Opinion ID: 1446228
Heading Depth: 1
Heading Rank: 9

Heading: Special Surplus Fund

Text: In order that the attorneys and the people of this state who are interested in the purchase of insurance may understand just exactly what took place in this case, I will set forth the facts relating to the second major issue involved here. The undisputed evidence in the record shows that under the old underwriters' agreements which were the original agreements between Exchange and Attorney, the Special Surplus Fund was a fund set aside from premiums on policies issued by Exchange and was intended to be used for the expenses of liquidation in the event Exchange was ever liquidated by Attorney in accordance with the terms of the original agreements. There is no dispute that such liquidation has never taken place or was even contemplated, as the undisputed evidence shows that Company took over all assets of Exchange as a going business and that the Special Surplus Fund was one of the items which Company set up as an asset of Exchange for which Company agreed to pay the subscribers of Exchange the sum of $1,045,159.71. How the trial court determined that Company was entitled to retain this Special Surplus Fund is one of the mysteries which the record does not reveal. It was an asset derived from the premiums on policies issued by Exchange and was set aside for a specific purpose for which it was never used, hence it must still be an asset of Exchange. This Special Surplus Fund at the time of the illegal take-over by Company amounted to $592,322.31 and the record shows that it was increased between January 1, 1949, and March 31, 1954, by the accrual of $119,307.37, so that on the last-mentioned date it amounted to the sum of $711,621.68. The majority holding is, of course, that Company is entitled to this fund. The theory relied on is a marvelous example of utter confusion. First it is said: ... the trial court found that the Special Surplus Fund was, under the Underwriters Agreement, [] to be reserved for expenses incurred in connection with liquidation and payable to Attorney; that on November 15, 1953, this was assigned to Company as compensation for work heretofore performed in connection with the liquidation of Exchange, less such portion as required to reimburse Attorney for future costs of liquidation; and that the subscribers have no right or claim to this surplus since it was not a part of Exchange's business or assets. (Emphasis added.) Having quoted the provisions of the superseded underwriters' agreements, the majority then states: Under the Underwriters Agreement, Attorney-in-Fact was entitled to this fund `if Exchange discontinues business,' as compensation for winding up the affairs and liquidation. The question then arises whether Exchange has been `discontinued.' The trial court found that it had, and the evidence supports the finding. It should be carefully borne in mind that this Special Surplus Fund was derived from investment income of Exchange. It should also be remembered that the membership of Company and Attorney was identical. It should also be remembered that the District Court of Appeal specifically and unequivocally held that Exchange was not in liquidation. Under the majority holding, the involuntary discontinuance of business by Exchange because of the machinations of Company must be paid for by Exchange. Relying on the illegal and void Transfer and Assumption Agreement the majority quote from its provisions that the Attorney waived its right to the Special Surplus Fund. And even though the Special Surplus Fund was one of the assets of Exchange for which Company contracted (Transfer and Assumption Agreement) to pay Exchange the sum of $1,045,159.71, the majority state that The court found, and the evidence amply supports the finding, that future profits, Attorney fees and the Special Surplus Fund were not items obtained by Company as a consequence of the illegal Transfer and Assumption Agreement. The public is also informed that the subscribers of Exchange have not suffered either injury or damage even though they have been cheated out of over a half million dollars. It is held that since the trial court found that Company had not waived its right to this Special Surplus Fund and that since Attorney was originally entitled to it for expenses of liquidation and that Attorney, through the void Transfer and Assumption Agreement had waived its rights thereto, Company was legally entitled to the fund. When the facts are understood it becomes apparent that Attorney's waiver of its rights to the fund is exactly the same as a man transferring his money from his right to his left trouser pocket. The majority opinion does not make clear just how the terms of an agreement declared by the District Court of Appeal to be void and of no effect can be relied on in support of a holding of the superior court. The majority, in an effort to justify its holding, quotes, out of context, a statement made by the District Court of Appeal in its opinion on the first appeal (117 Cal. App.2d 519, 537 [256 P.2d 677]) that The Company did not at any time in the operation of its business use any funds, facilities or information belonging to, or secured through, the Exchange. In reality the District Court was referring to the situation as it was prior to the illegal take-over of Exchange when Company engaged in writing compensation insurance in competition with Exchange. The majority, in giving everything involved to Company, goes along with Company's argument that it was entitled to the Special Surplus Fund under the old underwriters' agreements which, it contends, were reinstated by the holding of the District Court of Appeal that the Transfer and Assumption Agreement was invalid and void. The underwriters' agreements provided only that Company should use the fund in the event of the voluntary discontinuance of business by Exchange. The result to be reached so far as the Special Surplus Fund is concerned should be, since Exchange was illegally sold to Company and since it is now too late to set aside the illegal sale, that the subscribers of Exchange should be compensated as nearly as possible for that which they have lost which includes this fund which constituted their investment earnings. It stands to reason that had the illegal sale not taken place, the Special Surplus Fund would have remained intact. Exchange agrees, although under the circumstances its agreement is a magnanimous one, that Company should be reimbursed for its actual expenses in winding up the affairs of Exchange. But aside from that agreement, Exchange is most definitely entitled to the Special Surplus Fund. (See Schwarting v. Artel, 40 Cal. App.2d 433, 441 [105 P.2d 380]; Woods v. City Nat. Bank & Trust Co., 312 U.S. 262, 269 [61 S.Ct. 493, 85 L.Ed. 820].)