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People Ex Rel. Day v. Progress Ins. Ass'n

NOVEMBER 22, 1955.

PEOPLE OF STATE OF ILLINOIS, EX REL. J. EDWARD DAY, DIRECTOR OF INSURANCE OF STATE OF ILLINOIS, PETITIONER-APPELLEE,

v.

PROGRESS INSURANCE ASSOCIATION, A RECIPROCAL OR INTER-INSURANCE EXCHANGE, RESPONDENT-APPELLEE, JUSTINE F. MCCARTHY, DIRECTOR OF INSURANCE OF STATE OF ILLINOIS, AND AS LIQUIDATOR OF PROGRESS INSURANCE ASSOCIATION, PETITIONER-APPELLEE, ROBERT E. GALLAGHER, AS RECEIVER OF PROGRESS, INCORPORATED, APPELLEE, PROGRESS, INCORPORATED, AND W.N. LOWE, CLAIMANTS-RESPONDENTS-APPELLANTS.



Appeal from the Circuit Court of Cook county; the Hon. R. JEROME DUNNE, Judge, presiding. Orders affirmed.

JUDGE SCHWARTZ DELIVERED THE OPINION OF THE COURT.

Progress, Incorporated and W.N. Lowe, its president and sole stockholder, appeal from an order denying their claim against Progress Insurance Association, an Illinois reciprocal insurance company which is in the process of involuntary liquidation. The principal issue involved is whether the prosecution of this claim is barred by a prior order (from which order no appeal was taken) finding that Progress, Incorporated was indebted to the Association, that it admitted its indebtedness in writing, that it was unable to pay its debts, and that therefore a receiver should be appointed for it. Progress, Incorporated was the attorney-in-fact for Progress Insurance Association, and since this decision in part turns on the relationship between insurance reciprocals and their attorneys-in-fact, we here briefly describe the nature of reciprocal insurance companies.

A reciprocal insurance company is in essence an organization whose members have agreed to exchange insurance contracts with each other and thus distribute a loss. Since the members of such a reciprocal group may be numerous and widely scattered, it is necessary for practical operation that they designate some central authority to act for them. The statutes therefore provide that the reciprocal designate an attorney-in-fact who is given authority by each individual in the group to effect an exchange of the individual insurance contract with the other members of the group. Ill. Rev. Stat. 1953, Ch. 73, Par. 674 [Jones Ill. Stats. Ann. 66.737]. The Illinois Insurance Code defines insurance companies as any entity or group of individuals engaging in "any kind of insurance or surety business, including the exchanging of reciprocal or inter-insurance contracts between individuals, partnerships and corporations." Thus, a reciprocal is within the regulatory provisions of the Insurance Code. (Ill. Rev. Stat. 1953, Ch. 73, Par. 614 [Jones Ill. Stats. Ann. 66.677].) The attorney-in-fact for the reciprocal insurance company has been described as "the whole machinery, through which the association functions." (Mosteiko v. National Inter Insurers Corp. of Chicago, 229 Ill. App. 153, 163 (1923).) See also Roach & Co. v. Harding, 348 Ill. 454 (1932) and Warfield-Pratt-Howell Co. v. Williamson, 233 Ill. 487 (1908).

On April 14, 1951, the Director of Insurance acting under the authority granted him in the Insurance Code petitioned for the liquidation of Progress Insurance Association (the Association). Progress, Incorporated (the attorney-in-fact) and Lowe, the sole stockholder, were named as respondents. The petition alleged that the Association had filed a false annual statement, including among other things the listing of $300,000 in United States Treasury bonds as unencumbered assets of the Association when, in fact, such bonds had been pledged as collateral for a note signed by Lowe; that the Association had accepted risks in excess of the ratio permitted by law; and that the policies issued by it failed to provide for contingent liability as required by statute. An answer to the petition was filed by the Association, the attorney-in-fact, and Lowe. On motion of the Director of Insurance the answer was stricken and on June 27, 1951, the trial court entered a decree of liquidation against the Association, reserving jurisdiction to take action with respect to all claims filed against it. No appeal was taken from this decree.

On November 30, 1951, Progress, Incorporated and Lowe filed with the Director, as liquidator of the Association, a claim against the Association for $384,049.05 for alleged unpaid commissions. The claim itself is not a part of the record in this appeal since neither the Director nor the appellants introduced it in evidence. The absence of the claim from the record is the basis of a motion made by appellees to affirm the judgment or dismiss the appeal and of a countermotion by appellants seeking to require the Director to file in this court a true copy of the claim. Various counter-suggestions and other motions relating thereto were made. This raises a serious question of practice, but as we do not desire to dispose of the case on a technical point, we have considered the matter as if the claim had been introduced in evidence and our decision makes the ruling on these motions moot. For the record we have denied all the motions.

On February 21, 1952, the Director filed a second petition in which he prayed that a receiver be appointed for Progress, Incorporated. It set forth the relationship of Progress, Incorporated to Progress Insurance Association and alleged that the entire management of the affairs of the Association was under the control of the attorney-in-fact, including the supervision and auditing of all books and records. The petition, among other things, alleged that under the power of attorney signed by all the members of the Association, the attorney-in-fact was to receive thirty-five percent of all gross premiums; that it had paid itself commissions of $200,000 over and above this thirty-five percent; and that it had admitted in writing it owed this sum to the Association, as evidenced by excerpts from the books of account maintained by it, which excerpts were attached as exhibits to the petition. The petition further alleged that it was impossible for the Director to carry out his duties of liquidation of the Association unless a receiver were appointed for the attorney-in-fact. The petition prayed that the court either appoint a receiver pursuant to Sections 86 and 87 of the Illinois Business Corporation Act [Ill. Rev. Stats. 1953, Ch. 32, §§ 157.86, 157.87; Jones Ill. Stats. Ann. 32.088, 32.089] or, in the alternative, that the appointment of the receiver be pursuant to the inherent power of the court to grant such relief as ancillary to the liquidation decree previously entered. Appellant Lowe filed an answer on behalf of the attorney-in-fact, admitting certain allegations and denying others. The answer did not challenge the court's jurisdiction nor did it make any claims that the Association was indebted to the attorney-in-fact.

The issue on the appointment of a receiver for the attorney-in-fact was heard on January 13, 1953, and the court found that the attorney-in-fact owed the Association over $200,000; that it had in writing admitted such indebtedness and that it was unable to pay its obligations as they matured in the ordinary course of business. The court thereupon appointed a receiver for Progress, Incorporated. No appeal from that order was taken by appellants. Later in this opinion when we consider the finality of that order we will set forth more fully its recitals and findings. The court subsequently entered an order granting the receiver leave to institute legal proceedings against appellant Lowe to recover any moneys owed by him to the attorney-in-fact.

After the receiver for the attorney-in-fact had been appointed, the Director presented his recommendations on the claims filed against the Association including the claim of the attorney-in-fact for $384,049.05 filed November 30, 1951. He recommended that the claim of Progress, Incorporated and/or Lowe be disallowed in its entirety. The objections to this recommendation filed by Progress, Incorporated were stricken but Lowe was given leave to file specific objections as an individual to the disallowance of the claim. On May 24, 1954, these objections were overruled and the court found that the Association was not indebted to Progress, Incorporated.

Following this, separate petitions to set aside the order of May 24, 1954, were filed by each of the appellants (Lowe signing the petition for Progress, Incorporated), alleging they had a meritorious claim against the Association and further alleging that the order appointing a receiver for the attorney-in-fact was void because it was beyond the jurisdiction of the court. The petitions prayed that the order of May 24, 1954, disallowing the claim against the Association be vacated, that the appointment of the receiver for the attorney-in-fact be declared void or, in the alternative, that the findings in the receivership order be declared not binding as to the claim against the Association. The petitions also prayed that such findings be declared not binding in the receiver's separate suit against Lowe which had been instituted to recover moneys due from him to the attorney-in-fact. On June 28, 1954, these petitions were denied in their entirety. This appeal is from the orders of May 24, 1954 and June 28, 1954, denying appellants' claim against the Association. We may now proceed to a discussion of the issue.

Two basic questions are presented, as follows:

1. Did the court have jurisdiction to enter a receivership order against the attorney-in-fact in the proceeding relating to the liquidation of the Association?

2. If it had jurisdiction, was the finding that the attorney-in-fact owed the Association more than $200,000 such an adjudication as would bar the attorney-in-fact from claiming in another proceeding that the converse was true and that the Association owed it money?

Considering the first question, there can be no dispute that the Director could have brought a separate suit to have a receiver appointed for the attorney-in-fact pursuant to Section 86 of the Business Corporation Act. (Ill. Rev. Stat. 1953, Ch. 32, Par. 157.86.) If, as alleged by the Director, the attorney-in-fact was indebted to the Association, had admitted the indebtedness in writing, and was unable to pay its debt, the act authorized such receivership of the attorney-in-fact. Moreover, the functions of an attorney-in-fact are such as to bring it within the definition of Section 2(e) of Article I of the Insurance Code. (Ill. Rev. Stat. 1953, Ch. 73, Par. 614.) Accordingly, the Director upon the allegations he has made could have sought liquidation or receivership of the attorney-in-fact at the same time he brought the original petition against the Association. Similarly, he could have instituted separate proceedings against the attorney-in-fact for liquidation or receivership under either the Insurance Code or the Corporation Act. The question thus becomes whether the Director, as part of the liquidation proceedings of the Association but subsequent to the entry of the liquidation order, could obtain a receivership for the attorney-in-fact in order to effectuate his liquidation of the Association.

Appellants contend that the decree of liquidation against the Association having been entered pursuant to the special statutory jurisdiction given the court by the Insurance Code, the court's jurisdiction was limited by that statute and the court could not in that same proceeding entertain a petition for receivership under the Business Corporation Act. They cite Calkins v. Calkins, 229 Ill. 68 (1907) as the leading case for this doctrine. There, our Supreme court held that a defendant in a will contest could not file a cross-bill to construe the will as an ...


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