IN THE MATTER OF THE REHABILITATION OF INDEMNITY INSURANCE CORPORATION, RRG
Date Submitted: January 10, 2014
W. Harding Drane, Jr., Jessica M. Willey, DELAWARE DEPARTMENT OF JUSTICE, Wilmington, Delaware; Attorneys for Petitioner State of Delaware.
Michael W. Teichman, Michael W. Arrington, James D. Nutter, Elio Battista, Jr., PARKOWSKI, GUERKE & SWAYZE, P.A., Wilmington, Delaware; Attorneys for Respondent Indemnity Insurance Corporation, RRG.
Theodore A. Kittila, GREENHILL LAW GROUP, LLC, Wilmington, Delaware; Attorney for non-party Jeffrey B. Cohen.
LASTER, Vice Chancellor.
Jeffrey B. Cohen has moved for a stay pending appeal of an order placing Indemnity Insurance Corporation, RRG ("Indemnity") into rehabilitation (the "Rehabilitation Order"). His motion is denied.
I. FACTUAL BACKGROUND
The facts for purposes of Cohen's motion have been established at a series of hearings held on September 10, September 24, November 1, and December 5, 2013, and January 10, 2014. In connection with the hearings on September 24, November 1, and December 5, 2013, the parties submitted evidence with their written submissions and introduced documentary evidence and presented live witness testimony at the hearings. In connection with the hearings on September 10, 2013, and on January 10, 2014, the parties submitted evidence with their written submissions.
A. Indemnity Insurance Corporation, RRG
This case is a delinquency proceeding brought against Indemnity by the Insurance Commissioner of the State of Delaware (the "Commissioner"). See 18 Del. C. § 5901(3) (defining a "[delinquency proceeding" as "any proceeding commenced against an insurer pursuant to this chapter for the purpose of liquidating, rehabilitating, reorganizing or conserving such insurer"). A state-court delinquency proceeding is analogous to a federal bankruptcy court proceeding, but it proceeds in state court because Congress has reserved for the states the power to regulate insurance companies. See 15 U.S.C. §§ 1011-15 (McCarran-Ferguson Act); Checker Motors Corp. v. Exec. Life Ins. Co., 1992 WL 29806, at *2 (Del. Ch. Feb. 13, 1992) ("Because distressed insurance companies are prohibited from seeking the protection of the Federal Bankruptcy Code, the rehabilitation or liquidation of such insurers is left to regulation by the states."), aff'd, 615 A.2d 530 (Del. 1992) (TABLE). Many states, including Delaware, "have adopted the [Uniform Insurers Liquidation Act ('UILA')] to establish a uniform method for processing claims against, and distributing assets of, distressed insurance companies." Checkers Motors, 1992 WL 29806, at *2. The Delaware Uniform Insurers Liquidation Act appears in Chapter 59 of the Delaware Insurance Code, which is titled "Rehabilitation and Liquidation." See 18 Del. C. §§ 5901-5933; 5941-5944.
The movant, Cohen, founded Indemnity and served as its CEO and Chairman of the Board until August 5, 2013, when he resigned as Chairman and was removed from his other positions. As indicated by the letters "RRG" in its name, Indemnity is a risk retention group. Congress authorized risk retention groups by passing the Product Liability Risk Retention Act of 1981, which was amended in 1986 as the Liability Risk Retention Act. See 15 U.S.C. §§ 3901-3906. The Delaware General Assembly adopted the Delaware Risk Retention Act to govern risk retention groups that are formed under Delaware law or which operate in Delaware. See IS Del. C. §§ 8001-8014.
Under the Delaware Risk Retention Act, the term "'[r]isk retention group' means any corporation or other limited liability association . . . [w]hose primary activity consists of assuming and spreading all, or any portion, of the liability exposure of its group members." Id. § 8002(1 l)(a). The risk retention group must have "as its owners only persons who comprise the membership of the risk retention group and who are provided insurance by such group." Id. § 8002(1 l)(e). All members must be "engaged in businesses or activities similar or related with respect to the liability of which such members are exposed by virtue of any related, similar or common business trade, product, services, premises or operations." Id. § 8002(1 l)(f). The Delaware requirements parallel the federal requirements, which similarly mandate that a risk retention group be owned by its members and that all members be engaged in a similar or related line of business or activity that would expose the members to similar liabilities. 15 U.S.C. § 3901(a)(4)(E)-(F).
RB Entertainment Ventures, LLC ("RB Entertainment") is a limited liability company of which Cohen is the sole member. RB Entertainment claims to own 99% of Indemnity's equity by virtue of having been issued a zero-dollar insurance policy by Indemnity. Cohen has asserted that RB Entertainment once owned several investments in bars and other entertainment establishments, thereby qualifying RB Entertainment as a member of Indemnity. It is not clear whether RB Entertainment continues to own any such investments.
The remaining 1% of Indemnity's equity is owned by the International Association of Entertainment Businesses, which is an association comprising all of Indemnity's other policyholders. These other policyholders own or operate bars and other entertainment establishments, and they have been issued—and have paid premiums for—insurance policies that provide actual, positive-dollar coverage.
B. The Seizure Petition
On May 30, 2013, the Commissioner initiated a summary proceeding against Indemnity by filing a Verified Petition for Entry of Confidential Seizure and Injunction Order (the "Seizure Petition"). The Insurance Code grants the Commissioner power to file such a petition if the Commissioner believes (i) there exists "[a]ny ground that would justify a court order for a formal delinquency proceeding against an insurer" and (ii) "that the interests of policyholders, creditors or the public will be endangered by delay." 18 Del. C. § 5943(a). Grounds that "would justify a court order for a formal delinquency proceeding against an insurer, " such as an order requiring rehabilitation, include if (i) the insurer "is impaired or insolvent or is in unsound condition" or (ii) the insurer is "using such methods and practices in the conduct of its business as to render its further transaction of insurance presently or prospectively hazardous to its policyholders." Id. § 5905(1). The Insurance Code authorizes the Court of Chancery to issue a seizure order "forthwith, ex parte and without a hearing." Id. § 5943(a).
The Seizure Petition was supported by documentary evidence and averred that Indemnity was in a precarious financial position and had engaged (through Cohen) in multiple acts of fraud. After reviewing the Seizure Petition, the court entered an order granting the relief requested and authorizing the Commissioner to take control of the business and assets of Indemnity. Dkt. 4 (the "Seizure Order").
Among other things, the Seizure Order directed the Commissioner to
immediately take exclusive possession and control of, and is hereby vested with all right, title and interest in, of or to, all of the property of [Indemnity] including, without limitation, all of [Indemnity's] assets, contracts, rights of action, books, records, bank accounts, certificates of deposits [sic], collateral and rights to collateral of [Indemnity], securities or other funds, and all real or personal property of any nature of [Indemnity] including, without limitation, all proceeds of or accessions to any of the foregoing, wherever located, in the possession, custody or control of [Indemnity] or any trustee, bailee, or any agent acting for or on behalf of [Indemnity] (collectively, the "Assets").
Id. ¶2; see 18 Del. C. § 5943(a) (authorizing Court of Chancery to direct the Commissioner "to take possession and control of all or a part of the property, books, accounts, documents and other records of an insurer and of the premises occupied by it for the transaction of its business"). The Seizure Order prohibited "[a]ll persons or entities that have notice of these proceedings or of this Seizure and Injunction Order . . . from interfering with the Commissioner and her authorized agents either in their possession and control of the Assets or in the discharge of their duties hereunder." Seizure Order ¶ 9; see IS Del. C. § 5943(a) (authorizing Court of Chancery to "enjoin the insurer and its officers, managers, agents and employees from disposition of its property and from transaction of its business except with the written consent of the Commissioner").
The Insurance Code provides that an insurer subject to an ex parte order "may petition the Court at any time after the issuance of such order for a hearing and review of the order, and the Court shall grant such a hearing and review within 10 days of the filing of such petition." 18 Del. C. § 5943(d). On July 5, 2013, Indemnity petitioned for review of the Seizure Order. As required by statute, the court scheduled a hearing on the petition for July 15. The court held a telephonic status conference with the parties on July 10. After the status conference, the parties reached an agreement to defer the July 15 hearing.
C. The Liquidation Petition
Using the authority conferred by the Seizure Order, the Commissioner took possession of Indemnity's books, records, and other assets and conducted a preliminary examination of Indemnity. On July 26, 2013, the Commissioner filed a Verified Petition for Entry of Liquidation and Injunction Order (the "Liquidation Petition"). Under Delaware law, the statutory grounds on which the Commissioner may apply to liquidate an insurer include the statutory grounds for seeking rehabilitation. 18 Del. C. § 5906. To reiterate, those grounds include (i) if the insurer "is impaired or insolvent or is in unsound condition" or (ii) the insurer is "using such methods and practices in the conduct of its business as to render its further transaction of insurance presently or prospectively hazardous to its policyholders." Id. § 5905(1).
The Liquidation Petition expanded on the allegations in the Seizure Petition and sought authority to liquidate Indemnity in light of (i) Indemnity's hazardous business practices, consisting predominantly of acts of fraud by Cohen and (ii) Indemnity's unsound financial condition. Indemnity's counsel subsequently conceded that Indemnity does not have any basis to dispute the truth of the averments in the Liquidation Petition. Dkt. 73 at 10.
1. The Susquehanna Bank Fraud
The Liquidation Petition described in detail an effort by Indemnity, acting through Cohen, to defraud the Commissioner using false documents purporting to be from Susquehanna Bank. As part of their investigation into Indemnity's safety and soundness, the Commissioner's investigators inquired about Indemnity's assets. In response, Cohen caused Indemnity to represent that it held $5.1 million in unencumbered cash in an account at Susquehanna Bank. Indemnity further represented that Cohen had provided that money as a capital contribution.
To confirm the account balance, the investigators asked for a contact at Susquehanna Bank. Through Cohen, Indemnity provided the investigators with an email address purportedly belonging to a Susquehanna Bank employee named Nicole Bliss. When the investigators pressed for a physical address, Cohen asked them to use the email address on the grounds that Susquehanna Bank charged an exorbitant fee for providing confirmations via physical mail. When the investigators insisted on a physical address, Cohen gave them the address of a P.O. Box that purportedly belonged to Susquehanna Bank.
The investigators sent a confirmation form to the P.O. Box that Cohen provided, and they received a fax confirming the account balance and its ownership. To follow up on the confirmation, the investigators tried to call Bliss at the phone number listed on the fax. That number connected to a voicemail box for "James Berg of Susquehanna." Confused, the investigators looked up Bliss's phone number on the internet and contacted her at that number. Bliss denied having seen the form that the investigators had sent to the P.O. Box, and she asked them to resend the form by email. The investigators sent the form to the email address that Cohen had provided for Bliss.
The investigators did not receive a response to the email sent to Bliss at the address Cohen had provided. They followed up with Bliss by phone, and she told them that she had not received the email. She provided the investigators with her correct email address, which differed from the address Cohen had provided. The investigators sent a copy of the form to the correct email address, and Bliss confirmed that she had never seen the form, had not completed it, and had not faxed it to the investigators.
Further investigation revealed the following:
• The P.O. Box that Cohen claimed belonged to Susquehanna Bank was registered to Cohen.
• The fax number that transmitted the fax to the investigators did not belong to Susquehanna Bank.
• The signature on the fax was not Bliss's, and she did not authorize anyone to sign her name.
• There is no "James Berg" at Susquehanna Bank.
• The phone number listed for Bliss on the fax that the investigators received is a VoIP number that does not belong to Susquehanna Bank and whose true owner is unknown.
• Susquehanna Bank does not charge a fee for account confirmations via physical mail.
• The domain name for the email address that Cohen provided does not belong to Susquehanna Bank. It was registered anonymously by Domains by Proxy, LLC, a company that Cohen is known to have used in the past.
Contrary to what Cohen had caused Indemnity to represent to the investigators, the cash in the Susquehanna Bank account was not unencumbered, and Cohen was not the source of the money. The cash actually originated from Susquehanna Bank itself, which loaned it to RB Entertainment. As conditions of that loan, RB Entertainment had to provide the funds to Indemnity as a loan or capital contribution, and Indemnity had to deposit the money back in Susquehanna Bank as security for the loan to RB Entertainment. RB Entertainment and Indemnity thus paid loan origination fees and interest so that Indemnity could show an account balance of approximately $5 million, even though Indemnity could not use the cash and had to keep it at Susquehanna Bank as security for the loan to RB Entertainment.
2. Solvency Issues
The Commissioner's investigation revealed other solvency problems at Indemnity that went beyond the lack of economic substance to the $5.1 million in cash that Indemnity claimed to hold at Susquehanna Bank. In its filings with the Commissioner, Indemnity claimed as assets over $21 million in receivables from IDG Companies, LLC ("IDG"), another entity controlled by Cohen. Indemnity booked the receivables in lieu of actual payment of over $23 million in premiums that IDG failed to remit to Indemnity. Delaware law requires unremitted premiums to be held in a fiduciary account, but IDG did not have a fiduciary account for the premiums. In fact, the Commissioner's investigation revealed that IDG did not appear to have the premiums at all. At the time of the investigation, IDG had only $3.3 million in assets and had $24.4 million in liabilities, including the $21 million owed to Indemnity.
Given IDG's financial position, Indemnity had no reasonable expectation that the receivables would be fully repaid. Indeed, even without the money owed to Indemnity, IDG's net assets were effectively zero. Yet Indemnity was carrying the receivables from IDG at full face value on its financial statements.
The Commissioner's investigation revealed other material misstatements on Indemnity's financial statements, including overstated account balances and unsubstantiated reinsurance claims. Adjusted for these items, Indemnity's total policyholder surplus was negative $9 million, an amount that contrasts ...