James Feltman v. Mike Kreidler And Cascade National Insurance Company ( 2014 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
MIKE KREIDLER, Insurance
o
Commissioner, DIVISION ONE coo
3>?u
—i—{
Respondent, No. 71063-0-1 o
o •«-nf™
v.
enrn
PUBLISHED OPINION o
CASCADE NATIONAL INSURANCE
COMPANY, en
—'O
CO 2S<-
Respondent,
and
JAMES S. FELTMAN, Chapter 11
Trustee for the Estate of Certified HR
Services, Inc.,
Appellant. FILED: March 10, 2014
Dwyer, J. — Insurance Commissioner Mike Kreidler and Bankruptcy
Trustee James Feltman have likely never met. Nevertheless, the lengthy
litigation between these two men—as stand-ins for two corporations (one
iniquitous, both insolvent)—continues. Today, we bring the legal strife between
these men one step closer to finality by affirming the superior court's ruling that
Kreidler (as Receiver of Cascade National Insurance Company) acted lawfully in
denying the claim of Feltman (as Trustee of the Estate of the bankrupt Certified
HR Services, Inc., as assignee of causes of action from the insolvent Midwest
Merger Management, Inc.) that Cascade owes $4.3 million to Midwest and,
No. 71063-0-1/2
hence, to Certified. In affirming the superior court's decision, we hold both that
the court did not abuse its discretion by confirming the Receiver's determination
that the Trustee failed to prove his fraudulent transfer claim and that the court did
not abuse its discretion in denying the Trustee's motion for discovery.
I
Cascade, which operated as a domestic stock insurance company in
Washington, had a history of financial difficulties that prompted increased
scrutiny from the Office of the Insurance Commissioner (OIC). On November 30,
2004, after notifying Cascade three times that it needed to cure a deficiency in its
capital and surplus, the OIC obtained a superior court order appointing Kreidler,
the Insurance Commissioner, as Receiver for the purpose of seizing Cascade.
The court placed Cascade into receivership due both to Cascade's fragile
financial condition and to questionable transactions between Cascade and
Midwest. After spending nearly one year trying to rehabilitate Cascade, the
Receiver petitioned the court for and obtained an order allowing it to liquidate
Cascade.
Feltman is the Chapter 11 Trustee for the Estate of Certified HR Services,
Inc. in a bankruptcy case pending in the United States Bankruptcy Court for the
Southern District of Florida. In 2006, the Trustee, on behalf of Certified, entered
into a settlement agreement with Midwest, which transferred and assigned to
Certified all of Midwest's claims against Cascade. Subsequently, on December
4, 2007,1 the Trustee filed a proof of claim with the Receiver. The proof of claim
1Twenty-one months after the Receiver's March 4, 2006 deadline for submitting claims.
2
No. 71063-0-1/3
was based on a fraudulent transfer theory and alleged, in pertinent part, the
following:
Each of the transfers [from Midwest to Cascade] are fraudulent
transfers under RCW 19.40.041 and 19.40.051 because a) each
transfer was made without the Transferor receiving reasonably
equivalent value from Cascade, and b) at the time of each transfer,
the Transferor was i) insolvent and/or became insolvent as a result
of each transfer, ii) engaged or was about to be engaged in a
business or transaction for which its remaining assets were
unreasonably small in relation to the business or transaction, and/or
iii) intending to incur, or should have reasonably believed that it
would incur, debts beyond its abilities to pay as they became due.
The Trustee sought to recover $4.3 million from the Receiver.
In order to understand the Trustee's claim against the Receiver, it is
necessary to be aware ofthe history between Cascade and Midwest, and ofthe
federal litigation in which they were embroiled. Anthony Huff2 and Danny Pixler
created Midwest to acquire Certified Services, Inc., Certified HR Services, Inc.,
and their affiliates, and to operate these companies as professional employer
organizations (PEO). A PEO contracts with employers to provide payroll
services and workers' compensation insurance coverage to their employees.
Midwest would first take possession and control of all of the insurance premiums
and fees collected by the PEOs from the employees and employers, and would
then procure and service the workers' compensation insurance coverage.
In 2003, Midwest lost coverage from its major carrier that had been
providing workers' compensation coverage for the PEOs. This left Midwest in
2Although Huff had absolute control and authority over Midwest, he could not engage in
the business of insurance because he had three federal court convictions for mail fraud relating to
acts involving insurance and misappropriation of money paid by others for insurance premiums.
Aware that his name could not be involved in any insurance business enterprise, Huff concealed
his ownership and control of Midwest.
No. 71063-0-1/4
need of a carrier willing to provide coverage for over 15,000 PEO employees in
California and that was licensed to provide workers' compensation insurance in
California—a difficult license to obtain. Midwest learned that Cascade, which
was having financial problems and needed an infusion of funds to keep its capital
and surplus levels above the regulatory minimums, had such a license. Midwest
subsequently agreed to provide Cascade with capital and surplus in exchange for
a sale or transfer of a percentage ownership interest, which would allow Cascade
to stay operational so that it could provide insurance coverage for Midwest's
California PEO operations.
In order to complete this transaction, the OIC required submission of
certain financial records. Knowing that his name could not be tied to the
transaction, Huff created Gudeman &Weiss, LLC (G&W), an entity he used to
acquire the interest in Cascade and to conceal his involvement in the transaction.
G&W had no assets, capital contributions, or financial ability to make such a
purchase and, as a result, Huff and Midwest provided all of the funds that were
paid to Cascade. Although Midwest claimed to be a lender to G&W, G&W never
executed any promissory notes to Midwest and was never asked to reimburse
Midwest. Midwest's infusion of capital into Cascade allowed Midwest to satisfy
its obligation to procure workers' compensation coverage from a licensed insurer
for the California PEO, thus allowing Midwest to continue to receive premiums
from the California PEO. However, Midwest did not pay Cascade for all of the
insurance coverage, which resulted in a $19,310,744.00 debt to Cascade.
Once Cascade went into receivership, the Receiver filed suit in federal
No. 71063-0-1/5
court against Midwest and its operators, Anthony Huff, Sheri Huff,3 and Pixler.
The Receiver's claims included, among others, misappropriation, civil conspiracy,
violations of the Criminal Profiteering and Consumer Protection Acts, and breach
of contract. Following a jury verdict in the Receiver's favor, the federal district
court entered judgment against Midwest and its co-defendants, jointly and
severally, for the unpaid premiums and fees of $19,310,744.00, plus attorney
fees and costs, for a total judgment in excess of $21 million.
Subsequently, in this action, the Receiver denied the Trustee's claim on
March 27, 2012 (hereinafter Initial Determination). The Receiver determined that
the Trustee did not provide evidence or proof to establish the necessary
elements of his claim that Midwest's transfers to Cascade were fraudulent and,
accordingly, the Trustee failed to meet his burden under either RCW 19.40.041
or RCW 19.40.051. Additionally, the Receiver concluded that the Trustee's
fraudulent transfer claim failed because Midwest received "reasonably equivalent
value" from Cascade, as evidenced by the payment of capital and surplus to
Cascade, which allowed Midwest to continue providing workers' compensation
insurance for its PEO operations.4
Before filing an objection to the Initial Determination, the Trustee filed a
discovery motion in superior court on May 11, 2012, seeking to obtain
"documents, materials and other records concerning the Receiver's Initial Claim
Denial." Although the Receiver disputed the Trustee's claim that he was entitled
3Anthony Huff's wife.
4 In the Initial Determination, the Receiver also classified the Trustee's claim as a late-
filed claim, noting that"even if accepted and approved by the Receiver on the merits" it would be
a Class 7 claim pursuant to RCW 48.31.280(7). However, the Receiver did not state that he was
denying the Trustee's claim because it was filed late or because it was unlikely to be recoverable.
No. 71063-0-1/6
to discovery, the Receiver voluntarily provided the Trustee with documents and
exhibits from the federal court litigation. The Trustee then withdrew the discovery
motion.
On May 29, the Trustee timely submitted a written objection to the
Receiver's Initial Determination. Therein, the Trustee asserted that although
Midwest had paid approximately $4.3 million for purchase of Cascade preferred
stock, the stock was actually issued to G&W. Therefore, the Trustee contended,
the Receiver erred in concluding that Midwest received "reasonably equivalent
value" from Cascade.
On August 2, after considering the Trustee's objection, the Receiver
denied the Trustee's claim (hereinafter Final Determination). In the Final
Determination, the Receiver reiterated that the Trustee had failed to satisfy his
burden to prove each element of his fraudulent transfer claim. Additionally, in
addressing the objection raised by the Trustee regarding the issuance of stock
certificates to G&W, the Receiver concluded, first, that by virtue of providing the
infusion of capital and surplus to Cascade, Midwest was able to meet its
obligation to obtain licensed workers' compensation insurance for its PEOs and
to continue to collect payments from the PEOs, and, second, that evidence
presented in the federal court litigation established that G&W was a front for
Midwest, meaning that Midwest received the benefit ofthe stock certificates.
On August 6, the Receiver filed a petition in superior court seeking an
order confirming its Final Determination and noted the petition for hearing. The
Trustee opposed the petition and also sought a continuance and additional
No. 71063-0-1/7
discovery. Thereafter, the superior court confirmed the Final Determination and
denied the Trustee's request for a continuance and additional discovery. In
doing so, the court made the following pertinent findings with respect to the
Trustee's fraudulent transfer claims: the Trustee failed to meet his burden of
proof on his fraudulent transfer claim; sufficient evidence supported the
Receiver's determination that Midwest received reasonably equivalent value from
Cascade; and the Receiver's Final Determination was supported by substantial
evidence.
The court also made the following pertinent findings with respect to the
Trustee's motion for discovery: the Trustee could have obtained information
relating to the federal litigation from public sources, from Midwest, or from
Midwest's counsel in the federal litigation; the Receiver had no responsibility to
produce such information in the statutory proof of claim proceedings; the
Trustee's attempt to seek broad discovery as to the Receiver's actions in
administration of the estate was impermissible under the statutory proof of claim
process, which is controlled by RCW 48.31.145; and, even if such discovery
requests were properly before the court, nothing in the record supported access
to such broad discovery.
The Trustee appeals from the trial court's order confirming the Final
Determination and denying his request for additional discovery.
II
The Trustee contends that the Receiver abused his discretion in
concluding that Midwest had received reasonably equivalent value, and that the
No. 71063-0-1/8
trial court erred when it confirmed this determination. This is so, he avers, for
two reasons: (1) the federal litigation did not establish that G&W was operating
as a front for Midwest, and (2) despite Midwest's $4.3 million contribution to
Cascade, Cascade still went into receivership just one year later. We disagree.
In an insurance receivership action, the trial court reviews the Receiver's
determinations under an abuse of discretion standard.
As the program of rehabilitation takes form and the steps unfold,
the trial court in its supervisory and reviewing role may not
substitute its judgment for that of the Commissioner, but may and
should only intervene or restrain when it is made to appear that the
Commissioner is manifestly abusing the authority and discretion
vested in him and/or is embarking upon a capricious, untenable or
unlawful course.
Kueckelhan v. Fed. Old Line Ins. Co. (Mut.), 74 Wash. 2d 304, 316, 444 P.2d 667
(1968). In explaining the rationale for this deferential standard, the Kueckelhan
court made clear that the commissioner's role is more aptly characterized as a
neutral arbiter than as a zealous advocate.
[T]he legislature, in its wisdom, in its reliance upon the presumed
expertise and experience of a duly elected and functioning state
official, and in the public interest, vested the Commissioner with a
realistic and effective control over the administration of the affairs
and assets of an insurer found to be in need of rehabilitation. The
authority so vested necessarily contemplates and embraces a
considerable degree of independent administrative judgment and
discretion to be exercised by the Commissioner if he is to carry out
the responsibility and trust imposed upon him.
Kueckelhan, 74 Wash. 2d at 314.
Although it is well settled that the trial court's standard of review is abuse
of discretion, no reported decision has clarified what standard this court should
employ in reviewing the trial court's order. California appellate courts, however,
8
No. 71063-0-1/9
review trial court decisions in insurance receivership actions utilizing an abuse of
discretion standard. Low v. Golden Eagle Ins. Co., 104 Cal. App. 4th 306, 316,
128 Cal. Rptr. 2d 423 (Cal. App. 1 Dist. 2002); In re Exec. Life Ins. Co., 32 Cal.
App. 4th 344, 358, 38 Cal. Rptr. 2d 453 (Cal. App. 2 Dist. 1995). In California
and Washington, the policy rationales for affording the insurance commissioner
significant discretion in insurance receivership proceedings are quite similar.
Compare Low, 104 Cal. App. 4th at 315-16 ("Our high court has long since
observed that such conservation proceedings arise under the broad police
powers of the state to ensure the reorganization or orderly liquidation of insolvent
insurers and the protection of their policyholders and the public"), with
Kueckelhan, 74 Wash. 2d at 315 ("This task [of conducting the business of the
seized company] is assigned by the legislature to the Insurance Commissioner
who acts to protect the general public, the policyholders and owners of the
company, and the company itself.'" (quoting Kueckelhan v. Fed. Old Line Ins. Co.
(Mut), 69 Wash. 2d 392, 406, 418 P.2d 443 (1966))). Accordingly, in furtherance of
the policy explicated in Kueckelhan, we review the trial court's confirmation of the
Receiver's Final Determination for an abuse of discretion. As part of this
circumscribed review, we accept "the trial court's resolution of credibility and
conflicting substantial evidence, and its choice of possible reasonable
inferences." Exec. Life Ins., 32 Cal. App. 4th at 358. A decision constitutes an
abuse of discretion when it is "is manifestly unreasonable or based on untenable
grounds." In re Marriage of Fiorito, 112 Wash. App. 657, 663-64, 50 P.3d 298
(2002).
No. 71063-0-1/10
A court's decision is manifestly unreasonable if it is outside the
range of acceptable choices, given the facts and the applicable
legal standard; it is based on untenable grounds if the factual
findings are unsupported by the record; it is based on untenable
reasons if it is based on an incorrect standard or the facts do not
meet the requirements of the correct standard.
Fiorito, 112 Wash. App. at 664.
The Trustee makes fraudulent transfer claims pursuant to RCW 19.40.041
and RCW 19.40.051, both of which are provisions of Washington's Uniform
Fraudulent Transfer Act (UFTA). RCW 19.40.041 provides in part:
(a) A transfer made or obligation incurred by a debtor is fraudulent
as to a creditor, whether the creditor's claim arose before or after
the transfer was made or the obligation was incurred, if the debtor
made the transfer or incurred the obligation:
(1) With actual intent to hinder, delay, or defraud any creditor
of the debtor; or
(2) Without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor:
(i) Was engaged or was about to engage in a business or a
transaction for which the remaining assets of the debtor were
unreasonably small in relation to the business or transaction; or
(ii) Intended to incur, or believed or reasonably should have
believed that he or she would incur, debts beyond his or her ability
to pay as they became due.
RCW 19.40.051 provides in part:
(a) A transfer made or obligation incurred by a debtor is fraudulent
as to a creditor whose claim arose before the transfer was made or
the obligation was incurred if the debtor made the transfer or
incurred the obligation without receiving a reasonably equivalent
value in exchange for the transfer or obligation and the debtor was
insolvent at that time or the debtor became insolvent as a result of
the transfer or obligation.
As part of proving a constructive fraud claim pursuant to RCW
19.40.041 (a)(2)(i)(ii) and 19.40.051(a), the Trustee must demonstrate that
Midwest did not receive reasonably equivalent value from Cascade. The UFTA
10
No. 71063-0-1/11
does not provide a general definition for the phrase "reasonably equivalent value"
and Washington courts have not provided guidance in this context.
Nevertheless, because the provisions in which this phrase appear mirror the
fraudulent transfer provision of the Bankruptcy Code, decisions under the Code
are instructive. Compare RCW 19.40.041 (a)(2)(i)(ii), and RCW 19.40.051(a),
with 11 U.S.C. § 548(a)(1)(B)(i)(ii)(l)(ll)(lll). See also In re Reisner. 357 B.R.
206, 216 (Bankr. E.D. N.Y. 2006) (concluding that "[t]he analysis under Florida
law of whether reasonably equivalent value was given is identical to that under
Section 548 of the Bankruptcy Code" after identifying that Florida law was
"essentially identical" to the fraudulent transfer provisions of the Code).
Decisions interpreting the Code indicate that "[i]t is well settled that a debtor need
not benefit directly in order to receive reasonably equivalent value for a transfer.
He may benefit indirectly through benefit to a third person." Johnson v. First Nat'l
Bank, 81 B.R. 87, 88 (Bankr. N.D. Fla. 1987) (citing Williams v. Twin City Co.,
251 F.2d 678, 681 (9th Cir. 1958); Klein v. Tabatchnick. 610 F.2d 1043, 1047 (2d
Cir. 1979); Rubin v. Mfrs. Hanover Trust Co., 661 F.2d 979, 991 (2d Cir. 1981)).
Furthermore, "'[i]f the consideration given to a third person ultimately landed in
the debtor's hands, or if the giving of the consideration to the third person
otherwise confers an economic benefit upon the debtor, then the debtor's net
worth has been preserved '" Johnson. 81 B.R. at 88 (second alteration in
original) (quoting Rubin, 661 F.2d at 991).
Although Cascade did not issue stock certificates directly to Midwest,
evidence in the federal court litigation indicates that G&W—the entity that
11
No. 71063-0-1/12
received the stock directly—was operating as a front for Midwest. The Receiver
explicitly relied on this evidence in concluding that Midwest did receive
reasonably equivalent value because it controlled G&W and, thus, that the
benefit of the stock was ultimately conferred upon Midwest. Nevertheless, the
Trustee contends that the Receiver erred by asserting that the federal court
litigation "established" that G&Wwas a front for Midwest. Specifically, the
Trustee asserts, "[njeither the jury verdict nor the Ninth Circuit decision found that
G&W was a 'front' for Midwest." However, the Trustee cites no authority for the
proposition that, in order for the Receiver to conclude that G&W was a front for
Midwest, his conclusion must have been anchored to a jury verdict or a federal
court order. The Receiver acted within his discretion when he concluded that the
evidence from the federal litigation was dispositive.
Similarly, the Receiver did not abuse his discretion by concluding that
Midwest received reasonably equivalent value by virtue of Cascade staying in
business, which in turn allowed Midwest to satisfy its obligation to procure
workers' compensation coverage from a licensed insurer for the California PEO,
thus allowing Midwest to continue to receive premiums from the California PEO.
The Trustee asserts that Midwest did not receive reasonably equivalent value
because, despite its infusion of capital into Cascade, Cascade went into
receivership just one year later. However, the Trustee does not provide authority
to support his position, and his legally unsupported assertion that Midwest did not
receive reasonably equivalent value does not provide a tenable ground on which
either this court or the superior court could conclude that the Receiver abused his
12
No. 71063-0-1/13
discretion.5
The Trustee next contends that the Receiver abused his discretion when
he determined that the Trustee failed to meet his burden of proof on his
fraudulent transfer claim, and that the trial court erred when it confirmed this
determination. This is so, the Trustee asserts, because the Receiver's own
documents show that Midwest paid approximately $4.3 million to Cascade and
received nothing in return. We disagree.
In order to establish his fraudulent transfer claim under chapter 19.40
RCW, the Trustee needed to prove that Midwest did not receive reasonably
equivalent value from Cascade, and also establish either that (1) Cascade had
an actual intent to defraud, or (2) its actions constituted constructive fraud. See
Sedwick v. Gwinn. 73 Wash. App. 879, 885, 873 P.2d 528 (1994). With respect to
"actual intent," the Trustee needed to prove by clear and satisfactory evidence
that the debtor, Midwest, made each transfer to the creditor, Cascade, with the
"actual intent to hinder, delay, or defraud any creditor." RCW 19.40.041(a)(1);
Douglas v. Hill, 148 Wash. App. 760, 766, 199 P.3d 493 (2009). The Trustee failed
to provide any evidence of actual intent. Accordingly, RCW 19.40.041(a)(1) did
not support his fraudulent transfer claim.
With respect to "constructive fraud," the Trustee needed to prove that
Cascade's actions constituted constructive fraud. RCW 19.40.041 (a)(2)(i)(ii);
5"[T]he question of reasonably equivalent value is determined by the 'value of the
consideration exchanged between the parties at the time ofthe conveyance or incurrence ofdebt
which is challenged.'" In re NextWave Pers. Commc'ns. Inc., 200 F.3d 43, 56 (2d Cir. 1999)
(quoting In re NextWave Pers. Commc'ns. Inc.. 235 B.R. 277, 290 (Bankr. S.D. N.Y. 1999)).
Therefore, Cascade's state ofinsolvency one year later is not helpful in determining whether
Midwest received reasonably equivalent value at the time that it paid Cascade $4.3 million.
13
No. 71063-0-1/14
RCW 19.40.051(a); Douglas. 148 Wash. App. at 768-69. The Trustee had two
possible methods of proving constructive fraud, both of which required the
Trustee to present substantial evidence in support of his claim. Sedwick, 73 Wn.
App. at 885. The first method required the Trustee to showeither (i) that
Midwest was engaged or was about to engage in a business or a transaction for
which its remaining assets were unreasonably small, or (ii) that Midwest intended
to incur, or believed or reasonably should have believed that it would incur, debts
beyond its ability to pay as they became due. RCW 19.40.041 (a)(2)(i)(ii). The
second method required the Trustee to show that Midwest was insolvent at the
time of the transfer or became insolvent as a result of the transfer. RCW
19.40.051(a).
The Trustee did not establish constructive fraud by either method of proof.
As to the first, the Trustee offered no evidence either (i) that Midwest was
engaged or was about to engage in a business or a transaction for which its
remaining assets were unreasonably small, or (ii) that Midwest intended to incur,
or believed or reasonably should have believed that it would incur, debts beyond
its ability to pay as they became due. Accordingly, the Trustee failed to meet his
burden of proof.6
6Although the Trustee attempts to make use of the second method, his efforts are also
unsuccessful He contends that, because the Receiver argued to the trial court that Midwest was
set up as Ponzi scheme—which, by definition, is an enterprise insolvent from its inception—there
was substantial evidence in the record ofconstructive fraud. The Trustee's contention is
unavailing The Trustee cites to statements made by the Receiver's counsel before the trial
court a proceeding subsequent to the Receiver's Final Determination, meaning that the Receiver
could not have seen, let alone relied on, the hearing transcript. Moreover, even if there was
evidence before the Receiver to support such an assertion, the Trustee has failed to identify it,
managing only to assert that it is telling that the Receiver never contended that Midwest was
solvent or fully capitalized because he knew that was not the case. Such conjecture does not
provide a basis for this court to conclude that the Receiver abused his discretion. To the
14
No. 71063-0-1/15
The Trustee also contends that the trial court erred when it denied his
discovery motion. This is so, he asserts, because (1) he has a legal interest in
the estate, and (2) he demonstrated "a reasonable suspicion of negligence or
malfeasance." We disagree.
"A trial court has wide discretion in ordering pretrial discovery; such orders
are reviewed for manifest abuse of discretion." Gillett v. Conner. 132 Wash. App.
818, 822, 133 P.3d 960 (2006). "A trial court abuses its discretion when its order
is manifestly unreasonable or based on untenable grounds" and it "necessarily
abuses its discretion if it applies the incorrect legal standard." Gillett, 132 Wn.
App. at 822.
Insofar as the Trustee sought to discover evidence in the Receiver's
possession from the federal litigation relating to the Trustee's claim, the trial court
did not abuse its discretion by denying the Trustee's discovery motion. The
Receiver's role is more aptly characterized as a neutral arbiter than as a zealous
advocate. See Kueckelhan, 74 Wash. 2d at 314-15. Fittingly, the statutory scheme
for administering proofs of claim requires claimants to produce evidence to
support their own claim; it does not, however, provide a process for obtaining
discovery from the Receiver. See RCW 48.31.310(1) ("the commissioner shall
contrary, it is apparent that the Receiver acted well within his discretion in concluding that the
Trustee failed to present substantial evidence that Midwest was insolvent at the time ofthe
transfer with Cascade.
However, we do not base our ruling on the Trustee's unsuccessful insolvency argument.
The Trustee failed to make this argumentto the Receiver or to the trial court, and made itfor the
first time on appeal in his reply brief. Because this is not the proper manner in which to present
an argument on appeal, we decline to make it the basis for our ruling. Cowiche Canyon
Conservancy v. Boslev. 118 Wash. 2d 801, 809, 828 P.2d 549 (1992).
15
No. 71063-0-1/16
notify all persons who may have claims against such insurer and who have not
filed proper proofs thereof, to present the same to him or her"). Moreover, the
trial court recognized that the discovery sought was available to the Trustee from
other sources—including public sources, Midwest, or Midwest's counsel in the
federal litigation—and that the Trustee had considerable time and opportunity to
obtain this information through such sources.
Nevertheless, the Trustee invokes RCW 48.99.017(3), a provision of the
Uniform Insurers Liquidation Act, and asserts that this provision required the
superior court to conduct an in-camera review of the documents that the Trustee
requested before determining whether to permit discovery. The Trustee invoked
this provision in an effort to establish that the Receiver was mismanaging the
receivership. The pertinent statutory language is quoted below.
Any person who can demonstrate a legal interest in the
receivership estate or a reasonable suspicion of negligence or
malfeasance by the commissioner related to an insurer receivership
may file a motion in the receivership matter to allow inspection of
private company information or documents not subject to public
disclosure under subsection (1) of this section. The court shall
conduct an in-camera review after notifying the commissioner and
every party that produced the information. The court may order the
commissioner to allow the petitioner to have access to the
information, provided the petitioner maintains the confidentiality of
the information.
RCW 48.99.017(3) (emphasis added). For several reasons, this provision does
not provide a basis for the Trustee to obtain discovery.
Initially, the Trustee cannot demonstrate a legal interest in the receivership
estate because hefailed to prove any valid claim against Cascade. Accordingly,
that statutory language does not provide a basis for requiring the trial court to
16
No. 71063-0-1/17
conduct an in-camera review. In addition, the Trustee did not demonstrate a
"reasonable suspicion of negligence or malfeasance" by the Receiver. The
Trustee raises a number of arguments which, he contends, demonstrate the
requisite reasonable suspicion. Whether considered individually or collectively,
they are unavailing.
As to these arguments, the Trustee first asserts that there was a lack of
evidence supporting the Receiver's assertion that Midwest actually received
reasonably equivalent value for payments to Cascade. However, as previously
explained, the trial court did not abuse its discretion in confirming the Receiver's
determination that Midwest did receive reasonably equivalent value from
Cascade. Second, the trustee avers that the Receiver falsely asserted that the
federal court litigation established G&W was merely a front for Midwest.
However, as previously explained, it was not incumbent upon the Receiver to
anchor his determination to a jury verdict or a court order to conclude that G&W
was a front for Midwest. Third, the Trustee contends that the Receiver
repeatedly changed his basis for denying the Trustee's claim. However, the
Receiver determined, and the trial court confirmed, that the Receiver's
classification of the Trustee's claim as a late-filed claim that was unlikely to be
recoverable (the gravamen ofthis claim) was done to allow the Trustee to fully
evaluate whether to continue to expend legal resources to pursue a likely
unrecoverable claim—not as a basis for denying the Trustee's claim. Fourth, the
Trustee argues that the Receiver wasted estate assets attempting to justify
denying the Trustee's claim "at all costs." However, the Trustee has failed to
17
No. 71063-0-1/18
provide persuasive evidence that the Receiver was trying to "win at all costs."
Fifth and finally, the Trustee claims that the Receiver wasted $2.5 million in
estate resources pursuing an uncollectible judgment against Midwest in the
federal court litigation. However, the Trustee second-guessing the pursuit of
these claims due to current issues of collectability—eight years after the case
was filed—does not provide a sufficient basis for us to conclude that the Receiver
acted improperly such that an in-camera review of evidence in the Receiver's
possession was warranted. Ultimately, the trial court did not abuse its discretion
when it denied the Trustee's motion for discovery.
Affirmed.
We concur:
^7*,^ _GL t>A>
18