Board of Insurance Commissioners
Austin, Texas
Gentlemen:              Attention:   Mr. D. B. Barrow
                        Opinion No. O-2543
                        Re: Certain claims of the Examlna-
                             tion Division under the facts
                             set forth.
       Your recent request for an opinion of this Department
on the questions as are herein stated has been received.
      We quote from your letter as follows:
      "In connection with the operation of the
   Liquidating Division of this Department, which
   Division was created by the Forty-sixth Legis-
   lature, we wish to submit the following ques-
   tion for your ruling:
      "A number of mutual assessment associations
   operating under the provisions of Article 4859f
   as statewide associations, or Article 4875a as
   local mutual aid associations, or Article 4784
   to 4799 as life, health, and accident associa-
   tions, have been placed In the hands of the Llq-
   uidator following examinations by our Examining
   Division. In nearly all cases the associations
   were insolvent and the bills for the examina-
   tions remain unpaid at the time the associations
   are declared insolvent and placed in charge of
   the Liquidator. In nearly all such cases the
   only funds recovered by the Liquidator are Mor-
   tuary Funds and ordinarily their use is confined
   to the payment of claims or claim expenses, Does
   the Liquidator have legal authority to use such
   Mortuary Funds in the payment of examination
   bills referred to or may the claim of the EX-
   amination Division for the amount of unpaid
   bills be considered as of equal standing with
   claims under ~ollcies issued by the insolvent
   associations?
Board of   InBUrSnCe   CO~iSSione~S,   page 2         0 -2543




       Article 5068-1, Vernon's Annotated Civil Statutes, fB
a statute which applies to and embraces all insurance companies
and aSBOCtatiOn3, whether incorporated or not, which issues
policies OP certificates of insurance on the lives of persons,
or provide health and accident benefits, upon the so-called
mutual assessment plan, or whose funds are derived from the
assessment upon its policyholders or members, and in fact,
applies to all life, health and accident companies, associa-
tions, which do not come wlthln the provisions of Chapter8
3, 5, 7, 8, 9, 18, 19 and 20, Title 78 of the Revised Civil
Statutes of Texas. The act includes local titual aid associ-
atlons; Statewide life; or life, health and accident associa-
tions; mUtua1 assessment life, health, accident associations;
burial associations; and similar concerns, by WhStsOeVer   name
or class designated, whether specifically named in statute or
not. The companies mentioned in your inquiry are operating
either under Chapter 8a, Chapter ga, or Chapter 6, Title 78,
Vernon's Annotated Civil Siztutes, and Article 5068-1,   su-
w-a, is applicable  to such companies.
       Section 12 of Article 5068-1,      supra, provides in part
as follows:
         "Assessments when collected shall be di-
    vided into at least two (2) fUndsO One (1)
    of these shall be the mortuary or relief fund,
    by whatever name it may be called in the dif-
    ferent associations, from which claims   under
    certlflcates shall be paid, and to a limited
    extent the cost of defending contested claims,
    and nothing else; and the other funds shall be
    the expense funds from which expenses may be
    paid. At least sixty (609 per cent of assess-
    ments collected, except the membership fee,
    mUBt   be placed inthe mortuary or relief fund. O .
       "Such association shall provide in fts by-
    laws for the portion of its assessments to be al-
    lotted to the mortuary or relief fund and may
    provide for the payment out of said mortuary or
    relief fund of attorneys' fees and necessary ex-
    penses arising out of the defense, settlement,
    or payment of contested claims. Any such payments
    out of the mortuary or relief fund for other than
    claims shall be subject to approval of the Board
    of Insurance Commissioners.
       "A separate record shall be kept of the mor-
    tuary or relief funds of each group, club, or
    class, and the mortuary or relief fund8 of one
Board of Insurance Commlssloners, page 3           O-2543


   group, club, or Class shall not be used to pay
   the claims or obligations of any other group,
   club, or class."
       Section 19 of Article 5068-1,   supra, reads as   fOllOWS:

      "If, upon an examination or at any other
   time, it appears to the Board of Insurance Com-
   missioners that such association be insolvent,
   or its condition be, in the opinion of the
   Board, such as to render the continuance of
   its bU8ineBB hazardous to the public, or to
   holders of its certificates, or if such associa-
   tlon appears to have exceeded its powers or
   failed to comply with the law, then the Board
   shall notify the association of its determlna-
   tion and said association shall have thirty
   (30) day8 under the supervision of the Board
    within which to comply with the requirements
   of the.Board; and In the event of its failure
   to so comply wlthin such time, the Board, act-
   ing for itself, or through a conservator ap-
   pointed by the Life Insurance Commlssioner for
   that purpose, shall immediately take charge of
   such association, and all of the property and
   effects thereof. If the Board is satisfied
   that 8UCh association can best serve its policy-
   holders and theplblic through its continued
   operation by the conservator under the direction
   of said Board , pendlng the election of new Di-
   rectors and officers by the membershlp in such
   manner as the Board may determine, the same
   shall be done. If the Board, however, is satls-
   fied that euch association is not in condition
   to satisfactorily continue bU8ineSB in the
   interest of Its policyholders under the conser-
   vator as above provided, the Board shall pro-
   ceed to reinsure the outstanding liabilities
   In some solvent association or compang,-author-
   ized to transact bUSineBB in this State, or the
   Board shall proceed through such conservator,
   to liquidate such association, or the Board may
   give notlce to the Attorney General as provided
   under the general laws relating to insurance
   corporations. It shall be In the discretion of
   the Board to determine whether or not it will
   operate the association through a conservator,
   as provided above, or proceed to liquidate the
   association, as herein provided, or report it
   to the Attorney General. When the liabilities
Board of Insurance Commissioners, page 4        O-2543


   of an association are reinsured or liquidated,
   a'sherein provided, the Board shall report the
   same to the Attorney General, who shall take
   such action as may be necessary to effect the
   forfeiture or cancellation of the charter of
   the association so reinsured or liquidated.
   Where the Board lends its approval to the mer-
   ger, transfer or COnBOlidatiOn of the membershlp
   of one association with that of another, the
   same shall be reported to the Attorney General
   who shall prcceed to effect the forfeiture or
   cancellation of the charter of the association
   from which the membership was merged, transfer-
   red or consolidated,in the same manner as IS
   provided for the charters of associations re-
   insured or liquidated. No merger or transfer
   shall be approved unless the association assum-
   ing the members transferred or merged is operat-
   ing under the supervision of the Board of In-
   surance Commissioners. The cost incident to the
   conservator's services shall be fixed and deter-
   mined by the Board and shall be a charge against
   the assets and funds of the association to be
   allowed and paid as the Board may determine."
       In some Instances where the Board ha8 proceeded to
liquidate an association or corporation, etc., as above men-
tioned the liquidatlor has been appointed receiver of such
by the court. In general, with reference to the application
of funds by receiver, Article 2299, Vernon's Annotated Civil
Statutes enumerates and classifies certain liabilities, which,
except for court costs, accrued during the pendencg of the
receivership, and prescribes the order in which they Shall be
paid. It applies to earnings of the property during the
receivership, and gives a lien or a preference thereon, in
favor of the classes of claims mentioned. But the statute
gives no lien upon the corpus of the property. In the applica-
tion of earnings, it seems that they will be apportioned equally
and equitably among claims of a given class; however, one of
the claimants may have sued out an attachment, or attempted
to acquire a lien upon the property in receivershlp, so as to
have a right superior to other creditors. Thus it has been
decided that when a secured creditor is entitled to partici-
pate in earnings, he will share equally with unsecured cred-
itors of the same class. See Texas Jurisprudence, Vol. 36,
Page 234, and cases cited thereunder.
       Claims that do not fall within any of the statutory
classes will be adjusted and given such preference or priority
as the court deems equitable in the circumstances. We believe
Board of Insurance Commissioners, page 5           O-2543


that when any association or corporation, etc., as above
mentioned, is liquidated, the liquidator or receiver would
be governed by the same principles of law, with reference
tothe order in which the various claims shall be paid. Be-
fore any association or corporation, etc., is liquidatea it
is clear that the mortuary fund cannot be expended for any
purposes other than those specifically set out in the
statute. However, during the process of liquidation the
various claims are to be paid in the order prescribed by
statute.
       In view of the foregoing authorities you are respect-
fully advised that it is the opinion of this Department that
the liquidator does not have the legal authority to use the
mortuary funds of the insolvent associations or corporations
above mentioned In the payment of examination bills referred
to In your inquiry prior to adjustment of claims under policies
issued by such associations or corporations. Neither do we
think that there is any authority which would sustain the pro-
position that the unpaid bills of the Examination Division
could be considered as of equal standing with claims under
policies issued by the insolvent associations or corporations.
In other words, we believe that the claims under the policies
issued by the insolvent associations or corporations would
be prior to the claims of the examination division for ser-
vices rendered prior to the liquidation of such associations
or corporations.
         Trusting that the foregoing fully answers your inquiry,
we are
                                Yours very truly
                            ATTORNEY GENERAL OF TEXAS

                                By s/Ardell Williams
                                     Ardell Williams
AW:ew:wc                             AssIstant

APPROVED AUG 19, 1940
s/Grover Sellers
FIRST ASSISTANT
ATTORNEY GENERAL
Approved Opinion Committee by REK Chairman
