Opinion ID: 1438220
Heading Depth: 1
Heading Rank: 4

Heading: character of new company

Text: New company was organized by the insurance commissioner with a name similar to that of the old company as a corporate agent to assist him in carrying on the business of the old company ( Carpenter v. Pacific Mut. L. Ins. Co., 10 Cal.2d 307, 324, 325 [74 P.2d 761]). It was also said there (p. 327) that The proceeding was had under sections 1010 to 1061 of the Insurance Code which specially deal with the rehabilitation and liquidation of insurance companies. Those sections set up a comprehensive statutory scheme to accomplish those results. The proceeding is not one in which another party is prosecuting another party at all. It is simply a proceeding in which the state is invoking its power over a corporate entity permitted by the state to engage in a business vitally affected with the public interest upon condition of continuing compliance with the requirements provided by the state. It is not a controversy between private parties but a proceeding by the state in the interest of the public. See also Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 77, 82 [136 P.2d 779], where it was held that The new company was the corporate agency of the Insurance Commissioner as conservator for the purpose of continuing and preserving the business of the old company. (Emphasis added.) The commissioner held, either as conservator or later as liquidator, the entire capital stock of new company until 1938 when it was transferred to voting trustees ( Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 344, 356 [139 P.2d 908]). It was there said that The affairs of the new company are placed in charge of a board of directors to whom the agreement expressly confides a large measure of discretion. Supervisory powers, however, are reserved to the commissioner, independent of and in addition to his statutory powers over delinquent insurance companies. For example, no investment or reinvestment of the assets of the old company may be made without written approval of the commissioner. Payments to the restoration fund for non-can policies are subject to the approval of the commissioner who, in addition, may require further payments thereto. The determination by the board of directors of the apportionment of expenses and the exchange of assets among the several departments of the new company is subject to adjustment by the commissioner. Reserves against policies of the old company subject to assumption or reinsurance under the agreement were to be established by the new company with the approval of and in accordance with the requirements of the commissioner. While as holder of the stock the commissioner possessed the voting rights incident thereto, the agreement contains no express provision with respect to the exercise of the voting power.... The trustees are given legal title to the stock of the new company with the power to exercise all the rights of ownership. The commissioner, however, retains the entire beneficial interest for the benefit of creditors of the old company and others interested. The voting trust undertakes to transfer to the trustees only administrative duties relating to the stock, principally the right to vote the same .... (Emphasis added.) New company does not possess the characteristics of a solvent company as that term is generally understood. First, it was organized as the agent of the commissioner to rehabilitate the business of the old company. It may be, as was said in the Garrison case, that it is a distinct entity without detracting in the least from the fact that it is still an agent for the purpose of rehabilitating the old company. An agent, or servant, is usually a distinct entity, but the duties and activities of such agent or servant, are carried out to serve the purposes of the principal. In other words, the agent acts for the principal, not for himself, or itself. Does the insurance commissioner ordinarily, and customarily, hold all the stock of a solvent insurance company? Does the insurance commissioner ordinarily, and customarily, have reserved to himself supervisory powers, independent of and in addition to his statutory powers where a solvent company is concerned? Does an insurance commissioner ordinarily, and customarily, give his written approval of the investment or reinvestment of funds of a solvent insurance company? Does the insurance commissioner ordinarily, and customarily, tell the board of directors of a solvent company when and how they must apportion expenses and exchange assets among its several departments? In the case of new company, the commissioner does all of those things. (See Chief Justice Gibson's opinion in Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 344, 356 [139 P.2d 908].) New company would have no existence had it not been for the technical insolvency of old company. No new money constituted the assets of new company which was organized with the assets of old company. If new company were a solvent independent and distinct corporation, the insurance commissioner would not be holding its stock for the policyholders of old company. The stockholders of new company would be holding their own stock supported by assets in the hands of the officers and directors of the company. Section 11525 provides that A solvent domestic incorporated insurer [is one] having a paid-in capital represented by outstanding shares of capital stock and issuing, on a reserve basis, nonassessable policies of life insurance or of both life and disability insurance.... Surely in the normal case, outstanding shares of capital stock refers to stock held by stockholders, not by the commissioner! Mr. Justice Traynor has pointed out how the use of the solvent mutualization procedure has deprived the members of old company of their right to the protection of court scrutiny of the plan of mutualization. He shows how the procedure used here cannot apply to the facts of the case because in the ordinary case of a voluntary mutualization, the shareholders would have the power to protect their interests by withholding their consent to the plan of mutualization. The sections of the code which relate to mutualization of insolvent companies were clearly intended by the Legislature to protect the interests of the interested parties by providing for court approval. In the present case by the use of the procedure provided for in the case of a solvent company, the commissioner approves a plan to be formulated in the future. When that plan is formulated, as holder of all the stock, he votes for the plan. Then, as commissioner, he approves the plan as fair and equitable. We are told by the majority opinion that it must be assumed that the Legislature realized that the commissioner might be required to pass upon the fairness of a plan in a case where he, acting as conservator, had previously consented to mutualization on behalf of the stockholders. Nothing of the kind must be assumed. It is obvious from even a casual reading of the code provisions relating to insolvent companies (1043 et seq.) and those relating to solvent companies (11525 et seq.) that the Legislature had not the faintest thought that the two would be so commingled as they are in this case, or that the commissioner would be placed in a position where he was forced to approve a plan to be formulated some 10 years in the future, then, when the plan was formulated forced to vote an approval of it as a sole stockholder, and still later, to give his approval of something he had theretofore twice before approved. Ever since the inception [] of the receivership proceedings and the organization of new company all the parties and proceedings concerned in the rehabilitation matter have been subject to the continuing jurisdiction and supervision of the court. It has been pointed out in various phases of this litigation that new company was organized by the commissioner as his corporate agent to rehabilitate the business of old company. Without the original proceeding under section 1011 (d) of the Insurance Code, new company would not have come into being. It is necessary, next, to note the difference in methods provided for in the two divisions of the Insurance Code for mutualization of insolvent and solvent companies. Section 1046 provides that Said mutualization plan [called involuntary mutualization for insolvent companies and follows the section (1045) which provides: If at any time after the issuance of an order under section 1011 the commissioner shall formulate a plan of mutualization] shall include provisions for: (a) [Acquisition of capital stock.] The acquisition by such insurer of all outstanding shares of its capital stock at a price and upon terms and conditions to be fixed as hereinafter provided. (b) [Retirement of capital stock.] The retirement of said shares of stock when acquired by such insurer. (c) [Amendment of charter.] The amendment of the charter of such insurer so as to enable it to transact its business as a mutual insurer issuing nonassessable policies on a reserve basis. (d) [Payment of claims.] The manner in which and the time within which, after mutualization is effected, matured and maturing claims against such insurer shall be paid to the lawful holders thereof. (e) [Submission of plan to policyholders.] The submission of said mutualization plan to the policyholders of such insurer under such procedure as shall be set forth in the plan or prescribed by said court, for their approval or rejection. (f) [Notice to shareholders.] Notice to the shareholders of such insurer, in such manner and at such time after the approval of said mutualization plan by said policyholders, as the court may direct. Section 1048 provides that after the formulation of the mutualization plan, the commissioner shall submit it to the court for its order directing the submission thereof to the policyholders named in subdivision (e), of section 1046. Section 11526 (relating to solvent insurers) provides that Such plan shall include appropriate proceedings for amending the insurer's articles of incorporation to give effect to the acquisition, by said insurer, for the benefit of its policyholders or any class or classes thereof, of the outstanding shares of its capital stock and the conversion of the insurer from a stock corporation into a nonstock corporation for the benefit of its members. The members of such nonstock corporation shall be the policyholders from time to time of the class or classes for whose benefit the stock of the insurer was acquired, and no other persons. Such plan shall be: (a) Adopted by a vote of a majority of the directors. [As distinguished from the formation thereof by the commissioner as provided in section 1045.] (b) Approved by the vote of the holders of at least a majority of the outstanding shares at a special meeting of shareholders called for that purpose, or by the written consent of such shareholders. [As distinguished from section 1048 requiring the commissioner to obtain court approval and an order of the court directing the submission of the plan to the policyholders.] (c) Submitted to the commissioner and approved by him in writing. [Under the circumstances here prevailing with regard to the commissioner's position as conservator, liquidator and general supervisor of new company, this amounts to an idle act.] (d) Approved by a majority vote of all the policyholders of the class or classes for whose benefit the stock is to be acquired voting at an election by the policyholders called for that purpose, subject to the provisions of section 11528.... (e) Filed in the office of the Insurance Commissioner after having been approved as provided in subdivisions (b), (c) and (d) of this section. Under the provisions of the rehabilitation agreement, a price determination committee consisting of four members was set up. The price determination committee reported to new company, in April, 1950, that mutualization was practicable and valued the stock of new company at $3,000,000. The mutualization plan provided in part for the payment of the purchase price with simple interest at the rate of long term government bonds (2 1/2%). Under the terms of the rehabilitation agreement, The Conservator for himself and for any successors in the ownership of said stock claiming under him in any manner other than through a sale of said stock pursuant to the provisions of sub-paragraph (d) hereof agrees to consent and hereby consents as the holder and owner of the stock of the New Company to such plan of mutualization. In the event said mutualization plan is adopted, the Conservator, or a Liquidator as aforesaid, shall dispose of such stock in accordance with such plan. Under the voluntary mutualization procedure heretofore set forth (section 11526) the mutualization plan is submitted to the commissioner after adoption by a vote of a majority of the directors and after a vote by a majority of the outstanding shares at a special meeting of shareholders called for that purpose. Section 11527 provides that The Commissioner shall examine the plan submitted to him under the provisions of subdivision (c) of section 11526. He shall not approve such plan unless in his opinion the rights and interests of the insurer, its policyholders and shareholders are protected nor unless he is satisfied that the plan will be fair and equitable in its operation. (Emphasis added.) Fair and equitable to which company? Under the provision of the rehabilitation agreement heretofore set forth, the then commissioner agreed for himself, and his successors, to agree to any plan promulgated by the price determination committee. It should be borne in mind that the stock of new company is now held by voting trustees who had no discretion, but were (as stated in the insurance commissioner's answering brief, p. 73) not only authorized, but bound to give their consent; and [that] they had no discretion to exercise. (Emphasis that of the commissioner.) There is evidence in the record which shows that the trustees voted for the plan of mutualization because they were told to so vote; that they did not examine into the merits of the plan. The next step provided for in section 11526 (Ins. Code) is that the plan shall be submitted to the commissioner for his written approval. The insurance commissioner states (Answering brief, p. 83), As we have already shown, the Liquidator [commissioner] has bound himself to consent to a Plan of Mutualization proposed in accordance with the Rehabilitation Agreement. The code, however, (§ 11527) provides that the commissioner shall examine the plan submitted to him under the provisions of subdivision (c) of section 11526 and that He shall not approve such plan unless in his opinion the rights and interests of the insurer, its policyholders and shareholders are protected nor unless he is satisfied that the plan will be fair and equitable in its operation. (Emphasis added.) The net result, under the circumstances prevailing in this case, is that the commissioner, as beneficial owner of all the stock of the new company, instructs the voting trustees to vote for any plan proposed by the price determination committee and then, when such plan is submitted to him for his approval, places his rubber stamp of approval thereon because he (or his predecessor) has, 10 years prior to the promulgation of the plan, agreed to approve it no matter what it is  agreed, not only for himself, but for any successor in office, to approve the plan as proposed. It is shown, therefore, without a shadow of a doubt, that the earlier agreement to approve any plan proposed by the price determination committee has the effect of nullifying section 11527 of the Insurance Code, as well as the sections relating to mutualization of insolvent insurers. Had the procedure outlined in sections 1045, 1046 and 1048 been followed, the result would be very different. Under section 1045 the commissioner would formulate the mutualization plan for the purpose of carrying out the rehabilitation of the insurer whose business was seized under the provisions of section 1011. The commissioner's plan would then be submitted to the court for its order directing the submission of the mutualization plan to the shareholders and policyholders of the seized insurer for their vote of approval, or disapproval as the case might be (§ 1046, subds. (e) and (f)). Old company, not having been dissolved, still exists; new company was organized as the corporate agent of the commissioner to rehabilitate the business of old company with the assets of old company. New company cannot, as it appears, be considered as a completely independent and solvent organization under the facts here prevailing. As I have pointed out, the commissioner holds the entire beneficial interest in all the capital stock of new company for the benefit of stockholders, policyholders and creditors of old company; the legal title to the stock of new company is held by voting trustees who vote it as directed by the commissioner. As I have also pointed out, the board of directors of new company are under the close supervision, control and direction of the commissioner and must, in reality, take orders from him as to every major, and some minor, business details. It cannot be said that this close supervision, control and direction exist in the usual solvent corporation.