[318 U.S. 608, 609] Mr. Homer A. Holt, of Charleston, W. Va., for petitioners.
Mr John F. Davis, of Washington, D.C., for respondent Securities & Exchange Com'n.
Mr. H. Vernon Eney, of Baltimore, Md., for respondent John B. Gontrum, Ins. Com'r of Md.
Mr. Rickard H. Lauritzen, of Madison, Wis., for respondent Banking Com'n of Wisconsin.
Mr. Fyke Farmer, of Nashville, Tenn., for respondents L. H. Brooks, trustee, and others.
Mr. J. Campbell Palmer III, of Charleston, W. Va., for respondents West Virginia State Court Receivers.
Mr. Justice ROBERTS delivered the opinion of the Court.
This case presents important questions concerning the construction of Chapter X of the Bankruptcy Act. 1 [318 U.S. 608, 610] Many sates of the Union are interested because of the asserted incidence of its provisions upon state laws and rights thereby created. A number of state officers are parties.
Fidelity Assurance Association, a West Virginia corporation, filed its petition for reorganization in the District Court for Southern West Virginia. The Judge made an order approving the petition as properly filed. He also entered orders enjoining state officials from dealing with property held by them. 2
State banking and insurance Commissioners and state court receivers answered, asserting that the debtor could not avail itself of the Act because it was an insurance company3 and, in any event, the petition was not filed in good faith, as the phrase is defined in 146(3)(4) of Chapter X. 4 The Securities and Exchange Commission intervened at the request of the District Court. After trial of the issues, the court formally approved the petition and overruled the motions to rescind the decrees granting injunctions. 5 The Circuit Court of Appeals reversed. 6
The debtor was organized April 11, 1911, under the name of Fidelity Investment and Loan Association. Its corporate purposes were enlarged in 1912 to include the soliciting and receiving of payments on annuity contracts. Thereby it became subject to the provisions of [318 U.S. 608, 611] Art. 9 of Ch. 3 of the Code of West Virginia,7 relating to the selling of annuity contracts and, as therein provided, to the supervision of the Auditor, as ex-officio Insurance Commissioner of the State.
From December 1912 to the close of 1940 the company's business was the selling of investment contracts and for this purpose it was licensed in many states. It altered its contracts from time to time but in general they consisted of certificates evidencing the agreement of the purchaser to make specified periodic payments and the company's agreement that upon the expiration of a stipulated term it would return to him in instalments a sum designated as the face amount, or pay a lump sum less than the face amount.
During the six years preceding December 30, 1940, the debtor sold a contract having a collateral insurance feature provided by a blanket policy procured by Fidelity from Lincoln National Life Insurance Company. Approximately seventy-five per cent. of the contracts fissued after 1934 contained this feature.
It will be seen that the business was essentially the conduct of a compulsory savings plan. The interest paid a certificate holder was at a low rate and the penalty for failure to keep a certificate alive was heavy. The expense of selling the contracts was inordinately high and, in spite of a large volume of sales, the company was constantly falling behind and suffering serious losses.
The present Insurance Commissioner of West Virginia took office in 1933. It was his duty to require and approve the deposit with the State Treasurer of bonds and securities to be held in trust for the benefit of the company's West Virginia contract holders to an amount equal [318 U.S. 608, 612] to the cash liability to them; to require a similar deposit in trust for the benefit of holders located in other states to the extent that the laws of such states did not provide for a deposit equal to, or greater than, that called for by the laws of West Virginia. Shortly after taking office, the Commissioner discovered that the company was insolvent. There is a long history of negotiations and requirements, extending almost to the time of filing the petition, in an effort to restore it to a solvent condition.
The company was at one time licensed in twenty-nine states each of which had laws regulating its business; fifteen required a deposit of approved investment obligations with some state official to secure payment of outstanding contracts held by residents; the remainder had no such requirement, but the contracts sold in these states were secured by the deposit made with West Virginia. 8 As of the date of the filing of the debtor's petition, the deposits made with various states, including West Virginia, amounted, according to the debtor's figures, to $20,056,-680.27 against a net reserve liability of $24,221,651.36. In addition, the company had securities not deposited anywhere valued at $556,467.51, most of which were ineligible for deposit under the laws of any state, and $500, 000 in cash.
Each of the series of contracts sold by Fidelity embodied provisions for the creation and maintenance of a reserve fund. All of the contracts provided that the reserve fund maintained by the company should be invested in approved securities and deposited in trust as required by the laws of West Virginia. Securities purchased with the moneys paid by the contract holders were deposited with the Treasurer of West Virginia and officials of other states in compliance with their respective laws, but no effective [318 U.S. 608, 613] effort was made to designate the source of the funds with which securities were purchased so as to identify the latter as belonging to the reserve of any series, nor did the state authorities make any such allocation. The securities on deposit with the states were at all times treated by the debtor, and state authorities, as securing all obligations to contract holders in the state where each deposit was made, and reports by the company to the states respecting total liabilities failed to show such liabilities by funds or series. There were certificate holders in all forty-eight states, the District of Columbia, and foreign countries.
December 14, 1938, the Securities and Exchange Commission sought an injunction in a federal court, alleging the Company was engaged in acts and practices violative of the fraud provisions of 17(a) of the Securities Act of 1933. 9 This suit resulted in an injunction and was followed by another for appointment of a receiver in a federal court in West Virginia, which was dismissed. 10
Prior to 1938 the debtor had made efforts to obtain fresh capital to be used in reorganizing its business. After 1938 the effort was continuous, but no capital was forthcoming.
Despite enormous sales11 the company could not attain a solvent position. Moreover, the publicity ensuing the two suits resulted in the surrender of many contracts, the temporary suspension of the sale of new certificates, and a serious diminution of sales when activity was resumed.