Opposition Brief — Risk Managers Managers International, In Re: (No. 92-1050)

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No. 92-10-50

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IN THE SUPREME COURT OF THE UNITED See

October Term, 1992 | gFR.. OF Io. zak

IN RE: RISK MANAGERS INTERNATIONAL, INC.;

HERSCHEL HANCOCK, individually and as

Officer of RISK MANAGERS INTERNATIONAL,

INC.; and CORPORATE UNDERWRITERS, LTD.,

BRIEF IN OPPOSITION 7O PETITION FOR WRIT OF

MANDAMUS TO THE HONORABLE JOHN K. DIETZ,

PRESIDING JUDGE OF THE 250TH JUDICIAL

DISTRICT COURT OF TRAVIS COUNTY, TEXAS

DAN MORALES DIANE BARLOW-SPARKMAN

Attomey General of Texas Assistant Attomey General

WILL PRYOR

First Assistant Attomey General LINDA I. SHAUNESSY

MARY F. KELLER Assistant Attomey General

Deputy Attorney General P. O. Box 12548

for Litigation Austin, Texas 78711-2548

EDNA RAMON BUTTS (512) 463-2018

Assistant Attomey General (S12) 477-2348 - Telecopier

Chief, Finance Division COUNSEL OF RECORD

February 3, 1993 Attorneys for State of Texas

and State Board of Insurance

i

TABLE OF CONTENTS

Re Ue OEE bo 5 0 60 66 606k ee ce wees i, ii, iii

TABLE OF AUTHORITIES ...... ccc cccees lii, iv, V

REASONS FOR DENYING THE REQUEST

a 8

I. THE TRIAL COURT ORDERS DO NOT

INFRINGE ON PETITIONERS’

CONSTITUTIONAL PRIVACY RIGHTS ........ 9

A. SINCE 1911 THIS COURT HAS

HELD THAT CORPORATE DOCUMENTS |

AND FINANCIAL INFORMATION ARE

NOT AFFORDED ABSOLUTE

PROTECTION UNDER THE

FOURTH AMENDMENT ............ 9

B. GOVERNMENTAL ENTITIES

MAY OBTAIN CORPORATE

eS 11

II. THE TRIAL COURT DID NOT ABUSE ITS

DISCRETION BY ORDERING DISCOVERY

OF PETITIONERS’ CORPORATE

DOCUMENTS AND FINANCIAL

oo RE ee ee 13

A. THE SCOPE OF DISCOVERY IS

oo Ser eee 14

B. TEXAS COURTS ALLOW THE

DISCOVERY OF FINANCIAL

INFORMATION AND NET WORTH ..... 15

on THE DISCOVERY SOUGHT BY

THE STATE IS NECESSARY

TO CALCULATE PREMIUM

D. THE DISCOVERY SOUGHT

FROM INDIVIDUAL

PETITIONER HERSCHEL

HANCOCK IS WITHIN

THE PROPER SCOPE OF

oo Ee eee 19

Ill. THE TRIAL COURT DID NOT ABUSE ITS

DISCRETION IN ORDERING CORPORATE

UNDERWRITERS TO PRODUCE ITS

DISCOVERY RESPONSES FOR IN CAMERA

a Re ee ae 20

A. THE TRIAL COURT HAS

THE POWER TO ORDER

PRODUCTION OF THE

DISCOVERY SOUGHT BY

a 21

B. IT IS WITHIN THE

DISCRETION OF THE

TRIAL COURT TO ORDER

THE DISCOVERY REQUESTED

a ee 22

1. The Discovery Sought Is Important

Oe Cee I se oe oe wks 6 nas 23

2. The State’s Discovery Requests

Are Sufficiently Specific .............. 24

a Much Of The Information

Originated In The United States ......... 24

4. There Are No Alternative

Means To Secure The

EEE 2 Oo ee 24

> Noncompliance With The

Discovery Requests

Would Undermine Important

a NL ee eee 24

.. CORPORATE UNDERWRITERS HAS

THE BURDEN OF PROOF IN

ASSERTING THE EXEMPTION

FROM DISCOVERY AND HAS

FAILED TO MEET THIS BURDEN ...... 26

D. THERE IS NO PUBLIC POLICY

REASON TO EXEMPT CORPORATE

UNDERWRITERS FROM DISCOVERY ... 27

iv

TABLE OF AUTHORITIES

American Lithographic v. Werckmeister,

ee a ee 11

California Bankers Ass’n. v. Shultz,

ol NS 11, 13

Delgado v. Kitzman, 793 §.W. 2d 332

(Tex. App. - Houston [Ist Dist.] 1990),

NS Os oe OG ce ee

Essgee Co. of China v. United States,

EO rr er errr

Grant v. United States,

I 2 Ce ao ag een re var

Hancock v. State of Texas,

800 S.W.2d 683 (Tex. App. - Austin 1990,

atte te ee

Hanna v. Meurer,

769 S.W.2d 680, 681 (Tex. App. - Austin, 1989,

orig. proc.) (en banc, per curiam) ..............

In re: Grand Jury Proceedings v. Field,

532 F.2d 404, 407 (Sth Cir. 1976) .............

In re: Uranium Antitrust Litigation

(Westinghouse Electric Corp v.

Rio Algom Ltd.), 480 F.Supp. 1138,

Pe I ee hw we

Jordan v. Court of Appeals for Fourth Supreme

Judicial District, 701 S.W.2d 644,

648-649 (Tex. 1985) (orig. proc.) ..............

Lloyd A. Fry Roofing Co. v. State,

524 S.W.2d 313, 322 (Tex. App. -

Dallas 1975, writ ref'd n.r.e.) ................

Lunsford v. Morris,

746 S.W.2d 471 (Tex. 1988){orig. proc.) ......... 15

McKesson Corp. v. Islamic Republic of Iran,

S25 FD. 1 GR, GE) oe a se 26, 27

Oklahoma Press Pub. Co. v. Walling,

oat US. 806, SUB CISGB) 2 www cw ewes 12

Osborn v. Ozlin,

Se ne I os oh a we eee ee 25

Societe Internationale v. Rogers,

357 U.S. 197, 204-206, (1958). ..........00... 21

Societe Nationale v. U.S. District Court,

482 U.S. 522, 544 n.29 (1987)....... eee ea: 21

United States v. White,

See eh EE ok ee os be e's eae cudas 11

United States v. First Nat'l. Bank of Chicago,

699 F.2d 341, 345 (7th Cir. 1983) ............. 21

United States v. First National City Bank,

396 F.2d 997, 901 Gd Cir. 1968) ............22- 21

United States v. Morton Salt Co.,

Be ee EE 6 x GW eek Ue ena er 11, 13

W & S Life Ins. Co. v. State Board of Equalization,

ee as EY ok 6 ba bee 6 eee ee eS 25

Weisel Enterprises, Inc. v. Curry,

718 S.W.2d 56, 58 (Tex. 1986) (per curiam)

9 ee arr 26

Wheeler v. United States,

POURED io 0.6 6-6 oto va 60% a 11

Wilson v. United States,

ee ie ee ED 6k ns ee ee eb eee 10, 11

vi

RULES AND STATUTES

McCarran-Ferguson Act, 59 Stat. 33, 15 U.S.C. §1011 ..... 24

Restatement (Third) on Foreign Relations Law

(American Law Institute 1991 at §442) ........... 22

Tex. Ins. Code Ann. art. 1.14-1 §2(0)(4) .............. 2

Tex. Ins. Code Ann. art. 1.14-1, §11................. 18

Tex. Ins. Code Ann. arts. 1.14-1, §3(d) and 21.21,

§15(c) (Vernon Supp. 1993) ................. 16

Tex. Rev. Civ. Stat. Ann. art. 8308-3.23(a)

a “cae Oe

Texas Rule of Civil Procedure 166(b) ................ 14

No. 92-10-50

IN THE SUPREME COURT OF THE UNITED STATES

October Term, 1992

IN RE: RISK MANAGERS INTERNATIONAL, INC.;

HERSCHEL HANCOCK, Individually and as

Officer of RISK MANAGERS INTERNATIONAL,

INC.; and CORPORATE UNDERWRITERS, LTD.,

TS Be

BRIEF IN OPPOSITION TO PETITION FOR WRIT OF

MANDAMUS TO THE HONORABLE JOHN K. DIETZ,

PRESIDING JUDGE OF THE 250TH JUDICIAL

DISTRICT COURT OF TRAVIS COUNTY, TEXAS

STATEMENT OF THE CASE

Petitioners’ statement of the case contains numerous

inaccuracies and omits several important facts. Therefore, the State

of Texas ("State") provides the following statement of the case.

Corporate Underwriters, Ltd. ("Corporate Underwriters") is

an off-shore insurance company incorporated in the Turks and Caicos

Islands in the British West Indies. Corporate Underwriters sells

insurance to Texas residents which covers risks located and resident

in Texas. Corporate Underwriters is not licensed to sell insurance in

Texas. Corporate Underwriters claims that it is exempt from any

licensing requirements in Texas because it is selling insurance in

Texas on an “independently procured" basis. Texas law requires that

2

to comply with the independently procured exemption, all negotiations

for the procurement of such insurance must occur outside of Texas,

the transaction must be reported tc the State, and a premium tax must

be paid to the State. Tex. Ins. Code Ann. art. 1.14-1 §2(b)(4)

(Vernon Supp. 1993) (“Insurance Code").

Risk Managers International, Inc. ("RMI") is a Texas

corporation which administers claims for Corporate Underwriters.

RMI has its offices in Dallas. RMI is not licensed to sell insurance

and is not licensed as a third-party administrator. Herschel Hancock

is the president of RMI. Hancock is not licensed to sell insurance in

Texas and is not licensed as a third-party administrator. '

In the late 1980’s, the State became aware that Petitioners

were engaged in certain insurance activity in Texas. The State’s

investigation into Petitioners’ activities revealed that the negotiations

between Corporate Underwriters and its prospective insureds do not

' Although Petitioners claim that Corporate Underwriters

conducts its insurance business from offices in the Turks and Caicos,

Corporate Underwriters receives mail and premium check’s at RMI’s

office in Dallas. Corporate Underwriters maintains a bank account

in Dallas and Hancock has signatory authority on such account. At

Hancock’s direction, funds from the account are used to pay

commissions to insurance agents and consultants in Texas who bring

business to Corporate Underwriters. [Appendix L-27]

3

take place entirely outside the State of Texas and that therefore,

Corporate Underwriters is not selling insurance in Texas on an

independently procured basis. In furtherance of its investigation, the

State subpoenaed Hancock to appear for deposition and produce

certain documents related to the activities of Corporate Underwriters

and RMI in Texas. Hancock asserted the Fifth Amendment privilege

against self-incrimination and refused to testify or produce the

documents. The State moved to compel Hancock’s response and the

State district court entered an order compelling Hancock to respond

to the subpoena. Hancock appealed the district court order, but failed

to obtain relief. Hancock v. State of Texas, 800 S.W.2d 683 (Tex.

App. - Austin 1990, writ denied).

During the pendency of Hancock’s appeal, the State

uncovered additional evidence that Petitioners were unlawfully selling

insurance in Texas. Petitioners’ activities were particularly troubling

to State regulators because Petitioners were purporting to sell

workers’ compensation insurance to numerous employee leasing firms

throughout Texas.? These employee leasing firms “employ”

Petitioners have attempted to create a distinction between

“statutory” workers’ compensation insurance and workers’

a on

4

thousands of workers, usually in fields where there is a high risk of

on-the-job injury. If Corporate Underwriters does not have adequate

reserves to cover the claims that are bound to arise under such

policies or if Corporate Underwriters is misappropriating premiums,

the workers who are the beneficiaries of such policies will be without

meaningful coverage. Under these circumstances, the State would

have been remiss if it had not taken action against the Petitioners.

Thus, on September 8, 1989, the State filed its complaint

against Petitioners seeking to enjoin them from doing the

unauthorized business of insurance in Texas and seeking imposition

of fines and penalties for conducting the business of insurance in

Texas without a license in violation of Insurance Code art 1.14-1.

The State also applied for the ex parte appointment of a temporary

receiver. Pursuant to the State’s request, a temporary receiver was

appointed for Corporate Underwriters and RMI. Petitioners

compensation insurance used in a generic sense. In Texas, if an

employer elects to subscribe to the workers’ compensation system,

that employer must purchase workers’ compensation insurance from

an insurance company specifically licensed to sell workers’

compensation insurance. Tex. Rev. Civ. Stat. Ann. art. 8308-3 .23(a)

(Vernon 1992). Corporate Underwriters maintains that it is selling

generic workers’ compensation insurance which is outside the

workers’ compensation system.

5

characterize the temporary receivership, which was in effect for seven

days, as illegal and improper and accuse the State of numerous

wrongdoings during the receivership. [Appendix L-19] Petitioners

argue that these alleged wrongdoings should bar the State from

obtaining the discovery it now requests. Petitioners have been

entirely unsuccessful, however, in establishing any of their

allegations. For instance, Petitioners have failed to establish that the

State seized any of Hancock’s personal files during the temporary

receivership. [Appendix L-35, L-59]. Petitioners have also failed to

establish that the State intimidated any RMI employees or conducted

unlawful searches of RMI or its employees.’ Finally, Petitioners

have never established that the State made any false statements to

third parties concerning Petitioners.‘

*Petitioners’ witness on these points testified that the State asked

RMI employees for the keys to RMI’s file cabinets and used the keys

to obtain access to the cabinets. Further, Petitioners’ witness testified

that the State asked permission to search employee handbags, but did

not search the handbag of any employee who denied permission for

the search. The witness offered no evidence that the State threatened

her or any other RMI employee. [Appendix L-23, L-35].

‘In their allegations, Petitioners are evidently referring to the

article which appeared in the March 19, 1991 edition of The Wall

Street Journal. The article explores the havoc wreaked by cut rate

employee leasing companies and the off-shore, unregulated insurance

companies that provide them with what is purported to be workers’

6

On September 25, 1989, the state district court, after hearing

evidence and the argument of counsel, issued a temporary injunction

order enjoining Petitioners from doing the business of insurance in

Texas. The court specifically found that Petitioners had not complied

with the independently procured exempiion and were engaged in the

unauthorized business of insurance in Texas. The court dissolved the

temporary receivership on the basis that the State had not produced

any evidence of insolvency. Petitioners filed an interlocutory appeal

of the trial court’s temporary injunction order. The Court of

Appeals, Third Judicial District of Texas, Austin, Texas, in a written

opinion, affirmed the trial court’s ruling. [Appendix B-1] The Texas

Supreme Court dismissed Petitioners’ appeal for want of jurisdiction.

During the course of Petitioners’ appeals of the temporary

injunction order, the State’s efforts to obtain discovery from

Petitioners were stayed. When the appeals were resolved in favor of

the State, the State served Petitioners with its discovery requests. In

response, RMI produced limited responses, but moved for a

compensation insurance. One of the State’s attorneys was interviewed

for the article, but there has never been any showing that the State

made any false or inaccurate statements in connection with the

interview or that the article contains any inaccuracies.

7

protective order with respect to a majority of the requests alleging

that it has a privacy right which exempts it from having to respond.

Corporate Underwriters repeated the privacy arguments asserted by

RMI and further objected to every discovery request and moved for

a protective order on the basis of the Turks and Caicos nondisclosure

laws.°

On March 10, 1992, the trial court heard arguments and

testimony on the motions for protective order filed by RMI and

Corporate Underwriters. The trial court orderea RMI to respond to

the discovery in dispute and in a ruling from the bench, ordered

Corporate Underwriters to submit its responses to the court for an in

camera inspection. [Appendix H-1 and Petitioners’ Appendix C-1-1]

On April 13, 1992, the trial court heard Petitioners’ arguments for

reconsideration and denied the motions for reconsideration. On June

8, 1992, the trial court heard Petitioners’ second motion for

reconsideration. Once again, the trial court denied Petitioners the

relief they requested. Thereafter, Petitioners presented their Motion

* Hancock made the same privacy objections and also asserted

the Fifth Amendment in response to the State’s discovery requests.

In a later ruling, the trial court sustained some, but not all, of

Hancock’s Fifth Amendment objections.

for Leave to File Petition for Writ of Mandamus and for Immediate

Temporary Relief to the Court of Appeals, Third Judicial District of

Texas. The Court of Appeals denied Petitioners’ motion on July 1,

1992. [Petitioner’s Appendix A-1-1] Petitioners then presented their

Motion for Leave to File Petition for Writ of Mandamus and for

Immediate Temporary Relief to the Supreme Court of Texas. The

Supreme Court of Texas denied this motion on September 16, 1992.

[Petitioners’ Appendix A-2-1]

REASONS FOR DENYING THE REQUEST

FOR WRIT OF MANDAMUS

Petitioners make two arguments in support of their request

that this Court issue a writ of mandamus compelling the trial court

judge to vacate his discovery orders. First, Petitioners argue that

they have a constitutional right to privacy which extends to the

discovery sought by the State in this civil litigation. Petitioners claim

that this privacy right exempts them from having to respond to the

State’s discovery requests. Second, Petitioners contend that

Corporate Underwriters, which is subject to the jurisdiction of the

Texas courts, is exempt from responding to the State’s discovery

requests because the laws of the Turks and Caicos allegedly prohibit

disclosure of such information.

aires haiie Snare

9

As demonstrated below, Petitioners’ arguments must fail.

First, the Fourth Amendment rights of a corporation are not violated

when the requested discovery is relevant and reasonable. Here, the

. trial court ruled that the requested discovery was relevant and not

overbroad, so there has been no infringement of Petitioners’ Fourth

Amendment rights. Finally, it is well-established that a court in this

country is empowered to order discovery when it has personal

jurisdiction over a foreign party, despite the existence of foreign

nondisclosure laws. The trial court did not abuse its discretion when

it ordered Corporate Underwriters to produce its discovery for an in

camera inspection, so that it could weigh the respective interests of

the parties and determine whether any of the discovery should be

propounded to the State.

I.

THE TRIAL COURT ORDERS DO NOT INFRINGE ON

PETITIONERS’ CONSTITUTIONAL PRIVACY RIGHTS

Petitioners’ assertions that the discovery ordered by the trial

court would deprive them of their Fourth Amendment rights are

| incorrect and in direct opposition to prior rulings of this Court.

A. SINCE 1911 THIS COURT HAS HELD THAT

CORPORATE DOCUMENTS AND _ FINANCIAL

10

INFORMATION ARE NOT AFFORDED ABSOLUTE

PROTECTION UNDER THE FOURTH AMENDMENT

Petitioners fail to acknowledge this Court’s decisions on the

questions of whether financial information and corporate records may

be compelled from a corporation and whether production of corporate

documents is violative of a corporation’s Fourth Amendment rights.

This Court first addressed these issues in 1911 in Wilson v. United

States, 221 U.S. 361 (1911). There, this Court reviewed a decision

holding a corporate officer in contempt for refusing to produce the

corporate books pursuant to grand jury subpoena. This Court found

that the production of such documents did not violate the provisions

of the Fourth Amendment. This Court stated:

{B]ut the corporate form of business

activity with its chartered privileges,

raises a distinction when the

authority of government demands the

examination of books. That demand,

expressed in lawful process,

confining its requirements within the

limits which reason imposes in the

circumstances of the case, the

corporation has no privilege to

refuse....Although the object of the

inquiry may be to detect the abuses it

has committed, to discover its

violations of law, and to inflict

punishment by forfeiture of

franchises or otherwise, it must

11

submit its books and papers to duly

constituted authority when demand is

suitably made.

Wilson 221 U.S. 361, 382 (1911) (emphasis added).

This Court has consistently and continually foliowed Wilson,

finding no infringement of Fourth Amendment rights when corporate

records are properly subpoenaed or ordered to be produced. See,

American Lithographic v. Werckmeister, 221 U.S. 603 (1911);

Wheeler v. United States, 226 U.S. 478 (1913); Grant v. United

States, 227 U.S. 74 (1913); Essgee Co. of China v. United States,

262 U.S. 151 (1923); United States v. White, 322 U.S. 694 (1944);

and United States v. Morton Salt Co., 338 U.S. 632 (1950).

In sum, the corporate records at issue are not absolutely

protected by the Fourth Amendment from court ordered disclosure.

B. GOVERNMENTAL ENTITIES MAY OBTAIN

CORPORATE RECORDS

Corporations are not permitted to engage in commerce free

from regulatory scrutiny or in secret. California Bankers Ass'n. v.

Shultz, 416 U.S. 21 (1974). In the present case, the trial and appellate

courts have concluded that RMI and Corporate Underwriters have

conducted the business of insurance in Texas. [Appendix B-1] As

12

entities who enjoy the benefits of selling insurance products in Texas,

Corporate Underwriters and RMI must comply with the insurance

regulations instituted by Texas.°

Subpoenas or orders sanctioned by a court seeking production

of corporate records do not violate the Fourth Amendment if the

requests comply with a four prong test: 1) the requests are not too

indefinite or broad; 2) the demanding agency is authorized by law to

make such an inquiry; 3) the inquiry seeks relevant materials; and +

the disclosure is not unreasonable. Oklahoma Press Pub. Co. v.

Walling, 327 U.S. 186, 208 (1946). The State’s discovery requests

Satisfy all four prongs of the test.

The discovery requested is relevant and material to the

question of whether RMI and Corporate Underwriters have conducted

the unauthorized business of insurance in Texas. The State has

demonstrated that the discovery requests are reasonable because each

of the requests relate to documents which will prove that RMI or

Corporate Underwriters violated article 1.14-1 of the Insurance Code,

® See McCarran Ferguson Act, 59 Stat. 33, 15 U.S.C. §1011

(Insurance regulation is governed by the State); United States v.

Morton Salt Co., 338 U.S. 632, 652-3 (1950).

13

or will provide information relating to the assessment of premium

taxes and civil penalties under article 1.14-1.

In addition, records which an entity is required by law to

maintain in its possession for inspection by or disclosure to a

governmental entity are not subject to Fourth Amendment protection.

California Bankers Ass'n. v. Shultz, 416 U.S. 21 (1974). This Court

reasoned that artificial entities may be subject to enhanced regulations

and regulatory requirements as a result of the privileges the entities

derive from engaging in interstate commerce.

Further, this Court has ruled that an entity must comply with

a request for information from a regulatory agency. In United States

v. Morton, 338 U.S. 632, 652 (1950) this Court stated “that law

enforcing agencies have a legitimate right to satisfy themselves that

corporate behavior is consistent with the law.”

II.

THE TRIAL COURT DID NOT ABUSE ITS DISCRETION BY

ORDERING DISCOVERY OF PETITIONERS’ CORPORATE

DOCUMENTS AND i ("ANCIAL INFORMATION

Petitioners urge this Court to prohibit the discovery ordered

by the trial court. As discussed the discovery is not violative of the

U.S. Constitution. Moreover, the discovery requests are within the

14

scope of discovery as allowed by the Texas Rules of Civil Procedure.

Therefore, this Court should not disturb the trial court’s orders.

A. THE SCOPE OF DISCOVERY IS BROAD IN

TEXAS

Texas Rule of Civil Procedure 166(b) (patterned after Fed.

Rule Civ. Proc. 26(b)(1)) states that:

Parties may obtain discovery regarding any matter

which is relevant to the subject matter in the pending

action whether it relates to the claim or defense of the

party seeking discovery or the claim or defense of

any other party. It is not ground for objection that

the information sought will be inadmissible at the

trial if the information sought appears reasonably

calculated to lead to the discovery of admissible

evidence.’

The discovery orders entered by the trial court compel RMI

to answer interrogatories or produce the documents relating to the

following areas of inquiry:

(a) money paid or owed relating to

insurance solicited for risks resident,

located or to be performed in Texas;

(b) receipt of money from the sale of insurance;

(c) payment of claims;

(d) payment of expenses, commissions,

fees, taxes, relating to insurance sold

covering a risk in Texas;

7

The relevant portions of Tex. Rule Civ. Proc. 166 (b) are

included herein as Appendix A-1 .

—_———

15

(e) correspondence related to the

marketing of insurance where the

risk is located in Texas;

(f) disbursements or wire transfers

between RMI and _ Corporate

Underwriters regarding the

solicitation or procurement of

insurance;

(g) payment of salaries, expenses, or

compensation to RMI or Corporate

Underwriters;

(h) premium dollars paid to RMI and/or

Corporate Underwriters;

(i) capital, reserve, or assets available

for the payment of claims for

insurance; _

(j) consultant fees;

(k) money paid for solicitation of

insurance; and

(I) compensation paid to Hancock, and

or RMI.

[Petitioners’ Appendix C-1-1, C-2-1 and Appendix K-1, M-1]

These areas of inquiry are necessary and material to the case at bar

and are within the proper scope of discovery.

B. TEXAS COURTS ALLOW THE DISCOVERY OF

FINANCIAL INFORMATION AND NET WORTH

Net worth is discoverable in this case because the State seeks

civil penalties. The Texas Supreme Court has held that net worth,

including financial statements, is discoverable in a suit in which

punitive damages may be recovered. Lunsford v. Morris, 746 S.W.2d

16

471 (Tex. 1988)(orig. proc.); Hanna v. Meurer, 769 S.W.2d 680,

681 (Tex. App. - Austin, 1989), (orig. proc.) (en banc, per curiam).

Net worth is discoverable because the purpose of punitive damages is

to punish the defendant. As a result, the defendant’s ability to pay

damages is relevant so that damages may be properly assessed.

Lunsford at 473. In order to punish the Petitioners for their illegal

activities, the State seeks assessment of civil penalties in the statutory

amount of up to ten thousand dollars per day per violation of the

Insurance Code.* Civil penalties, like punitive damages, are awarded

to punish and set an example for others. Thus, net worth is relevant

to assessing civil penalties.

The Court of Appeals, Fifth Judicial District of Texas, has

concluded that evidence of the amount of profit a defendant has

obtained by violating a statute might be admissible evidence when

assessing civil penalties. Lloyd A. Fry Roofing Co. v. State, 524

S.W.2d 313, 322 (Tex. App. - Dallas 1975, writ ref’d n.r.e.).

Contrary to Petitioners’ representations, Fry Roofing stands for the

proposition that courts should assess civil penalties based on the

* Specifically, the State seeks penalties pursuant to Tex. Ins.

Code Ann. arts. 1.14-1, §3(d) and 21.21, §15(c) (Vernon 1993).

[Petitioner’s Appendix B-5-3, B-5-6]

17

nature and gravity of the violation. If evidence of the amount of

profit a defendant made from illegal activities may be admitted into

evidence in a case sete assessment of civil penalties, then

evidence of net worth should be discoverable in the same suit.?

.. THE DISCOVERY SOUGHT BY THE STATE IS

NECESSARY TO CALCULATE PREMIUM

TAXES

All categories of information requested of Petitioners are

needed to calculate unauthorized insurance premium taxes owed under

Insurance Code article 1.14-1, §11. The State has sued for

nonpayment of unauthorized insurance premium taxes under this

article. The Insurance Code provides that an unauthorized insurance

company must pay the State an unauthorized insurance premium tax

of 4.85% of the amount of gross premiums actually received during

a calendar year, not the amount of premiums which were charged as

, Under Texas case law, obtaining discovery regarding

financial information or net worth for a period of 10 years before trial

is allowable. Delgado v. Kitzman, 793 S.W. 2d 332 (Tex. App. -

Houston [Ist Dist.] 1990), (orig. proc.) Relator RMI was

incorporated in 1984, and discovery is requested from January 1,

1985.

the Petitioners have erroneously asserted."° In order to accurately

calculate the premium taxes, the State must know: (1) the exact

amount of premiums which the Petitioners actually received; (2) what

premiums were paid for insurance risks located in Texas (as opposed

to insurance risks located outside of the state); (3) what premium

taxes, if any, have been reported to other states; and (4) when the

insurance premiums were received by the Petitioner(s). [Appendix L-

67] The date the premiums are received is critical to a determination

of the amount of late payment penalties that should be assessed under

the statute, due to varying rates of interest and various tax rates under

the Insurance Code. Further, the State needs to know the amount of

money paid by an insurer to any person acting as an agent, which is

not included in the calculation of premium taxes and must be

separated from the actual premium payment. Therefore,

documentation demonstrating the amount of premium dollars which

were used to pay agent’s commissions is necessary.

Petitioners erroneously allege that they have previously

produced documents which show the amount of premiums paid for

‘© Under Tex. Ins. Code Ann. art. 1.14-1 § 11 (Vernon 1993)

the term "premium" includes all premiums, membership fees,

assessments, dues, and any other consideration for insurance.

19

each policy. Petitioners have produced certain insurance policies

which demonstrate the estimated policy premium which might be

charged under the policy. However, Petitioners have failed to

produce any documents that indicate: (1) the amount of premiums

which were actually received by Corporate Underwriters; (2)

premiums paid for insurance risks located in Texas; (3) the amount,

if any, of premium taxes which have been reported or paid to any

other state(s); and (4) the date and calendar year in which the

premiums were actually received. The State demonstrated through

testimony of its chief witness that to accurately determine the amount

of premium taxes owed, the State needs responses to the discovery it

propounded to Petitioners.'' [Appendix L-70]

D. THE DISCOVERY SOUGHT FROM INDIVIDUAL

PETITIONER HERSCHEL HANCOCK IS WITHIN

THE PROPER SCOPE OF DISCOVERY

Subsequent to the entry of the discovery orders which are the

subject of Petitioners’ request to this Court, the trial court heard

Hancock’s objections based on his alleged Fifth Amendment rights.

° Petitioners also erroneously allege that the premium

tax information is readily available from filings made with the Texas

Comptroller’s Office. Such filings do not exist and are not evident

in the record.

20

Many of Hancock’ Fifth Amendment objections were sustained.

[Appendix K-1] As a result, Hancock has been ordered to provide

the following information to the trial court for an in camera

inspection: (1) Hancock’s social security number; (2) Hancock’s

residential addresses; (3) the identity of Hancock’s accountants; (4)

Hancock’s net worth; and (5) information regarding compensation

received by Hancock from RMI and Corporate Underwriters. These

areas of inquiry contain no privilege which would prevent their in

camera inspection by the trial court. Thus, the trial court has not

abused its discretion.

III.

THE TRIAL COURT DID NOT ABUSE ITS

DISCRETION IN ORDERING CORPORATE UNDERWRITERS

TO PRODUCE ITS DISCOVERY RESPONSES FOR IN

CAMERA INSPECTION

Corporate Underwriters further objects to the discovery

requests propounded by the State on the basis of the Turks and Caicos

nondisclosure laws. Corporate Underwriters alleges that if it is

compelled to produce the information sought by the State, it will be

subject to criminal prosecution in the Turks and Caicos. First, it

Should be made clear that the trial court did not order Corporate

eT

a tile Bos ~ «

en

21

Underwriters to produce any discovery to the State. Instead, the trial

court merely ordered Corporate Underwriters to produce its responses

and responsive documents to the court for an in camera inspection.

[Appendix M-1] To the extent that Corporate Underwriters’

responses are duplicative of the responses by RMI, the trial court held

that Corporate Underwriters is not obligated to produce such

information. [Appendix H- 11] Corporate Underwriters has refused

to tender its discovery responses for the in camera inspection.

A. THE TRIAL COURT HAS THE POWER TO

ORDER PRODUCTION OF THE DISCOVERY

SOUGHT BY THE STATE

The case law is unmistakably clear that when a United States

Court has jurisdiction over a party which has control of documents or

other information, that court has the power to order production of the

discovery, despite the location of the documents and the existence of

any foreign laws which may impose penalties for their disclosure.

Societe Internationale v. Rogers, 357 U.S. 197, 204-206 (1958).; See

also, Societe Nationale v. U.S. District Court, 482 U.S. 522, 544

n.29 (1987); United States v. First Nat’l. Bank of Chicago, 699 F.2d

341, 345 (7th Cir. 1983); In re: Grand Jury Proceedings, 532 F.2d

404, 407 (Sth Cir. 1976); United States v. First National City Bank,

22

396 F.2d 897, 901 (2d Cir. 1968); and Jn re: Uranium Antitrust

Litigation (Westinghouse Electric Corp v. Rio Algom Ltd.), 480

F.Supp. 1138, 1145 (N.D. Ill. 1979).

It is undisputed that the trial court has jurisdiction over

Corporate Underwriters. Further, Corporate Underwriters does not

dispute that it has control of documents responsive to the State’s

discovery requests. Thus, the trial court has the power to compel

Corporate Underwriters to respond to the State’s discovery requests.

B. IT IS WITHIN THE DISCRETION OF THE TRIAL

COURT TO ORDER THE DISCOVERY

REQUESTED BY THE STATE.

While the existence of a foreign nondisclosure law does not

prevent a United States court from ordering discovery, the trial court

is instructed to use its discretion in determining whether to exercise

such power. The Restatement (Third) on Foreign Relations Law

(American Law jnstitute 1991 at § 442), identifies five factors to be

weighed by a court in determining whether to exercise its power to

compel production in the face of a foreign statute that blocks

discovery. Those five factors are: (1) the importance of the

documents to the litigation; (2) the degree of specificity of the

requests; (3) whether the information originated in the United States;

23

(4) the availability of alternative means of securing the information;

and (5) the extent to which non-compliance with the discovery

requests would undermine important interests of the state or

compliance with the request would undermine an important interest

in thé country where the information is located. In its brief to the

trial court, the State addressed each of these elements in detail. In its

ruling, the trial court concluded that it would review the discovery

responses in camera, weigh the respective interests of each party and

thereafter determine what documents or responses, if any, should be

_ disclosed to the State. [Appendix H-12] Clearly, there has been no

abuse of discretion since the trial court has not yet ruled that any of

Corporate Underwriters’ responses are discoverable. In any event,

the State has made an adequate showing that the discovery should be

ordered.

1. The Di Sought Is] To The Liticati

In its requests to Corporate Underwriters, the State seeks discovery

of information regarding the solicitation, sale and delivery of

insurance policies issued to Texas residents by Corporate

Underwriters, premiums paid to Corporate Underwriters by Texas

residents, claims made by Texas residents under the policies issued

24

by Corporate Cativetiniis, evidence of Corporate Underwriters’ net

worth or financial condition, and the manner in which Corporate

Underwriters provides for the payment of claims as they arise. This

discovery, as demonstrated in the preceding sections of this brief, is

relevant and important to this litigation.

2. The _State’s Discovery Requests Are Sufficiently

Specific, To the extent Petitioners have objected to the State’s

discovery requests for lack of specificity, such objections have been

disposed of by the trial court in a prior ruling. Petitioners do not

seek relief with respect to this prior ruling.

3. Much Of The Inf ion Originated In The United

States. The information requested by the State relates to Corporate

Underwriters’ insurance activities in Texas. The information

requested by the State either originated in Texas or is directly related

to Corporate Underwriters’ business in Texas.

4. There Are No Alternative Means To Secure The

Information, The trial court has ruled that Corporate Underwriters

is not obligated to produce information for the in camera inspection

that would be duplicative of the information supplied by RMI.

[Appendix H-1] There are no other sources for the information.

ae a a INE Se ren MO Lr

Ait es nt a

AA sh PL BENIN ly OA MAN ile a ead pai milo

A ae eal a eee iar ned

25

5. N liance With The Di R Would

Undermine Important Interests Of Texas, The State has a strong

interest in regulating insurance. Under the McCarran-Ferguson Act,

Congress has conferred upon the states the ability to regulate

insurance, declaring such regulation to be in the public interest.

Section | of the Act, 59 Stat. 33, 15 U.S.C. §1011; W& S Life Ins.

Co. v. State Board of Equalization, 451 U.S. 648 (1981); Osborn v.

Ozlin, 310 U.S. 53 (1940) (holding that a state has a legitimate

interest in all insurance policies protecting its residents, an interest

which the state can protect even though the state action may have

repercussion beyond state lines). This exercise of the State’s

regulatory powers can only be effectuated by allowing the State to

conduct discovery to obtain evidence necessary for a complete and

thorough investigation of unauthorized insurance activities. Corporate

Underwriters, on the other hand, has not provided any justification of

the Turks and Caicos nondisclosure laws or made any attempt to

demonstrate how the interests of the Turks and Caicos could possibly

outweigh the interest of the State. '?

'? Corporate Underwriters states that the Turks and Caicos

government extensively regulates all insurance companies

incorporated in the Turks and Caicos. The State does not concur with

26

C. CORPORATE UNDERWRITERS HAS _ THE

BURDEN OF PROOF IN ASSERTING- THE

EXEMPTION FROM DISCOVERY AND HAS

~ FAILED TO MEET THIS BURDEN.

Under Texas law, Corporate Underwriters, as the party

seeking to limit discovery by asserting a privilege or exemption from

discovery, has the burden of proof. Weisel Enterprises, Inc. v.

Curry, 718 S.W.2d 56, 58 (Tex. 1986) (orig. proc.) (per curiam)

(citing Jordan v. Court of Appeals for Fourth Supreme Judicial

District, 701 S.W.2d 644, 648-649 (Tex. 1985) (orig. proc.). The

fact that Corporate Underwriters is asserting an exemption from

discovery based on the Turks and Caicos nondisclosure laws does not

alter this rule.

Petitioners contend that McKesson Corp. v. Islamic Republic

of Iran, 138 F.R.D. 1 (D.D.C. 1991) suggests that the burden of

this statement and would point out that all such regulation is done on

a "confidential" basis which prohibits third parties from access to any

of the information obtained by the Turks and Caicos authorities.

Further, the Turks and Caicos authorities have refused to issue

Corporate Underwriters a license to sell insurance in the Turks and

Caicos. The “authority” granted to Corporate Underwriters by the

Turks and Caicos government prohibits Corporate Underwriters from

offering its insurance product to Turks and Caicos residents. In any

event, the extent to which Corporate Underwriters is regulated in the

Turks and Caicos is not relevant. Since Corporate Underwriters is

conducting its insurance business in Texas, it is subject to regulation

by the Texas authorities.

EMA BUN OO cle Oi nn are RO RII CN atts

Oa CAI Aa He A

lee os

Sat he a, So ARR en

27

proof shifts to the State because a foreign blocking statute is at issue.

McKesson does not stand for any such proposition. The holding in

McKesson is limited to a very specific fact situation which is not

applicable here. McKesson involved a suit against the country of Iran

and application of the Foreign Sovereign Immunity Act ("FSIA"). In

that case, the court found that before subject matter jurisdiction would

lie under FSIA, the court had to find that a principal-agency

relationship existed between Iran and the instrumental ity that allegedly

committed the wrong. Under FSIA, there is a presumption that an

instrumentality is separate from the foreign sovereign. Thus, the

plaintiff seeking discovery was allowed to take limited discovery with

respect to the FSIA jurisdiction issue, but was directed to "avoid

frustrating the significance and benefit of [Iran’s] immunity to suit."

McKesson at p. 3. None of the facts in McKesson are present here.

Corporate Underwriters has failed to meet its burden of proof

in establishing an exemption from discovery.

D. THERE IS NO PUBLIC POLICY REASON TO

EXEMPT CORPORATE UNDERWRITERS FROM

DISCOVERY.

Corporate Underwriters complains that it faces a Hobson’s

Choice: violate the Turks and Caicos nondisclosure laws and be

28

_

subject to possible criminal penalties in the Turks and Caicos or

violate Texas discovery rules and be subject to sanction in the

pending litigation. Corporate Underwriter’s dilemma is self imposed.

Corporate Underwriters purposely availed itself of the Texas market

for insurance and chose to do business in Texas. Corporate

Underwriters must now abide by the rules of the Texas courts. If

doing business in the State of Texas and abiding by the laws of the

State of Texas subjects Corporate Underwriters to criminal penalties

in the Turks and Caicos, perhaps Corporate Underwriters should

consider limiting its business to the Turks and Caicos or incorporating

in a different jurisdiction.

There is no evidence that the trial court abused its discretion

in ordering the in camera inspection of Corporate Underwriters’

responses to the State’s discovery requests. Accordingly, Petitioners’

Petition should be denied.

CONCLUSION

For the foregoing reasons, the State respectfully requests that

Petitioners’ Petition for Writ of Mandamus be denied and that this

Court grant the State such other relief as provided at law or in equity.

Dated: February 3, 1993

Austin, Texas

:

|

3

29

Respectfully submitted,

DAN MORALES

Attorney General of Texas

WILL PRYOR

First Assistant

Attorney General

MARY F. KELLER

Deputy Attorney General

for Litigation

EDNA RAMON BUTTS

Assistant Attorney General

Chief, Finance Division

DIANE BARLOW-SPARKMAN

Assistant Attorney General

LINDA IBACH SHAUNESSY

Assistant Attorney General

Finance Division

State Bar No. 01758557

P. O. Box 12548

Austin, Texas 78711

(512) 463-2018

(512) 477-2348 - Telecopier

COUNSEL OF RECORD

30

INDEX OF APPENDICES

Texas Rule of Civil Procedure 166(b) ............... A-1

Opinion of the Court of Appeals, Third Judicial

District of Texas, Cause #3-89-212-CV ......... B-1

State of Texas Second Document Production

Request to Corporate Underwriters, Ltd.

dated September 1991 ............ccccceee C-1

State of Texas First Amended Set of Interrogatories

to Corporate Underwriters, Ltd.

ee ae a a yew ok be D-1

Letter opinion of the trial court, dated February 6, 1992 .... E-1

Order of February 6, 1992 Regarding the Discovery

of Defendant Risk Managers International, Inc. .... F-1

Order of February 6, 1992 Regarding the Discovery

Objections of Defendant Herschel Hancock ....... G-1

Portions of the Statement of Facts dated March 10, 1992... . H-1

Order of April 13, 1992 Denying Defendant

Herschel Hancock’s Motion for Reconsideration .... I-1

Order of April 13, 1992 Denying Defendant Risk

Managers International’s Motion for Reconsideration . J-1

Order of May 27, 1992 Regarding Defendants’ Motions

for Protective Order and Plaintitfs’ Motions

a K-1

Portions of the Statement of Facts dated June 8, 1992...... L-1

PS i he sine ttn Bo

31

Order of June 8, 1992 Denying Defendants’ Joint Motion

Pursuant to Rule 13 regarding Plaintiffs’

Petition and Discovery from Receivership and

Supplemental Motion for Reconsideration