National Security Insurance Co. v. Mutual Savings Life Insurance Co.

Citations: 536 So. 2d 1378; 1988 Ala. LEXIS 665Docket: 87-899

Court: Supreme Court of Alabama; November 17, 1988; Alabama; State Supreme Court

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Petitioner seeks a writ of mandamus against Judge Gary L. McAliley to vacate a preliminary injunction favoring National Security Insurance Company (National Security) in its lawsuit against Mutual Savings Life Insurance Company (Mutual Savings). Alternatively, the petitioner requests the case be transferred to Montgomery Circuit Court. National Security, based in Coffee County, alleges that Mutual Savings illegally acquired 226,243 shares of its common stock and seeks to prevent Mutual Savings from voting those shares and compel their divestiture. The claim is based on violations of Alabama's Insurance Holding Company System Regulatory Act, specifically citing § 27-29-3(a) and § 27-29-9(b), which allow an insurer to seek injunctions and sequestration of shares acquired unlawfully. After the complaint was filed, Mutual Savings moved to dismiss, arguing lack of jurisdiction, improper venue, and res judicata/collateral estoppel. The court ultimately grants the writ, indicating support for the petitioner’s position.

The trial court denied Mutual Savings' motion to dismiss, leading the company to assert the same defenses in its answer. During the preliminary injunction hearing, evidence included certified copies of a prior hearing before the Alabama insurance commissioner and a pending appeal related to the commissioner's order. The Coffee Circuit Court subsequently ordered Mutual Savings not to vote or divest its shares in National Security and scheduled a final hearing. Mutual Savings appealed this order. The dispute centers on the acquisition of a 22.2% stake in National Security, initially owned by Atlantic American Corporation. J. Darrell Jordan, president of Victory Financial Group, engaged in negotiations with Atlantic American in early 1987 but initially declined due to price concerns. After receiving a telegram from Atlantic American on May 13, 1987, Jordan expressed interest in reopening negotiations and indicated a willingness to file a disclaimer of control in Alabama. An agreement on price was reached on May 14, 1987. At that time, Mutual Savings had not communicated with the Alabama insurance commissioner regarding the transaction. Jordan also consulted his lawyer about the applicability of the disclaimer procedure for acquiring more than 5% of an Alabama insurer without gaining control. This inquiry arose from concerns over the regulatory requirements outlined in Alabama Code § 27-29-3(a), which mandates filing and approval for tender offers and acquisitions that could result in control of a domestic insurer.

The disclaimer procedure in § 27-29-4(i) follows the registration requirements for insurers within an insurance holding company system, as mandated by § 27-29-4(b). These insurers must file a registration statement disclosing various details, including investments or purchases of affiliate securities, the insurer's capital structure, and other relevant transactions. Mutual Savings is concerned about how the definitions of "control" in § 27-29-1(3) and "affiliate" in § 27-29-1(1) may affect their purchase of National Security, particularly regarding the necessity for prior filing and approval under § 27-29-3(a) and the need for a disclaimer under § 27-29-4(i). If Mutual Savings does not achieve "control" over National Security, then National Security would not be considered an "affiliate," and the filing or disclaimer requirements would not be triggered. 

The definitions of "affiliate" and "control" indicate that "affiliate" includes any person that directly or indirectly controls, is controlled by, or is under common control with another, while "control" is defined as the power to direct management and policies, typically presumed with ownership of 5% or more of voting securities, unless proven otherwise. 

Mutual Savings informed the Insurance Department of its intent to abstain from voting the shares until filing a "Form A, Statement Regarding the Acquisition of Control or Merger With a Domestic Insurer" and obtaining approval. The Insurance Department indicated that the matter would be discussed. On May 18, 1987, Mutual Savings acquired the shares but delayed their transfer into its name until a disclaimer of control was filed or a "Form A" submitted and approved. According to § 27-29-4(i), any person can file a disclaimer of affiliation with an insurer, which must disclose all material relationships. Once filed, the insurer is relieved of registration duties unless the commissioner disallows the disclaimer after providing notice and a hearing, accompanied by specific findings.

On May 19, 1987, Mutual Savings confirmed its purchase of shares and submitted information to the Insurance Department to rebut the presumption of control under § 27-29-1(3). It offered to refrain from voting the shares until obtaining approval through a "Form A" filing. The Insurance Department rejected this disclaimer and required the "Form A" filing for review. Following this, Mutual Savings filed the necessary documents, leading to a public hearing on January 11, 1988, where National Security moved for Mutual Savings to divest its shares, arguing that Mutual Savings sought control contrary to procedural requirements. National Security's motion requested immediate divestiture, forfeiture of dividends, payment of attorney fees, and an injunction against further acquisitions during Louis J. Roussel, Jr.'s lifetime. The hearing addressed both the "Form A" acquisition request and National Security's motions. On March 2, 1988, the commissioner disapproved Mutual Savings’ acquisition but denied National Security's additional requests. Mutual Savings subsequently appealed this decision to the Montgomery Circuit Court on April 1, 1988, under § 27-2-32, which allows for de novo appeals without a jury. The appeal is currently pending. Although § 27-29-9(b) and (c) could allow National Security’s lawsuit in Coffee County, it was determined that these sections do not apply since the matter is already under appeal in Montgomery County. Consequently, the Coffee Circuit Court's refusal to transfer the case was deemed erroneous, leading to the issuance of a writ to transfer the action to Montgomery County.