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FOURTH DIVISION
FILED: 12/21/00

The People of the State of Illinois ex rel. Nathaniel S. Shapo, Director ofInsurance of the State of Illinois (Director), brought this action against thedefendant, Alpine Insurance Company (Alpine), seeking to conserve and liquidateAlpine's assets. Alpine sought to compel the Director to implement a proposedrehabilitation plan instead. The trial court entered summary judgment in favor ofthe Director, finding Alpine's proposed rehabilitation plan illegal, andsubsequently entered an order of liquidation, which it declined to stay. Alpinefiled this interlocutory appeal pursuant to Rule 307(a)(5) (166 Ill. 2d R.307(a)(5)), seeking reversal of those orders. For the reasons which follow, weaffirm.

Alpine, a stock, property, and casualty insurance company organized under the lawsof this State, suffers from certain financial difficulties. Based on an actuarialstudy commissioned by the Director, the firm of Deloitte & Touche concluded thatAlpine is insolvent by more than $43 million. In January 1999, the then ActingDirector of Insurance, Arnold Dutcher, filed a Verified Complaint for Conservationand Injunctive Relief pursuant to Article XIII of the Illinois Insurance Code (theCode) (215 ILCS 5/187 et seq. (West 1998)), alleging, inter alia, that Alpine'sfinancial condition rendered further transaction of business by the companyhazardous to its policyholders, its creditors, and the public. On January 8,1999, the trial court entered an agreed order of conservation, thereby authorizingthe Director to take possession and control of Alpine's property, business, books,records, accounts, assets, business, and affairs. As Conservator, the Directorconducted an investigation to determine Alpine's financial condition.

During this time, Alpine's representatives engaged in discussions with theDirector's staff regarding a possible plan for rehabilitation of the company. Specifically, Alpine divided its policyholders into two classes: (1) those havinginsurance through Alpine only (Alpine-only insureds); and (2) those having additional insurance through other carriers (Alpine multiple policy insureds). According to the plan, Alpine would first pay the claims of Alpine-only insureds,which it estimated to constitute about one-fourth of its policyholders. Alpineaverred that it had the resources to satisfy such claims and could completepayment by the year 2003. As to the other class, Alpine multiple policy insureds,the proposed plan required that they exhaust their other insurance coverage beforeseeking to recover on Alpine's policies. Once all loss and loss adjustmentexpenses were paid as to Alpine-only insureds, other carriers would then be ableto seek contribution from Alpine with respect to the claims of Alpine's multiplepolicy insureds. Alpine argued that its proposed plan was the only way to ensurethat the claims of its policyholders would be paid in full; whereas, liquidationwould result in its policyholders receiving only approximately 20 cents on thedollar.

The Director ultimately rejected Alpine's proposed rehabilitation plan asimpermissibly discriminatory and preferential, choosing to pursue liquidationinstead. In August 1999, the Director filed a Verified Complaint for Liquidationwith a Finding of Insolvency pursuant to section 188 of the Code (215 ILCS 5/188(West 1998)). In September 1999, Alpine conceded that it had financial deficitsand the trial court entered an order finding Alpine insolvent. However,previously, Alpine had filed a motion to compel the Director to rehabilitate,rather than liquidate, the company. In response, the Director filed a motion tostrike the motion to compel, characterizing it as the "functional equivalent of arequest for a writ of mandamus or a mandatory injunction." The Director argued,inter alia, that the Code granted him the discretion to choose liquidation overrehabilitation and that Alpine's proposed plan sought relief not provided for inthe Code. After oral argument, the trial court took the motions under advisementand scheduled the case for an evidentiary hearing on the merits of therehabilitation plan in order to determine whether the Director had abused hisdiscretion in choosing liquidation over rehabilitation. The parties sent noticeof the plan to all Alpine insureds some of whom filed objections to the plan withthe trial court.

Prior to the evidentiary hearing, the Director filed a motion for summary judgmenton the issue of the legality of Alpine's proposed rehabilitation plan. TheDirector argued that the plan discriminated among policyholders in that it gave apreference to Alpine-only insureds over Alpine multiple policy insureds inviolation of the ratable distribution scheme set forth in section 205 of the Code(215 ILCS 5/205 (West 1998)). The Director, therefore, asserted that the plan wasillegal and could not be implemented. Conversely, Alpine argued that: (1) neithersection 205 nor any other section of the Code prohibited the Director fromimplementing the plan; (2) the plan was not discriminatory in that it required allpolicyholders to seek other coverage before seeking to recover on Alpine'spolicies; and (3) assuming that the plan is discriminatory, the law permitsdiscrimination among members of a single priority where there is a reasonablebasis to do so.

After oral argument, the trial court took the Director's motion under advisement. On June 21, 2000, the trial court entered summary judgment in favor of theDirector, finding that "Alpine's proposed plan does impermissibly discriminateagainst policyholders with other insurance." It further held that the Code iscomprehensive and "clearly provides that all insureds have the equal right toparticipate in the distribution of assets, regardless of whether they only haveinsurance with Alpine or whether they are covered with additional insurance." Having ruled in favor of the Director on the issue of the rehabilitation plan'slegality and having previously found Alpine to be insolvent, the trial courtentered an order of liquidation, which it declined to stay. Alpine filed thisappeal, asserting that the trial court erred in entering summary judgment in favorof the Director because: (1) its proposed rehabilitation plan does notimpermissibly discriminate among its policyholders; (2) the trial court ignoredthe systematic preference for rehabilitation over liquidation; and (3) theDirector's reasons for rejecting the proposed plan were invalid.

Summary judgment is appropriate where the pleadings, depositions, admissions, andaffidavits, when taken together and in the light most favorable to the non-movant,show that there is no genuine issue of material fact and that the movant isentitled to judgment as a matter of law. 735 ILCS 5/2-1005(c) (West 1998); Majcav. Beekil, 183 Ill. 2d 407, 416, 701 N.E.2d 1084 (1998). Our review of a trialcourt's order granting summary judgment is de novo. In re Estate of Rennick, 181Ill. 2d 395, 401, 692 N.E.2d 1150 (1998).

The crux of this case is whether Alpine's proposed rehabilitation plan violatesthe distribution scheme set forth in Article XIII of the Code (215 ILCS 5/187 etseq. (West 1998)), the object of which is to secure a ratable distribution of aninsolvent insurance company's assets. People ex rel. Jones v. Chicago Lloyds, 391Ill. 492, 498, 63 N.E.2d 479 (1945), rev'd on other grounds, Morris v. Jones, 329U.S. 545, 91 L.Ed. 488, 67 S.Ct. 451 (1947). Article XIII was designed to providea comprehensive, orderly and efficient procedure for liquidating or rehabilitatinginsurance companies while protecting the rights of interested parties. In reLiquidation of Security Casualty Co., 127 Ill. 2d 434, 447, 537 N.E.2d 775 (1989). In order to avoid preferential treatment of creditors, the Code protectsindividual policyholders and other claimants without permitting certain classes ofcreditors to place themselves in a superior position. In re Liquidation ofCoronet Insurance Co., 298 Ill. App. 3d 411, 418, 698 N.E.2d 598 (1998); LincolnTowers Insurance Agency, Inc. v. Boozell, 291 Ill. App. 3d 965, 969-70, 684 N.E.2d900 (1997).

Section 205 of the Code governs the priority of distribution of an insolventinsurance company's assets. 215 ILCS 5/205(1) (West 1998). It applies in thecontext of either rehabilitation or liquidation (see 215 ILCS 5/192, 205, 210(West 1998); see also In re Liquidation of Reserve Insurance Co., 122 Ill. 2d 555,566, 524 N.E.2d 538 (1988)), and establishes the following priority ofdistribution:

"(a) The costs and expenses of administration, * * *.

(b) Secured claims, * * *, that are secured by liens perfected prior to the filingof the complaint.

(c) Claims for wages actually owing to employees for services rendered within 3months prior to the date of the filing of the complaint, * * *.

(d) Claims by policyholders, beneficiaries, insureds and liability claims againstinsureds covered under insurance policies and insurance contracts issued by thecompany, * * *.

(e) Claims by policyholders, beneficiaries, and insureds, the allowed values ofwhich were determined by estimation under paragraph (b) of subsection (4) ofSection 209.

(f) Any other claims due the federal government.

(g) All other claims of general creditors * * *.

(h) Claims of guaranty fund certificate holders, guaranty capital shareholders,capital note holders, and surplus note holders.

(i) Proprietary claims of shareholders, members, or other owners." 215 ILCS5/205(1)(a)-(i) (West 1998).

The claims of Alpine's policyholders fall under section 205(1)(d).

In support of its contention that its proposed rehabilitation plan is legal,Alpine argues, in relevant part, that: (1) the proposed plan treats allpolicyholders equally; (2) the Code does not prohibit classifications within apriority level; and (3) assuming the plan is discriminatory, such discriminationis allowed where it is necessary to serve policyholders' interests and is notunreasonable or arbitrary. We address these contentions in turn.

Alpine first argues that its proposed plan of rehabilitation does notimpermissibly discriminate among its policyholders, but rather treats them thesame, because it requires all policyholders to look to any other insurancecoverage that they have prior to seeking coverage from Alpine. Alpine avers thatits plan is thus wholly uniform, an argument we find to be disingenuous at best. As the Director correctly argues, "exhausting non-existent insurance coverage as aprecondition to eligibility to participate in a distribution of Alpine assets doesnot result in equality of treatment of policyholders." We, therefore, rejectAlpine's contention.

Alpine next argues that the Code does not prohibit classifications within apriority level. It thus contends that it is permissible to divide the class ofpolicyholders into two groups, Alpine-only insureds and Alpine multiple policyinsureds. It further argues that its plan does not tamper with the distributionscheme set forth in section 205 of the Code because it has no effect on theprioritization as between classes, but rather within a particular class only. Conversely, the Director argues that the Code requires ratable distribution ofAlpine's assets to the entire class of policyholders, both Alpine-only insuredsand Alpine multiple policy insureds. We agree with the Director.

The Illinois supreme court has held that "[s]ection 205(1) establishes a rule ofabsolute priority." (Emphasis added.) In re Liquidation of Security Casualty Co.,127 Ill. 2d at 444. Further, "[b]ecause the legislature has provided acomprehensive statutory scheme governing the distribution of assets from aliquidated insurer's estate, equitable relief different from that provided bystatute [is] not available * * *." In re Liquidation of Security Casualty Co.,127 Ill. 2d at 447; see also In re Liquidation of Coronet Insurance Co., 298 Ill.App. 3d at 417. The legislature has determined that the only time the Directormay, with the trial court's approval, take into consideration the specialcircumstances of a particular claimant and provide preferential treatment isduring the period of appeal from an order directing liquidation which has not beenstayed. See 215 ILCS 5/190.1 (West 1998).

Alpine's proposed rehabilitation plan creates a new class of claimants altogether,namely Alpine multiple policy insureds, and subordinates those claims to those ofAlpine-only insureds in direct contravention of the Illinois supreme court'sholding that "[s]ection 205(1) establishes a rule of absolute priority" (In reLiquidation of Security Casualty Co., 127 Ill. 2d at 444). Section 205(1)(d)simply does not provide for the subordination of the claims of multiple policyclaimants to those of single policy claimants. In other words, the Code does notprovide for the punishment of multiple policy insureds based on the fortuitouscircumstance of their seeking out additional coverage. We thus find Alpine'sargument to be without merit.

Lastly, Alpine argues that, when necessary to serve the interests of policyholdersand as long as not unreasonable or arbitrary, discrimination among claimants ispermissible. In support of this contention, Alpine relies heavily on Carpenter v.Pacific Mutual Life Insurance Co. of California, 10 Cal. 2d 307, 74 P.2d 761(1937), aff'd, Neblett v. Carpenter, 305 U.S. 297, 83 L.Ed. 182, 59 S.Ct. 170(1938). We find Carpenter to be distinguishable from the instant action and,therefore, decline to adopt its reasoning.

Carpenter involved an insurance carrier, Pacific Mutual, which engaged in thebusiness of life, health, and accident insurance. Pacific Mutual became insolventby virtue of the fact that it had issued a large number of non-cancellableaccident and health policies for which it charged insufficient premiums, causingan inability to maintain lawful reserves backing the policies. The insurancecommissioner of the state of California began conservation proceedings againstPacific Mutual and eventually instituted a plan of reorganization, whereby alllife policies would be reinsured by a newly formed company under the same terms asissued; whereas, all non-cancellable policies would be reinsured at existingpremium rates, but disability payments on the policies would be assumed on areduced basis. Any policyholder could opt out of the plan by filing a claim withthe commissioner in order to receive the liquidated value of his policy.

Alpine relies on Carpenter because the court maintained that liquidation is a lastresort and that the business should be preserved if possible. Carpenter, 10 Cal.2d at 329, 74 P.2d at 775. However, we note that California insurance lawrequires that its commissioner first attempt to rehabilitate the business of thecompany by entering into reinsuring or rehabilitation agreements. Carpenter, 10Cal. 2d at 331, 74 P.2d at 775. Only if the commissioner fails to accomplishreinsurance or rehabilitation and further efforts would prove to be futile, may hepursue liquidation. Carpenter, 10 Cal. 2d at 331, 74 P.2d at 775. Such is notthe case under Illinois law. Section 188 of the Code (215 ILCS 5/188 (West 1998))sets forth the grounds for either liquidation or rehabilitation, but does notmandate which should be pursued under what circumstances. Rather, the Directordecides what relief to seek based on the circumstances of a given case. Thus,Carpenter is inapplicable to the instant action.

Based on the foregoing, we find that the trial court did not err in enteringsummary judgment in favor of the Director, finding Alpine's proposedrehabilitation plan impermissibly discriminatory and therefore illegal. For thisreason, we need not address the remainder of the arguments raised by the partiesin their briefs. The trial court's order of summary judgment and order ofliquidation are affirmed.

Affirmed.

SOUTH and BARTH, JJ., concur.