The opinion of the court was delivered by: JOHN L. CADEN
CADEN, United States Magistrate Judge.
Plaintiff Elizabeth Costle, Vermont Commissioner of Banking, Insurance and Securities, Receiver of Ambassador Insurance Company, brings this motion to disqualify the accounting firm of Johnson, Lambert & Capron from providing accounting consulting services to defendant Coopers & Lybrand, L.L.P.
An evidentiary hearing on this motion was conducted by the undersigned on October 28 and 31, 1994. Based upon the following findings of facts and for the reasons set apart below, plaintiff's motion to disqualify Johnson, Lambert & Capron is denied.
This multi-district litigation consists of a series of suits arising out of the insolvency and liquidation of Ambassador Insurance Company ("Ambassador") and its subsidiary, Horizon Insurance Company. Ambassador is currently in court-supervised insolvency proceedings.
In November 1983, pursuant to a court order, the Vermont Commissioner of Banking, Insurance and Securities the "Receiver") gained control over Ambassador's books, records and assets ($ 120 million). In the process of liquidating Ambassador, the Receiver is responsible for evaluating and paying claims against Ambassador as well as pursuing recovery of amounts due to Ambassador from various entities including reinsurers. Since 1983, the Receiver has paid out approximately $ 100 million in claims.
The Receiver is the plaintiff in one of the multi-district cases, Costle v. Chait (D.N.J. No. 85-8441), filed in May of 1985, in which Ambassador's former managers and former auditor, Coopers & Lybrand, are named as defendants. Coopers & Lybrand provided audit services to Ambassador prior to the Ambassador receivership (the final audit was performed on December 31, 1982). In Costle v. Chait, the Receiver alleges mismanagement, fraud and breach of fiduciary duty on the part of Ambassador's former managers. The Receiver further alleges that Coopers & Lybrand negligently failed to inform regulatory authorities of Ambassador's "true" condition. The Receiver seeks recovery for the insolvency or shortfall -- the amount due to claimants after Ambassador's assets have been exhausted. The estimated amount of the shortfall varied from a projected $ 20-$ 45 million in 1984 to a projected $ 100 million more recently. See Def.'s Memorandum. In Opposition to Motion to Disqualify at 4-5 (Oct. 5, 1994).
Johnson, Lambert & Capron ("JLC") has offices in Washington D.C.; Bethesda, Maryland; San Jose, California; Burlington, Vermont; and New York. Hearing Transcript ("Tr.") at 229-30. The firm has four partners, approximately 35 professionals and is one of the principal accounting firms doing work in Vermont. Tr. 111, 229.
At the heart of this disqualification motion are two professional contacts between JLC and the Receiver which, for convenience, will be characterized as engagements. In 1993, Deborah D. Lambert, the partner in charge of JLC's Vermont insurance practice, was retained by the Vermont Commissioner to perform audit work for Beverage Retailers Insurance Company Risk Retention Group - In Rehabilitation ("BRICO"). BRICO's statutory receiver is also the Vermont Commissioner of Banking, Insurance and Securities (referred to herein as the "Receiver" regardless if referenced in her capacity on behalf of BRICO or Ambassador). Secondly, in 1994, Lambert was contacted by Robert Savage (manager of the Ambassador receivership) to perform specific accounting services for the Ambassador receivership. Because of their significance to this motion, the two engagements are discussed with greater specificity below.
A. The JLC-Ambassador/RCA Engagement
Ambassador is a Vermont-domiciled casualty insurer and was placed into receivership by the Vermont Superior Court (Washington County) in 1983. The Ambassador receivership is organized with the Vermont Commissioner at the top of the hierarchy as the Receiver, George Bernstein as the court-appointed agent of the Receiver, Robert Savage as the full-time manager, and 17 employees.
Ambassador, a primary insurer, farms its insurance out to reinsurers. Consequently, a large portion of its assets is comprised of monies due to it from reinsurers. Accordingly, some of the Receiver's activities, inter alia, involve negotiation and settlement of disputes with reinsurers. On or about February 7, 1994, JLC (Lambert) was contacted by Savage to perform audit work with respect to one of Ambassador's reinsurers, Reinsurance Corporation of America ("RCA"). Tr. 181-82. RCA had informed the Receiver that it was unable to meet its obligations (i.e., to pay claims on behalf of Ambassador). RCA is a named defendant in proceedings instituted by the Receiver in Vermont state court. Because RCA's purported inability to meet its obligations was belied by its annual statements and balance sheets, the Receiver requested Lambert and her staff to investigate RCA's financial condition. Tr. 26.
To prepare Lambert for the RCA-Ambassador work, the Receiver provided her with RCA's annual financial statement (public information). Lambert and David Tatlock (a JLC associate in the Vermont office) placed a telephone call together to a RCA representative, during which JLC was denied access to RCA's books. Apart from this, no other work was done. Subsequently, the Receiver was informed that JLC could not do any more Ambassador-related work on her behalf.
B. The JLC-BRICO Engagement
BRICO, a Vermont-domiciled insurer, went into receivership on August 12, 1993. BRICO is in court-ordered rehabilitation pending the Receiver's recommendation on whether BRICO should continue its operations or undergo liquidation.
BRICO is a captive insurer -- all of its management functions are performed by Victor O. Shinnerer & Co., Inc. ("VOSCO"), a professional management company. VOSCO underwrites claims and receives premiums on behalf of BRICO as well as other insurance companies, pools these premiums and distributes them aliquot. Tr. 9.
JLC was initially retained, on or about October 21, 1993, by the Receiver to investigate the accuracy of VOSCO's allocation and management of BRICO's funds and accounts. On October 22, 1993, BRICO staff met with Lambert at JLC's Bethesda offices to discuss the VOSCO-related work. The ultimate objective was to gather information to help the Receiver determine whether or not to bring claims against VOSCO, in its capacity as management, for BRICO's condition. Tr. 15. Lambert, Savage and Hinchey spent approximately one week in ...