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MATTER MANHATTAN LIFE INSURANCE COMPANY v. RICHARD E. STEWART (05/20/69)
SUPREME COURT OF NEW YORK, SPECIAL TERM, NEW YORK COUNTY
1969.NY.41663 <http://www.versuslaw.com>; 317 N.Y.S.2d 513; 65 Misc. 2d 358
May 20, 1969
IN THE MATTER OF MANHATTAN LIFE INSURANCE COMPANY, PETITIONER,v.RICHARD E. STEWART, AS SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK, RESPONDENT
Royall, Koegel & Wells and O'Connor & Farber for petitioner.
Louis J. Lefkowitz, Attorney-General, for respondent.
Irving H. Saypol, J.
In this proceeding (CPLR art. 78) the petitioner moves for judgment directing the respondent Superintendent of Insurance to approve the proposed amendment of petitioner's charter authorizing (1) an increase of its guarantee capital from $6,000,000 to $10,000,000, (2) the number of its authorized guarantee capital shares from $3,000,000 to $5,000,000 and (3) directing the respondent to limit his review of the proposed amendments under section 53 (subd. 1, par. [d]) of the Insurance Law to assure that the proposed amendments comply with the provisions of that section and that the respondent should not interfere with the business judgment of the petitioner's board of directors except as expressly authorized by statute. The petitioner's original charter when it was incorporated in 1850 provided for a guarantee capital of $100,000, represented by 2,000 shares, each having a par value of $50 with one vote in the election of the board of directors. The shareholders were entitled to share 1/8 of net profits after payment of a maximum of 7% interest on all these shares, subsequently limited to $7,000 on the first $400,000 and 3% on the remainder.
By 1950 the petitioner had accumulated undistributed profits allocable to holders of guarantee capital shares aggregating approximately $347,000 to which the shareholders had a vested right according to section 14 of the petitioner's charter which allocates profits, 7/8 to policyholders and 1/8 to shareholders.
Legislation was enacted in 1950 to enable the capitalization of the accumulated profits and this object was effected by the addition of subdivision (d) of section 52 of the Insurance Law and paragraph (d) of subdivision 1 of section 53, effective April 15, 1950. Thereupon the petitioner submitted to the New York Insurance Department an amendment to its charter which was officially approved and filed on June 26, 1950, including in section 33 thereof the following language: "The Guarantee Capital of the Company may be increased indefinitely in the manner provided by paragraph (d) of subdivision 1 of Section 53 of the Insurance Law of the State of New York." Since then six additional applications for amendment containing that language have been filed by the petitioner after receiving the endorsement of the Superintendent of Insurance. Pursuant to those amendments the authorized guarantee capital is now $6,000,000, represented by 3,000,000 shares of the par value of $2 each. The rejected application would increase the guarantee capital to $10,000,000 and the guarantee capital shares to 5,000,000, each of the par value of $2. It is that disapproval which is now under review. The application embraced also a change in the directorships which was approved. Otherwise the letter of October 10, 1968 disapproving the increase in guarantee capital and shares stated:
It appears that Manhattan Life Insurance Company was incorporated on May 29, 1850. Its charter then provided for a Guarantee Capital of $100,000 represented by 2,000 shares having a par value of $50.00 each. The charter also provided that the shareholders were entitled to one vote per share in the election of directors. It further provided that in each year in which there is a distribution of dividends to policyholders, the shareholders were entitled to 7% interest on the outstanding Guarantee Capital and 1/8th of the distribution of dividends to policyholders.
Since then, the charter has been amended a number of times. It presently provides for an authorized Guarantee Capital of $6,000,000 represented by 3,000,000 shares with a par value of $2.00 each; the fixing of the number of votes to be cast by the shareholders at 720,000; and that the annual interest on such Guarantee Capital is $7,000 on the first $400,000 and 3% on the excess thereof. The 1/8th of the distribution of dividends to policyholders remains unchanged.
The increases in Guarantee Capital emanated from a decision by the directors in 1950 to pay the shareholders the profits partly in cash and partly in additional shares. With each increase, there has been an increased interest cost to the company. Each increase in the number of outstanding shares has further diluted the voting power of the policyholders. In 1964, by charter amendment, the maximum number of shareholders' votes was fixed at the 720,000 figure previously mentioned. The maximum number of votes of the policyholders would appear to total about 160,000. This disparity in voting strength is an anomolous situation where the affairs of a mutual insurance company are not controlled by its policyholders in accordance with the basic concept of a mutual insurance company, but, rather, are controlled by the shareholders.
Under the circumstances, Section 57 of the Insurance Law provides, in addition, that "Every domestic mutual insurance corporation shall be organized, maintained and operated for the benefit of members as a non-stock corporation". Since it appears that the proposed amendment increasing Guarantee Capital would result in an additional increase in the interest cost to the company and would, therefore, be detrimental to the interest of policyholders, approval of the proposed amendment cannot be granted.
Thus, principally, the disparity in voting strength and increased interest cost animated the rejection.
Subdivision (d) of section 52 of the Insurance Law provides: "Any domestic insurance corporation heretofore incorporated under the provisions of any general or special law of this state and doing business as an authorized insurer at the effective date of this chapter, shall be subject to the provisions of this chapter relating to such a corporation, except as follows: * * * (d) If it has a guarantee capital represented by shares, it may amend any of the provisions of its charter." (Emphasis supplied).
Paragraph (d) of subdivision 1 of section 53 provides: "(d) Notwithstanding any other provisions of this section, if it has a guarantee capital represented by shares, it may amend any of the provisions of its charter, including, without limitation, the increase, reduction or retirement of its capital and the interest thereon and the increase or decrease in the number or par value of the shares representing its capital, upon the filing in the office of the superintendent, with his approval endorsed thereon, of a certificate setting forth such amendments which shall become effective upon such filing. The certificate shall have been approved by its board of directors or trustees and consented to by the holders of at least two-thirds of its outstanding shares. Such consent shall be given, either in person or by proxy, in writing or by vote at a meeting held on at least twenty days notice. Any holder of shares of guarantee capital not in favor of any such increase, decrease or retirement, who signifies such objection in the manner prescribed by section six hundred twenty-three of the business corporation law, shall have his rights determined in accordance with the provisions of said section six hundred twenty-three of the business corporation law." (Emphasis supplied.)
It would appear therefore that the action of the respondent is ministerial and his function is to assure only that there has been compliance with statutory procedure. This is evidenced further by the concluding sentence of paragraph (d) of subdivision 1 of section 53 which reads: "All the provisions of section one hundred ninety-five shall apply to the payment of any cash dividends from profits to the holders of shares of such guarantee capital." This is so for if more than ministerial action was intended the inclusion of the following last-quoted sentence of the section would not have been necessary, since section 195 of the Insurance Law provides: "No domestic stock life insurance company shall pay any cash dividend to its stockholders unless a notice of its intention to declare such dividend and the amount thereof shall have been filed with the superintendent not less than thirty days in advance of such proposed declaration, nor if the superintendent within thirty days after such filing gives written notice to such company of his disapproval of such payment, on the ground that he finds that the financial condition of the company does not warrant the payment of such dividend." (Emphasis supplied.) People ex rel. Schwab v. Grant (126 N. Y. 473) and Matter of Guardian Life Ins. Co. v. Bohlinger (284 App. Div. 110, affd. 308 N. Y. 174) relied on by the respondent, are inapposite for the statutes there involved embodied standards and guidelines which, of course, create an area of discretion in reaching final action. The statute here involved is not one of permissive action within stated standards and guidelines. Rather it authorizes charter changes without limitation when the proposed applications conform with statutory procedures.
As already indicated, the petitioner is unique among mutual insurance corporations in that it has shareholders as well as policyholders. Nevertheless, it has been regarded by the respondent in its dealings with the petitioner as a mutual company. Yet respondent argues that the proposed amendment violates section 57 of the Insurance Law, which requires that mutual insurance companies must be organized, maintained and operated solely for the benefit of their policyholders. This claimed violation disregards the legislative history of petitioner's organization, its changes and growth and the precedential treatment in past dealings with the Department of Insurance. Further, the argument assumes that the present proposed amendment, unlike the prior six amendments, would work to the petitioner's disadvantage, yet that implication is not shown. While petitioner may be treated as a mutual insurer for certain purposes (1942 Opns. Atty. Gen. 295-297) the intent of the Legislature in enacting subdivision (d) of section 52 and paragraph (d) of subdivision 1 of section 53 of the Insurance Law in 1950, together with the actions of the respondent in approving the prior amendments demonstrates that the petitioner has been treated as a mutual company because of its origin and that any action benefiting the shareholders is not necessarily unlawful. Indeed, the successive capitalizations of accumulated profits have given to the shareholders increased interest in the favorable and profitable operation of the company and any benefit or detriment would affect the shareholder as well as the policyholder.
Assuming, however, that there is an unfettered discretion in the respondent in this area, yet the action has been arbitrary and ...