Court Opinion

ID: 9857138
Source: CourtListenerOpinion
Date Created: 2023-09-24 13:51:09.645443+00
Date Added: 2024-06-11T09:38:03.440813
License: Public Domain

GIBSON, C. J.
I dissent. In my opinion, the majority of the court fails to apply the law correctly to undisputed facts concerning a transaction in violation of statute and, as a consequence, upholds an unjust result.
The law of the case, as decided on the prior appeal (Industrial Indem. Co. v. Golden State Co., 117 Cal.App.2d 519 *276[256 P.2d 677]), is that the Transfer and Assumption Agreement by which Company took over the whole business of Exchange was void because it violated section 1101 of the Insurance Code1 and that the subscribers are entitled to recover the business and assets obtained by Company as a consequence of that agreement. The code section was designed to protect persons such as the subscribers against the detrimental action of those in a position like that of Attorney. The subscribers, therefore, are not to be considered in pari delicto with Attorney and Company (Carter v. Seaboard Finance Co., 33 Cal.2d 564, 574 [203 P.2d 758]; see Lewis & Queen v. N. M. Ball Sons, 48 Cal.2d 141, 152 [308 P.2d 713]), and the latter are the parties legally responsible for the violation, even if they acted in good faith.
It is undisputed, and the trial court found, that the Transfer and Assumption Agreement was considered fair and equitable by Attorney and Company, that it was concluded openly with the consent of the Insurance Commissioner and of 98 per cent of the subscribers, and that the net worth of Exchange which would have been distributed to subscribers in accordance with the agreement, had it not been invalid, would have amounted to $1,018,589.07. Nevertheless, the judgment of the trial court affirmed by the majority awards the subscribers no more than $323,300.39 as the value of the business and assets of Exchange taken over by Company. Thus, as the decision of the majority stands, those for whose protection the violated statute was enacted will receive less than one-third of what would have been theirs under the agreement, whereas those who are responsible for the violation will not only retain all of the benefits of the agreement but also obtain a large financial windfall. It is true that the president of Company, who is also one of the partners of Attorney, testified that, regardless of the outcome of the case, it was the intention of Company to pay the subscribers an amount equivalent to that which the subscribers would have received under the void agreement, minus costs of litigation, but a court cannot be justified in rendering a decision which compels a litigant to rely on the magnanimity of his opponent to obtain equity, unless such a result is unavoidable. I am *277satisfied that a proper application of the law to the facts before us not only permits but requires a more equitable result.
There are three matters in controversy, namely, the profits realized by Company from the issuance of new insurance policies to former subscribers of Exchange, the sum referred to as attorney-in-fact fees, and the amount constituting the special surplus fund. Although I share the view of the majority that there is sufficient evidence to support the trial court ’s finding that the business profits were not obtained as a consequence of the void Transfer and Assumption Agreement, I cannot agree as to the disposition of the other two items. The facts relating to them are undisputed, and only questions of law are presented. The conclusion of the majority, in my opinion, results from an erroneous application of the Underwriters Agreement to the illegal transaction under consideration.
There can be no doubt that, under the Underwriters Agreement, any right of Attorney to attorney-in-fact fees must arise from performance of the managerial functions connected with the business of Exchange. Undeniably, Attorney did not perform such functions between January 1, 1949, when the Transfer and Assumption Agreement was to take effect, and November 6, 1953, when assets of Exchange were restored by Company.2 It is obvious, therefore, that Attorney would not be entitled to fees allocable to that period.
Nor can Company have any right to attorney-in-fact fees. Under the Underwriters Agreement, the fees were, of course, intended as compensation for management services rendered to Exchange, and, admittedly, Company did not at any time perform such services for Exchange but, instead, performed them solely for its own account, mistakenly believing that it was the owner of Exchange’s business. Any claim by Company to the contractual amount of fees would necessarily depend upon an effective assignment of Attorney’s rights, and there was no such assignment. The purported assignment in January of 1949 was, by its terms, made because of the Transfer and Assumption Agreement.3 It was merely one step in the overall transaction by which Company illegally took over the busi*278ness of Exchange, and, therefore, it was as invalid as the main agreement. (Stockton Morris etc. Co. v. California etc. Corp., 112 Cal.App.2d 684, 689-690 [247 P.2d 90].) The agreement of November 15, 1953, in which Attorney released its claim to fees in favor of Company, could not, of course, constitute an effective transfer to Company with respect to the period in question, since, as we have seen, Attorney had no right to fees allocable to that period.
In concluding that, by operation of the Underwriters Agreement, the sum treated as attorney-in-fact fees is not an asset of the subscribers, the majority opinion reasons, “There is no contention that the services were not performed in accordance with the agreement or that Attorney did not have a right to assign these fees.” As shown above, however, insofar as the period between January 1, 1949, and November 6, 1953, is concerned, Attorney did not perform any services, Company did not perform any services “in accordance with the agreement,” and no effective assignment was made. In my view, it is apparent that, even if, as assumed by the majority opinion, the Underwriters Agreement continued in force, it does not support the position taken but, to the contrary, compels the conclusion that the amount under consideration is an asset of the subscribers.
The erroneous use of the Underwriters Agreement by the majority in holding that the subscribers are not entitled to the special surplus fund is equally apparent. The agreement provided, “A Special Surplus Fund shall be created to which shall be set aside all investment income; ... it shall be used for the benefit of the Exchange as the Advisory Committee and Attorney may agree; if the Exchange discontinues business, any balance, after full provision for liabilities to the satisfaction of the Insurance Commissioner, shall be paid to the attorney to defray the expense of, and as compensation *279for, liquidation.” Obviously, the fund was to be an asset of Exchange with respect to which Attorney could have no right unless there was a discontinuation and liquidation of the business in keeping with the agreement.
The majority opinion concludes, in effect, that there has been a discontinuation of business of the type contemplated in the agreement. That conclusion is manifestly unsound. It requires holding that the provision for the benefit of Attorney was intended to refer not only to an ordinary discontinuation of business but also to a situation where, as here, through Attorney’s participation, the business was discontinued solely because of a sale of assets in violation of a statute which was designed to protect persons such as the subscribers against the detrimental action of those in a position like that of Attorney. Clearly, nothing done by Company during its illegal possession of the business may be regarded as constituting liquidation, since the law of the case, as decided on the prior appeal, is that the void transfer agreement under which Company acted was not an agreement for the liquidation of Exchange but one for Company’s purchase of assets and assumption of liabilities. (Industrial Indem Co. v. Golden State Co., 117 Cal.App.2d 519, 528 [256 P.2d 677].) While it appears to be true that, because of the unlawful transaction, the business cannot now be revived and must be liquidated, this cannot reasonably be treated as giving rise to any right in Attorney. The special surplus fund, which, on March 31, 1954, amounted to $592,322.31, was, of course, intended to relate to full and regular liquidation. To hold that Attorney is entitled to the fund for liquidating the remnants of a business in whose illegal destruction it participated represents an absurd application of the Underwriters Agreement. In addition, such a holding would ignore the rule that one may not take advantage of his own wrong, since the statutory violation for which Attorney and Company are responsible constitutes a wrong, regardless of good faith.
In view of the position taken by the majority, it is not necessary in this dissent to consider whether, notwithstanding the illegality of the action of Company and Attorney, some allowance should be made in their favor for the actual cost of services performed. It is clear, however, that a proper determination with respect to attorney-in-fact fees and the special surplus fund would substantially increase the recovery of the subscribers. For example, it appears to be undisputed that, even if an allowance for actual costs were made, a re*280fusal to grant Company attorney-in-fact fees would alone entitle the subscribers to approximately $324,000 more than the amount awarded in the erroneous judgment affirmed by the majority.
I would reverse the judgment.
Traynor, J., concurred.

Section 1101 of the Insurance Code provides: “An admitted insurer’s officers, directors, trustees and any persons who have authority in the management of the insurer’s funds, shall not, unless otherwise provided in this code: . . . (c) Directly or indirectly purchase, or be interested in the purchase of, any of the assets of the insurer.”

The agreement for restoration of assets was executed on November 3, 1953, but it was conditioned upon the Insurance Commissioner’s issuance to Attorney of a Certificate of Authority, and such a certificate was issued on November 6, 1953.

The purported assignment in 1949, after rgciting that Attorney was the Attorney-in-Fact for Exchange and was entitled to fees for the performance of certain services, provided:
"Whereas, effective 12:01 A. m., January. 1, 1949, all of the assets *278of the Exchange were transferred to Company and Company assumed all of the obligations of the Exchange including the obligation to perform certain services, for which performance the Attorney-in-Eact was, in turn, obligated to the Exchange; and
“Whereas, under its agreement with the Exchange, the Attorney-in-Fact would be entitled to receive certain moneys in addition to those earned or received by it on or prior to the close of business on December 31, 1948,
“Now, Therefore, It Is Agreed By and Between the Parties Hereto as Follows:"
In ensuing provisions, Company agreed to perform the services required of Attorney, and Attorney transferred and assigned its rights under agreements with Exchange.