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COLLINS v. BAYLOR

July 23, 1969

AMELIA AND INWOOD COLLINS, FLORENTINE CASTILLO, THOMAS BOYD, LEON NIECIKOWSKI, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
JAMES BAYLOR, DIRECTOR OF DEPARTMENT OF INSURANCE OF STATE OF ILLINOIS, AS LIQUIDATOR OF MULTI-STATE INTER-INSURANCE EXCHANGE, AND CHARLES J. HOFFMAN, JR., DEFENDANTS. ALBERT GARY, JULION GIRON, JOHN H. MCCULLOUGH, LORRAINE SHAW, AND PIERCE THOMAS, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS, V. JAMES BAYLOR, DIRECTOR OF DEPARTMENT OF INSURANCE, STATE OF ILLINOIS, AS LIQUIDATOR OF BLACKHAWK MUTUAL INSURANCE COMPANY, DEFENDANT. WILLIE BAXTER, WILLIAM BILLUPS, BENJAMIN BROWN, RAUL CHAVEZ, CARLOS DELGADO, FLORENTINO CASTILLO, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS, V. JAMES BAYLOR, DIRECTOR OF DEPARTMENT OF INSURANCE OF STATE OF ILLINOIS, AS LIQUIDATOR OF BELL MUTUAL CASUALTY COMPANY, AND PHILLIP KITZER, SR., DEFENDANTS. CHARLES BALLENGER, THOMAS BERRY, ARVELIO CABRERA, ERNESTO GARCIAS, CHARLES HAMPTON AND FLORENTINO CASTILLO, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS, V. JAMES BAYLOR, DIRECTOR OF DEPARTMENT OF INSURANCE OF STATE OF ILLINOIS, AS LIQUIDATOR OF ADAMS MUTUAL INSURANCE COMPANY, AND NORMAN J. SCHLOSSBERG, DEFENDANTS.



The opinion of the court was delivered by: Napoli, District Judge.

MEMORANDUM ORDER

These four cases are predicated entirely on the Securities Exchange Act of 1934. They are brought by certain policyholders of four defunct automobile insurance companies on behalf of all others similarly situated. The plaintiffs seek the rescission of their policies and an injunction against the State Director of Insurance to prevent the collection of assessments under the contingent liability provisions of their policies.

All of the defendants, except Phillip Kitzer, Sr., who has been ordered in default, have moved to dismiss these suits because the plaintiffs have not stated a claim upon which relief can be granted. The defendants contend that the insurance policies in question are not securities in any sense and certainly not within the meaning of the Securities Exchange Act and the rules promulgated thereunder and, moreover, that they are specifically exempted from coverage by the Act and its scheme of regulation. Defendants contend that whatever relief may be available to the plaintiffs must be pursued through the claim provisions of the Illinois Insurance Code.

As additional grounds for dismissal, various defendants have proposed that these suits are not proper class actions, that they are barred by the statute of limitations and laches, that the policies are not described in the complaint nor were they sold in commerce or through the U.S. mails and that the entire matter is res judicata.

The instant claims were raised as the second count in earlier suits filed in this Court. A three judge court was convened to determine the first count which challenged the constitutionality of the Illinois Insurance Code. The second count was dismissed without prejudice.

The central and dispositive issue in these cases is whether the insurance policies can be characterized as securities within the meaning of the Securities Exchange Act of 1934. The argument of the defendants is that as insurance these policies are implicitly and specifically excluded from the operation of the Act. The reply of the plaintiffs is that these policies represent not merely insurance, which they agree would not ordinarily be covered by the Act, but also membership in a reciprocal or mutual company, an ownership interest, a share in the profits and losses, a security.

The legislation both state and federal and the case law support defendants' position.

Section 2(b) of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b) provides:

  No Act of Congress shall be construed to invalidate,
  impair, or supersede any law enacted by any State for
  the purpose of regulating the business of insurance *
  * *.

A "security" is defined in the Securities Exchange Act of 1934, Section 3(a) (10) as follows:

  The term of "security" means any note, stock,
  treasury stock, bond, debenture, certificate of
  interest or participation in any profit-sharing
  agreement * * * or in general any instrument commonly
  known as "security" * * *

The above definition of the 1934 Act is substantially the same as that used in the 1933 Act. The 1933 Act also contained a specific exemption from registration of insurance policies and annuities regulated by appropriate state officials. 15 U.S.C. § 77c (a) (8). The legislative history of that exemption is quite clear as to the purport of the Act and the intention of Congress:

  Paragraph (8) makes clear what is already implied in
  the act, namely, that insurance policies are not to
  be regarded as securities subject to the provisions
  of the act. The insurance policy and like contracts
  are not regarded in the commercial world as
  investment securities offered to the public for
  investment purposes. The entire tenor of the act
  would lead, even without this specific exemption, to
  the exclusion of insurance policies from the
  provisions of the act, but the specific exemption is
  included to make misinterpretation impossible. H.R.
  Rep. No. 85, p. 15, 73rd Congress, 1st Sess. 1933.

The Supreme Court in Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967), in construing for the first time the 1934 Act's definition of "security", ...


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