Dearborn Nat. Ins. Co. v. Forbes, 79

• Decision Date: 05 December 1950
• Docket Number: J,No. 79,79
• Citation: 329 Mich. 107,44 N.W.2d 892
• Parties: DEARBORN NAT. INS. CO. et al. v. FORBES. * une term.
• Court: Michigan Supreme Court

Page 892

44 N.W.2d 892

329 Mich. 107

DEARBORN NAT. INS. CO. et al. v. FORBES. ^*

No. 79, June term.

Supreme Court of Michigan.

Dec. 5, 1950.

Wurzer, Higgins & Starrs, Detroit, John T. Higgins and John R. Starrs, Detroit, of counsel, for appellants.

Stephen J. Roth, Atty. Gen., Edmund E. Shepherd, Sol. Gen., Lansing, Maurice M. Moule, Asst. Atty. Gen., for appellee.

Before the Entire Bench.

BOYLES, Chief Justice.

This is an appeal from a decree of the circuit court for Wayne county in chancery affirming the findings and an order of the defendant commissioner of insurance directing the appellant insurance companies to dispose of the securities (stock) held by them in certain corporations. The essential facts have been stipulated.

Appellant Dearborn National Insurance Company was incorporated in 1936 with David F. Broderick as the principal incorporator. Underwriters Acceptance Corporation (Delaware) immediately became the holder of the principal stock interest, and subsequently of all of the stock of Dearborn National Insurance Company, except directors' qualifying shares and shares held by employees. Underwriters Acceptance Corporation held as of June 30, 1947, 196,590 shares of the outstanding 200,000 shares of capital stock of Dearborn National Insurance Company.

Appellant Dearborn National Casualty Company was incorporated in 1933, as the Great Lakes Casualty Company, as a reorganization of part of the business of Central West Casualty Company. From 1933 to December 20, 1938, the insurance commissioner of the State, as receiver of the Central West Casualty Company, held and voted all of the stock (except directors' qualifying shares) of Great Lakes Casualty Company, as an asset of said receivership. In 1938, the insurance commissioner, as receiver of Central West Casualty Company, and holder of all of the capital stock of Great Lakes Casualty Company, as an asset of said receivership, sold all of said capital stock of Great Lakes Casualty Company to Underwriters Acceptance Corporation (then known as D. F. Broderick Incorporated) and its affiliates, including Dearborn National Insurance Company, which then acquired 5,000 shares of the capital stock of Great Lakes Casualty Company. Dearborn National Insurance Company also acquired in 1938, as contributed surplus and at no cost to it, 6,584 shares from stockholders. The name of the Great Lakes Casualty Company was subsequently changed to Dearborn National Casualty Company, one of the appellants herein, and it has continued to operate under that name.

Dearborn National Casualty Company as of June 30, 1947, held 197,350 shares of the common capital stock out of 295,587 shares outstanding, and 11,000 shares preferred stock, of Intertown Corporation. Said Intertown Corporation holds controlling stock interest in Dearborn Coach Company, a Michigan corporation, which owns all of the stock of Lincoln Park Coach Company, a Michigan corporation. Intertown Corporation also holds controlling stock of the Geoda Corporation. Dearborn National Casualty Company has received from Underwriters Acceptance Corporation as contributed surplus 5,000 shares of the common stock and 1,000 shares of the preferred stock of said Geoda Corporation.

David F. Broderick holds voting control of Underwriters Acceptance Corporation, and the board of directors of that corporation has voting control of the appellant Dearborn National Insurance Company, and the board of directors of that company has voting control of the stock of the appellant Dearborn National Casualty Company; the board of directors of that company has voting control of the stock of Intertown Corporation; and the board of directors of that company has voting control of the stock of Dearborn Coach Company and of Geoda Corporation.

David F. Broderick, personally, holds directors' qualifying shares in Dearborn National Insurance Company and in Dearborn National Casualty Company. He is the president and a director of each of said companies as well as of Intertown Corporation, Dearborn Coach Company, Geoda Corporation, and also of Underwriters Acceptance Corporation.

On or about June 30, 1944, Intertown Corporation made a $200,000 down payment on a land contract for the purchase of Eaton Tower, now known as David Broderick Tower, a 34-story office building in Detroit. The purchase contract called for payment by Intertown of a balance of $1,025,000. On or before December 31, 1945, Intertown Corporation, then having a land contract vendee's equity in the building of approximately $225,000, marked up its equity by approximately $252,950 additional value, to $477,950. The department of insurance refused to accept the mark-up, and on or about November 18, 1946, Intertown paid off the balance of its purchase contract by securing a mortgage for $1,250,000 from Equitable Life Assurance Society of New York. Shortly thereafter Intertown Corporation sought to evaluate its equity over the mortgage at an amount in excess of $975,000, which evaluation of its equity by Intertown Corporation the examiners for the department refused to allow. In that connection, the commissioner actually considered the evaluation of the property held by the subsidiary Intertown Corporation.

Since 1936, Dearborn National Insurance Company has in 12 years' operation experienced net underwriting losses aggregating $1,130,350.96; and has shown investment gains, principally through the Broderick-controlled corporations, totalling $1,185,790.84. Since 1937, Dearborn National Casualty Company has in 11 years' operation experienced net underwriting losses aggregating $1,079,479.50; and has shown investment gains, principally through said Broderick-controlled corporations, of $1,579,185.99.

Appellants concede that the statutes governing State regulation of casualty and fire rates, so that they shall not be excessive or inadequate, make no provision or allowance of latitude for investment gains; but claim that section 16, pt. 2, ch. 1, of the insurance code, C.L.1948, § 511.16, Stat.Ann. § 24.84, requires that 'actual value' of an asset controls, in determining the condition of an insurance company. It is stipulated that the rules of the National Association of Insurance Commissioners on Valuation of Securities have for many years contained the following directives:

'Deduction from Admitted Assets on Account of Interownership

of Insurance Companies Stocks:

'Stock of the company itself, owned by it, or any equity therein or loans secured thereby, or any proportionate interest in such stock through the ownership by such company of an interest in another firm, corporation or business unit, shall not be an admitted asset.

'Valuation of Stock of a Subsidiary Company.

'The stock of a subsidiary (other than an insurance company) of an insurer, shall be valued on the basis of the value of only such of the assets of such subsidiary as would constitute lawful investments for the insurer if acquired or held directly by the insurer.'

The controlling issue for decision in this case depends on the construction of section 16(8), pt 2, ch. 1, of the insurance code C.L.1948, § 511.16(8), Stat.Ann. § 24.84(8), the material part of which is as follows:

'(a) Any stock fire, casualty or title insurance company may purchase such stocks, bonds or other evidence of indebtedness of solvent corporations, except insurance companies, as its board of directors or a committee of such board, entrusted by it with the investment of such company's funds, in the exercise of its judgment may deem proper, and such company may also lend its funds with such securities as collateral but no loans shall be made of more than 50 per cent of the fair market value thereof; and such company may hold such stocks so purchased and such loans so made as an investment;

'(b) Any stock fire or casualty insurance company shall, with the consent of the commissioner of insurance, have the power to purchase, in an amount not to exceed 1/10 of its assets, the whole or any part of the suares of stock of any solvent insurance company except the stock of life insurance companies organized under the laws of this, or any other state, and hold teh same as an investment: Provided, That no funds of any such company shall be invested in or loaned on its own stock: Provided further, That the commissioner of insurance in determining the condition of any such company purchasing, or lending on the securities referred to in paragraphs (a) and (b) hereof, shall not allow the funds, so employed and invested, as and for an asset at more than the actual value, as ascertained in the manner approved by him: * * * Provided further, That if at any time it shall appear to the commissioner of insurance that there is a deficiency in the surplus in that the value of the total holdings by any company of such securities shall exceed such surplus funds, and if in his judgment the financial stability of the company shall be impaired thereby, he shall issue an order to such company to make good such deficiency within such reasonable time as he may prescribe either by the sale or other disposal of sufficient of such securities, or by the addition to the surplus funds of sufficient legal assets, other than those permitted as an investment in paragraphs (a) and (b) hereof: * * *'.

Turning at once to the question as to the method to be adopted for evaluating the assets of an insurance company, appellants argue that the commissioner must determine the then-actual value of the assets of the corporations, the stock of which is held as assets of the insurance company, disregarding the cost to the company being examined, of the particular assets (in this case, the stock of the subsidiary corporations indirectly controlled by David F. Broderick). This would seem to mean that...