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

Heading: the undeniable facts

Text: On July 22, 1936, some 3,000 stockholders and 300,000 policyholders of The Pacific Mutual Life Insurance Company of California, hereinafter known as old company, were stunned by the news that the insurance commissioner had taken charge of the company, alleging it to be insolvent. This development was all the more shocking because of its suddenness and also because only a short time before, the regular, verified, annual statement of the company showed it to be in sound financial condition, as had similar previous statements from year to year consistently shown throughout its lifetime of over 68 years. The business and assets of old company were then taken over by the insurance commissioner of this state pursuant to the provisions of sections 1011 and 1013 of the Insurance Code. Thereafter, The Pacific Mutual Life Insurance Company was organized as part of a plan of rehabilitation of old company by the commissioner who purchased its entire capital stock with assets of old company. Pursuant to section 1043 of the Insurance Code, a Rehabilitation and Reinsurance agreement was entered into between the new company and the then insurance commissioner, as conservator of old company. The rehabilitation plan provided for the organization of a new corporation with a capital of $1,000,000 which consisted of 10,000 shares at a par value of $100 each. The commissioner was to purchase all the outstanding stock of the new company with $3,000,000 in cash belonging to the old company (which gave new company an initial surplus of $2,000,000). The commissioner was then to transfer all the other assets of old company (with the exception of the stock of new company which, of course, was owned by old company) to new company, and new company was to assume all policies and obligations of the old company to the extent provided for in the plan. The plan provided that new company would assume all the obligations of the old company under existing policies with the exception of the non-can policies, which obligations were assumed on a reduced benefit schedule at the old premium rates. It was agreed that further benefits would be restored out of certain designated income of new company. All of new company's stock was purchased with $3,000,000 out of old company's funds. In addition, all the other assets of old company (over $200,000,000 assets in addition to going agency organization and concern, good will, etc., worth several millions of dollars ( Carpenter v. Pacific Mut. L. Ins. Co., 10 Cal.2d 307, 325 [74 P.2d 761]) were transferred to new company. Therefore, new company owes its creation and existence to old company. The confiscatory nature of this entire proceeding, including the present majority holding, is at once apparent when we see that old company's stockholders will ultimately only receive $3,000,000 for their stock which, when old company was taken over, was supported by that amount in cash plus over $200,000,000 in various assets plus the value of good will, going business organization, etc., worth several millions of dollars! The agreement thus provided for a transfer to new company of the assets of old company (with certain exceptions not relevant here) and the assumption by new company of the obligations of old company, excluding certain noncancellable policies. With regard to these policies, known as the non-can policies, new company assumed a limited obligation and agreed to set up a special fund for the restoration of benefits thereunder. This obligation is still unpaid and outstanding. The capital stock of new company was to be held by the commissioner, as conservator, or liquidator, for the benefit of the creditors, policyholders, and stockholders of old company. On December 4, 1936, the agreement was approved by the trial court. In Carpenter v. Pacific Mut. L. Ins. Co., 10 Cal.2d 307, 332, 334 [74 P.2d 761 (affirmed Neblett v. Carpenter, 305 U.S. 297 [59 S.Ct. 170, 83 L.Ed. 182]), it was held that the organization of new company, as part of a plan to rehabilitate the business of old company was proper. It is pointed out (p. 322) that Ultimate mutualization, in the event the policyholders so elect is also provided for. On February 2, 1937, an order was made providing for the liquidation of the old company and appointing the insurance commissioner as liquidator. This order was upheld on appeal ( Carpenter v. Pacific Mut. L. Ins. Co., 13 Cal.2d 306 [89 P.2d 637]), although old company has never been dissolved. On April 4, 1938, the commissioner, as liquidator, transferred title to the capital stock of new company to voting trustees. This transfer was upheld on appeal ( Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 344 [139 P.2d 908]). (Other aspects of this case have been decided by this court in Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 77 [136 P.2d 779]; Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 386 [139 P.2d 930]; Caminetti v. Pacific Mut. L. Ins. Co., 23 Cal.2d 94 [142 P.2d 741]; Neblett v. Pacific Mut. L. Ins. Co., 22 Cal.2d 393 [139 P.2d 934]; Carpenter v. Pacific Mut. L. Ins. Co., 14 Cal.2d 704 [96 P.2d 796]; and by the appellate courts in Sanborn v. Pacific Mut. L. Ins. Co., 42 Cal. App.2d 99 [108 P.2d 458]; Garrison v. Pacific Mut. L. Ins. Co., 83 Cal. App.2d 1 [187 P.2d 893].) New company now seeks to acquire its stock (see later discussion) through the device of mutualization under section 20(a) of the rehabilitation agreement. The mutualization plan provides that the price to be paid for new company's stock is $3,000,000, with simple interest. If non-can benefits are fully restored prior to January 1, 1973, the purchase price is to be increased by an additional sum of $250,000 for each full year by which the date of completion of restoration precedes December, 1973. The purchase price is not absolutely payable, but is to be paid only when and if all the following conditions are met: (1) Non-can restoration is completed; (2) the funds in a special surplus fund (to be created pursuant to the plan) plus the capital and surplus of new company, equal or exceed the purchase price of the stock; (3) the financial condition of the new company is such that, after paying for and cancelling the stock, it would still have admitted assets in excess of all its liabilities amounting to the sum of 4 per cent of all admitted assets plus 25 per cent of the premiums collected during the preceding calendar year on all group insurance written on a one-year term basis and on all accident and health insurance. This resume shows that the new company was brought into existence as a creature of the state to rehabilitate old company and to carry on its business for that purpose. It also shows the grievous injustice being perpetuated by the majority in approving the plan of mutualization used here  that of voluntary mutualization of an insolvent corporation. This type of voluntary mutualization is as voluntary as a confession given under force, duress, and threats of bodily injury. Non-can benefits have not been fully restored; even under the mutualization plan it is contemplated they will not be fully restored (if partial benefit payments can be considered full restoration) until 1973. Until such time as they are restored, new company cannot be considered as a solvent concern since it still owes a debt to the policyholders and stockholders of old company, which it admittedly cannot now pay. The amount of this debt is conceded to be between $18,000,000 and $24,000,000. How can it then be said, with any degree of honesty whatsoever, that new company is solvent and may avail itself of the statutory provisions relating to mutualization? I defy anyone to give an affirmative answer to this question.