Court Opinion

ID: 5655927
Source: CourtListenerOpinion
Date Created: 2022-01-11 23:53:01.042768+00
Date Added: 2024-06-11T08:38:48.462671
License: Public Domain

WARD, J.—I dissent.
I believe that the admitted facts set forth in the record, as a matter of law, show that in seizing the California business and assets of the Rhode Island Insurance Company the commissioner abused his discretion and acted in an arbitrary *254manner, resulting in practical destruction of the California company and great financial loss to the policyholders.
This petition for a writ of mandate was previously ruled upon by this court. (209 P.2d 72.) A rehearing was granted, the petition reargued, and after the filing of additional briefs the matter was resubmitted. On the prior hearing the demurrer was sustained, and based upon that order the alternative writ was discharged and the petition for a peremptory writ denied. On the present hearing all of the original pleadings and certain pleadings filed subsequent to the rehearing have been considered. Included therein is a document which has been referred to as an “audit.” This document was prepared under the direction of the California commissioner and filed as an exhibit in the superior court on the application of the commissioner to “take possession” of the California business of the Rhode Island company. This exhibit, which contains the material forming the real basis of the commissioner’s action, was considered on the prior and present hearing. However, in addition, the factual matters alleged in certain pleadings, the admissions of counsel and the record generally have been considered.
The real problem presented is whether the Insurance Commissioner ■ made the application upon technical and trivial grounds to obtain an order as a conservator, which gave him the authority to “seize” the company and to displace the present management, office force and employees. In other words, the question presented is whether the commissioner arbitrarily abused the power of decision vested in him to act under statutory provisions. That the drastic and harsh action of the commissioner will result in the destruction of the California business of the company is admitted. To date the company has complied with every request of the commissioner, but not his demand to displace one of its officials. As I understand the commissioner’s theory, it is that a summary seizure may be made though other remedies are available as preventives against any hazardous condition that may arise. In the meantime, the commissioner’s action directly harms California policyholders of the company and, indirectly, its policyholders throughout the. nation. The California policyholders whose policies were thus cancelled are forced to pay two premiums for the same insurance. The commissioner’s action indicates a design on his part to avoid a hearing before the destruction of the company has been accomplished. The commissioner seeks to justify his action on *255the ground that courts in other cases—upon different facts— have upheld seizure without a preliminary hearing.
The issuance of the order of seizure under Insurance Code, section 1011, the section under which the commissioner purports to act, is mandatory upon the court, provided certain conditions exist as must appear “upon the filing by the commissioner of a verified application.” (Italics added.) The “final return” of the commissioner filed in this proceeding on June 8, 1949, alleges that the order of seizure made in the superior court was secured pursuant to the provisions of Insurance Code, section 1011, and that it “was based upon the insolvency of said petitioner, upon its hazardous condition, and upon the merger of its business and that of Pioneer Equitable Insurance Company, of Indiana.” It is then stated that the alleged insolvency and hazardous condition are based upon a “report” of examination which is set forth as “Exhibit ‘A’ to said Exhibit ‘A’ to said petition.” It must be admitted that the document is not an “audit” and does not purport to be an audit, but is a “report,” and it will be so referred to in this dissent. The report relates certain facts, certain distorted facts, certain information obtained from “hearsay” sources, and the balance consists of statements on “hearsay,” statements built upon “hearsay,” or conclusions based on surmise.
If an emergency should appear to exist based upon the grounds as enumerated in section 1011 of the Insurance Code so as to require that the commissioner “act immediately,” that is, in an emergency, the commissioner may “take possession” of the property of a company without notice and before securing an order of court. (§ 1013.) Without discussing the constitutionality of section 1013, it is apparent that it provides that the commissioner have power to act in an emergency “immediately,” without filing a “verified” application setting forth the grounds of seizure. Section 1011 of the Insurance Code provides that upon the filing of a “verified” application showing the existence of certain enumerated conditions the superior court “shall” issue an order vesting title in the commissioner to all assets of the subject company “wheresoever situated.” Some of the enumerated grounds for seizure are; (1) refusal to submit its books; (2) that the company “is found, after an examination” to be in a hazardous condition; (3) a merger with another company without the consent of the commissioner, and (4) insolvency. (Italics added.) No mention is made in' section 1011 with *256respect , to immediate seizure. Section 1013 is an emergency measure; the other, 1011, provides an orderly legal procedure that should insure the protection of the company and the policyholders. Section 1011 is mandatory only after the alleged but verified reasons for seizure are apparent.
A “verified” application is one that is supported by a statement certifying under oath that the allegations in the application are true. (People v. Thompson, 5 Cal.App.2d 655 [43 P.2d 600]; McCaffey C. Co., Inc. v. Bank of America, 109 Cal.App. 415 [294 P. 45].) Ordinarily, a state officer in his official capacity is not required to verify the allegations set forth in an application presented to a court in behalf of the state unless verification is demanded by statute. Verification is demanded in section 1011. “A pleading may set forth an instrument or other exhibit in haec verba, i.e., verbatim, or attach a copy and incorporate the same by clear and distinct reference thereto in the pleading; it then becomes a part of the complaint. Where, however, the instrument is the foundation of the cause of action or defense, such incorporation does not eliminate the necessity of specific allegations of the material facts, nor do the recitals in the instrument take the place of such allegations. [Citing cases.]” (Summary of Cal. Law, Witkin, Code Proe., § VI B. 3, p. 902., Matters of substance must be set forth in direct terms, not in equivocal recitals. (Silvers v. Grossman, 183 Cal. 696 [192 P. 534].) Here, the attachment of the report as a base for the allegations is not a mere assertion of its existence but the allegations of the application are founded upon the statements set forth in the “report.” (Washer v. Bank of America, 21 Cal.2d 822 [136 P.2d 297, 155 A.L.R. 1338].) Such a report must state the truth without equivocation. The only claim of verification which the commissioner could make would be with respect to the affidavit attached to the application, which is made in the usual form verifying as to actual knowledge except as to matters stated upon information and belief. No reference is made to the truth of the “report.” It is sometimes permissible to state the existence of certain facts on hearsay evidence if the grounds of the hearsay evidence are given so that the truth of the statement may be determined. (Am.Jur. vol. 1, p. 951.) The attachment to a. pleading in a court proceeding of a copy of a written document as an exhibit is a representation that the document is a genuine and correct copy of the original, but it does not necessarily purport to set forth a narration of the truth. *257If the pleading is presented under oath an inference may he drawn that portions of the exhibit recite the truth except as to the matters stated therein on information and belief and that the party believes such matters to be true. However, if the document shows the falsity of its own recitals then the exhibit should not be used as the foundation for the issuance of an order of court to seize a business. The following appears in the report and is a sample of one of the methods used to obtain the order of seizure: “Tour examiner questions the admissibility of a balance in the amount of $923,761.45 due from U. S. Interstate Brokerage Corporation as of September 30, 1948 until the ownership and the location of this agency can be better established. . . . We have been advised that the Pioneer Equitable Insurance Company, under the same management contract as Rhode Island Insurance Company, that is, the International Management Corporation, until June 30, 1948, when the Pioneer severed its connection as a member of the Rhode Island Group, intends to make claim for the excessive commissions charged on brokerage inasmuch as this contract had never been submitted to its Board of Directors for approval.” (Italics added.) Such statements are not made positively, nor is information given indicating a foundation of their truth. (See California Trust Co. v. Gustason, 15 Cal.2d 268 [101 P.2d 74].) The quoted item of $923,761.45 will be referred to later.
If it be assumed that in preparing the report official duty has been regularly performed (Code Civ. Proc., § 1963, subd. 15) such presumption is controverted by the presentation of this unverified report and its contents. An official written document should be authenticated by the certification of the legal keeper thereof. (Code Civ. Proc., § 1918.) The “report” in this case is not authenticated. It comprises 201 pages. Only 104 pages appear over the signature of an insurance examiner. The balance of the report contains exhibits and some further information in narrative form. Its contents demonstrate that as a matter of law it could not be used as the basis of a seizure even if it were verified. This conclusion appears certain when the grounds of the seizure are considered, as hereinafter set forth.
The commissioner justified his action of “seizure” upon three grounds: (1) “insolvency”; (2) “hazardous condition,” and (3) “merger” with another insurance company. On the prior hearing before this court the commissioner stressed the *258allegations with respect to a “merger.” In the application filed in the superior court it is alleged that Rhode Island “without first obtaining the consent in writing of the said Commissioner, has entered into a transaction the effect of which is to merge and consolidate substantially its entire property and business in or with the property and business of another insurance company, to wit: Pioneer Equitable Insurance Company of Indiana.” (Italics added.) It appeared that the alleged “insolvency” and “hazardous condition” primarily were based upon the alleged “merger.” The report indicates that an agreement was executed to the effect that the petitioner herein, Rhode Island, “reinsures and takes over the entire insurance business of Pioneer Equitable” as shown by “Rhode Island’s 1948 annual statement, showing its financial condition” and that the report “has been adjusted to reflect the effect of this reinsurance agreement.” The “merger” is not a present consolidation of the two companies, but is merely a reinsurance contract, approved by the Insurance Commissioner of Indiana, upon the depbsit of Rhode Island securities of an agreed valuation as a pledge of Rhode Island’s faithful and prompt performance of the obligations of payment of possible liabilities. Pioneer Equitable in its independent and nowise consolidated aspect also agreed to make a deposit of certain securities with the Indiana commissioner. Under the terms of the reinsurance contract, not a present but a future discontinuance of business of Pioneer Equitable may occur. “In the event that such steps [the performance of the reinsurance contract] require the disssolution and/or liquidation of Pioneer, Pioneer agrees promptly to take steps to dissolve and/or liquidate.” However, the majority opinion holds that “It is unnecessary for us to determine whether the transaction with Pioneer was a merger under this section, or, if so, whether the law can constitutionally require a foreign corporation to obtain consent of the California commissioner. The commissioner is making no claim of the illegality of that transaction. "While he refers to it as a ‘merger’ and we have used the word herein, it is without any legal signification.” Irrespective of the contentions of the commissioner, the ground for “seizure” based upon “merger” need not be given lengthy consideration though the financial transaction involved may be pertinent in discussing the questions of “insolvency” or “hazardous condition.” There are many judicial declarations from this and other jurisdictions, made no doubt to fit the facts of each particular *259case, on the question of the power conferred by statute on public commissions and boards. Each ease, however, must stand on the particular facts involved. The facts of the case at hand must be considered separately from the facts of all other cases. Because one seizure of the property and management of a company has been approved by an appellate court does not mean that the language used by the appellate tribunal in that instance is applicable to all similar subsequent “seizures.” That the foregoing statement is founded on a reasonable and sound theory may be illustrated with respect to the subject of insolvency. If a bank, building and loan association or insurance company is found destitute of funds caused by the fraudulent methods of the management resulting in legal insolvency, harsh language and strict rules, based on statutory construction, often appear as the reaction to the offended sense of justice of the author of an opinion on the matter. Such language, however, should not be used as an influence or guide in determining problems based upon different facts. Such a practice would lead to a remedy not appropriate to the case. A judicial precedent based upon analogous facts may be an authoritative determination directing a logical conclusion, but when such precedent is applied to facts materially differing it may result in a decision that is not conformable to justice.
The constitutionality of the various sections of the Insurance Code here involved need not be determined. For the purpose of considering this proceeding it may be assumed that they are constitutional. The commissioner relies strongly on North American Building & Loan Assn. v. Richardson, 6 Cal.2d 90 [56 P.2d 1221]. In that case on an appeal taken by the building and loan association against the commissioner, the primary question to be determined was the sufficiency of the evidence to uphold the judgment of the trial court. There an audit prepared by a “firm of certified public accountants” was introduced to prove “a capital impairment” of the association assets. In the present proceeding the question presented is not the sufficiency of the evidence but the sufficiency of the pleadings and whether the unsigned and unverified “report” sets forth such inconsistent, contradictory, exaggerated and minimized statements that as a matter of law it should be declared insufficient to base an order of seizure. In this case the alleged “insolvency” and “hazardous condition” are grounded on the “report.” The “report” contains alleged data which primarily brought *260about the seizure. The application made to the superior court for the order of seizure does not purport to claim that the narrations or statistical matter recited in the “report” are in fact true. The “report” itself demonstrates that at least some of the items are untrue, and that others are exaggerated or minimized. In some instances the author of the report resorts to- rumor instead of facts. The use of such terms as “We are informed” or “We have been advised,” without stating the source of the information or advice, are typical examples of the uncertainty of the information contained in the report. The “report” admits the author’s inability to understand certain statistical adjustments because, as the report states in substance, no effect was given in the adjusted financial statements due to legal aspects and insufficiency of data.
A suggestion is made that the commissioner was unable to obtain certain statistical data from the Rhode Island company. If that accusation were true, that is, in the sense that the company offered no excuse for refusing to give certain financial data to the commissioner, then all the commissioner needed to do in order to obtain full control of and title to the assets of the company was to file a “verified” application showing that the company had refused to submit its books “to the reasonable inspection of the commissioner. ...” (Ins. Code, § 1011.) But no such application was made. During part of this period the books were under inspection by representatives of other states. There is no claim that any commissioner seized the property in any other state.
On the question of insolvency, the majority opinion states: “The commissioner concedes that there is an excess of assets over true liabilities, so that no actual insolvency exists.” This statement appears to be correct. On the date of the seizure the commissioner obtained only $145,000 in assets. However, available assets might have reached the required amount the day before the seizure. There is no claim made that the home office, upon receipt of a request by wire, for instance, from its San Francisco office, could not have furnished the required amount immediately.
The commissioner contends that there is an overcredit of $616,589.79 on reinsurance commission payable to Rhode Island from “Lloyds.” In the petition for rehearing the Rhode Island company states: “The Lloyd’s contract provides for a decreasing scale of commissions, based upon Petitioner’s¡ loss ratio with a minimum of 25% as shown in the *261audit. The Commissioner arbitrarily assumed that only the minimum commission, the 25%, will be earned. In order for Petitioner to receive no more than 25%, it would have to incur an unprecedented ratio of 65%. In the ten-year period from 1938 to 1947 the company’s loss ratio has averaged 51.4%. The contract provides that if the loss ratio is 50% the commission is 46%. If the loss ratio is 51.4% the commission is 1.4% less, or 44.6%. It is obvious therefore that the write-off of $616,589.79 on the arbitrary assumption that only a 25% commission will be earned is capricious and arbitrary. On the basis of Petitioner’s average loss ratio of 51.4% the Commissioner’s figure is arbitrarily excessive by $563,238.79. Therefore over $563,238.79 of the $616,589.79 is on the face of the audit, an unjustified, arbitrary write-off.” The majority opinion states: “The right of Lloyds to cancel their reinsurance is relatively of no importance, as it probably never would occur. Whether the matters set forth in the report which the auditor considered a change in underwriting giving Lloyds the right to cancel, is such change or not, the report shows that the very existence of the company depends upon the continuance of the Lloyds contract.” The majority opinion then adds: “Perhaps, upon a hearing of all the facts in this case, it might be determined that it is not hazardous, but we cannot say as matter of law that placing so many eggs in one basket is not a hazardous thing for a company to do.” It could just as well be said that since 1688, the year Lloyds was founded, the reputation of “Lloyds” for stability has not been questioned. In such a situation it is well that Rhode Island protects its stockholders and policyholders by hatching its eggs in a “Lloyd” basket.
Other reasons for the seizure are given, based upon minor matters, which will be referred to briefly. The “hazardous condition” problem will be referred to later. One of the minor reasons given for the seizure is that three other states— Minnesota, Connecticut and New York—have either directed or suggested that the Rhode Island Insurance Company should cease doing business in the named states. It appears that the commissioners of several other states were interested in auditing the company’s books, but the record does not show that any action was taken against the Rhode Island company except in the three states mentioned. In the petition for writ of mandate a verified statement appears over the signature of an official national examiner, as follows: “For more than the *262past two weeks I have been engaged, together with other examiners, in making a convention examination of the business and affairs of the Rhode Island Insurance Company and for that purpose I am at present in the City of Philadelphia, Pennsylvania, where the records of the company are located. . . . That on May 24, 1949, I sent a straight wire telegram to Honorable J. Edwin Larson, Insurance Commissioner of the State of Florida, Tallahassee, Florida, who is also President of the National Association of Insurance Commissioners of the United States, reading as follows: ‘Retel concerning financial condition of Rhode Island Insurance Company. Examiners representing zones one, two, three, four and five are now conducting an examination of the subject company. Zone six had accepted assignment but to date not represented. No evidence of an insolvent condition apparent and current publicity and unrest resulting from California action appears to be unwarranted on the basis of information at hand. . . ” Another “verified” statement
appears therein, as follows: “ I am an official examiner in the office of the Insurance Commissioner of the State of Rhode Island. ... I am in the process of making an examination into the affairs and condition of the Rhode Island Insurance Company and we do not concur with the allegations of the California Insurance Department that the Company is on the verge of insolvency. All the facts set forth in this affidavit are true and correct.” In view of the fact that the majority opinion sets forth, as one of the minor reasons for the seizure in California, the action taken in Minnesota, Connecticut and New York, it seems proper to call attention to the fact that the Rhode Island company was licensed in 30-odd states and that no other state has taken the action adopted in the three states mentioned, and that those three states only resorted to the giving of a notice to the company to cease certain practices. No state except California had adopted the plan of destruction of the company and consequent injury to its thousands of policyholders in this state. The action of Minnesota is proof in itself that the harsh action taken in California is not justified. In Minnesota the Rhode Island company was notified that the commissioner disagreed with certain practices then being followed and that Rhode Island should discontinue the practices or withdraw from business in that state. The company concluded it was justified in continuing its current policy and preferred to voluntarily withdraw. In California the *263commissioner made a demand on the company to withdraw from business and then withdrew the demand.
The majority opinion fixes a legal rule or test to be applied by the trial court: “Under section 1011 [Ins. Code] nothing is required beyond the good faith determination by the commissioner of the existence of one of the conditions enumerated in the section.” Section 1011 does not contain one word about “good faith.” There is a decision which used language similar to that of the test set forth in the majority opinion. In Caminetti v. Imperial Mutual Life Ins. Co., 59 Cal.App.2d 476, the court, at page 487 [139 P.2d 681], stated: “In obtaining his original ex parte order, the commissioner is not required to show to the court that the company was in fact in a hazardous condition, but only that he, as a state officer, invested by legislative authority with the power, has so ‘determined’ and ‘found.’ ” In that case the court affirmed an order restoring the business to the insurance company.
The rule of “good faith” may be applied to the record and to admissions made by counsel. It is the desire of the commissioner from the commencement of this proceeding to have the company discharge a certain Mr. Hopps. That the commissioner’s attitude toward Hopps has not changed is apparent from a remark of the attorney general representing the commissioner at the oral argument, referring to Hopps and bis removal: “Well, I think the commissioner felt that that was the seat of the trouble.” The following day the position of the commissioner was changed to the extent that a rehabilitation could occur if the company complied with all of the commissioner’s directions. In the commissioner’s supplemental memorandum of points and authorities, on page 41, the following appears: “He [the commissioner] further insists that any rehabilitation of the company must include riddance of Mr. Hopps.” I do not purport to commend or to condemn the activities of Hopps. The point is that the commissioner may direct the change of policies and practices in the operation of an insurance company, so far as California has jurisdiction; but the commissioner may not direct the change of the officers of a company. If the commissioner has the authority to “fire” he likewise has the authority to “hire.” This could lead to political dictatorship in insurance matters. The authorities on this subject, that is, where personnel is concerned, are directed to change of “practices” and not the removal of officers. The strange feature of this phase of the *264case is that the commissioner knows that he does not possess the authority to demand the removal, but still persists in the “riddance” of Hopps. To my mind this shows lack of good faith as a matter of law, and the trial court is not called upon to pass upon the good faith issue as a matter of fact.
The majority opinion admits that the effect of seizure is “bad reputation for the company, cancellation of policies, the loss of its brokers and agents. ’ ’ This effect is destruction and, upon the record in this case, arbitrary action. It demonstrates the lack of good faith on the part of the commissioner.
The commissioner's lack of good faith also is patent from the record on the allegations in reference to an alleged receivable, heretofore referred to, which was due Rhode Island Insurance Company from the U. S. Interstate Brokerage Corporation in the sum of $923,761.45. In an amendment to the petition by the Rhode Island company to this court it is stated and verified that “the facts are that as of 12/31/48, said receivable of Petitioner had been reduced to $139,873.89 and Commissioner knew or should have known this to be the fact; . . . that on May 17,1949, the date of seizure hy the Commissioner, said receivable had been reduced to $24,039.19, and Commissioner knew or should have known as of the said date of said seizure that of this receivable of $923,761.45, the sum of $899,-722.26 had already been paid to and received by Petitioner. ’ ’ (Italics added.) The figure set forth in the “report”— $923,761.45, instead of $24,039.19—must have staggered the superior court judge, as it did this writer. The commissioner does not deny the truth of the Rhode Island company’s verified amendment, but seeks to avoid the matter by claiming inability to obtain the records from the company. To make the erroneous allegation—presented even as a “question”—without foundation or proof is an instance not only of capricious, arbitrary conduct but of-lack of good faith.
The record in this ease demonstrates that the seizure referred to in the majority opinion is the result of the personal and official disapproval by the California commissioner of one of the officers of the Rhode Island Insurance Company rather than fear that the company was or might become insolvent.
I am convinced that on the merits of the demurrer, or upon consideration of all of the pleadings, or upon the good faith test as set forth in the majority opinion, an order should issue setting aside the order of seizure, without prejudice to the commissioner, if there is good cause therefor, and instituting *265a form of procedure that would not accomplish the certain destruction of the California business of the company and irreparable injury to its agents as well as to more than 140,000 policyholders in California.
Petitioner’s application for a hearing by the Supreme Court was denied February 16,1950. Schauer, J., voted for a hearing.