Downey v. Humphreys

Appeal by plaintiff as liquidator of insurance companies from a judgment of nonsuit in an action against an agent to recover unremitted insurance premiums.

Independence Indemnity Company, a Pennsylvania corporation (referred to as Independence), for some time prior to November 1, 1931, Public Indemnity Company, a New Jersey corporation (referred to as Public), for some time prior

The complaint alleged, and the answer admitted, that prior to April 19,1933, all the assets and liabilities of Independence and Public were transferred to and assumed by International.

About November 1, 1931 (the exact date is not definitely fixed, but it is not material), Independence was “taken over” by International; that is, International acquired all of its assets and assumed all of its liabilities. Independence then ceased to function as a corporation. Thereafter International designated its Independence policies as “Independence Indemnity Underwriters, Division of International Reinsurance Corporation, ’ ’ and all business that had been and was thereafter written was the business of International. Defendant did not continue as agent of Independence after it was “taken over” by International; he dealt solely with International and was its general agent with respect to its Independence business.

On December 31, 1932, International “took over” Public; it acquired all of its assets and assumed all of its liabilities. Public then ceased to function as a corporation. Thereafter International designated its Public policies as “Public Indemnity Underwriters, Division of International Reinsurance Corporation,” and all business that had been and was thereafter written was the business of International. After International “took over” Public, the latter’s business was handled by International’s method of doing business without regard to Public’s contracts. Defendant did not continue as general agent of Public after it was “taken over” by International; he dealt solely with International with respect to the business of Public; he was general agent of International with respect to its Public division; and he was under the jurisdiction of the Pacific Coast manager of International.

There was evidence that on July 1, 1929, defendant entered into a written general agency contract with Public which provided in part: “The General Agent shall collect and will be responsible for the payment of the premium on any policy, contract of insurance or suretyship, or renewal thereof issued by, through or on account of his agency, whether through

The original contract was not produced. A copy which did not bear defendant’s signature was introduced in evidence. One witness testified that defendant had signed the original. There was much evidence that defendant did not have a written contract with Public; that the arrangement was oral and that defendant would not and did not sign the original of the copy produced. As this is an appeal from a judgment of nonsuit, we must give plaintiff the benefit of the evidence which tends to sustain his averments, and assume that during the time he was general agent for Public—that is, until December 31, 1932,—defendant was working under the written contract. Mr. Dempsey, who was Pacific Coast manager of Independence until it was “taken over” by International, and vice-president and Pacific Coast manager of International thereafter, testified that after Public was “taken over” by International on December 31, 1932, regardless of how Public had handled its business, he merged it with International and handled it his own way; that he did not know how Public handled it; that he handled it “without regard to Public’s contracts or even looking to see if there were any.” There was no evidence that defendant ever entered into a written contract with Independence or with International. The uncontradicted evidence was that he did not. Mr. Dempsey testified that at all times his (International’s) arrangements with defendant were oral.

Defendant reported monthly—to Independence until it was “taken over” by International, thereafter to International with respect to Independence business, to Public until it was “taken over” by International, thereafter to International with respect to Public business—on what is called a “bordereau” or “account current,” showing business written, premiums due, premiums collected, commissions allowable, unearned premiums, debits and credits, and net. He remitted to the companies between the 15th and 25th of the third month following the month in which the business was written. The amount due the companies from defendant was the premiums collected, less unearned premiums, less his commission.

An unearned premium is that portion of a premium which has not been earned by reason of the fact that the policy has been cancelled; it is the premium for the unexpired term of the policy. When a policyholder cancelled a policy he looked to defendant for the unearned premium. The understanding and the course of business between the companies and defendant was that if there was a cancellation of a policy after a premium had been paid the policyholder would get back all of the unearned premium from defendant and the companies would credit him with the amount.

Defendant did not, and he was not required to, segregate the premiums collected on behalf of any of the companies (he was general agent for more than 20 insurance companies) in a separate account or as trust funds. With the knowledge and consent of the companies, he deposited premiums collected from all companies he represented and his personal funds in his general commercial account, and paid money owing to the companies from that account. Bills sent to policyholders were sent on defendant’s billheads, without the name of any insurance company.

In March, 1933, because of rumors as to the financial instability of International, defendant told Mr. Dempsey, “I think the company is going to blow.” Dempsey replied, “I’ll tell you what you do: We will know this in a little while. You can hold back the December premiums. ... It will give you just that much more money to replace if they do blow, but I don’t think they are going to.”

On April 19, 1933, International was adjudged insolvent and receivers were appointed by the Court of Chancery, County of New Castle, Delaware. The record is not at all clear, hut apparently on the same day a receiver of Inter

Plaintiff, in proving his case, established that on April 19, 1933, defendant had in his possession unearned premiums in the amount of $24,944.35. In his answer defendant alleged that he was authorized and entitled to and did offset these moneys against moneys due by him. Plaintiff’s proof showed that on April 19, 1933, $18,717.45 was due from defendant to International, and that after setting off the unearned premiums of $24,944.35, there was a balance due defendant of $6,226,90. Defendant did not press his claim for the balance in this action.

The trial court concluded that there was no evidence that defendant “occupied the status of trustee” on April 19, 1933; that the evidence showed without conflict that the relationship was that of debtor and creditor; that defendant was the creditor on that date; and that he had a right to offset unearned premiums in the amount of $24,944.35 against plaintiff’s claim of $18,717.45.

Plaintiff’s position at the trial was: “It is our position that the thirteen thousand-odd dollars collected prior to April 19th, a good part of it was unearned and it is returnable to the policy holders, yes. But the policy holder, he has a claim against the company and not against Mr. Humphreys. He is entitled to file a claim and to share on the same basis as every other claimant. That is our position. So it makes no difference whether or not the thirteen thousand-odd dollars is earned or unearned so far as Mr. Humphreys is concerned, because it is the liquidator who is supposed to pay the claimant and not Mr. Humphreys. That is our position in this throughout. As far as the $5,100 is concerned, we are entitled only

Plaintiff here contends that the relationship between defendant and the companies was that of trustee and beneficiary ; that the moneys sued for belonged to the liquidator; that the defendant did not have a right of offset; and that the evidence of defendant’s liability was sufficient to require denial of the motion for judgment of nonsuit. Defendant contends that the evidence, giving plaintiff the benefit of every reasonable inference therefrom, shows without conflict that on April 19,1933, he was agent of International only; that the relationship was that of debtor and creditor; and that he had a right of offset.

The adjudication of the insolvency of International on April 19, 1933, operated as a breach of its policies (including those of Independence and Public) with its insured. (Garrison v. Edward Brown & Sons, 25 Cal.2d 473 , 482, 483 [ 154 P.2d 377 ].) The proceeding in which receivers of International were appointed in Delaware did not work a dissolution of, nor was it for the purpose of liquidating, the corporation. (In re International Reinsurance Corp., Del.Ch.- [ 48 A.2d 529 , 539].) It was not until June 28, 1933, that an order was made in California for its liquidation. Only upon the entry of the order directing its liquidation did International’s liabilities to its creditors and claims against its debtors becomes fixed. (Garrison v. Edward Brown & Sons, supra, 25 Cal.2d 473 , 482.)

If the relationship of defendant to International on April 19, 1933, was that of trustee and beneficiary, defendant would not be permitted to set off unearned premiums, for a fiduciary cannot set off claims owed by him in Ms personal capacity against obligations that he assumes as a trustee. If defendant was trustee of the premiums collected, he would be obligated to remit them, deducting only commis

A debtor is one who, by reason of an existing obligation, is or may become liable to pay money to another, whether such liability is certain or contingent. (Civ. Code, § 3429.) A creditor is one in whose favor an obligation exists, by reason of which he is, or may become, entitled to the payment of money. (Civ. Code, § 3430.) A debt is not a trust and there is not a fiduciary relation between debtor and creditor as such. If a person receives money and it is the intention that he shall have the unrestricted use thereof, being liable to pay a similar amount to a third person, a debt is created. (Rest. Trusts, § 12, comments b, g; Preston c& McKinnon v. Brennan, 135 Cal. 55 [ 66 P. 981 ].) If funds held by an agent are commingled with the knowledge and consent of his principal, in the absence of an agreement to the contrary, the inference is that the agent becomes a debtor to the amount received for the principal. (Rest. Agency, § 398, comment c. See, also, Id. § 72, comment e.) There was no evidence from which an inference could be drawn that after Independence and Public were “absorbed” by International the relationship between International and defendant was that of trustee and beneficiary. As will appear, the relationship Avas that of debtor and creditor.

The evidence is without conflict that Independence was “absorbed” by International about November 1, 1931, and that thereafter defendant was the agent of International as to all business of Independence, The evidence is also Avith

Plaintiff argues that there is evidence of a written contract between Independence and defendant because defendant, on May 22, 1933, filed an action to collect the premium on a policy which he alleged had been written by him as general agent for Independence, for which he became liable to Independence in accordance with the general agency contract between himself and Independence. The inference sought to be drawn from the existence of a written contract is that a fiduciary relationship existed between Independence and defendant. The suit was on a policy which had been cancelled on March 29, 1933. The allegation does not say that there was a written contract. The fact alleged does not establish either that there was a written contract with Independence or with International, nor is it evidence of the relationship between International and defendant on April 19, 1933.

Plaintiff relies on asserted admissions in defendant’s answer in the present case and allegations of the complaints in two actions brought by defendant to recover earned premiums as evidence that Independence and Public continued to do business after they were taken over by International. We find nothing in these pleadings inconsistent with the uncontradicted evidence that after Independence and Public were “taken over” their business was that of International. Plaintiff overlooks the fact that he alleged that prior to April 19, 1933, “all of the assets and liabilities of” Independence and Public “were transferred to and assumed by International,” and that he repeatedly represented to the trial court that prior to that date Independence and Public had been “absorbed” by International. He cannot here contend otherwise.

It is suggested that because in 1933 Penal Code, section 506(b) provided: “An insurance agent . . . who . . . with the intention to fraudulently convert to his own use . . . appropriates, or otherwise uses or applies any money . . . received by him as such agent . . . contrary to the instructions or without the consent of the company . . . shall be guilty of embezzlement, ’ ’ it must be held that respondent was

As a general rule, the powers of an agent of an insurance company are governed by the general law of agency. A general agent possesses such powers as have been conferred by the company. (Frasch v. London & Lankershire F. Ins. Co., 213 Cal. 219 , 223 [ 2 P.2d 147 ].) Any lawtul claims of an agent arising out of the agency by way of reimbursement, compensation, or interest may generally be deducted by the agent from the principal’s claim in rendering an account. (Arnold v. San Ramon Valley Bank, 184 Cal. 632 , 635 [ 194 P. 1012 , 13 A.L.R. 320 ]; Denny v. Scoonover, 93 Ind.App. 118 [ 153 N.E. 779 ] (where the facts are similar to those in the present case); Wallace v. American Life Ins. Co., 116 Ore. 195 [ 237 P. 974 , 976]; J. L. Riley & Co. v. London Guaranty & Acc. Co., 27 Ga.App. 686 [ 109 S.E. 676 , 677]; 3 C.J.S. 59, § 168.) A general agent is not required to account to the insurer for unearned premiums coEected by the agent after cancellation of the policies by an adjudication of the insurer’s insolvency where the agent replaced such insurance in other companies. (Union Mut. Casualty Ins. Corp. v. Insurance Budget Plan, 291 Mass. 62 [ 195 N.E. 903 , 98 A.L.R. 1422 ]; German-American Ins. Co. v. Tribble & Pratt, 86 Mo.App. 546 , 554.) “There can be no dissent from the doctrine that one who owes money to another on a written or other contract may meet its demands by setting off counter-obligations arising on contract and existing in his own favor.” (Automobile etc. Co. v. Salladay, 55 Cal.App. 219 , 226 [ 203 P. 163 ]. See Code Civ. Proc., §440.) The debits and credits of a mutual account constitute cross-demands which are deemed to compensate each other. (Hart v. Cooper, 47 Cal. 77 ; Jones v. Mortimer, 28 Cal.2d 627 [ 170 P.2d 893 ].)

At the time International was adjudicated insolvent, April 19, 1933, and at the time the liquidator was appointed, June 28, 1933, the statute providing for proceedings against delinquent insurance companies was silent as to the right of setoff. (Stats. 1919, p. 265, as amended Stats. 1933, p. 1420.) In 3 935 the statute was amended to provide for setoff of mutual debts and mutual credits. (Stats. 1935, p. 544.) The statute was based on the New York law and was but the enactment of the prevailing rule. (New York Title & M. Co. v. Irving Trust Co., 241 App.Div. 246 [ 271 N.Y.S. 775 , 778];

A receiver occupies no better position than that which was occupied by the party for whom he acts. “He takes the property and rights of the one for whom he was appointed precisely in the same condition and subject to the same equities as existed before his appointment and any defense good against the original party is good against the receiver.” (People v California etc. Trust Co., 168 Cal. 241 , 246 [ 141 P. 1181 , L.R.A. 1918A 299].) Choses in action pass to a receiver of an insolvent subject to any right of setoff. It is well settled that the insolvency of a party against whom a setoff is claimed constitutes a sufficient ground for the allowance of a setoff not otherwise available. The right is to be determined by the condition of things as they existed at the moment the party was adjudged insolvent. If the right of setoff was available to defendant at that time the insolvency of International did not defeat it. (People v. California etc. Trust Co., 168 Cal. 241 , 246, 250 [ 141 P. 1181 , L.R.A. 1918A 299]; Machado v. Borges, 170 Cal. 501 [ 150 P. 351 ]; In re Bank of San Pedro, 11 Cal.2d 313 , 315, 316 [ 79 P.2d 1057 ]; Pendleton v. Hellman Com. etc. Bank, 58 Cal.App. 448 [ 208 P. 702 ]; City Investment Co. v. Pringle, 73 Cal. App. 782 , 789-792 [ 239 P. 302 ] ; Henderson v. Electric Loop Land Co., 96 Cal. App. 576 , 581, 583-587 [ 274 P. 445 ] ; 22 Cal.Jur. 437, § 14, et seq.) The fact that the policyholders received their unearned premiums did not create an unlawful preference. (Scott v. Armstrong, 146 U.S. 499 , 511 [ 13 S.Ct. 148 , 36 L.Ed. 1059 , 1063] ; New York Title & M. Co. v. Irving Trust Co., 241 App.Div. 246 [ 271 N.Y.S. 775 , 778].)

In the following cases a setoff of unearned premiums was allowed against an insolvent company or its receiver or liquidator. (Carr v. Hamilton, 129 U.S. 252 [ 9 S.Ct. 295 , 32 L.Ed. 669 ]; Scott v. Armstrong, 146 U.S. 499 [ 13 S.Ct. 148 , 36 L.Ed. 1059 ]; Smith v. Binder, 75 Ill. 492 (held insured had action against agent for unearned premiums); Franzen v. Hutchinson, 94 Iowa 95 [ 62 N.W. 698 , 699]; Smith v. National Credit Ins. Co., 65 Minn. 283 [ 68 N.W. 28 , 33 L.R.A. 511 ]; Newman v. Hatfield Wire & Cable Co., 113 N.J.L. 484 [ 174 A. 491 , 494]; Johnson v. Button, 120 Va. 339 [ 91 S.E. 151 ], in which, quoting from 22 Cyc. 1404, it was said, p. 153 [91

On April 19 ,1933, defendant had a legal right to set off unearned premiums against the amount he owed International. The fact that a receiver of International had been appointed did not affect that right. The unearned premiums belonged to the policyholders. Neither the receiver nor the liquidator had any better right than International, upon its adjudication as insolvent, to the unearned premiums, and International had none. The domiciliary receivers approved the action of defendant in replacing the insurance. Replacing the insurance and the setoff had been effected before plaintiff’s appointment as liquidator. Plaintiff had no rights until the date of his appointment, June 28, 1933. It was on that date that his rights and powers became fixed. (Garrison v. Edward Brown & Sons, supra, 25 Cal.2d 473 , 482.) Plaintiff had no rights retroactively. In the Garrison ease ( 25 Cal.2d 483 ) the court said: “After the appointment of a liquidator, who may take possession of all assets of the insolvent insurance company, it was the duty of the agent to remit funds in his hands to the liquidator for the purposes of liquidation.” (Italics added.)

Disregarding conflicting evidence, giving plaintiff’s evidence all the value to which it was legally entitled, and indulging in every legitimate inference which may be drawn from that evidence, the trial court was justified in finding, as a matter of law, that there was no evidence of sufficient substantiality to support a verdict in favor of plaintiff.

Affirmed.

Shinn, P. J., and Wood (Parker), J., concurred.