Smith v. Washington Cas. Ins. Co.

• Decision Date: 09 March 1932
• Citation: 159 A. 510
• Parties: SMITH, Com'r of Banking, etc. v. WASHINGTON CASUALTY INS. CO. et al.
• Court: New Jersey Court of Chancery

159 A. 510

SMITH, Com'r of Banking, etc.

v. WASHINGTON CASUALTY INS. CO. et al.

Court of Chancery of New Jersey.

March 9, 1932.

Syllabus by the Court.

1. Under the provisions of subsection B of section 56 of the General Insurance Act as amended by chapter 244, P. L. 1931 (Comp. St. Supp. § 99—56, subsec. B), application to the Court of Chancery for a receiver and injunction is authorized only where the commissioner of banking and insurance has refused to take possession "upon the demand of any creditor or stockholder" of the insolvent company.

2. The right to apply to the Court of Chancery for a receiver of an insolvent insurance company and an injunction is limited by that subsection to the Attorney General, creditors, and stockholders or members. No such right is given the commissioner of banking and insurance.

3. Jurisdiction of the Court of Chancery over insolvent insurance companies where possession is taken by the commissioner of banking and insurance, defined.

4. Chapter 244, P. L. 1931 (Comp. St. Supp. § 99—56), is not unconstitutional as violative of the due process provision of Amendment 14 of the United States Constitution; nor is it unconstitutional as vesting the commissioner of banking and insurance with judicial powers.

5. The taking possession of the property and business of an insolvent insurance company by the commissioner of banking and insurance pursuant to the authority of section 56 of the General Insurance Act as amended by chapter 244, P. L. 1931 (Comp. St. Supp. § 99—56), does not divest the company of title to its property. The possession of the commissioner is substituted for that of its directors. He is merely a custodian and deals with the property in the name of and for the company and its creditors. Nor is the corporate existence of the company affected by such possession. The corporate franchise and existence can be terminated only in the mode prescribed by statute.

6. The rights of creditors against an insolvent insurance company, so far as reducing their claims to judgment is concerned, are not affected by the possession of the commissioner except that section 56 of the act as amended (Comp. St. Supp. § 99—56) automatically stays all judgments, decrees, levies, and executions against the corporate property.

7. In construing statutes the primary rule is to ascertain and give effect to the intention of the Legislature; and the occasion and necessity of the law, the mischief felt, and the remedy in view are important factors for consideration.

8. Whether the Court of Chancery has any jurisdiction under the General Corporation Act (Comp. St. Supp. § 47—65) to appoint a receiver of an insolvent insurance company organized under the General Insurance Act, and to enjoin it from the exercise of its franchises, quaere.

9. Whatever jurisdiction the Court of Chancery has to appoint a receiver of an insolvent corporation and to wind up its affairs is of statutory origin. It has no inherent equity power to do so.

10. The statutory proceeding in the Court of Chancery for the appointment of a receiver of an insolvent corporation is a sort of an equitable quo warranto designed to destroy the corporate existence and not to preserve it.

11. The inherent equitable jurisdiction of the Court of Chancery to appoint a receiver of a corporation is limited to the appointment of custodial receivers whose function is to preserve and not to destroy.

12. This inherent jurisdiction does not and never did depend upon statute nor upon the character of the parties, whether individuals or corporations, nor upon the nature of the property. Of that jurisdiction the legislature cannot deprive this court.

13. There is a plain distinction between the appointment of a custodial receiver of a corporation pursuant to this court's general equity powers and the appointment of a statutory receiver in insolvency proceedings. Custodial receivers are appointed pendente lite, no title to property coming into their hands vests in them, and the corporate existence and franchises are not affected. On the other hand, such title vests in a statutory receiver appointed in insolvency proceedings, and dissolution of the corporation by decree of the court usually, but not always, follows.

14. The Court of Chancery has inherent jurisdiction over all trusts, and this jurisdiction extends to the appointment of trustees.

15. It is a rule which admits of no exception that equity never allows a trust to fall for want of a trustee.

16. This court will not approve of the compensation of assistants and employees of the commissioner of banking and insurance fixed by the commissioner, and the expenses of administration and liquidation of an insolvent insurance company of which the commissioner has taken possession, except upon a full disclosure of facts showing the necessity for the appointment of such assistants and employees, and the reasonableness of such compensation and expenses. Where there is no such disclosure, the court will refer the matter to a master to inquire into and report as to such necessity and reasonableness.

Proceedings by Frank H. Smith, Commissioner of Banking and Insurance, against the Washington Casualty Insurance Company and others.

Decision in accordance with opinion.

Pearce R. Franklin, of Newark, for petitioner.

Edward A. Schilling, of Newark, for defendant.

Morris H. & Charles E. Cohn, of Newark, for creditors and stockholders.

BERRY, Vice Chancellor.

The commissioner of banking and insurance has filed a petition reciting the incorporation and organization of the defendant company in December, 1927, under the insurance laws of this state; his determination in November, 1931, that the company was insolvent; that the continuation of its operation would be hazardous to the public, to its policyholders, claimants, or other creditors; the taking possession of the assets of said company by the commissioner pursuant to the provisions of chapter 244, P. L. 1931 (Comp. St. Supp. § 99—56); that he is still in possession thereof, and is liquidating said assets pursuant to authority conferred upon him by law; that he has issued notice of the cancellation of policies of insurance issued by the company; that he is holding and administering the assets and business of the company as a trust fund and that he desires the aid, advice, and in struction of this court in and about the administration of the trust; that although desirous of such advice and instructions he is not entitled thereto because he is not an officer of this court; that situations have arisen and will arise in the future with respect to which he has no authority under the act; and that it is therefore necessary that this court assume jurisdiction of the trust. He then recites some of the problems which have arisen and prays the future advice of the court with reference thereto. He alleges that the statute under which he is operating provides no means for limiting the time within which claims against the company may be prosecuted and no means for barring creditors and invokes the jurisdiction of this court in that behalf.

The petition was filed January 29, 1932. It seeks the usual injunction against the exercise of its privileges and franchises by the defendant company and the usual restraint issuing against insolvent corporations, their officers, directors, etc., authorized by the Insurance Company Act (2 Comp. St. 1910, p. 2838 et seq., § 1 et seq., and Comp. St. Supp. § 99—1 et seq.) and also by the General Corporation Act (2 Comp. St. 1910, p. 1595 et seq., and Comp. St. Supp. § 47—1 et seq.). One prayer of the petition is "that this court take over the administration of said trust." Attached to the petition are a number of schedules, amongst which is one stating the per diem compensation of employees and assistants of the commissioner as heretofore fixed by him; another showing disbursements of the commissioner in the administration of his trust up to January 2, 1932, and a list of so-called preferred salary claims, and he asks this court's approval of the salaries and compensation of the assistants, as heretofore fixed by him, the payment of preferred claims, and the approval of disbursements already made, as shown by said schedules. But no account of his administration thus far is presented.

Upon the filing of the petition, an order to show cause directed to the stockholders, policyholders, creditors, etc., returnable before the Chancellor at Newark, was advised by Vice Chancellor Buchanan. The matter, in due course, came on for hearing before me.

The administration by this court which is sought by this petition was stated by counsel for the petitioner to be that which was authorized by chapter 244, p. 599, P. L. 1931 (Comp. St. Supp. § 99—56), referred to in the petition. The intention of requesting the court to assume jurisdiction of the trust pursuant to any other authority was expressly disavowed. The application is an unusual one and is the result of recent legislation. A somewhat similar petition, more limited in the scope of its prayers, was passed upon by Vice Chancellor Buchanan in Re Washington Casualty Insurance Co., etc., 109 N. J. Eq. 483, 158 A. 331. In that petition the commissioner sought the advice and instruction of this court on certain questions which the Vice Chancellor refused, pointing out that the commissioner of banking and insurance, although a trustee of the assets of the defunct company, was not an officer of this court and was not, therefore, entitled to the court's advice, stating "that is the province and duty of the Attorney General, to whose assistance in this behalf the commissioner is presumably entitled." In that proceeding there was apparently no suggestion that the Court of Chancery take over the administration of the trust, and under the circumstances the denial of the request for advice and instructions was undoubtedly entirely proper. The present application is, however, as already...