RHODE ISLAND INS. CO. v. DOWNEY et al.
Petition for a writ of mandate directing the superior court to vacate its ‘Order Appointing Conservator and Restraining Order’ in a proceeding brought against petitioner by respondent Insurance Commissioner of the State of California. The questions involved concern the validity of the acts of respondent in seizing, by virtue of said court order, the California business and assets of the petitioner.
On May 17, 1949, said commissioner filed an application in the superior court under section 1011 of the Insurance Code, for an order making him conservator of the petitioner, directing him to take possession of all of its assets, records, and property, vesting title thereto in him, and enjoining it from transacting further business in California, etc. The application, as permitted by section 1011 of the Insurance Code, was made ex parte and without notice. The order was granted forthwith. The application and order were served upon petitioner simultaneously with the seizure of the commissioner under the order, of all of its California assets. On June 1, petitioner filed its petition in this court for a writ directing the superior court to vacate its order. Respondents demurred to the petition on the ground that it does not state a cause of action against them and also filed returns. We will first consider the sufficiency of the petition.
The demurrer, of course, admits the truthfulness of the allegations of the petition. The material allegations may be summarized as follows:
Petitioner was organized under the law of Rhode Island, is lawfully doing business in 34 states, a number of foreign countries and territories, and has been duly licensed to do business in California since 1912. Wallace Downey is the duly appointed Insurance Commissioner of California.
As of December 31, 1948, petitioner's total assets exceeded the total liabilities (excluding capital and surplus) by about two and one-half million dollars. After deducting certain non-admitted assets, there was still a capital stock of one million dollars and a surplus of over one million dollars. During 1948 petitioner wrote insurance in gross premium value of about thirteen million dollars, and about one and one-half million dollars in California alone. Business in California has shown a healthy increase. Petitioner has 142,000 policies in force in the state, and is represented by over 2500 duly qualified and licensed agents.
The superior court order appointed the commissioner conservator of petitioner's business, gave him title to its assets ‘wheresoever situated,’ and restrained petitioner from carrying on its business. The commissioner, on taking over, has prohibited the issuance of any further policies in California, and, in effect, has stopped petitioner from doing business here.
The grounds given by the commissioner in his application are all disputed by petitioner, and it is contended that for more than a year most of them were known to him. They rest on the determination of legal questions, accounting problems, questions of valuation of assets, and similar questions, all of which are debatable. On many of these issues the commissioner has a difference of opinion with 33 other state insurance commissioners. The only recent development is in connection with an agreement between petitioner and Pioneer Equitable Insurance Company of Indiana, dated March 21, 1949. The commissioner's interpretation of that agreement is that (a) it amounted to a merger or consolidation without the commissioner's consent (the company denies that it does or that the commissioner's consent can be required); and (b) it would cause a properly adjusted financial statement to show the company's capital impaired to approximately 73 per cent. This cause a technical, statutory insolvency, and is based on determinations opposed to those of the insurance commissioners of the domicilary and other states. The commissioner concedes that there is an excess of assets over true liabilities, so that no actual insolvency exists.
From August, 1948 on, the commissioner had conferences with officers and attorneys of petitioner regarding matters of internal management, making various complaints about the management and asking the company to withdraw from business in California. Further conferences were held. Although petitioner did not believe the commissioner had power to demand internal changes, it made several of the requested changes—put in directors who were not employees, cut down the volume of its business, adopted a policy of investing only in securities traded on a national exchange, etc. Petitioner did not remove Stewart Hopps, chairman of the board, from his position as officer and director, as suggested by the commissioner, but transferred power from the chairman of the board to the president. The commissioner, although not contending he had the right to insist on such change, still insisted Hopps should be eliminated entirely.
Early in November, 1948, the commissioner met in New York with the insurance commissioners of Rhode Island, Pennsylvania and Indiana, and some officers of petitioner. This was followed by a meeting of the insurance commissioners alone, who took no action nor did any of the commissioners in other states.
On November 8, petitioner received a letter from the commissioner purporting to require it to cease business in California. Under authority given in the Insurance Code, petitioner asked the Attorney General of California for an opinion as to the legality of the commissioner's order in the November 8 letter, and was later advised that the commissioner's order had been withdrawn. On November 18, petitioner filed in the superior court an application for declaratory relief against the commissioner, seeking an adjudication of status and legal relations under the Insurance Code, and an injunction restraining the commissioner from interfering with the company's business pending final adjudication. An order to show cause for a preliminary restraining order issued November 18, returnable November 26. It was continued from time to time by mutual consent, and was to be heard on June 13, 1949.
Immediately after the declaratory relief action had been filed by petitioner, the commissioner, under authority of the Insurance Code, began investigating petitioner. Hearings were held in New York and petitioner's books were examined in Philadelphia. Hearings were adjourned on December 23rd, for the Christmas holidays, on the understanding that they would be resumed again on notice from the commissioner. On February 23rd the Attorney General of California wrote petitioner about completing questioning of officers. The company replied that they would be available in about one week. The attorney general made no objection and was to notify petitioner of the date. No further word was received from the attorney general or the commissioner, and no further request for resumption of the investigation was ever received by petitioner.
The National Association of Insurance Commissioners is an organization of all state insurance commissioners, having as one purchase to secure uniformity of insurance regulation among the states. At the convention of the N.A.I.C. in New York in December, 1948, the commissioner made a motion that the executive committee, of which he was a member, act together in the matter of petitioner. The motion was not seconded. On January 17, 1949, the commissioner advised the N.A.I.C. that he did not desire to act alone and requested the N.A.I.C. to join in uniform action. The commissioner was thereafter advised that the N.A.I.C. suggested a ‘convention examination,’ conducted by examiners from the state insurance departments, one examiner from each zone in which the company does business. For the purpose of these examinations, the United States is divided into six zones. Such examinations are made of all insurance companies as often as required by the law of the domiciliary state. Rhode Island requires such an audit every four years. The last examination of petitioner was in 1945. California is in zone 6, and the commissioner accepted the invitation to be the examiner representative of that zone.
The convention examination and audit of petitioner began on May 2, 1949. On May 10th, the commissioner notified the convention examiners that he would advise regarding his participation at the earliest moment. To date no representative of the commissioner has appeared to participate in the audit, although it has been going on for a month by the representatives of the other five zones, and will be finished in about 90 days.
On May 17th, one week after the commissioner communicated with the convention examiners, the commissioner filed his application for a conservator. The commissioner stated to the trial judge that application had to be made ex parte because it notification were given, petitioner would have a chance to withdraw all of its assets from California, and that petitioner's agent in California would pay it money due for premiums.
At the time of filing his application, the commissioner knew (a) that petitioner's agent in California forwards premiums to petitioner monthly, as they are collected from subagencies; (b) that on May 17th, the agent held only about $45,000 due petitioner; (c) that premiums receivable for the 60–90 day period proceeding May 17th were in an amount less that $200,000, and that only 50 per cent or less of that would be paid agents, due to a notice sent by the commissioner to all agents and brokers; (d) that the commissioner would come into possession of only $145,000 or less, and that petitioner has little or no other assets in California; (e) that the assets to be received by him ‘were at least $300,000 less than the amount required to pay the normal losses on insurance in force, without taking into consideration any provision for return premiums on policies which would be cancelled as a result of the commissioner's action and also without taking into consideration the expenses of his administration. Of $1,300,000 unearned premium reserve on California insurance in force at least $450,000 would be paid out in losses in the normal course.’
The commissioner's determination that continuation of business in California would be hazardous is highly debatable and in conflict with the determination of 33 insurance commissioners and convention examiners from Florida and Rhode Island who have signed affidavits that they do not believe the company to be on the verge of insolvency. The commissioner, on May 17th, notified the 2500 agents of the company and Pioneer Equitable, and all brokers, about 7500 in number, that he was taking the company over in this state; that no further business was to be written with the company, and that he was going to audit all accounts of agents and brokers. Petitioner is ready, willing and able to pay all losses for which it is not liable to residents in California, and to pay the return premiums on any policies cancelled by residents, but is prevented from so doing by the commissioner and the court's action. The commissioner, owing to the fact that the main assets of petitioner are in Rhode Island, cannot rehabilitate it in this state; he can only liquidate, or force it to discontinue business here. The seizure has caused petitioner irreparable injury.
Attached to the petition for a writ of mandate is the application of the commissioner for the superior court order appointing him conservator, which had attached to it Exhibit A, which is a report or audit of petitioner dated April 22, 1949, made by the commissioner's auditor, purporting to show the condition of petitioner as of December 31, 1948, and which is the basis upon which the commissioner claims his right to act. This audit shows petitioner to be insolvent within the meaning of article 13, chapter 1, part 2, division 1 of the Insurance Code.
Petitioner's principal contention is that the circumstances as known to the commissioner on May 17th did not justify a seizure of petitioner in California, without a previous hearing, and therefore the commissioner acted arbitrarily in so doing. It concedes that the situation of petitioner as shown in the report (although it denies the correctness of the report) justified the commissioner in submitting to a court the question of the effect of that condition and whether petitioner was actually insolvent under the Insurance Code, but did not justify a seizure, without first such court determination. Put differently, the main issue here is that the commissioner takes the position that while the question of petitioner's condition is being threshed out in court, the commissioner should have charge of its assets, while petitioner contends that during such time it should be permitted to possess and operate its business.
Petitioner contends that section 1011 authorizes the court to make the conservator order without notice only in situations of urgent emergency. There is nothing in the section which justifies this interpretation. The section provides: ‘The superior court * * * shall, upon the filing by the commissioner of the verified application showing any of the following conditions hereinafter enumerated to exist, issue its order [similar to the one made in this case] * * * (c) That such person, without first obtaining the consent in writing of the commissioner, has transferred, or attempted to transfer, substantially its entire property or business or, without such consent, has entered into any transaction the effect of which is to merge, consolidate, or reinsure substantially its entire property or business in or with the property or business of any other person. (d) That such person is found, after an examination, to be in such condition that its further transaction of business will be hazardous to its policy holders, or creditors, or to the public * * * (j) That the last report of examination of any person to whom the provisions of this article apply shows such person to be insolvent within the meaning of Article 13, Chapter 1, Part 2, Division 1 of this Code.'1
This contention is closely related to its argument that because the commissioner was aware of most of the matters complained of some time back he should not have sued the procedure provided by the statute, without a hearing either before the commissioner or the court. Similar contentions have been heretofore considered by the courts and denied. In Caminetti v. State Mutual Life Ins. Co., 52 Cal.App.2d 321, page 325–326, 126 P.2d 165, 168, the court said: ‘Appellant presents the further argument that the state is estopped from taking over this insurance company because the commissioner and his predecessors in office knew of the practices which the commissioner determined, and the court in this proceeding concluded, to be hazardous; that, knowing of these practices in years gone by, the commissioner failed to take over the company and permitted it to continue its business.
‘To state the contention is to state its impossibility. To govern themselves, the people act through their instrumentality which we call the State of California. The State of California functions through persons who are for the time being its officers. The failure of any of these persons to enforce any law may never estop the people to enforce that law either then or at any future time. It would be as logical to argue that the people may not proceed to convict a defendant of burglary because the sheriff perhaps saw him and failed to stop him or arrest him for another burglary committed the night before.’
The statute itself does not limit its use to times of sudden emergency. The statute, as construed by the California courts, requires only that the commissioner file a verified application stating that he has found one, or more, of the statutory grounds to exist. ‘In making his application under section 1011 of the Insurance Code, the commissioner does not seek a judicial appointment and a judicial ruling that the company is in fact delinquent. By his application the commissioner merely represents that he has found certain conditions to exist and has made his official administrative determination to proceed as authorized by the statute. In obtaining his original ex parte order, the commissioner is not required to show to the court that the company was in fact in a hazardous condition, but only that he, as a state officer, invested by legislative authority with the power, has so ‘determined’ and ‘found.’ The insurance code provides that the order or determination of the commissioner to take over the affairs and assets of the company shall continue in force and effect until, upon application by either the commissioner or of the company, it shall appear to the court, after a full hearing, that the ground for said order does not exist or has been removed and that the company can properly resume title to and possession of its property and the conduct of its business.' Caminetti v. Imperial Mut. Life Ins. Co., 59 Cal.App.2d 476, 487, 139 P.2d 681, 687; emphasis added. Under section 1011 nothing is required beyond the good faith determination by the commissioner of the existence of one of the conditions enumerated in the section.
Petitioner has emphasized that the matters involved were disputable. It is not a requirement of the statute, however, that such matters not be disputable. The Legislature undoubtedly assumed that in most cases the company involved would dispute the commissioner's contentions, and accordingly provided, in section 1012, for a full hearing before the trial court, at which the company could show that the conditions claimed by the commissioner did not exist. There is no implied restriction in the statute that the commissioner act only where the existence of the dangerous condition is beyond dispute.
That the company's contention that an emergency must exist is not well founded is further shown by the provisions of section 1013 of the Insurance Code, which provides for a seizure by the commissioner without any hearing or any court order. It reads: ‘Whenever it appears to the commissioner that any of the conditions set forth in section 1011 exist or that irreparable loss and injury to the property and business of a person specified in section 1010 has occurred or may occur unless the commissioner so act immediately, the commissioner, without notice and before applying to the court for any order, forthwith shall take possession of the property, business, books, records and accounts of such person, and of the offices and premises occupied by it for the transaction of its business, and retain possession subject to the order of the court * * *.’
Section 1012 provides for a hearing in case of seizure either under section 1011 or 1013: ‘Said order shall continue in force and effect until, on the application either of the commissioner or of such person, it shall, after a full hearing, appear to said court that the ground for said order directing the commissioner to take title and possession does not exist or has been removed and that said person can properly resume title and possession of its property and the conduct of its business.’
In Caminetti v. Guaranty Union Life Ins. Co., 52 Cal.App.2d 330, 126 P.2d 159, the court discusses the term ‘hazardous' as used in section 1011(d) and holds that even though an insurance company can be solvent its condition may still be hazardous and justify the seizure by the commissioner. The court said, 52 Cal.App.2d page 332, 126 P.2d page 162: ‘The company was solvent; it had grown under the family management; but the commissioner determined, and the court approved his determination, that the withdrawal from the funds of the mutual policy holders of these monthly salaries made it hazardous for it to continue in business. * * *
‘Did the withdrawal of these funds constitute a hazardous condition as defined by the Insurance Code? To follow to its conclusion appellant's argument that there could be no hazard to policyholders so long as the business is solvent, would be to sanction the withdrawal of policyholders' money in the payment of excessive salaries without restriction. This is not the law. Excessive withdrawal of policyholders' funds continued long enough will eventually render any company insolvent, and thus destroy the very purpose of the payment of insurance premiums. The people of the state and interested policyholders have a vital interest in this. There is no requirement of our Insurance Code that the insurance commissioner must wait until an insurance company is insolvent before he takes action to protect the policyholders. To so hold would be to apply the ancient aphorism about locking the barn door after the horse is stolen.’
‘* * * If the management of the insurance company so conducts its business that there is loss, or risk of loss to the policyholders, it becomes the duty of the insurance commissioner to take possession of the company's assets and to conduct its business as conservator. This is the meaning of the word ‘hazardous' as used in the statute.’ 52 Cal.App.2d page 333, 126 P.2d page 163; emphasis added.
Petitioner contends that because the company was in a position ‘to make available within a reasonable time sufficient moneys to meet promptly any demand which might in the ordinary course of events be properly made against’ it, Sec. 706.5, Insurance Code, the commissioner was not entitled to proceed under section 1011. However, under the Insurance Code a company may be in that position and yet be insolvent. Such was the situation in Carpenter v. Pacific Mut. Life Ins. Co., 10 Cal.2d 307, 74 P.2d 761. It must be remembered that insurance companies, like banks and building and loan companies, are charged with a public interest, and hence, the price of doing business is the fact that whenever a condition exists which the insurance commissioner feels is hazardous, he may take over the company and the question of whether he was justified in doing so is thereafter threshed out. ‘It is no longer open to question that the business of insurance is affected with a public interest. The state has an important and vital interest in the liquidation or reorganization of such a business. [Citing cases] Neither the company nor a policyholder has the inviolate rights that characterize private contracts. * * * Sections 1010 et seq. of the Insurance Code * * * deal with rehabilitation and liquidation of insurance companies in financial difficulties, and with the reinsurance of their business. This phase of state control is extremely important. Insurance is a public asset, a basis of credit, and a vital factor in business activity. Obviously, if an insurance company gets into financial difficulties, something must be done to remedy the situation. Either the company must be liquidated, and its assets distributed to its creditors, thus immeasurably injuring many of its policyholders who are thus deprived of insurance protection, or the business must, if possible, be rehabilitated. The public has a grave and important interest in preserving the business if that is possible. Liquidation is the last resort.’ 10 Cal.2d page 329, 74 P.2d page 774.
‘Under the statutory plan thus embodied in the Insurance Code, the state, acting under and within its police power, has provided that the commissioner, when an insurance company is in financial difficulties, shall first be appointed by the court as conservator.’ 10 Cal.2d page 331, 74 P.2d page 775.
In Andre v. Beha, 1925, 211 App.Div. 380, 208 N.Y.S. 65, the New York superintendent of insurance had taken over the assets of a Russian insurance company. Plaintiff there made the same contentions of irreparable loss and injury as are made here, and also the contention that the company was actually solvent. In refusing plaintiff's application for relief the court said, 208 N.Y.S. page 79: ‘The Attorney General, in his first point, argues that the proper procedure in this case calls for action on the part of the superintendent of insurance under section 63 of the Insurance Law (see McKinney's Consol.Laws and Supp.), which, he says, provides an exclusive remedy for the protection of the corporation and its shareholders. The plaintiff claims that this section has no application to a solvent company, which, he says, is the case here. I cannot agree with the learned counsel for the plaintiff in his narrow view of the section. It is not only insolvency that is made the basis for action on the part of the superintendent, but under the section he may act where the company is found, after an examination, to be in such a condition that ‘its further transaction of business will be hazardous to its policyholders, or to its creditors, or to the public.’ See Insurance Law, § 63 * * *
‘In construing this very section of the law, the Court of Appeals in a recent case (Matter of People [City Equitable Fire Ins. Co.] 238 N.Y. 147, at page 156, 144 N.E. 484, 486) said:
“The superintendent is not, therefore, to take possession of the property solely for the benefit of creditors or policyholders in this state or in the United States, but for the interest of all its policyholders, creditors, and stockholders wherever they may be.”
Petitioner has cited, and we have found, no case involving insurance companies, banks, or building and loan companies, affected, as they are, with a public interest, supporting the position it takes with reference (1) to necessity for urgent emergency; (2) abuse of discretion in selecting the remedy under similar circumstances; (3) or requirement for hearing before seizure.
Petitioner refers to the insolvency as a ‘technical’ one. The code has defined ‘insolvency.’ It has fixed the 75 per cent figure as a minimum figure below which it is dangerous for a company to go. Although the impairment shown here by Exhibit A is only approximately 2 per cent, it is below what the state has determined to be a safe point. Coupled with the fact that the company appears to have been losing over one million dollars per year for the past three years, and has changed in that time from a company with ample capital and surplus to one having no surplus and an impaired capital,2 it cannot be held to be strictly a technical situation. In North American Building & Loan Ass'n v. Richardson, 6 Cal.2d 90, 56 P.2d 1221, the court rejected a similar contention concerning the impaired capital of a building and loan association. There the statute allowed taking over, if the commissioner found that capital was impaired to any extent, and the court rejected the argument that this was a mere ‘technical impairment,’ not sufficient ground for a seizure (an argument made in this case by petitioner): ‘This language is so plain and clear that any attempt to interpret it would be almost an absurdity. It is apparent that the Legislature intended by this provision that if any impairment whatever existed, the commissioner might in his discretion take over the business, property, and assets of the association showing such impairment.’ 6 Cal.2d page 98, 56 P.2d page 1224.
Statute Applies To Foreign Corporations.
Petitioner argues that section 1011 of the Insurance Code should be construed as not applying to foreign corporations. This argument is untenable. Article 14 of the Insurance Code, dealing with proceedings in cases of insolvency and delinquency, contains sections 1010 to 1062 inclusive. Article 14 begins with section 1010 which provides as follows: ‘The provisions of this article shall apply to all persons subject to examination by the commissioner, or purporting to do insurance business in this State, or in the process of organization with intent to do such business therein, or from whom the commissioner's certificate of authority is required for the transaction of business, or whose certificate of authority is revoked or suspended.’ Petitioner admittedly is doing business in this state and subject to examination by the commissioner and required to obtain a certificate. The entire article, including section 1011, is applicable to persons in the enumerated, independent categories. There is no requirement that corporations be domiciled in California. Moreover, prior to 1931, proceedings against foreign insurance corporations were provided for in sections 5, 6, Stats.1919, Chap. 178, p. 265, while those against California corporations were provided for in section 2. In that year the provisions were combined by amendment of section 2 and repeal of section 5. See Stats.1931, Chap. 1123, p. 2375. These provisions in 1935 were codified in the Insurance Code in sections 1018 to 1022, Stats.1935, Chap. 145, p. 553. Thus, petitioner is within the intended scope of the statute. The original sections required a proceeding under order to show cause, but in the co-defication in 1935, this requirement was eliminated.
Section 1012 provides for a hearing, after seizure by the commissioner, either under section 1011 or 1013. Although the requirements of due process often involve a prior full hearing, it has long been recognized that where public necessity requires, there can be action followed by a hearing. Familiar examples include the right to examine cattle for tuberculosis, slaughtering those found diseased, Affonso Bros. v. Brock, 29 Cal.App.2d 26, 84 P.2d 515, the power to seize vehicles carrying narcotics, Health and Safety Code, sec. 11611, and other situations where the public welfare requires prompt action.
The same principles have consistently been applied to institution dealing with the financial affairs of the public. In the early case of State Savings & Commercial Bank v. Anderson, 165 Cal. 437, 132 P. 755, 756, L.R.A.1915E, 675, the state superintendent of banks had seized a bank under a statute providing as follows: ‘Whenever the superintendent of banks shall have reason to conclude that any bank is in an unsound or unsafe condition to transact the business for which it is organized, or that it is unsafe or inexpedient for it to continue business, the superintendent of banks may forthwith take possession of the property and business of such bank, and retain such possession until such bank shall resume business, or its affairs be finally liquidated, as herein provided.’ (The act also provided for an injunction proceeding to determine the merits, after seizure. Application for such an injunction had to be made within ten days.) It will be noted that a really ‘summary’ procedure was involved, since there was not even an application for a court order.
The California Supreme Court considered all possible constitutional arguments and held the legislation, and action thereunder, not violative of any constitutional right: ‘The state owes to the public the duty not only of providing for supervision and examination of banks, but the added duty as a matter of public policy, if the conditions warrant, of summarily closing them up and terminating their existence. When the management thereof has brought them into a condition of unsafety or insolvency, the public interest demands that on this condition being ascertained they should not be permitted to further hold themselves out as responsible institutions or be permitted to remain in a position to do so. Police regulations are only effective when provision is made for their prompt and summary execution and summary seizure and liquidation of unsafe banks can fairly and reasonably be justified on the ground of immedaite danger to the public welfare in further permitting their business continuance.
‘In this view it cannot be said that initial seizure is not a fair and reasonable measure to be adopted to effect the protection of the public welfare which is designed by it, and as the only limitation on the power of the state imposed under the constitutional amendment is that the regulations it makes shall be of that character, no constitutional right of the appellant has been impaired by such legislation.
‘Nor is the due process of law clause violated because such summary seizure is authorized to be made without action brought and judicial warrant for the taking. Due process of law does not necessarily imply a regular proceeding in a court of justice or after the manner of such courts. * * *
‘While the initial seizure is authorized under the act without suit brought and is justified as a matter of public policy for the reasons here given, it cannot be said that the bank is thereby deprived of its property without due process of law as heretofore defined. An opportunity is given the alleged delinquent bank to invoke the aid of a court of competent jurisdiction as to the validity of the seizure and right of the superintendent to hold the property; and, if that opportunity is a reasonable one, then the right which the Constitution guarantees has been in substance preserved to it.’ 165 Cal. pages 446, 448, 132 P. page 759.
The United States Supreme Court affirmed the holding by a per curiam decision. 238 U.S. 611, 35 S.Ct. 792, 59 L.Ed. 1488.
In North American Building & Loan Ass'n v. Richardson, supra, 6 Cal.2d 90, 56 P.2d 1221, the court held constitutional similar action, under a similar statute dealing with building and loan associations.
The legality of the Insurance Code was considered in a number of cases involving the Pacific Mutual Life Insurance Company. The California Supreme Court held that even though a court order might have been void, through disqualification of the judge, the action of the commissioner could be upheld under the summary seizure provisions, section 1013, of the Code, and that such provisions were legal: ‘Section 1013 of that Code * * * confers on the commissioner, whenever it shall appear to him that any insurance company is in such condition that its further transaction of business will be hazardous to its policyholders or creditors, the power to take summary possession ‘without notice and before applying to the court for any order.’ Similar provisions for summary seizure exist in the Bank Act * * * and Building and Loan Act * * *. These sections have uniformly been sustained against the claim of illegal seizure. State Savings & Commercial Bank v. Anderson, 165 Cal. 437, 132 P. 755, L.R.A.1915E, 675; North American Building & Loan Ass'n v. Richardson, 6 Cal.2d 90, 56 P.2d 1221.' Carpenter v. Pacific Mutual Life Ins. Co., supra, 10 Cal.2d 307, 324, 74 P.2d 761, 772. See also Holabird v. Richardson, 3 Cal.2d 299, 44 P.2d 530, sustaining a summary seizure under the building and loan statute.
On appeal to the United States Supreme Court, it was held that questions concerning the validity of the seizure and whether it was valid by ratification or by the summary seizure provisions ‘concern matters of state law and amount at most to alleged erroneous constructions of the State's statutes by its own court of last resort. Such decisions would not be a denial of the due process guaranteed by the Fourteenth Amendment.’ Neblett v. Carpenter, 305 U.S. 297, 302, 59 S.Ct. 170, 173, 83 L.Ed. 182.
It is not surprising that the Supreme Court found no due process issue, since it had approved a similar procedure, by per curiam opinion, twenty-five years earlier. State Savings & Commercial Bank v. Anderson, supra, 238 U.S. 611, 35 S.Ct. 792, 59 L.Ed. 1488. Following the Neblett case it has been assumed that the validity of the Insurance Code was beyond doubt, with respect to the provisions for summary seizure, and, a fortiori, seizure with court order. Thus in Caminetti v. State Mutual Life Ins. Co., supra, 52 Cal.App.2d 321, 126 P.2d 165, the court said: ‘There is no merit in the further contentions presented on this appeal: that the application of the commissioner for the ex parte order is deficient; that the court was without jurisdiction to make the order; and that the proceeding as a whole is based upon an unconstitutional statute. They are all covered by and disposed of, either directly or by analogy, in the Pacific Mutual cases.’ 52 Cal.App.2d page 325, 126 P.2d page 168.
In Title Guaranty & Surety Co. of Scranton, Pa., v. Allen, 240 U.S. 136, 36 S.Ct. 345, 60 L.Ed. 566, contentions similar to those made in this case were made concerning the seizure by the superintendent of banks of an Idaho bank. The banking act was challenged as unconstitutional. The court held, 240 U.S. page 141, 36 S.Ct. page 346: ‘But assuming, as it is now insisted in argument was the case, that the question relied upon was the repugnancy of the state statute to the due process clause of the 14th Amendment because power was conferred upon an administrative officer in the event of insolvency to close the doors of a bank without awaiting judicial proceedings, and that the observation on that subject by the court below was an adverse decision of such question, we think it suffices to state the proposition to demonstrate its want of merit. [Citing cases.]’
Application Of The Statute To A Foreign Corporation Does Not Render it Unconstitutional. (a) Extraterritoriality:
Petitioner argues that if the statute applies to foreign corporations it attempts to exercise power over assets not in the state, and calls attention to the broad language in the order concerning vesting title to all of the assets of petitioner, ‘wheresoever situated.’ It argues that this must refer to assets outside of the state and that the court lacks power to change title to such property. Admitting the lack of power in California courts to transfer title to assets outside of the state, there are two answers to the contention: (1) Petitioner has not alleged that the state is attempting to transfer title to out of state assets, and therefore has no standing to complain. (2) The statute can reasonably be construed as valid, the phrase ‘wheresoever situated’ meaning within the state where the court has power to act.
A similar point was involved in Franklin v. Peterson, 87 Cal.App.2d 727, 197 P.2d 788, involving the validity of a municipal ordinance imposing a license for revenue purposes upon an attorney at law. There the appellant contended that the terms of the ordinance were broad enough to include persons outside the municipality. The court said: ‘It is the rule that where a statute or ordinance is susceptible of two constructions, one of which will render it constitutional and the other unconstitutional, in whole or in part, the court will adopt the construction which, without doing violence to the reasonable meaning of the language used, will render it valid in its entirety, or free from doubt as to its constitutionality, even though the other construction is equally reasonable. The rule is based on the presumption that the legislative body intended not to violate the constitution, but to make a valid statute or ordinance within the scope of its constitutional powers. Read in the light of this rule, the ordinance here in question must be held as intended to operate only upon those subject to the jurisdiction of the City of Los Angeles.
‘Furthermore, a court will ordinarily inquire into the constitutionality of a statute or ordinance only to the extent required by the case under consideration. In the case at bar the stipulated facts show that appellant maintains a law office within the City of Los Angeles and carries on his law practice there. The construction given the ordinance by appellant would not, therefore, work any injustice upon him or violate his rights. He is therefore confronted with the general rule that one cannot complain of a possible illegal application of an ordinance if he himself is not a party thereby aggrieved.’ 87 Cal.App.2d page 730, 197 P.2d page 790.
There are cases from other states in which the taking over by a state official of the assets of a foreign insurance company has been upheld. See People ex rel. Potts v. Continental Beneficial Ass'n, 289 Ill. 40, 124 N.E. 352 and cases cited therein.
(b) Unreasonable burden on interstate commerce:
Petitioner argues that insurance has been held to be interstate commerce, and that the regulations in the Insurance Code, particularly, that allowing seizure if a foreign corporation enters into a merger, etc., without consent of the California commissioner, constitute an unreasonable burden on interstate commerce. In the case of United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440, it was held that for the purposes of the Sherman antitrust laws, 15 U.S.C.A. §§ 1–7, 15 note, insurance was ‘commerce’ and, in that case, interstate commerce. In making this holding, however, the court specifically denied that all state regulation of insurance must be found invalid. ‘Another reason advanced to support the result of the cases which follow Paul v. Virginia has been that, if any aspects of the business of insurance be treated as interstate commerce, ‘then all control over it is taken from the states and the legislative regulations which this court has heretofore sustained must be declared invalid.’ Accepted without qualification, that broad statement is inconsistent with many decisions of this Court. It is settled that, for Constitutional purposes, certain activities of a business may be intrastate and therefore subject to state control, while other activities of the same business may be interstate and therefore subject to federal regulation. And there is a wide range of business and other activities which, though subject to federal regulation, are so intimately related to local welfare that, in the absence of Congressional action, they may be regulated or taxed by the states. * * *. And the fact that particular phases of an interstate business or activity have long been regulated or taxed by states has been recognized as a strong reason why, in the continued absence of conflicting Congressional action, the state regulatory and tax laws should be declared valid.' 322 U.S. page 547, 64 S.Ct. page 1170.
To avoid any ambiguity which might still exist, the ‘McCarran Act’ was passed shortly thereafter by Congress, declaring that ‘the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.’ ‘The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.’ 15 U.S.C.A. §§ 1011, 1012.
Following the South-Eastern case, there were a number of cases (in some of which the acts occurred prior to passage of the McCarran Act) in which insurance companies argued that state regulatory provisions previously valid had become invalid as unreasonable burdens on interstate commerce, when applied to foreign corporations. The cases are annotated at 164 A.L.R. 500. In all the cases there discussed, including two Supreme Court decisions, the state taxes and regulations were upheld.
In Robertson v. People of State of California, 328 U.S. 440, 66 S.Ct. 1160, 90 L.Ed. 1366, the court held valid sections of the Insurance Code which in effect allowed the state to exclude a foreign insurance company or its agents from doing business within California if the company failed to meet California's reserve requirements. Without relying on the McCarran Act, the court answered the argument about interstate commerce as follows: ‘It is quite obvious, to repeat only one of those considerations, that if appellant's contentions were accepted and foreign insurers were to be held free to disregard California's reserve requirements and then to clothe their agents or others acting for them with their immunity, not only would the state be made helpless to protect her people against the grossest forms of unregulated or loosely regulated foreign insurance, but the result would be inevitably to break down aldo the system for control of purely local insurance business. In short, the result would be ultimately to force all of the states to accept the lowest standard for conducting the business permitted by one of them or, perhaps, by foreign countries. Inevitably this would mean that Congress would be forced to intervene and displace the states in regulating the business of insurance. Neither the commerce clause nor the South-Eastern decision dictates such a result.’ 328 U.S. page 459, 66 S.Ct. page 1170.
The court also stressed the fact that the statute did not discriminate against interstate commerce, but required only that foreign corporations meet the same requirements as domestic insurers. 328 U.S. page 461, 66 S.Ct. page 1171. The above reasoning is applicable to the present case. The provision allowing seizure by the commissioner applies equally to domestic or foreign corporations and is not discriminatory. Furthermore, it affects the sound financial condition of the company, and is therefore related to doing business in California.
Petitioner argues with reference to subdivision (c) of section 1011, that it would be burdensome, practically, to get the permission of all 48 commissioners to such a transfer of assets, if the company were doing business in all states. It is difficult to see why that would be more burdensome than submitting to examination in every state where the company does business, as the price of doing business in such state. Petitioner has cited no case in which state regulation of insurance, as applied to foreign corporations, has been held an unreasonable burden on interstate commerce, and as shown, there are numerous cases to the contrary.
Was The Commissioner Arbitrary In The Selection Of The Remedy?
Petitioner contends that the commissioner was arbitrary in his selection of the remedy for the conditions shown in the audit. The audit shows the capital to be reduced to approximately 73 per cent of the aggregate par value of its issued capital stock. (Section 981 of the Insurance Code defines insolvency as a condition where the capital falls below 75 per cent of the capital stock.' The result of the seizure, it is argued, is that the commissioner cannot rehabilitate or reorganize a foreign corporation whose main assets are outside this state, but only liquidate the company, and therefore, such a seizure is too heroic for a condition which it describes as ‘technical insolvency.’ The application and its exhibit show that there were, among others, three conditions upon which the application was made: (1) a ‘merger’ of petitioner and the Pioneer Equitable Insurance Company without the commissioner's consent; (2) conditions hazardous to the policyholders and the public; (3) insolvency.
Petitioner contends that the commissioner had other powers and remedies which were equally effective and less drastic than the remedy provided by section 1011, and hence it was arbitrary of him to select the latter method.
People v. One 1941 Chrysler Sedan, 81 Cal.App.2d 18, 183 P.2d 368, cited by petitioner, dealt with an entirely different set of facts. There, this court held that where there are alternative methods of giving notice under constructive service, a complainant may not select one which he knows will not notify the other party when he also knows that one of the alternatives, if selected, would notify him. Here, even though we might find that other remedies were open to the commissioner, we are required to go one step further and find that as matter of law the commissioner was arbitrary in proceeding as he did, instead of using another method. Under the circumstances of this case, we do not feel we can do so.
The other remedies suggested will be taken up seriatim. (1) Section 12928.6 of the Insurance Code provides that ‘Whenever the commissioner believes, from evidence satisfactory to him, that any person is violating or about to violate any provisions of this code or any order or requirement of the commissioner issued or promulgated pursuant to authority expressly granted the commissioner by any provision of this code or by law, the commissioner may bring an action’ in the superior court for an injunction enjoining the continuance of such violation, etc. To hold that he should have used this remedy, or any of the others suggested and hereafter set forth, instead of the one he did use, means that we must hold, as matter of law, that during the long delay in which all the complicated matters would have to be heard or litigated in order to determine the correctness of the matters stated in the audit, the operation and affairs of the company should be in its hands instead of those of the commissioner. However, it appears from the decision in Caminetti v. Imperial Mut. Life Ins. Co., supra, 59 Cal.App.2d 476, 139 P.2d 681, and from an examination of the Insurance Code, that it is the policy of the law in this state that whenever the commissioner deems the condition of a company hazardous, he should take over the company while these matters are being threshed out, rather than take the chance that, should the statements in the audit prove to be true, and the company in the meantime continue to take on new policyholders, great loss would result to them, as well as to the original policyholders. An examination of section 12928.6 shows that it is not broad enough to cover the situation disclosed in the audit. It is directed primarily to the stopping of certain acts occurring in this state, rather than to a situation which requires restoration of capital, or to acts occurring outside the state, where a California injunction could not apply. Moreover, an injunction complaint alleging the matters charged in the commissioner's application in this case, would have most of the serious effects on petitioner's business which it charges occurred as a result of the seizure here. (2) Section 700 of the Insurance Code provides for an administrative hearing under the provisions of the State Administrative Procedure Act. (3) General less drastic steps. This is rather an indefinite suggestion. (4) The commissioner's Bulletin 50 sets up a procedure by which the report of the examination staff is to be sent to the company involved, giving it 10 days to file objections thereto. These rules primarily are for intradepartmental regulation and do not necessarily require that this proceeding be taken before court proceedings are started. (5) Section 706.5 of the Insurance Code provides that the commissioner, whenever ‘in his judgment, the investments of such insurer are not so made as to make available within a reasonable time sufficient moneys to meet promptly any demand which might in the ordinary course of events be properly made against the insurer’ may ‘order such insurer to cease to effect new contracts of insurance until its financial circumstances are changed sufficiently to remove such condition’ and may suspend or revoke the certificate of authority of the insurer if he fails to comply with such order. This remedy would probably result in most of the evils which petitioner complains of here, injury to the company's reputation, surrender of policies, and loss of its agents, brokers, etc. (6) A notice to petitioner to make good within a limited time the deficiency in its capital followed by a proceeding under section 12928.6, (1) above. (7) Section 704 of the Insurance Code provides a method for the suspension of the certificate of authority of the company. (8) The general power appearing throughout the Insurance Code to revoke, cancel or suspend certificates of authority. Just how the effects of proceeding under either (7) or (8) would be less drastic from the company's standpoint than the procedure taken does not appear. Any suspension of the right to do business in California would bring about the same injury to the company as occurred here, without a corresponding protection to the policyholders in the safeguarding of its assets, small as those assets are.
Taking all the alternative methods suggested by petitioner, they either are practically as drastic as the one used, and therefore would be as injurious to petitioner, or they do not provide the protection to the policyholders and the public which the situation disclosed by the audit could have required.
Petitioner contends that the controversy should have been determined in the declaratory relief action instead of under section 1011. That action was started by petitioner. The commissioner's failure to join issue in it has been acquiesced in by petitioner. While the condition of the company could have been ascertained by hearings in that case, the fact that it existed did not bar the commissioner from proceeding as he did. It, also, was subject to the objection that the interests of the public could not be fully protected by a proceeding which did not give the commissioner the control of the company's assets.
The test to be applied to the action of the commissioner is, was the selection arbitrary as matter of law? Many of the proposed remedies would have been as disastrous to the petitioner as he claims is the one chosen. But the prime consideration is the protection of not only the policyholders of the company but also the public. The matters set forth in the audit are serious. They show that the company has been losing over a million dollars a year for the last three years. The time required to have a complete hearing of the truth of these charges (which petitioner says is debatable) would be very great. If they are true, it is probable that long before a hearing could be concluded, unless petitioner repaired its capital and changed its practice in the meantime, the company would be in such a condition as to place its new, as well as old, policyholders in a precarious situation. The refusal of the insurance commissioners of 33 states to join with the commissioner in action against petitioner; the commissioner's refusal to join in the contention audit, or to await its outcome; the fact that the commissioner had known of much of petitioner's situation for the past year; and the other matters stressed by petitioner, do not overcome the fact that when he received the audit and saw the actual hazardous situation of the company as of December 31, he was justified in taking immediate action. The law contemplates that when that danger exists (even though it may not be immediate) the commissioner may use his judgment as to which remedy to select. If we assume, as we must from the face of the audit, that the condition of the company was hazardous and insolvent (even though the results of that condition would not be felt immediately), the commissioner selected the best remedy. It would be a breach of his duty to the public to permit the company to go on writing business.
Petition has contended throughout that the effect of the seizure of a foreign corporation means almost automatic liquidation and no possibility of rehabilitation. This is not necessarily so. Whether there is conservation and rehabilitation or liquidation depends upon the attitude of petitioner. If it refuses to send into California sufficient moneys to meet claims for losses and returned premiums on cancellation of policies (even under company management there is not kept in this state sufficient funds for these purposes), if it refuses to cooperate with the commissioner in his endeavors to rehabilitate the company, then the commissioner will have to apply to the court for a liquidation order under section 1016. It is the conservator's duty to try to remove the causes leading to the company's difficulties. If this cannot be done, he must attempt to rehabilitate its business, and if this cannot be done, liquidation will have to follow. Carpenter v. Pacific Mutual Life Ins. Co., supra, 10 Cal.2d 307, 74 P.2d 761.
So far as the effects of seizure are concerned, there is not so much difference between a foreign and a California corporation. The effect of the seizure is practically the same, a bad reputation for the company, cancellation of policies, the loss of its brokers and agents. But the Legislature must have had those results in mind when adopting sections 1011 and 1013. So far as rehabilitation of the company is concerned, it is easier, of course, to rehabilitate a local company because the entire assets are within the state and in the hands or the conservator. However, rehabilitation requires the consent and cooperation of even the local company's stockholders. If they are not forthcoming, the commissioner cannot rehabilitate the company. Perhaps not to the same degree, but to a large extent, the foreign company can be rehabilitated if its stockholders cooperate. This difference in degree is one of the conditions which a foreign corporation must necessarily face as the price of doing business in a state other than its home state.
Assuming, as claimed, that the commissioner will not come into possession of over $145,000 and the normal loss on policies in force is at least $450,000, that there will be a large number of policies cancelled because of the seizure and the unearned premiums will have to be refunded, the commissioner was entitled to feel from the conditions disclosed in the audit that, in spite of such results, the protection of the public as well as of the then policyholders required such action. While this court might have concluded otherwise, were the decision, in the first instance, up to us, still we cannot find, as matter of law, that his action was an abuse of discretion.
Petitioner alleges that the commissioner, although conceding that he has no power to cause the removal of Hopps, the chairman of the Board of Directors of the company, was actuated in bringing this proceeding because of the failure of petitioner to remove Hopps entirely. Were the financial condition of the company beyond question, and did it not appear that Hopps was, at least, partially responsible for the impairment of the company's assets, this might be important. The commissioner has no power, for personal reasons, to cause the elimination of any individual connected with an insurance company. But, where a course of conduct by that individual has caused serious loss to the company, the commissioner has the right to require that those practices be abandoned. See Caminetti v. Guaranty Union Life Ins. Co., supra, 52 Cal.App.2d 330, 126 P.2d 159. A reasonable conclusion can be drawn from the facts stated in the audit, that petitioner has been dominated by Hopps, and, to some extent, run, for the benefit of himself and other companies in which he was interested, to the detriment of petitioner. Such a fact, if it is a fact, coupled with the other circumstances of the case, would make the commissioner's objection to the practices of Hopps justifiable.
Assuming the allegations of the petition to be true, in view of the matters set forth in the audit which is a part of the petition, petitioner has failed to set forth facts sufficient to show that as matter of law the commissioner was arbitrary in his action. To determine as matter of fact whether the matters set forth in the audit are true will require a hearing as long and involved as one under section 1012. This court is not equipped to pass upon such factual matters, nor can a mandamus proceeding be used as a substitute for the hearing before the trial court provided by that section. Therefore, the demurrer is sustained, the alternative writ is discharged, and the petition for a peremptory writ is denied.
The pleadings are set forth fairly in the majority opinion, although portions of an exhibit made a part of the petition for the present writ upon the request of the Insurance Commissioner should be emphasized.
The question before this court, in view of the demurrer to the petition, is whether, from the contents of the petition, may it be said, as a matter of law, that the commissioner acted in violation of the due process clause of the federal and state Constitutions. The application filed by the commissioner under section 1011 of the Insurance Code was an application made without notice to the real party in interest, the Rhode Island Insurance Company, and service of the notice of appointment of the commissioner and seizure of the company was made at the same time.
The order of seizure made upon the application of the commissioner, filed in the trial court, which petitioner herein seeks to set aside, was based upon an alleged merger of petitioner and the Pioneer Equitable Insurance Company, without approval by the commissioner, the alleged hazardous condition of the company, and alleged insolvency.
It is admitted that there is no actual insolvency, but only a technical insolvency of less than two per cent. The less than two percent technical insolvency is only based upon the alleged ‘merger.’
The alleged ‘hazardous condition’ is based upon the alleged ‘merger’ and the alleged ‘technical insolvency.’ The term ‘hazardous condition’ is used in reference to that part of the public who are policyholders. There is no allegation that any policyholder has lost one cent. Exhibit A, attached to the application for the appointment of a conservator, is a report of the examiner, appointed by the commissioner to investigate the petitioner herein. He reported that a ‘hazardous condition’ might arise—that is—that there might be some possible risk or loss to the policyholders, based upon the ‘merger.’ On the present petition the commissioner argues that there was in fact a merger, but in the application filed in the superior court it is alleged that Rhode Island ‘without first obtaining the consent in writing of the said Commissioner, has entered into a transaction the effect of which is to merge and consolidate substantially its entire property and business in or with the property and business of another insurance company, to wit: Pioneer Equitable Insurance Company of Indiana.’
The real question herein may be resolved into the matter of the alleged ‘merger’ without the consent of the California commissioner. Exhibit A, the report, indicates that an agreement was executed to the effect that the petitioner herein, Rhode Island, ‘reinsures and takes over the entire insurance business of Pioneer Equitable’ as shown by ‘Rhode Island's 1948 annual statement, showing its financial condition’ and that the report ‘has been adjusted to reflect the effect of this reinsurance agreement.’ In turn, Rhode Island reinsured ‘with an underwriter at Lloyds.’ The report states: ‘We have been advised that’ under the Lloyd contract ‘This commission rate of 46% was based upon an assumed loss ratio of 50%.’ (Italics added.) ‘Rhode Island, by this action, took credit for a profit not yet realized at December 31, 1949. There follows in the report a statistical summary of various adjustments. The report states: ‘No effect was given in the adjustment financial statement due to legal aspects and insufficiency of data.’ Based upon ‘We have been advised’ without definite reference to the source of the information, the conclusion is reached that Rhode Island's capital ‘is below 75% of its issued capital stock.’ This has reference to the less than 2% figures previously mentioned. In this manner the application for appointment of the commissioner attempts to justify the allegations of ‘insolvency’ and ‘hazardous condition.’
The ‘merger’ is not a present consolidation of the two companies, but is merely a reinsurance contract, approved by the Insurance Commissioner of Indiana, upon the deposit of Rhode Island securities of an agreed valuation as a pledge of Rhode Island's faithful and prompt performance of the obligations of payment of possible liabilities. Pioneer Equitable in its independent and no wise consolidated aspect also agreed to make a deposit of certain securities with the Indiana commissioner. Under the terms of the reinsurance contract, not a present but a future discontinuance of business of Pioneer Equitable may occur. ‘In the event that such steps [the performance of the reinsurance contract] require the dissolution and/or liquidation of Pioneer, Pioneer agrees promptly to take steps to dissolve and/or liquidate.’
I agree with the majority opinion that ‘The statute can reasonably be construed as valid, the phrase ‘wheresoever situated’ meaning within the state where the court has power to act.' Franklin v. Peterson, 87 Cal.App.2d 727, 197 P.2d 788. Likewise the action of the commissioner must be confined to California where the commissioner has power to act. The commissioner may not direct the disposition of either assets or liabilities outside of California.
Assuming that under a strained construction the reinsurance contracts could be declared to constitute a possible temporary merger, the contracts were executed outside of the jurisdiction of the California commissioner and therefore his consent was not necessary, and if given would be without purpose or effect. The seizure, under Insurance Code section 1011 and the facts as pleaded, was an infringement upon the property rights of the petitioner in California and its stockholders and the policyholders.
I disagree with the holding in the majority opinion that ‘The provision allowing a seizure by the commissioner applies equally to domestic or foreign corporations and is not discriminatory.’ The present application for seizure is based upon merger without permission. So far as the company's financial condition in California is concerned, if a remedy is necessary, the Insurance Code provides many less drastic operations. Upon the allegations in the present petition, based upon the application of the commissioner for seizure, a contrary determination to that reached in the majority opinion should be made.
The foregoing conclusion, as suggested above, does not leave the commissioner without remedy, if a hazardous condition should occur in the future. The commissioner without seizure may protect policyholders if the Rhode Island company fails to meet California reserve requirements. Robertson v. People of State of California, 328 U.S. 440, 66 S.Ct. 1160, 90 L.Ed. 1366. Petitioner herein does not challenge the right to act in a legal and reasonable manner, but it strenuously contests the power to destroy arbitrarily. The letter dated November 8, 1948, directing the company to cease business, would have been sufficient as a basis to test in court the propriety and legality of such order. That method was abandoned by the commissioner.
Up to this point the petition for writ of mandate to compel the trial court to dispose of the commissioner's application for appointment as conservator, with the order of seizure attached, has been considered with the allegations of the application filed in the superior court and the petition filed in this court, as the ground work for the test of the merits of the demurrer, that is, as a demurrer might be considered to the allegations of ‘merger,’ ‘hazardous condition,’ or ‘insolvency,’ the three points stressed by the commissioner. As a matter of law the demurrer should be sustained and the trial court directed to vacate and set aside its order of seizure upon the pleadings in this proceeding, unless a further test may be considered on the merits of the demurrer.
It may be that Caminetti v. Imperial Mut. Life Ins. Co., 59 Cal.App.2d 476, 139 P.2d 681, has set forth a rule, astounding as it may seem, that controls the disposition of the demurrer in this proceeding. In that case it was held that in filing the application for seizure it is not necessary that a ‘hazardous condition’ exists, but merely that the commissioner believes it to exist. In brief, as held in the majority opinion herein, the question to decide is the good faith of the commissioner. This language is based upon the holding in the Imperial Mutual Life Ins. Co. case, 59 Cal.App.2d 476, 139 P.2d 681, 687, that the commissioner ‘has so ‘determined’ and ‘found.”
To make the matter plain—it is not whether a merger occurred, or a hazardous condition actually existed, or that Rhode Island was less than 2% insolvent, but whether the commissioner believed that any of such conditions existed.
It will be necessary to examine the pleadings, the written stipulations, and the admissions made by the respective sides in open court during oral argument, to determine the good faith of the commissioner in obtaining the order of seizure. The facts may be mentioned and considered for one purpose, namely, must it be said from those facts as a matter of law that the commissioner acted with lack of good faith.
The commissioner had known most of the facts in reference to Rhode Island's condition for almost a year, except the reinsurance of Pioneer with Rhode Island and Rhode Island's reinsurance with Lloyds. Every suggestion, request or demand made by the commissioner upon Rhode Island had been complied with except the demand to cease business in California (which the commissioner subsequently withdrew) and the demand that a certain Mr. Hopps should be removed as chairman of the board. Even this demand was technically complied with—petitioner amended its by-laws to the end that the executive powers were transferred from the chairman of the board to the president of the company, and the chairman of the board's powers from executive to advisory.
That the commissioner's attitude toward Hopps has not changed is apparent from a remark of the attorney general representing the commissioner at the oral argument, referring to Hopps and his removal: ‘Well, I think the commissioner felt that that was the seat of the trouble.’ The following day the position of the commissioner was changed to the extent that a rehabilitation could occur if the company complied with all of the commissioner's directions. In the commissioner's supplemental memorandum of points and authorities, on page 41 the following appears: ‘He [the commissioner] further insists that any rehabilitation of the company must include riddance of Mr. Hopps.’
I do not purport to commend or to condemn the activities of Hopps. The point is that the commissioner may direct the change of policies and practices in the operation of an insurance company, so far as California has jurisdiction; but the commissioner may not direct the change of the officers of a company. If the commissioner has the authority to ‘fire’ he likewise has the authority to ‘hire.’ This could lead to political dictatorship in insurance matters. The authorities on this subject, that is, where personnel is concerned, are directed to change of ‘practices' and not the removal of officers. The strange feature of this phase of the case is that the commissioner knows that he does not possess the authority to demand the removal, but still persists in the ‘riddance’ of Hopps. To my mind this shows lack of good faith as a matter of law, and the trial court is not called upon to pass upon the good faith issue as a matter of fact.
I am convinced that (1) on the merits of the demurrer as tested in an ordinary case, and (2) on the ‘good faith determination of the commissioner’ as set forth in the majority opinion, an order should issue from this court directing the setting aside of the order of seizure and that the commissioner be relegated to some other remedy that does not mean that ‘seizure’ without a hearing in advance in synonymous with destruction.
1. It may be noted here that petitioner is making no point of the failure of the commissioner to comply with section 1038 which provides that any application under section 1011 ‘shall be served upon the person named in such application in the manner prescribed by law for personal service of summons * * *’—probably because Neblett v. Pacific Mutual Life Ins. Co., 22 Cal.2d 393, 139 P.2d 934, holds that notice is not essential.
2. Wherever in this opinion we have referred to the financial condition and conduct of the business of the company, we are referring merely to the situation as appears in the audit and are not holding that such situation actually exists. To determine that fact will require a long hearing, for which the superior court, in proceedings under section 1012, is better equipped than this court.
PETERS, P. J., concurs.