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Central Standard Ins. Co. v. Gardner





APPEAL from the Appellate Court for the First District; — heard in that court on appeal from the Superior Court of Cook County; the Hon. GEORGE M. FISHER, Judge, presiding.


The defendants, as holders of assessment policies designated as Class II in a certain reinsurance agreement hereafter referred to, were granted leave to appeal to this court from a decision of the Appellate Court, First District, which affirmed a decree of the superior court of Cook County approving an accounting by plaintiff as successor trustee of its acts in managing a trust of life insurance assets.

The original complaint filed by Central Standard Life Insurance Company (hereafter referred to as Central Standard) requested instructions as successor trustee under a specially created trust of life insurance assets being administered for the benefit of certain classes of persons insured under an assessment plan of insurance and further prayed an order approving the administration of the trust by Central Standard and its predecessor. Such approval was sought preparatory to raising rates of assessment.

Defendants filed objections to the accounting on the theory that both the original and successor trustee converted trust assets and trust income to their own use and through a series of self-dealings misconstrued the provisions of the trust in their own interest. Such objections have been consistently overruled and denied by the master in chancery, the circuit court, and the Appellate Court. There are no material questions of fact as to the actions of the original or successor trustees raised by the objections or the evidence. The questions presented for decision are whether or not the actions by the original and successor trustees constituted breaches of trust, or of contract.

Originally the defendants were insured by Illinois Bankers Life Association, (hereafter called the Association), a mutual assessment life insurance association. In 1929 a new stock company, Illinois Bankers Life Assurance Company, (hereafter called the Company), was organized to conduct an insurance business on the legal reserve basis.

A contract of reinsurance was entered into November 19, 1929, between the old Association and the new Company to permit the Company to reinsure the business of the Association. The 1929 reinsurance agreement provided that the Association assets be conveyed to the Company in trust, to be apportioned ratably between those members who elected to convert their then assessment policies into the new legal reserve insurance offered by the Company and those members who elected to remain on the assessment plan, which thereafter was to be administered by the Company. The assets from time to time apportioned by the Company for the benefit of those electing to convert to the Company's legal reserve insurance were withdrawn from the trust as policyholders converted and were "transferred" by the Company to itself, free of the trust, as a form of premium payment. Such "transferred" assets became its property.

The reinsurance agreement, after providing for the conveyance of all property of every kind of the Association to the Company and the latter's assumption of the risks, provided that the members shall thereafter pay premiums to it and that

"The members of the Association so reinsured shall contribute to the expenses of the Company, during the first two years after this contract goes into effect, 25% of the assessments and premiums as and when paid by such members. After the first two years the amount of such contribution shall be 22 1/2% of said premiums and assessments. * * *

"Section 5. All the present funds of the Association shall be considered as Trust Funds for the benefit of the members of the Association, and, with accretions thereto and deductions therefrom, shall be invested from time to time in accordance with the provisions of the statute as to the investments of Legal Reserve Life Insurance Companies; and the Company shall, at all times, keep books of account of said funds.

"Accretions shall consist of (A) the assessments and premiums to be paid by continuing members, less contributions to expenses as set forth in Section 4; (B) interest accumulations at the rate of 4 1/2% per annum on the reserves accumulated on the so-called Individual Reserve Policies, and at the rate of 4% per annum on the accumulated savings contributed by holders of Savings Accumulation policies, and at the rate of 3 1/2% per annum on the remainder of such funds, but in no event at a rate greater than the actual net rate of interest earned on the funds, nor less than 3 1/2%; and (C) the surplus earnings provided in Section 6.

"Deductions shall include (D) all policy payments and claims to the said members on the assessment plan and to their beneficiaries; and (E) any amounts apportioned and paid or credited to policies or certificates which may be converted as hereinafter set forth.

"There shall be set up by the Company from the aforesaid Trust Funds the legal reserve from time to time required to be set up to the credit of all policies or certificates assumed hereunder, and the special funds created in connection with policies on the Savings Plan and the reserves on the so-called Individual Reserve policies as provided by the terms of such policies.

"The Company shall have the power, as aforesaid, to invest said funds and to use the said funds, or the income therefrom, for the purpose of maintaining, as far as possible, the said present rates of the said certificates or for the benefit of the members of the said Association. No dividends shall ever be paid by the said Company out of the funds of the Association or accretions thereto as herein provided.

"Section 6. In consideration of said transfer of insurance and of the contributions to expenses herein provided and any excess interest earnings or otherwise, said Company agrees that at the end of each calendar year it will pay into the Trust Fund set apart for the benefit of the members of said Association, that proportion of the surplus earnings of the Company accumulated during the year as set forth in the Annual Statement made in conformity with the requirements of the Department of Trade and Commerce of Illinois, exclusive of dividends paid or apportioned to participating legal reserve policy holders and interest earned on the capital and unassigned surplus, that the total assessment premium income of the year bears to the total renewal premium income of the Company, including the assessment premium income."

In 1951 Central Standard, by an agreement to reinsure all risks of the Company, became successor trustee and assumed all liabilities of the original trustee.

As more fully outlined in the case culminating in Winger v. Chicago City Bank and Trust Co. 394 Ill. 94, the creation and early administration of the Company was conceived in fraud by one Martin and his associates. However, that case involved ownership of stock in the Company, did not involve construction or management of the trust, and did not pass upon the acts of the Company in its capacity as trustee under the reinsurance agreement.

The selection of assets from the trust fund for transfer to the Company in its own right on account of converting policyholders took place while the Company was under the full control of Martin, as did the establishment of policies for administration and methods of computation and ...

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