Odyssey Reinsurance Co. v. Nagby, 2019 U.S. Dist. LEXIS 111794 (S.D. Cal. July 2, 2019)
In Odyssey Reinsurance Co. v. Nagby, the United States District Court for the Southern District of California found the sole directors and owners of a defunct insurance agency liable for constructive fraudulent transfer under California’s version of the Uniform Fraudulent Transfer Act, when the owners sought to avoid a debt to the plaintiff reinsurance company by transferring the agency’s assets to their new wholly-owned Nevada corporation for no consideration, selling the Nevada corporation to a third party and distributing the proceeds to themselves.
Plaintiff Odyssey Reinsurance (“Odyssey”) is a reinsurance company. Defendant Cal-Regent Insurance Corp. (“Cal-Regent”) was an insurance agency that underwrote certain insurance risks on behalf of State National Insurance Company (“State National”). In turn, Odyssey reinsured State National for a certain percentage of those risks. In accordance with a series of reinsurance agreements between the parties, Cal-Regent received a provisional commission—paid in part by Odyssey—on all policies that it underwrote for State National. At the end of each year, the provisional commissions were adjusted depending on the profitability of the business underwritten by Cal-Regent. Where the provisional commission paid by Odyssey exceeded the amount to which Cal-Regent was entitled to after the yearly adjustment, Cal-Regent was obligated to pay the difference to Odyssey. After Cal-Regent failed to pay Odyssey amounts due for the 2006 underwriting year, which fell due in 2013, Odyssey filed suit in the United States District Court for the District of Connecticut (the “Connecticut District Court”) to collect amounts due to it from Cal-Regent. In 2015, the Connecticut District Court ruled in favor of Odyssey and awarded it $3.2 million in damages against Cal-Regent.
In March 2017, Odyssey filed suit in the United States District Court for the Southern District of California (the “California District Court”), alleging that Cal-Regent’s directors and sole shareholders, Richard Nagby and Diane Dostalik, had embarked on a scheme to strip Cal-Regent of assets to avoid paying return commissions to Odyssey. Odyssey alleged that Nagby and Dostalik formed a Nevada corporation named Pacific Brokers Insurance Services (“PBIS”), transferred Cal-Regent’s assets to PBIS for no equivalent value, sold PBIS to AmTrust North America, Inc. (“AmTrust”) for $5 million, and then caused PBIS to distribute the sale proceeds to Nagby and Dolastik In the California District Court action, Odyssey sought to hold Cal-Regent, PBIS, Nagby and Dostalik liable under several theories of liability, including constructive fraudulent transfer under the Uniform Fraudulent Transfer Act (“UFTA”), California’s successor liability law and principles of corporate law. Following a number of favorable rulings from the California District Court (including default entry of default judgment against Cal-Regent and PBIS for $3.2 million plus post-judgment interest on the basis of the Connecticut District Court judgment), Odyssey moved for summary judgment against Nagby and Dostalik solely on the UFTA claim.
Recovery for Odyssey on the basis of any theory hinged on the threshold question of whether Cal-Regent had transferred its assets to PBIS. The California District Court held that such a transfer had occurred, because the evidence showed that Cal-Regent had transferred to PBIS at least 75% of Cal-Regent’s most valuable resource: its relationships with insurance brokerage firms.
Odyssey argued that it could recover from Nagby and Dostalik under the UFTA, because (1) the transfer of assets from Cal-Regent to PBIS was fraudulent, rendering PBIS liable for the debts of Cal-Regent, and (2) when PBIS distributed the AmTrust proceeds to Nagby and Dostalik, it was rendered insolvent.
Odyssey argued that it was an existing PBIS creditor under three theories of liability: (i) the UFTA; (ii) successor liability; and (iii) entry of default judgment.
- Fraudulent Transfer. Under California state law, a transfer is voidable as to an existing creditor if the debtor does not receive reasonably equivalent value and was insolvent at the time of the transfer of became insolvent as a result. The California District Court held that Cal-Regent was a creditor of Odyssey before Cal-Regent transferred its assets to PBIS and that PBIS did not receive reasonably equivalent value for the asset transfer, because it received nothing in exchange for its valuable customer lists and business goodwill. Therefore, Odyssey was entitled to recover judgment against PBIS in an amount equal to the value of the assets transferred.
- Successor Liability. The California District Court held that Odyssey was also an existing PBIS creditor under California’s standard for successor liability. Under California law, a corporation that purchases all of the assets of another corporation may be held liable for the former corporation’s liabilities if, among other things, it is a “mere continuation” of the seller. A purchasing corporation is a “mere continuation” only if (1) no adequate consideration was given for the predecessor corporation’s assets and made available for claims of unsecured creditors and/or (2) one or more persons were officers, directors or stockholders of both corporations. Because PBIS did not pay adequate consideration for Cal-Regent’s assets and both corporations were owned and operated by Nagby and Dostalik, Odyssey became a creditor of PBIS.
- Default Judgment. Because the California District Court already had found that Odyssey was an existing PBIS creditor under the UFTA and successor liability, it did not decide whether the California District Court’s entry of default judgment against PBIS, which was entered after distribution of the AmTrust proceeds, rendered Odyssey an existing PBIS creditor.
- Subsequent Distribution by PBIS. Finally, the California District Court held that the distribution of the AmTrust proceeds rendered PBIS insolvent, because the distributions to Nagby and Dostalik rendered PBIS unable to pay the full amount owing under the Connecticut District Court judgment. Therefore, Odyssey was entitled to avoid the payment of the AmTrust proceeds to Nagby and Dostalik and to a money judgment under the UFTA against Nagby and Dostalik in the amount of the AmTrust proceeds distributed to them.
Article courtesy of David Simonds (Hogan Lovells) and Edward McNeilly (Skagit Law Group).