Churella v. Pioneer State Mut. Ins. Co.

• Decision Date: 29 October 2003
• Docket Number: Docket No. 238695.
• Citation: 258 Mich. App. 260,671 N.W.2d 125
• Parties: Mark CHURELLA, Susan Radtke, and Peter Treboldi, Plaintiffs-Appellants, v. PIONEER STATE MUTUAL INSURANCE COMPANY, Dan Czmer, Jack D'Arcy, Harlan Gingrich, Robert West, Carleton Wilson, Dale Little, Gordon Gingrich, and Milton Timmerman, Defendants-Appellees, and Attorney General, Commissioner of the Office of Financial and Insurance Services, and National Association of Mutual Insurance Companies, Intervening Defendants-Appellees, and MgNish Dennehy Agency, Inc. and Lori Smith, Defendants.
• Court: Court of Appeal of Michigan — District of US

671 N.W.2d 125

258 Mich. App. 260

Mark CHURELLA, Susan Radtke, and Peter Treboldi, Plaintiffs-Appellants, v. PIONEER STATE MUTUAL INSURANCE COMPANY, Dan Czmer, Jack D'Arcy, Harlan Gingrich, Robert West, Carleton Wilson, Dale Little, Gordon Gingrich, and Milton Timmerman, Defendants-Appellees, and Attorney General, Commissioner of the Office of Financial and Insurance Services, and National Association of Mutual Insurance Companies, Intervening Defendants-Appellees, and MgNish Dennehy Agency, Inc. and Lori Smith, Defendants.

Docket No. 238695.

Court of Appeals of Michigan.

Submitted August 6, 2003, at Detroit.

Decided August 28, 2003, at 9:00 a.m.

Released for Publication October 29, 2003.

Jaffe Raitt Heuer & Weiss, P.C. (by Joseph J. Shannon and Melanie LaFave), Detroit, for the plaintiffs.

Kaufman & Payton (by Alan Jay Kaufman and Donald L. Payton), Farmington Hills, for the Pioneer State Mutual Insurance Company and its directors.

Michael A. Cox, Attorney General, Thomas L. Casey, Solicitor General, and William A. Chenoweth, Assistant Attorney General, for the Attorney General and the Commissioner of the Office of Financial and Insurance Services.

Dykema Gossett, PLLC (by Lori M. Silsbury), Lansing, for amicus curiae the National Association of Mutual Insurance Companies.

Before: DONOFRIO, P.J., and BANDSTRA and O'CONNELL, JJ.

O'CONNELL, J.

Plaintiffs Mark Churella, Susan Radtke, and Peter Treboldi appeal as of right the trial court's order dismissing their suit pursuant to MCR 2.116(C)(8) for failure to state a claim on which relief may be granted. This case arose when plaintiffs brought suit to compel defendant Pioneer State Mutual Insurance Company and its directors, defendants Dan Czmer, Jack D'Arcy, Harlan Gingrich, Robert West, Carleton Wilson, Dale Little, Milton Timmerman, and Gordon Gingrich, to distribute the company's excess surplus. Plaintiffs claimed a right to sue as policyholders and therefore owners of Pioneer. Plaintiffs claimed that the directors violated the business judgment rule by failing to consider whether to distribute the excess surplus.¹ We affirm.

I

Plaintiffs filed an action seeking certification as a class action, alleging that as current and past policyholders, they had standing as owners of the company to compel Pioneer to distribute its excess surplus. They claimed that the company was holding millions of surplus in excess of its reserve requirements and that it was obligated to distribute that surplus. Furthermore, they claimed that the directors breached fiduciary duties owed to the policyholder-owners by failing to distribute the surplus, and thus were not protected by the business judgment rule.

In their answer, Pioneer and its director sought a judgment of no cause of action, claiming that plaintiffs had no recognizable claim under Michigan law and that the directors' actions were in the best interests of the policyholders and, therefore, protected by the business judgment rule. They also moved to dismiss for lack of subject-matter jurisdiction pursuant to MCR 2.116(C)(4).

The Attorney General and the Insurance Commissioner argued that while Michigan had no case law on point, court decisions in other states had denied similar plaintiffs the right to compel distribution when there was no dissipation of a surplus. They claimed that policyholders are different from shareholders because policyholders contract to have their insurance claims paid, while shareholders buy shares for investment purposes. While the Attorney General and the Insurance Commissioner admitted that plaintiffs had a beneficial interest in the surplus, they argued that plaintiffs had no right to compel distribution because plaintiffs did not allege that they were promised a share of the surplus, or that they had contracted for a share.

Plaintiffs, on the other hand, argued that policyholders have the same rights as shareholders, and that the board of directors was not protected by the business judgment rule because it had failed to act. The trial court decided to adjourn the hearing regarding the motions to dismiss because it found two cases cited by defendants difficult to distinguish, and wanted to give plaintiffs time to respond. The trial court indicated that it was troubled by the notion of ownership because plaintiffs conceded that their ownership rights could not be transferred.

Following a second hearing, the trial court granted summary disposition because it determined it did not have subject-matter jurisdiction over plaintiff's claim. The court further concluded that plaintiffs presented no deposition or affidavit indicating that the directors behaved in an improper fashion, but even if the directors had behaved improperly, it would be the Insurance Commissioner's job to sanction their behavior. The trial court subsequently dismissed the case and ordered plaintiffs to pay Pioneer's costs and attorney fees.

Plaintiffs appealed, and this Court affirmed the trial court's ruling regarding subject-matter jurisdiction, but reversed its imposition of costs and fees. Churella v. Pioneer State Mut. Ins. Co., unpublished opinion per curiam of the Michigan Court of Appeals, decided November 12, 1999 (Docket Nos. 204840, 209998), 1999 WL 33430022. Our Supreme Court reversed and remanded to this Court because it determined that M.C.L. § 500.403, 500.410, and 500.810 of the Insurance Code did not clearly give the Insurance Commissioner exclusive jurisdiction over plaintiffs' claim. 463 Mich. 993, 624 N.W.2d 725 (2001). This Court then remanded to the trial court to rule on the substantive issues.

The Attorney General and the Insurance Commissioner again moved for summary disposition pursuant to MCR 2.116(C)(4) and (C)(8). Pioneer also moved for summary disposition pursuant to MCR 2.116(C)(8). The trial court noted that it had already ruled substantively against plaintiffs, and that plaintiffs had received what they bargained for, i.e., insurance coverage, and that they had no cause of action beyond that for which they bargained.² The trial court again granted defendants summary disposition, reiterating the language of its previous order granting summary disposition for failure to state a claim.³ This appeal followed.

II

The issue on appeal is whether policyholders have a right to compel distribution of a surplus and whether the business judgment rule shields directors when they do not make the distribution.

We hold that policyholders do not have a right to compel distribution of a surplus where there is no statute, company bylaw, or contract provision according them that right, and where they did not sufficiently plead facts to overcome the business judgment rule.

This Court reviews de novo a trial court's grant of summary disposition for failure to state a claim. Beaudrie v. Henderson, 465 Mich. 124, 129, 631 N.W.2d 308 (2001). When reviewing a trial court's grant of summary disposition for failure to state a claim on which relief can be granted, an appellate court assumes that all factual allegations in the nonmoving party's pleadings are true, Maiden v. Rozwood, 461 Mich. 109, 119, 597 N.W.2d 817 (1999), and determines whether there is a legally sufficient basis for the claim. Beaudrie, supra at 129, 631 N.W.2d 308. In the instant case, plaintiffs' factual allegations are that they are policyholders and that the board of directors has not distributed the company's excess surplus.⁴

For this Court to conclude that plaintiffs' claim is legally sufficient, we must decide (1) that plaintiffs as policy holders, are owners of Pioneer, (2) that policyholders have the same rights as shareholders with respect to compelling distribution of excess surplus, (3) that shareholders have the right to compel distribution, and (4) that plaintiffs are not precluded by the business judgment rule from bringing suit. It appears clear that policyholders are owners of mutual insurance companies. Because of their ownership interest, policyholders of mutual insurance companies are both insureds and insurers. Comm'r of Ins. v. Arcilio, 221 Mich.App. 54, 66, 561 N.W.2d 412 (1997). Moreover, defendants concede that plaintiffs have some form of ownership interest.

However, whether a policyholder has the same rights as a shareholder is not as clear. Plaintiffs cited several cases that analogized policyholder suits to shareholder suits. Pincus v. Mut. Assurance Co., 4 Pa. D. & C.3d 71, 73 (1976), aff'd 251 Pa.Super. 626, 381 A.2d 913 (1977) (a suit challenging a mutual company's dividend policy is governed by the same legal principles applicable to stock companies); Barnes v. State Farm Mut. Auto. Ins. Co., 16 Cal.App.4th 365, 375, 20 Cal.Rptr.2d 87 (1993) (a policyholder has the same legal rights a shareholder has). These cases clearly analyzed suits to compel distribution by policyholders according to the same principles used to analyze shareholder suits to compel dividends. On the other hand, defendants assert that the relationship between a policyholder and a mutual insurance company is that of creditor and debtor, and that the policyholder's rights are determined by statute, company, bylaws, or contract. Prudential Ins. Co. of America v. Miller Brewing Co., 789 F.2d 1269, 1275 (C.A.7, 1986) (an insurance policy is interpreted like a contract); Pink v. Town Taxi Co., 138 Me. 44, 51, 21 A.2d 656 (1941), citing Greenlaw v. Aroostook Co. Patrons' Mut. Fire Ins. Co., 117 Me. 514, 105 A. 116 (1918) (a member of a mutual insurance company has the right to share profits and the duty to share losses according to state law, the company's bylaws, and contract); Boynton v. State Farm Mut. Automobile Ins. Co., 207 Ga.App. 756, 757, 429 S.E.2d 304 (1993) (a member has no contractual right to proceeds where the contract provides that distribution is within the company's discretion); Barnes, supra at 375, 20 Cal.Rptr.2d 87 (statute provides that members of a mutual insurance company have the same rights as...