United States District Court, Northern District of Illinois, E.D
July 23, 1969
AMELIA AND INWOOD COLLINS, FLORENTINE CASTILLO, THOMAS BOYD, LEON NIECIKOWSKI, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS,
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.
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
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
Section 2(b) of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b)
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", listed the following
criterion for their judgment:
[W]e are aided in our task by our prior decisions
which have considered the meaning of security under
the 1933 Act. In addition, we are guided by the
familiar canon of statutory construction that
remedial legislation should be construed broadly to
effectuate its purposes. * * * Finally, we are
reminded that, in searching for the meaning of the
word "security" in the Act, form should be
disregarded for substance and the emphasis should be
on economic reality. S.E.C. v. W.J. Howey Co.,
328 U.S. 293, 298, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946).
Following these guidelines only one conclusion is possible — that
these mutual and reciprocal insurance policies were not intended
by Congress to be treated as securities under the Securities
The legislative history is clear that laws regulating insurance
were to be left to the States. It might be noted here that S.E.C.
v. Variable Annuity Life Insurance Co., 359 U.S. 65, 79 S.Ct.
618, 3 L.Ed.2d 640 (1959) was not an
exception to that policy. The variable annuity is of recent
origin, a concept introduced in New York in 1952. Therefore the
holding that it was more security than annuity said nothing about
the intention of Congress in 1934. The Court acknowledged this
point at page 68, 79 S.Ct., at p. 620 of the decision:
When the States speak in the field of "insurance,"
they speak with the authority of a long tradition.
For the regulation of "insurance," though within the
ambit of federal power (United States v.
[South-Eastern] Underwriters' Assn., 322 U.S. 533 [64
S.Ct. 1162, 88 L.Ed. 1440]), has traditionally been
under the control of the States. * * * While all the
States regulate "annuities" under their "insurance"
laws, traditionally and customarily they have been
fixed annuities, offering the annuitant specified and
definite amounts * * *.
There is nothing about reciprocals or mutuals that is at variance
with insurance tradition and business custom. It is not the
expectation of anyone buying these kinds of policies that they
are going to be sharing in the profits of a company. In Coons v.
Home Life Insurance Co., 368 Ill. 231, 236, 13 N.E.2d 482 (1938)
the court took notice of this fact in discussing the nature of
the mutual's dividend:
Such so-called dividends are, in reality, not
dividends, but in a mutual insurance company are
merely a return to policyholders of the unearned,
that is, unused, portion of the premiums paid in.
The provision for dividends from mutuals was first adopted in
1869. It is no overstatement to say that both these types of
insurance fall squarely within the letter and the tradition of
the Illinois Insurance Code. See 73 Ill.Rev. Stat. §§ 648-697.
The fact that these plaintiffs may not have expected to be
paying assessments on the dissolution of their insurer, does not
take these policies out from under the insurance exception of the
Securities Exchange Act or the rationale behind that exception.
The plaintiffs were probably surprised and even shocked to find
themselves assessed for their insurers' liabilities. Plaintiffs
may have even suffered an injustice or been defrauded but that
still does not bring into play the Act or the jurisdiction of
this Court pursuant to the Act. Not every fraudulent or deceitful
practice is covered by Section 10(b) of the Act and Rule X-10B-5
but only those involving securities. Moreover neither the
district courts nor the federal judicial system were devised to
be the final arbiter of every claim or the rectifier of every
wrong. Plaintiffs can raise the issue of fraud in the state
courts either in a suit of their own instigation or those of the
State Director of Insurance. The three judge court impaneled in
this district will continue to consider the constitutionality of
the Illinois insurance laws.
In accordance with our conclusion that the instant insurance
policies can not be characterized as "securities", we need not
consider any of the additional and peripheral grounds for
We hold, therefore, that the plaintiffs have not stated a claim
under the Securities Exchange Act of 1934 upon which the District
Court can grant relief. It follows, therefrom, and it is hereby
ordered that the order of default entered against the defendant,
Phillip Kitzer, Sr., should be and the same is vacated, that
plaintiffs' motion for a preliminary injunction should be and the
same is denied, and that these four cases and each of them should
be and the same are dismissed.
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