IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
March 25, 2011 Session
LESLIE NEWMAN, COMMISSIONER OF THE TENNESSEE
DEPARTMENT OF COMMERCE AND INSURANCE v. SMART DATA
SOLUTIONS, LLC, ET AL.
Appeal from the Chancery Court for Davidson County
No. 10-507-III Ellen Hobbs Lyle, Chancellor
No. M2010-01938-COA-R3-CV - Filed June 3, 2011
This is an appeal of the grant of an application by the Commissioner of Insurance for
the State of Tennessee to place an allegedly illegal insurance enterprise into receivership for
purposes of liquidation pursuant to the Insurers Rehabilitation and Liquidation Act, Tenn.
Code Ann. § 56-9-101, et. seq. Respondents contend they are not insurers subject to the
Rehabilitation and Liquidation Act and that, because the court found that the insurance was
nonexistent, the appointment of a receiver of the businesses was not authorized. Finding that
the activities of the various respondents constitute “insurance business” as defined by the
applicable statute and that placing the businesses into receivership was proper, we affirm the
order of the trial court.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed;
Case Remanded
R ICHARD H. D INKINS, J., delivered the opinion of the court, in which F RANK G. C LEMENT,
J R. and A NDY D. B ENNETT, JJ., joined.
Stephen C. Knight and Nader Baydoun, Nashville, Tennessee, for the appellants, Smart Data
Solutions, LLC and American Trade Association, Inc.
John L. Norris, Nashville, Tennessee, for the appellant, William M. Worthy, II.
Robert E. Cooper, Jr., Attorney General and Reporter, Sarah A. Hiestand, Senior Counsel,
Lyndsay F. Sanders, Assistant Attorney General, and Laura T. Kidwell, Senior Counsel, for
the appellee, Leslie Newman, Commissioner of the Tennessee Department of Commerce and
Insurance.
OPINION
I. Background
On March 23, 2010, the Commissioner of Commerce and Insurance for the State of
Tennessee filed a verified petition (“the petition”) pursuant to the Insurers Rehabilitation and
Liquidation Act, Tenn. Code Ann. § 56-9-101, et. seq. (“the Act”) for injunctive relief and
seeking to have a receiver appointed for purposes of liquidation of Smart Data Solutions,
LLC (“SDS”), American Trade Association, Inc. (“ATA”), American Trade Association,
LLC (“ATA LLC”), and Serve America Assurance (“SAA”). The petition also named eight
individuals as respondents: Bart S. Posey, Sr., Angie Posey, Obed W. Kirkpatrick, Sr., Linda
Kirkpatrick, Richard H. Bachman, Kristy Wright, William M. Worthy, II, and Colin Youell.
Contemporaneous with the filing of the petition, the Commissioner filed an application (the
“Application”) for ex parte seizure of the business and assets of SAA, SDS, ATA and ATA
LLC. The petition and application alleged that the entities and individuals constituted an
unlicensed and unregulated insurance entity conducting insurance business in violation of
Tenn. Code Ann. § 56-2-105. Statutory grounds for the relief requested were Tenn. Code
Ann. § 56-9-301(1), (2) and Tenn. Code Ann. § 56-9-306(1), (2).
In pertinent part, the petition for appointment of receiver alleged as follows:
1. This is an action for receivership and injunction . . . to remove the
hazard to the public presented by the Respondents’ illegal solicitation and
issuance of unauthorized health insurance contracts . . . and to liquidate all the
related assets of this business enterprise. According to facts learned to date,
Respondents from their shared principal offices and unlicensed administrative
base in Springfield, Tennessee, and via website and marketers, solicit their
customers nationwide, take premiums for, administer and fund, limited health
insurance benefits that purport to be covered under a master insurance policy
issued to their “association.” However, the supposed master policy was issued
by an unknown company identified as “Serve America Assurance, Ltd.” that
lacks authority to insure in Tennessee or in any other state. Now, it appears
the policy ended in late 2009, or never existed. Each of the Respondents, to
the extent coverage was promised or furnished, are functioning as the insurer
and underwriting any benefits under the purported policy themselves without
any legal authority. Numerous laws have been violated.
2. The financial and operational condition of this enterprise is
hazardous and beyond repair. The Commissioner has heard of numerous
claims denied or turned down unjustly, especially in other states. . . .
Considering that any policy was at best unauthorized, and likely fictitious, and
2
considering the self-funding by wholly unauthorized actors, these entities pose
irreparable harm to the members and the public.
3. Respondents’ insurance issuance has occurred without being
submitted to the Commissioner’s authority, or any other state’s insurance
commissioner, and is designed to evade regulation. . . . Evidence is mounting
that Respondents deny payment owing under policyholders’ coverage.
Respondents have failed to submit financial statements to the Commissioner,
and are at risk for insolvency, wasteful practices and financial self-dealing.
Their customers have been induced to purchase bogus health coverage, turning
over millions of dollars of premiums, without any of the safeguards that the
licensed carriers possess, and without the protections for solvency and
consumer protection that accompany lawful insurance. The unlicensed,
unauthorized and otherwise fraudulent, deceptive and unfair transactions by
[respondents] present an immediate danger to the public health, safety or
welfare of Tennessee policyholders, and to the public of several other states.
The application for ex parte seizure alleged, in pertinent part, as follows:
6. Dangers of Delaying Ex Parte Seizure: In light of these conditions,
even the short period between the filing of the Liquidation Petition and a
prompt hearing on that Petition exposes the creditors and the public to
substantial risks of even more detrimental conduct by respondents until the
hearing, unless explicit controlling orders are issued under this application.
Until the issuance of orders on the Liquidation Petition, the Commissioner
requires the statutory remedy of seizure established by the Act. Seizure grants
immediate control of the ATA entities, SDS and SAA by taking possession
and control of all property, books, bank and investment accounts, documents,
claims files, computer systems and databases, and all other records in whatever
form, and where located, of the ATA entities, SAA and SDS, and of the
premises occupied by them for business transactions.
***
8. ATA has just taken steps to dissolve the corporation, has obtained
additional business premises in Springfield, Tennessee, and may be preparing
a transformation of its business operations and form that again would make it
difficult for the insurance regulators to detect and lock down its activities.
Thus, there is an immediate need to gain control and conserve the ATA
entities’, SAA’s and SDS’s operations and assets for the reasons discussed
further herein.
***
10. The Commissioner is requesting an immediate order of seizure, a
3
summary proceeding under the Act, permitting her to seize the ATA entities’,
SAA’s and SDS’s business and assets based on the same facts alleged in the
Liquidation Petition, plus accompanying exhibits. Under Tenn. Code Ann. §
56-9-201, seizure would vest control of the ATA entities’, SAA’s and SDS’s
business, including all records, wherever located and in whatever form, in the
Commissioner for the duration of the seizure before appointment of a Receiver
for Liquidation and would immediately enjoin disposition or transfer of the
ATA entities’, SAA’s and SDS’s assets without consent of the Commissioner.
This control is justified because of the danger posed to the ATA entities’,
SAA’s and SDS’s customers, creditors, and the public; their interests would
be endangered by delay in the vesting of such control during the pendency of
the receivership action. Control should be granted to the Commissioner to also
ensure that no additional health insurance contracts are negotiated and/or sold
by the ATA entities, SAA and SDS, and to ensure that their property and
assets, namely the property and assets obtained from their customers, are not
transferred or otherwise disposed of. The Commissioner’s control will assist
other states’ insurance commissioners in the enforcement of their orders
against the writing of such unauthorized insurance in their states. Finally, the
Commissioner’s seizure of the ATA entities, SAA and SDS is vital to provide
the Commissioner direct access and control of financial accounts, records, and
data within ATA, SAA and SDS.
11. . . .[T]he Commissioner does not believe that any lesser remedy
would provide the necessary control required to prevent additional damage
caused by their unlicensed activities. Therefore, an order of seizure must be
in place until an order of liquidation is entered by this Court. Seizure is
authorized to be issued ex parte and without a hearing under Tenn. Code Ann.
§ 56-9-201.
On the basis of the petition, the application, and the supporting exhibits and affidavits, the
court found that seizure was appropriate under Tenn. Code Ann. § 56-9-201 and entered an
order ex parte permitting the Commissioner to seize SDS, ATA, ATA LLC, and SAA. A
further hearing on the petition for liquidation was held on April 6.
Thereafter, SDS, ATA, ATA LLC, Bart Posie and Angie Posey filed a response in
opposition to the petition and moved to dismiss the proceeding, accompanied by numerous
affidavits and exhibits. Kristy Wright, Obed Kirkpartick and Linda Kirkpatrick filed separate
responses to the petition, accompanied by affidavits and exhibits. On April 14, the court
entered a Memorandum and Order in which the court found, inter alia, that ATA and SDS
were de facto insurers, that they came within the state’s liquidation powers, and that the
further transaction of business by ATA and SDS would pose a hazard to the public. The
4
court granted the petition for liquidation under Tenn. Code Ann. § 56-9-306(3), but stayed
the liquidation pending the outcome of a hearing on the additional ground of insolvency; the
court ordered that the seizure remain in effect. Following an evidentiary hearing held on
April 26, the trial court entered an order on April 27 finding that SDS, ATA, ATA LLC, and
SAA were insolvent insurers and permitting the liquidation to proceed. A final order
appointing the Commissioner as receiver for purposes of liquidation was entered on May 20.
On June 21, Mr. Worthy and the “Respondents”1 filed separate motions to Alter or
Amend and to Make Additional Findings of Fact. Mr. Worthy asserted as grounds that “the
Commissioner cannot be appointed receiver of Respondents Smart Data Solutions, LLC,
American Trade Association, Inc., American Trade Association, LLC and Serve America
Assurance absent a finding that at least one of the Respondents was an insurer engaged in
the insurance business in the State of Tennessee.” In support of their motion, the
Respondents filed a supplemental affidavit of Bart Posey and asserted that SDS was a third
party administrator, not an insurer; Respondents also requested that the court make 10
amended and 20 additional findings of fact. On July 14 the court denied both motions but
clarified certain statements in the April 14 and April 27 orders; in the July 14 order the court
explained that “the statements by the Court . . . that Beema and/or Serve America did not
exist were not meant literally but were used as a short form reference” to the following
findings:
• Serve America does not exist in the United States
• Serve America has never issued a policy to an entity in the United
States
• Beema has denied ownership of Serve America
• Insurance coverage with Beema/Serve America is unauthorized and
nonexistent coverage
• With Beema and Serve America there is no insurance underwriting
company to fund and direct payment of claims
• Beema and Serve America do not write insurance in the United States
• The Beema/Serve America insurance product is a sham and posed a
significant risk of nonpayment of claims
• In the United States there is no Beema/Serve America insurance
product in place
In response to arguments raised in the motions, the court reiterated its previous findings that
ATA and SDS had engaged in conduct that constituted the transaction of insurance business
and that SDS had “exceeded and altered its role from benefits administrator to insuror.”
1
The motion does not specify which of the named respondents were a party to the motion.
5
SDS and ATA2 appeal, contending that they are not “insurers” subject to the Act. Mr.
Worthy appeals separately, raising the issue of whether the appointment of a receiver is
authorized “where the trial court has found that any insurance coverage was nonexistent, that
there is no underwriter, and that there is no insurance company for the state to liquidate.”
II. Standard of Review
Review of the trial court’s findings of fact is de novo upon the record accompanied
by a presumption of correctness, unless the preponderance of the evidence is otherwise. See
Tenn. R. App. P. 13(d); Kaplan v. Bugalla, 199 S.W.3d 632, 635 (Tenn. 2006). Review of
the trial court’s conclusions of law is de novo with no presumption of correctness afforded
to the trial court’s decision. See Kaplan, 199 S.W.3d at 635.
III. Discussion
A. The Tennessee Insurers Rehabilitation and Liquidation Act
The Tennessee Insurers Rehabilitation and Liquidation Act, codified at Tenn. Code
Ann. § 56-9-101 et seq, provides “a comprehensive scheme for the rehabilitation and
liquidation of insurance companies . . . .” Tenn. Code Ann. § 56-9-101(d)(7). The purpose
of the Act is to protect “the interests of insureds, claimants, creditors, and the public
generally,” Tenn. Code Ann. § 56-9-101(d), through, inter alia, “[e]arly detection of any
potentially dangerous condition in an insurer, and prompt application of appropriate
corrective measures.” Tenn. Code Ann. § 56-9-101(d)(1). The Act authorizes proceedings
against the entities specified at Tenn. Code Ann. § 56-9-102, including “insurers” as defined
at Tenn. Code Ann. § 56-9-103(14).
Tenn. Code Ann. § 56-9-104 gives the Commissioner of Commerce and Insurance
sole authority to initiate a “delinquency proceeding” against an insurer; this proceeding
includes “any proceeding instituted for the purpose of liquidating, rehabilitating,
reorganizing, or conserving an insurer, and also any summary proceeding.” Tenn. Code Ann.
§ 56-9-103(4). Summary proceedings may be instituted against an insurer where the interests
of policyholders, creditors, or the public will be endangered by delay. Tenn. Code Ann. §
56-9-201(a)(2).
The Commissioner may initiate a summary proceeding by filing a petition in Davidson
County Chancery Court. Tenn. Code Ann. § 56-9-201. A court may issue the requested
2
Both ATA and ATA LLC were named as respondents in the receivership action, and the
court’s orders are applicable to both; ATA LLC is not a party to this appeal.
6
order ex parte and without a hearing where the Commissioner has shown, in addition to
demonstrating the harm of delay, the existence of any grounds that would justify a formal
delinquency proceeding and that the Commissioner deems the order necessary. Tenn. Code
Ann. § 56-9-201(b). An order issued through a summary proceeding permits the
Commissioner to take possession of the insurer and its property, books, accounts, documents,
and other records; the order may also enjoin the insurer and its officers, managers, agent, and
employees from disposing of the property and from transacting business, except upon written
consent of the Commissioner. Id. In essence, the order freezes the operation of the insurer
and places it under the control of the Commissioner. The order must set forth its duration,
Tenn. Code Ann. § 56-9-201(c), and the insurer may petition the court at any time for a
hearing and review; when review is sought, the court must set a time for a hearing not more
than fifteen days after the request. Tenn. Code Ann. § 56-9-201(e).
Tenn. Code Ann. §§ 56-9-301–337 govern formal proceedings and permit the
Commissioner to petition the court for an order to rehabilitate the insurer under Tenn. Code
Ann. § 56-9-301 and/or an order of liquidation under Tenn. Code Ann. § 56-9-305.
Rehabilitation of an insurer may be pursued on any of the grounds at Tenn. Code Ann. §
56-9-301. Under Tenn. Code Ann. § 56-9-305(a), “[w]henever the commissioner believes
further attempts to rehabilitate an insurer would substantially increase the risk of loss to
creditors, policyholders or the public, or would be futile, the commissioner may petition the
chancery court of Davidson County for an order of liquidation.” Grounds for liquidation are
set forth at Tenn. Code Ann. § 56-9-306 and are as follows:
(1) [] any ground for an order of rehabilitation as specified in § 56-9-301,
whether or not there has been a prior order directing the rehabilitation of the
insurer;
(2) That the insurer is insolvent; or
(3) That the insurer is in such condition that the further transaction of business
would be hazardous, financially or otherwise, to its policyholders, its creditors
or the public.
B. Respondents in the Proceeding
The following is shown by the affidavits and exhibits in the record:
ATA was incorporated under the laws of the State of Indiana on July 8, 1986 under
the name Transportation Services Association, Inc.; the name was changed in 2009 to
American Trade Association, Inc. ATA qualified to do business in Tennessee in May 2009;
the application for certificate of authority listed the principal office as 4676 Highway 41
North, Springfield, Tennessee 37172.
7
ATA LLC was chartered in Arkansas as a limited liability company on February 8,
2008, with a business address of 4676 Highway 41 North, Springfield, Tennessee 37172;
Bart Posey is the owner of ATA LCC.
SDS was formed as a Tennessee limited liability company in November 2005; the
address of the registered agent and office was listed on its articles of organization as 4676
Highway 41 North, Springfield, Tennessee 37172. On January 24, 2006, SDS applied for
a license as a business entity insurance producer in Tennessee; the application was
incomplete and SDS was not granted the license it sought.
There are no organizational or corporate documents in the record relative to SAA.
The Petition alleges the following with respect to SAA:
Respondent Serve America Assurance (“SAA”), on information and belief,
was incorporated in South Carolina as a Limited Liability Company on
February 5, 2009 and was dissolved on September 3, 2009. . . . The name
“Serve America Assurance” on materials issued by SDS and ATA is
represented to be the underwriter of the ATA’s group insurance coverage. No
records of a corporation or business known as, or starting with the terms
“Serve America Assurance” are found on the Tennessee Secretary of State’s
official website. The existence of Respondent SAA cannot be confirmed or
determined other than it was incorporated, although activities using the name
Serve America Assurance have been carried on by other Respondents. SAA
policies state their Administrative Office is: SDS LLC at its 4676 Highway 41
North, Springfield, Tennessee address. . . . The Commissioner has located no
record of a company by such name authorized to conduct business as an
insurance company anywhere in the United States. Serve America Assurance,
Ltd. may be and has sometimes been described as a wholly-owned alien
captive insurance company subsidiary of Beema-Pakistan Company, Limited,
of P. O. Box 5626, Karachi-7400, Pakistan (Beema) in certain materials
allegedly furnished to SDS and ATA; however, Beema denies owning any
subsidiary, company or legal entity outside Pakistan. . . .
Bart Posey was licensed by the State of Tennessee as an insurance producer to sell
property and accident and health insurance from February 26, 1999 until his license expired
on March 31, 2009. Mr. Posey was the organizer of Smart Data Solutions, LLC, was listed
in the articles of organization as “Owner,” and signed the 2007 annual report as
“President/Manager.” Mr. Posey was also listed as a director on ATA’s application for a
certificate of authority to do business in Tennessee.
8
Angie Posey was licensed by the State of Tennessee as an insurance producer to sell
casualty insurance from April 5, 2000 to April 4, 2001. Ms. Posey signed the SDS 2008
annual report as “Secretary” and was listed on ATA’s application for a certificate of
authority to do business in Tennessee as a director.
Obed W. Kirkpatrick, signator on articles of dissolution of ATA filed in Indiana on
March 1, 2010, held a license as an insurance producer issued by the State of Tennessee; the
license was revoked in February 2007. Mr. Kirkpatrick was identified as President of ATA
in its application for certificate of authority to do business in Tennessee and on ATA’s 2009
Indiana Business Entity Report.
Richard Bachman was listed on ATA’s application for certificate of authority to do
business in Tennessee as its Vice President. At the time of the filing of the petition, Mr.
Bachman was an insurance producer licensed by the State of Tennessee to sell life, accident,
and health insurance.
Linda Kirkpatrick was listed on ATA’s 2009 Indiana Business Entity Report and
ATA’s application for authorization to conduct business in Florida as secretary of ATA.
Kristy Wright was listed as treasurer on ATA’s application for authorization to
conduct business in Florida. She had applied for an insurance producer license but did not
pass the required examination.3
William Worthy was a licensed insurance producer in Tennessee; his license was
revoked in 2006. Mr. Worthy signed the articles amending the name of Transportation
Services Association, Inc. to American Trade Association, Inc. as President and was listed
on ATA’s 2007 and 2008 Indiana Business Entity Report as President. At times pertinent
to these proceedings Mr. Worthy was affiliated with SouthEast Insurance Advisors, LLC.
Colin Yuell signed a Master Policy of Insurance issued by SAA as President.
C. Discussion
1. Whether SDS and ATA are Insurers
SDS and ATA contend that an “insurer” is “one who undertakes a contractual
obligation to indemnify another against loss, liability, or damages caused by a contingent or
3
Ms. Wright was dismissed from the action after the trial court determined that she was not an
officer or director of any of the respondent entities.
9
unexpected event” and that the trial court failed to find such an obligation on their parts; they
assert that, as a consequence, the seizure and liquidation provisions of the Act do not apply
to them. SDS and ATA rely on the definition of “contract of insurance” set forth in Am. Sur.
Co. of New York v. Folk, 135 S.W. 778 (Tenn. 1911) and Tenn. Code Ann. § 56-7-101(a),
as well as the definition of “insurer” at Tenn. Code Ann. § 56-53-101(6),4 and assert that the
“insurance business,” as incorporated in the definition of insurer at § 56-9-103(14), is limited
to the making of insurance contracts.
We do not read Folk so narrowly. While the case stands for the proposition that
making contracts of insurance is an insurance business, it does not hold that making such
contracts is the only activity constituting the “insurance business”; neither does it limit a
court in considering whether other activities, including those set forth in Tenn. Code Ann.
§ 56-9-103(5) and Tenn. Code Ann. § 56-2-107 are consistent with the transaction of
insurance business and, thereby, subject to the Act.
While “insurance business” is not defined in the Act, the definition of “doing
business” is set forth and includes any of the following acts:
(A) The issuance or delivery of contracts of insurance to persons resident in
this state;
(B) The solicitation of applications for the contracts, or other negotiations
preliminary to the execution of the contracts;
(C) The collection of premiums, membership fees, assessments or other
consideration for the contracts;
(D) The transaction of matters subsequent to execution of the contracts and
arising out of them; or
(E) Operating under a license or certificate of authority, as an insurer, issued
by the department of commerce and insurance;
Tenn. Code Ann. § 56-9-103(5). In addition, Tenn. Code Ann. § 56-2-107 states:
Any of the following acts in this state, effected by mail or otherwise by an
unauthorized insurer, are included among those deemed to constitute
transacting insurance business in this state:
(1) The issuance or delivery of contracts of insurance to residents of this state;
4
Chapter 53 of Title 56 addresses insurance fraud and the definitions set forth at Tenn. Code
Ann. § 56-53-101are applicable to that chapter. Inasmuch as this was a proceeding under the liquidation
statutes at Chapter 9, the appropriate definition is that contained at Tenn. Code Ann. § 56-9-103(14).
10
(2) The solicitation of applications for contracts of insurance;
(3) The collection of premiums, membership fees, assessments or other
considerations for contracts of insurance; or
(4) The transaction of matters subsequent to the execution of contracts of
insurance and arising out of them.
Tenn. Code Ann. § 56-2-107. Considering the activities embraced within these definitions,
the record in this case fully supports the finding that ATA and SDS were “insurers” subject
to the Act.
The arrangement between the various parties was memorialized in an undated “To
Whom it may concern” letter on Beema-Pakistan letterhead and signed by the “Chief
Underwriter,” which stated:
This letter will confirm our structure of our program. Serve America
Assurance, Ltd., an offshore captive, owned by Beema-Pakistan Company
Limited, has issued a Master Policy to American Trade Association, Inc. to
insure all of its members through our Mini Medical Indemnity Policies. The
plans are marketed to the association members and are administered through
Smart Data Solutions, LLC.
In a March 10, 2008 letter written on the letterhead of SouthEast Insurance Advisors, LLC,
Mr. Worthy notifieds Mr. Posey that:
As per the approval from Beema Insurance Co. LTD and Serve America
Assurance And [sic] under my authority as the United States Representative
for the above entities, your firm is appointed as the approved Third Party
Administrator for these plans effective 1-1-08. SDS, LLC agrees to maintain
proper licensing and E&O Coverage for its officers and employees as part of
this agreement.
You are authorized to bill and collect premium and remit net insurance
premium to our trustee, Ron Ehli, of EZ-Pay Financial Services. You are
authorized to pay claims for the mini-med plans, the high access Cat plans, the
per occurrence plans and the accident/medical plan. Twice monthly you will
forward a list of claims to be paid along with the dollar amount of the benefits.
The funds will be wired directly to your claims account by our trustee and you
will release the checks upon the receipt of funds.
A March 18, 2008 letter on the letterhead of Beema-Pakistan Company LTD by Colin
11
Youell5 to “The Directors of SouthEast Insurance Advisors, LLC” states in part:
We thank you, for the presentation and opportunity, to provide coverage under
any of the club Mini Medical plans 100 to 1000.
You are now hereby authorized to attach coverage to us, this authority, extends
to allow you, to Bind and collect premium as per the rates quoted in the
documents submitted to us.
We backdate this facility to the first of Feb 2008 subject to no known or
reported losses.
We do require you to set up separate bank accounts forth-with.
Consistent with the foregoing, a document entitled “Master Policy of Insurance” was issued
by SAA and signed by Colin Youell, as President; the administrative office listed on the
policy was: SDS, LLC, 4676 Highway 41 North, Springfield, TN 37172. Thereafter, SDS
accepted premiums from ATA members and, upon approval from SAA representatives
including Mr. Worthy, paid claims from an account maintained for that purpose, referred to
as the “Claims Account.”
The record contains copies of email correspondence between Mr. Posey and Mr.
Worthy from January 23, 2008 to January 4, 2010, many of which sought Mr. Worthy’s
approval to pay insurance claims or requested that Mr. Worthy “wire” money to cover claims
or other expenses. Other emails from Mr. Worthy requested that various SDS and ATA
employees, including Angie Posey, Kristy Wright, and Richard Bachman, send reports or
wire money to Mr. Worthy; in some instances, Mr. Worthy refers to the money in general
terms as “premiums.” David White, Examiner in Charge for the Tennessee Department of
Insurance, reviewed bank records of ATA and SDS6 as well as collection data from Paylogix,
Inc., the company responsible for automatically drafting the accounts of SDS’s, ATA’s, and
SAA’s customers, and reported that $14,409,340.29 was collected from 12,400 policyholders
on behalf of SDS and ATA from August 2008 to November 2009; the funds were remitted
to SDS and ATA and deposited into either the SDS Account 1 or the ATA Account.
Significantly, Mr. White noted:
8. So far, all the documentation I have reviewed points to a pooling of the
5
Mr. Youell signed the letter as “Director.”
6
The accounts were denominated SDS Account 1, SDS Account 2, the ATA Account, and the
Claims Account. The signatories on SDS Account 1 and SDS Account 2 were Bart S. Posey and Angela
Posey; on the ATA Account were Obed Kirkpatrick, Angela S. Posey and Kristy Wright; and on the
Claims Account was Bart Posey.
12
funds of SDS and ATA, so that most money taken in by SDS goes into the
general type SDS Account 1, and is then simply moved into the Claims
Account where disbursements of claims payments are being made. . . . There
does not appear to be any effort taken by SDS or ATA to specifically earmark
or segregate funds which SDS has taken in from individual members
employer groups to offset those group’s individual benefit plan liabilities.
Furthermore, it appears there may be comingling of the funds of SDS and
ATA. The liabilities for claims payments for coverage are being shared by
SDS and ATA, and among employer groups and anyone who has contributed
funds to the pool.
***
14. The joint operation of SDS, ATA and SAA appears to perform the
functions of an insurance company. The money gets deposited into SDS
Account 1 and then the money is transferred into the Claims Account from
which claims are paid, the same as an insurance company would do. . . .
Of particular relevance to the issues involved in this appeal was an agency proceeding
in North Carolina. On February 9, 2009, the North Carolina Commissioner of Insurance
issued a final agency cease and desist order against Bart Posey, SDS, and ATA, among
others, specifically ordering them to cease and desist from “[r]eceiving or collecting any
premiums, commissions, or other consideration for insurance issued by Beema.” Among the
extensive factual findings and grounds for the order was the Commissioner’s finding that the
insurance offered by respondents was “bogus” and had been issued by an “unauthorized
insurer.”
Despite the findings and order in the North Carolina proceeding, ATA and SDS
continued to engage in activities described at Tenn. Code Ann. § 56-9-103(5)(A)–(D) and
§ 56-2-107. Robert Heisse, a fraud investigator with the Insurance Division of the
Department of Commerce Insurance, interviewed 10 Tennessee residents who had either
purchased insurance or paid premiums to SDS and ATA, or who failed to have their claims
paid by SDS and ATA. Mr. Heisse attested that, in at least three cases, the acts by
respondents had occurred after February 2009 and that “SDS has and continues to prepare
and distribute insurance cards and fulfillment packages to enrollees of ATA LCC and ATA
for this purported health insurance coverage [allegedly underwritten by SAA].” Attached to
his supplemental affidavit were copies of an insurance card issued by American Trade
Association with an effective date of April 1, 2010. In an affidavit filed on March 31, 2010
containing updated summaries of the bank accounts and financial activities of the
respondents, Mr. White found, inter alia:
4. . . . The four accounts contain a total of approximately $1,201,830. SDS
13
and ATA continue to receive premium payments from policyholders located
in all fifty states and the District of Columbia.
***
9. From January, 2008 to March 26, 2010, SDS Account 1, SDS Account 2,
the ATA Account and the Claims Account took in approximately $21,000,000
million from policyholders . . . .
10. . . . A total of $5,274,131.14 was deposited into the Claims Account from
SDS Account 1, SDS Account 2 and the ATA Account. All of the funds
deposited into SDS Account 1, SDS Account 2 and the ATA Account came
directly from Paylogix, CITM and policyholders. No funds were deposited
into SDS Account 1, SDS Account 2 and the ATA Account by any insurance
company other than deposits of approximately $112,000 from Transamerica
Assurance in April, May and June of 2008. From May 2008 to March 26,
2010, the average total amount paid from the Claims Account was $263,000
per month. The average payment per claim to pay policyholders was
$215. . . .
The evidence does not preponderate against the trial court’s finding that the
respondents, including SDS and ATA, undertook some or all of the activities listed under
either Tenn. Code Ann. § 56-2-107 and Tenn. Code Ann. § 56-9-103(5) such that they were
conducting insurance business.7 This activity constituted conducting insurance business
within the purview of Tenn. Code Ann. § 56-2-107 and Tenn. Code Ann. § 56-9-103(5) and
was of a nature and character sufficient for the trial court to conclude that they were insurers
under Tenn. Code Ann. § 56-9-103(14). Of particular significance is the course of conduct
taken by SDS and ATA after February 2009, when they knew or should have known that
SAA was an unauthorized insurer, yet continued to solicit customers, sell insurance and
process payments and claims. As noted by the trial court, “no other reasonable inference can
be drawn but that by the February 2009 date of the North Carolina order, the respondents
knew or should have known that the Serve America/Beema insurance product was a sham
and posed a significant risk of nonpayment of claims for ATA members.” 8 Accordingly,
SDS and ATA were subject to the Act and the authority of the Commissioner, including any
7
Even though not specifically raised as an issue on appeal, we affirm the trial court’s finding
that SDS and ATA “were collaborators and commingled funds such that the accounts and action of SDS
and ATA shall be considered together and in totality in analyzing the question of insolvency.”
8
Indeed, in an October 21, 2009 email to Mr. Worthy, Mr. Posey recounted difficulty in
receiving verification that a policy had actually been issued by Beema or Serve America and stated that
he had been instructed “unless and until we receive some assurances and/or documentation of the exact
relationship between Beema, Serve America and/or any other captive and/or Serve America or other
entity . . . to decline to make further payments on the above.”
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liquidation proceeding instituted against them.9
2. Appeal of William Worthy
Mr. Worthy contends that the appointment of a receiver is not authorized, since the
court found the insurance to be non-existent. We respectfully disagree.
At the outset, we address whether Mr. Worthy has standing to raise the issue of the
authority of the receiver relative to SDS or ATA. The petition only seeks relief against Mr.
Worthy for purposes of injunctive relief, securing his cooperation in the liquidation, and
insofar as he may have control or custody of the assets of the ATA entities, SDS and/or SAA.
In order to establish standing a party must show: (1) a distinct and palpable injury that is
more than conjectural or hypothetical; (2) a causal connection between the claimed injury and
the challenged conduct; and (3) that the alleged injury is capable of redress by a favorable
decision of a court. American Civil Liberties Union of Tenn. v. Darnell, 195 S.W.3d 612,
620 (Tenn. 2006) (citing Warth v. Seldin, 422 U.S. 490, 498 (1975)); Metro. Air Research
Testing Auth., Inc. v. The Metro. Gov’t of Nashville and Davidson Cty, 842 S.W.2d 611, 615
(Tenn. Ct. App. 1992). While Mr. Worthy does not assert any distinct injury as a result of
his inclusion in the proceedings and the appointment of a receiver, to the extent he is subject
to the injunctive orders of the court and charged to cooperate with the receiver, as well as to
resolve all issues raised in this appeal, we will address this issue.
The purpose of the Act as set forth at Tenn. Code Ann. § 56-9-101(d) is “the
protection of the interests of insureds, claimants, creditors and the public generally, with
minimum interference with the normal prerogatives of the owners and managers of insurers
. . . . ”; the Act is to be liberally construed to effect its purposes. Even though there was no
actual insurance in force, ATA and SDS sold coverage, received premiums and paid claims
from March 2008 until stopped by the court’s orders; as noted, they transacted the business
of insurance. The fact that there was no policy in force means only that there are no
“insureds” as that term is used at § 56-9-101(d). Those who purchased what was represented
to them to be insurance are now claimants or creditors of ATA and SDS. The appointment
of a receiver for purposes of liquidation of these companies under the circumstances
presented is fully authorized by the Act and consistent with its purposes.
9
We have reviewed the record and affirm the court’s finding that, for purposes of Tenn Code
Ann. § 56-9-306, SDS, ATA and ATA LLC are insolvent.
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IV. Conclusion
For the foregoing reasons, the final order of the court appointing the Commissioner
as receiver for purposes of liquidation is affirmed.
__________________________________
RICHARD H. DINKINS, JUDGE
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