Wright v. The Federal Reserve Life Insurance Company

• Decision Date: 20 November 1930
• Docket Number: 29,941
• Parties: JOHN WRIGHT et al., Appellees, v. THE FEDERAL RESERVE LIFE INSURANCE COMPANY et al., Appellants
• Court: Kansas Supreme Court

293 P. 945

131 Kan. 601

JOHN WRIGHT et al., Appellees, v. THE FEDERAL RESERVE LIFE INSURANCE COMPANY et al., Appellants

No. 29,941

Supreme Court of Kansas

November 20, 1930

Decided July, 1930.

Appeal from Shawnee district court, division No. 3; OTIS E. HUNGATE judge.

Judgment reversed and cause remanded.

SYLLABUS

SYLLABUS BY THE COURT.

1. INSURANCE--State Supervision--Duty of Commissioner to Failing Company. Under the insurance code, Laws 1927, ch. 231, R. S. Supp. 40-101 et seq., where a domestic life insurance company has been mismanaged, its capital and surplus of $ 600,000 dissipated, its reserves improvidently invested, and its solvency impaired, plenary and exclusive jurisdiction to deal with such a condition of its affairs is vested in the commissioner of insurance; and in the absence of fraud, corruption or official dereliction on his part that officer is presumed to be faithfully concerning himself with the rehabilitation of the company and supervising and directing the restoration of its finances; and until it appears that the corporate affairs of the company cannot be put to rights within the reasonable time granted to it for that purpose by the insurance commissioner an action to place such corporation in the hands of a receiver, and to sell its insurance risks and wind up its affairs, cannot be maintained at the instance of three stockholders owning an aggregate of fifteen shares of the par value of $ 10 per share.

2. SAME -- Receivership -- Sufficiency of Petition. Under the allegations of plaintiffs' petition, set out at length in the opinion, defendants' demurrer thereto was good on all the grounds urged therein, and the trial court's ruling thereon was erroneous.

E. R. Sloan, A. M. Cole, both of Holton, J. J. Schenck, F. A. Sloan, C. P. Schenck, all of Topeka, and J. H. Brady, of Kansas City, for the appellants.

Thomas F. Doran, Clayton E. Kline, Harry W. Colmery and M. F. Cosgrove, all of Topeka, for the appellees.

OPINION

DAWSON, J.:

On August 27, 1930, the plaintiffs brought this action in the district court of Shawnee county, alleging that they owned an aggregate of fifteen shares of the stock of the Federal Reserve Life Insurance Company, defendant, of the par value of $ 10 per share, and that the defendant company had been grossly mismanaged, its capital and surplus of $ 600,000 dissipated, its liabilities greatly in excess of its assets, and that a receiver should be appointed to resell its insurance risks and to wind up its affairs.

On the same day an order was procured from the district court, without notice, restraining the officers and directors of the defendant company from making any expenditures of money except where necessary to carry on the business of the company.

On August 28, 1930, plaintiffs filed a motion for the appointment of a receiver for the defendant company because of the alleged insolvency and for an order directing him to prosecute his duties.

On August 29, 1930, plaintiffs caused a subpoena duces tecum to be issued, directed to the commissioner of insurance, commanding his attendance in the district court on September 3, 1930, to testify on the matters involved in plaintiffs' petition, and that--

". . . You, Chas. F. Hobbs, insurance commissioner, are then and there to bring and have with you the report made to the insurance commissioner of the state of Kansas concerning the investigation made of the affairs of the Federal Reserve Life Insurance Company under the direction of the insurance departments of the states of Kansas, Missouri and Indiana, and this do you in no wise omit, under penalty of the law."

On September 3, 1930, defendants filed a demurrer to plaintiffs' petition on various grounds:

"First: That the court has no jurisdiction of the subject matter of the action.

"Second: That the plaintiffs have no legal capacity to sue.

"Third: That the petition does not state facts sufficient to constitute a cause of action."

On October 11, 1930, the trial court overruled the demurrer. On the same day an appeal was taken thereon, and by order of this court proceedings in the district court were stayed until the propriety of its ruling on the demurrer could be reviewed.

To determine that question the allegations of plaintiffs' petition must be examined at some length. It is alleged that the defendant is a domestic insurance corporation organized in 1919 with a capital of $ 100,000 divided into 10,000 shares of the par value of $ 10 each. These shares were sold at a premium, and thereafter the capital was repeatedly increased and additional issues of stock were sold until the company had acquired a capital and surplus of $ 600,000. In 1925 the corporation again undertook to increase its capital and authorized an issue of 10,000 additional shares, but that project has not been carried into effect.

It is alleged that in 1928 three persons, Wilson, Merritt and Henning, who then held the offices of president, vice president and general attorney of the defendant company, entered into a conspiracy with one Bushman, pursuant to which $ 400,000 of Liberty bonds belonging to the defendant were withdrawn from the custody of the state treasurer, on approval of the commissioner of insurance, who at that time was William R. Baker, which bonds (it may be inferred but is not alleged) were delivered to Bushman. Bushman executed a mortgage to the defendant company for $ 400,000 covering lands in Michigan, which were not worth more than $ 160,000 at the date of execution. Those Liberty bonds were sold and Bushman loaned the proceeds, $ 400,000, to Wilson, Merritt and Henning; and therewith those three persons, then officers of the defendant company, purchased the stock of the Farmers National Life Insurance Company, of Huntington, Ind., and sold the reinsurance of that company to this defendant corporation. At the time this sale was effected, November 30, 1928, the Indiana company had $ 40,000,000 of insurance in force; the sale price was $ 26 per $ 1,000 of insurance, making the total consideration $ 1,083,000; but by the terms of the purchase contract the price therefor was to be paid out of 75 per cent of the proceeds of the insurance thus taken over from the Indiana company, plus 5 per cent interest on deferred payments. It is alleged that the money used to purchase the stock of the Indiana company was in fact the money of the defendant company and that it is equitably entitled to the benefits of the original contract of purchase, and that the mortgage given by Bushman should be canceled. It is also alleged that of the mortgages taken over by defendant as part of the assets of the Indiana company $ 753,157.29 thereof are past due and in default.

Plaintiffs further allege that sometime, date not stated, the defendant company "held" mortgages aggregating $ 41,550 given (by whom not stated) for the purchase of the stock of the Commonwealth Fire Insurance Company, which transaction was negotiated through the connivance of one Frank Travis, treasurer of the defendant company; and that payment of these mortgages is being resisted by their makers, and are of doubtful value.

Plaintiffs also allege that--

"The defendant, the Federal Reserve Life Insurance Company, has either loaned direct to B. Frank Bushman, now president of the Federal Reserve Life Insurance Company, or purchased from him mortgages totaling the sum of $ 725,480.00. . . . That all of said mortgages to the said B. Frank Bushman, or purchased from or through him, are made in violation of the laws of the state of Kansas, which provide that the funds of an insurance company may be invested in loans secured by mortgages on unencumbered real estate worth 100 per cent more than the sum loaned thereon; . . . that the actual value of the land on which said mortgages were given amounts to the sum of $ 566,570.00; . . . all of which was known to and concurred in by the present officers and directors of the Federal Reserve Life Insurance Company, defendants herein. That no effort is being made by the present officers and directors to replace the impaired securities now on deposit with the state treasurer of the state of Kansas, or to foreclose any of the past-due mortgages, although many have been delinquent four or five years."

Plaintiffs further alleged that on account of the financial condition of the company and the mismanagement of its affairs by its officers and directors, policyholders are either canceling their policies or borrowing the full loan value thereof, and that the cancellations of the last nine months aggregate more than $ 10,000,000; and that the only assets defendant now has are the sales value of reinsuring its insurance risks now in force; that the board of directors are paying themselves and employees exorbitant salaries; and that--

"The entire capital and surplus of the company has been dissipated and by reason of the gross mismanagement of the present officers and directors of said company, the defendant herein, the legal reserve . . . of the insurance policies is being greatly impaired; . . . that the liabilities are far in excess of the assets, and that the Federal Reserve Life Insurance Company is insolvent. That for the purpose of protecting the rights of these plaintiffs, and all other stockholders similarly situated, it is necessary that a receiver be appointed for the purpose of taking full charge of the affairs of the Federal Reserve Life Insurance Company, disposing of its assets, taking such action as may be necessary under the direction of this court to cancel all stock illegally issued, and for the purpose of winding up the affairs of said company."

The prayer of the petition reads--

"Wherefore plaintiffs pray for an order of this court...