Opinion ID: 1446228
Heading Depth: 1
Heading Rank: 7

Heading: return of subscribers' individual surplus fund deposits:

Text: The Company agrees to pay to the individual subscribers entitled thereto the total amount of the subscribers' individual surplus fund deposits paid or maintained as of December 31, 1948, by each of said subscribers, such payment to be made to each individual subscriber entitled thereto on or within a reasonable time after the termination of his policy. However, in the event that at such time there shall be due and owing from such subscriber any premium arising under a policy issued by the Exchange on or before December 31, 1948, such subscriber's individual surplus fund deposit shall, to the extent of any such premium due and unpaid, be credited or applied in payment thereof. (Emphasis added.) At the time this agreement was executed K.K. Bechtel was president of Industrial Indemnity Company. He was also managing partner of Industrial Underwriters, Attorney-in-Fact for Industrial Indemnity Exchange. While Mr. Bechtel did not sign the contract on behalf of Industrial Indemnity Company, he signed it as managing partner of Industrial Underwriters, Attorney-in-Fact for Industrial Indemnity Exchange and as a member of the Advisory Committee of Industrial Indemnity Exchange and as managing partner of Industrial Underwriters. The contract was executed on behalf of Industrial Indemnity Company by Thomas G. McGuire, Executive Vice-President. It was found by the trial court and conceded by all of the parties to this litigation that Mr. Bechtel and his associates in Industrial Indemnity Company, by virtue of their financial interests, controlled all of the parties to said agreement. In this respect the District Court of Appeal in its first decision of this case cited supra stated: Neither is it denied nor could it be denied that the members of the Attorney are persons who have authority in the management of the funds of the Exchange. The interrelation between the Attorney and the Company, which is at the basis of this whole case, leaves no doubt that said partners in the Attorney would be interested in, at least indirectly, any purchase made by the Company. In this respect it will suffice to quote from finding 16 of the court the following passus which is not attacked: `The stock ownership of Industrial Indemnity Company has at all times been substantially the same as the ownership of Industrial Underwriters, a partnership, the attorney-in-fact of the Exchange.' (117 Cal. App.2d 519, 527, 528 [256 P.2d 677].) Prior to the execution of said Agreement an attempt had been made by Mr. Bechtel and his associates to procure the consent of all of the subscribers of the Exchange to said Transfer and Assumption Agreement and they succeeded in obtaining the consent of approximately 98 per cent of said subscribers. Industrial Indemnity Company then commenced an action in the superior court of the City and County of San Francisco seeking declaratory relief regarding the rights of subscribers of Industrial Indemnity Exchange, under said Agreement. The nonconsenting subscribers cross-complained in said action, claiming that all the insurance business transacted by Industrial Indemnity Company belonged in equity to Exchange, from whose business it was alleged to have been disloyally diverted by Industrial Underwriters, the Attorney-in-Fact of said Exchange, whose partners substantially owned the stock of Industrial Indemnity Company. The trial court awarded plaintiff Industrial Indemnity Company the relief demanded by it in said action and denied any relief to the objecting subscribers. The subscribers appealed and the District Court of Appeal in its decision cited supra, reversed the judgment and decree of the trial court and laid down the following rules which constitute the law of the case and should have controlled the subsequent disposition of the case: (1) The District Court of Appeal specifically held that the Transfer and Assumption Agreement constituted a sale of all of the assets and business of Exchange to Company. In this respect the court stated at page 530: Respondents urge, however, that even if it were an actual sale, as we consider it, the agreement would come under an exception to section 1101 [of the Insurance Code].... (Emphasis added.) (2) The District Court of Appeal specifically held that Exchange was not in liquidation. In response to the contention of Company that the Transfer and Assumption Agreement was actually an agreement to liquidate, the court stated at pages 528 and 529: Company contends that the transaction was actually an agreement to liquidate. However that is not the case.... Another circumstance which shows that the Company did not act merely as liquidator is of greater importance from a practical point of view. By taking over all assets, assuming all liabilities, including all outstanding policies of the Exchange and becoming directly liable thereon to the policyholders, the Company acquired the whole business of the Exchange as a going concern and would therefore benefit by the increase of its clientele. (3) In answer to Company's contention that the Insurance Commissioner could require the sale of Exchange to Company (section 1105) the District Court of Appeal specifically held at page 530: The contention is without merit. The Commissioner did not require and had no power to require the sale of the whole business of the Exchange as a going concern. To `require' in this sense means `to demand; to claim as by right and authority; to exact.' (Webster.) The Commissioner did not demand it and had no authority to demand it. (4) The District Court of Appeal held that the Transfer and Assumption Agreement was illegal and void because in contravention of section 1101 of the Insurance Code, which provides that an admitted insurer's officers, directors, trustees or any persons having authority to manage the insurer's funds shall not directly or indirectly purchase, or be interested in the purchase of, any of the assets of the insurer. It further held that section 1106 makes any violation of section 1101 a misdemeanor. In this respect the court stated at page 527: We have concluded that the original action [brought by Company] for declaratory relief should have been denied because the agreement to which it relates is void as violating section 1101 of the Insurance Code, expressly made applicable to reciprocal exchanges by section 1282 of said code. (5) With respect to the contentions made by Company that it acted in good faith because it did not know the law forbade the transaction and made such a violation of the law a crime, the court stated at page 532: Even if their said conduct was in good faith and proper, as found by the court below, it would create a precedent wholly adverse to the purpose of section 1101, subdivision (c), if they were permitted to solve the difficulties so caused by absorbing the going business of the Exchange into their privately owned corporation, even if the price they paid for it would be adequate. (6) The District Court of Appeal specifically held that the officers of plaintiff and the other parties to the Agreement were acting in a fiduciary capacity and could not seize for themselves the assets of Exchange as contemplated by the Transfer and Assumption Agreement. At page 533 the court said: Since the leading case of Guth v. Loft, 23 Del. Ch. 255 [5 A.2d 503], it has been generally accepted that a corporate officer or director may not seize for himself to the detriment of his company business opportunities in the company's line of activities which the company has an interest and prior claim to obtain, and that if he seizes them in violation of his fiduciary duty the corporation may claim for itself all benefits so obtained by him. The doctrine was applied in this state to joint venturers in MacIsaac v. Pozzo, 81 Cal. App.2d 278 [183 P.2d 901], and is equally applicable in all situations in which a person manages or transacts business for another or for others to whom he stands in a fiduciary relation without being trustee of an express trust. The position of the attorney-in-fact of a reciprocal insurance exchange, who manages the business of the exchange under powers of attorney of the subscribers, who provide the means for the reciprocal insurance enterprise, is fiduciary in character to the same extent as that of the management of an incorporated mutual insurance company, although neither is a real trustee. (See Caminetti v. State Mut. Life Ins. Co., 52 Cal. App.2d 321, 323 [126 P.2d 165]) and the doctrine of corporate opportunities is equally applicable. With respect to the language of the court concerning the evidence as supporting the findings of fact of the trial court that Company had not breached its fiduciary duty toward Exchange, it is obvious that it was referring to the contention of Exchange that it was entitled to the whole business of Company because it said at page 539: Under these circumstances it is not for us to say that the ultimate findings of the court below are necessarily improper inferences nor can we hold as a matter of law, contrary to said findings, that the Attorney breached its fiduciary duty to subscribers when it engaged in the writing of workmen's compensation insurance through the medium of Company or that the business of Company was in equity the property of Exchange. We are the more satisfied that this result is not unjust because the gain by Exchange of all profits of the business of Company without participation in them by any of Company's insureds would have given the subscribers of the Exchange a windfall wholly out of line with the setup of such Exchange. (Emphasis added.) The findings of the trial court that Company had not breached its fiduciary duties toward Exchange were, therefore, held by the District Court of Appeal to relate to Company's participating in the workmen's compensation insurance field before the illegal take-over of Exchange; and to Exchange's contention that it was entitled to all of Company's business developed prior to such take-over. It is obvious that this discussion on the part of the District Court of Appeal does not relate to Company's breach of its fiduciary duty to Exchange in executing the Transfer and Assumption Agreement, which it had theretofore held to be an invalid, illegal and void agreement of purchase and sale. The conclusions reached in the District Court of Appeal opinion were as follows: 1. Although we hold that the subscribers of Exchange are not entitled to the business built up by Company in general  and then they are necessarily not entitled either to the business of its wholly owned subsidiary, Industrial Service Company, mentioned separately on appeal  they have a right to the business taken over by Company in consequence of the transfer and assumption agreement, which we have held to be invalid. If they so desire they are entitled to have that matter wound up in these equity proceedings and for that purpose the judgment denying all relief on the cross-complaints [by Exchange] will also have to be reversed. (Emphasis added.) 2. The trial court was directed to deny all declaratory relief to plaintiffs [Company] on the ground that the agreement as to which it is prayed for is void as contrary to law.... 3. The trial court was directed to grant such relief to Exchange as to permit them to recover in their representative capacity for subscribers the business and assets obtained by Company in consequence of the agreement herein held to be invalid. ... (Emphasis added.) The gist of the decision of the District Court of Appeal cited supra which is now the law of the case, may be summarized as follows: The Transfer and Assumption Agreement dated December 21st, 1948, constituted an attempted sale of all of the business and assets of Exchange to Industrial Indemnity Company. Such a sale was illegal in face of the objection of the nonconsenting subscribers to Exchange. The illegality of such sale and transfer was based both upon common law rules and statutory law of this state. It violated common law rules because the officers of the participating companies were acting in a fiduciary capacity to the subscribers of Exchange. Those officers violated their fiduciary duty under the common law by appropriating to their own use the property of the subscribers of Exchange without their consent. The legal effect of this transaction was that the directors and officers of Company, who, because of their financial interests, controlled Exchange, Industrial Underwriters and Attorney-in-Fact, used their power of control to deprive subscribers of Exchange of their property rights in Exchange in violation of their fiduciary duty to subscribers which no court of justice should sanction. The transaction was in violation of the statutory law of this state because expressly and specifically prohibited by section 1101 of the Insurance Code, the violation of which section was made a misdemeanor by section 1106 of the Insurance Code. Because the entire transaction was illegal for the reasons above stated and the participants therein were guilty of a crime under the law of this state, Industrial Indemnity Company had no standing in a court of justice to enforce the Agreement and its action brought for this purpose was ordered dismissed. The court, however, reserved to the nonconsenting subscribers the right to resort to the court for the protection of their rights which should contemplate the restoration by Company to the Exchange of the business and assets illegally appropriated or an award of compensation adequate to cover the value of such business and assets so illegally appropriated together with all accrued increments therefrom. It is obvious that the trial court on the retrial of the case utterly disregarded the law of the case as declared by the first opinion of the District Court of Appeal cited supra. In direct violation of the law of the case announced in said decision the trial court held and found that Industrial Indemnity Company took over the business and assets of Exchange for the purpose of liquidation and that Exchange was not entitled to the going concern value of its business at the time of the illegal transaction. It charged Exchange with the cost and expenses incurred by Company in winding up the business of Exchange and awarded to Company assets of Exchange worth considerably over a million dollars without awarding subscribers of Exchange any compensation therefor. The obviously palpable result and legal effect of the decision of the trial court on the retrial of this case was to deprive the subscribers of Exchange of their property which consisted of a valuable beneficial interest in the business of Exchange without due process of law. A clear and concise statement with respect to the protection of the right of private property under the Fourteenth Amendment to the Constitution of the United States was made by Mr. Justice Day of the Supreme Court of the United States in Buchanan v. Warley, 245 U.S. 60, at page 74 [38 S.Ct. 16, 62 L.Ed. 149]. Speaking for a unanimous court he there declared: The Federal Constitution and laws passed within its authority are by the express terms of that instrument made the supreme law of the land. The Fourteenth Amendment protects life, liberty, and property from invasion by the States without due process of law. Property is more than the mere thing which a person owns. It is elementary that it includes the right to acquire, use, and dispose of it. The Constitution protects these essential attributes of property. Holden v. Hardy, 169 U.S. 366, 391 [18 S.Ct. 383, 42 L.Ed. 780]. Property consists of the free use, enjoyment, and disposal of a person's acquisitions without control or diminution save by the law of the land. 1 Blackstone's Commentaries (Cooley's Ed.), 127. In Brinkerhoff-Faris Co. v. Hill, 281 U.S. 673 [50 S.Ct. 451, 74 L.Ed. 1107], the Supreme Court of the United States specifically held that judicial action as state action is within the due process clause of the Fourteenth Amendment. At pages 681 and 682 the court stated: But, while it is for the state courts to determine the adjective as well as the substantive law of the State, they must, in so doing, accord the parties due process of law. Whether acting through its judiciary or through its legislature, a State may not deprive a person of all existing remedies for the enforcement of a right, which the State has no power to destroy, unless there is, or was, afforded to him some real opportunity to protect it. Compare Postal Telegraph Cable Co. v. Newport, 247 U.S. 464, 475-6 [38 S.Ct. 566, 62 L.Ed. 1215]. (Emphasis added.) We have here a situation where the beneficial interests  the property rights of Exchange and subscribers in the business and assets of Exchange are taken from them by Company without their consent and in violation of both common law rules and statutory law, and Company and its officers committed a crime under the law of this state when it and they appropriated the property of Exchange and subscribers to the use of Company by means of the illegal and void Transfer and Assumption Agreement. Under every concept of law, equity, justice or fair dealing, Exchange and subscribers are entitled to have their property or its full value restored to them with all accrued increments. But under the majority decision in this case, property, admittedly worth approximately two million dollars at the time it was illegally appropriated by Company, with all its accrued increments of many millions of dollars, is retained by Company, and subscribers are awarded the paltry sum of $323,300.07, probably 2 or 3 per cent of the present value of the property and its accrued increments now in the hands of Company. I cannot conceive of such a travesty on justice occurring under any system for the administration of justice entitled to the respect of honest, fair-minded men. I have always believed that the requirement of the due process clauses of both our state and federal Constitutions contemplates a fair and honest application of the settled rules of law to every established factual situation. Only by this process may justice be achieved. The result reached by the majority here today does violence to every concept of due process of law with which I am familiar. The majority glosses over the damning fact that in seizing the business and assets of Exchange in the manner shown by the record here, Company and its officers committed a crime  a misdemeanor (see Ins. Code, §§ 1101, 1106)  and since overt acts were committed in the furtherance of an unlawful agreement, the crime amounted to a felony under the law of this state (Pen. Code, § 182; Calhoun v. Superior Court, 46 Cal.2d 18 [291 P.2d 474]; People v. Malotte, 46 Cal.2d 59 [292 P.2d 517]; Lorenson v. Superior Court, 35 Cal.2d 49 [216 P.2d 859]; People v. Robinson, 43 Cal.2d 132 [271 P.2d 865]; People v. Vanderpool, 20 Cal.2d 746 [128 P.2d 513]). The illegal and void Transfer and Assumption Agreement itself makes out a clear case of conspiracy to violate sections 1101 and 1106 of the Insurance Code by the participants in this illegal transaction. Of course, no prosecution was instituted against them. This is just another example of the unequal administration of our criminal law. There can be no doubt that the power and influence of the participants in this illegal transaction weighed heavily in the determination of the prosecuting officials not to proceed against them under the above cited authorities. We also find two justices of this court (see concurring opinions of Justices Schauer and Shenk) expressing their approval and commendation of the unlawful conduct of these participants in the consummation of this illegal transaction. This demonstrates the truth of the charge made by some critics of our judicial system that those with sufficient wealth, power and influence can evade the law and that the phrase equal justice under law is empty and meaningless in such situations. It is obvious that on the record before us justice has been outraged by the result reached by the majority and those who believe in the ideal of equal justice under law, as well as the victims of this travesty, will look for an explanation. In my considered opinion it may be found only in the inferences which may be drawn from the time honored epigrammatic expression that You can't convict a million dollars. The essential facts of the controversy here are really very simple: Company and Attorney (made up of the same membership so really one and the same person legally speaking) contracted with a majority of the membership of Exchange for the purchase of the assets of Exchange some of whose members refused to consent to the purchase and sale. The purchase price was $1,018,539.07. After a series of legal maneuvers (to be discussed hereinafter), instigated by Company, Exchange subscribers, the innocent victims of the swindle, are held legally entitled to only the sum of $323,300.39. Company brought the original action for declaratory relief regarding the rights of subscribers of Exchange. The original action culminated in an estimated award to Exchange of $1,895,347.07. Exchange appealed. The District Court of Appeal reversed on the ground that the Agreement was illegal, void and of no effect, and directed that an accounting be had to determine the value of the whole going business of Exchange which had been, by means of the Agreement, illegally taken over by Company. Company, believing it had lost in the District Court of Appeal, petitioned this court for a hearing. We denied a hearing. The opinion of the District Court of Appeal (117 Cal. App.2d 519 [256 P.2d 677]) thereby became the law of the case on a retrial of the action. On retrial Exchange recovered $323,300.39 as the value of their whole going business which had been illegally taken over by Company as compared with the sum of $1,895,347.07 recovered by it at the first trial from which judgment Exchange had appealed and won a reversal. The judgment rendered on the second trial was appealed by Exchange and determined by the same District Court of Appeal which had heard the first appeal. On the second appeal ((Cal. App.) 301 P.2d 112) the judgment was again reversed with the District Court of Appeal holding that the decision theretofore rendered by it had not been followed by the trial court and stating, among other things, that because of the judgment on retrial the Company will have in fact everything, for which it agreed in the invalid agreement to pay considerably more than one million dollars to the subscribers and will pay for it only $323,300.39. At the time of the second trial the evidence showed indisputably that Company had collected over 20 million dollars in gross premiums because of the increased business it had obtained through the illegal take-over of Exchange. The net profit was not ascertained. The District Court of Appeal specifically held, on the first appeal, that by means of the illegal agreement Company increased its clientele. It was there held that by its illegal agreement the Company acquired the whole business of Exchange as a going concern and would therefore benefit by the increase of its clientele. Consents to the illegal agreement were obtained by sending out, in addition to 80 or 90 solicitors of consents, a letter which read, in part: At normal expiration of your policy, in 1949 you will be offered a participating policy in Industrial Indemnity Company, a stock company.... Your policy with Industrial Indemnity Company will be serviced by the same personnel, located at the same offices as in the past. The District Court of Appeal (117 Cal. App.2d 519 [256 P.2d 677]) commented on Company's tactics as follows: That in this manner the Company received an advantage not consistent with the position of a mere liquidator seems obvious. By the holding of the majority here, Company profits by its illegal conduct in that it is permitted to: 1. Retain all the net profits directly traceable to former Exchange subscribers although the loss experience was deducted from Exchange's recovery; 2. Retain the special surplus fund of $592,322.31 and the increment thereof to which it was not entitled since Exchange was not in liquidation but had been illegally put out of business by Company and since the original underwriters' agreements were no longer in existence; 3. Retain the Attorney-in-Fact fees which amounted, at the time of trial, to $324,751.07 to which it was not entitled since the original underwriters' agreements were no longer in existence but were superseded by the illegal agreement. In the majority opinion the issue as to net profits is discussed and the discussion relative thereto consists of quoting thirteen findings of fact and then making the bald, unadorned statement that It logically follows that since the trial court's findings were supported by evidence and covered the issue that the appellate court had ordered to be retried, the judgment in the principal amount should be affirmed. A slight attempt is made in the majority opinion to show that these findings are supported by the evidence in that certain testimony is quoted to the effect that since the policies were renewed annually there was no assurance that Exchange would have had any future subscribers had it not been illegally put out of business. Inasmuch as the record, as the majority admits, shows that Exchange had been the largest company of its kind for a great number of years prior to being illegally put out of business by Company, the theory behind the majority opinion that Exchange would probably not have continued in business in any event is nothing short of ridiculous. Absolutely no attempt is made in the majority opinion to reconcile the findings made by the trial court with the law of the case as set forth by the District Court of Appeal in its first opinion (117 Cal. App.2d 519 [256 P.2d 677]). Isolated bits of testimony extracted from the enormous record before us in support of erroneous findings do not concern us, or should not concern us, when there is a question of law involved. We are not concerned with whether or not the evidence supports these erroneous findings and conclusions since it is obvious that the trial court was not following the law of the case as laid down by the decision of the District Court of Appeal, supra. The very fact that the trial court considered Exchange to be in liquidation shows the error, since liquidation is the antithesis of a going business concern. It is also obvious that the judgment permitting Company to obtain all assets of Exchange for a lesser figure than that provided for in the void Agreement is in contravention of the holding of the District Court of Appeal that Company and Attorney stood in a fiduciary relationship so far as Exchange was concerned and that a fiduciary may not benefit by a breach of its duties to its beneficiary. The District Court of Appeal specifically held in its first opinion (117 Cal. App.2d 519 [256 P.2d 677]) that the doctrine of corporate opportunities was applicable; that if a corporate officer or director seized for himself such opportunities in violation of his fiduciary duty the corporation may claim for itself all benefits so obtained by him (emphasis added) 117 Cal. App.2d at p. 533) and that the purchase of Exchange constituted the breach of Company-Attorney's fiduciary duty to Exchange subscribers. This court held in Estate of Baird, 193 Cal. 225, 258 [223 P. 974], while discussing the law of the case as decided in a former appeal in the same case, that It was no part of the trial court's function to determine whether the former appeal had been correctly decided; its sole duty was to follow without question the principles established by that decision. This the trial court failed to do, and the instructions we have condemned are therefore prejudicially erroneous within the meaning of the constitution (sec. 4 1/2, art. VI). We also held ( Central Sav. Bank of Oakland v. Lake, 201 Cal. 438, 443 [257 P. 521]) that It has long been the law of this state that an unqualified reversal remands the cause for a new trial ( Falkner v. Hendy, 107 Cal. 49, 54 [40 P. 21]), and places the parties in the trial court in the same position as if the cause had never been tried, with the exception that the opinion of the court on appeal must be followed so far as applicable ( Sharp v. Miller, 66 Cal. 98 [4 P. 1065]; Estate of Pusey, 177 Cal. 367 [170 P. 846]). (Emphasis added.) (See also Wells v. Lloyd, 21 Cal.2d 452, 457 [132 P.2d 471]; Chamberlain Co. v. Allis-Chalmers Mfg. Co., 74 Cal. App.2d 941, 943 [170 P.2d 85]; Steelduct Co. v. Henger-Seltzer Co., 26 Cal.2d 634, 643 [160 P.2d 804]; Wallace v. Sisson, 114 Cal. 42, 43 [45 P. 1000]; Porter v. Muller, 112 Cal. 355, 366 [44 P. 729]; Clark v. Deschamps, 109 Cal. App.2d 765 [241 P.2d 681].) We are not here concerned with the method by which Exchange's recovery should be determined since that is a matter to be determined on a retrial upon evidence given by experts in the insurance actuarial field. We are concerned here with what items should be considered a part of the subscribers' recovery.