Fabe v. Prompt Finance, Inc.

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Fabe, Superintendent of Insurance, Appellant, v. Prompt

Finance, Inc., Appellee.

[Cite as Fabe v. Prompt Finance, Inc. (1994),

Ohio St.3d .]

Insurance -- Superintendent of Insurance has authority to

issue an order placing an insurer under supervision

-- R.C. 3903.09(C)(5), construed and applied -- Court

of common pleas has authority to issue a ruling which

is "necessary and proper" to enforce an order of the

Superintendent of Insurance -- R.C. 3903.09(I).

---

1. To protect the interests of policyholders, creditors,

claimants, and the public generally, the

Superintendent of Insurance has the authority to

issue an order placing an insurer under supervision.

An order of the Superintendent may require an insurer

to obtain approval from the Superintendent prior to

the transfer of any of the insurer's property. (R.C.

3903.09[C][5], construed and applied.)

2. Pursuant to R.C. 3903.09(I), a court of common pleas

has the authority to issue a ruling which is

"necessary and proper" to enforce an order of the

Superintendent of Insurance.

---

(No. 93-274 -- Submitted February 22, 1994 -- Decided

May 11, 1994.)

Appeal from the Court of Appeals for Franklin County,

No. 91AP-1347.

This case involves a complex scheme of numerous

interrelated domestic and international corporate

entities. However, the main focus of this appeal concerns

the interrelationship and involvement between only two of

the entities, Prompt Finance, Inc. ("Prompt"), appellee,

and the Oil & Gas Insurance Company ("OGICO"). Prompt is

a corporation engaged in the business of financing

insurance premiums.1 OGICO is an Ohio-licensed property

and casualty insurance company which primarily insures oil

and gas related activities.

Affiliates of OGICO are Petrosurance Casualty

Company, Millers National Insurance Company and the

Illinois Insurance Company (collectively referred to as

"OGICO").2 OGICO's parent company is Petrosurance

Incorporated, a subsidiary of Forum Holdings U.S.A., Inc.

Forum Holdings U.S.A., Inc. is a subsidiary of Forum Re

Group, Inc., a.k.a. The Group, Inc. Prior to December 29,

1989, Prompt's sole shareholder was Forum Re Finance

Corporation, which was owned by Forum Holdings U.S.A.,

Inc.

A common connection between Prompt and OGICO, their

affiliates and parent companies, is interlocking

directorates and/or officers. Some of the key persons

reflecting the integration of the various entities are

Clive Becker-Jones, Eric N. Wickfield and Mark G. Hardy.

Becker-Jones is president and a director of the OGICO

group companies, including OGICO's parent company,

Petrosurance Incorporated. He is also president and a

director of Forum Holdings U.S.A., Inc. and Forum Re

Group, Inc. Prior to December 1989, Becker-Jones assisted

Wickfield and was actively involved in the day-to-day

operations of Prompt. Wickfield is president and a

director of Prompt. He is also vice president of Forum

Holdings U.S.A., Inc. Hardy also wore many hats. He is a

director of OGICO and a director of Petrosurance

Incorporated. Hardy is also a director of Forum Holdings

U.S.A., Inc., and the chief executive officer and a

director of Forum Re Group, Inc. Further, Hardy is a

director of Prompt. In addition, many of the related

companies share a common vice president, treasurer,

secretary and assistant secretary. In any event, it is

apparent from the record that all related corporate

entities come under the ultimate control of Hardy.

In 1988, Prompt decided to obtain additional capital

to enhance its premium financing operation. After

exhausting loans from various affiliates, Prompt, through

Hardy and Wickfield, sought the services of Close Brothers

Group PLC ("Close Brothers"), a British merchant bank.

Close Brothers initially loaned Prompt $1 million. This

loan was secured by Hardy. Further, as a condition of

Prompt's securing an additional line of credit from a

corresponding bank, Close Brothers required that Prompt

obtain a guaranty arrangement.

On December 29, 1989, Forum Re Group, Inc., Forum Re

Finance Corporation and the OGICO group (collectively

known as the "guarantors") and Prompt entered into a

guaranty agreement. Pursuant to the terms of the

agreement, the guarantors jointly and severally guaranteed

"full and punctual payment when due" of any obligation

owed by them to Prompt. The agreement also provided for

the payment of Prompt's legal fees with respect to the

enforcement of any obligation owed by the guarantors to

Prompt. The guaranty agreement was secured by a letter of

credit issued by Society National Bank ("Society") in

favor of Prompt. The letter of credit authorized Prompt

to draw up to $1 million by draft for the failure of the

guarantors, individually or collectively, to abide by the

terms of the guaranty agreement. Hardy signed the

guaranty agreement on behalf of Forum Re Group, Inc. and

Forum Re Finance Corporation. Wickfield signed for Prompt

and Becker-Jones signed the guaranty agreement on behalf

of the companies consisting of the OGICO group.

To obtain the letter of credit, OGICO was required to

pay a $1 million debt owed by Petrosurance Incorporated,

pay a $10,000 fee, execute a promissory note and pledge

approximately $1 million in marketable securities as

collateral. The guaranty agreement was negotiated in

connection with the purchase of fifty percent of the stock

of Prompt by Close Brothers. The involvement of Close

Brothers resulted in a contribution of capital to Prompt,

a revolving credit facility in favor of Prompt, and the

payoff by Prompt of various of its outstanding loans.

Subsequent to Close Brothers' obtaining an interest

in Prompt, OGICO filed a financial statement with the Ohio

Department of Insurance ("ODI"). ODI reviewed OGICO's

financial status and determined that the company was in a

financially hazardous condition. Thus, on March 22, 1990,

the Superintendent of Insurance ("Superintendent"),

appellant, issued an order placing OGICO under

supervision. The order provided, among other things, that

OGICO was prohibited from transferring any of its property

without first obtaining written approval from the

Superintendent.

Following the March 22, 1990 order, representatives

of ODI and others met with Becker-Jones and Hardy. During

this meeting, Hardy refused to produce certain records

requested by ODI. ODI also informed Becker-Jones and

Hardy that OGICO needed additional amounts of cash to meet

certain statutory minimum surplus requirements.

While under supervision, OGICO directed Prompt to

pay, out of remittances Prompt was holding for OGICO,

aviation expenses apparently due from OGICO to yet another

affiliate, Phorum Re Investment Corporation ("Phorum

Re"). Phorum Re received three checks from Prompt

totalling $215,460.69. These payments were made on

OGICO's behalf pursuant to a "memorandum of understanding"

between Prompt and OGICO. The payments were made in

violation of the March 22, 1990 supervision order.

The Superintendent decided to take OGICO beyond

supervision and into rehabilitation. Accordingly, on May

4, 1990, the Superintendent filed a complaint for

rehabilitation in the Court of Common Pleas of Franklin

County. Four days later, various officers and/or

directors of Prompt discussed financial problems

associated with OGICO. Further, prior to this meeting,

Close Brothers, also a member of Prompt's board by virtue

of its fifty percent ownership interest in Prompt,

discussed these problems with Hardy. The managing

director of Close Brothers stated that his banking group

consulted with Hardy because he "* * * was also a director

of Prompt and was obviously intimately involved with the

general management of Forum and its insurance companies *

* *."

On May 16, 1990 a rehabilitation order was entered by

the trial court. Thereafter, Prompt's board of directors

authorized Wickfield to draw $1 million from Society. The

$1 million draft from Society was authorized by Prompt in

response to an unearned premium balance on cancelled

policies owed to Prompt from OGICO in the amount of

$45,000.

On May 17, 1990, the Superintendent, to protect

OGICO's assets, moved the trial court for a temporary

restraining order and preliminary injunction. The

Superintendent sought to enjoin any action by Prompt or

Society with respect to the letter of credit. The trial

court granted the Superintendent's motion. Thereafter, on

May 30, 1990, OGICO, through its rehabilitator, the

Superintendent, filed a complaint against Prompt and

Society for possession of assets. OGICO requested that

the trial court determine the validity and enforceability

of the guaranty agreement, the effect of the agreement on

the letter of credit, and direct an accounting of any

amounts owed by OGICO to Prompt. The trial court

continued the temporary restraining order, consolidated

the matters at issue and set the case for hearing.

Furthermore, the Superintendent, prior to the hearing,

amended his complaint. The Superintendent claimed that

Prompt owed money to OGICO for certain premiums financed

by Prompt. In response, Prompt filed an answer and

counterclaim. Prompt urged that OGICO failed to remit

unearned premiums on various cancelled policies.

On October 2, 1990, the trial court issued its

findings of fact and conclusions of law and, subsequently,

issued a judgment entry and an entry directing that an

accounting be made between the parties. The trial court

concluded that the guaranty agreement, as secured by the

letter of credit, was not supported by an exchange of

"fair equivalent value." The trial court determined that

OGICO received disproportionately less value than the

obligation it incurred since any default in any amount to

Prompt, either by OGICO or the other guarantors, would

result in Prompt receiving up to $1 million and OGICO's

reimbursing Society out of OGICO's collateralized

securities. Thus, concluded the court, the guaranty

agreement and the letter of credit should extend only to

the direct obligations of OGICO to Prompt rather than

obligations, if any, of the other guarantors. This being

the case, Prompt would only be entitled to draw the amount

of unearned premiums owing from OGICO to Prompt and not

the entire $1 million.

The trial court further held that the payment of

aviation expenses to Phorum Re by Prompt out of funds held

by Prompt for OGICO constituted "* * * attempts indirectly

to do that which was directly prohibited * * *" by the

supervision order. As such, the trial court found that

the payments made by Prompt to Phorum Re at the direction

of OGICO could not be deducted (set off) from the gross

amount of remittances Prompt had been holding for OGICO.

The court ordered an accounting between the parties, and

further held that Society could liquidate any securities

held as collateral for fees and expenses incurred by

Society with respect to the letter of credit.

The court of appeals reversed the judgment of the

trial court and remanded the cause. The court of appeals

concluded that the guaranty agreement was supported by

sufficient consideration and that the agreement and letter

of credit represented an exchange of "fair equivalent

value" between OGICO and Prompt. The court also held that

the trial court erred in charging Prompt with a violation

of the Superintendent's March 22, 1990 order without first

determining whether Prompt had knowledge of the terms of

the supervision order.

The cause is now before this court pursuant to the

allowance of a motion to certify the record.

Lee I. Fisher, Attorney General; Emens, Kegler,

Brown, Hill & Ritter Co., William J. Brown, John P. Brody,

Richard W. Schuermann and Paul L. Hokemeyer, for appellant.

Jones, Day, Reavis & Pogue, Fordhan E. Huffman and

Sara M. Allswede, for appellee.

Douglas, J. This appeal presents two questions

for our consideration. The first issue concerns the

authority of the Superintendent to prohibit transfers of

property where the transfer would be in violation of a

supervision order, and the authority of a court of common

pleas to issue a ruling necessary to enforce an order of

the Superintendent. The second question is whether the

trial court erred in concluding that the guaranty

agreement, as secured by the letter of credit, was

supported by adequate consideration.

I

R.C. Chapter 3903 is referred to as "'the insurers

supervision, rehabilitation, and liquidation act.'" R.C.

3903.02(A). If the Superintendent has reasonable cause to

believe that the continuance of an insurer's business

could be hazardous "to the public or to the holders of its

policies or certificates of insurance," the Superintendent

may order that the insurer be placed under supervision.

R.C. 3903.09(B) and (C). Further, the Superintendent may,

under certain circumstances, file a complaint in the court

of common pleas for an order authorizing the

rehabilitation of an insurance company. R.C. 3903.12.

See, also, R.C. 3903.09(D). However, if the

Superintendent determines that rehabilitation of an

insurer "would substantially increase the risk of loss to

creditors, policyholders, or the public, or would be

futile," the Superintendent may file a motion with the

trial court for an order of liquidation. R.C. 3903.16(A).3

The General Assembly enacted R.C. Chapter 3903 for

the specific purpose of protecting "the interests of

insureds, claimants, creditors, and the public generally,

with minimum interference with the normal prerogatives of

the owners and managers of insurers * * *." R.C.

3903.02(D). See, also, Anderson v. Ohio Dept. of Ins.

(1991), 58 Ohio St.3d 215, 569 N.E.2d 1042, paragraph two

of the syllabus, wherein a majority of this court held, in

part, that R.C. Chapter 3903 was enacted for the benefit

of the "general citizenry." Moreover, to ensure that the

purpose of the act is effectuated, R.C. 3903.02(C) sets

forth that the provisions of R.C. Chapter 3903 are to be

liberally construed.

The Superintendent contends that explicit statutory

authority exists to prohibit the transfer of payments

($215,460.69) from Prompt to Phorum Re. The

Superintendent asserts that the transfers were executed in

violation of the March 22, 1990 supervision order and,

consequently, the trial court properly concluded that

Prompt could not offset the payments against any

indebtedness of Prompt due OGICO. In support of his

position, appellant relies on R.C. 3903.05, 3903.09(C) and

(I).

The General Assembly has conferred upon the

Superintendent and a trial court broad discretionary and

equitable powers relating to the supervision,

rehabilitation and liquidation of insurance companies.

R.C. 3903.09(C)(5) provides that an insurer who has been

placed under supervision may be prohibited from

transferring any property absent prior approval of the

Superintendent. Further, the Superintendent may file a

complaint or move the trial court to issue a temporary

restraining order, preliminary or permanent injunction or

"such other orders as the court considers necessary and

proper to enforce a supervision order." (Emphasis

added.) R.C. 3903.05(A). R.C. 3903.05 also gives a court

of general jurisdiction a broad spectrum of powers. R.C.

3903.05(A) provides that a trial court, upon motion of a

receiver, conservator, rehabilitator or liquidator, may

issue an order which the court considers "necessary and

proper" to prevent, inter alia, the transaction of further

business; the transfer of property; the interference with

the receiver, conservator, rehabilitator, liquidator or

any proceeding under R.C. Chapter 3903; the obtaining of

preferences; and "[a]ny other threatened or contemplated

action that might lessen the value of the insurer's assets

or prejudice the rights of policyholders, creditors, or

shareholders * * *." See R.C. 3903.05(A)(1), (2), (3),

(7) and (11).

In the case at bar, payments totalling $215,460.69

were made by Prompt to Phorum Re at the direction of

OGICO. The payments were made after OGICO had been placed

under supervision. OGICO, Prompt and Phorum Re are

closely connected companies. The record indicates that

Prompt owed money to OGICO for premiums Prompt had

financed, that OGICO owed money to Prompt for unearned

premiums on cancelled policies, and that OGICO was

indebted to Phorum Re for aviation expenses. Further, the

payments to Phorum Re by Prompt were made in accordance

with a "memorandum of understanding" between OGICO and

Prompt. The memorandum provided "* * * that any and all

transfers that PROMPT makes to Phorum [Re] on OGICO's

behalf releases PROMPT from that same liability to OGICO

and that PROMPT's payment to Phorum [Re] shall be

construed to be the same as a payment to OGICO from

PROMPT."

The trial court held, and we agree, that the transfer

of payments made by Prompt to Phorum Re on behalf of OGICO

violated the Superintendent's March 22, 1990 order. We

further agree with the trial court that the transfer of

payments were "attempts indirectly to do that which was

directly prohibited" by the supervision order and,

therefore, Prompt may not offset monies which it may owe

OGICO.

The court of appeals found that Becker-Jones had

knowledge OGICO was under supervision and that he promptly

informed Wickfield of OGICO's status. The appellate court

also found that Prompt's vice president was aware OGICO

was under supervision. The court of appeals agreed that

the payments by Prompt to Phorum Re totalling $215,460.69

violated the supervision order. However, the court of

appeals concluded that the trial court erred in holding

that payments to Phorum Re by Prompt on OGICO's behalf

were attempts to circumvent the supervision order. The

court of appeals held that before such a conclusion can be

reached, the trial court must determine whether Prompt had

knowledge of the contents of the March 22, 1990

supervision order, which precluded any transfers of

property absent prior approval by the Superintendent.

Prompt agrees with the court of appeals' conclusion and

urges that the Superintendent's exclusive remedy is set

forth in R.C. 3903.09(J). We disagree.

R.C. 3903.09(J) provides that any person, including

those described in R.C. 3903.06(A), who knowingly violates

an order of the Superintendent thereby resulting in a

decrease in the net worth of an insurer or causes the

insurer to suffer a loss may be liable for such decrease

or loss. This section provides the Superintendent with a

civil cause of action for damages against those who

knowingly violate an order of the Superintendent.

However, this section is clearly not the only remedy

available to the Superintendent. To hold otherwise would

be to ignore additional rights given to the Superintendent

by law. Most notably, R.C. 3903.09(I) provides that the

Superintendent may move the trial court for such order

that "* * * the court considers necessary and proper to

enforce a supervision order." (Emphasis added.)

Given the inexorably intertwined relationship between

Prompt and OGICO and the directors and officers involved,

even assuming that R.C. 3903.09(J) provides the exclusive

remedy available to the Superintendent, it cannot be

seriously argued that Prompt did not have sufficient

knowledge so as to comply with R.C. 3903.09(J).

Wickfield, Prompt's president, was aware that OGICO was

under supervision. Prompt's vice president was also aware

of OGICO's status. Becker-Jones also had knowledge of the

order. Further, it is apparent that Hardy, a director of

Prompt and OGICO, was also intimately involved in the

management of OGICO and other related affiliates.

Moreover, at oral argument, counsel for Prompt conceded

that Hardy was aware of the March 22, 1990 order.

The statutory scheme of R.C. Chapter 3903 is intended

to protect the rights of insureds, policyholders,

creditors, and the public generally. The Act was not

intended to protect an insider affiliate such as Prompt.

Accordingly, we hold that to protect the interests of

policyholders, creditors, claimants, and the public

generally, the Superintendent of Insurance has the

authority to issue an order placing an insurer under

supervision. An order of the Superintendent may require

an insurer to obtain approval from the Superintendent

prior to the transfer of any of the insurer's property.

Further, pursuant to R.C. 3903.09(I), a court of common

pleas has the authority to issue a ruling which is

"necessary and proper" to enforce an order of the

Superintendent of Insurance.

II

The Superintendent contends, and the trial court

held, that the guaranty agreement, as secured by the

letter of credit, was not supported by fair

consideration. The trial court concluded that the

agreement and letter of credit, when viewed under the

totality of the circumstances, did not constitute an

exchange of fair equivalent value between OGICO and

Prompt. An exchange of fair equivalent value was not

present, reasoned the trial court, because OGICO received

disproportionately less value than the obligation it

incurred.

R.C. 3903.26(A) provides, in part, that every

transfer or obligation incurred by an insurer within one

year of the filing of a successful complaint for

rehabilitation or liquidation is fraudulent as to then

existing or future creditors if made without fair

consideration. R.C. 3903.01(H) provides that:

"'Fair consideration' is given for property or

obligation when either of the following apply:

"(1) When in exchange for such property or

obligation, as a fair equivalent therefor, and in good

faith, property is conveyed, services are rendered, an

obligation is incurred, or an antecedent debt is satisfied;

"(2) When such property or obligation is received in

good faith to secure a present advance or antecedent debt

in an amount not disproportionately small as compared to

the value of the property or obligation obtained."

(Emphasis added.)

The court of appeals held that the trial court did

not apply R.C. 3903.26(A) and 3903.01(H) correctly when it

determined whether fair equivalent value was exchanged

between OGICO and Prompt. In reaching this conclusion,

the court of appeals stated that "[f]air equivalent value

does not necessarily mean equal value, and the court must

look at the total circumstances involved in the

transaction. What is exchanged does not have to be equal,

but can be substantially equivalent as long as what is

exchanged is not disproportionately small." (Emphasis

sic.)

In Myers v. Garson (1993), 66 Ohio St.3d 610, 614,

614 N.E.2d 742, 745, we recently reaffirmed that: "[W]here

the decision in a case turns upon credibility of

testimony, and where there exists competent and credible

evidence supporting the findings and conclusions of the

trial court, deference to such findings and conclusions

must be given by the reviewing court." Having reviewed

the entire record in the instant case, we find that there

exists competent and credible evidence supporting the

findings of fact and conclusions of law of the trial court.

We agree with the trial court that the major

benefactor of the guaranty agreement was Prompt. The

guaranty agreement and letter of credit were a condition

precedent to Close Brothers' obtaining a fifty percent

ownership interest in Prompt. As a result of Close

Brothers' participation, Prompt was able to obtain a

beneficial infusion of capital, a revolving credit

facility, and the ability to pay off certain of its

outstanding loans. In contrast, OGICO was required to pay

a $1 million debt owed by its parent company, pay a

$10,000 fee and pledge approximately $1 million in

assets. The trial court noted that in exchange for

signing the guaranty agreement, OGICO simply received more

accessible premium financing. It appears that OGICO

already had existing opportunities available to it from

other companies for financing insurance premiums. Hence,

it is apparent that the court of appeals impermissibly

substituted its judgment for that of the trial court.

III

For the foregoing reasons, we reverse the judgment of

the court of appeals and reinstate the judgment of the

trial court in all respects.

Judgment reversed.

Moyer, C.J., A.W. Sweeney, Wright, Resnick, F.E.

Sweeney and Pfeifer, JJ., concur.

FOOTNOTES:

1 The concept of premium financing involves the

financing of an insurance policy. There is a contractual

or established relationship between an insurance company

and a financing entity. In general terms, the financing

company advances the amount of premium owed by the insured

to the insurer. The insured, which has given the

financing company a substantial down payment, then pays

the financing company the remainder of the premium in

installments. However, if the insured's policy is

cancelled, the insurer is required to remit any unearned

premium to the financing company which then reimburses the

insured for any amount that may be owed it.

2 The OGICO group companies had been for a certain

period of time operating on a "pooled" arrangement whereby

all day-to-day business operations were conducted out of

OGICO's main office. Further, OGICO was considered the

controlling company for the pooled arrangement. Moreover,

it appears that employees responsible for the management

of the OGICO group were located at the same address as

that of Prompt.

3 On August 31, 1990, OGICO was found to be insolvent

and placed in liquidation.