FINANCIAL INDEMNITY COMPANY v. John R. Maloney, Real Party in Interest. (1954)

This is a petition for a writ of mandamus to require respondent court to hear an order to show cause why the insurance commissioner of the State of California should not be restrained from taking over and conducting the business of petitioners until the determination of action No. 63372, entitled Financial Indemnity Company, a California corporation and G. Kenneth Vaughn, plaintiffs, vs. John R. Maloney, Individually and as Insurance Commissioner of the State of California, Department of Insurance of the State of California, defendants, which action is now pending in the superior court of the State of California, in and for the County of Los Angeles. There is also a motion to dismiss the order to show cause issued by this court.

Undisputed Facts.

Petitioner Financial Indemnity Company is a California corporation doing business as an insurer in the State of California. Petitioner Vaughn is the owner of 100% of the outstanding issued stock of Financial Indemnity Company.

On the 14th of September, 1954, petitioners filed a complaint in the superior court of the State of California against John R. Maloney, individually and as insurance commissioner of the State of California, and the department of insurance of the State of California, whereby they sought an injunction and declaratory relief against said defendants. At the same time they requested respondent court to issue an order to show cause and temporary restraining order, restraining defendants from taking over the conduct of the business of Financial Indemnity Company until the above mentioned action had been tried. Respondent denied petitioners' application for an order to show cause and temporary restraining order on the ground that it did not ‘have any jurisdiction’ to issue the same.

Question: In view of the facts hereinafter related, did the trial court have jurisdiction to issue an order to show cause as requested by petitioners?

Yes. The record discloses that Financial Indemnity Company, hereinafter called the ‘corporation’, was duly organized under the laws of the State of California and qualified to do business in said State as an insurance company; that the company furnishes a market to automobile dealers and finance companies for the placing of automobile insurance; that the department of insurance issued a permit authorizing the corporation to sell its capital stock to Olin E. Darby, Paul R. Lietzell and George E. Darby; that the stock was issued pursuant to such permit; that in July, 1948, G. Kenneth Vaughn purchased all of the issued stock of the company and has ever since been the sole owner of all the outstanding stock of said company; that under the direction of John R. Maloney, insurance commissioner of the State of California, hereinafter referred to as the ‘Commissioner’, and the Department of Insurance, hereinafter designated as ‘Department’, the financial condition of the company has been investigated since its inception in December 1945, and reports thereof filed with the department; that as a result of said investigations and examinations, the Department and the Commissioner have claimed that G. Kenneth Vaughn was not a proper person to be an officer, director, or manager of said Corporation and have claimed that the original incorporators of the corporation obtained the corporation's stock permit and its original certificate of authority by means of false and fraudulent representations as to the true incorporators of the corporation.

Defendants' claim is succinctly set forth in a letter from the Commissioner to petitioners' counsel, which reads in part as follows: ‘Does your proposal contemplate that the trustees, directors and management be fully informed that it is the Vaughn control which the Commissioner has found created and constitutes a hazardous condition, that the purpose of the entire arrangement which you propose is to effectively and permanently remove such Vaughn control and that it be understood and agreed by them that any action on their part which reestablishes or continues the condition which the Commissioner has found to be hazardous will defeat that purpose and is, therefore, prescribed to them? I ask this question to ascertain whether there is any thought on your part in making your proposal that the judgment of these impartial persons is to be substituted for the judgment of the Commissioner on the question whether Vaughn control or management constitutes a hazardous condition, and the Commissioner bound thereby, and I trust you will appreciate the necessity for my having your answer to this question before expressing myself on the acceptability of your proposal.’

As a result of defendants' criticism of the company plaintiffs offered to sell all of G. Kenneth Vaughn's stock in the company within ninety days and pending the sale of said stock to provide an independant management acceptable to the Department and deposit the stock certificates with counsel for the company with instructions to notify the department if any effort were made to vote or regain possession of said stock. This offer was accepted by defendants, whereupon G. Kenneth Vaughn, as 100% owner of the stock in the corporation (1) elected Joseph Froggatt, Jr., Kenneth P. Mackenzie, and Allan Bair as an independent board of directors of the company and independent managers of its affairs; such persons were approved by the Commissioner; (2) assigned all powers in the company to the aforesaid management and such management was named as signatories on all bank accounts, safety deposit boxes and all other financial papers of the corporation; (3) delivered to Lloyd Wright, one of his counsel, the stock certificates representing 100% of the outstanding stock in the company, instructing him to inform the Commissioner if he, G. Kenneth Vaughn, requested possession of said stock or attempted to vote it in any way; (4) executed a voting proxy to John S. Bolton, said proxy being an irrevocable proxy coupled with an interest, and instructed and agreed with said John S. Bolton that in the event the interest making said proxy irrevocable was disposed of, said John S. Bolton was to give the Commissioner 30 days notice of the relinquishment of said interest.

Thereafter a certified audit of the company's financial condition was prepared and delivered to the Commissioner. Such audit showed the company to be solvent within the meaning of the Insurance Code of the State of California.

It further appears that if defendants become the conservators of the company irreparable injury will result to G. Kenneth Vaughn and the company.

In such a state of the record defendants threatened, pursuant to the provisions of Section 1011 of the Insurance Code, to secure an ex parte order from the superior court vesting title to all of the assets of the corporation in the Commissioner and to forthwith take possession of all its books, records, real and personal property and assets and to conduct as conservator the business of said corporation.

Section 1011 of the Insurance Code reads as follows: ‘The superior court of the county in which is located the principal office of such person in this State shall, upon the filing by the commissioner of the verified application showing any of the following conditions hereinafter enumerated to exist, issue its order vesting title to all of the assets of such person, wheresoever situated, in the commissioner or his successor in office, in his official capacity as such, and direct the commissioner forthwith to take possession of all of its books, records, property, real and personal, and assets, and to conduct, as conservator, the business of said person, or so much thereof as to the commissioner may seem appropriate, and enjoining said person and its officers, directors, agents, servants, and employees from the transaction of its business or disposition of its property until the further order of said court:

‘(a) That such person has refused to submit its books, papers, accounts, or affairs to the reasonable inspection of the commissioner or his deputy or examiner.

‘(b) That such person has neglected or refused to observe an order of the commissioner to make good within the time prescribed by law any deficiency in its capital if it is a stock corporation, or in its reserve if it is a mutual insurer.

‘(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 policyholders, or creditors, or to the public.

‘(e) That such person has violated its charter or any law of the State.

‘(f) That a certificate of authority of such person has been revoked under section 10711.

‘(g) That any officer of such person refuses to be examined under oath, touching its affairs.

‘(h) That any officer or attorney-in-fact of such person has embezzled, sequestered, or wrongfully diverted any of the assets of such person.

‘(i) That a domestic insurer does not comply with the requirements for the issuance to it of a certificate of authority, or that its certificate of authority has been revoked; or

‘(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.’

From an examination of the foregoing section, together with the facts of the instant case above related, it is apparent that not any fact listed in the section under subdivisions (a) to (j), inclusive, exists which would authorize defendants to take the action which they threaten; also, that irreparable damage would result to petitioners should such action be taken.

Defendants' authority is not enlarged by Section 1013 of the Insurance Code, which provides for the seizure of the books and property of an insurance company only when ‘it appears to the Commissioner that any of the conditions set forth in section 1011 exist.’ Hence, since none of the facts appear in the instant case which are necessary to authorize the Commissioner to take over the assets of the corporation, the trial court had jurisdiction to issue an order to show cause to determine whether a restraining order should be issued, and its failure to do so is error which will be corrected by this court upon application for a writ of mandamus. (Stratton v. Superior Court, 87 Cal.App.2d 809, 811[1], 197 P.2d 821; Katenkamp v. Superior Court, 16 Cal.2d 696, 698[1], 108 P.2d 1.)

Modern Barber Colleges v. California Employment Stabilization Comm., 31 Cal.2d 720, 192 P.2d 916; Louis Eckert Brewing Co. v. Unemployment Reserves Comm., 47 Cal.App.2d 844, 119 P.2d 227, and Rhode Island Ins. Co. v. Downey, 95 Cal.App.2d 220, 212 P.2d 965, urged by defendants in support of their thesis that neither the superior court nor this court has jurisdiction to consider the relief which petitioners are seeking are inapplicable to the facts of the present case. In the first two cases cited there was applicable a statute reading in part as follows: ‘No injunction or writ of mandate or other legal or equitable process shall issue in any suit, action or proceeding, in any court against this State or against any officer thereof to prevent or enjoin under this act the collection of any contribution sought to be collected.’ (Statutes 1935, page 1226; Statutes 1939, page 2058; Deering's Gen.Laws 1939 Supp., Act 8780(d).) In the present case there is no such statute. Relative to Rhode Island Ins. Co. v. Downey, supra, in such case the right of the insurance commissioner to act was predicated upon a showing that one or more of the acts listed in Section 1011 of the Insurance Code authorizing him to seize the defendant in such case in fact existed.

As set forth above, in the present case there was no evidence of any of the acts having been committed which would authorize the Commissioner to seize the corporation under the provisions of Section 1011 of the Insurance Code. On the contrary, it appears from the record that the contemplated action of the Commissioner is predicated upon the fact that (a) he did not approve of Mr. Vaughn's having control of the corporation, and (b) he believed that the original incorporators had obtained their permit through fraud and misrepresentation. The record discloses that Mr. Vaughn is no longer in control of the corporation and there is nothing in Section 1011 of the Insurance Code authorizing the Commissioner to seize the corporation because of fraud of the original incorporators in obtaining a permit. It further appears that the present management of the corporation is in fact acceptable to the Commissioner and has been approved by him.

The motion to dismiss is denied. Let the peremptory writ of mandate issue as prayed.

McCOMB, Justice.

MOORE, P. J., and FOX, J., concur.