Case ID: ohio-st_43/html/0359-01.html
Source: Caselaw Access Project
Author: {"author": "Eollett, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Falkenbach v. Patterson, Receiver. Seltzer v. Patterson, Receiver.
    
      Life insurance — $100,000 deposit of securities with superintendent of insurance — Security for policy- holders only — Rights of makers of securities— Application of deposited securities to payment of claims.
    
    1. Where a deposit of $100,000 in securities is made by the company with the superintendent of insurance, as required by the statute (69 Ohio L. 152, §§ 8-10; Rev. Stats., ¡¡¡! 3593-3595), such securities are held by him as security for policy-holders only, and not for the security of the general creditors of the company.
    2. Such a deposit does not change the character of such securities; and, subject to the rights of such policy-holders, such securities are also subject to the rights of the makers of the same.
    3. 'When, such a company has become insolvent, and is dissolved, and a receiver is winding up the affairs of the company, if a part or all of such deposited securities be needed to pay such policy-holders, there should be collected the amount needed, if the securities are sufficient, to pay such claims; if the securities are not sufficient, the proceeds should be duly applied upon the claims of such policy-holders.
    4. After the claims of policy-holders are satisfied, the remaining securities are liable only to the rights of the company in such securities; and, as against the makers, the company had no rights in accommodation notes and mortgages given to such company for the purpose only of such deposit.
    Error to the District Court of Eranklin county.
    These cases are alike in legal principles.
    In March of the year 1877, William. M. Patterson, as receiver of the Ohio Life Insurance Company, commenced his actions in the court of common pleas of Eranklin county, one against Joseph Ealkenbaeh, and William D. Hill, superintendent of life insurance for the state of Ohio, and others, the object and- purpose of which was the foreclosure of a mortgage claimed to have been executed by Joseph Ealkenbaeh to the company, to secure the payment of the note of Ealkenbaeh described in the petition; and the other against Van *S. Seltzer, said superintendent and others, seeking the foreclosure of a mortgage of Seltzer, to secure the payment of his note described in the petition.
    The petitions aver the creation and organization of the Ohio Life Insurance Company, as a corporation under the laws of the state of Ohio, to do a business of life insurance, about January, 1871; that such company or corporation ceased such business in January, 1875, for the reason of its insolvency and inability to conduct the same. That about May 25, 1876, proceedings were instituted by the directors of such corporation in the court of common pleas of Cuyahoga county, to dissolve the corporation and settle up its liabilities, which resulted in the appointment of Patterson receiver of the assets of said company, with authority to collect the same, and to apply their proceeds to the payment of the liabilities of the company. That the corporation, at the time of such dissolution, was not possessed of any assets at its place of business, or elsewhere, except such as are hereinafter stated. That in pursuance of the laws under which the company was organized, and before it did, or was authorized to, commence the business of life insurance, it deposited with the state superintendent of insurance, at Columbus, Ohio, notes secured by mortgages upon real estate amounting upon their face to $100,000. That the several notes so deposited were each payable five years from date, with interest at the rate of eight per cent per annum, payable annually. That the indebtedness of the company, as found by the court, for losses under policies issued before its dissolution, and other liabilities, amounted to $40,000, or more, and that the company has no assets with which to pay any part thereof, except the securities aforesaid ; and that among the notes, so deposited, were included the note and mortgage of Joseph Ealkenbach, and the note and mortgage of Yan S. Seltzer. That the notes and mortgages were assigned to 'W. D. Hill, superintendent of insurance, in trust for the benefit of the company and its creditors, to be held for that purpose, and were so held by that officer for that purpose and no other, under the laws of the state in that behalf.
    The petitions further aver the amount claimed to be due from Ealkenbach and Seltzep.
    Demurrers to the petitions were overruled.
    The defendants below, that is, Joseph Ealkenbach in the action against him, and Yan S. Seltzer in the action against him, by their amended answers deny substantially the averments of the petitions, except the execution of the notes and mortgages, and deny that any sum whatever was due to the plaintiff, as such receiver, from Ealkenbach and Seltzer, on the notes and mortgages, and aver that such pretended creation and organization of such company, or corporation, was in fraud of the laws of the state.
    The second defense of these answers set forth, that these notes and mortgages were wholly without consideration, as to Ealkenbach and Seltzer, and that any pretended consideration upon which the same were signed and executed by them had wholly failed.
    The third defense of the answers shows, that Ealkenbach and Seltzer were severally induced to make the notes and mortgages by the false and fraudulent representations of one Charles J. Hess, professedly acting for and under the authority of the pretended company.
    The replies deny all and singular the allegations of such answers.
    The judgments of the court of common pleas in the actions were in favor of Ealkenbach and Seltzer, and Patterson, as such receiver, took his appeal to the district court.
    The district court in each of the cases found generally for the plaintiff', and upon request of the plaintiffs in error found the facts and conclusions of law, separately, as follows :
    “ 1. That the defendants, Joseph Ealkenbach and Van S. Seltzer, made aud delivered to the Ohio Life Insurance Company the notes and mortgages described in the petition.
    “ 2. That they were, by the president and secretary of said insurance company, indorsed and delivered to the superintendent of insurance, as stated in the petition.
    “3. That they were, by said superintendent, deposited with the state treasurer on or before January 20, 1874, and have since remained so deposited.
    “6. That the several acts and proceedings required by law to be done and performed by the corporators, prior to commencing business, were by said corporators so done and performed, and that said corporation was regularly organized in due form of law, and deposited with the superintendent of insurance, the securities required hy law, before said superintendent issued to said corporation his certificate of organization and authority to commence business.
    “ 7. That the amount evidenced by the notes and mortgages deposited with and transferred to the state superintendent as certified to by him was $100,000, which amount included the notes and mortgages of said defendants, Joseph Ealkenbach and Van S. Seltzer.
    “ 8. That Charles J. Hess was in some way an officer or agent of the corporators or company, and was engaged in procuring subscribers to the stock, and notes and mortgages to be deposited with the superintendent to complete the organization for business.
    “ 9. That said company became insolvent; that its officers, on June 1,1876, applied to the court of common pleas of Cuyahoga county, under the act of April 15,1867, for a dissolution of said company and the appointment of a receiver to settle up its affairs pursuant to said act of April 15, 1867; that the superintendent of insurance was a party to said proceedings. •
    “ 10. That in and by said court, and in said proceedings, the plaintiff' was appointed receiver, said superintendent not objecting thereto, with full authority, so far as the" court could confer the same, to collect the assets and pay the liabilities of the company, among which assets was included the notes and mortgages of defendants.
    “ 11. That the plaintiff gave bond and was qualified to act as such receiver, and has so remained ever since.
    “ 12. That a large number of policies were issued by said company while it did business, and were outstanding at the time of said dissolution.
    “ 13. That the liabilities of said company to policy-holders and general creditors amounted to $35,000, or more, and that the proceeds of the notes in suit are necessary to pay the same and make good losses to policy-holders.
    “14. That said defendant, Joseph Ealkenbach, was not a subscriber to the capital stock of said company, but that said Falkenbach received $1,900 in the stock of said company, being certificate No. 26, for nineteen shares.
    “ 15. That the said defendants made and delivered their notes and mortgages, under the following circumstances : That said Charles J. Hess, who was a personal acquaintance, applied to them for the same; that he stated to them that he required the amount of said notes to make good the $100,000 required by law to be deposited with the superintendent of insurance before the company could do any business, and that when the company got into business he would in a short time procure other securities to be deposited in their place, and would then return to them the notes and mortgages so requested; that in pursuance of this request, and to accommodate said Hess, they gave the notes and mortgages in suit without any consideration, with knowledge that they were to be .transferred to the superintendent of insurance, under the law, and to obtain for the company the proper certificates to enable it to do business.”
    Upon the facts aforesaid, the court state the following conclusions of law, to wit:
    “ 1. That the indorsement of approval by the attorney-general, on the charter or certificate was sufficient, but if technically insufficient the defendants as against the policyholders represented by the receiver, could not question the organization.
    “ 2. That the receiver was and is the proper person to bring and maintain the action, but if there were doubt about it, he and the superintendent both ■ being parties, a proper decree could be rendered without dismissing the action.
    “ 5. That the stubs from the stock books, and the letters offered by plaintiff to show that the . defendant was a stockholder, are not competent evidence for that purpose, and that the receipt of February 10,1874, signed by Joseph Falkenbach, is competent to show that he received stock in said company.
    “ 6. That defendants, having given their notes and mortgages to accommodate Hess and enable the company to obtain the certificate, that $100,000 had been deposited, and such use having been made of them with their assent, they are estopped as between them and the receiver, representing the policy-holders, from setting up or maintaining the defenses of fraud and want of consideration. Decree is therefore ordered for the plaintiff.”
    To the decrees Ealkenbaek and Seltzer severally excepted and took bills of exceptions, and they now ask for a reversal of the judgments of the district court.
    
      Lorenzo English and George K. Nash, for plaintiffs in error.
    The defendant in error had no title to the notes and mortgages enabling him to maintain actions thereon. There was no greater authority or control vested in him than was possessed by the corporation of which he was the receiver. Rev. Stats., § 5658; Bell v. Shibley, 33 Barb, 610; Lincoln v. Fitch, 42 Me. 456; Receivers v. Patterson Gas Light Co., 3 Zabr. 283; High on Rec., §§ 201, 205. At the time he was appointed receiver, neither the title to, nor possession or control of, them was in the company, but in the superintendent of insurance, and held by him in trust “ as security for policy-holders in said company.” They were not so held by him for the special security of the general creditors of the company. The court has no power to substitute another trustee in the place of the one designated by statute.
    The superintendent of insurance was improperly made a party. He is a public officer of the state, and can no more be sued than the state, without the direction or authorization of the general assembly.
    The due creation and organization of the corporation is denied by the plaintiffs in error. Upon this issue the burden of proof was on the defendant in error. There was neither a technical nor substantial compliance with the statute (69 Ohio L. 151, § 5) requiring the attorney-general to examine and certify to the secretary of state the declaration of the intention of the corporators to form a life insuranee company. This provision should be strictly construed. 1 Red. Law Railways (5- ed.), 70, and cases cited.
    The notes and mortgages bear date December 29, 1873, while the certificate of the secretary of state of the filing of the declaration and certificate of the incorporators bears date February 23, 1874. Hence the company was without authority to make these contracts, and the notes and mortgages are invalid and void, whether held by it or by others claiming under-it.
    It does not appear that any policy-holder presented any claim to the receiver, or that any policy-holder has sustained loss constituting the basis of such a claim, or that any thing is due to policy-holders.
    Neither fraud nor bad faith is imputed to either of the plaintiffs in error. Acting in entire good faith, they were induced, by false and fraudulent representations, upon the part of the company and its promoters, without consideration to them, to give these notes and mortgages. As between the parties they were void, for these reasons as well as for want of power in the company. The policy-holders are not parties to these- contracts, and they are not privies with the parties within the rule authorizing them to invoke the doctrine of estoppel. McKinzie v. Steele, 18 Ohio St. 38; Mut. Life Ins. Co. v. Norris, 31 N. J. Eq. 583.
    To- constitute an estoppel, there must be a concurrence of fraud or bad faith with prejudice to the party setting it up, together with reasonable diligence and care on his part; and the prejudice must be the immediate or proximate result of the acts complained of. Policy-holders must be held to some degree of care. Ordinary care in this respect would require some investigation, of the solvency of the company and whether or not it was authorized to transact business. Such investigation would, at any time, have detected its rotten condition as well as its want of organization and creation.
    
      Estep, Dickey ‡ Squire, for defendant in error.
    Upon the question of want of consideration-, we maintain that it is not necessary that any thing of value should have passed to these parties in order to constitute a valid legal consideration. In the contract of the surety it is but seldom that he receives any thing of value. If his principal receive profit, advantage, or change of condition by reason of the contract and on the faith of it, this is sufficient consideration to sustain the contract. In consideration of these notes and mortgages the company received its certificate from the proper officer and corporate power to do business, issue policies of insurance, and obtain credit.
    The plaintiffs in error are estopped from denying the validity of the notes and mortgages, or from asserting a want of consideration for their execution. They admit that they knew their admissions of indebtedness to the company were false at the time they made them; that they made them with the intent to deceive the superintendent of insurance and the public; and they can not now be permitted to assert such a defense as against creditors of the corporation who have been thus misled. Douglas v. Scott, 5 Ohio, 194; Bocock v. Pavey, 8 Ohio St. 270; Beardsley v. Foot, 14 Ohio St. 414.
   Eollett, J.

Section 5658 Revised Statutes provides that: Such receiver shall be vested with all the estate, real or personal, of the corporation, from the time of his having filed the security hereinbefore required, and shall be trustee of such estate for the benefit of the creditors of the corporation and its stockholders; and he shall have all the power and authority conferred by law upon trustees to whom assignments are made for the benefit of creditors.”

William M. Patterson, as receiver of the Ohio Life Insurance Company, is in the place of the company, and has only the same rights that the company would have. Bell v. Shibley, 33 Barb. 610; Coope v. Bowles, 42 Barb. 87; High Rec., § 201. And the liabilities of third parties are not| increased or varied by his appointment as receiver. Lincoln v. Fitch, 42 Me. 456.

There passes to the receiver the property and rights of the corporation, precisely in the same condition, and subject to the same equities, as they were held by the corporation. Receivers v. Patterson Gas Light Co., 3 Zabr. 283; High Rec., § 205.

There is but little, if any, dispute as to the facts of this case.

As shown on the face of the papers, $100,000 of notes, and mortgages appearing to secure tlie same, were deposited with the superintendent of insurance; and among the notes and mortgages were those of Ealkenbaeh and' Seltzer, who gave to the company their notes and mortgages without consideration, and to accommodate the company and Hess, who was the main agent of the Ohio Life Insurance Company. These makers gave these accommodation notes and mortgages to be deposited with the superintendent of insurance, under the the following statutes (69 Ohio L 152):

“ Sec. 8. Any life insurance company organized under this chapter, or any other law of this state, may invest its capital in stocks, bonds, and mortgages, or securities mentioned in the preceding section, and change and invest the same, or any part thereof, in like manner, at pleasure; but no company shall commence business until it has deposited with the superintendent of insurance at least one hundred thousand dollars in the stocks, bonds, and mortgages aforesaid, or one or more of them, duly made or assigned to said superintendent in trust for the purposes mentioned in this act.

“ Sec. 9. The superintendent of insurance shall hold such securities as security for policy-holders in said companies, but as long as any company so depositing shall continue solvent he shall permit such company to collect the interest or dividends on its securities so deposited, and from time to time to withdraw such securities, or any part thereof, on depositing with said superintendent other securities of the kinds heretofore named and of equal value with those withdrawn.

“ Sec. 10. Whenever the corporators shall have fully organized such company, and shall have deposited with the superintendent the requisite amount of capital, said superintendent shall furnish the company with a certificate of such deposit, which, with a certified copy of the papers required by this chapter, when filed in the county recorder’s office of the county wherein such company is located, shall be the authority to commence business and issue policies, and the same may be used in evidence for and against the compauy in all suits.”

And when the notes and mortgages were so used as a part of such deposit, they must remain “ as security for policy-holders in said company.” The statute is clear and imperative. And we think it is clear that, as to such policy-holders, Ealkenbach and Seltzer are estopped to deny the existence of the corporation and its power to issue such policies. But what, if any thing, is due in this case to policy-holders ? There is no finding or evidence in the record from which we can ascertain any specific sum. The court finds, “ that the liabilities of said company to policy-holders and general creditors amount to $35,000 or more;” and in the record of the original case the plaintiffs, on May 25, 1876, “ express the hope and belief that in a short time every policy outstanding against the company and which shall not have lapsed by reason of the non-payment of assessments and premiums, will be canceled and taken up.”

It may be that no policy-holder has a claim secured by these deposits. Before these mortgages can be foreclosed there must be shown some specific amount due, or that may become due, on account of such policy-holders, and that such amount is a claim against this special deposit. And when such amount is ascertained, the amount needed from the deposit to pay the same, should be obtained through the .superintendent of insurance, who is the holder in trust of the deposited securities. The superintendent of insurance should act and perform his trust; and as he was formally made a party to the suit, he may disclose the facts of such trust; and when the trust is fully performed, the remainder of the deposit, if any, should be properly disposed of.

The receiver has no rights in that part of the deposit of the $100,-000 that the company did not own ; but he has a right to know what the company did own, and he has an interest in the rights of the company in the deposit, though the rights of the company are subject to the rights of the policy-holders.

It is .suggested that such a claim must first exhaust the stockholders’ liability before these deposits can be required to be used. We think that such is not the law in this state.

In Wright v. McCormick, 17 Ohio St. 87, this court held that the liability imposed upon stockholders is a security over which the corporate authorities have no control,” and that “ this statutory liability of the stockholders is not a primary resource or fund for the payment of the debts of the corporation.”

But the general creditors are not in the same relation to these deposited securities. They have an interest only in the rights of the corporation. The notes and mortgages of Ealkenbach and Seltzer were not the property of the corporation. They were accommodation notes and mortgages, made without consideration, and taken and used by the corporation for a specific purpose. As against the makers, the corporation had no right to them for any other purpose. The corporation could not sue and compel the makers of these notes to pay to the corporation the amount of the notes; neither could the corporation foreclose the mortgages.

The receiver, as acting for the general creditors, has no more rights in them than the corporation had; and the makers of these notes and mortgages may defend against the claims of the general creditors, who have no rights in them; and these makers are not shown to have done any act that estops them to set up their defense in a suit by the receiver, as the representative of the general creditors. As to the other questions in the case we express no opinion. Whether or not Ealkenbach and Seltzer are estopped to deny they are stockholders in the company, we express no-opinion; and this reversal is without prejudice to either party as to that matter.

On the facts, the court erred in the judgment and in ordering the mortgages to be foreclosed, and the judgment is reversed and the case is remanded to the circuit court for further proceedings.

Judgment reversed and cause remanded.