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The California Supreme Court gut-punched state Attorney General Bill Lockyer on Monday by putting limits on his ability to go after insolvent insurers on behalf of defrauded policyholders. The justices ruled unanimously that Lockyer couldn’t pursue a claim under the California False Claims Act because the assets in question aren’t state funds. They also restricted his remedies under the state’s unfair competition laws by allowing him to seek only civil penalties and, possibly, injunctive relief. Even so, Lockyer spokesman Tom Dresslar put a positive spin on the 28-page decision, saying that the AG is “gratified that the justices recognize” that he “has a role to play in these cases. The federal district court wanted to completely shut the door [on him].” State of California v. Altus Finance, 05 C.D.O.S. 7240, stems from the collapse of the Executive Life Insurance Co., a California corporation with about 300,000 insured policyholders. The state’s insurance commissioner seized Executive Life’s assets in 1991 and put the company into a conservatorship. Subsequent purchasers of Executive Life’s assets, it was discovered, were headquartered in France, which violated state and federal rules prohibiting foreign entities from owning, operating or controlling Californian or American insurers. The insurance commissioner sued in February 1999 alleging fraud, while the AG intervened in a so-called qui tam action the same month claiming damages in excess of $2 billion. The suits were eventually moved to federal court, where a trial court judge threw out the AG’s claims, saying that the insurance commissioner, as conservator and liquidator of Executive Life’s assets, had “exclusive authority” to litigate such matters. The case was later referred to the state Supreme Court by the 9th U.S. Circuit Court of Appeals to determine whether the AG’s office had any authority to pursue claims involving insolvent insurers. The Supreme Court responded by saying Lockyer had no authority to file suit under the False Claims Act because the company assets held by the insurance commissioner never became part of the public treasury. “These proceeds were not transferred to the state’s general fund, but rather were initially invested in an escrow account established by the [insurance] commissioner, and were ultimately conveyed to private corporations,” Justice Carlos Moreno wrote for the court. “At no time did these funds in any sense become public funds.” He pointed out, though, that the ruling doesn’t let any alleged wrongdoers escape liability, what with the insurance commissioner still seeking substantial compensatory and punitive damages. The court reached a mixed conclusion on the AG’s right to pursue claims under the state’s unfair competition laws. Going for civil penalties and, perhaps, injunctive relief is permissible, the justices held, but restitution is not. “It is true that the attorney general is the state’s chief law enforcement officer and that restitution may have a collateral law enforcement effect, punishing the wrongdoer against whom restitution is sought,” Moreno wrote. “But the primary purpose of the attorney general’s attempt at restitution is to recover lost property on behalf of an insolvent insurer’s creditors and policyholders. “As such,” Moreno continued, “he seeks to perform an action that is quintessentially within the scope of the [insurance] commissioner’s power as conservator and trustee of the insolvent company.” The justices held, however, that seeking civil penalties of $2,500 for each transgression differ in that they “are not primarily concerned with restoring policyholders’ or creditors’ property,” but rather for “protecting the beneficiaries of the insolvent insurance company.” Injunctive relief, the court ruled, could be sought if the AG is fulfilling a law enforcement function of protecting the public and preventing future wrongdoing, but not in any way that would trespass on the insurance commissioner’s turf. Lockyer spokesman Dresslar said the AG “definitely” intends to pursue civil penalties and “do everything he can to maximize recovery.” James Clark, a partner at Los Angeles’ Gibson, Dunn & Crutcher who represented some of the defendant companies, said the decision “defines the limits on, essentially, duplicitous litigation between two of the elected, statewide constitutional officers.” He called the ruling “good for the state because it really puts the burden on the insurance commissioner to do the job he’s supposed to do and lets the courts supervising the rehabilitation of insurance companies do their jobs.” Justices Ming Chin and Kathryn Mickle Werdegar didn’t participate in the case for unexplained reasons. They were replaced by Justices Kenneth Yegan and Laurie Zelon, both of Los Angeles’ 2nd District Court of Appeal.

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