Appeal from the Circuit Court of Du Page County; the Hon.
Alfred E. Woodward, Judge, presiding.
MR. JUSTICE RYAN DELIVERED THE OPINION OF THE COURT:
This is an appeal to this court under Rule 302(b) (50 Ill.2d R. 302(b)) from the circuit court of Du Page County which entered an order approving an amended plan of liquidation for Equity Funding Life Insurance Company (EFLIC), a wholly owned subsidiary of Equity Funding Corporation of America (EFCA). The appeal has been taken by certain objectors to the approval of the amended plan of liquidation.
The Director of Insurance of the State of Illinois (Director) under the provisions of article XIII of the Illinois Insurance Code (Ill. Rev. Stat. 1971, ch. 73, par. 799 et seq.) filed a petition for conservation of assets of EFLIC in the circuit court of Du Page County. The court granted the prayer of the Director's petition. Later, on March 25, 1974, the Director filed a complaint for liquidation of EFLIC alleging the insolvency of the company and requested the entry of an order directing its liquidation and filed a petition for approval of a plan of liquidation (hereinafter referred to as the "original plan"). Pursuant to an order entered on that date a "Notice to Creditors and Other Parties" was published and sent to certain creditors.
On April 3, 1973, the Securities and Exchange Commission had filed a complaint against EFLIC's parent company, EFCA, in the United States District Court for the Central District of California alleging that for many years EFCA and certain of its officers had engaged in massive fraudulent activities. On April 5, 1973, EFCA filed its voluntary petition for reorganization under chapter X of the Bankruptcy Act (11 U.S.C.A. sec. 501 et seq.) in the United States District Court for the Central District of California and a trustee was appointed.
After April 3, 1973, approximately 200 actions including about 50 class actions were filed in various Federal and State courts against EFCA and others. In many of these actions EFLIC was named as a defendant upon allegations that as co-conspirator or aider or abettor EFLIC was jointly and severally liable with EFCA for damages to purchasers of EFCA's securities.
On April 23, 1973, Judge Malcolm M. Lucas of the United States District Court of the Central District of California consolidated for pretrial about 18 class actions against EFCA, EFLIC and others. On February 1, 1974, pursuant to 28 U.S.C.A., sec. 1407, the Judicial Panel on Multidistrict Litigation transferred to Judge Lucas all pending actions in all Federal courts relating to the EFCA fraud. This proceeding will be referred to as the MDL proceeding.
The circuit court of Du Page County in the proceeding from which this appeal has been taken found that a portion of EFLIC's book of business consisted of fictitious life insurance policies and many policies which had been validly issued and lapsed had been kept on EFLIC's books as valid in-force business. Substantially all of these fictitious and lapsed policies were reinsured with other life insurance companies. Pursuant to certain reinsurance and co-insurance treaties these life insurance companies caused monies to be paid to EFLIC for commissions and death claims on these policies. Through an audit the best possible determination under the circumstances was made of the amounts owing to the reinsurers as a result of these payments. The original plan of liquidation provided for a settlement of these claims and other claims not relevant to these proceedings.
The original plan of liquidation also provided that Northern Life Insurance Company of Seattle, Washington (Northern) would assume all of EFLIC's in-force insurance and restore each policyholder to full policy rights. Northern is also a wholly owned subsidiary of EFCA. No question has been raised as to its solvency nor has it been suggested that Northern is in any way tainted with the EFCA fraud.
Following the publication of notice to creditors as ordered by the circuit court of Du Page County on March 25, 1974, certain individual claimants and claimants acting on behalf of a class of claimants who had fraud claims against EFLIC filed claims and objections to the proposed original plan of liquidation. In addition to the fraud class claimants the State Teachers Retirement Board of Ohio and Jewel Companies Investment Trust filed individual claims in the court below totaling 15 million dollars. These claims were likewise based on alleged fraudulent activities of EFCA and EFLIC. The fraud class claimants alleged that for many years EFCA was engaged in massive fraudulent activities to overstate assets and earnings and to understate liabilities for the purpose of inflating the market price of EFCA securities; that EFLIC, a wholly owned subsidiary of EFCA, was engaged in a massive fraud to overstate the volume of its insurance business, its assets and earnings, and to understate its liabilities for the purpose of influencing the market price of EFCA securities; that EFLIC is liable as a co-conspirator and aider and abettor with EFCA and that the fraud claimants were owners of EFCA securities during the relevant period and suffered damages as a result of the fraudulent activities.
The primary objections to the approval of the original plan were: (1) certain other claimants, including EFCA and various insurance companies were treated as preferred creditors of EFLIC to the practical exclusion of the fraud claimants, and (2) certain assets of EFLIC were being transferred without adequate consideration. The hearing on the approval of the original plan and the objections continued for several days. After the Director had rested his case the parties negotiated a settlement agreement which has been incorporated in what is referred to as the amended plan for liquidation.
The amended plan differs from the original plan principally in that certain changes were made in the proposed settlements with re-insurers, co-insurers and others. Of primary concern in this litigation is the additional provision in the amended plan which creates a 2-million-dollar fund. No provision had been made in the original plan for settlement of claims of fraud claimants. Under the amended plan EFLIC is to transfer to a designated depositary the sum of 2 million dollars less such amounts as the court may direct EFLIC to pay to counsel for the fraud claimants as attorneys' fees and expenses in these proceedings. The fund is to be used to pay approved past and future costs and expenses (but not attorneys' fees) incurred in the prosecution of actions by and on behalf of fraud class claimants in the MDL proceeding in the Federal District Court in California. At such time as the settlement fund is no longer needed for that purpose, but not more than five years from the settlement date, counsel for the fraud claimants shall apply to the district court for an order of distribution of the balance in the settlement fund to the members of the class. All procedures for distribution are subject to the approval and supervision of the Federal District Court. There is to be no deduction from the settlement fund other than actual costs and expenses (but not attorneys' fees). The distribution is to be made in conjunction with distribution of other funds recovered in the Multiple District Litigation (MDL proceeding).
The order of the circuit court provided that the members of the class of fraud claimants who are potential creditors of EFLIC are presently undetermined but the membership of the class would include at most all persons, and their successors, who owned stock, debentures or warrants of EFCA at any time from January 1, 1964, through March 27, 1973, except those persons who had special knowledge of the EFCA-EFLIC fraud and were not deceived by any such conduct.
On August 6, 1974, the circuit court ordered that notice be given of the hearing on the amended plan. As ordered, notices were published in the same newspapers in which the original notice to creditors had been published pursuant to the March 25, 1974, order. Also, as ordered by the court, copies of the notice were mailed to: (1) All prospective members of the fraud claimants class who had filed claims and objections following the prior notice of the hearing on the original plan; (2) All of the attorneys for all of the parties (plaintiffs and defendants) whose names appear upon the most recent MDL service list, and (3) The mandatory service list in the EFCA bankruptcy reorganization proceeding. The notices required that any person who desired to be heard in opposition to the amended plan must file written objections on or before September 9, 1974.
Objections to the amended plan were filed by 9 law firms representing clients, some of whom were either shareholders or debenture holders of EFCA or were underwriter defendants (underwriters of debenture issues of EFCA who are charged by the fraud claimants with fraud in the issuance of these securities) accountant defendants (accounting firms who audited and certified EFCA and EFLIC financial statements and who are charged by the fraud claimants with fraud in so doing), broker-tippee defendants (brokers of EFCA securities who are charged by the fraud claimants with having sold EFCA securities in March, 1973, on the basis of confidential information that EFCA securities were worthless) and seller-tippee defendants (owners of EFCA securities who are charged by fraud claimants with having sold the securities in March, 1973, on the basis of confidential information that EFCA securities were worthless). These objectors are all defendants in the MDL proceeding in the Federal District Court in California. They contend that they are fraud class claimants because they owned stock and securities of EFCA during the relevant period, thus coming within the class as defined by the court. They are ...