Opinion
Argued June 9, 1896
Decided October 6, 1896
William E. Prentice for Royce, Spooner and Dwyer, appellants and respondents.
John Cunneen for receiver, respondent and appellant.
Hamilton Ward, Jr., for Riley, respondent.
Several questions presented on the trial before the referee are not before us, as the parties have not appealed from the portion of the order which determined them.
The most important question we are called upon to decide is whether the General Term properly held that $10,000 of the reserve fund should be applied to the payment pro rata of death claims arising under both kinds of certificates where the claim existed before the commencement of this action; that death claims under reserve certificates should not be paid in full, and that the remainder of the fund, after deducting $10,000, should be distributed among the holders of life reserve certificates.
As the certificates, under which the parties claim an interest in the fund, provide that the constitution and by-laws of the association shall form a part of the contract, it follows that, in determining the proper disposition of the fund, the liability of the association, and the rights of the parties, reference must be had to the provisions of the certificate, and to the constitution and by-laws as they existed at the time of the commencement of this action. Taken together, they constitute the contract between the parties and the standard by which their rights and liabilities are to be determined, and they are to be adjusted as of the date of the commencement of the action. ( Matter of E.R.F.L. Assn., 131 N.Y. 354, 369.)
Section 21 of chapter 175 of the Laws of 1883, as amended by section 6 of chapter 285 of the Laws of 1887, declares: "Nor shall anything in this act prevent the creation of a reserve fund by any corporation, association or society transacting the business of life or casualty insurance, or both, upon the co-operative or assessment plan, which funds or its accretions, or both, are to be used for the payment of assessments or death losses, or for benefits in case of physical disability only." It was under the provisions of this statute that the defendant was re-incorporated and its constitution and by-laws created. The portion of the statute quoted contains the only authority the association possessed to create a reserve fund, and states the purposes for which such a fund may be accumulated. It authorizes its creation for the payment of assessments or for the payment of death losses or disability benefits. Under the statute those are the only purposes to which such a fund could properly be devoted. In its constitution, the objects of the association, so far as they relate to the reserve fund, are stated to be to collect and accumulate a fund to be held in trust and used by the association and its members in reducing future dues and assessments and for such other purposes as are thereinafter provided for by the constitution, by-laws and amendments thereto. Notwithstanding this general statement as to its purpose, it is manifest that while a fund thus accumulated might be devoted to the reduction of future dues and assessments, yet under the statute the association had no authority to devote it to any other purpose than that, except to pay death losses or disability benefits.
While the statute in its reference to death losses is general and unlimited, yet it could not have been the intention of the legislature to permit such associations to accumulate a reserve fund wholly from the contributions of one class of members and then devote it to the payment of death losses of another class who in no way contributed to it. To attribute to the legislature such an intent would be to impeach its integrity and fairness of purpose. We think the statute should not be construed so as to permit any such unjust and absurd result.
One of the questions presented is whether, under the statute and contract between the parties, losses arising by the death of persons holding life certificates can be properly paid from the reserve fund thus accumulated. Obviously, the reserve fund was intended to be used only for the benefit of those holding reserve certificates. To place that question beyond cavil or peradventure, the constitution expressly provides that no person holding a life certificate shall be entitled to, or shall in any manner derive, any benefit from the reserve fund, but such fund shall be and is for persons holding life reserve certificates only. No plainer, more definite or positive statement as to the members who were to be benefited by the accumulation of that fund could have been made. In the most decisive and emphatic language it is declared that the holders of life certificates shall derive no benefit from the reserve fund. Thus it not only awards to the holders of reserve certificates all benefits to be derived from it, but positively forbids life members participating therein.
Under the constitution the association was authorized to issue two distinct and different kinds of certificates: One, a mere life certificate; the other, a life reserve certificate. The difference between them is marked, and seems well nigh controlling as to the rights of the holders of life certificates to share in the fund in the hands of the receiver. This difference is that the amount paid by a life member is only one-half that required to be paid by a reserve member, and, in consideration of the payment of such increased assessments, the increase is to be held by the association as a reserve fund for the sole benefit of the reserve members. Indeed, the dominant purpose of the contract was to provide for two kinds of certificates, and that the holders who paid increased assessments should alone share in the benefit of the reserve fund. Nothing can be plainer than this. Therefore, while examining the other provisions of the contract, it is necessary that this purpose should be borne in mind.
Section three of article three of the constitution provides that there shall be accumulated in the death fund a permanent sum from the surplus of the death assessments, or from transferring from the reserve fund not less than the proceeds of one death assessment of the maximum death claim. It was upon the latter provision that the learned General Term based its decision directing ten thousand dollars to be distributed among the holders of death claims. If construed alone and entirely independent of the other provisions of the constitution, it may be that the effect given to that provision by the General Term would be proper. The language is general, and, standing alone, sufficiently broad to sustain the contention that a portion of the reserve fund might be devoted to the payment of death losses even under life certificates. But when read in connection with those provisions of the constitution, which in absolute and unqualified terms declare that no person holding a life certificate shall in any manner derive any benefit from the reserve fund, it becomes obvious that the conclusion of the General Term cannot be sustained. When all the provisions relating to this subject are considered together, it is clear that it was not the intent of the constitution to provide that any portion of the reserve fund should be transferred to the death fund for the payment of death claims which were expressly excluded from any participation in that fund. Its purpose doubtless was to provide, in an emergency or case of necessity, for the transfer from the reserve fund to the death fund of an amount necessary to pay death losses arising under reserve certificates. In other words, the provision for transferring a portion of the reserve fund to the death fund must be limited and governed by the other provisions of the constitution. When so limited it is plain that such transfer could be made only for the purpose of paying death claims arising under reserve certificates. This construction renders all the provisions of the contract harmonious, and carries out its manifest spirit and purpose. Any other construction would be contrary to the evident intent of the statute, as well as to the clear and positive terms of the constitution.
Moreover, as the reserve fund was created solely by the contributions of reserve members, it would be highly unjust and inequitable to distribute any portion of it among life members. Such a disposition of the fund would result in a practical confiscation of the property of the reserve members. Our conclusion is that the reserve fund was created for the exclusive benefit of the holders of the reserve certificates, and that the holders of life certificates were not entitled in any way to share in its distribution.
This brings us to the consideration of the question, whether such a portion of the reserve fund as is necessary for that purpose should be appropriated to the payment of death claims of members holding reserve certificates who died before the commencement of this action, or whether the whole fund should be distributed pro rata among all the holders of such certificates. If this fund was pledged or dedicated to the purpose of assuring or guaranteeing payment of such certificates to the maximum limit upon the death of such a member, then plainly the holders of such death claims are entitled to resort to that fund for their payment.
Section one of article six of the constitution contains this provision: "This Reserve Fund, together with its earnings, is for the exclusive benefit and to reward the fidelity of the old and persistent members, and to make the Association sound and permanent, thereby guaranteeing the payment of every member's certificate at death, to the maximum limit named therein." In construing this provision, it must be remembered that it is contained in that portion of the constitution which relates only to the reserve fund, and, consequently, it must be regarded as referring solely to members interested therein. The provision guaranteeing the payment of every member's certificate was clearly intended to refer to reserve members only. No others could have been intended. If otherwise, that provision would have been in direct conflict with the other provisions of the constitution, which declare that no person holding a life certificate shall be entitled to or shall in any manner derive any benefit from such fund.
Here we have then a provision which, properly construed, provides that the reserve fund of the association with its earnings is for the exclusive benefit and to reward the old and persistent members holding reserve certificates by assuring or guaranteeing the payment of every such member's certificate to the maximum limit. This was a guaranty among contributors to the reserve fund, and as there was no other provision for the full payment of the amount of their certificates unless resort might be had, when necessary, to that fund, it was in effect a pledge of it for that purpose. The last clause of that provision was added by amendment in 1888, and its obvious intent was to bring the association within the provisions of the statute, which authorized the use of the reserve fund for the payment of death losses, and to provide that members who were entitled to share in it should receive the maximum amount of their certificates. Thus, by the terms of the constitution, the reserve members of the association dedicated that fund, so far as necessary, to the payment, at death, of every such member's certificate.
The receiver, however, persistently urges that the intent of this provision was to insure the payment of the dues of the reserve members, and in that way only to guarantee the payment of death claims, but that it was not intended that any part of that fund should be applied to that purpose. If such was its only object, why was there any necessity to amend that section of the constitution? Before it was amended the reserve fund was as available to pay assessments as it was after. No change in that respect was made. The amendment must have been made to accomplish some purpose. Evidently it was not to insure the payment of dues and assessments, as that had already been provided for, and was not affected by the amendment. We think its purpose was to bring itself within the provisions of the statute, and to devote the reserve fund to the payment of death losses of reserve members so far at least as was necessary to secure their payment in full. If such was not its purpose, the amendment was meaningless and ineffective. We do not think the contention of the receiver can be sustained. We are of the opinion that such a portion of the reserve fund as is necessary should be appropriated to the payment of death claims of members holding reserve certificates who died before the commencement of this action, and that the remainder of the fund undistributed should be divided pro rata among the other holders of reserve certificates.
The case of Burdon v. Mass. Safety Fund Assn. ( 147 Mass. 360), cited with approval in Matter of E.R.F.L. Assn. ( 131 N.Y. 354, 374) is relied upon as sustaining a contrary doctrine. In the Burdon case, the only ground upon which it was claimed that the funds belonging to the insolvent corporation could be applied to the payment of death losses was, that upon the back of the certificates issued there was an unsigned statement to the effect that the association would provide material and substantial protection for the families or other dependents of deceased members, by means of a safety fund which combined an improved plan of co-operative protection with the safety fund deposit, thereby rendering all the members and their dependents perfectly safe at the lowest possible rate. In that case, without passing upon the question as to what would have been the effect if the notice had been a part of the contract, the court distinctly held that it was not, and hence was entitled to no consideration in determining the question before the court. There the safety fund provided for was to inure to the benefit of members of five years' standing, by having the income from it, after five years, or after the accumulation should have amounted to one hundred thousand dollars, applied to the payment of their future dues and assessments, and if the association should fail to pay the indemnity provided for in the certificate, then the safety fund was to be converted into money, and divided among all the holders of certificates then in force, and not to be drawn upon to make good the indemnity for a loss by death, and it contained an express stipulation that the fund mentioned should be in no wise chargeable or liable for any use or purpose except that mentioned. Under those circumstances, it was held that the fund must be devoted to the purpose specified in the contract, and could not be applied in payment of death losses.
That case is clearly distinguishable from the case under consideration, as in that case there was no pledge or dedication of the fund to the payment of such claim, while in this, as we have already seen, one of the purposes for which such a fund was created was to insure the payment of death losses where the member held a life reserve certificate.
So in the Matter of E.R.F.L. Assn. ( 131 N.Y. 354), where a reserve fund was created, and was to be deposited in trust for purposes specified, which were for the benefit of living members, it was held that upon a dissolution of the corporation death losses could not be paid from the reserve fund. The principle of that case is clearly right, and fully sustains our conclusion that death losses, where a deceased member held a life certificate only, could not be paid from such fund. But, in this case, there was an express provision in the constitution, which formed a part of the policy, which dedicated the reserve fund to the payment of losses where the member held a reserve certificate. The cases are, therefore, wholly unlike.
The same may be said of People v. Life Union (83 Hun, 598; affirmed, 145 N.Y. 606). In that case, as in the case in 131 N Y, there was a reserve fund which was created by the appropriation of fifteen per cent of all the net assessments for mortuary and benefit purposes, and contained no provision by which the reserve fund was dedicated to the payment of death losses. We find nothing in either of the cases cited which is in conflict with the conclusion we have reached in this case.
It is doubtful if the question as to the claims of persons who hold bonds issued under their life reserve certificates, is before us. We are, however, of the opinion that they have no claim which can be paid by the receiver out of the funds in his hands. The contract between the parties was to the effect that the principal of such bonds was not available to pay future assessments until ten years after the issuing of the bonds. It was only then that the amount of the principal and interest of such bond was to be paid to the beneficiary in addition to the amount of the certificate. Hence, until the bonds became available to pay the assessments, the beneficiaries were not entitled to receive their amount in addition to the certificates of membership. Any interest or principal, which was not available for that purpose, was to be applied to increase the bonds issued at the next quadrennial apportionment to members of the association. We find nothing in the record to show that any of the bonds had become available for that purpose, and, therefore, conclude that none of the appellants, who held bonds issued on life reserve certificates, is entitled to be paid any portion thereof by the receiver either upon death claims, or in the distribution of the fund among the holders of such certificates.
As to the claims of persons holding life reserve policies, whether bonds were issued or not, we are of the opinion that the remainder of the reserve fund in the hands of the receiver, after paying the claims of general creditors, and claims based upon life reserve certificates, where the member died prior to the commencement of this action, should be distributed among the holders of life reserve certificates in proportion to the amount paid by each.
The appellant Dwyer contends that the assessment of July, 1892, was made for her benefit with others, and that a fund was thereby established which was expressly dedicated to the payment of the certificate held by her, and, therefore, a trust was created, and the funds thus collected were impressed with such trust to an extent which entitled her to payment of the amount of her certificate out of the funds in the hands of the receiver. It may be, if there was a fund in the hands of the receiver that was collected for the express purpose of paying that loss, that the principle contended for might apply. But the record shows that no portion of the money collected by that assessment reached the hands of the receiver. It was all expended by the corporation before that time, but in what manner or for what purpose does not appear. Moreover, there is nothing in the constitution, by-laws or certificate which appropriates money collected by assessment to the payment of any particular claim, or to the claims that are mentioned in the assessment. On the contrary, they seem to contemplate that a fund should always be kept on hand to meet claims as they arise, and that assessments should be made and collected in anticipation of death losses. Under the circumstances shown by the record in this case, and under the contract between the parties, we are unable to discover any principle under which it can be held that a trust in favor of Dwyer was impressed upon any portion of the moneys or fund that came into the hands of the receiver.
These considerations lead to the conclusion that the order of the General Term should be reversed, and the order of the Special Term affirmed, with costs to the receiver and one bill of costs to the appellants Spooner and Royce, to be paid out of the funds in the hands of the receiver.
All concur, except BARTLETT, J., who dissents on the ground that the General Term modification of the Special Term order was right, and HAIGHT, J., who dissents from Judge MARTIN'S opinion and concurs in the views adopted by the referee.
Ordered accordingly.