Equitable Life Assurance Society of the United States v. Brown (213 U.S. 25)

[Syllabus from pages 25-27 intentionally omitted]

This case comes here on writ of certiorari, which brings up the record from the circuit court of appeals of the second circuit, reversing the decree of the circuit court for the southern district of New York, which sustained the petitioner's demurrer to the plaintiff's bill and dismissed the same. The opinion of the circuit court is reported in 142 Fed. 835, and that of the circuit court of appeals, 81 C. C. A. 1, 151 Fed. 1.

The bill was filed against the defendant (the petitioner above named) some time in August, 1905, and is one of extreme length, and makes allegations in great detail relating to the conduct of the business of the defendant by its board of directors and by its officers and agents for many years prior to the filing of the bill. It will not be necessary to repeat all of them in order to understand the case as made. The following facts, among many others of a similar nature, appear in the bill:

The complainant is a citizen of the state of Maryland and brings this suit in behalf of himself, as well as all the policy holders and annuitants of the company defendant who may choose to come in and join therein; the defendant is a citizen of the state of New York and an inhabitant of the southern district thereof.

The defendant was incorporated in May, 1859, under a general law of the state of New York, passed June 24, 1853, providing for the incorporation of life and health insurance companies. In accordance with this act there was filed by the incorporators a declaration, in the nature of a charter, from which it appears that the capital of the defendant was $100,000 in cash, divided into 1,000 shares of $100 each, and the corporate powers of the company were vested in a board of directors. The insurance business was to be conducted upon the mutual plan. The holders of the capital stock were, by the declaration, to have the right 'to receive a semiannual dividend on the stock so held by them, not to exceed 3 1/2 per cent of the same; such dividends to be paid at the times and in the manner designated by said directors of the company. The earnings and receipts of said company, over and above the dividends, losses, and expenses, shall be accumulated.'

The officers were to strike a balance every five years from December 31, 1859, which was to exhibit its assets and liabilities and also the net surplus, after deducting a sufficient amount to cover all outstanding risks and other obligations. Each policy holder was to be credited with an equitable share of the surplus, which was to be applied to the purchase of an additional amount of insurance for each policy holder, or, if any policy holder should so direct, such equitable share of the surplus should be applied in his case to the purchase of an annuity.

The complainant took out a policy in the company on the 28th of December, 1867, for $25,000, in the form of an ordinary life policy, which was subsequently, and on the 12th of January, 1876, changed to another ordinary life policy, payable to his wife upon his death, and, if his wife were not then living, then to the children of complainant, and, if there were no children, then to the complainant's executors, administrators, or assigns. The policy was also issued and accepted upon certain conditions printed on its back, which were accepted as a part of the contract, among which provisions is the following:

'6. This policy, during its continuance, shall be entitled to participate in the distribution of the surplus of this society, by way of increase to the amount insured, according to such principles and methods as may, from time to time, be adopted by this society for such distribution, which principles and methods are hereby ratified and accepted by and for every person who shall have or claim any interest under this contract; but the society may, at any time before a forfeiture, upon the request of the person holding the absolute legal title to this policy, substitute a cash payment, to be fixed by said society, in lieu of the said increase to the amount insured, and such payment may be made by reduction of subsequent premiums, if said policy holder shall so elect.'

The complainant elected to receive his share of the surplus, as ascertained from time to time, in the reduction of the premium, and the company was notified of that election, and ratified and accepted the same; and, since the date of the issuing of the policy, the complainant has regularly paid the premiums thereon as they severally accrued, after deducting the sums which, at each period, the officers of the defendant stated to be the entire amount applicable in reduction of the premiums as complainant's equitable share in the surplus. Although the complainant has been entitled to have his full share of the lawfully-ascertained and true surplus profits of the defendant applied in reduction of his premium, yet the amounts allowed by the officers of the defendant in reduction of his premium have not been the real amounts of complainant's equitable share in the true surplus, but, by means of the abuse of discretion, wrongs, and the inequitable and fraudulent conduct of the defendant, its officers and agents, the company, its officers and stockholders, have wrongfully retained, and, to the extent of a large sum, fraudulently wasted and misappropriated to themselves, a large portion of complainant's share in said surplus; that he has accepted such reductions of premium as have been from time to time assigned to him solely because of his belief that the officers of the defendant were acting in a just and lawful manner, and in reliance upon the representations of the officers of the defendant thereto, stating that he was receiving his lawful share of the true surplus, which representations were untrue and fraudulent, and without knowledge by complainant that they were untrue, or of the facts thereafter stated in the bill.

The defendant has, at the expiration of each year since the defendant's incorporation, ascertained and entered upon its books a sum alleged to be the 'net surplus' earned by the defendant during the preceding year, which surplus has been reported annually for many years to the insurance department of the state of New York as the fund which belonged to the policy holders exclusively, and one in which the stockholders were without any interest whatever, while, on the other hand, the defendant now claims that such surplus belongs to its stockholders.

The defendant, through its officers, has been crediting and paying to its policy holders, from time to time, only a portion of the surplus admitted to exist by the defendant, and to the whole amount of which complainant and the other policy holders are entitled in equitable proportion, and the officers, contrary to the rights of the policy holders, and in fraud of their rights, have not credited the policy holders with their equitable share of the surplus, although such surplus has been duly ascertained from their books, nor have they paid policy holders whose policies matured from time to time their just and equitable share of such surplus to which they were entitled, and the stockholders now claim and threaten to appropriate all the surplus as a dividend, or earning, upon the shares of stock of the company, in direct disregard of the representations made by the defendant to the superintendent of insurance of the state and in disregard of the rights of the policy holders.

From the books it appears that there were in 1904 over 500,000 policy holders; over $1,495,000,000 of insurance risks; over $413,000,000 of assets; liabilities over $333,000,000, and a surplus of over $80,000,000. That there are over $10,000,000 of the surplus in which the stockholders can have no interest and which are still claimed by them. The retention of the surplus has been wrongful and for the fraudulent purpose to pile up a fund under the control of the defendant and its officers, by the use of which they could secure illegal and personal gain, and out of which they could distribute large sums to and among themselves under pretense of payment of salaries and expenses, by improper and extravagant disbursements, and that in fact they have distributed to themselves improper and extravagant salaries, commissions, and expenses from the fund or surplus which belonged to the policy holders. Great waste and extravagance are alleged to have been committed by the defendant through its officers in many ways. The officers of defendant have failed to properly invest and reinvest the funds of the company, but have wilfully and negligently misappropriated and fraudulently mismanaged them.

About January, 1905, dissensions among the officers and board of directors occurred, and in consequence a committee of the defendant was appointed for the purpose of investigating its affairs and condition, and the superintendent of insurance also conducted an investigation, and the results showed the facts above stated in very great detail. A committee of the legislature also investigated the condition of the defendant during the fall of 1905 and reported to the legislature in 1906, showing the same facts.

Mr. Thomas F. Ryan in the meantime had become the owner of 502 shares of the stock of the defendant (a majority thereof), with a par value of $50,200, which were purchased by him for $2,500,000, and thereupon he executed a deed of trust to three trustees, with power to vote the stock as stated in the deed, and since that time Ryan has been the managing spirit in the defendant. Twenty directors have been elected to fill vacancies in the board of directors, and are serving thereon, but the right to do so is denied by the complainant and the minority stockholders, and until such questions are settled by the determination of a court of final jurisdiction there does and will exist absolute confusion and corporate anarchy in the management of the affairs of the defendant.

If properly conducted, the defendant has sufficient assets to provide for and liquidate every outstanding policy, and to insure the performance of every contract made by the defendant with its annuitants. It is subsequently averred that the defendant is insolvent, because it is responsible to the policy holders for the excessive sums paid in the way of salaries and fees, and also for all sums of money lost consequent upon fraud and waste, and such amounts are said to be more than the defendant will have funds to meet when proved and demanded. (This, by way of opinion and prediction.)

The defendant is still in the control of the stockholders, whose representatives have been guilty of misappropriation, and its business is at a standstill. The interests of the policy holders are to place the assets in the hands of a receiver, in order to wind up the affairs of the defendant, which is the only way to safeguard the policy holders' interests. An action at law is inadequate to afford proper relief, and there would result, if such actions were necessary, a multiplicity of suits.

As relief, the bill prayed for the production of all books, papers, and records of the defendant, and that an accounting be had of all the dealings and transactions of the defendant, its officers and agents and stockholders, from the commencement of the business of the defendant in 1859, or for such period as the court might deem proper. Also, that a trust be adjudged and declared to exist and imposed upon the assurance funds and surplus, as ascertained, as against the defendant, its officers and stockholders, and that it be adjudged that they, and each of them, hold the same as trustees for such persons as shall be declared to have interests therein under the decree to be entered in the cause. Such accounting should also be taken for the purpose of ascertaining to what extent the defendant is indebted to the surplus fund on account of damage, loss, and depletion occasioned by the negligence, misconduct, misappropriation, and other causes averred in the bill. Also, that it be adjudged that the defendant pay into such assurance fund the amount ascertained on such accounting to be due from the defendant to such fund, and that the defendant, its directors, officers, and agents, be enjoined from further retaining the control of, or spending in any way, the said funds received from the policy holders and annuitants, and constituting the assurance fund and the socalled surplus of the company, and also from doing any other act or thing in connection with the funds of the defendant, except to transfer the same to a receiver, and that a receiver be appointed to take possession of all the funds held by the defendant, of every character and description, and administer and distribute the same as he may be directed by the court.

The defendant demurred to this bill (1) for want of equity; (2) complainant has an adequate remedy at law; (3) complainant, under the laws of New York, had not legal capacity to sue; (4) complainant had no interest in the subject-matter of the bill. Other grounds were stated not specially material now to notice.

Messrs. William B. Hornblower and Allan McCulloh for petitioner.

[Argument of Counsel from pages 33-38 intentionally omitted]

Messrs. John R. Dos Passos, Joseph De F. Junkin, George Gordon Battle, and H. Snowden Marshall for respondent.

[Argument of Counsel from pages 38-41 intentionally omitted]

Statement by Mr. Justice Peckham:

Mr. Justice Peckham, after making the foregoing statement, delivered the opinion of the court: