National Ben. Life Ins. Co. v. Shaw-Walker Co., 7376.

Decision Date08 January 1940
Docket NumberNo. 7376.,7376.
PartiesNATIONAL BEN. LIFE INS. CO. et al. v. SHAW-WALKER CO. (HILLYARD et al., Interveners) et al.
CourtU.S. Court of Appeals — District of Columbia Circuit

John E. Laskey, Francis C. Brooke, and Thurman L. Dodson, all of Washington, D. C., for appellants.

Levi H. David, R. H. McNeill, and Henry Lincoln Johnson, Jr., all of Washington, D. C., for appellees.

Before GRONER, Chief Justice, and STEPHENS and RUTLEDGE, Associate Justices.

RUTLEDGE, Associate Justice.

The appeal is from a decree establishing a receivership in a statutory dissolution proceeding (D.C.Code, 1929, Tit. 5, § 416) for the National Benefit Life Insurance Company, a District of Columbia corporation, at the instance of judgment creditors, plaintiff, Shaw-Walker Company, and intervening individuals, and an intervening policyholder. The decree held that a prior equity receivership had been created by the same court in excess of its jurisdiction and should be superseded by the statutory proceeding and receivership. It is challenged here by the equity receivers, acting for themselves and for the company.

The equity receivership was set up in September, 1931, pursuant to an amended petition filed by John R. Pinkett, a stockholder, officer and policyholder, who sued in his own behalf and as attorney in fact for 341 other policyholders. The bill followed closely upon the discovery of long continued and carefully concealed misconduct by some of the managing officials, which culminated in the resignation of all officers and the election of new ones in June, 1931. The company, a stock corporation, conducted its business in twenty-two states (chiefly southern and midwestern) and the District of Columbia. As of February 29, 1932, according to company actuaries, insurance in force exceeded $35,000,000, represented by more than 130,000 policies. Of these over 115,000, aggregating in excess of $20,000,000 insurance, were industrial policies, written largely for Negroes in amounts not exceeding $500 for life and $20 per week for health and accident on the weekly premium basis. The annual report for 1930 valued the company's assets at $5,541,000, and disclosed an apparently sound financial condition. Revelation of the contrary fact resulted in suspension of licenses to do business by the insurance authorities of several states. In these circumstances and after consultation with the District and state commissioners, the newly elected officers and legal advisers, Pinkett filed his bill pursuant to a general understanding that an "operating" receivership would afford the best, perhaps the only, means for rehabilitating the company or, if that should prove impossible, for conserving its assets and salvaging some part of the business.

The bill as amended alleged, among other facts including some previously mentioned, the existence of unpaid policy claims of $100,000 and of other sums due policyholders aggregating $150,000; the pendency of litigation against the former officers on account of their misconduct; impairment of the capital so far that $1,000,000 would be required to make up the deficiency and impaired legal reserves; fraudulent overissue of the capital stock; the appointment of a temporary receiver in Georgia for the company's assets there; suspension of its licenses to do business in Alabama, Missouri and North Carolina; the pendency or threat of receivership proceedings in Texas and Tennessee; insolvency of the company; that litigation arising out of its underwriting of another insurer's liabilities was threatened as a result of its insolvency; and that unless the court should take jurisdiction of the cause and appoint a general receiver to take over and preserve all the assets, they would be destroyed by reason of the pending claims, threatened litigation, and actions of public insurance officials. The prayer was for the appointment of a receiver, or receivers, "to manage, operate and control * * * pending further order of the Court, or a final determination" of the case; and that "upon final hearing of said cause the said temporary receivership may be made permanent, and that such action may be taken by the Court by way of dissolution of said corporation, or in such other manner as to the Court may seem just and proper and the equities of the case demand * * *." There was also a prayer for general relief.

A receiver pendente lite was appointed with authority to take possession of the books, records and property; to carry on the business as a going concern; and "as soon as may be to report to the Court with respect to the condition of said corporation and the practicability of rehabilitating and restoring it to a safe and sound condition." The usual injunction against interference with the receiver was issued.

In November, 1931, the temporary receiver reported that the company had a net worth of $2,396,749, but that there was an impairment in its legal reserves of $2,828,380; and that the shareholders should be given opportunity to make up the deficiency, but on their failure to do so, the corporation should be reorganized into a new mutual company as the only practicable method of resuscitating it.

Later the company, by its president, John T. Risher, answered, admitting Pinkett's material allegations, particularly the precarious condition of its affairs, but not its insolvency; setting forth further facts regarding a "Conference Examination" by the Insurance Commissioners of the District, Virginia, Kentucky and South Carolina, and the disclosure through this examination that the capital stock had been "entirely wiped out and depleted" and that the assets were insufficient to meet the legal reserve requirements of states where the company was operating. The answer further averred advice of counsel that only by an operating receivership could the remaining assets be conserved and protected for the benefit of all in interest. The prayer was that the court consider and dispose of the cause "as will best protect the interest of all concerned," in effect consenting to the relief asked in the bill.

In February, 1932, the court entered a decree holding the company "insolvent," replacing the temporary receiver (who had resigned) with permanent ones, authorizing them to carry on the business, except for writing new insurance, and directing them to have made a complete actuarial report and account of the company's affairs. The injunction against interference was continued, and the court specifically deferred "any decree for dissolution" until after filing of the actuarial account and report "so as to afford ample opportunity to said company, its officers, stockholders and/or policyholders to formulate and effectuate any plan for the rehabilitation or reorganization of said company * * *."1

Pursuant to the decree, the receivers began ancillary proceedings in eleven states. With the court's approval they modified or revived more than 60,000 previously existing policies, reducing death benefits and withdrawing disability provisions; thereby obtaining resumption of premium payments. No new policies were written. Believing that the modified business was sound and could continue if not hampered by the remainder, the receivers attempted, without success, to dispose of it by sale or reinsurance. This failing, and no feasible plan for rehabilitation having been presented, in August, 1933, the court entered an order, in effect, for liquidation, directing also that collection of premiums be stopped. On December 8, 1937, the receivers reported that liquidation was practically complete, and the court directed that creditors be notified to file formal proofs of claim with the auditor of the court or with the receivers. In February, 1938, plaintiff, the Shaw-Walker Company, and the intervening judgment creditors herein filed proofs of claims on their respective judgments with the Pinkett receivers.

The present statutory proceeding was begun May 12, 1933, process being served on the president, John T. Risher. The bill complied in all respects with § 416, alleging among other facts the corporation's insolvency, the suspension of its business, the plaintiff's judgment against it, with return of execution "nulla bona," and the company's ownership of property within the District and elsewhere. It attacked the court's jurisdiction to institute the prior (Pinkett) receivership, asserting its invalidity for defects in the bill claimed to be jurisdictional. The prayer was for dissolution, appointment of receivers, sale of the property, distribution of the proceeds, and an injunction to restrain others, including the Pinkett receivers, from interfering with those so appointed. The interveners joined in the prayer of the bill. The Pinkett receivers appeared for the company and moved to dismiss the suit. The motion was overruled, the motion justice holding that the court had jurisdiction in both proceedings, that the Pinkett receivers should retain control of the property for liquidation, but that nevertheless the court had jurisdiction in the Shaw-Walker case to dissolve the company.

The case came on for final hearing before another judge on December 10, 1937. In November following, the court filed an opinion holding that it had been without jurisdiction in the Pinkett proceeding, that the relief prayed in the Shaw-Walker bill should be granted, and that the Shaw-Walker receivership should supersede the Pinkett one. Subsequently the Pinkett receivers' motion for rehearing was denied, as was another made the previous July for leave to file a supplemental answer setting forth the filing of proofs of claim in the Pinkett proceeding by the plaintiff and intervening judgment creditors herein. In March, 1939, the court made its findings of fact and conclusions of law, and entered its decree appointing John T. Risher as receiver, also enjoining the Pinkett receivers,...

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