STATE of North Carolina on relation of John Randolph INGRAM, Commissioner of Insurance of North Carolina, Rehabilitator,
v.
ALL AMERICAN ASSURANCE COMPANY, Respondent, and
American Bank and Trust Company, Intervenor Respondent.
No. 7726SC13.
Court of Appeals of North Carolina.
December 7, 1977.*476 Cansler, Lockhart, Parker & Young by Thomas Ashe Lockhart, Joe C. Young and Winford R. Deaton, Jr., Charlotte, for petitioner-appellee.
Robert O. Klepfer, Jr., and Arthur A. Vreeland, Stern, Rendleman, Isaacson & Kleffer, Greensboro, for respondent-appellant.
CLARK, Judge.
This appeal raises the single issue of whether the trial court had the authority to order respondent "AAA" to pay attorney's fees and expenses to petitioner, counsel of record for "AAA," for services rendered in rehabilitation proceedings under G.S. 58-155.2 et seq.
Rehabilitation for insurance companies threatened by insolvency under G.S. 58-155.2 et seq. is a purely statutory procedure. The statutes confer no specific power upon the superior court to appoint counsel for the insurer or to award counsel fees to an attorney for the insurer during rehabilitation. The applicable statutes are clear as to purpose, nebulous as to procedure and generally silent as to powers of the court in accomplishing the purpose of rehabilitation. The control of the insurer company is transferred to the Commissioner as rehabilitator, but if the power of the court in rehabilitation is narrowly limited by a literal interpretation of the statutes, the objective of receiving and protecting the insurer, its creditors, the insured and the public could not be accomplished. The court must have broad supervisory power in order to deal effectively with the many and varied situations *477 that are likely to arise in rehabilitation proceedings. 25 N.C.L.R. 429, 430 (1947). The statutory language reflects this purpose and the need for judicial supervision over the rehabilitation proceedings, and guides us in determining the authority of the court.
Statutory reorganizations are generally considered to be deliberately informal and to give to the trial court both supervisory and initiative powers of the broadest sort, while giving to the commissioner only those powers specified in the statutes. It is also generally held that in a case of conflict of opinion the trial court may overrule the Commissioner. 19 Appleton, Insurance Law and Practice, § 11041, pp. 616, et seq.; National Bondholders Corporation v. Joyce, 276 N.Y. 92, 11 N.E.2d 552 (1937); In re Casualty Co. of America, 244 N.Y. 443, 155 N.E. 735 (1927). North Carolina cases decided before the enactment of the statutory proceedings generally held that the commissioners appointed in court-supervised equitable reorganizations were mere ministerial officers of the court, that the court had the final discretionary authority. Harrison v. Brown, 222 N.C. 610, 24 S.E.2d 470 (1943); Blades v. Hood, Comr. of Banks, 203 N.C. 56, 164 S.E. 828 (1932); Skinner v. Maxwell, 66 N.C. 45 (1872). No cases on the issue of court power have been decided under the new statute.
Under the statute the Commissioner as rehabilitator has discretionary as well as ministerial powers. Clearly also the court has broad supervisory powers and must also be held to have broad initiative powers as well so as to effect the mandate of such provisions as G.S. 58-155.18 which directs the court after full hearing to deny or grant the application for rehabilitation "together with such other relief as the nature of the case and the interests of policyholders, creditors, stockholders, members, subscribers or the public may require." The court is the final protector of those interests most jeopardized by an insurance company's financial instability, and we see no reason to assume that the broad mandate above quoted does not cover the court's actions in the instant case.
Though both the petitioner and respondent "AAA" argue the question of whether the court had authority to appoint counsel for "AAA," we do not find it necessary to determine this question, because it does not appear from the record on appeal that the court appointed counsel for "AAA." It is clear that petitioner was employed by "AAA" on 6 November 1975 to represent the company in the rehabilitation proceedings. By its order of 7 November the court recognized that petitioner was counsel of record and that "AAA" was entitled to have such representation. Thereafter "AAA" was in rehabilitation with much of the power of its officers and directors transferred under the statutes to the rehabilitator. Further, it is clear from the record on appeal that the financial difficulties which led to the rehabilitation were the result of a dangerously unstable power structure, complicated by a struggle to acquire control by some directors with apparent conflicts of interest. Though some effort was made by the executive committee and the directors of "AAA" to discharge petitioner in November 1975, without the knowledge or approval of its President and Senior Vice President, the legality of such effort was highly questionable. The court found, in its order of 14 November 1975, that petitioner "is the duly designated attorney for Respondent . . . in this proceeding and that all fees of said attorneys shall be subject to the approval of this court." [Emphasis added.] We do not construe this finding to mean that the court was appointing petitioner as counsel for respondent; rather, we find it to be a recognition that the petitioner was not lawfully replaced but remained the attorney of record for "AAA." In its order of 18 November 1975 the court again recognized petitioner as counsel for "AAA," and directed that petitioner continue to represent "AAA" in certain actions pending in other states. In so doing, the trial court properly exercised its broad supervisory power to assure continued and stable legal representation for "AAA" during a period when there was instability and discord between its officers and directors.
*478 The trial court by order entered 4 December 1975 found that petitioner had rendered legal services for "AAA" during the period from 1 October 1975 through 18 November 1975, that $30,034.50 was reasonable compensation for legal services and $3,411.53 for expenses advanced, and it was ordered that the rehabilitator pay these sums to petitioner. "AAA" has never excepted to this order. Both parties admit in briefs that petitioner was awarded attorney's fees on several occasions by the court, though not documented in the record, for services rendered during the period from 18 November 1975 through 30 April 1976. It does not appear that respondent excepted to and appealed from any of these orders. We conclude that the evidence and circumstances supported the finding of the trial court that petitioner had not been effectively replaced as counsel of record for "AAA," that petitioner continued so to represent "AAA" during the rehabilitation, and that the court in the exercise of its supervisory power had the authority to make this determination.
Respondents argue further that this determination had the effect of forcing "AAA" to be represented by counsel that was hostile to the Board of Directors and the Company executives and that petitioner was really representing the court and not the company. But the "Company" contemplated by the rehabilitation proceedings is far more inclusive than the Board of Directors or the executives. Concern is specifically to be given to the policyholders, creditors, stockholders, members and subscribers. "AAA" was placed under involuntary rehabilitation because of threatened insolvency, but it appears from the record that this condition, at least in part, was the result of a dangerously unstable power structure. The court's recognition of petitioner as "AAA's" legal representative throughout the proceedings required that petitioner represent the entire company, which requirement resulted in a conflict with some of the Board of Directors. But those directors' interests were in apparent conflict with the interests of the rest of the company.
Did the trial court have authority to order that "AAA" pay its attorney of record (petitioner) the attorney's fees and expenses for the period from 1 May through 30 June 1976? Ordinarily, attorney's fees are not recoverable as an item of damage or as part of the costs of litigation, except as provided for by statute. Hoskins v. Hoskins, 259 N.C. 704, 131 S.E.2d 326 (1963); 1 Strong's, N.C.Index, 3d ed., Attorneys at Law, § 7. North Carolina has applied a rule of equity exception in various classes of cases, i. e., where a litigant at his own expense has maintained a successful suit for the preservation, protection or increase of a common fund or of common property. Horner v. Chamber of Commerce, 236 N.C. 96, 72 S.E.2d 21 (1952). In Horner, the court stated that the equity exception rests, not upon the theory that the allowance is for attorney's fees as such or as an element of court costs, but rather upon the principle of approval by the court, in the exercise of chancery powers, of expenditures reasonably incurred in creating or preserving the fund or property. 236 N.C. at 98, 72 S.E.2d at 22.
The general rule against the award of attorney's fees is based on the policy that such awards would encourage attorneys to institute meritless litigation. The policy is not applicable to the case sub judice. Petitioner was employed by "AAA" during the rehabilitation in question and, by letter of 16 June 1976, "AAA" expressed its appreciation to petitioner for the legal services rendered. Their relationship was not adversarial, but was rather an attorney-client relationship in which petitioner was entitled to compensation for legal services rendered in rehabilitation, the insurer's business is operated by the rehabilitator under court supervision until the threat of insolvency is removed. The settlement of an outstanding debt by the rehabilitator is clearly a step "toward removal of the causes and conditions which have made rehabilitation necessary as the court may direct." G.S. 58-155.3(a). And it seems clear that the insurer is to bear the costs of rehabilitation, *479 which costs are to be assessed directly against it in the rehabilitation suit itself. For example, G.S. 58-155.11(f) gives to the rehabilitator the power to appoint special counsel and to collect his fees directly out of the insurer's funds, subject, of course, to the approval of the court.
We conclude that the supervisory power of the court in this rehabilitation suit included the authority to order that "AAA" pay fair and reasonable compensation to petitioner for legal services rendered. There was sufficient evidence to support the court's finding that the award to petitioner and to the California firm employed by petitioner was fair and reasonable.
Affirmed.
MORRIS and VAUGHN, JJ., concur.