Oral Argument January 9, 2014
[Copyrighted Material Omitted]
Appeal from Thurston Superior Court. Docket No: 04-2-02427-4. Date filed: 11/02/2012. Judge signing: Honorable Wm Thomas Mcphee.
Christopher M. Alston and Jason R. Donovan (of Foster Pepper PLLC ), for appellant.
Robert W. Ferguson, Attorney General, and Marta U. DeLeon, Assistant, for respondent Mike Kreidler.
Victoria L. Vreeland (of Vreeland Law ), for respondent Cascade National Insurance Company.
AUTHOR: Stephen J. Dwyer, J. We concur: Ronald Cox, J., C. Kenneth Grosse, J.
[179 Wn.App. 854] ¶ 1
Insurance Commissioner Mike Kreidler and Bankruptcy Trustee James Feltman have likely never met. Nevertheless, the lengthy litigation between these two men--as stand-ins for two corporations (one iniquitous, both insolvent)--continues. Today, we bring the legal strife between these men one step closer to finality by affirming the superior court's ruling that Kreidler (as " Receiver" of Cascade National Insurance Company) acted lawfully in denying the claim of Feltman (as " Trustee" of the Estate of the bankrupt Certified HR Services, Inc., as assignee of causes of action from the insolvent Midwest Merger Management, Inc.) that Cascade owes $4.3 million to Midwest and, hence, to Certified. In affirming the superior court's decision, we hold both that the court did not abuse its discretion by confirming the Receiver's determination that the Trustee failed to prove his fraudulent transfer claim and that the court did not abuse its discretion in denying the Trustee's motion for discovery.
¶ 2 Cascade, which operated as a domestic stock insurance company in Washington, had a history of financial difficulties that prompted increased scrutiny from the Office of the Insurance Commissioner (OIC). On November 30, 2004, after notifying Cascade three times that it needed [179 Wn.App. 855] to cure a deficiency in its capital and surplus, the OIC obtained a superior court order appointing Kreidler, the Insurance Commissioner, as Receiver for the purpose of seizing Cascade. The court placed Cascade into receivership due both to Cascade's fragile financial condition and to questionable transactions between Cascade and Midwest. After spending nearly one year trying to rehabilitate Cascade, the Receiver petitioned the court for and obtained an order allowing it to liquidate Cascade.
¶ 3 Feltman is the Chapter 11 Trustee for the Estate of Certified HR Services, Inc., in a bankruptcy case pending in the United States Bankruptcy Court for the Southern District of Florida. In 2006, the Trustee, on behalf of Certified, entered into a settlement agreement with Midwest, which transferred and assigned to Certified all of Midwest's claims against Cascade. Subsequently, on
December 4, 2007,  the Trustee filed a proof of claim with the Receiver. The proof of claim was based on a fraudulent transfer theory and alleged, in pertinent part, the following:
Each of the transfers [from Midwest to Cascade] are fraudulent transfers under RCW 19.40.041 and 19.40.051 because a) each transfer was made without the Transferor receiving reasonably equivalent value from Cascade, and b) at the time of each transfer, the Transferor was i) insolvent and/or became insolvent as a result of each transfer, ii) engaged or was about to be engaged in a business or transaction for which its remaining assets were unreasonably small in relation to the business or transaction, and/or iii) intending to incur, or should have reasonably believed that it would incur, debts beyond its abilities to pay as they became due.
The Trustee sought to recover $4.3 million from the Receiver.
¶ 4 In order to understand the Trustee's claim against the Receiver, it is necessary to be aware of the history between Cascade and Midwest, and of the federal litigation [179 Wn.App. 856] in which they were embroiled. Anthony Huff  and Danny Pixler created Midwest to acquire Certified Services, Inc.; Certified HR Services, Inc.; and their affiliates, and to operate these companies as professional employer organizations (PEO). A PEO contracts with employers to provide payroll services and workers' compensation insurance coverage to their employees. Midwest would first take possession and control of all of the insurance premiums and fees collected by the PEOs from the employees and employers, and would then procure and service the workers' compensation insurance coverage.
¶ 5 In 2003, Midwest lost coverage from its major carrier that had been providing workers' compensation coverage for the PEOs. This left Midwest in need of a carrier willing to provide coverage for over 15,000 PEO employees in California and that was licensed to provide workers' compensation insurance in California--a difficult license to obtain. Midwest learned that Cascade, which was having financial problems and needed an infusion of funds to keep its capital and surplus levels above the regulatory minimums, had such a license. Midwest subsequently agreed to provide Cascade with capital and surplus in exchange for a sale or transfer of a percentage ownership interest, which would allow Cascade to stay operational so that it could provide insurance coverage for Midwest's California PEO operations.
¶ 6 In order to complete this transaction, the OIC required submission of certain financial records. Knowing that his name could not be tied to the transaction, Huff created Gudeman & Weiss, LLC (G& W), an entity he used to acquire the interest in Cascade and to conceal his involvement in the transaction. G& W had no assets, capital [179 Wn.App. 857] contributions, or financial ability to make such a purchase and, as a result, Huff and Midwest provided all of the funds that were paid to Cascade. Although Midwest claimed to be a lender to G& W, G& W never executed any promissory notes to Midwest and was never asked to reimburse Midwest. Midwest's infusion of capital into Cascade allowed Midwest to satisfy its obligation to procure workers' compensation coverage from a licensed insurer for the California PEO, thus allowing Midwest to continue to receive premiums from the California PEO. However, Midwest did not pay Cascade for all of the insurance coverage, which resulted in a $19,310,744 debt to Cascade.
¶ 7 Once Cascade went into receivership, the Receiver filed suit in federal court against Midwest and its operators, Anthony Huff, Sheri Huff,  and Pixler. The Receiver's claims included, among others, misappropriation, civil conspiracy, ...