In Re the Equitable Reserve Fund Life Ass'n

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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] This is the first appeal which has come to this court in a proceeding to wind up a dissolved corporation that was originally organized under chapter 175 of the Laws of 1883, as amended in 1887.

The companies so organized are neither stock nor exactly mutual insurance companies. While partaking generally of the features of a mutual company, they could not be exactly described as such in all respects. Co-operative or assessment companies they are designated in the statute, and at any rate the rights of the members, when the company has been dissolved, have never up to this time been the subject of our investigation. The statute provides for the incorporation of companies for the purpose of transacting the business of life or casualty insurance upon the co-operative or assessment plan, and in section 5 of the act, a description of what constitutes such plan may be found.

It is admitted that this company comes within that description. In such case the liability of the company and the rights of its members must be measured and construed by the constitution and by-laws of the company and the certificates which it issued.

First. The chief and important question arising here is as to the rights of the holders of what are designated as death claims.

The death fund is not sufficient to pay all the claimants in full, and those claimants demand the right to resort to the so-called "reserve fund" for the payment of the balance of their claims.

The General Term, reversing in this respect the ruling of the Special Term and of the referee, has held that the reserve fund was the property of the association at the time of its dissolution, and it thereupon became available to meet all the unsatisfied debts and obligations of the association, and among such debts were the demands owned by persons in whose favor death claims accrued and which had not been wholly paid by the amounts received from the death fund. Such persons were held to be creditors of the company and entitled to be satisfied, so far as the assets were sufficient for that purpose, equally with other creditors having demands against the company. Such claimants were given the right of exclusive resort to the death fund, and if that fund did not suffice to pay them in full, then they were at liberty to come to the reserve fund and demand payment from it in common with the other creditors.

In determining the correctness of this view the fact must not be lost sight of that the question is not to be determined upon general principles of equity in distributing the funds of an insolvent estate. The rights of the parties are to be decided with reference to the constitution and by-laws and the contents of these certificates, all of which taken together form the contract between the company and the certificate holders. If the contract be in terms silent in regard to any particular question, a provision in regard to it may be implied under the same circumstances that an implication would arise in any other contract. The contract is the standard by which to determine the rights and liabilities of the parties thereto. (People ex rel.Meyers v. Masonic Guild, etc., Assn., 126 N.Y. 615.)

We are, after much examination of the question, convinced that the reserve fund is not in any event liable to be called upon for payment to those holding death claims.

As a "going concern," the company provided in its constitution for the creation of two distinct funds, and we do not think the ultimate destination of those funds was altered by the dissolution of the company. The company agreed to pay death claimants from a fund called the death fund, and no death claim was by the terms of the constitution (Art. 6, § 1) to becomeotherwise due or payable except from the reserve fund under the circumstances thereafter mentioned, which were when such fund arrived at the amount of $100,000, which it never did. Taking this provision alone and I do not see how the holder of a death claim can found a right to demand payment from any other than the death fund. There is nothing in the article of the constitution or in the circumstances surrounding its adoption that would enable us to say this provision would not obtain in case the company were dissolved. Of course, it was adopted with reference to the idea that it was to provide for a going concern, but when it carefully creates a separate and distinct fund for the payment of death losses and plainly announces that the holder of a death claim shall look to no other fund for its payment (except upon a contingency which has not arisen), it seems to us that such condition attends upon the claim at all times, even when presented to a receiver of the dissolved corporation. If it were not so to be regarded it would seem that some provision altering or annulling the condition upon the dissolution of the company would naturally have been adopted.

It lies with those who claim the abolition of this condition to show it or else to show clearly that it was intended solely for application to a living company. This death fund was to be formed by depositing therein seventy-five per cent of the amount of each assessment levied for the purpose of paying death claims, and if the fund were not enough to pay the whole of a death claim, the claimant was to receive a pro rata share thereof with other claimants. There was never a legal right to be paid in full under all circumstances. The balance of twenty-five per cent of the proceeds of each death assessment was to be transferred to the reserve fund, no part of which was to be used for expenses, but after it reached $100,000 in amount, the excess could be used as provided for by section 10 of article 7 of the constitution.

The constitution also expressly provided for the uses to which the reserve fund could be put. They were specified in article 7, particularly in section 9. Briefly stated, the fund was for the purpose of enabling those who remained certificate holders at the time when an apportionment should be made, to procure or rather retain insurance by the aid of that fund. Those living certificate holders who had an interest in the reserve fund could not retain it unless they continued living members at the time of an apportionment, and paid all assessments. By their death before that time they forfeited all their claims to any portion of the fund and their beneficiaries or personal representatives were relegated to the death fund for the payment of their claims.

It is true there is no provision which in terms states that upon the dissolution of the company the reserve fund shall be distributed to those who are living and are the holders of certificates and are in good standing, with all assessments paid. The fund was created for the purpose of aiding those persons to pay for their insurance who should, after the lapse of a certain number of years, be then the owners of certificates. If a man died he lost his chance or right to participate in the benefits to be derived from the existence of this fund.

Hence it was essentially a fund for the assistance of the living to the entire exclusion of the claims of those who represented deceased members. When the company is dissolved and it appears that the general purpose of the fund cannot for that reason be accomplished, we do not know upon what principle the claim can be founded that it must in that event be distributed, not to those living members who at that moment represent the persons for whom the fund was created, but that it must go to pay all creditors, because it represents assets of the company. This would be a most wrongful conversion of the fund from its original purpose.

The argument seems to be that on account of the failure of the company the purpose of the fund cannot be fully met and accomplished, therefore it shall be put to uses for which it was never intended and which are wholly inconsistent with and opposed to such original intention. This is the practical result of the claim which is based upon the fact that the constitution does not in terms provide for this fund upon a dissolution of the company.

But when it is found that the constitution expressly limits the right of a holder of a death claim to payment from the death fund, with an exception not material here, and when it is also found that the reserve fund was created for a special purpose, and that no death claimant could resort to it upon any pretext until it reached $100,000 we are of the opinion that the purpose of the reserve fund is so far made plain that there is no doubt of the right of the living certificate holders at a particular date to share among themselves the moneys remaining in that fund. The fund is not assets of the company within the general meaning of that term. It is more in the nature of a trust fund. We do not think that section 8 of article 7 of the constitution is applicable to this state of affairs. That section permits the board of trustees, in their discretion, to use the securities in which the moneys forming the reserve fund had been invested for the purpose of making any deposits required or allowed by law or usage of this or other states, "or to meet any want or necessity of the association that may hereafter arise by reason of unforeseen contingencies." The true meaning of the latter part of the section is not entirely plain; but the want or necessity spoken of must arise by reason of unforeseen contingencies and while the company is alive and in the hands of its board of trustees, for the question of the application of the securities is to be decided by such board.

When the company was dissolved the reserve fund was not left to be disposed of under the rules to be applied by law to the distribution of the assets of insolvent corporations free from the provisions already spoken of.

The implication from the language used in the constitution and in the certificates is plain and forms part of the contract, and must be respected when the reserve fund comes to be distributed.

The case of O'Brien v. Home Benefit Society of New York (117 N.Y. 310) sheds no light upon this part of the case. That case arose against a living solvent company, and the action was at law to recover upon a certificate of membership issued to plaintiff's intestate. The company had refused to pay on the ground of fraud, and had refused to make any assessment upon its members for the purpose of paying the certificate, or any part thereof. The defendant claimed that if the plaintiff were entitled to maintain any action it was one in equity to compel an assessment. We held an action at law was proper, and in that action it could be shown the amount which would have been collected by the assessment, and such amount was the damage sustained by the failure to levy such assessment up to the amount of the certificate. It was shown the latter was for $2,000, and that the assessment would have realized at least double that sum, and the damage sustained was, therefore, $2,000. In such a case it was said the defendant, when it refused to make an assessment, violated its contract and became liable to the plaintiff for the damages, and such damages were proved. In this case, if we assume that the holder of one of these death claims became a creditor of the association, we do not think such fact enables him to resort to the reserve fund for payment. He may be styled a creditor, but the contract which his intestate entered into was such as to preclude him from resorting to anything but the death fund for the payment of his claim. To the same effect as the O'Brien case is Darrow v. Family Fund Society (116 N.Y. 537).

We think very little light is shed upon such a question by reference to cases arising in regard to dissolved insurance companies of a totally different kind from these co-operative or assessment concerns. What damage is sustained by the failure of an ordinary insurance company with reference to its policy holders, what is the exact nature of its contract with them, and by what method it shall be discharged, are questions which have been heretofore determined with reference to the peculiar nature of such policies and of such companies. In regard to co-operative companies a totally different plan of insurance has been adopted. There is no regular premium paid in these companies, and it is impossible to tell what the cost of insurance in a like company would be. And then, too, it is difficult to say what is a like company. The constitutions and agreements of these societies may, under the act of 1883, as amended by the act of 1887, be almost infinite in their variety. The provision for the distribution of the assets of the dissolved corporation "among its members, certificate holders, policy holders and creditors," as contained in section 13, as amended in the act of 1887, does not, in our judgment, at all affect the question as to the rights of the different classes of claimants in the different funds. Those rights must still be looked for in the contract made between the company and the holders of the certificates.

The case of Burdon v. Mass. Safety Fund Assn. (147 Mass. 360) is a case very much in point, as it arose in regard to a company or society of the same general nature as the one herein. We come to the same conclusion as did the learned court in that case. The difference of language in the two contracts is not sufficient to call for a different construction thereof.

Second. A question arises as to what holders of certificates shall share in the reserve fund.

Thirty-four assessments for the payment of claims had been made by the officers of the company in conformity with the constitution, and before the attorney-general instituted any legal proceedings against the company. Certain certificate holders had paid such assessments. After the thirty-fourth had been made and prior to the time appointed for the thirty-fifth assessment, the attorney-general commenced these proceedings, under the 13th section of the act of 1883, as amended by the act of 1887, for the purpose of procuring the dissolution of the company. A temporary receiver was appointed, and, pending the trial of the allegations in the petition of the attorney-general, upon which he asked for the dissolution of the company, the court, at his instance, enjoined the corporation, its trustees, directors, managers and other officers from collecting any debt or demand, and from paying out, or in any way transferring or delivering to any person, any moneys, etc., of the company. In substance and effect, the order brought the business of the company to a standstill. The ground for demanding its dissolution, as alleged by the attorney-general, was that the company was conducting its business fraudulently. The application was based upon an official report of the facts made to him by the superintendent of the insurance department, and the report of that official was by the statute to be based upon an investigation which he was empowered to make, and such report was only to be sent to the attorney-general after an investigation by the superintendent, and after he was satisfied therefrom that the facts existed upon which the action of the attorney-general was demanded. The attorney-general was only directed to proceed against the corporation after the receipt of the report from the superintendent, if he should be of the opinion that the facts required such action. It is entirely apparent from this reference to the statute that when the attorney-general took the proceedings against the company, and alleged in his petition that it was conducting its business fraudulently, such allegation was not the result of any mere guess or surmise, but it was based upon the official report from a responsible public officer, made after an official investigation by him, conducted by virtue of the power given him by statute. A legal proceeding of this nature, commenced under such circumstances, would, in the nature of things, have a most harmful effect upon the company, and would almost, in and of itself, prevent the doing of any more business by the company.

In truth, although the officers of the company traversed the allegations of the law officer of the state, yet in the course of less than two months from the institution of the proceedings, the company withdrew its answer and permitted judgment of dissolution to go by default. The temporary receiver was appointed on the eighteenth of September. By the terms of the constitution already referred to, a bi-monthly assessment would be levied by the trustees on the eighth of October following, if the company were then in their hands. They, however, were stayed by the injunction which prohibited them from collecting any debt or demand, and the proceedings for the dissolution of the company were in progress on the seventh of October. Upon petition of the receiver the court on that day ordered the officers of the association to make the mortuary assessment upon the members of the company in the manner and at the time provided for in the constitution and by-laws, including the assessment for the coming eighth of October. Acting under this order of the court the so-called 35th assessment (October eighth) was made, and a certain proportion only of the holders of certificates who had paid the 34th assessment, paid the 35th and last.

Those who paid this 35th assessment now claim the right to share in the reserve fund to the exclusion of all others, on the ground that such fund should, by the terms of the constitution, be paid only to those who paid all assessments and were living at the date when the fund was to be divided.

We do not assent to this claim.

We agree that no mere suspicion of insolvency justifies a policy holder in refusing to pay his premium when it becomes due. Very likely the same rule would obtain in the case of a certificate holder with regard to the payment of an assessment. In this case, however, the company was in the hands of a receiver and proceedings were on foot looking to a dissolution of the corporation on account of the fraudulent conduct of its business managers. These proceedings were based upon an official report of a public officer, and the presumption of its truth was not an unjustifiable one. Under such circumstances we are quite clear in the opinion there was no absolute and legal duty resting upon the certificate holders then existing, to pay this 35th assessment or else to lose all benefit to be derived from this reserve fund. We have no doubt that if the proceedings instituted by the attorney-general had terminated favorably to the company, the court would in that event have had the power to make some equitable provision for the case of those who had not paid assessments during the continuance of such proceedings.

The assessments provided for in the constitution were those which were to be made by the officers of the company acting under its constitution and by-laws, and not acting simply under the direction of the court. In this case the court in effect made the assessment. The payment of an assessment under the scheme revealed by the constitution of the company, would be founded upon the expectation that the company was to go on as a business enterprise and continually seek and obtain new lives in place of those who died, and from such new lives obtain a portion of the means of payment of losses and a proportionate security for the payment of future liabilities. The commencement of these legal proceedings was well calculated, not only to shatter all hopes of securing new business, but also to cause many holders to believe in the foolishness of paying any more money with the sole result of thereby increasing an already certain loss. Upon this branch of the subject I think the opinion of Judge BLODGETT inProtection Life Insurance Co. (9 Bissell [U.S.] 188 at 196), is entirely sound. The result is that those certificate holders, who in fact paid the 35th assessment, are not to share exclusively in this fund, but they are entitled to have the amount of such assessment repaid to them in full, and then all who paid the 34th assessment and were living when these proceedings were commenced, shall share in the reserve fund. This payment must come from the death and reserve funds in the proportion which each received of such 35th assessment.

Third. From what has already been decided it naturally follows that those who are entitled to the reserve fund should be paid therefrom pro rata according to the amount which each has contributed thereto. The fund belongs to them and they are not restricted to the amount for which they might purchase other insurance of the same nature in a similar company. This is not the effect of their contract. By its terms they, as living certificate holders, are entitled to all there may be of the fund, and the distribution is not to be made upon the same lines as provided in the case of an insurance company, such as the Security Life, where entirely different questions arose. (People v. Security Life, 78 N.Y. 115.) Fourth. The date upon which to determine the rights of claimants upon the reserve fund should be the date of the commencement of the proceedings which terminated in the dissolution of the company.

In Attorney-General v. North Am. Life Ins. Co. (82 N.Y. 172, at 186), it was held that the date of the appointment of the receiver under the act of 1869, was the proper one at which to value all claims against the company, although it was not in fact dissolved until another application at a later date and under a different act. The court said the company was practically, although not technically, dissolved upon the first appointment of the receiver. There was under the act of 1869 a method by which the company should continue in a certain way to do business if the referee appointed under that act should so report, but the company did not continue and, therefore, the date named was adjudged the proper one. In this case the proceeding had for its end the dissolution of the company. We hold that after the commencement of the proceedings no assessments need be levied or paid, and if the proceedings terminate in dissolution, the status of the claimants at the commencement of the proceedings is the proper one upon which to base the distribution. If not dissolved, other considerations obtain which the court in such case would give the proper weight to.

If the company be dissolved and the date of its dissolution be taken as the proper time to adjudge the status of claimants, it seems to us great injustice is perpetrated. By failing to pay assessments otherwise falling due subsequent to the commencement of the proceedings to obtain a dissolution (which failure we hold to be proper), the death fund is not in the least augmented over its amount at the time of such commencement, while the number of persons who can claim to share therein is increased by each death up to the time of dissolution, and no assessment is made to pay it. The party thus dying loses all right in the reserve fund, while the death fund is not increased by the levy of any assessment to pay the death loss, and the dividend to each holder of a death claim is made constantly smaller by the death of each certificate holder. The certificate holder on the contrary who lives until the date of distribution has been constantly having his share in the reserve fund increased by the death of any holder before such dissolution and he has been and is called upon to pay no assessment towards the liquidation of the death loss from the death fund. Injustice each way is the result. In holding that the assessments may be withheld subsequent to the commencement of legal proceedings and pending their continuance, the date of the commencement of such proceedings is the equitable one upon which to define the status of claimants resulting from a decree dissolving the corporation. The certificate holders at the time of the commencement of the proceedings must share in the reserve fund, and if any have died since that date their representatives are entitled to the share which would have come to them if living.

Fifth. The holders of death claims must also have their status defined as of the date of the commencement of the proceedings, which date is the same, I believe, as the appointment of the temporary receiver. Those certificate holders who died after that date have no claims upon the death fund, but their representatives share in the reserve fund as already stated.

Sixth. A preference among the death claims is demanded by the beneficiary under the certificate issued on the life of Johanna Hurley. She died on the 23d of April, 1889, proofs of death were filed with the company on the third of June, and on the eighth of August an assessment was made which raised over $13,000, seventy per cent of which went to the death fund. The constitution (Art. 6, § 1) provided for payment of death claims within three months after satisfactory proof of death and the approval thereof by the executive committee. Before that time arrived the temporary receiver had been appointed and all that had been collected of the assessment made in August after the payment of certain death claims therefrom, together with the other funds of the company, passed into his hands. The August assessment was known as the 34th, and was the last one made by the company. Prior to the 33d assessment all assessments had been made at irregular times as deaths occurred and for the purpose of paying the particular death for which the assessment was made. The constitution was however amended prior to the 33d assessment, and by the terms of that amendment assessments were directed to be made bi-monthly, and the 33d and 34th assessments were made under such amendment, without reference to the death claims existing when the assessments were made, and for amounts equal to the full amount for which it was possible, under the constitution, to levy an assessment.

Prior to the levying of the August or 34th assessment, the claim of Hurley for $2,000 had been approved by the executive committee, as were also the claims of Creighton, $2,000; Cronin, $1,000; Day, $5,000, making a total of approved claims of $10,000, subsequent to the 33d and prior to the 34th assessment. There may have been other claims arising between these assessments, which had not received the approval of the executive committee. If the fund thus raised from the 34th assessment had been solely applicable to the payment of the above-named certificates, there was enough in the fund to pay the Hurley claim in full. The Creighton and Day claims were paid in full before the company went into the receiver's hands. The other claims were not paid.

The fund arising from the 34th assessment having passed into the hands of the receiver in less than three months after the approval of the executive committee, and, therefore, before the Hurley claim became due, he contested the claim, but was finally defeated and the claim established as valid. There were other death claims outstanding and unpaid at the time of the 34th assessment, and they have been proved before the referee. Upon these facts, we do not think the holder of the Hurley claim is entitled to payment in full before other claimants are paid anything. The 33d and 34th assessments were both levied under the amended constitution, by which an assessment was not levied for the payment of any particular death claim, and in fact the highest assessment that could be was made by the trustees for both of such assessments. The mere fact that the Hurley claim was approved by the executive committee before the assessment was made, does not, in the light of the rule adopted for an assessment, give such claim a preference. The fund raised became a trust fund for the payment of all valid death claims, and those who held such claims at the time of the commencement of the legal proceedings are entitled to share pro rata in the fund existing for their payment. The change in the constitution and the mode of doing business show that it was not intended, nor indeed deemed practicable, to confine each assessment strictly to the payment of death claims happening since the last assessment. By the books that were kept, it would appear that certain amounts were realized from each assessment, and the date of a death loss would also appear, but when paid there would appear to have been no charge of the payment to any particular assessment.

There was but one fund kept as a death fund, and from its total, payments were made upon the different death claims as they came along at the end of disputes as to their validity or of compromises as to their amounts.

No preference over other death claims should be given to that of Hurley.

Seventh. The two funds should pay pro rata the expenses of the winding up. The commissions of the receiver must, of course, be founded upon the amount of each fund, and the percentage due must be paid by each.

We have, we think, now reviewed all the questions which have been presented for our determination, and the result is that the orders both of the General and Special Terms will be modified in accordance with the views herein expressed. The costs of the receiver only will be paid out of the two funds pro rata.

All concur.

Ordered accordingly.