IN THE MATTER OF THE LIQUIDATION OF AMERICAN MUTUAL LIABILITY INSURANCE COMPANY & another. [Note 1]

GREANEY, J. A single justice of this court has reserved and reported four questions concerning the settlement made by the Commissioner of Insurance (commissioner), acting as the permanent receiver (receiver) of American Mutual Liability Insurance Company and American Mutual Insurance Company of Boston (collectively, American Mutual) with Coopers & Lybrand (Coopers), the former certified public accountant and auditor of American Mutual. That settlement was before the single justice on the receiver's motion for approval of the settlement.

The background of the report is as follows. On March 9, 1989, after declaring that American Mutual was insolvent under the provisions of G. L. c. 175, Section 180C (1992 ed.), [Note 2] the

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single justice sitting in the Supreme Judicial Court for Suffolk County appointed the commissioner as receiver with the authority to take possession and control of American Mutual, subject to any further order of the county court. [Note 3] Shortly thereafter, the receiver retained the Worcester law firm of Bowditch & Dewey to investigate the circumstances leading to American Mutual's insolvency.

As part of its work, Bowditch & Dewey examined work papers and reports concerning the financial affairs of American Mutual that had been prepared by Coopers which served as American Mutual's independent certified public accountant and auditor from 1980 through 1988. During that inquiry, lawyers from Bowditch & Dewey conducted extensive interviews with individuals from Coopers who had made audits of American Mutual's financial affairs. The investigating lawyers also consulted extensively with actuarial experts, and with accountants from the firm which succeeded Coopers as American Mutual's auditor. Based on a review of relevant documents, and the recommendations made by Bowditch & Dewey, the receiver entered discussions with Coopers directed at the resolution of possible claims arising out of its auditing and accounting work for American Mutual. As a result of the discussions, the receiver executed a proposed settlement agreement with Coopers, which, among other matters, required Coopers to pay $3,750,000 to the estate of American Mutual and to provide the commissioner with "certain assurances and in-kind services" without charge. In exchange, the receiver agreed to release Coopers from liability on claims "that she, acting either as Commissioner of Insurance or as Permanent Receiver on behalf of [American

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Mutual] or on behalf of [American Mutual] policyholders, claimants, and other creditors (including, without limitation, guaranty funds and insurance insolvency funds) has had, may now, or hereafter can, shall or may have."

The receiver then filed a motion for approval of the settlement agreement with the county court in keeping with the requirements of G. L. c. 175, Section 180C (1992 ed.). In June, 1993, a number of State insurance guaranty funds and associations (funds), including the Massachusetts Insurers Insolvency Fund (MIIF), [Note 4] sought to intervene in the receivership proceedings in order to file a separate complaint or claims against Coopers, to conduct discovery, and to object to the settlement. Shortly thereafter, the funds commenced an independent suit against Coopers in the Superior Court seeking damages for Coopers' allegedly negligent work for American Mutual. On August 10, 1993, the single justice denied the funds' motion to intervene "without prejudice" pending full court response to four questions which he reserved and reported. The questions are as follows:

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"1. (a) Whether the Commissioner of Insurance acting as receiver for an insolvent insurer under [G. L. c. 175, Section 180C], has sole authority to bring or `compromise' on behalf of such insurer certain claims (asserted by the receiver to be `choses in action') against such insurer's former independent auditor.

"(b) Whether the Commissioner of Insurance acting as receiver for an insolvent insurer under [G. L. c. 175, Section 180C], has sole authority to bring or `compromise' on behalf of such insurer's policyholders, claimants and other creditors certain claims (asserted by the receiver to be `choses in action') against such insurer's former independent auditor.

"2. Whether [MIIF] created by G. L. c. 175D, and similar . . . funds, have standing to object to such receiver's proffered compromise of the claims referred to in questions 1 (a) and 1 (b).

"3. Whether [MIIF] and similar . . . funds should be joined as parties to the proceedings on the petition for approval of compromise.

"4. Whether the standard of judicial review applicable to the Single Justice's `approval' of the `compromise' is (a) (as proposed by the Commissioner) whether, on the face of the settlement agreement and supporting papers, the compromise is free from any error of law and not arbitrary and capricious or (b) (as proposed by the [MIIF] and similar . . . funds) whether, on the basis of all relevant facts, the compromise is in the best interest of the estate and its creditors or (c) such other standard as the Supreme Judicial Court for the Commonwealth shall determine."

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As has been noted, the funds have been permitted to make their arguments in the case as amici curiae. See note 4, supra.

1. Reported question 1 seeks advice on the scope of the receiver's authority to bring, and settle subject to court approval, claims against an insolvent insurer's accountant and auditor. The question has two parts, asking first, whether the commissioner, acting as permanent receiver, has exclusive authority to bring or settle claims against Coopers "on behalf of [American Mutual]," and, second, "on behalf of [American Mutual's] policyholders, claimants and other creditors."

The receiver's authority emanates principally from G. L. c. 175, Sections 6 and 180C (1992 ed.). Section 6 authorizes the receiver appointed for an insolvent insurer "to take possession of all the property and effects of the company, to settle its affairs, and to distribute its assets, subject to such rules and orders as the court may prescribe." Section 180C provides that, after entry of a liquidation order and "[s]ubject to the approval of the court, [the receiver] may sell or otherwise dispose of the real and personal property, or any part thereof, and sell or compromise all choses in action, of the company." In conformity with these statutes, there was entered in the county court an order of liquidation which directed the receiver, "to liquidate [American Mutual] as provided in and subject to [G. L. c. 175, Section 180C], to take possession of, with the authority to transfer and control, the property, records, accounts, and effects of [American Mutual], to settle the affairs and distribute the assets of [American Mutual] subject to such rules and orders as the Court or some Justice hereof may prescribe."

a. With specific reference to question 1 (a), we agree with the commissioner that, as receiver, she had the exclusive authority to assert against Coopers, and to settle, subject to ultimate approval by the court, any claims that American Mutual may have had against Coopers. American Mutual had claims that Coopers, as its accountant and auditor, had provided negligent services causing American Mutual damage. Those claims clearly constituted a "chose in action," in the

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sense of a potential lawsuit, as that term is used in Section 180C. With respect to power, Section 6 of G. L. c. 175, confers on the receiver of an insolvent insurer broad authority to "settle its affairs," and Section 180C expressly allows the receiver to "compromise all choses in action." While the statutes do not use the word "exclusive" when speaking of the receiver's authority, their obvious import is to the effect that the receiver's power is paramount, subject to oversight and approval by the county court. See Corcoran v. Frank B. Hall & Co., 147 A.D.2d 165, 170-171 (N.Y. 1989); Foster v. Peat Marwick Main & Co., 138 Pa. Commw. Ct. 147, 155 (1991).

In reaching this conclusion, we reject the argument made by the funds that they also have the power to bring any claims American Mutual may have had against Coopers. MIIF bases its argument on G. L. c. 175D, Sections 5 (1) (b) and 8 (1) (1992 ed.) (the funds base their argument on similar statutes and laws that apply to them). Section 5 (1) (b) of G. L. c. 175D provides that MIIF shall "be deemed the insurer to the extent of its obligation on . . . covered claims and shall have all rights, duties and obligations of the insolvent insurer to such extent." [Note 5] Section 8 (1) of G. L. c. 175D provides that "[a]ny person recovering under this chapter shall be deemed to have assigned his rights under the policy to [MIIF] to the extent of his recovery from [MIIF] . . . ." MIIF and the funds maintain that these and like provisions give them all rights held by American Mutual to the extent of their total financial obligations on covered claims.

These provisions, which must be considered in light of the definition of "covered claims," just noted, are principally designed to subrogate the funds to any rights the policyholders of American Mutual may have had with respect to claims

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paid by the funds under the policies. [Note 6] We do not consider the provisions as authorizing the funds to assert a right held by American Mutual which passed by law to the receiver. To accept such a result would substantially undermine the reasonably specific and broad language of G. L. c. 175, Sections 6 and 180C, and create a potential morass of lawsuits involving the receiver, and potentially up to fifty funds, in which many seek to assert, as a representative of American Mutual, the latter's claims against Coopers for alleged negligent services.

b. Question 1 (b) asks whether the receiver has sole authority to bring and settle claims "on behalf of" American Mutual's policyholders, claimants, and creditors. We conclude that the receiver has sole authority to the extent that she is settling common claims.

"The weight of authority makes it clear that a statutory receiver, such as the [receiver] here, may prosecute claims on behalf of creditors and policyholders of the insolvent [insurance] company in order to preserve its estate assets, but may not maintain a suit in such a representative capacity if it is strictly personal in nature, that is, if the cause of action belongs clearly to the individual creditor or policyholder." Matter of the Liquidation of Integrity Ins. Co., 240 N.J. Super. 480, 491 (App. Div. 1990). See Corcoran v. Frank B. Hall & Co., supra at 177 (receiver has authority to prosecute claims on behalf of creditors); Foster v. Peat Marwick Main & Co., supra at 151-155 (insurance commissioner, as rehabilitator of insolvent insurer, had authority to assert claim against insurer's auditor on behalf of insurer, all policyholders and insurers, creditors, and interested parties alleging malpractice, breach of contract, and misrepresentation).

The nature of the distinction has been discussed in Cotten v. Republic Nat'l Bank, 395 S.W.2d 930 (Tex. Civ. App. 1965). In that decision, the court held that a receiver could sue to recover assets of an insolvent insurer on behalf of

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creditors and policyholders, but could not maintain a suit as the representative of a policyholder or creditor who claimed that he or she had been induced by fraud to invest in the insurer. In reaching its conclusion, the court said (id. at 941) the following:

"Certainly a receiver for an insolvent insurance corporation . . . has a right to maintain a suit which is necessary to preserve the corporation's assets and to recover assets of which the corporation has been wrongfully deprived through fraud. In such a suit the receiver may be said to sue as the representative of the corporation and its creditors, stockholders and policyholders, for they have an interest in the corporation's assets and upon liquidation they are entitled to a proper distribution of the assets.

"But some actions for fraud are by their nature personal to each creditor, or each stockholder, or each policyholder, and the receiver may not then maintain a suit in his representative capacity for their joint benefit. In such case each claimant and he alone may bring and maintain the suit himself, for the action is personal, separate and several, not joint, and extends no further than the individual loss of each particular creditor who sues. For example, one who proves that he relied on false representations as to the corporation's financial condition and was thereby induced to extend credit to the corporation, or to purchase stock in it, or to take out an insurance policy with it, must in his own name maintain a separate suit for his damages against the person who uttered the fraudulent representations. The aggrieved party and he alone may maintain the suit."

The same point was made in In re W. World Funding, Inc., 52 B.R. 743, 774-775 (Bankr. D. Nev. 1985). There the court said, quoting 3A Fletcher, Law of Private Corporations Section 1134, at 202 (rev. perm. ed. 1984), that:

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"`The dividing line is whether the cause of action is one which is purely personal, in which no other claimant or creditor of the corporation has an interest, or whether the cause of action is one in favor of creditors in general . . . .' Where the injury alleged is primarily to the corporation, and is an injury to the plaintiff creditor only insofar as it decreases the assets of the corporation to which he must look for satisfaction of his debt, then the suit is for a tort suffered by the corporation, and properly brought by the trustee; if there is a special damage to the creditor suing, not common to other creditors, then it is a personal creditor action which the trustee may not pursue."

It appears the distinction between common claims, which a receiver has exclusive authority to settle on behalf of policyholders and creditors, and personal claims, which a receiver cannot settle, is a basic one. Without the exclusive right in the receiver to settle common claims, resulting litigation could be endless. We accept the distinction and next apply it to reported question 1 (b).

The funds devote a considerable portion of their common briefs to arguing that they have personal claims against Coopers which are distinct from common claims held by creditors or policyholders. We need not consider the argument. In agreeing to settle with Coopers, the receiver was cognizant of, and accepted, the distinction between common claims and personal claims discussed above. In her reply brief, "the [r]eceiver concedes that she lacks authority to bring or compromise a claim [against American Mutual] on behalf of a creditor [or policyholder] where the claim depends on facts specific to the creditor [or policyholders] and the recovery will only benefit that creditor [or policyholder]." The receiver also stated in her affidavit in support of the motion to approve the settlement that she intended to compromise only common claims against Coopers on behalf of American Mutual, and its policyholders and creditors, for the benefit of the estate, and that the language of the settlement

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agreement should be so construed. Nothing in question 1 (b) asks us to determine whether any fund has a valid personal claim, in the sense of the fund having incurred special damage as the result of alleged wrongful conduct on the part of Coopers which could be found to have been directed at that fund. [Note 7] In response to question 1 (b), a sufficient response is that the receiver had the exclusive authority to settle common claims against Coopers on behalf of policyholders and creditors of American Mutual and that, by her own admission, she purports to act only to settle those claims.

2. Questions 2 and 3 ask whether the funds have "standing to object" to the settlement, and whether they "should be joined as parties to the proceedings" on the motion seeking its approval. The questions stem from the application by the funds to intervene as full scale litigants in the proceeding. That application was brought pursuant to Mass. R. Civ. P. 24 (a) and (b), 365 Mass. 769 (1974), and sought intervention as of right or, at least, by permission. The memorandum of law and affidavits filed in support of the application by the funds indicate that they sought to be admitted as parties to the settlement proceedings, so they could file an independent complaint or complaints, engage in discovery, acquire evidence, and make objections to the receiver's motion for approval. As previously noted, the application to intervene was denied by the single justice "without prejudice," and questions 2 and 3 were framed to resolve the issue of the extent of participation by the funds on the motion seeking approval. Questions 2 and 3 can be considered together.

We agree with the receiver that the issue of intervention of the funds is legally inseparable from the question of exclusive

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authority to bring and settle claims held by American Mutual and common claims. Having already concluded that the receiver, acting under G. L. c. 175, Sections 6 and 180C, has the exclusive authority to settle claims held by American Mutual and common claims against Coopers on behalf of policyholders and creditors, it follows logically that the funds should not be made parties to the approval proceeding.

This conclusion is not altered by the fact that MIIF and the funds have, for example, the right to sue (see, as to MIIF, G. L. c. 175D, Sections 3 and 5 [d] [2] (1992 ed.]), the right to file claims against the estate (see, as to MIIF, G. L. c. 175D, Section 8 [1992 ed.], and as to the funds, G. L. c. 175, Section 180F [1992 ed.]), the right to receive disbursements from the receiver (see G. L. c. 175, Section 180C, third par. [1992 ed.]), and other statutory rights and obligations. The rights that the funds possess against the estate are distinct from the right to pursue claims held by American Mutual and common claims to recover assets for the estate. This latter right is exclusive to the receiver. In substance, the receiver in this type of insolvency proceeding acts as the virtual representative of the funds for the purpose of settling any claim held by American Mutual or any common claims against Coopers. [Note 8] While MIIF and the funds possess a general interest in the settlement which we think entitles them to notice and an opportunity

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to be heard, they do not have an interest sufficient to require that they be made parties to the approval motion. The application to intervene should be denied without qualification.

3. The fourth and last reported question asks what standard the single justice should apply in reviewing the receiver's motion for approval. The receiver argues that the single justice should determine only "whether, on the face of the settlement agreement and supporting papers, the compromise is free from any error of law and not arbitrary and capricious." This suggested standard copies an abuse of discretion standard, commensurate with the commissioner's role as an administrative officer of the Commonwealth. On the other hand, the funds argue that the standard should be whether, "on the basis of all relevant facts and after considering the objections of any interested party, the compromise is in the best interest of the receivership estate and its creditors." General Laws c. 175, Section 180C, does not express any particular standard to guide a single justice in considering the question.

We conclude that the funds have a general interest which allows them to appear and comment on the receiver's motion for approval. As has been previously indicated, the funds do not possess rights which would dictate that they be made parties to the proceedings. Under G. L. c. 175, Section 180C, third par., however, the funds will, most likely, receive some distributions from the estate, and amounts recovered from Coopers may be distributed to satisfy obligations of the funds under their respective statutes. The funds also received notice of the receiver's motion to approve the settlement. That notice directed "any person who intends to object to the motion . . . [to] file [an] objection, in writing, together with any supporting papers" within a specified time. Notice and the right to object, such as was given to the funds, usually implies an opportunity to be heard on the propriety of the subject of the notice, here the proposed settlement.

As to the governing standard, we agree with the receiver that her regulatory function as commissioner requires some

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acknowledgement of her expertise and discretion. The receiver, qua commissioner, is not, for example, in the same position as a bankruptcy trustee, who serves no regulatory role. On this issue, bankruptcy cases referred to by the funds are not entirely on point. On the other hand, as receiver, the commissioner is not acting strictly in a regulatory capacity, but rather in the capacity of representative of American Mutual's estate which invokes the interests of its policyholders and creditors. We note here that the proposed settlement agreement states the commissioner's view that the settlement "is in the best interests of . . . [American Mutual's] [c]reditors," and also that G. L. c. 175, Section 180C, requires that a proposal submitted by a receiver for assumption of an insolvent insurer's policies by a solvent insurer be "the best proposal in the interest of the policyholders." The commissioner's role as receiver is not one that calls on either her expertise or her discretion in the same way as does her role as commissioner.

We conclude that the abuse of discretion standard advocated by the receiver is insufficient. We think the receiver should demonstrate that the settlement with Coopers is fair and reasonable. In doing so, the receiver is entitled to, and indeed must, take into account all the considerations that go into a decision to settle a potential lawsuit. Without limitation, these considerations include such factors as the strength of the receiver's claims against Coopers, the time that would be spent in litigation of the claim, the costs and expenses that would be incurred, and the expected outcome. [Note 9] The single

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justice should review the receiver's evaluation of these, and other relevant factors to determine whether the terms of the settlement with Coopers are fair and reasonable. [Note 10] In that examination, the single justice may give such weight as he or she considers appropriate to the receiver's expertise as commissioner. The receiver's role as commissioner does not, however, completely override an obligation to American Mutual; she should keep her role as receiver independent of her role as commissioner. [Note 11]

To perform review effectively, the single justice should be provided with the information on which the receiver's decision to settle was based. The receiver's conclusory statement in her affidavit supporting approval, that the settlement was "a reasonable exercise of [her] authority" is not enough. The receiver should open her records for scrutiny. Since the single justice's review of those materials can be assisted by the funds' opportunity to comment on the proposed settlement, they also should have access to the information on which the receiver relied as the basis for investigating Coopers. The funds should be afforded an opportunity to submit written

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comments and to participate in oral argument regarding the propriety of the settlement. [Note 12] Coopers should also have an opportunity to comment on the reasonableness of the settlement from its point of view.

The single justice will possess broad and discretionary authority with respect to approval. The single justice may also be called on to decide any dispute regarding the information that is to be made available by the receiver. As a matter of informed discretion, the single justice may approve the settlement in its entirety, or disapprove it, or approve any part and reject the rest. The case is remanded to the county court for further proceedings consistent with this opinion.

So ordered.