McDonald v. Medical Mut. of Cleveland, Inc.

• Decision Date: 14 March 1974
• Citation: 324 N.E.2d 785,41 Ohio Misc. 158
• Parties: , 70 O.O.2d 366 McDONALD v. MEDICAL MUTUAL OF CLEVELAND, INC., et al. *
• Court: Ohio Court of Common Pleas

Page 158

41 Ohio Misc. 158

324 N.E.2d 785, 70 O.O.2d 366

McDONALD v. MEDICAL MUTUAL OF CLEVELAND, INC., et al. ^*

Court of Common Pleas of Ohio, Cuyahoga County.

March 14, 1974.

Metzenbaum, Gaines, Finley & Stern Co., L. P. A., Donald M. Robiner, Marshall J. Wolf, Marvin E. Sable and Robert N. Rapp, Cleveland, for plaintiff.

Jones, Day, Cockley & Reavis, Ellis H. McKay, Thomas E. O'Connor, Jr., Cleveland, Vorys, Sater, Seymour & Pease, John C. Elam, Thomas B. Ridgley and Philip W. Stichter, Columbus, for defendants.

James A. Baker, Spencer Neth, Niki Z. Schwartz, Gold, Rotatori, Messerman & Hanna and H. W. Stark, Cleveland, for objectors.

FINK, Judge.

The primary issue of this case is whether Medical Mutual of Cleveland, Inc., may form and invest in a stock holding company and stock life insurance company as wholly owned subsidiaries. The specific issue now before the court is whether the Stipulation of Settlement achieved by the parties over many months of negotiations should be approved by the court as required by Civ.R. 23(E), as being fair, reasonable and adequate. For the following reasons, the court finds that the settlement should be approved.

Medical Mutual of Cleveland, Inc. (Medical Mutual), is a mutual non-profit casualty insurance company organized under the laws of the state of Ohio. Following the approval by the Ohio Superintendent of Insurance on June 20, 1973, of the envestment by Medical Mutual in a holding company and stock life insurance company, Medical Mutual instituted incorporation of Medical Life Insurance Company (Medical Life) as a wholly owned subsidiary on September 13, 1973. Public announcement of the formation of Medical Life was made on September 21, 1973.

On September 25, 1973 plaintiff filed the class action complaint challenging the legality of Medical Mutual's investment in Medical Life. Subsequently, on November 8, 1973, plaintiff filed an amended complaint additionally challenging the amount of surplus accumulated by Medical Mutual.

On September 28, 1973 the parties agreed to a restraining order maintaining the status quo of the holding and life insurance companies, restraining defendants from taking any action with respect to further investment, transfer and/or expenditure of accumulated funds or surplus of Medical Mutual related to the formulation of Medical Life or a holding company. The restraining order was continued from time to time thereafter by mutual agreement of the parties until such time as this ruling should be rendered.

Subsequent to the filing of the complaint, plaintiff's counsel conducted extensive document discovery, reviewing voluminous files of Medical Mutual. Defendants filed a motion to dismiss pursuant to Rule 12(B)(6), asserting therein that Medical Mutual was authorized to invest in a life insurance subsidiary pursuant to R.C. 3901.11, that it had done all things necessary to make such an investment pursuant to R.C. 3941.12 and 3925.08, and that it had obtained approval from the Ohio Department of Insurance. The court reviewed the motion to dismiss and the memorandum and affidavits in support thereof and concluded that the parties should consider the possibilities of settle ment of this action since litigation might prove costly, time-consuming and unproductive for all concerned. The court brought together the parties in an effort to seek a negotiated settlement of the disputes and participated with them in hammering out a compromise.

The court's only concerns were that the law be strictly followed and that the interests of all of the members of the class be protected to the best of the court's ability to do so.

Following long and strenuous negotiations, the parties presented the court with a Stipulation of Settlement and Dismissal on February 14, 1974. Also on February 14, 1974, the court ordered that the action be maintained as a class action pursuant to Civ.R. 23(B)(2). The proper class is composed of all persons who were members of Medical Mutual on the date of filing of the complaint or who became members between that date and the date of the first publication of notice ot the class of the proposed settlement. That order also directed Medical Mutual to publish notice of the settlement of the class action in two newspapers of daily circulation in Cuyahoga County once a week for three consecutive weeks beginning February 21, 1974.

Notice of the proposed compromise was published three times in The Cleveland Press and in the Cleveland Plain Dealer once a week for three consecutive weeks. Both newspapers are newspapers of general circulation in the five counties in which Medical Mutual transacted business of insurance. The combined circulation of the two newspapers in 699,319 in the five counties. (There are 730,021 households in those counties.)

In addition to the publication of the notices as required by the court, on February 14, 1974 both The Cleveland Press and television station WJW-TV carried news stories of the proposed compromise and settlement of the class action, making specific reference to the March 14 hearing date and the March 8 deadline for filing written objections to the proposed settlement. Television station WJW-TV reaches at least half of the households in all five counties. Moreover, various other newspaper, television and radio news reports included coverage of the proposed settlement, thereby creating a climate of general public awareness.

On March 14, 1974, the court held a hearing to determine whether the proposed settlement was fair, reasonable and adequate. Even with all of the publicity attendant to the lawsuit and the settlement hearing, only a handful of objectors appeared in person or by counsel at the March 14th hearing. Each objector or his representative was given an opportunity to state in writing and orally the basis of any objection to the settlement. Having considered carefully and at great length all matters related to the action and the proposed settlement which are before the court, including the objections raised thereto on all matters presented at the hearing and a thorough study of all such arguments and briefs submitted thereafter, this court finds that the proposed settlement is fair, reasonable and adequate as to members of the class and should be approved.

While the court need not go into all of the merits of the controversy, in judging the fairness and reasonableness of a settlement it may appropriately consider the likelihood of the class being successful in the litigation. 7A Wright and Miller, Federal Practice and Procedure, 230-31, Section 1797; Bryan v. Pittsburgh Plate Glass Co. (W.D.Pa.1973), 59 F.R.D. 616; Schimmel v. Goldman (S.D.N.Y.1973), 57 F.R.D. 481.

In this regard, while this court expressed no opinion as to the eventual finding on the issues raised by this lawsuit, substantial questions exist as to the likelihood of plaintiff prevailing in his attack upon the legality of the formation of an investment in the life insurance company by Medical Mutual and the level of Medical Mutual's reserves. One of the primary obstacles to Medical Mutual's formation of the life insurance subsidiary appeared to be the restriction included in its articles of incorporation, which stated:

'The corporation is formed for the purposes of transacting insurance and reinsurance business, except life insurance, and any of the kinds of insurance set forth in and as authorized by Section 3941.02 of the Ohio Revised Code as it now exists or may hereafter be amended * * *.' (Emphasis added.)

On February 19, 1974, at the annual meeting of Medical Mutual, its members voted to delete the phrase 'except life insurance' from the articles of incorporation, thereby removing this potential legal impediment ot Medical Mutual forming and investing in the life insurance subsidiary. Furthermore, based upon the memorandum and affidavits in support of the motion to dismiss filed by the defendants, it appeared that Medical Mutual satisfied all technical requirements of the statutes and the Department of Insurance in obtaining departmental approval of its investment in Medical Life.

As to the question of the propriety of the level of accumulated surplus, this is essentially a business decision to be left in the hands of the board of trustees of Medical Mutual.

Courts traditionally have refused to interfere in such business decisions of corporate managers absent the showing of fraud, abuse of discretion or bad faith. 12 Ohio Jurisprudence 2d 558-59, Corporations, Section 448; Sims v. Street Railroad Co. (1882), 37 Ohio St. 556; State, ex rel. Stuart, v. Urschel (1922), 105 Ohio St. 640, 141 N.E. 366; Coss v. Mansfield Lodge No. 56, B. P. O. E. (Richland Co.Cir.Ct.1902), 4 Ohio C.Ct.R.,N.S., 11; Gottlieb v. Mead Corp. (Montgomery Co.Ct.App.1955), Ohio Com.Pl., 137 N.E.2d 170, 72 Ohio Law Abs. 283; Menke v. Gold Medal Oil Co. (Hamilton County 1933), 47 Ohio App. 180, 191 N.E. 472; Lomis v. Dexter (Super.Ct. of Cincinnati 1888), 10 Ohio Dec.Rep. 287; Gruber v. Chesapeake & Ohio Rwy. Co. (N.D.Ohio 1957), 158 F.Supp. 593. There has been no indication in these proceedings of any fraud, bad faith or abuse of discretion by the board of trustees of Medical Mutual in determining the level of surplus which is appropriate for the company. Therefore only with great reluctance would this court impose its judgment upon the duly elected board of trustees, especially where the very action complained of is under the ultimate control of the Department of Insurance, the state agency entrusted by law to regulate the insurer. The court also has taken judicial notice of the fact that a single catastrophic year may wipe out a medical casualty company's entire surplus. One company in Michigan went from a $50,000,000 reserve in one year to a $17,000,000 deficit in the following year. On of the Blue Shield plans in New York is virtually bankrupt and is attempting to merge to protect the rights of subscribers and...