The South Carolina supreme court has overruled a lower court judge who for the past six years has been instrumental in keeping afloat an insolvent insurance company at the expense of its 135,000 policyholders, about 90 percent of whom are poor, rural blacks.
The five judge panel voted unanimously on April 18 to reverse several orders rendered by the Richland County Judge John Grimball concerning New South Life Insurance Co. of Columbia, S.C.
The details of the New South affair were described in The Washington Post on May 25, 1977.
In its decision, the supreme court upheld the rights of the company's policyholders over its stockholders. And the court left New South's management, and possibly its politically powerful board of directors, vulnerable to lawsuits for mismanagement.
New South sells a form of coverage known as credit life insurance, which is more costly than comparable standard policies because salesmen personally visit policyholers weekly or monthly to collect premiums.
The complex and questionable plan to bail out New South was directed by former South Carolina governor Robert McNair, the company's counsel. The plan - endorsed by Judge Grimball - permitted policyholders' funds to be used to rescue McNair's personal friend and political ally, Lester Bates Sr.
Bates, 72, is chairman and majority stockholder of New South, and he is the former major of Columbia where the company is based.
Briefly, this is how the insolvent company has remained in business since 1972:
A lien was placed on reserves, blocking policyholders from collecting the cash values of their policies, money that is legally theirs.
Thirteen million dollars of reserves then were declared assets, which instantly turned a $9 million deficit into a $4 million surplus.
Stockholdrs and policyholders were enjoined by Judge Grimball from suing management or the board of directors.
The supreme court declared: "The policyholders' rights should be restored within a reasonably short time here-after, or the company should be mutualized. The policyholders' interests come first."
The judges defined "mutualization" as "a process whereby stockholder interests would be extinguished and the policyholders would become sole owners of the company and would share in the profits."
Meanwhile, the court said potential buyers of the company should be encouraged in order to save the policyholders. The decision noted that one takeover plan "which would have been highly beneficial to the policyholders" was scuttled by majority stockholder Bates because it would have "eliminated" stockholders' interest.