Ohio State Life Insurance Company v. Clark

• Decision Date: 08 February 1960
• Docket Number: No. 13851.,13851.
• Citation: 274 F.2d 771
• Parties: OHIO STATE LIFE INSURANCE COMPANY et al., Appellants, v. Ray A. CLARK et al., Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

274 F.2d 771 (1960)

OHIO STATE LIFE INSURANCE COMPANY et al., Appellants, v. Ray A. CLARK et al., Appellees.

No. 13851.

United States Court of Appeals Sixth Circuit.

February 8, 1960.

Robert L. Barton and William S. Evatt, Columbus, Ohio (Donald J. Hoskins, Columbus, Ohio, on the brief), for appellants.

William E. Knepper, Columbus, Ohio (Edward B. Raub, Jr., William A. Wick, Indianapolis, Ind., Richard L. Miller, Columbus, Ohio, on the brief), for appellees.

Before McALLISTER, Chief Judge, and MILLER, Circuit Judge, and BROOKS, District Judge.

SHACKELFORD MILLER, Jr., Circuit Judge.

This declaratory judgment action was brought by the appellees on behalf of themselves as mutual plan policyholders of The Columbus Mutual Life Insurance Company and on behalf of The Columbus Mutual Life Insurance Company itself, hereinafter called Columbus Mutual, and on behalf of all mutual plan policyholders of that company against the appellant, Ohio State Life Insurance Company, hereinafter called Ohio State, and directors, officers and stockholders of both companies. It involves the conflicting claims of the mutual plan policyholders of Columbus Mutual and the stockholders of that company, including its principal stockholder, Ohio State, to the beneficial ownership of the surplus of Columbus Mutual, which, together with certain reserves and net profits for the year 1957, totaled as of December 31, 1957, $19,184,658.66. Jurisdiction is based upon the amount involved and because of diversity of citizenship and because the action arises under the Constitution of the United States. The District Judge found in favor of the mutual plan policyholders, from which ruling this appeal was taken.

The facts are not in dispute. Columbus Mutual is a legal reserve life insurance company, organized in 1906 under the laws of Ohio as a stock insurance company, with an authorized capital of $100,000.00 divided in 1,000 shares of $100.00 par value each. The original articles were amended by the company's shareholders to increase the company's authorized capital stock in the years 1910, 1913, 1920, 1921 and 1922. The company's present authorized capital is $500,000.00, divided in 5,000 shares of $100.00 par value each, all of which are issued and outstanding. Except for these increases of capital stock there have been no other amendments to the Columbus Mutual charter.

Columbus Mutual has been a well managed and successful life insurance company. As of December 31, 1957, it had approximately 160,000 policyholders who owned insurance in force in the amount of $479,919,138.00. As of that date the company's total assets were valued at $134,883,105.00. The business of the company has been managed and directed by a Board of Directors elected by the company's shareholders, as provided in Article VI of its charter. The company's policyholders have never had a voice in either the election of the directors or officers, or in the management of the company's business. Since it commenced business in 1906 there have been approximately 500,000 holders of its insurance policies, of which some 160,000 own policies which are currently in force.

Under Article III of its charter, Columbus Mutual is authorized to write policies of insurance "on both the mutual and stock plan." The company has written policies on the "mutual plan" primarily. Mutual plan policies are "participating" policies in that the terms of such policies expressly provide that such policies are entitled to share in the profits of the company to the extent that such profits are apportioned from time to time to the respective mutual plan policies by the company's Board of Directors. "Stock plan" policies contain no such participation clause.

Article V of the Columbus Mutual charter is as follows:

"Fifth. Dividends may be declared and paid on the outstanding stock; provided that the total dividends declared or paid shall not exceed an amount computed at the rate of ten (10) per cent per annum on the par value of the stock from the date of original issue to the date of its retirement, and, provided further that no dividend will exceed an amount equal to ten (10) per cent per annum on the par value of the stock from the date of its original issue to the date of payment of dividend.

"Dividends on capital stock shall be paid from the surplus of the company, and the directors may pay off from such surplus and retire all of the issued and paid up capital stock at the price of two hundred dollars ($200.00) per share; and may from such surplus, when deemed advisable by the directors, return to the holders of stock the amounts which may have been paid to the company by the stockholders over and above the par value of the stock subscribed and paid for by them respectively. Subject, however to the payment of dividends, the retirement of stock, and the return to the holders of stock of the amounts which have been paid to the company over and above the par value of the stock subscribed, the surplus of the company shall belong to the holders of policies on the mutual plan, and shall be apportioned and distributed on such equitable plan as the directors may provide.

"When all of said capital stock shall have been so retired and the amounts, if any, paid to the company by stockholders over and above the par value of the stock subscribed and paid for by them shall have been returned, said company shall be reorganized, reincorporated or converted, in any manner permitted by law, into a mutual company composed of the policyholders in this company. The subscriptions for such stock and the certificates of stock representing the same shall contain a provision whereby the subscriber to and holder of such stock shall agree and assent to the provisions of this charter."

Each policy issued by Columbus Mutual has contained a provision to the effect that the policy constitutes the entire contract between the company and the policyholder. Each mutual plan insurance policy issued by the company has contained a provision to the effect that such policy is entitled to share in the divisible surplus of the company as apportioned or determined by the company.

Ohio State is a legal reserve stock life insurance company, organized in 1906 under the laws of Ohio. Ohio State has prospered so that as of December 31, 1957, it had insurance in force in the amount of $384,955,905.00 and total assets of $88,614,777.00. As of that date its unassigned surplus amounted to almost $5,000,000.00.

During the year 1956 Ohio State acquired 4,977, or 99.54%, of the 5,000 authorized and outstanding shares of Columbus Mutual. It acquired this stock for $6,470,100.00, being at the rate of $1,300.00 per share. It acquired this Columbus Mutual stock for the avowed purpose of merging the two companies into a single large life insurance company of almost double the number of policyholders than was possessed by either of the companies alone, and possessed of sufficient assets and breadth of insurance coverage to insure greater protection to all policyholders, and to enable it to compete on favorable terms with other large insurance companies in the United States.

For the purposes of the merger and in order that Columbus Mutual might prospectively conduct its business in conformity with the method of business of Ohio State, the shareholders of Columbus Mutual, including Ohio State, have attempted since November, 1956, to amend Article V of the Columbus Mutual charter. The proposed amendment of Article V has been regarded by certain shareholders of Columbus Mutual as an attempt to raid the surplus of Columbus Mutual to the detriment of that company and its policyholders. Although Ohio State and other stockholders have vigorously denied this charge, they considered it advisable in the interest of public relations to abandon various proposed amendments to Article V and to finally propose the amendment which is now in issue.

The proposed amendment to Article V provides in substance that (1) the unassigned surplus as of December 31, 1956, shall be held and used as a special surplus for policyholders for protection of the holders of participating policies of the company, and no dividends to any stockholders of the company shall be payable therefrom; (2) annually, for a period of twenty-five (25) years, there shall be added to this special surplus from the earnings of the company a sum equal to the net earned interest rate on the mean invested assets after all taxes based on income; (3) regular dividends shall be paid from the earnings of the company to all participating policyholders without distinction, and additional dividends may be paid out of the special surplus for policyholders, as the directors in their sole discretion may from time to time provide, only to the holders of participating policies of the company in force on the effective date of the amendment; (4) in the event of dissolution and liquidation at any time so long as any participating policies of the company in force on the effective date of the amendment are then in force, such policyholders shall be entitled to distribution from such special surplus, as then existed, in amounts representing their percentage interest in such surplus at the time of the effective date of the amendment; and (5) at the maturity of the last participating policy in force on the effective date of the amendment, the special surplus, as then existing, shall be permanently held for the protection of all policyholders, and no dividends may at any time be declared to shareholders, except out of surplus over and above such amount.

This proposed amendment was adopted by Columbus Mutual shareholders on October 28, 1957, and was submitted to the Secretary of State of Ohio for filing. The Attorney General of Ohio approved the amendment but advised the Secretary of State to refuse to record it because of the legal objections raised by the appellees and in order that the rights of the appellees and other...