Pacific Finance Corp. v. Knox

• Decision Date: 23 January 1952
• Docket Number: No. 10007,10007
• Parties: PACIFIC FINANCE CORP. v. KNOX.
• Court: Texas Court of Appeals

Page 154

247 S.W.2d 154

PACIFIC FINANCE CORP. v. KNOX.

No. 10007.

Court of Civil Appeals of Texas, Austin.

Jan. 23, 1952.

Rehearing Denied Feb. 20, 1952.

Second Motion Denied March 12, 1952.

Irion, Cain, Bergman & Hickerson, M. R. Irion, Frank Cain, Douglas E. Bergman, Richard H. Cocke, Jr., Dallas, Hugh M. Foster, Jr., Los Angeles, Cal., of counsel, for appellant.

Renne Allred, Jr., Austin, for appellee.

HUGHES, Justice.

Will G. Knox, receiver for Texas General Underwriters, a reciprocal insurance exchange organized under Articles 19.01-19.12, inclusive, Texas Insurance Code of 1951, V. A.T.S., filed this class suit against numerous named parties, including the appellant, Pacific Finance Corporation, as representatives of all other subscribers and policyholders at Texas General Underwriters during its period of insolvency for an order and judgment requiring each such subscriber and policyholder to place intact its advance premium deposit and for an assessment of one additional annual premium or premium deposit, or such portion thereof as might be necessary, in order to pay all claims and expenses of such exchange which arose during the period of insolvency.

A jury was used and certain issues, not related to the issue of insolvency, were submitted to it.

Upon this verdict and upon numerous fact findings made in the judgment the trial court rendered judgment establishing the liability of the subscribers or policyholders at Texas General Underwriters during the period January 31, 1946, to January 27, 1947, inclusive, for an assessment for an amount equal to one additional annual premium on each policy prorated during such period of time, decreeing a necessity for and levying such assessment and providing for interest thereon at the rate of six percent per annum from the date of the judgment until paid.

The judgment was without prejudice to the right of the receiver to require policyholders and subscribers who had withdrawn part of their advance premium deposit to place their premium account intact.

Provision was also made for the pro rata refund of unused assessment funds.

The Pacific Finance Company is the only appellant.

Appellant's first five points challenge the determination by the trial court that Texas General Underwriters became insolvent on January 31, 1946 and remained insolvent through January 27, 1947. The basis of this challenge is that the reserve held by Underwriters for unearned premium deposits was considered a liability when it should, according to appellant, have been treated as an asset. Appellee concedes that unless this reserve is treated as a liability then Underwriters was not insolvent at any time material to this case. We quote from his brief: 'In fact, out of a trial lasting eleven days, producing thousands of pages of testimony and exhibits, there emerges as the major issue on appeal, the succinct and rather simple question, to-wit: As to whether the obligation of an insurance company to refund unearned premiums is a liability or not. Appellant contends and asks reversal upon the proposition that that obligation is not a liability. Appellee contends that it is a liability. Appellant concedes in effect that if the obligation to return unearned premiums is a legal liability of the Exchange, that then Texas General Underwriters was insolvent at all material times. And Appellee, (without conceding that proof of insolvency of the Exchange is a necessary condition precedent to the right of the Court to fix an assessment by the judgment below, but still reserving that contention which we set up in our Seventeenth Counter-Point and Brief on Pages 85 to 90 of this Brief), would, nevertheless, likewise concede that if the obligation to refund unearned premiums is not a legal liability of the Exchange, that then the Exchange was not insolvent at any time material to this case.'

Appellant concedes that Underwriters was insolvent on January 27, 1947.

The evidence shows that as of January 31, 1946, Underwriters' liabilities exceeded its assets by $611.28 if the reserve for unearned premium deposits amounting to $87,308.18 be considered a liability; but if not so considered the assets would exceed the liabilities by $86,695.90.

Appellant's position that these reserves are assets is based upon the following provision of the agreement execulted by subscribers or policyholders at Underwriters: 'Our Attorney-in-Fact is authorized to issue Contracts whenever and however applied for by us, which Contracts and Renewals thereof we hereby agree to accept, and to make the payments required as a result thereof. We agree to keep our Advance Deposit intact as a Surplus for the payment of our proportion of losses and expenses, and to pay promptly all demands for monies to be used for the purposes set forth in this Agreement. Failure to pay promptly such demands shall be cause for legal enforcement of same at our expense, and our Attorney-in-Fact is specifically authorized to bring such proceedings in the name of Texas General Underwriters, or in his own name as Attorney-in-Fact, for subscribers at Texas General Underwriters.'

The principal authorities cited by appellant in support of his contention are: Glenn H. McCarthy, Inc. v. Southern Underwriters, Tex.Civ.App., Austin, 192 S.W.2d 469 (Writ Ref. N. R. E.) and Knox v. Andrus, La.App., 38 So.2d 804.

Appellee's contention that those reserves are a liability is partly predicated on the provisions in the subscribers agreement that 'This agreement may be cancelled only in accordance with the cancellation provisions of Indemnity contracts issued to us as a result hereof,' which provisions are: 'If the named insured cancels, earned premiums shall be computed in accordance with the customary short rate table and procedure. If the company cancels, earned premiums shall be computed pro rata. Premium adjustments may be made at the time cancellation is effected, and, if not then made, shall be made as soon as practicable after cancellation becomes effective. The company's check or the check of its representative mailed or delivered as aforesaid shall be a sufficient tender of any refund of premium due to the named insured.'

This right of cancellation and reimbursement for unearned premiums is, however, subordinate to the obligation to keep the advance premium deposit intact for the purpose of paying losses and expenses of the Exchange incurred during the contract period. Glenn H. McCarthy v. Southern Underwriters, supra.

Appellee cites the case of Wilson v. Marshall, Tex.Civ.App., San Antonio, 218 S.W.2d 345, 346, which describes the relationship of subscribers to an insurance exchange, such as Underwriters, in this language: "The subscribers at a reciprocal exchange are not only policyholders thereat and as such entitled to the protection afforded by the policies and required to pay the premiums stipulated in the policies; but they also own the insurance business just as stockholders own their corporation. They are the owners of their insurance exchange, and as such are entitled to reap the profits accruing from the operation of their insurance business and are also required to pay their pro rata part of the losses and expenses incurred at the exchange. It is their liability to pay their pro rata part of the losses and expenses that take the place of the capital structure of the exchange. When called upon to pay an assessment for his pro rata part of the losses, the subscriber at the exchange stands in the position of a stockholder in a stock insurance company whose capital structure has become depleted and who is required to pay a certain amount on each share of stock he owns into the coffers of the company to remove the deficit."

From this premise appellee argues 'it is the universal accounting practice to carry capital stocks as a corporate liability even though stockholders cannot demand the return of any part of same until all corporate debts are paid.'

We do not question that such is a proper accounting practice. Certainly, in making up a profit and loss statement for a corporation, its capital stock is a liability. We find, however, that in determining the solvency of a corporation under the Federal Bankruptcy Act, 11 U.S.C.A. § 1 et seq., that this liability is not taken into account. We quote from 8 C.J.S., Bankruptcy, § 72, p. 488: 'The test for determining the solvency of a corporation is whether or not its assets, fairly valued as of that date, are in excess of its liabilities, disregarding liability to stockholders, either preferred or common, since the lawmakers had in mind such an insufficiency of assets that nothing is left for distribution to the stockholders as such. * * * Unpaid subscriptions of stock of the corporation, the right to enforce it being inherent in the corporation, may be counted as assets; * * *.'

The word 'assets' is generally defined as being the entire property of a person or corporation applicable or subject to the payment of his or its debts.

The fund in question is such property because of its express dedication to such purpose by the written agreement of the subscribers and because our courts have so held. McCarthy case, supra.

If this reserve is an asset then it cannot be a liability because 'assets' is the antithesis of 'liability.'

In support of his contention that this fund is a liability, appellee cites the cases of Hardware Mutual Fire Insurance Co. v. Stinson, 210 N.C. 69, 185 S.E. 449 (North Carolina) and Republic Insurance Co. v. Highland Park Independent School District, 129 Tex. 55, 102 S.W.2d 184.

The question in North Carolina case was whether unearned insurance premiums were taxable under the Constitution and statutes of that state. The Court in holding that unearned premiums are a liability and not taxable said: 'We see no reason why the statutes in this state should be nullified.' (210 N.C. 69, 185 S.E. 454.)

Similarly the Republic case, supra (129 Tex. 55, 102 S.W.2d 193), was a...