Kueckelhan v. Federal Old Line Ins. Co. (Mut.)

Decision Date29 September 1966
Docket NumberNo. 38116,38116
Citation69 Wn.2d 392,418 P.2d 443
CourtWashington Supreme Court
PartiesLee I. KUECKELHAN, Washington State Insurance Commissioner, Respondent, v. FEDERAL OLD LINE INSURANCE COMPANY (MUTUAL), Appellant.

J. R. Cissna, Federal Way, Brodie, Fristoe & Taylor, Olympia, for appellant.

Francis Hoague, Daniel Brink, Sp. Asst. Atty. Gen., Seattle, John J. O'Connell, Atty. Gen., Olympia, Basil Badley, Asst. Atty. Gen., for respondent.


RCW 48.31.030 1 permits the Insurance Commissioner, for cause and under judicial supervision, to take possession of a domestic insurance company as a statutory rehabilitator. Respondent, Insurance Commissioner, acting under this statutory provision, initiated this action against appellant, Federal Old Line Insurance Company, a domestic mutual company. The Superior Court for King County entered an order directing rehabilitation and empowered respondent to take possession of appellant's assets, books, records, and files and to conduct its business.

It is from this order that the instant appeal is taken.

A rehabilitation action under RCW 48.31.030 is designed to accomplish the conservation of an insurance company. In such an action, the court is authorized to appoint the Insurance Commissioner as rehabilitator, with the end in view of correcting and removing the causes and conditions which project the need for rehabilitation. RCW 48.31.040(1). 2 When rehabilitation has been accomplished, the assets and property of the company will be turned back to the insurer. RCW 48.31.040(3). 3

At the outset, and by way of background for the discussion to follow, it should be observed that RCW 48.09.270 4 provides that the policies of mutual life insurance companies, such as appellant, must maintain a condition permitting the assessment of policyholders, i.e., the owners of the company, until the company has acquired a surplus of over $100,000. When computing the amount of this surplus, or for otherwise determining compliance with provisions of the insurance code and/or any issues of financial condition, not all of a company's claimed assets are considered admissible to the balance sheet. Those which are deemed admissible, generally speaking, are assets which are not prohibited or proscribed by the insurance code. RCW 48.12.010 and 48.12.020. These assets then are characterized as 'admitted' assets, to be balanced against the liabilities, in determining the issue of code compliance, financial condition, or amount of required surplus. Cf. Federal Old Line Life Ins. Co. v. Sullivan, 33 Wash.2d 358, 206 P.2d 311 (1949).

In 1956, appellant filed a financial statement with the respondent showing a sufficient surplus to permit removal of the contingent liability condition. Before the condition could be removed, however, it was necessary to have an examination of appellant's books by the respondent. This examination occurred in 1957, following which respondent ruled that certain of appellant's claimed assets were not admissible. Appellant's surplus was accordingly reduced below the requisite amount, thus precluding removal of the condition at that time. Appellant's annual statements thereafter showed, in each succeeding year, a surplus greater than the year before. Its further requests for removal of the condition suggested another examination of its books, which in turn gave rise to this action.

The circumstances precipitating respondent's petition for rehabilitation reveal that between 1953 and 1956 appellant entered upon an investment program involving the purchase of real estate, real-estate contracts, and real-estate mortgages in a shopping center development located in a relatively circumscribed unincorporated area, designated as Federal Way in southern King County, Washington. On December 31, 1956, appellant's books revealed a total of $4,655,544.11 in assets, $1,814,544.45 of which was represented by notes and mortgages on property in the Federal Way Shopping Center complex. This concentration of investments was criticized in respondent's report of the 1957 examination. This criticism was apparently ignored by appellant, for, by September, 1962, it had increased its mortgage investments in the Federal Way shopping area to $3,960,401.04 out of claimed assets of over $7 million.

The substantial increase in real-estate based investments was in part attributed to a contract which appellant entered into with Federal Shopping Way, Inc., in January, 1957. The terms of the contract provided that appellant would provide $2,500,000 in additional mortgage financing to tenants of the shopping center which Federal Shopping Way, Inc., was interested in developing. In return for this financing, Federal Shopping Way, Inc., agreed to guarantee payment of the mortgages and to permit additional area financing subordinate to appellant's mortgages.

In the meantime, another corporation, named Federal Association, Inc., which had long operated under an agency contract with appellant in promoting appellant's business activities, also decided to aid in the development of the shopping area by providing initial financing for tenants. To facilitate the various financing arrangements, tenant companies (known as 'cooperating companies') 5 were organized and pledged the majority of their stock to Federal Association, Inc.

Subsequent to execution of the January, 1957, contract the legislature enacted Laws of 1957, ch. 193, § 8 (RCW 48.13.265), 6 which prohibited insurance companies from having more than 65 per cent of their investments in real-estate based assets. Appellant thereafter took the position that the passage of that act did not affect its contract which was in existence prior to the existence of the act.

Time passed and the Federal Way shopping area began to grow. Appellant, in the meantime, obtained comprehensive and optimistic appraisals of the area. Based upon these appraisals, appellant considered the mortgages given by the 'cooperating companies' to be within the requirement of RCW 48.13.120 7 that mortgaged property be worth at least one third more than the principal amount of the mortgage.

It appears that the original mortgages taken by appellant from the 'cooperating companies' were principally upon property located in the western section of the Federal Way shopping area, and that the holdings of some of such companies were of noncontiguous parcels. In 1963, it was decided that it would be in the best interests of all concerned if the land holdings of these companies would be reorganized. The purpose of this reorganization was to vest title in the 'cooperating companies' to contiguous parcels of property with greater emphasis on property in the eastern section of the shopping area. Ostensibly this would allow more logical development of the property and ultimately provide greater security for the mortgages.

Appellant participated in this proposed reorganization by accepting new mortgages on the reallocated parcels of property in lieu of the mortgages which it held at that time. The new mortgages, which were given in exchange for appellant's 'book' satisfaction of the former mortgages, had a higher face value, a greater though deferred interest rate, and shorter maturities.

In October, 1960, respondent dispatched examiners to appellant's offices. The examination continued until 1963. Following review of the examiners' report, respondent on May 28, 1963, issued Order No. 201, entitled 'Notice and Order to Make Good a Deficiency.' This order was premised on RCW 48.09.340, 8 and stated that respondent had determined that appellant's admissible assets fell below the amount of its liabilities plus the amount of required surplus. This order gave appellant the statutory 90 days in which to make good the deficiency, and advised of the prospects in the event of failure.

Appellant countered that the company was solvent; that it had substantial assets; that in its over-all history it had never failed to honor a policyholder's claim; and that it had never been involved in a lawsuit brought against it by a policyholder, beneficiary, or applicant.

Extensions of time for compliance with Order No. 201 were granted, following which appellant demanded an administrative hearing on the validity of the order. A hearing was commenced and lasted for 8 days. Before any decision was rendered, however, respondent commenced the instant action.

The underlying basis upon which Order No. 201 was issued and the instant action instituted was respondent's conclusion that appellant's persistent and insistent pursuit of and adherence to its prevailing investment policies in the Federal Way shopping area rendered further transaction of business hazardous to its policyholders and owners, its creditors, and the general public.

The trial court agreed, and in essence found and concluded that appellant had, with its investments in the shopping area, transcended proscriptions of the insurance code in the following respects: (a) Invested more than 4 per cent of its assets with a single entity, contrary to the limitation of RCW 48.13.030; (b) invested in mortgage loans which exceeded 66 2/3 per cent of the fair value of the mortgaged property, contrary to the limitation of RCW 48.13.120; (c) invested more than 65 per cent of its assets in real-estate loans contrary to the limitation of RCW 48.13.265; (d) permitted or acquiesced in the continued existence of prior encumbrances or clouds upon the title of the mortgage property, which rendered the mortgages inadmissible as assets by virtue of RCW 48.13.110 and 48.13.130; 9 (e) engaged in practices relative to the mortgages it held, e.g., crediting delinquent interest by increasing the face amounts of the mortgages, thereby reflecting an incorrect picture as to the income and the status of the mortgages; and (f) failing to comply with respondent's order of May 28, 1963, to correct impairment of assets.


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