Lawrence v. Illinois Life & Health Guaranty Ass'n

FIRST DIVISION
November 17, 1997



No. 1-95-2017

DONALD LAWRENCE, on Behalf of Himself and
All Others Similarly Situated,

Plaintiff-Appellant,

v.

ILLINOIS LIFE AND HEALTH GUARANTY
ASSOCIATION and JAMES W. SCHACHT,

Defendants-Appellees.)
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)Appeal from the
Circuit Court of
Cook County.

No. 91 CH 50114

Honorable
Aaron Jaffe,
Judge Presiding.

JUSTICE O'BRIEN delivered the opinion of the court:

Defendant, the Illinois Life and Health Guaranty Association
(ILHGA), filed a section 2-619 motion to dismiss plaintiff's third
amended complaint. 735 ILCS 5/2-619 (West 1996). The trial court
granted defendant's motion and plaintiff appealed. We affirm.
Plaintiff, Donald Lawrence, was an insured of Executive Life
Insurance Company (ELIC), a California-based company certified to
transact business in Illinois. In order to obtain certification,
ELIC agreed to maintain membership in the ILHGA and contribute to
a guaranty fund. The fund, which is administered by a board of
directors (215 ILCS 5/535 (West 1996)), guarantees coverage to
Illinois policyholders of financially impaired insurance companies
(215 ILCS 5/532 (West 1996)).
ELIC became insolvent and in 1991 the superior court of
California, County of Los Angeles (the California court), appointed
the Insurance Commissioner of the State of California (the
Insurance Commissioner) conservator. The National Organization of
Life and Health Insurance Guaranty Associations (NOLHGA)
represented all participating guaranty associations. The
California court did not certify a class or appoint an insured to
represent the interests of the policyholders.
The conservator and NOLHGA reached a settlement and filed a
rehabilitation plan with the California court. The plan called for
the creation of a new insuring entity (Aurora) out of the assets of
ELIC. In addition, the plan incorporated an enhancement agreement
entered into between ILHGA, through NOLHGA, and the California
Insurance Commissioner. According to the enhancement agreement,
any ELIC insured who failed to affirmatively opt out of the
agreement would be considered a plan participant. Plan
participants released all claims against ELIC, the California
Insurance Commissioner, and any state guaranty association taking
part in the settlement in favor of the right to recover from the
newly formed insurance company.
The California court set a date for hearings on the proposed
ELIC rehabilitation plan and ordered the Insurance Commissioner to
publish notices of the hearing in two newspapers of national
circulation. The notice stated that any person wishing to appear
at the ELIC hearing and to be heard or to present testimony or
other evidence was entitled to appear or to submit written
comments, suggestions, objections or testimony by mail. On
February 13, 1992, Paul R. Rigney, originally the lead plaintiff in
the instant case, filed a petition in the California court for
leave to intervene in the ELIC rehabilitation proceeding, seeking
to file a class action challenging the enhancement agreement on
behalf of all ELIC policyholders. Rigney was represented in the
ELIC rehabilitation proceedings by the same counsel that represents
Lawrence in the instant case.
Following the ELIC hearing, the California court rejected
Rigney's petition to certify a class and approved the enhancement
agreement. Further, the California court ordered that election
information be distributed to ELIC policyholders. The election
information did not specifically inform policyholders residing in
Illinois that, as plan participants, their rights under the
Illinois guaranty fund would be extinguished, but stated, "You may
wish to seek independent advice whether an election to opt out will
affect your rights, if any, against parties or persons other than
ELIC." The named plaintiff, Donald Lawrence, an Illinois resident,
failed to return the election form and thus was deemed to be a
participant of the ELIC rehabilitation plan.
Plaintiff filed a five-count class action complaint on behalf
of all ELIC insureds residing in Illinois or otherwise covered by
the Illinois Life Insurance and Health Insurance Guaranty
Association Law (215 ILCS 5/531.01 et seq. (West 1996) (hereinafter
the Insurance Guaranty Law). Count I of plaintiff's third amended
complaint seeks a declaratory judgment that the enhancement
agreement impermissibly denies policyholders due process because it
waives their rights against the ILHGA without their knowledge or
consent. Count II seeks a declaratory judgment that the
enhancement agreement violates policyholders rights under the
Insurance Guaranty Law because it obviates the fund's liability to
the plaintiff class in the event the newly formed insurance company
should likewise become financially unstable. Count III seeks an
award of damages to compensate the named plaintiff and the
plaintiff class for past and future claims under their various
insurance policies. Count IV seeks an accounting of amounts due to
him pursuant to his ELIC insurance policy and the Illinois guaranty
fund. Count V seeks to enjoin the ILHGA from pursuing or advancing
on the enhancement agreement until a full hearing on the pending
case. On June 7, 1995, the circuit court of Cook County dismissed
plaintiff's third amended complaint pursuant to section 2-619 of
the Illinois Code of Civil Procedure (735 ILCS 5/2-619 (West
1994)), ruling that the California court had jurisdiction over
Lawrence and that its orders were entitled to full faith and
credit. Plaintiff appealed.
On appeal, we consider (1) whether, as a resident of this
state, Lawrence was subject to the limited personal jurisdiction of
the California court to affect his rights against the ILHGA, (2)
whether the enhancement agreement violated plaintiff's statutory
and constitutional rights, and (3) whether the circuit court was
required to give full faith and credit to the California court's
judgment.

Personal Jurisdiction
Plaintiff was subject to the jurisdiction of the California
court under California's long-arm statute. Cal. Code Civ. Proc.
Ann. 410.10 (Deering 1991). California's long-arm statute grants
the broadest basis for jurisdiction consistent with due process.
It provides that a California court "may exercise jurisdiction on
any basis not inconsistent with the Constitution of [California] or
of the United States." Cal. Code Civ. Proc. Ann. 410.10 (Deering
1991). Accordingly, where it is found that personal jurisdiction
does not offend due process, it consequently cannot violate
California's long-arm statute. See Burger King Corp. v. Rudzewicz,
471 U.S. 462, 471, 105 S. Ct. 2174, 2181, 85 L. Ed. 2d 528, 540
(1985). The relevant considerations in determining whether
sufficient minimum contacts exist to justify the exercise of
limited personal jurisdiction over a nonresident are: (1) the
individual must have purposefully availed himself or herself of the
privilege of conducting activities in California, (2) the cause of
action must arise from those activities, and (3) the exercise of
jurisdiction must be reasonable. International Shoe Co. v.
Washington, 326 U.S. 310, 316, 319; 90 L. Ed. 95, 101-02, 104; 66 S. Ct. 154, 158, 159-60 (1945).
Here, Lawrence entered into a contract of insurance with ELIC,
an insurance company domiciled in California and subject to
California law regarding insurer insolvency, rehabilitation, and
liquidation. See Cal. Ins. Code Ann. 1010 et seq. (Deering 1992).
Because plaintiff deliberately reached beyond Illinois' borders and
purchased insurance from a California-based insurance company
(McGee v. International Life Insurance Co., 355 U.S. 220, 223, 78 S. Ct. 199, 201, 2 L. Ed. 2d 223, 226 (1957)), he purposefully
availed himself of the protection of California law regarding
insolvent insurers (Rudzewicz, 471 U.S. at 476, 105 S. Ct. at 2184,
85 L. Ed. 2d at 543; Commisioner of Insurance v. Arcilio, 221 Mich.
App. 54, 76; 561 N.W.2d 412, 422 (1997)). Further, because
plaintiff's rights against the ILHGA arose from his ELIC insurance
contract, those rights were subject to California's statutory and
judicial regulation of the ELIC insolvency proceedings. See
generally Travelers Health Ass'n v. Virginia, 339 U.S. 643, 647, 70 S. Ct. 927, 929, 94 L. Ed. 1154, 1160 (1950). Accordingly, the
California court's right to exercise jurisdiction over plaintiff
was entirely reasonable. See generally Shaffer v. Heitner, 433 U.S. 186, 216, 97 S. Ct. 2569, 2586, 53 L. Ed. 2d 683, 705 (1977).
See also Arcilio, 221 Mich. App. at 74; 561 N.W.2d at 421-22. And
while it is true that the plaintiff was not personally named as a
party to the insolvency proceedings, nor represented by a certified
class representative, his interests were nevertheless represented
by a "virtual class" of policyholders, particularly Paul Rigney,
who appeared in the ELIC insolvency proceedings pursuant to notice
and raised the same issues plaintiff seeks to raise here. Larson
v. Pacific Mutual Life Insurance Co., 373 Ill. 614, 27 N.E.2d 458
(1940); Padway v. Pacific Mut. Life Insurance Co., 42 F. Supp. 569
(E.D. Wis. 1942). Moreover, plaintiff's rights were protected by
the Insurance Commissioner, who was bound by California statute to
serve as trustee for the benefit of all creditors in the insolvency
proceedings, including ELIC's policyholders. Cal. Ins. Code. 1057
(Deering 1992); In re Executive Life Insurance Co., 32 Cal. App. 4th 344, 365-66; 38 Cal. Rptr. 2d 453, 465 (1995) (Insurance
Commissioner's first duty to not deprive policyholders of the
protection of their policies). The Insurance Commissioner
fulfilled this obligation by creating a new insurance company out
of the ashes of the old and providing the holders of otherwise
valueless ELIC insurance policies with the opportunity to either
accept reinsurance or pursue their claims against their respective
state guaranty associations.
Statutory and Constitutional Rights
The enhancement agreement is valid and enforceable against
Lawrence because it does not abridge his statutory rights, impair
any contractual obligation, or violate his right to due process or
equal protection of the laws. U.S. Const. art. I, 10, amend. XIV,
1.
The Insurance Guaranty Law provides that the ILHGA may
"[e]nter into such contracts as are necessary or proper" (215 ILCS
5/531.08(13)(a) (West 1996)) to protect covered insureds against
"failure" in the performance of obligations under covered insurance
contracts (215 ILCS 5/531.02 (West 1996)). To satisfy this
obligation, the Insurance Guaranty Law permits the ILHGA to
"reinsure" the covered policies of covered policyholders of the
insolvent insurer. 215 ILCS 5/531.08(2)(a) (West 1996).
Accordingly, the settlement agreement entered into by the ILHGA
through NOLHGA does not abridge plaintiff's statutory rights but is
a "contract" authorized by section 5/531.08(13)(a) (New Mexico Life
Insurance Guaranty Ass'n v. Quinn & Co., 111 N.M. 750, 758; 809 P.2d 1278, 1286 (1991)), to "reinsure" the covered ELIC
policyholders as permitted by section 5/531.08(2)(a), which
reinsurance satisfies the ILHGA's statutory obligations under
section 5/531.02.
Lawrence's claim that the enhancement agreement impaired the
ILHGA's contractual obligations is likewise without merit.
Plaintiff's rights against ELIC under its insurance contract
terminated when ELIC was declared insolvent except to the extent
that plaintiff became a creditor to the insolvency estate. In re
Executive Life Insurance Co., 32 Cal. App. 4th at 384; 38 Cal. Rptr. 2d at 477. Moreover, plaintiff's right to payment from the
ILHGA is statutory rather than contractual. Accordingly, even
assuming the enhancement agreement did, in some manner or
circumstances, alter the obligations owed to plaintiff under the
original ELIC policy or under the Insurance Guaranty Law, it did
not violate the contract clause (U.S. Const. art. I, 10). See
Honeywell, Inc. v. Minnesota Life & Health Guaranty Ass'n, 110 F.3d 547, 551-53 (8th Cir. 1997); Mendel v. Garner, 283 Ark. 473, 476-
77; 678 S.W.2d 759, 761 (1984).
Finally, we disagree with plaintiff's arguments that the
enhancement agreement violated his rights to due process and equal
protection of the laws (U.S. Const. amend. XIV). Because the ELIC
insolvency proceedings were analogous to bankruptcy proceedings,
the jurisdiction of the California court was no less comprehensive
than that of a bankruptcy court in similar circumstances.
Garamendi v. Executive Life Insurance Co., 17 Cal. App. 4th 504,
515; 21 Cal. Rptr. 2d 578, 585 (1993). A bankruptcy court's
judgment approving a rehabilitation plan may release a creditor's
claims against a bankrupt debtor providing the creditor is afforded
an opportunity to participate in the bankruptcy proceedings, even
if the creditor fails to do so. Stoll v. Gottlieb, 305 U.S. 165,
83 L. Ed. 104, 59 S. Ct. 134 (1938); Levy v. Cohen, 19 Cal. 3d 165,
172-74; 561 P.2d 252, 256-58 (1977), cert. denied, 434 U.S. 833;
137 Cal Rptr. 162, 166-68 (1977).
Despite his protestations to the contrary, the record reveals
that, at a minimum, Lawrence received notice by publication of the
ELIC hearings. The notice advised Lawrence that if he had an
interest in the ELIC estate he should appear and show cause why the
motion to approve the proposed rehabilitation plan should not be
approved. In addition, after the hearings had been concluded and
the plan approved, Lawrence received a second notice explaining
that he could either participate in the plan or opt-out. Because
the California court did more than provide Lawrence with notice and
an opportunity to participate, but also provided him the opt-out
alternative afforded to a member of a class action, the California
court did not violate his right to due process. Furthermore,
because Lawrence was provided the opportunity to opt-out, and
neglected to do so, his claim the enhancement agreement violates
his right to equal protection under the Insurance Guaranty Law is
not well taken.
Full Faith and Credit
Lastly, Illinois has adopted the Uniform Insurers Liquidation
Act (the Act), (215 ILCS 5/221.1 et seq. (West 1996)). Section
221.4 of the Act provides that when a liquidation proceeding is
commenced in a "reciprocal state" involving an insurer domiciled in
the reciprocal state, claims against the insurer by Illinois
claimants must be decided in the domiciliary state as provided by
the law of that state. 215 ILCS 5/221.4 (West 1996). Accordingly,
plaintiff's argument that the California court's approval of the
enhancement agreement is not entitled to full faith and credit is
without merit. Clark v. Standard Life & Accident Insurance Co., 68
Ill. App. 3d 97, 386 N.E.2d 890 (1979). Indeed, because the
California court had jurisdiction to approve the enhancement
agreement and bind plaintiff thereto, Lawrence cannot even properly
make a collateral attack on the California court's judgment.
Pacific Mutual Life Insurance Co. v. McConnell, 44 Cal. 2d 715; 285 P.2d 636 (1955).
Affirmed.
CAMPBELL, P.J., and GALLAGHER, J., concur.