Chicago Mutual Life Indemnity Ass'n v. Hunt

Mr. Justice Bailey delivered the opinion of the Court: This is a proceeding instituted by the Attorney General under the 12th section of the act of 1883 providing for the organization and management of mutual benefit societies. (1 Starr & Curtis’ Stat. 1348.) That section provides that-whenever any corporation, association or society organized or having transacted business under the provisions of said act, shall neglect or refuse to make its .annual statements as required by the act, or whenever the Auditor shall find, upon examination as provided in section 10 of the act, that any willfully false or untrue statements in any material respect •have been made, or that the business of the corporation, association or society has been conducted fraudulently, or in willful violation of any of the provisions of the act, or that the corporation has transacted business different from that author-, ized by its certificate of incorporation, “he shall communicate the fact to the Attorney General, whose duty it shall be to apply to the circuit court where its principal office is located, for an order requiring the officers, or directors, trustees or managers of such corporation, to" show cause why they should not be removed from office, or its business closed; and the court shall thereupon hear the allegations and proofs of the respective parties, and if it shall appear to the satisfaction of the said court that any one or more of them have been guilty of fraud or any material irregularity or violation of law to the injury of said corporation, association or society, or of noncompliance with any of the provisions of this act, the court shall decree a removal from office of the guilty party or parties, which decree shall forever debar him or them from holding a similar office, and shall substitute a suitable person or persons to serve until the regular annual meeting, or until a successor or successors are regularly chosen or elected; or if it shall appear to said court that the interests of its members or the general public so require, the court may decree a.dissolution of such corporation, association or society, and a distribution of its effects.” Counsel for the association insist that the Attorney General was without‘authority to institute the present proceeding, because, as they allege, no sufficient report was made to him by the Auditor of Public Accounts. The contention is, that such report was jurisdictional, or rather a condition precedent, and that until it was made, the Attorney General had no power to act. And it is further argued that, to justify the institution of proceedings, the report of the Auditor should have contained not merely the conclusions to which he arrived from an examination of the affairs of the association, hut also the facts upon which those conclusions were founded. We are of the opinion that the power of the Attorney General to file the information in no way depended upon the communication made to him by the Auditor, hut came within the purview of those powers which are inherent in his office. See Hunt v. Chicago Horse and Dummy Railway Co. 20 Ill. App. 282; Same case, 121 Ill. 638. The section of the statute under consideration conferred no new powers upon him, but vested the Auditor with the supervision of associations organized under the statute, and made it the duty of the Attorney General to take proper legal proceedings whenever the Auditor should communicate to him- the fact that an association or its officers had so conducted as to give occasion for the removal of the officers from their offices, or the closing of the business of the association. But even if this were otherwise, the communication by the Auditor to the Attorney General was sufficient to answer the requirements of the statute. The principal objection urged to it is, that it stated conclusions and not facts. In this counsel are clearly mistaken. The Auditor’s communication transmitted to the Attorney General the report of an examination of the books, papers and affairs of the association by an expert employed for that purpose by the Auditor, and requested him to institute proceedings under the section of the statute above quoted. The examiner’s report consisted in part of a • detailed statement of the facts ascertained on the examination, and copies of forms and documents used by the association in the management of its business, and in part of deductions and conclusions drawn by the examiner therefrom. It is perhaps not altogether formal in its statement of conclusions, but when considered either in relation to the facts stated or the conclusions drawn, it is clearly sufficient to show the existence of one or more of the grounds enumerated by the statute upon which it became the duty of the Attorney General to institute proceedings against the association. It should be observed that no particular form is prescribed by the statute for the communication by the Auditor to the Attorney General. It is only provided that when the Auditor, on examination, finds, either that the annual statement of the association is willfully false in some material respect, or, that the business of the association has been conducted fraudulently or in violation of some provision of the statute, or, that the association has transacted business different from that authorized by its certificate of incorporation, “he shall communicate the fact,” that is, the fact of having so found, to the Attorney General. The mode of making the communication is left entirely with the Auditor. It doubtless may be made by communicating the finding alone, but we see no objection to the mode adopted in this case, viz., by transmitting to the Attorney General the entire report of the examiner, so long as it shows one or more of the necessary findings. It is urged that a court of chancery has no jurisdiction. This contention is based upon the theory that the proceeding is in the nature of a quo warranto to remove the officers of the association from office and impose upon them the penalty prescribed by the statute, viz., that of debarring them from afterward holding a similar office, or, to oust the association of its corporate franchise and distribute its effects. It is said that the proceeding, so far at least as it relates to the officers of the association, is highly penal, and so not within the proper jurisdiction of a court of equity. It will be noticed that the relief provided by the statute is in the alternative, viz., the removal of the officers from office and the appointment of others in their places, the decree to operate, as a legal consequence, to debar the persons removed from office from afterward holding a similar office; or, the dissolution of the association and the distribution- of its effects. As the court saw fit to apply the latter remedy only, we have nothing to do with the question of its jurisdiction to administer the former, and the case may be decided precisely as though the dissolution of the association and the distribution of its effects was the only mode of relief provided by the statute. It is doubtless the rule that, in the absence of statutory provisions, courts of equity have no jurisdiction to decree the dissolution of a corporation, by forfeiture of its franchises, either at the suit of an individual or at the suit of the State. Attorney General v. Utica Ins. Co. 2 Johns. Ch. 370; Slee v. Bloom, 5 id. 366; State v. Merchant’s Ins. Co. 8 Humph. 234; Attorney General v. Bank of Niagara, 1 Hopkins’ Ch. 334; Doremus v. Dutch Reformed Church, 3 N. J. Eq. 332; Doyle v. Peerless Petroleum Co. 1 Edw. Ch. 83; Strong v. McCagg, 55 Wis. 624; 2 Morawetz on Corporations, sec. 1040. But in the cases holding this rule, it is uniformly admitted, whenever the question has arisen, that jurisdiction to decree the dissolution of a corporation may be conferred upon courts of equity by statute. In this State, statutes have been passed vesting courts of equity with jurisdiction to decree the dissolution of corporations in a great variety of cases. Thus, by the 25th section of the statute in relation to corporations, courts of equity are given full power, on good cause shown, as a portion of the relief provided for by that section, to dissolve or close up the business of a corporation organized under that act, and to appoint a receiver of its effects. 1 Starr & Curtis’ Stat. 618. Similar power is given by the 25th section of the statute in relation to fire, marine and inland navigation insurance companies. Id. 1324. Also by'the act of February 17, 1874, in regard to the dissolution of insurance companies. Id. 1353. Under neither of these statutes has the power of courts of equity to decree the dissolution of corporations in proper cases been seriously questioned, but when properly invoked, it has been uniformly exercised. St. Louis, etc., Mining Co. v. Mining Co. 116 Ill. 170; Life Association of America v. Fassett, 102 id. 315. Such power was directly affirmed by this court, after full and elaborate consideration, in Ward v. Farwell, 97 Ill. 593, and Chicago Life Ins. Co. v. Auditor, 101 id. 82, and the question therefore is no longer an open one. The point made by counsel that, by transferring jurisdiction of suits to dissolve corporations from courts of law to courts of equity, the corporations affected are deprived of the right of a trial by jury guaranteed by the Constitution, is fully and satisfactorily answered by the opinion of the court in Ward v. Farwell, supra, and the argument there made need not be repeated here. Nor is the position well taken that the. present suit is in the nature of a criminal prosecution, and therefore required by section 33, article 6, of the Constitution, to be carried on “in the name and by the authority of the People of the State of Illinois.” It is true a quo warranto has been held to be a criminal proceeding within the meaning of the Constitution, but this is neither a quo warranto nor its equivalent. It is a civil proceeding of a special statutory character, and is brought for the purpose of protecting and enforcing property rights. Its primary object is, not to punish the corporation or its officers for an abuse of the corporate franchise, but to enforce a due administration of the trust reposed by the corporation in its officers. Accordingly, when those officers have been guilty of fraud or some material irregularity or violation of law, to the injury of the corporation, or some non-compliance with the provisions of the statute under which the corporation was organized, a court of chancery is authorized to interpose for the preservation of the property rights of members and creditors and for the protection of the general public, by taking the administration of the affairs of the corporation from the hands of the delinquent officers and placing it in the hands of other suitable persons, or, if the interests of the members or the general public so require, by winding up its business and distributing its effects, and as incidental to such relief, by decreeing a dissolution of the corporation. It will thus be seen that the proceeding partakes of none of the elements of a criminal prosecution, but is purely a civil remedy, and one which falls directly within the proper domain of chancery jurisdiction. The information contains a large number of charges against the association and its officers of acts and modes of proceeding which are alleged to be unlawful. The defendants’ answer, as a general rule, denies the charges thus made, though it at the same time admits some of the acts alleged and insists that such acts were not unlawful. We have thus to determine from the pleadings and evidence whether any and which of the charges made are established, and whether the charges so established are legally sufficient to warrant the present proceedings and decree. One of the charges upon which considerable stress is laid and upon which the court below found in favor of the Attorney General is that of admitting minors to membership. The statute.requires that the certificate of association shall state, among other things, “the limits as to age of applicants for membership,” and in pursuance of that requirement, the certificate of association in this ease, which was submitted to and approved by the Auditor and by him transmitted to the Secretary of State and upon which the latter issued the certificate of organization, provided that “no person shall become a member who is under ten or over seventy years of age.” It appears from the evidence and the defendants’ admissions that, of about six hundred members belonging to the association, something over sixty were admitted under the age of twenty-one years, some of them being but little past the minimum age. Was their admission unlawful? The statute under which the association was organized is silent on the subject, nor do we find any statute which either expressly, or, so far as we can discover, by implication, either permits or forbids their admission to membership. If then minors are ineligible, such ineligibility arises from some principle growing out of the nature and objects of these associa-' tions, or the policy of the law applicable thereto. The contention is, that the certificate of membership is a personal contract between the member and the association, and that, as an infant is capable of making only a voidable contract, his admission to membership is a violation of those principles of mutuality which lie at the basis of mutual benefit societies. We may admit in the broadest sense that these societies are founded upon the principle of entire mutuality in relation to burdens as well as benefits, yet we are unable to see how that principle places the membership of infants upon any footing different from that of adults. While the certificate of membership is a contract, such contract, in the absence of express stipulations to the contrary, is purely unilateral. It may be enforced against the association where the member has performed all the prescribed conditions, but none of its stipulations are enforcible against the member. If he fails to pay his assessments or dues, or does any act forbidden by the certificate of membership, the certificate becomes void and the membership ceases. But the making of an assessment or the maturing of dues does not make the member a debtor to the association, so as to authorize it to bring a suit for its recovery in ease of his neglect or refusal to pay. Payment is left wholly to his discretion. The contract then not being one which has the legal effect of binding him, to the payment of any money or the performance of any condition, we can not see how it can be at all important whether it is voidable or otherwise. Performance is no more left to the option of the member where the contract is made by an infant than w'hen made by an adult. If an infant performs the conditions prescribed in the certificate, he, the same as an adult, becomes entitled to the benefits thereby secured. If he fails to perform, his membership ceases, and that is all. We do not assent to the view that, as a further consequence of his disability, he may recover back the dues and assessments he may have already paid. “If an infant advances money on a voidable contract which he afterwards rescinds, he can not recover this money back, because it is lost to him by his own act, and the privilege of infancy does not extend so far as to restore this money unless it was obtained by fraud.” 1 Parsons on Contracts, 332. Nor are we able to see any force in the suggestion that minors should not be admitted to membership because of their incapacity to act as trustees, or to perform the duties of members at corporate meetings, such as consulting or giving advice for the mutual benefit of the members, voting for officers, and the like. We know of no reason why the capacity to act as trustee should be a necessary qualification for membership. If a sufficient number of members possess the requisite capacity, so as to afford the members a reasonable and proper range of choice in the selection of trustees, the admission of others who are not thus qualified can work no injury to anybody. It will not be claimed that the want of the requisite intelligence or business experience on the part of an adult to qualify him to act as trustee would render him ineligible to membership, but these are quite as essential to the proper discharge of the duties of trustee as mere legal capacity. There would seem to be no legal obstacle in the way of minors taking part in corporate meetings, consulting, advising or even voting. The only objection to their doing so grows out of their inexperience and the immaturity of their judgments, but these are disqualifications which are not necessarily confined to persons, under the age of twenty-one years, and no one would allege them as a legal bar to the admission of an adult to membership. It should be remembered that in this proceeding we have nothing to do with the good or bad policy, in an economic or business point of view, of admitting minors to membership. Whether it was wise or unwise is not the question. We have only to determine whether it was such a violation of the rules or policy of the law as should subject the association to dissolution. On this point we are unable to agree with the learned chancellor before whom the cause was heard, our opinion being that, so far as this charge is concerned, the decree is not sustained. But there are other charges, either admitted or proved, of acts on the part of the association and its officers, which constitute such violations of law as warrant the dissolution of the association. Prominent among these is that which relates to the use by the association of the advance mortuary assessment for the payment of current expenses. The by-laws of the association provided that all persons becoming members should be required to pay a certain admission fee, the annual dues for one year, and one advance mortuary assessment. The money derived from this assessment was set apart and treated as a mortuary fund until February 16, 1886, at which date the trustees adopted a resolution authorizing the manager to use the advance mortuary assessment in defraying current expenses, the same to be replaced to the credit of the association from annual dues as soon as expedient. After the adoption of this resolution, the advance mortuary assessment or the larger portion of it was used by the manager for expenses, and as a consequence, at the time of filing the information, there was a large deficiency in the mortuary fund, if the advance mortuary assessment is to he treated as a part of that fund. The defendants admit the adoption of said resolution and the subsequent use of the advance mortuary assessment as alleged, but contend that the association had the legal right to so use it. The 6th section of the statute under which the association was organized provides that, “no part of the funds collected for the payment of death benefits shall be applied for any other purpose.” There can be no doubt that the advance mortuary assessment was money collected for the payment of death benefits, within the meaning of the statute. That is the clear import of the name under which it was collected, and if it was in fact designed for any other purpose, the very name and pretense under which the money was demanded, were of themselves a palpable fraud upon the members paying it. Not only is this so, but the circulars and other publications distributed by the association for the purpose of advertising its scheme and inducing those who might read them to apply for membership, represented that all expenses were to be paid out of the membership fees and the annual dues, and such was doubtless the understanding of most if not all who became members. The use of the money thus obtained for current expenses was not only a fraud upon the members, but a clear, palpable and inexcusable violation of law. The 8th section of said statute provides that associations organized thereunder may provide by their by-laws for the accumulation of a surplus, general or guarantee fund, to be invested in a manner particularly specified, and that such fund, when so set apart and invested shall, with the increase thereof, belong to such association and not to the directors, trustees, managers or officers thereof, “and shall be used only for mortuary benefits, without assessment, or applied in payment of future assessments, or otherwise used for the promotion of the object or objects for which such funds are specially provided and set apart, and such use shall not be deemed or construed to mean a profit received by members within the meaning of the statutes of this State.” The defendants’ certificate of association provided, as a part of the plan upon which the association was formed, that twenty-five per cent of the assessments for death benefits should constitute a guaranty fund to be known as the “Tontine Be-serve Fund,” and that for the apportionment of such fund, the association should be divided into classes by years, the portion of such fund contributed during ten years by members of each class, together with the accumulations, to be apportioned equitably among the surviving persistent members of that class. We think it clear that such disposition of the reserve fund was in direct violation of the letter as well as the spirit of the statute. The moneys from which it was to he accumulated, viz., those collected for the payment of death benefits, were dedicated and set apart by the statute to that purpose alone, and any other application of them was expressly prohibited. It follows that a reserve fund accumulated from that source could be lawfully applied to no other purpose than that of paying death benefits. But in addition to this, the section of the statute permitting th'e accumulation of such fund expressly provided that the fund should belong to the association, a provision which necessarily excludes the idea of its belonging to or being distributable among the persistent surviving members of a particular class. Doubtless it was the intention of the statute, in providing for the accumulation of a reserve fund, to place the association in such condition as to be able to pay its death benefits with greater promptness and certainty, and perhaps to provide against unexpected drafts upon its resources by extraordinary mortality caused by the visitation of epidemic diseases, when the ordinary death assessments would be likely to prove insufficient. It thus appears that the plan upon which the association was formed, so far as it relates to the disposition to be made of its reserve fund, was in direct violation of law. The information charges that the association, in order to obtain applications for membership, held out to the world that it had a legal right to and would, at the option of a member, refund to him in cash, at the expiration of the period of ten years, all the reserve fund to which he would be equitably entitled, in accordance with the plan upon which that. fund was being accumulated. This charge is admitted, and the claim is made that the association had the right to offer and make such payment. That such payment would be unlawful follows from what has been said, as well as from the further reason that it would be an allowance to the member of money from the association as a profit. The payment promised, it will be observed, was not of the unexpended balance of the assessment paid by the member, or such balance and interest, but the equitable share of the member as one of the surviving persistent members of the particular class to which the fund accumulated at the expiration of the tontine period was to belong. That share would manifestly be increased by the lapsing of the interest in the fund of all members who during the period should cease to be such by delinquency or otherwise, thus clearly introducing into the proposed payments the element of profit. The statute expressly forbids the receipt by members of associations organized thereunder of any money as profit, and it therefore follows that the payment promised to members at the expiration of the tontine period was in direct violation of its terms. We are also of the opinion that there was a clear violation of the spirit if not of the letter of the statute in the mode adopted for the election of officers, by which the virtual control and management of the association was taken from the board of trustees and vested in the manager and secretary. The statute provides that the affairs of all associations organized thereunder shall be managed by not less than five direetors, trustees or managers, who shall be elected from and by the members, at such time and place and for such period not exceeding three years, as may be provided for in the by-laws. The certificate of association provided that the management of the association should be vested in a board of eight trustees, who were to be elected annually. At first the manager and secretary were appointed by the board of trustees, but in consequence of some friction between the manager and the first board of trustees in relation to the proper mode of conducting the affairs of the association, a resolution was proposed and adopted at the meeting of the association held in January, 1886, providing that the manager and secretary should thereafter be elected annually by the members. It appears that the blank applications for membership then in use by the association had printed upon them a blank proxy authorizing the person whose name should be inserted therein to act and vote for the member at all meetings of the association, and underneath it was a request to the applicant for membership to sign it in blank, to be filled up by the secretary. In accordance with this request a large number of these proxies were signed in blank and transmitted to the secretary. It does not distinctly appear whether the proxies thus obtained were ever in fact used at the corporate meetings of the association, nor does it seem to us to be very important whether they were or not. The resolution changing the mode of electing the manager and secretary and making them practically independent of the board of trustees, was adopted mainly by the use of proxies, either the ones indorsed on the applications for membership or others. After the adoption of that resolution, the mere possession by the secretary and manager of a sufficient number of proxies to control all elections and other corporate action and to perpetuate themselves in power, was repugnant to the principles upon which the association was founded, and a clear abuse of the opportunities which their official positions afforded them. It took the control and management of the association from the body to which both the statute and the articles of association committed it, and placed it in the irresponsible hands of two of the subordinate officers. We can not for a moment suppose that so large a number of applicants for membership signed documents so utterly destructive of the very purposes and objects of the association understandingly arid properly, appreciating the consequences of their action. The circumstances tend rather to the conclusion that they were led to suppose that the execution of the proxy was a condition precedent to their admission to membership, and that they therefore signed unadvisedly and without understanding or properly considering what they were doing. An improper and unlawful advantage was thus taken of the members on their admission into the association. After the adoption of the resolution of January, 1886, the board of trustees gave but very little actual attention to the affairs of the association, and that only in a perfunctory manner, and, as we may well assume, at the dictation of the manager and secretary. The latter were the real governing authority, and conducted the business of the association as they saw fit. This was a palpable subversion of the rules of law as well as a fraud upon the members, and justly subjected the association to proceedings by the Attorney General for its dissolution. The information accuses the officers of the association of false representations as to various matters. Of these one is admitted by the answer, although the fraudulent intent is denied. That consists of issuing certificates of membership numbered, but not consecutively, a particular certificate being thus given a number very much larger than the total number of certificates issued up to that date. The answer alleges that this was done for the purpose of preventing rival associations from ascertaining the amount of business done by the defendant. Whether this was the true purpose or not, there is no evidence that any means were taken to apprise applicants of the actual number of certificates issued, nor does it appear that they had any knowledge on that subject; and as by the terms of the certificates the amount of the benefits payable on the death of a member depended upon the number of members in good standing at the time of his death, the issuing of certificates with numbers much larger than the number of certificates previously issued, had a direct tendency to deceive members receiving certificates as to their value. Whether intended or not, this mode of issuing certificates operated as an actual fraud upon those becoming members, and the result, so far as concerns those actually deceived, was the same as though the misnumbering of the certificates had been adopted with an actual intent to deceive and defraud. It is also alleged that the annual statement to the Auditor was false in its report of the financial condition of the association. Whether said statement is false or not in the particular pointed out depends upon the right of the association to use the advance mortuary assessments for current expenses. As we hold that it had no such right, it follows that the statement was incorrect by. the amount the mortuary and tontine funds had been depleted by the misappropriation of the advance mortuary assessments. It is urged that this was a mistake of law honestly made, which ought not to subject the association to proceedings by the Attorney General for its dissolution. The provision of the statute prohibiting the use of the mortuary assessments for any other purpose than that of paying death benefits is so plain and unambiguous that an honest mistake of law on that point seems scarcely possible. Besides, we are unable to see how a mistake of law can be set up in such case as a defense. The evidence however tends strongly to the conclusion that there was no mistake, but that the officers of the association acted in the matter with knowledge that they were violating a statutory prohibition. They claim to have taken legal advice, but it is by no means apparent that they took advice except from one of their own number, and it is not clear that such advice was sought in good faith or honestly believed to be correct. Another circumstance tends to the same conclusion, and that is that the officers studiously concealed from the Auditor the fact that they were misappropriating the advance mortuary assessments in the manner above stated. Again, in the statement to the Auditor, the officers gave a negative answer to the question in the Auditor’s blank, whether the association undertook or promised to pay members during life, without regard to their physical condition, any sum of money or thing of value. It appears from what has already been said that this answer was false. The promise to pay to each member at the end of the period of ten years, if he chose to receive it, his equitable proportion of the reserve or tontine fund, was a promise to pay money to members during life without regard to their physical condition. So of the answer to the question for what purpose and how the reserve or ton-tine fund was created. The answer given was, that it was created for the purpose of meeting the advance of rate at the end of ten years from the date of entry, by reserving twenty-five per cent of the net amount of assessments. This was correct so far as it went, but was false in suppressing the fact that the fund might be withdrawn at the end of ten years. The suppression of a material fact called for by a question makes the answer as essentially false as would the affirmative assertion of an untruth. Another, and in our judgment a very material official delinquency is charged in the information, based upon the unmethodical if not incorrect manner in which the books of account of the association were kept. The evidence shows that the books containing the accounts of money received and expended were so confused and unsystematic, that it was difficult if not impossible to derive therefrom any certain information as to the financial affairs of the association. The experts employed by the Auditor, finding themselves unable to strike any balance from the books, were compelled to construct the accounts for themselves anew out of such original data as they were able to find. The failure of the officers of a mutual benefit association to keep correct and intelligible books of account, whether such failure results from design, carelessness or want of skill, is a serious breach of official duty. Such officers are trustees, having funds intrusted to their care, to be safely and honestly kept and administered, not for their own benefit, but solely for the promotion of the laudable objects for which the association is organized. It is a duty of primary importance incumbent on all trustees, to keep proper accounts of trust funds, for unless that is done, the beneficial owners of such funds are subjected to constant uncertainty as to their rights, and to a constant liability to be defrauded. Next to the duty of honestly administering a trust fund is that of keeping a true, honest and intelligible account of such administration. Evidence was introduced tending to sustain various of the other charges made by the information, several of which the court below.held to be sustained, and in which conclusion we are disposed to concur. It is unnecessary however for us to protract the discussion, as what has already been said is sufficient to show that in our opinion the decree is fully warranted by the evidence. It will therefore be affirmed. Decree affirmed.