Boyd v. Mut. Fire Ass'n of Eau Claire

• Decision Date: 19 May 1902
• Parties: BOYD ET AL. v. MUTUAL FIRE ASS'N OF EAU CLAIRE ET AL.
• Court: Wisconsin Supreme Court

116 Wis. 155

90 N.W. 1086

BOYD ET AL.

v.MUTUAL FIRE ASS'N OF EAU CLAIRE ET AL.

Supreme Court of Wisconsin.

May 19, 1902.

Appeal from circuit court, Eau Claire county; James O'Neil, Judge.

Action by Robert K. Boyd, receiver, and others, against the Mutual Fire Association of Eau Claire and others. From an order sustaining demurrers to the complaint, and from an order refusing to state the particular ground on which said demurrers were sustained, plaintiffs appeal. Order sustaining demurrers affirmed, and the appeal from the order refusing to state grounds for sustaining the demurrers dismissed.

This action was commenced November 13, 1890, by the defendants John S. Owen and the Northwestern Lumber Company, as creditors, in their own behalf, and as representing all others similarly situated, against the Mutual Fire Association of Eau Claire, to have it adjudged insolvent, and to wind up its affairs. On the same day the association put in a verified answer, admitting the essential facts, and November 15, 1890, the defendant James A. Smith was appointed receiver of the corporation, and on the same day qualified as such. June 30, 1899, Smith was removed, and the plaintiff Boyd was duly appointed receiver in his place. Upon the petition of Boyd, as such receiver, and some of the creditors, who are now plaintiffs, the action was reorganized May 8, 1900, by making those who were then plaintiffs defendants with the association, and by bringing in all the additional persons now named as defendants herein, and making such petitioners, who were and are creditors of the corporation, plaintiffs herein. Such new plaintiffs were thereupon ordered by the court to prosecute the action for the benefit of all the creditors of the corporation. Accordingly, such new plaintiffs and Boyd, as receiver, filed and served an amended complaint. To such amended complaint 13 demurrers were interposed; 3 of them by a single defendant, and the other 10 by two or more defendants, as they deemed their interests to be similar. Each of the 13 demurrers were upon the same grounds, to wit: “First, that it appears upon the face of said complaint that said complaint does not state facts sufficient to constitute a cause of action as against them or either of them; second, for that it appears upon the face of said complaint that several causes of action have been improperly united; third, that it appears upon the face of said complaint that the action was not commenced within the time limited by law, and was not commenced within the time limited by sections 4219, 4221, 4222, 4224, 4227, and 4252 of the Revised Statutes of Wisconsin for the year 1878, and of the Revised Statutes of Wisconsin for the year 1898, reference to which sections is hereby made.” A fourth ground is mentioned, but, as it is expressly waived by counsel for defendants, it is unnecessary to state it. This is an appeal from an order sustaining each of such 13 demurrers, or rather 13 orders, embodied in one paper, each sustaining some particular one of such demurrers; and also from an order refusing to state the particular ground upon which such demurrers was sustained. Omitting formal matters, the substance of the amended complaint, so far as necessary to an understanding of the questions presented for decision on this appeal, is, in addition to the facts stated, to the effect that the Mutual Fire Association was incorporated September 1, 1885, under chapter 89, Rev. St. 1878, and did business as an insurance company from that time till it was adjudged insolvent, as hereafter stated. The articles of incorporation contained the following: “All persons holding contracts of insurance with this corporation, and the heirs, executors, administrators, successors or assigns of such persons continuing to be so insured shall thereby become members of this corporation, and shall continue to be such members during the continuance of such respective contracts of insurance, and no longer.” As soon as the corporation was organized, its directors and officers, all of whom are named as defendants herein, agreed to disregard the statutes of this state as to the manner such corporation should do business, and to pursue a plan of their own, one feature of which was that no assessment should be made upon any member of the corporation to meet any of its liabilities, whereas the statute requires such assessments to be made. That plan was followed till the corporation was declared insolvent. Another feature of the agreement, made as aforesaid, and which was carried out, was that two kinds of policies should be issued,--one called “cash policies,” covering periods of one year or less, each policy being issued for a single cash premium paid down; the other kind being those issued for three or five years, the policy holder in each case giving a premium note payable in installments as needed and called for by corporate authority to pay losses and expenses of the company. From the beginning to the end all the officers and directors of the corporation were interested in property insured by the company, and their aim was to obtain cheap insurance for themselves, regardless of its jeopardizing the ability of the company to furnish safe insurance to outside parties. To that end such officers and directors knowingly charged for carrying risks some 30 per cent. less than they knew would be necessary to do so and pay the expenses of the corporation and claims upon policies as they accrued, the idea of such officers and directors being that by such method their own risks could be carried for a few years at a very low rate, and the corporation then be allowed to go into insolvency, and the accumulated liabilities, representing losses in the business, be thrown on outside parties, such as plaintiffs. The scheme worked successfully for about two years, during which time no assessment was made on members of the corporation to pay losses or expenses, all being paid by using money as fast as collected to pay matured claims. To accomplish that, the 60 days after a proof of loss, allowed by the insurance contract for payment thereof, was taken in all cases. In the fall of 1887, in order to continue business in the manner aforesaid, more than 60 days was taken for the payment of losses suffered by policy holders and duly proved. Before the end of that year it became necessary to either abandon such method, and resort to assessments upon members of the corporation, or obtain money by borrowing, or to cease doing business altogether. That condition was created by disregarding the legal requirement to collect money from members of the corporation sufficient for a fund to pay losses as they matured. The difficulty was tided over temporarily by the officers and directors, without knowledge of the other members of the corporation, borrowing large sums of money. Money was so obtained prior to February 27, 1888, to the amount of $10,746.76, from 18 different persons and corporations, all of whom are named in the complaint, and the amount borrowed of each stated. That method was continued till the new receiver was appointed, as stated; the total indebtedness incurred in that way being about $26,254. When it was apparent to the officers and directors of the corporation that it could not continue doing business much longer, pursuant to the plan agreed upon, as aforesaid, they planned to have it wound up by proceedings commenced in an adversary way by creditors, but really upon their own motion, though to delay matters as long as possible to enable them to gather in as much money as possible, and apply the same in payment of the borrowed money in preference to the claims of policy holders. A part of the plan from first to last of doing the corporate business was not to keep books, so the real situation could not be readily discovered, and such plan was effectually executed. For that reason all the details of the borrowing operations resorted to as aforesaid cannot be stated. But the indebtedness of the corporation created by such operations steadily increased from the time that method of obtaining money was resorted to till the corporation was declared insolvent, notwithstanding the officers and directors well knew that the collapse thereof was only a question of a short time.

In order to obtain new members of the corporation and retain old ones, false representations of its condition were made, by which means plaintiffs and others were so deluded. Such false representations consisted, in the main, of the following: Money was given to persons who had paid the same into the corporation on premium notes, ostensibly as a legitimate division of a surplus over and above what was necessary to satisfy its needs for expenses and the payment of losses to policy holders. Policies were canceled, and money returned to the holders thereof as return premiums, when it was required to pay the pro rata share of such policy holders necessary to meet its then existing liabilities. In February, 1887, on false representations made by the officers and directors, a certificate was obtained of the commissioner of insurance of the state of Wisconsin to the effect that the corporation had available assets in cash and premium notes to meet future losses to the amount of $90,021.66, and the certificate was made public. Statements were made, ostensibly in compliance with section 1941d, Rev. St. 1878, in which the assets of the corporation were overstated from 40 to 200 per cent., and its liabilities understated from 5 to 70 per cent., the degree of falsity being least at the start and increasing from year to year up to the time of the final collapse of the company. In the reports so made no mention was made of the indebtedness of the corporation for borrowed money, though a true statement in that regard was required by law as a part of such reports; and, notwithstanding the fact that when such reports were made indebtedness of the corporation...