Court Opinion

ID: 9651342
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:15:33.767996+00
Date Added: 2024-06-11T13:27:16.512586
License: Public Domain

CONCURRING OPINION BY
Judge PELLEGRINI.
Although I am compelled to agree with the majority that the scheme by Kingsway Financial Services, Inc. and Kingsway America, Inc. (collectively, Kingsway) to jettison its failing subsidiary Lincoln General Insurance Company (Lincoln) by bribing 20 charities to take the stock of its subsidiary Walshire Assurance Company (Walshire), a holding company that wholly owns Lincoln, complies with Sections 1402(a)(1) and-1405(a)(2) of the Insurance Holding Companies Act1 and Section 205(a) of the GAA Amendments Act of 1990,2 I write separately to highlight its improper use of charitable corporations to accept its detritus.
Faced with the prospect of Lincoln’s deteriorating financial condition and, apparently desperate to rid itself of Lincoln before its ultimate demise or any obligations it may have had under debt covenants, Kingsway concocted an elaborate scheme to completely divest itself of Lincoln with minimal cost to itself. On Friday, October 16, 2009, Kingsway contacted at least 20 different charities to inquire whether someone would be present at the charities’ offices the following Monday, October 19, 2009, to accept a donation. At this time, Kingsway refused to provide any information to the charities about the “donation.” That Monday, Kingsway representatives visited, in person, each of the charities that had been contacted the previous Friday. Each charity was presented with a stock certificate for 226,112.55 shares (or 5%) of Walshire’s stock (and hence, 5% of the ownership interest in Lincoln) and a check from Kingsway for $20,000 as a bribe to accept the Walshire stock. Upon receiving this “donation,” a representative of each charity was required to sign a gift receipt and have their photograph taken with the stock certificate as acknowledgement of its receipt.
*261The fact that the $20,000 check was intended as a bribe rather than a bona fide donation was highlighted by the actions of one of the contacted charities. This unnamed charity, when presented with over 226,000 shares of an insurance company and the bizarre requirement that its representative have his photograph taken by Kingsway while holding the stock certificate, questioned the propriety of the transaction. Rather than donating the $20,000 to this charity without the accompanying 5% interest in Lincoln, Kingsway showed that the $20,000 check was a quid pro quo in return for accepting the stock. It immediately refused to provide the $20,000 “donation” to this charity and immediately found another charity to take its place. Obviously, Kingsway had planned in advance for this very scenario and had backup charities in mind. By the end of the day, Kingsway had given away all of its stock in Walshire to 20 different charities who were now Lincoln’s owners.
Three additional points as to the nature of Kingsway scheme: first, all of these charities were located in the New York City area and, thus, conveniently out of reach of Pennsylvania authorities. Second, not a single one of these charities had any history of owning insurance companies or had the capacity or the resources to figure out how or to meet Lincoln’s obligations to its customers. Third, Kingsway did not notify the Pennsylvania Insurance Department (Department) of the transaction until the day it occurred when it was already a done deal.
Once the Department belatedly learned of the scheme, it requested the names of the charities involved. Despite repeated requests, Kingsway refused, to provide the nam.es of the charities. On October 26, 2009, the Department learned the names of five of the charities from Lincoln. (It is unclear when Lincoln learned their identities or the nature of the transaction.) The Department contacted those charities and strongly recommended that they return the stock “donation” to Kingsway. At least one of those charities, the Children’s Tumor Foundation, attempted to return both the stock and the $20,000 to Kings-way. Kingsway responded by asserting that it would not accept the return of the stock, essentially stating that the charities were stuck with it whether they liked it or not. By this point, on October 28, 2009, following repeated requests by the Department, Kingsway finally provided the names of the 20 charities.
Kingsway’s obvious attempt to cover-up the true nature of its scheme has continued. The Department has on numerous occasions requested documentation from Kingsway showing that it complied with corporate formalities, including those found in 15 Pa.C.S. §§ 1727, 1732, 1757 and 1932. Kingsway has categorically refused to provide this information. Kings-way has refused to provide documentation that a majority of the directors of Walshire approved the transaction. Kingsway has refused to provide documentation showing that the transaction was in accordance with Walshire’s by-laws or pursuant to resolutions or orders of the board of directors. Kingsway has refused to provide documentation that the transaction was authorized by a majority of Walshire’s shareholders. Kingsway has refused to provide documentation that Joseph Stillwell, who is the sole signatory of the stock certificates and is listed as President and Secretary of Walshire, was properly elected an officer of Walshire according to its bylaws. Finally and most importantly, Kingsway has refused to provide copies of the debt covenants it made with Lincoln, which presumably were the reason for the entire transaction in the first place.
*262Because the nature of the debt covenants and other obligations Kingsway may have had, the end result of the scheme is that Kingsway has no obligation to cover Lincoln’s debts to its insureds, potentially costing taxpayers of Pennsylvania who bear the ultimate cost of Lincoln’s failure to meet is obligations. While its scheme may not have violated the insurance laws of Pennsylvania, it is well within the powers of the Attorney General of Pennsylvania and the Attorney General of New York to investigate whether Kingsway’s use of charitable corporations was improper or any fraud occurred.

. Act of May 17, 1921, P.L. 682, as amended, 40 P.S. §§ 991.1401 — 991.1413.

. Act of December 19, 1990, P.L. 834, 15 P.S. § 21205(a).