MARK CHURELLA V PIONEER STATE MUT INS CO
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STATE OF MICHIGAN
COURT OF APPEALS
FOR PUBLICATION
August 28, 2003
9:00 a.m.
MARK CHURELLA, SUSAN RADTKE, and
PETER TREBOLDI,
Plaintiffs-Appellants,
v
No. 238695
Wayne Circuit Court
LC No. 96-635359-CZ
PIONEER STATE MUTUAL INSURANCE
COMPANY, DAN CZMER, JACK D'ARCY,
HARLAN GINGRICH, ROBERT WEST,
CARLETON WILSON, DALE LITTLE,
GORDON GINGRICH, and MILTON
TIMMERMAN,
Defendants-Appellees,
and
ATTORNEY GENERAL, COMMISSIONER OF
THE OFFICE OF FINANCIAL AND
INSURANCE SERVICES, and NATIONAL
ASSOCIATION OF MUTUAL INSURANCE
COMPANIES,
Intervening Defendants-Appellees,
and
MGNISH DENNEHY AGENCY, INC. and LORI
SMITH,
Defendants.
Before: Donofrio, P.J., and Bandstra and O'Connell, JJ.
O'CONNELL, J.
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Updated Copy
October 24, 2003
Plaintiffs Mark Churella, Susan Radtke, and Peter Treboldi appeal as of right the trial
court's order dismissing their suit pursuant to MCR 2.116(C)(8) for failure to state a claim on
which relief may be granted. This case arose when plaintiffs brought suit to compel defendant
Pioneer State Mutual Insurance Company and its directors, defendants Dan Czmer, Jack D'Arcy,
Harlan Gingrich, Robert West, Carleton Wilson, Dale Little, Milton Timmerman, and Gordon
Gingrich, to distribute the company's excess surplus. Plaintiffs claimed a right to sue as
policyholders and therefore owners of Pioneer. Plaintiffs claimed that the directors violated the
business judgment rule by failing to consider whether to distribute the excess surplus.1 We
affirm.
I
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 policyholderowners by failing to distribute the surplus, and thus were not protected by the business judgment
rule.
In their answer, Pioneer and its director sought a judgment of no cause of action,
claiming that plaintiffs had no recognizable claim under Michigan law and that the directors'
actions were in the best interests of the policyholders and, therefore, protected by the business
judgment rule. They also moved to dismiss for lack of subject-matter jurisdiction pursuant to
MCR 2.116(C)(4).
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
1
The Attorney General and the Commissioner of the Office of Financial and Insurance Services
(the Insurance Commissioner) moved to intervene as defendants, and moved for dismissal
pursuant to MCR 2.116(C)(8) and (C)(4), alleging that the trial court lacked subject-matter
jurisdiction and that plaintiffs failed to state a claim on which relief could be granted. The
National Association of Mutual Insurance Companies (NAMIC) also moved to intervene as a
defendant and filed a brief supporting dismissal, but was granted leave to file amicus briefs in
lieu of being granted leave to intervene as a defendant. Nonparty defendant Lori Smith, an
employee of nonparty defendant MgNish Dennehy Agency, Inc., originally approached Pioneer
at an agent's meeting with information regarding plaintiffs' lawsuit, and she and her company
were listed as potential witnesses for Pioneer.
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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 promised a share of the surplus, or that they had contracted for a share.
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 plaintiff 's 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 subjectmatter 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 MCL 500.403, 500.410, and 500.810 of the Insurance Code did
not clearly give the Insurance Commissioner exclusive jurisdiction over plaintiffs' claim. 463
Mich 993 (2001). This Court then remanded to the trial court to rule on the substantive issues.
The Attorney General and the Insurance Commissioner again moved for summary
disposition pursuant to MCR 2.116(C)(4) and (C)(8). Pioneer also moved for summary
disposition pursuant to MCR 2.116(C)(8). The trial court noted that it had already ruled
substantively against plaintiffs, and that plaintiffs had received what they bargained for, i.e.,
insurance coverage, and that they had no cause of action beyond that for which they bargained.2
The trial court again granted defendants summary disposition, reiterating the language of its
previous order granting summary disposition for failure to state a claim.3 This appeal followed.
2
Plaintiffs assert that the trial court considered issues beyond the pleadings and, thus, its order
granting summary disposition was decided under MCR 2.116(C)(10), rather than MCR
2.116(C)(8). Because neither defendants' motion nor their supporting briefs included extraneous
evidence, see Smith v Globe Life Ins Co, 460 Mich 446, 455; 597 NW2d 28 (1999), we conclude
that the court properly considered the motions under MCR 2.116(C)(8).
3
Once a court concludes that it lacks subject-matter jurisdiction, any further action it takes is
void. Altman v Nelson, 197 Mich App 467, 472-473; 495 NW2d 826 (1992); see also Burke v
Michigan Catastrophic Claims Ass'n, unpublished opinion per curiam of the Court of Appeals,
(continued…)
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II
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
For this Court to conclude that plaintiffs' claim is legally sufficient, we must decide (1)
that plaintiffs as policyholders, are owners of Pioneer, (2) that policyholders have the same rights
as shareholders with respect to compelling distribution of excess surplus, (3) that shareholders
have the right to compel distribution, and (4) that plaintiffs are not precluded by the business
judgment rule from bringing suit. It appears clear that policyholders are owners of mutual
insurance companies. Because of their ownership interest, policyholders of mutual insurance
companies are both insureds and insurers. Comm'r of Ins v Arcilio, 221 Mich App 54, 66; 561
NW2d 412 (1997). Moreover, defendants concede that plaintiffs have some form of ownership
interest.
(…continued)
decided April 15, 2003 (Docket No. 227123) (circuit court had no jurisdiction over
policyholders' suit for breach of fiduciary duty and contract concerning extent of distributed
surplus). There may be a question whether the trial court could rely on its findings in the
previous order after it determined it lacked jurisdiction. However, the parties do not raise this
issue on appeal. Our Supreme Court determined that the trial court did have subject-matter
jurisdiction, and the trial court adopted its original findings after it was found to have subjectmatter jurisdiction. Therefore, we conclude that the court could validly rely on its previous
findings.
4
Defendants submitted with their brief on appeal meeting minutes indicating that the board of
directors considered whether to distribute excess surplus on November 1, 2001, and decided not
to distribute it. However, plaintiffs point out that these minutes were not presented to the trial
court, and there is no indication in the record that the trial court considered them. Because this
Court "is limited to the record established by the trial court," Reeves v Kmart Corp, 229 Mich
App 466, 481 n 7; 582 NW2d 841 (1998), we will not consider the meeting minutes in our
decision.
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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
(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) (an insurance policy is interpreted like a
contract); Pink v Town Taxi Co, 138 ME 44, 51; 21 A2d 656 (1941), citing Greenlaw v
Aroostook Co Patrons Mut Fire Ins Co, 117 Me 514; 105 A 116 (1918) (a member of a mutual
insurance company has the right to share profits and the duty to share losses according to state
law, the company's bylaws, and contract); Boynton v State Farm Mut Automobile Ins Co, 207 Ga
App 756, 757; 429 SE2d 304 (1993) (a member has no contractual right to proceeds where the
contract provides that distribution is within the company's discretion); Barnes, supra at 375
(statute provides that members of a mutual insurance company have the same rights as
shareholders of stock corporations). Yet, these cases are only persuasive authority because they
involve decisions from other states and a federal circuit court. See Farm Bureau Mut Ins Co v
Buckallew, 246 Mich App 607, 613-614 n 6; 633 NW2d 473 (2001); Sharp v City of Lansing,
464 Mich 792, 802-803; 629 NW2d 873 (2001).
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 right to compel distribution, it initially appears that their claim fails.
Furthermore, this Court previously determined that the Insurance Code, MCL 500.100 et
seq., did not incorporate by reference the appraisal rights given to shareholders by the general
corporation act, MCL 450.98 et seq. Wiltsie v Standard Accident Ins Co, 1 Mich App 212, 216;
135 NW2d 592 (1965). This Court further stated that the Legislature did not intend to
supplement omitted provisions from the Insurance Code, with provisions of the general
corporation act. Wiltsie, supra at 214-215. Because we are unable to find a provision in the
Insurance Code affording policyholders the right to compel distribution, it appears that plaintiffs
have no basis on which to maintain their suit. While Wiltsie, supra, was decided before
November 1, 1990, and therefore is not binding precedent, MCR 7.215(J)(1), Wiltsie is supported
by MCL 450.1123(2), which provides that Michigan's Business Corporation Act, MCL 450.1101
et seq., does not apply to insurance companies.
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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 (1997).
However, this statement was not essential to the determination of that case and, thus, is not
binding precedent. Faith Reformed Church of Traverse City, Michigan v Thompson, 248 Mich
App 487, 496; 639 NW2d 831 (2001).
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).]
Plaintiffs in the instant case claim that the directors are not protected by the business
judgment rule because they failed to exercise their discretion when they failed to consider
whether to distribute the excess surplus. They alleged in their complaint that Pioneer and its
directors violated their fiduciary responsibilities to the policyholders by not distributing the
surplus. However, plaintiffs did not explain how the failure to distribute the surplus amounted to
fraud or bad faith. They cite several cases to support their claim that failure to declare a dividend
is an abuse of business discretion. However, we find none of the cited cases dispositive.
-6-
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 judgment. Id. at 301-302. In the instant case, plaintiffs did
not allege that the directors had, by contract, abdicated their managerial responsibilities.
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.
Donofrio, P.J., concurred.
/s/ Peter D. O'Connell
/s/ Pat M. Donofrio
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