Court Opinion

ID: 4133464
Source: CourtListenerOpinion
Date Created: 2017-02-18 01:38:24.075955+00
Date Added: 2024-06-11T14:34:20.275354
License: Public Domain

.   .

    Honorable    Henry Wade                             Opinion     No. M-1205
    District  Attorney
    Dallas County Government          Center            Re:   Constitutionality    of the
    Dallas,   Texas    75202                                  Insurance     Holding Company
                                                              System Regulatory       Act,
                                                              Article 21.49-1,     Texas
                                                              Insurance     Code

    Dear      Mr.   Wade:

          In your recent letter you state that you believe the above mentioned
    statute    to be unconstitutional for various reasons     and ask this office for
    an official opinion on the matter.      It is our opinion   that the statute is
    constitutional    with respect to each of the questions     which you raise,
    namely:

                     “1. Is the caption or title of Article         21. 49 suf-
                     ficient to meet the legal requirements           for consti-
                     tutionality?

                     “2. Does the concept of ‘control’ as used in the
                     Act render it unconstitutionally vague and unen-
                     forceable?

                     “3. Does the Act so impair         the right    to contract
                     as to be unconstitutional?

                     “4. Does the Act violate      due process       under   State
                     and Federal prohibitions?

                     “5. Does the Act unconstitutionally         create a
                     mandatory       presumption   that a control person,
                     as defined in the Act, will deal with the company
                     contrary    to its interest,   without any prior fact
                     determination;       further, because of such pre-
                     sumption,      is the Act so broad as to prohibit

                                               -5907-
Honorable   Henry   Wade,   page 2       (M-1205)

             a control person in one insurance    company from
             dealing with another insurance    company in which
             said control person owns no stock without prior
             approval of the Commissioner     of Insurance?

       In considering   the constirutionality    of a statute,    the courts do not
presume      a statute to be invalid.      On the contrary,    they presume    any
statute under attack to be valid.          As was stated in Vernon v. State, 406
S.W.2d 236, (Civ.App.      1966, error ref. n. r. e. ):

             “In the field of constitutional        law, no stronger
             presumption       exists than that which favors the
             validity of a statute.       A legislative     act must be
             sustained     unless it is clearly      invalid beyond a
             reasonable     doubt. State v. City of Austin,           160
Tex. 348, 331 S.W.2d 747 (1960); Trapp v.
             Shell Oil Co., 145 Tex. 323, 198 S.W.2d 424 at 440
             (1946).     The strength of this presumption           is nurtured
             by an appreciation       of the nekds of the people and by
             a recognition      that the laws are directed        to problems
             manifest by experience.          The courts will not exert
             ingenuity to find reasons for holding a statute invalid:
             rather,    they will sustain its validity even if it is
             valid by the narrowest        margins.        Texas Nat. Guard
             Armory Board v. McGraw, 132 Tex. 613, 126 S.W.2d
627-634 (1939); Dendy v. Wilson, 142 Tex. 460. 179
S.W.2d 269-277 (1944).         This is particularly        true
             when the statute pertains        to governmental        policies
             established     in the interest    of public health,      safety,
             and welfare as is present in this statute.              Lombard0
             v. City of Dallas,       124 Tex. 1, 73 S.W.2d 475, 486
             (1934). 12 Tex. Jur. 2d Constitutional             Law, Sec. 36,
              p. 380. ”

      The Insurance Holding Company System Regulatory        Act (hereinafter
called the “Act”) grew auf of legislative    concern with the trend toward
conglomeration.     There has been a recent trend within the insurance
industry toward restructuring    into holding company systems.      As was
stated by Professor   J. Leon Izbowitz    in Corporations, Annual Survey of
Texas I,aw, 26 Southwestern Law Journal at page 91, (1972):               _

                                       -5908-
Honorable    Henry   Wade,    page 3       (M-1205)

              “In keeping with this trend and possibly due
              to concern with forestalling      yet another crisis
              of confidence   within the Texas insurance        industry
              through takeovers     by corporate    raiders   or stock
              manipulators,    a comprehensive       law regulating
              the acquisition  of control of Texas insurers
              through holding companies       and other devices
              has been added to the Texas Insurance         Code. ”

       In light of the strong presumption     that exists in favor of the validity
of a statute and the fact that the public welfare is directly           and acutely
involved in the regulation      of these quasi-public    financial    institutions,
this office must consider      any challenges    to the constitutionality        of this
statute in accordance      with the above cited rules of law to be applied by
our courts.

      Concerning  your first question,   we would point out, that while the
caption of the Act is broad, it is not deceptive    and it gives fair notice
of the contents of the statute,  as required  by Section 35 of Article III of
the Texas Constitution.     The caption to the bill reads as follows:

              “An Act adding a new Article 21.49 to the Texas
              Insurance     Code to be known as the Insurance
              Holding Company System Regulatory               Act, relating
              to regulation    of insurance      holding companies,      sub-
              sidiaries,    and affiliates,     and their transactions      with
              insurance     companies;      prohibiting  certain acts:
              providing    penalties    and declaring    an emergency.      ”

      The fact that the Act contains provisions    for enforcement     purposes
does not mean that these provisions     must be referred     to in the caption.
In Continental    Bus System,  Inc. vs. Carney,    310 S.W.2d 676, (Civ. App.,
1958. error ref. n. r. e. 1 the cantion of the statute stated that it was an
act amending certain other statutes     “by designating   corporations     subject
to franchise   tax. ” The court quoted with approval the following statement
of the law from Texas Jurisprudence:

              “Incorporate     in the body of an act of the means
              by which its objects may be accomplished       does not
              render the act obnoxious to the constitutional
              inhibition   against bills containing  more than one

                                          -5909-
                                                                                    .   .

Honorable      Henry   Wade,   page 4         (M-1205)

                subject.    Accordingly,      an act with one leading
                subject,   which is expressed       in its title, may
                contain appropriate      provisions    designed or tending
                to accomplish,     effectuate    or enforce the general
                object or purpose of the law.         When the title expresses
                the main subject dealt with by the act, it embraces
                any lawful mea~ns for the accomplishment            of the legis-
                lative object.    It is immaterial      that such subsidiary
                provisions    are not expressly      mentioned    in the title,
                if they are legitimately      connected    with the subject
                expressed.    ”

This case also refers to the well-established     rule of law that the caption
will be liberally construed in favor of its constitutionality.

      In our opinion,  the caption of the Act complies   with the requirements
of Section 35 of Article III of the Texas Constitution.      We have taken into
consideration    the numerous    provisions of the Act which you view as not
being covered by the caption and we find them all to be mere provisions
for the accomplishment      of the purposes  expressed  in the caption.

     Your second question is whether the concept of “control”    as used in
the Act renders  the Act unconstitutionally vague and unenforceable.

     Section    2(c) of the Act provides       as follows:

                “(c) Control.        The term ‘control’,       including the
                terms ‘controlling,       ’ ‘controlled    by’ and ‘under
                common control with, ’ means the possession,
                direct or indirect,       of the power to direct or cause
                the direction     of the management        and policies of
                a person,     whether through the ownership            of voting
                securities,     by contract     other than a commercial
                contract    for goods or nonmanagement             services,
                or otherwise,       unless the power is the result of
                an official position with or corporate           office held by
                the person.      Control shall be presumed           to exist if
                any person,      directly   or indirectly,     owns, controls,
                holds with the power to vote, or holds irrevocable
                proxies representing,         10 percent or more of the
                voting securities       or authority    of any other person.

                                           -5910-
Hanorable     Henry    Wade,    page 5        (M-1205)

               This presumption         may be rebutted by a showing
               made in the manner provided by Section 3(i)
               that control does not exist in fact.            The commis-
               sioner may determine,            after furnishing     all
               persons     in mterest     notice and opportunity         to be
               heard and making specific findings of fact to
               support such determination,             that control exists
               in fact, notwithstanding         the absence of a pre-
               sumption to that effect, where a person exercises
               directly    or indirectly     either alone or pursuant to
               an agreement      with one or more other pzrsons such
               a controlling    influence over the management               or
               policies of an authorized          insurer   as to make it
               necessary     or appropriate        in the public interest      or
               for the protection       of the policyholders       or stock-
               holders of the insurer         that the person be deemed
               to control the insurer.        ”

      In our opinion,   this definition    is neither vague nor unenforceable.
While it deals with sophisticated       and technical  corporate procedures,    it
is felt that one who is qualified to manage the affairs of a corporation         will
have no difficulty    understanding     the meaning of the concept of “control”
as embraced     in the Act.

       The cited definition    of the word “control”     principally      comes from the
Model Legislation      on the subject adopted by the National Association               of
Insurance    Commissioners.         In an analysis   of that model legislation
(Proceedings     of N. A. I. C., 1969, Vol. 1, page 196) it is stated that the
definition   of control is derived from the Savings and Loan Holding
Company Amendments           of 1967 (12 U.S. C. A. ( Sec. 1730a), the Bank
Holding Company Act of 1966 (15 U.S. C. A., Sec. 1841) and the Investment
Company Act of 1940 (15 U.S. C. A., Sec. 80a-2 (a)(9)).                In connection     with
the use of the control concept in relation to the Investment                Company Act
of 1940, there are several        reported   cases where the courts had no difficulty
in applying the concept in highly complicated           business     relationships     so
that there is no doubt that the concept is workably precise.                 See: Phillips
vs. Securities     Exchange Commission,         388 1:. 2d 964 (7th Cir.,        19r
Willheim vs. IMurchison,         342 1:. 2d 33 (2nd Cir.,     1965), cert. denied,
382 U.S. 840. 86 S. Ct. 36, 1.5 I,. Ed. 2d 82 (1965); and Acampra                  vs.
Berkland.    220 1:. Supp. 527 (11. Cola.,     1963).

                                           -5911-
Honorable   Henry    Wade,   page 6         (M-1205)

     It should be noted that the Texas Legislature    did add the following
words to the part of the definition giving the regulatory     agency power to
find a person in control without the statutory   presumption:
              1,
                . . . where a person exercises           directly  or
              indirectly   either alone or pursuant         to an
              agreement     with one or more other persons
              such a controlling      influence over the manage-
              ment or policies cf an authorized         insurer   as to
              make it necessary        or appropriate      in the public
              interest   or the protection     of the policyholders      or
              stockholders      of the insurer that the person be
              deemed to control the insurer.          ”

      If there was ever any doubt that the definition as used in the model act
lacked a proper standard     for the regulatory agency to follow, the Texas
Legislature    foreclosed that issue.

       Your third question deals with the impairment       of obligations    of contract.
You conclude that the Act affects rights accruing       before the Act became
effective,     and, therefore, constitutes  an impairment     of the obligation    of
contracts    within the meaning of the provisions    of the Texas and United States
Constitutions.      We must respectfully   disagree.

      Corporations,      being creatures   of the state, remain subject to its
regulation    and control.     Article 9. 12 of the Business Corporation  Act ex-
pressly    reserves    to the state the power to change the laws governing
corporations.       This statute provides    as follows:

              “The Legislature       shall at all times have the
              power to prescribe       such regulations,     provisions,
              and limitations    as it may deem advisable,         which
              regulations,    provisions,    and limitations     shall
              be binding upon any and all corporations           subject
              to the provisions     of this act, and the Legislature
              shall have power to amend, repeal,           or modify
              this act, ”

     In Jefferson County Title Guaranty Company              v. Tarver,       29 S.W.2d
316, 119 Tex. 410 (1930), the court said:

                                          -5912-
I   .

        Honorable   Henry    Wade,     page 7         (M-1205)

                       “Under the above constitutional           and statutory
                      provisions,      we hold that the company having
                      been incorporated        under the Constitution         and
                      general laws of Texas, expressly              reserving      in
                      the 1,egislature      the right to alter,      reform,      or
                      amend incorporation,          laws, and charters          is subject
                      to the act of 1929, requiring          a capital stock of
                      $100,000 as a condition precedent              to doing business
                      in this state, and that such statutory             requirement
                      does not impair any contract           evidenced      by the
                      charter    granted by the state to the company.                 We
                      further hold that the Constitution           and general       laws
                      of this state in force at the time the charter               here
                      under consideration         was granted are parts thereof
                      to the same extent,        and with the same force and
                      effect, as if they were expressly            incorporated
                      or written therein:       and this being the case, the
                      state’s exercise       of its reserved     power to require
                      an amendment        to the charter     of this concern
                      increasing     its capital stock to $100,000,           as a
                      condition precedent        to continuing     in business,       does
                      not impair or abrogate          any contract     between the
                      company and its members,             between the state and
                      the company,       or between the stockholders             of the
                      company and the state. ”

              The power of the Legislature    to control and regulate      corporations
        generally  and insurance    companies   in particular,      may not be superceded
        by private contracts,    which are subject to this reserved       power of the
        state to regulate.    See Daniel v. Tyrrell    & Garth Inv. Co., 93 S.W.2d
372, 127 Tex. 213 (1936): Attorney General’s           Opinion No. M-407 (1969).

              We have studied the numerous        provisions   of the statute which you
        consider   to be violative  of the constitutional    provisions    regarding   im-
        pairment    of contracts,  and we view these challenges         to be governed by
        the foregoing principles.      We find the statute to be constitutional       per se.

             Your fourth question concerns     whether the Act violates   the state
        and federal constitutional prohibition   against seizure of property    without
        due process  of law. In your brief you contend:      “The seizure   of voting

                                                   -5913-
Honorable    Henry   Wade,    page 8           (M-1205)

securities    and the power to declare       a contract    void, together with the
power to invalidate      an authorized     shareholder     meeting,   constitutes
arbitrary     and unreasonable      remedies    with no substantial     relation  to the
protection     of an insurance    company’s     shareholders     or policyholders     and
of the public.      The termination     [sic] that control exists thereby requiring
 registration    and reporting    is a denial of the due process       guarantee.   ”

        We do not construe   the Act as authorizing     seizures. On the contrary,
the sections     in question establish   very adequate court procedures   for the
litigation   of the rights of the interested   parties.

      In our opinion,    the provisions    of Section 12, Section 5 and Section 16
of the Act are well within the police powers of the State, as a creator         or
controller   of corporations.       In Scar&n v. Home Insurance     Company,   79
S.W.2d 186, 189 (Tex. Civ. App., 1935, error ref. ), the court declared:

               “The business   of insurance   is of public concern
               and therefore  subject to strict regulation   and
               control by the State. ”

For further discussion       of these   principles    see 44 C. J. S. 518,    Insurance,
Sections 55 and 56.

      As stated above, the statute in question was enacted by the Legislature
in an effort to curb very serious abuses in the insurance         industry by the
employment      of the holding company device.    It is our opinion that the
provisions    of the Act constitute a proper exercise     of the police powers of
the state and that they do not violate due process      in the respects    advanced
in your request and brief.

      Your fifth question     is as follows:

               “5. Does the Act unconstitutionally            create a
               mandatory    presumption      that a control person,     as
               defined in the Act, will deal with the insurance
               company contrary       to its interest,     without any
               prior fact determination:       further,     because of such
               presumption,     is the Act so broad as to prohibit
               a control person in one insurance           company from
               dealing with another insurance          company in which
               said control person owns no stock without prior
               approval of the Commissioner            of Insurance?”
                                          -5914-
.   ,.

         Honorable   Henry      Wade,   page 9       (M-1205)

               We do not hold the opinion that the Act creates           any such “mandatory
         presumption.     ” It merely provides for the regulation          of holding companies
         and others who control insurance            companies.     The Act does not require
         any administrative       body or court to presume        that such control is inimical
         to the interest    of the insurance      company:    it merely puts “control persons”
         under the administrative        surveillance    of the Commissioner       of Insurance.
         In our opinion,     this is a valid exercise      of the police powers of the state
         under the authority      discussed     above.

               It should be noted that you have presented    no specific       factual situation
         in connection   with your request and therefore    our opinion       is necessarily
         limited to whether the Act is constitutional    per se.

                                                 SUMMARY

                           Article 21.49-l of the Texas Insurance    Code,
                       which is known as the Insurance     Holding Company
                       System Regulatory   Act, is constitutional.

                                                     Veryy   uly, yours,

         Prepared    by James     Hackney
         Assistant   Attorney     General

         APPROVED:
         OPINION COMMITTEE

         Kerns Taylor,     Chairman
         W. E. Allen,     Co-Chairman

         Van Thompson,    Jr.
         Robert Lemens
         James Broadhurst
         Vince Taylor

                                                   -5915-
                                                  .   .   -

Honorable   Henry   Wade,   page 10    (M-1205)

SAMUEL D. MCDANIEL
Staff Legal Assistant

ALFRED      WALKER
Executive   Assistant

NOLA WHITE
First Assistant

                                      -5916-