Reply Brief — Moody v. Texas

Supreme Court, U. re

FILED

/ FEB 16 i978

MCRD AK, JR., CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1977

NO. 77-873

SHEARN MOODY, JR., and

JOHN S. BLEKER,

Petitioners,

VS.

THE STATE OF TEXAS, et al.,

Respondents.

PETITIONERS’ REPLY TO RESPONDENTS’

BRIEF IN OPPOSITION

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 MOODY, JR., JOHN S. BLEKER

:

IN THE

Supreme Court of the United States

OCTOBER TERM, 1977

NO. 77-873

SHEARN MOODY, JR., and

JOHN S. BLEKER,

Petitioners,

VS.

THE STATE OF TEXAS, et al.,

Respondents.

PETITIONER’S REPLY TO RESPONDENTS’

BRIEF IN OPPOSITION

TO THE HONORABLE SUPREME COURT

OF THE UNITED STATES:

Now come the Petitioners, SHEARN MOODY, JR., and

JOHN BLEKER, and file their Reply to the Brief in Opposi-

tion to Petition for Writ of Certiorari filed by the Respondents

in the above-entitled and numbered cause. In support hereof,

the Petitioners would respectfully show this Honorable Court

the following:

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I.

THE POLICYHOLDERS, STOCKHOLDERS AND

CREDITORS OF EMPIRE WERE DENIED THE EQUAL

PROTECTION OF THE LAWS SINCE THE TEXAS AN-

CILLARY RECEIVERSHIP PROCEEDING WAS NOT

INSTITUTED IN ACCORDANCE WITH SECTION 13

OF ARTICLE 21.28 OF THE TEXAS INSURANCE

CODE.

The constitutional infirmities inherent in the Texas Ancillary

Receivership proceeding involving Empire Life Insurance Com-

pany of America (“Empire”) are evident at the outset. The

Texas Ancillary receivership proceedings were initiated in total

defiance of the statutory requirements of Section 13, Article

21.28 of the Texas Insurance Code. (See Pet. pp. 57-65). As a

result, the ancillary receivership court lacked jurisdiction to

approve the reinsurance treaty and by proceeding it clearly

denied Empire’s policyholders, stockholders and creditors the

equal protection of the laws guaranteed by the Fourteenth

Amendment.

In the regulated field of insurance state courts cannot arbi-

trarily ignore statutory procedure. When an insurance company

with over 40,000 policyholders is placed in receivership, statu-

tory procedures must be followed in order to safeguard the

rights of all interested parties. At a minimum, equal protection

of the laws means the fair and consistent enforcement of the

laws. Such total defiance of established statutory procedure is

inexcusable and is totally contrary to the equal protection clause

of the Fourteenth Amendment.

———

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The Respondents’ assertion that the issue is of no consequence

since “the ancillary receiver never had jurisdiction over any of

Empire’s assets...” (Br. p.20), not only contradicts their

admission that the Texas Ancillary Receiver had jurisdiction

over most of Empire’s assets (Br. p.3) but is also grossly erron-

eous as a matter of laws. See, Texas Insurance Code, Section 13,

Article 21.28. City Bank Farmers Trust Co. vs. Schnader, 293

U.S. 112 (1934).

II.

THE APPROVAL OF THE TREATY OF ASSUMP.

TION AND BULK REINSURANCE BY THE TEXAS AN-

CILLARY RECEIVERSHIP COURT WITHOUT NOTICE

TO THE POLICYHOLDERS, STOCKHOLDERS AND

CREDITORS OF EMPIRE SITUATED WITHIN THE

STATE OF TEXAS DEPRIVED THEM OF THEIR

PROPERTY WITHOUT DUE PROCESS OF LAW CON.

TRARY TO THE FOURTEENTH AMENDMENT.

Not only was the ancillary receivership initiated in defiance

of statutory procedure, but the appointment of the permanent

ancillary receiver and the approval of the reinsurance treaty

occurred without notice to Empire’s policyholders, stockholders,

and creditors in Texas. Petitioner Bleker pointed out in his

Plea in Intervention that as a policyholder he had absolutely

no notice whatsover of the appointment of any ancillary receiver

for Empire in the State of Texas. He requested that the pro-

ceedings be abated until «ll policyholders were notified and

given an opportunity to appear at the hearing pertaining to the

Reinsurance agreement. His request was denied!

\ 4

Surprising:y enough, the Respondents have asserted that the

absence of notice with regard to the hearing on the treaty is

insignificant since the Petitioners were present at the hearing

and since informing the policyholders of said hearing may have

caused a run on cash reserves. The obvious response to these

arguments is, of course, that.the Petitioners have standing

to assert the deprivation of constitutional rights on behalf of

the policyholders, stockholders and creditors who were not

notified since the latter were denied an ‘opportunity to appear

and protect their rights. Further, the argument that the policy-

holders would immediately cash in their policies upon receipt

of notice implies the absence of any ability on the part of

the policyholders to make a rational choice as to whether they

should stay with the company. Certainly those policyholders who

would have chosen to cash in their policies and reject reinsur-

ance were entitled to appear and challenge the manner in which

their claims would be handled and the sufficiency of the

$2,000,000.00 fund set aside to pay creditors’ claims. The ancil-

lary receiver’s admission that Petitioner Moody alone had filed

claims totalling $2,000,000.00 (R. 164) is clear evidence that

the fund was insufficient. The possibility that upon receipt of

notice some of the policyholders would have cashed in their

policies is certainly no justification for withholding notice from

all of the policyholders.

The Respondents also asserted that notice to Empire’s stock-

holders, policyholders and creditors was not necessary in the

ancillary proceeding because notice had been given with regard

to the Domiciliary hearing in Alabama. Evidently, the Texas

Court was not persuaded that it should simply defer to the

5

Alabama Court’s approval of the reinsurance agreement, since

it did conduct a hearing on the reinsurance agreement. Unfor-

tunately, no notice of said hearing was given to Empire’s policy-

holders, stockholders and creditors within the State of Texas.

Since a majority of Empire’s stockholders, policyholders and

creditors resided in Texas, and since it is clearly less burden-

some for them to attend a hearing in the State of their residence,

the failure of the Texas Ancillary Receivership Court to provide

them with notice and an opportunity to appear at the hearing

effected a significant deprivation of their property without the

due process of law guaranteed by the Fourteenth Amendment.

III.

THE PETITIONERS HAVE BEEN DENIED THE

RIGHT OF DUE PROCESS IN THAT THE RECEIVER-

SHIP COURT DEPRIVED THEM OF A JUST EQUIT-

ABLE FAIR AND IMPARTIAL HEARING IN VIOLA-

TION OF THE FIFTH AND FOURTEENTH AMEND.-

MENTS TO THE UNITED STATES CONSTITUTION.

The Petitioners’ fundamental right of due process was directly

violated by the Ancillary Receivership Court, since that Court

simply ratified authorized and confirmed any and all pertinent

demands and requests of the Receiver. He did so under the mis-

conception that he merely served as a statutory “rubber-stamp”

of the State agency in clear and direct violation of the Consti-

tutional protectives of due process and separation of powers.

In response to the foregoing argument, the Respondents have

asserted that the issue was not specifically asserted in the pro-

6

ceedings below. The Petitioners would point out that this Court

has made it perfectly clear that it may of its own Motion notice

errors to which no exception has been taken, if such errors seri-

ously affect the fairness, integrity or public reputation of judi-

cial proceedings. See, Johnson vs. U.S., 63 S.Ct. 549, 318 U.S.

81 (1943). This Court clearly has jurisdiction to consider

“plain error” not specifically assigned as error below. Sibbach

vs. Wilson & Co. 61 S.Ct. 422, 312 U.S. 1 (1941); Mahler vs.

Eby, 44 S.Ct. 283, 264 U.S. 32 (1924); U.S. vs. Pena 20 S.Ct.

165, 175 U.S. 500 (1899).

IV.

THE TRIAL COURT WAS WITHOUT JURISDIC-

TION TO HEAR AND DECIDE THE CASE IN THAT IT

GAVE FULL, FAITH AND CREDIT TO AN ALABAMA

JUDGMENT WHICH WAS BASED UPON AN UNCON.

STITUTIONAL ALABAMA STATUTE.

Before the ancillary receivership court could entertain the

proposal to reinsure Empire it had the duty of determining

whether Empire was actually insolvent. The court’s refusal to

admit evidence on the issue and its decision to give full, faith

and credit to the Alabama decree deprived Empire’s policyhold-

ers, stockholders and creditors of their property without due

process of law.

Empire’s alleged statutory insolvency occurred as a result of

the Alabama Insurance Commissioner’s arbitrary devaluation of

its life estate interest in the Libbie Shearn Moody Trust from

$14,000,000.00 to approximately $4,250,000.00, after the trust

interest had been carried at the $14,000,000.00 value for ap-

7

proximately seven years. The devaluation was predicated upon

Section 745(13) of the Alabama Insurance Code which is de-

void of any guidelines and which provides the Alabama Insur-

ance Commissioner with unlimited and unbridled discretion as

to the valuation of assets. (See Pet. pp. 24-27)

It is the general principle 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

prohibited and what is not in each particular case. Giaccio v.

State of Pennsylvania, 387 U.S. 399, 86 S.Ct. 518. It is also

clear that an unconstitutional statute is void and unenforceable

and has no legal effect. Miller v. Davis, 136 Tex. 299, 150

S.W.2d 973 (1941) Colden v. Alexander 141 Tex. 134, 171

S.W.2d 928 (1943).

The ancillary receivership court therefore erred in giving of

full, faith and credit to the void Alabama decree and by failing

to make an independent determination on the issue of insolvency,

it lacked jurisdiction to approve the Treaty. The erroneous recog-

nition of the void Alabama decree also prevented the Peti-

tioners from raising the constitutional issues pertaining to the

constitutionality of §745(13) and the deprivation of vested

contractual rights caused by the devaluation of the trust interest.

Section 810 of the Alabama Insurance Code, entitled “Sav-

ings Clause,” indicates that the Act shall not impair rights accru-

ing prior to its effective date. Section 745(13) of the Code

became effective in 1972. Numerous policyholders, stockholders

8

and creditors acquired vested contractual rights prior to 1972

in reliance on the $14,000,000.00 valuation assigned to the trust

interest. The application of §745(13) in 1972 to effect a

$10,000,000.00 decrease in the value of the interest clearly

effected a substantial deprivation of vested property rights in

violation of §810 as well as Article I, Section 10 of the U.S.

Constitution.

V.

THE TREATY OF ASSUMPTION AND BULK REIN-

SURANCE TREATS DIFFERENTLY THOSE POLICY-

HOLDERS AND CREDITORS WHO ARE SIMILARLY

SITUATED AND FAILS TO TREAT THOSE WHO ARE

DIFFERENTLY SITUATED IN A MANNER CONSIST-

ENT WITH THEIR RIGHTS.

The Petitioners have attacked with specificity the unlawful

discrimination effectuated by the ‘Treaty of Assumption and

Bulk Reinsurance. (Pet. pp. 33-57). Since the Texas Court of

Civil Appeals for the Tenth Supreme Judicial District of Texas

wrote the initial appellate opinion concerning the Reinsurance

treaty and since the Alabama Supreme Court felt compelled to

recite said opinion as a justification for approving the treaty,

it is imperative that the constitutional issues raised by the ruling

of the Texas Court be examined with care. The Petitioners have

challenged in detail the basis for the Texas Court’s approval of

the treaty to-wit: that the differences in treatment are based

upon real and substantial differences. There was however no

evidence presented below justifying the discriminatory treatment

and establishing any rational basis for such treatment.

—

~_— ~~—*

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In addition to the unlawful discrimination caused by the

Treaty, it is also clear that the Treaty has created a profit for

the Reinsurer at the expense of Empire’s policyholders, stock-

holders and creditors. Despite the Respondents’ assertion that

Protective Life Insurance Company will receive no profit until

the moratorium imposed on cash benefits has been eliminated

(Br. p. 10), Mr. Thomas K. Pennington, a Vice-President of

Protective, admitted in a Federal District Court proceeding

involving Empire in 1976 that: “It (the Empire Transaction)

will account for roughly two percent (2%) of profits in this

year.” (R 1242) Payne v. Moody (N.D. Tex. CA-5678). It is

clear therefore that the Treaty not only effectuated an unlawful

discrimination among Empire’s policyholders, stockholders and

creditors but also created a profit for Protective at their

expense.

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CONCLUSION

Wherefore for the foregoing reasons, the Petitioners pray

that their Petition for a Writ of Certiorari to the Court of Civil

Appeals for the 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

Attorneys for Petitioners

SHEARN MOODY, JR., JOHN S. BLEKER

PROOF OF SERVICE

Proof of Service of three copies of Petitioners’ Reply to Re-

spondents’ Brief in Opposition upon each of the parties separ-

ately represented by counsel was filed by FRANK G. NEW-

MAN, a member of the Bar of the United States Supreme Court

on the same date the Reply was filed.