Citations
- 32 Cal. App. 4th 344
Full opinion text
Opinion
THOMPSON, J.
This is the fourth opinion of the Court of Appeal spawned by insolvency proceedings involving Executive Life Insurance Company (ELIC), a series which threatens to eclipse in scope, if not in time, the 30-year history of similar past litigation involving Pacific Mutual Life Insurance Company of California. In Texas Commerce Bank v. Garamendi (1992) 11 Cal.App.4th 460 [14 Cal.Rptr.2d 854] and Commercial Nat. Bank v. Superior Court (1993) 14 Cal.App.4th 393 [17 Cal.Rptr.2d 884] we recounted some of the background of these proceedings. We further summarize the background here to set the context of this opinion and to define various acronyms employed in it.
ELIC, a California-based life insurance company, had in the 1980’s issued conventional life insurance policies and annuities and also innovative annuity-like products known as Guaranteed Investment Contracts (GICs). These included contracts funding (1) pension and profit sharing plans (PensionGICs), (2) bond liability of municipalities (Muni-GICs), and (3) structured settlements reached in tort cases; as well as single premium immediate annuities certain (SPIAs) and single premium deferred annuities (SPDAs).
As required by law, ELIC established reserves representing its future liabilities on these contracts. The reserves were funded by investments, primarily in high yield fixed income securities with no, or very low, credit ratings. By 1991 the market in these high-risk bonds had crashed. A large proportion of the bonds in ELIC’s portfolio were in default, and the remainder had suffered serious declines in value so that ELIC reserves were grossly inadequate. The reserves faced a further serious deterioration because of the equivalent of a “run on the bank.” Policyholders whose contracts permitted were cashing out their contracts with ELIC, requiring ELIC to dispose of its better investments to raise necessary cash.
As mandated by Insurance Code sections 1010 et seq., the Insurance Commissioner (Commissioner) seized the assets of ELIC and placed the company in conservatorship on April 11, 1991. The Commissioner is an officer of the state (Caminetti v. Pac. Mutual L. Ins. Co. (1943) 22 Cal.2d 344, 354 [139 P.2d 908]) who, when he or she is a conservator, exercises the state’s police power to carry forward the public interest and to protect policyholders and creditors of the insolvent insurer. (Carpenter v. Pacific Mut. Life Ins. Co. (1937) 10 Cal.2d 307, 330-331 [74 P.2d 761].) “The public has a grave and important interest in preserving the business [of the insolvent insurer] if that is possible.” (Id. at p. 329.) Hence while the Commissioner as conservator has the power either to rehabilitate the insolvent insurer (§ 1043) or to liquidate it (§ 1016), liquidation is a last resort. (Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d at p. 329.)
In exercising this power, the Commissioner is vested with broad discretion. (Commercial Nat. Bank v. Superior Court, supra, 14 Cal.App.4th at p. 402.) This discretion is subject to statutory limitations (see id. at p. 409) and the requirement that the exercise of discretion be neither arbitrary nor improperly discriminatory. (Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d at p. 329.) The Commissioner as conservator of the insolvent insurer is also a trustee for the benefit of all creditors and other persons interested in the insolvency estate. (§ 1057.)
Complying with Carpenter's preference for rehabilitation, the Commissioner, after negotiations with interested parties, crafted a “rehabilitation plan” for ELIC. This plan provided for new policies to be issued to policyholders of ELIC by a successor insurer, with these policyholders entitled to “opt out” and receive the liquidation value of their claims if they wished. In ruling upon a petition for writ of mandate in Commercial Nat. Bank v. Superior Court, supra, we disapproved three discrete aspects of the voluminous and detailed plan. (14 Cal.App.4th at p. 398.) “[W]ith the hope and expectation that the deficiencies [discussed in the opinion] will be corrected and a new plan submitted that can be approved[,]” {ibid.) we ordered that a peremptory writ of mandate issue requiring the trial court to “vacate its order/judgment. . . and to proceed according to law.” {Id. at p. 421.)
In response to the peremptory writ, and after the Commissioner negotiated settlements with all of the many interested policyholder groups except one, he adopted a modified plan. He sought and obtained court approval of the settlements and the modified plan. The impact of our decision in Commercial National Bank upon the original rehabilitation plan, the validity of some aspects of the modified rehabilitation plan, the validity of the settlements, and the propriety of the professional fees approved by the court are the primary subjects of this appeal. The following are the appellants: Commercial National Bank in Shreveport and some other similarly situated banks (Commercial National), who are indentured trustees of Muni-GICs purchased in 1986; Texas Commerce Bank-El Paso (Texas Commerce), which is the indentured trustee of a Muni-GIC purchased in 1986; Wallace Albert-son, Mellvine Fuchs and Carole H. Fuchs (the Albertson appellants), who are holders of ELIC contracts; and Howard, Weil, Labouisse, Friedrichs Incorporated and four other similarly situated entities (Underwriters), who are underwriters of ELIC issues. Underwriters are defendants in class action lawsuits for Securities Act violations and related claims arising out of their activities in connection with the sale of ELIC contracts. Underwriters participated in all proceedings in the trial court as “interested parties similar to amicus curiae.”
For convenience we later refer to appellants collectively unless context requires that we designate more specifically. Respondents are the Commissioner; Aurora National Life Assurance Company (Aurora), the purchaser of ELIC’s insurance business; and other interested parties to whom we similarly refer as respondents unless context requires otherwise.
We first reject the claim of appellants that the sale of the ELIC bond portfolio must be rescinded. Addressing appellants’ challenge to the court’s approval of the settlement agreements, we conclude that its approval of the settlement giving class 5 priority to post-1988 Muni-GICs is unsupported by the record, and reversal is required. We conclude that appellant Commercial National is entitled to interest on the interim payments it should have received after its right to receive such payments was finally adjudicated.
We reject all of the other numerous contentions of appellants. The rehabilitation of ELIC, required in the public interest, is a continuing process. We thus emphasize that our action on this appeal affirms the validity of the modified rehabilitation plan except in the particulars we have noted. The modified rehabilitation plan remains in effect subject only to the need for the relatively minor further proceedings we have ordered and any corrections that will result from this appeal.
I
Standard of Review
All parties correctly proceed on the premise that the actions of the Commissioner are subject to judicial review. Contrary to what is implicit in many of the arguments of appellants, this review is not de nova. The trial court reviews the Commissioner’s actions under the abuse of discretion standard (Commercial Nat. Bank v. Superior Court, supra, 14 Cal.App.4th 393, 398): was the action arbitrary, i.e., unsupported by a rational basis, or is it contrary to specific statute, a breach of the fiduciary duty of the conservator as trustee, or improperly discriminatory?
We also test the action of the trial court by the abuse of discretion standard. (See Baggett v. Gates (1982) 32 Cal.3d 128, 142-143 [185 Cal.Rptr. 232, 649 P.2d 874].) In this connection we employ the equivalent of the substantial evidence test by accepting the trial court’s resolution of credibility and conflicting substantial evidence, and its choice of possible reasonable inferences. (See Shamblin v. Brattain (1988) 44 Cal.3d 474, 478-479 [243 Cal.Rptr. 902, 749 P.2d 339].)
II
Sale of the ELIC Portfolio of Junk Bonds
A. Background
Upon taking possession of the assets of ELIC, the Commissioner was acutely aware of the risk of further depreciation in value of the ELIC investment portfolio, which contained approximately $6 billion in par value of high risk bonds aptly denominated “junk.” Conflicting expert opinions of the actual value of the portfolio ranged from $2.6 billion to $5.4 billion, with the higher valuations dependent upon a workout of the portfolio over a lengthy period of time. Cognizant of his primary obligation to protect the policyholders of ELIC and to preserve their insurance coverage if possible (Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d 307, 329), the Commissioner determined that the risk of a long term workout was unacceptable and that the ELIC junk bond portfolio should be liquidated as expeditiously as feasible, accompanied by provision of restructured policies to ELIC policyholders by a new insurer. He accomplished this objective by exposing the bond portfolio broadly to the market and eventually conducting an auction. A European consortium led by Altus Finance was the successful bidder. Altus purchased the offered portfolio for a sum in excess of $3 billion. The other members of the consortium invested in Aurora, a new company formed to purchase and operate the insurance business of ELIC. Aurora offered restructured policies to the former ELIC policyholders in accordance with a modified rehabilitation plan. For convenience, we refer to this consortium as Altus when discussing the transaction as a whole; we refer to Aurora when discussing the restructured insurance company.
This aspect of the appeal presents two clusters of issues. Some of the appellants attack the process of bond sale employed by the Commissioner and approved by the court after its own expanded auction process. These appellants seek rescission accompanied by the remedy of restitution to the insolvency estate from Altus of $800 million which they assert is the excess of the market value of the bonds over the purchase price paid. Other appellants claim, some in conjunction with the first contention, that our decision in Commercial National Bank invalidated the rehabilitation plan of ELIC of which the bond sale was an inseverable part. These appellants thus assert that the bond sale to Altus has been per se invalidated by that decision, triggering the right to restitution.
As we explain below, the first cluster of contentions runs afoul of the applicable standard of review. The second contention misconstrues the procedural posture of Commercial National Bank and hence the actual scope of its holding, which in no way invalidated either the entire rehabilitation plan or the sale of the bonds.
B. Summary of Facts
Recited as required by the applicable standard of appellate review, the record establishes the following. When ELIC was taken into conservatorship its investment portfolio funding the reserves against its policies consisted of the worst of the high risk bonds. A run on ELIC’s assets during 1990 had caused its better and more liquid bonds to be sold. About 43 percent of the junk bond issuers were already in default, in bankruptcy, or being restructured. Another 25.3 percent faced potential restructuring. Almost half of the portfolio was invested in depressed industry sectors.
Holding the bonds for an orderly liquidation over time would involve ELIC in an unacceptably difficult and complicated workout of the portfolio and was fraught with risk. A similar effort to liquidate the junk bond portfolio of Columbia Savings & Loan had not been successful. Mere announcement of the immediate sale of such large blocks of junk bonds would have depressed the market.
The ELIC portfolio presented risks of illiquidity and concentration. Over half of the junk bond holdings were in positions exceeding $25 million, with 17 percent in positions exceeding $100 million. Approximately 58 percent of the portfolio consisted of holdings exceeding 20 percent of the particular bond issue with 7.5 percent consisting of over one-half of the issue. Quoted market prices for junk bonds were set by trades of $1 million to $2 million and not the large quantities ELIC owned. This concentration and a limited number of potential purchasers made disposition of the portfolio extremely difficult.
The trial court expressly found that concerns about the risk profile were not unreasonable. To reduce the risk to the ELIC policyholders, the Commissioner, based on expert advice, determined to sell the bonds at auction as an entire block.
There had been prior discussions with Hartford Insurance Company and Altus regarding the sale of ELIC. By the time it was placed in conservator-ship, ELIC had been engaged in “lengthy discussions” with Altus.
The Commissioner formed a working group of investment bankers and other experts to structure the sale process. This group assembled all the investment records, reinsurance agreements and financial data needed to evaluate the financial condition of ELIC and its bond portfolio. All of this data was made available to prospective purchasers in a “data room” at the Los Angeles premises of ELIC.
On May 21, 1991, the Commissioner published and publicized a memorandum serving as a request for proposals to purchase and setting out a framework for bids from any interested parties. This memorandum also described a contemplated structure for rehabilitation of ELIC’s insurance business by a purchasing company denominated “NEWCO” for convenience. The memorandum required that NEWCO guarantee the level of benefits to be provided to ELIC policyholders and contract holders in their restructured NEWCO contracts. The memorandum continued that in order to provide these guarantees, investors in NEWCO would need to evaluate the ELIC bond portfolio as well as ELIC’s other assets and then provide new capital and letters of credit sufficient to support the guarantees.
Recognizing that this was a complex transaction which could involve a virtually infinite number of variations in detail, the working group determined to create a template in which the detail had been worked out. The Commissioner announced that he would negotiate with Altus to create this target, called a “definitive agreement.” The Commissioner’s memorandum to prospective bidders announced that the definitive agreement, if and when reached, would be subject to overbids by which other parties would have the opportunity to take over the investor position in the agreement. The memorandum specified the economic factors the Commissioner would consider in evaluating bids.
The May 21, 1991, memorandum to bidders provided that when a definitive agreement was reached it would be filed with the court, with a hearing set 60 days after filing. During this period other bids could be filed and would be considered by the Commissioner and the court. The memorandum, including a request for proposals, was widely distributed and publicized so that the financial community was well aware of it.
While negotiations with Altus were proceeding, the working group met with other prospective bidders, provided them with information, and answered their queries as to how to structure the transaction. Care was taken to provide other potential investors with access to the same information that Altus possessed.
During this period of negotiations with Altus, the working group received other bids and discussed them with the bidders, pointing out portions of the bids which were considered deficient. The group developed methodology for evaluating bids which looked to the aggregate value to the ELIC policyholders.
Altus and the Commissioner entered into the definitive agreement on August 7, 1991, and its general structure was widely publicized. This agreement provided for the transfer of ELIC’s assets to three entities. The first, NEWCO (later to become Aurora), would be a new California-based stock life insurance company to be managed by the investor group. The second entity, Altus, would pay $2.7 billion to NEWCO for the major portion of the ELIC junk bond portfolio. The third entity constituted a liquidating trust to be operated by the Liquidation Division of the Department of Insurance to dispose of ELIC real estate and other assets worth approximately $680 million not transferred to the investor entities. The investor group would provide an additional $300 million capital infusion to NEWCO.
The Commissioner issued a press release on August 7 announcing the definitive agreement and describing its general terms. The release stated that the agreement would be filed with the court and that a 60-day period would then commence during which other potential buyers of ELIC could competitively bid for the company. It further announced: “The French investment group [Altus] has cleared the bar with an impressive opening height. I now encourage others to get into the competition and out-leap their performance.”
On August 23, 1991, the trial court issued its order establishing an October 25 hearing date to consider the agreement and any competing bids, and establishing the bidding process. Any person interested in bidding against the definitive agreement was to do so by delivering a written proposal to the Commissioner by October 11. The Commissioner reserved the right “to reject bids which are nonconforming in the sense that, in the opinion of the [Commissioner], such bids are so dissimilar to the Definitive Agreement as to make a reasonable comparison too difficult or impractical to warrant pursuing them.” The order further provided that interested bidders might seek to form consortiums or might submit bids dealing only with some aspects of the definitive agreement provided that such bids also offered to combine with other bids to effect a transaction comparable to the definitive agreement.
Eight bids were received by the Commissioner, including one from Altus. At the request of the Commissioner the trial court allowed an additional week during which any of the timely bidders could submit an improved final bid. Six bidders, including Altus, did so. The Altus improved bid increased its offered purchase price for the ELIC junk bond portfolio by $30 million and proposed to purchase an additional $120 million of lower quality junk bonds which originally were to remain as assets of the new company. Other relevant improved bids were submitted by Sierra National Insurance Holdings (Sierra) and the National Organization of Life and Health Guaranty Association (NOLHGA)
The Sierra bid provided for “bonds-in”; the junk bond portfolio would remain in the new company taking over the ELIC business, with Sierra providing a “capital cushion” of $1 billion to support the bond portfolio. Sierra proposed a profit-sharing arrangement by which the junk bond portfolio would be liquidated over time and policyholders of the restructured ELIC contracts would receive proportionate shares of any profit from the sale of the bonds. The NOLHGA improved bid, also bonds-in, which the Commissioner evaluated as producing the greatest financial value to the ELIC policyholders, presented a special variety of legal issues because of the makeup of the association.
On October 25 the Commissioner filed a “Selection of Bidder[s]” with the court, narrowing the field to NOLHGA, Altus and Sierra. The Commissioner tentatively selected NOLHGA as the winning bidder subject to its satisfying the potentially serious legal obstacles involved in its bid. NOLHGA was granted an additional 10 days to provide concrete written proof that these problems would not occur. Failing this proof the Commissioner’s recommendation of acceptance of the NOLHGA bid would be withdrawn and the field narrowed to Altus and Sierra. All other bids were rejected by the “Selection of Bidder[s].”
NOLHGA timely submitted its written response. The Commissioner viewed it as insufficient, particularly because the response did not adequately resolve the question of the ability of the state guaranty associations which made up NOLHGA to advance funds under applicable state laws. Failing that ability, the policyholders of ELIC would remain dependent upon the performance of the junk bond portfolio without a safety net to protect them against a downturn in the market.
Having narrowed the bidders to Altus and Sierra, the Commissioner invited these two to submit further overbids by November 11, 1991 and set November 14 as the date when he would accept the best overbid. Sierra and Altus both submitted overbids. Altus increased its bid for the transferred bonds by $250 million, bringing the total to $3.25 billion. Policyholder profit participations were increased and surrender charges were lowered. Sierra also improved its proposal.
The Commissioner selected the Altus bid over that of Sierra and sought approval of his recommendation from the trial court. Commencing on November 14 the court conducted an 11-day evidentiary hearing on the recommendation, in the course of which it unsuccessfully encouraged any interested persons to present other proposals. An enhancement agreement was negotiated with NOLHGA providing for improved payment of “covered claims,” and NOLHGA then withdrew its bid and supported that of Altus.
The court considered the benefits of Altus’s “bonds-out” proposal as compared to Sierra’s and NOLHGA’s “bonds-in” proposals; the value of ELIC’s assets and liabilities; the best method and necessary time frame for marketing the junk bonds; the availability of other bidders in the event of a differently structured sale; and ultimately whether outright liquidation or rehabilitation would be in the best interest of the ELIC policyholders. These questions were largely addressed by expert testimony, and as might be expected, the testimony was conflicting.
The court resolved conflicting evidence by affording greater credibility to testimony to the effect that (1) maintenance of the ELIC bond portfolio was extremely risky; (2) managing the portfolio in order to liquidate the bonds over time would require the commitment of substantial additional capital, forebearance of interest, and commitment of management resources; (3) breaking the portfolio into segments rather than disposing of the portfolio as a single block was not feasible if liquidation was not long delayed; and (4) the Altus bid provided significantly better return and less risk to the policyholders than the Sierra and NOLHGA bids.
Based on this view of the evidence, the trial court found: “The record of these proceedings demonstrates that the bid and negotiating process has been diligently, vigorously and intensely pursued by the Commissioner and his team. No evidence has been offered to overcome the presumption of Evidence Code section 654 as it applies to the Commissioner. More significantly, it also appears that the Altus/Aurora bid was the only bid that contemplated a complete and comprehensive rehabilitation on a ‘bonds out’ basis. . . . There is nothing to suggest that there exists a competing bid or that the Commissioner and his team have ‘left anything on the table.’ ”
The court also found that the $3.25 billion paid by Altus for the ELIC bond portfolio “reflected the fair value of the Transferred Bonds at the time of the sale,” i.e., when the court approved it.
C. Contentions
We first note contentions which have unnecessarily encumbered the process of this appeal. Relying upon evidence that the trial court implicitly rejected in favor of contrary evidence, appellant Texas Commerce and the Albertson appellants claim that the process and terms of the sale were unreasonable and the sales price inadequate to the extent of $800 million, all on the assumption that the portfolio should not have been sold as a single block. They claim also that the trial court failed to find the value of the bonds as of the date of the confirmation hearing. We reject these contentions because they ignore: (1) the standard of review of trial court findings supported by substantial evidence approving the sale of the portfolio as a single block, thus valuing the portfolio at $3.25 billion; and (2) the fact that the trial court made the finding that the appellants state it did not.
Appellants argue that our opinion in Commercial National Bank requiring valuation of opt-out claims as of the closing date (14 Cal.App.4th at pp. 416-421) forecloses approval of the bond sale because the $3.25 billion valuation was determined as of the April 1991 conservation, not the March 1992 closing of the bond sale. The argument is contrary to the August 13, 1993, statement of decision in which the trial court expressly found the Altus bid “reflected the fair value of the Transferred Bonds at the time of the sale.”
We now turn to contentions of substance. In varying language appellants contend that the structure of the auction violated a supposed duty of the Commissioner imposed by section 1037, subdivision (d) to sell the bonds in a commercially reasonable manner realizing reasonable market value.
Section 1037, subdivision (d) authorizes the Commissioner as conservator to sell estate property “at its reasonable market value,” subject to first obtaining court permission if the value of property sold exceeds $20,000, or “in cases other than . . . sale, or transfer on the basis of reasonable market value, upon such terms and conditions as the commissioner may deem proper.” Appellants, however, fasten upon the terms of Commercial Code section 9504 dealing with foreclosure sales. That section requires that the disposition of the encumbered property be conducted “in a commercially reasonable manner.” {Id. at subd. (3).) Appellants claim that the auction of the ELIC portfolio as a whole rather than in smaller blocks was not commercially reasonable.
We reject appellants’ contention. Commercial Code section 9504 is inapplicable to the administration of estates of insolvent insurers. The purpose of Commercial Code section 9504 is protection of debtors against sales at inadequate prices of property securing their debts. Section 1037, subdivision (d) is part of a comprehensive statutory scheme which serves primarily to protect policyholders of insolvent insurers by a process of rehabilitation. Thus risk to policyholders in the process adopted is a primary consideration, and the key question here is the propriety of the auction sale in this light.
Here the Commissioner’s first duty was to the “grave and important [public] interest” in not depriving the ELIC policyholders of the protection of their policies. (Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d 307, 329.) The Commissioner determined that this duty was best discharged by a “bonds-out” reorganization. Substantial evidence supports the trial court’s approval of this determination. The Commissioner further determined that avoidance of risk to the ELIC policyholders required the sale of the ELIC bond portfolio as a block and that other methods were not feasible.
Substantial evidence in the trial court record supports this determination on each of two theories. If “reasonable market value” is given its ordinary meaning, the price realized at the ELIC bond auction satisfies the test. Market value is a product of the relevant market. If, as here, the only appropriate relevant market is that for a quick sale of a single immense block of assets, the eventual price obtained in a highly publicized, open and fairly conducted auction is the best evidence of market value.
Even if it is assumed that obtaining “market value” required sale of the bonds in smaller blocks over time, the sale in this case meets the requirements of section 1037, subdivision (d). Avoidance of risk required that the sale be at an auction of the bonds as a block. This would constitute a sale at “other than . . . on the basis of reasonable market value, upon such terms and conditions as the commissioner may deem proper.” (§ 1037, subd. (d).) The sale was properly approved by the court because of the unacceptable risk inherent in a long-term liquidation.
D. Denial of Appellants’ Motion for Rescission
Quickly following our decision in Commercial National Bank, appellants filed a motion in the trial court seeking rescission of the sale of the ELIC bond portfolio to Altus. The motion, and this appeal claiming trial court error in denying it, are based upon the following syllogism: (1) the Court of Appeal in Commercial National Bank invalidated the ELIC rehabilitation plan; (2) the sale of the bonds is inseparable from the remainder of the rehabilitation plan; and hence (3) the bond sale was invalid. Underwriters add the theory that the bond sale should be rescinded because the Commissioner and Altus agreed to transfer the bonds under a mutual mistake of law concerning the plan’s validity and that there was a failure of consideration by reason of the plan’s invalidity. Without citation or significant argument, Underwriters also asserts that the public interest will be prejudiced if the bond transfer is allowed to stand. Unaccompanied by support as it is, we reject this last argument without discussion. (See Miller v. Kennedy (1987) 196 Cal.App.3d 141, 147 [241 Cal.Rptr. 472].)
Two segments of our opinion in Commercial National Bank are the basis of appellants’ claim that the opinion invalidated the rehabilitation plan, but a third deserves equal attention. The preamble to the opinion states, “We now consider the . . . question of the validity of the rehabilitation plan ... as formulated by the Commissioner of Insurance . . . and approved by the respondent court.” (14 Cal.App.4th at p. 397.) The disposition paragraph of the opinion provides, “Let a peremptory writ of mandate issue directing the respondent to vacate its order/judgment of July 31, 1992, and to proceed according to law.” (Id. at p. 421.) Between the quoted portion of the preamble and the disposition we said: “Because of these deficiencies [the three identified in Commercial National Bank], we must direct that the order approving the rehabilitation plan be set aside. We do so with the hope and expectation that the deficiencies will be corrected and a new plan submitted that can be approved.” (Id. at p. 398.)
Appellants now argue in effect that the first two segments quoted above are the seeds of destruction of the hopes and expectations expressed in the third. They treat Commercial National Bank as a mandate to return to square one in the conservatorship.
Appellants misconstrue the scope of Commercial National Bank because they ignore its procedural posture. Commercial National Bank reached us on petition for writ of mandate filed by parties who are appellants here. Mandate is not a matter of right but rather a prerogative writ issued in the discretion of the reviewing court upon an adequate showing of necessity, including inadequacy of remedy by appeal. (See Driving Sch. Assn. of Cal. v. San Mateo Union High Sch. Dist. (1992) 11 Cal.App.4th 1513, 1518 [14 Cal.Rptr.2d 908]; Code Civ. Proc., § 1086.)
We accepted jurisdiction in the writ proceeding because of a showing made by appellants, then acting as petitioners, that there was such a need for quick disposition of the questions raised in the petition that the remedy of an appeal disposing of the issues was inadequate. We decided the questions as to which we issued our alternative writ and nothing more. Indeed we lacked the power to extend the scope of our decision because to have gone beyond the dimensions of the alternative writ would have denied notice and opportunity to be heard to the respondents. (See Kowis v. Howard (1992) 3 Cal.4th 888, 894-895 [12 Cal.Rptr.2d 728, 838 P.2d 250].)
Thus Commercial National Bank determined only that the plan then before us was deficient: (1) in adopting a two-tier system for valuing claims; (2) in utilizing a dual valuation system which was discriminatory; and (3) in selecting an improper date for the valuation of the claims of opt-outs. (14 Cal.App.4th at p. 398.) None of these deficiencies impacted in the slightest the transfer of the insurance business of ELIC or the sale of its bonds. All were concerned with valuation for the purpose of distribution to policyholders, and none was of such significance as to cause a much more expansive rehabilitation plan to fail in its entirety.
We thus conclude that the basic premise of appellants’ argument fails. Appellants having failed to clear the first hurdle to their contention, we need not address their further arguments related to nonseverability and the process employed by the trial court in ruling on their motion.
Ill
Settlement of Priorities
A. Background
In Texas Commerce Bank v. Garamendi, supra, 11 Cal.App.4th 460 we held that Muni-GICs issued by ELIC prior to January 1, 1989, were insurance annuities within the meaning of section 101, and hence entitled by section 1033 to class 5 “policyholder” liquidation priority in distributions from the insolvent estate of ELIC, a priority superior to the class 6 status of general creditors. (11 Cal.App.4th at p. 465.) The assets and liabilities of the ELIC insolvent estate are such that in all probability class 6 creditors will receive nothing on their claims.
In its 1988 session and effective January 1, 1989, the Legislature enacted section 10541. This statute authorizes California life insurers to transact business in “funding agreements,” annuity-like agreements which lack a mortality or morbidity contingency. It is the lack of this contingency that is the primary characteristic distinguishing funding agreements from other annuity-type products of ELIC. So far as relevant here the only annuity-like contracts lacking this contingency which are expressly excluded from the definition of funding agreements are those funding structured settlements. Funding agreements are expressly stated to be a noninsurance product, a designation which precludes the class 5 priority afforded life-contingent annuities and relegates funding agreements to class 6. In dictum (because we held section 10541 is not retroactive), we stated in Texas Commerce, “Section 10541 has provided since 1989 that contracts with the characteristics of Muni-GICs are noninsurance funding agreements . . . .” (11 Cal.App.4th at p. 491.)
Texas Commerce was a declaratory relief action which had made its way through the trial court and Court of Appeal while the Commissioner’s conservancy of ELIC was proceeding in the same trial court. After our decision in Texas Commerce, the Commissioner and trial court were authoritatively informed of the class 5 priority status of the pre-1989 Muni-GICs issued by ELIC and informed of this court’s emphatic leanings with respect to the class 6 priority status of post-1988 Muni-GICs. The issue of the priority status of the post-1988 GICs was, however, not adjudicated in the trial court.
After our decision in Commercial National Bank, supra, 14 Cal.App.4th 393 disapproved three aspects of the Commissioner’s original rehabilitation plan, virtually all of the parties to the matter save the Commercial National Bank policyholders entered into a series of settlement agreements. These settlements resolved the priority issue by affording class 5 status to all ELIC GICs, including the post-1988 Muni-GICs, together with an agreement of the estate to pay the reasonable attorney fees of these groups of claimants up to stated máximums.
The trial court approved the settlements. In accordance with his fiduciary responsibility to all claimants, the Commissioner asked the court to extend class 5 priority to holders of post-1988 SPDAs and SPIAs. Holders of these contracts were not represented by counsel and had thus not taken part in settlement negotiations. The trial court granted the motion and incorporated the terms of the settlements in the modified rehabilitation plan.
The settlements were reached in a climate of widespread controversy. Virtually all of the parties except the Commissioner objected to the early versions of the original rehabilitation plan. Aurora, which possessed a strong interest in terminating the litigation, agreed to transfer to policyholders all appreciation above the original contract price specified for “Base Assets,” a sum of about $162 million at the time of the Modified Plan’s approval. Aurora also agreed to a “hardship” payment of $20 million payable out of its future profits to holders of structured settlement annuities. The agreements gave all policyholders a voice in the management of trusts established to liquidate assets retained by ELIC.
Aurora further reduced the charges payable on policy surrenders during a five-year moratorium period contained in policies restructured by the original plan. To further facilitate final resolution, Aurora made a substantial fund available to policyholders who chose not to contest the plan and “opted-in.”
By the terms of the settlements, holders of post-1988 Muni-GICs gave up their previous claims to interim payments and interest for the two-year period from the conservation date until the closing, withdrew their joinder in the motion to rescind the junk bond sale, withdrew their objection to a provision for payment of $20 million in additional benefits to structured settlement contract holders, and waived Racketeer Influenced and Corrupt Organizations Act (RICO) and Securities Act claims against ELIC.
All settling parties agreed to consult with the Commissioner concerning any future dispute that might arise concerning future modifications to the plan and to join the Commissioner in seeking legislation granting class 5 priority to funding agreements.
The near-global nature of the settlements is significant to the context in which the class 5 priority status was granted. Before the settlements, virtually all of the parties to the matter were asserting positions which in one way or another and to varying degrees were inconsistent. The settlements thus materially reduced the scope of the litigation, a factor clearly of weight in justifying the Commissioner’s actions.
B. Contentions
In this segment of the appeal Commercial National and Underwriters contend that: (1) the trial court erred in holding that the Commissioner possessed discretion to settle claims to priority; (2) as a matter of law the post-1988 Pension-GICs and Muni-GICs, SPIAs and SPDAs are funding agreements not entitled to class 5 priority; and (3) if the Commissioner possesses discretion to settle conflicting claims to priority, this discretion was abused because of the weakness of the settling parties’ claims to Class 5 priority and minimal benefit to the estate from concessions made by them. They argue that collateral estoppel precludes classification of these settling post-1988 claimants as entitled to class 5 priority. Appellants also attack the trial court holding that the Commissioner acted within his discretion in voluntarily extending class 5 priority to SPDAs and SPIAs.
Respondents counter with arguments directly contradicting those of appellants and add the contention that section 10541 does not impact on priorities.
We first conclude that section 10541 does affect priorities by defining the nature of contracts classified as “policies” entitled to class 5 priority by section 1033, and reject the contention that this issue is precluded by collateral estoppel. We next conclude that the power vested in the Commissioner by section 1037, subdivision (c) to settle claims against the insolvency estate includes discretion to settle disputes concerning relative priorities of claimants in appropriate circumstances and that the fiduciary duty of the Commissioner empowers him to extend the benefits of any settlement to similarly situated unrepresented parties.
The powers of the Commissioner in this regard are, as in other respects, limited by the requirements of rationality, compliance with statute, and prohibition against improper discrimination. We do not reach the question of precise delineation of the extent of the discretion of the Commissioner in this regard. We conclude only: (1) that the case for class 5 priority of all ELIC GICs except the post-1988 Muni-GICs is so strong and the benefit to the estate from the settlements so great as clearly to justify the Commissioner’s exercise of discretion to settle; and (2) that, at the other extreme, the record here fails to establish a rational basis for extending class 5 priority by settlement to the post-1988 Muni-GICs.
C. The Impact of Section 10541 on Priority
Respondents claim that section 10541 had no impact upon the priority scheme established by section 1033. They argue further that: (1) to construe section 10541 as affecting the priority scheme established by section 1033 is to hold that the latter section was repealed by implication, a disfavored proposition; (2) the purpose of section 10541 was to permit California life insurers to compete in a burgeoning national market for funding agreements and not to affect priorities in conservatorship; and (3) lack of Class 5 priority for these contracts would in fact place California insurers at a competitive disadvantage in marketing funding agreements.
1. Analysis of the impact of section 10541
Analysis of the impact of section 10541 upon the priorities specified in section 1033 of necessity begins with our decision in Texas Commerce. There, in dealing with the priority status of pre-1989 Muni-GICs issued by ELIC, we first took the necessary step of ascertaining the meaning of “all claims of policyholders” of California life insurers, the prerequisite in section 1033 for class 5 priority. We found part of the definition in section 101, which authorizes the sale of annuities as life insurance business. (11 Cal.App.4th at p. 470.) We found the remainder of the definition in the general law holding that annuities certain are annuities along with those which contain “a life contingency.” (11 Cal.App.4th at p. 475.) Texas Commerce thus incorporated a holding that the definition necessary for class 5 priority afforded by section 1033 is to be found in other statutes.
The enactment of section 10541 changed the character of annuities certain which do not contain a mortality or morbidity contingency from insurance to funding agreements. The section is express that these annuities are not a class of business provided in section 101. The legislative history of section 10541 reveals that as originally introduced, this progenitor bill did classify funding agreements as insurance, but that the statute as eventually enacted did not. It is clear therefore that with the enactment of section 10541, the foundation for the treatment of annuities certain as insurance in Texas Commerce disappeared. Inherent in the change in the legal nature of these contracts was a change in the nature of the status of their holders from policyholders to contract promisees, a class 6 priority in section 1033.
The Commissioner asserts that other language in Texas Commerce requires a contrary interpretation. There we dealt with a contention that, despite lack of retroactivity, section 10541 was applicable because section 1019 required that priorities be tested as of the date of liquidation. The latter section provides that all rights and liabilities of the insolvent insurer and creditors, shareholders, and other persons interested in the estate shall be fixed as of the date of entry of the liquidation order unless otherwise specifically directed by the court.
In rejecting this contention in Texas Commerce we stated: “In contrast to section 1019, section 1033 deals exclusively with ‘claims allowed.’ . . . [I]t expressly acknowledges claim priorities created by other statutes under priority 4. Section 1033 expresses no parallel function for section 1019 to classify claims as between priorities 5 and 6. Had the Legislature intended section 1019 to control claim priorities via section 1033, we expect it would have expressly done so by including the term ‘priorities’ in section 1019 or by making express provision in section 1033.” (11 Cal.App.4th at p. 493.)
The Commissioner’s argument ignores the context in which the quoted language appears. In this portion of the Texas Commerce opinion we were dealing with the question of whether the phrase “determination of rights and liabilities” as of the date of liquidation contained in section 1019 also encompassed determination of priorities as of that date. In this context the phrase was not free of ambiguity. Our quoted language responds only to this question. (11 Cal.App.4th at pp. 492-493) Here, however, we are dealing with a definition which is express in section 10541 and which the rationale of Texas Commerce dictates is determinative of priority.
2. Legislative purpose and unintended consequences
The Commissioner adds the argument that construction of section 10541 as imposing class 6 priority status on funding agreements is contrary to the legislative purpose in enacting the section. As we note later in this opinion, this argument correctly recites the legislative purpose as enabling California life insurers to compete in a burgeoning national market for funding agreements. The argument continues that imposing class 6 priority on funding agreements in the event of insurer insolvency will place California insurers at a competitive disadvantage. While intriguing for its ingenuity, the argument confuses statutory purpose with unintended consequences.
Respondents correctly state that nothing in the legislative history of section 10541 discloses any legislative consideration of the impact of the section upon priorities. They argue that this state of the legislative record demonstrates a legislative intent to exclude this impact. Contrary to respondents’ argument, the only inference we may reasonably draw is that the matter was not considered by the Legislature.
Determination of legislative intent is necessarily a legal construct based on statutory history and language, and here both point inescapably to an intent to classify funding agreements as noninsurance. In this construct the proposition that the intent may lead to unintended consequences is irrelevant. A court may feel that legislative failure to consider a consequence was unwise, but the court may not substitute its personally perceived wisdom for that of the Legislature. To do otherwise would unduly extend the judicial power because the field of unintended consequences approaches the infinite.
3. Implied repeal
Nothing in the construction which we here adopt treats section 10541 as impliedly repealing section 1033. The concept of implied repeal is operative only when the two statutes are so irreconcilable and inconsistent that the two cannot stand together. The courts are bound if possible to maintain the integrity of both statutes if they can so stand. (Department of Personnel Administration v. Superior Court (1992) 5 Cal.App.4th 155, 191-192 [6 Cal.Rptr.2d 714].) Here there is no irreconcilable inconsistency between sections 10541 and 1033.
D. Collateral Estoppel
Underwriters and Commercial National contend that collateral estoppel flowing from Texas Commerce precludes a holding that Pension-GICs differ in priority status from post-1988 Muni-GICs. Texas Commerce was a declaratory relief action seeking a declaration of section 1033 class 5 priority for pre-1989 Muni-GICs. The Pension-GICs intervened in the trial court and pursued their position as interveners in the Court of Appeal. Appellants assert that the Pension-GICs, while intervening on the ground that if declaratory relief were granted the assets available to them in distribution would be diminished, sought also to prove that there were material differences between the Pension-GICs and pre-1989 Muni-GICs. They assert further that the trial court denied this contention.
Taking the assertions of the Underwriters and Commercial National at face value, they do not establish issue preclusion. Issue preclusion requires both an identity of issue in the later and earlier cases and that the issue be entirely necessary to the decision in the earlier case. (7 Witkin, Cal. Procedure (3d ed. 1985) Judgment, §§253, 268, pp. 691-692, 710-711; see also Frommhagen v. Board of Supervisors (1987) 197 Cal.App.3d 1292, 1301, fn. 3 [243 Cal.Rptr. 390].)
Neither requirement is met here. At both the trial and appellate levels, the Texas Commerce courts dealt with priority status of Muni-GICs issued before the January 1, 1989, effective date of section 10541. As our decision in Texas Commerce demonstrates, at that time (prior to the effective date of section 10541) there was no material difference in the context of priority between the Pension-GICs and Muni-GICs. We were not called upon to decide, and did not decide, whether enactment of section 10541 effected a material difference between Pension-GICs and post-1988 Muni-GICs. It follows that there is no collateral estoppel on that issue.
E. The Commissioner’s Discretion to Settle a Dispute Among Claimants With Respect to Priority of Claims
We now turn to the power of the Commissioner to settle claims regarding priority. Section 1037, subdivision (c) provides that the Commissioner “[s]hall have authority to compound, compromise or in any other manner negotiate settlements of claims against [the insolvent insurer] upon such terms and conditions as the commissioner shall deem to be most advantageous to the estate of the [insurer] being administered or liquidated or otherwise dealt with under this article.” The questions presented are: (1) whether this power extends to settling a dispute regarding priority of claims; and (2) the nature of the Commissioner’s discretion if the power exists.
The appellants view the discretion granted the Commissioner by section 1037, subdivision (c) to settle claims against the estate as referring only to compromises of claims against the estate as a whole and not to conflicting assertions of priority of claimants. From this reading they argue that section 1033, which sets priorities, is an absolute limitation on the Commissioner’s discretion to settle claims.
Determination of the legal questions of whether the Commissioner has the power to resolve disputes over priority by way of settlement, and if so the extent of the Commissioner’s discretion to do so, is no easy task. To our knowledge this is a question of first impression. The language of section 1037 itself supplies some guidance. Its preamble states that its subsections are applicable “except as otherwise expressly provided by this article.” Section 1033 of that article (art. 14, § 1010 et seq.) establishing priorities in the conservancy estate does not refer to settlements.
Section 1037, subdivision (c) is a legislative expression of policy favoring resolution of claims by settlement. Inherent in any claim is the question of collectability, of which priority is a necessary attribute. But the Legislature’s definition of the role of the Commissioner as that of a trustee (§ 1057) may not be ignored, and in general fiduciary duty restrains the trustee from favoring one beneficiary over another. (See Estate of Nicholas (1986) 177 Cal.App.3d 1071, 1089 [223 Cal.Rptr. 410]; Security Pacific National Bank v. Geernaert (1988) 199 Cal.App.3d 1425, 1432 [245 Cal.Rptr. 712].) Fiduciary duty might thus limit the definition of the meaning of “claims” as the word is used in section 1037, subdivision (c).
While the issue here is of first impression, we write not on a slate that is clean but rather on one that is hopelessly cluttered by authority in the field of bankruptcy. (See, e.g., In re American Reserve Corp. (7th Cir. 1987) 841 F.2d 159; In re Miller (Bankr. N.D.I11. 1992) 148 Bankr. 510; Matter of Egolf (Bankr. N.D. Ind. 1989) 102 Bankr. 706.) The authority that has been cited to us and found by our own research is conflicting, to say the least. We thus look beyond sections 1037, subdivision (c) and 1057, first to construction of a similarly worded statute, former Probate Code section 718.5, and then to the pattern of the statutory scheme dealing with insurer insolvencies.
Former Probate Code section 718.5 authorized the estate’s executor or administrator, “with the approval of the court, [to] compromise, compound or settle any claim against the estate or any suit brought by or against the executor or administrator as such, by the transfer of specific assets of the estate or otherwise. To obtain such approval, the executor or administrator shall file a verified petition with the clerk showing the advantage of the compromise, composition or settlement.” In construing that section, our Supreme Court held that, despite the provisions of then Probate Code section 708 precluding allowance of claims against the estate barred by the statute of limitations, claims which were arguably barred could be settled so long as the claim was not “admittedly and on its face” barred by the statute. (Estate of Lucas (1943) 23 Cal.2d 454, 466 [144 P.2d 340].) Where there are “serious doubts as to the applicability of the statute [of limitations]” and “the rights of the respective parties cannot be conclusively determined without litigation, the representative, if acting in good faith and for the best interest of the estate, is entitled to enter into a compromise with the claimant.” (Id. at p. 466.)
Former Probate Code section 718.5 is strikingly similar in its language to section 1037, subdivision (c), and the Lucas court construed the word “claim” as inclusive of collectability. Language from Estate of Black (1976) 65 Cal.App.3d 112, 117-118 [135 Cal.Rptr. 115], cited as supporting a contrary conclusion, is mere dictum unsupported by citation or articulated reasons.
There appears from the pattern of the statutes dealing with insurer insolvencies an underlying theme of resolution of questions for the benefit of policyholders by rehabilitation if possible. This is not merely a resolution of private rights, but also a matter of the public interest because of the character of insurance. (See Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d 307, 329.) In carrying out his or her responsibility, the Commissioner acts not only as a trustee but also as a servant of the state in the exercise of its police power. (See Garris v. Carpenter (1939) 33 Cal.App.2d 649, 654-656 [92 P.2d 688].) In some instances individual policyholders must suffer some detriment if this is necessary to carry out the purpose of the statutory scheme. (Neblett v. Carpenter (1938) 305 U.S. 297, 305 [83 L.Ed. 182, 189, 59 S.Ct. 170].) The limitation upon the Commissioner’s authority is that its exercise be reasonably related to the public interest in rehabilitating the insurer (Commercial Nat. Bank v. Superior Court, supra, 14 Cal.App.4th at p. 416) and not be arbitrary or improperly discriminatory. (Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d at p. 335.)
This leads us to conclude that pursuant to section 1037, subdivision (c) the Commissioner, acting as conservator, has the power to settle disputes over section 1033 priority. The question remains as to the propriety of the Commissioner’s exercise of this discretion in this case.
F. The Settlement Granting Class 5 Priority to GICs Other Than Post-1988 Muni-GICs
1. Legislative history of section 10541
Section 10540, first enacted in 1945 and amended in 1957, authorized California life insurers to “accept funds under an agreement which provides for the accumulation of such funds for the purpose of purchasing annuities at future dates.” Pursuant to this section the Department of Insurance permitted California insurers to issue Pension-GICs containing a life annuity option as an insurance annuity. (Texas Commerce Bank v. Garamendi, supra, 11 Cal.App.4th at p. 467.) In the years preceding 1986, insurers in other states were authorized to issue a new product called a “Funding Agreement.” Funding agreements were used for diverse purposes such as payment to winners of state lotteries, funding of long term retirement agreements and structured damage settlements, and investments of bond proceeds by municipalities. (See Sen. Rules Com. Floor Analysis of Sen. Bill No. 901 (Apr. 22, 1987) ; letter to Sen. Newton Russell from FSA Insurance Services (Jan. 22, 1988) .)
Prior to 1986, ELIC issued Muni-GICs, contracts of investment by public entities of proceeds of bond sales. In late 1986, the California Department of Insurance advised ELIC that it did not consider ELIC’s Muni-GICs to be insurance annuities and forwarded an opinion letter concluding that they were not because, among other reasons, they did not comply with section 10540 by providing for the accumulation of funds with an option to purchase an annuity. (Texas Commerce Bank v. Garamendi, supra, 11 Cal.App.4th at p. 467.) ELIC ceased marketing the Muni-GICs. (Ibid.)
Because of the authorized issuance of these products in other states, particularly New York and Connecticut where many life insurers are domiciled, the lack of specific authority to issue these funding agreements placed California life insurers, including ELIC, at a competitive disadvantage. (Sen. Rules Com. Floor Analysis of Sen. Bill No. 901, supra.) To correct this disadvantage, the Association of California Life Insurance Companies in 1987 sponsored Senate Bill No. 901, the progenitor of section 10541, carried by Senator Russell. (Sen. Rules Com. Floor Analysis of Sen. Bill No. 901, supra; Texas Commerce Bank v. Garamendi, supra, 11 Cal. App.4th at p. 467.)
Senate Bill No. 901 traversed several permutations before being enacted in 1988 (eff. Jan. 1, 1989) as present section 10541, all for the purpose of permitting California life insurers to sell a product which, prior to the legislation, they were not expressly authorized to sell. (Texas Commerce Bank v. Garamendi, supra, 11 Cal.App.4th at p. 467.) The original March 3, 1987, version of Senate Bill No. 901, modeled on New York Insurance Law section 3222, provided that life insurers could issue funding agreements as part of their insurance business to fund benefits under employee benefit plans, to fund activities of organizations exempt from tax under Internal Revenue Code section 501, subdivision (c), to fund governmental programs including those of state entities, to fund structured settlements, and to fund programs of institutions with assets in excess of $25 million. This version of Senate Bill No. 901 expressly stated that funding agreements need not provide for payments based on mortality or morbidity contingencies.
As amended in the state Senate on April 6, 1987, the bill, while still authorizing California life insurers to deal in funding agreements, reversed course by providing that these agreements should not be deemed insurance. The amended bill retained the provision that funding agreements need not provide for payments based on mortality or morbidity contingencies. A further amendment in the Assembly removed the limitation upon classes of purposes for which funding agreements could be sold.
The present relevant language of section 10541 appears in an Assembly amendment of August 1, 1988: “As used in this section, the term ‘funding agreement’ means an agreement which authorizes an admitted life insurer to accept funds and which provides for an accumulation of those funds for the purpose of making one or more payments at future dates in amounts that are not based on mortality or morbidity contingencies. . . .”
It is clear from this history that the purpose of the legislation which became section 10541 was to permit California life insurers to compete in a new and growing market where previously their authorization to do so was questionable. The purpose was not to reclassify a