Court Opinion

ID: 5726256
Source: CourtListenerOpinion
Date Created: 2022-01-12 16:17:13.937906+00
Date Added: 2024-06-11T08:40:48.214409
License: Public Domain

Malone, J. (dissenting).
I would affirm the quashing by
Supreme Court of the Comptroller’s subpoenas.
The courts have long held that the role of the Superintendent of Insurance as liquidator must be distinguished from his role as the state officer in charge of regulating the insurance industry (see e.g. Corcoran v Hall & Co., 149 AD2d 165, 173 [1989]; Corcoran v National Union Fire Ins. Co. of Pittsburgh, 143 AD2d 309, 310-311 [1988]; Matter of Ideal Mut. Ins. Co., 140 AD2d 62, 67-68 [1988]; Matter of Kinney, 257 App Div 496, 501 [1939], affd 281 NY 840 [1939]). Specifically, cases have held that “[wjhen acting as statutory liquidator of an insolvent insurer, the Superintendent is essentially a court-appointed private trustee who for all practical purposes takes the place of the insolvent insurer and stands in its shoes” (Ideal Mut. Ins. Co., 140 AD2d at 67 [emphasis added]) and who “act[s] for a private business and not one utilized by the State in the discharge of its governmental duties” (Corcoran, 143 AD2d at 311, quoting Matter of Kinney, 257 App Div at 501), and holds the funds and legal title of property of an insolvent insurer in trust for the benefit of all its creditors (Matter of Bean v Stoddard, 207 App Div 276, 279 [1923], affd on other grounds 238 NY 618 [1924]). In finding that the Superintendent is a state officer whether he is acting as liquidator or regulator, the majority’s decision effectively overrules this line of cases, thereby rendering the distinction made by the courts one without a difference. I cannot agree.
Further, I see no compelling reason to change how the Liquidation Bureau has conducted itself for the last 100 years, which accords with the fundamental principle that the Superintendent as liquidator is not a state officer. The Bureau pays federal income taxes and state franchise taxes for each insurer it administers (while a state entity would be exempt from such taxes); the Bureau continues to employ officers and employees of the insolvent insurer who remain non-state employees; the Bureau is represented in the liquidation proceedings by in-house counsel or private counsel, rather than the Attorney General, as a state agency would be; the Bureau is not included in the budget of the Insurance Department; the assets of the insolvent *84entities are retained separate and apart from those of the State Treasury; the Bureau has no governmental immunity; any suits involving the Bureau are brought not in the Court of Claims, where damage suits against state agencies must be brought, but instead in Supreme Court; and the Bureau, unlike a governmenr tal agency, must obtain its own errors and omissions insurance (Matter of Consolidated Edison Co. of N.Y. v Insurance Dept. of State of N.Y., 140 Misc 2d 969, 973 [1988]). Further, in contrast to public officials, the Superintendent as liquidator has no governmental immunity and may be required by court to post a bond (Insurance Law § 7409 [b]), and claims or judgments entered against the Superintendent as liquidator are not claims or judgments against the State.
The constitutional and statutory provisions relied upon by the Comptroller do not extend his audit power to the Superintendent’s handling of the dissolution or rehabilitation of distressed insurance companies or the internal financial controls and management procedures of the Liquidation Bureau. By its terms, NY Constitution, article V, § 1 limits the Comptroller’s audit authority to “money of the state, or . . . under its control”; State Finance Law § 111, its statutory counterpart, limits the Comptroller’s pre-audit power to “moneys in the possession, custody or control of any officer, agent, or agency of the state.” As the above precedents make clear, both the Bureau and the Superintendent are outside the reach of these provisions. Simply put, the Bureau is not a state agency nor does it hold any state funds. Concomitantly, the Superintendent, in his role as liquidator, is neither a state officer nor under the Comptroller’s control or purview. While legal title to the assets of the insolvent insurer passes to the Superintendent, equitable title remains in the defunct insurer to be held for ultimate distribution to creditors and policyholders (see Corcoran, 143 AD2d at 311). As the assets never vest absolutely in the State (manifested by the fact that they are separated from the state general fund), it is clear that the moneys collected in the liquidation process do not constitute state moneys to be used by the State for any purpose at any time. The majority’s position that the assets remain subject to state control even though they are not to be commingled with general governmental funds is unsupported. Indeed, in different contexts dealing with NY Constitution, article V, § 1 and State Finance Law § 111, the courts have rejected similar arguments (see Matter of Blaikie, 11 AD2d 196 [1960] [State Harness Racing Commission]; Matter of Smith *85v Levitt, 30 NY2d 934 [1972], affg 37 AD2d 418 [1971] [New York State Urban Development Corp.]; see also Saratoga Harness Racing Assn. v Agriculture & N.Y. State Horse Breeding Dev. Fund, 22 NY2d 119, 123-124 [1968]; Matter of Clark v Sheldon, 106 NY 104, 111-112 [1887] [railroad]). Therefore, I find no compelling reason for different treatment to be accorded here to the Bureau and the Superintendent.
Even if, arguendo, the Superintendent were to be considered a state officer, “possession, custody or control” (State Finance Law § 111) “connotes the power to dispose of the funds in question” (Blaikie, 11 AD2d at 204). However, as the majority acknowledges, it is the Supreme Court, subject to this Court’s appellate review, not the Superintendent, who controls the assets of insolvent insurance companies involved in rehabilitation or dissolution by “ ‘directing] the manner in which payments and dividends to creditors shall be made’ ” (Matter of Knickerbocker Agency [Holz], 4 NY2d 245, 252 [1958], quoting Insurance Law § 545 [1]; see current Insurance Law § 7434 [a] [1]; § 7412 [b] [3]; see also Consolidated Edison, 140 Misc 2d at 977).
Neither is the Bureau a state agency under State Finance Law § 111 or § 8 (2-b) (a). As defined in State Finance Law § 2~a (3), a “State agency” is: “Any state department, state university of New York, city university of New York, board, bureau, division, commission, committee, council, office or other governmental entity performing a governmental or proprietary function for the state . . . .” (Emphasis added.) A governmental function is one “undertaken for the protection and safety of the public pursuant to the general police powers” (Sebastian v State of New York, 93 NY2d 790, 793 [1999] [emphasis added]). In contrast, the State acts in a proprietary function when it “essentially substitute[s] for or supplement^] traditionally private enterprises” (id. [internal quotation marks omitted]). The difference is that the State remains generally immune from negligence claims when acting in its governmental capacity but not when acting in its proprietary capacity. However, because the Bureau operates without the benefit of state funds, it does not perform either a governmental or proprietary function for the State. The argument that the Superintendent performs a proprietary function for the State is further weakened by the fact that a money judgment entered against the Superintendent, as liquidator, *86does not result in a money judgment against the State (see Bean, 207 App Div at 279).*
In my opinion, expansion of the Comptroller’s authority to audit the Bureau is an issue that should be addressed by the Legislature. If the Bureau were, by virtue of the majority’s decision, transformed into a state agency, the ramifications would have far-reaching implications that I do not believe were contemplated by the Legislature or are wise. The Bureau would be rendered subject, inter alia, to the requirement of legislative appropriations before any money could be spent (NY Const, art VII, § 7), the preapproval requirement for all contracts exceeding $50,000 entered into by a state agency or officer (State Finance Law § 112 [2] [a]), and the pre-auditing of any expenses before payment. In addition, the Superintendent’s acts in liquidating insolvent insurance companies would be acts of the State, which would consequently expose the State to liability from which it is presently exempt. Finally, the majority’s decision effectively undermines the undisputed authority of the Supreme Court to administer liquidation proceedings.
The Comptroller’s subpoena seeking a pre-auditing of the Bureau is unprecedented. Before 1976, the Comptroller never performed a single audit of the Bureau; then beginning in 1976, and again in 1984, 1990, 1996, 1998 and 2001, the Comptroller conducted only limited posi-audits of various parts of the Bureau, with its express consent, recognizing that the Bureau had historically been exempt from the oversight of the Comptroller and other state regulatory machinery. However, if, because of the Comptroller’s added authority to pre-audit the Bureau, the Superintendent is hindered from, for example, canceling insurance policies, marshaling all assets and collateral, reviewing all contract and other obligations of the insolvent insurer, and locating, taking possession of and ultimately liquidating stocks, bonds, securities and other salable properties of the defunct insurer, the liquidation process would be seriously frustrated. Further, with the power of pre-auditing, nothing could conceivably prevent the Comptroller from participating in negotiating contracts entered into by the Superintendent on behalf of the insurers.
*87Whether the Comptroller seeks a pre- or posi-audit of the Bureau, either type of review would give him the ability to second-guess orders of the Supreme Court. In demanding “access to the records related to payments made directly from the insurer estates,” the Comptroller seeks to circumvent Insurance Law article 74 since it is the court, upon the recommendation of the Superintendent as liquidator, that “ ‘ direct [s] the manner in which payments and dividends to creditors shall be made’ ” (Knickerbocker Agency, 4 NY2d at 252, supra). A post-audit raises similar concerns. According to the Comptroller, a post-audit is necessary to ensure the financial integrity of the Superintendent’s decisions regardless of whether they are subject to the court’s review or approval. However, this view is at odds with “the paramount interest of the various States in seeing that insurance companies domiciled within their respective boundaries are liquidated in a uniform, orderly and equitable manner without interference from external tribunals” (G. C. Murphy Co. v Reserve Ins. Co., 54 NY2d 69, 81 [1981]). As one federal court noted, “the structure of the New York system serves the state’s strong interest in centralizing claims against an insolvent insurer into a single forum where they can be efficiently and consistently disposed of” (Law Enforcement Ins. Co., Ltd. v Corcoran, 807 F2d 38, 44 [2d Cir 1986], cert denied 481 US 1017 [1987]).
The Comptroller’s performance of targeted reviews of the insurance security funds and abandoned property does not authorize the sweeping operational audits demanded in the subject subpoenas. First, the estates of liquidated insurers and the security funds are separate and distinct entities, each with its own separate purpose, payment eligibility criteria, and administration (see Matter of Union Indem. Ins. Co. of N.Y., 92 NY2d 107 [1998]). The security funds, which serve to settle claims that remain unpaid when an authorized insurer becomes insolvent, are funded by insurers’ periodic contributions, which are statutorily required to be kept “separate and apart . . . from all other state moneys” (Insurance Law § 7607 [a]). Disbursements from the funds are made by the New York State Commissioner of Taxation and Finance, who acts as the funds- ‘ “custodian,” to the Superintendent, acting as liquidator, upon the presentation of vouchers by the Superintendent (id.). That should be the extent of the Comptroller’s review. So long as the Superintendent, acting as liquidator, rehabilitator or conservator, presents proper vouchers for the release of money in the se*88curity funds, pre-audits, which consist of mere reviews of the vouchers authorizing claim payments from the security funds, are administrative in nature.
While the scope of the Comptroller’s inquiry as contained in the instant subpoenas is not unlimited, it is not up to the courts to “ ‘cull the good from the bad’ ” (Grotallio v Soft Drink Leasing Corp., 97 AD2d 383 [1983], quoting People v Doe, 39 AD2d 869, 870 [1972]). For the foregoing reasons, the subject subpoenas are beyond the reach of the Comptroller and were properly quashed by Supreme Court as overbroad.
Friedman and Sullivan, JJ., concur with Tom, J.P.; Catterson and Malone, JJ., dissent in a separate opinion by Malone, J.
Judgment (denominated an order), Supreme Court, New York County, entered July 5, 2005, reversed, on the law, without costs, the subpoenas reinstated, and it is declared that respondent has the power to post-audit the Liquidation Bureau’s financial management and operations and to audit property of distressed insurers held by the Superintendent of Insurance.

 The majority’s reliance upon State Finance Law § 121 (2), which authorizes the Comptroller’s post-audit of funds held in trust by state officers, is also misplaced. This provision appears to refer to moneys that the State is entitled to retain and, unlike the situation herein, is not being held in trust for other entities or individuals such as creditors or policyholders.