CHURELLA V PIONEER STATE MUTUAL INSURANCE COMPANY
Docket No. 238695
Court of Appeals of Michigan
Submitted August 6, 2003. Decided August 28, 2003.
258 MICH APP 260
The Court of Appeals held:
Policyholders of a mutual insurance company do not have a right to compel distribution of excess surplus where, as here, no statute, company bylaw, or contract provision accords them that right. Even if the plaintiffs had a legal basis on which to maintain their suit, they failed to plead facts sufficient to overcome the business judgment rule. The plaintiffs alleged that the defendant directors breached their fiduciary duties by failing to consider whether to distribute the surplus, but failed to explain how this failure to distribute, without more, constituted fraud or bad faith such that the business judgment rule should not apply to protect the defendants from suit.
Affirmed.
BANDSTRA, J., concurring, stated that he agrees that the trial court decision should be affirmed, but notes that it was unnecessary to decide the issue whether the defendants violated the business judgment rule because of the majority‘s conclusion that the plaintiffs’ have no right to compel distribution.
INSURANCE — MUTUAL INSURANCE COMPANIES — POLICYHOLDERS — EXCESS SURPLUS
Policyholders of a mutual insurance company do not have a right to compel distribution of excess surplus absent a statute, company bylaw, or contract provision according them that right.
Jaffe Raitt Heuer & Weiss, P.C. (by Joseph J. Shannon and Melanie LaFave), for the plaintiffs.
Kaufman & Payton (by Alan Jay Kaufman and Donald L. Payton) for the Pioneer State Mutual Insurance Company and its directors.
Michael A. Cox, Attorney General, Thomas L. Casey, Solicitor General, and William A. Chenoweth, Assistant Attorney General, for the Attorney General and the Commissioner of the Office of Financial and Insurance Services.
Amicus Curiae:
Before: DONOFRIO, P.J., and BANDSTRA and O‘CONNELL, JJ.
O‘CONNELL, J. Plaintiffs Mark Churella, Susan Radtke, and Peter Treboldi appeal as of right the trial court‘s order dismissing their suit pursuant to
Plaintiffs filed an action seeking certification as a class action, alleging that as current and past policyholders, they had standing as owners of the company to compel Pioneer to distribute its excess surplus. They claimed that the company was holding millions of surplus in excess of its reserve requirements and that it was obligated to distribute that surplus. Furthermore, they claimed that the directors breached fiduciary duties owed to the policyholder-owners by failing to distribute the surplus, and thus were not protected by the business judgment rule.
In their answer, Pioneer and its directors sought a judgment of no cause of action, claiming that plaintiffs had no recognizable claim under Michigan law and that the directors’ actions were protected by the business judgment rule. They also moved to dismiss for lack of subject-matter jurisdiction pursuant to
The Attorney General and the Insurance Commissioner argued that while Michigan had no case law on point, court decisions in other states had denied similar plaintiffs the right to compel distribution when there was no dissipation of a surplus. They claimed that policyholders are different from shareholders because policyholders contract to have their insurance claims paid, while shareholders buy shares for investment purposes. While the Attorney General and the Insurance Commissioner admitted that plaintiffs had a beneficial interest in the surplus, they argued that plaintiffs had no right to compel distribution because plaintiffs did not allege that they were prom-
Plaintiffs, on the other hand, argued that policyholders have the same rights as shareholders, and that the board of directors was not protected by the business judgment rule because it had failed to act. The trial court decided to adjourn the hearing regarding the motions to dismiss because it found two cases cited by defendants difficult to distinguish, and wanted to give plaintiffs time to respond. The trial court indicated that it was troubled by the notion of ownership because plaintiffs conceded that their ownership rights could not be transferred.
Following a second hearing, the trial court granted summary disposition because it determined it did not have subject-matter jurisdiction over plaintiffs’ claim. The court further concluded that plaintiffs presented no deposition or affidavit indicating that the directors behaved in an improper fashion, but even if the directors had behaved improperly, it would be the Insurance Commissioner‘s job to sanction their behavior. The trial court subsequently dismissed the case and ordered plaintiffs to pay Pioneer‘s costs and attorney fees.
Plaintiffs appealed, and this Court affirmed the trial court‘s ruling regarding subject-matter jurisdiction, but reversed its imposition of costs and fees. Churella v Pioneer State Mut Ins Co, unpublished opinion per curiam of the Michigan Court of Appeals, decided November 12, 1999 (Docket Nos. 204840, 209998). Our Supreme Court reversed and remanded to this Court because it determined that
The Attorney General and the Insurance Commissioner again moved for summary disposition pursuant to
The issue on appeal is whether policyholders have a right to compel distribution of a surplus and whether the business judgment rule shields directors when they do not make the distribution.
We hold that policyholders do not have a right to compel distribution of a surplus where there is no statute, company bylaw, or contract provision according them that right, and where they did not sufficiently plead facts to overcome the business judgment rule.
This Court reviews de novo a trial court‘s grant of summary disposition for failure to state a claim. Beaudrie v Henderson, 465 Mich 124, 129; 631 NW2d 308 (2001). When reviewing a trial court‘s grant of summary disposition for failure to state a claim on which relief can be granted, an appellate court assumes that all factual allegations in the nonmoving party‘s pleadings are true, Maiden v Rozwood, 461 Mich 109, 119; 597 NW2d 817 (1999), and determines whether there is a legally sufficient basis for the claim. Beaudrie, supra at 129. In the instant case, plaintiffs’ factual allegations are that they are policyholders and that the board of directors has not distributed the company‘s excess surplus.4
However, whether a policyholder has the same rights as a shareholder is not as clear. Plaintiffs cited several cases that analogized policyholder suits to shareholder suits. Pincus v Mut Assurance Co, 4 Pa D & C3d 71, 73 (1976), aff‘d 251 Pa Super 626 (1977) (a suit challenging a mutual company‘s dividend policy is governed by the same legal principles applicable to stock companies); Barnes v State Farm Mut Auto Ins Co, 16 Cal App 4th 365, 375; 20 Cal Rptr 2d 87 (1993) (a policyholder has the same legal rights a shareholder has). These cases clearly analyzed suits to compel distribution by policyholders according to the same principles used to analyze shareholder suits to compel dividends.
On the other hand, defendants assert that the relationship between a policyholder and a mutual insurance company is that of creditor and debtor, and that the policyholder‘s rights are determined by statute, company bylaws, or contract. Prudential Ins Co of America v Miller Brewing Co, 789 F2d 1269, 1275 (CA 7, 1986)
Indeed, none of the parties cited any binding Michigan authority on this issue, and the trial court indicated that it believed the issue was one of first impression. Nevertheless, while Michigan courts have not squarely dealt with this question, previous decisions involving similar issues are helpful. In a suit by a policyholder to enjoin reinsurance designed to allow a mutual insurance company to continue business, our Supreme Court indicated that a policyholder‘s rights depended on the terms of the policy. Glover v Diggs, 368 Mich 430, 432; 118 NW2d 278 (1962). Because plaintiffs in the instant case did not allege that the terms of their policies gave them the
Furthermore, this Court previously determined that the Insurance Code,
On the other hand, the Court in Glover, supra at 434, also stated, “If a suit of this nature, brought by the holder of a policy issued by an insurance company, may be regarded analogous to an action by a stockholder of a corporation when duly authorized under the law of the State, like rules of procedure must be observed.” This statement appears to consider the concept that a policyholder‘s suit should be treated like a shareholder‘s suit. In addition, the Supreme Court stated that mutual insurance company policyholders “would be in a better position to assert a property interest in the surplus....” In re Certified Question (Fun ‘N Sun RV, Inc v Michigan), 447 Mich 765, 791 n 34; 527 NW2d 468 (1994), after remand 223 Mich App 542; 567 NW2d 460 (1997).
We note that the arguments propounded by plaintiffs and defendants may be harmonized; where a policyholder of a mutual insurance company has the right to bring suit to compel distribution of surplus, the action must be treated as a shareholder‘s suit to compel a dividend; however, the policyholder must derive the right to compel distribution from either statute, the company‘s bylaws, or the policy itself. This analysis is consistent with Glover, supra at 432, 434. An extension of Glover in this fashion results in a holding that plaintiffs have no legal ground to support their claim.
Even if we did determine that plaintiffs have a legal basis on which to maintain their suit, they must next overcome the business judgment rule:
“It is a well-recognized principle of law that the directors of a corporation, and they alone, have the power to declare a dividend of the earnings of the corporation, and to determine its amount. Courts of equity will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its business, divide among its stockholders, and when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud, or breach of that good faith which they are bound to exercise towards the stockholders.” [In re Butterfield Estate, 418 Mich 241, 254-255; 341 NW2d 453 (1983), quoting Hunter v Roberts, Throp & Co, 83 Mich 63, 71; 47 NW 131 (1890) (citation omitted).]
In Miller v Magline, Inc, 76 Mich App 284; 256 NW2d 761 (1977), this Court noted that the dividend policy was one of the major purposes of a for-profit corporation, id., at 304-305, while in the instant case, the major purpose of a mutual insurance company is to provide insurance coverage to its policyholders. In addition, this Court quoted with approval the chancellor‘s finding that the directors could not claim that the company was unable to afford a dividend when they had paid themselves significant bonuses. Id. at 309. Plaintiffs have not made similar allegations in the instant case.
In Marvin v Solventol Chemical Products, Inc, 298 Mich 296; 298 NW 782 (1941), a board of directors signed an agreement giving another party complete control over the company‘s finances. Id. at 298. Our Supreme Court determined that the directors could not contract away their duty to exercise independent
While Dodge v Ford Motor Co, 204 Mich 459, 508-509; 170 NW 668 (1919), appears to support plaintiffs’ position that a failure to distribute excess profits, without more, is an abuse of discretion, our Supreme Court also noted that the purpose of a business corporation is to provide profit to its shareholders. Id. However, this is not the purpose of a mutual insurance company. The purpose of a mutual insurance company is to provide affordable insurance coverage to its members. Kamm & Schellinger Brewing Co v St Joseph Co Village Fire Ins Co, 168 Mich 606, 618; 134 NW 999 (1912).
Therefore, because plaintiffs did not explain how the directors’ failure to consider a distribution constituted fraud or bad faith dealings, and because plaintiffs have not cited any cases indicating that a failure to declare a dividend, without more, constitutes an abuse of business discretion, we conclude that plaintiffs have not sufficiently pleaded facts that would overcome the business judgment rule. Conclusory statements, unsupported by factual allegations, are insufficient to state a cause of action. ETT Ambulance Service Corp v Rockford Ambulance, Inc, 204 Mich App 392, 395; 516 NW2d 498 (1994).
In sum, we hold that policyholders have no right to compel distribution where there is no statute, company bylaw, or contract provision according them that right, and where they did not sufficiently plead facts to overcome the business judgment rule.
Affirmed.
BANDSTRA, J. (concurring). I concur with the majority that we should affirm in this case. However, the decision that the policyholders have no right to compel distribution of a surplus makes it unnecessary to consider whether the directors violated the business judgment rule in failing to make that distribution. I would not reach that second question and note that, by doing so, the majority opinion might be misread as indicating that policyholders such as those involved here would have a right to compel a distribution if they could allege and prove that the business judgment rule was violated. I do not read the majority opinion to have that import and write separately to point that out.
Further, I note that our decision that the policyholders have no right to compel a distribution should not be viewed as unduly harsh. They are not without a remedy. If a majority of policyholders thinks that a distribution should be made, they can elect new board members who share that view.