Title: Swiss Re Life Company America v. Gross
Citation: N/A
Docket Number: 961078
State: Virginia
Issuer: Virginia Supreme Court
Date: January 10, 1997

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.