Petition — Moody v. Payne

Supreme Court brief1977

Ask Donna

What actually matters in this document.

Text

Suprem .

F . es U8 |

SEP 16 1977

so ROUAK, TR, CLERK

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1977

no. 977-428 *

SHEARN MOODY, Jr.,

Petitioner,

VS.

STATE OF ALABAMA, EX. REL.

CHARLES H. PAYNE, COMMISSIONER

OF INSURANCE AND RECEIVER OF

EMPIRE LIFE INSURANCE CO., OF

AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF THE STATE OF

ALABAMA

FRANK G. NEWMAN

NEWMAN, SHOOK & NEWMAN

A Professional Corporation

4330 Republic National Bank Tower

Dallas, Texas 75201

MarTIN PauL SOLOMON

286 Sth Avenue

New York, New York 10001

Attorneys for Petitioner

SHEARN Moopy, Jr.

——————— ee

SuBJECT INDEX

Page

Pees Oe MP RIEUEEED 0.6 ce ccncncaavcctehscees vi

PETITION FOR WRIT OF CERTIORARI ........... 1

QPERIUCUD GEBAIW ce ccccccccccsccscsccccccscece 2

FE, Sin tae saber ht dadssd casesaedess 2-3

QUESTIONS PRESENTED ....ccccccccccccccccese 3

CONSTITUTIONAL PROVISIONS INVOLVED....... 5

STATUTORY PROVISIONS INVOLVED ............ 5-7

SUA TUEIUE GP BU GID oc ccccesicccccccccccss 7

REASONS FOR GRANTING THE WRIT ............ 16

I. THE TREATY OF ASSUMPTION AND BULK

REINSURANCE DENIED EMPIRE’S POLICY-

HOLDERS, STOCKHOLDERS AND CREDITORS

THE EQUAL PROTECTION OF THE LAWS

GUARANTEED BY THE FOURTEENTH

AMENDMENT BY TREATING DIFFERENTLY

THOSE POLICYHOLDERS, STOCKHOLDERS

AND CREDITORS WHO WERE SIMILARLY

SITUATED AND BY FAILING TO TREAT

THOSE DIFFERENTLY SITUATED IN A MAN.

NER CONSISTENT WITH THEIR RIGHTS .... 16

A. The Alabama Supreme Court erroneously held

that the Petitioner lacked standing to attack the

Trial Court’s approval of the Treaty of As-

sumption and Bulk Reinsurance Proposed by

POD cc ciddcccavetdocccconeceseces 16

II.

III.

B. The Treaty of Assumption and Bulk Reinsur-

ance as amended denied Empire’s policyholders,

stockholders and creditors the equal protection

GOED 0b ccescpecdervecdevuservecs

THE TRIAL COURT’S ENTRY OF AN EX PARTE

DECREE AUTHORIZING THE DOMICILIARY

RECEIVER OF EMPIRE TO SOLICIT PROPOS.

ALS FOR REINSURANCE AND REQUIRING

THAT A $2,000,000 FUND BE RETAINED FOR

THE PAYMENT OF CREDITORS AND EX-

PENSES OF ADMINISTRATION DEPRIVED

EMPIRE’S CREDITORS OF THEIR PROPERTY

WITHOUT DUE PROCESS OF LAW CONTRARY

TO THE FOURTEENTH AMENDMENT SINCE

THEY WERE NOT PROVIDED WITH NOTICE

OR A HEARING AT WHICH TO QUESTION THE

ADEQUACY OF SAID FUND TO PAY THEIR

GEE bees caccodeesecocesecsoncooesede

NOTICE BY PUBLICATION TO EMPIRE’S POL-

ICYHOLDERS AND CREDITORS OF THE RE-

CEIVER’S PETITION FOR AUTHORITY TO

LIQUIDATE AND TO REINSURE EMPIRE WAS

INSUFFICIENT UNDER THE DUE PROCESS

CLAUSE OF THE FOURTEENTH AMENDMENT

AND THE ABSENCE OF NOTICE TO ALL POL-

ICYHOLDERS, STOCKHOLDERS AND CREDI-

TORS OF EMPIRE OF THE PROPOSED

Page

IV.

ill

ADOPTION OF THE AGREEMENT TO EFFEC.

TUATE TREATY OF ASSUMPTION AND BULK

REINSURANCE AND THE ABSENCE OF A

HEARING THEREON DEPRIVED EMPIRE’S

POLICYHOLDERS, STOCKHOLDERS AND

CREDITORS OF THEIR PROPERTY WITHOUT

DUE PROCESS OF LAW CONTRARY TO THE

FOURTEENTH AMENDMENT ..............

THE ALABAMA SUPREME COURT ARBITRAR-

ILY DISCRIMINATED AGAINST THE ASSER-

TION OF THOSE FEDERAL DUE PROCESS

CLAIMS RELATIVE TO THE FINDING OF EM-

PIRE’S INSOLVENCY BY HOLDING THAT

SUCH CLAIMS DESPITE THE TRIAL COURT’S

GRANT OF A STANDING OBJECTION TO “THE

INTRODUCTION OF EVERY BIT OF EVI.-

DENCE” AND “EVERY RULING” WERE NOT

PRESERVED FOR APPELLATE REVIEW .....

. THE ALABAMA INSURANCE COMMISSION.

ER’S DEVALUATION OF THE TRUST INTER-

EST HELD BY EMPIRE LIFE INSURANCE

COMPANY OF AMERICA BY OVER 70%

(FROM $14,000,000 to $4,250,000) WHEN IT

HAD BEEN CARRIED AT THE $14,000,000

FIGURE FOR OVER SEVEN YEARS AND

HAD BEEN APPROVED BY THE ALABAMA

INSURANCE COMMISSIONER AND THE IN.

Page

VI.

VII.

Page

SURANCE COMMISSIONERS OF SEVERAL

STATES DURING THE COURSE OF MULTIPLE

MERGERS AND ACQUISITIONS BY EMPIRE

DEPRIVED EMPIRE’S POLICYHOLDERS,

STOCKHOLDERS AND CREDITORS OF THEIR

PROPERTY WITHOUT DUE PROCESS OF LAW

CONTRARY TO THE FOURTEENTH AMEND-

THE RETROACTIVE APPLICATION OF THE

1972 ALABAMA INSURANCE CODE, SECTION

748(2)(b), WHEREBY EMPIRE WAS DE-

CLARED INSOLVENT BY VIRTUE OF A 1970

EXAMINATION REPORT, DEPRIVED EM.

PIRE’S POLICYHOLDERS, STOCKHOLDERS

AND CREDITORS OF THEIR PROPERTY WITH-

OUT DUE PROCESS CONTRARY TO THE

FOURTEENTH AMENDMENT AND IMPAIRED

THEIR CONTRACTUAL RELATIONSHIPS

WITH EMPIRE IN VIOLATION OF ARTICLE I,

SECTION 10 OF THE U.S. CONSTITUTION ...

THE POLICYHOLDERS, STOCKHOLDERS AND

CREDITORS OF EMPIRE WERE DENIED THE

DUE PROCESS OF LAW GUARANTEED BY

THE FOURTEENTH AMENDMENT SINCE THE

TRIAL JUDGE VIOLATED CANONS 1, 2 AND 3

OF THE ABA CODE OF JUDICIAL CONDUCT... 55

VIII. THE ALABAMA STATUTE REQUIRING THAT

THE ALABAMA COMMISSIONER OF INSUR-

ANCE BE APPOINTED THE RECEIVER OF EM-

PIRE DENIED EMPIRE’S POLICYHOLDERS,

STOCKHOLDERS AND CREDITORS THE DUE

PROCESS OF LAW GUARANTEED BY THE

Page

FOURTEENTH AMENDMENT ............. 63-64

COIPMRMMMIEUN we sccccccccccccccccccccesceceecsee 65

PROOF OF SERVICE ... 2... cccccccccscccccscces 66

TABLE OF AUTHORITIES

CASES:

Ace Grain Co. v. Rhode Island Ins. Co., 107 F. Supp. 80

(1952), aff'd. 199 F. 2d 758 (2d Cir.) ; 46 A.L.R. 2d

BUD accqcndaccnadeenseebateccdenendpenedecs 21

Barbier v. Connolly, 113 U.S. 27, 31,5 S. Ct. 357 (1885) 24

Barr v. City of Columbia, 378 U.S. 146, 149-50 (1964).. 47

Barrows v. Jackson, 73 S. Ct. 1031, 346 U.S. 249 (1953) 20

Board of Regents v. Roth, 92 S. Ct. 2701, 408 U.S. 564

Page

ERED dnt cedcesdess canesadesenadccensdedoces 40

Boddie v. Connecticut, 91 S. Ct. 780, 401 U.S. 371 (1971) 40

Britton v. Green, 325 F. 2d 377 (10th Cir. 1963)...... 19, 39

Camp v. Arkansas, 404 U.S. 69 (1971)............... 47

Caroline W. Dobbins v. City of Los Angeles, 25 S. Ct. 18,

Bs EE Seacduuns coewbasoneees econ 52

Equitable Life Assur. Society v. Commonwealth, 113 Ky.

ee is Sd 6-0 ba dedenscnnnencéasean 35

Forbes Pioneer Boat Line v. Board of Commissioners, 258

Dad SP BED Hs Sched ovedeneécadicseceectee 55

Fuentes v. Shevin, 92 S. Ct. 1983, 407 U.S. 67 (1972) . .40, 42

Goldberg v. Kelly, 387 U.S. 254, 90 S. Ct. 1011 (1970).. 42

Goss v. Lopes, 95 S. Ct. 729, 419 U.S. 565 (1975)...... Ww

Grannis v. Orlean, 234 U.S. 385, 394, 34 S. Ct. 779, 783

OLED LE AERIAL HD 41

Hartford Steam Boiler Inspection & Sign Ins. Co. v. Har-

rison, 301 U.S. 459 (1937).........ceecceecceee 23, 54

Henry v. Mississippi, 379 U.S. 443, 85 S. Ct. 564 (1965) 47

Larson v. Pacific Mutual Life Ins. Co., 373 Ill. 614, 27

FEDS COND Cevcccedccsadacdesstseeedcede 42

vii

Louisville Gas & Electric Co. v. Coleman, Auditor, 227

U.S. 32, 37, 38, 48 S. Ct. 423, 72 L.Ed. 770 (1928).. 23

Lucas v. Manufacturing Lumbermans Underwriters, 349

Mo. 835, 163 SW 2d 750 (1942) .............005. 39

Melco Systems v. Receiver of TransAmerica Ins. Co., 105

Bn, BEG See COD b's ve heed ee ws eeceed Seeoec sc’ 21

Moody v. State Ex. Rel. Payne, Commissioner, Alabama,

344 So. 2d 160 (Feb. 11, 1977) ..............4... 2

Morris v. Investment Life Ins. Co. of America, 204 NE 2d

550, 1 Ohio App. 2d 330 (1960). .........0.00 000s 39

Mullane v. Central Hanover Trust Co., 339 U.S. 306, 70

DB Ge Ge ED sdb ucecepseceesiieusddevntws 40, 41

NAACP v. Alabama Ex. Rel. Flowers, 377 U.S. 288, 294-

IE oo rch dececncdcinlee: ae 47

NAACP v. Alabama Ex. Rel. Patterson, 357 U.S. 449

CD cknblnnctaue es tous caahwéwner tape tees 47

NAACP v. State of Alabama, 78 S. Ct. 1163, 1170, 357

eh Ge Ge GE 6 bb 3c ccc cede cecdoccsdedecs 20

Order of Railway Conductors of America v. Quigley, 131

Tex. 4, 111 S.W. 2d 698 (1938) .............0005- 35

Palmer, Ex. Rel. American Bankers Ins. Co. v. Palmer, 363

@ 8) ys § fi PST 21

Pennsylvania Coal Co. v. Mahon, 43 S. Ct. 158, 260 U.S.

ff, PP PererrrrT es rte rer 54, 55

Pierce v. Society of Sisters, 45 S. Ct. 571, 268 U.S. 510

(REED 6 ccrccadewscccdscccsdednceccctécesnnets 20

Robinson v. Wolfe, 27 Ind. App. 683, 62 N.E. 74 (1901) 35

Rogers v. Alabama, 192 U.S. 226 (1904)............. 47

Sniadach v. Family Finante Corp., 89 S. Ct. 1820, 395

Ce Be Meee cc eeevcescacues eet eeween 40

Vili

Page

State Life Insurance Co. v. Strong, 127 Mich. 346, 86 N.W.

Be GE cis ddickbuddincdédncpncedhdGscdtcdnee 35

Stewart v. Citizens Casualty Co. of New York, 23 N.Y. 2d

407, 244 NE 2d 690, 692 (1968) ..........-52000- 39

Sullivan v. Little Huntingpark, Inc., 396 U.S. 229 (1969) 47

Swann v. Adams, 87 S. Ct. 569, 385 U.S. 440 (1967).... 20

Wisconsin v. Constantineau, 400 U.S. 433, 91 S. Ct. 507

CREED in bkncescaeen sadedbewdec chnknkendeenees 40

W. B. Worthen Co. v. Kavanaugh, 295 U.S. 56, 55 S.

Ph SP ED. s0000 es bnsksdedeneeencnesnences 55

STATUTES:

Alabama Insurance Code, Title 28A, Section 1 (1972)... 39

Alabama Insurance Code, Title 28A,

a" 9 | Ra 6, 22, 34

Alabama Insurance Code, Title 28A, Sections 621-641

1 Sree r sr errrrrrrT rT Trt irtii. 21

Alabama Insurance Code, Title 28A, Section 748 (2) (b)

CRUE bic ges cteddiccces¥esccuceseudesedes 5, 53, 54

Canons 1, 2 and 3 of the ABA Code of Judicial Conduct. .56, 57

TREATISES:

16A C.J.S. Constitutional Law §569(4) (1956)........ 63

Clark on Receiverships 3d, Section 532(b) ..........+- 19

1 Couch on Insurance 2d, Section 1:102, pages 98-99

CREED cc ccccccnsecdecccecccesesesenssceses cs 33

2 Couch on Insurance 2d, Section 22:18 (1960) ........ 18

2 Couch on Insurance 2d, Section 22:28, page 702 (1960) 21

2 Couch on Insurance 2d, Section 22:52 (1960) ........ 39

2 Couch on Insurance 2d, Section 22:82, pages 775-778

CIGD 0 bi vccccteenvesecdsveseececescecesacés 20

Hochman, The Supreme Court and the Constitutionality of

Retroactive Legislation, 73 HARV. L. REV. 692 (1960) 54

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1977

NO.

SHEARN MOODY, JR.,

Petitioner,

VS.

STATE OF ALABAMA, EX. REL.

CHARLES H. PAYNE, COMMISSIONER

OF INSURANCE AND RECEIVER OF

EMPIRE LIFE INSURANCE CO., OF

AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF THE STATE OF

ALABAMA

TO THE HONORABLE SUPREME COURT OF THE UNITED

STATES:

Petitioner Shearn Moody, Jr. respectfully prays that a writ

of Certiorari issue to review the judgment of the Supreme Court

of the State of Alabama entered on February 11, 1977, affirm-

ing the orders of the Trial Court granting the Domiciliary Re-

ceiver of Empire Life Insurance Company of America the

authority to proceed with the liquidation and reinsurance of

Empire, and granting the Domiciliary Receiver the authority to

execute an Agreement to Effectuate the Treaty of Assumption

and Bulk Reinsurance proposed by Intervenor Protective Life

Insurance Company with regard to Empire.

This case involves important questions as to the constitutional

propriety of the approval of a Treaty of Assumption and Bulk

Reinsurance which arbitrarily discriminates between Empire’s

policyholders, stockholders and creditors who are similarly situ-

ated and accordingly denies them the equal protection of the

laws guaranteed by the Fourteenth Amendment, the approval

of an Agreement to Effectuate the Treaty of Assumption and

Bulk Reinsurance without providing all of Empire’s policyhold-

ers, stockholders and creditors with prior notice or an oppor-

tunity for a hearing at which to raise objections to the same,

contrary to the due process clause of the Fourteenth Amend-

ment, and an adjudication of insolvency premised upon the

retroactive application of a state insurance statute governing

the valuation of admitted assets.

OPINIONS BELOW

The opinion of the Alabama Supreme Court affirming the

judgments of the Trial Court is reported at Moody vs. State ex.

rel. Payne, Commissioner, Alabama, 344 So.2d 160 (February

11, 1977). (See Appendix p.A-1). A true and correct copy of

the order of the Alabama Supreme Court denying the Peti-

tioner’s timely Application for Rehearing appears in the Appen-

dix, p. A-10.

JURISDICTION

The Alabama Supreme Court entered its judgment on Feb-

ruary 11, 1977. The Alabama Supreme Court denied the Peti-

tioner’s timely Application for a Rehearing on April 22, 1977.

The Petitioner presented a timely Motion for Extension of Time

within which to file Petition for Writ of Certiorari to the Hon-

orable Justice Lewis F. Powell, who signed an Order on July 13,

1977, extending the time within which to petition for certiorari

to and including September 19, 1977. This Court’s jurisdiction

is invoked under 28 U.S.C. §1257 (3) (1970).

QUESTIONS PRESENTED

1. Whether the Treaty of Assumption and Bulk Reinsurance

denied Empire’s policyholders, stockholders ard creditors the

equal protection of the laws guaranteed by the Fourteenth

Amendment by treating differently those policyholders, stock-

holders and creditors who were similarly situated and by failing

to treat those differently situated in a manner consistent with

their rights.

2. Whether the trial court’s entry of an ex parte decree autho-

rizing the Domiciliary Receiver of Empire to solicit proposals for

reinsurance and requiring that a $2,000,000 fund be retained

for the payment of creditors and expenses of administration de-

prived Empire’s creditors of their property without due process

of law contrary to the Fourteenth Amendment since they were

not provided with notice or a hearing at which to question the

adequacy of said fund to pay their claims.

3. Whether notice by publication to Empire’s policyholders,

and creditors of the Receiver’s petition for authority to liquidate

and reinsure Empire was insufficient under the due process

clause of the Fourteenth Amendment and whether the absence

of notice to all policyholders, stockholders and creditors of

Empire of the proposed adoption of the Agreement to Effectu-

ate the Treaty of Assumption and Bulk Reinsurance and the

absence of a hearing thereon deprived Empire’s policyholders,

stockholders and creditors of their property without due process

of law contrary to the Fourteenth Amendment.

4. Whether the Alabama Supreme Court arbitrarily discrimi-

nated against the assertion of those federal due process claims

relative to a finding of an insurance company’s insolvency by

holding that such claims despite the trial court’s grant of a

standing objection to “the introduction of every bit of evidence”

and “every ruling” were not preserved for appellate review.

5. Whether the Alabama Insurance Commissioner’s devalua-

tion of the trust interest held by Empire by over seventy per-

cent (70%) (from $14,000,000 to $4,250,000) when it had

been carried at the $14,000,000 figure for over seven years

and had been approved by the insurance commissioner of the

State of Alabama and the insurance commissioners of several

other states during the course of multiple mergers and acquisi-

tions by Empire deprived Empire’s policyholders, stockholders

and creditors of their property without due process of law con-

trary to the Fourteenth Amendment.

6. Whether the retroactive application of the 1972 Alabama

Insurance Code, Section 748(2)(b), whereby an insurance

company was declared insolvent by virtue of a 1970 Examina-

tion Report, deprived its policyholders, stockholders and cred-

itors of their property without due process contrary to the

Fourteenth Amendment and impaired their contractual rela-

tionships with the company in violation of Article I, Section

10 of the U.S. Constitution.

7. Whether the policyholders, stockholders and creditors of

Empire were denied the due process of law guaranteed by the

Fourteenth Amendment since the trial judge violated Canons

1, 2 and 3 of the ABA Code of Judicial Conduct.

8. Whether the Alabama Statute requiring that the Ala-

bama Commissioner of Insurance be appointed the receiver of

Empire denied Empire’s policyholders, stockholders and credi-

tors the due process of law guaranteed by the Fourteenth

Amendment.

CONSTITUTIONAL PROVISIONS INVOLVED

Article I $10 of the United States Constitution:

No State shall... pass any...Law impairing th

Obligation of Contracts, . sa sabia acer adios

THE FOURTEENTH AMENDMENT

Section 1. All persons born or naturalized in the United

States, and subject to the jurisdiction thereof, are citizens of the

United States and of the state wherein they reside. No state shall

make or enforce any law which shall abridge the privileges or

immunities of citizens of the United States; nor shall any state

deprive any person of life, liberty, or property, without due

process of law; nor deny to any person within its jurisdiction

the equal protection of the laws.

* * *

STATUTORY PROVISIONS INVOLVED

Title 28A, Alabama Insurance Code, $748:

Disallowance of assets or credits resulting from “wash”

transactions.

* * *

(2) The Commissioner shall disallow as an asset any de-

posit, funds or other assets of the insurer found by him after

a hearing thereon:

(a) Not to be in good faith the property of the insurer;

(b) Not freely subject to withdrawal or liquidation by

the insurer at any time for the payment or discharge of

claims or other obligations arising under its policies, and

cipally for the purpose of deception as to the insurer’s

financial condition as at the date of ‘ny financial statement

of the insurer.

(3) No such disallowance or credits shall be valid unless

made by the Commissioner after a hearing of which notice was

given the insurer within six (6) months after the date of the

financial statement of the insurer as to which such deception is

claimed was filed with the Commissioner.

(4) The Commissioner may suspend or revoke the certifi-

cate of authority of any insurer which has knowingly been a

party to any such deception or attempt thereat. (1971, No. 407,

effective January 1, 1972).

Title 28A, Alabama Insurance Code, §237: Life insurance,

annuities, and disability insurance; unfair discrimination.

(1) No person shall make or permit any unfair discrimina-

tion between individuals of the same class and equal expectation

of life in the rates charged for any contract of life insurance or

of life annuity or in the dividends or other benefits payable

thereon, or in any other of the terms and conditions of such

contract.

(2) No person shall make or permit any unfair discrim-

ination between amount of premium, policy fees, or rates

charged for any policy or contract of disability insurance or in

the benefits payable thereunder, or in any of the terms or con-

ditions of such contract, or in any other manner whatever.

(1957, p. 866, § 4, appvd. Sept. 18, 1957; 1971, No. 407,

effective Jan. 1, 1972.)

STATEMENT OF THE CASE

The parties to the state court proceeding were Shearn

Moody, Jr. (“Moody”), the Petitioner herein; Protective Life

Insurance Company (“Protective”) Intervenor below; and

Charles H. Payne, Commissioner of Insurance of the State of

Alabama, as Domiciliary Receiver for Empire Life Insurance

Company of America (“Empire”).’

Empire was incorporated under the laws of the state of

Alabama in June, 1963. (R. 683). On July 3, 1963, Petitioner

Moody assigned to Empire two-fifths (2/Sths) of his one-eighth

(1/8th) life estate interest in a trust created by the will of

Libbie Shearn Moody (hereinafter “the Libbie Shearn Moody

Trust”) (R.742). In 1964, a value of $5,813,440 was given to

that trust interest by the Department of Insurance for the State

of Alabama (R. 753). In 1965, the value of the said interest

was increased to $13,528,000 by examiners of Empire for the

Insurance Departments of Alabama, Arkansas and Texas

(R. 755).

From 1964 to 1968, Empire, with its principal asset being

its interest in the Libbie Shearn Moody Trust, acquired by merg-

er or reinsurance the assets and insurance business of the fol-

‘ Intervenors Myers and Sanford the trial court’s order of

June 14, 1974, attacked by the P. herein, but the Alabama

Su Court dismissed Myers and Sanford’s appeal on September 23,

l — interested in the

present ’

lowing companies for shares of stock of Empire: Consolidated

American Life Insurance Co., Chicago, Illinois (1964); Em-

pire Life Insurance Company of America, Little Rock, Ar-

kansas (1965); National Empire Life Insurance Co., Dallas,

Texas (1966); Reliance Life Insurance Co., Dallas, Texas

(1968); American Trust Life Insurance Co., Wichita Falls,

Texas (1968); and Republic Life Insurance Co., Moline, IIli-

nois (1968) (R. 15). All of these mergers and acquisitions

were approved by the insurance departments of the aforemen-

tioned states, without disapproval of the value of the interest

of Empire in the Libbie Shearn Moody Trust (R. 2495).

In 1968, the Texas Insurance Commissioner questioned

whether any value could be given Empire’s interest in the trust

in connection with the American Trust Life Insurance Company

acquisition (R. 2501). However, after a public hearing by the

Texas Insurance Commissioner, Empire’s reinsurance of Ameri-

can Trust Life Insurance Company was approved and Empire

was found to be solvent (Moody’s Exhibit 8). This finding was

predicated upon the aforementioned 1965 valuation of Empire’s

interest in the Libbie Shearn Moody Trust because Empire

would not otherwise have been solvent (R. 703).

During 1969 and 1970, the Insurance Department of Alabama

conducted an examination of Empire and in June, 1969, the

Honorable Frank Ussery, the then Insurance Superintendent,

wrote a memorandum to the then examiner for the Alabama

Insurance Department, directing that, among other things,

Empire’s interest in the Libbie Shearn Moody Trust be valued

at $14,213,440, less a reserve of $1,292,130, which was to be

decreased annually by $430,710 (Moody Exhibit 96, R. 4146).

In 1971, the Honorable John GC. Bookout succceded Mr. Ussery

as Insurance Superintendent for Alabama, before completion of

the then pending examination. The then pending examination

of Empire was completed in December, 1971 and was made as

of December 31, 1970 (R. 4930). In it, Empire’s interest in the

Libbie Shearn Moody Trust was devalued to only $4,250,000

(R. 5084). That value was based upon the liquidating value

ascribed to the interest in an appraisal made in 1968 by the

American Appraisal Company (R. 5086).”

Following the completion in December, 1971 of the examina-

tion of Empire, the then Texas Insurance Commissioner on April

5, 1972, entered an order of supervision with respect to Empire

in Texas (R. 168).

A few days later, on April 17, 1972, the then Commissioner

of Insurance for the State of Alabama, John G. Bookout, insti-

tuted the proceedings below to place Empire in receivership.

After a hearing in which it was admitted that the devaluation

of the interest of Empire’s interest in the Libbie Shearn Moody

Trust was the single act which rendered Empire insolvent (R.

206, 217), the trial court, on June 29, 1972, issued a Decree

*The American Appraisal Company's isal actually gave two

values; the other being $8,600,000 as the caine tor Gidea ene

(R. 629). i april tat ihe naan coca

nee — or

aoe by changing conditions o economic, management and

CR. 669) Antther valuation of "s interest in the Libbie

Shearn Moody Trust was made in 1968 by . Richard B. Johnson and

he valued the interest at no less than $16,000,000 and at a reasonable

current value of $23,000,000 (R. 778). No other evaluation of Empire’s

interest in the Libbie Shearn Moody Trust was made between 1968 to

the date of the last mentioned examination report which adopted as

of December 31, 1970 the lowest figure assigned to the interest in

American Appraisal Company’s ayant” report of 1968.

enjoining Empire and its agents from conducting any further

business in the State of Alabama and appointing the Honorable

John G. Bookout as Receiver and directing him to operate

Empire to the end of rehabilitating said company (R. 1016-17).

Moody contested the appointment, but did not appeal the deci-

sion because the trial court reserved jurisdiction and the right

to modify the order (R. 1016), making the order interlocutory.

On September 6, 1973, John G. Bookout as Domiciliary

Receiver filed a Petition for Instructions Regarding Reinsur-

ance requesting that he be authorized to advertise and extend

an invitation for proposals regarding the total reinsurance of all

of the business of Empire (R. 1201-1208). On September 12,

1973, the trial court entered an ex parte order directing that

proposals for the reinsurance of Empire be filed with the Court,

and further indicating that all of the assets of Empire would be

available for transfer as reserves with the exception of the sum

of $2,000,000, which would be held by the Receiver to pay

administrative costs, the prosecution of derivative actions and

allowable claims presented by the creditors (R. 1209).

The Receiver received proposals from 3 different companies

to reinsure Empire.’ They were Protective Life Insurance Com-

pany, Mutual Savings Life Insurance Company and Bankers

Life and Casualty Company. An analysis of the 3 proposals by

* A fourth proposal was forwarded to the Alabama and Texas Receiv-

ers on or about April 4, 1974 by Harry L. Edwards, President of

National Western Life Insurance Company. National Western’s plan

ovided for Empire’s assets to be kept from its own assets and

or a moratorium on cash benefits av under the reinsu red pr

of 30% whereas Protective’s Plan ided for the of

assets and an initial moratorium of 35%, which moratorium was sub-

uently raised to 50% in an amendment entitled “Agreement to

Efectuste Treaty of Assumption and Bulk Reinsurance.”

Tillinghast & Company, consulting actuaries, is found in

Moody’s Exhibit 79 (R. 4037). In addition, Moody submitted

a proposal of rehabilitation (R. 3983), pursuant to the recom-

mendation for rehabilitation of the Court’s special advisor (R.

3830).

Moody then filed a Motion to Intervene and a Complaint in

Intervention as a Defendant (R. 1223), which motion was at

first denied on October 22, 1973, but later granted on January 8,

1974 (R. 1378-9).

In his Complaint in Intervention, Petitioner Moody specifically

attacked the trial court’s ex parte decree of September 12, 1973,

among others, and asserted that:

The total absence of notice to defendant [Empire] and

its policyholders, creditors and stockholders and the

ex parte nature of such orders [Order of September

12, 1973] constitutes a denial of due guaran-

teed by the Fourteenth Amendment to the Federal

Constitution. [R. 1226-27]

Commissioner Bookout as Receiver for Empire then filed a

Petition for Liquidation and Reinsurance of the Business and

Assets of Empire (R. 1363), and petitioned the trial court for

an Order of Liquidation and for an Order approving the plan

of reinsurance presented by Protective Life Insurance Company

as amended (R. 1365-6).

After conducting hearings in February and April of 1974 on

Moody’s Complaint in Intervention and the Domiciliary Re-

ceiver’s Petition, the trial court on June 14, 1974, entered a

decree, making a final adjudication of insolvency and authoriz-

ing the Receiver to enter into a Reinsurance Agreement with

Protective Life Insurance Company and to liquidate Empire

(R. 6265). Notice to Empire’s policyholders and creditors of

the 1974 proceedings was effected by publication and not by

individual notice. Moody duly perfected an appeal to the Ala-

bama Supreme Court from the June 14, 1974 Decree (R. 6278).

On March 26, 1975, the Domiciliary Receiver filed a Petition

for an Order Approving an amendment to the Reinsurance Agree-

ment (called an “Agreement to Effectuate Treaty of Assumption

and Bulk Reinsurance”) (R. 6708, 6714). The trial court

issued an order on the same day directing that all parties be

allowed to present written objections to the proposed agreement

and directing that copies of the Receiver’s Petition be sent to

the parties of record (R. 6752). Notice was not directed, how-

ever, to Empire’s policyholders, creditors and stockholders and

no hearing was had. Moody filed written objections to the pro-

posed Agreement to Effectuate on April 7, 1975 (R. 6943) (see

Appendix p. A-13), which objections were adopted by Inter-

venors Meyers and Sanford (R. 6941) (Appendix p. A-11).

Moody made the following objections, among others, to the pro-

posed reinsurance agreement:

(1) That the Treaty of Assumption and Bulk Reinsurance

between the Receiver and Protective provides for unequai treat-

ment to the policyholders and creditors of Empire and provides

for preferential or priority treatment in many respects (Appen-

dix p. A-16, R.6946) ;

(2) That it is a denial of due process to simply send assump-

tion certificates to policyholders under the Treaty of Assumption

and Bulk Reinsurance, by which they are deemed bound unless

they file a written objection within sixty (60) days, since they

have had no notice of the proceeding concerning the Treaty and

no opportunity to object to the terms thereof (Appendix p. A-23,

R. 6952) ;

(3) That approval of the proposed Agreement to Effectuate

Treaty of Assumption and Bulk Reinsurance without a hearing

thereon would be a complete denial of Intervenor’s and other

parties’ constitutional rights to due process (Appendix p. A-15,

R. 6945).

(4) That Empire is solvent and there is no need for reinsur-

ance (Appendix p. A-26, R. 6955).

Without notice to policyholders, creditors and stockholders

whose rights were substantially affected by the Agreement to

Effectuate, and without conducting a hearing thereon, the trial

court summarily rendered a Memorandum Opinion and Decree

en April 10, 1975, approving the Agreement to Effectuate

Treaty of Assumption and Bulk Reinsurance, (R. 6965). In its

Decree, the trial court held that: “The objections filed by Myers

and Sanford, which are identical to those which Moody has

attempted to file, [are] completely without merit and due to be

rejected.” Moody duly prosecuted an appeal to the Alabama

Supreme Court from the trial court’s Decree. (R. 6982).

Petitioner Moody’s appeal from the trial court’s decrees of

June 14, 1974, November 22, 1974, and April 10, 1975, were

consolidated in the Alabama Supreme Court and were afirmed

by that Court on February 11, 1977.

In the Alabama Supreme Court Moody specifically assigned

as error: (1) The unequal treatment accorded to Empire’s

policyholders, stockholders and creditors under the Treaty of

Assumption and Bulk Reinsurance (Issue I); (2) The unequal

treatment accorded to Empire’s creditors by virtue of the trial

court’s ex parte order of September 12, 1973, establishing a

$2,000,000 fund for the payment of creditors’ claims and ex-

penses of administration, which order was entered without notice

to Empire’s creditors and without a hearing to determine the

adequacy of said fund to pay the creditors’ claims (Issue I.1)

and (3) the trial court’s failure to provide all of Empire’s stock-

holders, policyholders and creditors with notice of the pro-

posed Agreement to Effectuate Treaty of Assumption and Bulk

Reinsurance and to conduct a hearing thereon, all in violation of

the due process clause of the Fourteenth Amendment (Issue VI).

In his Reply Brief filed with the Alabama Supreme Court

several months before the cause was argued on its merits Peti-

tioner Moody argued that the trial court’s finding of insolvency

involved a retroactive application of §748(2)(b) of the Ala-

bama Insurance Code, which retroactive application denied

Empire’s policyholders, stockholders and creditors the due pro-

cess of law guaranteed by the Fourteenth Amendment and which

impaired the contractual relationship Empire had with its stock-

holders, policyholders and creditors contrary to Article I, Sec-

tion 10 of the United States Constitution. Moody also asserted

that the devaluation of Empire’s trust interest to $4,250,000.00

as of December 31, 1970, after the interest had been carried at

a $14,000,000.00 valuation for seven years with the approval

of the Alabama Insurance Department, was an arbitrary devalua-

tion which denied Empire’s policyholders, stockholders and

creditors the due process of law guaranteed by the Fourteenth

Amendment.

In affirming the orders of the trial court, the Alabama Supreme

Court held that the issue of insolvency was not before it since

Moody had failed to appeal the trial court’s order of June 29,

1972 (R. 1016), finding Empire to be impaired and insolvent

and appointing John G. Bookout as Receiver of Empire. The

Alabama Supreme Court also held that Moody, the founder,

Chairman of the Board and principal stockholder of Empire

but not a policyholder thereof, had failed to assert his interest

as a creditor of Empire in the trial court and apparently held

that he lacked standing to attack the trial court’s approval of

the Treaty of Assumption and Bul!. Reinsurance.

The Alabama Supreme Court nonetheless went on to hold that

the Treaty of Assumption and Bulk Reinsurance was not dis-

criminatory and that the trial court did not abuse its discretion

by ordering Empire’s liquidation and reinsurance.

In his timely Application for Rehearing filed with the Ala-

bama Supreme Court, the Petitioner assigned as error its

affirmation of the trial court’s order authorizing the liquidation

and reinsurance of Empire; its approval of the Treaty of

Assumption and Bulk Reinsurance; its holding regarding

the Petitioner’s alleged lack of standing; the Court’s arbi-

trary refusal to review the issue of insolvency; the Court’s

failure to hold that the trial court’s finding of insolvency

involved a retroactive application of § 748(2)(b) of the Ala-

bama Insurance Code in violation of the due process clause of

the Fourteenth Amendment and Article I Section 10 (contract

clause) of the United States Constitution; the Court’s failure to

hold that the devaluation of Empire’s trust interest to $4,250,000

was arbitrary and that the finding of insolvency predicated

thereon effected a denial of the due process of law guaranteed

by the Fourteenth Amendment, and finally, that the Court erred

in failing to hold that the trial court’s failure to provide notice

and a hearing for all of Empire’s policyholders, stockholders

and creditors with regard to the Agreement to Fffectuate denied

them the due process of law guaranteed by the Fourteenth

Amendment.

The Alabama Supreme Court overruled the Petitioner’s

timely Application for Rehearing on April 22, 1977.

REASONS FOR GRANTING THE WRIT

THE TREATY OF ASSUMPTION AND BULK REINSUR-

ANCE DENIED EMPIRE’S POLICYHOLDERS, STOCK-

HOLDERS AND CREDITORS THE EQUAL PROTECTION

OF THE LAWS GUARANTEED BY THE FOURTEENTH

AMENDMENT BY TREATING DIFFERENTLY THOSE

POLICYHOLDERS, STOCKHOLDERS AND CREDITORS

WHO WERE SIMILARLY SITUATED AND BY FAILING

TO TREAT THOSE DIFFERENTLY SITUATED IN A MAN-

NER CONSISTENT WITH THEIR RIGHTS.

A. THE ALABAMA SUPREME COURT ERRONEOUSLY

HELD THAT THE PETITIONER LACKED STANDING TO

ATTACK THE TRIAL COURT’S APPROVAL OF THE

TREATY OF ASSUMPTION AND BULK REINSURANCE

PROPOSED BY PROTECTIVE.

As the largest single stockholder of Empire, and as a creditor

of Empire, Petitioner Moody clearly has a substantial interest

in attacking the Treaty of Assumption and Bulk Reinsurance

proposed by Protective which deprived stockholders of their

entire equity without providing them with any benefits in return

(R. 2084) and which deprived creditors of their contractual

rights with Empire. The Alabama Supreme Court acknowledged

in its opinion that Moody is “Chairman of the Board and the

largest single stockholder of Empire,” (Appendix p. A-2), and

even the Domiciliary Receiver acknowledged that Petitioner

Moody “...is recognized as President and Chairman of the

Board of Directors . . . and the largest single stockholder of

outstanding common capital stock of Empire and that as such,

Shearn Moody, Jr. does have an interest in said company

over and above the interest possessed by other persons.”

(R. 1377-78).

As a shareholder, Moody clearly had standing to attack the

Treaty since the evidence is uncontroverted that the Reinsur-

ance Agreement deprives Empire’s stockholders of their entire

equity without providing them with any benefits in return. In

response to an inquiry by Judge Barber, Dr. A. C. Olshen, an

actuary who studied the bids for reinsurance of Empire, indi-

cated that Protective’s proposal did not provide Empire’s stock-

holders with any benefits:

(The Court): In the construction of the proposal of

Protective Life, Doctor, looking forward through the

months and years of operation, do you find any pos-

_— —— to the stockholders under the plan set

(The Witness) : No, sir, that I can specifically answer

in dollars and cents, your Honor. (R. 2804).

The Petitioner’s status as a creditor exists by virtue of a

$200,000 debenture which he received from Empire. The

existence of the debenture was evident in the 1972 hearings

before the trial court below in Empire Life Exhibit 1, (R. 768),

the Alabama Insurance Department’s Examination Report of

Empire as of December 31, 1965, in which the debenture was

fully described and discussed. The Petitioner’s status as a

creditor of Empire was also evident in the proceedings below

by virtue of the fact that Empire had executed a guaranty on

January 20, 1969, guaranteeing payment to W. L. Moody and

Company Bankers (unincorporated), a sole proprietorship

owned by Moody, (R. 4960) of all of the indebtedness of Credit

Factoring Inc., an Empire subsidiary, which indebtedness at the

time was evidenced by a $785,000 note (R. 151-2; 1879-80).

The Alabama Supreme Court asserted in its opinion that

Moody had failed to assert his interest as a creditor in the

trial court below and by implication suggested that he lacks

standing to attack the Reinsurance Agreement. (Appendix p.

A-5). In response, Petitioner Moody submits that by adducing

the foregoing evidence in the trial court he clearly made mani-

fest his interest as a creditor. The Alabama Supreme Court did

not hold that the foregoing evidence lacked any probative value

nor did it ey ressly hold that Moody’s admitted status as a

shareholder failed to provide him with the requisite standing.

The principle that interested parties have a right to participate

in, and to object to, any activities of a receiver in a receivership

proceeding has been well established. In conservatorships, the

Superintendent of Insurance cannot rehabilitate, reinsure or

liquidate an insurance company without the order of the court,

and the court is a forum where “interested parties may assert

their rights, object to any proposal made by the superintendent

and question the reasonableness of the expenses of the adminis-

tration.” 2 Couch on Insurance 2d, Section 22:18 (1960); See

a BP

also, Clark on Receiverships 3rd, Section 532(b); Britton vs.

Green 325 F.2d 377 (10th Cir. 1963). Moody as an interested

party whose rights as a stockholder and creditor of Empire are

being cut off by the reinsurance agreement with Protective,

certainly has the right to complain of its discriminatory impact.

Moody’s standing as a stockholder was uncontroverted and

his interest in the proceedings as a creditor was evident from

the exhibits admitted into evidence. The Alabama Supreme

Court therefore erred in holding that the Petitioner lacked

standing to attack the trial court’s approval of the Treaty of

Assumption and Bulk Reinsurance.

As to the Petitioner’s attack upon the provisions of the

Reinsurance Agre. 2ent discriminating between Empire’s policy-

holders and denying them the equal protection of the laws, the

Petitioner would point out that notice of the Receiver’s petition

for authority to liquidate and reinsure Empire was only given to

its policyholders by publication and that the policyholders were

not given notice of the Receiver’s petition for authority to execute

the Agreement to Effectuate the Treaty of Assumption and Bulk

Reinsurance. The Petitioner’s assertion that the notice by pub-

lication of the Receiver’s petiticn to liquidate and reinsure was

inadequate and that the absence of notice regarding the approval

of the Agreement to Effectuate was a denial of due process is

developed more fully infra.

Since Empire’s policyholders were not provided with a rea-

sonable opportunity to object to Protective’s Treaty, the objec-

tions of Moody thereto on behalf of the policyholders should

have been entertained by the Alabama Supreme Court. “The

principle [ pertaining to standing] is not disrespected where con-

stitutional rights of persons who are not immediately before

the Court could not be effectively vindicated except through an

appropriate representative before the Court.” NAACP v. State

of Alabama, 78 S. Ct. 1163, 1170, 357 U.S. 449, 459 (1958) ;

Swann v. Adams, 87 S. Ct. 569, 385 U.S. 440 (1967) ; Barrows

v. Jackson, 73 S. Ct. 1031 346 U.S. 249 (1953); Pierce v.

Society of Sisters, 45 S. Ct. 571, 268 U.S. 510 (1925).

B. THE TREATY OF ASSUMPTION AND BULK REIN.

SURANCE AS AMENDED DENIED EMPIRE’S POLICY-

HOLDERS, STOCKHOLDERS AND CREDITORS THE

EQUAL PROTECTION OF THE LAWS.

In the Petitioner’s objections to the proposed Treaty of

Assumption and Bulk Reinsurance he expressly asserted:

. .. [T]hat the Treaty of Assumption and Bulk Re-

insurance between the Receiver and Protective . . .

provides for unequal treatment to the policyholders

and creditors of Empire and provides for preferential

or priority treatment in many respects, . . . [A-16]

In insurance company receivership proceedings, it is the

general rule that both policyholders and general creditors are

entitled to share pro rata in the distribution of the assets of the

company. The purpose of the insurance company receivership

acts, much like the Bankruptcy Act, is to put all claimants,

including both policyholders and general creditors, on an equal

footing and to prohibit preferential treatment for any of the

parties. See 2 Couch on Insurance 2d, §22:82, pp. 775-778

| 1960). Policyholders are general creditors of an insurance com-

pany in receivership, and as such are entitled to share ratably in

the distribution of the assets of the company. Palmer, ex rel.

American Bankers Ins. Co. v. Palmer, 363 Il]. 499, 2 N.E. 2d

728, 106 A.L.R. 447 (1936). Policyholders are also expressly

prohibited from receiving any preferential treatment.

In Alabama, the procedure for the liquidation of insurance

companies and the payment of creditors thereunder is governed

by the Alabama Insurance Code, Title 28-A, Sections 621-641.

This provision is, with some modification, the Uniform Insurers

Liquidation Act and became effective in Alabama on January 1,

1972. It is without question that the purpose of the Uniform

Insurers Liquidation Act is to achieve equality among claimants.

2 Couch on Insurance 2d, Section 22:28, p. 702 (1960); Ace

Grain Company v. Rhode Island Insurance Company, 107

F.Supp. 80 (1952), affd. 199 F.2d 758 (2d Cir.); 46

A.L.R.2d 1185.

The Alabama rule against preferential treatment was made

clear in the case of Melco Systems v. Receivers of Transamerica

Insurance Company, 105 So.2d 43 (Ala. 1958). In that cuse a

reinsurer had agreed to pay a certain sum for its liability under

a reinsurance agreement with an insurance company in receiver-

ship. The Supreme Court of Alabama held that the proceeds

of the reinsurance agreement constituted general assets to which

the plaintiff insured had no priority over other creditors. All

creditors had to share equally in the assets of the company and

this included policyholders. As that court stated:

No subsequent act of the liquidating agent in the

course of his duties as trustee can give on creditor a

preference over others of like class . . . Equality is

equity.

Not only is preferential treatment of certain claimants un-

lawful under Alabama law, but to the extent that one claimant

is preferred, others are discriminated against. Such discrimi-

nation between policyholders of the same class is unlawful.

ALA. INS. CODE TITLE 28A §237:

LIFE INSURANCE, ANNUITIES, AND DISABIL-

ITY INSURANCE: UNFAIR DISCRIMINATION.

— (1) No person shall make or permit any un-

fair discrimination between individuals of the same

class and equal expectation of life in the rates charged

for any contract of life insurance or of life annuity

or in the dividends or other benefits payable thereon,

or in any other of the terms and conditions of such

contract. (2) No person shall make or permit any

unfair discrimination between amount of premium,

policy fees, or rates charged for any policy or con-

tract of disability insurance or in the benefits payable

thereunder, or in any of the terms or conditions of

such contract, or in any other manner whatsoever.

(1957, p. 866, §4, appvd. Sept. 18, 1957; 1971, No.

407, effective Jan. 1, 1972).

Even the Domiciliary Receiver, John G. Bookout, has acknowl-

edged that such discriminatory treatment is contrary to Ala-

bama law (Moody Exhibit 16, R. 3062-3; R. 3067-69); and,

in fact, has admitted that the only acceptable reinsurance agree-

ment is one which affords all policyholders 100% protection

(R. 3069).

In a letter dated April 25, 1973, to the Commissioner of

Insurance for the State of Texas, Clay Cotten, Commissioner

Bookout expressly acknowledged that Empire’s policyholders

are general creditors and that the transfer of assets to reserve

policies pursuant to a reinsurance agreement, in and of itself,

constitutes an unlawful preference over other creditors (R.

3066-67). He further acknowledged that under Alabama law

there was no statutory authority authorizing such a preferential

transfer over the general creditors of a corporation in receiver-

ship: “As stated earlier, under present Alabama law the policy-

holders are genera! creditors and I, therefore, cannot transfer

assets to reserve policies in preference over other creditors. I

am proposing legislation in our current session of the legis-

lature to cure this situation.” (R. 3066).

Where this discriminatory treatment is being accomplished

by state action and has no rational or reasonable basis, it is in

violation of the Equal Protection Clause of the United States

Constitution. Hartford Steam Boiler Inspection & Ins. Co. v.

Harrison, 57 S. Ct. 838, 301 U.S. 459 (1937).

The applicable principle regarding the equal protection of

the laws guaranteed by the Fourteenth Amendment was set

forth by Mr. Justice Reynolds in Hartford Steam Boiler Inspec-

tion & Ins. Co. supra, in an excerpt cited from Louisville Gas

& Electric Company v. Coleman, Auditor, 277 U.S. 32, 37, 38,

48 S.Ct. 423, 425, 72 L.Ed. 770 (1928) :

‘It may be said generally that the i

in umeidennete——

tions omitted], and that it applies to the exercise of all

the powers of the state which can affect the individual

or his prepeny including the power of taxation. [cita-

tions omitted}. It does not, however, forbid classi-

fication; and the power of the state to classify for

purposes of taxation is of wide range and flexibility

provided always that the classification must be reason-

able, not arbitrary, and must rest upon some ground

of difference having a fair and substantial relation to

hy coheed pw [epee J aay adr

larly ci ced shall be treated alike.’ [citations

upon some difference which bears a reasonable and

just relation to the act in respect to which the classi-

fication is proposed, and can never be made arbitrarily

criminations of an unusual character especially sug-

gest careful consideration to determine whether they

———

omitted }.

See also, Barbier v. Connolly, 113 U.S. 27, 31, 5 S. Ct. 357

(1885).

The rule against preferential and discriminatory treatment

of any claimant, whether a policyholder, creditor, or otherwise,

is important in the present case because it is clear from review

of the Reinsurance Agreement between Protective and Empire

(See Appendix B p.p. A-27-A-95) that the Agreement effects

such preferential and discriminatory treatment.

1. Unfair Discrimination Against Policyholders Rejecting

Reinsurance.

One obvious element of preferentie| treatment given by the

Reinsurance Agreement is to prefe: policyholders who accept

the Reinsurance Agreement over those who do not. Under

Section XIV of the Reinsurance Agreement (Protective Life’s

Exhibit 6, R. 4852, 4887, Appendix p. A-56), it is provided

that all policyholders who do not reject the reinsurance assump-

tion in writing within 60 days after notice are deemed to have

accepted the Reinsurance Agreement <.d all the terms thereof.

They are further deemed to have agreed to have allowed

Protective to file claims with the Receiver in the amount of

the total moratoriums placed on the policies. Any amount

received by Protective from the Receiver pursuant to these

claims is, under the Reinsurance Agreement, to be added by

Protective to the Empire Fund and this amount will accrue to

the benefit of the policyhe!ders whose policies are reinsured.

Policyholders who thus consent to the reinsurance have the

benefit of the reinsurance and, in addition, have the benefit

of a claim against the fund in the hands of the Receiver. On

the other hand, policyholders who reject the assumption are left

with nothing but a claim against the fund. Policyholders who

accept thus have two bites of the apple; policyholders who

reject have but one. This is clearly preferential treatment lacking

any rational basis in favor of policyholders who accept the Re-

insurance Agreement.

Indeed, for policyholders who reject the Reinsurance Agree-

ment, there is no guarantee that they will even have one bite

of the apple. In the hearings on the proposal to accept reinsur-

ance and to proceed with liquidation, Mr. John G. Bookout, the

Domiciliary Receiver, admitted that when the trial court entered

its order of September 12, 1973 (R. 1209), directing that pro-

posals for the reinsurance of Empire be filed with the court and

directing that a $2,000,000 fund be set aside for creditors, the

court had not yet set a date for the filing of claims by creditors

and therefore had no basis for knowing whether the $2,000,000

fund would be sufficient to satisfy creditors’ claims (R. 1441).

When questioned as to the basis for the selection of the

$2,000,000 figure, Mr. Bookout replied:

I don’t really know. Mr. Webb told me that

$2,000,000 had been agreed upon, and it was agree-

able with me and I said all right, and that is as far as I

remember. (R. 1441) (See also, R. 1869-70).

Thus the trial court failed to determine whether the

$2,000,000 fund left with Empire to pay general creditors,

policyholders who do not consent to the reinsurance, and ex-

penses of administration would be sufficient to pay rejecting

policyhelders and creditors even roughly the same thing that

was being given to accepting policyholders, i.e. approximately

65% of what they were entitled to.

2. Unfair Discrimination Against Creditors Whose Claims

Are Not Assumed by Protective.

Under the Reinsurance Agreement, Protective does not assume

all the liabilities of Empire. Liabilities that were not assumed

are set forth in Section VI G of the Agreement and include

claims of creditors, claims for dividends on certain policies, the

obligations of Empire on surplus debentures, liability for certain

commissions, unpaid premium taxes, and any deficiency obli-

gation respecting mortgages (R. 4863). (Appendix p. A-36).

But there has been no computation of the amounts of liabilities

not assumed and therefore, the trial court had no way of know-

ing that the creditors whose debts were not assumed will receive

more or less than those whose debts were assumed.

For example, Section VI G, paragraph 8, indicates that the

non-assumed debts include any deficiency with respect to mort-

gaged real estate. (Appendix p. A-37). The annual statement

of Empire for the year ending December 31, 1973 (R. 5308)

reflects that Empire had mortgage loans on its home office

building in Dallas and other properties. But there was no

determination made as to whether there might be any deficiency

and if so, the amount. Presumably if any such deficiency does

exist, it would consume a large portion of the $2,000,000

reserve fund. Further, under Section VI G, paragraph 3, the

obligation of Empire to W. L. Moody and Company under a

guaranty agreement for about $700,000, as reflected in the

1973 annual statement, is also a non-assumed debt which will

consume a significant portion of the reserve fund. The fore-

going highlights not only the blatent inadequacy of the

$2,000,000 reserve fund to satisfy the claims of Empire’s

creditors, but it also underscores the unfair discrimination being

accorded to creditors of Empire whose debts are arbitrarily

not assumed by Protective.

3. Discrimination Regarding Pending Claims.

Under Section VI G of the Agreement, Protective assumes

only the liabilities of Empire that have been accepted by Empire

or which are pending as of the effective date of the Agreement.

Protective does not assume claims that Empire has previously

rejected, whether or not such claims are pending in court. This

is clearly unlawful discriminatory treatment lacking any rational

basis with respect to valid claims which have been rejected by

Empire and preferential treatment with respect to the others.

4. Unfair Discrimination Against Empire’s Agents.

Further, the Agreement provides in Section VI that Pro-

tective assumes certain liabilities as of the “effective date” of

the Agreement. But with respect to commissions due to Empire’s

agents, Protective agrees to assume liability for the payment

of these commissions for premiums collected before June 29,

1972, and none thereafter. Certainly this provision unlawfully

discriminates against Empire’s agents as creditors and prefers

other creditors and certain agents’ claims without any rational

basis therefor.

5. Unfair Discrimination in the Application of Different

Moratorium Amounts to Different Policyholders.

Concerning preferential treatment of certain policyholders,

the Reinsurance Agreement gives certain policyholders more

than others, and gives certain policyholders less. For example,

the Reinswrance Agreement, Section VIII, provides that the

moratorium is 35% of the withdrawable funds of certain

specified policies; 357% of the total value of certain separate

accounts of other policies; and 35% of the net reserves of

certain policies (R. 4875). (Appendix p. A-46). This obviously

results in different treatment for different classes of policy-

holders for which no rational basis has been advanced.

According to the report of George V. Stennis & Associates,

consulting actuaries, the value of Empire’s business in force

was approximately $6,000,000 (Moody’s Exhibit 8, R. 3842).

Mr. Bookout stated in April, 1973 in effect, that there should

be no moratorium and that “any reinsurance agreement that

would not offer 100% protection to the policyholders would

seem out of the question” (R. 3069). Mr. Thomas K. Penning-

ton, Vice-President and actuary for Protective, admitted on

January 18, 1973 that Empire’s deficiency in assets was likely

to be only 20-30% (R. 4490).

According to the projections of Mr. Pennington, the business

of Empire would be sufficient to eliminate the moratorium in a

ten-year period, if not sooner (R. 4507, 6919). He also indi-

cated that the Empire business should produce a profit of be-

tween $750,000 to $800,000 annually (R. 4507). Under the

Reinsurance Agreement all of the profit will inure to the benefit

of Protective after the moratorium is ended (Protective’s Ex-

hibit 6). Under the Reinsurance Agreement, Protective pays

absolutely nothing for that annual profit or for Empire’s busi-

ness (an annual premium income of over $3,000,000 and assets

of approximately $29,000,000) (Protective’s Exhibit 22,

R. 5308). Even a 20% moratorium would not give any con-

sideration for the value of the Empire business. Moreover, there

should be no moratorium if the value of Empire’s interest in

the Libbie Shearn Moody Trust was in fact at least $5,000,000

more than the $4,250,000 value given it in the 1973 statement.

According to the valuation made by Dr. Trosper, Professor of

Insurance at Indiana University, that interest has a value of not

less than approximately $14,000,000 (R. 6381).

If, in fact, Empire’s interest in the Libbie Shearn Moody

Trust was of the value assigned to it by Dr. Trosper, or by

Dr. Johnson or by the State Insurance Departments of Alabama,

Arkansas and Texas in their 1968 examination, then no insur-

ance agreement whatsover was required and the policyholders,

creditors and stockholders of Empire have been wrongfully

deprived of their rights by the Reinsurance Agreement with

Protective.

6. Unfair Discrimination Against Policyholders Who Elect

Reduced Paid-up or Extended Term Insurance.

The Reinsurance Agreement approved by the Trial Court

further discriminates against policyholders who place their

policies on reduced paid-up or extended term insurance. In

Section VIII Bl(d) of the Reinsurance Agreement (R. 4872)

(Appendix p. A-44) it is provided that if a policy is placed on

reduced paid-up or extended term insurance, the amount of such

insurance is reduced by 1/2 ef the then-existing moratorium.

The same section further provides that the moratorium continues

against the paid-up insurance and is to be deducted from its cash

surrender value. Accordingly, these policyholders are charged

twice, once with 1/2 of the moratorium and next with 100%

of the moratorium. To the extent that these policyholders are

discriminated against, all other policyholders are preferred,

and both this discrimination and this preferential treatment are

unlawful and lack any rational basis.

7. Unfair Discrimination in the Form of Preferential Treat-

ment for Consenting Policyholders.

Under the First Amendment to this Reinsurance Agreement,

Paragraph 4 (R. 4904) (Appendix p. A-70) it is provided that

the Receiver shall assign to Protective death proceeds from

insurance policies on the life of Moody in the amount of

$4,350,000, subject to increase or decrease of that amount to

match the admitted asset value of Protective’s interest in the

Libbie Shearn Moody Trust. (The $4,350,000 figure exceeds by

$100,000 the initial admitted asset value and the Agreement

contains no justification whatsoever for the increase.) The Re-

ceiver is to pay all premiums on the life insurance on Moody’s

life and Protective is to reimburse the Receiver annually for its

pro rata part. However, if Protective, upon non-payment by the

Receiver pays the premiums, Protective receives all of the policy

benefits, or $12,000,000. Accordingly, Protective may receive

all of the insurance proceeds on Moody’s life, or some portion

thereof in excess of $4,350,000. Mr. Herbert Crook, the Texas

Ancillary Receiver for Empire, testified that the “so-called wind-

fall” would be retained in the receivership for the benefit of

consenting policyholders; and then the creditors and stockholders

(R. 2258, 2261). However, the Reinsurance Agreement contains

no provision for the return of such windfall by Protective to the

Receiver. Such proceeds could be sufficient to entirely eliminate

the moratorium, in which event Protective, noi the creditors and

stockholders, will retain the excess under the terms of the Re-

insurance Agreement (R. 4906). Upon the elimination of the

moratorium from that “windfall” or from ordinary operations

(which Mr. Thomas K. Pennington, Vice President and actuary

of Protective, projected would occur in ten years (R. 4507,

6919)), the consenting policyholders whose policies are rein-

sured will thereafter receive 100% of their claims, but the non-

consenting policyholders and all other creditors have only a

claim for their pro rata part of the two million dollar fund, or

so much of it as is left after paying expenses of administration.

8. Unfair Discrimination Regarding the Payment of Divi-

dends.

With respect to the payments of dividends on Empire policies,

the Reinsurance Agreement approved by the trial court unlaw-

fully prefers certain policyholders in several ways. The Rein-

surance Agreement provides in Section XII A 1 and 2(R. 4884)

(Appendix p. A-53), that dividends on policies assumed by

Protective shall thereafter be declared only at the sole discre-

tion of Protective, except in the case of Presidents Special Inves-

tors Plan (PSIP) policies issued by Empire Life Insurance

Company of America, Little Rock, Arkansas, and assumed by

Empire. In addition, most of the policies issued by Empire or

reinsured by it were “participating” policies, i.e., the company

paid dividends upon the policies to the policyholders. In the

case of the American Trust policies, the dividend obligation

was a contractual one under a reinsurance agreement between

American Trust and Empire (R. 140; 2496-97). In other words,

the amount of the dividend was not left to the discretion of the

board of directors of the company, but had to be in a certain

specified amount. However, in Section XII A of the Reinsurance

Agreement (R. 4883) (Appendix P. A-52-A-53), the dividend

obligation of Empire to American Trust was not assumed. This

means that the contractual obligations to policyholders are

treated differently as to the American Trust policies, than with

respect to all other policies issued or assumed by Empire. Again

no rational basis is given for such treatment.

9. Discrimination as to Amounts Left on Deposit.

Policyholders with matured endowments or coupons left on

deposit with Empire prior to the effective date of the Reinsurance

Agreement re charged the full amount of the moratorium as

to these amounts, but those whose endowments mature after the

effective date, or whose coupons are left on deposit after the

effective date are not so charged (R. 4872) (Appendix P. A-44).

This obviously prefers certain policyholders over others with-

out any rational basis whatsoever.

10. Discrimination as to Policy Loan Applications.

Although the moratorium is stated to become effective as of

the effective date of the Reinsurance Agreement and chargeable

against withdrawable funds, including the policy loans, it is

stated in Section VIII A-l, that in determining moratorium

amounts, policy loan requests after June 29, 1972 shall be dis-

regarded (R. 4869) (Appendix P. A-42). This prefers policy-

holders who made their loan requests prior to that date and

discriminates against those who requested loans after that date,

again without any justification.

1l. The Tontine Aspect of the Reinsurance Agreement Unlaw-

fully Discriminates Between Policyholders.

Tontine Insurance derives its name from its Italian inventor

Tonti. The original concept was that premiums were invested for

a number of persons and income was divided among all, but

shares of members who died did not go to the insured’s legal

representatives but to the interest of the last surviving members

until the last survivor took the whole income and principal.

1 Couch on Insurance 2d §1:102 pp. 98-99 (1960).

In the present case Doctor Olshen, the Domiciliary Receiver’s

expert witness, testified that one of the beneficial elements of

the Reinsurance Agreement was that the agreement had a tontine

effect. (R. 2785-6). The tontine aspect works in the following

manner: The moratorium at the beginning is set at 35%. How-

ever, according to Protective’s own projections, the income to

be produced by the business taken over by Protective is pro-

jected to be sufficient to reduce the moratorium every year until

the tenth year, or sooner, so that there will be no moratorium

on the policies. The result of this reduction in the moratorium

is that if a man cashes in his policy in the first year, he gets a

35% moratorium placed on withdrawable funds and gets only

65% of cash surrender value. If a man cashes in his policy in

the second year, the policyholder gets less of a moratorium

applied and accordingly gets more than the man who cashes in

the first year and so on for ensuing years. The tontine aspect

was put in to create an incentive for people to continue to pay

premiums on their policies. (R. 2785). However, in practice,

the tontine aspect penalizes those policyholders who wish to cash

in their policies in early years, and discriminates among policy-

holders who either cash in or lapse over the period of time that

the moratorium is being reduced. Petitioner submits that this

tontine aspect is contrary to Alabama law and denies Empire’s

policyholders the equal protection of the laws guaranteed by

the Fourteenth Amendment.

Indeed, Alabama Insurance Department Regulation #15

(August 1, 1957) provides in relevant part as follows:

SUBJECT: TONTINE OR SEMI-TONTINE

POLICIES PROHIBITED

Life Insurance Companies now issuing in the State

of Alabama any policy generally known as tontine or

semi-tontine, or containing tontine or semi-tontine fea-

tures, or any policy described below, or any similar

policy, are hereby ordered to cease and desist there-

from.

* * *

The Alabama Insurance Code also contains the following pro-

vision. Title 28A Section 237 of that Code provides as follows:

LIFE INSURANCE, ANNUITIES, AND DISABIL-

ITY INSURANCE: UNFAIR DISCRIMINATION. —

(1) No person shall make or permit any unfair dis-

crimination between individuals of the same class and

equal expectation of life in the rates charged for any

contract of life insurance or of life annuity or in the

dividends or other benefits payable thereon, or in any

other of the terms and conditions of such contract.

(2) No person shall make or permit any unfair dis-

crimination between amount of premium, policy fees,

or rates charged for any policy or contract of disability

insurance or in the benefits payable thereunder, or in

any of the terms or conditions of such contract, or in

any other manner whatever. (1957, p. 866, §4, appvd.

Sept. 18, 1957; 1971, No. 407, effective Jan. 1, 1972).

The above provision prohibits discrimination in the payment

of policy benefits. However, the tontine aspect of the Reinsurance

Agreement approved by the Alabama Supreme Court does just

this. Though policyholders are entirely of the same class and may

have the same expectation of life, under the Reinsurance Agree-

ment, policyholders who decide to cash in their policies or who

lapse in the early years are penalized and much less than policy-

holders who do not. Petitioner submits that this aspect of the

Reinsurance Agreement is unfair discrimination, prohibited both

by Alabama law and the equal protection clause of the Four-

teenth Amendment. Order of Railway Conductors of America v.

Quigley, 131 Tex. 4, 111 S.W. 2d 698 (1938) ; See Also, State

Life Insurance Co. v. Strong, 127 Mich. 346, 86 N.W. 825

(1901); Robinson v. Wolfe, 27 Ind. App. 683, 62 N.E. 74

(1901); Equitable Life Assur. Society v. Commonwealth, 113

Ky. 126, 67 S.W. 388 (1902).

From these examples, one thing is certain: Unlawful prefer-

ential treatment in the Reinsurance Agreement abounds. Accord-

ingly, the trial court and the Alabama Supreme Court should

not have approved the Reinsurance Agreement and their ap-

proval of the same denied the Petitioner and Empire’s policy-

holders, stockholders and creditors the equal protection of the

laws guaranteed by the Fourteenth Amendment.

Il.

THE TRIAL COURT’S ENTRY OF AN EX PARTE DECREE

AUTHORIZING THE DOMICILIARY RECEIVER OF EM.-

PIRE TO SOLICIT PROPOSALS FOR REINSURANCE AND

REQUIRING THAT A $2,000,000 FUND BE RETAINED FOR

THE PAYMENT OF CREDITORS AND EXPENSES OF

ADMINISTRATION DEPRIVED EMPIRE’S CREDITORS OF

THEIR PROPERTY WITHOUT DUE PROCESS OF LAW

CONTRARY TO THE FOURTEENTH AMENDMENT SINCE

THEY WERE NOT PROVIDED WITH NOTICE OR A HEAR-

ING AT WHICH TO QUESTION THE ADEQUACY OF SAID

FUND TO PAY THEIR CLAIMS.

In his Complaint in Intervention, Petitioner Moody specif-

ically attacked the trial court’s Order of September 12, 1973,

among others, on the grounds that the trial court’s failure to

provide Empire’s policyholders, stockholders and creditors with

notice of its intent to enter an order authorizing the Receiver

to solicit proposals for the reinsurance of Empire, which pro-

posals were to provide for a two-million dollar fund to pay

Empire’s creditors and the expenses of administration, denied

them the due process of law guaranteed by the Fourteenth

Amendment:

The total absence of notice to defendant [Empire]

and its policyholders, creditors and stockholders and

the ex parte nature of such orders [Order of Septem-

ber 12, 1973] constitutes 2 denial of due process

guaranteed by the Fourteenth Amendment to the Fed-

eral Constitution [R. 1226-27].

The Alabama Supreme Court’s assertion that “the evidence is

uncontroverted that it [the $2,000,000 fund] is sufficient for

ee ee eee

PR Oo

the equitable payment of such claims,” [A-9] is contrary to the

record. Indeed, as indicated supra, when questioned as to the

basis for the selection of the $2,000,000 figure, Mr. Bookout

replied:

I don’t really know. Mr. Webb told me that

$2,000,000 had been agreed upon, and it was agree-

able with me and I said all right, and that is as far as

I remember. (R. 1441) (See also, R. 1869-70).

The trial court’s failure to provide the Petitioner as well as

Empire’s other creditors with a hearing as to the adequacy of

the $2,000,000 fund to pay their claims prior to the issuance

of the September 12, 1973 Order effected a deprivation of their

property without the due process of law guaranteed by the

Fourteenth Amendment.

Il.

NOTICE BY PUBLICATION TO EMPIRE’S POLICYHOLD.

ERS AND CREDITORS OF THE RECEIVER’S PETITION

FOR AUTHORITY TO LIQUIDATE AND REINSURE EM.

PIRE WAS INSUFFICIENT UNDER THE DUE PROCESS

CLAUSE OF THE FOURTEENTH AMENDMENT AND THE

ABSENCE OF NOTICE TO ALL POLICYHOLDERS, STOCK-

HOLDERS AND CREDITORS OF EMPIRE OF THE

PROPOSED ADOPTION OF THE AGREEMENT TO EFFEC-

TUATE TREATY OF ASSUMPTION AND BULK REINSUR-

ANCE AND THE ABSENCE OF A HEARING THEREON

DEPRIVED EMPIRE’S POLICYHOLDERS, STOCKHOLD-

ERS AND CREDITORS OF THEIR PROPERTY WITHOUT

DUE PROCESS OF LAW CONTRARY TO THE FOUR-

TEENTH AMENDMENT.

The only notice provided to Empire’s policyholders and credi-

tors regarding the Receiver’s petition for authority to liquidate

and reinsure Empire was had by publication. After the Receiver

secured permission to reinsure Empire and sought authority to

execute an Agreement to Effectuate the Treaty of Assumption

and Bulk Reinsurance proposed by Protective, Moody filed

objections to the Agreement to Effectuate Protective’s Treaty

and asserted that it is a denial of due process to simply send

assumption certificates to policyholders under the Treaty of

Assumption and Bulk Reinsurance, by which they are deemed

bound unless they file a written objection within 60 days, since

they have had no notice of the proceeding concerning the treaty

and no opportunity to object to the terms thereof (R.5952)

(Appendix P.A-23). Moody also asserted that approval of the

proposed Agreement to Effectuate Treaty of Assumption and

Bulk Reinsurance without a hearing thereon would be a com-

plete denial of the intervenor’s and other parties’ constitutional

rights to due process (R.6945) (Appendix P.A-15).

The trial court, however, without conducting a hearing on the

Receiver’s Agreement to Effectuate Treaty of Assumption and

Bulk Reinsurance and without providing notice to all of Empire’s

policyholders, stockholders and creditors, summarily approved

and granted the Receiver the authority to execute the Agreement

to Effectuate Treaty of Assumption and Bulk Reinsurance. The

trial court specifically held that Moody’s objections “. . . [are]

completely without merit and due to be rejected.” (R.6967).

All the Reinsurance Agreement provides is that policyholders,

after the reinsurance agreement has been approved and imple-

mented, are notified that they can accept the agreement or elect

I RY NE Oe dS

to be a general creditor in a fund that is likely to be quite insuf-

ficient to give them what they previously bargained for. In either

case, they will be forced to take less than their contractual rights

under their policies. The Agreement to Effectuate implemented

the Reinsurance Agreement without prior notice or an oppor-

tunity for hearing for these policyholders.

It is a general rule in receiverships that no action may be

taken against any party in interest unless that party is given

notice and an opportunity for a hearing on the matter. 2 Couch

on Insurance 2d Section 22:52 (1960). When faced with the

interpretation of regulatory schemes governing liquidation and

reinsurance, the courts have indicated that due process requires

that the judiciary should attempt to afford the affected parties

the fullest opportunity for a hearing consistent with the protec-

tion of the public interest. Stewart v. Citizens Casualty Company

of New York, 23 N.Y. 2d 407, 244 N.E. 2d 690, 692 (1968) ;

Britton v. Green, 325 F. 2d 377 (10th Cir. 1963) Morris v.

Investment Life Insurance Company of America, 204 N.E. 2d

550, 1 Ohio App. 2d 330 (1960) ; Lucas v. Manufacturing Lum-

bermen’s Underwriters, 349 Mo. 835, 163 S.W. 2d 750 (1942).

Under the Alabama Insurance Code, the only provisions for

action to be taken without notice is for the issuance of an injunc-

tion restraining the insurer or others from wasting or disposing

of the company’s property pending further order of the court.

Alabama Insurance Code Title 28A, Section (1). Under sub-

section 2 of this provision, the Court may enter such other injunc-

tions or orders as it may be necessary to prevent interference

with the proceeding, the obtaining of preferences, etc. But, noth-

ing is said about other orders being entered without notice or an

opportunity for a hearing. Thus, notice should be given for

actions under these provisions.

Notice is further required to be given to all “claimants”

Alabama Insurance Code Title 28A Sections 636-638. In this

case notice of the Receiver’s Petition for Authority to Liquidate

and Reinsure Empire was given to Empire’s policyholders and

creditors by publication and notice of the Receiver’s Petition

for Authority to Execute the Agreement to Effectuate Treaty of

Assumption and Bulk Reinsurance was given to the parties of

record, but that notice excluded notice to all policyholders,

creditors and stockholders of Empire. Although there is no

express statutory provision one way or the other concerning

notice to the policyholders, creditors and stockholders before

implementing a proposal for reinsurance and liquidation, the

Petitioner submits that adequate notice and an opportunity for

hearing was required by the U. S. Constitution.

This Court in a series of cases has made clear that the state

cannot participate in the interference with or taking of individual

property interests without prior notice and an opportunity for

hearing. Goss v. Lopes, 95 5. Ct. 729, 419 U.S. 565 (1975) ;

Wisconsin v. Constantineau, 400 U.S. 433, 91 S. Ct. 507 (1971) ;

Board of Regents v. Roth, 92 S. Ct. 2701, 408 U.S. 564 (1972) ;

Fuentes v. Shevin, 92 S. Ct. 1983, 407 U.S. 67 (1972) ; Snia-

dach v. Family Finance Corp., 89 S. Ct. 1820, 395 U.S. 337

(1969); Boddie v. Connecticut, 91 S. Ct. 780, 401 U.S. 371

(1971).

In Mullane v. Central Hanover Trust Co., 339 U.S. 306, 70

S. Ct. 652 (1950), this Court indicated that the “words of the

Due Process Clause . . . at a minimum . . . require that depriva-

tion of life, liberty or property by adjudication be preceded by

notice and opportunity for hearing appropriate to the nature of

the case.” /d at 313, 70 S. Ct. at 657. “The fundamental requi-

site of due process of law is the opportunity to be heard,”

Grannis v. Orlean, 234 U.S. 385, 394, 34 S. Ct. 779, 783

(1914). A right “has little reality or worth unless one is in-

formed that the matter is pending and can choose for himself

whether to . . . contest.” Mullane, supra, 339 U.S. at 314, 70 S.

Ct. at 657.

As to the propriety and constitutional validity of notice by

publication, this Court indicated in Mullane that: “An elemen-

tary and fundamental requirement of due process in any pro-

ceeding which is to be accorded finality is notice reasonably

calculated, under all the circumstances, to apprise interested

parties of the pendency of the action and afford them an oppor-

tunity to present their objections [citations omitted]. The notice

must be of such nature as reasonable to convey the required

information [citation omitted] and it must afford a reasonable

time for those interested to make their appearance.” Mullane at

314. As to the efficacy of notice by publication, this Court noted

that: “Chance alone brings to the attention of even a local

resident an advertisement in small type inserted in the back

pages of a newspaper, . . .” Mullane at 315. Accordingly,

Mr. Justice Jackson held that: “Where the names and post office

addresses of those affected by a proceeding are at hand, the

reasons disappear for resort to means less likely than the mails

to apprise them of its pendency.” Mullane at 318. It is clear in

the present proceeding that notice by publication alone to

Empire’s policyholders and creditors regarding the Receiver’s

petition to liquidate and reinsure Empire failed to satisfy the

due process clause of the Fourteenth Amendment since the

addresses of Empire’s policyholders and creditors were available

and notice by publication was not the most effective and reason-

able means of notifying them of the Receiver’s petition.

In Fuentes v. Shevin, this Honorable Court held that a state

replevin statute which allowed a Plaintiff to recover property

from a Defendant summarily without notice to the Defendant

and an opportunity for a hearing violated the due process clause

of the Fourteenth Amendment. Similarly, in Goldberg v. Kelly,

387 U.S. 254, 90 S. Ct. 1011 (1970), this Court held that a

state was without power to deprive a family on welfare of their

vested expectancy in welfare checks without giviag the recipients

prior notice and an opportunity for hearing prior to the cut-off.

The present case is no different from these previous U.S.

Supreme Court cases. Policyholders and creditors in this case

were not given individual notice with regard to the Receiver’s

petition to liquidate and reinsure Empire nor were they given any

notice or an opportunity for a hearing on the proposed Agree-

ment to Effectuate. Certainly, policyholders would have objec-

tions to the proposal since by virtue of the Agreement to Effec-

tuate the moratorium amount, that is, the reduction in the cash

henefits available under Empire’s policies, originally set at 35

percent is increased to 50 percent.

Further, notice to policyholders and stockholders who were

parties of record was not notice to all stockholders and policy-

holders of Empire. The “class representation” doctrine enun-

ciated and applied by the court in Larson v. Pacific Mutual Life

Insurance Company, 373 Ill. 614, 27 N.E. 2d 458 (1948) is

totally inapplicable here. In the present action the trial court’s

order allowing the intervention of certain policyholders and

stockholders of Empire, specifically decreed that such parties

a) ee oe 2 eee diete db. vids a

Cet tet cow eds

were being allowed to intervene individually and not as repre-

sentatives of the class of Empire policyholders and stockholders

(R. 1604-05). Therefore, notice to the policyholders and stock-

holders who were individually before the court was not notice

to all the Empire’s stockholders and policyholders.

After the Agreement to Effectuate was approved, both policy-

holders who accepted reinsurance and policyholders who rejected

it lost the contractual rights that they had under policies with

Emoire. A 50 percent moratorium was placed in affect for ac-

cepting policyholders and a greater loss is likely for rejecting

policyholders. This deprivation of property rights, which is

being done by state mandate, is certainly no less than the

deprivation of property rights in Fuentes, and is a much greater

deprivation of property rights than the deprivation of the expec-

tancy of welfare checks which was involved in Goldberg. Clearly,

the due process clause of the Fourteenth Amendment required

individual notice to all of Empire’s policyholders and creditors

regarding the Receiver’s petition to liquidate and reinsure

Er-yire and notice to all of Empire’s policyholders, stockholders

ana creditors as well as an opportunity for a hearing prior to

the approval of the Agreement to Effectuate.

IV.

THE ALABAMA SUPREME COURT ARBITRARILY DIS-

CRIMINATED AGAINST THE ASSERTION OF THOSE

FEDERAL DUE PROCESS CLAIMS RELATIVE TO THE

FINDING OF EMPIRE’S INSOLVENCY BY HOLDING THAT

SUCH CLAIMS DESPITE THE TRIAL COURT’S GRANT OF

A STANDING OBJECTION TO “THE INTRODUCTION OF

EVERY BIT OF EVIDENCE” AND “EVERY RULING” WERE

NOT PRESERVED FOR APPELLATE REVIEW.

The Alabama Supreme Court refused to review the issue of

Empire’s insolvency since it was of the opinion that Moody’s

failure to appeal the trial court’s decree of June 29, 1972,

finding Empire to be impaired and insolvent and appointing

John G. Bookout as Receiver for Empire, barred review of the

issue in connection with the orders on appeal before it, to-wit:

the trial court’s decree of June 14, 1974, authorizing the Re-

ceiver to proceed with the liquidation and reinsurance of Empire,

and the trial court’s decree of April 10, 1975, authorizing the

Receiver to execute the Agreement to Effectuate the Treaty of

Assumption and Bulk Reinsurance (Appendix p. A-7).

It is clear, however, from an examination of the Domiciliary

Receiver’s petition for authority to liquidate and reinsure Em-

pire filed in 1974 and from the trial court’s decree of June 14,

1974 granting the same, that the issue of insolvency remained

the central issue throughout the receivership proceedings. In the

Domiciliary Receiver’s petition, paragraph ten thereof reads

as follows:

10. Your Receiver, as Commissioner of Insurance

6 Go Oem 2 eam, Sane nae >

vestigation of the facts regarding said company,

its impairment, insolvency, and standing, and finds

that the company is impaired and insolvent. Your

Receiver finds that further efforts to rehabilitate the

insurer, Empire Life Insurance Company of America,

would be useless. |

During the hearing conducted in connection with the Receiver’s

petition for authority to liquidate and reinsure Empire, counsel

for Intervenor Protective, admitted at the hearing that Empire’s

insolvency was one of the two issues to be determined by the

Court:

ee ee ee ee ee

If I might just merely say, so far as the burden is con-

cerned, we have had to prove two things. One, further

efforts in the judgment of the Commissioner to rehibili-

tate this Company would be useless. That was proved

about the first half hour, and number two, that the

company was insolvent. Well, that was proved in the

first hour of this case. [R.2998]

It is also significant to note that the trial court granted Peti-

tioner Moody a standing objection to every bit of evidence

admitted during the 1974 proceeding (R.1687) :

Let me make this statement, Gentlemen. I have already

stated that consideration of this matter will be under

equity rules. That is the way I will consider it. It will

save a great deal of time and effort if you will under-

stand that I give you a standing objection to the intro-

duction of every bit of evidence into every question

that is asked. You can have a standing objection to

every ruling that I make as we move through this

Hearing. I ask your cooperation to that end. . . .

When the trial court ultimately entered its decree of June

14, 1974, granting the Receiver the authority to proceed with

the liquidation and reinsurance of Empire, the Court found and

concluded that at the time: “Empire is, and at all times since

the filing of this delinquency proceeding has been, both im-

paired and insolvent. At the time of the hearing, Empire was

impaired in excess of $10,000,000 and insolvent in excess of

$6,000,000.” The trial court in 1974 necessarily had to find

that Empire was either impaired or insolvent before it could

issue its order of liquidation.‘

*It would also appear that the trial court had no choice but to find

that Empire was insolvent since it was preempted from making its own

determination of Empire’s financial status by Sections 745 through 753

of the Alabama Insurance Code which vest in the Commissioner of

Insurance discretion as to the valuation of admitted assets.

When the Receiver filed his petition for authority to enter into

an Agreement to Effectuate the Treaty of Assumption and Bulk

Reinsurance, Petitioner Moody filed objections to the proposed

reinsurance agreement and in that pleading specifically asserted

that Empire was solvent and did not need to be reinsured.

(R.6955), (Appendix p. A-26).

The Alabama Supreme Court in its opinion held that the

objections by Moody in the foregoing pleading to the discrimina-

tory aspects of the reinsurance agreement were properly raised

and preserved for appellate review since: “... the trial court,

trying the case under equity rules, expressly gave the parties

a standing objection to ‘every bit of evidence’ and ‘to every

ruling.’ In this posture we consider that the objection was

timely made.” (Appendix p. A-4).

Yet the Alabama Supreme Court arbitrarily chose to find

that Moody had not preserved for appellate review the issue

of insolvency which was raised by him in the very same plead-

ing in which he raised objections to the reinsurance agreement,

and which issue was raised by both the Receiver and Intervenor

Protective during the 1974 hearing on the Receiver’s petition

for authority to liquidate and reinsure Empire. Indeed, the

trial court expressly found that Empire was insolvent in its

decree of June 14, 1974 authorizing the Receiver to proceed

with the liquidation and reinsurance of Empire.

From the foregoing it is clear that the Alabama Supreme

Court’s arbitrary refusal to review the issue of insolvency prop-

erly raised and preserved by Moody below denied him the

opportunity to present the federal constitutional claims pertain-

ing thereto. It is also clear as a matter of law that the Alabama

—

Od Rae Mle eB

ee ee ee eS

CM MT tr et re fe A. Ot ON IIR i ee

Supreme Court’s arbitrary refusal to review the issue of insol-

vency does not constitute an adequate and independent state

ground barring this Court from reviewing the constitutional

issues pertaining thereto; to-wit: the denial of due process caused

by the Alabama Insurance Commissioner’s arbitrary devalua-

tion of Empire’s trust interest, and the denial of due process and

violation of Article I Section 10 of the Constitution caused by

the retroactive application of the Alabama Insurance Code in

connection with the trial court’s finding of insolvency. NAACP

v. Alabama Ex Rel Patterson, 357 U.S. 449 (1958) ; Rogers v.

Alabama, 192 U.S. 226 (1904); NAACP v. Alabama Ex Rel

Flowers, 377 U.S. 288, 294-302 (1964) ; Barr v. City of Colum-

bia, 378 U.S. 146, 149-50 (1964); Henry v. Mississippi, 379

U.S. 443, 85 S.Ct. 564 (1965); Camp v. Arkansas, 404 U.S.

69 (1971); Sullivan v. Little Huntingpark, Inc., 396 U.S. 229

(1969).

THE ALABAMA INSURANCE COMMISSIONER’S DE.

VALUATION OF THE TRUST INTEREST HELD BY EMPIRE

LIFE INSURANCE COMPANY OF AMERICA BY OVER 70

PERCENT (FROM $14,000,000 to $4,250,000) WHEN IT

HAD BEEN CARRIED AT THE $14,000,000 FIGURE FOR

OVER SEVEN YEARS AND HAD BEEN APPROVED BY

THE ALABAMA INSURANCE COMMISSIONER AND THE

INSURANCE COMMISSIONERS OF SEVERAL OTHER

STATES DURING THE COURSE OF MULTIPLE MERGERS

AND ACQUISITIONS BY EMPIRE DEPRIVED EMPIRE’S

POLICYHOLDERS, STOCKHOLDERS AND CREDITORS OF

THEIR PROPERTY WITHOUT DUE PROCESS OF LAW

CONTRARY TO THE FOURTEENTH AMENDMENT.

VI.

THE RETROACTIVE APPLICATION OF THE 1972 ALA-

BAMA INSURANCE CODE, SECTION 748(2) (b), WHEREBY

EMPIRE WAS DECLARED INSOLVENT BY VIRTUE OF A

1970 EXAMINATION REPORT, DEPRIVED EMPIRE’S

POLICYHOLDERS, STOCKHOLDERS AND CREDITORS OF

THEIR PROPERTY WITHOUT DUE PROCESS CONTRARY

TO THE FOURTEENTH AMENDMENT AND IMPAIRED

THEIR CONTRACTUAL RELATIONSHIPS WITH EMPIRE

IN VIOLATION OF ARTICLE I, SECTION 10 OF THE U.S.

CONSTITUTION.

Shortly after Petitioner Moody assigned to Empire two-

fifths (2/5’s) of his one-eighth (1/8) life estate interest in the

Libbie Shearn Moody trust, a value of $5,813,440.00 was

given to that trust interest by the Department of Insurance for

the State of Alabama (R. 750). In 1965 the value of the said

interest was increased to $13,528,000 by examiners of Empire

for the Insurance Departments of the states of Alabama,

Arkansas and Texas (R. 755).

From 1964 to 1968, Empire, with its principal asset being

its interest in the Libbie Shearn Moody Trust, acquired by

merger or reinsurance the assets and insurance business of the

following companies for shares of stock of Empire: Consoli-

dated American Life Insurance Co., Chicago, Illinois (1964) ;

Empire Life Insurance Company of America, Little Rock,

Arkansas (1965); National Empire Life Insurance Company,

Oe | we A let a

Se a ee

Dallas, Texas (1966); Reliance Life Insurance Company, Dal-

las, Texas (1968); American Trust Life Insurance Company,

Wichita Falls, Texas (1968); and Republic Life Insurance

Company, Moline, Illinois (1968) (R. 15). All of these mergers

and acquisitions were approved by the Insurance Departments

of the aforementioned states without disapproval of the value

of the interest of Empire in the Libbie Shearn Moody Trust

(A. 2495). In 1968 the Texas Insurance Commissioner ques-

tioned whether any value could be given Empire’s interest in

the trust in connection with the American Trust Life Insurance

Company acquisition (R. 2501). However, after a public hear-

ing by the Texas Insurance Commissioner, Empire’s reinsur-

ance of American Trust Life Insurance Company was approved

and Empire was found to be solvent (Moody’s Exhibit A). This

finding was predicated upon the aforementioned 1965 valua-

tion of Empire’s interest in the Libbie Shearn Moody Trust

because Empire would not otherwise have been solvent (R. 703).

During 1969 and 1970, the Insurance Department of Ala-

bama conducted an examination of Empire and in June, 1969,

the Honorable Frank Ussery, the then Alabama Insurance

Superintendent, wrote a memorandum to the then-examiner

for the Alabama Insurance Department directing that, among

other things, Empire’s interest in the Libbie Shearn Moody

Trust be valued at $14,213,440, less a reserve of $1,292,130,

which value was to be decreased annually by $430,710 (Moody’s

Exhibit 96, R. 4146).

In 1971, the Honorable John G. Bookout succeeded Mr.

Ussery as Insurance Superintendent for Alabama, before com-

pletion of the then-pending examination. The then-pending

examination of Empire was completed in December, 1971 and

was made as of December 31, 1970 (R. 4930). Catastrophically,

Empire’s interest in the Libbie Shearn Moody Trust was de-

valued to $4,250,000! (R. 5084).

The $4,250,000 valuation was apparently based upon the

liquidation value contained in an appraisal of the trust interest

made in 1968 by the American Appraisal Company (R. 5086).

Another evaluation of Empire’s interest in the Libbie Shearn

Moody Trust was made in 1968 by Dr. Richard B. Johnson and

he valued the interest at no less than $16,000,000 and at a rea-

sonable current value of $23,000,000 (R. 778). No other

evaluation of Empire’s interest in the Libbie Searn Moody

Trust was made between 1968 and the date of the last men-

tioned examination report, December 31, 1971, which adopted

as of December 31, 1970, the lowest figure assigned to the

interest in the American Appraisal Company’s “teraporal”

report of 1968.

Following the completion in December, 1971, of the examina-

tion of Empire, the then-Insurance Commissioner of the State

of Texas on April 5, 1972 entered an order of supervision

with respect to Empire in Texas (R. 168). A few days later,

on April 17, 1972, John G. Bookout instituted an action to

place Empire in receivership in the State of Alabama.

At the hearing on the Commissioner’s Bill of Complaint,

counsel hired by Petitioner Moody, Mr. Sams, inquired as to

whether Empire would have been impaired or insolvent if the

value assigned to the life estate interest in the Libbie Shearn

Moody Trust were carried at the valuation ascribed to it in

the 1965 examination report. Commissioner Bookout replied

“There would be no insolvency. I believe there would be an

impairment.” (R. 206). In response to subsequent examina-

wither. «a « i

ee ee ee

tion by Mr. Sams, Commissioner Bookout admitted that if

the trust interest were carried at a figure of approximately

$13,000,000 then Empire would not be insolvent:

Q. [Sams] And simple mathematics would indicate to

us, then, that if it were carried at $13,000,000

that asset, it would not be insolvent, is that not

mathematically correct?

A. [Bookout] I believe you are right. (R. 217).

During the 1972 hearing, Mr. Simpson (an attorney for the

receiver) questioned Mr. Johnson (an expert for Moody) about

whether the Libbie Shearn Moody Trust satisfied §748 (2) (a)

[sic] of the Alabama Insurance Code:

Q. [Simpson] Section 748 and §2(a) [sic] [Alabama

Insurance Code, effective January 1, 1972] states:

“the Commissioner” of insurance, of course, we

are talking about, “should disallow as an asset, any

deposit, funds or other asset of the insurer found

by him after a hearing thereon not freely subject

to withdrawal or liquidation by the insurer at a

time for the payment of [sic] discharge of claims

or other obligations arising under its policy.”

Would you consider this asset one to be freely sub-

ject to withdrawal or liquidation at any time?

A. [Johnson] Not independent of its association with

a body of life insurance, but I assume that in any

liquidation procedure one would seek an insurer,

another insurer to take over the insurance and the

assets along with it. In that situation, I believe an

evaluation, but perhaps not $13,000,000, and

maybe it is 10, but some higher evaluation than

the American appraisal valuation would be appro-

priate. (R. 377-78).

On June 29, 1972, the trial court issued an order finding

Empire insolvent and appointing Bookout as Receiver. Moody

contested the appointment, but he did not appeal the decision

because the trial court reserved jurisdiction and the right to

modify the order.

The Alabama Insurance Department in the Examination Re-

port completed in the latter part of December, 1971, and which

was deemed to have been made as of December 30, 1970, placed

a value on the trust interest of $4,250,000 at the direction of

Commissioner Bookout, being the liquidation value suggested

in the American Appraisal Company’s appraisal. The Petitioner

submits that the Alabama Insurance Commissioner’s devalua-

tion of the trust interest from the $14,000,000 figure to the

$4,250,000 liquidating value, after the trust interest had been

carried at the $14,000,000 figure for over seven years with the

approval of the Alabama Insurance Department was blatantly

arbitrary and wholly unreasonable. The rapid devaluation has

had a devastating impact upon the property rights of Empire’s

policyholders, stockholders and creditors and the trial court’s

finding of insolvency premised thereon clearly denied Empire’s

policyholders, stockholders and creditors the due process of

law guaranteed by the Fourteenth Amendment. Caroline VW.

Dobbins v. City of Los Angeles, 25 S.Ct. 18, 195 U.S. 233

(1904). As Mr. Justice Day asserted in Caroline W. Dobbins,

supra: “. . . . the exercise of the police power is subject to

judicial review, and property rights cannot be wrongfully de-

stroyed by arbitrary enactment.” 25 S. Ct. at 21. The arbi-

trariness of Commissioner Bookout’s devaluation of the trust

interest is underscored by his radical departure from the conduct

of his predecessors in office and especially by his radical depar-

ture from the program of gradual devaluation of the Trust

ete ee

weyers

interest at the rate of $430,710.00 per year proposed by his

predecessor in office, Mr. Frank Ussery.

The Petitioner further submits that the selection of the

$4,250,000 liquidation value in the examination report made

in 1971 was predicated upon section 748(2) (b) of the Alabama

Insurance Code which became effective January 1, 1972. That

section provides in relevant part:

The Commissiouer shall disallow as an asset any de-

posit, funds or other assets of the insurer found by

him after a hearing thereon . . . (b) Not freely subject

to withdrawal or liquidation by the insurer at any time

for the payment or discharge of claims or other obli-

gations arising under its policies, . . .

Section 748 became effective after the American Appraisal

Company’s appraisal and after the Alabama Insurance Depart-

ment’s 1970 Examination Report made in December 1971, which

Examination Report is the basis of the original assertion of

insolvency. Yet, during both the 1972, as well as the 1974,

hearings, the attorneys for the Commissioner argued that Sec-

tion 748(2)(b) of the Alabama Insurance Code justified the

action of the Alabama Commissioner of Insurance in 1971 in

devaluing the trust interest to the $4,250,000 liquidation value

set forth in the American Appraisal Company’s appraisal. Dur-

ing the 1974 proceedings the attorney for Intervenor Protective

advised the Court that the relevant law concerning the valuation

of unusual assets (i.e., the trust) was “Section 748(2)(b) of

Title 28(A) of the Alabama code.” (R. 2609).

Since the examination report made in December of 1971

valued Empire’s interest in the trust as of December 31, 1970

and since the aforementioned section of the Alabama Insurance

Code became effective on January 1, 1972, the Commissioner

was in effect in 1971 applying the 1972 statute retroactively to

the prejudice of Empire’s policyholders, stockholders and credi-

tors. Accordingly, the trial court’s finding that Empire was insol-

vent on the basis of the Commissioner’s devaluation of the trust

interest gave retroactive effect to Section 748(2)(b) of the

Alabama Insurance Code and denied Empire’s policyholders,

stockholders and creditors the due process of law guaranteed

by the Fourteenth Amendment.

Despite the broad range of discretion which is afforded to

the states in exercising their police power, the exercise of that

discretion in giving retroactive effect to certain legislative enact-

ments has a limit which must be maintained if constitutional

safeguards are not to be overthrown. Hartford Steam Boiler

Inspection and Sign Insurance Company vs. Harrison, 301 U.S.

459 (1937); Pennsylvania Coal Company vs. Mahon, 435 Ct.

158, 260 U.S. 393 (1922). The most fundamental reason why

retroactive legislation is deemed to be suspect stems from the

principle that a person should be able to plan his conduct with

reasonable certainty of the legal consequences. Hochman, The

Supreme Court and the Constitutionality of Retroactive Legisla-

tion, 73 HARV. L. REV. 692 (1960) .

In the present action Empire’s trust interest had been valued

at the $14,000,000 figure between 1965 and 1972 and had been

approved by the insurance commissioners of the various states

with which Empire had come into contact by virtue of its mul-

tiple mergers and acquisitions. To allow the Alabama Insurance

ee ne ee) ae ee

Commissioner to devalue a reserve asset to a liquidating value

arbitrarily determined by him, a devaluation of approximately

$10,000,000 in a 1970 examination report, on the basis of a

1972 statutory enactment, is clearly a retroactive application of

said statute which is blatantly unreasonable and which has had

a devastating financial impact upon Empire’s policyholders,

stockholders and creditors. Where the retroactive application of

a statute defeats the reasonable expectations of the parties af-

fected thereby, then their rights to due process of law have been

denied and their contractual relationships have been impaired.

Forbes Pioneer Boatline vs. Board of Commissioners, 258 U.S.

338 (1922). |

The retroactive application of Section 748(2)(b) has meant

instant insolvency for Empire and has necessarily impaired the

contractual rights of every policyholder, shareholder, and credi-

tor of Empire and has deprived every shareholder of his invest-

ment in the company. To allow the application of the statute

to have such retroactive effect violates Article I Section 10 of the

U. S. Constitution which provides that: “no State shall pass . . .

any Law . . . impairing the obligation of contracts.” W. B.

W orthen Co. v. Kavanaugh, 295 U.S. 56, 55 S. Ct. 555 (1935) ;

Pennsylvania Coal Co. v. Mahon, supra.

VIL.

THE POLICYHOLDERS, STOCKHOLDERS AND CREDI-

TORS OF EMPIRE WERE DENIED THE DUE PROCESS

OF LAW GUARANTEED BY THE FOURTEENTH AMEND-

MENT SINCE THE TRIAL JUDGE VIOLATED CANONS 1,

2 AND 3 OF THE ABA CODE OF JUDICIAL CONDUCT.

56 ;

of the person consulted and the substance of the ad-

Canon | entitled: A Judge Should Uphold the Integrity and vice, and affords the parties reasonable opportunity to

Independence of the Judiciary, provides as follows:

The commentary to the foregoing Section indicates that:

An independent and honorable judiciary is indis-

pensable to justice in our society. A judge should

participate in establishing, maintaining, and enforc-

ing, and should himself observe, high standards of

conduct so that the integrity and independence of

the judiciary may be preserved. The provisions of this

Code should be construed and applied to further that

objective.

The proscription against communications concerning

a proceeding includes communications from lawyers,

law teachers, and other persons who are not partici-

pants in the proceeding, except to the limited extent

permitted. It does not preclude a judge from consult-

ing with other judges or with court personnel whose

function is to aid the judge in carrying out his adjudi-

cative responsibilities.

Canon 2 entitled: A Judge Should Avoid Impropriety and the

Appearance of Impropriety in All His Activities, provides as

follows:

An appropriate and often desirable procedure for a

court to obtain the advice of a disinterested expert on

legal issues is to invitc him to file a brief amicus

A. A judge should respect and comply with the

law and should conduct himself at all times in a man-

ner that promotes public confidence in the integrity

and impartiality of the judiciary.

B. A judge should not allow his family, social, or

other relationships to influence his judicial conduct

or judgment. He should not lend the prestige of his

office to advance the private interests of others; nor

should he convey or permit others to convey the

impression that they are in a special position to in-

fluence him. He should not testify voluntarily as a

character witness.

Canon 3, Section A, subparagraph (4) provides as follows:

A judge should accord to every person who is legally

interested in a proceeding, or his lawyer, full right to

be heard according to law, and, except as authorized

by law, neither initiate nor consider ex parte or other

communications concerning a pending or impending

proceeding. A judge, however, may obtain the advice

of a disinterested expert on the law applicable to a

proceeding before him if he gives notice to the parties

ee i ee

curiae.

The evidence adduced in the trial court below raises serious

questions as to the impartiality and fairness of the receivership

proceeding involving Empire since it is clear that the trial court

held repeated ex parte communications regarding the solvency

of Empire with a Mr. Paul Carr who was not a party to the

proceeding.

The comments of the trial court, the Honorable William C.

Barber, regarding his friend and advisor Paul Carr were as

follows:

Since the institution of this matter in this Court, I

believe that / am quite sure that I am the one that sug-

gested that Mr. Carr might be a good (R2049) con-

sultant and one who I would listen to and whose

statements I would have the utmost confidence in. /

made that suggestion to Mr. Bookout. | think I did.

At any rate, it wasn’t long after that until Mr. Book-

out did employ Mr. Carr and when he did I was glad

and Mr. Carr frequently has had me call him [ Book-

out] and had me ask him questions that were in my

mind relative to the matters that are before this Court

today. | make no apology for it. I’m glad of it. He has

been helpful to me. I haven’t always agreed with him,

when there have been areas of disagreement those

areas have been discussed and I have made a decision.

[Emphasis added ]

*_ * *

If there is anything improper about that why then a

proper higher tribunal will have to say so, but that is

the way I operate in this court, and I want everybody

to know it, and I want everybody to know about my

relationship with Mr. Paul Carr. He is one of my very

dear friends and that is the way I look at it right now,

and I don’t have very many. (R.2051).

The foregoing statements by the Honorable Judge Barber

clearly show that Judge Barber was using his position and in-

fluence as a Judge in order to have the parties to the litigation

hire his friend Paul Carr as a consultant. The foregoing clearly

shows that the trial court was having ex parte communications

with the Plaintiff-Receiver in this case which communications

are clearly in violation of Canons 1, 2 and 3 of the Judicial Code

and consequently denied the parties to the proceeding the due

process of law guaranteed by the Fourteenth Amendment.

The testimony of Paul Carr corroborates the existence of the

ex parte communications. The following testimony of Mr. Carr

documents that the Alabama Insurance Commissioner and other

authorities of the State of Alabama, acting under color of state

law, were shopping for a court in which to institute receivership

proceedings against Empire prior to June of 1972.

The following excerpts are from the deposition of Paul Carr

conducted on March 8, 1974, by Mr. Thomas Beech, counsel for

aN Anes =

ab wi Soe ed ee a tees Sea eee

+ — ee ee a ee eS re nae tae ot atta

the Petitioner, and which deposition was admitted into evidence

during the 1974 receivership proceedings pertaining to the

Receiver’s Petition for authority to liquiate and reinsure

Empire:

A. [Carr]

Q. Well, let’s start this way, What position have you

had with the Empire Life receivership? [R 5554].

A. I have been a consultant to the Receiver and the

Court.

Q. When did you first begin this role?

A. January of 1972.

Q. I’m sorry, the date bothered me. Are you sure the

date is January, 1972?

A. When I was first called in on the Empire Life sit-

uation, yes.

Q. Do you know the date the receivership in Alabama

was invoked?

A. June 29, 1972, Yes.

Q. So “7 were called in before the receivership busi-

ness

A. Before the receivership was effective, yes.

Q. All right. And who called you in in January, 1972?

A. The Commissioner of Insurance, Mr. John Book-

out.

Q. Is he the first one that contacted you about Empire

— problem or did Judge Barber contact you

I’m not positive as to the order of which it was, but

its entirely possible that the Judge called me first.

It was done quite close together and I don’t know

which, you know, which was the first.

Well, will you relate the first conversation with the

Judge when he called you about Empire Life?

. He was saying that he had been notified [R. 5555]

that the Insurance Department was considering

placing a complaint against Empire Life Insurance

Company in his Court for receivership, involun-

tary receivership hearing, and that he wanted to

know that — if I would be available to assist him

in the event it came into his Court and was so

ordered.

Q. Can you give us the approximate date of this con-

Oro

POP PeePer Op

versation, early January or late January, 1972?

. Well, this — well, to be factual I think I said

January of 1972. I believe it would be right be-

fore Christmas in 1971.

. December of *71?

Yes.

. Well, did you have one or more conversations with

Judge Barber before you had your first conversa-

tion with Mr. Bookout about the Empire Life

receivership?

My best recollection would be, would be just one.

All right, Did Judge Barber instruct you to call

Mr. Bookout and get in touch with him?

Yes.

And did you do so?

Yes.

How long after Judge Barber’s phone call?

Very shortly thereafter. I would say, you know, a

couple of days.

All right. Will you relate your phone [R. 5556]

conversation with Mr. Bookout about Empire

Life?

That the — I had — was calling him as a result

of my conversation with Judge Barber and at that

time we set up an appointment to get together to

discuss the matter which — and then I came to

Montgomery sometime in January.

First part of January or the last part of January?

De Otheal be PT LTE LEB NI hd LOO NG TS LD

SPere er F&F Pr PP

I would say more like the middle of January.

All right. Anc who did you meet with in Mont-

gomery?

In Montgomery, there was Mr. Bookout and an

attorney by the name of Robert Alton.

All right. Well, how long did your conversation or

conference last with Mr. Bookout and Mr. Alton?

I’m going from memory. It’s — I would estimate

about an hour and a half to two hours.

Where did the meeting take place?

In Mr. Bookout’s office.

What was discussed at that meeting, Mr. Carr?

What services I could perform and my fees there-

wr in the cont Empire Life wos p placed in a

receivership. {Emphasis Added

aod ePerP 2

All right. What services were you to perform at

that conference; did you agree on the services that

you would perform? (R 5557)

That I would perform as an insurance consultant

what matters they would like to have from the

administrative viewpoint.

Now, what does that mean, administrative view-

point?

From operations, you know of the company.

Financial advisor?

Financial primarily, yes sir.

Did chey tell you at that time what the financial

impairment of Empire Life was?

They gave me some figure, yes. .

Well, what was the figure; do you recall?

I’m going from memory. like a deficit

of — figure in excess of eleven million dollars,

which included the capital structure as a liability.

All right. Well, at that time in that conference

with Mr. Bookout and Mr. Alton did either one

of them refer to Shearn Moody, Jr. by name?

A. Yes. To the effect that they had asked if I knew

him and I said I never met him. They asked if I

had ever had any contact with Empire Life, you

know, and I said negative (R. 5558).

Q. All right. How many meetings did you have with

Mr. Alton and/or Mr. Bookout between this meet-

ing in January, middle of January, 1972, until

the receivership was imposed in June of 1972 in

Judge Barber’s courtroom?

A. I would say it was several meetings. It might have

been as many as a half dozen, certainly; maybe

up to more than that.

Q. In person?

A. In person and by the telephone. (R. 5560).

While serving as a special advisor to the Alabama State Court

Judge, Paul Car- with the judge’s encouragement and approval

entered into consulting fee arrangements with parties to the

litigation before the court. Paul Carr submitted, during a deposi-

tion, a memo he wrote himself which is self-explanatory:

“MEMO FOR FILE-February 9, 1973

On even date, Ry Baily came by and discussed Protective’s

interest in acquiring or reinsuring Empire Life. Briefly their

plan is to be couched along the lines —I raised the following

questions:

1. Had they thought about the disposition, and how to handle

any “windfall” gain from:

A. Death of Shearn Moody

B. Recovery from derivative action [R. 3894]. We dis-

cussed generally the fact that Protective Life was most definitely

interested in making a deal on Empire and Bailey insisted they

were going to make what they would consider a most attractive

offer.

Bailey asked me as to my position in the matter. I told him.

He replied that he understood that I was to instruct and advise

the Court on the plans submitted. He said this was not what he

had in mind. He was inquiring speculatively as to what function

or category I would or could fill after the hearing in April, in

the event their plan was accepted by the court.

I replied that Paul Carr and Associates was a consulting firm

and, as such, were always available and definitely interested in

discussing retainer relationships with honorable clients. In this

position we should be most happy to discuss with them perform-

ing services for Protective Life in the event they were the

successful bidder [R. 3805-06].”

The foregoing testimony indicates that John G. Bookout was

shopping for a receivership court in January of 1972, three

months before he filed his complaint (April 17, 1972). The testi-

mony also raises questions as to the ability of the trial court to

have been impartial and fair with regard to the Empire Re-

ceivership proceeding’. Such ex parte communications on the

part of the trial court raises serious questions as to whether the

stockholders, policyholders and creditors of Empire received the

due process of law guaranteed by the Fourteenth Amendment.

Vill.

THE ALABAMA STATUTE REQUIRING THAT THE

ALABAMA COMMISSIONER OF INSURANCE BE AP-

5 “The opportunity to be heard has been required to be adequate, fair,

tdi, on sated. he hearing or defense must be before a competent

— Oe oe ee ee ee

tribunal, full and complete, or on the merits and before trial and judg-

ment or decree. Such has been required to be fair, fair and

impartial, full and fair.” .J.S. Constitutional Law §569(4) (1956).

POINTED THE RECEIVER OF EMPIRE DENIED EMPIRE’S

POLICYHOLDERS, STOCKHOLDERS AND CREDITORS

THE DUE PROCESS OF LAW GUARANTEED BY THE

FOURTEENTH AMENDMENT.

In the Alabama Receivership court the insurance commis-

sioner was by state law the court-appointed receiver of the

receivership court. Alabama Insurance Code Section 634 pro-

vides as follows:

(1) Whenever under this chapter a receiver is to be

appointed in delinquency proceedings for a do-

mestic or alien insurer, the court shall appoint

the commissioner as such receiver. The court

shall order the commissioner forthwith to take

possession of the assets of the insurer and to

administer the same under the orders of the court.

The Alabama Receivership Court was by state law powerless

to fire its receiver and its receiver by law was its state’s ultimate

regulatory authority concerning life insurance companies. As

a result of these statutory provisions the policyholders, stock-

holders and creditors of Empire were denied due process of

law. The Receivership Court was powerless to do anything other

than to rubber stamp whatever the Insurance Commissioner

Receiver wanted done with respect to the life insurance com-

pany.

The Petitioner expended thousands of dollars in legal costs

and legal proceedings where his constitutional right to due

process had been violated. The special interest law in Alabama

required the Insurance Commissioner Plaintiff who decided to

place Empire in receivership to become the receiver of the

receivership court in question. It is difficult to perceive how

an insurance commissioner who decides to place a company in

receivership can then be expected as receiver to make a good

faith effort to rehabilitate the very company which he had

decided to place into receivership initially. Such a statutory

scheme clearly denied the stockholders, policyholders, and

creditors of Empire a fair and impartial hearing before the

Receivership Court and accordingly denied them the due process

of law guaranteed by the Fourteenth Amendment.

CONCLUSION

For the reasons stated, Petitioner prays that his Petition for

a Writ of Certiorari to the Supreme Court of the State of

Alabama be granted.

Respectfully submitted,

FRANK G. NEWMAN

NEWMAN, SHOOK & NEWMAN

Professional Corporation

4330 Republic National Bank Tower

Dallas, Texas 75201

(214) 747-9091

MARTIN PAUL SOLOMON

286 Fifth Avenue

New York, New York 10001

ATTORNEYS FOR PETITIONER,

SHEARN MOODY, JR.

PROOF OF SERVICE

Proof of service of three copies of Petitioner’s Petition for

a Writ of Certiorari to the Supreme Court of the State of

Alabama upon each of the parties separately represented by

counsel was filed by FRANK G. NEWMAN, a member of the

Bar of the United States Supreme Court, with the Clerk of the

United States Supreme Court on the same date the petitions

were filed.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.