Pacific Mut. Life Ins. Co. of Cal. v. McConnell

• Decision Date: 27 June 1955
• Citation: 285 P.2d 636,44 Cal.2d 715
• Court: California Supreme Court
• Parties: The PACIFIC MUTUAL LIFE INSURANCE COMPANY OF CALIFORNIA (a Corporation) et al., Appellants, v. F. Britton McCONNELL, as Insurance Commissioner, etc., et al., Respondents. L. A. 23261.

Page 636

285 P.2d 636

44 Cal.2d 715

The PACIFIC MUTUAL LIFE INSURANCE COMPANY OF CALIFORNIA (a Corporation) et al., Appellants, v. F. Britton McCONNELL, as Insurance Commissioner, etc., et al., Respondents.

L. A. 23261.

Supreme Court of California, in Bank.

June 27, 1955.

Rehearing Denied July 27, 1955.

Joseph L. Lewinson, Frank B. Belcher, Los Angeles, C. Ray Robinson, San Francisco, Henry W. Low, Hollywood, and William B. Boone, Merced, for appellants.

C. Ray Robinson, San Francisco, and William B. Boone, Merced, as amici curiae on behalf of appellants.

O'Melveny & Myers, Paul Fussell, Homer I. Mitchell, James E. Cross, George B. Gose, Frank P. Doherty, Guy Knupp and Peery Price, Los Angeles, for respondents.

Lloyd W. Dinkelspiel and Heller, Ehrman, White & McAuliffe, San Francisco, as amici curiae on behalf of respondents.

GIBSON, Chief Justice.

The Pacific Mutual Life Insurance Company of California (hereinafter referred to as the 'old company') and certain of its stockholders brought this mandamus proceeding in the superior court to review the action of the Insurance Commissioner in approving a plan for mutualization of a second corporation, Pacific Mutual Life Insurance Company (hereinafter called the 'new company'), which had been organized by the commissioner as part of the rehabilitation of the old company. The court upheld the action of the commissioner, and plaintiffs have appealed from the judgment.

In 1936 the old company was in a hazardous and insolvent condition within the meaning of the Insurance Code, and its business and assets were taken over by the Insurance Commissioner, ¹ as authorized by statute. Ins. Code, §§ 1011, 1013. Pursuant to section 1043 of the code, a rehabilitation agreement was entered into between the new company and Commissioner Carpenter, as conservator of the old company, whereby most of its assets were transferred to the new company in exchange for all the new company's capital stock. The stock was to be held by the commissioner as conservator for the benefit of the creditors, policyholders and stockholders of the old company. The new company assumed substantially all the obligations of the old company, including a limited obligation with respect to non-cancellable accident and health policies (referred to herein as 'non-can policies'), and agreed to set up a special fund for restoration of benefits to holders of those policies.

In December 1936, after a hearing, the superior court approved the rehabilitation agreement and authorized the commissioner to perform all the obligations required on his part. This order was affirmed in Carpenter v. Pacific Mut. Life Ins. Co., 10 Cal.2d 307, 74 P.2d 761. Affirmed in Neblett v. Carpenter, 305 U.S. 297, 59 S.Ct. 170, 83 L.Ed. 182. In February 1937 an Order was made providing for the liquidation of the old company and appointing the commissioner as liquidator. It was upheld in Carpenter v. Pacific Mut. Life Ins. Co., 13 Cal.2d 306, 89 P.2d 637. In 1938 the commissioner transferred the stock of the new company to five trustees who were given legal title to the stock with power to vote it in accordance with the purposes of the rehabilitation agreement. The order approving the transfer was affirmed in Caminetti v. Pacific Mut. Life Ins. Co., 22 Cal.2d 344, 139 P.2d 908.

The rehabilitation agreement set forth the method by which a plan for mutualization of the new company could be formulated. It provided that ten per cent of the participating life policyholders could request the new company to create an appointing committee consisting of the president of the Life Insurance Association of America, the president of Stanford University and the provost of the University of California at Los Angeles. The appointing committee was directed to select a price determination committee composed of persons skilled in matters of insurance company valuation. If the price determination committee concluded that voluntary mutualization could be practicably accomplished, it was to propose a plan of mutualization in accordance with the laws of this state. By the terms of the agreement the commissioner, as sole shareholder of the new company, consented in advance to the plan of mutualization to be formulated.

A price determination committee was appointed, consisting of Alva J. McAndless, president of the Lincoln National Life Insurance Company of Fort Wayne, Indiana; Horace R. Bassford, vice president and chief actuary of the Metropolitan Life Insurance Company of New York; Ray D. Murphy, vice president and chief actuary of the Equitable Life Assurance Society of New York; and Albert J. Hettinger, a partner in Lazard Freres & Company, a firm engaged in investment banking. After three years of study the committee proposed a plan of mutualization, which provides that, upon the occurrence of certain conditions, the new company shall buy all of its own capital stock for $3,000,000, plus interest from December 31, 1948, the price to be augmented should the restoration of benefits under the non-can policies be completed before 1973.

The proposed plan of mutualization was adopted by the directors of the new company on May 5, 1950. On September 22, 1950, after a hearing, Commissioner Downey approved the plan, finding that it would be fair and equitable in its operation, and thereafter it was approved by the policyholders of the new company. This proceeding in mandamus was then brought to review the action of the commissioner, and the trial court concluded that there was substantial evidence to support his findings and that he had not exceeded his jurisdiction or abused his discretion in approving the plan.

Plaintiffs attack the judgment upon numerous grounds, and, although many of their contentions may be disposed of by application of principles of res judicata, we believe that the problems may be more clearly presented by first discussing the propriety of the determination of the various points without regard to the binding effect of prior adjudications.

The first problem which we must consider is whether the proper statutes were followed in the formulation and approval of the mutualization plan. As contemplated by the rehabilitation agreement, all steps in connection with the adoption of the plan were taken pursuant to sections 11525 et seq. of the Insurance Code, which relate to voluntary mutualization of a solvent insurer. ² Plaintiffs assert that the applicable statutes for mutualization of the new company are sections 1043 et seq., which govern involuntary mutualization of an insolvent insurer. ³ The essential differences in procedure are that under the sections relating to voluntary mutualization of a solvent company the plan is adopted by the directors, subject to approval by the stockholders and the commissioner, and no court proceedings are necessary; whereas under the provisions for involuntary mutualization of a seized insurer the plan is formulated by the commissioner as conservator without consent of the stockholders or directors, and it must be approved by the court.

The new company is solvent and nondelinquent, and there is no sound reason why it should be mutualized under the statutes relating to insolvent insurers. The commissioner had power to create the new corporation in order to preserve the business of the seized insurer. Section 1043, which authorizes the commissioner to enter into rehabilitation agreements, contains no express limitation on what may be included in them, and section 1037 provides that the enumeration of the powers of the commissioner shall not be construed as a limitation upon him or upon his right to do such other acts as he may deem necessary in connection with the handling of the affairs of an insolvent company. ⁴ When salvaging the business of a seized insurer the greatest possible protection should be given to creditors and other interested parties, and in the present instance the commissioner evidently concluded that this objective could best be accomplished through the formation of a new company divorced as far as possible from the control of those who were in charge of the old company when it experienced financial difficulties.

The new company is a separate and distinct entity, and when the business was transferred it ceased to be the business of the old company and became the business of the new company. In Garrison v. Pacific Mut. Life Ins. Co., 83 Cal.App.2d 1, 9-10 187 P.2d 893, 899, it was held that the identity of the new company 'is utterly distinct from that of old company,' that it 'cannot be fairly said that it is a continuance of old company', and that the new company 'is a separate entity that came into being after old company's insolvency was declared * * * *.' The fact that the new company may for some purposes have served as an agent or instrumentality of the commissioner does not destroy its identity as a separate company. Accordingly, as contemplated by the rehabilitation agreement, the applicable statutory provisions for mutualization of the new company are those found in sections 11525 et seq., which govern voluntary mutualization of solvent nondelinquent insurers.

Plaintiffs nevertheless contend that it was improper to follow the procedure set up in the code for mutualization of a solvent company because, they assert, the commissioner in doing so was forced to act in a dual capacity with conflicting interests. Section 11526, which prescribes the method to be followed in mutualizing a solvent insurer, provides that the plan shall be: '* * * (b) Approved by the vote of the holders of at least a majority of the outstanding shares at a special meeting of shareholders called for that purpose, or by the written consent of such shareholders. (c) Submitted to the commissioner and approved by him in writing.' Commissioner Carpenter as the sole holder of the stock of the new company consented in advance to the plan of mutualization, and Commissioner Downey approved it after...