Taylor v. Ernst & Young, L.L.P.

• Decision Date: 18 October 2011
• Docket Number: No. 2010–1324.,2010–1324.
• Citation: 130 Ohio St.3d 411,958 N.E.2d 1203,2011 -Ohio- 5262
• Parties: TAYLOR, Supt., Appellee, v. ERNST & YOUNG, L.L.P., Appellant.
• Court: Ohio Supreme Court

130 Ohio St.3d 411

2011 -Ohio- 5262

958 N.E.2d 1203

TAYLOR, Supt., Appellee,

v.ERNST & YOUNG, L.L.P., Appellant.

No. 2010–1324.

Supreme Court of Ohio.

Submitted May 25, 2011.Decided Oct. 18, 2011.

[Ohio St.3d 411] Syllabus of the Court

1. The Ohio superintendent of insurance, in her capacity as the liquidator of an insolvent insurer, is not a mere successor in interest of an insolvent insurer.

2. The Ohio superintendent of insurance, as liquidator of an insolvent insurance company, is not bound by an agreement to arbitrate that was entered into by the insolvent insurer when her claims do not arise from the contract containing the arbitration clause.

3. An insurance company does not have the authority to bind the liquidator of the company to arbitrate preference or fraudulent-transfer claims.

Michael DeWine, Attorney General, Alexandra T. Schimmer, Chief Deputy Solicitor General, Stephen P. Carney, Deputy Solicitor, and Thaddeus H. Driscoll, Assistant Solicitor; and Kegler, Brown, Hill & Ritter Co., L.P.A., and Melvin D. Weinstein, Columbus, for appellee.

Squire, Sanders & Dempsey, L.L.P., John R. Gall, and Aneca E. Lasley, Columbus; and Mayer Brown, L.L.P., Stanley J. Parzen, and James C. Schroeder, for appellant.

O'CONNOR, C.J.

{¶ 1} This appeal involves the question of whether the superintendent of insurance, in her capacity as the liquidator of an insolvent insurer, is bound by an agreement to arbitrate that was entered into by an insolvent insurer in cases in which the liquidator does not disavow the contract that contains the arbitration clause. For the reasons explained below, we hold that the liquidator is not bound by the insolvent insurer's agreement when the liquidator's claims do not arise from the contract that contains the arbitration provision. Accordingly, we affirm the judgment of the court of appeals but in part for different reasons, as explained below.

[Ohio St.3d 412] I. Relevant Background

{¶ 2} For purposes of this appeal, the facts are as stated in the complaint and the motion to dismiss. Ernst & Young (“E & Y”), an independent accounting firm, provided auditing services to American Chambers Life Insurance Company (“ACLIC”) for the year ending December 31, 1998. The audit was undertaken pursuant to an engagement letter signed by E & Y and ACLIC ¹ that contained an arbitration clause. On February 25, 1999, E & Y submitted a report to the Ohio Department of Insurance (“ODI”) that certified that it had conducted the audit in accordance with generally accepted auditing standards and that ACLIC's financial statements presented fairly, in all material respects, ACLIC's financial position.

{¶ 3} On March 13, 2000, the superintendent filed an action in the Franklin County Common Pleas Court that sought, at first, to place ACLIC in rehabilitation. On May 8, 2000, the court issued a final liquidation order based on ACLIC's insolvency. During the liquidation proceedings, the liquidator entered into a tolling agreement with E & Y whereby each side agreed to toll the time for filing causes of action and claims against the other side until one year from May 2, 2002.

{¶ 4} On April 30, 2003, the liquidator filed this action in the Franklin County Common Pleas Court against E & Y.² The liquidator alleged two claims against E & Y. In one claim, she alleged that E & Y had “negligently failed to perform its duties as the independent certified public accountant retained to conduct the audit of ACLIC's December 31, 1998, Annual Statement, thus breaching the duties owed.” Specifically, the liquidator alleged that E & Y had failed to conduct its audit according to generally accepted auditing standards and had failed to discover or disclose material misstatements in ACLIC's financial statements, such as understatement of loss reserves, overstatement of receivables, unrecorded liabilities, and investments that exceeded the allowable amounts. That breach, she alleged, allowed ACLIC's financial condition to go undetected and, consequently, allowed it to continue transacting business, causing harm to ACLIC, its policyholders and creditors, and the public.

{¶ 5} In another claim, the liquidator alleged that E & [Ohio St.3d 413] Y had received preferential or fraudulent payments of more than $25,000. Specifically, she alleged that E & Y received a sum of money from ACLIC after March 13, 1999, when ACLIC was insolvent, and that E & Y had refused to return the money, notwithstanding the liquidator's demand for it. Consequently, the liquidator alleged, E & Y had obtained a greater percentage of its debt than other creditors of the same class would receive in the distribution of ACLIC's estate.

{¶ 6} On July 15, 2003, E & Y moved to dismiss the complaint or to stay the proceedings and compel arbitration based on the arbitration clause contained in the engagement letter. The trial court denied the motion, and E & Y appealed. The Tenth District Court of Appeals affirmed. Hudson v. Ernst & Young, L.L.P., 189 Ohio App.3d 60, 2010-Ohio-2731, 937 N.E.2d 585, at ¶ 39.³ That court held that because the liquidator had not signed the arbitration agreement, there was a presumption against arbitration. Id. at ¶ 16. It then held that the presumption could never be overcome because the General Assembly did not contemplate liquidation proceedings being turned over to private arbitrators. Id. at ¶ 18. In other words, the Tenth District held that there is an irreconcilable conflict between the Ohio Liquidation Act and the Ohio Arbitration Act and that the Liquidation Act prevails. Id.

{¶ 7} This court accepted E & Y's discretionary appeal, which sets forth two propositions of law: (1) “An insurance liquidator that does not disavow a contract entered into by an insurer is bound by an arbitration provision in that contract, which must be enforced pursuant to Ohio's statutory code and strong policy favoring arbitration,” and (2) “A tolling agreement that preserves ‘all defenses' as of its effective date preserves an arbitration defense that existed on the effective date.” We address each proposition in turn.

{¶ 8} Although the liquidator did not agree to arbitrate any claims and is not a signatory to the engagement letter that contains the arbitration provision, E & Y nonetheless argues that the liquidator is bound by the arbitration clause for three reasons. First, E & Y asserts that the liquidator stands in the shoes of the insolvent insurer. In the alternative, E & Y contends that because the liquidator is asserting claims that are based on and arise out of the contract that contains the arbitration clause, she is bound by the arbitration provisions. Finally, E & Y argues that the Liquidation Act does not permit the liquidator to disavow the arbitration clause while enforcing the balance of the contract.

{¶ 9} The liquidator rebuts each assertion. First, she denies that she stands in the shoes of the insolvent insurer. Rather, she stands in a unique public-protection role. Second, she argues that she is not asserting claims that are based on or arise out of the contract but, rather, that she is bringing claims that arise from both her statutory powers and certain financial statements and audit [Ohio St.3d 414] certifications filed in the public record by ACLIC and E & Y. Therefore, she argues, her disavowal powers are not implicated. Finally, in the alternative she asserts that there is an irreconcilable conflict between the Liquidation Act and the Arbitration Act and that the Liquidation Act must prevail. We proceed with the analysis of E & Y's arguments and begin our discussion with an overview of the Ohio Liquidation Act.

II. Analysis

A. The Ohio Liquidation Act

{¶ 10} The Insurers Supervision, Rehabilitation, and Liquidation Act (the “Liquidation Act”), codified in R.C. Chapter 3903, “confer[s] upon the Superintendent and a trial court broad discretionary and equitable powers relating to the supervision, rehabilitation and liquidation of insurance companies.” Fabe v. Prompt Fin., Inc. (1994), 69 Ohio St.3d 268, 273, 631 N.E.2d 614. Through the Liquidation Act, the General Assembly established “a comprehensive framework governing the liquidation of insurance companies operating in Ohio,” Hudson v. Petrosurance, Inc., 127 Ohio St.3d 54, 2010-Ohio-4505, 936 N.E.2d 481, ¶ 16, through which the liquidator is empowered “to protect the rights of insureds, policyholders, creditors, and the public generally.” Fabe, 69 Ohio St.3d at 275, 631 N.E.2d 614. R.C. 3903.02(D). We must liberally construe the Liquidation Act to effectuate that purpose. R.C. 3903.02(C).

{¶ 11} The Liquidation Act grants the superintendent three levels of oversight of the insurance industry apart from her usual regulatory powers. First, R.C. 3903.09 confers on the superintendent power to identify and supervise a potentially troubled insurer by requiring it to get her permission before engaging in certain business transactions, such as disposing of assets or investing funds. Second, R.C. 3903.12 grants the superintendent the power, with the court's permission, to attempt to rehabilitate an insurer in such a poor financial condition that its further transaction of business would be financially hazardous to its policyholders, creditors, or the public. Third, R.C. 3903.16(A) and 3903.17 grant the superintendent the power, with the court's permission, to liquidate an insurer if, for example, it is insolvent. When the superintendent believes that an insurance company is insolvent, she may file a complaint for liquidation. R.C. 3903.17(B). When issued, a final order for liquidation appoints the superintendent as liquidator and directs her to use her broad, statutory powers to marshal assets of the insolvent insurer in the liquidation court and to administer the assets under the general supervision of that court. R.C. 3903.18(A). To that end, the liquidator maximizes the insolvent insurer's estate; she then reviews, prioritizes, and pays claims to the extent...