ALBANY, N.Y., October 15 – The New York State Court of Appeals, in a unanimous decision, has ruled that the New York Liquidation Bureaus is not a state agency, and therefore not subject to audit by the New York State comptroller.

In Dinallo v. DiNapoli (formerly Serio v. Hevesi) the court found that the superintendent of insurance, when acting as receiver for insolvent insurance companies, and the New York Liquidation Bureau, which runs those companies on a day-to-day basis, act in a private, not governmental, capacity. It also said that the superintendent of insurance, when acting as a litigator, is not an officer, and is not administering state monies.

The issue in the case was whether the state comptroller had the authority to audit the performance of the bureau. The bureau refused to provide all documents and employees sought by the auditors, following which the comptroller issued subpoenas to the superintendent of insurance and bureau officials. The superintendent opposed the subpoenas, contending that the bureau is not a state agency and the superintendent is not a state officer when acting in his capacity as liquidator of insolvent insurers, under the supervision of the Supreme Court, as opposed to his administrative capacity as regulator of the insurance industry in New York.

The Supreme Court quashed the subpoenas, saying the money in his custody as liquidator is neither state money nor money under the superintendents control in a representative capacity as a state officer. The superintendentis a de facto receiver or administrator of the assets of an insolvent insurer subject to the control of the court.

The Appellate Division reversed and reinstated the subpoenas in a 3-2 decision, saying that the comptrollers power to audit encompassed all assets held by the superintendent, including abandoned property reports of open and closed insurer estates.

The recent Court of Appeals decision by Judge Eugene F. Pigott, Jr. states, The comptroller asserts that his constitutional and statutory authority to pre-audit bureau expenditures and post-audit the financial management and operational practices of the bureau is derived from Article V, Section 1 and State Finance Law Section 111, respectively. Both provisions relate to the comptrollers express authority to pre-audit certain expenditures. The comptrollers asserted authority to post-audit is derived from his implicit constitutional authority to post-audit funds under state control and his express constitutional power to audit all official accounts.

In 1939, the Legislature passed State Finance Law Section 111, the statutory counterpart to article V, Section 1, to further delineate and designate the comptrollers re-audit authority. The provision states that: No moneys of the state, including moneys collected in its behalf, and no moneys in the possession, custody or control of any officer, agent, or agency of the state in his or her representative capacity, and no moneys in or belonging to any fund or depository, title to which is vested in the state, shall hereafter be paid, expended or refunded except upon audit by the comptroller.

The comptroller has, on certain occasions upon the consent of the bureau, post-audited the bureaus financial management and operating practices. The first of such post-audits was conducted in 1976; prior to that time, the bureau operated without any pre-audits or post-audits by the comptroller. Indeed, this is the first time the comptroller has sought to pre-audit bureau expenditures, who now contends that any moneys expended by the bureau without a pre-audit are void. Our interpretation of the constitutional and statutory provisions before us does not support such an argument.

Bureau Funds Not Under State Control

We now hold that because the liquidation of a distressed insurer has no impact on the state fisc, it does not implicate the comptrollers constitutional and statutory authority to superintend the fiscal affairs of the state, and therefore the comptroller lacks the authority to audit the bureaus. Specifically, neither article V, section 1 nor State Finance Law Section 111 grants the comptroller the power to audit the bureau because assets of a distressed insurer constitute neither money(s) of the state nor money(s) under (state) control.

We recognize that the statutory framework of the Insurance Law grants the superintendent legal title to the assets of the insolvent insurer; however, equitable title remains with the distressed insurer for distribution to the creditors and policyholders.

The comptroller, citing State Finance Law Section 111, argues that the assets of a liquidated insurer constitute moneys in the possession, custody or control of the superintendent in his representative capacity as an officer of the state. We disagree. When acting as liquidator of a distressed insurer, the superintendent operates as a statutory receiver who stands in the shoes of a private entity and takes immediate possession and control of the assets and proceeds to a liquidation of its affairs. Indeed, the superintendent as liquidator occupies a legal status that is separate and distinct from the superintendent of insurance as the public official charged with regulating the insurance industry generally. Thus, while the superintendents role as liquidator is judicial and private, his role as regulator and supervisor is administrative and public. Consequently the superintendent as liquidator is not a state officer but rather one who acts on behalf of a private entity.

Bureau Not a State Agency

Nor do we agree that the bureau is a state agency subject to audit by the comptroller, the decision states. A state agency is defined as a board, bureau, division, commission, committee, council, office, or other governmental entity performing a governmental or proprietary function for the state. The bureau does not perform a governmental or proprietary function for the state, but rather runs the day-to-day operations of private businesses in liquidation pursuant to Supreme Court order. The bureau is not part of the Insurance Departments budget, operates without the benefit of state funds, maintains its own errors and omissions coverage, and is represented by its own private counsel, not the attorney general, as is normally the case when a state agency is sued. Thus, the bureau is not a state agency within the ambit of State Finance Law. To hold otherwise would be to contravene Article V, Section 1s prohibition against the Legislature assigning to the comptroller administrative tasks that are not incidental to his duty to superintend the fiscal concern of the state.

Because the superintendent as liquidator is neither a state officer, nor the bureau a state agency, State Finance Law does not apply to either the superintendent or the bureau. Section 121 permits the comptroller to audit those funds governed by State Finance Law, which applies to money(s) which (have) not been given, granted, or bequeathed to the stateand the ownership and equitable title of which belongs to an individual or organization other than the state, but which is being held by an agency or officer of the state.

Finally, the comptroller lacks the authority under the Abandoned Property Law to conduct the broad audit functions he seeks to implement in this case. Therefore, Supreme Court properly determined that the subpoenas issued here were overly broad.

Based on the foregoing, the Appellate Divisions order should be reversed, with costs, and the judgment of Supreme Court should be reinstated.

The dissenters said the decision conflicts with precedent and effectively undermines the undisputed authority of the Supreme Court to administer liquidation proceedings. They argued the bureau is not a state agency, the superintendent acting as liquidator is not a state officer, and the funds at issue are not under his control because it is the Supreme Court, subject to this courts appellate review, not the superintendent, who controls the assets of insolvent insurance companies involved in rehabilitation or dissolution by directing the manner in which payments and dividends to creditors shall be made.

Bureau Comments On Decision

According to Erin Carney, spokesperson for the New York Liquidation Bureau: We are extremely gratified by the unanimous ruling by the Court of Appeals. The court confirmed that the insurance superintendent, when acting as receiver for insolvent insurance companies, and the New York Liquidation Bureau, which runs those companies on a day-to-day basis, act in a private, not governmental, capacity. The decision found that the superintendent when acting as liquidator is not a state officer and is not administering state monies. As the court recognized, the bureaus private and independent status benefits creditors of the insolvent insurance companies and protects New York States government and taxpayers.

We have great respect of the State Comptrollers Office and the essential role it plays in oversight of state agencies. But declaring the Liquidation Bureau a state agency would have been counter to the law and would have created enormous legal problems and potentially saddled state government with financial obligations of the failed insurance companies that the Liquidation Bureau operates. It could also interfere with efforts to expeditiously privatize failed companies, Carney stated.

Although this case was about far more than transparency and outside oversight, transparency and accountability are nonetheless critical elements in successfully fulfilling the bureaus legal responsibilities. Since his appointment in April 2007, Mark G. Peters, special deputy superintendent in charge of the New York Liquidation Bureau, has already made substantial progress in reforming the bureau. Those reforms include installing new management, hiring independent certified public accountant to conduct a top to bottom audit of the bureau, reconstituting the hiring of outside attorneys so that the process is based solely on merit, speeding up the payouts to creditors of insolvent and impaired insurance companies, and moving forward in other insolvencies, one of which has languished for more than 20 years, Carney said.

To institutionalize the reforms underway at the bureau, we will proposed legislative amendments to the Insurance Law which require annual audited financial statements for the insolvent insurance companies administered by the bureau. We look forward to working with the Legislature to enact these legislative amendments.