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Taylor, Supt v. Ernst & Young

October 18, 2011


APPEAL from the Court of Appeals for Franklin County, No. 09-AP-949, SYLLABUS BY THE COURT

SYLLABUS OF THE COURT 1. The Ohio superintendent of insurance, in her capacity as the liquidator of an insolvent insurer, is not a mere successor in interest of an insolvent insurer. 2. The Ohio superintendent of insurance, as liquidator of an insolvent insurance company, is not bound by an agreement to arbitrate that was entered into by the insolvent insurer when her claims do not arise from the contract containing the arbitration clause. 3. An insurance company does not have the authority to bind the liquidator of the company to arbitrate preference or fraudulent-transfer claims.

The opinion of the court was delivered by: O'connor, C.J.

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Taylor v. Ernst & Young, L.L.P., Slip Opinion No. 2011-Ohio-5262.]


This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published.


[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Taylor v. Ernst & Young, L.L.P., Slip Opinion No. 2011-Ohio-5262.]

Insurance--Liquidation of insolvent insurance company--Superintendent of insurance as liquidator not bound by insurer's arbitration agreement.

Submitted May 25, 2011

{¶1} This appeal involves the question of whether the superintendent of insurance, in her capacity as the liquidator of an insolvent insurer, is bound by an agreement to arbitrate that was entered into by an insolvent insurer in cases in which the liquidator does not disavow the contract that contains the arbitration clause. For the reasons explained below, we hold that the liquidator is not bound by the insolvent insurer's agreement when the liquidator's claims do not arise from the contract that contains the arbitration provision. Accordingly, we affirm the judgment of the court of appeals but in part for different reasons, as explained below.


{¶2} For purposes of this appeal, the facts are as stated in the complaint and the motion to dismiss. Ernst & Young ("E&Y"), an independent accounting firm, provided auditing services to American Chambers Life Insurance Company ("ACLIC") for the year ending December 31, 1998. The audit was undertaken pursuant to an engagement letter signed by E&Y and ACLIC*fn1 that contained an arbitration clause. On February 25, 1999, E&Y submitted a report to the Ohio Department of Insurance ("ODI") that certified that it had conducted the audit in accordance with generally accepted auditing standards and that ACLIC's financial statements presented fairly, in all material respects, ACLIC's financial position.

{¶3} On March 13, 2000, the superintendent filed an action in the Franklin County Common Pleas Court that sought, at first, to place ACLIC in rehabilitation. On May 8, 2000, the court issued a final liquidation order based on ACLIC's insolvency. During the liquidation proceedings, the liquidator entered into a tolling agreement with E&Y whereby each side agreed to toll the time for filing causes of action and claims against the other side until one year from May 2, 2002.

{¶4} On April 30, 2003, the liquidator filed this action in the Franklin County Common Pleas Court against E&Y.*fn2 The liquidator alleged two claims against E&Y. In one claim, she alleged that E&Y "negligently failed to perform its duties as the independent certified public accountant retained to conduct the audit of ACLIC's December 31, 1998, Annual Statement, thus breaching the duties owed." Specifically, the liquidator alleged that E&Y failed to conduct its audit according to generally accepted auditing standards and failed to discover or disclose material misstatements in ACLIC's financial statements, such as understatement of loss reserves, overstatement of receivables, unrecorded liabilities, and investments that exceeded the allowable amounts. That breach, she alleged, allowed ACLIC's financial condition to go undetected and, consequently, allowed it to continue transacting business, causing harm to ACLIC, its policyholders and creditors, and the public.

{¶5} In another claim, the liquidator alleged that E&Y received preferential or fraudulent payments of more than $25,000. Specifically, she alleged that E&Y received a sum of money from ACLIC after March 13, 1999, when ACLIC was insolvent, and that E&Y refused to return the money, notwithstanding the liquidator's demand for it. Consequently, the liquidator alleged, E&Y had obtained a greater percentage of its debt than other creditors of the same class would receive in the distribution of ACLIC's estate.

{¶6} On July 15, 2003, E&Y moved to dismiss the complaint or to stay the proceedings and compel arbitration based on the arbitration clause contained in the engagement letter. The trial court denied the motion, and E&Y appealed. The Tenth District affirmed. Hudson v. Ernst & Young, L.L.P., 189 Ohio App.3d 60, 2010-Ohio-2731, 937 N.E.2d 585, at ¶ 39.*fn3 That court held that because the liquidator had not signed the arbitration agreement, there was a presumption against arbitration. Id. at ¶ 16. It then held that the presumption could never be overcome because the General Assembly did not contemplate liquidation proceedings being turned over to private arbitrators. Id. at ¶ 18. In other words, the Tenth District held that there is an irreconcilable conflict between the Ohio Liquidation Act and the Ohio Arbitration Act and that the Liquidation Act prevails. Id.

{¶7} This court accepted E&Y's discretionary appeal, which sets forth two propositions of law: (1) "An insurance liquidator that does not disavow a contract entered into by an insurer is bound by an arbitration provision in that contract, which must be enforced pursuant to Ohio's statutory code and strong policy favoring arbitration," and (2) "A tolling agreement that preserves 'all defenses' as of its effective date preserves an arbitration defense that existed on the effective date." We address each proposition in turn.

{¶8} Although the liquidator did not agree to arbitrate any claims and is not a signatory to the engagement letter that contains the arbitration provision, E&Y nonetheless argues that the liquidator is bound by the arbitration clause for three reasons. First, E&Y asserts that the liquidator stands in the shoes of the insolvent insurer. In the alternative, E&Y contends that because the liquidator is asserting claims that are based on and arise out of the contract that contains the arbitration clause, she is bound by the arbitration provisions. Finally, E&Y argues that the Liquidation Act does not permit the liquidator to disavow the arbitration clause while enforcing the balance of the contract.

{¶9} The liquidator rebuts each assertion. First, she denies that she stands in the shoes of the insolvent insurer. Rather, she stands in a unique public- protection role. Second, she argues that she is not asserting claims that are based on or arise out of the contract but, rather, that she is bringing claims that arise from both her statutory powers and certain financial statements and audit certifications filed in the public record by ACLIC and E&Y. Therefore, she argues, her disavowal powers are not implicated. Finally, in the alternative she asserts that there is an irreconcilable conflict between the Liquidation Act and the Arbitration Act and that the Liquidation Act must prevail. We proceed with the analysis of E&Y's arguments and begin our discussion with an overview of the Ohio Liquidation Act.


A. The Ohio Liquidation Act

{¶10} The Insurers Supervision, Rehabilitation, and Liquidation Act (the "Liquidation Act"), codified in R.C. Chapter 3903, "confer[s] upon the Superintendent and a trial court broad discretionary and equitable powers relating to the supervision, rehabilitation and liquidation of insurance companies." Fabe v. Prompt Fin., Inc. (1994), 69 Ohio St.3d 268, 273, 631 N.E.2d 614. Through the Liquidation Act, the General Assembly established "a comprehensive framework governing the liquidation of insurance companies operating in Ohio," Hudson v. Petrosurance, Inc., 127 Ohio St.3d 54, 2010-Ohio-4505, 936 N.E.2d 481, ¶ 16, through which the liquidator is empowered "to protect the rights of insureds, policyholders, creditors, and the public generally." Fabe, 69 Ohio St.3d at 275. R.C. 3903.02(D). We must liberally construe the Liquidation Act to effectuate that purpose. R.C. 3903.02(C).

{¶11} The Liquidation Act grants the superintendent three levels of oversight of the insurance industry apart from her usual regulatory powers. First, R.C. 3903.09 confers on the superintendent power to identify and supervise a potentially troubled insurer by requiring it to get her permission before engaging in certain business transactions, such as disposing of assets or investing funds. Second, R.C. 3903.12 grants the superintendent the power, with the court's permission, to attempt to rehabilitate an insurer in such a poor financial condition that its further transaction of business would be financially hazardous to its policyholders, creditors, or the public. Third, R.C. 3903.16(A) and 3903.17 grant the superintendent the power, with the court's permission, to liquidate an insurer if, for example, it is insolvent. When the superintendent believes that an insurance company is insolvent, she may file a complaint for liquidation. R.C. 3903.17(B). When issued, a final order for liquidation appoints the superintendent as liquidator and directs her to use her broad, statutory powers to marshal assets of the insolvent insurer in the liquidation court and to administer the assets under the general supervision of that court. R.C. 3903.18(A). To that end, the liquidator maximizes the insolvent insurer's estate; she then reviews, prioritizes, and pays claims to the extent possible. Benjamin v. Pipoly, 155 Ohio App.3d 171, 2003-Ohio-5666, 800 N.E.2d 50, ¶ 28; R.C. 3903.42.

{¶12} R.C. 3903.21 contains a nonexclusive list of the powers given to the liquidator to accomplish these tasks. Among other things, she may "[c]onduct public and private sales of the property of the insurer," R.C. 3903.21(A)(7); "[e]nter into such contracts as are necessary to carry out the order to liquidate, and * * * affirm or disavow any contracts to which the insurer is a party," R.C. 3903.21(A)(11); and sell, encumber, or otherwise dispose of the insurer's property, R.C. 3903.21(A)(9). In addition to 23 enumerated powers set forth in the act, the liquidator has authority to do whatever is "necessary or appropriate for the accomplishment of or in the aid of the purpose of liquidation." R.C. 3903.21(B). Indeed, as other courts recognize, this statutory scheme is "abounding in features designed to vest within the liquidator broad and largely unfettered powers, under the supervision of the courts, to maximize the assets available to her in discharging her duties to claimants, shareholders, and creditors of the insolvent insurance company." Pipoly at ¶ 28.

{¶13} In contrast to the liquidator's broad powers, creditors have limited rights to file claims against the insurer's estate. R.C. 3903.24(A) and 3903.35 through 3903.44. With the issuance of a liquidation order, claims of creditors against the insolvent insurer are extinguished by operation of law and replaced by a right to seek redress in the liquidation court. Id. Those claims must be filed by a date specified by the liquidator, regardless of the underlying statute of limitation that would have applied if the claimant had sued the insurer in ordinary litigation.

R.C. 3903.22(B) and 3903.36.

{¶14} Subject to judicial review, the liquidator investigates, values, and approves or denies claims filed against the estate. See, e.g., Covington v. Am. Chambers Life Ins. Co., 150 Ohio App.3d 119, 2002-Ohio-6165, 779 N.E.2d 833, ¶ 26. She then sorts the payable claims according to nine statutory classes. R.C. 3903.42(A) through (I). The Liquidation Act establishes priority among the classes and prescribes that each claimant of the first class be paid in full before the claimants of the second class are paid at all, and so on. R.C. 3903.42. Finally, the statutory scheme provides for setoff when the estate has a cause of action against a claimant. R.C. 3903.30.

{¶15} The General Assembly designed the Liquidation Act to be centralized in order to enhance efficiency. R.C. 3903.02(D)(3). The general rule is that all liquidation actions brought pursuant to R.C. 3903.01 to 3903.59 "shall be brought in the court of common pleas of Franklin county" (the "liquidation court"). R.C. 3903.04(E). While the Liquidation Act itself contains a reiteration that the liquidation court has jurisdiction over preference claims, R.C. 3903.28(G), and liquidation complaints, R.C. 3903.04(B), elsewhere it sets forth limited exceptions under which the liquidator may select a forum other than the liquidation court. R.C. 3903.21(A)(6) (establishing that as part of her power to collect debts of the insolvent insurer, the liquidator may "[i]nstitute timely action in other jurisdictions"), R.C. 3903.21(A)(12) (establishing that the liquidator has the power to "[c]ontinue to prosecute or commence * * * any and all suits and other legal proceedings, in this state or elsewhere"), and R.C. 3903.41(A)(2) (establishing that the court has the power to put the question of a security's value to arbitration).

{¶16} The liquidator's power of forum selection stands in sharp contrast to the creditors' limited right to file suits in the liquidation court only. R.C. 3903.24(A) (establishing that upon the issuance of a liquidation order, "no civil action shall be commenced against the insurer or liquidator, whether in this state or elsewhere, nor shall any such existing action be maintained or further prosecuted"). In short, when allowed, forum selection belongs to the liquidator, and the liquidator alone.

{¶17} Here, E&Y seeks to remove the entire action filed by the liquidator in the liquidation court to arbitration. We turn our discussion to the arbitration law, which E&Y relies upon in support of its position.

B. The Ohio Arbitration Act

{¶18} The Ohio Arbitration Act ("OAA") provides: "A provision in any written contract * * * to settle by arbitration a controversy that subsequently arises out of the contract * * * shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract."

R.C. 2711.01(A). The language of the OAA tracks the language of the Federal Arbitration Act ("FAA"), which provides: "[A] contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract * * * shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Section 2, Article 9, U.S.Code. The OAA expresses Ohio's strong public policy favoring arbitration, which is consistent with federal law supporting arbitration. Taylor Bldg. Corp. of Am. v. Benfield, 117 Ohio St.3d 352, 2008-Ohio-938, 884 N.E.2d 12, ¶ 26, fn. 1.

{¶19} The FAA was enacted in 1925 " 'to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitrations agreements upon the same footing as other contracts.' " Equal Emp. Opportunity Comm. v. Waffle House (2002), 534 U.S. 279, 289, 122 S.Ct. 754, 151 L.Ed.2d 755, quoting Gilmer v. Interstate/Johnson Lane Corp. (1991), 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26. The purpose was " 'to make arbitration agreements as enforceable as other contracts, but not more so.' " Id. at 294, quoting Prime Paint Corp. v. Flood & Conklin Mfg. Co (1967), 388 U.S. 395, 404, 87 S.Ct. 1801, 18 L.Ed.2d 1270, fn. 12. Therefore, the FAA " 'does not require parties to arbitrate when they have not agreed to do so.' " Id. at 293, quoting Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior Univ. (1989), 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488; see also id. at 294 (holding that the FAA is, at its core, a policy of enforcing contractual arrangements).

{¶20} Consistently, this court has held: " ' "[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit." * * * This axiom recognizes the fact that arbitrators derive their authority to resolve disputes only because the parties have agreed to submit such grievances to arbitration.' " Council of Smaller Ents. v. Gates, McDonald & Co. (1998), 80 Ohio St.3d 661, 665, 687 N.E.2d 1352, quoting AT&T Technologies, Inc. v. Communications Workers of Am. (1986), 475 U.S. 643, 648-649, 106 S.Ct. 1415, 89 L.Ed.2d 648, quoting United Steel Workers of Am. v. Warrior & Gulf Navigation Co. (1960), 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409. Accordingly, when deciding motions to compel arbitration, the proper focus is whether the parties actually agreed to arbitrate the issue, i.e., the scope of the arbitration clause, not the general policies of the arbitration statutes. Waffle House, 534 U.S. at 294. It follows that although any ambiguities in the language of a contract ...

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