inherent powers. See, e.g., Dale M. ex rel. Alice M. v. Board of Educ. of Bradley-Bourbonnais High Sch. Dist. No. 307, 282 F.3d 984 (7th Cir. 2002); SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985); Eash v. Riggins Trucking, Inc., 757 F.2d 557, 564 (3rd Cir. 1985). A prominent use of inherent power to streamline litigation was upheld by the Seventh Circuit. Dale M., ex rel. Alice M. v. Board of Educ. of Bradley-Bourbonnais High Sch. Dist. No. 307, 282 F.3d 984 (2002). In Dale M., the court affirmed the district court's order to an attorney to return attorney's fees that his client had been awarded and had turned-over to the attorney, when the underlying judgment was reversed. Id. at 985-86. Admittedly, the party wronged by the judgment could have brought a suit in restitution against the attorney's client, who in turn could have sued the attorney for recoupment on the theory of unjust enrichment. Id. at 986. But the court concluded that it was proper for the district court, exercising its inherent powers, to forego such circuitry by ordering the attorney to remit the money directly to the wronged party. Id. The U.S. Supreme Court has endorsed the use of inherent powers to avoid "extensive and needless satellite litigation." See Chambers v. NASCO, Inc., 501 U.S. 32, 51 (1991). However, because "[i]t is only one short step from the assertion of inherent power to the assumption of absolute power," State ex rel. Selleck v. Reynolds, 158 S.W. 671, 681 (Mo. banc 1913) (Brown, J. concurring), rarely should a court invoke its inherent powers. Higgins v. Dir. of
Revenue, 778 S.W.2d 24, 26 (Mo. App. 1989). The Director, as respondent, claims that, without the power to surcharge, a trial court would not be able to rectify ills that the Insolvency Code was designed to prevent. It is true that it would be more difficult. If the court lacked a surcharge power, the only impetus for relief could come from creditors of the company. Such action would be attenuated because the receivership's creditors would have a weak incentive to file suit if their claims were for minor sums. It is essential for a trial court to have the power to surcharge, lest the assets of a mortally wounded insurance company be frittered away. By giving the court supervisory authority over receiverships, the legislature generally intended the court to prevent this unreasonable outcome. See Abrams v. Ohio Pac. Express, 819 S.W.2d 338, 341 (Mo. banc 1991) (statutes are to be interpreted to avoid unreasonable results). Although, the Supreme Court of Missouri has never held that a trial court has the power to surcharge an SDR, in Lucas v. Manufacturing Lumbermen's Underwriters, however, the Court did tacitly approve of a receivership court surcharging a Superintendent of Insurance (now the Director of Insurance) for exceeding the scope of his authority, thus implying that a separate suit in a separate court was unnecessary. 163 S.W.2d 750 (Mo. 1942). In Lucas, the Superintendent of Insurance (Robertson) filed exceptions to the former superintendent's report of the expenses incurred by the former superintendent in handling the affairs of an insurance company that was placed in temporary receivership. Id. at 752. The former superintendent was temporarily placed in charge of the insurance company. Id. at 756. A court order authorized the former superintendent to pay employees. Id. at 755. The court was unable to rule on the propriety of either attempting to liquidate or rehabilitating the insurance company because of bankruptcy petitions, voluntary and involuntary, filed in federal court and because of a pending motion for change of venue. Id. at 755f0 . Besides collecting premiums and processing claims and paying employees, the former superintendent entered into a reinsurance agreement to maintain the status quo. Id. at 756-57. Citing a public policy favoring rehabilitation, the Court reversed the surcharge because it held that the former superintendent's actions were within the scope of his authority. Id at 759. If a surcharge action in Lucas brought within the ambit of the receivership proceeding, as opposed to a separate lawsuit, was improper, the Court's prolonged discussion of the former superintendent's authority to reinsure and to pay employees was otiose. If the trial court didn't have jurisdiction to surcharge, the Court had an obligation to raise the issue sua sponte. Commercial Bank of St. Louis County v. James, 658 S.W.2d 17, 21 (Mo. banc 1983). It didn't. This court sees no distinction between filing exceptions to a final report of a receivership, as was done in Lucas, and the Receiver's request for a hearing on the audit report, with the possibility of a surcharge, as was done here. The power to impose a restitutionary surcharge is similar to two inherent powers that courts definitely have. A
court has the power to order a party who received money under a mistaken judgment to disgorge it. See State ex rel. Util. Consumers' Council of Mo., Inc. v. Pub. Serv. Comm'n, 585 S.W.2d 41, 59-60 (Mo. banc 1979). There is no reason why a supervising court can't do the same when an SDR wrongfully retains money paid over without final court approval. The reliance interests of a surcharged SDR are weaker than those of a party who has executed on a judgment later deemed mistaken. A court also has the inherent power to sanction bad faith litigation misconduct. Rea v. Moore, 74 S.W.3d 795, 799-800 (Mo. App. 2002) (per curiam). Other jurisdictions have recognized the inherent power to surcharge. The Sixth Circuit noted that a district court has "broad powers and wide discretion" deriving from the court's inherent power to fashion relief in an equity receivership proceeding. S.E.C. v. Basic Energy & Affiliated Res., Inc., 273 F.3d 657, 668 (6th Cir. 2001). It may adopt summary processes, "including the use of single receivership proceeding to resolve all claims." Id. "Such abbreviated procedures . . . advance the government's interest in judicial efficiency by reducing the time needed to resolve disputes, decreasing the costs of litigation, and preventing the dissipation of the receiver's assets. Id. Many state decisions say the same. The Supreme Court of Oregon affirmed a trial court's order that demanded that a former receiver repay money mistakenly paid to him and that barred any further payments to the former receiver for services performed until he complied with the court's order. Weber v. Empire Holding Corp., 41 P.2d 1084 (Or. 1935). The court stated, "That a court appointing a receiver has the unquestioned authority and it is its duty to compel a receiver, who has embezzled funds in his possession or wrongfully applied them to an improper or unauthorized use, to return the funds is beyond controversy." Id. at 1087. In a similar context, the Hawaii Supreme Court averred that "[I]t can scarcely be doubted" that a trial court has the inherent power not only to impose a surcharge on but also to remove a trustee that has breached his fiduciary duties. In re Holt's Trust Estate, 33 Haw. 352, 355-57 (Haw. Terr. 1935). "To hold otherwise would be to place an unwarranted and dangerous limitation upon the great powers which courts of equity have over trust estates." Id. "A receiver . . . is a fiduciary who, as an officer and representative of the court, acts for the benefit of all persons interested in the property . . . [and] may be surcharged . . . for a failure to properly carry out the duties imposed by the order of appointment." Shannon v. Superior Court., 266 Cal. Rptr. 242, 245-46 (Cal. Ct. App. 1990). See also Aviation Brake Sys. Ltd. v. Voorhis, 183 Cal. Rptr. 766, 769 (Cal. Ct. App. 1982) ("[U]pon the receiver's final report and account, the receiver in his personal capacity may be surcharged for losses to the receivership estate based upon misconduct or mismanagement"); N&G Taylor Co. v. Berger, 49 F.Supp. 524, 526 (D.Penn. 1943) ("An equity receiver who pays himself . . . without authorization [in good faith] does so at his own risk" and may be surcharged); Clark on Receivers section 419 (1969 ed.).
If the Insolvency Code only allowed a separate lawsuit brought by the Director of Insurance, the purported surcharge of Sauer was a nullity. See State ex rel. ISC Fin. Corp. v. Kinder, 684 S.W.2d 910, 913 (Mo. App. 1985). Sauer argues that the Insolvency Code implicitly stripped the supervising court of a surcharge power because, while it explicitly grants a broad array of powers to the receiver, it says nary a word about the supervising court's surcharge power. Section 375.1182 gives the Receiver (see section 375.1176.1) the power to audit the books of all agents of the insurer, section 375.1182.1(5); to file suits in the name of the insurer or in his own name, section 375.1182.1(12); and to "prosecute any action which may exist on behalf of the creditors, members, policyholders or shareholders of the insurer against any officer of the insurer, or any other person," section 375.1182.1(13). It also gives the Receiver "all powers now held or hereafter conferred upon receivers by the laws of this state[.]" Section 375.1182.1(22). Because the Receiver has these broad powers and the Code doesn't mention any similar judicial powers, it seems that the Receiver must initiate a separate action to recover any monies wrongfully retained by Sauer. Laying aside the argument that section 375.1182.1(12) seems to prove the opposite, Sauer's claim nonetheless fails. First, section 375.1182.1(12)-(13) seems to deal with suits by the liquidator against third parties, not against those administering the receivership. Section 375.1182.1(12) deals with the continuation the prosecution of suits that predated the petition to liquidate; and section 375.1182.1(13) of prosecuting suits "on behalf of the creditors, members, policyholders or shareholders of the insurer against any officer of the insurer, or any other person." The comma in section 375.1182.1(13) suggests that the "any other person" phrase is the object of the prepositional phrase "on behalf of," which means that section 375.1182.1(13) does not anticipate suits by the Receiver, as liquidator, against anyone except the officers of the insurance company. This is unlikely. Alternatively, if the comma was added because of a scrivener's error, then, applying ejusdem generis, section 375.1182.1(13) allows suit against any other person who is like the officer of the insurance company – a third party, not an SDR. To be sure, State ex rel. Missouri State Life Insurance Co. v. Hall seems to support Sauer's argument. 52 S.W.2d 174 (Mo. banc 1932). In Hall, the state sought a writ prohibiting the trial court from appointing an operating receiver, a temporary receiver. Id. at 176. The Insolvency Code then, as now (see section 374.010), charged the insurance department with "the execution of all laws now in force, or which may be hereafter enacted." Id. (citing Mo. St. Ann. section 5670 (since repealed)). The judge argued that he had the power to appoint an operating receiver because the Code was silent about the appointment of one. Id. at 177. The court disagreed. Id. It stated: "The enactment of this comprehensive Code made the state a real party in interest. The superintendent of insurance [the former name for the Director of Insurance] is the administrative officer, in charge of that interest, and courts are without authority to interfere
with his administration of the Code." Id. Nonetheless, Hall doesn't preclude a finding of inherent power to surcharge. Of paramount importance, the Court did not reject the trial court's general contention. Its justification for making the writ absolute was that "[i]nsurance companies exist and thrive on public confidence" and that the appointment of an operating receiver "would destroy that confidence." Id. That is, the trial court's inherent power to appoint a temporary receiver cannot frustrate a key objective of the Insolvency Code – shoring up confidence in the insolvent insurance company. Here, disallowing a surcharge of the SDR would reduce the amount of recovery by creditors of USPM. Conversely, allowing a surcharge would signal to future receivers that they best pursue their responsibilities carefully and diligently. The institutional capacity concerns underlying Hall are not present in this case. While the Department may have a better insight into the necessity of a receivership, given its agency expertise, it in no way follows that requiring the Receiver to file a separate lawsuit would better further the objectives of the Insolvency Code. It is also important that the Receiver and supervising court were of one mind about the propriety of a surcharge hearing before the court. This was not true in Hall, where the court and the Receiver were at loggerheads over appointment of an equity Receiver. 52 S.W.2d at 174. That section 375.1230 requires a copy of the audit report be filed not only with the Receiver but also with the court bolsters the conclusion that a trial court may surcharge an SDR. If the legislature had intended to repose the remedy of surcharge solely in the Receiver, requiring the auditor to provide a copy of the audit report to the court would make little sense. For, if the Receiver decided that a surcharge was inappropriate or unnecessary, the court could do nothing with the report. The very silence of the Insolvency Code argues in favor of the existence of the surcharge power. "While the provisions of the [I]nsolvency [C]ode do indeed prevail over the common law and any general statutes, . . . [w]here the insolvency code is silent, the common law and general statutory authority should be applied." Transit Cas. Co. ex rel. Pulitzer Publ'g. Co. v. Transit Cas. Co. ex rel. Intervening Employees, 43 S.W.3d 293, 303 (Mo. banc 2001). The Insolvency Code authorizes civil actions, section 375.1182.1(12)-(13), The power to compel an SDR to disgorge unjustified fees bears a resemblance to civil contempt, an inherent judicial power. State ex rel. Robinson v. Hartenbach, 754 S.W.2d 568, 571 (Mo. banc 1988). The goal of civil contempt is remedial, not punitive, Teefey v. Teefey, 533 S.W.2d 563, 565 (Mo. banc 1976), just as the goal of the surcharge here, taking the form of restitution, is to prevent an SDR from reaping a windfall. But the court's order was not explicitly aimed at Sauer. It ordered the Department to pay Sauer according to Sauer's terms; it didn't directly order Sauer
to accept payment only for work performed according to these terms. (As a fiduciary, of course, Sauer had an obligation to remit any overpayment.) In any event, while compensatory contempt (ordering a contemnor to compensate a party for losses caused by contumacious conduct) was theoretically available, K. Khan, Inc. v. Wortham, 983 S.W.2d 539, 541 (Mo. App. 1998), nothing requires a court to exercise its contempt power instead of imposing remedial sanctions. See Chambers, 501 U.S. at 46 ("The imposition of sanctions . . . transcends a court's equitable power concerning relations between the parties and reaches a court's inherent power to police itself, thus serving the dual purpose of 'vindicat[ing] judicial authority without resort to the more drastic sanctions available for contempt of court and mak[ing] the prevailing party whole for expenses caused by his opponent's obstinacy.'"). See also Roadway Express, Inc. v. Piper, 447 U.S. 752, 764-65 (1980). It would be perplexing for the court not to have the authority to command its officer (the SDR is an officer of the court), section 375.650.2, and its agent, see State ex rel. Weber v. Vossbrinck, 333 S.W.2d 298, 302 (Mo. App. 1960) (equating officer of court and agent of court), to make restitution; a key element of agency is relinquishment of control to the principal. Constance v. B.B.C. Dev. Co., 25 S.W.3d 571, 587 (Mo. App. 2000). See also State v. Wobler, 461 N.E.2d 927, 929 (Ohio Ct. App. 1983) ("A court has the inherent power to direct the officers of that court to perform their duties."); Ex parte Cross, 22 So.2d 378, 383 (Ala. 1945) (same). Cf. U.S. v. Bell, 120 F.Supp. 670, 672 (D.D.C. 1954) (court has inherent power "to discipline one of its officers whenever he has in his possession or under his control any property illegally withheld from its owner). This court holds that a trial court supervising an insurance company in receivership under the Insolvency Code has the inherent power to surcharge an SDR to prevent unjust enrichment when the Receiver requests a surcharge. (FN10) B. Extent of surcharge While the trial court did have the inherent power to surcharge Sauer in the form of restitution, its award of the auditor's costs and expenses and Receiver's counsel fees incurred since July 1999 was erroneous. Missouri, with few exceptions, follows the majority American rule that litigants pay their own attorney's fees. David Ranken, Jr., Technical Inst. v. Boykins, 816 S.W.2d 189, 193 (Mo. banc 1991), overruled on other grounds, Alumax Foils, Inc. v. City of St. Louis, 939 S.W.2d 907 (Mo. banc 1997). A court has the inherent power to sanction bad faith conduct, Rea v. Moore, 74 S.W.3d 795, 801 (Mo. App. 2002), probably by way of awarding attorney's fees, see Chambers v. N.A.S.C.O, Inc., 501 U.S. 32, 45-46 (1991), on analogy to the power to award attorney's fees related to prosecuting a contemnor. See Reed v. Reed, 10 S.W.3d 173, 182 (Mo. App. 1999). But it may do so only when the
sanctioned party acted in bad faith. Chambers, 501 U.S. at 45-46. Here, however, the trial court found there was insufficient evidence to conclude that Sauer acted in bad faith. The award of attorney's fees was thus impermissible, unless there was statutory authority for the court's action. There wasn't. The costs of the audit were also improperly awarded. Courts do not have the inherent power to award costs. Wirken v. Miller, 978 S.W.2d 60, 63 (Mo. App. 1998). A fortiori, courts cannot award costs when a statute -- section 375.1230 -- provides that costs are to be taxed to the receivership. Again, costs can be imposed as a sanction, but not without a finding of bad faith. Chambers, 501 U.S. at 48. Yet another reason the Receiver attorney's fees and the audit costs should not have been assessed against the SDR is that Receiver's counsel candidly admitted during oral argument that the fees and costs "were not specifically requested," and that if there was any concern, the Receiver was "willing to have the court vacate" those portions of the judgment. C. Immunity Sauer argues that either section 375.650(2) or section 375.1182.5 -- the two immunity provisions in the Insolvency Code(FN11) -- immunized her from liability for the acts and omissions upon which the court based its surcharge because they were committed in the performance of her duties as liquidator of USPM. "The . . . special deputy . . . when acting with respect to the liquidation shall enjoy absolute judicial immunity and be immune from any claim against [her] personally for any act or omission committed in the performance of [her] functions and duties in connection with the liquidation." Section 375.1182.5. On its face, the statute's absolute language ("absolute judicial immunity" from "any claim" for "any act or omission") seems to preclude holding an SDR personally liable. Sauer reads Section 375.1182.5 as literally providing "absolute judicial immunity." She is mistaken. The purpose of the immunity statute is not to protect receivers (and, derivatively, SDRs) from court-imposed surcharges, but rather to prevent receivers (and SDRs) from becoming "a lightening rod for harassing litigation." Kermit Constr. v. Banco Credito y Ahorro Ponceno, 547 F.2d 1, 3 (1st Cir. 1976). "[T]he receiver functions as an arm of the court by making decisions about the operation of a business that the judge otherwise would have to make." New Alaska Dev. Corp. v. Guetschow, 869 F.2d 1298, 1303 n.6 (9th Cir. 1989). Immunity, then, is designed to ease compliance with judicial orders by barring third parties from hindering an agent of the court when the agent is complying with court orders, not when the agent evades the spirit of those very orders. Section 375.650 provides two kinds of immunity -- absolute judicial immunity and personal immunity. Avidan v. Transit Cas. Co., 20 S.W.3d 521, 525 (Mo. banc 2000). The former, according to the SDR is enough to insulate her from
liability. But she misreads the statute. There is "absolute judicial immunity" but only "for any act or omission committed in the performance of [her] functions and duties in connection with the liquidation." See Section 375.650(2). No doubt it is possible, under the last antecedent rule, see Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., 186 F.3d 210, 215-16 (2nd Cir. 1999), that the prepositional phrase only applies to personal immunity. But the rule is not absolute and a better explanation for inapplicability of the phrase to absolute judicial immunity is that judicial immunity presupposes what the prepositional phrase requires. See State ex rel. Bird v. Weinstock, 864 S.W.2d 376, 382 (Mo. App. 1993) (noting that Supreme Court of Missouri has interpreted common law doctrine of judicial immunity as extending only to the particular functions of the judicial office, and not the office itself). Either way, the result is the same: no immunity for acts beyond the scope of one's authority. Context supports this interpretation. See J.B. Vending Co. v. Dir. of Revenue, 54 S.W.3d 183, 187 (Mo. banc 2001). The juxtaposition of an immunity provision and the provision making the SDR an officer of the court, Section 375.650.2, suggests that the SDR is immune only when doing acts that are those the court, or some other agent, would otherwise have to do itself. The SDR's interpretation would confer an unfettered license upon the Receiver (or, here, the SDR). For, while the court could use its contempt power to enforce compliance with its orders, it would be a dicey issue whether criminal contempt would be the only available check on the SDR's actions. This interpretation also undercuts her claim that the court may not surcharge an SDR because section 375.1182.1(12)-(13) provides the only proper remedy for breach of fiduciary duty by an SDR, namely, a separate lawsuit by the Department. A lawsuit wouldn't lie under Sauer's reading of the immunity statute. A state insurance receivership proceeding is similar to a federal bankruptcy proceeding: both the bankruptcy trustee and the Receiver (or SDR) have fiduciary obligations to the estates they are administering. As a trustee may be held personally liable for breach of these duties, Mosser v. Darrow, 341 U.S. 267, 274 (1951), so should an SDR. As a codification of the common law, section 375.1182.5 allows the court to hold an SDR liable for any acts beyond either statutory or judicial authority. The extent of this immunity was elaborated by the Wyoming Supreme Court in Krist v. Aetna Casualty & Surety. 667 P.2d 665, 667-69 (Wyo. 1983). There, a successor receiver filed a claim against a former receiver for failure to perform the duties of receiver resulting in damage to the receivership estate. Id. at
- The trial court entered judgment against the former receiver, and the Court affirmed the trial court, holding that
"When the receiver steps outside his authority granted to him by the court, he cannot claim the protection of the court and he can be sued as an individual." Id. at 671. See also INF Enter., Inc. v. Donnellon, 729 N.E.2d 1221, 1222 (Ohio Ct.
App. 1999) (disallowing immunity in the face of an immunity statute in no wise different from Missouri's (see Ohio Rev. Code Ann. Section 1125.33). As the New York Court of Appeals has opined: Receivership by its very nature involves weighty responsibility, and the failure to discharge it cannot be excused because of inadvertence, neglect, insufficient diligence or a misapprehension of legal principles. If it is shown . . . that the claim against the [r]eceiver arises by reason of some act or omission within the context of his official responsibilities as a [r]eceiver, the receivership property may be looked to for whatever damages plaintiff's may prove. However, if the plaintiff's claims against the [r]eceiver are occasioned by acts or omissions outside the purview of the court's orders to the [r]eceiver and the [r]eceiver is personally, as distinguished from officially, responsible in contract or tort then, since a suit against him personally would be justified, he may be surcharged in this action for such claims arising out of his defalcations, negligence, misfeasance or contract liabilities. 149 Clinton Ave. N., Inc. v. Grassi, 382 N.Y.S.2d 185, 189 (1976). Immunity from personal liability extends only to those acts (or omissions) stemming from a judicial order, either expressly or implicitly, but not to breaches of one's fiduciary duty to the court. See Kinder v. Mo. Dep't of Corrs., 43 S.W.3d 369, 369 (Mo. App. 2001). As a fiduciary, Sauer had a duty to exercise reasonable care, at a minimum. See Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). Avidan v. Transit Casualty Co. doesn't help Sauer. 20 S.W.3d 521 (Mo. banc 2000). In Avidan, the receiver terminated an employee who then sued the Receiver under 42 U.S.C. Section 1983. Id. at 523. The former-employee contended the termination was "willful, wanton, and malicious." Id. The trial court dismissed the action, finding the Receiver immune under section 375.650.2, which contained the "good faith" requirement, unlike section 375.1182.5. Id. at 524. Because section 375.1182.1(5) had not gone into effect yet, the court did not have to interpret section 375.1182.5. Id. at 525. The Court reversed because the former employee's petition alleged the Receiver acted in bad faith. Id. The commentary in Avidan does not support Sauer's position. First and foremost, the comments about section 375.1182.1.5 were obiter dicta. See id. at 524 n.4. The Court's dicta are not binding. State ex rel. Anderson v. Hostetter, 140 S.W.2d 21, 24 (Mo. banc 1940). At most, they have persuasive force. Id. Furthermore, the Court's comments were about the absence of a "good faith" requirement in section 375.1182.1(5), not the range of acts covered. To get from the Court's off-the-cuff comments, in a case in which the Receiver's act, terminating an employee, was within the Receiver's power, see State ex rel. Angoff v. Wells, 987 S.W.2d 411, 415-16 (Mo. App. 1999); section 375.954.3, to Sauer's conclusion requires an astounding leap of logic. Immunity doesn't attach unless the SDR's acts or omissions fall within the ambit of the protections of section 375.1182.5. An agent's acts are within the scope of authority only if (1) the acts are done by virtue of the agency relation (2) to further the interests of the principal. See Maryland Cas. Co. v. Hughes, 728 S.W.2d 574, 579 (Mo. App. 1987).
Sauer's alleged overcharging of the receivership was not motivated by a desire to further the interests of the principal. C. Did the court lack jurisdiction because its audit was ultra vires? Sauer concedes that section 375.1230 authorized the court to audit the SDR. But she argues that it doesn't countenance a managerial or performance audit, the kind rendered by the auditor; and that interpreting the statute as allowing a managerial audit might violate the separation of powers. MO. CONST. art. II, section 1. Sauer invokes the interpretive canon of constitutional avoidance, that when "a statute is susceptible of two constructions, by one of which grave and doubtful constitutional questions arise and by the other of which such questions are avoided, [the court's] duty is to adopt the latter." Harris v. U.S., 122 S.Ct. 2406, 2413 (2002). See also Blaske v. Smith & Entzeroth, Inc., 821 S.W.2d 822, 838-39 (Mo. banc 1991) (invoking doctrine not only where one interpretation raises "grave and doubtful constitutional questions" but also where one interpretation would be unconstitutional). Respondent retorts that the receivership system is one of shared power and that Missouri courts have never questioned its validity, making the canon inapplicable. Finding no support for Sauer's conflation of "audit" and "financial audit" and nothing prohibiting the judiciary from regulating its officers of the court, this court agrees with respondent. But we also find that, even if Sauer were correct, the surcharge hearing would still be valid. Does section 375.1230 authorize a managerial audit? Under section 375.1230, the court may "cause audits to be made of the books of the receiver." The meaning of "audit" is a question of statutory interpretation, i.e., a question of law. Carmack v. Mo. Dep't of Agric., 31 S.W.3d 40, 46 (Mo. App. 2000). "Audit" is undefined by statute. Webster's describes an audit as "an examination of an account of or of accounts by proper officers or persons appointed for that purpose, who compare the charges with the vouchers, examine witnesses, and report the results." Webster's New Universal Unabridged Dictionary 123 (2d ed. 1983). Black's Law Dictionary defines an audit as "[s]ystematic inspection of accounting records involving analyses, tests and confirmations." Black's Law Dictionary 131 (6th ed. 1990). These definitions don't suggest the clear-cut distinction Sauer makes between financial and performance audits, nor rule out the latter. If "audit" could only mean "financial audit," then section 23.160.1, which uses the term "management audit," would be nonsense, for a "management audit" would necessarily mean a "management financial audit," a contradiction in terms. That section 23.160.1 was invalidated for violating the separation of powers, see State Auditor v. Joint Comm. on Legislative Research, 956 S.W.2d 228, 233 (Mo. banc 1997), presupposes it was not nonsense to define "audit" as a management audit (in which case a "management audit" could mean a "management management audit," a redundancy but meaningful nonetheless).
Though section 375.1230 does state that any court-instigated audit must be "of the books," Sauer doesn't explain why an audit "of the books" cannot inquire into the veracity of the items listed. No accounting experts are cited that define "audit" in a way that reduces the auditor to a mere cipherer. Interpreting "audit" as countenancing a managerial audit wouldn't risk violating the separation of powers. See Mo. Const., art. II, section 1. Neither State Auditor v. Joint Committee on Legislative Research, 956 S.W.2d 228 (Mo. banc 1997), nor Director of Revenue v. State Auditor, 511 S.W.2d 779 (Mo. banc 1974), suggests the contrary. In the former, the Supreme Court of Missouri held that a legislative committee couldn't conduct a management audit of the state auditor, in whom the Missouri Constitution reposed sole authority to audit the executive branch. Here, the court didn't interfere with the constitutional authority of the Receiver to audit the SDR: the Receiver's power derived from statute, not the Constitution. Neither is the audit power here nearly as extensive as that in Joint Committee; in Joint Committee, the legislative committee could review entire agencies. 956 S.W.2d at 231. Here, the auditor is restricted to specific receiverships over which the court has specific statutory oversight authority. See section 375.1230. Also notable is that, unlike in Joint Committee, see id., no public monies are used to pay for an audit. Section 375.1230 ("The expenses of each audit shall be considered a cost of administration of the receivership."). Most importantly, an SDR, unlike the state auditor, is not a purely executive agent. The SDR is an officer of the court. Section 375.650.2. Historically, receiverships were initiated, supervised, and terminated by the courts under their equity powers. It must be remembered that the separation of powers doesn't create an impenetrable wall between the branches of government. Chastain v. Chastain, 932 S.W.2d 396, 398 (Mo. banc 1996). It is designed to prevent the concentration of unchecked power in one branch. Dabin v. Dir. of Revenue, 9 S.W.3d 610, 613 (Mo. banc 2000). Allowing the court to audit one of its officers with the purpose of ascertaining whether the officer breached his (or her) fiduciary duties doesn't interfere with the Director of Insurance's administration of receiverships. On the contrary: the information a court-initiated audit turns up can only help the Department monitor an SDR's performance. It is not an exercise of unbridled power for the court to order an audit of one of its officers, under a statute passed by the legislature, with the objective of determining whether the court needs to exercise its inherent powers to prevent unjust enrichment. The best reading of section 375.1230 is that the supervising court can order a performance audit or managerial audit of an SDR. II. SHOULD THE TRIAL JUDGE HAVE PRESIDED OVER THE TRIAL WHICH RESULTED IN A SURCHARGE?
The emotions in this case ran high and the briefs ran long. To bring three somewhat similar points into better focus, the court has chosen to treat as one point Sauer's basic contention that the trial judge should not have presided over the August trial which resulted in the over $770,000 surcharge judgment against her. She asserts under Rule 51.05, as a party, she was entitled to an automatic change of judge in this civil action based on a timely application; or under Section 508.090 et.seq., the judge was disqualified in this civil suit where she, as a party, showed she could not get a fair trial because of the bias, interest or prejudice of the judge; or under Rule 2.03 Canon 3(E)(1), the judge should have recused himself because his actions in this proceeding raised reasonable questions of his impartiality. A denial of a motion for change of judge is reviewed for an abuse of discretion, State v. Ayers, 911 S.W.2d 648, 651 (Mo.App. 1995), that is a mistaken finding clearly contrary to the facts and circumstances -- an act untenable and clearly against reason, working an injustice. See Egelhoff v. Holt, 875 S.W.2d 543, 549-50 (Mo.banc 1994). A.RULE 51.05 and CHAPTER 508 As explained infra, the court finds that pursuant to the canon cited above, the judge should have recused for the surcharge hearing, which ruling results in a reversal and remand. Even though the court does not decide the case on the issues of the SDR procuring a change of judge for the hearing, several observations should be made as to the SDR's allegations for relief under Rule 51.05 for change, and chapter 508 for disqualification. As stated earlier, the style of the case under review reflects the very nature of the lawsuit -- an action by the regulator, as statutory receiver to liquidate an insolvent insurance company. A hearing within that suit, which may result in a fiduciary being subject to a surcharge under the Insurance Insolvency Code, is not a typical stand-alone lawsuit and does not fit into the ordinary status of party's within a regular suit. The court observes the SDR, although later denominated as a defendant, is not and was not, made a party to the underlying suit (Director v. USPM); there is also a question as to whether a surcharge effort commenced within an insolvency proceeding, is even a civil action for purposes of invocation of the rule or civil suit for purposes of the statute. That a proceeding is not criminal does not necessarily make it a civil action. (See Hayes v. Hayes, 252 S.W.2d 323, 326-27 (Mo. 1952); Capps v. Capps, 715 S.W.2d 547, 552 (Mo.App. 1968); the fact the judge who presided over the liquidation ordered an audit does not decide the issue of his or her bias or prejudice. B.RULE 2.03 CANON 3E.(1) This brings the analysis to the SDR's bifurcated point that the canons applicable to judges required the court to recuse. Rule 2 covers the Code of Judicial Conduct. Canon 3 of Rule 2.03 states, "A Judge Shall Perform the Duties of Judicial Office Impartially and Diligently." The applicable subsection states: E.Recusal. (1) A judge shall recuse in a proceeding which the judge's impartiality might reasonably be questioned, including but not limited to instances where: (a) the judge has a personal bias or prejudice concerning a party or a party's lawyer, or personal knowledge of disputed evidentiary facts concerning the proceeding. . . ."
The SDR contends Wells should have recused because of bias and prejudice and because his actions went counter to the canon's language of avoiding raising a reasonable question of impartiality. The facts presented by the SDR in support of a recusal under this prong of the canon are summarized: the court's ex parte meetings and telephone conversations with counsel for the Receiver; numerous rulings and rulings on her motions, particularly for fees and costs which went against the SDR; ordering the audit and allowing audit costs to escalate into the hundreds of thousands of dollars; the court's comments rejecting Sauer's appointment for ProMed; the court's comments about holding the SDR in contempt and that her malpractice insurance should be paid up. 1.Bias and Prejudice "[A] disqualifying bias and prejudice is one with an extra[-]judicial source that results in the judge forming an opinion on the merits based on something other than what the judge has learned from participation in the case." State v. Cella, 32 S.W.3d 114, 119 (Mo. banc 2000) (citing State v. Nicklasson, 967 S.W.2d 596, 605 (Mo. banc 1998)). But see Liteky v. U.S., 510 U.S. 540, 555 (1994) ("[O]pinions formed by the judge on the basis of facts introduced or events occurring [during] the current proceedings, or of prior proceedings, do not constitute a basis for bias or partiality motion, unless they display a deep-seated favoritism or antagonism that would make fair judgment impossible"). Bias must stem from an extra-judicial source. State v. Hunter, 840 S.W.2d 850, 866 (Mo. banc 1992). Any information Judge Wells received from the auditor was not strictly extra-judicial. Sauer's citation to Haynes v. State is unavailing. 937 S.W.2d 199 (Mo. banc 1996). There, the Supreme Court of Missouri held that a trial court judge who had conducted a grand jury proceeding had an adversarial interest and, thus, couldn't preside over the defendant's trial. Id at 202. That Judge Wells made rulings against Sauer was not grounds for disqualification. See State v. Copeland, 928 S.W.2d 828, 841 (Mo. banc 1996). Neither were Wells' harsh words -- his admonition to Sauer to ensure that her malpractice insurance was paid up and his contempt threat. "[E]xpressions of impatience, dissatisfaction, annoyance, and even anger, that are within the bounds of what imperfect men and women . . . sometimes display [do not create bias]. A judge's ordinary efforts at courtroom administration – even a stern and short-tempered judge's ordinary efforts at courtroom administration -- remain immune." Liteky, 510 U.S. at 555-56. See also Haynes, 937 S.W.2d at 204. That the comments were made during a hearing unrelated to the USPM receivership also weakens whatever prejudice-revealing force they might have. The inference made by Sauer is insufficient to require recusal, for if Judge Wells was partial towards Campbell, a former SDR, the source of bias wasn't extra-judicial. See City of Kansas City v. Willey, 697 S.W.2d 240, 243 (Mo. App. 1985) (information acquired during an earlier proceeding doesn't stem from an extra-judicial source). In any event, another possible scenario is that Wells became aware of the investigation into Sauer's billing practices launched by a bar
complaint. Sauer's final salvo is that Judge Wells must have been biased against Sauer because the audit cost the USPM estate about $500,000. If the ordering of the audit required recusal, surely the Insolvency Code would say so. It doesn't. An audit is an inquiry, not an accusation. Just as a the court may ask questions of witnesses without ipso facto tainting itself, see Abel v. State, 737 S.W.2d 487, 488 (Mo. App. 1987), so may a judge order an audit without risking disqualification. Judge Wells did nothing during the hearing indicating he was biased. Sauer was allowed to conduct discovery on the payment matters raised by the Receiver and on the issues raised by the audit. She was granted a continuance when it appeared she was unprepared for trial. Judge Wells assured her that he would compel attendance of witnesses from the Department. She presented her case, introduced hundreds of exhibits, and called witnesses without hindrance from Judge Wells. The Court did not abuse his discretion in refusing to recuse himself on the grounds of actual bias. A judge's impartiality might reasonably be questioned if a reasonable person would have a factual basis to doubt the judge's impartiality. Graham v. State, 11 S.W.3d 807, 813 (Mo. App. 1999). "[A]lthough the court tries to make an external reference to a reasonable person, it is essential to hold in mind that these outside observers are less inclined to credit judges' impartiality and mental discipline than the judiciary itself will be." In re Mason, 916 F.2d 384, 386 (7th Cir. 1990) (cited in Robin Farms, Inc. v. Bartholome, 989 S.W.2d 238, 248 (Mo. App. 1999)). It must also be remembered that: "'No system of justice can function at its best or maintain broad public confidence if a litigant can be compelled to submit [a] case in a court where the litigant sincerely believes the judge is . . . prejudiced.'" State ex rel. Roack v. Kohn, 720 S.W.2d 941, 943 (Mo. banc 1986) quoting State ex rel. McNary v. Jones, 472 S.W.2d 637, 639 (Mo.App. 1971). Canon 3(E)(1) doesn't limit disqualification to instances of actual bias under subsection (a); other circumstances can compel recusal. Robin Farms Inc., 989 S.W.2d at 246. See also State ex rel. Wesolich v. Goeke, 794 S.W.2d at 698 ("[A] judge's duty to disqualify is not confined to the factors listed . . . but is much broader."). Whether the circumstances warrant recusal because of an appearance of impropriety must be made on a case-by-case basis. Robin Farms, 989 S.W.2d at 246. The public's confidence in the judicial system is the paramount interest safeguarded by the canon. Id. at 247. It must be noted that Judge Wells' denial of Sauer's offer to resign and of her payment motions are irrelevant. Adverse rulings cannot serve as grounds for recusal. Id. at 247. Otherwise, a party could judge shop merely by filing bogus motions. Where rulings are improper, the remedy is to appeal. Even so, the facts here created a reasonable question as to the judge's impartiality.
To begin with, the extended ex parte meetings and conversations between the Court and the auditor are of concern. See Rule 2.03 Canon 3(B)(7). In light of Judge Wells' comments, a reasonable layman might question the propriety of the meetings if indeed only substantive matters were discussed. To be sure, "Ex parte communications that are occasioned by the exercise of 'related judicial functions' do not stem from an extra-judicial source. A judge's ex parte communication occasioned by a related judicial function -- for example, the judge's exercise of her administrative duties -- is generally not deemed to provide a cognizable ground for judicial disqualification[.]" Richard E. Flamm, Judicial Disqualification, section 14.3.3 (1996). And in bankruptcy-type proceedings such as an insurance receivership, the prohibition on ex parte communication isn't so stringent. Flamm, supra at section 14.3.5. Still, the court had already delineated the nature the audit was to take. He had previously instructed the auditor to do: "(1) any accounting procedure to assess and evaluate the efficiency of all receivership personnel; (2) a review of all supporting documentation for time spent on all receivership affairs; (3) an analysis of the total cost to the receivership estate for execution of the partial distribution to Class 2 creditors upon application to this [c]ourt; and (4) an accounting of all receivership receipts and expenditures including examination of all supporting documentation." There was no need for any further communications with the auditor, except perhaps by modification of his initial order. These comments about Sauer's handling of the receivership matter are unimportant to the bias calculus. They don't stem from an extra-judicial source. See Williams v. Reed, 6 S.W.3d 916, 921 (Mo. App. 1999) (actual bias must have extra--judicial source). They relate to Sauer's handling of a receivership over which Judge Wells had supervisory responsibilities. They are, however, germane to the appearance of impropriety inquiry, no matter what their source. See Robin Farms, 989 S.W.2d at 248 ("[I]t is irrelevant in determining whether there is an appearance of impropriety, whether the trial judge was actually biased or prejudiced against a party."). See also Rogers v. Bradley, 909 S.W.2d 872, 874 (Tex. 1995) (judge's "'impartiality might reasonably be questioned' regardless of the source or circumstances giving rise to the question of impartiality . . ."). "Conduct or speech of a trial judge indicative of a belief as to the accused's guilt is the antithesis of impartiality. Acts or conduct [that] give the appearance of partiality should be avoided with the same degree of zeal as acts or conduct [that] inexorably bespeak partiality." State v. Garner, 760 S.W.2d 893, 906 (Mo. App. 1988). Both the timing and the content of Judge Wells' comments, in particular the malpractice comment, are also important.(FN12) The malpractice comment preceded the surcharge hearing. Cf. Classe v. Classe, 772 S.W.2d 386, 388 (Mo. App. 1989) (harangue at end of trial, in which trial judge called defendant a liar and a "miserable human being," didn't merit disqualification); State v. Jones, 979 S.W.2d 171, 179 (judge's reprimand of counsel's for apparently making rambling objections to sway jury not grounds for disqualification). To a reasonable layman, it thus might indicate the
hardening of the judicial mind against Sauer, a forming of prejudice. See State v. Dodd, 944 S.W.2d 584, 587 (Mo. App. 1997) ("[A] judicial statement -- on the record or off -- that raises a genuine doubt as to the judge's willingness to follow the law, provides a basis for recusal of, if the judge refuses to recuse, reversal on appeal."). There had been no audit; there had been no hearing. It was made the day after he approved an interim payment to Sauer. As the court does not have knowledge of any new facts occurring between the two events, except Sauer's notification that the Director of Insurance had appointed wanted her to be SDR in the ProMed receivership That these comments came two years before the hearing before Wells somewhat mitigates their force, but given the ongoing dispute between the Director and Judge Wells, see State ex rel. Angoff v. Wells, 987 S.W.2d 411 (Mo. App. 1999). The court also notes, in addition to the just mentioned facts, the decision here is buttressed by the trial court's attempt to talk to Receiver's counsel, the trial court's avoidance of ruling on the motions to recuse, the trial court's reluctance to allow Sauer to intervene and attain party status, and the belated attempt to assess costs and attorney's fees against the SDR. The cumulative effect of the court's actions would lead a disinterested layman to conclude that there was a significant risk that Judge Wells could not be impartial. See Williams, 6 S.W.3d at 922-23 (in combination judge's questions and statements created appearance of impropriety); Hopfinger v. Kidder Int'l, Inc., 827 F.Supp. 1444, 1449 (W.D. Mo. 1993). See also U.S. v. Whitman, 209 F.3d 619, 624-26 (6th Cir. 2000) (judge who harangued defendant's counsel about his purported ethical lapses and who declared that his mission as federal judge was to "educate the bar" created appearance of impropriety); Sales v. Grant, 158 F.3d 768, 781 (4th Cir. 1998) (snide comments and pre-trial statements that lawsuit seemed to lack merit and that jury had made mistake in deciding earlier case might have created an appearance of impropriety). In State ex rel. McCulloch v. Drumm. 984 S.W.2d 555 (Mo. App. 1999). In Drumm, the trial court judge denied the defendant's motion to waive a jury trial because he felt he couldn't be objective. Id. at 556. After the jury convicted the defendant, he said that he had denied the motion because he had seen psychiatric evaluations that diagnosed the defendant as having a mental disease or defect, and that he agreed with the evaluations. Id. After the defendant's conviction (for which the judge sentenced the defendant to life without possibility of parole) was reversed, the case was remanded to the same judge for retrial. Id. Thereafter, the judge who agreed to hear the State's motion for change of judge for cause denied the motion. Id. The judge granted defendant's motion to waive a jury trial. Id. at 557. A writ of prohibition was issued prohibiting the judge from hearing the case. Id. at 558. This court made the writ absolute on the grounds of an appearance of impropriety. Id. It should be kept in mind that there are only three grounds for issuance of a writ, Ferrellgas, L.P. v. Williamson, 24 S.W.3d 171, 175 (Mo. App. 2000), and the only one applicable in Drumm was to
remedy an abuse of discretion. Id. There was insufficient evidence of actual bias. The question, though, is whether the judge's impartiality might reasonably be questioned, not whether the judge was, in fact, biased. Robin Farms, 989 S.W.2d at 247 (appearance of impropriety if there is "a shade of doubt or a lesser degree of possibility" that judge appears biased) (emphasis added); Molasky v. State, 710 S.W.2d 875, 878 (Mo. App. 1986). See also In re Masson, 916 F.2d 384, 386 (7th Cir. 1990) ("[D]rawing all inferences favorable to the honesty and care of the judge whose conduct has been questioned could collapse the appearance of impropriety standard . . . into a demand for proof of actual impropriety.") As Justice Frankfurter observed, "When there is ground for believing that . . . unconscious feelings may operate in the ultimate judgment, or may not unfairly lead others to believe they are operating, judges recuse themselves. . . . [T]he administration of justice should reasonably appear to be disinterested as well as be so in fact." Public Utils. Comm'n of D.C. v. Pollak, 343 U.S. 451, 466-67 (1952). To maintain public confidence in the integrity of the judicial system, the courts adopt a liberal construction that favors the right to disqualify. Robin Farms, 989 S.W.2d at 247 (citing State ex rel. Wesolich v. Goeke, 794 S.W.2d 692, 695 (Mo. App. 1990)). Judges must "err on the side of caution by favoring recusal to remove any reasonable doubt [of] impartiality." Id. Such is the situation here. Even though the court was justifiably frustrated with the SDR, the court should have recused. Based on a totality of the facts, this court holds that Judge Wells abused his discretion in refusing to recuse himself on the basis of an appearance of impropriety. Therefore, the judgment of the court will be reversed. * * * Sauer's additional points have been rendered moot by the decision on recusal. CONCLUSION The trial court had the inherent power to surcharge Sauer. Because Judge Wells abused his discretion in failing to recuse himself under Rule 2.03, Canon 3(E)(1), however, the judgment must be reversed, and the case is remanded for trial before a different judge. Several matters, however, need to be set out to aid the trial court in conducting the new trial; Judge Wells had the jurisdiction to order the audit which was presented for court approval; Wells had the authority to receive in evidence and accept the contents of the audit; in this insurance insolvency proceeding the trial court has jurisdiction to assess a reasonable surcharge against a special deputy receiver who has been afforded proper due process and discovery rights; Sauer, if she so chooses, may again present her claim for an increased hourly rate for unreimbursed time spent as SDR prior to April 29, 1999; the Receiver will not be allowed to recover the audit costs and the attorney's fees because of his admission during oral argument that the fees had not been requested, an admission
that is binding under the law of the case. See St. Louis Union Trust Co. v. Conant, 536 S.W.2d 789, 796 (Mo. App. 1976); and, the issues raised in this appeal, and the court's rulings today, do not affect the designation of Judge Wells to preside over the winding up procedure of USPM. Sauer's motion for sanctions under Rule 55.03 is denied. The judgment for surcharge is reversed and the cause is remanded pursuant to the directions outlined in this opinion. Footnotes: FN1. "The imposition of personal liability on a fiduciary for willful or negligent misconduct in the administration of his fiduciary duties." Black's Law Dictionary 1441 (6th ed. 1990). FN2.Not just for Missouri: To date, no federal or state court has faced the issue, though many other states have insurance insolvency codes similar to Missouri's. FN3.McPherson was acting head director at the time of this action. Scott Lakin is the present director. FN4.Unless indicated otherwise, all statutory references are to RSMo. 2000. FN5.Background information comes from Walter R. Lamkin, Paula M. Young, William M. Symon, Jr. & Denise Farris, Supervision, Rehabilitation, and Liquidation of Troubled Insurance Companies in Missouri Insurance Practices 2-1 (4th ed., Missouri Bar 1990). FN6.375.1230. Audit of receivership may be ordered, when: The court may, as it deems desirable, cause audits to be made of the books of the receiver relating to any receivership established under sections 375.1150 to 375.1246, and a report of each audit shall be filed with the receiver and with the court. The books, records and other documents of the receivership shall be made available to the auditor at any time without notice. The expenses of each audit shall be considered a cost of administration of the receivership. FN7.There is no reported Missouri case concerning a trial judge ordering an audit of an SDR. Insurance cases from other jurisdictions are silent. FN8.Wells was consistent in taking the position that the Director could not unilaterally terminate the SDR. The Angoff above citation was the culmination of a successful case by the Director to prohibit Wells from keeping the director from unilaterally terminating Campbell as Pro-Med's SDR. FN9.An attorney hired by the SDR and several others on her staff obtained immunity before answering questions about their duties and time sheets. FN10.Sauer P.C. did not argue on appeal that the court could not surcharge it because all the harm to SDR stemmed from the acts (or omissions) of the SDR or that the SDR's actions were beyond the scope of her authority as an agent for Sauer P.C. This court, exercising its discretion under Rule 30.20, decides not to review for plain error; and does not decide whether the surcharge of Sauer P.C. was error. FN11.The latter is particular to liquidations, while the former, section 375.650(2), applies to all receivership proceedings. The only substantive distinction is that the former explicitly makes good faith a prerequisite for immunity. Because Sauer's good faith is irrelevant to the analysis, see infra, only section 375.1182.5 is cited to ease readability. FN12.See Leslie W. Abramson, Appearance of Impropriety: Deciding When a Judge's Impartiality "Might Reasonably Be Questioned," 14 Geo. J. Legal Ethics 55 (2000) (courts more likely to find appearance of impropriety when comments by judge precede trial, as opposed to comments made at end). Separate Opinion: