Hutchinson v. Fidelity Inv. Ass'n

• Decision Date: 28 August 1939
• Docket Number: No. 4490.,4490.
• Citation: 106 F.2d 431
• Parties: HUTCHINSON v. FIDELITY INV. ASS'N.
• Court: U.S. Court of Appeals — Fourth Circuit

106 F.2d 431 (1939)

HUTCHINSON v. FIDELITY INV. ASS'N.

No. 4490.

Circuit Court of Appeals, Fourth Circuit.

August 28, 1939.

COPYRIGHT MATERIAL OMITTED

Edward Lamb, of Toledo, Ohio (Lowell Goerlich, of Toledo, Ohio, on the brief), for appellant.

Tom B. Foulk and Austin V. Wood, both of Wheeling, W. Va. (Koontz & Koontz, of Charleston, W. Va., and James G. McClure, of Wheeling, W. Va., on the brief), for appellee.

Chester T. Lane and John T. Callahan, both of Washington, D. C., Edward C. Jaegerman, of New York City, and Homer Kripke, of Washington, D. C., for Securities Exchange Commission, amici curiæ.

Before PARKER and NORTHCOTT, Circuit Judges, and H. H. WATKINS, District Judge.

PARKER, Circuit Judge.

This is a suit in equity brought in the District Court of the United States for the Northern District of West Virginia, at Wheeling, on December 19, 1938, by Robert F. McCammon and other contract holders, against the Fidelity Investment Association, a West Virginia corporation, engaged in the selling of investment contracts and operating under a license issued by the Insurance Commissioner of West Virginia pursuant to Article 9 of Chapter 33 of the West Virginia Code. The object of the suit was to secure the appointment of a receiver for the Association and have it liquidated. The complaint alleged that a civil action had been instituted against the Association, in the District Court of the United States for the Eastern District of Michigan, setting forth that its contracts were being improperly sold and asking that it be enjoined from engaging in certain alleged unfair practices, and further alleged that because of this suit the plaintiffs and others holding contracts of the Association would suffer great loss unless the company were liquidated through a receivership.

The appellant, Alice P. Hutchinson, on December 23, 1938, moved the court for leave to intervene in the suit as a defendant and filed an answer alleging that she was the holder of one of the contracts of the Association known as a Special Annuity Contract. The value of her contract was less than $3,000.00. She prayed that the appointment of a receiver for the Association be denied and the suit dismissed. Her answer further prayed that the court declare her rights and the rights of others holding similar contracts. There were a number of other intervenors but they have not appealed from the decree of the court below.

The Association filed its answer to the complaint, as well as to the intervening answer of appellant, denying all pertinent allegations as to the misconduct of its business, and moved for judgment on the pleadings. The court below overruled this motion but denied the motion for a receiver until a further hearing could be had. A stipulation was entered into between the attorneys representing all the parties then in court, including the appellant, that counsel with the aid of auditors and experts, should make an examination of the affairs of the Association and report their findings to the court. To this the trial judge agreed and entered an order appointing a Special Master to preside at the conferences to be held pursuant to the stipulation.

Hearings were immediately had and on January 26, 1939, the Special Master filed his report, which was signed also by representatives of all the parties to the suit except the attorneys representing appellant.

The Special Master reported, among other things, that the conferences were participated in by representatives of the regulatory bodies of various states in which the Association was operating including the States of Wisconsin, Ohio, Virginia, Indiana, and West Virginia; that a number of the officers of the Association and experts, as well as the auditor of the State of West Virginia, who had supervisory powers over the Association as ex-officio Insurance Commissioner, had been examined; that the Association had approximately one hundred thousand (100,000) contracts on which the liability, at the time of the institution of this suit, was in excess of thirty-four million dollars ($34,000,000); that the assets of the Association, measured by the sound value basis, were greater than its liabilities and that therefore the Association was solvent, and that the laws of the State of West Virginia, as to the deposit of securities, had been complied with. The report recommended that the application for the appointment of a receiver be denied.

Exceptions to the report of the Special Master were filed on behalf of appellant, all other parties to the suit having concurred in the report. On January 31, 1939, the judge below filed an opinion holding, among other things, that the "sound value" basis adopted by the Special Master in computing the value of the Association's assets was a proper basis to be used in determining the solvency of the Association. He then entered an order overruling the exceptions to the report of the Special Master, confirming the report in all respects, both as to findings of fact and conclusions of law, and dismissing the suit. The appellant excepted to the entry of the final judgment and brought this appeal.

The civil action brought in the Michigan court was terminated on December 22, 1938, by the entry of a consent judgment and we are of the opinion that that proceeding has no bearing upon the issues here.

The points raised by appellant's exceptions to the report of the special master are three in number and are as follows: (1) That there was "failure to outline the facts behind the trust or contractual relationship which the Fidelity Investment Association has with its contract holders"; (2) that there was failure to disclose the extent of the demands made for the withdrawal of cash surrender and loan value; and (3) that the so-called West Virginia or "sound value" theory of appraisal was used in valuing securities instead of market value. The exceptions entered to the judgment of the District Court properly raise no other questions except one relating to the validity of the judgment itself, i. e. whether judgment dismissing the complaint could be entered without prior notice to each of the contract holders of the association. We shall consider each of these in the order named.

We see no basis for the contention that there was failure to outline the facts behind the trust or contractual relationship which the association sustains towards the contract holders. On the contrary, the report sets forth an analysis of each type of contract issued by the association, shows a segregation of funds applicable to contracts of that type and gives the status of each fund showing assets and liabilities, with "sound" value, book value and market value of assets, and with a showing of the amount of the actuarial reserve required to meet outstanding contracts in excess of cash liability thereon. The report further shows that transactions between funds which had been subject to criticism had been discontinued; that on the basis of "sound" value each of the funds was solvent, with the exception of two of the older funds which had gone through the depression; and that, with respect to these two, the value of assets in the general fund in excess of liabilities was ample to take care of their deficits. If it be assumed, as appellant contends, that the association sustains a trust relationship towards its contract holders with respect to the securities held in each of these funds, there is nothing in the record before us which would justify the court in taking these assets out of the hands of the association and appointing another trustee to handle them; and there is no reason for the court to make a declaration of such trust relationship in the absence of some affirmative action to be taken with regard thereto, as certainly the court...