DocketNumber： Civ. No. 14210
Citation Numbers： 95 Cal. App. 2d 220, 212 P.2d 965, 1949 Cal. App. LEXIS 1105
Judges： Bray, Ward
Filed Date： 12/21/1949
Status： Precedential
Modified Date： 10/19/2024
Petition for a writ of mandate directing the superior court to vacate its “Order Appointing Conservator and Restraining Order” in a proceeding brought against petitioner by respondent Insurance Commissioner of the State of California. The questions involved concern the validity of the acts of respondent in seizing, by virtue of said court order, the California business and assets of the petitioner.
Record
On May 17, 1949, said commissioner filed an application in the superior court under section 1011 of the Insurance Code, for an order making him conservator of the petitioner, directing him to take possession of all of its assets, records, and property, vesting title thereto in him, and enjoining it from transacting further business in California, etc. The application as permitted by section 1011 of the Insurance Code, was made ex parte and without notice. The order was granted forthwith. The application and order were served upon petitioner simultaneously with the seizure by the commissioner under the order, of all of its California assets. On June 1, petitioner filed its petition in this court for a writ directing the superior court to vacate its order. Respondents demurred to the petition on the ground that it does not state a cause of action against them and also filed returns. Later petitioner filed a supplement to the petition and then an amendment thereto. Respondents filed demurrers and answers to the petition and to the supplement and amendment. The case was submitted on the pleadings and the briefs, it being the petitioner’s theory that the pleadings, together with certain admissions claimed to be made in the briefs and on the argument, show as matter of law that the commissioner had no legal right to seize the company as he did.
The material allegations of the complaint as supplemented and amended may be summarized as follows:
Petitioner was organized under the law of Rhode Island, is lawfully doing business in 34 states, a number of foreign countries and territories, and has been duly licensed to do business in California since 1912. Wallace Downey is the duly appointed Insurance Commissioner of California.
As of December 31, 1948, petitioner’s total assets exceeded the total liabilities (excluding capital and surplus) by about two and one-half million dollars. After deducting certain nonadmitted assets, there was still a capital stock of one million dollars and a surplus of over one million dollars. During 1948, petitioner wrote insurance in gross premium value of about thirteen million dollars, and about one and one-half million dollars in California alone. Business in California has shown a healthy increase. Petitioner has 142,000 policies in force in the state, and is represented by over 2,500 duly qualified and licensed agents.
The superior court order appointed the commissioner conservator of petitioner’s business, gave him title to its assets “wheresoever situated,” and restrained petitioner from carrying on its business. The commissioner, on taking over, has prohibited the issuance of any further policies in California, and, in effect, has stopped petitioner from doing business here.
The grounds given by the commissioner in his application are all disputed by petitioner, and it is contended that for more than a year most of them were known to him. They rest on the determination of legal questions, accounting problems, questions of valuation of assets, and similar questions, all of which are debatable. On many of these issues the commissioner has a difference of opinion with 33 other state insurance commissioners. The only recent development is in connection with an agreement between petitioner and Pioneer Equitable Insurance Company of Indiana, dated March 21, 1949. This agreement was approved in March by the Insurance Commissioner of the State of Rhode Island, petitioner’s domiciliary state, and the Insurance Commissioner of the State of Indiana, Pioneer’s domiciliary state.
The commissioner’s interpretation of that agreement is that (a) it amounted to a merger or consolidation without the commissioner’s consent (the company denies that it does or that the commissioner’s consent can be required); and (b) it would
From August, 1948 on, the commissioner had conferences with officers and attorneys of petitioner regarding matters of internal management making various complaints about the management and asking the company to withdraw from business in California. Further conferences were held. Although petitioner did not believe the commissioner had power to demand internal changes, it made several of the requested changes—put in directors who were not employees, cut down the volume of its business, adopted a policy of investing only in securities traded on a national exchange, etc. Petitioner did not remove Stewart Hopps, chairman of the board, from his position as officer and director, as suggested by the commissioner, but transferred power from the chairman of the board to the president. The commissioner, although not contending he had the right to insist on such change, still insisted Hopps should be eliminated entirely.
Early in November, 1948, the commissioner met in New York with the insurance commissioners of Rhode Island, Pennsylvania and Indiana, and some officers of petitioner. This was followed by a meeting of the insurance commissioners alone, who took no action nor did any of the commissioners in° other states.
On November 8, petitioner received a letter from the commissioner purporting to require it to cease business in California. Under authority given in the Insurance Code, petitioner asked the Attorney General of California for an opinion as to the legality of the commissioner’s order in the
Immediately after the declaratory relief action had been filed by petitioner, the commissioner, under authority of the Insurance Code, began investigating petitioner. Hearings were held in New York and petitioner’s books were examined in Philadelphia. Hearings were adjourned on December 23d, for the Christmas holidays, on the understanding that they would be resumed again on notice from the commissioner. On February 23d, the Attorney General of California wrote petitioner about completing questioning of officers. The company replied that they would be available in about one week. The attorney general made no objection and was to notify petitioner of the date. No further word was received from the attorney general or the commissioner, and no further request for resumption of the investigation was ever received by petitioner.
The National Association of Insurance Commissioners is an organization of all state insurance commissioners, having as one purpose to secure uniformity of insurance regulation among the states. At the convention of the N. A. I. C. in New York in December, 1948, the commissioner made a motion that the executive committee, of which he was a member, act together in the matter of petitioner. The motion was not seconded. On January 17, 1949, the commissioner advised the N. A. I. C. that he did not desire to act alone and requested the N. A. I. C. to join in uniform action. The commissioner was thereafter advised that the N. A. I. C. suggested a ‘ ‘ convention examination,” conducted by examiners from state insurance departments, one examiner from each zone in which the company does business. For the purpose of these examinations, the United States is divided into six zones. Such examinations are made of all insurance companies as often as required by the law of the domiciliary state. Rhode Island requires such an audit every four years. The last examination
The convention examination and audit of petitioner began on May 2, 1949. On May 10th, the commissioner notified the convention examiners that he would advise regarding his participation at the earliest moment. To date no representative of the commissioner has appeared to participate in the audit, although it has been going on for a month by the representatives of the other five zones, and will be finished in about 90 days.
On May 17th, one week after the commissioner communicated with the convention examiners, the commissioner filed his application for a conservator. The commissioner stated to the trial judge that application had to be made ex parte because if notification were given, petitioner would have a chance to withdraw all of its assets from California, and that petitioner’s agent in California would pay it money due for premiums.
As an example of the determinations from which the commissioner drew a conclusion of hazardous condition of the company the report (Exhibit A) questioned a receivable due petitioner from the U. S. Interstate Brokerage Corporation in the sum of $923,761.45 as of September 30, 1948, although as of December 31, 1948, the date given to the audit, said receivable had been reduced to $139,873.89 and to $24,039.19 at the date of the seizure, and the commissioner knew or should have known these facts. In writing off a reinsurance commission receivable from Lloyds on the reinsurance contract petitioner claimed it should be based upon a 25 per cent commission, whereas, for the reasons there set forth, the commission basis should have been 44.6 per cent. The write-down by the commissioner was $616,589.79 when it should have been only $53,351, and the commissioner acted arbitrarily and unreasonably in making such write-down.
At the time of filing his application, the commissioner knew (a) that petitioner’s agent in California forwards premiums to petitioner monthly, as they are collected from subagencies; (b) that on May 17th, the agent held only about $45,000 due petitioner; (c) that premiums receivable for the 60-90-day period preceding May 17th were in an amount less than $200,000, and that only 50 per cent or less of that would be paid agents, due to a notice sent by the commissioner to all agents and brokers; (d) that the commissioner would come into possession of only $145,000 or less, and that petitioner has
The commissioner’s determination that continuation of business in California would be hazardous is highly debatable and in conflict with the determination of 33 insurance commissioners and convention examiners from Florida and Rhode Island who have signed affidavits that they do not believe the company to be on the verge of insolvency. The commissioner, on May 17th, notified the 2,500 agents of the company and Pioneer Equitable, and all brokers, about 7,500 in number, that he was taking the company over in this state; that no further business was to be written with the company, and that he was going to audit all accounts of agents and brokers. Petitioner is ready, willing and able to pay all losses for which it is now liable to residents in California, and to pay the return premiums on any policies cancelled by residents, but is prevented from so doing by the commissioner and the court’s action. The commissioner, owing to the fact that the main assets of petitioner are in Rhode Island, cannot rehabilitate it in this state; he can only liquidate, or force it to discontinue business here. The seizure has caused petitioner irreparable injury.
Attached to the petition for a writ of mandate is the application of the commissioner for the superior court order appointing him conservator, which had attached to it Exhibit A, which is a report or audit of petitioner dated April 22, 1949, made by the commissioner’s auditor, purporting to show the condition of petitioner as of December 31, 1948, and which is the basis upon which the commissioner claims his right to act. This audit shows petitioner to be insolvent within the meaning of article 13, chapter 1, part 2, division 1 of the Insurance Code.
Respondents’ answer denied the allegations of the petitioner as to the action of the commissioner being arbitrary, unreasonable, and in abuse of his discretion, or that he had knowledge of the matters which petitioner claims differs from those shown in the audit,
Petitioner’s principal contentions are (1) that the circumstances as known to the commissioner on May 17th did not justify a seizure of petitioner in California, without a previous hearing, and therefore the commissioner acted arbitrarily in so doing; it denies the correctness of the report and contends that neither the report nor the circumstances known to the commissioner justified a seizure without a preliminary court hearing; and (2) that because it claims that petitioner has no adequate remedy to show that the seizure was arbitrary, not made in good faith, and unnecessary, the statute permitting such seizure is unconstitutional, or if constitutional, has been applied in an unconstitutional manner; that while the question of petitioner’s condition is being threshed out in court, it should be permitted to possess and operate its business.
Urgent Emergency
Petitioner contends that section 1011 authorizes the court to make the conservator order without notice only in situations of urgent emergency. There is nothing in the section which justifies this interpretation. The section provides: “The superior court . . . shall, upon the filing by the commissioner of the verified application showing any of the following conditions hereinafter enumerated to exist, issue its order [similar to the one made in this ease] ... (e) That such person, without first obtaining the consent in writing of the commissioner, has transferred, or attempted to transfer, substantially its entire property or business or, without such consent, has entered into any transaction the effect of which is to merge, consolidate, or reinsure substantially its entire property or business in or with the property or business of any other person, (d) That such person is found, after examination, to be in such condition that its further transaction of business will be hazardous to its policy holders, or creditors, or to the public ... (j) That the last report of examination of any person to whom the provisions of this article apply shows such person to be insolvent within the meaning of Article 13, Chapter 1, Part 2, Division 1 of this Code.”
“To state the contention is to state its impossibility. To govern themselves, the people act through their instrumentality which we call the State of California. The State of California functions through persons who are- for the time being its officers. The failure of any of these persons to enforce any law may never estop the people to enforce that law either then or at any future time. It would be as logical to argue that the people may not proceed to convict a defendant of burglary because the sheriff perhaps saw him and failed to stop him or arrest him for another burglary committed the night before.”
The statute itself does not limit its use to times of sudden emergency. The statute, as construed by the California courts, requires only that the commissioner file a verified application stating that he has found one, or more, of the statutory grounds to exist. “In making his application under section 1011 of the Insurance Code, the commissioner does not seek a judicial appointment and a judicial ruling that the company is in fact delinquent. By his application the commissioner merely represents that he has found certain conditions to exist and has made his official administrative determination to proceed as authorized by the statute. In obtaining his original ex parte order, the commissioner is not required to show to the court that the company was in fact in a hazardous condition, but only that he, as a state officer, invested by legislative authority with the power, has so 1 determined’ and ‘found.’ The Insurance Code provides that the order or determination of the commissioner to take over the affairs and assets of the company shall continue in force and effect until, upon application by either the commissioner or of the company, it shall
Petitioner has emphasized that the matters involved were disputable. It is not a requirement of the statute, however, that such matters not be disputable. The Legislature undoubtedly assumed that in most cases the company involved would dispute the commissioner’s contentions, and accordingly provided, in section 1012, for a full hearing before the trial court, at which the company could show that the conditions claimed by the commissioner did not exist. There is no implied restriction in the statute that the commissioner act only where the existence of the dangerous condition is beyond dispute.
That the company’s contention that an emergency must exist is not well founded is further shown by the provisions of section 1013 of the Insurance Code, which provides for a seizure by the commissioner without any hearing or any court order. It reads: “Whenever it appears to the commissioner that any of the conditions set forth in section 1011 exist or that irreparable loss and injury to the property and business of a person specified in section 1010 has occurred or may occur unless the commissioner so act immediately, the commissioner, without notice and before applying to the court for any order, forthwith shall take possession of the property, business, books, records and accounts of such person, and of the offices and premises occupied by it for the transaction of its business, and retain possession subject to the order of the court. ...”
Section 1012 provides for a hearing in case of seizure either under section 1011 or 1013: ‘ ‘ Said order shall continue in force and effect until, on the application either of the commissioner or of such person, it shall, after a full hearing, appear to said court that the ground for said order directing the commissioner to take title and possession does not exist or has been removed and that said person can properly resume title and possession of its property and the conduct of its business.”
“Did the withdrawal of these funds constitute a hazardous condition as defined by the Insurance Code ? To follow to its conclusion appellant’s argument that there could be no hazard to policyholders so long as the business is solvent, would be to sanction the withdrawal of policyholders’ money in the payment of excessive salaries without restriction. This is not the law. Excessive withdrawal of policyholders’ funds continued long enough will eventually render any company insolvent, and thus destroy the very purpose of the payment of insurance premiums. The people of the state and interested policyholders have a vital interest in this. There is no requirement of our Insurance Code that the Insurance Commissioner must wait until an insurance company is insolvent before he takes action to protect the policyholders. To so hold would be to apply the ancient aphorism about locking the barn door after the horse is stolen. . . .
“. . . If the management of the insurance company so conducts its business that there is loss, or risk of loss to the policyholders, it becomes the duty of the Insurance Commissioner to take possession of the company’s assets and to conduct its business as conservator. This is the meaning of the word ‘hazardous’ as used in the statute.” (P. 333; emphasis added.)
Petitioner contends that because the company was in a position ‘ ‘ to make available within a reasonable time sufficient moneys to meet promptly any demand which might in the ordinary course of events be properly made against” it (Ins. Code, § 706.5), the commissioner was not entitled to proceed under section 1011. However, under the Insurance Code a company may be in that position and yet be insolvent. Such was the situation in Carpenter v. Pacific Mut. Life Ins. Co., 10 Cal.2d 307 [74 P.2d 761]. It must be remembered that insurance companies, like banks and building and loan com
In Andre v. Beha (1925), 211 App.Div. 380 [208 N.Y.S. 65], the New York superintendent of insurance had taken over the assets of a Russian insurance company. Plaintiff there made the same contentions of irreparable loss and injury as are made here, and also the contention that the company was actually solvent. In refusing plaintiff’s application for relief the court said (p. 79 [208 N.Y.S.]): “The Attorney General, in his first point, argues that the proper procedure in this case calls for action on the part of the superintendent of insurance under section 63 of the Insurance Law (see McKinney’s Consol. Laws and Supp.), which, he says, provides an exclusive remedy for the protection of the corporation and its shareholders. The plaintiff claims that this section has no application to a solvent company, which, he says, is the case here. I cannot agree with the learned counsel for the plaintiff in his narrow view of the section. It is not only insolvency that is made the basis for action on the part of the superintendent, but under the section he may act where the company is found, after an examination, to be in such a condition that ‘its further transaction of business will be hazardous to its
“In construing this very section of the law, the Court of Appeals in a recent case (Matter of People [City Eq. Fire Ins. Co.] 238 N.Y. 147, at page 156, 144 N.E. 484, 486) said:
“ ‘The superintendent is not, therefore, to take possession of the property solely for the benefit of creditors or policyholders in this state or in the United States, but for the interest of all its policyholders, creditors, and stockholders wherever they may be.’ ”
Petitioner has cited, and we have found, no case involving insurance companies, banks or building and loan companies, affected, as they are, with a public interest, supporting the position it takes with reference (1) to necessity for urgent emergency; (2) abuse of discretion in selecting the remedy under similar circumstances; (3) or requirement for hearing before seizure.
Petitioner refers to the insolvency as a “technical” one. The code has defined “insolvency.” It has fixed the 75 per cent figure as a minimum figure below which it is dangerous for a company to go. The impairment of capital shown in Exhibit A is approximately 73 per cent. Section 981 of the Insurance Code provides that when the impairment (as defined therein) falls below 75 per cent of the aggregate par value of its issued stock, an insurance company is insolvent. Thus, the apparent impairment amounts to approximately 48.5 per cent of petitioner’s stock par value. It is therefore considerably below what the state has determined to be a safe point. Coupled with the fact that the company appears to have been losing over one million dollars per year for the past three years, and has changed in that time from a company with ample capital and surplus to one having no surplus and an impaired capital
Statute Applies to Foreign Corporations
Petitioner argues that section 1011 of the Insurance Code should be construed as not applying to foreign corporations. This argument is untenable. Article 14 of the Insurance Code, dealing with proceedings in cases of insolvency and delinquency, contains sections 1010 to 1062 inclusive. Article 14 begins with section 1010 which provides as follows: ‘ ‘ The provisions of this article shall apply to all persons subject to examination by the commissioner, or purporting to do insurance business in this State, or in the process of organization with intent to do such business therein, or from whom the commissioner’s certificate of authority is required for the transaction of business, or whose certificate of authority is revoked or suspended.” Petitioner admittedly is doing business in this state and subject to examination by the commissioner and required to obtain a certificate. The entire article, including section 1011, is applicable to persons in the enumerated, independent categories. There is no requirement that corporations be domiciled in California. Moreover, prior to 1931, proceedings against foreign insurance corporations were provided for in sections 5, 6, Statutes 1919, chapter 178, page 265, while those against California corporations were provided for in section 2. In that year the provisions were combined by amendment of section 2 and repeal of section 5. (See Stats. 1931, eh. 1123, p. 2375.) These provisions in 1935 were codified in the Insurance Code in sections 1018 to 1022 (Stats. 1935, ch. 145, p. 553). Thus, petitioner is within the intended scope of the statute. The original sections required a proceeding under order to show cause, but in the codification in 1935, this requirement was eliminated.
Due Process
Section 1012 provides for a hearing, after seizure by the commissioner, either under section 1011 or 1013. Although the requirements of due process often involve a prior full hearing, it has long been recognized that where public neces
The same principles have consistently been applied to institutions dealing with the financial affairs of the public. In the early case of State Savings etc. Bank v. Anderson, 165 Cal. 437 [132 P. 755, L.R.A. 1915E 675], the state superintendent of banks had seized a bank under a statute providing as follows: “Whenever the superintendent of banks shall have reason to conclude that any bank is in an unsound or unsafe condition to transact the business for which it is organized, or that it is unsafe or inexpedient for it to continue business, the superintendent of banks may forthwith take possession of the property and business of such bank, and retain such possession until such bank shall resume business, or its affairs be finally liquidated, as herein provided.” (The act also provided for an injunction proceeding to determine the merits, after seizure. Application for such an injunction had to be made within 10 days.) It will be noted that a really “summary” procedure was involved, since there was not even an application for a court order.
The California Supreme Court considered all possible constitutional arguments and held the legislation, and action thereunder, not violative of any constitutional right: “The state owes to the public the duty not only of providing for supervision and examination of banks but the added duty as a matter of public policy, if the conditions warrant, of summarily closing them up and terminating their existence. When the management thereof has brought them into a condition of unsafety or insolvency the public interest demands that on this condition being ascertained they should not be permitted to further hold themselves out as responsible institutions or be permitted to remain in a position to do so. . . .
“In this view it cannot be said that initial seizure is not a fair and reasonable measure to be adopted to effect the protection of the public welfare which is designed by it, and as the only limitation on the power of the state imposed under the constitutional amendment is that the regulations it makes shall be of that character no constitutional right of the appellant has been impaired by such legislation.
*237 “Nor is the due process of law clause violated because such summary seizure is authorized to be made without action brought and judicial warrant for the taking. Due process of law does not necessarily imply a regular proceeding in a court of justice or after the manner of such courts. . . .
“. . . While the initial seizure is authorized under the act without suit brought and is justified as a matter of public policy for the reasons here given, it cannot be said that the bank is thereby deprived of its property without due process of law as heretofore defined. An opportunity is given the alleged delinquent bank to invoke the aid of a court of competent jurisdiction as to the validity of the seizure and right of the superintendent to hold the property, and if that opportunity is a reasonable one, then the right which the Constitution guarantees has been in substance preserved to it.” (Pp. 446, 448.)
The United States Supreme Court affirmed the holding by a per curiam decision (238 U.S. 611 [35 S.Ct. 792, 59 L.Ed. 1488].)
In North American Building & Loan Assn. v. Richardson, supra (6 Cal.2d 90), the court held constitutional similar action, under a similar statute dealing with building and loan associations.
The legality of the Insurance Code was considered in a number of eases involving the Pacific Mutual Life Insurance Company. The California Supreme Court held that even though a court order might have been void, through disqualification of the judge, the action of the commissioner could be upheld under the summary seizure provisions (§ 1013) of the code, and that such provisions were legal: “Section 1013 of that code confers on the commissioner, whenever it shall appear to him that any insurance company is in such condition that its further transaction of business will be hazardous to its policyholders or creditors, the power to take summary possession ‘without notice, and before applying to the court for any order. ’ Similar provisions for summary seizure exist in the Bank Act and Building and Loan Act. These sections have uniformly been sustained against the claim of illegal seizure. (State Savings etc. Bank v. Anderson, 165 Cal. 437 [132 P. 755, L.R.A. 1915E 675]; North American Building etc. Assn. v. Richardson, 6 Cal.2d 90 [56 P.2d 1221].)” (Carpenter v. Pacific Mutual Life Ins. Co., supra, 10 Cal.2d 307, 324.) See, also, Holabird v. Richardson, 3 Cal.2d 299
On appeal to the United States Supreme Court, it was held that questions concerning the validity of the seizure and whether it was valid by ratification or by the summary seizure provisions “concern matters of state law and amount at most to alleged erroneous constructions of the State’s statutes by its own court of last resort. Such decisions would not be a denial of the due process guaranteed by the Fourteenth Amendment.” (Neblett v. Carpenter, 305 U.S. 297, 302 [59 S.Ct. 170, 83 L.Ed. 182].)
It is not surprising that the Supreme Court found no due process issue, since it had approved a similar procedure, by per curiam opinion, 25 years earlier (State Savings etc. Bank v. Anderson, supra [238 U.S. 611]). Following the Neblett case it has been assumed that the validity of the Insurance Code was beyond doubt, with respect to the provisions for summary seizure, and, a fortiori, seizure with court order. Thus in Caminetti v. State Mutual Life Ins. Co., supra (52 Cal.App.2d 321), the court said: “There is no merit in the further contentions presented on this appeal: that the application of the commissioner for the ex parte order is deficient; that the court was without jurisdiction to make the order; and that the proceeding as a whole is based upon an unconstitutional statute. They are all covered by and disposed of, either directly or by analogy, in the Pacific Mutual eases.” (P. 325.)
In Title Guaranty & S. Co. v. Allen, 240 U.S. 136 [36 S.Ct. 345, 60 L.Ed. 566], contentions similar to those made in this case were made concerning the seizure by the superintendent of banks of an Idaho bank. The banking act was challenged as unconstitutional. The court held (p. 141) : “But assuming, as it is now insisted in argument was the case, that the question relied upon was the repugnancy of the state statute to the due process clause of the Fourteenth Amendment because power was conferred upon an administrative officer in the event of insolvency to close the doors of a bank without awaiting judicial proceedings, and that the observation on that subject by the court below was an adverse decision of such question, we think it suffices to state the proposition to demonstrate its want of merit. [Citing eases.] ”
Petitioner contends that to make the application of statutes providing for summary seizure constitutional there must be a reasonable necessity for taking, coupled with an adequate
Application' op the Statute to a Foreign Corporation Does Not Render It Unconstitutional
(a) Extraterritoriality:
Petitioner argues that if the statute applies to foreign corporations it attempts to exercise power over assets not in the state, and calls attention to the broad language in the order concerning vesting title to all of the assets of petitioner, “wheresoever situated.” It argues that this must refer to assets outside of the state and that the court lacks power to change title to such property. Admitting the lack of power in California courts to transfer title to assets outside of the state, there are two answers to the contention: (1) Petitioner has not alleged that the state is attempting to transfer title to out of state assets, and therefore has no standing to complain. (2) The statute can reasonably be construed as valid,
A similar point was involved in Franklin v. Peterson, 87 Cal.App.2d 727 [197 P.2d 788], involving the validity of a municipal ordinance imposing a license for revenue purposes upon an attorney at law. There the appellant contended that the terms of the ordinance were broad enough to include persons outside the municipality. The court said: “It is the rule that where a statute or ordinance is susceptible of two constructions, one of which will render it constitutional and the other unconstitutional, in whole or in part, the court will adopt the construction which, without doing violence to the reasonable meaning of the language used, will render it valid in its entirety, or free from doubt as to its constitutionality, even though the other construction is equally reasonable. The rule is based on the presumption that the legislative body intended not to violate the Constitution, but to make a valid statute or ordinance within the scope of its constitutional powers. Read in the light of this rule, the ordinance here in question must be held as intended to operate only upon those subject to the jurisdiction of the city of Los Angeles.
“Furthermore, a court will ordinarily inquire into the constitutionality of a statute or ordinance only to the extent required by the case under consideration. In the case at bar the stipulated facts show that appellant maintains a law office within the city of Los Angeles and carries on his law practice there. The construction given the ordinance by appellant would not, therefore, work any injustice upon him or violate his rights. He is therefore confronted with the general rule that one cannot complain of a possible illegal application of an ordinance if he himself is not a party thereby aggrieved.” (P. 730.)
There are cases from other states in which the taking over by a state official of the assets of a foreign insurance company has been upheld. (See People ex rel. Potts v. Continental Beneficial Assn., 289 Ill. 40 [124 N.E. 352] and cases cited therein.)
(b) Unreasonable burden on interstate commerce:
Petitioner argues that insurance has been held to be interstate commerce, and that the regulations in the Insurance Code, particularly, that allowing seizure if a foreign corporation enters into a merger, etc., without consent of the California commissioner, constitute an unreasonable burden on interstate commerce. In the case of United States v. South
To avoid any ambiguity which might still exist, the “McCarran Act” was passed shortly thereafter by Congress, declaring that “the continued regulation and taxation by the several states of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States. ” “ The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.” (59 Stats, pp. 33, 34, 15 U.S.C.A. §§ 1011, 1012.)
Following the Southeastern case, there were a number of cases (in some of which the acts occurred prior to passage of the McCarran Act) in which insurance companies argued that state regulatory provisions previously valid had become invalid as unreasonable burdens on interstate commerce, when applied to foreign corporations. The cases are annotated at 164
In Robertson v. California, 328 U.S. 440 [66 S.Ct. 1160, 90 L.Ed. 1366], the court held valid sections of the Insurance Code which in effect allowed the state to exclude a foreign insurance company or its agents from doing business within California if the company failed to meet California’s reserve requirements. Without relying on the McCarran Act, the court answered the argument about interstate commerce as follows: “It is quite obvious, to repeat only one of those considerations, that if appellant’s contentions were accepted and foreign insurers were to be held free to disregard California’s reserve requirements and then to clothe their agents or others acting for them with their immunity, not only would the state be made helpless to protect her people against the grossest forms of unregulated or loosely regulated foreign insurance, but the result would be inevitably to break down also the system for control of purely local insurance business. In short, the result would be ultimately to force all of the states to accept the lowest standard for conducting the business permitted by one of them or, perhaps, by foreign countries. Inevitably this would mean that Congress would be forced to intervene and displace the states in regulating the business of insurance. Neither the commerce clause nor the Southeastern decision dictates such a result.” (P. 459.)
The court also stressed the fact that the statute did not discriminate against interstate commerce, but required only that foreign corporations meet the same requirements as domestic insurers. (P. 461.) The above reasoning is applicable to the present case. The provision allowing seizure by the commissioner applies equally to domestic or foreign corporations and is not discriminatory. Furthermore, it affects the sound financial condition of the company, and is therefore related to doing business in California.
Petitioner argues with reference to subdivision (c) of section 1011, that it would be burdensome, practically, to get the permission of all 48 commissioners to such a transfer of assets, if the company were doing business in all states. It is difficult to see why that would be more burdensome than submitting to examination in every state where the company does business, as the price of doing business in such state. Petitioner has cited no case in which state regulation of insurance,
Was The Commissioner Arbitrary In The Selection Op The Remedy ?
Petitioner contends that the commissioner was arbitrary in his selection of the remedy for the conditions shown in the audit. The audit shows the capital to be reduced approximately 73 per cent of the aggregate par value of its issued capital stock. The result of the seizure, it is argued, is that the commissioner cannot rehabilitate or reorganize a foreign corporation whose main assets are outside this state, but only liquidate the company, and therefore such a seizure is too heroic for a condition which it describes as “technical insolvency.” The application and its exhibit show that there were, among others, three conditions upon which the application was made: (1) a “merger” of petitioner and the Pioneer Equitable Insurance Company without the commissioner’s consent; (2) conditions hazardous to the policyholders and the public; (3) insolvency.
Petitioner contends that the commissioner had other powers and remedies which were equally effective and less drastic than the remedy provided by section 1011, and hence it was arbitrary of him to select the latter method.
People v. One 1941 Chrysler Sedan, 81 Cal.App.2d 18 [183 P.2d 368], cited by petitioner, dealt with an entirely different set of facts. There, this court held that where there are alternative methods of giving notice under constructive service, a complainant may not select one which he knows will not notify the other party when he also knows that one of the alternatives, if selected, would notify him. Here, even though we might find that other remedies were open to the commissioner, we are required to go one step further and find that as matter of law the commissioner was arbitrary in proceeding as he did, instead of using another method. Under the circumstances of this case, we do not feel we can do so.
The other remedies suggested will be taken up seriatim. (1) Section 12928.6 of the Insurance Code provides that “Whenever the commissioner believes, from evidence satisfactory to him, that any person is violating or about to violate any provisions of this code or any order or requirement of the commissioner issued or promulgated pursuant to authority expressly granted the commissioner by any provision of this
Taking all the alternative methods suggested by petitioner, they either are practically as drastic as the one used, and therefore would be as injurious to petitioner, or they do not provide the protection to the policyholders and the public which the situation disclosed by the audit could have required.
Petitioner contends that the controversy should have been determined in the declaratory relief action instead of under section 1011. That action was started by petitioner. The commissioner’s failure to join issue in it has been acquiesced in by petitioner. While the condition of the company could have been ascertained by hearings in that ease, the fact that it existed did not bar the commissioner from proceeding as he did. It, also, was subject to the objection that the interests of the public could not be fully protected by a proceeding which did not give the commissioner the control of the -company’s assets.
The test to be applied to the action of the commissioner is, was the selection arbitrary as matter of law? Many of the proposed remedies would have been as disastrous to the petitioner as it claims is the one chosen. But the prime consideration is the protection of not only the policyholders of the company but also the public. The matters set forth in the audit are serious. They show that the company has
Merger
Section 1011 of the Insurance Code permits seizure where the insurance company has “entered into any transaction the effect of which is to merge, consolidate, or reinsure” etc., without first obtaining the commissioner’s consent. It is unnecessary for us to determine whether the transaction with Pioneer was a merger under this section, or, if so, whether the law can constitutionally require a foreign corporation to obtain consent of the California commissioner. The commissioner is making no claim of the illegality of that transaction. While he refers to it as a ‘merger” and we have used the word herein, it is without any legal signification. We are concerned with the effect on the finances of the company of the commitments made in the agreement.
Admitted Facts Do Not Establish Abuse of Discretion
To entitle petitioner to the relief sought here, we must find from the admitted facts that the commissioner, as
The facts upon which plaintiff bases its charge of arbitrary action either do not support such charge or are denied by the commissioner and would require a hearing to determine their truth. The facts mainly relied upon follow:
1. It is contended that all of the criticisms and complaints made of petitioner by the commissioner were corrected and his requirements complied with excepting only petitioner’s refusal to eliminate completely Mr. Hopps. The record does not support this claim. The petitioner had not agreed to stop the practices which were criticized by the commissioner and in the report. Moreover the commissioner contended that the company was insolvent. The commissioner requested the company to stop writing policies in California until these matters could be straightened out. This the company refused to do.
2. Petitioner sets forth a number of acts of the commissioner, such as his failure to disclose his adjustments to the company’s balance sheets, which it contends show as matter of law that he was arbitrary in his actions and was acting for the sole purpose of eliminating Mr. Hopps. Logical reasons for these acts have been given by the commissioner or his attorneys. Whether these reasons are well founded would require the taking of testimony.
*248 3. Petitioner contends the information in the commissioner’s possession did not show a hazardous condition of the company’s affairs because it claims that:
(a) The brokerage contracts referred to in the report were cancelled. The reports show that some of these were replaced with what it is contended were “worse” contracts. Testimony would be required to determine this question.
(b) The alleged excessive underwriting was substantially reduced. Reference is made to a transcript which is not before us.
(e) The objections in the report to the “alien reinsurance” situation is matter of “pure conjecture.” The report shows that this kind of reinsurance was doubled in 1948. Under California law these alien companies do not meet the standards required for reinsurance. (See Ins. Code, § 989.) That fact alone makes the doubtfulness of their value more than “pure conjecture.”
(d) The right of Lloyds to cancel their reinsurance is relatively of no importance, as it probably never would occur. Whether the matters set forth in the report which the auditor considered a change in underwriting giving Lloyds the right to cancel, is such change or not, the report shows that the very existence of the company depends upon the continuance of the Lloyds contract. Perhaps, upon a hearing of all the facts in this case, it might be determined that it is not hazardous, but we cannot say as matter of law that placing so many eggs in one basket is not a hazardous thing for a company to do.
(e) The loss of $1,000,000 on the Pioneer transaction adds nothing to hazardous condition as a separate ground. However, this is an erroneous statement. The entry by an insurance company into a contract which caused it to lose that much money (if it did) might be placing the company in a hazardous condition, whether it did or did not make the company insolvent.
(f) The derivative stockholders’ suits should not be considered. These suits are an incident of the commissioner’s claims that company funds are being used for the private gains of company officers.
(g) Questionable investments were cured. We are unable to determine that this is so from the record before us. It will require evidence to determine this.
(h) The fact that records of the company do not support certain payments does not show that the payments were im*249 proper. The failure to keep proper records is a circumstance to be taken into consideration by the commissioner when considering whether or not the company is in a hazardous condition.
4. Petitioner contends that the commissioner was not justified in considering the company insolvent, because (a) the commissioner admitted that his justification for the claim of insolvency stands or falls on the effect of the Pioneer agreement. We have no such admission before us. The statement of the commissioner quoted in respondents’ supplemental memorandum (p. 49) does not justify this conclusion. The statement merely shows that the making of this agreement, when considered with all the other matters, caused the commissioner to feel that immediate action should be taken, not that it was the only fact upon which he based his determination of insolvency.
Petitioner contends that the commissioner’s determination of insolvency is open to grave doubt because certain other state commissioners disagree with his conclusion and no state commissioner has taken action similar to this. If the record supports the commissioner in reasonably believing the company to be insolvent under the laws of California, it is immaterial what the commissioners of other states do.
In arriving at the conclusion of insolvency the report takes certain matters into consideration, which petitioner claims were erroneously considered. They are: (1) The Lloyds commission. The commissioner allowed a return to the company of only 25 per cent of Lloyds’ commission, when petitioner’s 1948 statement assumed 46 per cent. Settlement will not be made until March, 1950, so it is necessary to estimate the amount of the commission based upon an assumed loss ratio. The company assumed a loss ratio of 50 per cent based upon its loss experience of three months under the contract and the company’s previous average experience over a 10-year period. The commissioner’s auditor took the position that as there had been no real experience under the contract the company should take credit only as of December, 1948, for the commission which the contract guaranteed, namely, 25 per cent. Petitioner’s brief states that the company carried $1,300,000 unearned premium reserve on California business when in normal course they expected to pay out in losses only $450,000. This would indicate that the commissioner was not far wrong in anticipating a greater loss in the Lloyds situation than that estimated by the company. We cannot
Petitioner contends that by admissions in the commissioner’s reply to the amicus curiae brief, the commissioner has admitted that $414,808 should be added to the company’s assets. This is a wrong construction of the position taken by the commissioner. There is no evidence before us that these alleged assets existed at the time of the seizure nor that the commissioner had knowledge of them.
Petitioner lays emphasis upon the situation as to the receivable shown in the company’s statement due from the U. S. Interstate Brokerage Corporation in the sum of $923,761.45, which the auditor questions. (It was not deducted by him in arriving at the figure which shows the company to be insolvent.) Petitioner alleged in its amendment to the petition that as of December 31, 1948, the date to which the audit relates, that sum had actually been reduced to $139,873.89, and that on the date of seizure, it had been reduced to $24,039.19 and that the commissioner knew or should have known on each of these dates the exact situation of that account. In his return to this amendment, the commissioner alleged that he had no notice of the true condition of this account for the reason that petitioner denied the commissioner’s examiners full access to the books which would have revealed the true status of this account. The report sets forth at some length the inability of the examiner to get the details of this account due to the action of petitioner’s officers and employees. If the facts set forth in the report and as alleged by the commissioner are true, it is obvious that the commissioner did not know the true situation of this account and could not have known it. This issue is one which would require evidence.
There are certain allegations in the commissioner’s return which support his contention that he was justified in the seizure. Some of these merely demonstrate the background, which it is alleged caused the commissioner to consider petitioner’s management subject to question. Thus it is alleged that since 1945 studies have been made of petitioner’s financial statements and of examination made by departments of other states, all of which indicated reinsurance dealings by the petitioner, which resulted in great loss to it; that the admission to California of a sister company under common management with petitioner was conditioned on certain agreements to refrain from certain dealings; that this agreement was violated and then in 1948, following certain disclosures by quarterly statements of the petitioner and the other company, the latter agreed to, and did, cease writing insurance in California until its finances were repaired. Then there are allegations which, if true, are quite serious. Thus it is alleged that in 1948, petitioner filed certain quarterly statements with the commissioner, which statements were false; that the examinations of petitioner by Pennsylvania and Indiana examiners as of September 30, 1948, stated that it was not possible to present an accurate statement of the financial condition of petitioner; that petitioner withdrew under compulsion from Minnesota, Connecticut and New York
Liquidation
Petitioner has contended throughout that the effect of the seizure of a foreign corporation means almost automatic liquidation and no possibility of rehabilitation. This is not necessarily so. Whether there is conservation and rehabilitation or liquidation depends upon the attitude of petitioner. If it refuses to send into California sufficient moneys to meet claims for losses and returned premiums on cancellation of policies (even under company management there is not kept in this state sufficient funds for these purposes), if it refuses to cooperate with the commissioner in his endeavors to rehabilitate the company, then the commissioner will have to apply to the court for a liquidation order under section 1016. It is the .conservator’s duty to try to remove the causes leading to the company’s difficulties. If this cannot be done, he must attempt to rehabilitate its business, and if this cannot be done, liquidation will have to follow. (Carpenter v. Pacific Mutual Life Ins. Co., supra [10 Cal.2d 307].)
So far as the effects of seizure are concerned, there is not so much difference between a foreign and a California corporation. The effect of the seizure is practically the same, a bad reputation for the company, cancellation of policies, the loss of its brokers and agents. But the Legislature must have had those results in mind when adopting sections 1011 and 1013. So far as rehabilitation of the company is concerned, it is easier, of course, to rehabilitate a local company because the entire assets are within the state and in the hands of the conservator. However, rehabilitation requires the consent and cooperation of even the local company’s stockholders. If they are not forthcoming, the commissioner cannot rehabilitate the company. Perhaps not to the same degree, but to a large extent, the foreign company can be rehabilitated if its stockholders cooperate. This difference in degree is one of the conditions which a foreign corporation must . necessarily face as the price of doing business in a state other than its home state.
Petitioner alleges that the commissioner, although conceding that he has no power to cause the removal of Hopps, the chairman of the board of directors of the company, was actuated in bringing this proceeding because of the failure of petitioner to remove Hopps entirely. Were the financial condition of the company beyond question, and did it not appear that Hopps was, at least, partially responsible for the impairment of the company’s assets, this might be important. The commissioner has no power, for personal reasons, to cause the elimination of any individual connected with an insurance company. But, where a course of conduct by that individual has caused serious loss to the' company, the commissioner has the right to require that those practices be abandoned. (See Caminetti v. Guaranty Union Life Ins. Co., supra [52 Cal.App.2d 330].) A reasonable conclusion can be drawn from the facts stated in the audit, that petitioner has been dominated by Hopps, and, to some extent, run, for the benefit of himself and other companies in which he was interested, to the detriment of petitioner. Such a fact, if it is a fact, coupled with the other circumstances of the case, would make the commissioner’s objection to the practices of Hopps justifiable.
The alternative writ is discharged, and the petition for a peremptory writ is denied.
Peters, P. J., concurred.
It may be noted here that petitioner is making no point of the failure of the commissioner to comply with section 1038 which provides that any application under section 1011 “shall be served upon the person named in such application in the manner prescribed by law for personal service of summons . . .” —probably because Neblett v. Pacific Mutual L. Ins. Co., 22 Cal.2d 393 [139 P.2d 934], holds that notice is not essential.
Wherever in this opinion we have referred to the financial condition and conduct of the business of the company, we are referring merely to the situation as it appears in the report and are not holding that such situation actually exists. To determine that fact will require a long hearing, for which the superior court, in proceedings under section 1012, is better equipped than this court.