Court Opinion

ID: 4136201
Source: CourtListenerOpinion
Date Created: 2017-02-18 02:10:57.806598+00
Date Added: 2024-06-11T14:35:05.883204
License: Public Domain

AUSTIN     m.   TEXAS

  WILL    BVJJSION
AX-TORNKY   GSNFXZAL
                                                    January     13, 1960

        Honorable     William    A. Harrison                       Opinion   No.    WW-778
        Commissioner        of Insurance
        State Board of Insurance                                   Re:    Whether dividends   may be
        International    Life Building                             paid by a fire and casualty     in-
        Austin, Texas                                              surance   company out of the un-
                                                                   realized   appreciation  in value
                                                                   of some of the corporation’s
        Dear      Mr.   Harrison:                                  assets.

                     In your request for an opinion                you have asked whether a fire
        and casualty    insurance company may pay                   dividends  out of a surplus
        arising  from the unrealized    appreciation               in the market value of certain
        assets  of the company over their cost or                  book value.   You have cited an
        instance where dividends     were so paid.

                        Article     2 1.3 1 of the Texas      Insurance      Code   provides   in part
        as follows:

                              “It shall not be lawful   for any insurance       company
                        organized    under the laws of this State to make any div-
                        idend, except from surplus profits         arising  from its
                        business.    In estimating    such profits,    there shall be
                        reserved    therefrom    the lawful reserve      on all unexpired
                        risks and also the amount of all unpaid losses,           whether
                        adjusted or unadjusted,      and all other debts due and
                        pay:ble,   or to become     due and payable by the company
                        . . .

                       Article    8.14, applicable generally   to casualty   insurance                 com-
        panies,     before    its recent amendment    provided   as follows:

                              “The directors  of any such company   shall not
                        make any dividends    except from the surplus profits
                        arising   from their business.  , .”

                       By the provisions of S.B. 180, Acts                1959, 56th Leg.      R.S..
        Article     8.14 was amended to read as follows:

                              “The directors  of any such c’ompany shall not make
                        any dividends   except in compliance  with Article 2 1.3 1
                        of this Code.”

                        Thus, irrespective       of which      of the several laws apply, fire
        and casualty      companies     are    prohibited      from paying dividends  except
                                                                                    . --   ..

Hon.   William   A. Harrison,    page   2 (WW-778)

from “surplus      profits   arising    from its business.”     The term “surplus
profits”   implies    among other things that payment of dividends          may
only be made to the extent of a c,ompany’s            surplus and, additionally,
that funds from which the payment was made arose from the profits
of the company’s       business.     Since you have stated that the payments
of dividends    were made from surplus,           the only question for determin-
ation is whether      the payments       were also from profits    of the business
of such insurance       company.      In our opinion under the facts given the
payments     of dividends    were not from “profits       arising from its busi-
ness* and were th,erefore         unlawful.

           It must be conceded    initially that the Legislature   in using
the term “profit”  intended some meaning distinct from the term
“surplus” elsewise    they would not have elected    to use both terms.
Hence, we conclude that a profit is not the same thing as surplus.

              The term “profit”   has been defined        by Webster’s      New   Inter-
national   Dictionary in the following   manner:

                   “The excess    of returns    over expenditure      in
             a given transaction     or series    of transactions;     as:
             a. the excess   of the price received       over the price
             paid for goods sold (115 Wis. 261) b. the excess             of
             the price received     over the cost of purchasing         and
             handling,   or of producing    and marketing,      particular
             goods (3 Fed. 566, 569) c. the advantage          derived     (as
             in infringement    of patents)   from employing       one
             process    or machine    in manufacturing      instead of
             another.

                   “Excess    of income over expenditure,       as in a
             business    or any of its departments,      during a given
             period of time; specif.:      a. the income of invested
             property,    not including  an appreciation     in market
             value (15 Wall. 63, 65; 198 Pa. 216) b. usually in
             pt. with reference     to Lands the sum of revenue
             yielded   by it, or the proceeds    derived   from its
             use or enjoyment,      as in case of leased property
             or land that is mined.      Cf. profit prendre.     . .”

             These definitions    all envision    a realization     of the benefits
accruing   from the given transaction.        Stated differently,      these defini-
tions do not encompass      a benefit or advantage        that is yet to be realized.
The everyday     business   use of the term     “profit”   is compatible     with these
dictionary   statements.     Unrealiied    appreciation     of assets does not enter
into a profit and loss statement,       nor is it considered      for income tax
purposes.

               The general    rule in other jurisdictions     is that the unrealized
appreciation     in value of assets cannot be utilized       in determining   the funds
available    for distribution    as dividends.   11 Fletcher     Encyc. Corp. (1958
-.

     Hon.   William    A. Harrison,      page 3     (WW-778)

     Revised)    1050 Sec. 5335.1; Berks Broadcasting     Co. v. Craumer,
     52 Atl.Zd 571, (Penn.Sup.     Ct.                    ason,              8,
     (C.C.A.   - 4th - 1957 cert. den., 35; D.S. 949) and cases collected
     55 A.L.R. 8, 76 A.L.R. 885 and 109 A.L.R. 1381. Support in Texas
     to this general   rule is in some measure     iven by the case of Dealers
     Granite   Corp. v. Faubion,    18 S.W.Zd 737 7Aus.Civ.App.    1929) where,
     in determining    the meaning of the term net profits    as applied to a cor-
     poration,   the Court stated:

                         “And    the general  rule seems to be that in-
                   crease   in   the value of lands held by a corporation
                   cannot be     considered  as profits,    at least until such
                   lands are     sold and the profits    actually   realized.”

                  The adoption of a rule permitting         insurance    companies     to
     declare  dividends   on speculative     profits   would leave the financial
     soundness    of the capital and required       surplus accounts      of insurance
     companies    to the vagaries    and uncertainties      of fluctuating    market
     values.   We believe    that the courts    of this state when the occasion
     arises  will hold that “unrealized’*     appreciation     does not constitute
     profit.  As stated in Loftis    v. Mason, supra, on page 433:
                         ”
                           . . .in the application    of sound accounting    prin-
                   ciples,    dividends   may ordinarily     be declared   only out
                   of actual earnings      or profits   and not upon a theoret-
                   ical estimate      of an unrealized    appreciation   in the
                   value   of the assets.”

                  A different    view is held in New York.            (See Randall v. Bailey,
     43 N.E.2d 43, (Ct. of Ap. 1942). It has been suggested                   that the New
     York position    is determinative        of the proper     interpretation      of the Texas
     provision   because     of certain   similarities      in the respective       statutes.
     It is true that the New York general            corporation     laws over a lon# period
     of years,   predating    any of the Texas enactments,            used the term         surplus
     profits * in limiting    the source available        for dividends      and that several
     of the New York cases suggest            the possibility     that this source may in-
     clude unrealized      appreciation     in the value of corporate          assets.    But the
     only clear holding in New York that unrealized                appreciation      is an avail-
     able source of dividends        is the case of Randalrv.          Bailey,    supra, which
     was decided after the abandonment             by the New York Legislature             of the
     surplus profits     test and under statutory        language     leaving no room for
     any other conclusion.        Under these circumstances             we do not believe
     that the New York decisions         are particularly        persuasive.
Hon. William      A. Harrison,   page 4   (WW-778)

                                  SUMMARY

             Unrealized    appreciation   in the assets of a fire
             and casualty    insurance   company do not consti-
             tute “net profits   arising  from its business”
             available  for distribution    as dividends.

                                               Yours    very   truly,

                                               WILL    WILSON
                                               Attorney   General       of Texas

                                               By &db-&’
                                                     Fred B. Werkenthin
                                                     Assistant

FBW:lmc

APPROVED:

OPINION     COMMITTEE:

W. V. Geppert,      Chairman

Arthur  Sandlin
Phocion   Park
Tom McFarling
L. P. Lollar

REVIEWEDFORTHEATTORNEYGENERAL
BY:  Leonard Passmore