Court Opinion

ID: 9569177
Source: CourtListenerOpinion
Date Created: 2023-08-21 20:11:12.580791+00
Date Added: 2024-06-11T11:50:09.096452
License: Public Domain

OP ALA, J.,
with whom HODGES and WILSON, JJ., join, dissenting.
¶ 1 Today’s pronouncement declares that the trial court erred in allowing the terms of 36 O.S.1991 § 1928 B.41 to serve as the basis for depriving the reinsurer, The Guardian Life Insurance Company of America (Guardian), of its contractual-offset bargain because a) the invoked statutory provisions were not in force when the reinsurance contract was made and b) their interposition would imper-missibly impair the obligation of Guardian’s reinsurance contract. I cannot accede to the court’s view that the nisi prius judgment must be reversed because the statutory provision in § 1928 B.4, by which certain offsets could have been disallowed, is after-enacted law that may not be applied to this case. In the process of administering a statutory regime applicable to insolvent insurers, the state’s regulatory power over the insurance industry most certainly includes equity-anchored authority to modify contracts. Moreover, because pre-existing chancery practice amply supports the nisi prius rejection of the claimed offsets upon grounds long cognizable by equity jurisprudence, and because the findings on which that rejection is rested are not clearly contrary to the weight of the evidence, I would affirm the trial court’s judgment.
¶2 Although I join the views expressed by the other dissent in the case, I also write separately to unveil my own analysis of the flaws in today’s pronouncement.
I
THE ANATOMY OF LITIGATION
¶ 3 Guardian agreed, on or about January 27, 1986, to reinsure a block of life insurance contracts of which a Pennsylvania company was primary insurer. That primary insurer later sold these contracts, effective December 31, 1986, to American Standard Life and *1242Accident Insurance Company (American). American’s year-end financial statements-— beginning in 1985 — reflected large losses, and by June 1987 the company was considered “exceedingly risky”. Either on June 5 or 18, 1987 Guardian amended its reinsurance agreement with the Pennsylvania company by consenting to the latter company’s contract assignment to American. American — declared insolvent on February 22, 1991 — was placed in receivership with the State Insurance Commissioner (Receiver).
¶ 4 The reinsurance agreement in contest allowed Guardian to collect insurance premiums paid by policyholders to American and then to offset these payments against claims made on the policies, so that Guardian would owe American only the net amount. Receiver sued Guardian on July 1,1992 for declaratory relief from Guardian’s premium-offset demands. The nisi prius court acceded to its plea, giving two reasons for a favorable ruling: 1) the provisions of 36 O.S.1991 § 1928 B.4, effective from November 1, 1988, which were in force when Receiver was appointed, prohibit “lending or renting of surplus” which “masked” from the regulators American’s true financial condition; and 2) when Guardian consented in June 1987 to American’s substitution as primary insurer, it knew or should have known that American was insolvent.
¶ 5 Guardian appealed. After the Court of Civil Appeals’ decision that favored Receiver, this court granted certiorari to review the tendered issues.
II
PRE-EXISTING EQUITABLE PRINCIPLES, DRAWN FROM CHANCERY PRACTICE, AMPLY SUPPORT THE TRIAL COURT’S FINDINGS ON WHICH DISALLOWANCE OF OFFSET DEMANDS ARE RESTED; INSOLVENCY JURISPRUDENCE FIRMLY SUPPORTS THE -NOTION THAT THE AFTER-ENACTED PROVISIONS OF 36 O.S.1991 § 1928 B.4 ARE NO BARRIER TO INVOCATION OF COMMON-LAW RULES
A.
¶ 6 Insolvency law is a branch of equity jurisprudence.2 When insolvent, insurers are subject to state-court liquidation proceedings, which are controlled by rules that govern receiverships in chancery. There, unwritten law is followed unless found contrary to some specific statutory enactment.3
¶ 7 The pre-existing non-statutory body of law, known as equity jurisprudence, supports the nisi prius court’s disallowance of offset credit to Guardian because of the latter’s consent to the assignment when it knew that American was insolvent. Under time-honored chancery practice, an offset against an insolvent may be refused once the proof is clear that when the contract was made the offset claimant had knowledge of the primary insurer’s insolvency.4 The nisi prius court found that at a very critical time (either close to or before the reinsurance transaction) Guardian knew (or should have known) the company it was to reinsure was insolvent. This finding provides a tenable ground in equity for rejecting the offset plea.5
*1243¶ 8 Application of the pertinent chancery jurisprudence is not dependent upon one’s statutory right of set-off; it may be allowed independently of statute.6 The trial court did not rest its refusal to allow offsets solely on the after-enacted statute. Its disallowance clearly came to be rested upon Guardian’s scienter with respect to a critical fact.7
¶ 9 The critical nisi prius ruling is not contrary to law, nor does it impair the rein-surer’s right to offsets under its contract. The trial court’s finding of Guardian’s “guilty knowledge” (of American’s insolvency) at the time Guardian consented to have American reinsured is a sufficient ground in equity to support its rejection of Guardian’s demand for offsets. Because this dispositive rule of law, drawn from a non-statutory source, was in force long before the enactment of § 1928 B.4, its application to this case does not offend the constitutional prohibition against applying an after-enacted statute to affect the obligation derived from a pre-existing promise.
B.
¶ 10 The trial court's other ruling that Guardian “lent or rented surplus” to American, which “masked” from the regulators American’s declining financial condition is not a determination solely rested upon the after-enacted provisions of 36 O.S.1991 § 1928. The equitable principle invocable as a basis for that ruling antedates the cited statute’s enactment.
¶ 11 The critical amendment, which added the language in 36 O.S.1991 § 1928 B.4— whose application to this ease the court condemns today — prohibits that manner of structuring a reinsurance agreement which would avoid “reasonable risk transfer” to a primary insurer.8 More simply put, a rein-surer cannot lend its credit (surplus) but must extend genuine financial indemnity to the primary insurer in order to provide economic security to the company and its policyholders. The nisi prius tribunal’s ruling determined Guardian had entered into an illusory transfer which allowed American to borrow Guardian’s credit and to conceal American’s insolvency from the knowledge of its insurance regulators. In short, Guardian’s reinsurance scheme was found to have been but an illusory assumption of indemnity and in effect a “paper” security that may create the appearance of value but in reality is no more than a sham transaction. Reality, not appearance, is the test which determines Guardian’s claim to set-off rights in this case.9
¶ 12 Nisi prius application of the illusory-transfer doctrine, long followed in equity,10 neither implicates here the after-enacted statute nor impairs Guardian’s contractual rights. Just as a federal bankruptcy court can pierce through the form to test the sub*1244stance of any transaction under its examination and then reform the affected instruments to meet legal reality,11 so too may a state court sitting in chancery similarly deny Guardian’s offset claim that is sought to be anchored upon an illusory transfer.
¶ 13 I would neither disturb the trial court’s findings nor its conclusion. The judgment rests on clearly supportive proof, is consistent with time-honored equity jurisprudence, and does not impair Guardian’s constitutionally-protected contractual rights.
Ill
THE INCIDENTS OF OKLAHOMA INSOLVENCY LAW MAKE ALL INSOLVENT INSURERS (SUBJECT TO THIS STATE’S JURISDICTION) AMENABLE TO MODIFICATION OF THEIR CONTRACTUAL OBLIGATIONS
¶ 14 Governmental authority to regulate the insurance business as an enterprise affected with public interest lies within the state’s recognized police power.12 Insurance companies do business under supervisory control of the State Insurance Commissioner.13 That official’s power is exercised for the benefit of the policyholders and of the public.14 Reasonable state regulations are not deemed violative of the constitution as an impermissible deprivation of property which offends due process of law.15 When declared insolvent, insurers chartered by this state become subject to a legal regime interposed to regulate their special rights and liabilities applicable to entities which cannot meet obligations as they become due. The terms of insolvency law are to be viewed as the rules of conduct with respect to which all insurers must contract on a daily basis.
¶ 15 In federal bankruptcy matters, the Bankruptcy Act takes precedence over other laws and, in case of conflict, controls over competing statutory preferences.16 Because attempts to place the insurance industry under congressional control as an activity in interstate commerce failed to take hold, the states continue to have plenary power to regulate this business in the public interest.17
¶ 16 The focus of state concern is insurer misconduct.18 Both supervision and conser-vatorship of the industry are matters of public policy. They are necessary to the public welfare and have been declared a condition of doing insurance business in this state.19 In the process that immediately precedes the declaration of an insurer’s insolvency (called a delinquency proceeding) it is the court’s duty to appoint as receiver the insurance commissioner,20 who, by force of law, becomes vested with title to property, contracts, and all rights of action formerly controlled by the insurer.21 The state’s power *1245that is set in motion at this point consists of not only the authority to regulate but also to rehabilitate, liquidate, sell assets, and bring about restructuring of the insolvent company.22
¶ 17 Insurance companies are creatures of the law and must act in conformance with its provisions. All insolvent insurers doing business in this state are subject to those contract modifications which govern them in equity as well as by statute. In short, the state has the power to say what contracts are enforceable against insolvents as well as in what manner and in what forum they may be performed.23
¶ 18 State government’s police power to regulate the insurance industry is part of the existing law in every insurance contract that is executed. That power, in contemplation of law, is a part of every such contract.24 Once the insurance commissioner’s control over an insolvent risk carrier stands conferred, the insurer’s contractual obligations are subjected to strict scrutiny imposed by both equity jurisprudence as well as the statutes.
¶ 19 The rule against impairing contracts by after-enacted legislation does not protect those who deal with a department of government that is given the power to safeguard public welfare.25 There is a legal presumption that when contracts are entered into by a highly-regulated enterprise, such as the insurance industry, the parties cannot by private agreement withdraw their undertaking from the police power of the state.26 Were it not for this rule the state’s regulatory authority would, in every instance, be defeated by the contracting companies’ will.27
¶ 20 Where police power is exercised for a public purpose, insolvents’ contracts must yield to the accomplishments of that end.28 Rehabilitation of insurance companies under state insolvency statutes does not impair contractual obligations.29 Upon the occurrence of an insurer’s insolvency, contracts are subject to reassessment in light of the applicable equity rules that govern in administering the insolvent insurer’s assets. The provisions of 36 O.S.1991 § 1928 B.4, which in some circumstances pose a barrier to offsets, are to be viewed as no more than a supplement to the governing equity jurisprudence. Their terms include pre-existing principles of the state’s regulatory scheme applicable in insol*1246vency proceedings. That scheme allows modification of contractual terms when that' becomes necessary to uphold public policy.30
¶ 21 All insurers declared insolvent stand subject to the state’s power to modify their contractual obligations. To meet the legitimate objective of liquidation, rehabilitation or sale, the exercisé of that power is well-nigh critical, if not indeed indispensable.31
SUMMARY
¶ 22 All demands pressed in receivership proceedings against insolvent insurers are governed by statute and by equity jurisprudence. Long before statutory rights of set-off were ever fashioned, courts of equity applied their own principles to that concept.32 A judicial presumption favors legislative preservation of common-law rights.33 Where the common law gives a remedy, and another is added by statute, the latter is to be treated as merely cumulative, unless it was explicitly declared to be exclusive.34 When new legislation affecting insolvent insurers merely codifies the common law, pre-existing contractual rights are not impermissibly impaired.35
¶ 23 It is of no moment in this case that the contested provisions of § 1928 B.4 might be treated as an after-enacted statute whose terms, generally speaking, cannot be applied to the declaratory relief sought in this case. Four reasons militate in favor of this view: 1) the trial court found that the offset claim is tainted by Guardian’s knowledge of the reinsured entity’s insolvency; 2) the court also found the reinsurance transaction to be illusory; 3) none of these findings is clearly contrary to the weight of the evidence in the record; and 4) the chancellor’s refusal to allow the offset claim is rested on firmly-settled principles of pre- § 1928 B.4 equity jurisprudence.
¶ 24 While in an equity case an appellate court will examine and weigh the record proof, it must abide by the law’s presumption that the trial court’s decision is legally correct.36 A nisi prius decree cannot be disturbed unless found to be clearly contrary to the weight of the evidence or to some governing principle of equity jurisprudence.37 Although the trial court did not explicitly refer to all the governing equitable principles, its findings are impervious to reversal if the result reached was correct even though the pertinent rule of law was not assigned as a ground for the conclusion reached.38 If legally correct, the chancellor’s decree will not be reversed because of faulty reasoning, an erroneous finding of fact or the consideration of some immaterial issue.39
¶ 25 Because I cannot countenance today’s implicit assumption that there was no *1247antecedent norm of Oklahoma’s common law to support the trial judge’s rejection of the offset, I recede from this court’s pronouncement as well as from its disposition.40

. The pertinent terms of 36 O.S.1991 § 1928 are:
"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 article, such 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.
B. No offset shall be allowed in favor of any such person where:
[[Image here]]
4. the obligation of the insurer to such person was the result of a life or accident and health reinsurance agreement that contains terms or conditions structured to avoid reasonable risk transfer and indemnification criteria....”

. Cumberland Glass Mfg. Co. v. De Witt, 237 U.S. 447, 453, 35 S.Ct. 636, 638, 59 L.Ed. 1042, 1045 (1915); In re Rosenbaum Grain Corp., 103 F.2d 656, 658 (7th Cir.1939); Givens v. Hall, 18 Wash.App. 618, 569 P.2d 1232, 1234 (1977); 4 W. Collier, Bankruptcy § 68.02 at 851-52 (14th ed. J. Moore 1975); 1 Remington, Bankruptcy Law, § 22 at 44-50 (5th ed. James M. Henderson 1950).

. The pertinent terms of 12 O.S.1991 § 2 are:
“The common law, as modified by constitutional and statutory law, judicial decisions and the condition and wants of the people, shall remain in force in aid of the general statutes of Oklahoma ..."
See also Greenberg v. Wolfberg, 1994 OK 147, 890 P.2d 895, 899; In the Matter of the Estate of Maheras, 1995 OK 40, 897 P.2d 268, 273; Wright v. Grove Sun Newspaper Co., 1994 OK 37, 873 P.2d 983, 987; Tate v. Browning-Ferris, 1992 OK 72, 833 P.2d 1218, 1224-25.

. United States v. Columbia Erection Corporation, 134 F.Supp. 305, 306 (W.D.Mo., 1955); 3 Remington, Bankruptcy Law, § 1471 at 443-447 (5th ed. James M. Henderson 1950); 4 Remington, Bankruptcy Law, § 1710.8 at 354-358 (5th ed. James M. Henderson 1950).

. The critical finding in the trial court's July 18, 1994 journal entry, which supports this ruling is; “Guardian knew or should have known on or before June 18, 1987, that ASL [American] was insolvent and they possessed the right to refuse to enter into the amendment to the Coinsurance Agreement with ASL [American].” (Emphasis supplied.)

.See Siegel v. State, 262 A.D. 388, 390, 28 N.Y.S.2d 958, 961 (1941), where it is stated: "The right to assert set-off at law is of statutory creation; it was not recognized at common law. Courts of equity however supplied what the common law omitted and long prior to the statute of set-offs it had been a familiar and favorite principle of courts of chancery to adjust in one suit all conflicting demands between the parties, which were readily capable of such adjustment, where, from the relations and situation of the parties and from the nature of their mutual claims, equity and justice seemed to require a complete and speedy settlement. Consequently the jurisdiction of equity is not based upon any statutes of set-off, and would exist as well without any such statutes as it now does, and would not in any sense be affected by their repeal. By the exercise of this equitable jurisdiction the courts are enabled to do justice between the parties in cases not strictly within the provisions of the statute.” (Emphasis added.)
See also Cumberland Glass, supra, note 2; In re Rosenbaum Grain Corporation, supra, note 2.

. In civil law the element of “prior knowledge” is not always tantamount to willfulness of conduct. Willfulness stems from "guilty knowledge” which is synonymous with "culpable knowledge” or "scienter ”. See Dayton Hudson Corporation v. American Mutual Liability Insurance Company, 1980 OK 193, 621 P.2d 1155, 1161; In re Initiative Petition 272, State Question 409, 1963 OK 285, 388 P.2d 290, 293. Scienter, or guilty knowledge, may be shown either by circumstantial evidence or by direct and actual proof. See Hanf v. State, 1977 OK CR 41, 560 P.2d 207, 210.

. For the amended provision, see supra note 1.

. Roberts v. South Oklahoma City Hospital Trust, 1986 OK 52, 742 P.2d 1077, 1082 (Opala, J., concurring); Newman v. Dore, 275 N.Y. 371, 9 N.E.2d 966, 968 (1937).

. See Newman, supra note 9.

. 1 Remington, Bankruptcy Law, § 22 at 47-58 (5th ed. James M. Henderson 1950).

. Insurance Company of North America v. Welch, 49 Okl. 620, 154 P. 48, 49 (1915).

. 36 O.S.1991 § 307 et seq.; § 1803 et seq.

. Oklahoma Benefit Life Association v. Bird, 192 Okl. 288, 135 P.2d 994, 997 (1943).

. Insurance Company of North America v. Welch, supra, note 12, at 50.

. In the Matter of Jonker Corporation, 385 F.Supp. 327, 331 (D.Md.1974).

. United States Department of the Treasury v. Fabe, 508 U.S. 491, 113 S.Ct. 2202, 124 L.Ed.2d 449 (1993).

. Article 18 of Title 36 of the Oklahoma Statutes, which addresses supervision and conserva-torship of insurers, includes the provisions of 36 O.S.1991 § 1801(A)(8). These are:
"It is a proper concern of this State to attempt to correct or remedy insurer misconduct, ineptness or misfortune."

. The terms of 36 O.S.1991 § 1801(C) are:
"The substance and procedure of this act is, therefore, declared to be the public policy of this state and necessary to the public welfare. Such policy and welfare require the availability of the remedies provided by this law whenever circumstances warrant, and it is a condition of doing an insurance business in this state."

. The terms of 36 O.S.1991 § 1914(A) are:
"Whenever under this article a receiver is to be appointed in delinquency proceedings for a domestic or alien insurer, the court shall appoint the Insurance Commissioner as such receiver. The court shall order the Insurance Commissioner forthwith to take possession of the assets of the insurer and to administer the same under the orders of the court.”

. The terms of 36 O.S.1991 § 1914(B) are:
"As domiciliary receiver, the Insurance Commissioner shall be vested by operation of law with the title to all of the property, contracts, and rights of action and all of the books and records of the insurer, wherever located, as of the date of entry of the order directing him to *1245rehabilitate or liquidate a domestic insurer or to liquidate the United States branch of an alien insurer domiciled in this state, and he shall have the right to recover the same and reduce the same to possession; except that ancillary receivers in reciprocal states shall have, as to assets located in their respective states, the rights and powers which are herein prescribed for ancillary receivers appointed in this state as to assets located in this state.”

. The provisions of 36 O.S.1991 § 1914(E) are: "Upon taking possession of the assets of an insurer, the domiciliary receiver shall, subject to the direction of the court, immediately proceed to conduct the business of the insurer or take such steps as are authorized by this article for the purpose of rehabilitating, liquidating, or conserving the affairs or assets of the insurer.”

. Metropolitan Life Insurance Company v. Lillard, 118 Okl. 196, 248 P. 841, 845 (1926).

. Sunray DX Oil Company v. Cole, 1967 OK 242, 461 P.2d 305, 308-309; Landowners, Oil and Gas Royalty Owners v. Oklahoma Corporation Commission, 1966 OK 225, 420 P.2d 542, 544.

. Southeastern Oklahoma Development and Gas Authority v. Oklahoma Corporation Commission, 1980 OK 16, 606 P.2d 574, 575, citing Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 434, 54 S.Ct. 231, 238, 78 L.Ed. 413 (1934):
"Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government by which contractual relations are worthwhile, a government which retains adequate authority to secure the peace and good order of society.”

. See Southeastern Oklahoma Development and Gas Authority v. Oklahoma Corporation Commission, supra, note 25, at 576.

. See Southeastern Oklahoma Development and Gas Authority v. Oklahoma Corporation Commission, supra, note 25, at 576.

. Veix v. Sixth Ward, 310 U.S. 32, 39, 60 S.Ct. 792, 795, 84 L.Ed. 1061 (1940).

. Neblett v. Carpenter, 305 U.S. 297, 302, 59 S.Ct. 170, 172, 83 L.Ed. 182 (1938); Mendel v. Garner, 283 Ark. 473, 678 S.W.2d 759, 761 (1984).

. Bluewater Insurance Limited (by Tennessee Insurance Company) v. Balzano, 823 P.2d 1365, 1372 (Colo.1992).

. Southeastern Oklahoma Development and Gas Authority v. Oklahoma Corporation Commission, supra, note 25, at 576.

. McCormack v. Oklahoma Publishing Company, 1980 OK 98, 613 P.2d 737, 740; Hogan v. State of Nevada, 84 Nev. 372, 441 P.2d 620 (1968); Siegel v. State, supra, note 6.

. Greenberg v. Wolfberg, supra, note 3 at 899; Tale v. Browning-Ferris, supra, note 3 at 1225; State Mut. Life Assur. Co, of Amer. v. Hampton, 1985 OK 19, 696 P.2d 1027, 1036 (Opala, J„ concurring); Reaves v. Reaves, 15 Okl. 240, 82 P. 490, 495 (1905).

. Greenberg v. Wolfberg, supra, note 3 at 899; Wright v. Grove Sun Newspaper Company, Inc., supra, note 3 at 987; Tate v. Browning-Ferris, supra, note 3 at 1225.

. See Southeastern Oklahoma Development and Gas Authority v. Oklahoma Corporation Commission, supra note 25 at 575; Sunray DX Oil Company v. Cole, supra, note 24 at 308-309; Landowners, Oil and Gas Royalty Owners v. Oklahoma Corporation Commission, supra note 24, at 544.

. Boatright v. Perkins, 1995 OK 34, 894 P.2d 1091, 1094.

. Boatright v. Perkins, supra note 36, at 1094; Adams v. Adams, 208 Okl. 378, 256 P.2d 458, 462 (1953); Childers v. Breese, 202 Okl. 377, 213 P.2d 565, 568 (1950); Courts v. Aldridge, 190 Okl. 29, 120 P.2d 362, 364 (1941).

. In the Matter of the Estate of Bartlett, 1984 OK 9, 680 P.2d 369, 373.

. Boatright v. Perkins, supra note 36 at 1094; Willis v. Nowata Land and Cattle Co., 1989 OK 169, 789 P.2d 1282, 1286-87; In the Matter of the Estate of Bartlett, supra note 38 at 373; Carpenter v. Carpenter, 1982 OK 38, 645 P.2d 476, 480; Moree v. Moree, 1962 OK 95, 371 P.2d 719, 720.

. Because, in my view, the 1988 amendment of § 1928 did not change the teachings of equity jurisprudence then in force, the later addition of Subsection C in 1997 has no effect on this litigation. Subsection C declared the legislative intent of the 1988 amendment to stand confined to reinsurance agreements entered into after November 1, 1988. See Okl.Sess.L.1997, Ch. 156, § 3, p. 930. My analysis would relegate Subsection C to the irrelevant status of after-enacted legislation.