Opinion
03-18-1890
PELTZ et al. v. SUPREME CHAMBER OF THE ORDER OF FINANCIAL UNION et al. MASON et al. v. SAME.
Allen H. Gangewer and Eugene Stevenson, for complainants. A. H. Dellecker and Mr. Williams, for various persons who came in by petition. Gilbert Collins, for defendants.
Two bills to wind up and dissolve the Supreme Chamber of the Order of Financial Union.
Allen H. Gangewer and Eugene Stevenson, for complainants. A. H. Dellecker and Mr. Williams, for various persons who came in by petition. Gilbert Collins, for defendants.
BIRD, V. C. The defendant society was organized under the act of the legislature authorizing the formation of benevolent and charitable institutions. The bill shows that the complainants and a large number of others had become members thereof. It also shows that the officers and managers, before the filing of the Peltz bill, had mismanaged the affairs of the institution, and misapplied its funds, so that out of over $24,000 received there was a loss of over $3,000. The prayer of the bill is that the officers may account, and, if necessary, the affairs of the said union may be wound up, and the said union dissolved; and that the complainants and others interested may be paid what is justly due to them; and that the said officers may be enjoined from, paying out any of the funds or moneys of the said union, or removing the same out of the jurisdiction of this court, or disposing of any of its assets or personal property; and that its management be taken charge of by the court; and that a receiver be appointed; and a prayer for other and further relief. Upon the filing of the bill and affidavits, an order to show cause was allowed, together with a restraining clause prohibiting the defendants from disposing of any of the assets or effects of the institution. Upon the return of the order the defendants come in with their answer. Upon the argument of the motion for an injunction and a receiver, it was conceded that the officers had been guilty of a violation of the by-laws of the union in the use and application of the funds; and, although it may not have been fully assented to by counsel for the defendants, it certainly was not earnestly resisted that the court ought to enjoin the officers of the union from the further control or attempted management of the union, and that, if this should be done, a receiver should also be appointed. Most obviously, it was the duty of the court to undertake to protect the rights of the complainants, and all who sought the benefit of the proceedings, from further invasion or spoliation by the officers of the company who had so mismanaged its affairs. Such course was taken. But the court did not feel at liberty to declare a dissolution of the union at that time with the view of winding up its affairs. It was not certain but that the embarrassments which the misconduct of the officers had thrown over and around the institution might not soon be overcome, and the great object had in view by the creation of the union still be successfully promoted. Having in mind the possibility of such success, an order was made allowing all of those who were still members to pay their dues to the receiver, in order that they might not be charged with forfeiting their rights as members. Under this order, a great many continued to pay such dues.
Before the final hearing upon the Peltz bill, Mason and others, the above-named complainants, filed a bill. It was agreed between counsel for the respective parties that both cases should be heard together, although, as will be seen, the Mason Case embraces a larger field of inquiry than the Peltz. The Mason Case, after setting forth the formation of the institution, shows that its object was to "unite, in equal bonds of fidelity, equality, and morality, all acceptable white persons of both sexes, to improve the conditions of itsmembership morally, socially, and materially, by instruction, lessons, judicious counsels, and timely aid, by encouragement in business, and by assistance to employment when in need, and to establish a relief fund from which members of said order who have complied with all of its rules and regulations, or the heirs of such members, may receive a benefit, in a sum not exceeding one thousand dollars. which shall be paid in such sums and at such times as may be provided by the laws governing such payments, or in their certificates of membership, when all the conditions regulating such payments have been complied with," which, together with all the constitution, and certificate of incorporation by-laws, were printed and widely circulated among those likely to become interested therein.
Every one will observe that the objects had in view were as captivating as they were charitable. It shows that the central governing body was to be located in Patterson, N. J., and that inferior departments were to be located throughout the cities and towns of the United States. The bill charges that the whole scheme was founded on fraud and delusion, and designed to entrap the unwary and confiding; they being influenced by the hope of the benefits which were promised, without taking pains or having the ability to investigate the scheme, and ascertain its real impracticability. It shows that loss to a large number would inevitably result should they join the union, and that that fact was well known and understood by the said officers and promoters of the scheme, and that, so far as they were personally concerned, they knew that success to themselves depended upon the loss which would accrue to a large number of poor people who would be unable to continue their membership in the union. The inducement to join was an offer and promise to pay a benefit in case of disease, accident, or death, and, apart from disease, accident, or death, to pay a sum of money at the expiration of the term of five years, not exceeding $1,000 or $750 or $500 or $250, upon the payment of a weekly sum of $1 for the periods of time named; thus holding out to the unwary, though necessitous, the possibility of receiving $1,000 at the end of live years upon the payment in of only $260 during that same period. It shows, further, that the certificate which the secretary of state is required to give in such cases was not published in connection with the constitution in all its fullness, but in a garbled form, omitting certain important passages, and that as published it was used for the purpose of making those who were sought to be influenced believe the scheme had the approbation of the secretary of state. The bill charges that the said officers, by their constitution and by-laws, and by their circulars, induced the complainants, and a large number of others, to believe that the scheme was practicable, and capable of being carried out, and thereby caused them, under such delusion, to organize and join local departments of said order, to become members thereof, and to pay the sums of money called for by said constitution and by-laws; that over 70 local departments were organized, with a membership of over 2,000, (the proof showing over 2,800;) and that the said complainants, and a large number of others, became such members upon such false and fraudulent representations. The bill then alleges that the assets of the said union which have not been wasted are in the hands of a receiver appointed by the order of this court, and that all the assets in the hands of the receiver were contributed by the complainants and others to the said union, and that they were induced to make such contributions through the fraudulent and deceptive practices of the said officers. The bill then shows the filing of the said bill of complaint of Peltz and others, setting forth the substance of the said bill; that the effect of the appointment of a receiver has been to utterly break up and destroy the plan and scheme and business operations of the said union; that thereupon those interested began to inquire and saw the impracticability of the scheme, so that, even if the said property and assets in the hands of the said receiver should be for any reason, at any time, restored to said corporation, the said corporation could not possibly continue its plan of operation, or carry out its functions as a benevolent or life or accident insurance association. The bill shows that the officers of said union held a meeting at which they resolved to assess all its members at a given rate for the purpose of raising additional moneys, which had not theretofore been provided for, which it is alleged was a confession of the impracticability of the original scheme to pay four dollars for one. It shows that the amount of money due to the members thereof is greatly in excess of the whole amount which has been paid to the said corporation or to the receiver, and that the said corporation is hopelessly insolvent; and that the said union was in fact founded for purposes of gain, and is not, and never has been, from its origin, a benevolent or charitable corporation, within the true intent and meaning of the said act to incorporate benevolent and charitable associations; and alleges that it is against public policy and true interests of the inhabitants of this state, and the spirit of its institution and laws, to allow the continuance of the said union, whereby innocent people are misled to their prejudice and wrong. The bill then alleges that the bill filed by Peltz and others does not fully or sufficiently set forth the merits of the controversy, and is inadequate in its statements to meet all the demands of the case, and expresses a willingness upon the part of the complainants in the Mason bill to have the two suits consolidated. The bill prays that the said union may be restrained from transacting any further business; that it may be declared insolvent; that a receiver may be appointed to take charge of the assets; and that said assets may bedistributed among the members of the said union.
The answer to the Mason bill denies that the said scheme was conceived in fraud, or that the originators had any intent or desire to defraud any, or that it is impracticable, or at all calculated to mislead those whose interests it aimed to control, or any who might be induced to become members thereof. It denies that any were deceived or deluded either by the constitution and by-laws or by any of its circulars which were distributed; denies that the mismanagement and misappropriation of funds was of any serious character, but trifling and temporary, and only so appropriated for the time being, and that no injury thereby resulted to any, and could not impair the solvency of the union; that all the officers in charge at the time of said misappropriation, except one, have resigned, and others have been elected in their stead. The answer insists that the attack upon the union by the Peltz bill was most wanton and uncalled for; that at that time the union was most prosperous, a very large number having recently become members; but admits that the filing of the Peltz bill produced a widespread alarm. Says "the attack upon this defendant and its officers was made at the time when the membership was very rapidly increasing, but the great majority of the then existing members had but recently joined, and had made payments only for a very few weeks. Many of these persons have abandoned membership, but the earlier members have remained loyal, and are entitled to the protection of this court, and the benefit of the lapsed membership of those who have deserted the order because of its undeserved difficulties." It denies that "there is any indebtedness whatever due from said corporation to the members thereof, or otherwise, except arrears of salary to some of its officers accruing since the appointment of said receiver; and it denies that the said corporation is insolvent, but, on the contrary thereof, it insists that it has never been in so prosperous a financial condition." The answer insists that the principles on which the union is founded are financially sound, and that, while it depends for success upon what is termed "lapsed membership," that is also true of life insurance companies who make their calculations for success upon the expectation of a lapse of at least 33 1/3 per cent. of all policies issued; and insists that in the case in hand there is an absence of all fraud, and that this court can grant no relief, since the most that can be said in behalf of those who complain is that they have made a mistake in judgment.
I conclude that the court has jurisdiction of the case, although not given by the act under which the union obtained its certificate. This, I think, is so, not only because of the illegal conduct of its officers, but because an injunction was necessary in order to protect the assets of the union from further illegal management and from further misappropriation. Having jurisdiction for this purpose, it is well understood that, whatever is necessary to be done in order to protect the rights of the parties and to do complete justice, the court may proceed to do. But, besides this, there is undoubtedly another well-recognized ground of jurisdiction, viz., the settlement of the right of a large number of persons interested in one suit, and thereby avoiding a multiplicity of suits. These are all independent of the allegations of fraud which are set up in the Mason bill, which in themselves were perhaps sufficient to justify the court in holding the bill until the proofs were in.
The proofs having been presented, I conclude that the condition in which the union now is, and has been since the injunction was allowed, is such as not only to justify the court in so doing, but to require it to wind up the affairs of the said union, and to distribute its assets among those who are lawfully entitled thereto. To do otherwise would be subjecting the rights and interests of all those who withdrew from the said union, by ceasing to pay their contributions according to its constitution and by-laws, to the peril of great loss and risk of having their interest declared lapsed by said union, or to great expense in the courts of justice in compelling the recognition of their rights by said union; and, although the court has taken every precaution to protect those who might desire to secure their interest against lapsing, it certainly cannot be an undisputed question whether those who have paid their dues to the receiver, rather than into the treasury of the union, thereby maintained their standing in the union, and that any court has the power to say that such payment is equivalent to a strict compliance to the requirements of the constitution and by-laws. This is, indeed, a grave consideration; for at the time of the filing of the Peltz bill there were over 2,800 members, and at the time of the hearing of the cause there were only about 215, so that, if the by-laws be strictly enforced, a very large proportion of the members will have forfeited all their payments. And since this is one of the principal foundations upon which such institutions base their hope of success, according to the answer in this case, it will undoubtedly be an object of great solicitude on the part of the 215 to establish a forfeiture, since by such forfeiture they become enriched. These things being so, there is no course at all satisfactory to my mind to be pursued, except for this court to distribute all the moneys in the hands of the receiver to those who were in good standing at the time of the filing of the Peltz bill, and at least to those who have continued to make payment to the receiver since. This will be, a complete protection to them, whether they desire to continue their membership in the said union or not, or whether the said union is willing that they shall continue their membership or not. Certainly there is nothing that can be charged against such members.They did nothing to disturb the harmony or success of the union. They did nothing to make it necessary to invoke the aid of this court. The cause was brought to this court by the conceded mismanagement of the officers. If the members were not willing to trust such officers after such fault, it should not become the misfortune of the members.
It will be seen that the Mason bill charges that the said union is insolvent, and makes this one of the principal grounds for insisting that a receiver should be appointed, and the assets of the union distributed. This cannot be maintained, because of the maturity of any of its contracts according to the strict letter of the constitution and by-laws. Looking at the case from this stand-point alone, it has not been shown that a single claim has been presented which has not been promptly discharged, except those which led to the filing of the Peltz bill; that is, those which grew out of the misappropriation of the funds. So that, if the union be found to be insolvent, it must be upon some other basis. There is only one other view which can be taken into account, considering the allegations of the bill, and that is the charge that all the moneys which have been paid are due to the members respectively, because of the fraud which underlies the whole scheme, and, being so due, because of such fraud there are not sufficient assets to discharge them, and hence the insolvency.
It must be admitted that there is great force in these charges, especially when they are considered in connection with the class of people designed to be reached and benefited by the statute and the admissions of the answer. Unquestionably the act of the legislature should be liberally construed. Nothing can be clearer than that its purpose is to enable numbers of citizens to unite in order that they may support and maintain those of their number who perchance become unfortunate; and yet the answer expressly admits that, upon the basis upon which this union is formed, it cannot be at all successful, unless a very large proportion of its members forfeit their right to membership by failing or refusing to comply with all the terms or conditions of the constitution and by-laws. It will be observed, therefore, that in all probability the great majority of those who need the protection of such an institution are not only deprived of its benefits, but, by forfeiting the right, contribute to the benefit of those who are not in such need, and who have not been unfortunate. It is admitted that at least 33 1/3 per cent. of the members of such institutions forfeit their membership by failing to comply with all the conditions; and during the progress of the cause I became convinced that there was every probability that this union, if continued for any length of time, would show a much larger percentage of forfeitures. I was not a little surprised at what seemed to be the boast of the officers of the defendant company, that the very foundation of their scheme rested upon the unsuccessful efforts of such large numbers to continue their membership. I find it very difficult to conclude that a scheme based upon such acknowledged weakness, misfortune, or disability of large numbers of citizens is at all within the true spirit or meaning of the act. A calculation based upon the theory of these officers shows that, instead of the possibility of a member in full standing ever receiving $1,000 for $260 paid in, he can only receive about $450, and this, only after making allowances for the immense numbers of forfeitures above spoken of. How can it be said that the legislature ever intended to allow the learned and skillful and financially able to make profit under the guise of benevolence and charity out of the unlearned, unskilled, and those who are so unfortunate as to suffer from financial disability? After the fullest and most careful reflection, I am unable to discover any method or principle of law by which this scheme can be sustained under the act. With all due respect for the learned counsel who presented the case for the defendant, it seems to me that the scheme presented by the constitution and by-laws in this case has more the appearance of a lottery than of a charity. It is not necessary for me to say that any such result was intended, it being enough to find that the scheme has culminated in disaster. The cases which support the jurisdiction of the court, and also show the extent to which courts of equity have gone in winding up such institutions, are hereby referred to in part: Pearce v. Piper, 17 Ves. 1, 16, 19, and notes; St. Louis, etc., Min. Co. v. Sandoval, etc., Min. Co., 5 N. E. Rep. 370; Bac. Ben. Soc. §§ 3, 51-54, 57-59; Stamm v. Association, 32 N. W. Rep. 710; Slee v. Bloom, 19 Johns. 456; Nibl. Mut. Ben. Soc. §§ 142, 145, 163, 164; Com. v. Wetherbee, 105 Mass. 161.
Upon the argument, it was urged by counsel that the court should give relief because the defendant had undertaken to pay a given sum at the expiration of a certain period of time to all those who should continue to be members during the period, which undertaking was without authority of law, it not being a charity so to undertake, but rather a profit, or a business speculation. It is doubtful whether the allegations or the aim of either of the bills of complaint are sufficiently broad and explicit to warrant any decree embracing this contention, and hence I have avoided giving it any consideration. I will advise a decree making the injunction perpetual, and continuing the receiver, or, if need be, reappointing him, or appointing another, and directing the distribution of the funds which have come to his hands, or which shall hereafter come to his hands, among the members of the said union, all who are such members to be ascertained by a master, to whom the same will be referred.
It will be seen that I have not found it necessary to declare the said union insolvent, although it is perfectly manifest that it has notthe funds to discharge the liabilities with which, in my judgment, it should be charged, because of the false basis or miscalculation upon which the scheme was projected, and of the violation of the true spirit and meaning of the act. But because of these things it has seemed to me to be the plain duty of the court to protect all those who have suffered, or are likely to suffer, from such miscalculation or violation of law, by paying back to them, to the extent of the funds remaining, the moneys which they have paid; and this will be open to all who were in good standing at the time of the filing of the Peltz bill, and have continued since to make payments to the receiver.