reinsurance business as a source of liquidity. In a reinsurance transaction, one insurance company (the reinsurer) receives a fee for agreeing to pay the losses on a group of policies written by another insurance company (the cedent). If the reinsurer does not cover the losses, then the cedent remains liable to its policyholders.
As part of the reinsurance transaction, the cedent transfers premium and reserves associated with the covered policies to the reinsurer. In theory, the reinsurer manages the reserves and, over time, uses the reserves plus its own financial strength to pay the claims associated with the transferred risks.
For Platinum Management, reinsurance offered access to investable reserves. Platinum Management could use those reserves to address the Platinum Funds’ liquidity crisis and mask the funds’ losses through transactions that would bid up the prices of the funds’ assets.
To tap the reinsurance market, Platinum Management created a series of affiliated entities that did business under the name "Beechwood." Through Beechwood, Platinum Management focused on selling reinsurance to distressed insurers that had difficulty securing reinsurance coverage.
Beechwood initially succeeded in entering into reinsurance agreements with insurance companies affiliated with CNO. Like SHIP, those subsidiaries had written long-term care policies, but unlike SHIP, they had remained subsidiaries of CNO (the "CNO Companies").
Through relationships with the CNO Companies, Fuzion heard about Beechwood. Soon, Fuzion had caused SHIP to enter into a series of investment management agreements that granted Beechwood discretion to invest pools of assets on SHIP's behalf.
Beechwood used the funds from the CNO Companies and SHIP to engage in a series of transactions involving Platinum-sponsored investments. In this action, everyone agrees that Platinum Management and Beechwood entered into transactions that were designed to support inflated valuations for the risky assets owned by the Platinum Funds. Those valuations hid the Platinum Funds’ losses and enabled Platinum Management to pay itself both transaction-based fees and larger asset-based fees.
The vast majority of the Platinum-sponsored investments that Beechwood made did not turn out well. Before long, the portfolios that Beechwood was managing for SHIP and the CNO Companies held a mix of nearly worthless debt and equity investments.
After entrusting Beechwood with SHIP's reserves, Fuzion began to have concerns about what Beechwood was doing. Fuzion questioned the relationship between Beechwood and Platinum Management and expressed doubts about the quality of the investments that Beechwood had made.
In 2016, Fuzion's concerns turned to panic when news broke about an investigation by the U.S. Attorney's Office for the Southern District of New York into Platinum Management's business dealings. On June 8, the CEO of Platinum Management was arrested and charged with bribery and other criminal counts. Platinum Management promptly announced that it would wind down and liquidate one of the Platinum Funds.
Fuzion was suddenly confronted with the fact that SHIP's obligations to its policyholders were secured by poorly performing and overvalued investments sponsored by a firm whose CEO had been arrested. The CNO Companies were in a similarly unpalatable situation.
Fuzion demanded SHIP's reserves back. The CNO Companies also wanted out. Their desire to extract whatever they could from the sinking Platinum ship matched up with the short-term interests of Platinum Management and its principals. Through Beechwood, they similarly wanted to extract whatever value they could before everything...
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