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In re Liquidation of Integrity Insurance Company

Decided: March 6, 1990.

IN THE MATTER OF THE LIQUIDATION OF INTEGRITY INSURANCE COMPANY. KENNETH D. MERIN, COMMISSIONER OF INSURANCE OF THE STATE OF NEW JERSEY, AND HIS SUCCESSORS AS COMMISSIONERS OF INSURANCE OF THE STATE OF NEW JERSEY, IN HIS CAPACITY AS LIQUIDATOR OF INTEGRITY INSURANCE COMPANY, PLAINTIFF-RESPONDENT, AND CLARK EQUIPMENT COMPANY, A DELAWARE CORPORATION, INTERVENOR-PLAINTIFF,
v.
YEGEN HOLDINGS CORP., F/K/A YEGEN ASSOCIATES, INC., A NEW JERSEY CORPORATION, THE INTEGRITY FINANCIAL GROUP, INC. F/K/A THE INTEGRITY GROUP, INC., A NEW JERSEY CORPORATION, CHRISTIAN C. YEGEN, LAWRENCE E. STERN, EUGENE M. MCGEE, JR., IRWIN S. MARKOWITZ, CAROL LERER, JASON W. SEMEL, JOHN W. NOLAN, W. SHELLMAN MORSE, ROBERT W. STUBBS, ROBERT E. DENNIS, SAM L. MONK, JAMES P. MURPHY, BRIAN S. FRISCH, LAURA C. TALBOTT, RICHARD J. SVOBODA, HENRY C. SAVINO, BRADLEY D. WILEY, WILLIAM R. FISHER, JR., ALBERT L. WEISS, ARTHUR S. NICHOLAS, LEANDRO S. GALBAN, JR., MALLORY FACTOR, ROBERT J. LOCKHART, KENNETH R. MACLEOD, JOEL H. SCHLEIFSTEIN, AND TOUCHE ROSS & COMPANY, A NEW YORK PARTNERSHIP, DEFENDANTS-APPELLANTS



On appeal from the Superior Court, Chancery Division, Bergen County.

Dreier, Scalera and Wefing. The opinion of the court was delivered by Scalera, J.A.D.

Scalera

This case involves the liquidation of Integrity Insurance Company (Integrity) in which the New Jersey Commissioner of Insurance was appointed as Liquidator (Liquidator) pursuant to the provisions of the New Jersey Insurers Liquidation Act (Act), N.J.S.A. 17:30C-1 et seq. In this opinion, we undertake to set forth the extent to which the Liquidator may act in that capacity and to establish the procedures which are to be followed whenever he asserts claims of the insolvent estate and other claimants against third parties.

On December 30, 1986, the Commissioner commenced rehabilitation delinquency proceedings against Integrity pursuant to the Act, N.J.S.A. 17:30C-6, and a consent order was entered. On March 24, 1987, however, the trial court terminated that proceeding (N.J.S.A. 17:30C-7), declared Integrity to be insolvent and directed the Commissioner, as statutory Liquidator, to

dissolve the company in accordance with the Act. (This is referred to herein as the so-called "liquidation order"). N.J.S.A. 17:30C-9 and 10.

Paragraph 16(i) of that liquidation order provided that the Liquidator was empowered to

prosecute any action which may exist on behalf of the creditors, policyholders or shareholders of Integrity against any officer or director of Integrity, or any other person.

The trial court thereby sought to grant to the Liquidator all of the express and implied statutory powers delineated in the Act, including the authority to commence litigation on behalf of Integrity, its creditors, policyholders, claimants and other beneficiaries of the estate.

In addition, the order provided that the Liquidator had to give notice of the entry thereof to all potential claimants, including policyholders, state insurance commissioners, guaranty associations and insurance agents and to specify the procedure by which they could file proofs of claim against the estate of Integrity. N.J.S.A. 17:30C-9a and 20. In response thereto, the Liquidator received over 25,000 proofs of claim from policyholders and creditors. Thereafter, although the Act did not require him to do so, the Liquidator secured a further order allowing him to provide all interested parties with the right to request and receive notice of future proceedings. Approximately 400 policyholders responded to that notification and their names were placed on a separate list.

On April 28, 1988, 18 of those policyholders, led by Clark Equipment Company (Clark), moved to have the trial court appoint a policyholders' committee to represent all policyholders in the liquidation process and asked that it be financed from the Integrity estate. On September 22, 1988, the trial court denied that application for the reasons set forth in its published opinion. In re Liquidation of Integrity Ins., 231 N.J. Super. 152, 159, 555 A.2d 50 (Ch.Div.1988). In essence, the denial was grounded on the provisions of the Act which enabled the court to fashion "such . . . relief as the nature of the case and

interests of the policyholders, creditors, stockholders, members, subscribers or the public may require" as provided in N.J.S.A. 17:30C-4d. Liquidation of Integrity Ins. Co., 231 N.J. Super. at 156, 555 A.2d 50. While Clark did not seek to appeal from that denial, the issue of its intervention is, nevertheless, implicated in our discussion. We also note that no one questions the trial court's appointment of the Liquidator or the general procedure attendant upon such action, except as may be specifically noted herein.

Meanwhile, on May 4, 1988, the Liquidator commenced the instant collateral suit in this action on behalf of Integrity, its creditors, policyholders, claimants and beneficiaries to recover damages from Touche Ross & Company (Touche) as Integrity's accountant and auditor, the Integrity Financial Group, Inc. as public owner of 100% of Integrity's stock, Yegen Holding Corporation as private owner of 80% of the Integrity Financial Group, Inc.'s stock (Yegen defendants), and 25 individuals who, at various times, had been associated with Integrity as directors and officers (D & O defendants.)

The complaint asserted various causes of action against the Yegen defendants for common law negligence, negligent misrepresentation, breach of fiduciary duties, common law fraud, waste, depletion and diversion of Integrity's corporate assets, violation of N.J.S.A. 17:27A-4(c) and N.J.S.A . 2C:41-1 et seq.; against the D & O defendants for violation of N.J.S.A. 14A:6-14 and N.J.S.A. 14A:7-14; and against Touche for breach of contract, malpractice, negligence, negligent misrepresentation, gross negligence, and recklessness. The amended complaint further charged Touche with fraud and aiding and abetting the misconduct of its codefendants. Both Touche and the Yegen defendants were also charged with violating New Jersey's anti-racketeering and consumer fraud statutes, N.J.S.A. 2C:41-1 et seq., and N.J.S.A. 56:8-1 et seq.

The essence of the allegations set forth in the pleadings was,

that as a result of mismanagement and fraud, the Yegen Defendants caused Integrity to become statutorily insolvent in 1981 or 1982 and then, with the active participation of Touche, concealed the company's true economic condition by preparing and disseminating materially false financial statements. But for such concealment, New Jersey's Insurance Department . . . would have shut down the company in 1982 or 1983 instead of 1987; policyholders would not have purchased insurance from Integrity during these years; and, creditors would not have extended credit to Integrity during these years without obtaining adequate security.

Although most of the asserted causes of action concededly "belong" to Integrity, two of the counts of the complaint seek a recovery based on alleged misrepresentations made by defendants to the creditors, policyholders, and other Integrity beneficiaries. The Liquidator premises his authority and standing to assert such claims on the provisions of the Act and paragraph 16(i) of the liquidation order.

On October 31, 1988, the defendants moved to dismiss these two counts on the ground that the Liquidator lacked standing to prosecute these claims because they "belonged" personally to the policyholders, creditors, and other parties who allegedly relied upon the misrepresentations. On April 10, 1989, the trial court denied these motions, but refused to address at that time, whether any recovery by the Liquidator in this action would constitute a general asset of the estate or pass directly to "some creditor, policyholder or claimant."

On March 17, 1989, Clark moved to intervene in this action and suggested in its brief to the trial court the appropriateness of proceeding with a class action. It noted that, in the absence of such, the defendants might justifiably complain that a determination by the court might not be binding or have res judicata effect. On April 10, 1989, the trial court partially granted Clark leave to intervene for the purposes of "monitoring" the proceeding only and in order to receive notice of all steps taken in the action. He further granted Clark the opportunity to object to any proposed settlement by the Liquidator. However, Clark was denied any right to negotiate a settlement of the claim which it assertedly owned, to take discovery or otherwise

participate as a party-plaintiff. Again, the present appeal does not directly involve that determination insofar as no appeal was prosecuted by Clark therefrom. On May 19, 1989, the trial court entered a further order "memorializing" this decision and therein granted to the Liquidator, the "non-exclusive" right to assert claims on behalf of Integrity's creditors, policyholders, claimants, and other beneficiaries. (This order is referred to as the so-called "standing order").

Shortly thereafter, this court granted leave to both Touche and the other named defendants herein. We also directed the parties to specifically address on appeal, "the issues of whether the Chancery Division should be directed alternatively to determine whether a class action should be certified or other case management techniques utilized on behalf of all policyholders, and prosecuted by one other than the Liquidator." Clark was permitted to submit a brief as amicus curiae. Since the appeals by Touche and the other defendants involve identical issues we will dispose of both appeals in this one opinion.

The Uniform Insurers Liquidation Act (Uniform Act) was approved by the National Conference of Commissioners on Uniform State Laws in 1939. 13 Uniform Laws Annotated at 322. One of the announced purposes of promulgating such a uniform act was to eliminate the problems that arose because the assets of an insolvent insurance company were often located in different states which had a myriad of different applicable laws. Id. Thus, the provisions of the Uniform Act were designed specifically to reduce the problems encountered by out-of-state claimant creditors by allowing for the appointment of both domiciliary and ancillary receivers in the various states with whom they could file claims. Id. at 322-323; 43 Am.Jur.2d § 93 at 172-173. See also Zullo Lumber v. King Construction, 146 N.J. Super. 88, 368 A.2d 987 (Law Div.1976). Thus, all of the difficulties previously encountered presumably could "easily be eliminated" by the passage of a uniform act by the several states. 13 Uniform Law Annotated, at 323; 19A Appleman, Insurance Law and Practice, § 10621, at 11.

It is now well settled that the insurance business affects the public interest and is therefore subject to reasonable regulation, including liquidation proceedings of an insolvent carrier. Saffore v. Atlantic Casualty Ins. Co., 21 N.J. 300, 310, 121 A.2d 543 (1956); 19A Appleman, § 10621. In New Jersey, the passage of L.1975, c. 113 § 1 et seq., N.J.S.A. 17:30C-1 et seq., incorporated essential provisions of the Uniform Act but contained some variations, omissions and additions. 13 Uniform Laws Annotated at 325. See N.J.S.A. 17:30C-23. Obedient to the spirit of the Uniform Act, however, our Act provides that it is to be interpreted so as to effectuate the purposes of the former unless specifically in conflict with our statutory provisions. N.J.S.A. 17:30C-23b.

Thus, our Act undertakes to statutorily regulate the rehabilitation and liquidation of insolvent insurance companies doing business in New Jersey by ratifying the major portions of the Uniform Act and also, by providing its own additional requirements. Section 17:30C-15 provides, in relevant part:

a. . . . The court shall direct the commissioner forthwith to take possession of the assets of the insurer and to administer the same under the orders of the court.

b. As domiciliary receiver, the commissioner shall be vested by operation of law with the title to all property, contracts, and rights of action, and all of the books and records of the insurer wherever located, as of the date of entry of the order directing him to rehabilitate or liquidate a domestic insurer and he shall have the right to recover the same and reduce the same to his possession.

Clearly, this statute vests the Commissioner, as Liquidator, with title to the rights of action belonging to Integrity but concededly does not specifically bestow him with the right to prosecute claims "on behalf" of, or belonging exclusively to, creditors, policyholders, and the like. However, unlike the Uniform Act, our Act goes on to mandate that the court is to fashion any relief which "may" be necessary to protect their interests, as well as that of "the public."

On the return of the order to show cause, the court shall either deny the application or grant the application together with such other relief as the nature of the case and the interests of the policyholders, creditors, stockholders, members, subscribers or the public may require. [ N.J.S.A. 17:30C-4(d)].

Thus, a supervising court is statutorily required to exercise a wide range of discretion in order to protect such interests. N.J.S.A. 17:30C-5. Any interpretation of both our Act and the Uniform Act must be influenced by the provisions which mandate that the broadest protection be afforded to the public and the various claimants and beneficiaries. Purdy v. Nationwide Mut. Ins. Co., 184 N.J. Super. 123, 445 A.2d 424 (App.Div.1982). Cf. Benham v. Manufacturers & Wholesalers Indem., 685 P.2d 249 (Colo.App.1984). Against this backdrop we undertake a review of the orders granted to the Liquidator herein from the inception of the liquidation proceeding. Appleman, § 10654, at 85-88.

The defendants in this case argue essentially that upholding the Liquidator's omnibus right to prosecute all claims, including claims which are not part of Integrity's estate assets, constitutes an unconstitutional deprivation of the property of affected creditors without due process of law. Cf. Appleman, § 10682, for a discussion of this area.

The weight of authority makes it clear that a statutory receiver, such as the Liquidator here, may prosecute claims on behalf of creditors and policyholders of the insolvent company in order to preserve its estate assets, but may not maintain a suit in such a representative capacity if it is strictly personal in nature, that is, if the cause of action belongs clearly to the individual creditor or policyholder. In Corcoran v. Frank B. Hall & Co., Inc., 149 A.D.2d 165, 545 N.Y.S.2d 278 (1 Dept. 1989), the court embraced this principle in holding that the superintendent of insurance, as liquidator of the ...


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