Opposition Brief — Richardson v. Kelly

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SUPREME COURT OF THE UNITED STATES.

= O > 1946 fl a <> er.

Sip W. RICHARDGON, ET AL

Petitioners,

“

KritH KELLY, RECEIVER

BRIEF IN OPPOSITION TO THE PETITION FOR

WRIT OF CERTIORARI. .

ws MARION B. SOLOMON,

CHARLEs L. BLACK,

we JOHN W. STAYTON, ©.

Counsel for Respondent,

Keith Kelly, Receiver.

VI.

VII.

VIII.

INDEX

eg Et Sa NY aE 1

FRR TY ies chtinceihnicinicnsaneirvisiestiaicaintion 2

STATEMENT OF THE CASE... 2-10

SUMMARY OF THE ARGUMENT... . 10-11

FIRST AND SECOND PoOINTS—Presenting propo-

sition that, since the courts below have held

that petitioners have no defense to the cause

of action asserted by the receiver in the class

suit, the judgments below rest upon ee

non-federal grounds _. Stunna Sculantesnecuuticcen .. 11-16

THIRD PoINT—Presenting proposition that no

federal question is presented because petition-

ers do not claim that they have a defense to

the cause of action asserted by the receiver

in the class suit, and do not claim that they

would be entitled to judgment if that cause

should be tried again _ _... 16-17

FOURTH PoINT—Presenting proposition that a

class suit will lie to assess the subscribers of

a reciprocal insurance association 17-37

FIFTH POINT—Presenting proposition that the

finding of the three courts below that the class

suit was properly conducted by the receiver is

supported by substantial evidence and should

be upheld _.. 87-44

CONCLUSION 44-45

APPENDIX 46-47

AUTHORITIES

United States Statutes:

Judicial Code, Sec. 237(b), 28 U.S.C., Sec. 344(b) .

Texas Statutes:

Article 5029, Vernon’s Ann. Civ. Stats. of Texas .

Sections 15, 16a and 23, Article 8308, Vernon’s

Ann. Civ. Stats of Texas _......-.-.-------------- sceliatieet ang

List of Cases:

Ashwander v. Tennessee Valley Authority,

997 U. S. 288...--.---------—+----2-—annnn ene anne

Baldwin v. lowa State Traveling Men’s Association,

288 U. S. 522.......--- (PIR 3 0

Brown Vv. Clippinger, 113 ‘Tex. 364,

aE” 2 a _ 4,

Capital Endowment Co. v. State of Ohio, ex rel.

Bowen, 296 U. S. 546. ......... ---. ae

Christopher v. Brusselback, 87 Fed. (2d) 762

Christopher v. Brusselback, 302 U. S. 500 39, 31,

City of Tyler v. Texas Employers Ins. Assn. (Tex.

Com. App.), 288 S. W. 409.............-.-.--------------

Clay v. Moore (Tex. Civ. App.), 175 S. W. (2d) 4383

Converse v. Hamilton, 224 U.S. 243 __ -

Easterling Lumber Co. v. Pierce, 235 U.S. 380

Empire Gas & Fuel Co. v. Noble (Tex. Com. App.),

36 S. W. (2d) 451. Io enter eae

Fox Film Corporation v. Muller, 296 U. S. 207.

Freeland v. Williams, 131 U. S. 405 —

Gray v. Moore (Tex. Civ. App.), 172 S. W. (2d) 746

Great Western Telegraph Co. v. Purdy

162 U.S. 329 ee

Hamilton v. Empire Gas & Fuel Co.,

184 Tex. 377, 110 S. W. (2d) 561

Hansberry v. Lee, 311 U. S. 32

Hartford Life Insurance Co. v. Ibs,

237 U.S. 662 , 25,

Hawkins v. Glenn, 131 U.S. 319 31, 32, 33,

Pages

32

17

12

6, 15

13

35

34, 09

_ 36, 37

26, 30

34, 35

wv

AUTHORITIES iii

Pages

Hazel-Atlas Glass Co. v. Hartford-Empire Co.,

$22 U. S. 288....__.. i. 14

Holley v. Lawrence, Warden, i. sf 13

Humble Oil & Refining Co. v. State (Tex. Civ.

App.), 158 S. W. (2d) 336, writ refused... 4

Humphrey v. Harrell (Tex. Com. App.),

29S. W. (2d) 963 y 8

Irwin v. Missouri Valley Bridge & Iron Co,

(C.C.A. 7), 19 Fed. (2d) 300, cert. den. 275 U.S.

Johnson v. Templeton, 60 Tex. 238... 4

Kern Barber Supply Co, v. Freeze,

96 Tex. 513, 74 S. W. 303... Lake 5

Knox County v. Harshman, 133 U. ‘s. ce 4

Levy v. Roper, 113 Tex. 356, 256 S. W. 251. 4

Lindsley v. Natural Carbonic Gas Co.,

220 U. S. 61... naan 15

Louisville and Nashville R. R.z Co. ' v. “Schmidt,

RR RRR RAG iia Ue ie 14

McLean v. Morrow (Tex, Civ. App.),

££ & 3% SiGe ieee 3

Marshall v. Holmes, 141 U.S. 589. sss 4

Marye v. Parsons, 114 U.S. 325... 13

Martin v. Burns, Walker & Co.,

80 Tex. 676, 16 |. | 5

Mayhew & Isbell Lbr. Co. v. Valley Wells Truck

Growers’ Ass’n (Tex. Civ. App.), 216 S. W. 225 21

Minneapolis & St. Louis R. R. Co. v. Minnesota,

193 U.S. 53 . 15

Mitchell v. Pacific Greyhound Lines (Cal. Ct. of

App.), 91 Pac. (2d) 176 23, 32

Modern Woodmen of America v. Mixer,

267 U. S. 544... . 20

New Jersey v. Sargent, 269 U. S. 328 - 13

Pink v. A.A.A. Highway Expres, 314 U.S. 201 20

Pure Oil Co. v. Reece, 124 Tex. 476,

78 S. W. (2d) 932 7 chacinbicaasaads 4

Richardson v. Kelly (Tex. Sup. Ct. ),

191 S. W. (2d) 857. - : 1

Richardson v. Kelly (Tex. Civ. App. ),

179 S. W. (2d) 991... a ; 1

Royal Arcanum v. Green, 237 U. S. 531 28, 29, 30

Royal Petroleum Corp. v. McCallum,

134 Tex. 543, 185 S. W. (2d) 958 39

iv AUTHORITIES

Pages

aunent v. Goldsmith Dry Goods Co.,

110 Tex. 482, 221 S. W. 259. ....... 21-22, 31

Smith v. Ferrell (Tex. Com. App. ae

44 S. W. (2d) ie 4

Southern Ornamental Iron Works v. Morrow

(Tex. Civ. App.), 101 S. W. (2d) 336, writ

RT .nsssicisinninentoneimtnnnincannrntithiiel 4, 23, 24, 34, 35

Supreme “Tribe of Ben-Hur v. Cauble,

255 U. S. 356... : . 26, 27, 30

Switzer v. Smith (Tex. ‘Com. “App.), “300 S. W. 31 4

Treinies v. Sunshine Mining Co., 308 U. S. 66... 12

Treadway v. Eastburn, 57 Tex. 209 4

U. S. v. Illinois Central R. R. Co., 291 ‘U. S. 457... 15

Voeller v. Neilston Warehouse Co., 311 U.S. 531_. 17

White v. Crow, 110 U.S. 183... 4

Winters Mutual Aid Ass’n v. Reddin (Tex. “Com.

App.), 49 S. W. (2d) 1095. ee 5

Text Writers and Other Authorities:

2 Moore’s Federal Practice, pp. 2235-2245 24

2 Moore’s Federal Practice, pp. 2237-2238 24

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1946

No. 288

Sip W. RICHARDSON, ET AL.,

Petitioners,

Vs.

KEITH KELLY, RECEIVER

BRIEF IN OPPOSITION TO THE PETITION FOR

WRIT OF CERTIORARI

Opinions Below

The opinion of the intermediate appellate court,

the Court of Civil Appeals for the Third Supreme

Judicial District of Texas, is reported in 179 S. W.

(2d) 991 (R. 759-773). The majority opinion of

the Supreme Court of Texas and the dissenting

opinion of Justices Alexander and Sharp are reported

in 191 S. W. (2d) 857 (R. 801-833).

—

Jurisdiction

Petitioners claim jurisdiction under Judicia! Code,

Section 237(b), 28 U.S.C., Section 344(b). Respond-

ent submits, as will appear from the Summary of the

Argument, that no jurisdiction exists because no

federal question is presented by petitioners.

Statement of the Case

Petitioners brought this bill of review proceeding

on behalf of themselves and on behalf of a class com-

posed of all other subscribers at National Indemnity

Underwriters of America, a reciprocal or interinsur-

ance exchange,* who were not named as parties to

the assessment suit but who as members of a class

were bound by the judgment entered therein (R. 5,

27, 63, 143), to set aside such judgment, and to reliti-

gate the issue of the liability of the subscribers to

assessment. The judgment in the assessment suit

(Cause No. 63,621), a class suit proceeding, adjudi-

cated that those named as defendants in such suit

were truly representative of and fairly and actually

represented the whole class of subscribers at the Ex-

change (R. 658-659, 665) ; that the Exchange was

insolvent, thereby making it necessary to levy an as-

sessment against the subscribers at the Exchange

(R. 660-661) ; and that each subscriber should pay

an assessment equal to the amount of premiums

booked and earned on all policies of insurance carried

by him during any part of the insolvency period

(R. 663).

* Hereinafter referred to as the “Exchange.”

wuliiien

The judgment entered in the assessment suit was

a judgment in rem and not in personam. The judg-

ment, in so far as the members of the class are con-

cerned, names no subscribers and names no sums of

money. Under State law, any subscriber sued for

his assessment would be sued upon his subscription

contract and not upon the judgment entered in the

assessment proceeding, and such subscriber, when

sued for his assessment, would be free to make any

personal defenses available to him, e. g., payment,

that he was not in fact a subscriber during the in-

solvency period, or that the receiver was in error as

to the amount of premiums booked and earned on the

policies of insurance carried by the subscriber dur-

ing the insolvency period, or that the party suing to

recover the assessment had no interest in the cause

of action asserted. Clay v. Moore (Tex. Civ. App.),

175 S. W. (2d) 433; McLean v. Morrow (Tex. Civ.

App.), 187 S. W. (2d) 113, 120, writ dismissed.

The judgment entered in the assessment suit,

Cause No. 63,621, contains extensive recitals as to

the court’s jurisdiction over those sued as members

of aclass. It recites the impossibility of making all

3200 subsciibers parties to the suit; that those sub-

scribers named as parties defendant stood in exactly

the same position as the remaining subscribers who

were sued as members of a class; and that those

named as parties defendant were truly representa-

tive of and fairly represented the subscribers at the

Exchange (R. 658-659). Under Texas law, these

jurisdictional recitals are conclusive until set aside

in a direct proceeding. Southern Ornamental Iron

Works v. Morrow (Tex. Civ. App.), 101 S. W. (2d)

—_

336, 343, writ refused.* This case applies to recitals

concerning jurisdiction in class suit judgments, the

settled law of the State to the effect that a recital in

a judgment that the defendant was served with proc-

ess is conclusive until and unless the judgment is set

aside in a direct proceeding, even though the defend-

ant was not in fact served with process, Levy v.

Roper, 113 Tex. 356, 256 S. W. 251; Brown v. Clip-

pinger, 118 Tex. 364, 256 S. W. 254.

Under State law [Johnson v. Templeton, 60 Tex.

238; Smith v. Ferrell (Tex. Com. App.), 44 S. W.

(2d) 962] as under Federal law [White v. Crow,

110 U. S. 183; Knox County v. Harshman, 133 U. S.

152; Marshall v. Holmes, 141 U. S. 589], a party

seeking to set aside a final judgment must allege anc

prove that he has a good defense which he was pre-

vented from making by fraud, accident or the acts

of the opposing party, wholly unmixed with any

fault or negligence of his own. These requirements

of a direct attack must be met where the judgment

recites jurisdiction of the defendant, even though the

party against whom the judgment was entered can

prove, by showing lack of service upon him or other-

wise, that the court did not in fact acquire such jur-

isdiction. Treadway v. Eastburn, 57 Tex. 209;

Switzer v. Smith (Tex. Com. App.), 300 S. W. 31;

Pure Oil Co. v. Reece, 124 Tex. 476, 78 S. W: (2d)

* The refusal by the Supreme Court of Texas of an Ap-

plication for Writ of Error amounts not only to an approval

of the judgment of the Court of Civil Appeals but to an

approval of that Court’s opinion. Hamilton v. Empire Gas

& Fuel Co., 134 Tex. 377, 110 S. W. (2d) 561; Humble Oil

& Refining Co. v. State (Tex. Civ. App.), 158 S. W. (2d)

336, writ refused.

a

932; Martin v. Burns, Walker & Co., 80 Tex. 676, 16

S. W. 1072.

The dissenting opinion contains the statement that

the class suit judgment may be set aside without the

showing of a meritorivus defense because “it appears

on the face of [the] record that the judgment is void”

(R. 883). This is an inaccurate statement of the ap-

plicable State law since it has long since been settled

in Texas that a judgment which contains recitals

showing jurisdiction (as does the one here involved,

pp. 3-4, ante) may not be set aside except through

a bill of review proceeding in which a meritorious

defense is pleaded and proved. We have cited above

a few of the cases so holding.

The two cases cited in the dissenting opinion in no

way support the statement in the opinion. In Em-

pire Gas & Fuel Co. v. Noble (Tex. Com. App.), 36

S. W. (2d) 451, 454, one of the cases cited in the

dissenting opinion, the Court states: “If a judgment

is void, the party against whom it is rendered is not

compelled to show a defense to the action in order to

enjoin it * * *. However, if a judgment shows

upon its face to be valid, every presumption will be

indulged in favor of it.” The judgment here involved

“shows upon its face to be valid” since it contains

elaborate recitals concerning the court’s jurisdiction

over those subscribers sued as members of a class.

In Kern Barber Supply Co. v. Freeze, 96 Tex. 518,

74 S. W. 308, the other case cited in the dissenting

opinion, some question was raised as to the advis-

ability of requiring a party to show a meritorious de-

fense as a prerequisite to setting aside a judgment

entered by a court which actually had no jurisdic-

— a

tion over such party. However, any doubt expressed

in that case was removed by the Supreme Court of

Texas in Brown v. Clippinger, 113 Tex. 364, 366, 256

S. W. 254, 254-255, where the Court said:

“The writ of error was granted because of the

doubt expressed in Kern Barber Supply Co. v. Freeze,

96 Texas, 516, 74 S. W., 303, whether the rule that

a party seeking equitable relief to prevent the en-

forcement of a judgment against him, not void on its

face, must show a meritorious defense to the cause

of action on which the judgment was based, was

properly applied to actions to set aside apparently

valid judgments for want of jurisdiction of the

person.

“The judgment which Brown sought to vacate re-

cited facts which sustained the court’s jurisdiction.

It could not therefore be collaterally attacked with

success in the courts of this state. Levy v. Roper,

113 Texas, 356, 256 S. W., 251. If it was the cor-

rect judgment on the merits, a direct proceeding to

vacate it would not have had a different result. For,

the party recovering a judgment must be made a

party to a proceeding for its vacation, with the right

to enforce any subsisting obligation of the complaint

on which the judgment was predicated. If the com-

plainant was truly bound to render to the plaintiff

in the judgment all that the judgment required, his

direct action must end with another adjudication -

against him having precisely the effect of that sought

to be annulled. Courts of equity do not sit to remedy

injuries wholly technical and insubstantial.”

In the instant case petitioners recognized when

they prepared their pleadings that the class suit

judgment was not void on its face and that they

could only set it aside through a bill of review pro-

—

_ a

ceeding in which they alleged and proved that they

had a good defense to the cause of action asserted

in the class suit (R. 8-9, 19-27, 79-84, 139-140, 168-

172). Furthermore, in the Court of Civil Appeals

(R. 750) and in the Supreme Court of Texas (R.

797) petitioners urged that they were entitled to re-

lief because they had a good defense to the cause of

action asserted by the receiver in the class suit. Peti-

tioners have never contended at any point in this pro-

ceeding that the judgment entered in the class suit is

void on its face and that they are entitled to set it

aside without showing a meritorious defense.

With the settled law of the State in mind, peti-

tioners alleged below that they were not served with

process in Cause No, 63,621; that they knew nothing

about that suit until the judgment rendered therein

had become final, with the consequence that they had

no opportunity to appear and present their defense;

that they were not adequately represented by the

class representatives; and that they had a meritwri-

ous defense which they had been prevented from pre-

senting through no fault of their own, the defense

being that they were not liable for the assessment

sought by the receiver (R. 8-9, 19-27, 79-84, 139-

140, 168-172).

The receiver filed answers in the bill of review

proceeding, and also filed cross actions against peti- .

tioners in which he sought personal judgment against

each of them in a sum equivalent to the amount of

premiums booked and earned by the Exchange on all

policies of insurance held by each such petitioner

during the insolvency period or any portion thereof

(R. 119-135).

—3—

The judgment entered in the bill of review pro-

ceeding denied petitioners any relief and gave the

receiver judgment against each petitioner in a sum

equivalent to the amount of premiums booked and

earned by the Exchange on all policies of insurance

held by each such petitioner during the insolvency

period or any. part thereof (R. 185-206).

Under State law a proceeding by bill of review to

set aside a final judgment completely reopens the

cause in which the judgment was rendered and such

cause must be tried anew. Humphrey v. Harrell

(Tex. Com. App.), 29 S. W. (2d) 963; Winters Mu-

tual Aid Ass’n v. Reddin (Tex. Com. App.), 49 S.

W. (2d) 1095. In this bill of review proceeding

Cause No. 63, 621 was completely reopened. As the

Court of Civil Appeals states in its opinion: “They

[petitioners] alleged that certain conduct of the

Receiver in procuring the assessment judgment

amounted to fraud, and that appellant [petitioner]

subscribers at the NIU had a meritorious defense

to the assessment, in that their respective contracts

limited their liability ‘to the amount of the premium

deposit and the application fee provided for in this

policy.’ The trial court heard these matters to-

gether and at length, the statement of facts contain-

ing 726 pages, which in part explains the severa!

hundred pages of powers of attorney, the applica-

tions for certificates to do business, and policies is-

sued at the office of NIU before and during the in-

solvency period, photostatic copies of the originals

being under the order of the court sent up with the

record” (R. 759). Petitioners do not claim that the

trial court in any way prevented them from proving

winillion

in the bill of review proceeding such defenses as they

desired to urge to the cause of action asserted by the

receiver in the assessment suit, Cause No. 63,621.

The Court of Civil Appeals affirmed the trial

court’s judgment upon the ground that petitioners

had no defense to Cause No. 63,621, the assessment

suit, and consequently were liable for the assess-

ment fixed by the judgment entered in that cause

(R. 760-770). In this connection the Court of Civil

Appeals states in its opinion: ‘We prefer, however,

to base our decision upon the issue that appellants

[petitioners] did not show or prove a meritorious de-

fense to the assessment liability of the subscribers at

the NIU, rather than upon the practice questions”

(R. 760).

The Supreme Court of Texas not only affirmed the

ju¢gments below but that Court also held that peti-

tioners had no defense to the cause of action asserted

in the assessment suit, Cause No. 63,621. This hold-

ing, while just as clear and explicit as the holding

of the Court of Civil Appeals, requires some explana-

tion. The Supreme Court of Texas was primarily

concerned with the issue of whether a class suit

would lie to assess the subscribers at the Exchange,

and in order to determine this issue had to first de-

cide whether all subscribers at the Exchange (includ-

ing petitioners) were subject to assessment. That

Court answered this question in the affirmative,

thereby overruling the defense which petitioners

claimed to have to the class suit, the defense that they

were not liable to assessment. In holding that ali

subseribers were subject to assessment that Court

said: “So, both in Southern Ornamental Iron Works

po ae

vs. Morrow, supra, and in this case, although the lia-

bility of each subscriber was several, it was properly

recognized that the duty to pay assessments was com.

mon to all and resulted in a ‘unity between them in

the fund from which their rights were to be enjoyed,’

and that, therefore, it was a duty which could be en-

forced in a class suit” (R. 811).

SUMMARY OF THE ARGUMENT

1. No federal question is presented by petitioners’

contention that they were denied procedural due

process in Cause No. 63,621, the class suit proceed-

ing, because the State courts have held in this pro-

ceeding, to which petitioners were actual parties,

that petitioners have no defense to the cause of ac-

tion asserted against them in Cause No. 63,621. (See

11-15, post.)

2. No federal question is presented by petitioners’

contention that they were denied procedural due

process in Cause No. 63,621, the class suit proceed-

ing, because petitioners do not contend that they have

any defense to the cause of action asserted against

them in that suit or that they could prevail in the

suit if it should be retried. (See pp. 16-17, post.)

3. A class suit proceeding will lie to determine

(1) the necessity for an assessment against the sub-

seribers of a reciprocal insurance association; (2)

the total amount of money to be raised by the assess-

ment; and (3) the basis upon which each subscriber

shall be assessed. Use of such a proceeding does not

a

deny procedural due process to those subscribers not

actual parties to the suit. (See pp. 17-37, post.)

4. The finding of the three courts below that. the

receiver properly conducted the class suit proceeding

is supported by substantial evidence and should be

upheld. (See pp. 37-44, post.)

First Point

Petitioners chose to bring this bill of review pro-

ceeding, a proceeding to which they are actual par-

ties, to set aside the judgment entered in the class

suit. Under settled State law one prosecuting sucn

a suit must plead and prove a meritorious defense to

the cause of action asserted in the cause in which the

judgment sought to be set aside was entered. In this

proceeding the courts below have held that petition-

ers are entitled to no relief because they have no de-

fense to the cause of action asserted by the receiver

in the class suit. Consequently the judgments below

rest upon adequate non-federal grounds, and peti-

tioners’ contention that they were denied procedural

due process in the class suit presents nothing but an

abstract question of law.

Second Point

If this Court should hold that petitioners were de-

nied procedural due process in the class suit and if

the judgments below should be reversed and the

cause should be retried, the same judgments would

be entered because petitioners could not meet the re-

se

quirements imposed by State law upon one prosecut-

ing a bill of review, in that they could not show any

defense to the cause of action asserted by the re-

ceiver in the class suit. Consequently petitioners’

contention that they were denied due process of law

in Cause No. 63,621, the class suit proceeding, pre-

sents nothing but an abstract question of law which

this Court will not decide.

Argument

Petitioners present no federal question because

they have had their day in court and have been held

liable to assessment under the laws of Texas. Their

Petition for Writ of Certiorari and Brief in Support

Thereof are concerned only with the class suit; peti-

tioners utterly ignore the fact that the very issues

raised by the class suit have been re-litigated in this

bill of review proceeding brought by them, a proceed-

ing to which they are actual parties rather than par-

ties by reason of membership in a class. Petitioners

are entitled to their day in court, but conceding

arguendo that they did not have their day in Cause

No. 63,621, the class suit proceeding, they certainly

got it in this bill of review proceeding, to which they

are actual parties and in which they contended below

strenuously and at length that they were not subject

to assessment. Due process of law does not require

that petitioners be given two opportunities to litigate

the issue of their liability for assessment. Baldwin

v. Iowa State Traveling Men’s Association, 283 U. S.

522; Treinies v. Sunshine Mining Co., 308 U. S.

66, 78.

_

As shown at pp. 4-5, ante, the State law afford-

ed petitioners a means whereby they could set

the class suit judgment aside if they could plead and

prove that they had a good defense to the cause of

action asserted by the receiver in the class suit, which

defense they had been prevented from urging by

fraud of the receiver and without fault on their part.

Petitioners elected to avail themselves of this remedy

furnished by State law, but they were unsuccessful

in their suit because both the Court of Civil Appeals

and the Supreme Court of Texas held, as pointed out

at pp. 9-10, ante, that petitioners have no defense

to the cause of action asserted by the receiver in the

class suit; that they are liable for the assessment

fixed by the judgment entered in that suit. Conse-

quently the judgments below rest upon an adequate

non-federal ground and will not be disturbed by this

Court. Fox Film Corporation v. Muller, 296 U. S.

207 ; Capital Endowment Co. v. State of Ohio, ex rel.

Bowen, 296 U. S. 546; Holley v. Lawrence, Warden,

317 U. S. 518.

If the judgments below should be reversed and the

cause retried the same judgments would be entered

because petitioners have no defense to the cause of

action asserted by the receiver. Under these circum-

stances petitioners’ contention that they were denied

due process of law in the class suit presents nothing

but an abstract question of law which this Court will

not decide. New Jersey v. Sargent, 269 U. S. 328.

“But no court sits to determine questions of law i

thesi.” Marye v. Parsons, 114 U.S. 325, 330.

Petitioners do not directly contend that the bill of

review proceeding which they elected to prosecute

an

denied them the right to adequately contest the issue

of their liability for assessment. At common law,

and in most jurisdictions today, and in the federal

courts a bill of review proceeding is the remedy fur-

nished a defendant who desires to set aside a judg-

ment entered by a court which he claims had no juris-

diction over him. Hazel-Atlas Glass Co. v. Hartford-

Empire Co., 322 U.S. 238, 244. This Court has held

that such a proceeding is consonant with due process

of law. Freeland v. Williams, 131 U. S. 405, 418;

Louisville and Nashwille R. R. Co. v. Schmidt, 177

U. S. 230. Petitioners do complain of the fact that

they had the burden of proof in the bill of review

proceeding and in this connection state:

“All the petitioners ask is that they be permitted,

in a fair and openly conducted trial, to have their day

in Court where they may openly contest and litigate

every step essential to the establishment of liability

against them, and where the burden of proof will be

cast on the Receiver to prove up his case rather than

on the Petitioners to disprove it as has been their

burden on this Bill of Review.” (Brief, p. 46.)

The above quotation at long last sums up peti-

tioners’ case. Since they have had a “fair and openly

conducted trial,” their real contention is that they

have been denied due process of law because they

had the burden of proof in the bill of review pro-

ceeding; whereas in the class suit proceeding the

burden rested upon the receiver. This Court has

many times held that such a contention presents no

constitutional question. Easterling Lumber Co. 1.

Pierce, 235 U.S. 380, 382; Minneapolis & St. Louis

a

R. R. Co. v. Minnesota, 198 U. S. 53, 63; Lindsley v.

Natural Carbonic Gas Co., 220 U. S. 61, 81-82; U.S.

y. Illinois Central R. R. Co., 291 U. S. 457, 463-464.

Petitioners voluntarily chose to file this bill of review

proceeding, knowing that the burden of proof rested

upon them, and it would seem unbecoming of them

to now complain of the fact that they had the bur-

den of proof in such proceeding.

Two remedies were available to petitioners to ob-

tain relief from the class suit judgment. First, they

were entitled under the settled State law to file this

bill of review proceeding to have the class suit judg-

ment vacated. Second, they were each entitled to

await the filing of a suit by the receiver in an effort

to collect from each the assessment decreed by the

class suit judgment. Petitioners elected to resort to

the remedy first mentioned—this bill of review suit.

Having resorted to that remedy, the settled law of

the State imposed upon them the burden of proving

not only that the class suit judgment was invalid but

that they had a meritorious defense to the cause of

action asserted against them in that suit, for the

reason that “it would be useless for a court of equity

to set aside one judgment when the principles of

equity would require another adjudication of like

import.” Brown v. Clippinger, 113 Tex. 364, 366,

256 S. W. 254, 255. Having elected to resort to this

bill of review proceeding, in which the burden men-

tioned rested upon them, it is unnecessary to con-

sider or decide what would have been their rights or

burdens if each petitioner had awaited suit by the

receiver to collect the assessment owed by each such

petitioner.

7

Third Point

The State law gave petitioners a remedy conso-

nant with due process of law, the right to file a bill

of review proceeding in which they could have set

aside the class suit judgment upon proof that they

had a good defense to that suit which they had been

prevented from urging by fraud of the receiver and

without fault on their part. Petitioners elected to

file such a suit; lost it, and now appeal to this Court

to reverse the judgments below, but in such appeal

do not claim to have any defense to the class suit,

which means that they do not claim that they could

obtain a favorable judgment if the judgments below

should be reversed and the cause tried again. Con-

sequently petitioners are asking this Court to decide

a constitutional question when such decision is un-

necessary to protect petitioners’ rights.

Argument

As shown at pp. 12-13, ante, the State law gave

petitioners a remedy consonant with due process of

law, the right to file a bill of review proceeding fo

set aside the class suit judgment. As there shown,

successful prosecution of such a proceeding would

have required petitioners to plead and prove, among

other things, that they had a good defense to the

cause of action asserted by the receiver in the class

suit.

Petitioners elected to avail themselves of the rem-

edy furnished by the law of the State,:but they were

unsuccessful because, as pointed out at pp. 9-10

—_—

—

ante, the Court of Civil Appeals and the Supreme

Court of Texas both held that petitioners have no

defense to the cause of action asserted by the receiver

in the class suit; that they are liable for the assess-

ment fixed by the judgment entered in that suit. But

even if the courts below had not decided the issue of

meritorious defense, petitioners would present no

Federal question of substance because they do not

claim to have any defense to the cause of action as-

serted by the receiver. On the contrary, they dismiss

the question of defense with the statement: “The

question of meritorious defense, however, is not nec-

essary to a decision of the Due Process questions be-

fore this Court.” (Brief, p. 17.)

Why reverse the judgments below and retry the

cause when petitioners in effect admit that the same

judgments would have to be entered because of their

inability to present a defense? It is plain that peti-

tioners are seeking to have this Court decide a con-

stitutional question, or an alleged constitutional ques-

tion, when such decision is unnecessary to protect

petitioners’ rights. This Court will not decide the

constitutional question in these circumstances. Ash-

wander v. Tennessee Valley Authority, 297 U. S.

288, 345-348 (concurring opinion of Mr. Justice

Brandeis) ; Voeller v. Neilston Warehouse Co., 311

U. S. 531, 5387.

Fourth Point

In Cause No. 63,621, the class suit proceeding, the

court. determined (1) the necessity for an assess-

ment against the subscribers; (2) the total amount

—

of money to be raised by the assessment; and (3) the

basis upon which each subscriber should be assessed.

Petitioners were not served with process in that

cause but they were made defendants as members of

a class composed of all subscribers to the Exchange,

a class all members of which rested under the com-

mon duty of creating a fund to discharge the obliga-

tions of the Exchange; and this class was represented

in the cause by a group of subscribers who appeared

and defended on their own behalf and on behalf of

the class of which they and petitioners were members.

This representation afforded petitioners due process

of law.

Argument

Since the judgments below rest upon adequate

non-federal grounds (pp. 11-15, ante), petitioners’

contention that they were denied procedural due

process by the class suit presents nothing but an ab-

stract question of law. We will reply to petitioners

because we believe their position, even in the ab-

stract, is untenable.

Cause No. 63,621, the class suit, was prosecuted

by a receiver appointed by a State court under State

statute to liquidate the insolvent exchange or asso-

ciation of which petitioners were members (R. 761-

762). In that proceeding the receiver sought a

judgment decreeing that the Exchange was insol-

vent; that an assessment should be levied against the

subscribers in order that the obligations of the Ex-

change might be discharged; that the subscribers

were subject to assessment; and the rate of assess-

_—

ment required to liquidate the Exchange (R. 7 62-

763). In prosecuting this proceeding the receiver

acted as the representative of injured workmen who

were entitled to workmen’s compensation payments

under policies issued by the Exchange and as the

representatives of all other parties who were cred-

itors of the Exchange (R. 561-562, 657).

While petitioners contend that the “purpose of the

suit was to impose a personal liability on the absent

subscribers for the debts of the Exchange (Brief, p.

30), it is plain, as pointed out at p. 3, ante, that

under State law the judgment sought in that suit and

the judgment actually entered therein imposed no

personal liability upon the absent subscribers. The

judgment determined nothing but (1) the necessity

for an assessment; (2) the total amount of money to

be raised by the assessment; and (3) the basis upon

which each subscriber should be assessed, that is,

the manner in which the liability should be prorated

among the subscribers.

The judgment entered did not go nearly so far in

determining the ultimate liability of the subscribers

as did the judgment considered by this Court in Greaz

Western Telegraph Co. v. Purdy, 162 U. 8. 329, a

judgment “that a call or assessment be, and the same

is hereby, made upon the stock and stockholders of

thesaidcompany, * * * of thirty-five per centum

of the par yalue of the shares of said stock subscribed

for or held by them, being eight dollars and seventy-

five cents on each and every share thereof.” (162

U.S. 332.) This Court held that such judgment was

not “a judgment against anyone” (162 U. S. 337) ;

and that it was binding upon all stockholders, al-

=x ‘=

tltough entered in 2 suit against the corporation te

which the stockholders were not parties. See also

Converse v. Hamilton, 224 U. S. 243, 256.

Use of a class suit to determine the foregoing ques-

tions did mot deny procedural due process to these

subscribers not niade actual parties to the suit be-

cause the relationship between the subscribers was

such as to make it appropriate for a group of the

subscribers to represent all of the subscribers. There

is more to a reciprocal insuranee exehange or asso-

ciation than a bundle of contracts (powers of at-

torney) signed by the subscribers or members. Such

an association functions as an entity and the mem-

bers thereof acquire a status simply by reason of the

fact that they are members. As Mr. Justice Holmes

has stated: “The act of becoming a member [of a

mutual association] is something more than a con-

tract, it is entering into a complex and binding rela-

tion, and as marriage looks to domicile, membership

looks to and must be governed by the law of the State

granting the incorporation.” (Modern Woodmen of

America v. Mixer, 267 U. S. 544, 551.) In deter-

mining the relationship between the subscribers of

the reciprocal association here involved the State

courts necessarily considered the reciprocal contraets

and the applicable Texas statutes, all matters of

purely local concern. Pink v. A. A. A. Highway Ez-

press, 314 U.S. 201, 211.

Any effort to compel a reciprocal association to

meet its obligations is an effort to make the indi-

vidual subseribers as 2 group meet obligations owed

aga group. In fact the unity of the members of the

reciprocal association here involved was an aecorm-

=

plished fact Jong before the institution of the class

proceeding and long before the association was placed

in the hands of a receiver. The members volunterily

at owls unity by operating as a reciprecal imsur-

ance exchange. The unity of the members was euch

that the members as a group wrote policies of in-

surance (R. 761-762). The unity of the members

was such that the members, the class, could incur

obligations in a common name. Mayhew & Isbell

Lbr. Co. v. Valley Wells Truck Growers’ Ass’n (Tex.

Civ. App.), 216 S. W. 225.

The unity of the members of the reciprocal wa3

such that they or it obtained a license to operate as

an association through the members making common

representations to the Board of Insurance Commis-

sioners through a common agent (R. 770). The unity

of the members of the association was such that they,

the class, by issuing workmen’s compensation po!-

icies thereby took from their employees the common

law rights of such employees and required such em-

ployees and doctors, nurses and hospitals rendering

services to them to look alone to the association for

payment. (Art. 8306, Vernon’s Ann. Civ. Stats. of

Texas.) The unity of the members of the associa-

tion was such that they were jointly and severally

liable for claims of third parties. Sergeant v. Gold-

smith Dry Goods Co., 110 Tex. 482, 221 S. W. 259.

In that ease, the Supreme Court of Texas stated:

“As to third persons dealing with the association

and to whom it incurred lawful debts contracted

within the powers of whatever agency it employed,

* * the members of the association, as stated

before, are jointly and severally liable as principals.

—22—

They could not create an organization, give it a

name, invite others to sell it supplies or render it

services, for instance, for their benefit, and not as

principals be liable for such debts. The association

was a fiction except as the members stood behind it.

They are necessarily liable for debts to third persons

incurred in carrying out the purposes for which they

were associated. They were the association. Such

transactions inured to their joint and several ben-

efit. They should in the same measure pay what is

owing upon them.” (110 Tex. 490, 221 S. W. 261.)

In the instant case the receiver did not seek to im-

pose joint and several liability upon the subscribers,

but this in no way detracts from the fact that under

State law the members of a reciprocal insurance as-

sociation are jointly and severally liable in so far as

claims of third parties are concerned. In this con-

nection, the statement in the dissenting opinion that

“regardless of what mav have been the liability of

the parties under the relations that actually existed

among them, the suit under consideration was on

alleged several obligations, and the judgment actu-

ally recovered was several, and not joint” (R. 826),

furnishes no support for the position of the dissent-

ing justices because “the relations that actually ex-

isted among them” (the subscribers) is of the great-

est importance in determining whether or not a

group of subscribers could stand in judgment for ail

subscribers.

The duties which the members incurred were re-

ciprocal duties. In a reciprocal association like duties

and obligations are exchanged. The duty owed by

one party to a reciprocal undertaking necessarily af-

ee

fects and is related to the duty of every other party

thereto. The duty which the members of a reciprocal

owe to each other, injured workmen and other cred-

itors is at the very least a common duty . It is the

duty to provide a fund to pay claims. This burden

descends upon a party when he becomes a member of

a reciprocal association, and not by reason alone of

any language in the contract signed by him, but by

reason of his becoming a member of the association,

and a party to a reciprocal undertaking.

All members of the association are interested in

the duty owed by them as a group, the duty to satisfy

the obligations of the association. Their interest is

common, Since all may be called upon to raise a fund

to satisfy obligations of the association of which they

are members, all are interested in how the fund shall

be raised. Consequently their interest is common.

Their duty isthe same. The burden to be shouldered

by one subscriber is the same as the burden to be

shouldered by every other subscriber.

It seems plain from the foregoing that the rela-

tionship between the members or subscribers of a

reciprocal insurance association is such that the ques-

tion of whether the members shall be assessed and the

amount thereof may be determined in a class suit

proceeding in which a group of the subscribers rep-

resent all of the subscribers. The class suit device

is commonly used and its use has been upheld by the

courts without exception. Southern Ornamental

Iron Works v. Morrow (Tex. Civ. App.), 101 S. W.

(2d) 336, writ refused; Gray v. Moore (Tex. Civ.

App.), 172 8. W. (2d) 746; Mitchell v. Pacific Grey-

hound Lines (Cal. Ct. of App.), 91 Pac. (2d) 176;

a

~ 2d

drwin v. Missouri Valley Bridge & Iron Co. (C. C. A.

7), 19 Fed. (2d) 300, cert. den. 275 U. S. 540.

That a class suit may be filed in such a situation

is demonstrated by Rule 23 of the Federal Rules of

Civil Procedure which allows a class suit “when the

character of the right sought to be enforced for or

against the classigs * * * joint, or common.” While

this rule speaks of a “right” it is obvious that the

rule has application when the duty sought to be im-

posed upon a class is a common duty. The language

a “right sought to be enforced * * * against the

class” is nothing but a somewhat clumsy reference

to a “duty sought to be imposed * * * upon the

class.” 2 Moore’s Federal Practice, pp. 2237-2238.

In the treatise last mentioned (pp. 2235-2245)

Professor Moore discusses the binding effect of a

judgment rendered in a true class action, the effect

of a judgment rendered in a spurious class action,

and the effect of a judgment rendered in a hybrid

class action. In grouping the cases he places South-

ern Ornamental Iron Works v. Morrow (Tex. Civ.

App.), 101 S. W. (2d) 336, writ refused, a case

holding that a class suit will lie to assess the members

of a reciprocal insurance association, in the category

of true class actions; he does so because the right

sought to be enforced against the members and the

duty ‘sought to be imposed upon the members is com-

mon (p. 2289).

The dissenting opinion below (R. 817-833) is fun-

damentally erroneous because it is based upon the

hypothesis that the rights held by each member of

a reciprocal insurance association and the duties

owed by each member are separate and distinct and

oo

entirely unrelated to the rights held by, and the

duties owed by, the other members; and that the

rights held and the duties owed by a member depend

entirely upon whatever bargain the member may

have made with the association. The error in this

assumption is exposed by the very name applied to

the association here involved, reciprocal insurance

association. It is obvious that an association is not

reciprocal where the rights and duties owed by one

member are entirely unrelated to the rights and

duties owed by other members. In truth and in fact

such rights and duties are, at the very least, common

rights and duties; and the dissenting justices erred

in holding otherwise.

The dissenting opinion is also fundamentally er-

roneous because it assumes that the judgment en-

tered in the class suit was a judgment in personam

against each subscriber. This is not true, as we

point out at pp. 3, 19-20, ante.

This Court has held that procedural due process is

not denied absent members by a class suit to assess

the members of a mutual insurance association. In

Hartford Life Insurance Co. v. Ibs, 237 U. S. 662,

the mutual department of the company had forfeited

Ibs’ policy by reason of his failure to pay an assess-

ment levied to meet some one hundred forty-five

claims. When Ibs’ widow sued on the policy the de-

fense was forfeiture. In reply, the widow contended

that the assessment levied to meet the 145 claims

was invalid because there was then in the fund in-

volved sufficient money to pay the 145 claims; that

as a consequence the attempted forfeiture of Ibs’

policy was ineffective.

i

—_—s

In rebuttal, the company offered in evidence the

judgment of a Connecticut court holding that the

company had the right to maintain the fund as a

reservoir to pay claims promptly and that the com-

pany could make such an assessment as that levied

against Ibs. That judgment had been rendered in

a suit brought by 31 members of the mutual depart-

ment of the company for themselves and some 12,000

other members, as a class, against the company to

determine the company’s right to assess the members

to maintain the fund.

In considering the effect of the Connecticut de-

cree this Court said: “On that issue the Connecticut

decree was admissible, since it adjudged that the

Company had the right to make advances to pay

claims and could subsequently collect the amount oj

such claims by an assessment levied as in the present

case. Its right so to do having been determined by a

court of competent jurisdiction, the decree was bind-

ing between the parties or their privies in any sub-

sequent case in which the same right was directly or

collaterally involved.” (237 U.S. 673.)

We earnestly maintain that the court which en-

tered the class suit judgment here involved had the

same authority as the Connecticut court; that is, the

authority to determine what assessment should be

levied on the members of the association. We fur-

ther submit that if the class proceeding upheld ir

the Ibs case afforded due process to those represented

as members of a class, the instant proceeding did

likewise.

In Supreme Tribe of Ben-Hur v. Cauble, 255 U.S.

356, the 70,000 members of Class “A” of the society

= =

were held bound by a decree entered in a proceeding

in a Federal court of Indiana in which they were

represented by 500 members. One of the questions

presented in that proceeding was:

“The right of the Supreme Tribe of Ben-Hur to

require members remaining in Class ‘A’, and not

transferring to Class ‘B’, to pay a sufficient number

of monthly payments, or assessments, to meet the

death losses in Class ‘A’.” (255 U. S. 358.)

In holding that the Indiana suit was a true class

proceeding ; that the right to entertain it was not de-

pendent upon any rule of the Court; and that all

members were bound by the decree entered therein,

this Court said:

«* * * Itis true that jurisdiction, not warranted

by the Constitution and laws of the United States,

cannot be conferred by a rule of court, but class suits

were known before the adoption of our judicial sys-

tem, and were in use in English Chancery. Street’s

Federal Equity Practice, vol. 1, § 549.

TS 3 7 * * * *

“Tf the federal courts are to have the jurisdiction

in class suits to which they are obviously entitled, the

decree when rendered must bind all of the class prop-

erly represented. The parties and the subject-mat-

ter are within the court’s jurisdiction. It is im-

possible to name all of the class as parties, where,

as here, its membership is too numerous to bring

into court. The subject-matter included the con-

trol and disposition of the funds of a beneficial or-

ganization and was properly cognizable in a court of

equity. If the decree is to be effective and conflict-

ing judgments are to be avoided all of the class must

be concluded by the decree.” (255 U. S. 366, 367.)

—2Z8—

In the dissenting opinion below is the statement

that the Jos and Cawble cases “involved the rights

of the members of the alleged class in property owned

by them in common. None of them involved an at-

tempt to recover on the several obligations of the

members of the alleged class” (R.824). This state.

ment is inaccurate. In so far as the twe cases are

relied upon by us, they involved, not a fund owned

in common, but the right of a particular association

to assess its members. In the Ibs case this Court

held that the class suit judgment conclusively deter-

mined the company’s right to assess members of the

mutual department; and in the Cauble case this

Court held that the class suit judgment conclusively

determined the right of the association “to require

members remaining in Class ‘A’, * * * topaya

sufficient number of monthly payments, or assess-

ments, to meet the death losses in Class ‘A’.” (255

U.S. 358.) Exactly the same issue was determined

in the class suit here involved, i. e., the right of the

receiver of the association to assess the members of

the association.

In Royal Arcanum v. Green, 237 U.S. 531, the

governing body of the mutual had changed the by-

laws, and thereby increased the rates charged the

members. Thereafter, 16 members, on behalf of

themselves and thousands of other members, filed a

¢lass suit against the association to vacate the by-

laws on the ground that the change was “violative”

of contract rights.” (237 U.S. 537.) In that liti-

gation a judgment was entered holding the increase

in rates valid.

After the foregoing judgment was handed down

—-_™

the validity ef the increase in rates was at issue in

litigation between the association and the widow of

one Green, a deceased member of the association. In

this litigation this Court, in helding that the decree

in the elass suit that the inerease in rates was valid

was conclusive, said:

“Indeed, the aecuracy of this conclusion is irre-

sistibly manifested by considering the intrinsic rela-

tion between each and all the members concerning

their duty to pay assessments and the resulting indi-

visible unity between them in the fund from which

their rights were to be enjoyed. The contradiction

in terms is apparent which would rise from hol

on the one hand that there was a collective and unifi

standard of duty and obligation on the part of the

members themselves and the corporation, and saying

on the other hand that the duty of members was to

be tested isolatedly and individually by resorting not

to one source of authority applicable to all but by

applying many divergent, variable and conflicting

criteria. In fact their destructive effect has long

since been recognized.” (237 U. 8. 542.)

What possible distinction can be drawn between

the foregoing ease and the instant case? There, the

question involved was as to the rate of assessment of

the members. Each member rested under the bur-

den of paying assessments; the burden was common

to alk. The very subject-matter of the class suit

was the common duty which rested on the members.

It was held that the class suit judgment was conclu

sive as to those mot actually parties, even though

these latter contended that the decree fixing their

rate of assessment was “violative of contract rights.”

(237 U. S. 537.)

lite

In the class suit involved in the instant case the

question was as to the rate of assessment of the

members. The burden of paying assessments rested

upon all members as a group. The members rested

under a common duty, just as did the members in-

volved in Royal Arcanum v. Green.

As a final argument here let it be supposed that

the Exchange, acting through the attorney in fact,

had levied the assessment here involved and had at-

tempted to collect such assessment from the mem-

bers. It seems clear to us that in such situation

those members who took the position that their rights

were violated by the levying of the assessment could

have brought a suit on their own behalf and on behalf

of all other members to determine the right of the

association to levy and collect the assessment and

that such a proceeding would have been compatible

with procedural due process. That is exactly what

was done in the Jbs and Ben-Hur cases. If the mem-

bers could bring a class suit to test the validity of an

assessment made by the association, it follows that

a class suit could be brought against the members

to determine the same thing.

Petitioners rely almost entirely upon this Court’s

opinion in Christopher v. Brusselback, 302 U.S. 500.

That case is not in point for the following reasons:

First: There is no such relationship between a cor-

poration’s stockholders who are by statute made

liable to an assessment (the situation involved in the

Brusselback case) as there is between the members

or subseribers of a Texas reciprocal insurance ex-

change. The corporation is an entity separate and

—

~~

apart from its stockholders and the stockholders are -

not subject to assessment at all unless made so by

statute; whereas, under State law, the members of a

reciprocal insurance association are the association.

Sergeant v. Goldsmith Dry Goods Co., 110 Tex. 482,

490, 221 S. W. 259, 261. (See pp. 21-22, ante.)

Under State law the members are jointly and sever-

ally liable for the claims of third parties, and even

where the claims of the subscribers themselves ar?

involved the members of the association rest under a

common duty, the duty to create a fund to discharge

such claims. Obviously, there is a closer relationship

between such members than there is between a cor-

poration’s stockholders who are by statute made

liable to assessment. A holding that under certain

circumstances a class suit will not lie to assess the

latter, even if made in the Brusselback case (which

respondent denies), is not controlling in a case in-

volving the propriety of a class suit to assess the

members of a reciprocal insurance association.

Second: The holding in the Brusselback case is

based squarely upon the proposition that the assess-

ment liability of the stockholders there involved dia

not constitute an asset of the corporation which could

be availed of by the corporation or its receiver, with

the consequence that a court could not do what was

done in Hawkins v. Glenn, 131 U. S. 319, i. e., order

the assessment which should have been made by the

corporation itself. In Hawkins v. Glenn, this Court

held that a court of equity could entertain a suit

against a corporation to fix the liability for assess-

ment of its stockholders and that any decree entered

=

in the suit would bind all stockholders of the eorpo-

ration, even those not. made parties to the suit, upon

the ground that they were adequately represented

by the corporation. That holding was explained and

approved in the Brusselback case upon the ground

that the Court in Hawkins v. Glenn was ordering

done what. the corporation itself should have done—

assess the stockholders. However, that holding was

held inapplieable in the Brusselback case because the

assessment liability of the stockholders there involved

was not an asset of the corporation and their obliga-

tion to creditors (liability to assessment) was an ob-

ligation which could not have been enforced by the

corporation itself or by its receiver. Consequently,

this Court held in the Brusselback case that the cor-

poration could not stand for its stockholders.

In the instant case the subscribers’ liability to

assessment is an asset of the Exchange (Mitchell v

Pacifie Greyhound Lines (Cal. Ct. of App.), 91 Pac.

(2d) 176, 180}, and the Exchange itself, or rather

the attorney in fact for the members or subscribers,

should have assessed the members in a sufficient

amount to satisfy the obligations of the Exchange.

Article 5029, Vernon’s Ann. Civ. Stats. of Texas (set

out at page 52 of Petitioners’ Brief) provides that

the members of a reciprocal association shall at all

times maintain a reserve of not less than ten thou-

sand dollars, and that if the reserve falls below this

amount, “then the subscribers, or their attorney for

them, shall make up any deficiency.” Under this

statute the Exchange, or rather the attorney in fact

who operated the Exehange, should have forced the

subseribers to maintain the constani reserve re-

-_

oe

quired. It was the failure to perform this statutory

duty that led to the insolvency of the Exchange, and

resulting receivership; and which created the neces-

sity for assessment of the subscribers. Further-

more, Sections 15, 16a and 23 of Article 8308, Ver-

non’s Ann. Civ. Stats. of Texas, a workmen’s com-

pensation statute (Appendix, pp. 46-47), require

any association writing workmen’s compensation in-

surance (the main business of the Exchange here in-

volved, R. 817) to maintain a reserve “sufficient for

the payment of its incurred losses and expenses,” and

provide that if such reserve is not maintained, the

association “shall make an assessment for the amount

needed to pay such losses and expenses.” This liabil-

ity for assessment constitutes an asset of the associa-

tion. City of Tyler v. Texas Employers Ins. Assn.

(Tex. Com. App.), 288 S. W. 409, 412.

It is plain from the foregoing that the assessmen

liability of the subscribers here involved constituted

an asset of the Exchange, and it is further plain

that the attorney in fact for the subscribers should

have required the subscribers to pay an assessment

in an amount sufficient to take care of the obliga-

tions of the Exchange. If this is an obligation which

the association or its attorney in fact could have en-

forced against the subscribers, then it is likewise an

obligation which can be enforced through a court of

equity. The principle in Hawkins v. Glenn, 131 U.

S. 319, is applicable, the only difference between this

case and that case being that in Hawkins v. Glenn

the corporation stood for its stockholders, who were

subject to assessment; whereas, in the instant case

a group of subscribers who were subject to assess-

‘aidan

ment represented all subscribers of the Exchange.

If virtual representation was justified in Hawkins v,

Glenn and if that proceeding did not deny due process

of law to the stockholders who were not actual parties

to the suit, then petitioners were not denied due

process of law in the instant case by reason of the

fact that they were represented in the assessment

suit by a group of subscribers selected to represent

them as a class.

Third: In the Brusselback case this Court empha-

sized the fact that no procedure whereby the stock-

holders of the corporation might be assessed had been

provided by statute or by rules governing the corpo-

ration, with the consequence that the stockholders

had no “warning” that they might be assessed in

such an action as was there involved. (302 U.S.

504.) The contrary is true in the instant case be-

cause it had been determined in an opinion approved

by the highest court of the State that subscribers or

members of a reciprocal insurance association could

have their liability for assessment determined in a

class suit, i. e., a suit brought by a receiver of the

Exchange against a group of subscribers selected to

represent a class composed of all subscribers. The

opinion so holding (Southern Ornamental Iron

Works v. Morrow (Tex. Civ. App.), 101 S. W. (2d)

336, writ refused) was handed down in January,

1937, whereas the Exchange here involved was not

even placed in the hands of a receiver until Decem-

ber, 1937 (R. 802). Consequently petitioners and

other subscribers had “warning” before their Ex-

change was placed in the hands of a receiver and long

—

——_—

=_ =

before the assessment suit was filed that their lia-

- pility for assessment could be determined in a class

suit. By becoming members of the Exchange or by

retaining their membership therein, after the warn-

ing given in Southern Ornamental Iron Works v.

Morrow, petitioners and other subscribers assumed

the risk that a selected group of subscribers might,

stand in judgment for all of them. (302 U.S. 504.)

Furthermore, even before the decision in Southern

Ornamental Iron Works v. Morrow the subscribers

of this reciprocal association knew that they rested

under the duty of maintaining a fund adequate to

take care of all claims; and they further knew that

if they failed to perform their duty they could be

brought to account through the “powers and proce-

dure of a court of equity.” (Hawkins v. Glenn, 131

U. S. 319, 330.)

Fourth: The Brusselback case did not involve a

true class action. In that case the liability for assess-

ment of the stockholders was not sought to be estab-

lished in a plenary proceeding brought by all cred-

itors or by a plaintiff representing all creditors. On

the contrary, it was brought by “certain bondholders

of the bank.” (87 Fed. (2d) 762.) Furthermore,

the proceeding was not brought against certain stock:.

holders as representatives of a class but was brought

against the “bank and all its stockholders,” but serv-

ice was had only upon stockholders residing in IIli-

nois. (302 U.S. 501.)

It is plain from the foregoing that the Brusselback

case did not involve a plenary proceeding brought by

all creditors or a representative of all creditors (such

a

as a receiver) against certain stockholders sued as

representatives of a class composed of all stockhold-

ers. For this reason the principle of that case has

no application here where the receiver, on behalf of

all creditors, sued a group of subscribers as repre-

sentatives of a class composed of all subscribers.

Petitioners also rely upon Hansberry v. Lee, 311

U. S. 32, but that case is not remotely in point. There

the prior decree which it was claimed rendered cer-

tain issues res judicata was entered in a suit brought

by a single landowner in the restricted area on be-

half of herself and other property owners in like

situation to enforce an agreement allegedly executed

by the property owners in the area, which stipulated

that no part of the land in the restricted area should

be sold to a negro. This Court held that the decree

did not bind those who were opposed to enforcing

the agreement and who were not parties to the prior

litigation.

In the Lee case the judgment showed on its face

that it was not binding upon Lee, et al. The very fact

that the judgment was entered showed that there

were two classes of property owners—those who de-

sired to enforce the restriction and those who were

opposed to its enforcement. Yet there was no repre-

’ sentation either through use of the class suit device

or otherwise of those who were opposed to enforce-

ment of the agreement. The four individuals who

were named as defendants in the first suit were not

sued as representatives of a class; that is, as repre-

sentatives of those landowners who did not desire

that the covenant be enforced. It was obvious, there-

=

fore, from an examination of the judgment entered

in the prior suit that Lee, et al., were not represented

in that proceeding and that they eould not be bound

by the judgment entered therein. In fact the judg-

ment entered in the prior suit did not purport to bind

those not named as defendants. (311 U. S. 46.)

In the Lee case each property owner had the right

to elect whether he desired to enforce the covenant

cr oppose its enforaggient. In the instant case no

subscriber had the t to elect whether or not he

would abide by his reciprocal undertaking.

in the dissenting opinion the point is made that

ali members of the class, the subscribers at the Ex-

change, did not have the same interest; that some of

them were interested in having an assessment made,

whereas others were interested in defeating any as-

sessment (R. 830-831). There is nothing in this

record te-stipport any such conclusion, which prob-

ably explains why petitioners make no such conten-

tion here. Since petitioners make no such contention,

we will give no further consideration to this phase

of the dissenting opinion.

Fifth Point

The finding of the three courts below that the re-

ceiver properly conducted the class suit proceeding

is supported by substantial evidence and should be

upheld.

Argument

We will now consider the abstract question of

whether petitioners were denied due process of law

a

by the manner in which the receiver conducted the

class proceeding. This question is purely abstract

because, as already pointed out at pp. 11-17, ante,

petitioners have no defense to the cause of action

asserted against them by the receiver, with the con-

sequence that they cannot, under settled principles

of State law, successfully prosecute a bill of review

proceeding to set the class suit judgment aside, irre-

spective of any fraud that may have been

trated upon them by the receiver. What difference

does it make whether petitioners were properly rep- _

resented in the class proceeding now that the courts —

below in a proceeding to which petitioners were

actual parties, have held that judgment should have

gone against petitioners in any event?

We cannot accept as complete or accurate peti-

tioners’ statement as to the receiver’s conduct. Peti-

tioners seek to create the impression that the receiver

prevented the 32 defendants and interveners in the

class suit from obtaining a holding that the policies

issued by the Exchange were non-assessable. This

contention is not supported by the weight of the evi-

dence.

The Court of Civil Appeals, after reviewing the

voluminous record, held:

“* * * the evidence would support implied find-

ings of the trial court * * * that the Receiver

was not guilty of misconduct amounting to fraud in

obtaining the assessment judgment in Cause No.

63,621.” (R. 760.)

The Supreme Court of Texas made a similar hold-

ing (R. 816).

—“

—39—

Mr. Kelly, the receiver, denied that he selected the

class defendants so as to avoid a contest (R. 266).

He checked Dun & Bradstreet for solvency of every

defendant (R. 261). Twenty-five defendants in the

first suit, No. 61,773, were also parties to the second

suit, No. 63,621 (R. 511-528, 554-556). Mr. Kelly

testified that he omitted from the second suit Sid

Richardson and others who had filed pleas of privi-

lege in the first suit, because he was afraid he could

not maintain venue against them (R. 266).*

In the instant proceeding over one hundred sub-

scribers (including petitioner Mid-Co Gasoline Com-

pany, whose pleadings were adopted by petitioners

Sid W. Richardson and Richardson Oils, Inc., R. 173}

sued these same parties as class representatives.

The same parties selected by the receiver as class rep-

resentatives in the original proceeding, No. 63,621,

were also selected and sued by these petitioners as

class representatives in the instant suit (R. 2, 63-64).

If these parties afforded adequate representation of |

the class in the instant proceeding it would seem that

they afforded such representation in Cause No.

63,621.

Petitioners’ criticism of the amounts owed by the

class representatives in Cause No. 63,621 is like-

wise unfounded. The premiums booked and earned

from the 3200 subscribers amounted to only $402,-

000.00, making the average assessment less than

$126.00 (R. 663). Most of the 123 subscribers who

participated in this bill of review proceeding owed

‘Petitioners agreed with him (R. 139, 154). See Royal

hengeongy Corp. v. McCallum, 134 Tex. 543, 1385 S. W.

) 958.

a

=

small amounts. Two owed only $1.79; nine owed

less than $10.00 each; thirty-five owed less than

$100.00 each (R. 838-841).

As to the thirty-two defendants and interveners

in the original proceeding, No. 63,621, the record

shows:

Two® were dismissed. One had died, the other

could not be served (R. 267).

Six’ defaulted. None of these parties testified.

There is no evidence the receiver prevented them

from defending the suit.

Five’ answered by their attorneys and tendered

into court the amount of their assessments. None

of these parties testified. Their attorneys did not

testify. There is no evidence Mr. Kelly influenced

their actions.

Five defendants’ filed defensive pleadings, but did

not appear at the trial. None of said parties tes-

tified. Their attorneys did not testify. There is no

evidence Mr. Kelly ever discussed the case with them

or with their attorneys.

? W. C. Moore and H. E. Cannon.

* Bell Furniture & Mattress Company, Inc.; H. E. Caton;

O. G. Hanseler; Harry Knox Company; A. S. Hull d/b/a

Hull Stationery & Printing Company; Lockhart’s, Inc.

(R. 652).

* Morris Catchman (R. 624) ; Lockhart Produce Company,

Inc. (R. 643) ; C. W. Lott (R. 618) ; Oakhurst Land Com-

pany (R. 617); O. K. Warehouse Company (R. 616).

* Frank Del Curto (R. 645); Edwin M. Dezendorf (R.

641); O. .P. Lockhart (R. 619); Gus J. Moos (R. 642);

Owens-Snebold Oil Corp. (R. 621).

—

—41—

Six other denefdants’ answered but did not appear

at the trial. These parties did not testify. Carlisle

Cravens of Cantey, Hanger, McMahon, McKnight &

Johnson, was the attorney for three of them (R. 254-

256). He did not testify. Mr. Kelly testified no

agreement was made with Cravens prior to trial (R.

256). There is no evidence that Mr. Kelly pre-

vented his attendance at the trial. Another sub-

scriber, Rogelein Packing Company, was represented

by the firm of Terrill, Davis, Hall & Clemmons. No

member of that firm testified. There is no evidence

that Mr. Kelly prevented their attendance at the

trial, although he had discussions with Mr. Hall

(R. 259).

Sterling P. Holloway testified concerning a settle-

ment agreement (33 1/3 per cent discount) for

Brownwood Public Service Co., but admitted that a

dispute existed as to the amount of the premiums

booked and earned on his client’s policy (R. 317).

This settlement was denied by Mr. Kelly (R. 260),

and was never consummated (R. 314). Several

months after the class decree the parties were still

negotiating (R. 315).

Great stress is laid upon Kelly’s alleged statement

to Kogers, attorney for Foxworth-Galbraith Lumber

Company, “You have caused me a lot of trouble about

this thing.” Rogers testified that Kelly was “joking

*Rogelein Packing Company, represented by Terrill,

Davis, Hall & Clemmons (R. 646) ; B. C. Bates, J. M. Gar-

rett, and National Livestock Commission Company of Texas,

represented by Cantey, Hanger, McMahon, McKnight &

Johnson (R. 632, 633, 639) ; Brownwood Public Service Co.,

represented by Thompson & Barwise (R. 626) ; Foxworth-

Galbraith Lumber Company, represented by Kilgore &

Rogers of Wichita Falls (R. 630).

—

and laughing” at the time the statement was made

(R. 301). Kelly testified that, while discussions of

settlement were had with Rogers before the judg.

ment became final, a settlement was not consum-

mated until April 17, 1941 (R. 258). This is borne

out by a letter (R. 698) and the release (R. 699).

Rogers testified that the settlement “was a fair bar-

gain openly arrived at” (R. 305), and he refused to

testify that Kelly caused him to waive any defense

to the suit, or that he had any particular defense in

mind (R. 306).

Eight subscribers’ appeared by their attorneys

and defended the suit on its merits. Mr. Gresham,

the attorney for three of said subscribers, testified

that he represented his clients to the best of his

ability; that Mr. Kelly made no attempt to prevent

him from defending the suit or from introducing evi-

dence (R. 382). Mr. Gresham testified that Mr. Kelly

refused to discuss settlement with him prior to trial

(R. 384).

Petitioners stress Evans’ testimony to the effect

that he made an agreement with Mr. Kelly whereby

he would not “press his defense” (R. 286), but on

cross-examination he failed to identify any evidence

that he held back (R. 294). He testified that he

acted in good faith during the trial (R. 294). The

proceedings (R. 219-237) show a vigorous defense

by Mr. Evans.

‘'T. B. Hill, Harry Joseph and Riddle Oil Co., represented

by Willis Gresham of Austin; Nick Linz, represented by

Elbert A. Boynton of Austin; William H. Balzen, Russell C.

Crawford, Krisch & Lanham, Inc., and W. R. Thrailkill, rep-

resented by O. Shelley Evans of San Antonio (R. 219, 286,

382).

—

In connection with the testimony of Evans it

should be remembered that he had had a dispute with

the first receiver, and a controversy with the second

receiver over salary and possession of company rec-

ords (R. 292) resulting in hearings before the Mas-

ter and the Court (R. 262). Mr. Kelly denied the

alleged settlement (R. 262).

A partial transcript® of the class proceedings is in

evidence, consisting of 54 pages of testimony (R. 219-

237, 388-400, 448-472), 34 pages of defensive plead-

ings (R. 616-650) ; 64 exhibits were introduced. Dis-

regarding for the moment the impossibility of saying

that the record here shows the class was improperly

represented in the original proceeding, since a ma-

terial part of the original proceeding is not in evi-

dence ;* yet, it is submitted that the record introduced

shows proper representation.

The trial court had before him the books and rec-

ords of the Exchange, the reciprocal contracts, the

testimony of its manager (R. 458) and two bookkeep-

ers (R. 221, 388). The State Examiner, who had

audited the reciprocal exchange for six consecutive

years, also testified (R. 466) and produced his audits

(R. 468). Mr. Kelly also testified (R. 232).

So thoroughly were the principal issues covered

‘Thirty (30) exhibits in the original proceeding were not

introduced below. They are: Exhibits 7, 8, 9, 10, 11, 13, 15,

16, 17, 18 and 19 (R. 220-224) ; Exhibits 1, 2, 3a, 3b, 4, 5,

6a, 6b, 7a, 7b, 7c, 7d, 8a, 8b of Coleman’s deposition (R. 394-

397) ; Vaughan’s Exhibit 32 (R. 463) ; McClain’s Exhibits

40, 41, 42 and 43 (R. 468-469). All exhibits identified in

these depositions were in evidence in 63,621 (R. 282-283).

These exhibits included the books and records of the asso-

ciation and four audits by the State Examiner.

is |

in the original proceeding that the petitioners below

did not, and do not now, question the findings as to

the extent of insolvency of the Exchange, the insol-

vency period, the necessity for the assessment, the

amount of assessment, and the assessment period.

They confined their attack on the assessment pro-

ceeding to the contention that the policies were non-

assessable, a point they cannot and do not urge here.

When the decree became final, on April 9, 1941,

the court authorized the receiver to settle claims for

assessments (R. 739). Pursuant thereto, Mr. Kelly

settled with eight parties to the class proceeding. He

testified concerning each of these settlements (R.

253-260) and said “That is all of them” (R. 260).

He also withdrew from the registry of the court the

assessments paid in full by five other defendants.

Mr. Kelly was his own attorney in the class pro-

ceeding. It was not shown that his discussions with

attorneys for the defendants were wrongful or im-

proper.

It is respectfully submitted the petitioners hav

failed to prove wrongful conduct of the receiver

causing improper representation of the class. The

record fails to show improper representation of the

class; it fails to show any possible defense available

to the class. In fact petitioners’ contention that the

class was not properly represented boils down to the

contention that a defense should have been urged al-

though none was available.

wailiiinsin

Conclusion

It is respectfully submitted that no federal ques-

a ——————— ae

—

tion of substance is presented by the petition for writ

of certiorari and that the petition should be denied.

Respectfully submitted,

MARION B. SOLOMON,

CHARLES L. BLACK,

JOHN W. STAYTON,

Counsel for Respondent,

Keith Kelly, Receiver.

—

APPENDIX

Article 8308:

Sec. 15. If the association, at the end of any cal-

endar year, is not possessed of admitted assets in ex-

cess of unearned premiums sufficient for the pay-

ment of its incurred losses and expenses, it shali

make an assessment for the amount needed to pay

such losses and expenses, first upon the subscribers

within each group whose earned premiums compared

with its incurred losses and expenses show a defici-

ency for the group, and second only upon the sub-

scribers within each group whose earned premiums

compared with its incurred losses and expenses show

a surplus, and in no event shall it make an assess-

ment for any aggregate amount more than is needed

to pay losses and expenses. Every subscriber shall,

in accordance with the law and his contract, pay his

proportionate part of any assessment which may be

levied by the association on account of losses and ex-

penses incurred during any calendar year while he

is a subscriber.

Sec. 16a. Whenever the Association shall have

accumulated, at the end of any calendar year, an ad-

mitted surplus in excess of incurred losses, expenses

and unearned premiums or other liabilities amount-

ing to the sum of Two Hundred Thousand Dollars

($200,000.00) or more, the liability of its members

to assessment under Article 8308, Section 15, shail

be suspended, and it shall be authorized to issue pol-

icies not subject to assessment. It shall be the duty

of the Board of Insurance Commissioners to deter-

a

mine promptly after the filing of the annual State-

ment of the Association, whether or not such an

amount of surplus exists and if it finds that it does,

it shall so state in a certificate. Such certificate shall

remain in full force and effect for one (1) year or

until such time as a later report to or examination

by the Department of Insurance shall show the sur-

plus to be less than Two Hundred Thousand ($200,-

000.00) Dollars, whereupon the Board of Insurance

Commissioners shall cancel and revoke such certifi-

cate and require the Association to issue policies

subject to assessment under Article 8308, Section 15,

as they were prior to the time when such surplus of

Two Hundred Thousand ($200,000.00) Dollars or

more was first accumulated.

Src. 23. The association shall set up and maintain

reserves adequate to meet anticipated losses, carry all

claims to maturity and policies to termination, which

reserves shall be computed in accordance with such

rules as shall be approved by the Commissioner of

Insurance and may be invested in such securities as

are permitted to casualty companies organized unde

the General Laws; and, for the protection of its re-

serves and surpluses against the liability herein im-

posed, shall have the same right to reinsure or be re-

insured as casualty companies organized under Gen-

eral Laws.