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07/28/88 Thelma Cohen Et Al., Indiv v. the Department of

July 28, 1988

THELMA COHEN ET AL., INDI

v.

AND AS TRUSTEES, PLAINTIFFS-APPELLANTS,

v.

THE DEPARTMENT OF INSURANCE ET AL., DEFENDANTS-APPELLEES (MERIT INSURANCE COMPANY ET AL., DEFENDANTS)



APPELLATE COURT OF ILLINOIS, FOURTH DISTRICT

527 N.E.2d 581, 173 Ill. App. 3d 363, 123 Ill. Dec. 118 1988.IL.1162

Appeal from the Circuit Court of Sangamon County; the Hon. Simon L. Friedman, Judge, presiding.

APPELLATE Judges:

JUSTICE SPITZ delivered the opinion of the court. LUND and KNECHT, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SPITZ

In 1986, defendant Jerome H. Stern sought approval from the defendant Illinois Department of Insurance to acquire a controlling interest in Merit Insurance Company. Thereafter, the Department of Insurance appointed a hearing officer to analyze Stern's application and report proposed findings of fact and Conclusions of law. Following a four-day evidentiary hearing, the hearing officer recommended that the proposed acquisition be approved. The Director of the Department of Insurance (Director) then conducted an independent review of the administrative record, adopted the hearing officer's report in its entirety and approved the acquisition by Stern. The plaintiffs, Thelma and Stuart Cohen, were shareholders in Merit Insurance Company and had participated in the administrative hearing, opposing Stern's acquisition. Following the ruling by the Department, the Cohens filed a complaint in administrative review in the circuit court of Sangamon County. Upon consideration of the administrative record and the parties' briefs and arguments, the circuit court affirmed the Director's decision. The Cohens now appeal arguing that the findings of the Director of Insurance regarding Stern's financial situation and integrity are against the manifest weight of the evidence and that the Department of Insurance abused its discretion in assessing one-half of the costs of the hearing against them. For the reasons that follow, we affirm.

The record shows that Merit Insurance Company (insurance company) is an Illinois domestic stock insurance company, wholly owned by a holding company, Merit Financial Corporation (holding company). Prior to the closing of the instant acquisition, the holding company was owned or controlled in the following percentages by: the Cohen family -- 40% interest; the Brody family -- 40% interest; and Jerome H. Stern -- 20% interest. Stern was hired by Harold Cohen on November 30, 1965, to serve as president and chief executive officer of the insurance company. For 20 years thereafter, the insurance company's directors voted to retain Stern as president.

In late 1984, Stern approached the Brodys concerning the purchase of their 40% interest in the holding company. Then in 1985, Stern instituted proceedings for the approval of his purchase of the Brodys' stock as the purchase would have given Stern a controlling interest in the insurance company. On September 25, 1985, Stern filed a statutorily required disclosure statement concerning his proposed acquisition (1985 Form A) with the Illinois Department of Insurance (Department). (See Ill. Rev. Stat. 1985, ch. 73, par. 743.1 et seq.) Stern proposed to purchase the Brodys' interest in the holding company and its affiliates for $1,840,000, financed by a loan from American National Bank of Chicago. The loan was for a term of one year and was subject to renewal at the bank's discretion. The Cohens subsequently raised objections to the proposed acquisition.

On October 25, 1985, the Department issued a notice alleging that Stern's 1985 Form A statement failed to demonstrate that he met the standards in section 131.8 of the Illinois Insurance Code (Code) (Ill. Rev. Stat. 1985, ch. 73, par. 743.8(1)), in that "there [was] a lack of information regarding [Stern's] financial condition, specifically: (1) the source of funds for repayment of the purchase loan and attendant interest payments." The Director issued a notice of public hearing and appointed a hearing officer to conduct an evidentiary hearing on matters raised by Stern's 1985 Form A and the Cohens' objections. The hearing commenced on November 20, 1985, and lasted three days. As shareholders in the holding company who had received notice of the hearing, the Cohens were allowed to participate at the hearing. On December 3, 1985, the hearing officer recommended that the acquisition be disapproved, finding, among other things, that Stern had failed to prove that he had the financial means to repay the purchase loan. On December 20, 1985, the Director adopted the hearing officer's findings of fact and Conclusions of law and issued an order disapproving Stern's proposed acquisition. The Director's chief objection to Stern's proposed acquisition was the one-year term of the loan Stern had intended to use to finance the transaction. Stern took no appeal from this order.

On October 9, 1986, Stern obtained a commitment from American National Bank of Chicago for a six-year loan in the amount of $1,900,000, to finance the purchase of the Brodys' stock. Then on October 16, 1986, Stern filed a second Form A disclosure statement (1986 Form A) with the Department. In his 1986 Form A, Stern proposed to buy the Brodys' stock for $1,800,000, financed by the loan from American National Bank. Included with the 1986 Form A were financial statements dated October 7, 1986, which had been prepared by Stern's personal accountant. These schedules included: (1) a statement of Stern's financial condition as of August 31, 1986, which disclosed a net worth of $1,002,873; (2) forecasted statements of Stern's financial condition covering the six-year period of the purchase loan; and (3) projected personal cash flow schedules also covering the period of the loan. These schedules were submitted in an attempt to demonstrate that Stern would be able to repay the purchase loan from his personal income and "that no funds of the [insurance company would] be required to repay the loan." These schedules did not reflect a September 29, 1986, investment by Stern in a company called Computer Leasing, Inc. . According to Stern, at the time of the CLI investment, his accountants had concluded most of the preparation of the financial statements. Shortly after making the investment, Stern consulted the Deputy Director of the division that would review his 1986 Form A. According to Stern, the Deputy Director had no objection to the filing of Stern's financial statements in an unchanged form.

The Cohens again filed objections to the acquisition. On December 2, 1986, the Director issued a notice of public hearing on Stern's 1986 Form A which alleged that the form contained insufficient information to determine whether Stern met the financial and ethical standards set by the Code. The hearing officer that had presided over the 1985 administrative hearing was again appointed. An evidentiary hearing then commenced on December 15, 1986, and lasted four days. The presentation of Stern's case in chief lasted 3 1/2 days and consisted of testimony from Stern, the banker who approved the purchase loan, the accountant who had prepared the October 7, 1986, schedules, the insurance company's outside auditor, and a character witness. The Cohens then called Stern as their only witness. Stern testified regarding the CLI investment. He discussed the nature of the investment, the date he was first approached about the investment, the date the investment was made and the identity of the parties who advised him of the benefits of such an investment. He also provided a copy of its prospectus. Further, he discussed the financial commitments connected with the CLI investment and the debt of $1,651,220 incurred as a result of the investment. Stern explained that he entered into the CLI investment because, based on his personal experience with a similar computer leasing venture, it was likely that CLI's business would prove profitable. He further stated that the CLI investment was attractive because the investment's general partner, Westinghouse Credit Corporation, insulated investors from liability.

On December 29, 1986, the hearing officer entered his findings of fact, Conclusions of law and recommendation. The findings and Conclusions will be discussed in relation to the issues presented. The hearing officer determined Stern had demonstrated that the proposed acquisition complied with the requirements of sections 131.8(1)(a), (1)(b), (1)(c), (1)(d), and (1)(e), of the Code (Ill. Rev. Stat. 1985, ch. 73, pars. 743.8(1)(a), (1)(b), (1)(c), (1)(d), (1)(e)) and therefore recommended that the proposed acquisition be approved.

On December 30, 1986, the Director issued an order indicating that he independently reviewed the administrative record, and he adopted the hearing officer's findings of fact, Conclusions of law and recommendation that Stern's proposed acquisition be approved. In addition, the Director assessed one-half of the costs of the hearing against Stern and the other one-half against the Cohens. The Director assessed the fees incurred by the hearing officer prior to December 1, 1986, against Stern only. Thereafter, Stern closed the transaction with the Brodys and acquired a controlling interest in the insurance company.

On February 3, 1987, the Cohens filed a complaint for administrative review in the circuit court of Sangamon County alleging that their due process rights had been violated by the Director's decision. In response, Stern filed a motion to dismiss arguing that the Cohens' complaint failed to state a cause of action. Thereafter, the Cohens filed a first-amended complaint which abandoned the due process claim and alleged, in part, that the Director's assessments of Stern's financial condition and personal integrity were contrary to the manifest weight of the evidence. After hearing argument and reviewing the parties' briefs and the administrative record, the trial court affirmed the Director's decision in its entirety. The Cohens filed a timely notice of appeal.

The Cohens first contend that the hearing officer's finding, that Stern's financial condition would not jeopardize the insurance company's financial stability, was against the manifest weight of the evidence. The Cohens argue that there was no competent evidence in the record that any of Stern's debts were offset by the alleged tax benefits of the CLI investment. The Cohens maintain that the record showed "unequivocally" that the CLI investment had a substantial negative effect on Stern's cash flow, that a negative cash flow would cause Stern to default on the acquisition loan and that such a default would jeopardize the insurance company's financial stability.

Defendants Stern and the Department of Insurance contend the Director's findings, that the net effect of Stern's investment in CLI would be positive and that Stern's financial condition would not jeopardize either the insurance company or its policyholders, are supported by the record. Defendants first contend that there is a substantial amount of uncontradicted evidence supporting the Director's Conclusion that the CLI investment would have a positive effect on Stern's financial situation. Defendants maintain that there were at least five categories of evidence admitted at the hearing concerning the CLI investment which support the hearing officer's determination. Defendants refer to CLI's prospectus, Stern's testimony evaluating the profitability of the investment, testimony demonstrating that CLI's general partner was Westinghouse Credit Corporation, cash flow and tax benefits projections and other testimony concerning the beneficial tax and cash flow consequences of the investment. Defendants also contend that Stern's sophistication in business affairs, his training in law and accounting, and his personal experience with the computer leasing industry and with tax planning investments generally make him qualified to evaluate the CLI investment.

Next, defendants contend that even if this court finds that both the Director and the circuit court erred in assessing the probable effect of Stern's CLI investment, the record nevertheless supports the hearing officer's determination that Stern's overall financial condition would not jeopardize either the insurance company or its policyholders. Defendants assert that the evidence concerning CLI comprises only a small part of the 4,700-page record, and the findings of fact pertaining to CLI are only two of the 56 separate findings made by the hearing officer. Defendants argue that the Department's ultimate decision ...


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