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02/03/94 REHABILITATION CENTAUR INSURANCE COMPANY

February 3, 1994

IN RE REHABILITATION OF CENTAUR INSURANCE COMPANY (STEPHEN F. SELCKE, APPELLANT,
v.
HARTFORD FIRE INSURANCE COMPANY ET AL., APPELLEES).



Nickels

The opinion of the court was delivered by: Nickels

JUSTICE NICKELS delivered the opinion of the court:

The Director of Insurance of the State of Illinois (Director) appeals the appellate court's decision denying him, as rehabilitator of Centaur Insurance Company (Centaur), the right to assert an alter ego action on behalf of Centaur against Centaur's parent, Borg-Warner corporation (Borg-Warner). We granted the Director's petition for leave to appeal (134 Ill. 2d R. 315).

FACTS

The facts of the case are not in dispute. Centaur is a wholly owned subsidiary of Borg-Warner which Borg-Warner formed in 1974 to act as its insurer. Centaur also issued insurance and reinsurance policies to other entities not affiliated with Borg-Warner. Various Hartford companies (Hartford) entered into numerous reinsurance contracts with Centaur from 1981 through 1984. Centaur began to default on its obligations to Hartford in 1984.

In September 1987, the Director began rehabilitation proceedings against Centaur in the circuit court of Cook County. On September 4, 1987, the Director was appointed rehabilitator of Centaur and ordered to assume control of Centaur's business and assets. Also on September 4, 1987, the court entered an order enjoining suits against any current or former shareholders of Centaur. This moratorium was subsequently lifted at the Director's request on January 27, 1988.

After the moratorium was lifted, Hartford filed suit against Borg-Warner in the United States District Court for the Northern District of Illinois. The suit sought to hold Borg-Warner liable for Centaur's reinsurance obligations to Hartford, which Hartford claims to be in excess of $29 million. Hartford alleged four theories of recovery in its Federal suit: (1) abuse of corporate structure requiring piercing of Centaur's corporate veil; (2) promissory estoppel; (3) fraud; and (4) reckless misrepresentation. The Federal court dismissed Hartford's complaint without prejudice in a April 17, 1989, memorandum decision citing Federal abstention and ripeness grounds due to the State rehabilitation proceedings then in progress. Hartford moved for reconsideration and the Federal court denied the motion on August 9, 1989. In its order denying reconsideration, the court found that Hartford lacked standing to pursue its alter ego claim against Borg-Warner. (Hartford Casualty Insurance Co. v. Borg-Warner Corp. (N.D. Ill. April 17, 1989), No. 88-C-0783.) The court, relying on the Federal decision Koch Refining v. Farmers Union Central Exchange, Inc. (7th Cir. 1987), 831 F.2d 1339, determined that the alter ego action belonged to all of Centaur's creditors and thus should be brought only by the Director. The Federal court of appeals affirmed the dismissal without prejudice on Federal abstention principles on September 18, 1990. Hartford Casualty Insurance Co. v. Borg-Warner Corp. (7th Cir. 1990), 913 F.2d 419.

After the dismissal of Hartford's Federal complaint, Hartford filed a declaratory judgment action against Borg-Warner on October 29, 1990, in the circuit court of Cook County. This State-court action alleged the same four theories of recovery that were the basis of Hartford's Federal court complaint. On May 8, 1991, the Director filed a motion to intervene in Hartford's action. The Director sought to have Hartford's action dismissed and argued that he, as the rehabilitator of Centaur, was the proper party to bring Hartford's four claims. In response to this motion, Hartford asked the court to declare that the Director had no standing to pursue Hartford's claims against Borg-Warner.

The trial court ruled on October 17, 1991, that Hartford had the right to assert the alter ego and promissory estoppel claims against Borg-Warner. However, the court also ruled that the Director had standing to pursue Hartford's fraud and reckless misrepresentation claims.

The Director appealed only the trial court's finding concerning the alter ego claim, and Hartford appealed the trial court's ruling on the fraud and reckless misrepresentation claims. The appellate court ruled in Hartford's favor on all claims. The court held that the Director could not pursue the alter ego claim because a "subsidiary corporation cannot pierce its own corporate veil to reach a parent corporation." 238 Ill. App. 3d 292, 300.

The Director asks this court to review only the alter ego issue. Thus, the question we now address is whether the Director, as rehabilitator of Centaur, has standing to assert an alter ego action against Centaur's parent, Borg-Warner. We conclude that he does not and affirm the appellate court.

I.

Director's Rights

"[A rehabilitator] derives his authority from statute, and cannot act in contravention of or beyond the statute * * *." (19A J. Appleman & J. Appleman, Insurance Law & Practice ยง 10682, at 121 (rev. 1982).) Article XIII of the Insurance Code (Code) details the ...


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