Act used a subsidiary net worth exclusion, calling for the aggregation of the net worth of the insured
and its subsidiaries. Tlinois, however, is not alone. Both the Arkansas and Nevada legislatures, for
example, have used the affiliate net worth exclusion in establishing their insurance guaranty funds.
Ark, Code Ann. § 23-90-103 (2004); Nev. Rev, Stat. § 687A.033 (2004).
Tl. Constitutionality of the Act’s Affiliate Net Worth Exclusion

‘The same standard governs the validity of the Act’s affiliate net worth exclusion under the
due process and equal protection clauses of the Illinois and federal Constitutions and the special
legislation clause of the Illinois Constitution. Smith v. Severn, 129 F.3d419, 424 n. 3 (7" Cir. 1997);
McLean v. Dep't af Revenue of the State of IMinois, 704 N.E.2d 352, 359 (Ill. 1998); Chicage Nat.
League Bail Club, Inc. v. Thompson, 483 N.E,2d 1245, 1250 (ll. 1985), Because no fundamental
constitutional right or suspect class is implicated, the parties agree that the exclusion need only
withstand rational basis review in order to survive a challenge. Under this standard of review, the
exclusion is presumed to be constitutional and Cresswood has the burden of showing the absence
of rationality, Fed, Communications Comm'n v, Beach Communications, 508 U.S, 307, 314 (1993).
Cresswood’s burden requires it “to negative every conceivable basis which might support it”
irrespective of “whether the conceived reason for the challenged distinction actually motivated the
legislature.” Fed. Communications Comm'n v. Beach Communications, Inc,, 508 U.S. 307, 315
(1993), quoting Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S, 356, 364 (1973) (internal
quotation marks omitted), The exclusion will only be deemed unconstitutional if “completely,
ludicrously arbitrary.” Pontarelli Limousine, Inc. v. City of Chicago, 929 F.2d 339, 341 (7" Cir,

1991). The “rational basis review in equal protection analysis ‘is not a license for courts to judge


CONCLUSION
The affiliate net worth exclusion to compensation under the Illinois Insurance Guaranty Fund
Actis constitutional. This court need not reach the issues raised by the parties as to alter ego liability

and estoppel. The Fund is entitled to summary judgment as a matter of law.

April 16, 2004 ENTER:

Onucprng) 8. Orodor.
Suzanne B Conlon

United States District Judge



Cresswood has not negated each of the conceivable bases identified by the lund. Instead,
Cresswood’s constitutional challenge to the affiliate net worth exclusion focuscs on two issues.
Cresswood argues that the exclusion arbitrarily transfers liability for workers’ compensation injuries
to non-liable affiliates and pierces the insured’s corporate veil by categorically including the net
worth of affiliates. Cresswood misunderstands the nature of the Act’s affiliate net worth exclusion.
The exclusion does not serve to transfer liability for workers’ compensation claims to non-liable
affiliates. The exclusion is a mere eligibility requirement that determines whether the insured is
qualified for the benefits provided by the Act. The affiliate remains unaffected. Nothing in the Act

imposes new legal obligations on an affiliate as a result of this determination.

Nor is the exclusion “completely, ludicrously arbitrary” simply because it transcends
traditional notions of corporate separateness and liability. By citing federal cases discussing the
parameters of corporate separateness and liability to argue that the exclusion arbitrarily pierces the
insured’s corporate veil, Cresswood fails to appreciate that the legislature’s departure is not irrational
for the simple reason that the legislature is not bound by the corporate piercing doctrine. A decision
to depart from traditional notions of liability is a public policy decision within the province of the
legislature, not the courts. The Illinois legislature may have concluded that going beyond the
insured’s net worth to capture the affiliate’s net worth was warranted in order to conserve the Fund’s

limited resources for those likely in greatest need. It is not indicative of a “classification whose

relationship to an asserted goal is so attenuated as to render the distinction arbitrary or irrational.”

matter of legislative, rather than judicial, consideration”). Cresswood does not contend that the
NAIC rationale is not served by the alfiliate net worth exclusion.

6



the wisdom, fairness, or logic of legislative choices.’” Heller v. Doe, 509 U.S, 312, 319 (1993),
quoting Fed. Communications Comm'n v. Beach Communications, 508 U.S. at 313.

Cresswood concedes that the Fund is entitled to summary judgment on its claims if the
inclusion of the affiliate net worth exclusion in § 534.3 is constitutional because, as the sole
sharcholders, the Cresseys are statutory “afliliates” of Cresswood. Pl. Mem, Opp. Summ. Judg. at
4. The Fund has advanced numerous rational arguments, or conceivable bases, for net worth
exclusions generally, and the Act’s affiliate net worth exclusion specifically, The Fund argues the
exclusion is rational because (1) the scope of the Fund’s coverage should be limited in order to
preserve resources for those in need of protection; (2) the high net worth insured is a “sophisticated
buyer” who “ought to be able to buy insurance intelligently so that it is not insured by an unsound
insurer”; (3) the high net worth insured would not experience “extreme hardship” as a result of losses
not covered by the Fund; (4) public policy is not served by “sending] bills... for wealthy persons’
losses or claims against such wealthy persons to all of the homeowners and small businesses to pay”;
(5) the affiliate net worth cxclusions prevent the insured from manipulating its corporate form so as
to obtain coverage under the Act; and (6) the affiliate net worth exclusion allows the Fund to

ascertain the insured’s actual financial resources by including its affiliates.’

‘The quoted material is taken from the minutes of the National Association of Insurance
Commissioners (“NAIC”), Guarantee Funds Task Force, 1985 Proceedings, Vol, II, at 473-74,
505 and 1986 Proceedings, Vol. 1, al 420. Def. Mem. Supp. Summ. J. at 12. Itis of no
consequence thal the Fund’s rationale for the affiliate net worth exclusion is found in NAIC
proceedings, as opposed to legislative history. The Illinois legislature based the Act on the
Model Act. Hasemana et al. v. White et al., 686 N.E.2d 571, 572 (IIL. 1997). The Fund is not
restricted by the Act’s overall statutory purpose “to avoid financial loss to . . . policyholders
because of the entry of an Order of Liquidation against an insolvent company 27215 ILCS 5/532.
It js irrelevant that the Illinois legislature ultimately substituted the broader affiliate net worth
exclusion for the subsidiary net worth exclusion. (/.5, Railroad Retirement Board v. Fritz, 449
U.S. 166, 179 (1980) (“the fact that the linc might have been drawn differently at some point is a

5


legislature conceivably may have concluded that the ease of administration and the preservation of
limited fund resources for legitimate claimants justified the adoption of the rough net worth standard
rather than a more precise mechanism of individual determination’). Nor does the fact that
Borman’s only addressed the net worth of the insured change this result. It is simply irrelevant
whose net worth — the insured or the afliliate— is considered. The mathematical precision of the net
worth standard is the same.

Cresswood has not met its burden. The rationale bases identified by the Fund are not so
“patently, wildly, [or] totally irrational” as to render the affiliate not worth exclusion
unconstitutional. ‘The Act is a benefit program established by the Tllinois legislature. It was not
intended to render the Fund absolutely liable to policyholders due to the insolvency of their insurance
companies. The affiliate net worth exclusion is an eligibility requirement that the Illinois legislature
apparently concluded would assist in weeding out those less likely in need. U.S. Railroad
Retirement Board v. Fritz, 449 U.S. 166, 179 (1980) (“task of classifying persons lor . , . benefits

. inevitably requircs that some persons who have an almost equally strong claim to favored
treatment be placed on different sides of the line,’ and the fact that the line might have been drawn
differently at some point is a matter of legislative, rather than judicial, consideration”), citing
Matthews v. Diaz, 426 U.S. 67, 83-84 (1976); Califano v, Boles, 443 U.S. 282, 296 (1979)
(“Congress could rationally chose to concentrate limited funds where the need is likely to be
greatest”). The Illinois legislature's rationality is also supported by the fact that a similar affiliate
net worth cxclusion was promulgated under the Model Rules implementing the Equal Access to

Justice Act in order to determine eligibility for benefits. See 46 Fed. Reg. 32900, 32912 (1981).



Minute Onder Fhem (06497)

FAL

a

United States District Court, Northern District of Illinois

‘Name of Assigned Judge Sitting Judge if Other
or Magistrate Judge Suzanne B. Conlon than Assigned Judge
CASE NUMBER 03 C 7051 DATE 4/16/2004
CASE CRESS WOOD FARM, INC. vs. ILLINOIS INSURANCE GUARANTY FUND
TITLE
Lin the followingbox (u) indicate the party filing the motion, c.g., plaintiff, defendant, 3ed party plaintiff, and (b) state briefly the nature
MOTION: of the motion being preserited.]
DOCKET ENTRY:
fw oO Filed motion of [ use listing in “Motion” box above.]
(2) o Brief in support of motion due
(3) Oo Answer brief to motion due_ . Reply to answer brief due
(C3) Oo Ruling/flearing on __ setfor_ ss at_
(5) o Status hearing[held/continued to] [set for/re-set for] on ss set for at.
(6) o Pretrial conference[held/continucd to] [set for/re-set for]on___—ssetfor_— at.
(7) oO Trial[set for/re-set for]}on ss at__
(8) oO [Bench/Jury trial} [Hearing] held/continuedto___—at__
(9) Oo This case is dismissed [withAvithout] prejudice and without costs[by/agreement/pursuant to]
OFRCP4in) OLocal Rule 41.1 OFRCP4 (a1) 0 FRCP4I(@)(2).
do) =f [Other docket entry] Defendant's motion for summary judgment [13-1] is granted. ENTER
MEMORANDUM OPINION AND ORDER. .
Suc , bu B Orvbon
dl) @f [For further detail see order attached to the original minute order.]

No notices required, advised in apen court

No notices required.

number of notices

wv | Notices mailed by judge’s staff.

Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form. ee iat
Copy to judge/magistrate judge.
sepa
caurtroom date mailed ngtive
cB deputy’s ew
initials

Dateftime received in
central Clerk’s Offieg

mailing deputy initinls



PL. Mem. Opp. Summ. J. at 7, quoting Cleburne v. Cleburne Living Ctr., Inc., 473 U.S. 432, 466
(1985){(citation omitted).

Cresswood’s reliance on JMH Properties, Inc. v. Industrial Commission et al., 773 N.E.2d
736 (4" Dist. 2002) is similarly flawed. ‘Che court’s discussion of the unavailability of the veil
piercing doctrine with regard to workers’ compensation cases was predicated on the limited authority
granted to the Illinois Industrial Commission as an administration agency. The court determined that
the Illinois legislature did not empower the Industrial Commission’s usc of any equitable remedies,
such as piercing the corporate veil. /d. at 738 (“[a]ny alteration in the Act so as to allow the piercing
of the corporate veil and reaching of officers, directors, and shareholders must come from the
legislature”). Here, the Illinois legislature has empowered the Fund to aggregate the net worth of
the insured and its affiliates for purposes of determining eligibility for benefits related to insurance
policy claims, including workers’ compensation insurance policy claims.

Cresswood contends that the affiliate net worth exclusion is unconstitutional because the
Seventh Circuit has “pointedly criticized” the net worth standard generally as an “accounting
artifact.” Mathias v. Accor Economy Lodging, Inc., 347 ¥.3d 672, 677-78 (7th Cir. 2003).
Cresswood’s contention fails to consider that Mathias involved the issue of whether punitive
damages were excessive, a necessarily particularized case-by-case determination. Legislatures need
not be as exacting. City of Chicago v. Shalala, 189 F.3d 598, 606 (7" Cir. 1999) (“[a] classification
does not fail rational-basis review because it ‘is not made with mathematical nicety or because in
practice it results in some inequality’) (citations omitted). As Cresswood points out, the Sixth
Circuit upheld a net worth siandard against constitutional challenge on similar grounds. Borman’s,

Inc, v, Michigan Prop, & Cas. Guar, Ass'n, 717 ¥. Supp. 468, 479 (E.D. Mich. 1989) (“the



burden, the non-moving party must go beyond the pleadings and set forth specific facts showing
there is a genuine issue for trial, Fed. R. Civ. P. 56(e); Sik v. City of Chicago, 194 F.3d 788, 798
(7th Cir. 1999), A genuine issue of material fact exists when “the evidence is such that a reasonable
jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248 (1986).
I. The Illinois Insurance Guaranty Fund Act

In order to protect policyholders and claimants, Tlinois established an insurance guaranty
fund pursuant to the Act to pay claims in the event an insurance company becomes insolvent. 215
ILCS 5/532 et seq.; Hasemann et al. v, White et al., 686 N.E.2d 571, 572 (Ill. 1997), However,
policyholders and claimants do not have absolute entitlement to payment under the Act. /e. Instead,
the Act limits payment to a “covered claim.” Section 534.3 of the Act provides that a “covered
claim” does not include:

any first party or third party claim by or against an insured whose net worth on

December 31 of the year next preceding the date the insurer becomes an insolvent

insurer exceeds $25,000,000; provided that an insured’s net worth on such date shall

be deemed to include the aggregate nct worth of the insured and all of its affiliates

as calculated on a consolidated basis.
215 ILCS 5/534/3(b)(iv) (“the affiliate net worth exclusion”). The Act broadly defines “affiliate”
as “a person who directly, or indirectly, through one or more intermediarics, controls, is controlled
by, or is under common control with the specified person on December 31 of the year noxt preceding
the date the insolvent company became an insolvent company.” 215 ILCS 5/534.7.

The Actis based on the Model Properly and Casualty Post-Assessment Guaranty Association

Act. Hasemann et al. v. White et al., 686 N.E.2d 571, 572 (Ill, 1997), The Illinois legislature

apparently deviated from the Model Act by including the affiliate net worth exclusion. The Model



and Liability Co, of Illinois (“I4[H”) issued a workers’ compensation policy. Pl. Add. Facts 228.
The face of the 1999 HIH policy read “INSURED: Bryan C. & Christina Cressey... Business Type
Corporation.” Jd. at § 230. In March 2000, HIH issued another workers” compensation policy
containing identical language. /d. at 242, The parties dispute whether the insured for purposes of
the policies was Cresswood, the corporation, or the Cresseys individually. Def. Resp. Pl. Add. Facts
230, 242; Pl. Add. Facts § 231; Pl. Resp. Def. Facts {j 10. In September 2000, Juergen Roesch, an
individual working at Cresswood Farm, was thrown from a horse while on the premises of a third
party. Pl. Add. Facts § 251, 255; Def: Facts § 18. This accident rendered Roesch a paraplegic from
the chest down. Pl. Add. Facts ¥ 255. Pursuant to the 2000 HIH policy, HIH paid benefits on
Roesch’s claim for workers’ compensation until HIH became insolvent in May 2001. PI. Add, Facts
§ 280. In June 2001, the Fund sent a letter to the Cresseys, informing them that HIH was in
liquidation and that it had “assumed responsibility for the obligations of [HH] to Illinois claimants
and insured subject to the limitations and conditions of the [Act].” Def. Facts ¥ 30; Pl. Resp. Def.
Facts { 30. The letter included an affidavit requiring the insured to attost to its consolidated net
worth, as well as all of its affiliates as of December 31, 2000. Def. Facts 34. Because the
Cresseys’ net worth exceeded $25 million as of December 31, 2000, the Fund refused to make
further payments on Roesch’s claim. Pl, Add. Facts {J 287A, 288.
DISCUSSION

L Standard of Review

Summary judgment is appropriate when the moving papers and affidavits show there is no
genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ.

P, 56{c); Celotex Corp. v, Catrett, 477 U.S. 317, 322 (1986), Once a moving party has met its


IN THE UNITED STATES DISTRICT COURT
FOR TFIE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION DOCKETED

APR 19 2004

CRESSWOOD FARM, INC.,
Plaintiff, No. 03 € 7051
v. Suzanne B. Conlon, Judge

ILLINOIS INSURANCE GUARANTY FUND,

ww SSeS ED

Defendant.

MEMORANDUM OPINION AND ORDER

Cresswood Farm, Inc. (“Cresswood”) originally filed this action against Illinois Insurance
Guaranty Fund (“the Fund”) in the Circuit Court of Cook County, Illinois seeking a declaratory
judgment and specific performance regarding the Fund’s purported obligation to defend, indemnify
and reimburse Cresswood for a workers’ compensation claim under the Illinois Insurance Guaranty
Fund Act (“the Act”), 215 ILCS 5/532 et seg. Specifically, Cresswood claims § 534.3(b)(iv) of the
Act is unconstitutional under the equal protection and due process clauses of the United States and
Nlinois constitutions and the special legislation clause of the Illinois constitution. The Fund timely
removed the action to this court based on federal question jurisdiction and moves for summary
judgment.

BACKGROUND

The following facts are undisputed unless otherwise noted. The Fund is a non-profit,
unincorporated legal entity created pursuant to the Act. Def. Facts 41. Cresswood is a closely-held
corporation organized under Illinois Jaw in 1988 by its sole shareholders, husband and wife Bryan
C. and Christina Cressey (“the Cresseys”). /d. at 12. In April 1999, HIH America Compensation

1