Case ID: abb-pr-ns_15/html/0363-01.html
Source: Caselaw Access Project
Author: {"author": "Hardin, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

FISHER against THE WORLD MUTUAL LIFE INSURANCE CO.
    
      Supreme Court, First District;
    
    
      Special Term, March, 1873.
    Pleading.—Liability of Insurance Companies.— Stockholder’s Action.—Parties.
    An action does not lie by a stockholder of a mutual life insurance company, formed under the act of 1853, to declare the franchise forfeited, and enjoin its exercise, and have a receiver appointed, on the ground that "defendants made a false annual statement, in violation of the act of 1853.
    The penalty prescribed by section 18 of the act of 1853, for any violation of the act, may be recovered in the name of the people, and a dissolution may be sought through the attorney general in the case of insolvency; but the provisions of 2 Rev. Stat, 463, §§ 39, 40, that any corporation having banking or insurance powers, &c., which violates any act binding on it, may be enjoined at suit of a creditor or stockholder, &c., do not apply to violations of the provisions of the act of 1853, in reference to annual statements, or in reference to any matters specially provided for in the act of 1853.
    The stockholder’s remedy for any violation of these kinds is by causing the district attorney to sue for the penalty.
    James W. Fisher sued defendants, alleging in his complaint that he owned fifty shares of the full paid stock of defendants, who were a corporation under the life and health insurance companies act of 1853, incorporated thereunder about September 24, 1866 ; that by the charter, each stockholder was entitled to receive a semi-annual dividend riot exceeding three and a half per cent. ; that no dividend had been paid upon plaintiffs stock; that defendants had received large sums for policies issued by them, and their receipts had been much greater than their expenditures, and that they had on hand money sufficient to pay to the stockholders the semi-annual dividends, to which stockholders were entitled ; that defendants, in fraud of the rights of their stockholders, had divided profits among policy holders, and had knowingly and willfully 'violated their charter in this respect. Plaintiff also alleged that defendant’s charter bound the directors to make a true annual statement, and that in the annual statement for 1868, they had charged a large sum as paid to the stockholders for interest or dividends, no part of which had in fact been paid, and that the omission, in subsequent years, to present in their annual statement the dividend which was due to stockholders, was through fraudulent intent.
    Wherefore, plaintiff demanded a discovery of the books, &c., a dissolution of the corporation, an injunction, and the appointment of a receiver.
    
      Defendant demurred by reason that: 1. There was a defect of parties plaintiff, in that plaintiff sued alone, • and not in behalf of others. 2. A defect of parties defendant in that the directors were not joined. 3. There was a failure to state a cause of action.
    
      F. Pulver, for the plaintiff.
    
      W. P. Prentice, for the defendant.
   Hardin, J.

The plaintiff by his complaint asks our injunction restraining all the corporate acts and business of the defendant, and the appointment of a receiver of its effects, “to collect, sue for and recover the debts and demands that may be due.”

The scope and object of the bill are aimed at a forfeiture of all the corporate rights of the defendant, and an injunction is asked for, which will suspend its operations.

It was settled by ample authority in this State, prior to April 31, 1835, that the court of chancery possessed no such power or right of interference with corporations (The Attorney General v. Utica Insurance Company, 2 Johns. Ch., 371; op. by Kent, Chancellor; Attorney General v. Bank of Niagara, 1 Hopk., 354, op. by Sandford, Chancellor.

The last case was decided in March, 1835, and following its announcement came the act of the legislature of April 31, 1835, which was adopted and incorporated subsequently into the revised statutes, and is now found in 2 Rev. Stat., Edm. ed., 484, §§ 39-41).

The first case which was decided under the act of 1825, was that of The Attorney General v. Bank of Chenango, 1 Hopk. 598, and in, delivering the opinion in that case, Chancellor Sandfobd took occasion to refer to the antecedent cases, and to Redare that the new power granted by the act of 1825, was invoked and applicable. ■ Following that case was Verplank v. Mercantile Insurance Company.

The vice chancellor granted ex parte an injunction and appointed a receiver. An appeal was taken to the chancellor, and the injunction was dissolved, and the receiver discharged, in June, 1831, and the case was remitted back to the vice chancellor of the first circuit, with permission to the complainants to apply to him for leave to amend their bill, so as to make the corporation defendant (2 Paige, 452).

In July, 1831, before the vice chancellor (of the first circuit), the complainants presented a petition for leave to amend their bill (1 Edw. Ch., 46-48).

The vice chancellor allowed an amendment by inserting the corporate name of the Mercantile Insurance Co. in the place of the president and directors.

The complainants having so amended their bill, in August, 1831, a motion was made by them, as stockholders, for an injunction to restrain the further operations of the company, and for the appointment of a receiver.

In the opinion of Vice Chancellor McCottn", the antecedent cases were referred to, denying the power of the. court of chancery to interfere in such cases, prior to the act of 1825, under the general equity powers of the court; and the powers of the court to superintend and exercise visitorial powers over corporations were declared to depend upon sections 39, 40, 41 and 42 of the revised statutes referred to supra.

The Mercantile Insurance Company was not insolvent, and, therefore, the question to be examined was wholly dependent upon the alleged violation of the act of incorporation, or the violation of any other act of the legislature, binding upon said company.

The conclusion is reached, then, that when the directors are alleged to have fraudulently dealt with the funds of the company, the remedy is not against the company in its corporate character, but against the directors by whom the fraud is committed (1 Edw., 94).

It is approved in Robertson v. Bullions, 9 Barb., 100, and 4 Abb. Pr. N. S., 107.

From the foregoing reference to the origin of sections 39, 40 and 41, of revised statutes, and the authorities quoted, it will be seen that the right of the plaintiff in this case depends, as was supposed by his learned counsel, and stated in the argument, upon the. sections quoted.

When these sections were passed by the legislature, there was no general law in this State authorizing the formation of insurance companies.

After th°e adoption of the constitution of 1846, the first general law authorizing the formation of such companies was passed in 1849, April 10 th.

That act was followed by an act of the legislature of 1851 amending the act of 1849.

Then came the act of 1853, ch. 463, entitled “An act to provide for the incorporation of life and health insurance companies, and in relation to agencies of such companies.” The act of 1853, by section 22, expressly repealed so much of the acts of 1849 and 1851 as relates to life insurance companies.

The act of 1853 was amended in 1863, and it is not necessary here to give the amendments in detail.

The plaintiff alleges that the defendant was organized under the general act of 1853, and, in pursuance of its provisions, entered into the business now carried on by it.

It is, therefore, not necessary to look for any act or acts incorporating the defendant, for no such act or acts are to be found.

It cannot, therefore^ be said that the defendant has, in the language of section 39 of 2 Rev. Stat. (page 484), “violated any of the provisions of its act or acts of incorporation.”

But section 39 of the Rev. Stat., supra, also provides for a case where an insurance company “ shall have violated any other act binding on such corporation.”

It is not alleged that the defendant is insolvent, but, on the contrary, it is expressly alleged, by the plaintiff, that the defendant is wholly solvent.

It becomes important, therefore, to turn to the general act of 1853, and the amendments thereof, and-to consider its provisions and the allegations of the complaint in connection therewith.

The plaintiff alleges that the defendant, by putting fourteen thousand dollars into its annual statement as cash paid to its stockholders as dividends" or interest when, in fact, it was never paid, made a false statement in 1868.

Other allegations are made in the complaint, in respect to supposed irregularities and improprieties of the defendant, in respect to its annual statement, which are claimed to be in violation of law.

By section 18 of the act of 1853, it is provided that every violation of the act shall subject the party violating to a penalty of five hundred dollars for each violation, which shall be sued for and recovered in the name of the People, &c.

By section 12 of the act of 1853, an annual statement is. required, and its contents are prescribed. If, therefore, there has been a violation of the provisions of the act of 1853, by the defendant, in respect to its annual statement, the penalty therefor is prescribed in the act of 1853, in the terms of section 18 already quoted. ,,

An action may be brought in the name of the People to recover five hundred dollars, by the district attorney of the county in which the company is situated, and one half of the penalty will belong to the “informer,” and the other half to the treasury of the county.

It therefore is clear that the violations of the act of ' 1853, in respect to annual statements by the defendant, may be the subject of the action provided for by section 18 of the act.

It will be observed that section 17 of the act of 1853, also provides for an examination into the affairs of a company formed under the general act by the comp troller, and he may also invoke the action of the attorney general, who may make application to this court for an order to show cause against the company requiring it to show cause why its business should not be closed. If its insolvency shall appear, the court may decree a disolution of the company.

It will be seen by these sections that a penalty is provided for every violation of the act, and the course is prescribed for'a dissolution of the company in a case coming within its provisions.

It was suggested upon the argument by the learned counsel for the plaintiff, that sections 39 and 40 of the revised statutes aré applicable, and therefore, that a stockholder can maintain this action.

This argument renders it necessary to consider section 11, of the act of 1853, (4 Stat. at Large, p. 219, Edm. ed). It is as follows: “All companies formed under this act shall be deemed and taken to be bodies corporate and politic, in fact and in name, and shall be subject to all the provisions of the revised statutes in relation to corporations so far as the same are applicable, except in regard to annual statements and other matters herein otherwise specially provided for.”

The latter part of the words are very important and controlling upon the question now under consideration. The section is to be construed as though it read “ companies formed under this act shall not be subject to the provisions of the revised statutes in regard to annual statements, and shall not be subject to the revised statutes in respect to other matters herein specially-provided for.”

The object of the exception was to prevent the application of the revised statutes to the annual statements, and to prevent their application to any “other matters” specially provided for in the act of 1853 (Potter’s Dwarris on Stat., 119 ; 1 Wash. C. Ct., 119, op. of Washington, J.; Minis v. United States, 15 Pet., 423).

Upon the construction of section 11 of the act of 1853, given, it must be concluded that sections 39 and 40 of the revised statutes are inapplicable.

The annual statements required of this defendant are regulated by the act of 1853.

So too, that act provides for every violation of the act. The violation of the act being ‘1 specially provided for” by it, the exception found in section 11 expressly excludes the application of the revised statutes to the violations of the act of 1853.

The remedy for any supposed violation is to be pursued under the act of 1853. That is the exclusive remedy in respect to annual statements, and in respect to every violation of the act.

If this plaintiff is prepared to prove a violation of the act of 1853, then he can become an “informer” * against the company, and cause a suit to be brought by the district attorney of the proper .county for the recovery of the five hundred dollars of penalty, and receive one half thereof, as provided in section 18, of the act.

He is not in a situation to bring a suit in his own behalf, asking no personal telief; a suit not stated to be in behalf of all other stockholders who will come in for a share of its benefits, who are similarly situated (45 Barb. 510); a suit in which an injunction and receiver are asked for, because of supposed violations of the act of 1853 (1 Edwards Ch., 95).

The directors are not parties, and if they are guilty of frauds and illegal acts injuriously affecting the rights of the plaintiff, they should be made parties (5 Paige, 607; 9 Barb., 65 ; 45 Id., 510; 36 How. Pr., 20; 4 Abb. Pr., N. S., 107 ; 1 Kern., 243 ; 55 Barb., 667).

Courts of equity should not be called to usurp the province of directors, nor to govern them in the exercise, fairly and legitimately, of the discretion vested in them by the laws relating to the corporations in whose behalf they act. .

Differences as to the internal management can be settled by stockholders at elections of directors oftentimes more judiciously than by the interference of a court of equity (51 Barb., 378).

The demurrer is sustained with leave to the plaintiff to amend upon payment of the costs thereof. 
      
       Judgment was entered accordingly, and no appeal was taken.