In re Supreme Lodge of the Masons Annuity

• Decision Date: 02 February 1923
• Docket Number: 7831.
• Citation: 286 F. 180
• Parties: In re SUPREME LODGE OF THE MASONS ANNUITY.
• Court: U.S. District Court — Northern District of Georgia

286 F. 180

In re SUPREME LODGE OF THE MASONS ANNUITY.

No. 7831.

United States District Court, N.D. Georgia.

February 2, 1923

Little Powell, Smith & Goldstein, of Atlanta, Ga., for alleged bankrupt.

Spalding MacDougald & Sibley, of Atlanta, Ga., for petitioning creditors.

A. H Davis, R. R. Arnold, McClelland & McClelland, and W. H Terrell, all of Atlanta, Ga., for objecting creditors.

SIBLEY District Judge.

On February 4, 1922, a state court appointed receivers, on the ground of insolvency, for the Supreme Lodge of the Masons Annuity, a corporation. On the same date three of its creditors, averring this to be an act of bankruptcy, filed against it, in this court, a petition in involuntary bankruptcy, describing the company as one engaged in the business of insurance. The Supreme Lodge filed a motion to dismiss the petition, because it showed on its face that the lodge, being an insurance corporation, was not subject to the Bankruptcy Act (Comp. St. Secs. 9585-9656). By agreement further proceedings were suspended in the bankruptcy case until the issues over the receivership should be fought out. By January, 1923, the receivership had been confirmed, and large classes of certificate holders in the Supreme Lodge had been reinsured in another company, and various acts of partial administration of the corporate assets accomplished by the receivers.

Thereupon, the original petitioning creditors in bankruptcy having indicated their purpose to abandon their procedure, another creditor by certificate asked leave to be made a party to prosecute the petition, and to amend it by striking the allegation that the alleged bankrupt was a corporation engaged in insurance, and alleging that it was a moneyed and business corporation, and not an insurance company. The alleged bankrupt, under resolution of its directors, sought to withdraw its motion to dismiss the petition and to file an answer admitting insolvency and its willingness to be adjudged a bankrupt, and praying that it be so adjudged, but accompanied by no schedules. Other creditors also appear, as do the receivers of the state court, no objection being made, to resist the bankruptcy; they principally asserting an estoppel against the Supreme Lodge to change front in the case, and denying the jurisdiction in bankruptcy over that corporation. Evidence was submitted on both sides, and the case taken under advisement by the judge.

1. It is the right of creditors other than the original petitioners to be heard in support of the petition, when the latter seek to abandon their petition. This is implied in the requirement of the Bankruptcy Act, Secs. 58a(7), and 59g, that all creditors be notified of a proposed dismissal, and is expressly asserted in section 59f. The intervening creditor will be made party plaintiff, and permitted to amend the petition as prayed. So the creditors who seek to defend will be allowed to do so, regardless of the attitude of the alleged bankrupt. Section 59f.

2. The Supreme Lodge itself will be allowed to withdraw its motion to dismiss and to answer as it offers to do. It is elementary that the corporation was not dissolved by the receivership. In re Beaver Cotton Mills (D.C.) 275 F. 498. Its directors may still direct its litigation, and no rule of bankruptcy practice prevents it from changing its policy from one of active defense to one of submission. No such voluntary participation in the state court receivership is shown as should be held an estoppel here. The answer, however, is only an answer, and does not bind the objecting creditors, nor convert the involuntary into a voluntary bankruptcy. If this may be done, the allegations of this pleading, unaccompanied by schedules, do not even show such an attempt. The case remains one in involuntary bankruptcy, with creditors both prosecuting and defending, and is so triable by the court without a jury. Bankruptcy Act, Secs. 18d, 19.

3. The submission of the alleged bankrupt by no means relieves the question whether it is subject to bankruptcy jurisdiction. The provision on the point of section 4 of the Bankruptcy Act, as amended in 1910, is:

'Any unincorporated company, and any moneyed, business, or commercial corporation, except a municipal, railroad, insurance. or banking corporation * * * may be adjudged an involuntary bankrupt. ' Comp. St. Sec. 9588.

The term 'unincorporated company' is used in opposition to the term 'corporation,' and refers to combinations of individuals without a charter, but other than partnerships, who act together in a joint adventure or as a joint-stock company or the like. 'Corporation' is used, not in the broad sense defined in section 1(6) of the original act, because as therein excepted such meaning would be 'inconsistent with the context,' but in the exact sense of an artificial entity created by charter, either de jure or de facto. The Supreme Lodge is such a corporation.

The contention here, on the one hand is that it is a moneyed or business corporation, but, though a fraternal benefit society, it is not an insurance corporation. The contention, on the other hand, is that it is either a benevolent corporation, and so neither a moneyed, business, nor commercial one, or else, being engaged in mutual benefit insurance, is an insurance corporation, and in neither case subject to involuntary bankruptcy. Questions of law are: What did Congress mean by 'insurance corporation'? Is the nature of a corporation to be determined by its charter powers, or by the business actually done, or by both? Is the classification of the corporation by the laws of the state of its creation controlling, or is there a uniform test applicable in all parts of the country?

Answering the last first, it is held that the language used to define the subjects of bankruptcy speaks to the entire territory over which Congress has legislative jurisdiction, and means the same thing everywhere. State classification was not regarded, nor intended to be followed, and the language of state Legislatures is important only as it may tend to show the meaning of terms as used throughout the United States. That which is an insurance corporation in the meaning of Congress is such in every state or territory, regardless of the name locally assumed by or attributed to it.

The second question is answered by considering the very nature of a corporation as a creature whose functions and powers arise out of and are limited by its charter. Manifestly that instrument is the natural primary and generally sufficient evidence of the nature of the corporation, which ought to be presumed to do what it was chartered to do. The abandonment by the amendment of 1910 of the business principally engaged in which was the test under the original Bankruptcy Act, indicates that it ought no longer to be looked to in ordinary cases. But a corporation often has power to do many things. The most ancient railroad charter in Georgia which is still used is that of the Georgia Railroad & Banking Company, which gave franchises both as a railroad and as a bank. The company has done no banking business for many years, and its present assets and liabilities are only those of a railroad company. Manifestly, if for bankruptcy purposes it were necessary to determine whether it is a railroad or a banking corporation, it should be held to be the former. So many corporations are chartered both as banks and trust companies. Surely whether such a one was actually doing a banking business could be inquired into, if it was sought to be put in bankruptcy. It is even conceivable that a corporation might be chartered to do every lawful business. Then, of necessity, the business it actually did in making its debts and getting its property must be looked to, in order to test its real nature for bankruptcy purposes. Yet again, corporations may so engage in ultra vires enterprises as totally to depart from the business fixed by charter, and perhaps alter de facto their corporate status. The rule on a related subject is thus stated in 29 Cyc.p. 9:

'The question whether an association is a benevolent or friendly society is ordinarily determined by its object, as expressed in its charter or articles and by-laws; but the fact that it adopts a name indicative of social and beneficial objects, or that it is described in its charter or articles as a beneficial or friendly society, does not render it such, if in fact its main object is that of the ordinary insurance company.' The true rule is that the charter is first to be looked to in classifying the corporation, but that the business really done, and which is to be administered in bankruptcy, may also be looked to either to explain or rebut the inferences from the charter powers.

The first question, What did Congress mean by 'insurance corporation'? is best approached by remembering that this is the language of an amendment, an attempt to better the law, requiring consideration of the old law and its difficulties. Section 37 of the Bankruptcy Act of 1867 (14 Stat. 535) made its provisions applicable to moneyed business, and commercial corporations. These words obtained a specific judicial construction, as excluding public, political, educational, charitable, and social corporations, and including such as engaged in trade or other business for gain (Veazie Bank v. Fenno, 8 Wall. 533, 19 L.Ed. 482), embracing, notwithstanding their quasi public character, railroads (Adams v. Boston Railroad Co., Fed. Cas. No. 47; New Orleans Railroad Co. v. Delamare, 114 U.S. 501, 5 Sup.Ct. 1009, 29 L.Ed. 244), insurance companies (Merchants' Insurance Co., Fed. Cas. No. 9,441; Hercules Mut. Life Society, Fed. Cas. No. 6,402; Independent Insurance Co., Fed. Cas. No. 7,017), and banks (Thornhill v. Bank of Louisiana, Fed. Cas....