IMO: The Liquidation of Indemnity Insurance Corporation, RRG

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN THE MATTER OF THE )
LIQUIDATION OF ) C.A. No. 8601-VCZ
INDEMNITY INSURANCE )
CORPORATION, RRG )
MEMORANDUM OPINION
Date Submitted: February 25, 2019
Date Decided: May 15, 2019
Christopher P. Simon and Kevin S. Mann, CROSS & SIMON, LLC, Wilmington,
Delaware; James J. Black III, Jeffrey B. Miceli, Mark W. Drasnin, BLACK &
GERNGROSS, P.C., Philadelphia, Pennsylvania; Attorneys for the Honorable
Trinidad Navarro, Insurance Commissioner of the State of Delaware, as Receiver
for Indemnity Insurance Company, RRG, in Liquidation
David S. Eagle and Sally E. Veghte, KLEHR HARRISON HARVEY
BRANZBURG LLP, Wilmington, Delaware; Francis M. Correll, KLEHR
HARRISON HARVEY BRANZBURG LLP, Philadelphia, Pennsylvania; Attorneys
for Intervening Third-Party Plaintiff Branch Banking & Trust Company
ZURN, Vice Chancellor
Indemnity Insurance Corporation, RRG (“IIC”) is undergoing delinquency
proceedings after years of internal fraud. Delaware’s Insurance Commissioner
administers IIC’s liquidation as its Receiver. Prior to these proceedings, IIC and its
controller entered into a $5 million loan with a bank and then allegedly defaulted on
their obligations. That bank’s successor in interest, Branch Banking and Trust
Company (“BB&T”), brought this third-party action seeking a declaratory judgment
that it has a valid and enforceable security interest to the proceeds of that loan. The
Receiver raised affirmative defenses asserting that BB&T’s predecessor committed
acts tantamount to fraud, and that BB&T’s purported security interest is thus
unenforceable as a matter of equity. The Receiver also asserts that IIC’s guaranty
of the loan and BB&T’s security interest are void for failure to disclose those
agreements to, and secure the approval of, the Commissioner.
BB&T moved for summary judgment to exclude the Receiver’s affirmative
defenses.1 I grant that motion in part. BB&T has brought a purely legal claim: a
declaratory judgment as to rights under a series of contracts. The Receiver’s
equitable defenses are unavailable to bar that legal relief. In addition, I conclude
that the Receiver’s requested relief of declaring some of the relevant agreements
1
Docket Item (“D.I.”) 656 [hereinafter the “Motion”]. I refer to briefing on the Motion as
the Opening Brief, the Opposition Brief, and the Reply Brief. See D.I. 655, 665, 681. I
refer to the transcript of the February 25, 2019 hearing on the Motion as the Hearing
Transcript.
1
void is a statutory remedy that the Commissioner must exercise in the first instance,
not this Court. The Commissioner, here synonymous with the Receiver, has not
requested appropriate relief under that statutory scheme, rendering the relevant
agreements, at most, voidable by the Commissioner. Summary judgment is granted
against any affirmative defenses that rely on the theories I reject in this opinion.
I. BACKGROUND
Delaware courts have already described the long and tumultuous history of
these proceedings.2 This opinion only addresses facts essential to the Motion, drawn
from the record to date.
BB&T brought its third-party complaint as successor to Susquehanna Bank.3
Throughout 2012, Susquehanna entered into a series of transactions with IIC; its
controller, Jeffrey Cohen; and other entities controlled by Cohen and related to IIC.
One of those transactions was a $3 million revolving line of credit (the “LOC”). 4
After the parties entered into the LOC, Cohen attempted to change its structure to
place him as borrower and IIC as guarantor. In email correspondence with
2
See, e.g., Cohen v. State ex rel. Stewart, 89 A.3d 65 (Del. 2014); Indem. Ins. Corp., RRG
v. Cohen, C.A. No. 8985-VCZ (Del. Ch. Apr. 22, 2019) (ORDER); Matter of Liquidation
of Indem. Ins. Corp., RRG, 2018 WL 6431747 (Del. Ch. Dec. 6, 2018).
3
See D.I. 512 ¶ 3.
4
BB&T alleges that Susquehanna relied on a record of IIC’s annual audited financial
statements, an independent valuation provided by Cohen, and Cohen’s personal financials
before entering into the LOC. Id. at 5-6.
2
Susquehanna, Cohen acknowledged that the point of his ask was to “add capital
without a corresponding liability” to help IIC capture a larger number of “very
profitable accounts that we can write with increased rate levels.” 5 A Susquehanna
representative hesitated, remarking to Cohen that his plan “really comes across the
wrong way in my opinion,” and that Susquehanna’s “preliminary thoughts are that
we would prefer not to do this” without regulatory sign-off.6 Susquehanna held fast
on its position when Cohen suggested the idea a second time in September 2012. 7
By October 2012, Cohen and Susquehanna were discussing a $5 million term
loan (the “Loan”) to either Cohen or RBE Entertainment (“RBE”), an entity that
controlled IIC and was, in turn, controlled by Cohen. The Loan’s purpose, at least
as framed by Cohen and according to BB&T, was to help IIC prepare for an initial
public offering by increasing its ability to write premiums.8 Cohen’s pitch was that
the Loan, payable on demand, would be made to RBE to provide a capital injection
to IIC. IIC would guarantee the Loan. But Susquehanna would hold the cash in a
restricted account in IIC’s name.
5
Answering Br. Ex. 36.
6
Id.
7
Answering Br. Ex. 68.
8
Opening Br. 7.
3
To support the Loan, Cohen and IIC gave Susquehanna a series of audited
financial statements, but Susquehanna also requested an opinion letter from counsel
to Cohen, RBE, and IIC, addressing the Loan’s propriety. The borrowing parties
agreed and furnished an opinion letter stating, among other things:
[N]o consent, approval, authorization, or other action by, or filing with,
any governmental authority is required for the execution and delivery
by the Company of the [Loan] Documents or, if required, the requisite
consent, approval, or authorization has been obtained, the requisite
filing has been accomplished, or the requisite action has been taken.9
On December 12, 2012, Susquehanna, RBE, Cohen, IIC, and another Cohen
entity closed on the Loan transaction.10 The Loan was payable on demand, and
guaranteed by IIC as well as by Cohen and one of his entities.11 Although RBE was
technically the borrower, the funds were for IIC’s benefit. Susquehanna held the
proceeds in a collateral account in IIC’s name, and IIC granted Susquehanna a
security interest in those proceeds.12 The agreement establishing that security
interest between Susquehanna and IIC agreed that all funds held in the Loan
9
Answering Br. Ex. 37.
10
Opening Br. Ex. 4 [hereinafter “Loan Agreement”].
11
Opening Br. Exs. 5-7.
12
Opening Br. Ex. 8.
4
collateral account “shall be under the sole dominion and control of” Susquehanna.13
In short, the funds were not available to IIC to fulfill policyholders’ claims.
In May 2013, the Commissioner initiated this action by petitioning for a
seizure order under the Delaware Uniform Insurance Liquidation Act (“DUILA”).14
Those proceedings progressed to a petition for the entry of a liquidation order in July
2013, followed by a failed attempt at rehabilitating IIC in November 2013.15
Ultimately, in April 2014, the Court entered a Liquidation and Injunction Order with
Bar Date (the “Liquidation Order”), placing IIC into liquidation.16
Under the Liquidation Order, the Commissioner, as Receiver, is tasked with
overseeing the administration of claims by IIC’s creditors and policyholders. “The
object to be attained by the liquidation of an insolvent insurance company is the
orderly and equitable apportionment among creditors of losses that may result and
to ensure the equitable distribution of an insolvent debtor’s property or assets among
creditors.”17 The Liquidation Order permits the Receiver to “take and continue
exclusive possession of the property of [IIC],”18 and also provides that:
13
Opening Br. Ex. 8.
14
18 Del. C. §§ 5901, et seq.
15
D.I. 20, 228, 237.
16
D.I. 444.
17
44 C.J.S. Insurance § 245.
18
Liquidation Order ¶ 3.
5
All persons or entities . . . that have in their possession Assets or
possible Assets and/or have notice of these proceedings or of this Order
are hereby enjoined, restrained and prohibited from . . . transferring,
destroying, wasting, encumbering or disposing of any property, assets,
books or records of [IIC] whether such assets, property, books or
records are or may be the property of [IIC], without the prior written
permission of the Receiver or until further Order of this Court.19
On May 27, 2016, Susquehanna’s successor BB&T filed its third-party
complaint (“the Complaint”) to prevent the Loan funds from being marshalled into
IIC’s Assets under the Liquidation Order.20 BB&T purports that the Loans are in
default due to “nonpayment by RBE of principal and interest due, and the
commencement of delinquency proceedings against” IIC.21 Additionally, as of the
Complaint’s date, the amount due under the Loan was $5,314,538.24, against a
balance in the Loan’s collateral account of only $5,060,601.09.22 That gap has,
presumably, widened since then.
BB&T seeks a declaratory judgment that the Loan funds are not an Asset or
possible Asset of IIC under the Liquidation Order, that BB&T has a first priority lien
against and security interest in those funds, that it can set-off amounts due under the
Loan against funds held in the Loan’s collateral account, and that any deficiency
19
Id. at ¶ 8.
20
D.I. 512.
21
Compl. ¶¶ 21-22.
22
Id.
6
after that set-off will be an unsecured claim against IIC’s general assets.23 BB&T
also seeks relief from the Liquidation Order in these proceedings, or, alternatively,
a decree that the Liquidation Order is unconstitutionally vague.24 The Receiver
answered BB&T’s pleadings with narrative denials and several affirmative defenses,
many of which assert that the Loan and its corollary agreements are invalid and
unenforceable due to, essentially, fraud by Susquehanna.25
On November 21, 2018, BB&T filed the Motion. On November 26, it
amended the Motion, but kept the same opening brief.26 The parties completed
briefing, and on February 25, 2019, I heard argument at the Hearing.
II. ANALYSIS
“The function of summary judgment is the avoidance of a useless trial where
there is no genuine issue as to any material fact.”27 Summary judgment is
appropriate where the “pleadings, depositions, answers to interrogatories and
admissions on file, together with the affidavits, if any, show that there is no genuine
issue as to any material fact and the moving party is entitled to judgment as a matter
23
Compl. 15.
24
Id.
25
D.I. 519 [hereinafter “Answer”].
26
The amendment appears to have corrected a scrivener’s error in the text of the cover
motion. See D.I. 656.
27
Emmert v. Prade, 711 A.2d 1217, 1219 (Del. Ch. 1997).
7
of law.”28 “A fact is material if it ‘might affect the outcome of the suit under the
governing law.’”29 A material issue of fact exists if “a rational trier of fact could
find any material fact that would favor the non-moving party in a determinative way,
drawing all inferences in favor of the nonmoving party.”30
The parties’ dispute essentially boils down to whether BB&T can enforce its
first priority lien in this action, which reduces further to whether the Loan funds are
IIC’s Assets or possible Assets that must be turned over to the Receiver as part of
the claims administration process under the Liquidation Order and DUILA.
Answering this question begins with Delaware’s claims administration structure for
a liquidation. That structure gives secured creditors the ability to remove their claim
from the general pool of assets under the Receiver’s control for purposes of
liquidation. DUILA Section 5918 sets out the priority of claims for delinquency
proceedings. Section 5918(e) describes the waterfall for all payments “from the
insurer’s general assets” under the Receiver’s control per the Liquidation Order.
Policyholders, beneficiaries, and insureds are paid in Class III, while general
creditors are not paid until Class VI. “Under this priority scheme, general creditors
28
Ct. Ch. R. 56(c).
29
Deloitte LLP v. Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009) (quoting
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).
30
Id.
8
are unlikely to recover from an insolvent insurer.”31 Section 5918(d), however,
provides that “[t]he owner of a secured claim . . . may surrender his or her security
and file a claim as a general creditor, or the claim may be discharged by resort to the
security, in which case the deficiency, if any, shall be treated as a claim against the
general assets of the insurer on the same basis as claims of unsecured creditors.” In
other words, Section 5918 permits security holders either to execute on their security
and channel that portion away from the waterfall process, or to pursue the entire
interest as a general creditor claim from the insurer’s general assets.32
“Although the Rehabilitation Order and the Liquidation Order vested title to
[IIC’s] property in the Commissioner, those orders only gave the Commissioner the
same rights that [IIC] possessed.”33 The Receiver stepped into IIC’s shoes for
purposes of determining who has claim over the Loan funds, and thus “did not gain
greater rights than [IIC] had.”34 If BB&T is correct that it holds a secured claim
against the defaulted Loan funds, then the Receiver does not have any greater claim
31
In Matter of Liquidation of Freestone Ins. Co. (Freestone II), 143 A.3d 1234, 1248 (Del.
Ch. 2016).
32
See Freestone II, 143 A.3d at 1247 n.10 (“The owner of a secured claim is given a choice.
The owner may either (i) ‘surrender his or her security and file a claim as a general creditor’
or (ii) ‘the claim may be discharged by resort to the security, in which case the deficiency,
if any, shall be treated as a claim against the general assets of the insurer on the same basis
as claims of unsecured creditors.’”).
33
In Matter of Liquidation of Freestone Ins. Co. (Freestone I), 2014 WL 7399502, at *4
(Del. Ch. Dec. 24, 2014).
34
Freestone I, 2014 WL 7399502, at *4.
9
to those funds than IIC would have had. Thus, in order to determine whether the
Loan funds are Assets or possible Assets of IIC’s estate, such that they must be
turned over through the Liquidation Order and added to IIC’s general assets under
Section 5918, the Court must first determine whether BB&T holds a valid and
enforceable security interest. If it does, BB&T can execute on that security interest
to recover the secured amount from the Loan collateral account, and then submit any
deficiency claim for additional amounts owed as a general creditor.35
The Receiver does not dispute at this time that the Loan Agreement and its
corollary materials create an enforceable security interest in the Loan funds.36
Instead, the Receiver asserts a series of equitable affirmative defenses to preclude
the validity or enforceability of BB&T’s security interest. As developed in briefing,
35
BB&T’s counsel stated at the Hearing that BB&T has not yet resorted to the security
interest, but rather chose to pursue this declaratory judgment to settle the rights. Hearing
Tr. at 17. Because no party has raised whether that choice bars them from enforcing a
security interest under Section 5918(d), I do not reach that question.
36
I refer here to the parties’ positions on BB&T’s Motion. The Receiver may, of course,
dispute the technical validity of the Loan Agreement and its corollary agreements at trial.
10
those theories largely fall into three doctrines: unclean hands,37 quasi-estoppel,38 and
equitable subordination.39 The Receiver also argues that the Loan and BB&T’s
security interest are generally unenforceable because the Commissioner did not
approve their terms under the applicable regulatory provisions.40
One of the Receiver’s defenses fails on procedural grounds. The Receiver
never pled equitable subordination as an affirmative defense or counterclaim. Nor
did the Receiver raise the argument, even informally, prior to the Answering Brief.
Although the parties dispute whether equitable subordination is a defense or a
remedy, I need not reach that question where, as here, the Receiver failed to plead it
as either. I GRANT summary judgment against the Receiver’s equitable
subordination claim.
37
See generally Answer 29-31. Although many of the Receiver’s affirmative defense
allegations look like fraud allegations, the Receiver is adamant that it “has not asserted a
counterclaim for fraud,” and that, instead, the allegations of fraud “are relevant to show
inequitable conduct . . . in the context of a defense of unclean hands or related defenses[.]”
Answering Br. 52-53. “Fraud can constitute ‘offensive conduct’ sufficient to invoke the
unclean hands doctrine.” Universal Enter. Grp., L.P. v. Duncan Petroleum Corp., 2014
WL 1760023, at *7 (Del. Ch. Apr. 29, 2014).
38
See Answer 29; Answering Br. 64.
39
See Answering Br. 67.
40
See Answer 30.
11
A. The Receiver Cannot Assert Its Equitable Defenses Against
BB&T’s Declaratory Judgment Seeking Legal Relief.
Unclean hands and quasi-estoppel are equitable defenses. “The doctrine of
unclean hands provides that he who comes into equity must come with clean hands;
in other words, equitable relief will be denied to a party who has engaged in
inequitable conduct related to the matter in which he is seeking such relief.” 41
“Under Delaware law, the doctrine of quasi-estoppel applies ‘when it would be
unconscionable to allow a person to maintain a position inconsistent with one to
which he acquiesced, or from which he accepted a benefit.’”42
“‘The Court of Chancery jealously guards its domain as a court of equity,’ and
accordingly, ‘the Court will refuse equitable relief in circumstances where the
litigant’s own acts offend the very sense of equity to which he appeals.’”43
“Typically, a party may not assert an equitable defense against a purely legal claim,
41
NHB Advisors, Inc. v. Monroe Capital LLC, 2013 WL 6906234, at *2 (Del. Ch. Dec. 27,
2013).
42
RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 872-73 (Del. 2015) (quoting Bank
of New York Mellon v. Commerzbank Capital Funding Tr. II, 2011 WL 3360024, at *8
n.71 (Del. Ch. Aug. 4, 2011)); see also Farkas v. Jarrell, 1993 WL 401878, at *2 (Del. Ch.
Sept. 17, 1993) (“The term quasi-estoppel generally is included within the synonymous
doctrines of equitable estoppel and estoppel in pais.”); 31 C.J.S. Estoppel and Waiver
§ 146 (“Quasi-estoppel is an equitable concept based on principles of conscionability.”).
43
NHB Advisors, 2013 WL 6906234, at *2 (quoting Wagamon v. Dolan, 2013 WL
1023884, at *2 n.19 (Del. Ch. Mar. 15, 2013)).
12
even when the legal claim is pending in a court of equity.” 44 Similarly, “the
vindication of purely statutory rights represents an exercise of the prerogative of the
legislature, and not this equity Court,” and “a purely statutory right, therefore, will
be enforced by this Court not as a matter of equity, but of law, even where . . . the
claimant has acted inequitably in a collateral matter.”45
Here, BB&T is asserting a purely legal claim: declaratory judgment as to its
rights under the Loan documents, in the context of IIC’s statutory liquidation.
BB&T asks this Court to examine the Loan documents and conclude that “[t]he
Collateral Account has been pledged and deposited for the exclusive benefit of
[BB&T] and, therefore, does not constitute a general asset of [IIC].”46 I find that the
Receiver’s unclean hands and quasi-estoppel theories are “unavailable because
[BB&T’s] claims do not invoke equity and are not, therefore, subject to equitable
44
NASDI Hldgs., LLC v. N. Am. Leasing, Inc., 2019 WL 1515153, at *6-7 (Del. Ch. Apr.
8, 2019) (granting summary judgment against unclean hands defense for breach of contract
claim); see also Kraft v. WisdomTree Investments, Inc., 145 A.3d 969, 976 (Del. Ch. 2016)
(“[A] plaintiff vindicating a purely legal action in the Court of Chancery as a result of
ancillary jurisdiction or some other jurisdictional source should not be placed in a
potentially better position to seek to avoid a statute of limitations than if she had filed in a
Delaware court of law[.]”).
45
In re Estate of Tinley, 2007 WL 2304831, at *1 (Del. Ch. July 19, 2007).
46
Compl. ¶ 46.
13
defenses.”47 Accordingly, I GRANT summary judgment against the affirmative
defenses relying on unclean hands and quasi-estoppel.48
B. The Commissioner Has Not Properly Voided The Loan Guarantees
And Security Interest For Failure To Disclose To The
Commissioner.
BB&T also moved for summary judgment on the Receiver’s sixth and seventh
affirmative defenses, which claim that the guaranty agreement, and BB&T’s security
interest provided therein, are invalid and unenforceable because the guaranty was
made without the Commissioner’s approval.
47
Quantlab Grp. GP, LLC v. Eames, 2019 WL 1285037, at *7 (Del. Ch. Mar. 19, 2019);
see also Weber v. Weber, 2015 WL 1811228, at *4 n.20 (Del. Ch. Apr. 20, 2015)
(“Generally, this Court does not apply the unclean hands doctrine in garden-variety breach
of contract cases.”); Universal Enter. Grp., 2014 WL 1760023, at *8 (Del. Ch. Apr. 29,
2014) (“Delaware courts are hesitant to apply unclean hands in cases involving a breach of
contract.”); Lehman Bros. Hldgs. Inc. v. Spanish Broad. Sys., Inc., 2014 WL 718430, at *7
n.47 (Del. Ch. Feb. 25, 2014), aff’d, 105 A.3d 989 (Del. 2014) (“Similarly, the ‘unclean
hands’ doctrine bars equitable, but not legal, relief.”).
48
Additionally, the parties brief a dispute, borne from discovery, regarding whether
Susquehanna accurately disclosed the nature of the Loan and its security interest in an
auditor’s confirmation process leading up to IIC’s planned IPO. The Receiver claims that
an inaccurate disclosure from Susquehanna can be “evidence of [Susquehanna’s]
inequitable conduct in three ways”: (1) evidence of fraud, (2) evidence in support of quasi-
estoppel, or (3) evidence that Susquehanna knew or, or aided and abetted, Cohen’s fraud.
Answering Br. 75. At this juncture, that allegedly deficient disclosure appears relevant
only to an unclean hands or estoppel defense, both of which I have rejected. The Receiver
has provided no independent grounds or standing, outside of those equitable defenses, to
contest BB&T’s security interest based on the auditor’s confirmation process. As a result,
I do not reach this theory here.
14
At the time of the Loan transaction in 2012, 18 Del. C. § 5005(a)(2)(a), in the
Insurance Holding Company System Registration Act (“the Registration Act”),
provided in relevant part:
The following transactions involving a domestic insurer and any person
in its holding company system may not be entered into unless the
insurer has notified the Commissioner in writing of its intention to enter
into such transaction at least thirty days prior thereto . . . and the
Commissioner has not disapproved it within such period: (a) Sales,
purchases, exchanges, loans or extensions of credit, guarantees, or
investments, provided such transactions are equal to or exceed . . . the
lesser of three percent of the insurer’s admitted assets or twenty-five
percent of surplus as regards policyholders.49
BB&T claims Section 5010(c) of the Registration Act provides that the
exclusive remedy for noncompliance with Section 5005, a sort of statutory
rescission, and vests that remedy in the Commissioner. Section 5010(c) reads:
Whenever it appears to the Commissioner that any insurer subject to
this chapter or any director, officer, employee or agent thereof has
engaged in any transaction or entered into a contract which is subject
to § 5005 of this title and which would not have been approved had
such approval been requested, the Commissioner may order the insurer
to cease and desist immediately any further activity under that
transaction or contract. After notice and hearing, the Commissioner
may also order the insurer to void any such contracts and restore the
status quo if such action is in the best interest of the policyholders,
creditors or the public.
49
The relevant portion of the current Section 5005 is substantively identical.
15
Further, under Section 5009(a):
Whenever it appears to the Commissioner that any insurer . . . has
committed or is about to commit a violation of this chapter . . . the
Commissioner may apply to the Chancery Court for an order enjoining
such insurer . . . from violating or continuing to violate this chapter . . .
and for such other equitable relief as the nature of the case and the
interest of the insurer’s policyholders, creditors and shareholders or the
public may require.
For purposes of this Motion, it is undisputed that IIC’s guaranty of the Loan
to RBE required the Commissioner’s approval under Section 5005, and that IIC did
not seek such approval.50 There are several issues here. One is whether Section
5010 holds the Commissioner’s exclusive tools to void or rescind transactions that
failed to meet the approval requirements of Section 5005. If so, the second is
whether the Court may decree an unapproved transaction invalid or unenforceable
when the Commissioner, as Receiver, (a) has not formally requested the Court to
implement a prior Section 5010 determination from the Commissioner, and (b) is
attempting to nullify only portions of an unapproved package of transactions in a
manner that benefits IIC but harms the other parties to those transactions.
I conclude that Section 5010 provides the Receiver’s exclusive means to
police the unapproved guaranty and security interest here. The Receiver, as
Commissioner, has yet to act under Section 5010. Even if I were to read the
50
Opening Br. 28; Answering Br. 42, 79-81.
16
Receiver’s affirmative defenses in this case as invoking Section 5010, the
appropriate remedy under that section would be to “restore the status quo,” which
would require voiding all the core relevant Loan transactions, not just IIC’s guaranty
and BB&T’s security interest in the Loan’s proceeds.51
I turn first to whether Section 5010 provides the exclusive means for the
Commissioner to render transactions not compliant with Section 5005 “invalid [and]
unenforceable” as the Receiver requests in this action.52 “When a statute is silent as
to the enforceability of contracts made by one who has not complied with the statute,
the whole act and its purposes should be considered in determining whether the
contract is enforceable.”53 Insurance company regulation is a statutory matter, with
those statutes administered by the state insurance department.54
51
The Receiver argues that the entire Loan transaction, in which Susquehanna loaned
money to RBE which then flowed to IIC, and where the Loan was guaranteed and secured
by IIC, required the Commissioner’s approval. Answering Br. 86-87.
52
Answer 30.
53
E. A. Strout Co. v. Howell, 85 A. 666, 667 (Del. 1913).
54
See In re BCBSD, Inc., 2004 WL 2419161, at *13 (Del. Super. Ct. Oct. 4, 2004)
(Slights, J.); Beeber v. Walton, 32 A. 777, 777-78 (Del. Super. Ct. 1887).
17
Chapter 3 of the Delaware Insurance Code outlines the Commissioner’s
general authority. It provides, in part, that “[t]he Commissioner shall
enforce and execute the duties imposed by this title” and “. . . shall have
the powers and authority expressly vested by or reasonably implied
from this title.” This broad grant of authority allows the Commissioner
to do all that is “reasonably necessary” to execute her powers and
duties. In addition to this broad grant of statutory authority, the
Delaware Insurance Code addresses specific instances in which the
Commissioner may exercise her regulatory powers.55
In In re Montgomery Ward & Co., Inc., the District Court for the District of
Delaware considered a request to void a contract that had not been approved as
required by Illinois’ Holding Company Systems Act (the “Illinois Act”), which is
substantively identical to the relevant portion of Section 5005.56 In that case, a party
to an agreement with an insurance company sought to defend against a motion for
summary judgment by arguing that the agreement was void because it had not been
approved by the Illinois insurance director.57 The defense also contended that the
counterparty “knew or should have known” that the agreement was illegal and
therefore unenforceable.58
On appeal from the bankruptcy court, the District Court noted first the purpose
of the Illinois Act: “to protect the interests of current and future policyholders of
55
In re BCBSD, Inc., 2004 WL 2419161, at *7 (Del. Super. Ct. Oct. 4, 2004) (quoting 18
Del. C. § 310; Dep’t of Correction v. Worsham, 638 A.2d 1104, 1107 (Del. 1994)).
56
344 B.R. 256 (D. Del. 2006).
57
Id. at 257-58.
58
Id. at 258.
18
Illinois insurance companies.”59 In view of this purpose, the District Court found
that the Illinois Act did not provide for the per se judicial invalidation of a contract
that was not approved under the Act.60 Rather, the Act gave the Illinois insurance
director discretion to declare a contract that violates the Act void.61 The District
Court concluded that “the statutory scheme of the Holding Company Act expressly
vests the [Illinois insurance director] with the authority to approve or disapprove
contracts falling within the provisions of the Act and with the authority to determine
the consequences of a violation of . . . the Act,” and rejected the illegality defense.62
Similarly, the California Court of Appeal reviewed its statute, virtually identical to
the Registration Act’s relevant provisions, and ruled: “[t]he fact that the [California]
Insurance Holding Company System Regulatory Act creates a comprehensive
scheme for administrative enforcement and a judicial remedy to enforce
administrative action strongly suggests that the remedies provided are exclusive.”63
In the absence of any Delaware authority on the subject, I am persuaded by
the rationale of the District Court and California Court of Appeal. I read Sections
59
Id. at 259.
60
Id. at 260.
61
Id.
62
Id.
63
Fremont Indem. Co. v. Fremont Gen. Corp., 55 Cal. Rptr. 3d 621, 645 (Cal. Ct. App.
2007).
19
5005, 5009, and 5010 to permit a noncompliant contract to still be enforceable absent
action by the Commissioner. The General Assembly granted the Commissioner the
ability and discretion under Section 5010(c) to enforce the Registration Act’s
approval requirements by ordering the insurer to “cease and desist . . . any further
activity” related to unapproved agreements, and to “void any such contracts and
restore the status quo if such action is in the best interest of the policyholders,
creditors or the public.” Section 5009 empowers the Commissioner to then seek this
Court’s assistance to enjoin ongoing violations or provide other relief where “it
appears to the Commissioner” that an insurer has or will violate “this chapter or []
any rule, regulation or order issued by the Commissioner hereunder.” The
consequences for failing to obtain regulatory approval are set by statute, and the
enforcement of those consequences is vested in the Commissioner.
I distinguish the Receiver’s efforts in this litigation from its statutory power
as Commissioner to void the contracts. Assuming, without deciding, that the
Receiver appropriately invoked Section 5010(c) and asked this Court to enforce that
decision through its affirmative defenses,64 the Registration Act provides only one
relevant remedy to the Commissioner, and by extension the Court, to deal with an
64
It is unclear whether the Receiver has appropriately ordered IIC to take the remedies
outlined in Section 5010(c), or whether the statute’s notice and hearing requirements are
met by this litigation. But I need not reach those issues here.
20
unapproved transaction: “void [the offending contracts] and restore the status
quo.”65 Here, BB&T, a third party, is attempting to enforce an unapproved security
interest against IIC, an insurer, in delinquency proceedings. The Commissioner, as
Receiver, wields that lack of approval like a shield and asks this Court to nullify
BB&T’s contractual security rights. But the Receiver also seeks to maintain IIC’s
benefit from the underlying bargain: the Loan proceeds.
The Loan Agreement, guaranties, and security interests were executed
together in a package of transactions, as the Receiver acknowledges in its briefing.66
The Receiver, as Commissioner, is not ordering IIC to void the Loan Agreement or
its corollary transactions to return the parties to their status quo under Section 5010.
Instead, it requests that the Court carve off and render unenforceable only BB&T’s
security interest in the Loan proceeds, so that IIC’s estate may gain all the benefits
of the Loan transaction without the cost of that encumbrance. The status quo in this
case, however, would not be for BB&T to issue the loan without security—it would
be for the Loan to have never issued at all. Because the statutorily required status
quo would require reversing the core of the Loan package, not just the parts that the
65
Section 5010(c)’s other relief of “order[ing] [IIC] to cease and desist . . . any further
activity” is not applicable to these facts.
66
Answering Br. 85-87.
21
Receiver does not like, I decline to find that Section 5010(c) enables the Receiver’s
relief as requested in its affirmative defenses.
The Receiver also claims Section 5009 creates an independent ground for
equitable relief that renders Section 5010 nonexclusive and permits this Court to
deny the Bank’s motion. But Section 5009 permits the Commissioner to “apply to
the Chancery Court for an order enjoining” an insurer that has not complied with the
Registration Act from continuing to violate the Act. The Commissioner has not
made any such application here. Rather, the Receiver raises broad equitable
principles in an attempt to void rights asserted by a third party under a contract that
is statutorily noncompliant. Section 5009 does not support this endeavor because
Section 5010(c) specifically provides the remedy for policing compliance with
Section 5005’s approval requirements. Where Section 5010(c) delineates the
carefully crafted mechanism to void contracts in this instance, I do not find Section
5009 to create a broader, more general tool for the Commissioner that supersedes
that in Section 5010(c). Instead, Section 5009 may be used to enforce a
determination made under Section 5010(c). The Bank’s motion is GRANTED as to
the Receiver’s sixth and seventh affirmative defenses.
22
III. CONCLUSION
BB&T moved for summary judgment to exclude the Receiver’s affirmative
defenses to the Complaint. I GRANT that Motion to the extent any of those
affirmative defenses rely on the arguments addressed above, including unclean
hands, quasi-estoppel, equitable subordination, failure to disclose materials to the
Commissioner, and failure to obtain the Commissioner’s approval.67 The parties
shall confer and provide a thorough status update on what issues currently remain
for trial.
IT IS SO ORDERED this 15th day of May, 2019.
67
For clarity, my decision here relates to the Motion and the parties’ positions on that
Motion. I do not intend to limit the Receiver’s statutory duty to oversee IIC’s liquidation,
and do not reach in this decision whether the Receiver may take additional statutory
actions, including under Section 5010(c) or otherwise, relating to BB&T’s alleged failure
to disclose materials to, and secure the approval of, the Commissioner.
23