S. HOLLY C. BAKKE, COMMISSIONER OF BANKING et al. v. SECURITY INDEMNITY INSURANCE CO.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NOS. A-6551-02T26551-02T2

A-6063-03T2

HOLLY C. BAKKE, COMMISSIONER

OF BANKING and INSURANCE,

STATE OF NEW JERSEY,

Plaintiff-Respondent,

v.

SECURITY INDEMNITY INSURANCE CO.,

Defendant-Appellant,

and

SPECIALITY INSURANCE AGENCY, INC.

and SPECIALTY DATA SYSTEMS, INC.

Defendants.

_______________________________________

I/M/O THE REHABILITATION OF THE

SECURITY INDEMNITY INSURANCE CO.

_______________________________________

 

Argued October 24, 2005 - Decided

Before Judges Alley, C. S. Fisher and Yannotti.

On appeal from the Superior Court of New Jersey, Chancery Division, Mercer County, Docket No. MER-C-62-03.

Herbert C. Klein argued the cause for appellant (Nowell, Amoroso, Klein, Bierman, attorneys; Mr. Klein, Daniel S. Eichhorn and Bradley W. Wilson, on the briefs).

Emerald Erickson Kuepper, Deputy Attorney General argued the cause for respondent Commissioner of Banking and Inssurance (Peter Harvey, Attorney General of New Jersey, attorney; Patrick DeAlmeida, Assistant Attorney General, of counsel; James A. Carey, Jr., Deputy Attorney General, on the briefs).

Thomas P. Weidner argued the cause for Motors Insurance Corp., GMAC Corp. and MIC Corp. (Windels, Marx, Lane & Mittendorf, attorneys; Mr. Weidner, David F. Swerdlow, Charles M. Fisher and Xan K. Desch, on the briefs).

PER CURIAM

On June 27, 2003, Judge Neil H. Shuster entered an order pursuant to the Uniform Insurers Liquidation Act (UILA), N.J.S.A. 17:30C-1 to -31, placing Security Indemnity Insurance Company (Security) into rehabilitation under the supervision of the Commissioner of Banking and Insurance (Commissioner). Security and the principal shareholders of the company (Shareholders) filed a notice of appeal on August 8, 2003. By order entered October 2, 2003, we denied the Commissioner's motion to dismiss the appeal on the ground that the rehabilitation order was not a final judgment for purposes of appeal under R. 2:2-3(a). However, we granted the Shareholders leave to appeal nunc pro tunc pursuant to R. 2:4-4(b)(2). We also denied the Shareholders' motion to accelerate the appeal.

On January 22, 2004, the Commissioner petitioned the trial court for an order of liquidation asserting that Security was insolvent and further efforts at rehabilitation would be useless. Following a trial, the judge granted the Commissioner's application and on June 30, 2004 entered an order authorizing the Commissioner to liquidate the company. The Shareholders filed a notice of appeal from the liquidation order on July 6, 2004. We entered an order on August 12, 2004 denying the Shareholders' motion for a stay of the order and for acceleration of the appeal. On August 16, 2004, we granted the Shareholders' motion to consolidate the appeals.

I.

Security is a property-casualty insurer domiciled in New Jersey and authorized to transact the business of insurance in this State. Barry Moffett was the company's President and Chief Executive Officer and his brother William Moffet served as Chief Financial Officer. Barry owned approximately 95% of Security's shares and William owned 5%. Two other persons owned .5% of the shares.

Security initially provided property and casualty insurance for restaurants and taverns. However, in 1997, Security began writing commercial automobile (CA) insurance for its restaurant and tavern clients. Sometime in 1997, Security applied to the Commissioner for authorization to enter the private passenger automobile (PPA) insurance business.

The Department of Banking and Insurance (Department) determined that Security did not possess sufficient surplus to write PPA insurance without reinsurance. Security advised the Department that it would support its underwriting of the PPA business by ceding a percentage of its net liability up to $100,000 to Motors Insurance Company (Motors) through a quota share reinsurance program. The Commissioner authorized Security to write PPA insurance but required that a provision be included in the initial PPA quota share reinsurance agreement providing that any cancellation of the contract was subject to 90 days prior written notice to the Commissioner and the Commissioner's approval. The Commissioner further required that the agreement include a provision requiring the submission of a plan for the orderly withdrawal of Security from the New Jersey PPA market in the event the quota share agreement was cancelled.

Security and Motors thereupon entered into a quota share reinsurance agreement under which Security ceded to Motors 97.5% of Security's net liability under its PPA insurance policies up to $100,000. The agreement became effective April 1, 1998. Article II of the agreement stated that it was subject to cancellation by either party upon 90 days prior written notice. The agreement further stated that cancellation by Motors was subject to:

1. 90 days prior written notice by certified or registered mail to the Insurance Commissioner of the State of New Jersey;

2. Acceptance and approval by the Insurance Commissioner of the State of New Jersey.

In addition, the agreement stated that upon cancellation Security was required to submit a withdrawal plan to the Commissioner. Motors agreed that it would "assume its portion of business" in accordance with the plan.

Sometime in 1999, Security and Motors entered into an agreement which reduced as of July 1, 1999 Motors' quota share reinsurance from 97.5% to 90% of Security's net liability up to $100,000. Neither Security nor Motors sought the Commissioner's approval for this reduction in Motors' quota share. Article II of the 1999 agreement also provided that any cancellation by Motors was subject to prior written notice to the Commissioner and the Commissioner's approval.

Security and Motors entered into another agreement effective January 1, 2000 which increased Motors' quota share reinsurance obligation to 95% of Security's net liability under its PPA insurance policies up to $500,000. Again, Security and Motors did not seek the Commissioner's approval for these changes in the reinsurance arrangement.

In April 2001, the Department notified Security that review of the company's 2000 annual statement showed that its total adjusted capital was too low. Security was required to file a plan explaining the reasons for its insufficient capital and stating how the company intended to address the deficiency. Security submitted a remedial plan to the Department in April 2001 in which it stated that its reinsurance contracts had been changed to eliminate the company's dependence on "quota share" and to move to an "excess of loss" type of reinsurance, which Security had begun to purchase from Swiss Re on both the CA and PPA lines of its business. According to Security, the change was intended to return the company to a reinsurance structure in which it would retain liability for the first $100,000 on each policy. This was the type of reinsurance used by Security in the 1990's, when the company experienced what it said was a period of positive growth for the policyholders' surplus.

In July 2001, Security and Motors entered into another agreement which provided for quota share reinsurance of 70% as of January 1, 2001 and 35% throughout 2002. The reinsurance limit was $100,000 of Security's net liability. Security filed another remedial plan with the Department in August 2001. In that submission, Security informed the Department of the new agreement with Motors which would serve as a transition from quota share to excess of loss reinsurance.

In March 2002, Security submitted another remedial plan to the Department, in which Security reported that it had restructured its reinsurance to position the company for future growth. Security explained that by changing from quota share reinsurance to excess of loss reinsurance, it had retained a 70% ceding arrangement with Motors on the PPA insurance business. Security stated, "The effect of this transition, which will gradually reduce reinsurance recoverables, was to lower policyholders surplus in this year of transition." Security asserted that it hoped to alter its existing contract with Motors to maintain a 70% quota share level for 2002 and said that it had a verbal commitment for that change. Security admitted that its ability to achieve the goals of the 2002 remedial plan would be in jeopardy without that change.

In April 2002, in response to a request from the Department, Security provided a chronology of its reinsurance relationship with Motors. Security reported that Motors had decided to adhere to the 35% quota share for 2002 despite what Security claimed was Motors' earlier commitment to increase that share to 70%. Security said that because of the poor experience with its commercial book of business, Motors made a "take-it-or-leave-it" offer for reinsurance of Security's PPA and commercial auto insurance lines of business. The terms, according to Security, were "completely unacceptable" but Security said that it was compelled to accept the offer in order to attempt to mitigate a further decline of its financial results.

Security also asserted that it entered into the reinsurance agreement in 2001 under duress. Security maintained that Motors violated the cancellation provision of the 1998 quota share agreement because it had not obtained the Commissioner's approval for the changes in the percentages of the quota share. Security suggested that Motors be required to return to the 1998 quota share agreement. This, Security asserted, would allow Security to "grow out" of its insufficient capital levels.

On or about October 1, 2002, the Commissioner filed a verified complaint against Motors in the Chancery Division seeking specific performance of the 1998 quota share reinsurance contract (the Motors case). The Commissioner alleged that the 1998 agreement had been cancelled by Motors without notice to and approval by the Commissioner as required by the contract. The Commissioner asserted that any termination of the reinsurance arrangement would render Security incapable of continuing to underwrite PPA insurance and in "significant danger" of being placed into rehabilitation.

Security filed an answer and cross-claim, demanding specific performance by Motors of the 2000 quota share agreement. Security sought to void the 2001 reinsurance contract on the grounds that it had been forced to enter into that agreement under duress. Security also demanded compensatory damages resulting from the breaches by Motors of the contracts.

The judge entered a preliminary injunction on December 17, 2002 enjoining the defendants in the Motors case from taking any action to reduce or terminate the 35% quota share reinsurance obligation that was in effect at that time, until a final hearing in the matter. The judge's order also enjoined Security and Motors from withdrawing from the PPA insurance market in New Jersey in violation of the statutes governing the orderly withdrawal of insurers. See N.J.S.A. 17:17-10 and 17:33B-30.

On February 26, 2003, the Commissioner entered a confidential administrative decision and consent order placing Security under the Commissioner's supervision pursuant to the Administrative Supervision Act, N.J.S.A. 17:51A-1 to -10. The Commissioner determined that the company was in a hazardous financial condition. The Commissioner found that Security had insufficient value, liquidity or diversity in its asset portfolio to assure that it would meet its obligations when they came due. The Commissioner further found that Security's reinsurance programs were not sufficient to protect the company's remaining surplus. In addition, the Commissioner found the company had experienced or would experience in the foreseeable future cash flow or liquidity problems. Security was ordered to cease writing new business.

On April 24, 2003, Security filed with the Department its annual statement for 2002. The statement showed that Security's surplus had dropped from $6,527,529 as of December 31, 2001 to $710,710 as of December 31, 2002.

On May 15, 2003, the Commissioner commenced rehabilitation proceedings under the UILA by filing a verified complaint in which she alleged that further transaction of business by Security would be hazardous to policyholders, creditors and the public. In a certification submitted to the trial court, Deputy Commissioner of the Office of Insolvency Regulation Karen Mitchell stated that Security's

Risk-Based Capital ("RBC") level has been below certain benchmarks set by the Department and the National Association of Insurance Commissioners ("NAIC"). . . as of December 31, 2000, the company's RBC ratio was 1.879 . . . as of December 31, 2001, the company's RBC ratio had further deteriorated and was 1.789. . . . According to Security Indemnity's recently filed 2002 Annual Statement, its RBC ratio is 0.17 as of December 31, 2002. Under NAIC guidelines and Departmental regulations, an RBC ratio of less than 0.70 requires the Commissioner to institute delinquency proceedings. See N.J.A.C. 11:2-39.6.

Raymond Conover, the Chief Insurance Examiner in the Department's Office of Solvency Regulation, stated in a certification that, "Even accepting Security's claim that its surplus as of March 31, 2003 is now $1,039,000, Security's RBC does not rise above $2,883,456 and remains at mandatory control level." Donald Bryan, then serving as Director of the Division of Insurance, stated in a certification that the Commissioner's efforts to improve Security's financial condition had not succeeded and the company and its policyholders were in "imminent financial jeopardy."

Security opposed the Commissioner's application. Security argued that successful prosecution of the Motors case would restore the company to financial health. Security filed a motion seeking an order enjoining the Commissioner from placing the company into rehabilitation or liquidation and setting a June 2003 trial date in the Motors case.

The judge heard argument on June 25, 2003 and, in his ruling from the bench, found that the Commissioner had established "a clear basis" for placing Security into rehabilitation. The judge noted that it was "essentially undisputed" that Security was in a "financially hazardous condition." The judge stated that Security's RBC had fallen below minimum levels established by the Department pursuant to NAIC guidelines. The Department requires insurers like Security to maintain a RBC of 2.0 but by December 31, 2002, Security's RBC level had "dipped" to 0.17. The judge further stated that Security was required by the Department's regulations to maintain surplus of about $4,100,000 but as of December 31, 2002, the company's surplus had declined to $710,710. These facts, in the judge's view, provided the Commissioner with sufficient grounds to place the company into rehabilitation.

The judge rejected Security's contention that its financial health would be restored by successful prosecution of the Motors case. The judge found that the contention was grounded in speculation and would put the company's 20,000 policyholders at risk. He noted that the case was not trial ready. The judge stated that previously he thought the case could be resolved quickly but facts subsequently developed in discovery cast doubt as to the merits of the claims asserted by the Commissioner and Security. The judge concluded that he did not think it prudent to deny the Commissioner's application and risk harming Security's policyholders simply because Security believed that the company would achieve "the best case scenario" in the Motors case.

The judge accordingly entered the rehabilitation order and appointed the Commissioner as rehabilitator. The judge directed the Commissioner to conduct Security's business and take such steps she deemed appropriate to remove "the cause and conditions which have made rehabilitation necessary." The order also directed the Commissioner "to explore the liquidation" of the company. The order additionally provided for the stay until September 25, 2003 of all actions then pending against Security and its policyholders, including the Motors case.

The judge subsequently entered orders extending the stay of litigation. On January 7, 2004, the Commissioner sought a further stay of litigation on the grounds that the company was insolvent and the Commissioner soon would be filing an application for liquidation. The judge granted the Commissioner's application by order filed January 9, 2004.

The Commissioner petitioned the court for an order of liquidation on January 22, 2004. The judge heard testimony at a trial which was held on thirteen days between March 24, 2004 and May 4, 2004. The parties thereafter filed post-trial submissions and made their final arguments on June 11, 2004.

On June 30, 2004, the judge filed a written opinion and entered an order permitting the Commissioner to liquidate the company. In his opinion, the judge found that

the Commissioner has met her burden of proving by a preponderance of the evidence that Security was insolvent and in a hazardous financial condition as of June 30, 2003 and no credible evidence has been produced indicating that Security's financial condition has changed. The testimony and evidence presented at trial proves that Security's assets are less than its liabilities. . . . Finally, the evidence shows that the Commissioner as Rehabilitator has made a good faith effort to rehabilitate the company, but that because of the severity of its financial problems, this was not possible.

II.

We turn first to the Shareholders' appeal from the rehabilitation order. The Shareholders raise the following contentions: 1) the order violates N.J.S.A. 17:30C-7(a) because it prevents the Department from removing the cause of Security's financial distress; 2) the Department "seems" aimed at the liquidation of the company instead of its rehabilitation; 3) the Commissioner should have exercised the Commissioner's power to avoid rehabilitation by continuing the administrative supervision of the company; 4) Security was denied procedural due process; 5) the order is contrary to public policy which favors keeping insurance carriers solvent and not imposing responsibility for their claims upon the Property Liability Insurance Guaranty Association and the public; and 6) the judge erred in failing to approve the Shareholders' proposals to improve Security's finances. We find no merit in these contentions and affirm substantially for the reasons stated by Judge Shuster in his decision from the bench on June 25, 2003. We add the following.

The UILA provides in pertinent part that the Commissioner may apply to the court for an order directing the rehabilitation of an insurer that is domiciled in this State if the insurer is "impaired or insolvent," N.J.S.A. 17:30C-6(a), or the insurer is "found, after examination, to be in such condition that its further transaction of business will be hazardous" to the insurer's policyholders, stockholders, creditors or the public. N.J.S.A. 17:30C-6(f).

As the judge noted in his decision from the bench, it was essentially undisputed that Security was in a financially hazardous condition. The record established that under the Department's regulatory standards, Security is required to maintain Security's capital surplus of about $4,100,000 and yet, as of December 31, 2002 its surplus had declined to $710,710. By the time of the hearing on June 25, 2003, Security's capital surplus was said to be about $1,000,000 which was also well short of the surplus required.

Moreover, as the judge pointed out, the company was required to maintain an RBC level of 2.0. The RBC ratio is used by the Department as a tool to evaluate the financial soundness of companies under its regulatory jurisdiction. As of December 31, 2002, Security's RBC had dropped to 0.17. Under the Department's regulations, an RBC of below 0.70 is considered a "mandatory control level" event. N.J.A.C. 11:2-39.2. Such an event requires the Commissioner to seek relief under the UILA. See N.J.A.C. 11:2-39.7.

Findings of fact by the trial judge are binding on appeal when supported by adequate, substantial and credible evidence. Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 484 (1974). We will not disturb the judge's findings of fact "unless we are convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice." Ibid. (quoting Fagliarone v. Twp. of No. Bergen, 78 N.J. Super. 154, 155 (App. Div. 1963)). We are satisfied that the judge's determination that Security was in a hazardous financial condition is supported by substantial credible evidence. In light of that determination, the judge's finding that there was a "clear basis" to place Security into rehabilitation under N.J.S.A. 17:30C-6 is unassailable.

The Shareholders argue, however, that the Commissioner's stay of the Motors case undermined the company's efforts to address its financial problems. The Shareholders contend that a judgment of specific performance mandating compliance by Motors with a 97.5% reinsurance obligation would have restored Security to financial health. The Shareholders further argue that the Commissioner's application for an order placing Security into rehabilitation should have been denied and the company permitted to pursue its claims against Motors.

In our view, the judge correctly rejected these assertions. As the judge pointed out in his decision from the bench, the Motors case was not ready for trial and in light of the company's dire financial condition, further transaction of business would be hazardous to Security's policyholders, its creditors and the public generally. N.J.S.A. 17:30C-6(f). Moreover, the facts revealed in discovery cast considerable doubt on whether the Commissioner and Security were entitled to relief on their claims. The judge correctly determined that rehabilitation of the company could not await the uncertain outcome of the Motors case.

The judge's finding on this point also is supported by substantial credible evidence. There is evidence to support Motors' assertion that the changes in the quota shares of the reinsurance agreements did not constitute a "cancellation" of the agreements but merely represented a change in the terms and conditions of the ceding commission. Indeed, in its quarterly financial statements filed with the Department from 1999 to 2002, Security repeatedly denied that its reinsurance contracts had been cancelled. There is also evidence to support Motors' position that the Department knew about the changes in the reinsurance agreements and never questioned or challenged those changes.

In addition, there is evidence that the changes in the reinsurance agreements were the result of a deliberate business decision by Security to move from quota share reinsurance to excess of loss reinsurance. Security stated in its submissions to the Department that it was pursuing this restructuring for several reasons, including the reduction of the cost of quota share reinsurance and the need to address concerns that Security was at risk because it was too dependent upon such reinsurance.

The judge also found that, even if the Commissioner was successful in the prosecution of the Motors case, the recovery probably would not be sufficient to return the company to fiscal health. Security's RBC ratio had fallen below acceptable levels in 2000 even when the company was operating under the quota share agreements. Thus, specific performance of the agreement was not likely to address the root causes of Security's financial problems. Furthermore, the Commissioner's preliminary actuarial analysis found that a favorable result in the Motors case would not be sufficient to restore Security to solvency. Even under the best case scenarios proffered by the Shareholders, the company would be insolvent in part because the Security's CA insurance program was a significant source of its deficit. Consequently, there is sufficient support in the record for the judge's finding that successful prosecution of the Motors case was not likely to resolve the company's financial problems.

We therefore are convinced that the judge properly rejected the Shareholders' assertions and found that further transaction of Security's business to allow the pursuit of the uncertain claims in the Motors case was not in the interests of the policyholders, creditors or the public. Based on the evidence before him, the judge correctly found that grounds existed under N.J.S.A. 17:30C-6 for entry of the order placing the company into rehabilitation.

III.

We next consider the Shareholders' appeal from the liquidation order. The Shareholders contend: 1) the liquidation order is contrary to law and does not protect the public interest; 2) the trial judge erred by giving deference to the Commissioner on "crucial issues;" 3) the judge committed reversible error by permitting Motors to participate in the liquidation proceeding; 4) the liquidation order does not serve the public interest because Motors is the sole beneficiary of this action; 5) the judge erred in making findings of fact regarding the Motors litigation; and 6) the judge's refusal to allow Security to engage in discovery is reversible error. We are not persuaded by these contentions and therefore affirm the liquidation order substantially for the reasons stated Judge Shuster in his thorough and comprehensive written opinion filed on June 30, 2004. We add the following.

The UILA permits the Commissioner to petition the court for an order of liquidation if the Commissioner "deems that further efforts to rehabilitate the insurer would be useless." N.J.S.A. 17:30C-7(b). The Commissioner may apply for an order of liquidation if the insurer is "impaired or insolvent" or is in "such condition that its further transaction of business will be hazardous" to its policyholders, stockholders, creditors or the public. N.J.S.A. 17:30C-8; N.J.S.A. 17:30C-6(a) and (f). Under the UILA, an insurer's capital shall be deemed impaired and the insurer insolvent "when such insurer is not possessed of assets at least equal to all liabilities and required reserves together with its total issued and outstanding capital stock...." N.J.S.A. 17:30C-1(a).

Here, the judge found that Security was insolvent. He based that determination on the balance sheet prepared by the Department with the assistance of Deputy Rehabilitator Andrew A. Alberti. The Department's balance sheet showed that, as of June 30, 2003, Security's net admitted assets were $35,640,620 and its liabilities were $42,598,381. The balance sheet thus showed that Security had a negative net worth of $6,957,761 as of June 30, 2003. There is ample support in the record for the judge's finding that the balance sheet established that Security was insolvent. The finding is based upon substantial credible evidence and is binding on appeal. Rova Farms, supra, 65 N.J. at 484. Based on that factual determination, the judge correctly ruled that there were grounds for the entry of the liquidation order under N.J.S.A. 17:30C-6(a) and (f).

In this regard, we note that the Department's balance sheet reflected the loss reserves and loss adjustment expense reserves drawn from the study prepared for the Department by actuary Mary Lou O'Neil. The judge expressly found that O'Neil's reserve study was more credible and more persuasive than the analysis prepared for the Shareholders by Allen Schwartz. The judge noted that O'Neil and Schwartz had used the same methods in reaching their respective conclusions but O'Neil's findings were more reliable because she based her analysis on Security's historical data and Schwartz weighed the company's historical data with data from the industry as a whole. O'Neil testified that Schwartz's reliance upon industry data was not appropriate in the circumstances because there was sufficient company-specific information with which to estimate the company's reserve requirements. Moreover, the judge noted that Schwartz's testimony demonstrated that since 1997, he had "consistently underestimated" Security's loss reserve requirements.

Clearly, there were sound reasons for the judge's decision to accept O'Neil's testimony and her analysis. When the judge sits as fact finder, he has the discretion to accept or reject all or a part of an expert's testimony and he may give the testimony such weight as he deems is appropriate. Torres v. Schripps, Inc., 342 N.J. Super. 419, 430 (App. Div. 2001)(citing Todd v. Sherman, 268 N.J. Super. 387, 401 (App. Div. 1993)). In this regard, we must give due regard to the judge's opportunity to weigh the credibility of the testimony. In re Taylor, 158 N.J. 644, 656 (1999). In our view, Judge Shuster properly relied upon O'Neil's analysis in finding that the Department's balance sheet was a credible statement of the company's financial condition.

We also are convinced that the trial judge correctly rejected the Shareholders' assertion that the Motors case should be considered an asset of the company. At trial, the Shareholders maintained that Security would have a positive surplus if Motors were ordered to perform its obligations under the 2000 quota share reinsurance agreement. But Deputy Commissioner Mitchell testified that the Department uses "statutory accounting principles" when it evaluates the financial condition of insurers under its regulatory supervision. See N.J.S.A. 17:23-1. Mitchell stated that claims such as those being pursued in the Motors case are not an "asset" as that term is defined in Statement of Statutory Accounting Principle (SSAP) 4 in the NAIC Accounting Practices and Procedures Manual. Rather, the claims in the Motors case are a "gained contingency" under SSAP 5 because the potential for gain is uncertain. Moreover, the claims are not a "reinsurance recoverable" which is generally considered to be the money owed by a reinsurer for amounts paid by the reinsured company to claimants.

There is considerable evidence in the record to support the judge's finding that the company's prospects for success in the Motors case were uncertain and speculative. As we pointed out previously, evidence developed in discovery cast considerable doubt as to the merit of the claims asserted by the Commissioner and Security in the Motors case. Like Judge Shuster, we are convinced that the claims were too uncertain and too speculative to be considered an asset of the company under the applicable statutory accounting principles.

The Shareholders additionally argue that the Commissioner failed in her obligation to pursue all avenues to rehabilitate the company and should have been required to pursue the Motors case instead of liquidation. We disagree. Under N.J.S.A. 17:30C-7(a), an order to rehabilitate a domestic insurer:

shall direct the commissioner forthwith to take possession of the property of the insurer and to conduct the business thereof, and to take such steps toward removal of the causes and conditions which have made rehabilitation necessary, as the court may direct.

The Commissioner has broad discretion under N.J.S.A. 17:30C-7(a)

in pursuing claims on behalf of a company in rehabilitation. The judge here properly found that the Commissioner had not abused her discretion as rehabilitator in seeking a stay of the Motors case and petitioning the court for liquidation.

Deputy Rehabilitator Alberti testified that the company had limited liquid assets and it would not have been prudent to devote those assets to the litigation, particularly in view of the evidence developed in discovery which cast doubt on the merit of the claims. Alberti also stated that, if the stay in the Motors case were lifted, it could affect the stay of litigation against Security in other jurisdictions, leading to an influx of litigation against the company.

As the judge stated in his written opinion, the Commissioner is responsible for balancing the potential for success of the litigation against the potential risk to the policyholders, creditors and the public. The judge properly determined that the Commissioner did not abuse her discretion in concluding that liquidation was the better approach where, as here, lifting the stay in the Motors case would have depleted the company's assets "without any certainty of result or that the result will return the company to solvency."

The Shareholders also contend that the judge erred in permitting Motors to participate in the liquidation proceedings. Again, we disagree. It is clear that Motors had a strong interest in these proceedings. A key issue raised by the petitions for rehabilitation and liquidation was the merit or lack of merit in the claims asserted in the Motors case. In our view, the judge did not abuse his discretion in allowing Motors to participate because the Motors case was inextricably linked to the rehabilitation and liquidation proceedings. Motors clearly had a substantial interest in any findings regarding the Motors litigation made by the judge in this case.

We have considered the other issues raised by the Shareholders in their appeals from the rehabilitation order and the order of liquidation. We find those contentions not to be of sufficient merit to warrant further discussion in this opinion. R. 2:11-3(e)(1)(E).

 
Affirmed.

Holly C. Bakke served as Commissioner in the period relevant to this dispute. She resigned effective March 1, 2005. Since that date, Donald Bryan has served as Acting Commissioner.

Quota share reinsurance is a type of reinsurance where the reinsurer assumes a proportionate share of any loss sustained by the ceding insurer from the first dollar of loss. 14 Holmes' Appleman on Insurance 2d, 102.3(A) (2000).

Excess of loss reinsurance involves the agreement by a reinsurer to reinsure a stated amount of each loss in excess of an amount retained by the ceding insurer. 14 Holmes' Appleman on Insurance 2d, supra, 102.3(B)(2).

GMAC Re Corporation and MIC Re Corporation also were named as defendants because those entities executed the quota share agreements on behalf of Motors.

We note that although the Motors case was stayed, the Commissioner has not abandoned the claims. While specific performance may no longer be available, Security's demand for compensatory damages remains. We were advised at oral argument that negotiations are continuing and the matter may be settled.

(continued)

(continued)

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A-6551-02T2

November 29, 2005