Petition — Moody v. Texas
Supreme Court brief1978
Ask Donna
What actually matters in this document.
Text
f-Sireme Cont, WS.
FILED ‘\
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1977
No. 6% "87 3
SHEARN MOODY, JR., and
JOHN S. BLEKER,
Petitioners,
VS.
THE STATE OF TEXAS,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
TO THE COURT OF CIVIL APPEALS FOR
THE TENTH SUPREME JUDICIAL DISTRICT
OF TEXAS
Frank G. NEWMAN
NewMaN, SHook & NEWMAN
A Professional Corporation
4330 Republic National Bank Tower
Dallas, Texas 75201
FREDERICK J. Lawson
Union Bank Plaza, Suite 414
15233 Ventura Boulevard
Sherman Oaks, California 91403
Attorneys For Petitioners
SHEARN Moony, Jr., Jonn S. BLEKER
SUBJECT INDEX
Page
TA RUIIOEED a Cb hb ee Sec dees coccces iv
PETITION FOR WRIT OF CERTIORARI .......... 1
oe cin eee wudeaneds é bhperne 3
TE eh aah ode cab keue enti 6466000 68 4
CURE RUeeD PUMICE: oc ccccccccescccececccce 4
CONSTITUTIONAL PROVISIONS INVOLVED ....... 6
STATUTORY PROVISIONS INVOLVED ............ 7
SEARMMEE GO BEE GAD ccc cscccccscns ceccces 9
REASONS FOR GRANTING THE WRIT ............ 18
I. THE PETITIONERS HAVE BEEN DENIED THE
RIGHT OF DUE PROCESS IN THAT THE RE-
CEIVERSHIP COURT DEPRIVED THEM OF A
JUST, EQUITABLE, FAIR AND IMPARTIAL
HEARING IN VIOLATION OF THE FIFTH AND
FOURTEENTH AMENDMENTS TO THE
UNITED STATES CONSTITUTION. 18
Il. THE TRIAL COURT WAS WITHOUT JURIS.-
DICTION TO HEAR AND DECIDE THE CASE
IN THAT IT GAVE FULL, FAITH AND CREDIT
TO AN ALABAMA JUDGMENT WHICH WAS
BASED UPON AN UNCONSTITUTIONAL ALA-
BAMA STATUTE. 23
A. THE SUBJECT ALABAMA STATE COURT
INTERLOCUTORY DECREE TO WHICH
THE TRIAL COURT IMPROPERLY GAVE
FULL, FAITH AND CREDIT, WAS BASED
UPON AN UNCONSTITUTIONAL ALA-
BAMA STATUTE WHICH GAVE UNLIM-
ITED AND ARBITRARY DISCRETION TO
THE ALABAMA INSURANCE COMMIS-
SIONER TO VALUE THE SUBJECT EMPIRE
LIFE INSURANCE COMPANY ASSET AT
ANY VALUE TO BE DETERMINED BY HIM. 24
Il.
IV.
B. THE APPLICATION AND ENFORCEMENT
OF SECTION 745(13) BY THE ALABAMA
STATE COURT DEPRIVED PETITIONERS
OF SUBSTANTIAL CONTRACTUAL AND
PROPERTY RIGHTS IN VIOLATION OF
DUE PROCESS, AND, THE IMPROPER
GRANTING OF FULL, FAITH AND CREDIT
BY THE TRIAL COURT FURTHER COM-
POUNDED PETITIONERS’ DENIAL OF DUE
PROCESS.
THE FAILURE OF THE TEXAS ANCILLARY
RECEIVERSHIP COURT TO PROVIDE THE
POLICYHOLDERS, STOCKHOLDERS AND
CREDITORS OF EMPIRE WITHIN ITS JURIS-
DICTION WITH NOTICE OF THE ANCILLARY
RECEIVER’S PETITION FOR AUTHORITY TO
CONSUMMATE THE TREATY OF ASSUMP.
TION AND BULK REINSURANCE, OF THE
HEARING THEREON, AND AN OPPORTUNITY
TO BE HEARD AT SAID HEARING DEPRIVED
THEM OF THEIR PROPERTY WITHOUT DUE
PROCESS OF LAW CONTRARY TO THE FOUR.
TEENTH AMENDMENT.
THE TREATY OF ASSUMPTION AND BULK
REINSURANCE DENIED THE POLICYHOLD-
ERS, STOCKHOLDERS AND CREDITORS OF
EMPIRE 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 WHO WERE DIFFERENTLY SIT-
UATED IN A MANNER CONSISTENT WITH
THEIR RESPECTIVE RIGHTS.
Page
27
V. THE COURT OF CIVIL APPEALS DENIED THE
PETITIONERS THE EQUAL PROTECTION OF
THE LAWS GUARANTEED BY THE FOUR.
TEENTH AMENDMENT WHEN IT HELD THAT
THE ANCILLARY RECEIVERSHIP COURT HAD
JURISDICTION TO APPROVE THE REINSUR-
ANCE AGREEMENT EVEN THOUGH THE SUIT
BELOW WAS INITIATED WITHOUT THE DI-
RECTION, AUTHORIZATION OR APPROVAL
OF THE TEXAS STATE BOARD OF INSUR.
ANCE AS REQUIRED BY SECTION THIRTEEN
OF ARTICLE 21.28 OF THE TEXAS INSUR-
EEE So cdar vad se bevcuneseeducesuas
iv
TABLE OF AUTHORITIES
CASES Page
Ace Grain Company v. Rhode Island Insurance Company,
197 F. Supp. 80 (1952) affirmed 199 F. 2d 758 (2d
Cie.) s 46 BLM. SS DIB on wc cvcccccccsevdovccuss 37
Adler v. Brooks, 375 S.W.2d 544 (Tex. Civ. App. — Tyler
Pee, WU COTS DROID dc cc ccdcdecceséséebiaones 64
Arnold v. Sherman, 244 S.W.2d 880 (Tex. Civ. App. —
Dallas 1951, writ ref’'d n.r.e.) ....ccccccccccccees 28
Barbier v. Connolly, 113 U.S. 27, 5S. Ct. 357 (1885) ... 39
Barrows v. Jackson, 73 S. Ct. 1031, 346 U.S. 249 (1953) 33
Board of Regents v. Roth, 92 S. Ct. 2701, 408 U.S. 564
t..: SPT 32
Boddie v. Connecticut, 91 S. Ct. 780, 401 U.S. 371 (1971) 32
Britton v. Green, 325 F. 2d 377 (10th Cir. 1963) ....... 30
Clark v. Williard, 292 U.S. 112 (1935) ............--. 36
Cocke v. Wright, 299 S.W. 446, 448 (Tex. Civ. App. —
ames BGs, OD WUE cc ccccccvevesossunenunes 41
Colden v. Alexander, 141 Tex. 134, 171 S.W.2d 328
COED ov ov 0 0v'0uc046se6e03e00000n0nnee 27
Day v. State, 489 S.W.2d 368 (Tex. Civ. App. — Austin
Seta Welk CUTS GRA) oc cccecoeseseunneeneeee 65
Equitable Life Assurance Society v. Commonwealth, 113
Ky. 126, 67 S.W. 388 (1902) ............ceeeees 57
Fuentes v. Shevin, 92 S. Ct. 1983, 407 U.S. 67, (1972)... 32
Page
Giaccio v. St.te of Pennsylvania, 387 U.S. 399, 86 S. Ct.
GED. nccccvdeecpndescsbetaueeveseacweusetehess 26
Goldberg v. Kelly, 387 U.S. 254, 90 S. Ct. 1011 (1970) . 32
Goss v. Lopez, 95 S. Ct. 729, 419 U.S. 565 (1975) ..... 32
Grannis v. Orlean, 234 U.S. 385, 34S. Ct. 779 (1914) .. 32
Hartford Steam Boiler Inspection and Insurance Company
v. Harrison, 301 U.S. 459 (1937) ........ ccc ccees 38
International & G.N.R. Co. v. Edmondson (Com.), 222
S.W. 181 (Tex. Comm. App. — 1920) ............. 28
John L. Hammond Life Insurance Company v. State, 299
S.W.2d 163 (Tex. Civ. App. — Austin 1957, writ ref’d
WOUND. cncns ciweetndeddesnkesés.2<oececoondess 62
Lone Star Gas Company v. Texas, 304 U.S. 224 (1938)... 1
Lucas v. Manufacturing Lumberman’s Underwriters, 349
Mo. 835, 163 S.W.2d 750 (1942) .............. 30
Lumbermen’s Insurance Corporation v. State, 364 S.W.2d
429 (Tex. Civ. App. — Austin 1963, writ refd n.r.e.) 63
Louisville Gas and Electric Company v. Coleman, Auditor,
ee Slee a ee GP OED nn odcdecanedecces 38
Marion v. Marion, 205 S.W. 2d 426 (Tex. Civ. App. —
a Se Oe nn cn chtedibcbeccaes 30
McFarling v. Mayfield, 510 S.W. 2d 108 (Tex. Civ. App.
— Beaumont 1974, writ ref'd n.r.e.) ...........-5- 37
Melco Systems v. Receivers of Transamerica Insurance
Company, 105 So. 2d 43 (Ala. 1958) ............. 37
vi
Michigan-W isconsin Pipeline Company v. Calvert, Comp-
troller Public Accounts, 347 U.S. 157 (1954) ......
Middletown v. Texas Power & Light Co., 108 Tex. 96, 185
PEED cecdciaceniccccesccscacesecs'’ss
Miller v. Davis, 136 Tex. 299, 150 S.W.2d 973 (1941)...
Miller v. Letzerich, 121 Tex. 248, 49 S.W.2d 404 (1932).
Moody v. State of Alabama, 344 So.2d 160 (1977) .....
Morris v. Investment Life Insurance Company of America,
204 N.E. 2d 550, 1 Ohio App. 2d 330 (1960) .......
Mullane v. Central Hanover Trust Company, 339 U.S. 306,
Pe Gs ED ED “ccntccccdssevecencedess ee
N.A.A.C.P. v. State of Alabama, 78 S. Ct. 1163, 357 U.S.
I PPPS PTT Tere TTTTTTT TT Tri
Order of Railway Conductors of America v. Quigley, 131
Tox. 4, 133 SW. Bd GSS (ISEB) 2... ccccccccccces
Palmer Ex Rel American Bankers Insurance Company v.
Palmer, 363 Ill. 499, 2 N.E. 2d 728, 106 A.L.R. 447
SEED GdUaecbeeesccvudnedbekveesentinwaceuds
CREED ccwbncaccccdnteseceedcctoudévetecdsee
Robinson v. Wolfe, 27 Ind. App. 683, 62 N.E. 74 (1901)
Salas v. Gonzalez, 181 S.W. 2d 821 (Tex. Civ. App. —
Sen Aatenlo 1966, wn welt) ...cccccccccccccescces
Security Trust Company of Austin v. Lipscomb County,
142 Tex. 572, 180 S.W. 2d 151 (1944) ...........
Page
26
28
31
32
57
vii
Shaw v. Strong, 128 Tex. 65, 96 S.W. 2d 276 (1936) ... 40
Sniadach v. Family Finance Corporation, 89 S. Ct. 1820,
Be GED cc cceveue ectebbacesseteces 32
State v. Mitchell, 110 Tex. 498, 221 S.W. 925 (1920)... 28
State Life Insurance Company v. Strong, 127 Mich. 346,
es EP ROUND ON 060 ee decor eceesavevecnes 57
Stewart v. Citizens Casualty Co. of New York, 23 N.Y.2d
407, 244 N.E.2d 690 (1968) .............ceeeee 30
Swann v. Adams, 87 S. Ct. 569, 385 U.S. 440 (1967)... 33
Weber v. Aetna Gas ané Insurance Company, 406 U.S.
ek ee ek ks CED 6k o dWwwsddicdedecdoce 38
Wisconsin v. Constantineau, 400 U.S. 433, 915 S. Ct. 507
Dt tWidbcclbatd Jd taduddedugdédwes aoe ake ou 32
vill
Page
STATUTES
ALABAMA INSURANCE CODE TITLE 28-A §237 ..... 56
ALABAMA INSURANCE CODE TITLE 28-A §745(13). 25
ALABAMA INSURANCE CODE TITLE 28-A §$$621-641 36
TEX. INS. CODE ANN., art. 21.21-A ........-2-008- 55
TEX. INS. CODE ANN., art. 21.21(4) ............-- 55
TEX. INS. CODE ANN., art. 21.21, $4(7), art. 21.28-A 38
TEX. INS. CODE ANN.. ast. SR. BBRS) ..cccccccsccss 14
TEX. INS. CODE ANN., art. 21.28 §$§2(b) and 13.... 58
TEX. INS. CODE ANN., art. 21.28 §4(a)(2) ........ 30
TREATISES
16A C.J.S. Constitutional Law §569(4) (1956) ....... 3
1 Couch on Insurance 2d §1:102, pgs. 198-99 (1960)... 54
2 Couch on Insurance 2d §22:28, pg. 702 (1960) ..... 37
2 Couch on Insurance 2d §22:52 (1960) ..........-- 30
2 Couch on Insurance 2d $22:82, pgs. 775-780 (1960)... 36
i it ee”... cnchecdnsesdnesossennnebese 26
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1977
No.
SHEARN MOODY, JR., and
JOHN S. BLEKER,
Petitioners,
VS.
THE STATE OF TEXAS,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
TO THE COURT OF CIVIL APPEALS FOR
THE TENTH SUPREME JUDICIAL DISTRICT
OF TEXAS
TO THE HONORABLE SUPREME COURT OF THE UNITED.
STATES:
Petitioners, Shearn Moody, Jr. and John S. Bleker, respect-
fully pray that a Writ of Certiorari issue to review the judg-
ment of the Court of Civil Appeals for the Tenth Supreme Judi-
cial District of Texas’ affirming the judgment of the Texas
'The Texas Supreme Court refused to review the present action by
refusing the Petitioners’ timely Application For Writ of Error with a
notation of no-reversible error. Accordingly, this Petition is
directed to the Court of Civil Appeals, rather than the Texas Supreme
Court. Michigan-Wisconsin Pipe Line Co. v. Calvert, C of
Public Accounts, 347 U.S. 157 (1954); Lone Star Gas Co. v. Texas,
304 U.S. 224 (1938).
2
Ancillary Receivership Court granting the Ancillary Receiver
of Empire Life Insurance Company of America (“Empire”)
the authority to consummate the Treaty of Assumption and
Bulk Reinsurance proposed by Protective Life Insurance Com-
pany (“Protective”) with regard to Empire?
Petitioner Moody has previously filed a Petition For Writ of
Certiorari to the Supreme Court of the State of Alabama attack-
ing that Court’s affirmation of the Domiciliary Receivership
Court’s Order authorizing the Domiciliary Receiver of Empire
to execute the Treaty of Assumption and Bulk Reinsurance. See,
Shearn Moody, Jr., vs. State of Alabama, ex. rel. Charles H.
Payne, .... U.S. .... (No. 77-428, docketed September 16,
1977). Petitioner Moody respectfully submits that the present
action pertaining to the ancillary receivership should also be
considered with the aforesaid action pertaining to the domi-
ciliary receivership of 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 policyhold-
ers, stockholders and creditors who are similarly situated and
accordingly denies them the equal protection of the laws guaran-
teed by the Fourteenth Amendment, and the constitutional pro-
priety of ari Ancillary Receivership Court’s approval of a Treaty
of Assumption and Bulk Reinsurance in a proceeding where the
ancillary receivership was instituted in total defiance of estab-
~ 2Defendants’ Exhibit 49 reveals that the Executive Vice President of
Protective made private ex parte promises to the insurance commis-
sioners of Arkansas, Nebraska, North Dakota, and Montana at a meet-
ing in Las Vegas to induce them to sign a joint resolution recommending
Protective. Paul Carr, the court appointed adviser to the Domiciliary
Receivership Court, was a party to and participated in these ex parte
discussions.
3
lished statutory procedure and where the policyholders, stock-
holders and creditors situated in the ancillary jurisdiction were
denied notice and an opportunity to appear at a fair, unbiased*
hearing at which to raise objections to the Reinsurance Agree-
ment contrary to the due process clause of the Fourteenth
Amendment. The total defiance of established statutory proce-
dure exhibited by the Commissioner of Insurance and the
Attorney General of the State of Texas in pushing through the
creation of an ancillary receivership and the clandestine manner
in which the Texas Ancillary Receiver sought to have the Rein-
surance Agreement approved are totally incredulous in light of
the undisputed fact that a majority of Empire’s policyholders and
assets are located within the State of Texas. Indeed, the Supreme
Court of the State of Alabama, the state of the domiciliary
receivership, expressly acknowledged this fact and in light
thereof gave undue emphasis to the opinion of the Texas Court
of Civil Appeals below in passing upon the Reinsurance Treaty,
See, Moody v. State of Alabama, 344 So.2d 160 (1977).
OPINIONS BELOW
The opinion of the Court of Civil Appeals for the Tenth
Supreme Judicial District of the State of Texas affirming the
Ancillary Receivership court’s judgment authorizing the Ancil-
lary Receiver of Empire to consummate the Treaty of Assump-
tion and Bulk Reinsurance is reported at 538 S.W.2d 158 (Tex.
Civ. App.-— Waco, 1976) and appears in the Appendix at
*The opportunity to be heard has been required to be adequate, fair,
full, or reasonable. The hearing or defense must be before a competent
as well as before a just, equitable and fair and impartial court or tribu-
nal, full and complete, or on the merits and before trial and judgment or
decree. Such hearing has been required to be fair, fair and impartial,
full and fair.” 16A C.J.S. Constitutional Law $569(4) (1956).
4
page A-1. The judgment of the Court of Civil Appeals appears
in the Appendix at Page A-6. The order of the Court of Civil
Appeal’s overruling of the Petitioners’ timely Motion for Rehear-
ing appears in the Appendix at page A-7.
The order of the Texas Supreme Court refusing the Peti-
tioners’ timely Application for a Writ of Error, with a notation
of no-reversible error, appears in the Appendix at page A-9.
The order of the Texas Supreme Court overruling the Peti-
tioners’ timely Application for a Rehearing of the refusal of
the Application for Writ of Error appears in the Appendix at
page A-10.
JURISDICTION
The Court of Civil Appeals affirmed the judgment of the
Ancillary receivership court on May 13, 1976, and overruled
Petitioners’ timely Motion for Rehearing on June 10, 1976.
The Texas Supreme Court refused the Petitioners’ timely
Application for Writ of Error with a notation of no-reversible
error on June 22, 1977. The Texas Supreme Court overruled
the Petitioners’ timely Application for Rehearing on July 20,
1977. The Petitioners presented a joint Motion for Extension
of Time in which to file a Petition for Writ of Certiorari to the
Honorable Justice Lewis F. Powell, Jr., who signed an order on
October 14, 1977 extending their time within which to petition
for certiorari to and including December 16, 1977. This Court’s
jurisdiction is invoked under 28 U.S.C., §1257(3) (1970).
QUESTIONS PRESENTED
1. Whether the Petitioners have been denied the right of due
process in that the receivership court deprived them of a just,
equitable, fair and impartial hearing in violation of the Fifth
and Fourteenth Amendments to the United States Constitution.
5
2. Whether the trial court was without jurisdiction to hear
and decide the case in that it gave full, faith and credit to an
Alabama judgment which was based upon an unconstitutional
Alabama statute.
A. Whether the subject Alabama state court interlocu-
tory decree to which the trial court improperly gave full,
faith and credit, was based upon an unconstitutional Ala-
bama statute which gave unlimited and arbitrary discretion
to the Alabama Insurance Commissioner to value the sub-
ject Empire Life Insurance Company asset at any value to
be determined by him.
B. Whether the application and enforcement of section
745(13) by the Alabama state court deprived Petitioners
of substantial contractual and property rights in violation
of due process, and, the improper granting of full, faith
and credit by the trial court further compounded Peti-
tioners’ denial of due process.
3. Whether the failure of the Texas Ancillary Receivership
Court to provide the policyholders, stockholders and creditors
of Empire within its jursidiction with notice of the Ancillary
Receiver’s Petition for Authori', to Consummate the Treaty of
Assumption and Bulk Reinsurance, of the hearing thereon, and
an opportunity to be heard at said hearing deprived them of
their property without due process of law contrary to the
Fourteenth Amendment.
4. Whether the Treaty of Assumption and Bulk Reinsurance
denied the policyholders, stockholders and creditors of Empire
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
6
to treat those who were differently situated in a manner con-
sistent with their respective rights.
5. Whether the Court of Civil Appeals denied the Petitioners
the equal protection of the laws guaranteed by the Fourteenth
Amendment when it held that the Ancillary Receivership Court
had jurisdiction to approve the Reinsurance Agreement even
though the suit below was initiated without the direction, au-
thorization or approval of the Texas State Board of Insurance
as required by Section Thirteen of Article 2].28 of the Texas
Insurance Code.
CONSTITUTIONAL PROVISIONS INVOLVED
Article I §10 of the United States Constitution:
No State shall . . . pass any . . . Law impairing the Obligation
of Contracts, . . .
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 jurisdic-
tion the equal protection of the laws.
TEXAS CONSTITUTION
ARTICLE II
§1. Division of powers; three separate departments;
exercise of power properly attached to other departments
Section 1. The powers of the Government of the State of
7
Texas shall be divided into three distinct departments, each of
which shall be confined to a separate body of magistracy, to
wit: Those which are Legislative to one; those which are Execu-
tive to another, and those which are Judicial to another; and no
person, or collection of persons, being of one of these depart-
ments, shall exercise any power properly attached to either of
the others, except in the instances herein expressly permitted.
STATUTORY PROVISIONS INVOLVED
ALABAMA INSURANCE CODE TITLE 28A §237:
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. Sent. 18, 1957; 1971, No. 407, effective
Jan. 1, 1972).
ALABAMA INSURANCE CODE TITLE 28A §745:
“ASSETS” DEFINED. In any determination of the
financial condition of an insurer, there shall be al-
lowed as assets only such assets as are owned by the
insurer and which consist of :
(13) other assets, not inconsistent with the provi-
sions of this section, deemed by the Commissioner to
be available for the payment of losses and claims, at
values to be determined by him.
8
TEXAS INSURANCE CODE
ARTICLE 21.21 §4:
UNFAIR METHODS OF COMPETITION AND
UNFAIR OR DECEPTIVE ACTS OR PRACTICES
DEFINED. — THE FOLLOWING ARE DEFINED
AS UNFAIR METHODS OR COMPETITION AND
UNFAIR OR DECEPTIVE ACTS OR PRACTICES
IN THE BUSINESS OF INSURANCE: ...
(7) UNFAIR DISCRIMINATION
(a) Making or permitting any unfair discrimination
between individuals of the same class and equal ex-
pectation 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 terms
and conditions of such contract... -
TEXAS INSURANCE CODE
ARTICLE 21.21-A
No insurance company doing business in this state
shall make or permit any distinction or discrimination
in favor of individuals between the insured of the
same class and of equal expectation of life in the
amount of the payment of premiums or rates charged
for policies of life or endowment insurance or divi-
dends or other benefits payable thereon: . . .
TEXAS INSURANCE CODE
ARTICLE 21.28 §13:
Sec. 13. Ancillary Delinquency Proceedings. When
ever under the laws of this State, a receiver is to be
appointed in delinquency proceedings for an insurer
domiciliary in another state, a court of competent juris-
diction in this State shall, on the petition of the Board
of Insurance Commissioners of this State, appoint
ae
9
the liquidator herein provided as ancillary receiver
in this State of such insurer. The Board shall file such
petition (a) if it finds that there are sufficient assets
of such insurer located in this State to justify the ap-
pointment of an ancillary receiver, or (b) if ten (10)
or more persons resident in this State, having claims
against such insurer, file a petition or petitions in writ-
ing with the Board, requesting the appointment of such
ancillary receiver. Such ancillary receiver shall have
the right to sue for and reduce to possession the
assets of such insurer in this State, and shall have the
same powers and be subject to the same duties with
respect to such assets, as are possessed by a receiver
of a domiciliary insurer under the laws of this State.
The remaining provisions of this Article shall be ap-
plicable to the conduct of such ancillary proceedings.
STATEMENT OF THE CASE
The parties to this proceeding were Shearn Moody, Jr.,
(“Moody”), the principal shareholder, a creditor, president and
chairman of the Board of Empire Life Insurance Company
(“Empire”), an Alabama domiciliary insurance company
placed in receivership in Alabama and Texas; John S. Bleker.
an intervenor, shareholder and policyholder of Empire; Protec-
tive Life Insurance Company, (‘Protective’), an intervenor
and the reinsurer of Empire: and Herbert Crook, statutory
insurance liquidator of the State of Texas and Ancillary
Receiver of Empire.
Empire was incorporated in Alabama in June, 1963. In July
1963, Petitioner Moody assigned to Empire two/fifths (2/5ths)
of his one /eighth (1/8th) life estate interest in the income
from a trust created under the Will of Libbie Shearn Moody
(hereinafter “the Trust Interest’). In 1964 a value of $5,813.440
10
for the Trust Interest was approved by the Alabama Insurance
Department. In 1965 the value of the said trust interest was
increased to $14,213,440 by Empire and the National Associa-
tion of Insurance Commissioners’ (“NAIC”) zone examination
of Empire. Examiners from the insurance departments of Ala-
bama, Arkansas and Texas approved the increased valuation
to $13,528,000.
From 1964 to 1968 Empire, with its principal asset being
said trust interest, acquired by merger or acquisition the assets
and insurance business of the following companies: Consoli-
dated American Life Insurance Co., Chicago, Illinois (1964) ;
Empire Life Insurance Company of America, Little Rock,
Arkansas (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, Illinois
(1968). All of these mergers and acquisitions were approved
by the insurance departments of the aforementioned states, and
predicated on the value of the trust interest of over thirteen
and a half million dollars.
In 1968, the Texas Insurance Commissioner questioned
whether any value could be given Empire’s interest in the trust,
but after a public hearing by the Texas Insurance Commissioner,
Empire’s reinsurance of American Trust Life Insurance Com-
pany was approved and Empire was found to be solvent (Defen-
dants’ Exhibit 13). This finding was predicated upon the
aforementioned 1965 valuation of Empire’s interest in the
Libbie Shearn Moody Trust because Empire would not other-
wise have been solvent.
ll
During 1969 and 1970, the Insurance Department of Ala-
bama conducted an examination of Empire and in June of 1969
the Honorable Frank Ussery, the then Alabama Insurance Su-
perintendent, directed that Empire’s interest in the Libbie Shearn
Moody Trust be valued at $14,213,440 less a reserve of
$1,292,130, to be increased annually by $430,710 (Defendants’
Exhibit 30). In 1971, the Honorable John G. Bookout succeeded
Mr. Ussery as Insurance Superintendent for Alabama, and sud-
denly, without justification directed that Empire’s interest in
the trust be devalued to $4,250,000. This sudden politically
motivated devaluation by almost $10 million dollars rendered
Empire insolvent and impaired under statutory insurance ac-
counting principals, and deprived Moody of a large part of
his inheritance which he had given to Empire to capitalize said
company and for which he has received no economic benefit.
On April 5, 1972, the Texas Insurance Commissioner en-
tered an Order of Supervision with respect to Empire in Texas.
(Order No. 36707). However, on June 7, 1972, by Commis-
sioner’s Order No. 37251, the Commissioner of Insurance did
not appoint a conservator under Article 21.28-A of the Texas
Insurance Code, Empire having represented that it would inter-
pose no delay concerning its rehabilitation in the receivership
proceedings to be initiated against it in Alabama. Indeed,
Empire’s officials were assured by Bookout in Alabama that
the receivership would simply provide Empire with an oppor-
tunity to get back on its feet after the staggering blow caused
by the devaluation of the trust interest. The Texas State Board
of Insurance took no official action concerning Empire at all
12
(S.F.* 266-272). On April 17, 1972, the then Alabama Com-
missioner of Insurance John G. Bookout instituted receivership
proceedings against Empire in Alabama.
On June 23, 1972, the State of Texas, by and through the
Attorney General of the State of Texas, “at the instance and
the request of the Commissioner of Insurance of the State
of Texas”’ filed its original Petition in the 53rd Judicial District
Court of Travis County, Texas,’ against Empire, asking that
after a hearing a permanent receiver be appointed to take
possession of the affairs of Empire pursuant to Article 21.28 of
the Texas Insurance Code and pursuant to Subsection (a) of
Section 12 of Article 21.49-1 of the Texas Insurance Code.
The petition alleged that Empire, a company domiciled in
Alabama, had been placed in receivership in Alabama and
asked that “the receivership prayed for herein should be made
ancillary to such Alabama receivership in accordance with
Section 13 of Article 21.28 of the Texas Insurance Code”. On
July 11, 1972 the Texas court appointed a temporary ancillary
receiver for Empire.
On June 29, 1972, the Alabama Court issued a Decree
appointing John G. Bookout as Domiciliary Receiver for
‘The notation “S.F.” refers to the Statement of Facts in the record
below. The Statement of Facts is a transcript of the testimony and
exhibits introduced in the trial court below.
*According to a report prepared by the State Board of Insurance
entitled “Insurance Companies and Afhliates in Texas in Receivership”
and presented to the Governor of Texas, the 53rd Judicial District Court
of Texas of Travis County received over 70° of the insurance receiver-
ship cases filed in Travis County District Courts in 1972. The 53rd
received 31; the 200th had 1; the 126th had 8; the 167th had 3; the
147th had 1; the 149th had 0; the 20Ist had 0; and the 98th had 0.
This was an unfair distribution of receiverships involving life insurance
companies and their affiliates among the District Courts of Travis County
in violation of the due process provisions of the Fourteenth Amendment.
13
Empire, and on June 14, 1974, the Alabama Court entered a
decree finding, with respect to that proceeding, that Empire was
insolvent and authorizing the Domiciliary Receiver to con-
summate a reinsurance agreement between Empire and Pro-
tective, to proceed with the liquidation of Empire, and to “pro-
ceed under this Order subject to the further review by and of
this Court”.
Pursuant to the Treaty of Reinsurance approved in Alabama
a two million dollar slush fund was set up to finance, among
other things, the prosecution of a corporate mismanagement
suit against Moody predicated on Empire’s losses which re-
sulted from the precipitous Alabama devaluation of the value
of the trust interest by almost ten million dollars overnight after
it had been carried at over fourteen million dollars for over
seven years and although said value had been approved by the
insurance commissioners of at least six states, including Ala-
bama and Texas, countless times.
In November of 1974, the State of Texas moved for summary
judgment on its application for the appointment of a permanent
ancillary receiver for Empire in Texas. The motion was based
entirely upon the Alabama Court’s decree of June 14, 1974.
Shortly thereafter Herbert Crook, the Temporary Ancillary
receiver moved for authority to consummate the Reinsurance
Agreement. Petitioner Moody filed an Opposition to the Motion
For Summary Judgment (p.A-11) and filed various afhdavits
in support thereof, including the affidavit of Dr. Joseph Tros-
per, who had prepared an evaluation of the two/ fifths (2/5ths)
of the one/eighth (1/8th) life estate interest in the Libbie
Shearn Moody Trust.
In his Opposition, Petitioner Moody pointed out that “since
most of the assets of Empire [were] located in Texas, [the
14
Texas] Court ha[d] a special obligation to Texas policyholders
and Texas creditors to insure that whatever arrangements made
[were] in the best interest of those policyholders and creditors.
[U]nder the Order of the Alabama Court, all of the assets of
Empire, primarily located in Texas, [were to] be lumped
together, and treated as one, without any provisions for the
protection of Texas policyholders and stockholders in relation
to those assets.” (p.A-15).°
The Petitioner Moody attacked any summary approval by the
Ancillary Receivership Court of the reinsurance agreement
approved by the Alabama Domiciliary Receivership Court, and
indicated that no time had yet been set for the filing of claims
against Empire. Petitioner Moody asserted the following:
Under Section 3(a) of Article 21.28 of the Texas
Insurance Code, filing of such claims shall be within
the period of time as ‘specified by the Court’. How-
ever, the Court, at this time, has not specified any time
for the filing of such claims. The time for filing of
such claims, as a matter of due process, must be prior
to any determination concerning the disposition of
assets by reinsurance of Empire. This is the only
manner in which Texas Policyholders and creditors
are given notice of the proposed disposition of assets
and reinsurance agreement, and the only manner in
which they may be heard on such issues and object to
such proposal if they so desire. Without such notice to
Texas policyholders and other creditors, Texas pol-
icyholders and creditors would be constitutionally
denied due proc ss. [Emphasis added]
*On or about April 4, 1974, Harry L. Edwards, President of National
Western Life Insurance Company forwarded a proposal to the Alabama
and Texas receivers whereby Empire's assets would be kept separate
from its own assets and a moratorium on the cash benefits available
under the reinsured policies would be 30°2 whereas Protective's Plan
provided for the commingling of assets and an initial moratorium of
35%, which moratorium was later increased to 50%.
15
The Fourteenth Amendment of the United States Con-
stitution requires that policyholders and creditors
must be given prior notice and a hearing tne assets
in which they have an interest are sold. |Emphasis
added |
This is especially true in light of the following:
1. Under the terms of the said reinsurance agree-
ment, Protective Life Insurance Company of America
does not assume all the liabilities of Empire Life
Insurance Company of America to its policyholders,
but only a portion thereof. The reinsurance agree-
ment provides for the transfer to Protective Life Insur-
ance Company except $2,000,000. Accordingly, a pol-
icyholder who does not consent to reinsurance upon the
terms stated in the reinsurance agreement, would be
left with nothing more than an unsecured claim
against Empire Life Insurance Company of America,
to share with other creditors in its assets after pay-
ment of all of administration expenses.
2. All the Empire Life Insurance Company of Amer-
ica assets are to be lumped together and transferred
outside of Texas.
3. Under the present reinsurance agreement, Empire
Life Insurance Company of America assets are to be
transferred to Protective Life Insurance Company
when the June 14, 1974 Order is final, regardless of
the fact that problems may arise later with the order
or with the agreement.
Because no such notice has been given to the policy-
holders and other creditors as a matter of statutory
and constitutional law, Plaintiffs are not entitled to
Summary judgment on the application before this
Court. [p.A.17-19]
The Petitioner Moody also attacked the Reinsurance Agree-
ment as being contrary to Alabama and Texas law because “such
agreement prefers policyholders over creditors,” (p.A-20).
On November 15, 1974, the Ancillary Receivership Court
16
granted the Motion for Summary Judgment filed by the State
of Texas and appointed Herbert Crook the statutory liquidator
for the Texas State Board of Insurance, permanent ancillary
receiver for Empire. The court decreed that the rights of all
parties interested in the proceeding were to be fixed as of
June 14, 1974, the date of the Alabama decree. The court
refused summarily to grant the Ancillary Receiver the authority
to consummate the Reinsurance Agreement and set the matter
for trial.
On or about January of 1975 Petitioner Bleker, a stock-
holder and policyholder of Empire was granted permission to
intervene and filed a Plea in Intervention pointing out that
as a policyholder of Empire he had no notice of the ancillary
receiver's appointment, that the Reinsurance Agreement was
unacceptable because it reduced the cash value of his policy
and subjected his policy to a 35% moratorium, that he had no
notice of his rights, that he had no opportunity to object to the
adequacy of the two million dollar fund to pay rejecting
policyholders and that in light of the foregoing he had been
denied his right to due process guaranteed by the Fourteenth
Amendment. He requested that no approval of the Reinsurance
Treaty be had until all policyholders were notified and given
an opportunity to appear.
In February of 1975 Bleker filed a motion for order vacating
the appointment of ancillary receiver. In ihe Motion, Petitioner
Bleker pointed out that the ancillary receivership court lacked
jurisdiction to proceed since Article 21.28 Section 13 of The
Texas Insurance Code had not been complied with, that the
policyholders received no notice of the appointment of the perma-
nent ancillary receiver in violation of their right to due process
17
and that the reinsurance of Empire would deprive policyholders
of their right to the equal protection of the laws guaranteed
by the U.S. Constitution. Petitioner Moody also filed a motion
to vacate the appointment of the ancillary receiver and also
attacked the jurisdiction of the trial court since Article 21.28
Section 13 had not been complied with; ie, the statute required
the State Board of Insurance to institute the proceeding and not
the Attorney General at the instance and request of the Com-
missioner of Insurance.
In mid-February of 1975, the Texas Ancillary Receivership
Court conducted a nonjury trial on the Ancillary Receiver’s
Request for authority to consummate the Reinsurance Agree-
ment, but failed to provide the policyholders, stockholders and
creditors of Empire situated within the State of Texas, with
notice of the hearing. During said trial, Petitioners Moody and
Bleker attacked the finding of Empire’s insolvency predicated
on the Alabama receivership court’s decree, the jurisdiction of
the court to proceed because of non-compliance with Article
21.28,Section 13 and the unlawful and discriminatory impact of
the reinsurance agreement upon Empire’s policyholders, stock-
holders and creditors. On February 26, 1975, the Ancillary
Receivership Court granted the Ancillary Receiver the authority
to consummate the reinsurance agreement.
Petitioners Moody and Bleker appealed the Ancillary Receiv-
ership Court’s Order of February 26, 1975, to the Court of
Civil Appeals for the Third Supreme Judicial District of the
State of Texas, which cause was transferred to the Court of
Civil Appeals for the Tenth Supreme Judicial District of Texas
and affirmed by that Court on May 13, 1976. The Texas
18
Supreme Court refused Petitioners’ timely Application for Writ
of Error with a notation of no-reversible error on June 22, 1977.
Petitioners’ timely Application for Rehearing filed in the Texas
Supreme Court was overruled on July 20, 1977.
_ In both the Court of Civil Appeals and in the Texas Supreme
Court, the Petitioners assigned as error the Ancillary Receiver-
ship Court’s approval of the Reinsurance Agreement on the
grounds that it unlawfully discriminated among Empire’s policy-
holders, stockholders and creditors. The Petitioners also as-
signed as error the finding of insolvency predicated on the Ala-
bama court’s decree, and assigned as a denial of the due process
of law guaranteed by the Fourteenth Amendment, the Ancillary
Receivership Court’s failure to provide the policyholders, stock-
holders and creditors of Empire situated within the State of
Texas with notice of its hearing upon the Ancillary Receiver’s ap-
plication for authority to consummate the Reinsurance Agree-
ment.
Finally, the Petitioners also assigned as serror and attacked
the jurisdiction of the Ancillary Receivership Court to approve
the Reinsurance Agreement since the suit was initiated by the
State of Texas without the authorization or approval of the Texas
State Board of Insurance as required by Section 13 of Article
21.28 of the Texas Insurance Code.
REASONS FOR GRANTING THE WRIT
I.
THE PETITIONERS HAVE BEEN DENIED THE RIGHT
OF DUE PROCESS IN THAT THE RECEIVERSHIP COURT
DEPRIVED THEM OF A JUST, EQUITABLE, FAIR, AND
tes + eee
19
IMPARTIAL HEARING IN VIOLATION OF THE 5TH AND
14TH AMENDMENTS TO THE UNITED STATES CONSTI-
TUTION.
In addition to being denied the right of notice of hearing,
and the very important concomitant right to be heard, the peti-
tioners were deprived of a just, equitable, fair, and impartial
hearing on the merits. Such a right is elementary and has been
described in Corpus Juris Secundum as follows:
The opportunity to be heard has been required to be
adequate, fair, full, or reasonable. The hearing or
defense must be before a competent as well as before
a just, equitable and fair and impartial court or tri-
bunal, full and complete, or on the merits, and before
trial or judgment or decree. Such a hearing has been
required to be fair, fair and impartial, full and fair.
(Emphasis added. 16A C.J.S. Constitutional Law
§569(4) (1956).
Furthermore, a fair, impartial, and independent judiciary
has been uniformly held to be indispensable to justice in our
society. Canons 1, 2 and 3 of the American Bar Association
Code of Judicial Conduct are pertinent to the case at bench.
Canon | provides in pertinent part as follows:
An independent and honorable judiciary is indis-
pensable to justice in our society. A judge should par-
ticipate in establishing, maintaining and enforcing,
and should himself observe high standards of con-
duct so that the conduct of integrity and independence
of the judiciary may be preserved . . .
Furthermore, Canon 2 provides in pertinent part as follows:
A. A judge should respect and comply with the law
and should conduct himself at all times in a manner
that promotes public confidence in the integrity and
impartiality of the judiciary.
20
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.
Each of the above mentioned Canons of Judicial Conduct
and the fundamental rights of procedural due process, in-
cluding the right to receive an equitable, fair, and impartial
hearing, was violated by the Ancillary Receivership Court.
Furthermore, the Ancillary Receivership Court violated the
eonstitutional principal of separation of powers, as enunciated
in Article 2, Sec. 1 of the Texas Constitution, by allowing
the State Liquidator and Receiver of the Executive Branch of
State Government full and complete authority to control and
determine the state court proceedings and to dictate the judg-
ment and decision of the Receivership Court.
Clear evidence of these violations of due process and canons
of judicial conduct is found in the statement in open court
by Judge Herman Jones, Texas Ancillary Receivership Judge,
on April 5, 1973, wherein he stated as follows:
“But a Court who appoints a receiver gets a lot of
confidence out of the fact that his receiver has asserted
a claim, and | want to keep it that way. It seems to
me what I am saying ought to be pretty clear to any-
body. I have the highest respect for the present attor-
ney general, every attorney general that has been here
since | have been here, but it is not the Attorney Gen-
eral of Texas to whom this Court looks for the
preservation of its receivership estate. It is to its
receiver that it looks. And it ought to be able to say,
if the claim is worth anything, my receiver will assert
21
it, and that is the relationship I want, and | have
labored this far beyond what [ intended to when |
mentioned it. But I think the relationship between
the Court and its receiver — this Court is totally —
and everybody from the receivership’s offices knows
it — this court is totally helpless to know the details
or even, I guess, the general outline of most of the
matters that are presented to me by the receiver, and
I will say very frankly I put my name on things —
they know this better than I: / put my name on
things that I am not fully conversant with, and I do
it because the receivership of this court has recom-
mended it, and I am going to continue to do that,
because I have confidence in the receiver and his staff.
. . . that is my view of the function of the receiver
and the relationship that should exist between the
receiver and the court which appoints him. Of course,
the court appoints him because he is the liquidator
and is under the statute required to appoint him.
(Emphasis added). (T. p. 479, 480, 481)
Such a statement is conclusive evidence of the judge’s direct
violation of petitioner's fundamental right of due process as
described above. Rather than receiving an impartial hearing
on the merits in an adversary proceeding, petitioner was help-
less to exercise his fundamental constitutional rights of due
process. The trial court ratified, authorized, and confirmed any
and all pertinent demands and requests of the Receiver. He
did so under the misconception that he served as a statutory
“rubber-stamp” of the state agency, in clear and direct viola-
tion of the constitutional protectives of due process and separa-
tion of powers.
It is the substance and not the mere form of judicial pro-
ceedings which must be weighed in the exercise of procedural
due process. If a litigant is provided a courtroom, and judge,
22
but is denied the opportunity of an “impartial” hearing on
the “merits” he has been denied procedural due process. A
Judge's courtroom statement that he signs documents for the
adversary party, without knowledge or understanding of con-
tents or effects of the documents solely because of the adver-
sary’s recommendation, is a clear abuse of judicial discretion.
A more blatant denial of a “fair and impartial hearing on
the merits” is difficult to imagine.
This judicial conduct permeated the entire judicial proceed-
ing, including the Receiver’s Motion for Summary Judgmert
on the issue of Empire Life Insurance Company’s “insolvency”,
which ultimately resulted in the Receivership Court’s approval
of the subject “reinsurance agreement’. Stated more simply,
the court first “rubber-stamped” the Receiver’s Motion for
Summary Judgment and thereby deprived petitioners of the
right of a fair and impartial trial of the important factual
issues. After summarily deciding in 1975 that Empire Life
Insurance Company was insolvent “. . . because the receivership
of this court has recommended it,” (T. p. 480), the couit
proceeded in early 1976 to approve a “reinsurance agreement”
between another receiver (Alabama) and Protective Life Insur-
ance Company. Although the subject agreement disposed of
the substantial assets of the petitioners, and further, destroyed,
impaired, or otherwise effected petitioners’ vested contractual
rights, the court failed to give notice of the hearing in which
he approved the agreement, apparently “because, the receiver
recommended it” and “. . . because I have confidence in the
receiver and his staff.” (T. ibid). Such judicial conduct is the
very reason for the procedural safeguards of due process.
- ee aw ee
*
23
Il.
THE TRIAL COURT WAS WITHOUT JURISDICTION TO
HEAR AND DECIDE THE CASE IN THAT IT GAVE FULL
FAITH AND CREDIT TO AN ALABAMA JUDGMENT
WHICH WAS BASED UPON AN UNCONSTITUTIONAL
ALABAMA STATUTE.
The issue of jurisdiction was raised early by the petitioners’
im their motions to vacate the appointment of a permanent
ancillary receiver and in Petitioner Moody’s Opposition to
Motion for Summary Judgment. Furthermore, petitioners’ ob-
jection to the trial court’s exercise of full faith and credit was
raised in the trial court (S.F. 70-71) and on appeal and is
more particularly described in petitioners’ Appellate Brief in
The Court of Civil Appeals and their Application for Writ
of Error to the Supreme Court of Texas.
The improper and unlawful application of the doctrine of
full faith and credit and comity by and between the states
of Alabama and Texas merely compounded the substantial
deprivation of constitutional rights suffered by the petitioners.
For example, when called upon to decide the important issue
of “insolvency” which was improperly and summarily deter-
mined by the trial court based upon full faith and credit given
to an Alabama state court judgment, the Texas Supreme Court
cited the Alabama Supreme Court decision which cited the
Texas Civil Court of Appeal decision and all gave full faith
and credit to each and the other.
In addition, the Texas trial and appellate courts were im-
proper in denying petitioners the right to challenge the jurisdic-
tion of the Alabama state court and to challenge the decision
24
of the Alabama state court on constitutional and extrinsic fraud
grounds. Instead, the Texas courts improperly gave full faith
and credit to an interlocutory Alabama state court decree,
which was itself based upon an unconstitutional statute. (See
Point II, infra). All of this occurred, despite the fact that
substantially all of the assets of Empire Life Insurance Com-
pany and a majority of its shareholders and policyholders were
all located in the state of Texas. Despite important contrary
constitutional and legal principals, the effect of the Alabama
state court interlocutory decree was to deprive each of the
Texas shareholders, creditors, and policyholders of Empire Life
Insurance Company of vested contractual rights and substantial
assets located within the state of Texas.
A. THE SUBJECT ALABAMA STATE COURT INTER.
LOCUTORY DECREE TO WHICH THE TRIAL COURT
IMPROPERLY GAVE FULL FAITH AND CREDIT, WAS
BASED UPON AN UNCONSTITUTIONAL ALABAMA
STATUTE WHICH GAVE UNLIMITED AND ARBITRARY
DISCRETION TO THE ALABAMA INSURANCE COMMIS.
SIONER TO VALUE THE SUBJECT EMPIRE LIFE INSUR-
ANCE COMPANY ASSET AT ANY VALUE TO BE DETER.
MINED BY HIM.
The entire question of Empire Life Insurance Company’s
“insolvency” arose by Alabama Insurance Commissioner, John
Bookout’s determination that the life estate trust interest of
Empire Life Insurance Company in the Libbie Shearn Moody
Trust was to be arbitrarily devalued from $14,000,000 to
approximately $4,250,000. Commissioner Bookout’s authority
25
to make such an arbitrary determination was based upon Sec-
tion 745 (13) which statute provides as follows:
Sec. 745: “ASSETS” DEFINED. In-agy determina-
tion of the financial condition of an insurer, there
shall be allowed as assets only such assets as are
owned by the insurer and which consist of :
(13) Other assets, not inconsistent with the provi-
sions of this section, deemed by the Commissioner to
be available for the payment of losses and claims,
at values to be determined by him. (Emphasis added)
The value of $14,000,000 has been previously approved in
1965 by Alabama Commissioner Roussel and in 1968 by Ala-
bama Commissioner Ussery, and by other insurance commis-
sioners in the state of Texas and in the state of Arkansas. Yet,
despite all of the prior approvals and despite Empire Life
Insurance Company’s reliance thereon, and business activity
for more than seven years in reliance upon said prior valua-
tions, Commissioner Bookout arbitrarily made this uncon-
scionable devaluation and used as his sole authority therefor
the abovementioned insurance code sectiou, which is totally
devoid of standards, guidelines, or other limitations. The arbi-
trary devaluation of more than $10,000,000 resulted in a
unique insolvency under the very narrow and limited statutory
insurance accounting principles. Despite the improper devalua-
tion by Commissioner Bookout, Empire Life Insurance Com-
pany remained solvent and in good financial condition under
the more commonly accepted, “generally acceptable accounting
principles” and other forms of accounting.
It should be noted that Sec. 745(13) became effective Jan-
uary 1, 1972. There was no such code provision prior to said
date which gave any of Commissioner Bookout’s predecessor
26
commissioners such unlimited and totally arbitrary discretion,
without standards of any kind.
It is the general principal of statutory law that a statute must
be definite and certain to be valid. Furthermore, it has uni-
formly been held that a law violates due process if it is so
vague and standardless that it leaves the public uncertain as to
the conduct thereby prohibited, or leaves judges and juries
free to decide without any legally fixed standards, what is pro-
hibited and what is not in each particular case. (Giaccio v.
State of Pennsylvania, 387 U.S. 399, 86 S.Ct. 518). If Empire
Life Insurance Company was wrong in valuing the trust interest
at $14,000,000, or in the alternative, was wrong by accepting
the various state insurance commissioner’s approval of the
$14,000,000 valuation, then certainly they are entitled to clear
and express standards in the Alabama Insurance Code upon
which to base their conduct. Absent such standards, it is rea-
sonable that they would accept and rely upon prior approval!
by the states of Alabama, Texas and Arkansas.
It is an elementary principal of law that an unconstitutional
statute is void and unenforceable and has no legal effect. The
same uniform principal of law is followed in the state of Texas
and is more particularly described as follows:
It is the general rule that an unconstitutional statute,
though having the form and name of law, is in reality
no law and in legal contemplation is an inoperative
as if it had never undergone the formalities of enact-
ment. Such a statute leaves the question that it purports
to settle just as it was prior to its ineffectual enact-
ment. /t is invalid and it imposes no duties, confers
no rights, creates no office, bestows no power, affords
no protection, and justifies no acts performed under
it. (Emphasis added) (12 Tex. Jur. 2d 391) Miller v
27
Davis, 136 Tex. 299, 150 S.W.2d 973, 136 A.L.R.
177, Colden v Alexander, 141. Tex. 134, 171 S.W.
2d 928.
B. THE APPLICATION AND ENFORCEMENT OF SECTION
745 (13) BY THE ALABAMA STATE COURT DEPRIVED
PETITIONERS OF SUBSTANTIAL CONTRACTUAL AND
PROPERTY RIGHTS IN VIOLATION OF DUE PROCESS,
AND, THE IMPROPER GRANTING OF FULL FAITH AND
CREDIT BY THE TRIAL COURT FURTHER COMPOUNDED
PETITIONER’S DENIAL OF DUE PROCESS.
It is an undisputed fact in the case at bench that prior to
Alabama Insurance Commissioner Bookout’s improper devalua-
tion of the trust interest of Empire Life Insurance Company,
said insurance company relied upon prior approvals of the
$14,000,000 trust valuation by prior Alabama insurance com-
missioners and commissioners of the states of Arkansas and
Texas. Furthermore, it is undisputed that from 1965 to 1972,
petitioners and other shareholders and policyholders of Empire
Life Insurance Company obtained vested and substantial
contractual rights and property rights on the basis of the
$14,000,000 approved valuation.
The subsequent enactment, in 1972 of Section 745(13) of
the Alabama Insurance Code, and the subsequent devaluation
by Commissioner Bookout, effectively destroyed, impaired and
otherwise deprived said petitioners, shareholders, creditors and
policyholders of Empire Insurance Company of their substantial
vested property and contractual rights.
It is an elementary principal of federal and state constitu-
tional law that once one has become possessed of a property
right created by law, the legislature may not deprive him of
28
that property right by changing the law, Middletown v. Texas
Power & Light Co., 108 Tex. 96, 185 S.W. 556 (1916); Inter-
national & G.\.R. Co. v. Edmondson (Com.) 222 S.W. 181
(1920): 4rnold r. Sherman 244 S.W. 2d 880 (Tex. Civ. App.
— Dallas 1951, writ ref‘d n.r.e.)
It has also been uniformly held that vested rights may not
be destroyed or impaired, and an enactment that would effect
a destruction or impairment of a vested right is invalid. State
v. Mitchell, 110 Tex. 498, 221 S.W. 925 (1920); Miller r.
Letzerich, 121 Tex. 248, 49 S.W. 2d 404. 85 A.L.R. 451
(1932).
Therefore, if Section 745 (13) is relied upon by Alabama
Commissioner Bookout as authority for him to arbitrarily
devaluate substantial assets of Empire Life Insurance Company
and thereby impair, destroy, or otherwise deprive individuals
of vested contractual and property rights, said authority is
invalid and constitutes a violation of Article 1 Section 10 of
the U.S. Constitution.
Although petitioners attempted to raise all of the above
objections in the trial court. they were precluded from doing
so by virtue of the trial court’s granting of full faith and credit
to the Alabama state court decree. The granting by the trial
court of full faith and credit did not cure the fatal defects and
unconstitutional deprivations suffered by the petitioners as
mentioned above.
THE FAILURE OF THE ANCILLARY RECEIVERSHIP
COURT TO PROVIDE THE POLICYHOLDERS, STOCK.
HOLDERS AND CREDITORS OF EMPIRE WITHIN ITS
29
JURISDICTION WITH NOTICE OF THE ANCILLARY
RECEIVER’S PETITION FOR AUTHORITY TO CONSUM-
MATE THE TREATY OF ASSUMPTION AND BULK
REINSURANCE, OF THE HEARING THEREON, AND AN
OPPORTUNITY TO BE HEARD AT SAID HEARING
DEPRIVED THEM OF THEIR PROPERTY WITHOUT DUE
PROCESS OF LAW CONTRARY TO THE FOURTEENTH
AMENDMENT.
No notice whatsoever was provided to Empire’s policyhold-
ers, stockholders and creditors situated within the State of
Texas of the Ancillary Receiver’s Petition For Authority To
Consummate the Treaty of Assumption and Bulk Reinsurance,
or the hearing thereon, nor were they provided with an oppor-
tunity to appear and object to the same.
[ Petitioners’ Counsel] But you never gave any notice
concerning this receivership in Texas, did you?
[Ancillary Receiver] No [S.F. 130 Feb. 1975 Trial]
Petitioner Moody specifically asserted in his Opposition to the
Receiver’s application that the failure to notify Empire’s pol-
icyholders, stockholders and creditors of said application denied
them the due process of law guaranteed by the Fourteenth
Amendment. (A-18, A-19). Petitioner Bleker, a policyholder,
indicated in his Plea of Intervention that he had no notice of the
appointment of an ancillary receiver and requested that the
court give policyholders an opportunity to appear at the hear-
ing on the Treaty. But the court refused to do so! Given the
fact that a majority of Empire’s policyholders and assets are
within Texas, such blatent denial of the basic elements of due
process, 1.9tice and an opportunity to appear, is simply incredu-
lous and taints the entire ancillary proceeding.
30
All the Reinsurance Agreement provides is that the policy-
holders, after the Reinsurance Agreement has been approved
and implemented. are notified that they can accept the acree-
ment or elect to be a general creditor in a fund that is likely to
be quite insufheient to give them what they previously bar-
gained for. In either case they will be forced to take less than
their ‘ontractual rights under their policies.
It is the general rule in receiverships that no action may
be taken against any party in interest unless that party is given
notice and an opportunity to be heard on the matter. 2 Conch
on Insurance 2d, Section 22:52 (1960). Salas rs. Gonzalez,
181 S.W.2d 821 (Tex.Civ.App.-San Antonio 1944, no writ);
Marion vs. Marion 205 $.W.2d 426 ( Tex.Civ.App.-San Antonio,
1947, no writ). When faced with the interpretation of regula-
tory 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 oppor-
tunity for a hearing consistent with the protection of the public
inter@st. Stewart vs. Citizens Casualty Co. 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 Ins.
Co. of America, 204 NE2d 550, 1 Ohio App. 2d 330 (1960);
Lucas vs. Manufacturing Lumbermans Underwriters, 349 Mo.
835. 163 S.W.2d 750 (1942).
Under the Texas Insurance Code, the only provision for action
to be taken without notice is where the issuance for an injunc-
tion restraining the insurer or others from wasting or disposing
of the company’s property pending further order of the court.
Tex. Ins. Code Ann. art. 21.28, Section 4(a) (2). Under subsec-
tion 2, the court may enter such other injunctions or orders as
31
may be necessary to prevent interference with the proceed-
ings, the obtaining of preferences, etc. Nothing is said about
other orders without notice. Thus, notice should be given for
action under these provisions. Notice is further required to be
given to all “claimants”. Tex. Ins. Code Ann. art. 21.28(3).
In the present action, no notice was given to Empire’s policy-
holders, stockholders or creditors situated within the State of
Texas of the February, 1975 hearing on the Ancillary Receiver’s
application for authority to consummate the Treaty of Assump-
tion and Bulk Reinsurance.
Although there is no express statutory provision one way or
the other concerning notice to policyholders before reinsurance
and liquidation, certainly from the above general statutory
scheme, it is evident that such notice should have been given,
not only as a matter of Texas law, but also as a matter of
Federal constitution law. Indeed, in passing upon The Reinsur-
ance Agreement, the Alabama Supreme Court expressly noted
that “Approximately one-half of the Empire policyholders
reside in Texas, and most of Empire’s physical assets are located
in that state.” Moody v. State of Alabama, 344 So.2d 160
(1977). Evidently the Alabama Supreme Court felt compelled
to refer to the opinion of the Texas Court of Civil Appeals below
since a majority of Empire’s assets and policyholders are in
Texas. In light of this fact, the issue of procedural due process
in the present proceeding becomes extremely significant. Query?
Should policyholders, creditors and stockholders in Texas have
the assets of their company removed from the state without an
opportunity to appear at a hearing and object to the same? At a
minimum, this is exactly what the notion of due process requires.
This court, in a series of cases has made clear that the state
32
cannot participate in the interference with or the taking of
individual property interests without prior notice and opportu-
nity for hearing. Goss vs Lopez, 419 U.S. 565, 95 S.Ct. 729,
(1975): Pisconsin vs. Constantineau, 400 U.S. 433, 91 S.Ct.
507 (1971): Boddie vs. Connecticut, 401 U.S. 371, 91 S.Ct.
780 (1971); Board of Regents vs. Roth, 408 U.S. 564, 92 S.Ct.
2701. (1972)-: Fuentes vs. Shevin, 407 U.S. 67, 92 S.Ct. 1983,
(1972): Sniadach vr. Family Finance Corp.. 395 U.S. 337, 89
S.Ct. 1820, (1969).
In Mullane vs. Central Hanover Trust Co., 339 U.S. 306,
70 S. Ct. 652 (1950), this Court indicated that the “words of
the due process clause . . . . require that deprivation of life,
liberty or property by adjudication be preceded by notice and
opportunity for hearing appropriate to the nature of the case.”
Mullane, supra, 339 U.S. at 313. “The fundamental requisite
of due process of law is the opportunity to be heard,” Grannis
vs. Orlean, 234 U.S. 385, 394, 34 S.Ct. 779, 783 (1914). A
right “has little reality or worth unless one is informed 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.
In Fuentes vs. Shevin, supra., 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 vs. 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
giving the recipient prior notice and an opportunity for a hear-
ing prior to the cutoff period.
33
The present case is no different from these previous Supreme
Court cases. Policyholders, stockholders and creditors in the
present action were not given notice of the Ancillary Receiver’s
application to consummate the Treaty of Assumption and Bulk
Reinsurance of the hearing thereon or with an opportunity to
appear. Clearly, the due process clause of the Fourteenth
Amendment required notice to Empire’s policyholders, stock-
holders, and creditors within the state of Texas and an oppor-
tunity to appear at the hearing and raise objections to the
proposed Treaty of Assumption ad Bulk Reinsurance.
Further, since Empire’s policyholders were not provided with
notice of the Ancillary Receiver’s Application for Authority to
Consummate the Reinsurance Agreement and accordingly were
not provided with a reasonable opportunity to object to the
Treaty, the objections of Petitioners Moody and Bleker, a policy-
holder, with regard to the lack of notice on behalf of the
policyholders should have been entertained by the Court of Civil
Appeals below. “The principal [pertaining to standing] is not
disrespected where constitutional rights of persons who were
not immediately before the court could not be effectively vin-
dicated except through an appropriate representative before
the court.” N.A.A.C.P. vs. State of Alabama, 78 S.Ct. 1163,
1170, 357 U.S. 449, 458 (1958) ; Swan vs Adams, 87 S.Ct. 569,
385 U.S. 440 (1967); Barrows vs. Jackson, 73 S.Ct. 1031, 346
U.S. 249 (1953); Pierce vs. Society of Sisters, 45 S.Ct. 571,
268 U.S. 510 (1925).
IV.
THE TREATY OF ASSUMPTION AND BULK REINSUR-
ANCE DENIED THE POLICYHOLDERS, STOCKHOLDERS
34
AND CREDITORS OF EMPIRE 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 WHO WERE DIFFERENTLY SITUATED
IN A MANNER CONSISTENT WITH THEIR RESPECTIVE
RIGHTS.
Shortly after Empire was placed in receivership in the State
of Alabama in 1972, the Alabama Trial Court directed the
Domiciliary Receiver, John G. Bookout, to take whatever action
was necessary to rehabilitate Empire and to solicit proposals
for its rehabilitation. Tom McFarling, the then temporary Ancil-
lary Receiver for Empire in Texas, petitioned the Ancillary
Receivership Court for authority to approve a plan of rehabilita-
tion with regard to Empire. On February 9, 1973, the Texas
Ancillary Receivership Court approved a plan of rehabilitation
with regard to Empire that had similarly been approved and
adopted by the Alabama Domiciliary Receivership Court.
During the period that Empire was to be rehabilitated,
Mr. Clay Cotten, former Texas Commissioner of Insurance,
wrote the Domiciliary Receiver, Bookout, and instructed him
that any rehabilitation of Empire would be unacceptable. Out-
rageously enough, the Texas and Arkansas Ancillary Receivers
also communicated their adamant opposition to rehabilitation
of Empire, not only to the Domiciliary Receiver, but also in
ex parte fashion to the Domiciliary Receivership Court.
Indeed, in the early part of 1974, an Assistant Attorney
General in the office of the Attorney General of the State of
35
Texas expressed “alarm” at having heard that Judge Barber,
the Domiciliary Receivership Court had announced his inclina-
tion to appoint “an administrator” for Empire Life for the sole
purpose of rehabilitating the company. The Assistant Attorney
General outlined in an inter-ofice communication (See Adden-
dum to Petition) that “if he [the Domiciliary Receivership
Court] does not back down from his ridiculous notion of ap-
pointing an “administrator”, we can deal with the problem
before his Order becomes final.”
It is obvious from the foregoing that the State of Texas had
no intention of making a good faith effort to rehabilitate Empire
in accordance with the plan of rehabilitation approved by the
Ancillary Receivership Court in February of 1973, but instead
chose to persist in demanding the liquidation of Empire. As a
result, the liquidation of Empire ensued and a Treaty of As-
sumption and Bulk Reinsurance was approved which treated
differently those Empire policyholders and creditors who were
similarly situated and failed to treat those who were differently
situated in a manner consistent with their rights.
The response of the Texas Court of Civil Appeals to the
Petitioners’ attack upon the unlawful preferences and discrim-
inatory treatment effected by the Reinsurance Agreement was
that the differences in treatment were not unlawful discrimination
because of the different contractual relationships which various
groups of policyholders and creditors have had with Empire.
However, the record below was barren of any such differences.
It is clear therefore that the axiom asserted by the Court of
Civil Appeals assumed the very issue in dispute: whether the
differences between the various groups of Empire’s policy-
holders and creditors are “real and substaniial differences”
36
justifying the preferential and discriminatory treatment ac-
corded those groups under the Reinsurance Agreement.
The Petitioners respectfully submit that the Reinsurance
Agreement as amended does not reflect the proper application of
the principle cited by the Court of Civil Appeals, since it not only
fails to treat those who are differently situated in a manner
consistent with their rights, but it also unlawfully discriminates
among the policyholders and creditors of Empire who are
similarly situated. Thus, the Reinsurance Agreement denies
Empire’s policyholders, stockholde-s and creditors the equal
protection of the laws guaranteed by the Fourteenth Amendment.
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. See, Clark v. Williard, 292 U.S. 112 (1935).
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 775-780 (1960). Policy-
holders are general creditors of an insurance company in re-
ceivership, 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 Ill. 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
37
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, 197
Supp. 80 (1952), aff'd. 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 case
a reinsurer had agreed to pay a certain sum for its liability
under a reinsurance agreement with an insurance company in
receivership. 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 one creditor a
preference over others of like class . . . Equality is
equity.
See also Art. 1040, 1975 Alabama legislature session prohibiting
preferential treatment.
Texas has not adopted the UILA. Nevertheless, the Texas
courts have made it clear that in Texas all creditors of an in-
solvent insurance company must share equally in the distribution
of the assets of that company, and that no creditor or policy-
holder is entitled to preferential treatment in receivership pro-
ceedings. McFarling v. Mayfield, 510 S.W.2d 108 (Tex. Civ.
38
App-Beaumont 1974, writ ref'd. n.r.e.). In that case the Court of
Appeals held that judgment creditors against an insolvent insur-
ance company were not entitled to direct payments from the
proceeds of a reinsurance agreement since to do so would be to
prefer those creditors over others. As that court held at 109:
Generally, all creditors of an insolvent insurance
company are entitled to share equally, 44 CJS 733,
Insurance $134 (1945); 75 CJS 919, Receiver §283
(1952). Art. 21.28-B, V.A.T.S. The “Loss Claimants
Priorities Act”, (60th Leg. 1967) gives appellees a
preferred claim, but no statutory authority is given for
the preference granted by the trial courts judgment.
Reversed and rendered.
Not only is preferential treatment of certain claimants un-
lawful under Texas and Alabama law, but to the extent that one
claimant is preferred, others are discriminated against. Such
discrimination between policyholders of the same class is unlaw-
ful TEX. INS. CODE ANN. art. 21.21 §4(7), Art. 21.21-A;
ALA. INS. CODE TITLE 28A §237. Where this discriminatory
treatment is being accomplished by state action and has no
rational or reasonable basis, it is also in violation of the Equal
Protection Clause of the United States Constitution. See, e.g.,
Weber v. Aetna Gas & Ins. Co., 406 U.S. 615, 92 Ct. 1400
(1972).
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., 301 U.S. 459 (1957) 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):
39
‘It may be said generally that the equal protection
clause means that the rights of all persons must rest
upon the same rule under similar circumstances, [ cita-
tions omitted] and that it applies to the exercise of all
the powers of the state which can affect the individual
or his property, 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
the object of the legislation, so that all jersons simi-
larly circumstanced shall be treated alike.’ [citations
omitted] That is to say, mere difference is not
enough; the attempted classification ‘must always rest
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
and without any such basis.’ [citations omitted]. Dis-
criminations of an unusual character especially sug-
gest careful consideration to determine whether they
are obnoxious to the constitutional provision. [citations
omitted J.
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
that the agreement effects such preferential and discriminatory
treatment, and there is absolutely nothing in the record to jus-
tify such treatment.
Indeed, the Petitioners would assert that the transfer of
Empire’s assets as reserve funds to Protective under the Rein-
40
surance Agreement is, in itself, a preferential transfer which
unlawfully discriminates among Empire’s creditors and policy-
holders contrary to both Texas and Alabama law. Although the
Texas Legislature has indicated that in proceedings instituted
against out-of-state insurance companies under Article 21.28-A
Section 6 of the Texas Insurance Code, a transfer of assets as
reserve funds to a reinsuring company by a conservator shall
not be deemed a preference of creditors, no comparable pro-
vision exists allowing such a preferential transfer by a receiver
in the present receivership proceeding instituted under Article
21.28 Section 13 of the Texas Insurance Code. Thus, the trans-
fer of Empire’s assets as reserve funds to Protective under the
Reinsurance Agreement is, in itself, a preferential transfer
unlawfully discriminating among Empire’s creditors and
policyholders.
As the largest single stockholder of Empire and as a creditor
of Empire (S.F. 164, 264, 1278), Petitioner Moody clearly has
a substantial interest in attacking a reinsurance agreement which
deprives stockholders of their entire equity without providing
them with any benefits in return (S.F. 253, 814) and which
deprives creditors of their contractual rights with Empire. The
Texas Supreme Court has indicated that in receivership pro-
ceedings the stockholders and creditors of an insolvent cor-
poration are parties in interest and as such are, in effect, parties
to the proceeding bound by all decrees rendered therein. Shaw v.
Strong, 128 Tex. 65, 96 S.W.2d 276 (1936). The Receiver is
“the representative and protector of the interest of all persons,
including creditors, shareholders and others, in the property in
receivership.” Security Trust Company of Austin v. Lipscomb
County, 142 Tex. 572, 180 S.W.2d 151 (1944). “The general
41
rule is that when a court takes control and custody of the prop-
erty of a corporation by the appointment of a receiver, all
creditors of the corporation are in effect or constructively before
the court; . . .” Security Trust Company of Austin at 157-8
and authorties cited therein.
When Moody assigned the two-fifths (2/5) of a one-eighth
(1/8) life estate interest in the Libbie Shearn Moody Trust to
Empire he received in exchange therefor a $221,000 debenture
(S.F. 1278). Moody has also filed two claims against the receiv-
ership estate totalling approximately $2,000,000, one of which
was filed on behalf of W. L. Moody & Company Bankers (Unin-
corporated) (S.F. 164). Thus, Moody is clearly a creditor and
an interested party in the receivership proceeding having the
requisite standing to attack any action by the ancillary receiver-
ship court. “The appointment of a receiver is not made for the
purpose of destroying the rights of persons, but rather that their
rights be made more secure.” Cocke v. Wright, 299 S.W. 446,
448 (Tex. Civ. App. — Dallas 1927, no writ).
As an interested party whose rights as a stockholder and
creditor of Empire are being destroyed or significantly reduced
by the Reinsurance Agreement, Moody clearly has standing to
complain of its discriminatory treatment. As a policyholder and
stockholder of Empire, Petitioner Bleker’s standing is obvious.
These discriminatory features are set forth below.
1. Unfair Discrimination Against Policyholders Rejecting
Reinsurance.
One obvious element of preferential treatment given by the
Reinsurance Agreement is to prefer policyholders who accept
the Reinsurance Agreement over those who do not. Under Sec-
42
tion XIV of the Reinsurance Agreement (Receiver’s Exhibit 6,
P. A-56), it is provided that all policyholders who do not reject
the reinsurance assumption in writing within 60 days after
notice are deemed to have accepted the Reinsurance Agreement
and 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 policyholders whose policies
are reinsured. Policvholders who thus consent to the reinsur-
ance 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 (S.F. 195). Certainly’
this is preferential treatment to policyholders who accept the
Reinsurance Agreement under any sense of the words, and is
contrary to both Texas and Alabama law.
Unfortunately, for policyholders who reject the Reinsurance
Agreement, there is even no guarantee that they will have one
bite of the apple. There has been no determination as to whether
the $2,000,000 fund left with Empire to pay general creditors,
rejecting policyholders, and the expenses of administration would
be sufficient to pay such claimants roughly the same thing being
given to accepting policyholders, i.e., approximately 657 of
what they are entitled to (See S.F. 699, 797). Indeed, the blatant
inadequacy of the $2,000,000 fund is underscored by Empire's
43
1973 Annual Statement which reflects liabilities of approximately
$37,000,000 of which $31,000,000 were reserves ( Defendants’
Exhibit 23 below). This means that the general creditors whose
claims represent $6,000,000 of Empire’s liabilities will have
to rely upon the balance of the $2,000,000 fund to satisfy their
claims after the expenses of administration are first paid from
the $2,000,000 fund. In the hearing on the Ancillary Receiver’s
application for authority to consummate the reinsurance agree-
ment, Herbert Crook, the Ancillary Receiver, admitted that at
the time of the hearing no computation had been made of the
total amount of claims against the receivership estate (S.F. 162).
When confronted with the question of whether he had computed
the amount of such claims at the time he had determined that
the Reinsurance Agreement was in the best interest of Empire’s
policyholders and creditors, the Ancillary Receiver candidly
admitted: “Not the total amount, no” (S.F. 164).
Indeed, the Petitioners would submit that a prior determina-
tion as to the adequacy of the $2,000,000 fund was mandated
as a matter of both Texas and Alabama law in order to prevent
unlawful discrimination against the rejecting policyholders and
creditors who must rely on the fund to satisfy their claims. In
Melco Systems v. Receivers of Transamerica Inc. Co., supra,
Employers, the reinsurer of Trans-America had agreed to com-
promise the claims against Transamerica by paying $130,000
to the receiver provided that this amount settled all claims
against Employers by Transamerica, its receiver or any other
persons, arising out of the reinsurance contract.
After a hearing and testimony, the trial court held that it
was in the best interest of the receivership to accept the com-
+4
promise offer of $130,000. The Alabama Supreme Court affirmed
the holding of the trial court with the following statement:
We must assume that the trial court, in approving
the compromise, took into consideration the probable
validity of Employers’ claims, the difficulty of enforce-
ment by the receivers, the collectibility of any judg-
ment recovered, the delay, expense and trouble of
litigation, and the amount of the compromise offer
as compared with the amount and collectibility of
various judgments in favor of the receivers against
Employers.
In the present proceeding, however, there has been absolutely
no determination by the Domiciliary receivership court or the
Ancillary receivership court below as to the adequacy of the
$2,000,000 fund to satisfy the claims of Empire’s rejecting
policyholders and creditors and to pay the expenses of adminis-
tration. Certainly this accords preferential treatment to accept-
ing policyholders and unlawfully discriminates against rejecting
policyholders who simply have no guarantee that they will
receive the amount to which they are entitled.
In the proceedings before the Ancillary receivership court
below. Herbert Crook testified that Protective’s right to file a
claim on behalf of consenting policyholders against the
$2,000,000 fund was conditioned upon the event that the reject-
ing policyholders and other claimants received a dividend or
more than the value of reinsurance initially allocated to accept-
ing policyholders (S.F. 192). Yet, Mr. Crook candidly admitted
that the Reinsurance Agreement contains no provision expressly
conditioning such right on the part of Protective to file a claim
on behalf of consenting policyholders to such a situation (S.F.
193). Accordingly, such right is also an instrument of potential
discrimination.
45
In response to the Petitioners’ argument regarding the unlaw-
ful discrimination against rejecting policyholders, the Court
of Civil Appeals has asserted that: “Different treatment as a
result of a voluntary election can hardly be classified as arbi-
trary or unfair discrimination.” [p. A-4]. Yet, it is difficult to
understand how an election to reject reinsurance can be charac-
terized as “voluntary” when a policyholder has no information
other than an Assumption Certificate and a letter from Protective
to determine whether he will receive fair and equal treatment.
If neither of the receivership courts nor the receivers knew
whether the $2,000,000 fund would be sufficient to handle all
of the claims against Empire, how could a policyholder be
assumed to know? Thus, the Court of Civil Appeals clearly
erred as a matter of law in holding that the $2,000,000 fund
left with the Receiver would be sufficient to satisfy equitably
the claims of Empire’s general creditors and rejecting policy-
holders. Given the absence of a rational basis for the discrimina-
tion described above, the policyholders and creditors of Empire
have been denied the equal protection of the laws guaranteed by
the Fourteenth Amendment.
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 liability for certain commissions, unpaid pre-
mium taxes, and any deficiency obligation respecting mortgages
(Receiver’s Exhibit 6 p. A-37). Unfortunately, there has been
46
no computation of the amounts of liabilities not assumed and
therefore, the trial court had no way of knowing that the
creditors whose debts were not assumed will receive more
or less than those whose debts were assumed. This is clearly
an unlawful and discriminatory preference against the creditors
whose claims are not assumed and who must confront the reality
that no determination has been made as to the adequacy of
the $2,000,000 fund to satisfy the claims of Empire’s creditors
(S.F. 699).
For example, Section VI G, paragraph 8, indicates that the
non-assumed debts include any deficiency with respect to mort-
gaged real estate. The annual statement of Empire for the year
ending on December 31, 1973 (Defendants’ Exhibit 23 below)
reflects that Empire had mortgage loans on its home office build-
ing in Dallas and other properties. But there was no determina-
tion 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, [p. A-38] the obliga-
tion 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 foregoing highlights
not only the blatant inadequacy of the $2,000,000 reserve fund
to satisfy the claims of Empire’s creditors, but it also under-
scores the unfair discrimination being accorded to creditors of
Empire whose debts are not assumed by Protective. Indeed,
under the axiom asserted by the Court of Civil Appeals, unless
a significant difference can be shown to exist between the
creditors whose claims are assumed and those whose claims are
47
not assumed, the difference in treatment accorded to those
creditors whose claims are not assumed is a violation of the
Equal Protection Clause of the Fourteenth Amendment. The
truth is there is no reason for the difference in treatment of
Empire’s creditors, and the ancillary receiver failed to prove
any justification for the preferential treatment.
3. Discrimination Regarding Pending Claims.
Under Section VI G of the Agreement, Protective assumes
only the claims against 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 which the
Court of Civil Appeals failed to discuss with respect to valid
claims which have been rejected by Empire and preferential
treatment with respect to the others. Again, no reason exists for
such differential treatment.
4. Unfair Discrimination Against Empire’s Agents.
Further, the Agreement provides in Section VI that Protective
assumes Empire’s liability for agent’: commissions on premiums
paid to June 29, 1972. But Protective assumes no liability for
the payment of commissions to agents for premiums collected
after June 29, 1972. Certainly this provision unlawfully dis-
criminates against Empire’s agents as creditors and prefers
other creditors and certain agents’ claims (S.F. 699, 811).
Moreover, the significance of the date June 29, 1972 was never
explained.
5. Unfair Discrimination in the Application of Different
Moratorium Amounts to Different Policyholders.
48
Concerning preferential treatment of certain policyholders,
the Reinsurance Agreement gives certain policyholders more
than others, and gives certain policyholders less. For example,
the Reinsurance Agreement, Section VIII, (A-47) provides that
the moratorium is 35% of the withdrawable funds of certain
specified policies; 35% of the total value of certain separate
accounts of other policies; and 35% of the net reserves of
certain policies. This obviously results in different treatment
for different classes of policyholders. However, there was no
showing in the trial court that the different contractual relation-
ships justified such treatment.
Indeed there is no definite evidence on how the 35% mora-
torium was arrived at. Mr. Pennington, Vice-President and
actuary of Protective, did make several projections on the Em-
pire business. (See Defendants Ex. No. 11). According to his
projections, the business of Empire would be sufficient to elimi-
nate the moratorium in a ten year period, if not sooner. He
testified that Protective expects to make a profit on the Empire
policies of one-half of a million dollars per year for 10 to 15
years after the moratorium is eliminated. (S.F. 1415).
According to Empire’s 1973 Annual Statement, ( Defendants’
Ex. No. 23), it had $31,000,000.00 of statutory assets and
approximately $36,000,000.00 of liabilities. Had the mora-
torium been calculated according to even the deficiency in
Empire’s Annual Statement, the deficiency would be about 39
to 36, and the moratorium would be about 20%. (S.F. 643).
Thus even according to Empire’s statutory financial position,
there should be no justification for a moratorium of greater
than 20%, rather than the 35% imposed by the Reinsurance
Agreement.
49
Indeed, such a computation, and even the computation
made by Protective gives no consideration at all for the value
of business in force of Empire. According to the Stennis
Report, the value of that business is approximately $6,000,-
000.00 ( Defendants’ Ex. No. 10). Thus Protective is entering
into an agreement to assume assets of Empire which by Pro-
tective’s own projections are sufficient of their own to reduce
the moratorium placed on the policy by ten years, if not sooner.
At the end of this period of time, Protective gets the full value
of the Empire business, for which it pays essentially nothing
(See S.F. 678, 794). Even a 20% moratorium would not give
sufficient consideration for the value of the Empire business.
Moreover, no moratorium would give sufficient consideration to
the actual value of the Libbie Shearn Moody Trust (S.F. 643).
According to the valuation made by Dr. Joseph Trosper, Profes-
sor of Insurance at Indiana University, that interest has a value
of not less than approximately $14,000,000.00 (Defendants Ex.
No. 14). If Empire’s trust interest has such a valuation, there
is no need for any moratorium; indeed there is no need for a
Reinsurance Agreement at all. (S.F. 791).
Moreover, Protective is given the benefit of certain assets
which have a value greater than the statutory carrying value.
For example, certain subsidiaries are valued and transferred
at the book value though the actual value of these subsidiaries
are probably much greater (See S.F. 813).
Adding all this up, the conclusion is that Protective is getting
such a good deal that they cannot afford to pass it up. Mr.
Pennington projected a profit to Protective of 5-71 million
dollars from the Reinsurance Agreement. (S.F. 1415). This
is obviously at the expense of Empire’s policyholders, creditors
50
and stockholders. Had the moratorium been based on an asset
to liability ratio, which should have been done, the moratorium,
according to the statutory statement, would only be 20% (S.F.
794, 795). Had proper value been given to the business of
Empire, the subsidiaries and other assets of Empire, and the
life estate interest of Empire, there would be no moratorium
needed: in fact there would be no Reinsurance Agreement despite
the fact that each item of benefit to Protective amounted to a
greater diminution of policyholders rights.
6. Unfair Discrimination Against Policyholders Who Elect
Reduced Paid-Up or Extended Term Insurance.
The Reinsurance Agreement not only discriminates among
policyholders and creditors who are similarly situated, but
also fails to treat the policyholders who are differently situated
in a manner consistent with their rights as defined by their
contractual relationship with Empire. In Section VIII B 1(d),
(A-45) it is provided that if a policy is placed on a reduced
paid up or extended term insurance, the amount of such insur-
ance is reduced by one-half (14) of the then existing mora-
torium. 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 the one-half (14) moratorium and
next with 100% of the moratorium (S.F. 652, 808). These
policyholders are clearly discriminated against and are treated
in a manner which is clearly inconsistent with their rights as
holders of policies placed on reduced paid up or extended term
insurance. There is simply no evidence in the record justifying
the double imposition of a moratorium upon these policy-
51
holders. Again, the Court of Civil Appeals failed to confront
this discriminatory provision of the Reinsurance Agreement
in its opinion holding that the Reinsurance Agreement does not
unlawfully discriminate among Empire’s policyholders.
7. Unfair Discrimination in the Form of Preferential Treat-
ment for Consenting Policyholders.
Under the First Amendment to this Reinsurance Agreement,
Paragraph 4, (p. A-71), 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 in-
crease 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 admitted asset
value and the Agreement contains no justification whatsoever for
the excess.) In fact Dr. Olshen testified that it was an error
(S.F. 500). The Receiver 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 (S.F. 203-5). Such proceeds could be sufficient to entirely
eliminate the moratorium, in which event Protective, not the
creditors and stockholders, will retain the excess under the
terms of the Reinsurance Agreement. Upon the elimination of
the moratorium by that windfall or by ordinary profits on the
business (which Mr. Pennington projected would occur in ten
years with a 35% moratorium S.F. 1415), the consenting
policyholders whose policies are reinsured will thereafter receive
52
100% of their claims, but the non-consenting policyholders and
all other creditors (who have at least $6,000,000 worth of
claims) have only a claim for their pro rata part of the two
million dollar fund, if any is left after paying expenses of
administration. This is clearly preferential treatment of accept-
ing policyholders over rejecting policyholders and Empire’s
creditors, and the ancillary receiver offered no proof to justify
this preferential treatment.
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. Most of the
policies issued by Empire or reinsured by it were “participat-
ing” 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 Rein-
surance Agreement between American Trust and Empire
(Defendants’ Exhibit 13). 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
(A-53), the dividend obligation of Empire to American Trust
was not assumed. The Reinsurance Agreement provides in Sec-
tion XII A 1 and 2 (A.54-5), that dividends on policies as-
sumed by Protective shall thereafter be declared only at the
sole discretion of Protective, except in the case of Presidents
Special Investors Plan (PSIP) policies issued by Empire Life
Insurance Company of America, Little Rock, Arkansas, and
assumed by Empire which are different policyholder obliga-
53
tions under the Reinsurance Agreement. Clearly then, the Re-
insurance Agreement unlawfully discriminates among policy-
holders who are similarly situated; i.e., policyholders who were
entitled to dividends by virtue of their contractual relationship
with Empire.
9. Discrimination as to Amounts Left on Deposit
Policyholders with matured endowments or coupons left on
deposit, persons who have simply not yet collected money due
them with Empire prior to the effective date of the Reinsurance
Agreement, are charged the full amount of the moratorium as
to these amounts, but persons whose endowments mature after
the effective date, or whose coupons are left on deposit after the
effective date are not so charged (Receiver’s Exhibit 6). This
obviously prefers certain policyholders over others (S. F. 813).
However, no testimony was offered justifying this different
treatment.
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-1 (A-43), that in determining mora-
torlum amounts, policy loan requests after June 29, 1972 (a
date about 214, years prior to approval of the Reinsurance
Agreement and about three years prior to its effective date
which is included) shall be disregarded. This prefers policy-
holders who made their loan requests prior to that date and
discriminates against those who requested loans after that date
yet there was no testimony as to any justification for such dis-
crimination, nor for the election of such date.
54
11. The Tontine Aspect of the Reinsurance Agreement Un-
lawfully 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. ] Couch on Insurance 2d §1:102, pp. 98-99 (1960).
Tontine policies have been outlawed by every state in the nation.
(See i.e. ALA. INS. DEPT. REG. #15).
In the present case Doctor Olshen, the Domiciliary Receiver’s
expert witness, testified that one of the elements of the Rein-
surance Agreement was that the agreement has a semi-tontine
effect (S.F. 308). Dr. Trosper, an expert who testified on behalf
of the Defendants, explained how this tontine aspect worked
(S.F. 802, 803, 804). The moratorium at the beginning is set
at 35% (which was later increased to 50% ). However, accord-
ing to Protective's own projections, the profit to be produced
by the business taken over by Protective is projected to be
sufficient to reduce the moratorium every year until it is elimi-
nated in ten years or sooner. The result of this reduction in
the moratorium is that if an insured cashes in his policy in the
first year, he receives only 65% of cash surrender value (This
amount was changed by the Second Amendment to 50%). If a
man cashes in his policy in the second year, the policyholder
gets less of a moratorium applied and accordingly receives
more cash than the man who cashes in the first year and so on
for ensuing years. The same applies to loans on policies. The
tontine aspect was put in to create an incentive for people to
55
continue to pay premiums on their policies (S.F. 433). How-
ever, in practice, as Dr. Trosper explained, the tontine aspect
penalizes those policyholders who take the cash value or loan
value of their policies or permit their policies to lapse in early
years and discriminates against policyholders who do the same
thing in later years (S.F. 802-804). The fact that the tontine
aspect induces a continuation of policies is no justification for
persons who have paid the same premiums for the same con-
tracts with Empire. Petitioners submit that this tontine aspect
is contrary to both Texas and Alabama law.
The Texas Insurance Code Article 21.21 Section 4 provides
in pertinent part as follows:
UNFAIR METHODS OF COMPETITION AND
UNFAIR OR DECEPTIVE ACTS OR PRACTICES
DEFINED. — THE FOLLOWING ARE DEFINED
AS UNFAIR METHODS OR COMPETITION AND
UNFAIR OR DECEPTIVE ACTS OR PRACTICES
IN THE BUSINESS OF INSURANCE: .. .
(7) UNFAIR DISCRIMINATION
(a) Making or permitting any unfair discrimination
between individuals of the same class and equal ex-
pectation 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 terms
and conditions of such contract . . .
Moreover, Article 21.21-A of the Texas Insurance Code
provides in pertinent parts as follows:
No insurance company doing business in this state
shall make or permit any distinction or discrimination
in favor of individuals between the insured of the
same class and of equal expectation of life in the
amount of the payment of premiums or rates charged
56
for policies of life or endowment insurance or divi-
dends or other benefits payable thereon: .. .
The Alabama Insurance Code has a similar provision. 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 provisions prohibit discrimination in the payment
of policy benefits. However, the tontine aspect of the Rein-
surance Agreement approved by the Trial Court below does
just this. Though policyholders are entirely of the same class
and may have the same expectation of life. under the Rein-
surance Agreement, policyholders who decide to cash in their
policies or who lapse in the early years are penalized, and
much more than policyholders who do not. Petitioners submit
that this aspect of the Reinsurance Agreement is unfair dis-
crimination, prohibited by both Alabama and Texas law, and
accordingly that the Court of Appeal’s affirmation of the trial
court’s order was erroneous. Order of Railway Conductors of
America v. Quigley, 131 Tex. 4, 111 S.W. 2d 698 (1938);
57
See also, State Life Insurance Company v. Strong, 127 Mich.
346, 86 N.W. 825 (1901); Robinson v. Wolfe, 27 Ind. App.
683, 62 N.E 74 (1901); Equitable Life Assurance Society v.
Commonwealth, 113 Ky. 126, 67 S.W. 388 (1902).
V.
THE COURT OF CIVIL APPEALS DENIED THE PETI-
TIONERS THE EQUAL PROTECTION OF THE LAWS
GUARANTEED BY THE FOURTEENTH AMENDMENT
WHEN IT HELD THAT THE ANCILLARY RECEIVERSHIP
COURT HAD JURISDICTION TO APPROVE THE REINSUR-
ANCE AGREEMENT EVEN THOUGH THE SUIT BELOW
WAS INITIATED WITHOUT THE DIRECTION, AUTHORI-
ZATION, OR APPROVAL OF THE TEXAS STATE BOARD
OF INSURANCE AS REQUIRED BY SECTION THIRTEEN
OF ARTICLE 21.28 OF THE TEXAS INSURANCE CODE.
On April 5, 1972, the Commissioner of Insurance of the
State of Texas by Order No. 36707 found without a hearing
that Empire should be placed under supervision in Texas under
Article 21.28-A of the Texas Insurance Code. However, on
June 7, 1972, by Commissioner’s Order No. 37251 the Com-
missioner of Insurance did not appoint a conservator under
Article 21.28-A, Empire having represented that its would
interpose no delay concerning the receivership proceedings
initiated against Empire in Alabama. The State Board of Insur-
ance took no official action concerning Empire at all (S.F.
266-272).
Nevertheless, on June 23, 1972, the State of Texas by the
Attorney General of Texas “at the instance and the request of
58
the Commissioner of Insurance of the State of Texas,” filed its
original petition in this case against Empire Life Insurance
Company of America asking that after a hearing a permanent
receiver be appointed to take the possession of the affairs of
Empire pursuant to Article 21.28 of the Texas Insurance Code
and pursuant to Subsection (a) of Section 12 of Article 21.49-1
of the Texas Insurance Code. The petition further alleged that
Empire, a company domiciled in Alabama had been placed in
receivership in Alabama and Plaintiff asked that “the receiver-
ship prayed hereinfore should be made ancillary to such Ala-
bama receivership in accordance with Section 13 of Article
21.28 of the Texas Insurance Code.” (Emphasis added)
Section 13 of Article 21.28 of the Texas Insurance Code
provides as follows:
Sec. 13. Ancillary Delinquency Proceedings. When-
ever under the laws of this State, a receiver is to be
appointed in delinquency proceedings for an insurer
domiciliary in another state, a court of competent juris-
diction in this State shall, on the petition of the Board
of Insurance Commissioners of this State, appoint
the liquidator herein provided as ancillary receiver
in this State of such insurer. The Board shall file such
petition (a) if it finds that there are sufficient assets
of such insurer located ip this State to justify the ap-
pointment of an ancillary receiver, or (b) if ten (10)
or more persons resident in this State, having claims
against such insurer, file a petition or petitions in writ-
ing with the Board, requesting the appointment of such
ancillary receiver. Such ancillary receiver shall have
the right to sue for and reduce to possession the
assets of such insurer in this State, and shall have the
same powers and be subject to the same duties with
respect to such assets, as are possessed by a receiver
of a domiciliary insurer under the laws of this State.
The remaining provisions of this Article shall be ap-
39
plicable to the conduct of such ancillary proceedings
[Emphasis added].
Texas no longer has a Board of Insurance Commissioner’s
as referred to in Section 13, Article 21.28. However, under
Article 1.02(b) of the Texas Insurance Code the State Board
of Insurance in the State of Texas is the successor to all the
powers, functions, authorities, prerogatives, duties, obligations
and responsibilities previously vested in the Board of Insur-
ance Commissioners. Article 1.02(b) and (c) of the Texas
Insurance Code state as follows:
(b) All of the powers, functions, authorities, pre-
rogatives, duties, obligations and responsibilities, here-
tofore vested in devolving upon the Board of
Insurance Commissioners as heretofore constituted
under prior statutes; the Chairman of said Board;
the Life Insurance Commissioner; the Fire Insurance
Commissioner; and the Casualty Insurance Commis-
sioner, shall hereafter be vested in the State Board of
Insurance as a body, and except as provided herein,
they shall be exercised, performed, carried out, and
administered by the Commissioner of Insurance as the
chief executive and administrative officer of the Board
in accordance with the pertinent laws of this state and
the rules and regulations for uniform application
made by the Board and subject to supervision of the
Board. The duties of the State Board of Insurance
shall be primarily in a supervisory capacity and the
carrying out and administering the details of the In-
surance Code shall be primarily the duty and responsi-
bility of the Commissioner of Insurance acting under
the supervision of the Board.
(c) Except as otherwise provided herein, all re-
maining references in the Insurance Code and other
statutes of this state to “Board of Insurance Commis-
sioners,” “Board,” or individual Commissioners shall
60
mean the “State Board of Insurance”’ or the “Commis-
sioner of Insurance,” consistent with their respective
duties and responsibilities under the terms and provi-
sions of this amendatory Act.
These statutes are clear. It is the State Board of Insurance
that must initiate ancillary receivership proceedings under Sec-
tion 13 of Article 21.28, not the Commissioner of Insurance.
In this case. however, it was the Commissioner of Insurance
that initiated the ancillary receivership proceedings, not the
State Board of Insurance. The Commissioner of Insurance is
wholly without statutory authority to initiate such proceedings
on his own. Yet, this is precisely what occurred.
The strange and unprecedented institution of this proceed-
ing by the Attorney General of Texas was questioned by Judge
Jones in the District Court below, but he failed and refused to
direct that the proper statutory procedures be followed by the
appropriate officials having the authority to place an insurance
company in receivership. Accordingly, Empire was not treated
the same as any other insurance company and was denied the
equal protection of the laws guaranteed by the Fourteenth
Amendment.
When discussing why the application for a mandatory tem-
porary injunction was commenced on application of the Attor-
ney General, Judge Jones entered into the following colloquy
on April 5, 1973, with Assistant Attorney General Rash:
61
ships, a petition not of this nature, as I recall—I do
not recall any for mandatory temporary injunction—
but to recover assets of the receivership estate, and
this is the first one that I recall that was brought by
the attorney general’s office. | may be mistaken. It
is the first one I recall.
MR. RASH: If Your Honor please, that is abso-
lutely correct. We have a new statute which I think
adds great basis for this very type of action. Now,
Your Honor, I will say right now it would suit me
fine if the Court told us not to try to recover assets.
As Your Honor knows, we frequently have very aggra-
vated types of misapplication of company funds. Now,
it would be perfectly all right if we don’t have any
authority, if the Court holds that we don’t have any
authority to come before the Court with an urgent
situation such as we think we have here.
THE COURT: Mr. Rash, you misunderstood me. I
said I welcome any help. But I want to make it abun-
dantly clear that I am looking to the receiver appointed
by the Court as the one to protect the receivership
estate and to recover its funds. Any assistance else-
where is welcome, but I cannot pass up this the appar-
ent coincidence that in this case this procedure is fol-
lowed, and why it is not a petition on behalf of the
receiver.
Now, this is complicated somewhat by the fact—
and I don’t deplore this at all; I think it works excel-
lently—that the receiver is in effect a State employee,
the liquidator . . . [Emphasis supplied] [Hearing
April 5, 1973, T.pp. 469, 470.]
I know from press reports that this thing is fraught
with politics. 1 don’t want it in this court, if there is
a “mad” on politically about this, I don’t want it to be
a part of this proceeding, and that is why I mention
it. | have had the receiver file in many, many receiver-
Note that even the Attorney General's office questioned
whether that office had authority to institute this action herein.
The Court, rather than holding that it did not, begged the ques-
tion and said that it was looking to the receiver to protect the
62
receivership estate. But the receiver has no authority to act in
an action brought without authority.
When the Commissioner of Insurance of Texas took it upon
himself to request the Attorney General to initiate ancillary
receivership proceedings against Empire under Section 13 of
Article 13 of Article 21.28, he was acting completely in excess
of his authority, ultra vires and such acts are void and have
no force and effect. Further, Empire was deprived of the equal
protection of the laws by. being the only insurance company
put into receivership on application of the Attorney General
rather than by the duly authorized authority.
Since the action taken by the Insurance Commissioner on his
own was completely without authority and is void, the Trial
Court was without jurisdiction to even consider a Reinsurance
Agreement for Empire, much less approve one.
Of course Petitioners do not contend that the Attorney Gen-
eral of the State of Texas could not by himself bring quo war-
ranto proceedings to forfeit a domiciled company’s charter in
Texas. See John L. Hammond Life Insurance Company v. State,
299 S.W. 2d 163 (Tex. Civ. App.—Austin 1957, writ ref‘d.
n.r.e.). But the Attorney General on his own or at the instance of
the Commissioner of Insurance has no authority under Texas
statutes to ask for an ancillary receivership or the cancellation
of a certificate of authority of a foreign insurance corporation
in Texas. Under Article 21.28 the exclusive authority to initiate
such proceedings is given to the State Board of Insurance, not
the Attorney General, not the Commissioner of Insurance and
not the Attorney General acting for the Commissioner of Insur-
ance.
63
That the proceeding for the cancellation of the certificate of
authority in Texas and the appointment of a receiver in Texas
must be initiated by the State Board of Insurance, rather than
the Commissioner of Insurance, has been recognized by the
courts of Texas in the case of Lumbermen’s Insurance Corpo-
ration v. State, 364 S.W. 2d 429 (Tex. Civ. App.—Austin 1963,
writ ref. n.r.e.). Though that case dealt with the appointment
of a receiver for a company domiciled in Texas under Section
2(a) of Article 21.28 of the Texas Insurance Code, the court
recognized that under both that section and Section 13 the
action must be initiated by the State Board of Insurance, not
the Commissioner of Insurance:
The Texas Insurance Code empowers the Court to
appoint the statutory liquidator as receiver to take
charge of the assets of the company and proceed with
the company as the court may direct . . . . The action
of the attorney general in behalf of the Board of Insur-
ance was correct. ...
The dangers of such circumvention of Section 13 of Article
21.28 by the Commissioner in initiating ancillary receivership
proceedings become more apparent when viewed in the Com-
missioner’s absence of authority to initiate actions against do-
mestic insurance companies. Article 1.19 of the Texas Insur-
ance Code mandates that only the State Board of Insurance
has the power to initiate or maintain actions affecting the busi-
ness of domestic insurance companies. Article 1.19 states that:
The Board shall have the power to institute the suits
and prosecution either by the Attorney General or such
other attorneys as the Attorney General may designate
for any violation of the law this state relating to insur-
ance. No action shall be brought or maintained by any
64
person other than the Board by closing up the affairs
or to enjoin, restrain or interfere with the prosecution
company organized under the law of this State.
The absence of the ability of the Commissioner of the State
of Texas to initiate such proceedings was confirmed in Adler v.
Brooks, 375 S.W. 2d 544 (Tex. Civ. App—Tyler 1964, ref
n.r.e.). To permit the Commissioner to initiate the receivership
proceedings under Section 13 of Article 21.28 while the Com-
missioner is not allowed to seek relief under Article 1.19 would
totally contradict the statutes and clear legislative intent.
Though prior to the initiation of these proceedings Empire
was placed in supervision by the Texas Commissioner of Insur-
ance in an order of April 5, 19/2, the proceedings below were
not initiated under Article 21.28-A. The fact that the proceed-
ings before the Texas Ancillary receivership court are not under
Article 21.28-A is evidenced both by the fact that the Texas
Attorney General’s Petition alleges in at least two places that
the proceedings are under Article 21.28 of the Texas Insurance
Code, but also by the fact that the procedures followed below
are not the procedures required in Article 21.28-A.
Under Article 21.28-A the Commissioner of Insurance is
authorized to request the Attorney General to file a quo warranto
suit only after (1) notice, (2) a hearing and (3) a finding by
the Commissioner that the insurance company has failed to
comply with the lawful requirements of the Commissioner. In
this case this was never done. Instead, the Insurance Commis-
sioner decided to wait for the Alabama court to act to appoint
a receiver, and when that Court did act on June 22, the Com-
missioner of Insurance, not the State Board of Insurance, re-
quested the Attorney General to file the present action.
65
Further, the holding of the Court of Civil Appeals for the
Third Supreme Judicial District of the State of Texas in Day v.
State, 489 S.W. 2d 368 (Tex. Civ. App.—Austin 1972, writ
ref. n.r.e.) is not res judicata of the issues raised by the Peti-
tioners. In Day the court’s holding that the Commissioner of
Insurance has the independent authority to seek the “receiver-
ship and liquidation” of an insurer was based upon Article
21.28-A of the Texas Insurance Code and not upon Article 21.28,
Section 13, the section upon which the present Texas ancillary
receivership proceeding is based. In addition, the Court’s hold-
ing in Day that the Attorney General has the independent au-
thority to initiate quo warranto proceedings to forfeit a corpo-
ration’s charter and the authority cited by it in support thereof
are not res judicata of the issue raised by the Petitioners,
whether the Attorney General has the independent authority
under Texas law to ask for an ancillary receivership of a
foreign insurance corporation doing business in Texas. Under
Article 21.28 the exclusive authority to initiate such proceed-
ings is given to the State Board of Insurance not the Commis-
sioner of Insurance and not the Attorney General acting for the
Commissioner of Insurance.
In summary, since this proceeding was brought under Article
21.28 of the Texas Insurance Code and since Section 13 of
Article 21.28 requires that the proceedings be brought upon
the instance of the Texas State Board of Insurance, and not
the Texas Commissioner of Insurance, the acts of the Texas
Insurance Commissioner here are wholly without authority, and
accordingly are void. The Court of Civil Appeals failure to so
hold clearly denied the Petitioners the equal protection of the
laws guaranteed by the Fourteenth Amendment.
66
CONCLUSION
For the reasons stated, the Petitioners pray that their Petition
for a Writ of Certiorari to the Court of Civil Appeals for Tenth
Supreme Judicial District of Texas be granted.
Respectfully submitted,
FRANK G. NEWMAN
NEWMAN, SHOOK & NEWMAN
Professional Corporation
4330 Republic National Bank Tower
Dallas, Texas 75201
(214) 747-9091
FREDERICK J. LAWSON
Union Bank Plaza, Suite 414
15233 Ventura Boulevard
Sherman Oaks, California 91403
(213) 981-4100
PROOF OF SERVICE
Proof of service of three copies of Petitioners’ Petition for
a Writ of Certiorari and Appendix 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.
ADDENDUM
INTER-OFFICE COMMUNICATION
Attorney General’s Office
DATE: April 19, 1974.
TO: File AG72-888
FROM: Ralph Rash
SUBJECT: Empire Life
On Apr.. 18, 1974, I received an emergency call from Tom
McFarling, Deputy Commissioner of Insurance, formerly
Liquidator of the State Board of Insurance, saying that a crucial
and urgent matter had arisen in the Empire case. I rushed to
the State Board of Insurance and had a conference with Tom,
Herb Crook, the present Liquidator, Bob Clines, and others, and
later in the day, we conferred with the Commissioner and
the Board.
Herb Crook had just returned from Alabama where, he stated,
the Judge of the State court (Judge Barber) had announced his
inclination to appoint “an administrator” for Empire Life for
the sole purpose of rehabilitating the company, who would take
possession of all of the assets of the company, including those
in Texas, and administer the company from Alabama.
This alarmed everyone. In order for you to understand the
significance of this matter, I will give you a brief history of
the case.
In the early part of 1972, as the result of the investigation
by our office of another matter, we learned that the recently filed
examination report of Empire Life revealed that the company
was insolvent by approximately $14 Million Dollars. It further
developed that the company had not been examined for five
years, even though the law requires that insurance companies
be examined at least every three years. The company technically
had its domicile in Alabama, which had provided a very favor-
able climate in previous years for the operation of crooked
insurance companies. Commissioner Cotten was agreeable to the
filing of a suit in Texas to place the company in receivership,
but he wanted to wait until Alabama appointed a receiver, so
that we could appoint an ancillary receiver. Getting the Ala-
bama court to proceed with the appointment of a receiver was
like mining granite, and it took until about June 22, 1972, for
Judge Barber to finally act.
In the meantime, it became apparent that the de facto domicile
of Empire was in Dallas, where they maintain their principal
offices and every operation of the company was headquartered
there. Most of the policyholders and most of the assets were in
Texas and very little business of the company was conducted
in Alabama. Several states had a considerable number of policy-
holders. About a month prior to the action of the Alabama court,
the company was placed in receivership by the Arkansas court,
where the company has considerable business, but we could not
persuade Clay Cotten to go ahead with a receivership in this
state. We felt that to permit the Alabama authorities to have
charge of the affairs of the company would be like permitting
the “tail to wag the dog”, and we knew that in this case the
“tail” was very corrupt. Let me hasten to add that Commissioner
Bookout of Alabama impressed all of us as being a fine and
honest man, and none of us have had occasion to doubt his
Ill
integrity at any time. However, he had considerable reserva-
tions about Judge Barber.
At the hearing conducted before Judge Barber last week, the
Commissioners of Alabama, Texas, Arkansas and all of the
other states in which the company did business were trying to
convince the court that he should approve a plan for the rein-
surance of the company’s business, which they had unanimously
worked out. Herb Crook reported that the lawyer for Commis-
sioner Bookout put on a “beautiful” case and, without a word
of evidence to support the action, the court called a conference
in chambers where he announced his idea of appointing a crony
of his, Paul Carr, to take over the company as its “administra-
tor”. This is foreign to law, and is in the very teeth of the
statutory and case law on the matter. Commissioner Bookout
plans to appeal from such an order, if it is entered. Judge Barber
told the parties to return for further proceedings next Monday,
and it is anticipated that he will announce his decision at that
time.
The emergency arises by reason of the fact that if Judge
Barber dissolves the domiciliary receivership, it might have the
effect of terminating or at least impairing our ancillary receiver-
ship, and I revived my original theory of the case that Texas
should have filed the case here on the ground that the de facto
domicile of the company was in Texas. However, I stated that
I thought it was probably too late and that we would not be in
a strong position to urge such theory.
As our conference progressed, it became more and more
apparent that the others present, especially Herb Crook, took
great stock in the idea of reviving the de facto domicile theory,
IV
and all of us commenced a search of our prior briefs on the
subject. I found mine and relayed them to Herb Crook.
My tentative conclusion is that under the authorities which
I included in a brief which I submitted to Tom McFarling sev-
eral months ago, the Texas statutes and cases simply do not
permit any one to remove the assets of this corporation from
the state until the Texas creditors and policyholders have been
satisfied. Therefore, at this point, I do not feel that it is neces-
sary to amend our pleadings so as to ask Judge Jones to convert
the ancillary receivership into a domiciliary receivership, but
this may become necessary. I do not think we would be
jeopardizing our position by waiting to see what Jud ze Barber
does, because any order of the Alabama court attempting to
remove the statutory receiver would be appealed from and would
not be final for quite some time, and we would have ample
time to reconsider our basic pleadings in the matter. In other
words, the Alabama court could not possibly enforce its orders
within the State of Texas, and if he does not back down from
his ridiculous notion of appointing an “administrator”, we can
deal with the problem before his order becomes final.
Herb Crook, as the court’s receiver, contacted Judge Jones
and apprised him of the situation in Alabama, but Judge Jones
did not have any proposal as to what should be done at this time.
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.