Kennan v. Rundle

ObtoN, J.

The Manufacturers’ Mutual Fire Insurance Company of Milwaukee was organized under secs. 1941®-1941y, S. & B. Ann. Stats., and continued in business until November 5, 1890, when it became embarrassed, and suit was brought under "secs. 3218, 3219, R. S., to close up its *219 affairs; and the' plaintiff was appointed the receiver thereof, and authorized to bring suit to enforce the collection of the outstanding credits of the company.

The complaint states “ that on or prior to the 5th day of October, 1889, the condition of tlie company was unsatisfactory and discouraging; that many policies of insurance were outstanding against the company; that the amount of losses reported was large, the amount of money in the treasury limited, and the company was in embarrassed circumstances; . . *. that for the purpose of strengthening the credit and standing of the company, and providing it with a substantial basis to continue and prosecute its business, and to secure and protect the policyholders, and supply it with ready means for meeting its liabilities, past and present, ... it was determined to execute a bond or undertaking, in the sum of fifty thousand dollars, by the managers of the said company; . . . which said bond was so executed and delivered for the benefit and in the interest of all those parties who had then, or should thereafter have, actual or contingent claims upon or against said company under their contracts of insurance; and was so intended and understood by the signers,” etc.

The bond executed for the purposes aforesaid is, in substance, “ that we, the undersigned policy-holders [of the company], a corporation organized and existing under the laws of Wisconsin, for the purpose of establishing a guaranty fund for [the said company], and to establish the credit of said company upon a more firm basis, do hereby, for value received, severally promise and agree, to and with each other, and to and with said company, that we will, and each of us does hereby, guaranty the payment of the existing and future indebtedness of [said company] to the amount of the several sums below set opposite our respective names, but no further; and we each of us hereby *220 pledge ourselves, and each binds bimself, bis heirs, etc., to pay. into the treasury [of the company], upon the -call of the board of directors of said company, from time to time, as calls may be made, or within ten days thereafter, such pro rata of thq several amounts below set opposite our respective names as said board of directors may wish, for the payment of the losses and expenses of said company.” Then follow the signatures of the defendants in this suit, with various sums set opposite their respective names, amounting in the aggregate to $50,000. This bond was duly accepted, ratified, and approved by the board of directors of the company.

This action is predicated on this bond, undertaking, or promissory note, or whatever it may be, with the necessary (and proper averments in the complaint.

The defendants demurred to the complaint on the grounds, ■first, that the plaintiff had not the capacity to sue; second, that several causes of action are improperly joined; and third, that the complaint fails to state facts sufficient to entitle the plaintiff to recover. The demurrer was overruled, and this appeal is from said order.

It would not be' in the interest of the company, or of the defendants, to have the action suspended on either of the first two grounds of the demurrer, even if sufficient. The policy-holders, creditors, and the defendants ought to know, as early as practicable, whether the bond can be relied on as an asset of the corporation. We shall therefore consider the important question whether the bond is valid, or ultra vires and void. We have been furnished with able briefs and arguments by the learned counsel on both sides on this question. The learned counsel of the appellants contend that this corporation, as a mutual insurance company, had no power by its charter to take this guaranty bond, and that therefore it is ultra vires. By the authority of Clark v. Farrington, 11 Wis. 306 , this question may be *221 twofold: (1) Was the power to take such an instrument for sucb a purpose expressly conferred upon the company by its charter? (2) Was the taking of sucb a guaranty obligation tbe necessary or proper mecms of executing some power conferred. Madison, W. & M. P. R. Co. v. W. & P. P. R. Co. 7 Wis. 59 . As said in tbis last case,' “ it is not contended that tbe guaranty wbicb the plaintiff acquired was expressly authorized by tbe charter.” It certainly could not be contended that any sucb express power is conferred. If tbe power exists at all, it must be inferred from tbe general powers given. The principle governing tbis question, with its limitations and scope, is as well settled in tbe above cases and those following them in tbis court as anywhere in tbis country.

Is tbis scheme or method of raising a fund to meet tbe losses and expenses of this company tbe necessary and proper means of accomplishing this object, and within tbe powers expressly granted? We are satisfied that it is not. It must be conceded that sucb an object is one of tbe legitimate objects to be accomplished by tbe company. Tbe question, so limited, may easily be applied when we understand tbe nature and legal character of a mutual insurance company, in view of tbe statute under wbicb it is organized.- It is not essential to tbe raising of such a fund that a premium note be taken, for “ tbe members of the company would all be bound to contribute to pay tbe losses sustained by tbe company, and would form a mutual insurance company, in tbe strict legal sense of these words,” if even tbe first premium should be paid in money, instead of tbe taking of a premium note. Tbe one thing absolutely essential to a mvMal company is tbe obligation of tbe members to pay their pro rata share of tbe necessary expenses and losses of the company, and that they are bound to so contribute. All tbe members of tbe company assume tbis obligation, and are so bound, by.virtue of sec. 1941«, E. S., whether *222 they pay the premium in cash in the first place, or give premium notes. This section “authorizes an assessment to pay losses and. expenses upon the property insured, without any exception. The effect of this provision is to make a cash policy-holder a member of the company, and liable to pay-assessments for losses.” That section provides that “ whenever any loss has been ascertained which requires an assessment to be made, then [the officers of the company] shall malte am, assessment sufficient to pay such loss, upon all the properly insured.” The above quotations are taken from the opinion of Chief Justice Cole in the late case of Rundle v. Kennan, 19 Wis. 492 . This mutmality of liability to assessment, and obligation to pay pro rata for losses and expenses, are the essential and distinguishing characteristics of a mutual insurance company.

It is contended by the learned counsel of the respondent that such a company has mo way of accumulating a cash fund, to be devoted to the objects of the corporation or to be treated as cash capital, by means of such assessments alone. By the authority of the above case the first premium may be paid in cash. Second, “ at the time of affecting the insurance, the persons insured shall pay a percentage in cash.” Third, and “ such other charges as may be required by the by-laws of the corporation.” Here is a very large power to raise cash capital without resorting to such a guaranty bond. A mutual insurance company is not a business corporation for the accumulation of capital or profits. The members secure their profits and pecuniary advantages by their mutual insurance of each other; and, if the expenses and losses can be paid, the full object of such a corporation would seem to have been attained. All the members are equally interested in the objects to be attained, and it is not supposed that they will make profit of each other, beyond securing these objects. But the statute allows the accumulation of sufficient cash capital to answer *223 all tbe purposes of sucb a limited corporation. It must not be overlooked that this is not a stock corporation. The mutuality of obligation, insurance, and of all the advantages, is the main and .essential feature of such a corporation, that must not in any respect be wanting, superseded, or impaired. When this principle of mutuality is violated in any essential particular of its business management, it so far ceases to be a mutual company. Rundle v. Kennan, 79 Wis. 492 . It follows, therefore, that if the money to be paid for all losses and expenses is to be raised through such a guaranty bond or by other extraneous means, and the members of the company are thereby exempted from assessments and the payment of their pro rata shares of such losses and expenses proportionate to their insurance, this essential feature of mutuality is entirely destroyed, and the company ceases to be a mutual insurance company.

If such a foreign resource is resorted to to relieve the members partially, or some of them only, of such assessment, to that extent the mutuality principle is destroyed, and the nature and legal character of the corporation subverted pro tanto, and the company ceases to be such a corporation as the law requires, wholly or partially. It is not simply the substitution of other means than the law provides for the payment of losses and expenses, but it destroys the essential nature and legal character of the corporation as a mutual insurance company. - The statute not only provides that the officers of the company “ shall make an assessment sufficient to pay such loss,” but the very nature of such a company makes this method of raising money to pay stich losses and expenses imperative and indispensable. It follows, also, that such a guaranty bond' is not the necessary or prqper means for carrying out the objects and executing the powers of the' corporation, which objects and powers are to pay losses and expenses, and the power to do so does not exist. These must be the clear, logical, *224 and legal conclusions drawn from the nature and legal character of the corporation. Not only has the company no legal power or authority to do this, but it is in violation of the law and illegal.

The learned counsel of the respondent has cited no case that conies anywhere near sanctioning such a doctrine. The cases are neither in point nor analogous. On the other hand, the learned counsel of the appellants cite many authorities close in analogy with this, and several in point holding that the taking of such a security is not only ulba vires, but void while still executory. The case of Trenton Mut. L. & F. Ins. Co. v. McKelway, 12 N. J. Eq. 133, is clearly in point. The company had similar powers. If losses occurred exceeding their means to pay, the company was to make assessments ratably on the members according to the amount of each member’s insurance. Instead of doing this, they took guaranty money bonds, secured by mortgage, to the amount of $150,000, and an assessment was to be made thereon, as provided in this obligation. In a suit on one of the mortgages it was held “ that the corporation had no power to enter into the contract with the contributors to the guaranty fund, and that such contract was illegal and void, and could not be enforced in a court of law or equity.” Held, also, that the charter of the insurance company “ makes its members mutual insurers, and constitutes a fund to meet losses, made up from premiums to be contributed by the members, . . . and no other fund can be created for that purpose.” This case is cited approvingly in Morris & E. R. Co. v. Sussex R. Co. 20 N. J. Eq. 564, and National Trust Co. v. Miller, 33 N. J. Eq. 160. In Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co. 118 U. S. 630 , it is held that a lease by one company to the other, not authorized by the charter, was void as to both lessor and lessee. In this case, Madison, W. & M. P. R. Co. v. W. & P. P. R. Co. 7 Wis. 59, above cited, is *225 cited approvingly. In Central Transp. Co. v. Pullman's P. C. Co. 139 U. S. 24 , the first-named company leased its business and property to tbe last-named company, of another state. It was held that the contract was unlawful and void, because beyond the corporate powers of the lessor, and that no action could be maintained by the lessor on the contract to recover the sums thereby payable, even while the lessee had enjoyed the benefits of the eont/ract. In Salem Mill Dam Corp. v. Ropes, 6 Pick. 23 , it is held that, “ if a corporation is created with a specific fund limited by the act, it cannot enlarge or diminish that fund but by license from the legislature.” An insurance company has no right to receive accessions to its funds from sources not authorized by its charter. Dietrich v. Madison R. Asso. 45 Wis. 79 ; Jemison v. Citizens' Sav. Bank, 122 N. Y. 135 ; Bank of Augusta v. Earle, 13 Pet. 588 ; National Trust Co. v. Miller, 33 N. J. Eq. 160; Rochester Ins. Co. v. Martin, 13 Minn. 59 . When the legislature had authorized the city of Milwaukee to raise and expend $100,000 on the harbor at that place, the city could not bind itself exceeding that limit; and the contract for such purpose is void for want of power. Hasbrouck v. Milwaukee, 13 Wis. 37 . Where an insurance company is authorized to take the notes of its members for insurance, it cannot take the note of a third person "for such purpose. Mutual Ben. L. Ins. Co. v. Davis, 12 N. Y. 569 . Where a corporation had no power to loan money, a note taken for a loan is void. Beach v. Fulton Bank, 3 Wend. 573 . Corporations can do business in no other way than prescribed by their charters. N. Y. T. & L. Co. v. Helmer, 12 Hun, 35 ; Montgomery v. M. & W. P. R. Co. 31 Ala. 76 ; Farmers' & M. Bank v. Baldwin, 23 Minn. 198 ; Farmers' & T. Bank v. Harrison, 57 Mo. 503 . Where the statute provides for the payment of losses and expenses by making assessments on the members, the company cannot adopt any other plan or means of doing so. This *226 power being expressly given, and to be carried out in a pa/r-tieular way, excludes all other measures and resources. Matthews v. Skinker, 62 Mo. 329 ; Thomas v. Railroad Co. 101 U. S. 71 ; Crocker v. Whitney, 71 N. Y. 161 .

There are cases where the contract may be ultra vires, but not void, according to many authorities, where equitable estoppel or the full execution of the contract may deter the interference of the courts to afford relief; but this is not one of them. This contract is executory, and the court is asked to enforce it, and there are no equities to palliate such a radical departure from the powers conferred by the charter, and assumption of powers not only foreign but which, if executed, would subvert the purposes and radically change the nature of the corporation. In such cases there is no conflict of authority that the contract effecting such change is not only ultra vires but void. All the cases of the supreme court of the United States, and a preponderance of the cases elsewhere, make no distinction between executory and executed contracts in declaring the contract absolutely void. But we are not concerned in that distinction. Reference may be had to many other cases in the brief of the learned counsel of the appellants. This contract is unquestionably void.

By the Court.— The order of the superior court is reversed, and the cause remanded with direction to sustain the demurrer, and for further proceedings according to law.