Barton v. International Fraternal Alliance

Page, J., delivered the opinion of the Court. The complainants in this case pray: 1st. That the defendant company, its officers and attorneys, may be restrained from disposing of its assets, and from levying or collecting further assessments. 2nd. That it may be declared insolvent, and adjudged to be dissolved. 3rd. That a receiver may be appointed; and 4th. Such other relief as the case may require. The grounds upon which they rely, may be briefly summarized as follows: 1st. The alleged insolvency of the corporation. 2nd. Frauds alleged to have been committed in the management of its affairs, particularly as to its dealings with the several complainants ; and 3rd. The whole scheme of the corporation is alleged to have been changed in violation of the rights of the complainants ; and moreover is impracticable. The respondent’s first objection to the granting of the relief prayed for, is that the bills and answers thereto do not make out a case within the jurisdiction of the Court. This objection, it may be said without quoting at large from the — 29 — record, is raised by the defendants in all the answers. It is the first question, therefore, to be determined by this Court. There can be no question that the granting of the relief asked would necessarily result in the dissolution of the corporation, and a forfeiture of its charter. “ Apart from statutory power, a Court of Equity cannot dissolve a corporation.” “ The remedial power exercised by Courts of Equity, in such cases ” (that is where fraud, mismanagement and collusion on the part of the corporate authorities is alleged) “ extends no further than the granting of an injunction against any special misconduct on the part of the corporate officers; and although the facts shown may be sufficient foundation for such an injunction, the Court will not enlarge its jurisdiction by taking the affairs of the corporation out of the management of its own officers, and placing them in the hands of a receiver.” Mason et al. v. Supreme Court of the Eq. League, 77 Md. 485. The question is therefore narrowed down to this: Is there any statute that confers upon a Court of Equity power to appoint a receiver and decree a dissolution in a case like the one at bar ? Let us first examine into the nature of this corporation. The “ Order of the International Benevolent and Fraternal Company of Baltimore City,” was incorporated in June, 1888. The business of this corporation, including its liabilities, was. assumed by “The Order of the International Fraternal Alliance of Baltimore City,” incorporated on the 4th January, 1889. The last mentioned association was formed “ for social or fraternal beneficial purposes or both,’ ’ and to carry this out its charter authorized it to enact a constitution and laws prescribing its government, its methods . of conduct and the various means whereby it could improve and benefit its members, their families and those having “a legal interest therein.” It provided also, that the members of the order “ shall convene in assemblies (or local bodies), and conduct their operations by and according to the ritual of the order,” &c. Upon its organization, — 30 — it adopted numerous by-laws, and proceeded to conduct the business particularly described and commented on by this Court in a former case wherein this order and its trans-; actions were the subjects under consideration. Order of Int., &c., v. State, 77 Md. 547. The Court in its opinion in that case, after contrasting its operations with its charter powers, said, they “regarded it as clear, that the company has assumed and is now engaged in the exercise of franchises and privileges not allowed by its certificate of incorporation, and is transacting and conducting an insurance business not by law allowed to be assumed or exercised by it.” But instead of striking down its charter, whereby disaster would be entailed upon many persons, the Court directed that it confine its affairs to the exercise of its powers as a social or fraternal beneficial order, or amend its charter under the provisions of the Code, and “bring itself within the provisions of the insurance laws of the State.” In accordance with this decision, the “ amended certificate of incorporation,” bearing date the 26th of June, 1893, was obtained. By this charter the name was changed to the “ International Fraternal Alliance of Baltimore City.” Its objects were declared to be for social or fraternal beneficial purposes, or both ; to grant insurance on lives on the mutual assessment or co-operative plan provided for in sec. 127, Art. 23 of the Code; to provide for loans to its members, policy or certificate holders, and to provide a social method of convening its membership in assemblies or lodges, under such parliamentary rules as may be contained in the by-laws and ritual of the order. The capital stock was limited to one hundred shares of the par value of one hundred dollars each, and the management of the company was deposited in a board of ten managers who were named for the first year or until the ensuing or general meeting. Being thus incorporated, by-laws were adopted, establishing a form of government, by which, while the real control of the company was vested in the stockholders, “ a cabi — 31 — net,” an annual congress and sundry committees are created and invested with various duties and powers in the affairs of the company. Grand and local assemblies were also included in the scheme, and to secure a policy, it was made requisite for the applicant to belong to one of these bodies. The policies issued by the corporation include mortuary, weekly disability, total disability, partial-permanent disability, and what are known as “ Golden Cycle certificates.” The last mentioned (the class to which the policies of the appellants belong), provide for sick, accident and death benefits, and “ a cash dividend surrender benefit at the end of every seven years.” The meaning of the last phrase, as appears from the policies filed in this cause, is, that in consideration of the payment of certain monthly assessments, the sum of seven hundred dollars shall be paid at the end of each seven years during the continuance of the policy. A corporation of this character is clearly within the terms of the Act of 1894, ch. 295. Its charter authorizes it to be, and it is a fraternal beneficial association operating on the lodge system, and carried on for the sole benefit of its beneficiaries. Moreover, it is an association operating on the lodge system and having ritualistic work, whose business it is, in part, to pay at the expiration of a period of more than five years, a sum not exceeding the maximum amount named in its certificates. As such, it has deposited with the Insurance Commissioner the sum required by sec. 143E. This being so, how far do the provisions of sec. 143O of the Act apply to the case at bar? The section is as follows : “Any such association refusing or neglecting to make report, as provided in section 143H, shall be excluded - from doing business within this State in procuring new members. Said insurance companies must, within sixty days after failure to make such report, or in case any such association shall exceed its powers, or shall conduct its business fraudulently, or shall fail to comply with any of the provisions of sections 143E to section 143R (both in32 elusive), of this article, immediately commence an action against such association to enjoin the same from carrying on any business. And no injunction against any such association shall be granted by any Court except on application as set forth in this section. No association so enjoined' shall have authority to continue 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, See.” These provisions impose the duty upon the Commissioner immediately to commence an action to enjoin the corporation from carrying on any business whenever, ist, it has failed for sixty days to make the report provided in section 143H ; or, 2nd, has failed to comply with other sections; or, 3rd, has exceeded its powers ; or, 4th, is conducting its business fraudulently. The injunction to be sought by him, is to enjoin the corporation “ from carrying on its business.” Then follows the clause providing, “ no injunction against any such association shall be granted by any Court, except on application as set forth in this section.” This clause must be construed in connection with the preceding; and so taking it, can it mean anything else than that the word “ injunction” refers to an injunction of the same nature as that already referred to; that is, an injunction to restrain the company “ from carrying on its business,” and that the cases in which it should not be granted at the instance of other persons are those where the Commissioner is to make the application himself? In other words, we think the Legislature intended by this clause to provide that injunctions to restrain the corporation from carrying on its business in cases where it has failed to comply with the statute, or exceeded its powers or is conducting its business fraudulently, can be granted only when applied for by the Insurance Commissioner; leaving in all other respects the powers of a Court of Equity unimpaired. It is clear the section was not intended to create another method by which corporations may be dissolved and their charters forfeited. The next clause of the — 33 — section provides, that when “ the report shall be made or overt act or violation complained of shall have been corrected and the costs of the action paid by it” * * * the Insurance Commissioner shall -reinstate the association, and “ not until then shall such association be allowed to again do business in this State.” It surely cannot be successfully contended that such provisions are intended to supersede the effective remedies for the abuse, misuse or non-use of corporate powers afforded by sec. 295 of Art. 23 of the Code, or the right conferred on stockholders and creditors to commence proceedings against insolvent corporations by sec. 264 of Art. 23 of the Code, as amended by the Act of 1894, chapter 263. Nor must we be understood as implying that if the officers should be guilty of fraud or misconduct by which the rights of parties are injuriously affected, it is not within the power of a Court of Equity to enjoin or otherwise decree so that justice may be substantially done between the parties ; it is only as we have stated for the causes set out in the act, that it cannot grant an injunction restraining the corporation from doing business except upon the application of the Insurance Commissioner. It follows from what we have said that the allegations of the insolvency of the company is the only one of the averments of the bills that can enable the Court, if true, to grant the relief prayed for by the complainants. Is the charge of insolvency sustained ? The case comes before us on bills and answers; and therefore all well pleaded averments of the answers, whether responsive to the allegations of the bills or in avoidance, must be taken as true. Royston v. Horner et al. 75 Md. 566. It is charged in the bills that the corporation is insolvent, and insisted in argument that Exhibits Y and Z, filed with the Barton bill, are virtual admissions thereof. The respondent denies that it is insolvent. On the contrary, it avers that the calls set out in these exhibits were not made in view of actual or threatened insolvency, and that it has — 34 — been and still is' able to maintain itself and meet all its obligations. The complainants’ counsel very properly contend that if the facts established by the admissions of the answers and exhibits do in fact show the corporation to be insolvent, then the mere denial, being the statement of an erroneous conclusion of law, will not avail. The hypothesis of fact so made by the counsel, is partly based upon the averments found in an answer filed by the company in. a cause instituted by one Jacob Simpson; and partly upon supposed admissions contained in Exhibits Y and Z, already referred to. The averment in the answer to the Simpson bill is as follows : “ By reason of these attacks upon its credits and business * * * it (the company) has not been able to earn sufficient money to pay the amounts of its policies as they fall due, &c.” But how can this be taken as an admission of insolvency ? As we have seen the policy-holders are all members of the company, and by the terms of the charter the association was not required to maintain the reserve accumulations required by law, of “ old line or regular life insurance companies but was to pay all claims against it by the collection of “all necessary assessments,” or by notes or other obligations of its members (see charter, section 3, paragraph F). The solvency of the company, therefore, cannot depend entirely upon what it may have earned and retained as assets, but upon its capacity to collect by assessment the amount needed to discharge its obligations. The complainants do not aver that such capacity had been impaired, so that it has no power to make such collections, and such an averment was necessary to show it was unable to pay its debts and was therefore insolvent. As to the effect of the exhibits referred to, the first exhibit, Y, has not been inserted in the record; and we are of opinion Exhibit Z fairly construed cannot be regarded as an admission of insolvency. It.appears to be an address to the membership. It is a verbose document, in some of its parts difficult of interpretation. It consists of a series of preambles followed by a statement, in the form of reso — 35 — lutions, of what the company proposed to do. It begins with an explanation why the “ Golden Cycle System” has not proved more profitable; and then proceeds to state that all the members of the order are equally bound to the payment of such sums as may be required to meet the obligations of the company, in notes, assessment or cash; that “ equitable action ” being necessary, the executive committee and trustees should determine what may be the proper settlement of a certain class of policies therein named ; and there were certain assets "with no immediate prospect of realization ” therefrom, to the benefits of which all members must be treated “ alike and equitable.” In view of all this, it is further stated, it had been determined that as to the matter of surrender values on “ Golden Cycle” policies a certain proportion of cash be continued to their credit, provided they were within a year of maturity, and provided further that policies already terminated be accorded a preference ; but should "the state of the funds” require the cash to be used exclusively for maturing policies, then the members surrendering their policies before the period of maturity "shall be listed,” and in case of death of the member the cash surrender value shall be paid; otherwise shall be payable in order of date of surrender from the surplus revenue at the earliest moment; that note assessments should be levied to the extent of $650 upon each “ maturing holder,” who should be entitled to receive when his policy matured, the note back, together with $50 in cash (making in all $700, the amount of the policy), and also a certificate for $100, bearing interest at 4 per cent., payable out of the uncollected assets when realized upon, and on maturities after June, 1896, an increase thereon of $3 per month for each additional month the policy may continue after that month; provided again, the executive committee had power to reduce the certificate upon correspondingly increasing the cash payment. The purport of the address is the statement of an elaborate plan for providing for the payment of the matured policies and those maturing there — 36 — after. It is an ingenious scheme that undoubtedly stretches the power to levy assessments to its ultimate limit. Whether it amounts to a fraudulent conducting of its business, or is in excess of its charter powers, or fraudulent, in that it enabled those who held the earlier policies to appropriate to themselves the available cash in the treasury, leaving the holders of policies of later date, either to bear the burden of the heavy assessments, or submit to the annullment of their policies, are matters with which in this proceeding, for the reasons already stated, we are not concerned. But it certainly is not an admission of insolvency. Indeed, so far from this, the address or “ circular ” is a declaration of the purpose and ability of the company to meet its obligation, and an elaborate explanation of the plan adopted to do so, according to the provisions of its charter, that is, by the appropriation of the assets to that purpose, and by the levying of cash and note assessments on the membership. (Decided January 6th, 1897.) The original bill, filed by Barton and others, prayed only for an injunction to restrain the company, Unverzagt, Wilson and Stieff, from paying, selling or transferring any of the policies therein mentioned. With reference to this; it is only necessary to say, the answers deny all the allegations of fraud and swear away all the equities of the bill. From what has been said it follows the decree must be affirmed. Decree affirmed.