Riley v. Simmons
| Decision Date | 13 December 1993 |
| Docket Number | Civ. A. No. 91-3626. |
| Citation | 839 F. Supp. 1113 |
| Parties | Charles N. RILEY, et al., Plaintiff, v. Ted D. SIMMONS, et al., Defendants. |
| Court | U.S. District Court — District of New Jersey |
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Kenneth A. Jacobsen, Lisa J. Rodrigues, Ira Neil Richards, Chimicles, Burt, Jacobsen & McNew, Haverford, PA, and Daniel W. Krasner, Peter C. Harrar, Michael Jaffe, Wolf, Haldenstein, Adler, Freeman & Herz, New York City, and Dianne Nast, Kohn, Nast & Graf, Philadelphia, PA, for plaintiffs.
Steven S. Radin, Joseph L. Buckley, Sills Cummis Zuckerman Radin Tischman Epstein & Gross, Newark, NJ, for defendants Brown, Bull, Carlotti, Cartledge, Ferland, Hardin, Harris, Huck, Futter, Kraemer, Marano, Simmons and Weston.
Bruce E. Baldinger, Somerville, NJ, for defendant Kates.
Robert J. Del Tufo, Atty. Gen. of N.J., Trenton, NJ and Robert L. Ritter, Cole, Schotz, Bernstein, Meisel & Forman, Hackensack, NJ, for intervenor/commissioner/rehabilitator.
This matter comes before the Court on the joint motion of defendants Fred Brown, Edward Bull, Stephen Carlotti, Raymond Cartledge, E. James Ferland, Ellen Futter, Paul Hardin, Peter Harris, John Huck, John Kreamer, Rocco Marano, Ted Simmons, Josh Westons, and Henry Kates (collectively "defendants"), former directors of Mutual Benefit Life Insurance Company ("Mutual Benefit" or the "Company"), to dismiss the Consolidated Amended Complaint pursuant to Federal Rules of Civil Procedure 9(b) for failure to state the fraud claim with particularity; Rule 12(b)(1) for lack of subject matter jurisdiction; and Rule 12(b)(6) failure to state a claim. The New Jersey Commissioner of Insurance, Samuel Fortunato, who is also the Rehabilitator of Mutual Benefit, subsequently moved to intervene in this action for the purpose of filing his motion to dismiss the plaintiffs' complaint or in the alternative to stay the action pending the outcome of the Rehabilitator's action in state court. Having considered all of the submissions of counsel and having heard oral arguments, the Court grants the motion to intervene for a limited purpose. The Court also finds that Burford abstention is warranted and will dismiss the within action without prejudice.1
To understand the complexities and nuances involved in this matter, the Court must examine not only the Life and Health Insurers Rehabilitation and Liquidation Act, N.J.S.A. 17B:32-31 et seq., (the "Act"), which governs the rehabilitation of insolvent New Jersey insurers but also previous orders of the state court and the rehabilitation plan for the Company.
The genesis of this action was the rehabilitation of Mutual Benefit. By order dated July 16, 1991 (the "Rehabilitation Order"), Mutual Benefit, with the consent of its Board of Directors, was placed in rehabilitation. Affidavit of Joseph L. Buckley ("Buckley Aff."), ¶ 2, Ex. A. The New Jersey Commissioner of Insurance (the "Rehabilitator") was appointed as Mutual Benefit's rehabilitator.
The Rehabilitation Order vested the Rehabilitator with all of the powers set forth in the order and all of the "powers and authority expressed or implied under the provisions of N.J.S.A. 17B:32-1 et seq.,"2 including the power to take immediate and exclusive possession and control of all of Mutual Benefit's causes of action. Id. at ¶¶ 2, 3. The Rehabilitation Order also enjoined all policyholders from, among other things, "bringing, maintaining or further prosecuting any action at law, suit in equity, special or other proceeding against Mutual Benefit" and "interfering in any way with the Commissioner, or any successors in office, in his possession of or title to the property and assets of Mutual Benefit, or in the discharge of his duties as Rehabilitator thereof, pursuant to this Order." Buckley Aff., ¶ 4.
The Rehabilitation Order was amended by an order dated August 7, 1991, Id. at Ex. B, ¶ 2, which affirmed the previously described provisions of the Rehabilitation Order and also stated that the "Commissioner's authority to act as Rehabilitator with all the powers provided under the July 16 Order and pursuant to statute shall continue until further order of this Court." Id. at Ex. B, ¶ 1 (emphasis added).
On August 3, 1992, over a year after Mutual Benefit was placed in receivership, a proposed Plan of Rehabilitation (the "Plan") was released. Buckley Aff., ¶ 14, Ex. H. The Plan incorporates, inter alia, a series of agreements relating to the participation of a proposed insurance industry consortium and the National Organization of Life and Health Insurance Guaranty Associates to provide support for the rehabilitation of Mutual Benefit in the form of guarantees. Buckley Aff., ¶ 14. Under the Plan, inter alia, the rehabilitation period would last for seven years, until December 31, 1999. Id. at ¶ 15. State guaranty associations would provide a guarantee of death, disability and retirement benefits and full account values at minimum guaranteed interest rates for Mutual Benefit's individual life insurance policyholders and tax deferred annuity holders. Id.
The Plan requires approval by the Superior Court of the State of New Jersey. Public hearings on the Plan were commenced on January 28, 1993. Id. at ¶ 16. At the time of oral arguments, the Plan had not yet been approved.
On July 17, 1991, one day after the Rehabilitation Order was entered, the first of six class complaints were filed by policyholders and annuitants against the former directors and officers of Mutual Benefit in the Superior Court of New Jersey. Within a week, the other complaints were filed. All of those cases were consolidated. These class actions allege, among other things, mismanagement, misrepresentation and fraud against the defendants and other parties. Buckley Aff., ¶ 8. The plaintiffs in the state court actions purport to represent all 700,000 of Mutual Benefit's policyholders, annuitants and holders of guaranteed investment contracts who either purchased those products or maintained the products during the period November 15, 1989 to July 14, 1991.
On January 5, 1993, the Superior Court, Judge Paul Levy presiding, denied plaintiffs' motion for class certification without prejudice. The court ruled that the "Rehabilitator shall have priority to pursue his claims and the assets of the potentially responsible parties prior to the continued assertion of any claims by plaintiffs" and that the plaintiffs shall not press their claims until a final plan of rehabilitation has been approved and the Rehabilitator's action against potentially responsible parties has been concluded. Buckley Aff., Ex. F. The justification for the order was that the "public policy, expressed in the statutes enabling the Commissioner of Insurance to act as rehabilitator, supports" the Rehabilitator's position that his action, which seeks to benefit all policyholders, has preference over plaintiffs' action. Id. Judge Levy also barred the plaintiffs in the state court actions from taking discovery against Mutual Benefit which might interfere with or undermine the administration of the rehabilitation. Id.
Plaintiffs subsequently moved for an interlocutory appeal. Their motion was denied by the Appellate Division. Certification of Robert L. Ritter, Esq. ("Ritter Certification") Ex. H. Plaintiffs subsequently filed a similar motion for leave to appeal with the New Jersey Supreme Court which was denied. Ritter Certification, Ex. I.
The Rehabilitator filed an action in the Superior Court of New Jersey on July 8, 1993 on behalf of all the policyholders and annuitants. Ritter Certification, Exhibit B. The Rehabilitator's complaint alleges that the former directors and officers of Mutual Benefit mismanaged Mutual Benefit, and made material misrepresentations to Mutual Benefit's policyholders and annuitants. Specifically, the Rehabilitator's complaint alleges that the former directors and officers of Mutual Benefit mismanaged Mutual Benefit by investing too much of the company's assets in real estate and by investing in high risk real estate projects and leveraged buy-outs. The complaint also alleges that the directors and officers made material misrepresentations to Mutual Benefit's policyholders and annuitants concerning the financial condition of the company. This complaint seeks recovery on theories of negligence, breach of fiduciary duty, fraud and waste.
The Complaint in the within action was filed with this Court on August 14, 1991. Plaintiffs—representing all the annuitants, some 200,000 in number — seek recovery from the defendants, as controlling persons of Mutual Benefit. Plaintiffs allege that defendants (1) failed to register its annuity products, which were in fact securities, with the Securities and Exchange Commission in violation of sections 5 and 12(1) of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. §§ 77e, 77l(1); (2) made materially false or misleading statements in the prospectuses issued in connection with the annuities in violation of section 12(2) of the 1933 Act, 15 U.S.C. § 77l(2); (3) made materially false and misleading statements about is financial strength which induced plaintiffs to purchase the annuities in violation of section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b); and (4) violated New Jersey statutory and common law. Complaint, ¶¶ 107-112. The plaintiffs also allege that Mutual Benefit compiled a real estate portfolio that lacked adequate diversification, ¶ 42, that Mutual Benefit's overall portfolio had substantial concentration in real estate, ¶ 45, and that Mutual Benefit made improper investments. ¶¶ 47-65.
The Commissioner of Insurance, as the Rehabilitator of Mutual Benefit, has moved to intervene in this action "for the purpose of filing his motion to dismiss the plaintiffs' complaint...
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