On appeal from Superior Court of New Jersey, Chancery Division - General Equity Part, Mercer County, C-84-06.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Axelrad, Payne and Messano.
Defendants Eagle Insurance Company and its parent, The Robert Plan Corporation (RPC), appeal from an order of liquidation entered by Chancery Judge Shuster upon the application of the Commissioner of the New Jersey Department of Banking and Insurance (DOBI). Defendants argue that the judge erred by deferring to the Commissioner's determination that liquidation was warranted and by not holding a plenary hearing to resolve alleged factual disputes concerning Eagle's status. Defendants contend further that the court should have enforced the terms of a prior consent order in which defendants agreed to rehabilitation in exchange for the Commissioner's promise to use "best efforts" to effectuate a sale of two of Eagle's subsidiaries. Finally, defendants argue that the Commissioner rushed to liquidation without attempting to collect debts owed to Eagle. We affirm.
This matter has a lengthy factual background and procedural history of relevance to the present appeal. RPC, a Delaware corporation, is Eagle's sole shareholder. RPC is not an insurance company; it controls a number of non-insurance subsidiaries that provide underwriting, policy and claims administrative services. Eagle is a New Jersey domiciled property/casualty insurance company that has been licensed to transact insurance business in this State since 1913. Eagle owns several subsidiary insurers domiciled in New York, New Jersey and Pennsylvania. Its New Jersey subsidiaries, Newark Insurance Company, GSA Insurance Company and National Consumer Insurance Company (NCIC), primarily write policies of private passenger automobile insurance. Eagle, Newark and GSA have been under consensual administrative supervision by DOBI since 2001; NCIC has been under consensual administrative supervision since 1998. All are in runoff status, and none has any in-force policies.
In 1998 and 1999, having experienced financial difficulties, Eagle entered into reinsurance treaties with affiliates of AIG. However, a dispute soon arose between Eagle and AIG that resulted in AIG's unilateral termination of the treaties, thereby worsening Eagle's financial condition.
On June 20, 2001, Eagle consented to being placed in confidential administrative supervision by the Commissioner. Alexander T. Farley, President of American Insurance Management, was appointed to serve as administrative supervisor. While these steps were occurring, arbitration proceedings were being conducted between Eagle and an AIG affiliate, the American International Insurance Company (for simplicity, AIG), regarding the cancelled reinsurance treaties. On December 31, 2001, Eagle and AIG executed two commutation and release agreements that required AIG to make commutation payments of $124,643,000 to Eagle and $24,315,000 to Newark, for a total of $148,958,000 in exchange for a release by Eagle and Newark of present and future payment obligations under the reinsurance treaties. These commutation agreements were executed in conjunction with a master agreement between RPC and AIG, intended to permit the solvent runoff of the Eagle entities in the year 2013 with a $5 million surplus. The master agreement gave AIG control over certain RPC affiliates in exchange for AIG's promise to purchase up to $150 million in surplus notes from Eagle, fund Eagle's loss adjustment expenses, and guarantee a $19 million promissory note from RPC to Eagle. RPC, in turn, guaranteed payment of up to $7.9 million if needed to ensure Eagle's solvency. The consolidated transaction between RPC and AIG was approved by the Commissioner on February 1, 2002 as a "product of arm's length bargaining" between the two entities. However, in his approval order, the Commissioner reserved the right to "require a special deposit or deposits from AIG in the future until such time as the liabilities of the RPC insurance subsidiaries no longer exist" if AIG failed to perform in accordance with its agreements. Administrative supervision of Eagle and its subsidiaries was continued.
Soon thereafter, RPC raised concerns regarding the accuracy of AIG's accounting during the settlement process, asserting that AIG's commutation reserves were considerably greater than the $148 million set forth in the agreements. Farley was directed by the Commissioner to investigate these allegations.
On July 9, 2004, Farley issued a draft report finding that AIG had understated its commutation balances by $56.5 million. However, Farley concluded the discrepancy had little impact on Eagle, since any amount added to the commutation payment would have resulted in a corresponding reduction in the amount of surplus notes to be purchased by AIG. Both AIG and RPC disputed Farley's conclusions. AIG took the position that the commutation amount set forth in the settlement was never intended to reflect AIG's exact book balance, but instead was a negotiated figure to which the parties agreed in order to settle a legal dispute. RPC argued that AIG's underreporting of its commutation reserves resulted in an unwarranted increase in Eagle's surplus note obligation that affected RPC's profit sharing potential, since Eagle was required to repay the notes, with interest, whereas the amounts paid under the commutation agreements were not subject to repayment or interest. In other words, if the commutation amounts had been correctly reported by the addition of $56.5 million, Eagle's potential debt obligation would have been reduced by a corresponding amount.
In a final report issued on September 20, 2005, Farley adhered to his prior conclusion that the commutation balances had been understated by AIG by $56.5 million. Farley explained the effect of this fact as follows:
Should the commutation and surplus note be adjusted accordingly, the impact on Eagle would be the lost opportunity of investment income derived from the $56.5 million or about $3.6 million on investment income and the interest owed on the notes drawn down would be reduced by $8.7 million. Eagle's surplus note of $150 million would thus have been $93.5 million. The surplus note was established based on the ultimate commutation balance established such that Eagle will end with $5 million of surplus at the end of its runoff [in 2013]. It is also noted that these differences do impact RPC's profit sharing potential on 2002 and subsequent business as provided for in the Master Agreement.
Farley then noted that the difference in the surplus note obligation would affect Eagle only if a solvent runoff were successful; if not, Eagle would not be able to pay the note, regardless of its balance. He therefore concluded that the only real and present impact on Eagle was the loss of $3.6 million in investment income.
In the letter transmitting Farley's report to RPC and AIG, the Acting Commissioner observed:
Enclosed for your information is the final report of the Department's consultant regarding the commuted balance of Reinsurance Treaties as of June 30, 2001, which has been accepted by the Department. The report concludes that the amount transferred was less than the fair and reasonable balance as of that date.
Please further note that this deficiency would create potential claims of the Eagle and Newark Insurance Companies for lost investment income on the deficiency and impairment of the Robert ...