Goldsborough v. Siegk

Adkins, J., delivered the opinion of the Court. 'The bill of complaint in this case alleges proceedings by the State Insurance Commissioner in the Circuit Court Eo. 2 of Baltimore City for the appointment of a receiver for the Federal Mutual Fire Insurance Company of Baltimore by reason of the unfavorable condition of said company at the close of the year 1923, as shown by its annual statement for that year and its failure to make good a, deficiency in its assets on the demand of the commissioner; that Arthur M. ⁵⁵⁹ Siegk was appointed receiver on December 23rd, 1924, and subsequently, on January 19th, 1925, J. Morfit Mullen wa's appointed co-receiver and both have dnly qualified; that the receivers have hy the order of said court, dated March 4th, 1925, been authorized and directed to file suit against Charles Goldsborough for' the recovery, for the benefit of said company, of certain assets later referred to and described; that the original business of said company was principally the insurance of whiskey, in which it did a profitable business until the adoption of the Eighteenth Amendment and the passage of the Eederal Prohibition Law, after which it became necessary for the company to engage in the general fire insurance business; that its business in the year succeeding 1919 showed a change for the worse; that being a mutual company, it had no capital stock, but its assets over those actually expended for its losses, expenses and other business disbursements were carried and described as a surplus; that about the first of the year 1921 its surplus fell below $50,000 and, in order to continue to do business in Massachusetts, a surplus of $50,000 was necessary; that defendant, who was at that time president of the company and a director, made an offer, which was duly accepted by the company, as appears from the minutes of a director’s meeting held on February 9th, 1921, as follows: “Secretary reported that the company was Short of $13,000 in its surplus of $50,000, which was necessary for the renewal of license in Massachusetts. Mr. Golds-borough offered to contribute $11,000 and Mr. Grove $2,000 to be deposited with the Company as paid-up capital, drawing 2% interest per annum, this to be returned when surplus over all liabilities amounts to $63,000, or any time prior to same upon vote of the directors;” That on February 26, 1921, the company rendered its annual statement signed and sworn to by the defendant for the year 1920 to the Insurance Commissioner, reporting therein, among “bonds and stocks acquired during 3920” ⁵⁶⁰ and “ledger assets” of the company, liberty loan bonds amounting to $13,000, as having been acquired by the company on December 30, 1920, the first eleven bonds having been “contributed by Charles Goldsborough” and the remaining four bonds having been “contributed by Thomas O. Grove”; that $13,000 Wa's reported in said statement as “guaranty capital paid up,” which being added to the surplus of the company brought said surplus up to $51,-414.58, as shown by said statement; that later, prior to April 13, 1921, a report was received from the Massachusetts Insurance Department by said company advising it of a deficit of $7,000 in its surplus, and an offer was made by the defendant, and duly accepted by the company, as appears from the minutes as follows: “Report from Massachusetts Insurance Department was received advising us of a deficit of $7,000 in our surplus, which it would be necessary to make up, and the opportunity was given the directors to contribute by depositing securities with the company at 2%. As no one desired to make up this offer, the president stated that he would do so.” That in this total deposit of $20,000 the defendant deposited with the company $18,000, and Thomas O. Grove, vice-president, deposited $2,000, all in liberty bonds, and they -executed and delivered to the insurance department of Maryland a certificate, a copy of which is filed with the bill, as Exhibit 1; and the commissioner certified to the insurance ■commissioner of Massachusetts that the surplus had been made good, and in consequence thereof the company was ■■able to continue its license to do business in Massachusetts; that thereafter, prior to the end of the year 1921, when it ¡appeared that the surplus had become further impaired, the said Goldsborough, as shown by the annual statement for said year, did deposit with the company further securities, withdrawing, however, from said “guaranty capital paid up” liberty bonds of the value of $6,000, and substituting therefor certain stocks, and a liberty bond contributed by ⁵⁶¹ said Grove of $1,000, and said defendant on December 31, 1921, executed and delivered another certificate to the insurance department of Maryland, listing said additional and ■substituted securities, and certifying to a, deposit of $26,813 towards surplus, a copy of which certi ficate is filed with the bill as Exhibit 2; that the said securities were by the defendant and the company treated as assets of the company, constituting part of its surplus, and reported in the 1921 statement to the commissioner as assets of the company, contributed by the defendant, as follows: “Bonds and stocks constituting guaranty capital of the Federal Mutual Fire Insurance Company, Dee. 31st, 1921.” That during the year 1922 the surplus was further impaired and the defendant deposited further securities of the .alleged value of $4,415, and executed and delivered to the commissioner a certificate dated May 16, 1922, .a copy of which is filed with the bill, as Exhibit 3; and said commissioner certified the contents of said Exhibits 1, 2 and 3 to the insurance authorities of Massachusetts and treated the same as contributions by the defendant to the assets of the ■company for the security and benefit of its policy holders, whether residing in Massachusetts, Maryland or elsewhere; that in the annual statement to the commissioner at the termination of business in the year 1922, the defendant and the company treated said securities as contributions by the ■defendant to the company for its capital, and reported the .same among the assets of the company under the caption: '“Bonds and stocks constituting guaranty capital of The Federal Mutual Fire Insurance Company December 31st, 1922.” That said statement shows that at the end of 1922, only '$2,000 in liberty bonds remained of the original liberty bond contribution of $20,000 to “guaranty capital paid up,” the balance having1 been withdrawn by the defendant and Grove and corporate stocks substituted therefor, and the ¡amount of “guaranty capital paid up” was reported as $30,-188, and the total surplus, including “guaranty capital paid up” was reported as. $35,435.61; that in the year 1923, the ⁵⁶² business of tbe company continued to be still more unsuccessful, and at a time when the financial affairs of the company had become critical, the defendant resigned as president at a directors’, meeting held on July 11, 1923, the minute of which report is as follows; “After considerable discussion of the affairs and conditions of the company, Mr. Charles Goldsborough stated that he thought it would be best for him to resign as president and let Mr. Thomas C. Grove succeed him. Mr. Goldsborough also stated it was his intention to withdraw the securities he had placed with the company as a guarantee of surplus.

Mr. Golds-borough then tendered his resignation as president. “Upon motion, duly seconded, Mr. Goldsborough’s resignation was accepted.” That the statement to the commissioner for the year 1923-shows that the defendant has withdrawn from the assets of the company all of the securities deposited by him, and eon- • tinues to retain them contrary to the demand of plaintiffs for their surrender to them as receivers of the company, or payment to them of the value of said securities with accretions thereof representing interest or dividends; that plaintiffs are-advised that the actions of the defendant amounted to the-creation of a trust fund of said securities for the benefit of the policy holders of the company in Massachusetts, Maryland, and elsewhere; 'and that the effect of the actions of the-defendant in depositing said securities with the company, and his other actions in connection with the same, constituted said securities assets of the company to be used by it for the benefit of its policy holders or other creditors; the only circumstances under which the same could be released being when the surplus of the company (meaning thereby assets other than said securities) should be in excess of $50,000; and that said surplus since said contributions has never been in excess of said sum, but continued to decrease; that the-directors of the company had no authority to permit said securities to be withdrawn from the assets of the company by the defendant, and the records of their proceedings show ⁵⁶³ that the defendant withdrew the same without the authorization by the directors; that on learning of the depletion of the assets and the surplus from the statement at the end of 1923 the insurance commissioner of Maryland took action against the company; that except for the appearance of the securities deposited by defendant in the statements - for the year 1921 and 1922 the company would have been proceeded against by the commissioner two years before he took action, and that the said actions of defendant in connection with said securities resulted in the continuation of the operations of the company for a period of about two years during which time its assets continuously decreased; that under all the aforesaid facts and circumstances the defendant is. now es-topped to assert that said securities do not belong to the company, to be applied or distributed to its policy holders, who have suffered loss by fire-, as well as to tbe other creditors of said company; that the legal operation and effect of the contributions, or deposits, or whatever characterization may be given to defendant’s acts as set out in the bill,- resulted in the creation of a fund for the benefit of the policy holders and other creditors of said company, and that defendant and the -company in the public transactions, aforesaid, to wit, the annual statements for the State of Maryland and other states, treated the same as assets of the company for the benefit of policy holders or other creditors, -and that, as the surplus of the company from the tipie of said deposits continued to decrease, the defendant in withdrawing said securities from the assets of the company, in effect took possession of trust funds to which he was not entitled and which should be surrendered and delivered to plaintiffs as receivers, of said company; that the company is hopelessly insolvent; that the cash and other tangible assets coming into the hands, of Arthur M. Siegk on his. appointment as receiver (excluding assessments and other accounts receivable in the course of collection) approximate $2,000, and the liabilities, of the company aggregate more than $60,000; that there have been filed in -court or with the receivers claims for loss by fire amounting' to more than $73,000, among which are- claims for losses in ⁵⁶⁴ Massachusetts aggregating more than $5,800, and no part of said claims have been paid; that the assets unlawfully withdrawn, as aforesaid, by the defendant are necessary for payment of the claims of said policy holders and other creditors of the company and plaintiffs are advised they are entitled to have the court direct defendant to return said securities or account for their value, together with interest, or dividends or accretions upon or connected with same; that plaintiffs do not know what interest or dividends or other income or returns were paid upon the said bonds, or stocks, but aver that some interest or other income from the same has been received by defendant to which the receivers are entitled. The prayer of the bill is: (1) That a trust may be declared of said securities and that the court assume jurisdiction of same. (2) That defendant may be decreed to be a trustee of said trust funds, and be directed to account and restore the same, or their value to the receivers. (3) For discovery and account of all interest, dividends or1 accretions.

(4) That in the event of disposition by defendant of said securities plaintiffs may have a money decree against defendant for their value with interest. (5) For further relief. The three exhibits filed with this bill are certificates sworn to by defendant as president and T. 0. Grove as vice-president of the company, each certificate giving a