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COMMONWEALTH EX REL. CHIDSEY v. KEYSTONE MUTUAL CASUALTY COMPANY (ET AL. (12/08/52)

December 8, 1952

COMMONWEALTH EX REL. CHIDSEY
v.
KEYSTONE MUTUAL CASUALTY COMPANY (ET AL., APPELLANT)



Appeal, No. 27, May T., 1952, from order of Court of Common Pleas of Dauphin County, 1947, Commonwealth Docket No. 129, in case of Commonwealth of Pennsylvania ex rel. T. McKeen Chidsey, Attorney General v. Keystone Mutual Casualty Company; Keystone Mutual Policyholders' Committee, William Goldstein et al., Max J. Perks et al., Claude B. Hanley and Kurt Kitke and Company et al., intervenors. Order affirmed; reargument refused April 4, 1953.

COUNSEL

Elder W. Marshall and John C. Bane, Jr., with them Walter M. Newman, Walker & Newman, Donald B. Heard and Reed, Smith, Shaw & McClay, for Policyholders' Committee, appellant.

F. Brewster Wickersham, with him Metzger & Wickersham and Claude B. Hanley, for ancillary receiver in State of Maryland, intervenor.

Sebastian C. Pugliese, with him Michael J. Pugliese and Pugliese, Troiano & Pugliese, for intervenors, appellees.

David A. Saltzburg, with him Morris W. Kolander, Kolander & Saltzburg, Maurice Stern, Josef Jaffe and Mayer, Magaziner & Brunswick, for intervenors, appellees.

Before Drew, C.j., Stern, Stearne, Jones, Bell and Musmanno, JJ.

Author: Bell

[ 373 Pa. Page 107]

OPINION BY MR. JUSTICE BELL

An appeal was taken to this Court from the dismissal by the Court below, on March 17, 1952, of a petition to vacate a decree of Court made on June 26, 1947. That decree was unappealed from and unchallenged for a period of approximately three and one-half years, during which time the Deystone Mutual Casualty Company was in the hands of the Insurance Commissioner of Pennsylvania for purposes of liquidation

[ 373 Pa. Page 108]

    in accordance with the Court's decree. The decree of June 26, 1947 has been recognized ever since its entry by 26 of our sister states which have accorded it full faith and credit in accordance with Article IV, § 1 of the Constitution of the United States.

This case originated in June 1947 in a statutory proceeding, initiated by the Attorney General of Pennsylvania at the relation of the Insurance Commissioner of the Commonwealth, for the dissolution of the Keystone Mutual Casualty Company, a Pennsylvania casualty insurance company, pursuant to the provisions of §§ 502-506 of the Insurance Department Act of May 17, 1921.*fn1 On June 26, 1947, the Court of Common Pleas of Dauphin County entered a final decree directing the Insurance Commissioner to take possession of the company's property and ordering the dissolution of the company and the liquidation of its assets.

Three and one-half years later, to wit, on December 18, 1950, the succeeding Attorney General and the succeeding Insurance Commissioner petitioned the Court of Common Pleas of Dauphin County to vacate its decree of June 26, 1947, on the ground that it was entered under a mistake of fact. Various parties were permitted to intervene in the proceedings in the Court below. See Commonwealth ex rel. Chidsey v. Keystone Mutual Casualty Company, 366 Pa. 149, 76 A.2d 867. The petition to vacate was supported by a "Policyholders' Committee" and also by a committee of creditors called the "Perks Committee"; it was opposed by a committee of creditors called the "Goldstein Committee" and by the Insurance Commissioner of Maryland, and by insurance agents from the State of Illinois who were creditors and known as the "Hitke Committee".

[ 373 Pa. Page 109]

The Commonwealth in the its petition to vacate alleged (1) that the Casualty Company was solvent (a) on June 26, 1947, and (b) as of the time of the filing of the petition of December 18, 1950; and (2) that the vacation of the decree of June 26, 1947, was sought for the purpose of rehabilitation of the company. No plan of rehabilitation was attached to the petition or offered at the trial and the Court below doubted that an acceptable plan could, under all the conditions here present, be devised. Judge NEELY, after lengthy hearings, found in a very able and painstaking opinion of 97 pages: (1) that the decree of dissolution of June 26, 1947 was validly entered; (2) that the Commonwealth and the intervenors who supported the petition to vacate the decree of 1947 had the burden of proving that the decree was entered under a mistake of fact or law; and (3) that the petitioners failed to sustain their burden of proof. The "policyholders' Committee" took an appeal from the decree of the Court below which dismissed the Commonwealth's petition to vacate, but the Commonwealth, which was the original petitioner, refused to take an appeal or to join in this appeal. The Insurance Commissioner in his answer to a petition for supersedeas, doubts whether a rehabilitation of the company could now be consummated even if the company were solvent, and avers that "he believes that compliance with [the] admonitions [of the Court below] is in the best interest of the public and of the company, its creditors and policyholders and will not adversely affect the interest of any of them and that further delay would be subversive of the interest of the public, policyholders, creditors and claimants." Briefs were filed in support of the appellant by the "Perks Committee"; and "Goldstein Committee" and by the "Hitke Committee".

[ 373 Pa. Page 110]

The appellant intervenors contend that the decree of June 26, 1947, was void (1) because it was based upon a mistake, viz., insolvency, and (2) because it was entered without the required notice or hearing, and (3) because the Court erred in placing the burden of proof of solvency on the Commonwealth.

From the record and briefs totaling more than 2000 pages, we briefly summarize the important facts.

The principal place of business of the Keystone Mutual Casualty Company was in Pittsburgh, Pennsylvania. As of December 31, 1946, the company was writing 19 different classes of casualty insurance and had approximately 1000 agents who were operating in 26 states in which the company was authorized to do business. From this business it derived net premiums in 1946 in excess of 7 1/2 million dollars. In its annual statement filed with the Insurance Department of the Commonwealth, as well as with the Insurance Department of other states, the company reported a surplus as of December 31, 1946, of $1,439,066.36. This report aroused the suspicions of the officers of the Insurance Department of Maryland and of the Insurance Director of the State of Kentucky, who called certain items in the report and certain practices of the company which they considered unsound and improper to the special attention of the Insurance Commissioner of Pennsylvania. In May of 1947, the Insurance Commissioner directed that a special examination should be made of the Meystone Mutual Casualty Company, which was joined in by examiners representing the Insurance Commissioner of Kentucky and of Maryland. Shortly after the examination was begun N. P. Kann, Secretary, Director, Chairman of the Finance Committee, and the active Manager of the company, and A.J. O'Leary, Vice President, Director and Comptroller of the company, came with the company's attorney to the

[ 373 Pa. Page 111]

    office of the Insurance Commissioner in Harrisburg to discuss the company's affairs. During the course of this conference with the Insurance Commissioner both Kann and O'Leary admitted that the company was insolvent. They also admitted that the annual statement of December 31, 1946, deliberately concealed the extent of the company's liabilities; thus enabling the company to show a surplus. Kann requested the Insurance Commissioner to discontinue the examination and to permit the company to operate for the balance of the year in the hope that the company could "run off" the bad debts on its books before the regular examination which would be held on or about January 1, 1948. The Insurance Commissioner refused to discontinue the examination and insisted that additional funds must immediately be raised, otherwise the company would be taken over by the Insurance Department. He also notified the District Attorney of Allegheny County of the criminal acts of Messrs. Kann and O'Leary. The officers and directors were unable to borrow additional funds to bring the reserves up to the legal requirements and to rehabilitate the company. Kann and O'Leary were convicted in Allegheny County on a criminal charge arising out of the falsification of the company's books. On June 1, 1947, the Insurance Commissioner of Maryland ordered the company to cease doing business in that state. Upon being informed of this action, the then Insurance Commissioner of Pennsylvania, Mr. James F. Malone, Jr., on June 2, 1947, prohibited the writing of any new business.

On June 6, 1947, the Insurance Commissioner's examiners (as a result of their examination and preliminary report) reported to the Commissioner and also to Messrs. Kann and O'Leary that they found the company was insolvent, and that it had a deficit of over 1 1/2 million dollar. Mr. Kann said he could not

[ 373 Pa. Page 112]

    in person with whatever records you may desire to produce at that time and accompanied by any witnesses you may desire to testify. You may be represented by counsel in this matter as may the other officers of the company. Testimony will be taken at this hearing.

Yours very truly, George W. Keitel, Deputy Attorney General."

On June 24, 1947, the Board of Directors of Keystone Mutual Casualty Company adopted the following Resolution:

"WHEREAS, the Company has been advised that the reserves of the Company do not meet the legal requirements of the Insurance Department of ...


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