Opinion ID: 2567359
Heading Depth: 2
Heading Rank: 1

Heading: Are Assets of the Insolvent Insurer State Funds?

Text: We answer the second question first, i.e., whether assets to which the Commissioner acquires title constitute state funds within the meaning of the CFCA, and specifically Government Code section 12650, subdivision (b)(1) (hereinafter Government Code, section 12650(b)(1)). The CFCA imposes liability on any person who [k]nowingly presents or causes to be presented to an officer or employee of the state ... a false claim for payment or approval. (Gov.Code, § 12651, subd. (a)(1).) The CFCA defines a claim as any request or demand for money, property, or services made to any employee, officer, or agent of the state or of any political subdivision, or to any contractor, grantee, or other recipient, whether under contract or not, if any portion of the money, property, or services requested or demanded issued from, or was provided by, the state (hereinafter `state funds').... (Gov.Code, § 12650(b)(1)). The Attorney General argues that ELIC's assets temporarily became state funds when the Commissioner exercised his authority under Insurance Code section 1011 to acquire and subsequently distribute those assets to the defendants in the ELIC conservatorship proceedings. Insurance Code section 1011 provides in pertinent part: The superior court of the county in which the principal office of a person described in Section 1010 [i.e., insurance companies and specified other entities] is located shall, upon the filing by the commissioner of the verified application showing any of the following conditions hereinafter enumerated to exist, issue its order vesting title to all of the assets of that person, wheresoever situated, in the commissioner or his or her successor in office, in his official capacity as such, and direct the commissioner forthwith to take possession of all of its books, records, property, real and personal, and assets, and to conduct, as conservator, the business of said person, or so much thereof as to the commissioner may seem appropriate, and enjoining said person and its officers, directors, agents, servants, and employees from the transaction of its business or disposition of its property until the further order of said court: [¶].... [¶] (d) That such person is found, after an examination, to be in such condition that its further transaction of business will be hazardous to its policyholders, or creditors, or to the public. (Ins.Code, § 1011, italics added.) The statute is part of a statutory scheme found in chapter 1, article 14 of the Insurance Code (hereinafter article 14), relating to the Commissioner's treatment of insolvent insurers. Article 14 is the functional equivalent of federal bankruptcy laws, which generally do not apply to insurance companies. (11 U.S.C. § 109(b)(2).) After acquiring title to the insolvent insurer's assets, the Commissioner's role is as a trustee for the benefit of all creditors and other persons interested in the estate of the person against whom the proceedings are pending. (Ins.Code, § 1057.) The Commissioner acts as conservator or liquidator of the assets. ( Id., § 1037.) Public policy favors rehabilitating the insurance company if possible, with liquidation as a last resort. ( Id., § 1016 [proceeding to liquidation when conservation is futile]; Commercial Nat. Bank v. Superior Court (1993) 14 Cal.App.4th 393, 398, 17 Cal.Rptr.2d 884.) In order to effect rehabilitation, the Commissioner may enter into a court-approved rehabilitation agreement. (Ins.Code, § 1043.) The Commissioner's conservatorship is terminated by the court at the behest of either the Commissioner or the insurer when the ground for such conservatorship does not exist or has been removed and when the insurer can properly resume title and possession of its property and the conduct of its business. ( Id., § 1012.) If the Commissioner goes the liquidation route, his or her role terminates after executing a court-approved plan for dispersing the insurer's assets among its creditors. ( Id., § 1035.5.) The Attorney General argues that the phrase issued from as it appears in Government Code, section 12650(b)(1) encompasses the transfer of property at issue in this case, i.e., property temporarily controlled by the Commissioner as a trustee on behalf of private parties. In statutory construction cases, our fundamental task is to ascertain the intent of the lawmakers so as to effectuate the purpose of the statute. [Citation]. `We begin by examining the statutory language, giving the words their usual and ordinary meaning.' ( Estate of Griswold (2001) 25 Cal.4th 904, 910-911, 108 Cal.Rptr.2d 165, 24 P.3d 1191.) The Attorney General contends that the dictionary definition of the phrase to issue supports his position. Specifically, the Attorney General points to Black's Law Dictionary (5th ed.1979) page 745, which defines the verb to issue as, inter alia, [t]o send out, to send out officially ... to deliver, for use or authoritatively.... The Attorney General also cites Webster's Third New International Dictionary (1981) page 1201, which defines to issue as, inter alia, 1. to cause to come forth .... 3.a. to cause to appear or become available by bringing out for distribution to or sale or circulation among the public. `To seek the meaning of a statute is not simply to look up dictionary definitions and then stitch together the results. Rather, it is to discern the sense of the statute, and therefore its words, in the legal and broader culture. Obviously, a statute has no meaning apart from its words. Similarly, its words have no meaning apart from the world in which they are spoken.' ( Hodges v. Superior Court (1999) 21 Cal.4th 109, 114, 86 Cal.Rptr.2d 884, 980 P.2d 433 [considering the term arising out of].) In the present case, we do not believe that the Attorney General's proffered dictionary definitions shed light on the narrow question at issue here. The term to issue is generally employed as an abstract legal term that can apply to a broad range of activities  including issuing a search warrant or issuing capital stock of a company. (Black's Law Dict. (7th ed.1999) p. 836.) Although the dictionary definitions of to issue cited by the Attorney General could theoretically encompass a transfer of private property held in trust by a public official, the use of the general term issued from does not definitively resolve whether the Legislature intended that specific meaning. Certainly, the term issued from has no special or connotative meaning that points inexorably to its application in the present context. Because the language of the statute does not answer the question before us, we look to a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, ... and the statutory scheme of which the statute is a part.' ( Granberry v. Islay Investments (1995) 9 Cal.4th 738, 744, 38 Cal.Rptr.2d 650, 889 P.2d 970.) The legislative history of the CFCA indicates that the statute's purpose was to protect the public treasury and the taxpayers. The principal drafter of the statute testified before the Assembly Committee on the Judiciary that the statute, which has a whistleblower component (see Gov.Code, § 12653), would be self-executing in that it would deputiz[e] citizens to join the fight to protect the public treasury. (Sen. Com. on Judiciary, Rep. on Assem. Bill No. 1441 (1987-1988 Reg. Sess.) appended testimony of David Huebner, representative of the Center for Law in the Public Interest, before Assem. Com. on Judiciary, May 6, 1987, p. 3) Moreover, taxpayers benefit because their hard-earned dollars are no longer squandered through fraudulent practices.... [T]axpayers see their elected representatives ... calling upon the source of the funds, the taxpayers themselves, for assistance. The only losers ... are those who .... expect to get away with raiding the public treasury. ( Id., at p. 4.) The statute's legislative sponsor, Assemblyman Floyd, stated in his letter urging Governor Deukmejian to sign the CFCA: This bill lets the state recover treble damages plus penalties from contractors who try to rip off the taxpayer. (Assemblyman R.E. Floyd, sponsor of Assem. Bill No. 1441 (1987-1988 Reg. Sess.), letter to Governor Deukmejian, Sept. 15, 1987.) California courts have consistently reaffirmed that the Legislature obviously designed [the CFCA] to prevent fraud on the public treasury, ( Southern Cal. Rapid Transit Dist. v. Superior Court (1994) 30 Cal.App.4th 713, 725, 36 Cal.Rptr.2d 665 ( Southern Cal. Rapid Transit Dist. ), and that [t]he ultimate purpose of the [CFCA] is to protect the public fisc. ( City of Hawthorne ex rel. Wohlner v. H & C Disposal Co. (2003) 109 Cal.App.4th 1668, 1677, 1 Cal.Rptr.3d 312; accord, Laraway v. Sutro & Co., Inc. (2002) 96 Cal.App.4th 266, 274, 116 Cal.Rptr.2d 823; City of Pomona v. Superior Court (2001) 89 Cal.App.4th 793, 801, 107 Cal.Rptr.2d 710; Levine v. Weis (1998) 68 Cal.App.4th 758, 765, 80 Cal.Rptr.2d 439; Wells v. One2One Learning Foundation (2004) 10 Cal.Rptr.3d 456, 471-472). Because the purpose of the CFCA is to protect the public treasury and the taxpayer, we next inquire into whether that purpose would be fulfilled by treating the property at issue in this case as state funds. Our starting point is Carpenter v. Pacific Mutual Life Ins. Co. (1937) 10 Cal.2d 307, 74 P.2d 761 ( Carpenter ), in which this court addressed the nature of the Commissioner's property interest in the assets of an insolvent insurance company. In Carpenter, policyholders of an insolvent insurer subject to rehabilitation proceedings under Insurance Code section 1011 challenged a court order affirming the rehabilitation plan, arguing that the Commissioner improperly used the insolvent insurer's assets to purchase stock in a new insurance company. ( Carpenter, supra, 10 Cal.2d at p. 339, 74 P.2d 761.) The policyholders asserted that in using the assets to purchase stock of another company, the commissioner as conservator violated a California constitutional provision (Cal. Const., former art. XII, § 13, now art. XVI, § 17), prohibiting the state from loaning its credit to, subscribing to, or otherwise being interested in the stock of a corporation. This court acknowledged that Insurance Code section 1011 vest[s] the commissioner with title to all the assets of the [insolvent insurance] company. ( Carpenter, supra, 10 Cal.2d at p. 330, 74 P.2d 761.) It also recognized that the Commissioner is a state officer and that the state has an interest in rehabilitating insolvent insurance companies. ( Id. at p. 340, 74 P.2d 761.) Carpenter nonetheless rejected the argument that the Commissioner's temporary control over the property rendered the state interested in the stock of the new insurer. Of course the insurance commissioner is a state officer, and of course the state has an interest in rehabilitating insolvent insurance companies, but that interest is not a vested interest as is contemplated by the above constitutional provision. Section 1057 of the Insurance Code ... expressly provides that in all proceedings thereunder the commissioner acts as trustee for the benefit of all of the creditors of the insolvent company. It is quite clear that the commissioner by subscribing to the stock of the new company has not loaned the credit of the state to the new company. Not a penny of state money has gone into the treasury of the new company. ... The commissioner acting pursuant to statute, with court approval, took certain assets of the old company and transferred them to the new company in exchange for the stock which he holds as trustee for the benefit of the creditors of the old company. Obviously, the commissioner as a state officer did not subscribe to the stock of the new company so as to make the state a stockholder. ( Ibid., italics added.) Thus, both Carpenter and the Insurance Code provisions cited above demonstrate that the assets to which the Commissioner holds title do not become part of the public treasury, but are held in trust for the benefit of private parties. This point is underscored by what the Commissioner actually did with the proceeds of the sale of ELIC's assets in the present case. As recounted by the district court in this case, these proceeds were not transferred to the state's General Fund, but rather were initially invested in an escrow account established by the Commissioner, and were ultimately conveyed to private corporations. ( State of California ex rel. RoNo, LLC, (C.D.Cal.2002) No. CV01-8587AHM (CWX), 2002 WL 1008251 at ; see also In re Executive Life Ins. Co. (1995) 32 Cal.App.4th at pp. 360-361, 38 Cal.Rptr.2d 453.) At no time did these funds in any sense become public funds. The Attorney General's argument that the assets are state funds is further undermined by language elsewhere in the CFCA, particularly Government Code section 12651, subdivision (a). That subdivision states that the penalty for a violation of the CFCA is three times the amount of damages which the state ... sustains. In the present case, in which the state holds property in trust for private beneficiaries, the state has sustained no damages. The Attorney General contends that absent the defendants' allegedly fraudulent bid for ELIC's assets, another bidder would have paid more money for the property. But the Attorney General does not dispute that any additional money paid for ELIC's assets by an alternate bidder would have ultimately been distributed to policyholders and other creditors of ELIC rather than deposited into the state treasury. (See Ins.Code, § 1033.) Indeed, the state has disclaimed any liability under the rehabilitation plan, which states that the parties hereto agree and acknowledge that the State of California is not a party and shall have no liability with respect hereto. [2]  The Attorney General cites Southern Cal. Rapid Transit Dist., supra, 30 Cal.App.4th 713, 36 Cal.Rptr.2d 665, for the proposition that a false claim under the CFCA does not require financial harm to the public treasury. In that case, the court held that defendants' false documentation regarding their status as a disadvantaged business enterprise fell within the scope of the CFCA. The distinction between that case and the present one is fundamental. In Southern Cal. Rapid Transit Dist., defendants' fraudulent documentation was in connection with a bid that would have led a governmental entity to provide funds from the public treasury under false pretenses. In other words, it was an attempt to defraud the government out of public funds. In the present case, no such public funds are at issue. In fact, Southern Cal. Rapid Transit Dist. stated that As a statute obviously designed to prevent fraud on the public treasury, [Government Code] section 12653 plainly should be given the broadest possible construction consistent with that purpose. ( Southern Cal. Rapid Transit Dist., supra, 30 Cal.App.4th at p. 725, 36 Cal.Rptr.2d 665, italics added.) Although the CFCA authorizes civil penalties for attempts to misappropriate public funds that were not in fact completed by payment from the treasury (see Gov.Code, § 12651, subd.(a)(1) [anyone who [k]nowingly presents or causes to be presented ... a false claim for payment or approval may be liable under the CFCA]), we are aware of no successful CFCA case that did not involve either potential or actual harm to the public treasury. [3] Moreover, the CFCA is patterned on similar federal legislation and it is appropriate to look to precedent construing the equivalent federal act. ( Laraway v. Sutro & Co., Inc., supra, 96 Cal.App.4th at pp. 274-275, 116 Cal.Rptr.2d 823.) Federal authority construing the FFCA supports our construction of the CFCA. In Hutchins v. Wilentz, Goldman Spitzer (3d Cir.2001) 253 F.3d 176 ( Hutchins ), the court affirmed the dismissal of a claim brought under the FFCA based on fraudulently inflated legal bills submitted to the United States Trustee [4] and United States Bankruptcy Court in various bankruptcy proceedings. Although the fraudulently procured check in Hutchins was signed by a government agent, payment came not from the United States government but from the assets of those in bankruptcy. Like the CFCA, the FFCA defines claim to include requests for property if the United States Government provides any portion of the ... property. (31 U.S.C. 3729(c).) The Hutchins court held there was no false claim under the FFCA. The court first reviewed the legislative history behind the statute. The False Claims Act was originally adopted following a series of sensational congressional investigations into the sale of provisions and munitions to the War Department. Testimony before Congress painted a sordid picture of how the United States had been billed for non-existent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war. Congress wanted to stop this plundering of the public treasury. At the same time it is equally clear that the False Claims Act was not designed to reach every kind of fraud practiced on the Government. ( Hutchins, supra, 253 F.3d at p. 183.) The Hutchins court then concluded that the bills submitted to the bankruptcy court and United States Trustee were not within the scope of the FFCA because the submission of false claims to the United States government for approval which do not or would not cause financial loss to the government are not within the purview of the False Claims Act. ( Hutchins, supra, 253 F.3d at p. 184.) [T]he purpose of the [FFCA] `was to provide for restitution to the government of any money taken from it by fraud.' [Citation.] It was not intended to impose liability for every false statement made to the government.... ( Ibid. ) Extending the [FFCA] to reach any false statement made to the government, regardless of any impact on the United States Treasury, would appear to impermissibly expand standing doctrine and essentially permit any [qui tam] plaintiff to sue on behalf of the government when false or misleading statements are made to any government agent including the courts, the legislature or any law enforcement officer. ( Id. at p. 184, fn. 5.) The Attorney General contends Hutchins is distinguishable because in that case the United States Trustee may not have been acting as a bankruptcy trustee, analogous to the conservatorship role played by the Commissioner in this case, but merely as an administrator overseeing bankruptcy proceedings. Yet whether the United States Trustee was serving as a trustee or merely supervising trustees, the significant similarity remains: false claims were made to assets that never became public funds, and therefore those claims had no potential or actual impact on the public treasury. [5] The Attorney General argues that the Commissioner, in discharging his duties under in article 14, is primarily acting not as a trustee of private funds but as a public officer. He cites Insurance Code section 1059, which provides that in the performance of any of his duties under article 14, the Commissioner shall be deemed to be a public officer acting in his official capacity on behalf of the State. (Ins.Code, § 1059.) In that connection he also cites Mitchell v. Taylor (1935) 3 Cal.2d 217, 43 P.2d 803. In Mitchell, the Commissioner was appointed liquidator of an insolvent insurance company and on appeal from an adverse ruling, sought to avoid a statutory filing fee. The Mitchell court found that the Commissioner was acting in his official capacity on behalf of the state, and thus was exempt from the fee under former Political Code section 4295, which stated that the state ... or any public officer ... acting in his ... official capacity on behalf of the state ... shall not be required to pay or deposit any fee for the filing of any document or paper, or for the performance of any official service ... ( Mitchell, at p. 218, 43 P.2d 803.) In arriving at this conclusion, the Mitchell court reasoned that the state has an interest in the liquidation of insolvent insurance companies and that the Insolvency Act has made provision for a state officer to protect and advance that interest. ( Id. at p. 219, 43 P.2d 803.) There is no question that when the Commissioner acts to rehabilitate an insolvent insurer, he does so as a public officer and furthers a public interest. But it is equally clear that, when he performs that particular public office, he also serves as a conservator and trustee on behalf of private policyholders and creditors. The commissioner is an officer of the state [citation] who, when he or she is a conservator, exercises the state's police power to carry forward the public interest and to protect policyholders and creditors of the insolvent insurer. ( In re Executive Life Ins. Co., supra, 32 Cal.App.4th at p. 356, 38 Cal.Rptr.2d 453.) The Commissioner's role as a public officer is wholly consistent with his role as a trustee under article 14. Nothing in Mitchell suggests that, because the Commissioner acts as a public officer under article 14, he or she transforms the assets acquired pursuant to Insurance Code section 1011 into public funds. In sum, we conclude that, the state funds necessary to state a claim under the CFCA only include funds that are in some sense part of the public treasury, the diminution of which harms or would harm taxpayers. When the Commissioner takes title to the assets of an insolvent insurer pursuant to Insurance Code section 1011, he holds them as a trustee for the benefit of private parties, and they never become part of the public treasury. Because the Attorney General alleges that defendants falsely procured private, rather than public, funds, he may not allege a claim under the CFCA. Our holding that such fraud is not within the scope of the CFCA obviously does not mean that those perpetuating the fraud may escape liability. As the record makes clear, the Commissioner as trustee of the insolvent insurance company has sought both substantial compensatory and punitive damages against at least some of the defendants in this action for their alleged fraud and misconduct. All that we hold is that the specific remedies under the CFCA are available not for any fraud against the government but rather one which leads to potential or actual injury to the public treasury and the taxpayer. No such injury is present when false claims involve the insolvent insurers' assets that the Commissioner holds in trust for private parties.