Welch v. Union Casualty Ins Co.
| Decision Date | 01 February 1917 |
| Docket Number | 1655. |
| Parties | WELCH et al. v. UNION CASUALTY INS. CO. In re O'NEIL, Ins. Com'r, et al. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
J Howard Reber, of Philadelphia, Pa., for plaintiffs.
Joseph L. Kun, Deputy Atty. Gen., and Francis Shunk Brown, Atty Gen., for the Commonwealth of Pennsylvania.
The plaintiffs, Homer G. Welch, a citizen of New Jersey, and the Consolidated Investment Company, a citizen of Delaware, filed their bill against the Union Casualty Insurance Company, of Philadelphia, a citizen of the state of Pennsylvania. The following facts are set out in the bill:
The plaintiffs are stockholders of the defendant, a corporation organized under the laws of Pennsylvania, authorized to transact a general casualty and liability insurance business with a capital stock of $100,000, all issued and full paid and invested in real estate in Philadelphia, the equipment of its offices, and other lawful investments. The company was incorporated in 1909 and continued its business until 1916. During that period it conducted a large business in nine different states of the United States.
In February, 1916, the management of the business was taken over by H. G. Welch, one of the plaintiffs, L. D. Wood, and other individuals, for the purpose of placing the company on a thorough working and business basis, and for that purpose a substantial amount was invested in the purchase of its capital stock. An investigation resulted in the discovery that the company's business had been grossly and fraudulently mismanaged by its former officers and managers, and its books falsified by them, for the purpose of deceiving the public and the various state insurance departments in the jurisdictions in which it was operating, by writing into its books fictitious insurance for the purpose of increasing its apparent assets from premiums to be collected, by fictitious cancellation on the books of a large portion of its actual outstanding insurance for the purpose of decreasing its apparent reserve liability, by writing into the books fictitious excess premiums presumably due by reason of pay roll audits under its liability policies, and by suppression and concealment of a large amount of outstanding liability which had accrued under its policies.
Through the improper and fraudulent conduct of the company's business, it had become financially involved, and as soon as the condition was ascertained it stopped the issuing of additional policies, canceled a large portion of the remaining business, and within a short time thereafter reinsured and transferred to another insurance company its outstanding policies, and no new insurance has since then been written. Numerous suits have been instituted against the company and are now pending, and it is embarrassed by threatened proceedings in the different states where it has operated.
It is alleged that, if creditors who have sued and others who have threatened suit are permitted to obtain judgment and issue execution, its assets will be sacrificed, its business ruined, and its creditors and stockholders injured. It is alleged that, although the defendant has no available funds at this time to meet its obligations, it is solvent, and, if a reasonable time is permitted to liquidate its business, its creditors will receive the full amount due them, and its stockholders the full value of their holdings, and the business may be rehabilitated, but if suits are permitted to continue, and the assets disposed of through forced sale or otherwise, they will be sacrificed at but a small part of their real value. In order to preserve and administer the assets, and prevent their being sacrificed and destroyed, the bill prays for the appointment of a receiver and for general relief.
The bill was filed December 18, 1916. On the same day an answer was filed by the defendant company, admitting the allegations in the bill, and joining in the prayer for the appointment of a receiver. Thereupon, on the same day, a decree was entered appointing Samuel W. Cooper, Esq., temporary receiver, with leave to the plaintiffs to move for the appointment of a permanent receiver on January 2, 1917, upon 10 days' notice to all known creditors and parties in interest.
On December 20, 1916, J. Denny O'Neil, insurance commissioner, and Francis Shunk Brown, Attorney General, of Pennsylvania, presented a petition to vacate the appointment of the receiver, representing that on November 15, 1916, the Attorney General, at the relation of the insurance commissioner, had filed in the court of common pleas of Dauphin county his suggestion against the Union Casualty Insurance Company, giving the court to understand that the company was insolvent and that its further transaction of business would be hazardous to its policy holders, to its creditors, and to the public. Thereupon the Dauphin county court granted a rule upon the company to show cause on November 29, 1916, why the insurance commissioner should not take possession of its property, and why the court should not order the liquidation of the business of the company and the dissolution of the corporation, and enjoining the company, its officers, agents, and employes, from transacting any business of the company or disposing of any if its property.
On November 29, 1916, the company filed an answer to the suggestion, setting forth that, since its incorporation, it had transacted a casualty insurance business in Philadelphia up to May 1, 1916, since which time it has written no new insurance in this state or elsewhere. It denied that it was insolvent, and that a further transaction of business would be hazardous to its policy holders, its creditors, and to the public, and denied any necessity for the appointment of a receiver. On November 27, 1916, the company appeared, by its counsel, in the Dauphin county court, and in open court agreed that December 19th, at 10 o'clock a.m. should be fixed as the time for a hearing.
On December 19th (the day after the entry of the decree appointing the receiver in this case), the Dauphin county court, having taken jurisdiction on November 15, 1916, proceeded to a hearing, and, after full hearing, entered, on the same day, a formal decree, in which it finds that the company is insolvent, and that its further transaction of business will be hazardous to its policy holders, its creditors, and the public, and ordered, adjudged, and decreed that the company--
'be and the same is hereby dissolved, and its corporate existence ended, and the liquidation of the business of said corporation is hereby ordered, said liquidation to be made by and under the direction of the insurance commissioner of the commonwealth and in accordance with the provisions of the act of June 1, 1911 (P.L. 599); and it is hereby further ordered that the said dissolution of said corporation shall take effect upon the entry of certified copy of this order in the office of the prothonotary of Philadelphia county.'
The petition alleges that a copy of the decree of the Dauphin county court has been filed as provided by law in the prothonotary's office of Philadelphia county. The proceedings in the Dauphin county court were had and the decree entered under the provisions of the act of assembly of Pennsylvania of June 1, 1911 (P.L. 599), providing for dissolution of insurance companies and the liquidation of their assets, under the supervision of the insurance commissioner of Pennsylvania.
The petition represents that the commonwealth of Pennsylvania has established a complete system for the regulation and control of insurance companies created by it and operating under its laws, and for the liquidation of such companies, and, under the act of 1911, has vested exclusive jurisdiction for that purpose in the court of common pleas of Dauphin county, or the court of any county in which the principal office of such corporation is located. The act of April 23, 1909 (P.L. 167), provides that whenever a receiver of a corporation is appointed by any court of this commonwealth on motion of the Attorney General at the instance of the insurance commissioner, such receiver shall forthwith supersede any receiver previously appointed by the decree of any court of this commonwealth.
The petition represents that the District Court of the United States has no power or authority to decree the dissolution of a corporation created by the commonwealth of Pennsylvania, nor the right or authority to supersede and take away the control vested in the insurance commissioner of Pennsylvania, and the court of common pleas of Dauphin county, or the court where the principal office of an insurance corporation is located, nor the right to wind up the affairs of a Pennsylvania corporation so created and subject to the supervision of the insurance commissioner; that, under the comity existing between the courts of the state and federal courts, this court should regard the proceedings instituted in the court of common pleas of Dauphin county in this case as a state court would be bound to regard them under the laws of the state of Pennsylvania; that the decree of the Dauphin county court, made in this case on November 29, 1916, enjoined the Union Casualty Insurance Company, its officers, agents, and employes, from transacting any of the business of the company or disposing of any of its property; and that the application made in this court in the present suit at the instance of the officers of the company, Linden D. Wood and Homer G. Welch, its principal stockholders, violated both the letter and spirit of the said injunction.
The petition further represents that the application for a receiver made to this court was made in bad faith and for the sole purpose of...
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