Stewart v. Lee Mutual Fire Insurance

Cooper, C. J., delivered the opinion of the court. It seems to us more than probable that in the court below the appellant has been treated as occupying some sort of charter connection with the officers and directors of the insurance company, and therefore bound by their acts done in good faith as the acts of his agents. To us it seems manifest that though the company is designated a mutual insurance company, it is in no sense such except that the assured are mutually bound to each other through their connection with the company. By its charter certain privileges are conferred upon the incorporators and their successors, who for the management of their corporate affairs are authorized to make such by-laws as they may deem advisable. But such laws can have no effect to modify contracts entered into by the corporation on the one hand and persons desiring insurance on the other. The price agreed to be paid by the assured for the supposed benefits to be derived from his policy was his pre-payment of one assess [507] ment and certain dues and bis undertaking to pay subsequent assessments so long as be should elect to retain his connection with the company and through it with other policy-holders. But policyholders were in no sense members of the insurance company and had no interest in or power over its corporate action so long as it complied with the contract into which, it had entered. The company agreed to pay to the appellant the sum of two thousand dollars, or so much thereof as should be realized by one assessment on all the policy-holders in the event of the destruction of his property by fire, wind, or lightning. This it declined to do, but contended that by a by-law of which the complainant had no notice (if, in fact, it existed at the time of the issuance of his policy) he was entitled only to so much as could be realized by an assessment upon a part of the policy-holders who had been assigned to a particular class. If the company by this classification'put it out of its power to demand that all policy-holders should submit to an assessment to pay the complainant’s loss, it could still have complied with its contract by the payment of the sum named in the policy, two thousand dollars. That the company failed and refused to do either the one thing or the other is unquestioned. It is sought now to escape liability for this on the ground that by such refusal the officers acted in good faith, believing that the company was not liable. If it were true that the directors of the company were the agents of the complainants and other policy-holders, the principle invoked might have application; but it cannot be true that if one party to a contract mistakingly construes it, good faith in so doing will relieve him from executing the contract when construed by the courts. It is manifest that the complainant has not received the benefit of his contract and that there is a liability on the company to respond to him to the full extent of his rights. The company being liable for the unpaid balance of $-, it remains to be determined whether the directors and members of the company who appropriated the assets of the company are personally liable to refund the same, that it may be applied to the payment of the complainant’s demand. The Lee Mutual Insurance Company was organized under a [508] 'peculiar charter. It is designated a mutual company, but it has no element of mutuality either in its charter or by-laws. It is in fact a close corporation doing business for the exclusive benefit of its corporators. It would more properly be classed as a joint-stock enterprise, but there were no stockholders for there was no stock. It began business with a charter, a name, and a corps of officers without a dollar of stock paid up or subscribed, ■ It was a mere broker offering to do business in the guise of an insurance company and assuming no obligation that might not be fully discharged by calling upon those who did business with it to subscribe certain sums to the payment of any loss that might occur to any policyholder, and disbursing the sum so collected. Its liability to personally respond to the policy-holder who sustained a loss was contingent, and depended solely on its failure to perform the duty it undertook to 'notify policy-holders of a loss, and to receive and distribute the funds which they should contribute to indemnify him who had sustained the loss. The capital of the company consisted of five hundred dollars, which the incorporators advanced to pay the expenses of putting it in operation, and of certain assessments called “ dues,” which were to be paid by each policy-holder when he took a policy and semi-annually thereafter. This sum was appropriable to the expenses of the concern, and what should remain over was the property of the company, and as such was of course chargeable with its debts. After appellant had sustained his loss, and after he had put the company in default, the officers and corporators of the company divided this fund among themselves, thus stripping the company of its only assets and rendering it insolvent. At the time of complainant’s loss there was a considerable fund in the hands of the company arising from advance assessments paid by the policy-holders. This fund was appropriated by the company to the payment of its privilege taxes, and also to the payment of its attorneys, whom it had employed to defend it against an indictment preferred against it for a failure to pay the tax. Under a by-law adopted either in 1882 or early in 1883 (there is a conflict of testimony as to the date of its adoption), ten per [509] cent, of all special assessments made to pay losses was also set apart and used in the payment of the taxes chargeable on the company. The appellant’s claim is that by reason of the distribution of the funds of the company, and by reason of the appropriation of the advance assessments to the payment of taxes and attorneys’ fees, and by reason-of the application- of ten per cent, of the special assessments to the same purpose, the officers of the company are personally responsible to him on his claim. We think this contention not well founded as to the appropriation of the part of the special assessment fund. In this fund he has no interest. No part of the assessment made for his loss has been so applied. The other special assessments were made for other policy-holders. The other persons may have contracted with reference to the by-law, which appropriated the fund; their contracts or settlements with the company may have been such as to make the appropriation proper and legal. In any event' the complainant has no interest in the disposition that was made of it, and if any injury has been done thereby of which any one can complain, the appellant has sustained no loss thereby. But as to the payment of taxes and attorney fees from the advance assessment, which was appropriable 'to his demand, we think the appellant may justly complain. In our view the appellant had no interest in the claims to which the fund was applied. The company held itself out to him as lawfully qualified to transact the business it undertook, and payment of these taxes was a necessary step to enable it so to do. It contracted with the appellant to do certain things in consideration of certain fees fixed by itself. If from these fees and others of like character a greater sum had been realized than was necessary to defray all expenses of the company, the gain would have been to the corporators; if it was insufficient, the loss cannot be transferred to the policy-holder, nor paid out of a fund not contributed for that purpose and not owned by the company. We think the directors of the company and its other corporators, to whose use or benefit the advance assessment fund and the fund arising from the dues paid by the policyholders were disbursed, liable to complainant personally. [510] First, because they have divided out the assets of the company without having first discharged its legal obligations, and, second, they have appropriated to the payment of debts chargeable only on the company (taxes and attorneys’ fees) the money to which complainant had the better right. The sums thus misappropriated are in excess of the sum needed to satisfy complainant’s demand, and he is entitled to a decree against the persons by whom or for whose benefit it was applied. Marr v. Bank of Tenn., 4 Cold. 471; National Trust Co. v. Miller, 33 N. J. Eq. 155; Curran v. State of Ark., 15 How. 304; Bartlett v. Drew, 57 N. Y. 587. Neither the sureties on the bond of the treasurer, nor Clayton, the president, aré personally liable. The treasurer as such had no power to direct the application of the fund which he held. He was subject to the orders of the directors and is protected as treasurer for any disbursement made in good faith under their direction. Clayton, the president, had no interest personally in the company; he received none of the funds distributed, nor were any applied for his benefit. He was a mere employee of the company and stands in no contract relation with the appellant. Nor do we think the loss of the fund deposited in the bank can be visited upon the officers or corporators personally. The bank was in good credit at the time of the deposit, the officers seem to have acted in good faith and as prudent men generally in the community acted in reference to their own funds. The position taken by counsel for the company that the complainant cannot secure to himself the sole benefit of the fund misappropriated because others are interested therein is not supported by the record. It is not shown that there are any other creditors of the company, nor that any policy-holder has a claim which will not be met by the plan of assessing other policy-holders according to the practice of the company. Decree reversed and cause remanded.