In re Fidelity Assur. Ass'n

• Decision Date: 24 December 1941
• Citation: 42 F. Supp. 973
• Court: U.S. District Court — Southern District of West Virginia
• Parties: In re FIDELITY ASSUR. ASS'N.

42 F. Supp. 973

In re FIDELITY ASSUR. ASS'N.

District Court, S. D. West Virginia.

December 24, 1941.

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Townsend & Townsend (T. C. Townsend and Hillis Townsend), of Charleston, W. Va., for Central Trust Co., trustee.

James R. Fleming, of Fort Wayne, Ind., and John V. Ray, of Charleston, W. Va., for debtor.

Justin N. Reinhardt, Edward C. Jaegerman, and John P. Moore, all of Washington, D. C., for Securities and Exchange Commission.

Allen H. Blondy, of Detroit, Mich., for Contract Holders Paul V. Lundstedt and Lelia Lundstedt.

Austin V. Wood, of Wheeling, W. Va., for Edward W. Driehorst and others, certificate holders of debtor.

Raymond Huwe and John J. Rivers, both of Cincinnati, Ohio, for A. Clyde Ross, trustee, and others.

Rudolph K. Schurr, of St. Louis, Mo., for Dewey S. Godfrey, receiver for Missouri policyholders.

Rickard H. Lauritzen, of Madison, Wis., for Banking Commission of State of Wisconsin and others.

Edmund Burke, of Springfield, Ill., for S. Leigh Call, receiver in Illinois.

W. F. Gray, of Springfield, Ill., for Secretary of State and Treasurer of State of Illinois.

Dorr E. Warner, of Cleveland, Ohio, for Bertha Thornton and others, contract holders.

Earl B. Swarner, of Kansas City, Kan., for V. M. Huffman, Securities Commissioner of State of Kansas.

Dale Dunifon, First Asst. Atty. Gen., and David M. Spriggs and Howard Bernstein, Asst. Attys. Gen., all of Columbus, Ohio, for Treasurer of State of Ohio.

Fyke Farmer, of Nashville, Tenn., for L. H. Brooks, A. L. Goldberg, Jr., and Frederick Leake, Contract Holders.

Price, Smith & Spilman (Robert S. Spilman, Jr.), of Charleston, W. Va., for George Melcher and others, Protective Committee of Missouri Contract Holders.

Clarence W. Meadows, Atty. Gen. of State of West Virginia, of Charleston, W. Va., for Edgar B. Sims, State Auditor and Ex Officio Insurance Commissioner of State of West Virginia.

Koontz & Koontz (J. Campbell Palmer, III), of Charleston, W. Va., for H. Isaiah Smith and Ross B. Thomas, Receivers of Debtor, appointed by Circuit Court of Kanawha County, West Virginia.

H. Vernon Eney and Guy B. Brown, both of Baltimore, Md., for Insurance Commissioner of State of Maryland.

MOORE, District Judge.

On June 6, 1941, Fidelity Assurance Association filed its petition under Chapter X of the Chandler Act, 11 U.S.C.A. § 501 et seq., as debtor, praying for corporate reorganization. After an ex parte hearing, the court entered an order approving the petition, enjoining various persons including receivers theretofore appointed by State courts, both in and outside the State of West Virginia, from disposing of any of the property of the debtor; appointing Central Trust Company of Charleston, West Virginia, as trustee for the debtor, and requiring the receivers to turn over to the trustee all property of the debtor in their hands. On June 10, 1941, the court further ordered all state officials, both in and outside the State of West Virginia, having in their possession, custody or control any of the debtor's property, to deliver such property to the trustee, and on the same day the court fixed the 5th day of August, 1941, as the date for a plenary hearing on the debtor's petition. Ross B. Thomas and H. Isaiah Smith, receivers appointed by the Circuit Court of Kanawha County, West Virginia, delivered to the trustee under protest the property of the debtor in their possession. The Ohio receiver turned over to the trustee without protest the property of the debtor in his possession.

Edgar B. Sims, Auditor and ex-officio Insurance Commissioner of the State of West Virginia, Ross B. Thomas and H. Isaiah Smith, the West Virginia receivers, and various other state court receivers and state depositaries of securities of the debtor outside the State of West Virginia, as well as certain groups of creditors, were permitted to intervene and file answers controverting the allegations of debtor's petition.

The hearing which began on August 5, 1941, was continued from time to time until the 10th day of October, 1941, during which time nearly 4,000 pages of testimony were taken and 123 exhibits filed, at the conclusion of which hearing the court heard the argument of counsel upon the questions at issue.

During the course of the hearing, on August 9, 1941, the court entered an order modifying the orders of June 6, 1941, and June 10, 1941, so as to eliminate therefrom any requirement that property of the debtor in possession, custody or control of any state official on April 11, 1941, should be turned over or delivered to the debtor's trustee in this proceeding. The West Virginia Insurance Commissioner, the receivers appointed by the Circuit Court of Kanawha County, West Virginia, and the Insurance Commissioner of Maryland, who appeared specially for that purpose, filed motions that the orders of June 6, 1941, and June 10, 1941, be further modified by eliminating all injunctive provisions against them, respectively, on the ground, substantially, that the effect thereof is to subject sovereign states to suit contrary to the provisions of the Federal Constitution; and as to property already delivered by the receivers to the trustee, that the orders be rescinded and the trustee required to return such property.

The case is now submitted to the court upon the questions (1) whether debtor's petition shall be approved or dismissed, (2) whether the injunction "freezing" deposits in the hands of state depositaries should be dissolved, and (3) whether the orders requiring receivers to turn over certain assets of the debtor in their hands to the Central Trust Company as trustee of the debtor should be rescinded.

Statement of Facts.

Debtor was incorporated under the laws of the State of West Virginia on April 26, 1911, under the name of Fidelity Investment & Loan Association. Its objects and purposes as set forth in its original charter were to engage in a general brokerage business in securities, real estate and insurance; and for a period of approximately a year and one-half it carried on a general brokerage business. In November, 1912, it changed its name to Fidelity Investment Association and amended its charter so as to provide for conducting "the business of soliciting and receiving deposits and payments on any annuity contracts, certificates or annuity bonds." This charter amendment brought the company under the provisions of what is now Article 9 of Chapter 33 of the Code of West Virginia, 33-9-1 et seq., relating to annuity contracts. Since the change of name and amendment of the charter in November, 1912, debtor has been engaged solely in the business of selling its own securities in the form of investment contracts or bonds of various types and the investment of the funds received from purchasers of such contracts so as to provide for their payment at maturity, according to their terms, or for payment of specified cash values at various stages in the life of the individual contract, if required by the purchaser. If a purchaser paid all the installments of his contract to maturity, he received a net return on the money invested which ranged from 1.55% to 3.09%, depending on the type of contract. The cash values were so fixed that it was not until the purchaser had paid all of the first year's installments that his contract was given any cash value whatever. Thereafter it acquired a cash value which increased proportionately as the years passed; but the cash value did not equal the total amount paid in by the purchaser until the end of a period varying from six to nine years, again depending on the type of contract. Contracts were matured when monthly installments had been paid for a period of ten to eleven years with a subsequent waiting period of three to thirteen months. About the year 1934 debtor began issuing a contract known as Series B contract, the sale of which from that time on constituted the major portion of debtor's business. Series B contracts were issued and sold in two forms. One of these contained a provision commonly referred to as Section 6, by the terms of which it was agreed that the debtor would protect the unpaid portion of those contracts containing Section 6 by procuring an insurance policy which would provide that the contract of any purchaser who died before the maturity of his contract and while the same was in good standing would be paid to maturity (or the commuted value of a paid-up contract would be paid to the purchaser's estate) without further payment of any monthly installments. The net return to the purchaser of this Series B contract containing Section 6, after allowing for the amounts deducted to pay the premiums on the insurance, was 1.55%.

While the various types of investment contracts sold by the debtor differ in some respects, they are all alike in providing for monthly, semi-annual or annual payments of specified sums, of which a sufficient portion was to be set aside in a reserve fund which was to produce the sum required to pay the purchaser the amount of money agreed upon in the contract. The earlier contracts contained no statement as to the basis of the reserve fund. Of the later contracts, some provided for reserves on a 4½% basis and some on a 4% basis. All provided that the reserve fund so set aside should "be invested in approved securities and deposited in trust as required by the laws of the State of West Virginia."

During the course of its history, the debtor expanded its business to a point where it was conducting operations in no fewer than 29 states. Section 3 of Article 9 of Chapter 33 of the Code of West Virginia provides that companies such as the debtor, as a condition to receiving a license to transact business in the State of West Virginia, must deposit with the state treasurer in trust for the benefit of its contract holders securities approved by the Insurance Commissioner of West Virginia, in the amount of $100,000 "and,...