Traders & Mechanics' Insurance v. Brown

Gardner, J. In January, 1882, the plaintiff company voted to discontinue its stock department, and to redeem and cancel its guaranty capital stock; and has now, under the Pub. Sts. c. 119, § 94, applied to this court to determine upon what “ just and equitable terms and conditions,” and in what manner, this may be accomplished. At the time of the passage of the St. of 1854, e. 76, authorizing the company to make insurance “otherwise than on the mutual principle,” it was the intention of the Legislature to empower it to transact business upon the stock principle, in — 411 — addition to insuring upon the mutual plan, for which the company was chartered in 1848. The Rev. Sts. c. 37, made provision for the way and manner in which insurance companies should carry on business under the stock plan, and also under the mutual plan. The first twenty-three sections relate to stock companies, under the name of “ insurance companies,” and §§ 24-39 relate to “ mutual insurance companies.” As the corporation, prior to 1854, had been acting as a mutual company, the reference to the Revised Statutes in the St. of 1854 was to “all the powers and privileges,” and to “ all the duties, liabilities, and restrictions ” contained therein, relating to stock companies. By the St. of 1848, e. 124, the company was empowered to make insurance upon the mutual plan, and, as such mutual insurance company, it enjoyed all the powers and privileges, and was subject to all the duties and liabilities, which the statutes imposed upon mutual insurance companies. The St. of 1854 gave it the additional right to insure “ otherwise than on the mutual principle,” and imposed upon it the laws governing companies conducting such business. The Rev. Sts. a. 37, refer only to stock companies, to mutual companies, and to foreign insurance companies. In those sections relating to stock companies, there was no limit to the number of stockholders; the directors, at such times as their charter or by-laws prescribed, were to make dividends of so much of the profits and of the interest arising from the capital as to them appeared advisable. The statement of the profits was to be laid before the stockholders biennially; and in certain contingencies the directors were made liable. It would seem that, under the Revised Statutes, if the company, in transacting business “otherwise than on the mutual principle,” was governed by these laws, it was necessary to keep the business of each department separate and distinct. Since its guaranty capital was paid in, the company has kept separate accounts of the business carried on in the stock and mutual departments, and of the receipts and expenditures in each. None of the assets or earnings of one department have been applied to payment of losses or dividends of the other. The dividends to shareholders have been paid from the earnings of the stock department. None of the earnings of this department have been paid as dividends to the holders of policies issued by — 412 — the mutual department. The salaries, rents, and other general expenses of the company were divided between and borne by the two departments, in proportion to the amount of cash premiums received by them respectively. The tax assessed on account of the guaranty capital was paid by the company, and charged to the stock department. Practically the company considered that, under a common board of directors, there were two separate and distinct organizations, one governed by the laws relating to stock companies, and the other by those relating to mutual companies. Two branches of business were conducted, each independent of the other, with distinct interests, but under a common head. The by-laws which the company passed in anticipation of raising the guaranty capital were, in some respects, without authority of law. Article 4, which provided that, before the subscription books were opened, the directors should determine the rate per cent of the semiannual dividends, and that the rate thus fixed should not be reduced without the written consent of each and every shareholder, was in direct conflict with the Rev. Sts. c. 37, § 15. The dividends were to be made on profits, and depended on profits, and were to be made as to the directors appeared advisable. The company had no authority to establish them in the arbitrary manner attempted by this by-law. Article 10 directed the manner in which the funds of the company arising from premiums or assessments, or from any other source, should be appropriated. By this article the funds were to be appropriated to the payment, first, of expenses; secondly, of losses by fire; thirdly, dividends on the guaranty capital, and to make good any reduction in the amount of said capital; and fourthly, return premiums and dividends on policies upon the mutual principle, as they shall expire. The Revised Statutes, c. 37, § 31, made provision for the appropriation of the funds of mutual companies in a different manner. This article of the by-laws contemplated no distinction between the two departments, and no division of their interests or funds. Soon after the company was organized under its new plan, the St. of 1856, c. 252, was passed. It provided, in § 36, that “all business and all investments' on account of the stock department of such [namely, mutual] companies shall be separately kept,” — 413 — and “ the business done on the mutual principle shall also be kept separate.” The plaintiff has complied with the statute, and has not followed the requirement of article 10 of its bylaws. The dividends have been paid from the earnings of the stock department, and no occasion has arisen to make good any reduction in the amount of the guaranty capital. The plaintiff contends that the guaranty capital was practically a loan by the shareholders to the company, to enable it to carry on the stock business. Mutual fire insurance companies were required to have a guaranty capital before they could insure. The charter of the Berkshire Life Insurance Company contained a similar provision. In Commonwealth v. Berkshire Ins. Co. 98 Mass. 25, it was held that this guaranty capital was a liability; that it was in no proper sense a capital of the company; that the shares did not, as in stock corporations, represent aliquot fractional interests in the property and franchise; and that it was a liability rather than a part of the assets of the company. It was decided in this case that the corporation, a mutual insurance company, was not liable to a tax on its unredeemed guaranty stock, upon the ground that the fund stood as a security for the payment of losses upon policies; that it was tantamount to a debt due from the corporation, for the ultimate payment of which provision was constantly made; that the stockholders had no interest in the business of the company beyond the payment of their stipulated dividends, and the maintenance of the sinking fund out of which their stock was eventually to be redeemed. The court said: “ By the St. of 1864, c. 208, §§ 1, 5, a return is required from, and a tax imposed upon, ‘ every corporation having a capital stock divided into shares; ’ which is computed on ‘ the excess of the market value of all the stock of each corporation ’ ‘ over the value of its real estate and machinery.’ The return is also required to be made ‘by the stock department of stock and mutual insurance companies.’ These are companies which under one charter unite two separate branches of business, the stock department doing a stock business, and the mutual department a mutual business, each independent of the other, with distinct interests, and constituting two companies under one corporate organization.” And the provision in the act to include the stock department" of stock — 414 — and mutual companies, was considered as affording a strong presumption that the Legislature did not contemplate the taxation of mutual companies upon their- guaranty stock. In the case at bar, the company has regularly paid the tax upon its guaranty capital and charged it to the stock department. It is to be assumed that this would not have been paid by the company, unless it was done in compliance with the provisions of law, especially after the decision, in 1867, of Commonwealth v. Berkshire Ins. Co., ubi supra. We think that there is a marked distinction between the guaranty capital referred to in the case cited, and the guaranty capital of a company doing business upon the stock plan, and that the capital of the latter is not a debt, and cannot be construed as a loan to the company to enable it to carry on the stock business. The plaintiff contends that, in acquiring the fund, the company made certain promises set forth in the by-laws and votes of the directors; that the risks and liabilities were all upon the side of the corporation; that the subscribers and shareholders differed in no respect from every lender of money; that there was a written contract between the subscribers to the fund and the capital, and by that contract the rights of the parties thereto must be determined; that by this contract, as shown in the bylaws and votes, the shareholders were to take the dividends upon their stock as guaranteed to them, without any liability for losses; and that, if the capital should be reduced, it was to be repaired by the mutual department. We have been referred to several statutes passed subsequently to the creation of the guaranty fund, for the purpose of showing that it has been the policy of legislation to keep the stock and mutual departments of companies organized to do business upon both plans distinct from each other, and not to subject mutual policy holders to any liability for losses in the stock department, or for any impairment of the guaranty capital. The St. of 1878, e. 141, § 2, provides that “the mutual policy holders shall not be entitled to participate in the profits of the stock department, nor shall they be liable to assessment to repair any deficiency in the guaranty capital arising from losses in said department; but said deficiency shall be repaired from the^ reserve fund of said department, and, if said fund is not — 415 — sufficient therefor, by the shareholders in the manner provided by law in the case of joint stock fire insurance companies.” Although this statute was enacted several years after the plaintiff commenced doing business upon the stock principle, yet we think it states in general terms the law which governed such companies before its passage. The stock department was organized and governed by the laws governing stock companies. The mutual department was in like manner subject to the laws governing mutual companies. There was no legal authority for securing the contributors to the guaranty capital by the mutual company. The statutes fixed the liabilities imposed upon the holders of mutual policies, and the company could not enlarge these liabilities. The funds of such companies were to be appropriated first to.pay the expenses of the corporation, and then to pay the damages which any member might be entitled to recover on his policy; and the directors were authorized to assess such sum as might be necessary to pay the same upon the members, in proportion to the amount of their premiums and deposits severally for seven years. Rev. Sts. e. 37, § 31. Section 38 provided that every member, at the expiration of his policy, should have a right to a share of the funds then remaining, after deducting payments of expenses and losses, in proportion to the sums actually paid on account of such policy. If the business of the stock department was not sufficient to authorize dividends to be declared to the stockholders, there was no provision of law by which the members of the mutual department could be assessed for the purpose of making it up to them. The company had no right given it by statute to pledge its assets to the payment of dividends, or of deficiencies in the capital of the stock department. The statutes which regulated assessments prescribed also the manner of appropriating the funds so raised. We think that this was not a contract between the subscribers to the guaranty fund and the company. The statute authorized the corporation to form the stock department. This department was to transact a stock business independently of the mutual department. Its interest was distinct and separate. The laws governing it were those which governed stock companies. The two had one controlling head, but in all other respects they — 416 — were each as distinct as though they had separate charters We cannot agree with the plaintiff, that the subscribers to the guaranty fund were subject to no risk and no liability. The risk and liability to which they were subject were the same as if they had not been connected with the mutual department, but had been conducting business upon the stock principle only. The surplus which the plaintiff now contends should be decreed to the company“was derived from the stock department, from the profits of its business conducted under the guaranty capital, and from the gains of its profitable investments. Under the Rev. Sts. e. 37, § 15, the directors of the company, if it had appeared to them advisable, could have distributed the entire surplus among the stockholders as dividends. There is no provision of law by which it can be decreed to the mutual department of the company. Under § 38 of the same chapter, to which we have already referred, the mutual department was required by law to account for the accumulations of the stock department to each holder of a mutual policy'as it expired, if the proposition contended for by the plaintiff is correct. And if the court should now decree that the mutual department of this" company is entitled to any share in these accumulations, all the mutual policy holders during the thirty years that the guaranty capital has been in existence would be entitled to their, proportionate share in the same. The shareholders have deposited money and created the guaranty fund upon their own risk. If the business had been unsuccessful, they would have been the losers. The mutual department, notwithstanding its by-laws and votes, could not have been compelled to contribute to make good their losses. The surplus stands credited to the stock department, and it seems to us to be just and equitable that, in winding up the affairs of this department, this surplus, together with the guaranty capital, should be distributed among the shareholders of the fund, according to their several shares. Decree accordingly.