IN THE MATTER OF THE REHABILITATION OF INDEMNITY INSURANCE CORPORATION, RRG
Submitted: February 20, 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 Proposed Intervenor RB Entertainment Ventures, LLC.
LASTER, Vice Chancellor.
This case is a delinquency proceeding involving Indemnity Insurance Corporation, RRG ("Indemnity" or the "Company"). A delinquency proceeding is "any proceeding commenced against an insurer pursuant to this chapter for the purpose of liquidating, rehabilitating, reorganizing or conserving such insurer." 18 Del. C. § 5901(3). The Insurance Commissioner of the State of Delaware (the "Commissioner") initiated this proceeding by seeking and obtaining a seizure order that authorized the Commissioner to conduct a targeted investigation into Indemnity's business. Based on the results of that investigation, the Commissioner sought and obtained authority to place Indemnity into liquidation. After assessing Indemnity's situation further, the Commissioner believed it might be possible to rehabilitate Indemnity through a capital infusion or a sale of assets, and the Commissioner sought and obtained a rehabilitation order. When the effort at rehabilitation proved unsuccessful, the Commissioner petitioned to return Indemnity to liquidation. Non-party RB Entertainment Ventures, LLC ("RB Entertainment") has moved pursuant to Rule 24 to intervene for the purpose of opposing the liquidation petition. The motion is denied.
I. FACTUAL BACKGROUND
A state-court delinquency proceeding is analogous to a federal bankruptcy court proceeding, but it is heard 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), affd, 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." Checker Motors, 1992 WL 29806, at *2. The Delaware Uniform Insurers Liquidation Act appears in Chapter 59 of the Insurance Code, which is titled "Rehabilitation and Liquidation." See 18 Del. C. §§ 5901-5933; 5941-5944.
A. Indemnity Insurance Corporation, RRG
Indemnity is a Delaware corporation. Non-party Jeffrey B. 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.
RB Entertainment is a Delaware limited liability company. RB Entertainment has grounded its motion to intervene on two factual premises: its purported ownership of 99% of Indemnity's equity and its purported ability to exercise 100% of Indemnity's voting power. The Commissioner has raised serious questions about the factual accuracy of both premises. This decision assumes without deciding that RB Entertainment is a stockholder of Indemnity.
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. Dkt. 1 (the "Seizure Petition"). The Insurance Code grants the Commissioner the 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. Among other things, the Seizure Petition explained that as part of an examination into Indemnity's safety and soundness, the Commissioner asked for more specific information regarding amounts reported as being held at institutions designated on Indemnity's financial statements as "Banks 1 through 4." Through Cohen, Indemnity responded that Indemnity held $5, 100, 000 in unencumbered cash at Susquehanna Bank, the institution identified as "Bank 4."
To confirm the account balance, the investigators asked to contact 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, representing 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 number for a P.O. Box that purportedly belonged to Susquehanna Bank.
The investigators sent a confirmation form to the P.O. Box, 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 Indemnity (through Cohen) had provided for Bliss.
The investigators did not receive a response to the email sent to Bliss at the address Indemnity 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 Indemnity 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 Indemnity 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 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.
• The domain name for the email address that Indemnity 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.
• The email address that Indemnity provided was created within days after the Commissioner's February 28, 2013 request for bank confirmation.
• The signature on the fax was not Bliss's.
• Contrary to what Indemnity (through Cohen) had represented to the investigators, the cash in the Susquehanna Bank account was not unencumbered. It was 100% encumbered.
The Seizure Petition identified other troubling problems with Indemnity's records and representations. 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. See 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. The Insurance Code specifically authorizes this relief. 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 also 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. Here too, the Insurance Code specifically authorizes this relief. See 18 Del. C. § 5943(a) (authorizing Court of Chancery to "enjoin the ...