Hobbs v. Occidental Life Ins. Co., 1514.

Citation87 F.2d 380
Decision Date12 January 1937
Docket NumberNo. 1514.,1514.
PartiesHOBBS, Com'r of Insurance of State of Kansas, v. OCCIDENTAL LIFE INS. CO. et al.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

John G. Egan and John L. Hunt, both of Topeka, Kan. (Clarence V. Beck and John H. Hunt, both of Topeka, Kan., on the brief), for appellant.

George E. Brammer, of Des Moines, Iowa (Joseph Brody, Clyde B. Charlton, and Louis A. Parker, all of Des Moines, Iowa, on the brief), for appellee Occidental Life Ins. Co.

Jerome S. Koehler, of Kansas City, Kan. (Thomas C. Lysaught, of Kansas City, Kan., on the brief), for appellee receiver.

Before LEWIS, PHILLIPS, and BRATTON, Circuit Judges.

BRATTON, Circuit Judge.

The Federal Reserve Life Insurance Company was organized under the laws of Kansas. One of its policyholders who was also a stockholder, acting for himself and all others similarly situated, instituted this action for the appointment of a liquidating receiver. An order was entered directing that the Commissioner of Insurance of the state be notified of the pendency of the suit and that he be permitted to intervene if he so desired. A copy of such order and a copy of the amended bill were served on the commissioner, but he failed to appear. The court found on May 22, 1936, that the affairs of the company had been wrongfully and dishonestly managed; that its assets were being dissipated; and that it was hopelessly insolvent. A temporary receiver was thereupon appointed and he was directed to seek proposals from solvent insurance companies to reinsure the outstanding policies of the failed company. Five days thereafter the company filed an answer in which it consented to the appointment of a permanent receiver and to the entry of a final decree directing reinsurance, rehabilitation, or liquidation of its affairs. Two days later the temporary receiver was appointed permanent receiver. The receiver and Occidental Life Insurance Company, a corporation organized under the laws of California and authorized to engage in business in Kansas, entered into a contract on June 13th, in which it was provided that, subject to the liens, terms and conditions of the agreement and not otherwise, Occidental reinsured and assumed the liabilities of Federal Reserve under its policies of insurance which were in force on May 22d; that co-incident with the approval of the contract, title to all of the assets of Federal Reserve including those on deposit with the insurance department of any state, should vest in Occidental and that the receiver should execute appropriate instruments of conveyance or assignment; that all such assets and the profits from them, except books, records, office furniture, fixtures, and appliances, together with the net gains from the business reinsured should be administered in a separate account called Federal Reserve fund; that since the assets of Federal Reserve at their then value, were insufficient to cover the reserve liabilities of that company a lien of 50 per cent. of the net equity should be placed against each policy thus reinsured with provision that the lien should be adjusted by an appraisal of the assets as of May 22d, and should be thereafter adjusted from time to time by the application of the net profits arising out of the business of the Federal Reserve, but in no event should it exceed 50 per cent. of such net equity; that if, at the end of any calendar year prior to 1951 or on June 30, 1951, the total lien and accrued interest on all policies then in force had decreased to such an extent that it was equal to or less than the equivalent of $11 per $1,000 of premium paying insurance then in force, Occidental should contribute to the Federal Reserve fund an amount sufficient to discharge such lien; that if on June 30, 1951, such lien should exceed the named amount, Occidental should contribute to the fund the sum of $11 per $1,000 of such insurance, less such percentage thereof as that contribution bears to the net equity of the policies reinsured; that thereafter the lien should not be subject to further change except for interest; that the lien against any policy could be discharged at any time by the payment to Occidental of the entire amount and that thereupon such policy should become free and not subject to subsequent adjustment of the lien; that death claims should be paid in full, the reduction having exclusive application to the net equity in the policies; that upon the application of the insured named in any reinsured policy, Occidental should have the right to issue a new policy on its form and credit thereto any amount to which the insured would then be entitled under the terms of the agreement; that Occidental did not assume any liability of Federal Reserve except as set forth in the agreement; and that Occidental should promptly mail to the insured in each policy in force on May 22d, a printed copy of the agreement and a certificate of assumption of liability. The agreement contained many other provisions, but this resume of the pertinent ones will suffice for present purposes.

The court's approval, appended to the contract, was dated June 13th; and on the same date a decree was entered approving the agreement, directing the receiver to carry its provisions into execution and transferring all of the assets to Occidental, but with the provision that every holder of a policy who elected to reject the benefits of the agreement should within thirty days after Occidental mailed the notice of its assumption, deliver to the receiver his rejection in writing; that such an election should be considered as a claim for the cash surrender value of his policy as of May 22d, plus any amount thereafter paid on such insurance less the cost of carrying such insurance and less any amount paid by the receiver as a premium on any reinsurance treaty or contract covering such policy; that Occidental should be under no obligation or liability of any kind to any policyholder thus electing to reject benefits under the agreement; and that all policyholders who failed to reject such benefits in the manner and within the time specified should be deemed to have accepted such reinsurance contract and should be conclusively bound by its terms.

There were more than 27,000 policyholders on May 22d. Occidental sent each of them a copy of the agreement and the notice as directed. The receiver also mailed each of them a notice of the decree and called attention to the provision that all who failed to reject the benefits of the agreement should be deemed to have accepted it and become bound by its provisions. Twenty-eight rejected and filed claims as an election to take the cash surrender value of their respective policies; and their claims have been paid in full.

The book value of notes secured by mortgages and the par value of bonds delivered to the commissioner and by him delivered to the treasurer for safekeeping as of May 22d, were in the aggregate sum of $2,354,114.33. Occidental filed a petition seeking an order requiring the commissioner to withdraw from the treasurer and deliver to it or the receiver notes and mortgages from such securities in the aggregate sum of $439,518.05. It was alleged that such notes were delinquent; that an efficient administration of the securities required the immediate institution of foreclosure proceedings and sale of the real estate covered by the mortgages; that the commissioner had refused to surrender them unless Occidental deposited other securities for an amount at least equivalent in value as a substitution for those withdrawn; and that unless the commissioner were required to deliver them, Occidental could not administer them in a timely and efficient manner. The commissioner responded to an order to show cause with the contention that he was required by the laws of Kansas to retain such securities in trust for the benefit of the holders of Federal Reserve policies and could not withdraw and surrender them unless other securities were substituted. The court heard evidence and found that foreclosure proceedings should be immediately instituted on the notes in question; that the commissioner had no authority in law to maintain suits of that kind; and that it was to the best interest of those concerned with such assets to have them delivered to the Occidental or the receiver for foreclosure and service otherwise. An order was entered on November 27, 1936, by which the commissioner was directed to withdraw or cause such securities to be withdrawn from the treasurer and to deliver them to Occidental or the receiver for such purposes; but it was further provided that the proceeds derived from collection, compromise, foreclosure or sale, or deeds received in satisfaction thereof, be deposited with the treasurer through the commissioner. The commissioner was directed to make further withdrawals for like purposes on demand and that the proceeds derived therefrom be deposited in like manner. A reversal of that order is sought.

We come at the outset to the contention that in reality the order is a proceeding against the state of Kansas without its consent, in violation of the Eleventh amendment to the Constitution of...

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