Weingarten v. Gross

PRESENT: All the Justices

ROBERT WEINGARTEN, ET AL.,
OPINION BY
v. Record No. 012702 JUSTICE DONALD W. LEMONS
June 7, 2002
ALFRED W. GROSS, DEPUTY RECEIVER OF
FIRST DOMINION MUTUAL LIFE INSURANCE COMPANY,
SUCCESSOR TO FIDELITY BANKERS LIFE INSURANCE
COMPANY, AND TRUSTEE OF FIDELITY BANKERS LIFE
INSURANCE COMPANY TRUST, ET AL.

FROM THE STATE CORPORATION COMMISSION

In this appeal of right from a final order of the State

Corporation Commission (the “Commission”), we consider whether a

claim for mandatory indemnification, pursuant to Code § 13.1-

698, is entitled to be paid as “costs and expenses of

administration,” pursuant to Code § 38.2-1509(B)(1).

I. Facts and Proceedings Below

The complete history of this case is reported in Gross v.

Weingarten, 217 F.3d 208 (4th Cir. 2000). The facts are not in

dispute and we summarize only those facts relevant to this

appeal. On May 13, 1991, the Circuit Court for the City of

Richmond entered an order placing Fidelity Bankers Life

Insurance Company (“Fidelity Bankers”) into receivership and

appointing Steven T. Foster (“Foster”), then the Commissioner of

Insurance in Virginia, to serve as Deputy Receiver for Fidelity

Bankers.

Alfred W. Gross succeeded Foster as Commissioner of

Insurance and was appointed Deputy Receiver (“Gross” or “Deputy
Receiver”) of Fidelity Bankers. Gross proposed a Rehabilitation

Plan (the “Plan”) for Fidelity Bankers and after a nine-day

hearing, the Commission approved the Plan and entered a final

order on September 29, 1992. Under the Plan, Hartford Life

Insurance Company (“Hartford”) would assume and reinsure

potentially all the Fidelity Bankers policies. Those who

declined to participate in the Plan received a cash payment of

the lesser of either 85% of their account value or the surrender

value of their contracts, and to the extent that available

assets permitted, a two-year annuity from Fidelity Bankers equal

to no more than the remaining 15% of their account value.

Gross, 217 F.3d at 214. Those who chose to participate were

offered a Hartford annuity with an account value equal to their

account value as of the “Effective Date.” They would also

receive a Plan Dividend, which was intended to compensate them

“for loss of interest and liquidity during the seven-year period

provided for in th[e] [P]lan.”

In December 1992, approximately 19 months after the

commencement of the receivership, the Deputy Receiver initiated

an action in the United States District Court for the Eastern

District of Virginia against Robert I. Weingarten, Gerry R.

Ginsberg, and Leonard Gubar (collectively “Directors”), in their

capacity as former directors of Fidelity Bankers, alleging,

among other things, violations of federal and state securities

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laws and breach of fiduciary duties. During the pendency of the

litigation, the Directors filed counterclaims against the Deputy

Receiver. At the close of the evidence during trial, the

district court granted judgment as a matter of law in favor of

the Directors on the state securities claim and submitted the

remaining counts to the jury. On May 21, 1998, the jury

returned a verdict in favor of the Directors on the remaining

counts, and the district court dismissed the counterclaims for

lack of subject matter jurisdiction. Gross v. Weingarten, 18

F.Supp.2d 616 (E.D. Va. 1998).

The Deputy Receiver appealed the adverse jury verdict and

the Directors filed a cross-appeal. The United States Court of

Appeals for the Fourth Circuit affirmed the jury verdict and

reinstated and remanded the counterclaims. Gross v. Weingarten,

217 F.3d at 225.

In November 2000, the Deputy Receiver and the Directors

agreed to a settlement of $3.5 million, which represented

“certain of the fees and costs incurred” by the Directors in

their defense of the action. The district court entered a

stipulated judgment order (the “judgment”) on January 19, 2001,

memorializing the $3.5 million settlement and directing that the

judgment was “subject to the determination of the Virginia State

Corporation Commission as to the priority to be accorded th[e]

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judgment among the claims against, and liability of, the

Receivership Estate.”

The Directors filed a petition for payment and declaration

of priority status with the Commission against Gross, as Deputy

Receiver of Fidelity Bankers and Trustee of Fidelity Bankers

Life Insurance Trust, 1 and against First Dominion Mutual Life

Insurance Company. 2 The Directors asserted that the judgment

represented statutory mandatory indemnification, to which they

were entitled pursuant to Code § 13.1-698. They requested an

order requiring the sum of $3.5 million of the estate to be

reserved under Code § 38.2-1509 and not distributed by the

Deputy Receiver until the issues were finally resolved. The

Directors further requested a finding that the judgment was

entitled to “priority status as an administrative expense,” or

in the alternative, that the judgment was entitled to priority

status over other creditors, including any further payments

toward the Plan Dividend. Finally, the Directors requested

injunctive relief to require the Deputy Receiver to reserve

$3.5 million from any final distribution of the Plan Dividend,

until the judgment was satisfied or until the legal issues were

finally resolved.

1
The Trust was established by the Deputy Receiver for the
management and realization of assets not transferred to Hartford
under the Plan.

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 The Commission did not grant the requested injunctive

relief, holding that if it found for the Directors, the judgment

would have to be paid as an expense of administration and no

injunction would be necessary. Otherwise, if the Commission

found that the Directors were not entitled to be paid as an

administrative expense, the Commission would have to modify its

order of September 29, 1992, to pay the Directors in advance of

the policyholders entitled to the Plan Dividend. The Commission

held that it did not have the authority to modify a final order

after 21 days following its entry. Furthermore, the Commission

concluded that even if it had the authority, it declined “to

impose such an extremely unfair and chaotic result on the many

policyholders who made the choice to opt in to the

Rehabilitation Plan.”

With respect to the Directors’ request for payment as an

administrative expense, the Commission found:

The [Directors’] right to indemnification
arises by virtue of their services as directors
. . . prior to the Receivership, not because of
services benefiting the Estate thereafter.
Under these circumstances the [Directors] are
judgment creditors equal in status with other
creditors, but not creditors to be paid as part
of the expense of administration of the
Receivership.

The Directors appeal the adverse ruling of the Commission.

2
First Dominion Mutual Life Insurance Company is the
successor to Fidelity Bankers.

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 II. Standard of Review

On appeal, the findings of the Commission are “presumed to

be just, reasonable, and correct.” Swiss Re Life Co. Am. v.

Gross, 253 Va. 139, 144, 479 S.E.2d 857, 860 (1997). However,

we will reverse the Commission when its decision is based upon a

mistake of law. Lake Monticello Serv. Co. v. Board of

Supervisors of Fluvanna County, 237 Va. 434, 438, 377 S.E.2d

446, 448 (1989) (citing First Virginia Bank v. Commonwealth, 213

Va. 349, 351, 193 S.E.2d 4, 5 (1972)).

III. Analysis

On appeal, the Directors argue that the Commission erred in

holding that the $3.5 million judgment was not entitled to be

paid as an administrative expense of the receivership estate and

by assigning the judgment the priority status of a general

creditor under Code § 38.2-1509(B)(1)(v). The Directors

maintain that the judgment is entitled to be paid under Code

§ 38.2-1509(B)(1) as an administrative expense, or in the

alternative, that the judgment is entitled to “equitable

priority” over other general creditors, including the

policyholders entitled to the Plan Dividend. Finally, the

Directors assert that the Commission erred when it denied their

request for injunctive relief.

The Deputy Receiver argues that the Commission correctly

determined that the judgment is an obligation due a general

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creditor pursuant to Code § 38.2-1509(B)(1)(v). He further

argues that the judgment is not entitled to equitable priority

because the Commission could not alter its final order entered

on September 29, 1992. Finally, the Deputy Receiver maintains

that injunctive relief was not proper.

The relevant version of Virginia Code § 38.2-1509 provided:

B. The Commission shall disburse the assets of
an insolvent insurer as they become available
in the following manner: 1. Pay, after
reserving for the payment of the costs and
expenses of administration, according to the
following priorities: (i) wages entitled to
priority . . . (v) other creditors.

The Code does not define the phrase “costs and expenses of

administration,” and the Deputy Receiver urges us to adopt the

definition from the United States Bankruptcy Code (“Bankruptcy

Code”), 11 U.S.C. § 503. The Bankruptcy Code, 11 U.S.C.

§ 503(b)(1)(A), defines administrative expenses as “the actual,

necessary costs and expenses of preserving the estate, including

wages, salaries, or commissions for services rendered after the

commencement of the case.” The Deputy Receiver relies upon

United States Court of Appeals and Bankruptcy Court decisions

interpreting 11 U.S.C. § 503 to support his assertion that in

order to claim the status of an administrative expense, a

claimant “must demonstrate that the claimed expenses . . . arose

out of a post-petition transaction with the debtor-in-

possession.” See, e.g., In re Christian Life Ctr., 821 F.2d

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1370, 1373-74 (9th Cir. 1987) (recognizing that “[c]laims that

arise from a creditor’s pre-petition services to the debtor are

not entitled to administrative expense treatment”); see also In

re Consolidated Oil & Gas, Inc., 110 B.R. 535, 537 (Bankr. D.

Colo. 1990) (holding that claimants are not entitled to be paid

as an administrative expense when the claim for indemnification

arose “from strictly pre-petition services”). The Deputy

Receiver maintains that because the action filed against the

Directors was based entirely on their pre-receivership role as

directors of Fidelity Bankers, their claim for indemnification

is not entitled to be paid as an administrative expense.

Federal decisions interpreting 11 U.S.C. § 503 rely on the

clause “after the commencement of the case” included in the

statute to hold that a claim based on pre-receivership conduct

is not entitled to be paid as an administrative expense. See,

e.g., In re Consolidated Oil & Gas, 110 B.R. at 537. However,

Virginia Code § 38.2-1509 does not contain such language.

Further, the Deputy Receiver argues that we should adopt the

requirement of “benefit to the estate” implied in the language

of 11 U.S.C. § 503(b)(1)(A), which gives administrative expense

status to actions to “preserve” the bankrupt estate. However,

Virginia Code § 38.2-1509 does not contain such language.

Because the language of Code § 38.2-1509 is demonstrably

different from the definitions used in the Bankruptcy Code, we

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decline to adopt the rationale employed by the federal courts in

bankruptcy cases in our interpretation of Code § 38.2-1509.

It is important to note that the claim for statutory

mandatory indemnification for directors did not arise until the

Directors “entirely prevail[ed]” in the action brought against

them by the Deputy Receiver. As such, the claim accrued well

after the commencement of the receivership. The Deputy Receiver

is charged with knowledge of Virginia’s strong public policy of

mandatory indemnification found in Code § 13.1-698, which

provides that “a corporation shall indemnify a director who

entirely prevails in the defense of any proceeding to which he

was a party because he is or was a director of the corporation

against reasonable expenses incurred by him in connection with

the proceeding.”

Unlike an action by a third party against directors, the

action in question in this case was brought by the Deputy

Receiver on behalf of the insolvent corporation. The action

itself commenced after the receivership began, was done in the

administration of the estate, and was instituted on behalf of

the estate. If the $3.5 million award had been assessed as

sanctions for bringing a frivolous lawsuit, it most certainly

would have been a cost of administration, as conceded by the

Deputy Receiver during oral argument. We see no reasonable

distinction between the hypothetical award of sanctions for

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bringing the action and the mandatory indemnification provided

by statute. When the Deputy Receiver brought the action, he

knew that the “costs” to the estate would include his legal fees

and the Directors’ fees by indemnification if they “entirely

prevail[ed].” The Deputy Receiver’s attorney’s fees have been

paid as a cost of the administration of the estate. There is no

reason why the Directors’ fees established by way of statutory

indemnity should not also be paid as a cost of the

administration of the estate.

We hold that the $3.5 million judgment in favor of the

Directors is entitled to be paid as an expense of the

administration of the estate under Code § 38.2-1509.

Consequently, it is unnecessary to resolve the Directors’ claim

of equitable priority. Furthermore, it is unnecessary for this

Court to issue an injunction to the Deputy Receiver. The

Court’s ruling is provided herein and the Deputy Receiver is a

party who is bound by the opinion of this Court. For these

reasons, the judgment of the Commission will be reversed and

this matter will be remanded to the Commission for further

proceedings consistent with this opinion.

Reversed and remanded.

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