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Cohen v. State ex. rel. Stewart

Supreme Court of Delaware

April 9, 2014

JEFFREY B. COHEN, and IDG COMPANIES, L.L.C., Non-Parties Below, Appellants,
v.
STATE OF DELAWARE, ex. rel. THE HONORABLE KAREN WELDIN STEWART, CIR-ML, INSURANCE COMMISSIONER OF THE STATE OF DELAWARE, Petitioner-Below, Appellee, -and- INDEMNITY INSURANCE CORPORATION, RRG, Respondent Below, Appellee. IN THE MATTER OF THE REHABILITATION OF INDEMNITY INSURANCE CORPORATION, RRG

Submitted March 5, 2014.

Case Closed April 25, 2014.

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[Copyrighted Material Omitted]

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Court Below: Court of Chancery of the State of Delaware. C.A. No. 8601-VCL. Court Below: Court of Chancery of the State of Delaware. C.A. No. 8601-VCL.

Theodore A. Kittila, Esquire (argued), Greenhill Law Group, LLC, Wilmington, Delaware for Appellants Jeffrey B. Cohen, IDG Companies, LLC, and RB Entertainment Ventures, LLC.

W. Harding Drane, Jr., Esquire (argued), and Jessica M. Willey, Esquire, of the Department of Justice, Wilmington, Delaware for Appellee State of Delaware.

Michael W. Teichman, Esquire, Michael W. Arrington, Esquire, James D. Nutter, Esquire, Elio Battista, Jr., Esquire, Parkowski, Guerke & Swayze, P.A., Wilmington, Delaware for Appellee Indemnity Insurance Corporation, RRG.

Before STRINE, Chief Justice, HOLLAND, BERGER, JACOBS, and RIDGELY, Justices, constituting the Court en banc.

OPINION

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STRINE, Chief Justice:

I. INTRODUCTION

Central to this appeal, which challenges multiple orders issued by the Court of Chancery, is one issue: whether the delinquency proceedings for Indemnity Insurance Corporation, RRG (" Indemnity" ) violated the constitutional due process rights of Appellant Jeffrey B. Cohen (" Cohen" ) or Co-Appellant RB Entertainment Ventures (" RB Entertainment" ). We conclude that no violation of those parties' due process rights occurred.

RB Entertainment is one of a complicated web of at least seventeen different companies that Cohen allegedly owns and controls (the " Cohen-affiliated entities" ). Co-Appellant IDG Companies, LLC (" IDG" ), Indemnity's managing general agent,[1] is also one of the Cohen-affiliated entities. After uncovering evidence that Cohen had committed fraud in his capacity as Indemnity's CEO and that Indemnity might be insolvent, the Delaware Insurance Commissioner (the " Commissioner" ) petitioned the Court of Chancery for a seizure order. The Delaware Uniform Insurers Liquidation Act (the " Insurers Liquidation Act" ) authorizes the Commissioner to obtain a seizure order to protect the interests of policyholders and creditors and to prevent further depletion of the insurer's assets.[2] Based on the detailed allegations and supporting evidence presented by the Commissioner, the Court of Chancery granted that seizure order, which, among other things, prohibited anyone with notice of the proceedings from transacting the business of Indemnity, selling or destroying Indemnity's assets, or asserting claims against Indemnity in other venues without permission from the Commissioner. The seizure order also prohibited anyone with notice of the proceedings from interfering with the Commissioner in the discharge of her duties.

Cohen, who founded Indemnity and had served as its President, Chairman, and CEO, resigned from Indemnity's board during the ensuing investigation and the board removed him from his managerial positions. After his resignation, Cohen interfered with the Commissioner's lawful efforts to operate Indemnity in various ways. As Cohen's misbehavior escalated, Indemnity and the Commissioner returned

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to the Court of Chancery several times, first seeking an amendment to the seizure order to address Cohen's behavior and then seeking sanctions against him. The Court of Chancery entered a series of orders that, as Cohen's ongoing disruptive actions justified, increased the restrictions on Cohen's behavior and imposed stiffer sanctions upon him.

Cohen argues that he was denied due process at several junctures during the Court of Chancery proceedings. Because Cohen's claims allege violations of his right to due process, the focus of this opinion is on whether Cohen was given notice of the allegations against him and a fair opportunity to present his side of the dispute. Having carefully examined the record in this case, we conclude that he was.

At oral argument, Cohen's counsel emphasized what he considered to be his client's strongest claim: that Cohen was not provided with a copy of the transcript from a brief hearing that, as authorized by § 5904 of the Insurers Liquidation Act, occurred ex parte on September 10, 2013. The Court of Chancery directed that the transcript be provided to Cohen by counsel for the Commissioner, but it was not. Cohen argues that the transcript contained a critical reference to criminal contempt that would have altered his approach to the case and changed his decision not to attend the hearing to show cause on September 24, 2013. Cohen claims that his absence from the September 24, 2013 hearing put him at a permanent disadvantage that tainted all subsequent sanctions proceedings.

But, Cohen was on abundant notice of the allegations against him and the transcript contained no new information that had not already been provided to Cohen by (i) Indemnity's September 9, 2013 motion, supporting exhibits, and proposed order; and (ii) the Court of Chancery's September 10, 2013 Amended Seizure Order. The Court of Chancery made it clear that a hearing would be held to give Cohen a chance to show cause why he should not be held in civil or criminal contempt. Cohen was represented by counsel at the hearing on September 24, 2013 and had a full and fair opportunity to respond to the allegations against him. Thus, after weighing the factors set out by the U.S. Supreme Court in Mathews v. Eldridge ,[3] we conclude that although the failure to provide the transcript was unfortunate and regrettable, it did not constitute a due process violation.

Likewise, we conclude that Cohen's due process rights were respected throughout the remainder of the Court of Chancery proceedings, and that the Court of Chancery did not abuse its discretion when it denied Cohen's motion for reargument of one of its orders. We also find that the Court of Chancery's decision not to delay the entry of a rehabilitation order that the Commissioner proposed and Indemnity's board consented to in order to protect the remaining value of the company and avoid liquidation -- in response to a letter from RB Entertainment asking for time to brief a renewed motion to intervene -- did not deny RB Entertainment its due process rights. The letter from RB Entertainment did not deny that serious fraud had occurred, did not proffer any evidence that Indemnity was not in the precarious financial situation that the Commissioner and Indemnity's board indicated, and made no offer to provide back-stop financing to Indemnity to ensure that no harm from the delay would befall it and its policyholders and creditors. Given the important public policy interests served by the Commissioner's proposed order and the opportunity

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afforded by the Court of Chancery for objections to the rehabilitation plan, RB Entertainment suffered no denial of its due process rights. Thus, we affirm the decisions of the Court of Chancery.

II. FACTUAL AND PROCEDURAL BACKGROUND

Indemnity is a Delaware-domiciled risk retention group that sells liability policies to restaurants and nightclubs, as well as insurance for special events. Indemnity insures approximately 4,100 policyholders and processes approximately 4,500 claims per year.[4] Indemnity wrote over $35 million in hospitality premiums during the 2012 calendar year.[5] Indemnity is subject to the regulatory authority of the Delaware Department of Insurance (the " Insurance Department" ), which is charged with protecting insurance consumers, making sure that insurance companies are able to pay claims, and prosecuting insurance fraud.[6]

Indemnity shares its offices with at least seventeen Cohen-affiliated entities, which are intertwined, have complicated financial relationships with each other, and share employees and equipment. Before the spring of 2012, one of the Cohen-affiliated entities, IDG, performed " essentially all" of the day-to-day operations for Indemnity, including providing employees, paying for utilities, and other services.[7] Then, around April 2012, Cohen changed this arrangement and transferred these operational functions, including the employees, to Indemnity, but the companies remained interrelated.[8] For example, although by 2013 Indemnity was paying for at least some of the utilities itself, some accounts remained in IDG's name.[9]

In July 2012, the Insurance Department began a routine regulatory examination of Indemnity. From the beginning, Cohen allegedly refused to cooperate with the Insurance Department's requests for information.[10] During the examination, concerns emerged about Indemnity's solvency when the Insurance Department discovered (i) a receivable to Indemnity from Cohen-controlled affiliate IDG for approximately $20 million that was likely uncollectible, (ii) an unsubstantiated representation that Indemnity was entitled to recover $983,000 of incurred insurance losses from a reinsurer, and (iii) indications that Indemnity's booked reserves

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were understated by between $1 million and $3 million.[11] The $20 million receivable was of particular concern, because -- for an insurer like Indemnity that had written $35 million in premiums in 2012 -- that was a material amount. The receivable existed because, over a three-year period, IDG had been collecting premiums on Indemnity's behalf but had not remitted those premiums to Indemnity.[12] After reviewing IDG's financial statements, which Cohen had submitted, the Commissioner concluded that IDG was insolvent because its total assets were only $3 million while its total liabilities exceeded $24 million, and that it was unlikely that Indemnity would ever receive the money IDG owed to it.[13]

In both the Petition for Entry of a Confidential Seizure and Injunction Order (the " Seizure Petition" ) and the Petition for Entry of a Liquidation and Injunction Order (the " Liquidation Petition" ), the Commissioner alleged that in spring 2013, as part of the ongoing inquiry by the Insurance Department, Cohen represented that Indemnity had $5,100,000 in unencumbered cash in an account at Susquehanna Bank.[14] When the Insurance Department sought to verify that amount, Cohen submitted a form that appeared to have been faxed from Susquehanna Bank confirming the account balance.[15] The Insurance Department suspected that this form was fraudulent and followed up by attempting to contact the Susquehanna Bank representative who purportedly had signed the form.[16] Cohen thwarted the Insurance Department's inquiries by providing a false post office box, telephone number, fax number, and email address for that representative.[17] When the Insurance Department finally succeeded in contacting the Susquehanna Bank representative, she confirmed its suspicions that the signature on the form Cohen submitted was not hers.[18] The Insurance Department's investigation later revealed that the actual account balance did not match the amount disclosed in Indemnity's financial statements, and -- contrary to Cohen's assertions -- the cash in the account represented the proceeds of a loan that another Cohen-controlled affiliate, RBE Entertainment, had taken out and that cash was fully encumbered by the loan.[19]

The Insurance Department's evidence suggested that the fraudulent activity at Indemnity was not limited to the account at Susquehanna Bank. The Insurance Department's investigation uncovered a similar scheme involving an account allegedly held at Royal Bank

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of Canada -- Barbados, [20] as well as additional misrepresentations in Indemnity's financial statements that hid its true financial condition, including insufficient reserves, overstated account balances, and reinsurance claims that could not be corroborated.[21] The discovery of these potential frauds fueled the Insurance Department's concerns about Indemnity's financial viability.

Insurer insolvency is regulated by state law rather than the federal Bankruptcy Code.[22] Many states, including Delaware, have adopted a form of the Uniform Insurers Liquidation Act " to avoid the confusion inherent in the forced liquidation of a multistate insurance corporation, especially with regard to assets in foreign jurisdictions." [23] The General Assembly enacted the Delaware Uniform Insurers Liquidation Act (the " Insurers Liquidation Act" ) in 1953.[24] Section 5943 of the Insurers Liquidation Act provides that, " [u]pon the filing by the Commissioner in the Chancery Court of a petition" meeting the statutory requirements, the Court of Chancery may:

issue forthwith, ex parte and without a hearing, the requested order which shall 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, and until further order of the Court 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.[25]

The Insurance Department filed the Seizure Petition because of its concerns about Indemnity's financial viability and its suspicion that Cohen had engaged in fraud. The Court of Chancery reviewed the Seizure Petition, found it to be supported by sufficient evidence, and granted the Confidential Seizure and Injunction Order (the " Seizure Order" ) on May 30, 2013. The Seizure Order, tracing the language of the Insurers Liquidation Act, instructed the Commissioner to take immediate control of Indemnity and vested the Commissioner with " all right, title and interest in, of or to, all of the property of [Indemnity]." [26]

The Commissioner later determined that Indemnity was " impaired, or insolvent or

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in unsound condition" and that its " further transaction of insurance [was] presently or prospectively hazardous to its policyholders." [27] The Commissioner filed the Liquidation Petition on July 26, 2013, based on the allegations of fraud described above, all of which were supported by extensive evidence.

Cohen resigned from Indemnity's board of directors on August 5, 2013, and the board removed him from all of his officer positions that same day. Cohen has not denied or substantively contested the fraud allegations in the Court of Chancery proceedings.[28] Indemnity did not deny the fraud allegations either.[29] But Indemnity did file an opposition to the Liquidation Petition on August 21, 2013, arguing that Indemnity was not insolvent. Thus, at that time, Indemnity's board still believed that Indemnity was a " profitable business" that was " both solvent and in possession of substantial liquid assets that are sufficient to service [Indemnity]'s operations and pay claims." [30]

A. RB Entertainment's First Request to Intervene

On August 14, 2013, Cohen-controlled affiliate RB Entertainment moved to intervene under Court of Chancery Rule 24, seeking to oppose the Liquidation Petition.[31] RB Entertainment is one of the seventeen Cohen-affiliated entities. Cohen claims to own 100 percent of RB Entertainment, and RB Entertainment in turn claims to own 99 percent of Indemnity's equity.[32] RB Entertainment sought to intervene

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based on its alleged status as Indemnity's controlling stockholder. As discussed above, the Commissioner alleged that Cohen used RB Entertainment as an instrumentality to perpetrate at least one of the frauds, by causing RB Entertainment to take out a loan to provide the funds that were later deposited into the Indemnity account at Susquehanna Bank and were falsely represented as unencumbered.

RB Entertainment's motion to intervene argued that Indemnity was solvent but did not contest the fraud allegations. Both Indemnity and the Commissioner opposed RB Entertainment's motion. The Court of Chancery held an office conference on RB Entertainment's motion on August 22, 2013 and denied it without prejudice. But the Court of Chancery, citing the Insurers Liquidation Act and other authority,[33] held that as a general matter, stockholders do not have any official role as parties in a delinquency proceeding, because the insurer's interests are protected and the insurer's board of directors.[34] The Court of Chancery also emphasized that it had not yet adjudicated any of the fraud claims, stating that " before we determine that Mr. Cohen is a bad guy, he actually ought to be able to dispute the fact that he's a bad guy." [35] The Court of Chancery stated that:

If it turns out that the State wants some remedy that would deprive [RB Entertainment] of its voting rights or other[wise] affect its unique rights as a stockholder, I would reconsider and I would give Mr. Cohen, or really [RB Entertainment], the ability to intervene for the purpose of litigating its own particular rights. Likewise, I think that if the issue of fraud is to be adjudicated . . . and if that adjudication would then, in turn, be binding upon [RB Entertainment], then I would allow [RB Entertainment] to intervene solely for the purpose of defending against an adjudication that would be dispositive of its rights.[36]

But the Court of Chancery added that:

Even if I allowed [RB Entertainment] to intervene, it would only be for that limited purpose. So it's not going to be for the purpose of arguing about valuation. It's not going to be for the purpose of arguing about solvency. It's not going to be for the purpose of arguing about business viability. Those are all issues that are now within the control of the board ...

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