When a life insurance company becomes insolvent and goes into
liquidation, the amount due on an endowment policy, payable in any
event at a fixed time, and sooner if the party dies before that
time, should, in settling the company's affairs, be set off against
the amount clue on a mortgage debt from the holder of the policy to
the company by way of compensation or reconvention.
When a life insurance company becomes insolvent before the time
fixed for the termination of an endowment policy, payable to the
holder in case of survival until drat time, or to his children in
case of his death before it, the contingent interest of each party
is fixed by the insolvency, to be determined by the tables
ordinarily used for that purpose.
Where a holder of a life policy borrows money of his insurer, it
will be presumed
prima facie that he does so on the faith
of the insurance and in expectation of possibly meeting his own
obligation to the company by that of the company to him.
Newcomb v. Almy, 96 N.Y. 308, disapproved.
Page 129 U. S. 253
Bill in equity to foreclose a mortgage. The case is stated in
the opinion.
MR. JUSTICE BRADLEY delivered the opinion of the Court.
This case arises out of a granted by the Life Association of
America, a corporation of the State of Missouri, to William E.
Hamilton, the appellee, of Shreveport, Louisiana, upon the life of
said Hamilton and also out of a mortgage given by said Hamilton to
the said association for a loan of money, and the main question is
whether the amount due on the policy ought to be set off by way of
compensation or reconvention against the amount due on the
mortgage.
The policy was not an ordinary one, payable only at the
termination of the life insured, but was what is sometimes called
an "endowment policy," payable at a certain time at all events, or
sooner if the party should die sooner, and the premiums were all to
be paid within a certain limited time, to-wit, ten years. By the
terms of the policy, in consideration of $877.80, paid by Hamilton,
trustee, and of the annual payment of a like amount on the 14th of
July every year for nine years thereafter, the association assured
his life in the amount of $10,000, payable to him or his assigns on
the 14th of July, 1884, or, if he should die previously, payable to
his children, naming them.
By the rules of the association, the insured was only required
to pay two-thirds of the annual premium in cash, and had the option
of a credit or loan for the other third, paying the interest
thereon at eight percent per annum. Hamilton availed himself of
this privilege of credit, and made all the cash payments required
for the whole ten years. His premium loan amounted in 1879, when
the association failed, to $2,372.90, and the equitable value of
his policy at that time was
Page 129 U. S. 254
$7,779.95, leaving in his favor the sum of $5,407.05. This is
the amount which he contends should be allowed to him by way of
compensation or reconvention against his mortgage debt due to the
association.
The mortgage debt referred to arose as follows:
In March, 1870, Hamilton borrowed of the association the sum of
$3,850, being, as he contends, entitled to such loan as a
policyholder, and which he would not have made but for his being
such policyholder. To secure the payment of this loan, he gave his
promissory note for $3,850, dated 11th of March, 1870, and payable
twelve months after date, with eight percent interest after
maturity, and to secure the note he gave a mortgage of same date on
certain lots and buildings in Shreveport, Louisiana. The mortgage
contained the usual pact
de non alienando, and was
recorded 11th March, 1870, and reinscribed 28th May, 1881.
By an amended charter of the association approved October 2,
1869, it was authorized by its directors to form separate
departments and branches in the different states, with separate
organizations of directors and officers, but having a general
connection with the parent company, and it was provided that each
department should have the management and investment of the funds
received therein. Under this charter, a separate department was
made of Louisiana and Texas, and Shreveport was one of the
districts of this department. The loan made by Hamilton, who
resided in Shreveport, was made, as he testifies, from the funds
raised from the business of the association in that district.
The Insurance Association became insolvent in 1879, and on the
13th of October in that year, proceedings were instituted against
it by the superintendent of the Insurance Department of Missouri,
under the laws of that state, for the liquidation of its affairs,
and such proceedings were had that on the 10th day of November,
1879, a decree was made by the Circuit Court of the City of St.
Louis, having jurisdiction of the matter, declaring that the
association was insolvent and that its condition was such as to
render its further proceedings hazardous to the public and to its
policyholders, and that the
Page 129 U. S. 255
association be dissolved, and its officers and agents enjoined
from exercising any control over its property or affairs, and from
the further continuance of its business of life insurance. The
decree further proceeded to vest the title to all the property and
assets of the association in the superintendent of the insurance
department of the state, to hold and dispose of the same for the
use and benefit of the creditors and policyholders of the
institution, and its officers were directed to convey, assign, and
transfer all its property and assets to the said superintendent. In
short, the association was put into a condition of absolute
bankruptcy and liquidation.
In June, 1883, the Insurance Superintendent of Missouri for the
time being, finding Hamilton's note and mortgage among the assets
of the Life Association, filed a petition for executory process in
the Circuit Court of the United States for the Western District of
Louisiana for the seizure and sale of the property covered by the
defendant's mortgage before referred to, and afterwards filed a
bill of foreclosure against Hamilton, the appellee. The latter,
besides an answer, filed a cross-bill, setting up the amount due on
the policy of insurance by way of compensation and reconvention. It
is conceded that the interest was paid on the mortgage debt up to
March, 1879, and there is no question that the equitable value of
the policy in November, 1879, was, as before stated, $5,407.05,
after deducting all deferred premiums. This was more than enough,
by over $1,300, to pay and satisfy the mortgage. The question is
whether the appellee is entitled to such compensation or
reconvention.
Natural justice and equity would seem to dictate that the
demands of parties mutually indebted should be set off against each
other, and that the balance only should be considered as due. But
the common law, for simplicity of procedure, determined otherwise
and held that each claim must be prosecuted separately. "The
natural sense of mankind," says Lord Mansfield, "was first shocked
at this in the case of bankrupts, and it was provided for by 4
Anne, c. 17, § 11, and 5 Geo. II. c. 30, § 28."
Green v.
Farmer, 4 Burrows 2220, cited in 2 Story's Eq.Jur. § 1433, 1
W.Bl. 651. In pursuance
Page 129 U. S. 256
of these old statutes and of the dictates of equity, the
principle of setoff between mutual debts and credits has for nearly
two centuries past been adopted in the English bankrupt laws, and
has always prevailed in our own whenever we have had such a law in
force on our statute book, and it mattered not whether the debt was
due at the time of bankruptcy or not.
See Babington on
Setoff 118;
Ex Parte Prescott, 1 Atk. 231; Bacon's
Abridge. tit. "Bankrupt," K; Acts of Congress 1800, c.19, § 42;
1841, c. 9, § 5; 1867, c. 176, § 20; Bump on Bankruptcy, 10th ed.,
91. It is difficult to see why this principle of justice should not
apply to persons holding policies of life insurance in a company
which becomes bankrupt and goes into liquidation. By that act, the
company becomes
civiliter mortuus, its business is brought
to an absolute end, and the policyholders become creditors to an
amount equal to the equitable value of their respective policies,
and entitled to participate
pro rata in its assets. If
anyone is indebted to the company, especially if his debt was
contracted with reference to and because of his holding a policy,
there would seem to be strong reason for allowing him a setoff, and
no good reason to the contrary.
One objection raised against the allowance of setoff, or
compensation, in the present case is that when the Life Association
became insolvent and when the present suit was commenced, the
insurance had not become absolute in Hamilton, and did not become
so until July 14, 1884, previous to which time his children had a
contingent interest therein, they being the beneficiaries in case
he should die before that date. But this reason cannot be sound,
for a settlement of the company's affairs cannot be postponed to
await the determination of every contingency on which its policy
engagements are suspended. This would postpone a settlement for at
least half a century. Every person's interest in life insurance is
capable of instant and present valuation, almost as certain and
determinate as the discount of a note or bill payable in the
future. Tables of mortality, and of all values dependent thereon,
are adopted by every company, and furnish an assured basis of
computation for this purpose. The table used by the
Page 129 U. S. 257
Life Association of America is set out in the record, and other
tables based upon it are used to facilitate the calculations
desired.
Another reason urged against allowing a setoff in this case is
that the defendant, Hamilton, holds the policy as trustee, and
cannot set off his claim as trustee against a debt due in his own
right.
This argument has no better foundation than the other. Hamilton
was only trustee so far as his children were interested; he could
not be trustee for himself, and his interest was separate from
theirs. The value of each was easy of calculation by any competent
actuary. The policy had less than five years to run, and the
interest of his children was contingent upon his dying within that
time, he being then fifty-one years of age. Calculated according to
the American table of mortality annexed to the charter of the
association, and contained in the record at five percent compound
interest, the usual rate assumed, the value of the children's
interest was less than seven percent of the total insurance, or
less than $700, while the value of Hamilton's interest was more
than seventy percent of the insurance, or more than $7,000,
* or, first
deducting from the whole present value of the policy (which at five
percent per annum for five years deferred is $7,836.26) the amount
due for deferred premiums ($2,372.90), the value of the children's
interest was less than $500, and that of Hamilton's nearly $5,000
-- a sum sufficient to cancel all
Page 129 U. S. 258
his indebtedness to the company and leave a considerable balance
over.
The proceedings which took place in the Circuit Court of St.
Louis in the course of liquidating the affairs of the association
may be referred to in this connection. In the progress of the case,
an actuary was appointed by the court to value all the policies of
the company then in force. Hamilton presented a petition to the
court claiming that the net value which his policy had on November
10, 1879 (the day the association was declared bankrupt and
dissolved), should be an offset to his note of $3,850, and the
interest thereon. The actuary made a report exhibiting the
particulars relating to the policy, and concluded as follows:
"The value of the policy on November 10, 1879, the date of the
dissolution of the company by order of the court, was, of the whole
$10,000, $7,779.95; from which, deducting outstanding note of
$2,372.90, left $5,407.05 as the net value, and which amount was
allowed by the commissioner, and approved by the circuit court.
"
Page 129 U. S. 259
It does not appear whether the Circuit Court of St. Louis
allowed the setoff or not. But the circuit court of the United
States dismissed the original bill in the present case, and granted
a perpetual injunction against the sale of the defendant's property
under his mortgage, but disallowed his demand of reconvention. The
form of the decree was as follows: after stating the titles of the
bill and cross-bill, the decree was in the words following,
to-wit:
"In the above cases, after trial and due consideration by the
court, it is ordered and adjudged by the court that John F.
Williams, superintendent, take nothing on his bill of complaint,
and said bill is hereby dismissed. And it is further adjudged and
ordered that the bill of complaint of W. E. Hamilton be sustained,
and the injunction of said Hamilton be, and is hereby, made
perpetual. And it is further ordered that the demands in
reconvention of the said Hamilton in his bill of complaint be, and
are hereby, rejected, without prejudice and of nonsuit."
Also decree for costs.
We think that this decree attained the substantial justice of
the case. If not absolutely correct, it erred against the
defendant, who has not appealed. The counsel for the appellant,
however, strenuously contends that compensation could not properly
be allowed in this case. In support of his views, he refers to the
case of
Newcomb v. Almy, 96 N.Y. 308, decided by the Court
of Appeals of New York. That case was almost parallel with the
present one, and the claim of setoff was disallowed. The suit was
brought by the receiver of an insolvent life insurance company
against the holder of an endowment policy issued by the company, to
recover the amount of a promissory note. The defendant, as in this
case, sought to setoff the value of his policy against the note.
The policy was not yet due, and, in case the defendant died before
it became due, the amount was payable to his wife. The court
assumed that the interests of the assured and his wife were so
involved together that they could not be separated, and that it did
not yet appear who would be entitled to the insurance, not
adverting to the fact that the interests of all the parties
Page 129 U. S. 260
became fixed by the insolvency of the company, and must be
computed as expectancies reduced to present values. It is true, the
court does, in the next sentence, concede that the policy had a
reserve value, but asks, "To whom was that value payable?" The
plain answer was at hand, that the reserve value of each person's
interest was payable to him or her. We cannot but think that if the
true character of the interests in question had been brought to the
attention of that learned court, it would have come to a different
conclusion from that which was reached.
The counsel for the appellant further contends that by the law
of Louisiana (which must undoubtedly govern the case), compensation
is not allowed against an insolvency in favor of a party whose
credit was not due when the insolvency occurred. The Civil Code of
Louisiana on the subject of setoff is identical with the Code
Napoleon. The article apropos of the point now under consideration
is 1291 of the Code Napoleon, and 2209 of the Civil Code of
Louisiana, and reads as follows:
"Compensation takes place only between two debts, having equally
for their object a sum of money, or a certain quantity of
consumable things of one and the same kind, and which are
equally liquidated and demandable [
exigibles,
i.e., due.]"
Now although upon a bankruptcy declared, all claims against the
bankrupt become instantly due, subject, of course, if not matured,
to a rebate of interest, and are equally entitled to dividends of
the bankrupt assets, yet in order that a claim may be the cause of
compensation, the commentators hold that it must be due
[
exigible] at the time when the bankruptcy is declared.
Touillier, vol. 7, art. 381; 28 Demolombe, vol. 28, art. 540. There
have also been judicial decisions to the same effect, though not
uniformly so.
See 3 Merlin Rep., vol. 3, p. 262, tit.
"Compensation."
But if there are technical reasons in the law of Louisiana for
rejecting the defense when set up by way of compensation, it was
nevertheless allowed by the Supreme Court of that state, by way of
reconvention, in a case exactly like the present.
Life
Association of America v. Levy, 33 La.Ann. 1203. Levy was the
holder of an endowment policy in the same
Page 129 U. S. 261
company as Hamilton, and in the same district (Shreveport). As
in this case, the policy had not matured, but the court held that
it might be set up by way of reconvention, and that the amount to
which the defendant was entitled could be recovered by him and
deducted from the amount of his indebtedness to the company. This
decision was based on a statute of Louisiana enacted in 1839 as an
amendment to article 375 of the Code of Practice. Article 375 was
originally in the following form, to-wit:
"In order to entitle the defendant to institute a demand in
reconvention, it is requisite that such demand, though different
from the main action, be nevertheless necessarily connected with
and incidental to the same, as for instance the demand instituted
by the possessor in good faith against him who sues in order to
evict him, or for the purpose of obtaining the payment of the
improvements made on the premises."
The amendment adopted in the act of 1839, and now forming part
of the article, provides
"that when the plaintiff resides out of the state, or in the
state, but in a different parish from the defendant, said defendant
may institute a demand in reconvention against him for any cause,
although such demand be not necessarily connected with, or
incidental to, the main cause of action."
The court in
Life Association v. Levy said:
"The right of the defendant to set up and urge his demand in
reconvention against the plaintiff, a resident of the State of
Missouri, is under our law, and the jurisprudence of our state, too
plain to require argument,"
and reference is made to
Spinney v. Hide, 16 La.Ann.
250;
Spears' Liquidator v. Spears, 27 La.Ann. 642. The
court added:
"The objections urged by plaintiff to the allowance of the
reconventional demand, on the ground that it would be a
compensation of plaintiff's demand, and that this cannot take
place, because plaintiff is insolvent, and defendant cannot
compensate his own debt, but is entitled only to such dividend as
may be declared after a final settlement, and because the
policyholders of the association are partners, and can only sue for
a settlement of the partnership affairs, are fully met, discussed,
and overruled by the lower judge, and we think properly."
The court, in its judgment,
Page 129 U. S. 262
allowed the cash value of the policy, as reported by the
actuary, with interest thereon from the time of the adjudication in
bankruptcy, November 10, 1879. In our opinion, this was a just
judgment, and the present case, being precisely like, is governed
by it.
It is true the court below disallowed the claim in reconvention,
but it decreed a perpetual injunction against the enforcement of
the defendant's mortgage, and thereby did substantial justice. The
result which the court reached was correct, though it may have been
led thereto on an insufficient ground. We are free to say, however,
that if the court below went on the ground that the defendant was
entitled to the benefit of compensation, we should be disposed to
concur with it notwithstanding the doctrine laid down by the
commentators. We are inclined to the view that where a holder of a
life policy borrows money of his insurer, it will be presumed
prima facie that he does so on the faith of the insurance
and in expectation of possibly meeting his own obligation to the
company by that of the company to him, and that the case is one of
mutual credit, and entitled to the privilege of compensation or
setoff whenever the mutual liquidation of the demands is judicially
decreed on the insolvency of the company. The case of
Scammon
v. Kimball, 92 U. S. 362, is in
concurrence with this view. It was there held that a banker, having
insurance in a company which was rendered utterly insolvent by the
great Chicago fire of 1871, by which the banker's insured property
was consumed with the rest, had a right to set up the amount of his
insurance against money of the company in his hands on deposit. The
insurance was not a debt due at the time of the insolvency; it
became due afterwards, when the banker had performed all the
conditions required in such cases. As the defendant took no appeal,
the case is so clearly decided rightly as regards any complaint to
be made by the plaintiff against the decree that we have no
difficulty in affirming it.
Decree affirmed.
* The process is a simple one, as shown by the elementary books
on the subject. The policy at the time the association failed
(November, 1879) had nearly five years to run; suppose it five.
Present value of $10,000, five years deferred at five percent
compound interest, is $7,835.26. This sum, less the value of his
children's expectancy, was the value of Hamilton's interest. He was
then fifty-one years old. The mortality table shows that, out of
68,842 persons living at that age, 1,001 die the first year; 1,044,
the second year; 1,091, the third; 1,143, the fourth, and 1,199,
the fifth, showing that the chances of the children's receiving the
insurance the first year were only 1,001 in 68,842, or 1001/68842;
the second year 1,044, etc., and the present value of the
expectancy for each year would be the sum expected divided by 1.05,
1.052, 1.053, etc. The present value of the children's expectancy
for each year therefore was as follows, to-wit:
1001 10,000
1st year, ------ X ------ = $ 138.48
68,842 1.05
1044 10,000
2d year, ------ X ------ = 137.53
68,842 1.052
1091 10,000
3d year, ------ X ------ = 136.90
68,842 1.053
1143 10,000
4th year, ------ X ------ = 136.60
68,842 1.054
1199 10,000
5th year, ------ X ------ = 136.46
68,842 1.055
---------
Total for the 5 years = $ 685.97
This deducted from 7,835.26
---------
Leaves value of Hamilton's interest $7,149.29
Or. =========
If the entire present value $7,835.26
Is reduced by the amount of deferred
premiums 2,372.90
---------
The net equitable value is $5,462.36
=========
If this be divided in the same pro-
portion as before, the value of
the children's interest was $ 478.22
And that of Hamilton's 4,984.14
In November, 1879, his interest would be a little more, and that
of the children's little less, than in July. By the subsidiary
tables in use by all life insurance companies, the above
calculation would be greatly shortened and simplified.