Court Opinion

ID: 9630132
Source: CourtListenerOpinion
Date Created: 2023-08-22 10:02:13.959392+00
Date Added: 2024-06-11T18:07:32.002500
License: Public Domain

GIBSON, C. J.
The Pacific Mutual Life Insurance Company of California (hereinafter referred to as the “old company”) and certain of its stockholders brought this mandamus proceeding in the superior court to review the action of the Insurance Commissioner in approving a plan for mutualization of a second corporation, Pacific Mutual Life Insurance Company (hereinafter called the “new company”), which had been organized by the commissioner as part of the rehabilitation of the old company. The court upheld the action of the commissioner, and plaintiffs have appealed from the judgment.
In 1936 the old company was in a hazardous and insolvent condition within the meaning of the Insurance Code, and its business and assets were taken over by the Insurance Commissioner,* as authorized by statute. (Ins. Code, §§1011, 1013.) Pursuant to section 1043 of the code, a rehabilitation agreement was entered into between the new company and Commissioner Carpenter, as conservator of the old company, whereby most of its assets were transferred to the new company in exchange for all the new company’s capital stock. The stock was to be held by the commissioner as conservator for the benefit of the creditors, policyholders and stockholders of the old company. The new company assumed substantially *720all the obligations of the old company, including a limited obligation with respect'to noncancellable accident and health policies (referred to herein as “non-can policies”), and agreed to set up a special fund for restoration of benefits to holders of those policies.
In December 1936, after a hearing, the superior court approved the rehabilitation agreement and authorized the commissioner to perform all the obligations required on his part. This order ivas affirmed in Carpenter v. Pacific Mut. L. Ins. Co., 10 Cal.2d 307 [74 P.2d 761], (Affd. in Neblett v. Carpenter, 305 U.S. 297 [59 S.Ct. 170, 83 L.Ed. 182].) In February 1937, an order was made providing for the liquidation of the old company and appointing the commissioner as liquidator. It was upheld in Carpenter v. Pacific Mut. L. Ins. Co., 13 Cal.2d 306 [89 P.2d 637], In 1938 the commissioner transferred the stock of the new company to five trustees who were given legal title to the stock with power to vote it in accordance with the purposes of the rehabilitation agreement. The order approving the transfer was affirmed in Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 344 [139 P.2d 908].
The rehabilitation agreement set forth the method by which a plan for mutualization of the new company could be formulated. It provided that 10 per cent of the participating life policyholders could request the new company to create an appointing committee consisting of the president of the Life Insurance Association of America, the president of Stanford University and the provost of the University of California at Los Angeles. The appointing committee was directed to select a price determination committee composed of persons skilled in matters of insurance company valuation. If the price determination committee concluded that voluntary mutualization could be practicably accomplished, it was to propose a plan of mutualization in accordance with the laws of this state. By the terms of the agreement the commissioner, as sole shareholder of the new company, consented in advance to the plan of mutualization to be formulated.
A price determination committee was appointed, consisting of Alva J. McAndlcss, president of the Lincoln National Life Insurance Company of Fort Wayne, Indiana; Horace R. Bass-ford, vice president and chief actuary of the Metropolitan Life Insurance Company of New York; Ray D. Murphy, vice president and chief actuary of the Equitable Life Assurance Society of New York; and Albert J. Hettinger, a partner in Lazard Freres and Company, a firm engaged in investment *721banking. After three years of study the committee proposed a plan of mutualization, which provides that, upon the occurrence of certain conditions, the new company shall buy all of its own capital stock for $3,000,000, plus interest from December 31, 1948, the price to be augmented should the restoration of benefits under the non-can policies be completed before 1973.
The proposed plan of mutualization was adopted by the directors of the new company on May 5, 1950. On September 22, 1950, after a hearing, Commissioner Downey approved the plan, finding that it would be fair and equitable in its operation, and thereafter it was approved by the policyholders of the new company. This proceeding in mandamus was then brought to review the action of the commissioner, and the trial court concluded that there was substantial evidence to support his findings and that he had not exceeded his jurisdiction or abused his discretion in approving the plan.
Plaintiffs attack the judgment upon numerous grounds, and, although many of their contentions may be disposed of by application of principles of res judicata, we believe that the problems may be more clearly presented by first discussing the propriety of the determination of the various points without regard to the binding effect of prior adjudications.
The first problem which we must consider is whether the proper statutes were followed in the formulation and approval of the mutualization plan. As contemplated by the rehabilitation agreement, all steps in connection with the adoption of the plan were taken pursuant to sections 11525 et seq. of the Insurance Code, which relate to voluntary mutualization of a solvent insurer.* Plaintiffs assert that the applicable statutes for mutualization of the new company are sections 1043 et seq., which govern involuntary mutualization of an insolvent insurer.†
                   The essential differences in procedure *722are that under the sections relating to voluntary mutualization of a solvent company the plan is adopted by the directors, subject to approval by the stockholders and the commissioner, and no court proceedings are necessary; whereas under the provisions for involuntary mutualization of a seized insurer the plan is formulated by the commissioner as conservator without consent of the stockholders or directors, and it must be approved by the court.
The new company is solvent and nondelinquent, and there is no sound reason why it should be mutualized under the statutes relating to insolvent insurers.  The commissioner had power to create the new corporation in order to preserve the business of the seized insurer. Section 1043, which authorizes the commissioner to enter into rehabilitation agreements, contains no express limitation on what may be included in them, and section 1037 provides that the enumeration of the powers of the commissioner shall not be construed as a limitation upon him or upon his right to do such other acts as he may deem necessary in connection with the handling of the affairs of an insolvent company.* *  When salvaging the business of a seized insurer the greatest possible protection should be given to creditors and other interested parties, and in the present instance the commissioner evidently concluded that this objective could best be accomplished through the formation of a new company divorced as far as possible from the control of those who were in charge of the old company when it experienced financial difficulties.
The new company is a separate and distinct entity, and when the business was transferred it ceased to be the *723business of the old company and became the business of the new company. In Garrison v. Pacific Mut. L. Ins. Co., 83 Cal.App.2d 1, 9-10 [187 P.2d 893], it was held that the identity of the new company “is utterly distinct from that of old company, ’' that it ‘ ‘ cannot be fairly said that it is a continuance of old company,” and that the new company “is a separate entity that came into being after old company’s insolvency was declared. ...”  The fact that the new company may for some purposes have served as an agent or instrumentality of the commissioner does not destroy its identity as a separate company.  Accordingly, as contemplated by the rehabilitation agreement, the applicable statutory provisions for mutualization of the new company are those found in section 11525 et seq., which govern voluntary mutualization of solvent nondelinquent insurers.
Plaintiffs nevertheless contend that it was improper to follow the procedure set up in the code for mutualization of a solvent company because, they assert, the commissioner in doing so was forced to act in a dual capacity with conflicting interests. Section 11526, which prescribes the method to be followed in mutualizing a solvent insurer, provides that the plan shall be: “. . . (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, (c) Submitted to the commissioner and approved by him in writing.” Commissioner Carpenter as the sole holder of the stock of the new company consented in advance to the plan of mutualization, and Commissioner Downey approved it after holding a hearing to ascertain if the plan would be fair and equitable in its operation. Plaintiffs claim that the responsibilities of the commissioner under subdivision (c) are different from and may conflict with his duties under subdivision (b). Even if there might be such a conflict under some circumstances, it would not follow that it was improper to adopt the statutory procedure set forth for the mutualization of a solvent company. The legislative scheme for the mutualization of solvent nondelinquent insurers would in some instances be defeated if the commissioner were disqualified for the reasons urged by plaintiffs, and 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. In numerous cases where the action of an admin*724istrative officer was necessary to prevent defeat of the statutory scheme, his participation has been upheld, although the grounds for disqualification were much more serious than those raised here. (For example, see Thompson v. City of Long Beach, 41 Cal.2d 235, 243-244 [259 P.2d 649]; Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 344, 365-366 [139 P.2d 908]; Federal Const. Co. v. Curd, 179 Cal. 489, 493-495 [177 P. 469, 2 A.L.R. 1202]; Scannell v. Wolff, 86 Cal.App.2d 489, 492-493 [195 P.2d 536]; Nider v. Homan, 32 Cal.App.2d 11, 13 [89 P.2d 136].) The fact that Commissioner Carpenter gave advance consent on behalf of the stockholders to a plan of mutualization did not disqualify Commissioner Downey from passing upon the fairness of the mutualization plan which was promulgated.
An alternative reason for rejecting plaintiffs’ claim that it was improper to follow the procedure set forth in sections 11525 et seq. in the mutualization of the new company is that the validity of the rehabilitation agreement, which provided for voluntary mutualization, is now res judicata. A copy of the agreement was attached to and made a part of the petition which sought approval of the agreement. The petition was filed pursuant to section 1043, which provides that rehabilitation agreements entered into by the commissioner are subject to the approval of the superior court. The validity of all the provisions of the agreement was put in issue by the petition and determined by the court. The order of December 4, 1936, approved the agreement “and each and all of the terms and conditions thereof, and the plan therein embodied, ’ ’ reciting that all interested parties had been given a reasonable opportunity to be heard on “the question of fairness, justice, equity, feasibility, and propriety” of the agreement and the plan. All parties were forever enjoined from making any complaint with respect to the agreement or any provisions thereof. This order was affirmed in Carpenter v. Pacific Mut. L. Ins. Co., 10 Cal.2d 307 [74 P.2d 761]. (See also Carpenter v. Pacific Mut. L. Ins Co., 13 Cal.2d 306, 314-316 [89 P.2d 637]; Caminetti v. Pacific Mut. L. Ins. Co., 22 Cal.2d 344, 351-352 [139 P.2d 908].)
While different causes of action were involved in the present proceeding and the one leading to the order approving the rehabilitation agreement, the parties were the same, and it is settled that even though the causes of action be different, the prior determination of an issue is conclusive in a subsequent suit between the same parties as to that issue *725and every matter which might have been urged to sustain or defeat its determination. (Shore v. Shore, 43 Cal.2d 677, 682 [277 P.2d 400]; Krier v. Krier, 28 Cal.2d 841, 843 [172 P.2d 681]; De Hart v. Allen, 26 Cal.2d 829, 831 [161 P.2d 453]; Estate of Keet, 15 Cal.2d 328, 334 [100 P.2d 1045]; Sutphin v. Speik, 15 Cal.2d 195, 201 et seq. [99 P.2d 652, 101 P.2d 497]; Caminetti v. Board of Trustees, 1 Cal.2d 354, 356 [34 P.2d 1021]; Price v. Sixth District Agri. Assn., 201 Cal. 502, 510 et seq. [258 P. 387].) Inconsistent language found in certain opinions of the District Court of Appeal must be disapproved. (Green v. Green, 66 Cal.App.2d 50, 59 [151 P.2d 679]; Babcock v. Babcock, 63 Cal.App.2d 94, 97 [146 P.2d 279]; Bank of America v. McLaughlin, 22 Cal.App.2d 411, 417 [71 P.2d 291, 72 P.2d 554].)  The basic issue before the court when the agreement was submitted for approval was the propriety of each of its provisions, and the determination of that issue is conclusive as to every matter which might have been urged to sustain or defeat its determination.
It is contended that the order approving the rehabilitation agreement may be collaterally attacked upon the theory that the mutualization procedure provided for in the agreement followed the wrong* statutory provisions and that therefore the order is void. For the purpose of passing upon this question we shall assume, contrary to what we have just decided, that the wrong statutes were used in the mutualization of the new company.
It is the general rule that a final judgment or order is res judicata even though contrary to statute where the court has jurisdiction in the fundamental sense, i. e., of the subject matter and the parties.  In the consideration of problems arising in this field it should be kept in mind that there is a difference between lack of jurisdiction in the fundamental sense, which is ordinarily essential for collateral attack, and the broader meaning of the term “lack of jurisdiction” when used in determining the availability of prohibition or certiorari to review an order or judgment. Some cases involving collateral attack have unfortunately failed to recognize this distinction. (For discussion of the distinction, see Abelleira v. District Court of Appeal, 17 Cal.2d 280, 287-291 [109 P.2d 942, 132 A.L.R. 715]; Tide Water Assoc. Oil Co. v. Superior Court, 43 Cal.2d 815, 821 [279 P.2d 35].)
In some instances the requirements of a statute may relate to subject matter jurisdiction, and disregard of the *726statute may render a judgment void and subject to collateral attack. (See, for example, Grannis V. Superior Court, 146 Cal. 245, 254-255 [79 P. 891, 106 Am.St.Rep. 23]; cf. Rogers v. Cady, 104 Cal. 288, 291-292 [38 P. 81, 43 Am.St.Rep. 100] [constitutional provision].)  In the present ease, however, it is clear that the court which approved the rehabilitation agreement had jurisdiction of the subject matter and the parties, and, unless the case comes within some exception, collateral attack cannot be based on the ground that the court authorized mutualization to proceed under the wrong statute.
Closely analogous to the problem involved here are cases holding that probate decrees are res judicata, although they direct distribution pursuant to wills which are contrary to statute, since the court sitting in probate, like a court passing upon a rehabilitation agreement, is under a duty to determine the validity of the instrument before it. (Estate of Loring, 29 Cal.2d 423, 427 et seq. [175 P.2d 524]; Crew v. Pratt, 119 Cal. 139, 147 et seq. [51 P. 38]; Estate of Gardiner, 45 Cal.App.2d 559, 562 et seq. [114 P.2d 643]; McGavin v. San Francisco P.O.A. Soc., 34 Cal.App. 168, 170 et seq. [167 P. 182].)  Similarly analogous are cases holding that an order settling a trustee’s account is res judicata as to the propriety of the purchase of investment certificates which were issued contrary to statute. (Willson v. Security-First Nat. Bank, 21 Cal.2d 705 [134 P.2d 800]; Estate of Crane, 73 Cal.App.2d 93 [165 P.2d 940]; cf. Fergodo v. Donohue, 40 Cal.App. 670 [181 P. 819].) Estate of Rowe, 66 Cal.App.2d 594 [152 P.2d 765], which is contrary to the eases cited above, is disapproved.
The principle of res judicata has also been applied as a basis for holding that judgments enforcing contracts are a bar to the defense of illegality in subsequent litigation. (Andrews v. Reidy, 7 Cal.2d 366 [60 P.2d 832]; De Hart v. Allen, 49 Cal.App.2d 639, 646 [122 P.2d 273], approved in De Hart v. Allen, 26 Cal.2d 829, 830-831 [161 P.2d 453]; cf. Short v. Short, 106 Cal.App. 210, 215 [288 P. 1111].) Another instance in which the doctrine was applied is San Diego Trust & Sav. Bank v. Young, 19 Cal.2d 98 [119 P.2d 133], where the prior judgment reduced the time for redemption contrary to statute. The San Diego case impliedly overruled Anthony v. Janssen, 183 Cal. 329 [191 P. 538], and Tonningsen v. Odd Fellows' Cemetery Assn., 60 Cal.App. 568 [213 P. 710], It has also been held that a judgment, which was contrary to the Constitution because it was based *727upon a statute later held invalid, was nevertheless res judicata in a subsequent suit, the court stating that objections to the statute should have been raised in the prior proceeding. (Chicot County Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 376, 378 [60 S.Ct. 317, 319-320, 84 L.Ed. 329].) The Chicot case is quoted with approval in Mueller v. Elba Oil Co., 21 Cal.2d 188, 205-206 [130 P.2d 961], and was cited in Rescue Army v. Municipal Court, 28 Cal.2d 460, 463-464, [171 P.2d 8].
There are some recognized exceptions to the general rule that collateral attack will not be allowed where there is fundamental jurisdiction even though the judgment is contrary to statute.  For example, a judgment may be collaterally attacked where unusual circumstances were present which prevented an earlier and more appropriate attack. (See 1 Witkin, California Procedure (1954), 411-412.) In Burtnett v. King, 33 Cal.2d 805 [205 P.2d 657, 12 A.L.R.2d 333], collateral attack was permitted against a default divorce decree which awarded all the community property to the plaintiff in the absence of a prayer therefor in the complaint, contrary to the provision in section 580 of the Code of Civil Procedure that relief in a default case cannot exceed that demanded in the complaint. The defendant in the divorce action had no notice or warning that the property would be affected by a default judgment, and the opinion points out that the decision would sanction a trap if it held that his property rights had been disposed of since he would properly have assumed from the complaint that his rights to the property.were not to be litigated at that time. (33 Cal.2d at p. 811.) The present case is readily distinguishable, since there was nothing to prevent the questions which are raised with regard to the validity of the rehabilitation agreement from being litigated in the proceedings which led to the order approving the agreement.
Proceedings to prohibit or annul judgments of contempt for violation of injunctions and other equitable orders made contrary to statute may constitute another exception to the general rule. (Harlan v. Superior Court, 94 Cal.App.2d 902, 904-905 [211 P.2d 942]; Hunter v. Superior Court, 38 Cal.App.2d 100 [97 P.2d 492]; cf. Fortenbury v. Superior Court, 16 Cal.2d 405, 407-408 [106 P.2d 411] [violation of Constitution].) The decisions do not use the term, but the attack in such eases might be considered to be collateral, *728and the proceedings apparently fall in a special category because they are penal in nature.
Prom the foregoing discussion it follows that, even if we assume that the rehabilitation agreement and the order approving it authorized mutualization of the new company under the wrong statutes, the order is nevertheless res judicata.
The next problem is whether there was sufficient compliance with the statutory requirements for voluntary mutualization of solvent insurers. Sections 11525 et seq. provide that the plan of mutualization shall be adopted by the directors and approved by the shareholders, the commissioner and the policyholders. Plaintiffs contend that the actions taken to meet these requirements were in certain respects defective and unauthorized.
The approval of the shareholders to the plan of mutualization was given in the rehabilitation agreement by Commissioner Carpenter as sole stockholder of the new company. As we have seen, the agreement provided for the formulation of a plan of mutualization by the price determination committee, and plaintiffs claim that the commissioner, acting for the shareholders of the new company, was without authority to give advance consent to such a plan.  In the absence of statutory provision to the contrary, the stockholders of a solvent company can contract to consent to a future plan of voluntary mutualization (cf. Market St. Ry. Co. v. Hellman, 109 Cal. 571, 586-587 [42 P. 225]), and no sound reason appears why such an agreement is improper merely because the shares are held by the commissioner as conservator of a seized insurer. The commissioner apparently concluded that a plan for mutualization which could not be destroyed by future action or nonaction of the shareholders was necessary as a means of inducing both former and prospective policyholders to deal with the new company and thus permit its continued existence.  The powers vested in the commissioner by sections 1037 and 1043 are sufficiently broad to authorize him, as sole stockholder, to give advance consent to the plan of mutualization. Moreover, the validity of all portions of the rehabilitation agreement, including the provision for advance consent, is res judicata.
The directors adopted the mutualization plan, but it is claimed that the action taken was ineffective because they assertedly did not obtain sufficient information to enable them to properly evaluate the desirability of the plan.  They had the benefit of the report of the price determination com*729mittee and the opinions of experts, including actuaries and officers of the company, and it seems obvious that, as a practical matter, directors must ordinarily act on the advice of corporate officers and other persons who have expert knowledge. (See Ballantine & Sterling, California Corporation Laws (1949), p. 110.)
After the directors adopted the plan as formulated by the price determination committee, Commissioner Downey held a hearing which lasted nearly three weeks. Oral and documentary evidence was received, and all interested parties had an opportunity to participate. The commissioner approved the plan after finding that the rights and interests of the new company, its policyholders and shareholders were protected and that the plan would be fair and equitable in its operation. Plaintiffs contend that the findings are not supported by the evidence and that there was a lack of procedural due process at the hearing. In passing upon these contentions, we shall first give consideration to plaintiffs’ claim that the trial court, in reviewing the action of the commissioner, should have held a trial de novo.  The approval of the mutualization plan by the commissioner did not involve any deprivation of property rights or vested rights; it was in essence a permit or license authorizing the neAV company to purchase its own stock. Under these circumstances the function of the superior court was to determine whether the action taken by the commissioner was arbitrary or constituted an abuse of discretion, and in upholding the action of the commissioner, it properly refused to conduct a trial de novo. (Southern Calif. Jockey Club, Inc. v. California etc. Racing Board, 36 Cal.2d 167, 174-175 [223 P.2d 1]; McDonough v. Goodcell, 13 Cal.2d 741, 746-749 [91 P.2d 1035, 123 A.L.R. 1205]; see Thomas v. California Emp. Stab. Com., 39 Cal.2d 501, 504 [247 P.2d 561]; Andrews v. State Board of Registration, 123 Cal.App.2d 685, 694-695 [267 P.2d 352].)
There is no merit in plaintiffs’ claim that the record before the commissioner does not support his approval of the plan. The price determination committee consisted of men highly skilled in matters of insurance company valuation, and they were assisted in the formulation of the plan by Joseph Christman, associate actuary of the Metropolitan Life Insurance Company of New York, two Fellows of the Society of Actuaries, and numerous trained supervisory and clerical employees. Experts testified that the price fixed for the purchase of the stock was fair, that the provisions relating *730to the time and manner of payment were necessary for the safety and stability of the new company, that the proposed plan gave due regard and protection to the rights of all persons interested in the new company and would be fair in its operation.
Plaintiffs’ contention that there was a denial of procedural due process is based on their claim that the commissioner accepted the conclusions of the price determination committee without having before him all the facts on which those conclusions were based and that the committee itself relied on statistics furnished by its actuary without reviewing all the supporting data. Two members of the price determination committee testified in detail as to how the committee arrived at its determinations, and the actuary testified regarding his report which was introduced in evidence. Thus two of the four members of the committee who were responsible for its report, as well as the actuary who procured most of the data relied on by the committee, were available for cross-examination. These men, as we have seen, were experts in the insurance and investment fields, and the fact that the other members of the committee and the persons who assisted the actuary were not called as witnesses is immaterial, at least in the absence of a showing that plaintiffs sought to obtain their testimony. (City of Pasadena v. City of Alhambra, 33 Cal.2d 908, 919 [207 P.2d 17].) At the hearing an offer was made to furnish the documents and testimony necessary to explain every detail of the committee’s work. No claim is made that any request for data was refused, and plaintiffs have no valid basis for complaint if they failed to make such a request.
The judgment is affirmed.
Shenk, J., Spence, J., and Wood (Fred B.), J. pro tem.,* concurred.

Six successive commissioners, Messrs. Carpenter, Goodcell, Caminetti, Garrison, Downey and Maloney, have passed upon matters relating to the insolvency of the old company.

Section 11525 of the Insurance Code provides: “A solvent domestic incorporated insurer 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, may convert itself into an incorporated mutual life insurer, or life and disability insurer, issuing nonassessable policies on a reserve basis. To that end it may provide and carry out a plan for the acquisition of the outstanding shares of its capital stock for the benefit of its policyholders, or any class or classes of its policyholders, by complying with the requirements of this chapter.”
Sections 11526-11533 contain detailed provisions relating to procedure for adoption and execution of the plan of mutualization.

Section 1043 of the Insurance Code provides in part: “In any proceeding under this .article, the commissioner, as conservator or as *722liquidator, may, subject to the approval of said court, and subject to such liens as may be necessary mutualize or reinsure the business of such person, or enter into rehabilitation agreements." The words “such person" include an insolvent insurer as referred to in sections 1010 et seq. of the Insurance Code dealing with insolvency and delinquency.
Section 1045 provides: “If at any time after the issuance of an order under section 1011 ... it shall appear to the commissioner that the purposes of section 1011 can be best attained by the mutualization of such life insurer, the commissioner may formulate a plan for the mutualization of such insurer." Section 1046 et seq. set forth the necessary procedural steps.

Section 1037 of the Insurance Code provides in part: “The enumeration, in this article, of the duties, powers and authority of the commissioner in proceedings under this article shall not be construed as a limitation upon the commissioner, nor shall it exclude in any manner his right to perform and to do such other acts not herein specifically enumerated, or otherwise provided for, which he may deem necessary or expedient for the accomplishment or in aid of the purpose of such proceedings. ’ ’

Assigned by Chairman of Judicial Council.