Whaley v. Matthews, 30151.
| Decision Date | 10 June 1938 |
| Docket Number | No. 30151.,30151. |
| Citation | 280 N.W. 159,134 Neb. 875 |
| Parties | WHALEY ET AL. v. MATTHEWS ET AL. (JEWELL ET AL., INTERVENERS). |
| Court | Nebraska Supreme Court |
OPINION TEXT STARTS HERE
Syllabus by the Court.
1. “A director of a corporation bears to it and its stockholders a fiduciary relation and is treated by courts of equity as a trustee.” Howell v. Poff, 122 Neb. 793, 241 N.W. 548.
2. “Every violation by a trustee of a duty required of it by law, whether wilful and fraudulent, or done through negligence, or arising through mere oversight or forgetfulness, is a breach of trust.” First Trust Co. v. Carlsen, 129 Neb. 118, 261 N.W. 333.
3. A trustee is personally liable to beneficiaries of a fund for any misapplication of the fund to other beneficiaries not entitled thereto. State v. Lincoln Hail Ins. Co., 133 Neb. 496, 276 N.W. 169.
4. Under the general principles of equity, aided by sections 44-1106, 44-1107, and 44-1108, Comp.St.1929, a mutual life insurance company may not discriminate in its distribution to its members.
5. The surplus of a mutual life insurance company belongs to its members and a minority member may sue, on behalf of himself and all others similarly situated, for misapplication thereof. Folts v. Globe Life Ins. Co., 117 Neb. 723, 223 N.W. 797.
6. A domestic insurance company is limited in its real estate mortgage investments to bonds or notes secured by first mortgages. Comp.St.1929, sec. 44-310.
Appeal from District Court, Lancaster County; Shepherd, Judge.
Suit by Harold S. Whaley and others, as policyholders in the Cosmopolitan Old Line Life Insurance Company, against Jack Matthews and another, wherein Hazel W. Jewell and others intervened, for breaches of trust and violations of duty on the part of the named defendant as president of the Cosmopolitan Old Line Life Insurance Company and by the company. Judgment for plaintiffs and interveners, and the defendant named appeals.
Affirmed.
Beghtol, Foe & Rankin, of Lincoln, for appellant.
Bernard S. Gradwohl, of Lincoln, for appellee Whaley.
Robert G. Simmons, of Lincoln, for appellee Cosmopolitan Ins. Co.
Bernard S. Gradwohl, of Lincoln, for interveners Jewell and others.
Heard before GOSS, C. J., and ROSE, DAY, PAINE, CARTER, and MESSMORE, JJ.
The three plaintiffs and three interveners, all holders of certain types of insurance contracts, brought this suit in equity against Jack Matthews and Cosmopolitan Old Line Life Insurance Company, on behalf of themselves and others similarly situated, for breaches of trust and violations of duty. They charged Jack Matthews, president of the company, with wrongful diversion of moneys from various funds belonging to the company. The result was a judgment against Matthews and the company for $191,300. Matthews alone appealed.
The decree, dated December 10, 1936, shows that the items making up the above total sum of the judgment were: (1) $65,000 removed and overpaid from the cumulative endowment funds and $9,750 interest thereon, making the total of this first item $74,750; (2) $90,000 removed and overpaid from the general fund, plus interest thereon in the sum of $17,250, making the total of this item $107,250; and (3) $9,300 for the negligent and wrongful purchase of securities known as the Neverve mortgages, without securing and examining an abstract of title thereof, which would have revealed prior liens and would have avoided such loss. This makes a grand total of $191,300.
The insurance company had its origin in 1917 or 1918, beginning as Cosmopolitan Club of America, a cooperative investment association. In 1923 it became a mutual association as Cosmopolitan Thrift Association. In 1926 a mutual legal reserve insurance company was organized under the same name and it was agreed that members of the old association might exchange their memberships for insurance contracts in the newly organized mutual legal reserve insurance company. These contracts were called “thrift certificates.” In 1929 the name of the company was changed to the Cosmopolitan Old Line Life Insurance Company. The life insurance participation was comparatively small, the chief business being the selling of thrift contracts as before, but thrift contracts were issued by the new company and contained the added life insurance feature. From the first the contracts issued by the various companies were issued by a mutual organization owned exclusively by its members. Since the organization of the present life insurance company some straight life insurance not connected with the thrift certificates has been issued, but the funds in connection with such straight life insurance contracts have been separately held and are not involved in this action.
For each unit of a general thrift certificate the holder contracts to pay in one dollar each month for ten years. Thus, when matured, he has paid in $120. The certificate contains this provision: “The Company agrees that not more than $28.00 per unit shall be allotted during the life of this contract to the General Fund for payment of all expenses of supervision and management.” The company, by the terms of the contract, agrees to act as trustee for all holders of this class of certificates, as a whole, for their payments, after deducting that proportion of the payment allotted for expense of supervision and management and the net premium on the amount of insurance in force the current year under each respective certificate, which resultant amount, together with the accumulated interest thereon, shall be the basis for the fund known as the “cumulative endowment fund,” which shall constitute the surplus of the association belonging to the holders of this class of certificates.
The contract provides that the company will pay the holder at the terminal age of the certificate a sum of money computed as follows:
“1. The entire amount he has placed in the Cumulative Endowment Fund, plus,--
2. His proportionate share of the net interest earnings on said fund compounded annually, plus,--
3. His proportionate share of the money left in the fund by reason of lapse of other holders of such certificates, together
with the interest accumulations thereon, compounded annually, plus,--
4. His proportionate share of all surplus interest earned on the funds of such members who withdraw before arriving at their terminal age, plus,--
5. His proportionate share of all withdrawal values forfeited by beneficiaries who upon death of such member surrender the certificates for insured settlements, plus,--
6. His proportionate share of all interest earnings compounded annually on all such withdrawal values forfeited by beneficiaries.
7. Also a participation in any saving in expense of supervision and management as determined by the Board of Directors.”
Then there was also a form of “Educational Certificate,” which had the same general provisions of the other certificate described, but with the accumulations arising upon the forfeiture of the certificates on any surrenders upon the death of dependents for whose benefit the certificates were taken out.
Each application for a thrift certificate was attached to and made a part of the thrift certificate and contained this provision:
“I hereby designate the Cosmopolitan Old Line Life Insurance Company as Trustee of my payments to the Company or its authorized agent, and agree that my share of the Cumulative Endowment Fund of the Company shall be distributed according to the computation of the Company under the terms of the certificate to be issued to me hereon.”
In blackfaced type on the margin of the certificate opposite the paragraph stating how settlements will be computed appears “Guaranteed Prompt Settlement of Full Share of Funds,” and in a later paragraph of the certificate is stated: “The distribution of surplus, as well as the loan, extended insurance, and surrender values provided in this certificate are based upon the premiums paid rather than upon the American Experience Table of Mortality.”
Literature put out by the company, and in evidence, says that the association “offers a unique plan of cooperative saving to the public” and, under the heading “How It's Done” recites: “First: Expenses are limited; Second: No dividends to stockholders; Third: Members get Full share of surplus.”
It should be stated early that there is no evidence showing or tending to show that Matthews, who is held for the payment of this large sum, ever profited to any extent (unless he profited by overpayment of his own thrift certificate), or that any of the other seven directors, who were Fred Eymer, an employee of the company, F. B. Fleming, Sterling F. Mutz, H. A. Taylor, R. W. Reynolds, C. H. Roper, and D. H. Campbell, and voted the disbursements of the company on thrift certificates maturing from time to time during the period (1928 to 1935), ever profited personally. Yet none of the other directors was made a defendant in this action.
Defendant Matthews was a director of the company continuously from 1922. He was vice-president from 1922 to 1927 and president from 1927 to 1930 and again in 1935. He was chairman of the investment committee from 1927 to the date of the trial, and was chairman of the board or executive committee from June, 1935.
The accounting firm of Martin & Cole made an investigation and report with particular reference to the amounts paid by the company on thrift certificates of the character owned by plaintiffs and others for whom they brought suit, to determine whether there had been overpayments on those certificates paid from 1929 to 1935, both years inclusive. They did not pretend to make a complete audit of the affairs of the company. The company furnished them such records as were needed for the purpose. Primarily the records used were the general ledger and certain books of original entry and the worksheets of the company actuary which had been used by him to provide the date for fixing payments each of the years named. These worksheets were made by D. H. Campbell...
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