State v. Bankers Union of the World

Sedgwick, J. The defendant is a fraternal beneficial association organized under chapter 47, laws of 1897, “An act defining fraternal beneficiary societies, orders or associations, and regulating the same.” Under section 16 of the act, it is the duty of the auditor to notify the attorney general, in writing, whenever any such society has refused or neglected to make the report provided for; or, if any such society shall exceed its powers, or conduct its business fraudulently, or fail to comply with any of the provisions of the act, and upon receiving such notice, it is made the duty of the attorney general to “immediately commence an action against such society to enjoin the same from carrying on any business.” The attorney general having received such notice from the auditor, began this action in this court against the defendant in pursuance of the statutory requirements. The Honorable Robert Ryan was appointed referee to take the evidence and report his findings of fact and conclusions of laAV. A large amount of evidence was taken by the referee, and he has made an exhaustive report, which concludes Avith the recommendation that this court, by its judgment, permit the defendant to continue in business under certain directions and restrictions. We do not think that this recommendation is within the pur-Adew and meaning of the statute. The requirement of the statute is that, if the court shall find that such society AA'as in default, as charged, the defendant shall be enjoined, and shall not have authority to continue in business until such report shall be made, or overt act or violation complained of shall have been corrected, nor until the costs of such action be paid by it. On the other hand, the attorney general insists that the court appoint a receiver to wind up the affairs of the — 625 — defendant and to “distribute the assets as equity would permit.’’ This, the court can not do in these proceedings. There are, no doubt, some allegations in the petition which would be appropriate in an action in the nature of quo warranto to oust a defendant corporation of its franchise and wind up its affairs, and we do not decide that, under proper pleadings and evidence, such a proceeding might not be maintained. But these proceedings, by the express language of the petition, as well as by the character of the allegations, and the nature and force of the evidence brought to sustain them, must be considered to be under section 16 of the act referred to, and the meaning of that section is that, if the allegations are sustained by the evidence, the defendant shall not be allowed to do business until it has complied with the law. It is the duty of the court to determine and point out the particulars in which the defendant has failed to comply with the law, and to enjoin the defendant from proceeding to carry on its business until these delinquencies in these respects have been corrected. When this shall have been done by the defendant, it will be the duty of the auditor to reinstate the defendant. The court has been greatly assisted by the work of the referee in his exhaustive and painstaking investigation of the evidence and conclusions of fact derived therefrom. 1. By the provisions of section 10 of the act these societies are required, on or before the first day of March of each year, to make and file with the auditor of public accounts a report for the year ending on the 31st day of December immediately preceding. These reports are to be upon “blank forms to be provided by said auditor,” and are to be “verified under oath,” and are to contain answers to questions specifically prescribed by the statute, among which are: (3) Number of losses or benefit liabilities incurred. (4) Number of losses or benefit liabilities paid. (7) Number and kind of claims for Avhich assessments have been made. (8) Number and kind of claims .compromised or resisted, and brief statement of reasons. It — 626 — appears from the findings of the referee, and is abundantly established by the evidence, that the defendant has failed to make the annual reports contemplated by the statute. It is plainly intended by the statute that the defendant shall report all claims against it on account of death losses. When the insured under one of the defendant’s policies has died, and the defendant has notice that a claim is made against it on account thereof, there can be no doubt that such claims should he included in its report to the auditor. When the auditor finds that the defendant has not made the report required by the statute, hut refuses so to do, it is his duty to notify the attorney general, who should take proceedings to prevent the defendant from further carrying on business until this error is corrected. The reports of the defendant for several years past were not in compliance with the statute in this respect, and the fact that the auditor has not heretofore enforced the law is not a defense in these proceedings in which he is trying so to do, and the defendant is enjoined from transacting business until such report is made. 2. The referee finds: “It is provided by section A, division 3 of the constitution of the Bankers Union of the World, that the supreme officers of the supreme lodge shall he 9 in number. These, by section 0, division 1 of said constitution, are required to be elected by supreme1 lodge delegates. It is further provided in said section A, as follows: “There may also be not more than 8 directors elected by said supreme officers. The officials above designated shall together constitute a board of directors, and all the power and authority of the supreme lodge shall, when not in session, be vested in the board of directors, the same as though the said supreme lodge was regularly convened in open session.’ It is provided in section B, division 3 of said constitution: 'All of said officers of the supreme lodge shall be elected for the. term of 2 years and until their successors are elected and qualified.’ The effect of the above provisions is to create a possible board of directors, 17 in — 627 — number, of which board 8 members are to be elected by the executive officers. These 8 directors a're not to be chosen by the members of the Bankers Union of the World, nor by the representatives of the said members selected for that purpose.” These findings are abundantly supported by the evidence, and this provision in the organization of this company, is in conflict with section 1 of the act, which provides that “such society shall have a * * * representative form of government.” These directors, who control the affairs of the company, must be chosen by the membership thereof, either directly or through representatives chosen by the membership for that purpose. No license to transact business should have been granted to this defendant until such a board of directors was provided for in its organization. The defendant is enjoined from doing business until this error is corrected. 3. It appears from the evidence that the management of the affairs of the society has been • exclusively within the control of its supreme executive officers. These officers have not only had charge of the general affairs of the society, but in many instances have dealt with themselves in making contracts in their own personal interest, and, in some instances, in conflict with the interest of the society. In order that the society shall have a representative form of government as required by the statute, the general control of the affairs of the society must be in the hands of directors elected by the membership, as before pointed out. The defendant should not have been licensed to do business while this evil existed, and is therefore enjoined from transacting anv further business until this error is corrected. 4. It appears from the findings of the referee, a contract with the president was made by those purporting to act for the defendant society, Avhich Avas in violation of law, and was afterAvards abrogated, and another contract made in January, 1902, giving the president a stated salary per month, and commissions upon policies that had — 628 — theretofore been taken, as well as upon policies after-wards to be taken; and the referee concludes that the defendant had no right to give to its president a commission on membership already secured. In this, the referee is undoubtedly right. The salary of the president should have been fixed by its board of directors. It is inconsistent with the policy of the law, under which these societies are organized and authorized to do business, to allow commissions to its managing officers, which are uncertain in amount, and are to be determined by computations from data not within the knowledge of the membership, and to which the members have not ready access. The defendant is therefore enjoined from transacting business until it is made to appear to the satisfaction of the auditor, or by a showing in this case, that no such contracts are in existence, and that no such claims of emolument are made by the president. 5. It is charged in the petition: “By unlawful means, liabilities against said Bankers Union of the World were suddenly created and not shown on the books of said Bankers Union of the World, or in the statements filed by it in the office of the auditor of public accounts of the state of Nebraska, and this condition of affairs was first disclosed by an examination into the affairs of said Bankers Union of the World, made and conducted by the authority and under directions of the auditor of public accounts; such examination of the books and affairs of the defendant, Bankers Union of the World, disclosing the facts herein alleged; and the further fact that the president of the said defendant, Dr. E. 0. Spinney, and the vice-president, J. 0. Spinney, who is the wife of the said E. 0. Spinney, drew from the treasury of said Bankers Union of the World, during the year 1908, the sum of $20,000 for their own use and benefit, and for their alleged services as president and vice-president of said Bankers Union of the World, in fraud of the rights of the members and certificate holders of said Bankers Union of the World, and while said association was then, and is now, — 629 — indebted to beneficiaries for death losses in the aggregate sum of $30,000, for the payment of which said association had on hand, at the time of the examination referred to, available assets in the sum of $2,437.65.” Upon this allegation, the referee finds: “From the organization of the Bankers Union of the World, its president advanced various sums to it and for its use. There is in evidence, no tabulated statement of the amounts drawn out by him. There is in evidence sufficient data to show that the amounts paid to him as salary, not including commissions, is $5,015.76. The Bankers Union began business November 14, 1898. The period above contemplated is, therefore, over 5 years. The net sum he has received as salary is at the rate of less than $1,000 a year during the existence of the Bankers Union of the World”; and, second, “There was paid the vice-president, the wife of the president of the Bankers Union, for services in 1903, $50 a month for a short period. She received for the remainder of that year, for editing the official paper of tin1 .Bankers Union, $150 a month. The salary of the president of the Bankers Union, for the year 1903, was $600 a month. The salaries just referred to I find are not exorbitant.” This finding of the referee does not appear to us to fully reflect the evidence upon this allegation. We do not want to be understood as expressing an opinion whether the salary as allowed to the president would, or would not, be exorbitant, when allowed by a board of directors selected as the statute requires, and freely acting in the management of the general affairs of this society. The finding of the referee, “That there is in evidence no tabulated statement of the amounts drawn out by him,” is, to our minds, more serious in its nature and consequences than would appear to be regarded by tin1 referee. There should be no uncertainty in the accounts between a salaried officer and the society, and the auditor would undoubtedly be justified in refusing a license to a society in whose transactions such uncertainty existed. The managing officers of these societies are trustees for — 630 — the members, and most transact the business that comes within their province for the interests of the members. If it appears from their plan of organization, and their manner of doing business, that the funds of the society are considered and used by them as their personal emolument, they are not to be allowed to transact business. The defendant is enjoined from doing business until it is made to appear to the satisfaction of the auditor, or by a showing in this case, that all claims of the president against the company are fully and finally adjusted; and no claims of the president for compensation for services rendered will be made or entertained, except the regular and reasonable salary as allowed and fixed by the board of directors. 6. The petition alleges that the society is insolvent and unable to meet its pending death claims. A large proportion of the evidence red ates to this allegation. The referee finds that the allegation is not proved, and we are entirely satisfied with his finding in that regard. The conduct of the officers of the society in adjusting death claims has without doubt led to great confusion, and unnecessary delay; and merits criticism. Also does its apparent reluctance and neglect to disclose to the proper authorities the true state of affairs regarding these matters, and, possibly, also the provisions of its constitution and bylaws as to the extent of its liabilities upon death claims, and its manner of determining the same. The managing officers have failed to appreciate the fact that the supervising authority of the auditor is such as to require perfect frankness and a full disclosure of its affairs, whenever demanded. We have already indicated that these evils must be corrected before business is continued. But, the allegation that the society is insolvent is wholly unsupported. The plan of its organization, if carried out,' will, apparently, furnish ample funds to meet all its just liabilities, and the managing officers have been active and vigilant in the prosecution of its business. It has, apparently, during the last year, paid from the assessments collected for death claims occurring during the year, more than the — 631 — total amount of losses for the same period. The assets of such societies do not consist of tangible property and (‘ash in hand alone. Its members pay assessments when called upon to meet the loss occasioned by the death of one of their number. If its plan of operation is feasible, its ability to meet its liabilities depends upon the good faith and solvency of its members. It can not be said that it will not be able to meet its death losses as they occur. 7. It is charged that the defendant has diverted the funds of the society and paid out large, sums for the alleged purchase of the business and membership of other purchased organizations, and that the membership of such other purchased organizations were admitted to the defendant association, without medical examination, at lower and less rates of charges and assessments than required from persons originally becoming members of the defendant society. Upon this allegation the referee finds: “While all the transfers of societies above noted, except the Red Cross of Waverly, Iowa, the Home Guardians of Sterling, Illinois, and the Pioneer Life Association of Lu-verne, Minnesota, were made under sanction of the -insurance department of this state, the evils which inhere in such transfers without authority of law have fully justified the auditor’s refusal to. sanction such transfers. Of these evils, the following are the most conspicuous: There is a temptation to the officers of the absorbed lodges, who receive its fund for disbursement, to use such funds for their own individual advantage. There are of necessity members whose health has failed, or who have passed the age of 55, between the date of entry into the transferred order and its transfer to another order. These must either be ignored and their insurance thus destroyed without their consent, or a physical examination must be waived, contrary to the provisions of the statute of the state. Reserves accumulated must be diverted by the transferred society to an improper purpose, and thus there must be violated a sacred trust.” It appears that the insurance department of the state at one — 632 — .time approved of such methods, and recognized such action as legal. It also appears that, after a change had taken place in the personnel of the department, such action was not sanctioned hut disapproved, and that the defendant society, nothwithstanding such disapproval, has persisted in the same course of conduct. The statute prescribes the qualifications of members that may be admitted; and to admit members above the age limit, or without medical examination, is clearly in violation of its provisions. What may not be done directly in that regard, (tan not be done by taking over the entire membership of another society, and the conduct of the defendant was a manifest violation of law. It seems to be the opinion of the referee that this practice had been discontinued before these proceedings were begun, and that no further action on the part of the court is necessary than to express its disapproval- thereof. We are inclined to adopt this suggestion. 8. The defendant asks that the court will, in this action, enter an order upon the auditor to reinstate the defendant, but, as before pointed out, the court is not given authority to do so under section 16 of the act. It will be the duty of the auditor to reinstate the defendant when it has complied with the order of this court, and has corrected the errors herein indicated. The suggestion that the auditor might, through prejudice or partiality, neglect to perform this duty is wholly unwarranted by the evidence. The evidence shows a desire and effort on the part of the auditor to perform the duties enjoined upon him by statute, and his action in commencing these proceedings was not only justified, but required, by the facts as disclosed in the evidence. If this judgment is complied with by defendant within 60 days, the injunction will be dissolved. In the meantime, the injunction is continued, and if further action herein becomes necessary to protect or enforce the rights of the parties, upon application of either party, such action can be taken. Judgment according!#.