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RILEY v. SIMMONS

December 13, 1993

CHARLES N. RILEY, et al., Plaintiff,
v.
TED D. SIMMONS, et al., Defendants.



The opinion of the court was delivered by: ALFRED M. WOLIN

 WOLIN, District Judge

 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. *fn1"

 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."), P 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 PP 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., P 4.

 The Rehabilitation Order was amended by an order dated August 7, 1991, Id. at Ex. B, P 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, P 1 (emphasis added).

 The Rehabilitation Plan

 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., P 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., P 14. Under the Plan, inter alia, the rehabilitation period would last for seven years, until December 31, 1999. Id. at P 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 P 16. At the time of oral arguments, the Plan had not yet been approved.

 PROCEDURAL HISTORY

 The State Court Actions

 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., P 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.

 This Action

 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. § 78l(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. § 78l(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, PP 107-112. The plaintiffs also allege that Mutual Benefit compiled a real estate portfolio that lacked adequate diversification, P 42, that Mutual Benefit's overall portfolio had substantial concentration in real estate, P 45, and that Mutual Benefit made improper investments. PP 47-65.

 DISCUSSION

 1. Commissioner's Motion to Intervene

 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 or in the alternative to stay the action pending the outcome of the Rehabilitator's action" in state court. Memorandum of Law of Intervenor Samuel F. Fortunato ("Rehabilitator's Brief"), p. 13. The Commissioner argues that pursuant to Federal Rule of Civil Procedure 24(a) he has the right to intervene as he has a vested interest in the property of Mutual Benefit, id. at p. 9, or in the alternative, permissive intervention pursuant to Federal Rule of Civil Procedure 24(b).

 
A. Intervention of Right

 Federal Rule of Civil Procedure 24(a) provides in pertinent part,

 
Intervention of Right. Upon timely application anyone shall be permitted to intervene in an action:
 
. . .
 
(2) when the applicant claims an interest relating to the property or transaction which is the subject of the action and the applicant is so situated that the disposition of the action may as a practical matter impair or impede the applicant's ability to protect that interest, unless the applicant's interest is adequately represented by existing parties.

 To satisfy Rule 24(a)(2) the Rehabilitator must show: (i) his application is timely; (ii) he has a direct interest in the subject matter of the litigation; (iii) it's interest would be impaired by disposition of the action without it's involvement; and (iv) it's interest is not adequately represented by any existing party. Harris v. Reeves, 946 F.2d 214, 219 (3d Cir. 1991), cert denied sub nom, Abraham v. Harris, 117 L. Ed. 2d 652, U.S. , 112 S. Ct. 1516 (1992). Each of these requirements must be met. Id. The Court finds that the Rehabilitator has met all four requirements.

 First, there is no dispute that the motion is timely. The Rehabilitator's motion was filed on August 20, 1993, approximately two weeks after defendants' motion was filed, but well in advance of the September 13, 1993 return date.

 Second, the Rehabilitator has a direct interest in the subject matter of the litigation. *fn3" Courts have found that a public official has a sufficient interest to intervene in which the subject of the suit comes within the scope of his official duties. Harris v. Pernsley, 820 F.2d 592, 60 (3d Cir. 1987), cert. denied, Castille v. Harris, 484 U.S. 947, 108 S. Ct. 336, 98 L. Ed. 2d 363 (1987), To intervene pursuant to Rule 24(a)(2), the Rehabilitator must do more than show that his duties may be affected in some incidental manner. Rather, the Rehabilitator must demonstrate that there is a tangible threat to a legally cognizable duty to have the right to intervene. See e.g., United States v. Perry County Board of Education, 567 F.2d 277, 279 (5th Cir. 1978).

 N.J.S.A. 17B:32-32 et seq. expressly provides the Rehabilitator with a cognizable duty which would be compromised if the Rehabilitator were not allowed to intervene. N.J.S.A. 17B:32-50(a)(15) grants the Rehabilitator the power to "prosecute any action which may exist on behalf of creditors, members, policyholders or shareholders of the insurer against any director or officer of the insurer, or any other person." *fn4" N.J.S.A. 17B:32-50(a)(21) provides that the Rehabilitator with the additional power "to exercise and enforce all the rights, remedies and powers of any creditor, shareholder, policyholder or member."

 These directives to the Rehabilitator reflect the overarching goal of N.J.S.A. 17B:32-32 et seq. The statute provides for a comprehensive scheme for the rehabilitation and liquidation of life and health insurers with a view to protecting the assets of the insurer as well as the interests of creditors, members, policyholders or shareholders of the insurer. See N.J.S.A. 17B:32-35(a)(11). The Act authorizes the Rehabilitator to make an application to enjoin any party from (i) interfering with the rehabilitation, or (ii) lessening the value of the insurer's assets, or (iii) prejudicing the rights of policyholders, creditors or shareholders. See id. The Act provides that the "rehabilitator may take such action as he deems necessary or appropriate to reform and revitalize the insurer." N.J.S.A. 17B:32-43(c). The Rehabilitator may also "continue to prosecute and to institute in the name of the insurer or in his own name any and all suits and other legal proceedings, in this State or elsewhere, and to abandon the prosecution of claims he deems unprofitable to pursue further." N.J.S.A. 17B:50(a)(14).

 In opposing the motion to intervene, plaintiffs argue that because the Rehabilitator will remain free to protect and maximize Mutual Benefit's assets by pursuing his own litigation against Mutual Benefit's former officers and directors, irrespective of whether Plaintiffs are permitted to proceed in this litigation, the Rehabilitator is free to carry out his statutory duties. Plaintiff's Memorandum of Law in Opposition to the Rehabilitator of Mutual Benefit Life Insurance Co.'s Motion to Intervene ("Plaintiff's Opposition Brief"), p. 6. To support this contention plaintiffs submit that Hayes v. Gross, 982 F.2d 104 (3d Cir. 1992), is dispositive of the Rehabilitator's claim.

 In Hayes, a purchaser of stock in an insolvent savings bank sought to recover against the former officers and directors of the bank on direct fraud claims under the Securities Exchange Act, even though the bank was in receivership of the Resolution Trust Corporation ("RTC"). RTC claimed that the plaintiffs' suit "threaten[s] to impair RTC's statutory mandate [under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")] to protect and maximize the assets of the failed" bank. Id. at 109. Plaintiffs' direct the Court's attention to the following passage wherein the Third Circuit, in rejecting the RTC's arguments, stated:

 
We can perceive no merit to this argument. The RTC does not identify any section of FIRREA that would be violated by permitting a bank stockholder to recover on a direct fraud claim given him by the Exchange Act. It merely asserts and reasserts that those whose interest the RTC represents will be better off if this case is dismiss. This proposition is self serving.

 Id.

 Plaintiffs submit that this case is synonymous with Hayes. Hence, as in Hayes, the Act would not be violated by permitting investors in Mutual Benefit products to recover on direct fraud claims under federal law. The Court does not believe that Hayes extends to this case. Hayes dealt with interpreting FIRREA. The Hayes court rejected the RTC's argument because, inter alia, "the RTC does not identify any section ...


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