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TRANSIT BATTLES CONFLICT CLAIM

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JEFFERSON CITY, Mo. -- Transit Casualty Co. is locked in a bitter dispute with one of its reinsurers over charges that the longtime supervising judge in the Transit receivership has a conflict of interest that raises questions about his impartiality.

Winterthur Swiss Insurance Co. earlier this month sought to disqualify Cole County, Mo., Circuit Judge Byron L. Kinder from hearing any Transit-related litigation after discovering that Judge Kinder's wife works for a lobbying firm headed by Transit's chief lawyer.

"Winterthur has just cause to believe that it cannot have a fair and impartial trial" in Cole County, the reinsurer's filings say. "Would not any reasonable person . . .find palpable impropriety in being compelled to have his dispute adjudicated by (Transit's) supervising judge when the judge's wife is a lobbying 'affiliate' of his opposing counsel?"

In addition to the disqualification, Winterthur asked that its case be moved to another county, arguing that the only other circuit judge in Cole County is a close friend of Judge Kinder's, raising more questions about impartiality.

Transit lawyers countered that Judge Kinder himself disclosed the "potential conflict" in 1989, and turned over review of the Transit general counsel's legal bills to the other circuit judge, Thomas J. Brown III.

At a hearing last week, Judge Brown took over the Winterthur case himself without addressing the disqualification arguments. He also denied Winterthur's request for a change of venue.

J. Burleigh Arnold, Transit's special deputy receiver, attacked the Winterthur filings as "character assassination."

"In a small town, sons practice (law) in front of their fathers," said James C. Owen, a partner with McCarthy, Leonard, Kaemmerer, Owen, Lamkin & McGovern, Transit's general counsel. "In small towns, people know the judge.

"If you made that a problem in Missouri, in most small circuits in this country you are going to have a problem."

However, John M. Wulfers, a lawyer with Lord, Bissell & Brook in Chicago, representing Winterthur, defended the reinsurer's action.

"All we want for our client is for them to reasonably believe they can get a fair hearing on this in the Missouri courts," Mr. Wulfers said.

Transit, a Missouri-domiciled company that operated from Los Angeles, collapsed in 1985 in one of the largest property/casualty insurer company failures in U.S. history.

The company assumed large books of high-risk casualty insurance business through several managing general agents, reinsuring the business with scores of reinsurance companies, many of which subsequently became insolvent themselves.

Transit's failure became one focus of House Oversight and Investigations subcommittee hearings on the adequacy of state insurance regulation.

Mr. Arnold said that the size of Transit's insolvency is still estimated at approximately $4 billion and that the estate has so far amassed about $960 million in assets, the bulk of it reinsurance recoveries.

The receivership estimated at year-end 1996 that it may collect up to another $400 million from about 200 reinsurers, including Lloyd's of London underwriters, Munich Reinsurance Co., a number of Asian reinsurance companies and the estates of numerous insolvent companies such as the KWELM companies and Bermuda Fire & Marine Insurance Co. Ltd., said Mr. Arnold.

By the end of this year, the Transit estate will have paid about $220 million to policyholders and state guaranty funds, and the Missouri court has set aside another $400 million for additional distributions over the next two to three years, according to Mr. Arnold.

When the receivership is closed, he said, Transit expects to have paid about 50 cents on the dollar on approved claims.

While the receivership has commuted reinsurance agreements with more than half of Transit's reinsurers, it is litigating disputes with half a dozen other reinsurance companies, including Winterthur.

Transit's receivers filed two separate actions against Winterthur in Cole County Circuit Court in June. The estate is seeking to force Winterthur to post security covering about $2.4 million in paid losses and $12.1 million in reserves for unpaid claims, Mr. Owen said.

The litigation took an unexpected turn earlier this month, though, when Winterthur filed motions seeking to disqualify Judge Kinder.

According to the filings, Winterthur's lawyers discovered on Nov. 4 that Thomas W. McCarthy -- Transit's general counsel and lead partner with McCarthy, Leonard -- employs Ellen Kinder, Judge Kinder's wife, at The McCarthy Group, a Jefferson City lobbying and public relations firm.

In a lobbyist registration statement filed with the Missouri Ethics Commission last month, Mr. McCarthy reported employing Ms. Kinder and listed Transit Casualty and McCarthy, Leonard as "principals" for which Mr. McCarthy worked.

In a similar filing in 1995, Ms. Kinder reported working as a lobbyist for The McCarthy Group but did not list Transit as a principal, documents show.

Judge Kinder, meanwhile, filed a judicial financial disclosure statement earlier this year in which he described his wife as a "self-employed" government relations specialist.

Mr. McCarthy, a former state senator and Republican minority leader, had previously employed Ms. Kinder as an administrative assistant, according to court filings.

"This is not the case of a judge being related to a junior associate in a huge metropolitan law firm who has no involvement in a case that other lawyers in his firm might argue before the judge," Winterthur argued.

"Every person involved here has a significant role. The general counsel of (Transit) has reported that he employs the judge's spouse for lobbying purposes where they are acting on behalf of (Transit) as their principal."

Along with removing Judge Kinder, Winterthur also asked for the case to be moved out of the county: "There are only two circuit judges in Cole County and Judge Kinder is the presiding judge. . . .It would be extremely difficult for a junior judge to review prior decisions of the presiding judge in the same circuit court," the reinsurer argued.

Winterthur "believes the entire bench of this venue may be unduly influenced by the matters recited in this motion," according to court filings.

Transit's lawyers rejected these claims. In affidavits, Mr. McCarthy, Ms. Kinder and Mr. Arnold said that Ms. Kinder has never lobbied on behalf of Transit or McCarthy, Leonard and that she had never received payments from either.

Mr. McCarthy and Ms. Kinder also denied she is an employee of The McCarthy Group, explaining instead that she is an "independent contractor."

Mr. McCarthy said that he has performed lobbying work for Transit on a pro bono basis as part of his work as Transit's general counsel.

Transit also pointed out that Judge Kinder in 1989 had disclosed his wife's work as an assistant to then-Sen. McCarthy and had recused himself from handling Transit-related legal bills from Mr. McCarthy's firm, then providing litigation support.

Winterthur countered, however, that the relationships "changed dramatically" after 1989, when Mr. McCarthy took over as Transit general counsel and Judge Kinder assumed much broader powers over the receivership under amendments to Missouri's liquidation law.

Regardless of the actual relationships, Winterthur also argued that even an appearance of a conflict required Judge Kinder to remove himself from the case.

In a hearing last week, though, Judge Brown refused to hear the disqualification arguments.

Instead, he accepted Transit's contention that under a Missouri procedural rule, the timing of Winterthur's motion required him to treat the motion as a request for a new judge and to disregard the conflict of interest charges.

Judge Brown said he would take over the Winterthur case himself, and denied the reinsurer's request for a change of venue.