CAMINETTI v. PRUDENCE MUT LIFE INS ASS (1943)

Appellant, as Insurance Commissioner of the State of California, obtained from the Superior Court of Sacramento County an order under section 1011 of the Insurance Code, St. 1937, p. 2563, appointing him as conservator of the business of the respondent, Prudence Mutual Life Insurance Association, and pursuant to this order took over its property and business. The respondent is a corporation organized to do life insurance business on the mutual benefit assessment plan. Corporations of this class are usually referred to in the Insurance Code as “associations.” As soon as this order was made, the proceeding was transferred to Los Angeles County. Later, on application of respondent, a hearing was had under section 1012 of the Insurance Code, St. 1935, p. 541, at the conclusion of which the Superior Court of Los Angeles County entered a judgment cancelling and terminating the former order, dissolving the conservatorship and directing the restoration to respondent of its property and business. From this judgment the Insurance Commissioner appeals.

At the outset of the hearing the trial court was asked to rule upon the question where lay the burden of proof, and after extended argument it announced its opinion that the burden rested on the Insurance Commissioner. Appellant now complains of this as reversible error. The court's declaration of law, although erroneous, as will presently appear, does not in itself afford ground for a reversal, under the circumstances of this case. As a result of this declaration the commissioner's evidence was produced first, but it does not appear that either party was prevented by it from producing all available evidence, or desired to or could obtain or present anything further. The hearing appears to have been a “full hearing,” as required by section 1012 of the Insurance Code. After the taking of evidence, and just before the entry of judgment, the trial court made an order vacating the submission of the case and reopening it for the purpose of making and did make a further order vacating its ruling on the burden of proof and declaring that it had heard, considered and weighed all of the evidence of both parties and that “regardless of where the burden of proof lay, the decision of this court would not be affected.” This order was made seven days after the filing of the first of the decisions on burden of proof hereinafter cited and we are informed by the briefs that it was made by reason of that decision. However that may be, it shows that the court vacated its ruling on the burden of proof. We must therefore presume, nothing now appearing to the contrary, that the court weighed and considered the evidence in the light of the proper rule as to the burden of proof. The only remaining effect of its former ruling is that the appellant was required to proceed first with the production of evidence. But an error in that respect does not ordinarily result in a miscarriage of justice, where all the evidence of both parties is fully presented, and we think it did not here.

In spite of this conclusion it is necessary for us to deal with the question of the burden of proof, for appellant contends that there is no proof of various facts essential to the support of the judgment, that respondent had the burden of proving those facts, and that the lack of proof of them requires a reversal. The Insurance Code contains, in Article 14 of Chapter 1, Part 2, Division 1, comprising sections 1010 to 1062, St.1935, pp. 540–553, as amended, elaborate provisions for proceedings in case of insolvency or delinquency of “persons” (defined by section 19, St.1935, p. 498, to include associations and corporations) doing insurance business. Section 1011 provides that the superior court “shall, upon the filing by the commissioner of the verified application showing any of the following conditions hereinafter enumerated to exist” make an order vesting in the commissioner title to all the assets of an insurance company and directing him to take possession of its records and assets, and to conduct, as conservator, its business. This application must be served on the company (“person”) in the same manner as a summons (section 1040, St.1935, p. 547), but no provision is made for an answer to it, and the order mentioned in section 1011 is obviously to be made ex parte on the filing and presentation of the application. Section 1012 provides as follows: “Said order shall continue in force and effect until, on the application either of the commissioner or of such person [company], 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.”

It is clear that what we have here is not an ordinary civil action, but a special statutory proceeding. None of the rules of procedure for such actions are made applicable to it by the statute (except as already noted) and they do not apply to it of their own force. (Carpenter v. Pacific Mut. Life Ins. Co., (1937) 10 Cal.2d 307, 327, 328, 74 P.2d 761; Carpenter v. Pacific Mut. L. Ins. Co., (1939) 13 Cal.2d 306, 311, 89 P.2d 637.) No provision is made for an appearance in response to the verified application filed by the commissioner under section 1011, and that application is evidently not a complaint to be answered. The company, if it desires a vacation of the order, must present its own application therefor. While the statute does not require it to state in such application any reasons for vacation of the order no doubt it may do so. Such reasons may or may not include a negation of the grounds of the order, but if they do it comes as the claim or contention of the company so applying. The original application of the commissioner has served its purpose when an order has been made upon it, except as a place of reference to ascertain the grounds of the order.

Nor is the proceeding at all like that in case of an order to show cause and restraining order issued to one seeking an injunction. Such a party is the actor and must proceed with his proof or lose his restraining order. Here the commissioner need do nothing after obtaining the order appointing him as conservator; and if the company does nothing the order continues in force indefinitely.

Even if the company obtains a hearing, the order, by the terms of section 1012, “shall continue in force and effect until * * * it shall, after a full hearing, appear to said court” that for the reasons stated in this section it should be set aside. If at the hearing there is no evidence at all, or the evidence presented is insufficient to prove, that is, make it “appear to the court,” that there are proper reasons for setting aside the order made under section 1011, the company, if it is the applicant for such relief, must fail. A statutory provision with this effect places the burden of proof on the party who must meet its requirements to succeed. This is in conformity to the provisions of section 1981, Code of Civil Procedure, that “the burden of proof lies on the party who would be defeated if no evidence were given on either side.” The same conclusion has been reached, for somewhat different reasons, with which, also, we agree, in Caminetti v. Guaranty Union L. Ins. Co., (1942) 52 Cal.App.2d 330, 337, 126 P.2d 159, and Caminetti v. Imperial Mut. L. Ins. Co., (1943) 59 Cal.App.2d 476, 139 P.2d 681.

Section 1011 of the Insurance Code enumerates among the conditions, the existence of which affords ground for an order appointing the Insurance Commissioner as conservator of an insurance company, the following: “(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. * * (h) That any officer or attorney–in–fact of such person has embezzled, sequestered, or wrongfully diverted any of the assets of such person.” The word “person” here, as elsewhere in the code, by definition includes corporations and associations. The commissioner's application for the order in this case stated as a ground therefor that two of the officers of respondent, Charles E. Fielder and his wife, Eunice H. Fielder, had wrongfully diverted assets of the association to themselves. This charge is based on the compromise and payment of claims for back salary made against the association by them. During the whole time covered by the inquiry Charles E. Fielder was a director and general manager of the association and also held either the office of president or that of secretary and his wife, Mrs. Eunice H. Fielder, was office manager and vice president and also a director. In February of 1931, 1932, 1933, and 1934, the Board of Directors of the association consisted of three persons, of whom Mr. and Mrs. Fielder were two, and in each of these months the board adopted a resolution fixing the salary of the “secretary and general manager” at $400 per month and another resolution fixing the salary of the “vice president and assistant secretary” at $200 per month. Apparently all the directors voted for all of these resolutions. The next action taken by the Board of Directors on officers' salaries was a resolution adopted on September 7, 1935, fixing the salaries of the officers at a maximum of $200 per month “during the existing emergency.” In August, 1935, Mr. and Mrs. Fielder signed waivers of all unpaid salaries up to July 31, 1935. No further action regarding officers' salaries was taken up to the time of the compromises hereinafter mentioned. From July 31, 1936, to August 1, 1939, C. E. Fielder drew a salary of $200 per month and Mrs. Fielder drew a salary of $75 per month. On September 5, 1939, Mr. and Mrs. Fielder presented to the Board of Directors claims for back salaries, Mr. Fielder's for $5,000, and Mrs. Fielder's for $4,775, each of them also making an offer to compromise for $2,550. On September 13, 1939, the board of directors, at a meeting at which Mr. and Mrs. Fielder and one other director were present, adopted separate resolutions, for which all the directors voted, authorizing the acceptance of these offers of compromise and the compromise of each of these claims for $2,550. Following these resolutions the amounts of the compromises were paid to Mr. and Mrs. Fielder.

The law in California formerly was that a director was disqualified from voting on any matter in which he was directly and personally interested and could not be one of a majority essential to the adoption of such a resolution. (6A Cal.Jur. 1107; Angelus Securities Corp. v. Ball, (1937) 20 Cal.App.2d 423, 432, 67 P.2d 152.) That rule was somewhat modified by the adoption of section 311 of the Civil Code, which as it now stands declares that no contract or other transaction between a corporation and one of its directors, or between a corporation and any corporation, firm on association in which one of its directors is financially interested, shall be void or voidable by reason of the fact that such director is present at the meeting at which the contract or transaction is authorized or approved or that his vote is counted for that purpose, if (a) the fact of his interest is known to the board and the contract or transaction is authorized or approved by a vote sufficient without counting that of such director, or (b) the contract or transaction is approved or ratified, with knowledge of the director's interest, by a majority of the shareholders, or (c) the “contract or transaction be just and reasonable as to the corporation at the time it was authorized or approved.”

It is clear that, as far as Mr. Fielder is concerned, the original resolutions fixing his salary and the resolution authorizing the compromise were not passed by a majority sufficient for that purpose without his vote, and hence the transaction cannot be upheld under subdivision (a) of section 311, above referred to. His salary, as well as any amount received in compromise of a claim therefor, would be community property (Civ.Code, sec. 164), and by virtue of section 161a of the Civil Code, adopted in 1927, his wife would have a present, existing and equal interest therein. Possibly Mrs. Fielder's vote on her husband's salary is not within the letter of section 311 of the Civil Code, since he is neither a corporation, a firm nor an association; but if not, it is within the rule which governed prior to the adoption of that code provision and there is nothing in section 311 to prevent the continuing application of the former rule to cases not within the purview of this section. In either case Mrs. Fielder's vote could not be counted to carry the resolution fixing her husband's salary. Cuneo v. Giannini, (1919) 40 Cal.App. 348, 180 P. 633, which appears to hold to the contrary, was decided before the adoption of section 161a of the Civil Code.

It is to be noted also that while the salary fixing resolutions under which Mr. Fielder made his claim fixed the salary of the “secretary and general manager,” which positions he held when the resolutions were passed, he ceased to be secretary and became president on November 3, 1937, and so remained until August 3, 1939. This interregnum extended over nearly the whole period of time for which he claimed back salary, and during it the salary fixing resolutions above mentioned did not cover him. Apparently there was no resolution fixing a salary for the president alone or for the general manager alone, or for both officers together.

Mrs. Fielder's vote for the compromise of her husband's claim also fails for another reason. The resolutions compromising her salary claim and that of Mr. Fielder came up for action at the same meeting. Before this meeting they talked the matter over and agreed to both compromises. They thus became interested, if they were not before, in the common object of obtaining more salary for each of them and were both disqualified to vote on either resolution. (Angelus Securities Corp. v. Ball, supra, (1937) 20 Cal.App.2d 423, 433, 67 P.2d 152.)

For the reason last stated Mr. Fielder was also disqualified from voting on the resolution compromising Mrs. Fielder's claim. Apparently he was not interested in her salary as community property, and hence was not disqualified to vote on the original resolutions fixing her salary. Both parties state in their briefs that Mr. and Mrs. Fielder were living separate and apart and while they give us no record reference for that fact and we have found none, we are disposed to accept the fact thus agreed on. Her earnings while she is living separate from her husband being her separate property (Civ.Code, sec. 169), he would not be disqualified from voting upon them.

The compromise was not submitted to the shareholders––indeed, this corporation had no shareholders––and hence is not affected by subdivision (b) of section 311 of the Civil Code. Respondent contends that it may be upheld under subdivision (c) on the ground that it was just and reasonable as to the corporation. As to that, we begin with the fact that there was no valid resolution fixing the salary of Mr. Fielder. However it is held that an officer who renders beneficial services to a corporation, without any lawful action of the board of directors fixing his compensation, but under circumstances negativing an intent that they were to be gratuitous, may recover the reasonable value of those services. (Bassett v. Fairchild, (1901) 132 Cal. 637, 64 P. 1082, 52 L.R.A. 611; Andrews v. Glick, 1928, 205 Cal. 699, 272 P. 587.) Respondent seeks to support the judgment here under this rule. However, we can find no evidence which would support a finding that the services rendered to the corporation by Mr. Fielder during the time to which his claim for back salary relates were worth more than he had received for them. Since the burden of proof was upon respondent in this proceeding, a defect of proof in this respect would require a finding against respondent. While the respondent states in its brief that the record “is replete with testimony of what duties they [the Fielders] performed,” no reference is made to any such testimony and we have discovered none. There is testimony showing that respondent was in bad condition financially at the beginning of this period and in greatly improved condition at the end of it. But this is not enough. We find nothing showing how much time, effort and attention on the part of the officers were necessary or applied to produce such a result. The association was a small one and its administration may have been a part–time job. It does appear that the salaries claimed by the two officers would, for most of the period covered by their claims, amount to 20 percent or more of the income of the association. It further appears that no liability for these back salaries was set up on the books of the association or mentioned in any of its published statements of condition; and that Mr. and Mrs. Fielder received and accepted the salaries paid them without manifesting any objections to them.

Respondent also attempts to support the compromises by reference to the rule that a compromise of a claim asserted in good faith is valid even though the claim is actually without legal foundation. That rule can have no application in a case like this where the claimants, acting as fiduciaries for the adverse party, approve the compromise of their own claims and the approval fails for that reason.

Respondent further claims that the payment of these sums to Mr. and Mrs. Fielder did not constitute a diversion of the association's assets because they had agreed [with each other] to make a “contribution” of the amounts received (less $50 each) to the association under section 10745 of the Insurance Code, St.1935, p. 667. However, this arrangement for a “contribution” did not prevent any part of the payments on the compromise from being a diversion. The “contribution” was not a gift, but an advancement, to be repaid to the contributor when the condition of the association should warrant. Section 10745, under which the contributions would be made, while it provides that the “obligation to return such money shall not be a liability or claim * * * against the association” also provides that the “return of such money * * shall be payable only out of surplus remaining after providing for all required reserves, surplus, or minimum funds and other liabilities, whether required by the laws of this State or any other State in which the association does business,” and section 10748, St.1935, p. 667, relating to the same subject, provides that when such an association discontinues business, after all claims and liabilities are paid or provided for “any surplus shall be returned to the person who advanced it.”

Respondent also argues that these payments to officers of the association upon the unauthorized compromise of their claims, which in the case of at least one of them appear to be without any legal foundation, do not constitute a wrongful diversion of the assets of the association within the meaning of subdivision (h) of 1011 of the Insurance Code, the contention being that “the wrongful diversion would have to be akin to embezzlement and be of a deliberate fraudulent or felonious nature.” One answer to this argument is, that the statute, in describing the acts which subject an insurer to seizure, uses the words “embezzled” and “sequestered” in addition to “wrongfully diverted”. Since the word “embezzlement” thus appears in the statute, we must, following the rule of statutory construction that meaning and effect are to be given to every word and clause of a statute, if that is reasonably possible (23 Cal.Jur. 758, 759), seek some meaning other than that of embezzlement for the words “wrongfully diverted”. The ordinary meaning of the words is sufficient for that purpose. The payment of funds of the association to the two officers constituted a diversion of those funds to them, and since there was no legal authority for the payment, the diversion was wrongful. Nothing further was needed to bring the case within the statutory provision in question. See Wickersham v. Crittenden, (1892) 93 Cal. 17, 32, 28 P. 788; Id., (1895) 106 Cal. 327, 39 P. 602; also People v. Talbot, (1934) 220 Cal. 3, 15, 28 P.2d 1057.

Finally, section 1012 of the Insurance Code, requires that before an order such as that here appealed from can be made it shall appear that the insurer “can properly resume title and possession of its property and the conduct of its business.” On this issue, also, the respondent had the burden of proof, and appellant insists that there is no evidence justifying a finding in respondent's favor thereon. This is a matter primarily for the consideration and discretion of the trial court, whose decision is binding on appeal unless without any support in the evidence. (Caminetti v. Guaranty Union L. Ins. Co., supra, (1942) 52 Cal.App.2d 330, 336, 126 P.2d 159; Caminetti v. Imperial Mut. L. Ins. Co., supra, (1943) 59 Cal.App.2d –––, 139 P.2d 681.) While there is evidence here which would have supported a finding against the respondent on this issue, we cannot say there is no reasonable view of the evidence which would support the trial court's implied finding in its favor. However, this conclusion does not require us to affirm the judgment. Section 1012 of the Insurance Code further requires, as a prerequisite to such an order as we have here, a showing, in the alternative, that the ground on which the commissioner was made conservator “does not exist or has been removed.” The first of these alternatives, “does not exist,” although couched in the present tense, undoubtedly refers to the time when the order appointing the conservator was made. If it were not so construed, there would be no use in this provision for the other alternative, “or has been removed,” for a condition that has been removed necessarily does not exist. This would again run counter to the rule of construction above mentioned, that meaning and effect shall be given every word of a statute. As we have already shown, the ground of action existed here when the order was made; and there is no showing that it has been removed, for the diverted funds appear to be still diverted. We are not undertaking here to decide whether such an act of diversion, once done, can be undone so as to remove the ground of such an order. We merely suggest the question as one which may require future consideration.

The judgment appealed from is reversed.

SHAW, Justice pro tem.

SHINN, Acting P. J., and PARKER WOOD, J., concur.