wind up the same.^^

§ 489. Appointment on Account of Futility of Continuing
Business under Existing Plan — Opportunity to Re-
organize.

In the case of a fraternal insurance organization, based
on the lodge system, the company is simply in fact an
aggregation of individuals endeavoring to create a fund
to enable them to make provisions for their wives, chil-
dren or heirs in case of their death. There is no profit
in it and the assessments are made for the purpose of
jjaying death benefits. The organization has no capital

and through the stockholders pro- 15 Security Savings & Loan

cure the appointment of liquidat- Assn. v. Moore, 151 Ind. 174, 50

ing trustees, the court upon a N. E. 869.

showing of the insolvency of the ic Council of Royal Arcanum v.

association may remove the trus- Hobart, 244 F. 385, 157 C. C. A. 11.

tees and appoint a receiver where See comment, note 10, supra.

such action appears to be the best itWehrs v. Sullivan, 217 Mo.

thing. Fitzgerald v. State Mut. 167, 116 S. W. 1104.

Dldg. & Loan Assn., 74 N. J. Eq. i>* Swing v. American Glucose

440, 69 Atl. 564. Co., 123 III. App. 156.



1454 LAW OP RECEIVERS.

in the strict sense of the word. It might properly be
called a charity in the nature of a trust fund to provide
in case of death for the survivors of the deceased mem-
bers. Hence where the situation of such an organization
is such that by its plan of association the assessment will
in the nature of things become so higli as to make a con-
tinuance of its operations an impossibility, ithasbeen held
that a court of equity will interpose for the protection
of the trust fund. Such a situation, and one which is
perhaps typical of such organizations if their plan of
organization does not safeguard them in that respect
was shown in the case of Dill v. Supreme Lodge, ^ where
the court intimated that the appointment of a receiver
would afford the company an opportunity to rehabiUtate
itself by a reorganization pending the receivership. The
court in that case said :

''That courts of equity have jurisdiction in all cases
of trust is elementary. In a case of this nature the ques-
tion of creditor is practically immaterial, because the
parties who are members may suffer just as great an
injury by the dissolution of a corporation of this nature,
while they are alive, as those who have departed this life.
It is true, that upon the winding up of a corporation like
this, those whose claims have matured would be preferred
to those still living. Still there is a contingent interest
possessed by every member which may become vested at
any time by reason of the death of the member.

"It has been the public policy of every state in the
Union — in fact, we might say, of every civilized govern-
ment — to try and protect the members of such organiza-
tions by preventing the corporation, fraternal society of
this nature, from carrying on its business whenever proof
establishes beyond question, as it does in this case, that
it would be impossible for the corporation to carry out
the objects of its existence and induce its members to

1 Dill V. Supreme Lodge, Knights of Honor, 226 Fed. 807.



INSURANCE COMPANIES, FRATERNAL SOCIETIES, ETC. 145-3

continue paying assessments, especially when they are
increased periodically, which would be perpetrating a
fraud on them. . •

"In this case the evidence shows beyond question that
this Supreme Lodge is unable to continue its business for
any length of time. If the assessments are raised to an
extent w^hich would be necessary in order to provide for
all the members thereof, when the average age has
reached as high as it has in this case, the rates would be
correspondingly high, with the result that, either owing
to poverty, inability to pay, or fear that the assessments
would be raised continually, and just about the time the
man dies, the institution would be unable to pay. This
would naturally cause a great many members to with-
draw, and the worst of it is that the withdrawal of mem-
bers in cases of this nature is generally of those mem-
bers who are most valuable to the institution by reason
of their good health and age. If the average age of its
members, as has been stated here, now exceeds 55, it will
in less than a year exceed 60, because all younger mem-
bers in perfect health will try to withdraw, because they
will find the assessments are too great and uncertain.
The decrease of membership has been so continuous for
the last 15 or 20 years that for the court to presume for a
moment that there can be an increase of new members,
an infusion of young blood, is preposterous. . . .

"There is not the least likelihood that the conditions can
possibly improve unless there can be such rehabilitation
by a large addition to the membership, the new members
being offered inducements to join, so as to increase the
membership by bringing in a sufficient number of young-
people, and thus reduce the average age. We believe, if
there is a possibility to do that, it can be done just as
well after the appointment of a receiver as before such
appointment. If at any time after the receiver is ap-
pointed (the only money that can be paid out by the re-



1456 LAW OF RECEIVERS.

ceiver will be for the death claims that have matured ; the
others can not get anything nntil these claims are paid)
this lodge can rehabilitate itself, perfect a plan of re-
habilitation which will appear to the court to be feasible,
the court can immediately discharge the receiver and
turn the assets in the hands of the receiver back to the
parties.

*'It is a matter of everyday occurrence where large cor-
porations are placed in the hands of receivers for the sole
purpose of reorganization. We believe, in the majority
of cases in which receivers have been appointed for large
railroad systems, it was done for the purpose of reorgan-
ization, and when that purpose was accomplished the
property was generally turned back to them. When they
could not reorganize by reason of the nonconsent of all
the parties, there had to be a sale, and the purchase was
usually made for the owners of the property for the pur-
pose of reorganization. So in this case, if at any time
the lodge can rehabilitate itself and satisfy the court that
it is in such condition that it can carry out the objects of
the order and provide safely for the protection of all of
its members, I am authorized to say that the court will
unhesitatingly turn the property back and throw no
obstacle in the way of reorganization; but as conditions
now are we feel that to permit this institution to go on
would simply result in the waste of assets, and be a detri-
ment, not only to the members who are still living, but to
the widows, orphans, and beneficiaries of those who have
died, or are likely to die, while the order is under the con-
trol of the officers."

§ 490. Receiver of Unincorporated Beneficial Association
Based on Failing Operations,

Where an organization is a beneficial association and
not an insurance company, its contracts are not insurance
policies and the test of determining solvency as applied



INSURANCE COMPANIES, FRATERNAL SOCIETIES, ETC. 1457

to an insurance company is not applicable. Under such
circumstances the ordinary rule for determining solvency
should be applied. Hence where such an organization
has no outstanding obligations and has a substantial bal-
ance in its treasury and can by its usual method of
assessment raise sufficient money to meet its probable
death claims it will not be deemed insolvent even though
it may ultimately become so if the future plans do not
make it as successful as its members anticipate. Under
such circumstances where no fraud or mismanagement
by its officials in the conduct of its business is shown, a
court of equity will not appoint a receiver over its affairs.
In making the ruling just referred to, the Supreme Court
of Pennsylvania,^ speaking through Justice Potter, said :
"We find nothing in the record to justify the conclusion
that the Order of Sparta is at the present time insolvent,
under the law applicable to fraternal, beneficial associa-
tions. Such societies can not be held to the rigid rules
which are used to safeguard insurance contracts. To do
so would practically mean to prohibit their formation or
existence. We do not see that the court is justified in ap-
pointing receivers, and in winding up the business of the
association, merely because its scheme of operation seems
to the court to be impracticable, and likely to end in in-
solvency. This is particularly true where, as here, it ap-
pears that the association has no unpaid indebtedness,
and has lawfully amended its constitution so as to permit
of the employment of new methods which have not yet
been tested, and where but a small minority of the mem-
bers have expressed dissatisfaction with present condi-
tions and prospects."

The organization referred to above was an unincor-
porated one and the bill in equity seeking the appoint-
ment of the receivership was by a committee representing
several hundred members and named a number of indi-

1 Taylor v. Order of Sparta, 254 Pa. St. 556, 99 Atl. 157.
II Rec— 92



1458 LAW OF RECEIVERS.

vidual members and others having the same interests and
whose names are to be hereafter ascertained, as trading
under the name of the Order of Sparta,

A court of equity has jurisdiction of an equitable peti-
tion filed by a member and certificate holder of a fraternal
benefit association chartered by the superior court, in
behalf of himself and of all others similarly situated,
against such association, for the purpose of having it
placed in the hands of a receiver to conserve the prop-
erty of the association, alleged to be going to waste on
account of the illegal removal of two of the executive
officers of the association by the parent society, and the
refusal of the other three to act, and to keep it a going
concern until other officers can be legally elected to trans-
act the business of the association according to its charter
and by-laws, even though a court of equity has no power
to dissolve a corporation. The court is not deprived of
jurisdiction in such a case because of a statute which
provides that no application for injunction against, or
proceedings for the dissolution of, or the appointment
of a receiver for any such domestic society or branch
thereof shall be entertained by any court in this state
unless the same is made by the Attorney General, inas-
much as the act expressly excepts from its operation
grand or subordinate lodges. Nor is the court without
jurisdiction of the case for the alleged reason that the
defendant is an insurance company or association, and
must be chartered by the secretary of state where it
appears that the defendant is a fraternal benefit associa-
tion and not subject to the special statute.^

2 Daniel v. Jones, 146 Ga. 583, plan of insurance. Cummings v.

91 S. E. 665. Supreme Council of Royal Arca-

The court will not pass on the num, 247 Fed. 992.
soundness or unsoundness of any



INSURANCE COMPANIES, FRATERNAL SOCIETIES, ETC. 14b9

§ 491. Federal Court Will Assume Constitutionality of State
Statute Regulating Insurance Societies.

In presenting a bill in a federal court in which it is
sought to have a receiver appointed over a fraternal in-
surance society, the bill must disclose the existence of
federal jurisdiction. If the bill merely complains that
the provisions of a statute of the state in which the so-
ciety is organized and which provides a complete scheme
of regulation of such organizations, are violative of the
constitutional rights of the complainant it will not be
sufficient to constitute an essential part of the cause of
action. In so holding it was said :^

"The Massachusetts statute thus referred to is entitled
*An act to provide for the control and regulation of fra-
ternal benefit societies.' Sections 24 and 25, of which
the above complaint is made, are quoted at length in
paragraph 2 of the bill.

''By section 24 power is given to the state insurance
commissioner to inspect and investigate the affairs of any
such society, and, whenever satisfied that its business is
being conducted in a manner such as is charged in this
bill, to present the facts to the state Attorney General,
who, if he deem the circumstances to warrant such a
course, is then to begin a quo warranto proceeding in a
proper court. If after due notice and hearing, as pro-
vided by said section, the court finds that the society
should be closed, it is to enjoin further business and ap-
point a receiver to wind up affairs and distribute its
funds under the court's direction.

''Section 25, which contains the principal provisions al-
leged to violate the plaintiff's constitutional rights,
directs that:

" 'No application for injunction against, or proceed-
ings for dissolution of, or the appointment of a receiver

1 Supreme Council of Royal Arcanum v. Hobart, 244 Fed. 385, 157
C. C. A. 11.



1460 LAW OF KECEIVERS.

for, any such . . . society . . . shall be entertained
by any court in this state unless the same is made by the
Attorney General.'

"The above are provisions which have formed part of
the Massachusetts legislation regarding fraternal benefit
societies since 1898. See chapter 474, § 19, of the acts
of that year. Assuming that they violate any constitu-
tional right belonging to a certificate holder like the
plaintiff, it must appear from the bill, before a federal
question can be said to be involved as a ground of juris-
diction, that such violation is so connected with the real
cause of action which the bill sets forth, as to form an
essential part thereof. In other words, whether the
remedy sought from the district court is obtainable or not
must depend upon the result of the constitutional ques-
tion raised as to the validity of said previsions. New
Orleans v. Benjamin, 153 U. S. 411, 14 Sup. Ct. 905, 38
L. Ed. 764; Bankers', etc., Co. v. Minneapolis, etc., Co.,
192 U. S. 371, 385, 24 Sup. Ct. 325, 48 L. Ed. 484; Hull v.
Burr, 234 U. S. 712, 720, 34 Sup. Ct. 892, 58 L. Ed. 1557.

"The plaintiff has never tried, so far as shown, to get
the state officials to proceed against the defendant accord-
ing to the above provisions ; still less is any opposition
by the defendant to such 'an attempt shown. The bill
does not show that the defendant has in any way availed
itself of them to the plaintiff's prejudice. That it is con-
ducting its business subject to them, as part of the state
legislation applicable to all such business, is not enough to
render the defendant liable to any such charge. Nothing
is found in said provisions which in any way purports to
permit or justify maladministration of said business, such
as that against which the bill prays relief. The district
court is not asked to enjoin their enforcement, and could
not do so if asked.

"A suit to obtain the relief prayed for in the bill is
not a suit which the federal statutes allow one Massachu-



INSURANCE COMPANIES, FRATERNAL SOCIETIES ETC. ] 461

setts citizen to bring against another in the federal courts.
If it is true that unconstitutional limitations are imposed
by the Massachusetts statutes upon the bringing of such
suits, the right of one Massachusetts citizen to resort to a
federal court for such relief against another Massachu-
setts citizen is not thereby enlarged. The method pro-
vided by existing statutes for raising a quc.tion of con-
stitutionality as to any such limitations, in the federal
court, is by raising it first in a Massachusetts court, and
then by appealing to the Supreme Court from a decision
sustaining them. The presumption to be made here is
that, if such limitations are objectionable because uncon-
stitutional, the Massachusetts courts will so declare when
the question is brought before them. Defiance Water Co.
V. Defiance, 191 U. S. 184, 24 Sup. Ct. 63, 48 L. Ed. 140;
Gundall v. Manhattan Rwy. Co. (D. C), 205 Fed. 410.
Should they fail to do so, the Supreme Court of the
United States has power to correct their error, under
section 237 of the Judicial Code (Comp. St. 1916, § 1214).
In Bogni V. Perotti, 224 Mass. 152, L. R. A. 1916F, 831,
112 N. E. 853, a decision cited to us by the plaintiff, the
Massachusetts Supreme Court upheld the principle for
which the plaintiff contends, viz. : That the power of
courts to afford equitable relief can not be impaired by
legislation in such a way as to prevent its use in favor
of one property owner while preserving it for the benefit
of others. If the same principle is rightly applicable to
the legislation of which the plaintiff complains, the same
court will of course api)ly it thereto."

§492. Whether a Federal Equity Court May Appoint a Re-
ceiver After Preliminary Steps by State OflEicials
under Statutory System.

A question of coniiict of jurisdiction between that of a
federal court of equity and a state court acting under a
statutory system of regulation of insurance companies



1462 LAW OF RECEIVERS.

arose in an exhaustively argued case^ in tlie federal cir-
cuit court of appeals. In that case the plaintiffs, who
were stockholders of the defendant company, were citi-
zens of New Jersey while the residence of the corporation
was in . Pennsylvania where it had been organized and
authorized to transact a general casualty and liability in-
surance business. The business of the company had been
grossly and fraudulently mismanaged by former officers
and managers, its books falsified for the purpose of de-
ceiving the public and various state insurance depart-
ments by making a showing of fictitious insurance and
concealment of outstanding liabilities. Numerous suits
had been instituted against it and it had ceased writing
up new policies. It was alleged that if threatened suits
were permitted, its assets would be sacrificed, its busi-
ness ruined and its stockholders and creditors injured.
It was, however, claimed that the company was solvent
and that its business could be rehabilitated. The bill
prayed for the appointment of a receiver to preserve and
administer its assets and general relief. The company
filed an answer admitting the allegations and joined in
the prayer for a receiver, whereupon the court appointed
a receiver. Subsequently the Insurance Commissioner
and Attorney General presented a petition to vacate the
appointment of the receiver representing that the Attor-
ney General at the instance of the Insurance Commis-
sioner had prior to the receivership suit filed in the state
court his suggestion against the company stating that it
was insolvent and its further transaction of business was
hazardous to the public, its policyholders and its credi-
tors and that the state court had granted a rule to show
cause why the Insurance Commissioner should not take
charge of its property and the court order the liquida-

1 0"Neil V. Welch, 245 Fed. 261, 340, respecting the appointment of
157 C. C. A. 453. In this connec- a receiver of a banl<ing institu-
tion see the case of Lyon v. Mc- tion by a federal court prior to
Kcefrey, 171 Fed, 384, 96 C. C. A. proceedings in the state court.



INSURANCE COMPANIES, FRATERNAL SOCIETIES, ETC. 1463

tion of its business and the dissolution of the corporation
itself. The lower federal court refused to vacate the ap-
pointment.- But upon appeal to the circuit court of
appeals, the latter court held that the proceedings insti-
tuted under the state law by the state officials were suffi-
cient to give the state court jurisdiction over the com-
pany, which jurisdiction was prior in time to that of
the federal court.

The court, speaking through Judge Wooley in render-
ing its opinion, said : ' ' The jurisdiction of the state
court thus invoked is a special jurisdiction conferred by
statute as a part of the state's policy of insurance regu-
lations and control. It is not conferred for the protec-
tion of corporations' policyholders and creditors alone,
but for the protection of the public as well. This clearly
appears by the terms of the act; it again appears in the
court's decree. In prosecuting an insurance company
the state is acting for the public, and the public is in
turn interested in the proceeding; though not nominally
present as a party, it is nevertheless present in the per-
son of the Attorney General.

''The statutory proceeding includes several prescribed
steps, namely, the filing of the suggestion, the rule to
show cause (and if needed, an accompanying order re-
straining the disposition of the corporation's property),
hearing on the rule, a decree dismissing the proceeding or
directing the Insurance Commissioner to take over the
property and conduct the business of the corporation
and proceed with the liquidation and distribution of its
assets. In this order, actual or physical possession of
the property of the corporation is not acquired until the
rule has been returned and made absolute. Yet it is abso-
lutely essential to the declared purpose of the action that
the property of the corporation, its subject matter, shall
not be withdrawn from the jurisdiction of the court be-

2 Welch V. Union Casualty Ins. Co., 238 Fed. 968.



1464 LAW OP RECEIVERS.

fore its inquiry is completed. To that end the statute
affords, as against the corporation and its ofdcers, the
remedy of injunction, to be invoked, if desired, at the in-
ception of the proceeding. As against stockholders, the
law is equally effective. The law under which an insur-
ance company is incorporated subjects it to state super-
vision and administrative control, and ordains the pro-
ceeding by which its life may be determined and its
affairs wound up and liquidated. The rights of such a
corporation are therefore subordinate to the rights of
the state, and the rights of stockholders are no greater
than those of the corporation. When, therefore, the statu-
tory proceeding has been begTin in a state court and by
its commencement jurisdiction has been acquired over
the corporation, neither the corporation nor its stock-
holders, nor its creditors can divest the court of its juris-
diction or deprive the state of its public function by sub-
sequently invoking the aid of a federal court to remove
the corporation's property beyond the reach of the state
court and thereby withdraw from the state court the sub-
ject matter of the action there pending. If this were not
so, every action instituted by the state government
against an insurance company might be interrupted and
defeated by a non-resident stockholder filing in a federal
court a bill accompanied with the answer of an acquiesc-
ing corporation, after action has been begun in the state
court and before in its orderly progress the property of
the corporation has been physically seized. Thus the
policy of the state would be thwarted and its administra-
tion overthrown; the state's creature would be more
powerful than the state itself. We are satisfied that no
such thing was contemplated either in federal or state
policy.

''In disposing of this question it is important to note
that w^e are not concerned with a situation where a fed-
eral court on a stockholders' bill appointed a receiver,



INSURANCE COMPANIES, FRATERNAL SOCIETIES, ETC. 1465

and, acquiring control of the corporation's property, ac-
quired jurisdiction before the state moved in tlie state
court, Lyon v. McKeefrey, 171 Fed. 384, 96 C. C. A. 340;
we are dealing with a situation w^here the state moved
first, where the state court first acquired jurisdiction over
the corporation by its appearance and answer, and exer-
cised a species of control over its property by a restrain-
ing order long before a bill was filed in the federal court
and long before a receiver was appointed by that court,
and where in one day more it would have completed its
control over the corporation 's property by actual seizure
but for the appointment of a receiver by the federal court,
made possible only by the willing answer of the corpora-
tion filed concurrently with the bill.

**The act of the state in bringing suit was the exercise
of a governmental power ; the acts of the state court in
pursuing a procedure established to insure the full ac-
complishment of that power stand for dominion over the
entire subject matter in litigation, and subject the prop-
erty of the corporation to its jurisdiction for the full pur-
pose of the judicial proceeding, which includes its pos-
session, liquidation and distribution. We are therefore
of opinion that the state court acquired jurisdiction not