Barnes v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 08 June 1993
• Docket Number: No. BO56809,BO56809
• Court: California Court of Appeals Court of Appeals
• Parties: Benjamin G. BARNES, Plaintiff and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant and Respondent.

Page 87

20 Cal.Rptr.2d 87

16 Cal.App.4th 365

Benjamin G. BARNES, Plaintiff and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant and Respondent.

No. BO56809.

Court of Appeal, Second District, Division 3, California.

June 8, 1993.

William M. Shernoff, Frank N. Darras, Claremont, and Sharon J. Arkin, Irvine, for plaintiff and appellant

Skadden, Arps, Slate, Meagher & Flom, Frank Rothman, Darrel J. Hieber, Gary S. Glickman and Ben D. Whitwell, Los Angeles, for defendant and respondent.

CROSKEY, Associate Justice.

This is a class action brought on behalf of the policyholders of the defendant and respondent State Farm Mutual Automobile Insurance Company ("State Farm") by the plaintiff and appellant Benjamin G. Barnes ("Barnes"). By this action, in its final form prior to appeal, Barnes sought to preclude State Farm from spending premium revenues on political activities opposed by dissenting policyholders; in addition, Barnes also sought to compel State Farm to distribute "excess" surplus funds to its policyholders in the form of an extraordinary dividend. The trial court sustained State Farm's demurrer to these two claims

and dismissed the action. We conclude that Barnes has not stated a cause of action for relief on either of his claims and we therefore affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Barnes, a policyholder of State Farm, filed this action on August 15, 1988. In his original complaint he alleged four causes of action: (1) a claimed violation of his freedom of speech, (2) unfair and misleading business practices, (3) breach of fiduciary duty and (4) declaratory relief. ¹

The thrust of Barnes' original complaint was to preclude the expenditure of funds by State Farm in support of the no-fault insurance initiative that was on the November 1988 ballot. It was essentially alleged that (1) State Farm, as a mutual automobile insurer, is owned by its policyholders, (2) Barnes was compelled by state law to obtain automobile insurance, (3) State Farm had already expended substantial amounts, and intended to spend additional sums, in support of the no-fault initiative and (4) Barnes, and a class of similarly situated California policyholders, ² objected to the expenditure by State Farm of its premium revenues in pursuit of that particular political goal.

Barnes requested appropriate injunctive relief, including two separate and successive motions for a preliminary injunction. The first sought to preclude State Farm from making any political expenditures; the second sought to require State Farm to establish a procedure designed to protect its policyholders' free speech rights by ensuring that dissenting policyholders' premiums are not used to fund political expenditures to which they object. Each of these motions was extensively briefed and argued and each was denied by the trial court.

Thereafter, on May 22, 1989, Barnes filed a first amended complaint which was substantially the same as the original pleading, except that an additional count was added which sought to compel State Farm to distribute "its unjustifiably large surplus" back to its policyholders. ³ In support of this cause of action, Barnes alleged that State Farm had accumulated a surplus fund consisting of premiums and investment income in excess of $10 billion. This, Barnes alleged, had resulted in a gross overcapitalization which was compounded by the fact that State Farm, in 1988, had paid out dividends which were less than 10 percent of the industry average. Barnes alleged that such conduct by State Farm amounted to an unjustified hoarding of surplus funds, for no legitimate business purpose and all to the detriment of policyholders who otherwise could have received either reduced premium rates or substantial dividends. He sought a court order which would require State Farm's directors to correct this imbalance by a one-time extraordinary dividend and to avoid the problem in the future by regular dividends which conformed to the "industry average."

State Farm filed a demurrer to this first amended complaint. In response, Barnes agreed to dismiss all counts except (1) the claim for violations of policyholders' free speech rights resulting from use of premium revenues for political activities which were not supported by dissenting shareholders and (2) the cause of action seeking to compel distribution of the allegedly excessive surplus. The court overruled the demurrer as to the former and sustained it as to the latter, but with leave to amend. ⁴

On August 8, 1990, Barnes filed his second amended complaint, the one now before Although Barnes was granted leave to amend his first cause of action, he chose not to do so and the parties stipulated that a judgment dismissing the entire second amended complaint could be entered so that an appeal could be taken on the issues framed by the allegations of that pleading. A judgment was entered and Barnes noticed this timely appeal.

                us, in which he repeated the first claim found sufficient by the court, although in a somewhat broadened form, and realleged the second in substantially the same language.  State Farm again demurred on the ground that no cause of action was stated by either of Barnes' claims.  This time, the court agreed as to both counts.  The demurrer was sustained with leave to amend as to the first cause of action relating to the policyholder free speech issue and without leave as to the second cause of action regarding disposition of the allegedly excessive surplus. 5  With respect to this latter claim, the court not only found that Barnes had failed to allege sufficient facts of [16 Cal.App.4th 371] director fraud or oppression so as to overcome the "business judgment" rule, but also that he had failed to allege the necessary exhaustion of administrative remedies now provided for in the Insurance Code for the regulation of premium rates to be paid by policyholders.  (Ins.Code, § 1861.05, et seq.) 6
                

ISSUES PRESENTED

This appeal essentially raises three issues.

1. Does a policyholder of a mutual insurance company have a constitutionally protected right to prevent the insurer's use of premium revenue to support political activities with which the policyholder disagrees?

2. May a policyholder of a mutual insurance company object to, or seek judicial assistance to control, the insurer's maintenance, management and disbursement of surplus funds?

3. Must a policyholder of a mutual insurance company first exhaust available administrative remedies before judicial intervention may be sought with respect to the insurer's maintenance, management or disbursement of surplus funds?

DISCUSSION

1. Standard of Review

As this matter comes to us on a judgment of dismissal following the trial court's The issue before us is one of law. Assuming the truth of Barnes' factual allegations, has he alleged any claim cognizable under California law? The answer, as we discuss below, is no.

                order sustaining State Farm's demurrer, we must assume the truth of all facts which are properly pleaded.  (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)   However, at least with respect to Barnes' first cause of action, which he declined to amend although given the opportunity to do so, we also must assume that he has alleged the strongest case that he can;  "if the [cause of action] is objectionable on any ground, the judgment of dismissal must be affirmed."  (Hiemstra v. Huston (1970) 12 Cal.App.3d 1043, 1045, 91 Cal.Rptr. 269.   See also Cal Francisco Inv. Corp. v. Vrionis (1971) 14 Cal.App.3d 318, 321, 92 Cal.Rptr. 201.)
                

2. No Invasion Of The Constitutional Right Of Policyholders Has Been Alleged

In his first cause of action, Barnes alleged that State Farm's political expenditures and contributions infringed on the free speech rights of its dissenting California policyholders under article I, section 2 of the California Constitution. However, this claim ignores the free speech rights of State Farm. ⁷

Political expenditures and contributions are forms of political speech " 'at the core of ... First Amendment freedoms.' " Buckley v. Valeo (1976) 424 U.S. 1, 39, 96 S.Ct. 612, 644, 46 L.Ed.2d 659 (quoting Williams v. Rhodes (1968) 393 U.S. 23, 32, 89 S.Ct. 5, 11, 21 L.Ed.2d 24). In Buckley, the Supreme Court held that statutory restrictions on campaign contributions and expenditures "operate in an area of the most fundamental First Amendment activities" (424 U.S. at p. 14, 96 S.Ct. at p. 632.) The Court therefore concluded that any restriction on political contributions or expenditures must be subjected to strict constitutional scrutiny. (Id. at pp. 24-25, 44-45, 96 S.Ct. at pp. 637-638, 646-647.)

This protected right is not lost or diminished simply because it is claimed by a corporate entity. (First National Bank of Boston v. Bellotti (1978) 435 U.S. 765, 781-784, 98 S.Ct. 1407, 1418-1420, 55 L.Ed.2d 707.) In Bellotti, the court overturned a state statute which prohibited "corporation[s] carrying on the business of ... insurance...." from making campaign contributions and expenditures "on any question[s] submitted to the voters, other than one materially affecting any of the property, business or assets of the corporation." (Id. at 768 and fn. 2, 98 S.Ct. at 1411 and fn. 2.) The Court recognized that contributions and expenditures "that otherwise would be within the protection of the First Amendment" do not "lose[ ] that protection simply because [their] source is a corporation." (Id. at p. 784, 98 S.Ct. at p. 1420.)

The Bellotti court held that a corporation's right to express its views on issues of general public interest--including issues that do not "materially affect[ ]" its business--may not be restricted unless a "compelling" state interest is shown. (Id. at pp. 781-83, 785-86, 98 S.Ct. at pp. 1418-19, 1420-21.) In Bellotti, the Commonwealth of Massachusetts attempted to justify its statute by arguing that the restriction on...