Weingarten v. Gross

PRESENT: All the Justices
ROBERT WEINGARTEN, ET AL.,
OPINION BY
v. 	Record No. 012702 	JUSTICE DONALD W. LEMONS
June 7, 2002
ALFRED W. GROSS, DEPUTY RECEIVER OF
FIRST DOMINION MUTUAL LIFE INSURANCE COMPANY,
SUCCESSOR TO FIDELITY BANKERS LIFE INSURANCE
COMPANY, AND TRUSTEE OF FIDELITY BANKERS LIFE
INSURANCE COMPANY TRUST, ET AL.
FROM THE STATE CORPORATION COMMISSION
In this appeal of right from a final order of the State
Corporation Commission (the “Commission”), we consider whether a
claim for mandatory indemnification, pursuant to Code § 13.1-
698, is entitled to be paid as “costs and expenses of
administration,” pursuant to Code § 38.2-1509(B)(1).
I. 	Facts and Proceedings Below
The complete history of this case is reported in Gross v.
Weingarten, 217 F.3d 208 (4th Cir. 2000). 	The facts are not in
dispute and we summarize only those facts relevant to this
appeal. 	On May 13, 1991, the Circuit Court for the City of
Richmond entered an order placing Fidelity Bankers Life
Insurance Company (“Fidelity Bankers”) into receivership and
appointing Steven T. Foster (“Foster”), then the Commissioner of
Insurance in Virginia, to serve as Deputy Receiver for Fidelity
Bankers.
Alfred W. Gross succeeded Foster as Commissioner of
Insurance and was appointed Deputy Receiver (“Gross” or “Deputy

Receiver”) of Fidelity Bankers. 	Gross proposed a Rehabilitation
Plan (the “Plan”) for Fidelity Bankers and after a nine-day
hearing, the Commission approved the Plan and entered a final
order on September 29, 1992. 	Under the Plan, Hartford Life
Insurance Company (“Hartford”) would assume and reinsure
potentially all the Fidelity Bankers policies. 	Those who
declined to participate in the Plan received a cash payment of
the lesser of either 85% of their account value or the surrender
value of their contracts, and to the extent that available
assets permitted, a two-year annuity from Fidelity Bankers equal
to no more than the remaining 15% of their account value.
Gross, 217 F.3d at 214. 	Those who chose to participate were
offered a Hartford annuity with an account value equal to their
account value as of the “Effective Date.” 	They would also
receive a Plan Dividend, which was intended to compensate them
“for loss of interest and liquidity during the seven-year period
provided for in th[e] [P]lan.”
In December 1992, approximately 19 months after the
commencement of the receivership, the Deputy Receiver initiated
an action in the United States District Court for the Eastern
District of Virginia against Robert I. Weingarten, Gerry R.
Ginsberg, and Leonard Gubar (collectively “Directors”), in their
capacity as former directors of Fidelity Bankers, alleging,
among other things, violations of federal and state securities
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laws and breach of fiduciary duties. 	During the pendency of the
litigation, the Directors filed counterclaims against the Deputy
Receiver. 	At the close of the evidence during trial, the
district court granted judgment as a matter of law in favor of
the Directors on the state securities claim and submitted the
remaining counts to the jury. 	On May 21, 1998, the jury
returned a verdict in favor of the Directors on the remaining
counts, and the district court dismissed the counterclaims for
lack of subject matter jurisdiction. 	Gross v. Weingarten, 18
F.Supp.2d 616 (E.D. Va. 1998).
The Deputy Receiver appealed the adverse jury verdict and
the Directors filed a cross-appeal. 	The United States Court of
Appeals for the Fourth Circuit affirmed the jury verdict and
reinstated and remanded the counterclaims. 	Gross v. Weingarten,
217 F.3d at 225.
In November 2000, the Deputy Receiver and the Directors
agreed to a settlement of $3.5 million, which represented
“certain of the fees and costs incurred” by the Directors in
their defense of the action. 	The district court entered a
stipulated judgment order (the “judgment”) on January 19, 2001,
memorializing the $3.5 million settlement and directing that the
judgment was “subject to the determination of the Virginia State
Corporation Commission as to the priority to be accorded th[e]
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judgment among the claims against, and liability of, the
Receivership Estate.”
The Directors filed a petition for payment and declaration
of priority status with the Commission against Gross, as Deputy
Receiver of Fidelity Bankers and Trustee of Fidelity Bankers
Life Insurance Trust,1 and against First Dominion Mutual Life
Insurance Company.2 The Directors asserted that the judgment
represented statutory mandatory indemnification, to which they
were entitled pursuant to Code § 13.1-698. 	They requested an
order requiring the sum of $3.5 million of the estate to be
reserved under Code § 38.2-1509 and not distributed by the
Deputy Receiver until the issues were finally resolved. 	The
Directors further requested a finding that the judgment was
entitled to “priority status as an administrative expense,” or
in the alternative, that the judgment was entitled to priority
status over other creditors, including any further payments
toward the Plan Dividend. 	Finally, the Directors requested
injunctive relief to require the Deputy Receiver to reserve
$3.5 million from any final distribution of the Plan Dividend,
until the judgment was satisfied or until the legal issues were
finally resolved.
1 The Trust was established by the Deputy Receiver for the
management and realization of assets not transferred to Hartford
under the Plan.
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The Commission did not grant the requested injunctive
relief, holding that if it found for the Directors, the judgment
would have to be paid as an expense of administration and no
injunction would be necessary. 	Otherwise, if the Commission
found that the Directors were not entitled to be paid as an
administrative expense, the Commission would have to modify its
order of September 29, 1992, to pay the Directors in advance of
the policyholders entitled to the Plan Dividend. 	The Commission
held that it did not have the authority to modify a final order
after 21 days following its entry. 	Furthermore, the Commission
concluded that even if it had the authority, it declined “to
impose such an extremely unfair and chaotic result on the many
policyholders who made the choice to opt in to the
Rehabilitation Plan.”
With respect to the Directors’ request for payment as an
administrative expense, the Commission found:
The [Directors’] right to indemnification
arises by virtue of their services as directors
. . . prior to the Receivership, not because of
services benefiting the Estate thereafter.
Under these circumstances the [Directors] are
judgment creditors equal in status with other
creditors, but not creditors to be paid as part
of the expense of administration of the
Receivership.
The Directors appeal the adverse ruling of the Commission.
2 First Dominion Mutual Life Insurance Company is the
successor to Fidelity Bankers.
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II. 	Standard of Review
On appeal, the findings of the Commission are “presumed to
be just, reasonable, and correct.” 	Swiss Re Life Co. Am. v.
Gross, 253 Va. 139, 144, 479 S.E.2d 857, 860 (1997). 	However,
we will reverse the Commission when its decision is based upon a
mistake of law. 	Lake Monticello Serv. Co. v. Board of
Supervisors of Fluvanna County, 237 Va. 434, 438, 377 S.E.2d
446, 448 (1989) (citing First Virginia Bank v. Commonwealth, 213
Va. 349, 351, 193 S.E.2d 4, 5 (1972)).
III. 	Analysis
On appeal, the Directors argue that the Commission erred in
holding that the $3.5 million judgment was not entitled to be
paid as an administrative expense of the receivership estate and
by assigning the judgment the priority status of a general
creditor under Code § 38.2-1509(B)(1)(v). 	The Directors
maintain that the judgment is entitled to be paid under Code
§ 38.2-1509(B)(1) as an administrative expense, or in the
alternative, that the judgment is entitled to “equitable
priority” over other general creditors, including the
policyholders entitled to the Plan Dividend. 	Finally, the
Directors assert that the Commission erred when it denied their
request for injunctive relief.
The Deputy Receiver argues that the Commission correctly
determined that the judgment is an obligation due a general
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creditor pursuant to Code § 38.2-1509(B)(1)(v). 	He further
argues that the judgment is not entitled to equitable priority
because the Commission could not alter its final order entered
on September 29, 1992. 	Finally, the Deputy Receiver maintains
that injunctive relief was not proper.
The relevant version of Virginia Code § 38.2-1509 provided:
B. The Commission shall disburse the assets of
an insolvent insurer as they become available
in the following manner: 1. Pay, after
reserving for the payment of the costs and
expenses of administration, according to the
following priorities: (i) wages entitled to
priority . . . (v) other creditors.
The Code does not define the phrase “costs and expenses of
administration,” and the Deputy Receiver urges us to adopt the
definition from the United States Bankruptcy Code (“Bankruptcy
Code”), 11 U.S.C. § 503. 	The Bankruptcy Code, 11 U.S.C.
§ 503(b)(1)(A), defines administrative expenses as “the actual,
necessary costs and expenses of preserving the estate, including
wages, salaries, or commissions for services rendered after the
commencement of the case.” 	The Deputy Receiver relies upon
United States Court of Appeals and Bankruptcy Court decisions
interpreting 11 U.S.C. § 503 to support his assertion that in
order to claim the status of an administrative expense, a
claimant “must demonstrate that the claimed expenses . . . arose
out of a post-petition transaction with the debtor-in-
possession.” 	See, e.g., In re Christian Life Ctr., 821 F.2d
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1370, 1373-74 (9th Cir. 1987) (recognizing that “[c]laims that
arise from a creditor’s pre-petition services to the debtor are
not entitled to administrative expense treatment”); see also In
re Consolidated Oil & Gas, Inc., 110 B.R. 535, 537 (Bankr. D.
Colo. 1990) (holding that claimants are not entitled to be paid
as an administrative expense when the claim for indemnification
arose “from strictly pre-petition services”). 	The Deputy
Receiver maintains that because the action filed against the
Directors was based entirely on their pre-receivership role as
directors of Fidelity Bankers, their claim for indemnification
is not entitled to be paid as an administrative expense.
Federal decisions interpreting 11 U.S.C. § 503 rely on the
clause “after the commencement of the case” included in the
statute to hold that a claim based on pre-receivership conduct
is not entitled to be paid as an administrative expense. 	See,
e.g., In re Consolidated Oil & Gas, 110 B.R. at 537. 	However,
Virginia Code § 38.2-1509 does not contain such language.
Further, the Deputy Receiver argues that we should adopt the
requirement of “benefit to the estate” implied in the language
of 11 U.S.C. § 503(b)(1)(A), which gives administrative expense
status to actions to “preserve” the bankrupt estate. 	However,
Virginia Code § 38.2-1509 does not contain such language.
Because the language of Code § 38.2-1509 is demonstrably
different from the definitions used in the Bankruptcy Code, we
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decline to adopt the rationale employed by the federal courts in
bankruptcy cases in our interpretation of Code § 38.2-1509.
It is important to note that the claim for statutory
mandatory indemnification for directors did not arise until the
Directors “entirely prevail[ed]” in the action brought against
them by the Deputy Receiver. 	As such, the claim accrued well
after the commencement of the receivership. 	The Deputy Receiver
is charged with knowledge of Virginia’s strong public policy of
mandatory indemnification found in Code § 13.1-698, which
provides that “a corporation shall indemnify a director who
entirely prevails in the defense of any proceeding to which he
was a party because he is or was a director of the corporation
against reasonable expenses incurred by him in connection with
the proceeding.”
Unlike an action by a third party against directors, the
action in question in this case was brought by the Deputy
Receiver on behalf of the insolvent corporation. 	The action
itself commenced after the receivership began, was done in the
administration of the estate, and was instituted on behalf of
the estate. 	If the $3.5 million award had been assessed as
sanctions for bringing a frivolous lawsuit, it most certainly
would have been a cost of administration, as conceded by the
Deputy Receiver during oral argument. 	We see no reasonable
distinction between the hypothetical award of sanctions for
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bringing the action and the mandatory indemnification provided
by statute. 	When the Deputy Receiver brought the action, he
knew that the “costs” to the estate would include his legal fees
and the Directors’ fees by indemnification if they “entirely
prevail[ed].” 	The Deputy Receiver’s attorney’s fees have been
paid as a cost of the administration of the estate. 	There is no
reason why the Directors’ fees established by way of statutory
indemnity should not also be paid as a cost of the
administration of the estate.
We hold that the $3.5 million judgment in favor of the
Directors is entitled to be paid as an expense of the
administration of the estate under Code § 38.2-1509.
Consequently, it is unnecessary to resolve the Directors’ claim
of equitable priority. 	Furthermore, it is unnecessary for this
Court to issue an injunction to the Deputy Receiver. 	The
Court’s ruling is provided herein and the Deputy Receiver is a
party who is bound by the opinion of this Court. 	For these
reasons, the judgment of the Commission will be reversed and
this matter will be remanded to the Commission for further
proceedings consistent with this opinion.
Reversed and remanded.
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