Sims v. Fidelity Assur. Ass'n
| Decision Date | 16 June 1942 |
| Docket Number | No. 4923.,4923. |
| Citation | 129 F.2d 442 |
| Parties | SIMS, Auditor of State of West Virginia, et al. v. FIDELITY ASSUR. ASS'N. |
| Court | U.S. Court of Appeals — Fourth Circuit |
James Ward Rector, Deputy Atty. Gen., State of Wisconsin, Fyke Farmer, Rickard H. Lauritzen, Asst. Atty. Gen., State of Wisconsin, J. Campbell Palmer, III, of Charleston, W. Va., and H. Vernon Eney, of Baltimore, Md. (John E. Martin, Atty. Gen., State of Wisconsin, John M. Rankin, Atty. Gen., State of Iowa, Floyd Philbrick, First Asst. Atty. Gen., State of Iowa, Carl J. Stephens and Ben C. Buckingham, both of Des Moines, Iowa, Guy B. Brown, of Baltimore, Md., Rudolph K. Schurr, of St. Louis, Mo., Clarence W. Meadows, Atty. Gen. of West Virginia, and Ira J. Partlow, Asst. Atty. Gen. of West Virginia, on the brief), for appellants.
John V. Ray, of Charleston, W. Va., Justin N. Reinhardt, Atty., Securities and Exchange Commission, and Homer Kripke, Sp. Counsel, Securities and Exchange Commission, both of Washington, D. C., T. C. Townsend, of Charleston, W. Va., and Dorr E. Warner, of Cleveland, Ohio (James R. Fleming, of Fort Wayne, Ind., Townsend & Townsend and Hillis Townsend, all of Charleston, W. Va., W. J. Thompson, of Charleston, W. Va., John T. Keenan, of Le Mars, Iowa, and Chester T. Lane, Gen. Counsel, Securities and Exchange Commission, of Washington, D. C., on the brief), for appellee.
Before PARKER, SOPER, and DOBIE, Circuit Judges.
The appeal in this case is from an order of the District Court of January 5, 1942, whereby the court approved the petition of Fidelity Assurance Association, a West Virginia corporation, praying for reorganization under Chapter X of the National Bankruptcy Act, 11 U.S.C.A. § 501 et seq., and overruled certain motions to modify or rescind prior orders of the court with respect to the custody or control of securities deposited by the corporation with officials in fifteen states of the union. The appellants herein are intervenors in the bankruptcy proceeding, and include various state officials with whom the debtor had deposited securities, as required by state statutes, that is, the Auditor and Ex Officio Insurance Commissioner of West Virginia, the State Court Receivers in West Virginia, the Banking Commission of Wisconsin, the Commissioner of Insurance and Permanent Receiver for the debtor in the State of Iowa, the Insurance Commissioner of Maryland, the State Court Receiver in Missouri, and certain contract holders in Tennessee. Since the Fidelity is now insolvent and its business operations have been discontinued, the appellants seek to uphold the authority of the state officials to apply the deposits in their custody for the benefit of local contract holders in accordance with the applicable state laws. A number of objections to the action of the District Judge are raised, but in the view we take of the case, it will be sufficient to consider only two questions: (1) Whether the Fidelity was an insurance company when the petition in bankruptcy was filed, and as such, was exempt from the provisions of the Bankruptcy Act; (2) whether the petition was filed in good faith within the meaning of that term in Chapter X of the statute.
The Fidelity was incorporated on April 11, 1911, in West Virginia, under the name of the Fidelity Investment and Loan Association, to buy, sell and deal in stocks, bonds and real estate. By charter amendment in November, 1912, its name was changed to Fidelity Investment Association and it was authorized to receive payments on annuity contracts in fixed installments or otherwise, and to sell certificates, bonds or other investment securities of any kind on the installment or any other plan of payment. Its original authorized capital of $100,000 was increased to $200,000 in 1912, $500,000 in 1926, $1,000,000 in 1929 and $13,000,000 in 1931. The total outstanding stock on December 30, 1940 was $911,000 of preferred and $812,300 of common. Of the preferred, $505,100 had been paid for in cash in that it was issued in exchange for annuity contracts surrendered by the holders and $405,900 of preferred had been issued as dividends on the common stock. Of the common stock, $195,873.34 had been issued for cash and $616,426.66 had been issued as dividends on the common stock.
From November, 1912, to the end of 1940, the Fidelity was engaged in selling its own securities in the form of investment contracts variously known as annuities, installments or, more recently, face amount certificates, and in investing the funds received from the purchaser. This activity brought the corporation within the scope of Article 9 of Chapter 33 of the Code of West Virginia which required every person or corporation engaged in this business in the State to secure a license from the Insurance Commissioner of the State and to deposit with the State Treasurer, in trust for the benefit of the contract holders, securities approved by the Insurance Commissioner in the sum of $100,000; and in addition to maintain with the State Treasurer securities so approved equal in amount to the cash liabilities of the corporation under its contracts; provided that such additional deposits were not required to be made with respect to contracts sold in other states to the extent that the law of such states required deposits to be made therein for the benefit of local contract holders. Article 9 (5) of the West Virginia Code directed the Insurance Commissioner to revoke the license of any corporation failing to make the required deposits and to suspend the license of any corporation if he should find that its liabilities exceeded its assets; and Article 9 (10) of the Code gave the Insurance Commissioner the same authority over every corporation engaged in selling annuity contracts as over insurance companies, and empowered him, if he should be of the opinion that the assets of such a corporation were impaired, or that it was not complying with the law, to revoke its license; and if so, to retain authority and control over the deposits until the total liability of all the contracts issued by the corporation in the state should be redeemed or settled. Similar provisions are found in the statutes of fourteen other states in which the Fidelity sold annuity contracts and made the required deposits.1 The Fidelity also sold annuity contracts in fourteen additional states in which no deposit was required by law. In short, the Fidelity sold contracts in twenty-nine states and deposited securities for the benefit of the purchasers in fifteen states. The market value of the securities deposited in each of the fifteen states as of June 6, 1941, when the pending suit was instituted, and the net cash liability of the Fidelity to the purchasers therein as of April 10, 1941, is shown by the following table:
Deposit by Liabilities
States as of by States as
June 6, 1941 of April 10
State Market Value 1941
Net Cash
Alabama ............. $ 32,555.16 $ 31,346.71
Delaware ............ 293,790.63 290,175.36
Illinois ............ 3,759,894.00 1,225,790.75
Indiana ............. 162,863.44 386,173.45
Iowa ................ 45,082.50 34,478.27
Kansas .............. 83,337.50 108,784.89
Kentucky ............ 86,712.50 92,690.42
Maryland ............ 470,806.25 492,552.24
Missouri ............ 861,100.62 786,988.86
Ohio ................ 509,573.44 2,360,418.70
Pennsylvania ........ 232,591.57 4,668,582.25
Tennessee ........... 196,574.38 200,504.97
Virginia ............ 27,703.13 557,809.19
West Virginia ....... 10,674,696.08 6,896,393.88
Wisconsin ........... 2,619,399.07 2,342,978.73
______________ ______________
$20,056,680.27 $23,475,668.67
In addition, the Fidelity had undeposited securities of the market value of $556,467.51 on June 6, 1941, and approximately $500,000 in cash.
On April 10, 1941, 87,999 contracts were outstanding with a face amount of $181,948,026.70 and cash liability of $23,475,668.67. The contract holders reside in each of the forty-eight states, the District of Columbia and in foreign countries.
The Securities and Exchange Commission, pursuant to Section 30 of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. 792 — 4, undertook an investigation of the business of companies issuing face amount installment certificates, and made a report to Congress on March 13, 1940, in which one chapter was devoted to the Fidelity Investment Association. Based on this report Congress passed the Investment Company Act of 1940, 54 Stat. 789, 15 U.S.C.A. 80a — 1 et seq., effective January 1, 1941, wherein it found that investment companies are affected with a "national public interest"; and enacted strict regulations to govern the sale of face amount certificates, that is, certificates, investment contracts or other securities which represent an obligation of the issuer to pay a stated sum at a fixed date more than twenty-four months after the date of issuance, in consideration of the payment of periodic installments of a stated amount. Upon the passage of this Act,2 it was immediately apparent that the Fidelity would be unable to comply with the regulations, especially as to the permissible sales load and the reserve to be maintained with respect to the issued contracts. To meet this situation, another change in the corporate charter was made on December 31, 1940 whereby its name became Fidelity Assurance Company, and its objects and purposes were stated to be "to issue insurance upon the lives of persons and every insurance appertaining thereto and connected therewith, and to grant, purchase and...
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