In re Equitable Reserve Fund Life Ass'n

16 N.Y.S. 80, 68 N.Y. Sup. Ct. 299, 40 N.Y. St. Rep. 800, 61 Hun 299, 1891 N.Y. Misc. LEXIS 324

• Court: New York Supreme Court
• Decided: October 16, 1891
• Status: Published

Opinion

Daniels, J.

The Equitable Reserve Fund Life Association of the City of New York was created a corporation on or about the 17th of May, 1883, under the authority of chapter 175 of the Laws of 1883. It continued its business uninterruptedly from that time until the 18th of September, 1889, a period of upward of six years, when, upon the application of the attorney general, John Yon Glahn was appointed temporary receiver of the assets and property of the corporation. He continued in that capacity until the 9th of November, 1889, when a decree was made dissolving the corporation, and he was appointed and became permanent receiver. As such, there came into his hands the sum of $78,953.99, or thereabouts. This sum was divided into two funds under the constitution and by-laws of the association, one of which was designated the “Death Fund,” which was applicable alone to the payment of beneficiaries in certificates of insurance upon the lives of persons becoming deceased during the existence and force of the certificate. This fund amounted to the sum of $18,401.35, which was very largely deficient in its ability to meet the claims made by beneficiaries under certificates issued to persons who had become members of the association and fulfilled all their obligations, and were deceased prior to the dissolution of the association. The other was denominated the “Reserve Fund,” and amounted to the sum'of $63,614.79; and it is as to the disposition of this reserve fund that the principal controversy in this proceeding has arisen. The receiver, being in doubt as to the manner in which this latter fund should be distributed, and the allowance of claims that were presented in favor of beneficiaries under certificates where the assured was deceased, applied to the court by petition for instructions, and a very comprehensive reference was directed, including these- and other subjects of uncertainty or controversy arising in the case; and upon the hearing before the referee all points of a controverted character were presented to him, and he decided, as the constitution of the association required that to be done, as well as the form of the certificate of insurance, that the-persons in whose favor death claims existed were entitled to an exclusive-preference to payment, so far as that could be made, out of this death fund,. but that they had no legal claim whatever against the reserve fund for the amount remaining unpaid after the death fund was exhausted. In this decision, that the beneficiaries having existing claims were entitled to payment out of the death fund, the referee is fully supported by the constitution of the association, as well as the form of the certificates which were issued. The association had no capital whatever, but the claims arising against it were provided for by means of an assessment upon' the persons holding certificates of insurance issued by it; and the amount realized through these assessments, as the constitution was finally amended, was applied to the extent of 70 per cent, to the creation of this death fund. Five per cent, of it was applied to a contingent fund, created to meet other expenses and liabilities of the association, and the remaining 25 per cent, was devoted to the creation of the reserve fund. These assessments were, in the first instance, made as the claims arose in favor of beneficiaries under the certificates, but that was finally changed by an amendment to the constitution providing for the imposition of assessments on the second Tuesday of every other month in each year; and this proceeding was continued, under 'the authority of the court, by the receiver, through the intervention of the trustees of the association, in the month of October, 1889, which was the last assessment made upon the hold- < ers of certificates in this association; and from that assessment was realized the sum of $7,044.40, whicli formed a part of the aggregate death fund already mentioned. For the payment of claims of this character the constitution contained this provision: “Section 1. Upon the death of a member during the continuance of his or her certificate or certificates in full force the association shall, within three months after due notice and satisfactory proofs of such death, and the approval thereof by the executive committee, pay to the beneficiary named on the books of the association, if such beneficiary be living at the time of such member’s death, otherwise to the heirs or legal representatives of such deceased member, the amount to which the same may appear entitled according to the books of the association and the terms of the certificate of membership, out of the death fund (hereinafter defined) of the association; or, if the death fund shall then he insufficient to pay the whole of any such claim, then pro rata with other claims out of the moneys to be realized to said death fund from the assessment to be made as hereinafter described: provided, however, that there shall be first deducted therefrom any counter-claim or indebtedness due from said member to the association; and no death claim shall become otherwise-due or payable, except from the reserve fund, as hereinafter provided.” And it was further provided, by section 6 of article 7 of the constitution, that the death claims’should be payable from the death fund account, and this was conformable also to the certificates issued by the association for the insurance of its members. No other claim whatever was permitted to be made a charge upon this death fund, but it was exclusively limited to the payment of the claims of beneficiaries under certificates issued to deceased members; and, so far as the referee concluded, that wtiat are called the “death claims maturing prior to the dissolution of the association” were entitled to payment as a first charge upon this death fund, there seems to be no ground to doubt its correctness. In this respect the case differs entirely from People v. Insurance Co., 78 N. Y. 115. In that action-the company, which was a corporation doing its business upon an actual capital, issued ordinary policies of insurance, and when it became insolvent the persons insured were thereby absolved from the payment of further premiums, and entitled to a valuation of their policies at the time when the insolvency commenced to exist. And so it was also held in In re Albert Life Assur. Co., L. R. 9 Eq. 706; while in the present case the association depended wholly upon assessments to be made to meet the claims arising against it. And it obtained the power, and the authority existed, to continue such assessments as long as the association legally existed, which included the assessment made under the application of the receiver in the month of October, 1889. But after the dissolution of the association no authority appears to have survived through which additional assessments could be made, and the result which followed this disability is that the death claims arising prior to, the dissolution of the association have been paid much less than a moiety of their amount. To meet this large deficit they were urged upon the attention of the referee as entitled to payment out of the reserve fund; but he rejected that view, and held the reserve fund to be only distributable proportionately among the holders of unforfeited certificates in the association at the time of its dissolution. This conclusion was considered to be supported by the peculiar language of the certificate and of the constitution of the association, and, if that view is to be sustained, then the case of Burdon v. Association, 147 Mass. 360, 17 N. E. Rep. 874, seems to be an authority in favor of his conclusion. But this case differs very significantly from that authority in the circumstance that no disposition of the reserve fund has been provided for by the constitution or by-laws in any manner after the dissolution of the association. In that case there was such a provision, giving the safety fund to the persons holding certificates in the company.

Neither the constitution, by-laws, nor certificate of insurance of this company has in any form prohibited the payment of the deficiency remaining in death losses out of the reserve fund. But the constitution has contemplated the fact of such payment in the discretion of the board of trustees, for it has invested them with authority to use the reserve fund to meet any want or necessity of the association that might arise by reason of unforeseen contingencies; and the unforeseen deficiency in the death fund seems to be fairly within the effect of this language. It has also been provided in-the occurrence of another event, which never in fact, however, was attained, that the excess in the reserve fund exceeding the sum of $100,000 might be used towards making up any deficiency then existing in the death fund. The constitution has also prohibited the reserve fund from being used for the payment of expenses; but it has nowhere prohibited the use of this fund, after the dissolution of the association, to supply the deficiency in the death fund. Neither has it given, either directly or by implication, the reserve fund in any event to the holders of certificates in the association. It is true that it was declared in the certificate that this fund should be deposited and invested in trust for the benefit of the members of the association, but the extent to which that benefit was provided for or in any manner conferred was through the issuing of bonds to members under certificates issued to those who paid the assessments made against them for the period of at least five years. In favor of such members or holders of certificates the constitution did provide for an apportionment of the reserve fund to their holders on such basis and principles as the board of trustees should deem safe and equitable, and to render the apportionment available the members to be included in it were authorized, after 10 years from the date of the apportionment, to apply the sum apportioned towards paying dues and assessments under the certificate. But this was qualified by the further proviso that, if the member in whose favor an apportionment was made should die, or otherwise cease to be a member, leaving the apportionment unapplied, then it should be withdrawn, and apportioned in like manner to the holders of other certificates at the expiration of the next five years in which the apportionment could by the constitution be made. The only advantage secured to the holder of the certificate by this apportionment was the right to use the amount apportioned, after the expiration of 10 years from the time of making the apportionment, towards the payment of future dues and assessments under his certificate, and that never became available. This contemplated no advantage to the member under the apportionment after he ceased, by death or otherwise, to be a member of the association, but the benefit conferred was wholly to be realized while he remained a member, and the association itself continued to exist. If he ceased to be a member, or the association should be dissolved, from that time, as there could be no further assessment, very manifestly under these provisions of the constitution he could derive no benefit whatever from the apportionment. It accordingly did not affect the disposition of the reserve fund in any manner whatever if the association itself should cease to exist. The regulations, on the other hand, were all made in contemplation off the continued existence and business ability of the association itself. When it should cease to exist, no regulation or provision whatever was anywhere made, controlling, directing, or indicating what disposition should be made of this reserve fund, but It was left entirely to be disposed of under the rules and regulations to be applied by law to the distribution of the assets of the insolvent corporation. There was but one appropriation made from the reserve fund under this authority vested in the trustees, and that was in August, 1889, amounting to no more than the sum of $8,204.72, and, as that became ineffectual by the dissolution of the association, the reserve fund remained unaffected by any. action, direction, or disposition on the part of the trustees of the association; and that fact seems to place the disposition of this fund under the authority of People v. Security, etc., Co., 78 N. Y. 114, which in the main has also been sanctioned by Attorney General v. Insurance Co., 82 N. Y. 172.

The provisions of the constitution of the association having failed to make any disposition of this fund, for the apportionment necessarily failed with the dissolution of the association, the fund remained the unqualified property of the association itself. It was not given to the members holding the certificates at the time of the dissolution; neither was any authority given to the trustees to bestow it on such members, nor has the constitution in any form created any power of that description; and the consequence seems to follow that this fund, as the property of the association itself, at the time when the permanent receiver was appointed, became available to meet all the unsatisfied debts and obligations of the association, and was not distributable, as that was directed to be done by the referee, among the holders of certificates of insurance. In this respect, section 3 of chapter 285 of the Laws of 1887, amending the act under which the association was formed, appears to contemplate a general application of the assets of the association among all the persons having claims or demands against it. For that purpose it has provided for the appointment of a receiver or trustee “for the distribution of its assets among its members, certificate holders, policy-holders, and creditors,’’ which contemplates equality of disposition among these various persons in proportion to their final rights against the association. The provision has been awkwardly connected with the verdict of a jury on the disposition of the controverted right of the attorney general to the appointment of a receiver. But it could not have been intended by the legislature that it should depend alone upon this event. There was no reason why it should be made to follow the verdict, and not generally to include the disposition of the assets of the association: and, while the language employed has in form made this disposition dependent upon the verdict, it is still to be understood as the creation of a general authority conferred upon the court to distribute the assets of the association among the persons actually appearing entitled thereto, and that is conformable to the legal principles which have been applied to the distribution of the assets of insolvent corporations when they have been brought before the courts for distribution. As the property of this association at the time when its affairs passed into the hands of the permanent receiver, this reserve fund became entitled to be used and appropriated to the satisfaction of alllegal demands existing against the association. It was its property, and, as its disposition had been not otherwise incumbered or declared by the authority of the association, it was subject to this obligation; and among the persons entitled to satisfaction from this fund are the persons in whose favor death claims accrued and who have not been wholly paid by the amounts received by them from the death fund, for they were creditors of the association, entitled to be satisfied, so far as the assets were sufficient for that purpose, equally with other creditors having demands against them; and among these, under the authorities which have been referred to, are to be included the owners of the certificates of insurance in force at the time of the dissolution of the association, for to them the association had become obligated to maintain its existence and ability to meet the certificates in the event of the decease of the persons upon whose lives they were respectively issued. The extent of this liability was fully considered in People v. Insurance Co., already referred to; and it was there held, in the event of the company becoming disabled to continue the insurance, as this association did when it was dissolved, that a liability arose in favor of the holder of its obligation to pay to him such a sum as would be sufficient to obtain a similar insurance at the same rate of premium or assessment in another similarly organized association. To that extent the holder of the certificate became a creditor of the association, equally entitled to payment with the beneficiaries in the death claims left unpaid by the amount of the death fund; and in principle this has been followed in Darrow v. Society, 116 N. Y. 537, 22 N. E. Rep. 1093, and O'Brien v. Society, 117 N. Y. 310, 22 N. E. Rep. 954; and between them, after paying the expenses and any other superior liabilities, the reserve fund of this association should be distributed. All these parties are equally creditors of the association, entitled, as far as that may be done, to the satisfaction of their unsatisfied legal claims, by the application to them of this reserve fund. This obligation results from the necessities of the situation. ¡Neither the contract made by the certificate, qualified as it was by the constitution and the bylaws, nor the constitution or by-laws, provided for any final disposition of this fund in the event of the dissolution of the association; and it consequently devolved upon the court to distribute it under the rules and dictates of the principles of equity, and they require its equal distribution among all the creditors of the company.

A special preference was claimed in favor of the beneficiary John Hurley under the certificate of insurance issued on the life of Johanna Hurley, who died on the 23d of April, 1889. It appeared by the evidence that the assessment following the decease of the person named in the certificate was specially made to pay the death claim asserted in favor of this beneficiary, together with others which had then accrued against the association; and under the assessment an amount was realized more than sufficient to satisfy all the death claims which at that particular time were required to be provided for; butthe amount payable to this beneficiary was not paid over, for the reason that a-dispute afterwards arose concerning the liability of the association to make the payment, and the fund realized for this purpose passed into the hands of the receiver, and became a part of the amount of the death fund of the association. The referee considered that this beneficiary was not entitled to the payment of the claim existing in her favor out of this balance which was paid over to the receiver. In that he seems to have been in error, for the money was raised to pay this and the other claims allowed at the time by the trustees. It was a special fund, received by them, which it was their duty to pay over, inasmuch as it turned out that there was no substantial ground for denying the validity of the claim; and the receiver, having this money specially charged with this obligation, should apply it to the payment of this demand. It was also claimed in behalf of Benjamin J. Klene that he was entitled, as the beneficiary named in in the certificate issued to John P. Schulte, to participate in the division of the death fund. • But it appeared that Schulte died on the 12th of ¡November, 1889, after the association had become dissolved, and the rights of the parties had been fixed by that event. He was at the time of its occurrence the holder of a certificate alone, entitled to no further compensation than such an amount as would enable him to secure another insurance in a similar company at the same rate of liability to assessment. There was, therefore, no error in rejecting the claim made by him to satisfaction out of assessments so far as they have been appropriated to the creation of- the death fund. The claim made by Martin and Johnson, as the beneficiaries of Mrs. Johnson, who died on the 4th of July, 1889, has been sufficiently disposed of by what has been said concerning the disposition which should be made of the reserve fund; and so also has that made by Maggie C. Lewis, as the beneficiary of J. 0. Lewis, who died on the 10th of May, 1889; and the same is true as to the claim presented in favor of Theodore A. Liebler, Jr.

This leaves alone to be considered the claims presented by John B. Foley and others, who failed to pay the last assessment made in October, 1889, and were therefore held by the referee to have forfeited their certificates. It appeared by the evidence that the notices which were required to be served of the making of this assessment were served upon these persons, and they failed to pay the amount assessed against each of their certificates; and in that event, not only the certificate itself, but the by-laws of the association, provided for the forfeiture and termination of the certificate of the person in that manner in default. Within the express language employed for this object, therefore, these certificates were forfeited. It has been insisted that the assessment made in October, 1889, and which is known as the thirty-fifth assessment, was made without authority, for the reason that a temporary receiver had been appointed for the company, and had entered upon the discharge of his duties prior to the time of the making of this assessment; but that fact did not terminate the ability or the obligation of the trustees to make the assessment. On the contrary, it was provided by the constitution, as it had been amended, and subject to the right to make which the certificates were expressly issued, that the assessment should be made on the day in October in which it was made. The receiver applied to the court for liberty or authority to have it made, and that was accredited to him, and under that the trustees made the assessment; and in all respects they appear to have proceeded regularly in so doing. Associations or corporations of this description are distinguished as to the exercise of this authority from life insurance companies carrying on their business upon required as well as contributed capital. Their insolvency puts an end to the right to demand the payment of premiums on the policies, but the business of this company was carried on solely upon contributions expected to be obtained from its members through the instrumentality of these assessments; and both the right and ability to make the assessment and require its payment from the holders of the certificates continued as long as the association retained its corporate existence. This subject was considered in McDonald v. Ross, 29 Hun, 87. And so it was in Vanatta v. Insurance Co., 31 N. J. Eq. 15, and in Com. v. Insurance Co., 112 Mass. 116. And the exercise of this authority has been further sanctioned in Insurance Co. v. Rand, 24 N. H. 428, and Sterling v. Insurance Co., 82 Pa. St. 75. Both upon principle and authority this assessment, therefore, appears to have been regularly as well as legally made; and, as the parties failed to pay their proportionate pans of it, after they had been regularly notified of it and payment required, their certificates were forfeited, and became void, under the language forming a part of each certificate, as well as under the by-laws of the association; and because'of this default there seems to have been no error in the disposition of this part of the case as it was submitted to and decided by the referee. In this and the other respects in which the referee is considered to have rightly disposed of the claims submitted to him the exceptions to his report were correctly overruled at the special term, and the order to that extent should be affirmed. But in the conclusions reached by him that the death claimants were restricted to the death fund for the satisfaction of their claims, and were unauthorized to participate in the distribution of the reserve fund upon an equality with the holders of certificates in force at the time of the dissolution of the corporation for the residue remaining unpaid to them after exhausting the death fund, and as to the claim made in behalf of John Hurley, the order should be reversed, and the report of the referee set aside; and as to those matters a further hearing should be provided in conformity to the conclusions which have been indicated in this investigation to determine the value of the certificates, and apportion the fund between them and the other creditors of the association, and* this disposition of the ease in each respect should be without costs to either party. All concur.