Davis v. Life Ass'n of America

• Decision Date: 01 January 1881
• Citation: 11 F. 781
• Parties: DAVIS and others v. LIFE ASSOCIATION OF AMERICA and others.
• Court: U.S. District Court — Southern District of Alabama

11 F. 781

DAVIS and others v. LIFE ASSOCIATION OF AMERICA and others.

United States Circuit Court, S.D. Alabama.

December Term, 1881

John Little Smith, G. L. Smith, and Wm. G. Jones, for complainants

Herndon Croom & Lewis and Carr & Reynolds, for defendants.

BRUCE D. J.

This suit is brought by John B. Davis and others, policy-holders of the defendant corporation, residents of the state of Alabama, in their own behalf, and in behalf of such other policy-holders of the defendant corporation, of what is called the Alabama department of said corporation, as may join them in and contribute to the expenses of this suit. The defendant corporation was organized under the laws of the state of Missouri, with its principal place of business at St. Louis, in said state, and did business in that and in other states of the Union. In the year 1879 it became insolvent, and upon proceedings instituted in the circuit court of the city of St. Louis, Missouri, the court, on the fourteenth day of October, enjoined the corporation from doing business, and upon the tenth day of November decreed the corporation dissolved. The bill in this case was filed on the twenty-eighth day of October, 1879, in the chancery court of the southern chancery division of the state of Alabama and the cause has been removed into this court under the provisions of the act of congress in such cases made and provided.

It is provided in section 2, art. 18, of the constitution of the defendant corporation, as amended October 18, 1868, 'that the board of directors shall, by special resolution, organize branches of the association at different points throughout the state of Missouri and the United States, and the business of such branches shall be placed under the supervision of a board of resident trustees.'

Section 5 of article 18 provides that the board of directors shall have power to organize such branches under and in accordance with the provisions of the laws of any state or territory of the United States, and when organized such board of directors may enter into such agreements and make such contracts with the trustees or directors of said branches, for the extension and management of the business of this association, as they may deem proper, and all such contracts shall be binding upon this association and all of its branches.

Section 1, art. 20, provides: 'No policy shall be issued upon any other than sound lives, and all business shall be conducted upon the purely mutual plan.'

Section 3, art. 20, provides: 'It shall be the duty of the board of directors to loan the funds of the association, as far as practicable, upon the security of unencumbered real estate situated within the districts from which such funds are derived, thereby conferring upon each section the benefit of a local organization; but no such loan shall be made unless upon the official recommendation of the board of trustees for the district in which such real estate is situated.'

Section 6 provides: 'A full reserve, (or reinsurance fund,) based upon the assumptions mentioned in section 5 of this article shall at all times be kept up, and no dividends shall be declared or division of surplus made which shall impair this reserve.

It is, perhaps, unnecessary to quote further from the constitution or charter of the defendant corporation.

On the twenty-sixth day of April, 1869, a department of the Life Association of America for the state of Alabama was formed, and a contract was entered into by the Life Association and its Alabama department by which, among other things, it was stipulated in section 5 of the article, which is in writing,--

'That the net assets of the business of said department shall be invested and kept invested within the state of Alabama, provided proper securities as designated in the constitution can be obtained; said net assets being the whole of the premiums, less the amount necessary to be held at the present office, St. Louis, Missouri, as a contingent fund, to pay the expenses and losses from year to year, as the same become due and payable; it being anticipated that such expenses and losses will not consume more than 25 or 30 per cent of said premium receipts.'

It appears that there are assets of the defendant corporation in the state of Alabama, and it is claimed, and is not controverted, that the assets of the defendant corporation in the state of Alabama arose from the premium paid by policy-holders in the branch department of the state of Alabama, and that they do not exceed in amount the reserve fund which the department corporation under said contract, and under the charter of the defendant corporation, was required to keep invested in the department of Alabama; but it is claimed, and it is the theory of the case made by the complainants, that the net assets of the business of the department is what is called in section 6, art. 20, of the constitution of the defendant corporation a full reserve, (or reinsurance fund,) and that this fund was to be kept invested in the department of Alabama as a special and continuing security for the benefit of the policy-holders of the department of the state of Alabama, and that such assets constitute a trust fund, charged with the payment of the policy-holders of the department of Alabama such sums as may be found due to them, to the exclusion of other creditors and policy-holders of the insolvent and dissolved corporation.

This proposition is controverted by John F. Williams, the superintendent of the insurance department of the state of Missouri, appointed under the laws of Missouri, and charged with the duty of winding up the business of dissolved insurance corporations, and who is now the statutory successor of the defendant, the Life Association of America. He, by his counsel in this case, contends that the contract of April 26, 1869, set up by the complainants, does not bear the construction which they placed upon it, that that portion of the assets which, under the fifth section of the contract, was to be invested and kept invested within the state of Alabama, was not intended for the special security of the Alabama policy-holders, or any particular class of policy-holders; that this fund was not and is not a trust fund created for the benefit, specially and exclusively, of the Alabama policy-holders; and that they have no right to have this fund administered for their special and exclusive benefit.

The contention is, further, that if this contract is capable of such a construction as is claimed for it, that it is ultra vires, and therefore without authority and void. The constitution of the defendant corporation, section 1, art. 20, provides that all business of the corporation shall be conducted upon the purely mutual plan, and that the construction claimed by the complainants for the contract would be to give to one class of policy-holders and creditors a preference over others, and over creditors of the corporation not the holders of policies, and therefore be violative of the principles upon which the corporation was organized, and upon which the corporation and its operations were to be conducted.

The true construction, then, of the contract of April 26, 1869, is to be determined; and it is to be observed the fifth section, quoted supra, while it does provide 'that the net assets of the business of said department shall be invested and kept invested within the state of Alabama, yet it is not specific as to the particular purpose and object of such investment. It does not provide that this fund so created and so to be invested, and kept invested, shall be for the benefit and security of the policy-holders of the department of Alabama, or for the particular benefit or security of any policy-holders or persons whatever.

The idea of special security or trust, other than the general trust and security which attaches to the property and assets of a corporation for the benefit of its creditors, is not in the words employed in this fifth section of the contract.

But it is contended that a consideration of the whole scheme and plan of organization and operation of this association, as indicated in its charter, and the laws of the state of Missouri upon the subject of life insurance companies, shows that this fund was intended as a special security for the exclusive benefit of the policy-holders of the department of Alabama. Section 5, art. 18, of the constitution of the association, cited supra, providing for the organization of branch departments, with local trustees or directors, and authorized agreements with sub-branches to be entered into for the extension and management of the business of the association, certainly does not furnish the idea that the policy-holders of the branch department were to stand upon different footing, or authorized agreements to be made for special security to the policy-holders of the particular...