Opinion ID: 1438220
Heading Depth: 1
Heading Rank: 5

Heading: corporate entity of new company

Text: Respondents argue that the corporate entity of new company cannot be disregarded so as to make the proposed mutualization a mutualization of old company. In support of this contention, In re Bond & Mortg. Guar. Corp., 157 Misc. 240 [283 N.Y.S. 623, 652], and Garrison v. Pacific Mut. L. Ins. Co., 83 Cal. App.2d 1, 9-10 [187 P.2d 893], are cited. In neither case was mutualization involved. In the Bond & Mortgage Guarantee case, the superintendent of insurance had organized Bond & Mortgage Guarantee Corporation as a domestic insurance corporation, with a capital of $1,000,000, a surplus of $2,000,000, and a reserve for contingencies of $200,000, all of which was paid out of the assets of the guarantee company in exchange for the entire capital stock of the new corporation, 10,000 shares of the par value of $100 each; a certificate for said number of shares was issued in the name of the guarantee company and is held by the superintendent of insurance as an asset, for the benefit of the creditors (including the policyholders), of the guarantee company. (Emphasis added.) The guarantee corporation here involved took on the duty of insuring mortgages, but on a restricted basis under a limited policy of guaranty. (Pp. 641, 650.) This case involved a proceeding whereby the People, and certain individuals interested, applied for an order enjoining the State Mortgage Commission from demanding and receiving or assuming control of certain mortgages being serviced by the guarantee corporation pursuant to court order. The injunction was granted. The contention was that the guarantee corporation, in servicing mortgages, was acting without adequate corporate powers. The court held that the corporation was acting within its corporate authority and, in answer to the contention that the guarantee corporation was a state agency inseparable from the superintendent of insurance (so as to permit another state agency, the Mortgage Commission, which came into being after the proceedings set forth had been had) to take it over, the court said: Said corporation is like any other corporation; a distinct entity. All of its stock is owned by guarantee company, and the certificate therefor is held in the custody of the superintendent; this he holds as he does any other assets of the company in rehabilitation, as a receiver designated by statute for the benefit of the creditors and stockholders of said company; not as an owner, representing the state. It is a stock corporation, having been created, for one thing, with a view to its possible sale for the benefit of the creditors, as its exhaustive by-laws make apparent. During such time as the stock control remains as it is, the operation of the corporation is to be under the supervision of the superintendent as rehabilitator. (Emphasis added.) The court continued and said that the primary management of the corporation was with the board of directors, although it was subject to the supervision of the superintendent in his capacity as supervisor of insurance companies (pp. 651, 652). The situation presented in the New York case and that presented in the case at bar are factually similar up to a point. I have heretofore quoted extensively from Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 344, at page 356 [139 P.2d 908], wherein we set forth the extensive and minute supervision exercised by the commissioner over new company. This supervision exceeded by far anything required of him as supervisor of insurance companies. We also said in Carpenter v. Pacific Mut. L. Ins. Co., 10 Cal.2d 307, 324, 325 [74 P.2d 761], that new company was organized as a corporate agent to assist him [commissioner] in carrying on the business of the old company. (See also Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 77, 80 [136 P.2d 779].) In Garrison v. Pacific Mut. L. Ins. Co., 83 Cal. App.2d 1 [187 P.2d 893], the court said, The question for decision is whether an insurance company which was organized to conserve an insolvent insurance company and to rehabilitate its business is obligated to pay interest on claims allowed by the conservator against such insolvent, based upon the breach by the latter of certain policies, in the absence from the rehabilitation agreement of a specific promise to pay such interest, the agreement having provided for the payment to the liquidator for the benefit of such claimants an amount equal to the sum of all `allowed claims' against the insolvent company. New company, by the terms of the rehabilitation agreement had agreed (Paragraph 17) to pay to the liquidator for payment to claimants an amount equal to the sum of all claims against old company filed with the liquidator and finally allowed. The court answered the question put with this statement: It is customary practice in liquidation proceedings to marshal the assets of the debtor, fix the amount of its liabilities and disburse the assets among the creditors pro rata. Such a process would not be possible, if during the season of liquidation, the claims should be varied by the additions of varying amounts of interest. (P. 9.) Respondents rely upon the following paragraph from the opinion of the District Court in the Garrison case: Appellants contend that new company is a reincarnation of old company and, therefore, has impliedly promised to pay all of the latter's indebtedness. In this they ignore provisions of the Insurance Code, article 14 of chapter 1, part 2, division 1, which article deals with insolvency and liquidation proceedings. Section 1043 of such article provides that in any proceeding under the article, the commissioner may mutualize or reinsure the business of any person affected by proceedings thereunder and may enter into rehabilitation agreements. New company was organized by the sovereign power for the purpose of rehabilitating the business of one of its own creatures whose very existence inhered in the blood and sweat of the people. It was to go forward under the guidance of the state. Its identity is utterly distinct from that of old company, notwithstanding the latter's equitable ownership of new company's stock. It cannot be fairly said that it is a continuance of old company. It did not take over the latter's assets or assume its burdens at the behest of old company. Such transfer and assumption were rendered indispensable to the public weal and were required by law to conserve the common good in general and the army of policyholders of old company in particular. New company was not organized by old company to do service in a prescribed manner for the latter but was created by the state to perform a public service. It must be and act in its own right upon the arena of trade and commerce and of human existence, free from the fetters of a collapsed institution which in the kaleidoscope of a changing world will soon be only a memory. (Pp. 9, 10.) New company was organized by the state to rehabilitate the business of old company; as the corporate agent of the insurance commissioner for that purpose. The language just quoted is, in part, illogical under the facts presented in this long line of litigation, including the Garrison case. It appears to me that the statement that its [new company] identity is utterly distinct is inconsistent with the latter part of the same sentence that this was so notwithstanding the latter's [old company] equitable ownership of new company's stock and with one of the preceding sentences wherein it is said that New company was organized by the sovereign power for the purpose of rehabilitating the business of old company, and the fact that new company was to go forward under the guidance of the state. The duties and obligations imposed upon the commissioner in this case amount to far more than his usual supervision of the usual solvent insurance company. There can be no doubt that new company is a separate corporate agency and that it was not organized by old company, but it does not logically follow that it is utterly distinct from old company. In my opinion, new company would have no existence but for the insolvency proceedings against old company. It also conclusively appears that the quoted statement from the Garrison case is dictum since it had nothing to do with the question involved there. Respondents also argue that because this court said in Carpenter v. Pacific Mut. L. Ins. Co., 10 Cal.2d 307, 334 [74 P.2d 761], that new company was, as a reinsurer, substituted as an insurer in the place and stead of the original insurer that the corporate identity of new company cannot be disregarded; that because this court said in the Carpenter case (p. 335) that Every policyholder who consents to the Plan clearly enters into a novation with the New Company that the two companies cannot be considered as essentially one and the same. New company will in time replace old company but so long as old company exists in any form, it is clear that new company is still only the corporate agent of the commissioner for the purpose of rehabilitating the business of old company and that the mutualization plan must be worked out in accordance with the procedure provided for in that part of the Insurance Code relating to involuntary mutualization of insolvent companies. The stock of new company, held now by voting trustees, with beneficial ownership in the commissioner is still held by him for the benefit of the policyholders and creditors of old company. This fact cannot be disregarded; nor can the rights of the policyholders and creditors of old company be disregarded. In holding that new company is utterly distinct from old company for all purposes, a majority of this court chooses to forget all the facts concerning this litigation and pretends that new company was organized as any other insurance company with its own assets and liabilities, that the insurance commissioner had only the normal, nominal, supervision over its affairs, and that no insolvency proceedings had ever been involved. In the light of the record before us, such a holding cannot stand the test of honest scrutiny.