The opinion of the court was delivered by: Senior Judge Friedman
BEFORE: HONORABLE DAN PELLEGRINI, Judge, HONORABLE JOHNNY J. BUTLER, Judge, HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge.
Kingsway Financial Services, Inc. (Kingsway) and Kingsway America, Inc. (Kingsway America) have filed preliminary objections in the nature of a demurrer to the petition for review (Petition) filed in this court's original jurisdiction by the Commonwealth of Pennsylvania, Insurance Department (Department). We sustain the preliminary objections and dismiss the Petition with respect to Kingsway and Kingsway America.
The Department alleges the following.*fn1 Kingsway acquired control of Lincoln General Insurance Company (Lincoln General) in 1998. Kingsway is an insurance and financial services holding company incorporated in Ontario, Canada. Kingsway America is a Delaware corporation and a wholly-owned subsidiary of Kingsway. Walshire Assurance Company (Walshire) is a Pennsylvania corporation and a wholly-owned subsidiary of Kingsway America. Walshire is the sole shareholder of Lincoln General, an insurance company domiciled in Pennsylvania.
In 2005, Lincoln General began experiencing financial distress, and, in March 2009, Lincoln General signed a Letter Agreement with the Department to "run-off" Lincoln General's book of business. Lincoln General subsequently undertook a claim-by-claim review to ascertain the adequacy of its reserves. Before Lincoln General completed its review, Kingsway decided to divest its entire interest in Lincoln General by donating 226,112.55 shares (5%) of Walshire's stock, plus $20,000, to each of twenty charities. During the divestiture process, Kingsway informed the Department of the transaction.
On October 20, 2009, the Department sent a letter informing Kingsway that the transaction was illegal. Kingsway rejected the Department's position in an October 21, 2009, response. On October 26, 2009, the Department advised five of the charities known to have received the donation to return the Walshire stock to Kingsway. At least one charity attempted to do so, but Kingsway refused to accept it.
On November 20, 2009, the Department filed its Petition with this court. The Department alleges that the transaction violated section 1402(a)(1) of the Act known as the Insurance Holding Companies Act (Act),*fn2 which prohibits a person from entering into an agreement to "acquire control" of a domestic insurer unless (1) the person has filed with the Department and sent to the insurer a statement containing certain information, and (2) the agreement or acquisition has been approved by the Department. 40 P.S. §991.1402(a)(1). The Department refers to this filing as a Form A filing.
The Department also alleges that the transaction violated section 1405(a)(2) of the Act, which prohibits certain transactions "involving a domestic insurer and any person in its holding company system" unless (1) the insurer has given prior written notice to the Department, and (2) the Department has not disapproved it. 40 P.S. §991.1405(a)(2). The Department refers to this filing as a Form D filing.
Finally, the Department alleges that the transaction violated section 205(a) of the GAA Amendments Act of 1990 (GAA Act),*fn3 which states that any "asset transfer . of any insurance corporation" shall become effective only if approved by the Department.
Based on these allegations, in Count I of the Petition, the Department seeks a declaration that Kingsway's divestiture of the Walshire stock was illegal. In Count II of the Petition, the Department seeks an injunction to "unwind" the transaction. In Count III of the Petition, the Department seeks attorney fees based on section 1402(f)(3) of the Act, 40 P.S. §991.1402(f)(3) (stating that the Department may retain at the acquiring person's expense any attorneys not otherwise a part of the Department's staff as may be reasonably necessary to assist the Department in reviewing the proposed acquisition of control).
Kingsway and Kingsway America filed preliminary objections in the nature of a demurrer. With respect to Counts I and II, they ask this court to examine the plain language of the applicable statutes. First, section 1402(a)(1) of the Act pertains only to agreements to "acquire control" of a insurer, and, in this case, the charities received only 5% of Walshire stock, not enough for control of Lincoln General. Second, section 1405(a)(2) of the Act pertains to transactions "involving a domestic insurer and any person in its holding company system," but the transactions in this case involved Kingsway America, which is not a domestic insurer, and charities that are outside the Kingsway holding company system. Third, section 205(a) of the GAA Act pertains only to the transfer of assets of insurance corporations, and the Walshire stock was an asset of Kingsway America, which is not an insurance corporation as defined by the GAA Act. With respect to Count III for attorney fees, section 1402(f)(3) of the Act allows the Department to retain attorneys "at the acquiring person's expense," and neither Kingsway nor Kingsway America acquired control of Lincoln General in the transaction.
I. Section 1402(a)(1) of the Act
Kingsway and Kingsway America argue that section 1402(a)(1) of the Act does not apply to the divestiture of Walshire ...