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Sachs v. Ohio Nat. Life Ins. Co.

November 28, 1940


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; Chas. G. Woodward, Judge.

Author: Kerner

Before EVANS, SPARKS, and KERNER, Circuit Judges.

KERNER, Circuit Judge.

The appellants as creditors of the Roseland State Savings Bank (Illinois corporation), instituted suit in an Illinois state court to enforce the constitutional superadded liability of the stockholders of the state bank to its creditors. In our case the stockholder in question is the American Old Line Life Insurance Company (Illinois corporation), hereinafter also referred to as the "American Old Line" or the "Insurer," and the appellee is the Ohio National Life Insurance Company (Ohio corporation), hereinafter also referred to as the "Ohio National" or the "Reinsured," which agreed to reinsure the policies of the former upon certain terms and conditions. When the Ohio corporation was made a party defendant in the state court, it removed the separable controversy as to it to the District Court where later it moved for summary judgment. The court rendered judgment pursuant to defendant's motion and the appellants appealed therefrom.

In 1930 the American Old Line (organized in Illinois to write life insurance) was desirous of discontinuing business. At this time it owned stock in the Roseland State Savings Bank which carried with it a contingent liability of $139,800 (the constitutional superadded liability). In 1930 the Ohio National organized in Ohio to insure lives and to acquire such property as was "authorized or permitted" under Ohio laws, was willing to enlarge its total insurance by reinsuring the policies of the American Old Line. Under the Ohio statutes the power to invest in corporate stock was prohibited except in enumerated instances,*fn1 the power to accept a business risk unrelated to insurance was prohibited,*fn2 and the power to reinsure the policies of other insurance companies was regulated.*fn3

Accordingly on November 19, 1930, the Illinois and the Ohio corporations entered "into a re-insurance agreement for reinsurance by the Re-insurer of the policies of the Insurer upon the following terms and conditions." Of these terms and conditions four are very pertinent here: (1) "On or before January 10, 1931, agter the approval of this re-insurance agreement by the duly constituted officials of the States of Illinois and Ohio, the Insurer shall transfer and assign to the Reinsurer all of its contracts, assets and property [except a few assets constituting part of the purchase price] * * * , including all policy contracts in force;" (2) "Upon such transfer the Reinsurer shall assume and agree to discharge all of the contracts * * * and liabilities of the Insurer * * * and in addition pay the Insurer * * * $1,388,750 * * * [and] Thereafter said Insurer shall proceed to liquidate the Company and surrender its corporate charter"; (3) the "Insurer guarantees and warrants the genuineness and accuracy of its records and books of accounts * * * in reliance upon which this agreement is made"; and (4) "The Re-insurer, after the transfer of said policies to it, shall be directly liable at the suit of and to any policy holder upon any such policy."

This reinsurance contract was consummated on January 8, 1931. On that date the American Old Line transferred all of its assets to Ohio National except four items totaling $607,030 which according to the contract constituted part payment of the purchase price of $1,388,750. These items were (1) corporate stocks valued at $382,030; (2) real estate valued at $50,000; (3) collateral note worth $25,000; and (4) government bonds worth $150,000. Included in item (1) was the Roseland State Savings Bank stock which at the time carried with it the contingent liability of $139,800 but which according to the pleadings of defendant was not listed or shown on the records and books of account of the American Old Line. As to item (1) it is noted that the Ohio statutes prohibited life insurance companies from acquiring bank stock (see foot note 1). In return for the transfer of assets and policy contracts the Ohio National (1) assumed the discharge of the "contracts * * * and liabilities of the Insurer" and (2) paid over $781,720 in cash which when added to the $607,030 in assets above retained made up the sum of $1,388,750.

Thereafter on January 10, 1931, the American Old Line retired from the business of writing life insurance and prepared for liquidation of the company and ultimate distribution to its stockholders. Later, on July 6, 1931, the Roseland State Savings Bank ceased to do business and on that date the constitutional liability of $139,800 accrued in favor of the creditors of the bank. Immediately on the same day the appellants as creditors of the bank, started suit in the state court to enforce the superadded bank stock liability against the stockholders. Among those stockholders was the American Old Line which owned a substantial block of stock and was the stockholder of record. On August 13, 1931, the state bank was closed. On June 3, 1934, the American Old Line's liability was fixed at $139,800 and on July 3, 1935 (four years after commencement of the suit) the appellants joined the Ohio National as party defendant.

The reinsurance contract provided for its execution by the parties on or before January 10, 1931, after the "duly constituted officials of the States of Illinois and Ohio" had approved the contract. The facts already related above show that this reinsurance agreement was carried out on January 8, 1931, and it is undisputed that the agreement received the approval of the insurance officials of Illinois.The record also shows that the Ohio National filed its petition for approval with Ohio's Superintendent of Insurance, also a member of the Commission provided for in the Ohio statutes, who in fact did approve the reinsurance agreement. The record further shows that in this instance the Superintendent of Insurance did not issue an "order of Notice" to the policyholders of the Ohio National and the Commission was not convened. See footnote 3 for the pertinent sections of the Ohio law.

It appears from the record that it had been the practice in Ohio for the Superintendent of Insurance acting alone to approve the petition in reinsurance cases such as the one here before us. In this regard the District Court found that "In numerous instances the insurance department waived the requirement of the giving of notice by mail and the publication of the order of notice, as well as the appointment of a commission, and instead the Superintendent of Insurance, acting alone, approved the proposed reinsurance agreements." This practice of approval by the Superintendent of Insurance was customary especially where the reinsurer was an Ohio corporation and where in the judgment of the Superintendent of Insurance the reinsured was not particularly large.

In the complaint the appellants claim that the Ohio National is required by virtue of the reinsurance contract above described to pay the bank stockholder's liability fixed at $139,800. Obviously the complaint is based on the theory that as part of the consideration for the transfer of assets and policy contracts by the American Old Line, the Ohio National agreed to pay or assumed the payment of the bank stockholder's liability which subsequently accrued against the American Old Line (the owner and holder of the bank stock). To this complaint the Ohio National pleaded several defenses among which were the following: (1) the Ohio National did not agree to pay, or assumed the payment of, the bank stockholder's liability; (2) if assumption of the bank stockholder's liability is considered part of defendant's consideration for the reinsurance agreement, the assumpetion thereof was ultra vires; and (3) the reinsurance agreement was void for non-compliance with the Ohio statute.

After the facts above related had appeared of record by way of admission or deposition, the Ohio National moved for summary judgment on the strength of defense (3) stated in the preceding paragraph. The District Court rendered judgment pursuant to this motion after stating his findings of fact which are substantially as already related and making three conclusions of law thereon.He concluded that the reinsurance agreement was void for statutory noncompliance, that the assumption of bank stockholder's liability was ultra vires and that the defendant was not estopped to assert these defenses. We note that defendant's motion for summary judgment raised only defense (3), but in this opinion we shall review the District Court's disposition of defenses (2) and (3).

Validity of Reinsurance Agreement. We have here a situation where one insurance company assumes the risks of another company retiring from business and agrees to protect it from liability on the policies thus assumed. Such an agreement is known as an agreement of reinsurance and in the main there are two types of reinsurance agreements. In the case at bar the agreement relates to many risks and contains a direct assumption of liability to the policyholders. A more usual type is the agreement relating to individual risks which contain no direct assumption of liability to the policyholders. This difference does not appear material from the standpoint of corporate power to reinsure, for the latter type of reinsurance agreement may well contain an obligation running to the policyholder. Logic would then compel the thought that the power to reinsure individual risks and the power to reinsure many risks manifestly emanates from the same corporate source. It is possible that the exercise of the latter power might entail more serious consequences than the exercise of the former, and hence conceivably invite closer legislative supervision, but this would not change the thesis expressed above. It also appears that much of the case-law on the subject of reinsurance deals with agreements relating to individual risks, but for the reasons stated in this paragraph we believe that this caselaw is also applicable to the type of reinsurance agreement relating to many risks.

In his brief counsel for the Ohio National states that "insurance companies have no implied power to execute reinsurance agreements." In support of this statement he cites Allison v. Fidelity Mut. Fire & Ins. Co., 81 Neb. 494, 116 N.W. 274, 129 Am.St.Rep. 694; Twiss v. Guaranty Life Ass'n, 87 Iowa 733, 55 N.W. 8, 43 Am.St.Rep. 418; and Smith v. St. Louis Mut. Life Ins. Co., 2 Tenn. Ch. 727. The Allison and Twiss cases do support the proposition that mutual companies and benefit societies lack the implied power of reinsurance but counsel may well have observed that other non-Ohio cases have, tacitly at least, recognized the right of mutual companies to write reinsurance.See 1 Couch, Insurance, ยง 262. The Smith case involved not so much the power of the reinsured company to procure reinsurance which was expressly authorized by its charter, but the effect of such an agreement of reinsurance upon the policyholders ...

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