Present: All the Justices
SWISS RE LIFE COMPANY AMERICA, ETC.
OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.
v. Record No. 961078 JANUARY 10, 1997
ALFRED W. GROSS, ETC., ET AL.
FROM THE STATE CORPORATION COMMISSION
In this appeal from the State Corporation Commission
(Commission), the primary issue we consider is whether Code
§ 38.2-1509 permits a reinsurer for an insurance company in
receivership to obtain administrative priority over other
creditors in recovering amounts owed it under an ongoing treaty
of reinsurance with the insolvent company. The reinsurer also
raises additional issues related to its claim against the
insolvent insurer. For the reasons that follow, we will affirm
the decision of the Commission.
I. BACKGROUND
On December 28, 1990, Fidelity Bankers Life Insurance
Company (Fidelity) sold a portion of its traditional life
insurance business to Protective Life Insurance Company
(Protective). As a condition of the purchase, Protective
required Fidelity to provide Protective with an independent
guarantee against potential losses from excess mortality claims
among insureds under the policies Protective would acquire in the
transaction.
To satisfy this requirement, Fidelity, Protective, and North
American Reassurance Company, now known as Swiss Re Life Company
America (Swiss Re), entered into reciprocal treaties of
reinsurance, sometimes referred to as "stop-loss" agreements.
Under the terms of its treaty of reinsurance with Protective (the
Protective treaty), Swiss Re agreed to indemnify Protective for
any payments above levels established in agreed-upon mortality
schedules for the policies Protective acquired from Fidelity. In
the treaty of reinsurance between Swiss Re and Fidelity (the
Fidelity treaty), Fidelity agreed to indemnify Swiss Re for any
payments Swiss Re made to Protective under the Protective treaty.
Both agreements contained provisions for interest to accrue on
amounts owed on claims under the agreements. In return for
fulfilling its duties under the treaties of reinsurance, Swiss Re
would receive a fee of approximately $40,000 per year.
On May 13, 1991, Fidelity went into receivership by order of
the Circuit Court of the City of Richmond, which appointed the
Commission as receiver, pursuant to Code § 38.2-1505. On that
same day, the Commission appointed the Commissioner of Insurance
as deputy receiver of Fidelity, pursuant to Code § 38.2-1510.
Subsequently, Protective made demand under its treaty with
Swiss Re for excess mortality losses for calendar year 1991 in
the amount of $1,134,923. Swiss Re satisfied this demand, which
included a small amount of interest, and ultimately filed a claim
for that sum with the deputy receiver. Swiss Re sought
administrative priority for that sum, due it under the Fidelity
treaty, as an administrative expense under Code § 38.2-1509.
Swiss Re also sought interest on this debt.
The deputy receiver, while acknowledging the claim against
the receivership estate, classified Swiss Re as an unsecured
creditor of Fidelity, denied its claim for administrative
priority, and disallowed its claim for interest. Thereafter, the
deputy receiver disavowed further obligations under the Fidelity
treaty as an executory contract, pursuant to the Commission's
order granting the deputy receiver the authority to "affirm or
disavow any contracts to which [Fidelity] is a party." The
parties do not dispute the propriety of this grant of authority
by the Commission to the deputy receiver.
In July 1991, Swiss Re acquired from Integrated Resources
Life Insurance Company (Integrated) various reinsurance treaties
(the Integrated treaties) including some polices for which
Fidelity was the indemnified party. Swiss Re held additional
reinsurance treaties for which Fidelity was the indemnified party
(the non-Integrated treaties) predating the Fidelity and
Protective treaties. As a result, Swiss Re became both a debtor
and a creditor of Fidelity. Consequently, Swiss Re attempted to
set off payments it owed to Fidelity under these treaties by the
amount Fidelity owed to it as a result of the payments Swiss Re
made to Protective. The deputy receiver disallowed this
practice, citing a lack of mutuality of the debts and credits as
required under Code § 38.2-1515 and as a matter of public policy.
In a petition for review, Swiss Re appealed these
determinations to the deputy receiver. It asserted that the
disavowal of the Fidelity treaty with the Protective treaty
remaining in effect was not appropriate because these agreements
were part of one contract, and that it had entered into them only
as a pass-through agent, assuming no risk of Fidelity's
insolvency. In the alternative, Swiss Re asserted that,
notwithstanding Fidelity's future obligation to pay sums which
might come due, the Fidelity treaty was not an executory contract
in that its overall purpose, the provision of a reinsurance
guarantee, had already been performed.
Upon review of Swiss Re's appeal, the deputy receiver
retracted his disavowal of the Fidelity treaty, stating that it
would be "treated as [if] it was never disavowed, and . . . the
status quo ante is restored." The deputy receiver left
undisturbed the remainder of his prior determinations. Swiss Re
then pursued an appeal before the Commission. *
In its petition to the Commission for review of the appeal
to the deputy receiver, Swiss Re asserted that the Fidelity
treaty was an executory contract and that the deputy receiver's
retraction of his disavowal of the Fidelity treaty was a de facto
assumption of it. Consequently, Swiss Re contended that it was
entitled to priority in the distribution of the assets of
Fidelity's receivership estate on the ground that the obligations
of an assumed contract were expenses of administration as
provided by Code § 38.2-1509. Swiss Re further asserted that it
was entitled to the interest provided for under the Fidelity
treaty as an expense of administration on the ground that the
interest called for was not in the form of a default penalty, but
*
During the pendency of its appeal before the Commission,
Swiss Re continued to pursue new claims and related matters
arising out of the Fidelity treaty before the deputy receiver.
The Commission consolidated Swiss Re's appeal of unfavorable
decisions on these matters with the prior appeal.
served to compensate Swiss Re for the time value of the funds it
had paid to Protective. Swiss Re also challenged the denial of a
set off for its debts to Fidelity under the other treaties.
In this petition to the Commission and in subsequent
pleadings, Swiss Re asserted the need for an evidentiary hearing
by the Commission. The Commission, after determining that there
were no material issues of fact in dispute, considered the appeal
on the record and issued its decision without conducting a
hearing. During the 21-day period after entry of the final order
during which the Commission retained jurisdiction over the
matter, Swiss Re made no objection to the failure to conduct a
hearing.
In its final order, the Commission denied Swiss Re's claim
for priority, citing Code § 38.2-1509, and its claim for set off
of the debts it owed Fidelity under the Integrated treaties,
finding that there was a lack of mutuality. The Commission
reversed the deputy receiver's denial of a set off for the non-
Integrated treaties, finding that there was adequate mutuality
and no violation of public policy. Lastly, the Commission
rejected Swiss Re's claim for interest on the amounts due under
the Fidelity treaty on the ground that, even if the interest was
commercially reasonable, the policy against payment of interest
on claims against an insurer in receivership prevailed. Swiss Re
then filed a petition for an appeal of right before this Court.
II. STANDARD OF REVIEW
Our review is guided by well established principles. On
appeal, the findings of the Commission are presumed to be just,
reasonable, and correct. Bralley-Willett v. Holtzman Oil, 216
Va. 888, 890-91, 223 S.E.2d 892, 895 (1976). The decisions
rendered by the Commission "must be ascribed the respect due to
the judgments of a 'tribunal appointed by law and informed by
experience.'" Chesapeake & Potomac Telephone Co. v.
Commonwealth, 147 Va. 43, 58, 136 S.E. 575, 579 (1927)(quoting
Illinois Central Railroad Co. v. Interstate Commerce Commission,
206 U.S. 441, 454 (1907)). Accordingly, a presumption of
correctness attaches to actions of the Commission, Farmers &
Merchants National Bank v. Commonwealth, 213 Va. 401, 404, 192
S.E.2d 744, 747 (1972), and its orders will not be disturbed when
they are based upon the application of correct principles of law.
Commonwealth v. Washington Gas Light Co., 221 Va. 315, 325, 269
S.E.2d 820, 826 (1980).
III. DISCUSSION
A. DENIAL OF EVIDENTIARY HEARING: DUE PROCESS
Swiss Re asserts on appeal that the failure of the
Commission to conduct an evidentiary hearing violated its due
process right to present evidence and be heard in a timely
fashion. We recognize that "[p]rocedural due process . . . is a
constitutional right which applies to . . . adjudicative or
quasi-judicial proceedings." County of Fairfax v. Southern Iron
Works, Inc., 242 Va. 435, 444, 410 S.E.2d 674, 679 (1991).
However, although Swiss Re indicated that it wanted to present
facts in a hearing, the constitutional due process claim was not
raised below. Accordingly, we will not consider this issue for
the first time on appeal. Rule 5:25.
B. CLAIM FOR ADMINISTRATIVE PRIORITY
1. Retraction of Disavowal as Assumption of Fidelity Treaty
Swiss Re asserts that the deputy receiver's retraction of
his prior disavowal of the Fidelity treaty constituted an
assumption of the contract. As such, Swiss Re contends that this
step gave rise to an irrebuttable presumption that the deputy
receiver recognized the Fidelity treaty as beneficial to the
receivership estate, that an actual benefit was conferred on that
estate, and that the obligations incurred under the Fidelity
treaty are therefore expenses of administration entitled to
priority under Code § 38.2-1509. We need only address this issue
to the extent that it bears upon Swiss Re's ultimate contention
that it is entitled to administrative priority. Clearly, without
an assumption of the Fidelity treaty, Swiss Re was an unsecured
creditor of Fidelity.
Swiss Re asserts that the Fidelity treaty was an executory
contract, and, thus, once disavowed, any resumption of the
contract would necessarily constitute an assumption of Fidelity's
rights and obligations under the contract. In support of its
position, Swiss Re relies upon authority in bankruptcy law that
an assumption need not be express, so long as the intent of the
debtor-in-possession is clear. See, e.g., In re A.H. Robins Co,
68 B.R. 705, 708 (E.D. Va. 1986). However, Swiss Re properly
notes on brief that "[g]eneral principles of bankruptcy law [are]
not technically applicable in state insurance company
receivership proceedings" and we will not address that matter
here.
Rather, we will assume that the Fidelity treaty was an
executory contract. We agree with Swiss Re that, under the
authority granted to the deputy receiver by the Commission's
order, the Fidelity treaty was subject to assumption by the
deputy receiver. We fail to see, however, how the deputy
receiver's election, at Swiss Re's behest, to retract his prior
decision and treat the Fidelity treaty "as [if] it was never
disavowed" and to restore "the status quo ante" evinces an intent
to assume the contract. To the contrary, the clear intent as
expressed by the language in the deputy receiver's decision was
to make his prior act a nullity and to restore Swiss Re to its
original position. In that position, Swiss Re was an unsecured
creditor of Fidelity for both prior and succeeding claims under
the Fidelity treaty.
2. Equitable Claim for Priority
Swiss Re further asserts that even if it is not entitled to
administrative priority for the amounts owed it under the
Fidelity treaty as an expense of administration, equity requires
that it be given priority over all other creditors of the
Fidelity receivership estate. Swiss Re asserts that it was
"gulled" by Fidelity to enter into the Fidelity and Protective
treaties as a "favor," and that Fidelity deliberately misled
Swiss Re as to Fidelity's solvency.
This assertion is belied by the undisputed facts of the
case. Swiss Re is a company experienced in the practice of
issuing and administering treaties of reinsurance. Nothing in
the record suggests that Swiss Re's agreements with Fidelity and
Protective were not arm's length transactions by sophisticated
parties of equal position. Nor was Swiss Re prevented from
making inquiries into the financial condition of Fidelity.
Protective's obvious concerns with respect to Fidelity's position
expressed during the negotiations were sufficient to place Swiss
Re reasonably on notice as to the potential for difficulties in
the future. Under such circumstances, equity cannot be invoked
to permit a party to avoid the consequences of what became an
ill-advised transaction. See Curtis v. Lee Land Trust, 235 Va.
491, 498, 369 S.E.2d 853, 857 (1988). Such is particularly the
case here where an unsecured party seeks a priority over the
claims of policyholders of an insolvent insurance company.
3. Application of Code § 38.2-1509
Code § 38.2-1509(B), as in effect in 1991, controls the
manner in which the Commission will pay claims out of the estate
of the insolvent insurer. In pertinent part, the statute read:
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 as
provided in § 38.2-1514, (ii) claims of secured
creditors with a perfected security interest not
voidable under § 38.2-1513 to the extent of the value
of their security, (iii) taxes owed to the United
States and other debts owed to any person, including
the United States, who by the laws of the United States
are entitled to priority, (iv) claims of the
associations for "covered claims" as defined in
§ 38.2-1603 and claims of other policyholders
apportioned without preference, and (v) other creditors
. . . .
Because we find no merit in Swiss Re's claims for
administrative priority for the amounts owed to it under the
Fidelity treaty, Code § 38.2-1509 provides the sole vehicle for
Swiss Re to recover. As an unsecured creditor, Swiss Re's
priority falls within that class of creditors addressed in the
statute, and its claim is to be satisfied accordingly.
A. CLAIM FOR INTEREST
Swiss Re asserts that it is entitled to interest on the
amounts owed it under the Fidelity treaty based upon the
provision for interest in the treaty itself. Virginia law
prohibits creditors of an insolvent estate from earning interest
on their claims. Metompkin Bank & Trust Co. v. Bronson, 172 Va.
494, 500, 2 S.E.2d 323, 325 (1939). Accordingly, the claim is
without merit.
D. CLAIM FOR SET OFF
Swiss Re asserts that the Commission erred in not permitting
it to set off sums owed by it to Fidelity under the Integrated
treaties against the sums owed to it under the Fidelity treaty.
Set off of mutual debts and credits of insurers in receivership
is controlled by Code § 38.2-1515(A):
In all cases of mutual debts or mutual credits
between the insurer and another person in connection
with any action or proceeding under this chapter, the
credits and debts shall be set off and the balance only
shall be allowed or paid, except as provided in
subsection B of this section.
The rationale underlying the principle of a set off is that
"'[t]he demands must be due between the same parties, and in the
same right.'" First National Bank of Waynesboro v. Johnson, 183
Va. 227, 237, 31 S.E.2d 581, 585 (1944). At the time Swiss Re
acquired the Integrated treaties, Fidelity was already in
receivership. Any rights acquired by Swiss Re at that time were
necessarily limited by the effect of that receivership, and,
thus, were of a quality distinguishable from the obligations it
owed under the Fidelity treaty. Accordingly, there is a lack of
mutuality between the Fidelity treaty and the Integrated
treaties, barring set off of the respective debts owed. A
contrary holding would run counter to the express provision in
the statute that debts owed by the insurer cannot be acquired for
the purpose of obtaining a set off. Code § 38.2-1515(B)(2).
For these reasons, the decision of the Commission will be
affirmed.
Affirmed.