Dawson v. National Life Ins. Co. of America

• Decision Date: 15 May 1916
• Docket Number: 30493
• Parties: E. J. DAWSON, Appellant, v. NATIONAL LIFE INSURANCE COMPANY OF AMERICA et al., Appellees
• Court: Iowa Supreme Court

157 N.W. 929

176 Iowa 362

E. J. DAWSON, Appellant, v. NATIONAL LIFE INSURANCE COMPANY OF AMERICA et al., Appellees

No. 30493

Supreme Court of Iowa, Des Moines

May 15, 1916

Appeal from Polk District Court.--W. S. AYRES, Judge.

ACTION to recover damages consequent upon fraud alleged to have been practiced in the purchase of three shares of stock in the Des Moines Life Insurance Company. From judgment entered on the verdict, plaintiff appeals.

Reversed.

Casper Schenk, for appellant.

Maurice E. Locke, Cummins, Hume & Bradshaw, and J. B. Weaver, Jr. for appellees.

OPINION

LADD, J.

The Des Moines Life Insurance Company was organized on the mutual plan about 1885, and so continued under various forms of organization until about January 1, 1908, when it was incorporated under the laws of Iowa as a legal reserve life insurance company, with a capital stock of $ 100,000 divided into 1,000 shares of the par value of $ 100 each. Its business expanded so that, in the fall of 1911, nearly $ 30,000,000 of insurance was in force. The health of its president, C. E. Rawson, failed, and the burden of managing the company devolved largely on his wife, L. C Rawson, and son-in-law, Wilmot A. Harbach, who had been vice-president and secretary respectively since the reorganization. Rawson owned 251 shares of stock; Mrs Rawson, 250 shares; their son Homer, 1 share; and Harbach, 50 shares. The remaining 448 shares were widely distributed; for in reorganizing, any policy holder was permitted to subscribe for a limited number, and in that way, plaintiff, who was the company's chief bookkeeper, acquired 3 shares. The book value of these shares was about $ 130 each at the time in question, but shares had been sold for as much as $ 150 each. A surplus of $ 350,000 not assigned to policy holders had accumulated, and, according to the evidence, the value of the insurance outstanding for the purpose of transferring to another company was about $ 15 per $ 1,000 of stipulated indemnities, or altogether, about $ 450,000. This, of course, included the transfer of agencies, in so far as possible, and other incidental advantages. Manifestly, the management had been efficient, and there was room for a finding that the actual value of the stock was much more than either the book value or prices at which previously sold, or $ 200 per share paid plaintiff by defendant Harbach on December 8, 1911, especially if disposed of for the purpose of effecting reinsurance. During the time in question, the National Life Insurance Company of the United States was a corporation organized under the laws of Illinois, with a capital of $ 500,000, divided into shares of $ 100 each, of which Albert M. Johnson owned 3,420; his wife, 1,050; Robert D. Lay, 500; and Robert E. Sackett, 30. Johnson was president, and Lay, secretary, both being directors. Since January 23, 1912, W. A. Harbach has been in the employ of that company in the agency department, at a salary of $ 12,000 per annum. For more than a year, Johnson had been negotiating in behalf of his company, either directly with Mrs. Rawson or, through Harbach, with Mr. and Mrs. Rawson, for the purchase of the stock of the Des Moines company, with the well-understood purpose of reinsuring its risks in the National Life Insurance Company and taking over its assets. These negotiations culminated in an option, November 29, 1911, in the words following:

"For and in consideration of one dollar and other good and valuable considerations in hand paid to C. E. Rawson and L. C. Rawson by A. M. Johnson, receipt of which is hereby acknowledged, the said C. E. Rawson and L. C. Rawson hereby agree to sell and the said A. M. Johnson hereby agrees to buy on or before February 28, 1912, 502 shares of the capital stock of the Des Moines Life Insurance Company for the sum of $ 500,000, to be paid as mutually agreed to.

"If either party fails to perform their part to this agreement they shall pay to the other the sum of $ 5,000 as liquidated damages.

"In witness whereof the parties hereto have set their hands and seals this 29th day of November, A. D. 1911.

"C. E. Rawson (Seal)

"L. C. Rawson (Seal)

"A. M. Johnson (Seal)"

At the time this was signed, the parties thereto, with Harbach, arranged that Johnson should acquire the remainder of the stock, or substantially all of it, at not to exceed $ 200 per share, and that Harbach should purchase the stock for Johnson. On December 1st following, the latter addressed a letter to Harbach, saying that his 50 shares of stock would be purchased for the sum of $ 10,000, to be paid when the shares of Mr. and Mrs. Rawson were finally acquired, and on the following day placed in Harbach's hands $ 80,000 out of which to obtain the remaining 448 shares of stock. Harbach acknowledged this and outlined a plan under which the name of the purchaser would be concealed. On December 16th, Harbach was paid for his stock, and on the 23d, Johnson advised Harbach:

"That, upon the consolidation or reinsurance of the Des Moines Life Insurance Company by the National Life Insurance Company of the United States of America, you will be placed upon the pay roll of the National Life Insurance Company of the United States of America for a term of three years, at a salary of $ 12,000 per year, payable monthly.

"For your services in assisting me in purchasing the capital stock of the Des Moines Life Insurance Company, and for other services in connection with the possible consolidation or reinsurance of the Des Moines Life Insurance Company by the National Life Insurance Company of the United States of America, you are to receive the sum of $ 40,000, upon terms of payment to be agreed upon between us, at the same time the stock of C. E. and L. C. Rawson is purchased and paid for."

This latter would make the price of Harbach's stock a little higher than that to be paid the Rawsons. The plan doubtless was adopted because of Harbach's agency in buying the minority of shares. He had bought for Johnson all but 14 of these shares at an average price of something less than $ 200 per share. On January 23, 1912, the Des Moines Life Insurance Company and the National Life Insurance Company entered into a contract, by the terms of which the former undertook to transfer to the latter all of its assets and business; and the National Life Insurance Company, in consideration thereof, agreed to save the Des Moines Life Insurance Company harmless, to assume all its obligations on outstanding policies, to maintain the necessary legal reserves, make necessary reports, and to enter into direct individual supplementary contracts to this effect with the policy holders of the Des Moines Life Insurance Company, and further, to "pay the Des Moines Life Insurance Company $ 700,000--$ 300,000 on the taking effect of the agreement, and $ 400,000 in five annual installments of $ 80,000 each." This plan was approved by the state reinsurance commission, consisting of the governor, auditor of state and attorney general. The contract was performed, and thereafter the Rawsons were paid $ 500,000 in money or legal obligations to pay for their 502 shares of stock, or nearly $ 1,000 per share, and Harbach, $ 40,000 for his services rendered Johnson in consummating the deal; and also he was taken into the employment of the National Life Insurance Company at the salary agreed upon, more than double that paid him by the Des Moines Life Insurance Company. The evidence was such that the jury might have found that, though the president of the Des Moines Life Insurance Company was enjoying a salary of $ 10,000 per year, the vice-president, a salary of $ 6,000, and the secretary, a salary of $ 5,000, they had negotiated, for nearly a year, without the knowledge of other stockholders, with Johnson as president of the National Life Insurance Company with the distinct purpose of effecting, directly or indirectly, the transfer to his company of all the assets and risks of the Des Moines Life Insurance Company, and thereby terminating its existence. Until Johnson, in pursuance of the plan agreed upon, had acquired substantially all the shares of the minority stockholders, he humored Mrs. Rawson's sentiment against participating in the actual transfer of the assets and reinsuring the risks; but thereafter he insisted that this be done as a condition precedent to buying the Rawsons' stock, and she finally acquiesced, and the deal as contemplated from the outset was consummated. According to Johnson's testimony, the completion of the deal depended upon obtaining substantially all the shares of the minority stockholders. The jury might well have found, but for the withdrawal of the issue, that the negotiations from the beginning were to acquire all the company's property; that the scheme of buying the stock was merely a means of accomplishing this; and that these directors and officers, knowing that Johnson was ready and willing to pay approximately $ 700,000 therefor, secretly connived with him to so effect the transfer that the Rawsons and Harbach might receive an unfair portion of the proceeds of the sale,--that is, $ 550,000 for their 552 shares of stock, or nearly $ 1,000 per share,--while those owning the 448 shares should have less than $ 100,000, leaving the balance for the added expenses of perpetrating the deal in this fashion.

Appellant requested the court to instruct the jury in the language following:

"You are instructed that a director and managing officer of a corporation doing business as a life insurance company stands in a relation of a fiduciary to all the stockholders who are not themselves engaged in the active management of the company, and before any such director and officer of the company, who is acquainted with its conditions...