Harris v. Equitable Life Assurance Society — 10 N.Y. Sup. Ct. 724

Majority

p. 724

MARX HARRIS, Respondent, v. THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Appellant.

Headnote

Policy of insurance —false statements —renewal of policy after forfeiture — Rescission of contract on account of fraud—when party must retwrn what has been received under.

On the 1st of June, 1869, a policy for $8,000 was issued by the defendant, payable to the plaintiff, upon the life of his wife ; the policy provided that if any declaration contained in the application upon which the policy was issued, should be found false, then it should be null and void, and that, in case of a failure to pay the premiums at the times therein specified, the policy should cease and determine, and all payments made thereon should be forfeited to the company. The application, which was signed by the plaintiff and his wife,. stated, among other things, that she had never had rheumatism or disease of the heart.

p. 725

The premiums due September and December, 1869, and March, 1870, were not paid. In February, 1870, Mrs. Harris had a severe attack of inflammatory rheumatism, which resulted in disease of the heart, from which she died April third. On March 28th, 1870, plaintiff went to defendant’s office, tendered the premiums then due, and asked to have the policy renewed; he-stated that his wife was then in good health, and that she had not been sick , since she was examined for insurance, and signed a paper stating that she was then equally well, and in as good insurable condition as when examined. The defendant accepted the money, and gave a receipt continuing the policy in force until June 1, 1870. In an action upon the policy, Jield, that the legal effect of the agreement of March twenty-eighth was precisely equivalent to the taking out of a new policy upon the terms of the old one, the only difference being, that the representations as to the condition of the health of the assured should be regarded as repeated at that time with such modifications as the parties then made and accepted ; that as such representations were false, the policy became veid, and the premiums were forfeited to the defendant.

A party who has been defrauded in the making of a contract, and who wishes, by an action at law, to avoid the contract for fraud and reinstate himself in the possession of the property parted with, or to recover its value before the maturity of the contract, must return, or offer to return, to the other party, before commencing his action, whatever he has received under the contract, unless it be of such a character that its return at the trial, or in the progress of the suit, will leave such party in as good condition as the return or offer before suit would have done.

Where, however, the party who has been guilty of the fraud brings an action to enforce the contract, the other party thereto need not return what he has received thereunder, but may set up such fraud as a complete or partial defense to the action.

After the commencement of this action, the defendant served an offer to allow judgment to be taken against it, for the amount of the premium paid March twenty-eighth, with interest thereon, together with the costs of the action, which was refused. At the trial, the court held that the defendant should have dis-affirmed the contract of March twenty-eighth on discovering the fraud, and returned or offered to return the premium then received, and that, as they had failed so to do, they were liable on the policy.

Eéld (1), that defendant was not obliged to rescind the contract, but might set up ■ the fraud as a defense thereto; (2), that even if a rescission of the contract was necessary, the offer of judgment made by the defendant was a sufficient compliance with the rule requiring a return of what had been received under the contract.

Appeal from a judgment in favor of the plaintiff, entered upon a verdict directed by t^e court.

George De Forest Lord, for the appellant.

Even in cases where the rescinding party is plaintiff, restitution before suit is not insisted

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upon where justice can be otherwise secured. (Nellis v. Bradley, 1 Sandf., 560 ; Ladd v. Moore, 3 id., 589 ; Nichols v. Michael, 23 N. Y., 264 ; Fraschieris v. Henriques, 36 Barb., 276 ; Pearse v. Pettis, 47 id., 267, 282; Allerton v. Allerton, 50 N. Y., 670 ; Hawkins v. Appleby, 3 Sandf., 421 ; Anderson v. Sherwood, 56 Barb., 66 .) It is a very noticeable fact, that almost every case in our reports, in which the rule requiring a return of the property received under the contract is laid down, is a case where the rescinding party was plaintiff. (Ash v. Putnam, 1 Hill, 302 ; Voorhees v. Earl, 2 id., 288; Masson v. Bovet, 1 Den., 69 ; Baker v. Robbins, 2 id., 136 ; Mattewan Co. v. Bentley, 13 Barb., 641 ; Wheaton v. Baker, 14 id., 594; Willis v. Bradley, 1 Sandf., 560 ; Ladd v. Moore, 3 id., 589 ; Nichols v. Michael, 23 N. Y., 364 ; Fraschieris v. Henriques, 36 Barb., 276 ; Pearse v. Pettis, 47 id., 267; Hinney v. Kiernan, 49 N. Y., 164 ; Cobb v. Hatfield, 46 id., 533.) But although the distinction never appears to have been drawn in any adjudicated case, there are reasons why the rule, requiring restitution to be made before commencement of the action, should not apply to cases where the defendant seeks to escape from liability on the ground of fraud, and why restitution at or before the trial should be sufficient in such a case. While a party seeking to rescind may choose his own time for commencing an action, so that he can always tender restitution before doing so, he cannot so control the time of an action being commenced against him. If, therefore, he must tender such restitution before suit, his rights and liabilities will depend only upon his advantages, speed or negligence. This should not be. While a party who becomes an actor upon the basis of the rescission of a contract should be required to do everything to establish his position before he claims any rights under it, the party who simply depends upon that ground should be entitled to put in his defense after the attack is made.

A. B. Dyett, for the respondent.

Never having offered to return the premiums, or rescind the contract by which the original , contract was brought into existence again, the defendants had made their choice to affirm the contract, and were liable upon the policy. (Hutcheons v. Johnson, 33 Barb., 392 ; McNeven v. Livingston, 17 Johns., 437 ; Bruce v. Davenport, 3 Keyes, 474; Wheaton v. Baker, 14 Barb., 594 , and cases there cited.)

On the 18th day of Hay, 1869, the plaintiff made application to the defendant for an assurance of §3,000 upon the life of his wife. His application stated, among other things, that she had not had any of a long list of diseases, among which rheumatism, disease of the heart, of the urinary organs, or of any vital part, were specified. Mrs. Harris was examined by the medical examiner of the defendant, and found to be in such condition of health that he approved of and recommended the assurance. The application was subscribed by both plaintiff and his wife, and contained a declaration that the answers to the questions contained therein, were fair and true, and an agreement on their part that the statements therein should form the basis of the contract for assurance, and that any untrue or fraudulent answers, or any suppression of facts in regard to her health, should render the policy null and void.

On the 1st day of June, 1869, a policy on this application was issued upon the life of Mrs. Harris for $3,000, payable to the plaintiff, in consideration of the premiums then paid, and of $26.16 payable quarterly, on or before the first days of September, December, March and June of each year. The policy states that it was issued and accepted by the assured upon the conditions and agreements indorsed thereon, among which were the following: “ If the declaration made by the applicant for this policy, or if any statement respecting the person or family of the person whose life is hereby assured, submitted by such person to this society, and upon the faith of which declaration or statement this policy is issued, shall be found in any respect untrue, then and' in every such case, this policy shall be null and void. And if the premiums as herein stipulated shall not be paid on or before the days herein mentioned for the payment thereof, at the office of the society in the city of Hew York * * * then, and in every such case, this society shall not be liable for the payment of the sum assured, or any part thereof, and this policy shall cease and determine.” In every case when this policy shall cease and determine, or become and be null and void, all payments thereon shall be forfeited to the society.”

The premium of $26.16, which fell due on the 1st day of September, 1869, was not paid; nor were either of the premiums

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paid, which would have become due on the first of December and the first of March. About the 1st of February, 1870, Mrs. Harris had a severe attack of inflammatory rheumatism. Her family physician was called in, and attended her almost daily through February and March until her death in April. He testified that she suffered a great deal until about the middle or twentieth of March, when she became so much improved that he had hopes of her recovery, but a few days afterward she was taken with symptoms very grave, which indicated trouble in the heart, and in the lungs, and in the kidneys, and he found it necessary to ask for a consulting physician, and mentioned to plaintiff that he would like to have Dr. Alonzo Clark to assist in the case. Dr. Clark was called in consultation, on the twentieth day of March, and he says that he regarded her case as a grave one, and feared that it would terminate fatally; that she was in bed, .gravely sick, which would appear to any one who came into the room, professional or unprofessional. He continued to attend her, making seven visits of consultation before her decease. On the twenty-eighth day of March the plaintiff went to the defendant’s office, and' applied to have the policy on his wife’s life restored. He stated, in answer to questions put to him by the defendant’s actuary, that his wife was then in good health, and had not been sick since she was examined for insurance, and signed a certificate which was prepared by that officer in these words :

“ Hew Yobk, March 28, 1870.

“ Mrs. Rachel Harris is now equally well, and in as good assurable condition as on May 18th, 1869, when examined for assurance under policy Ho. 43,788, not having been sick since that time.

“M. HARRIS.”

The actuary then authorized the receipt of the premiums, and plaintiff paid the same, amounting to $78.48, and received the following :

“ 92 Broadway, Hew Yobk, Sept. 1, 1869.

“ Received $78.48, continuing in force policy number 43,788, on the life of Mrs. Rachel Harris, from the 1st day of September, 1869, to the 1st day of June, 1870.

“ S. H. PHILLIPS, Actuary.

“ T.

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Mrs. Harris died on the 3d day of April, 1870, of heart disease, acute pneumonia, and Bright’s disease or congestion of the kidneys, which her doctor attributes as the primary cause, to her attack of inflammatory rheumatism. Proofs of death were delivered to the defendant the latter part of April; among which was the affidavit of the attending physician, who stated that he attended Mrs. Harris during her last illness; that ,he was called about the 1st of February, 1870, and continued in attendance till the time of her death; that the immediate cause of her death was heart disease, its remote cause rheumatic affection, and that she had also disease of the kidneys and lungs. After the expiration of sixty days, and about the 1st of July, 1870, the defendants refusing to pay the amount insured, this action was brought. ' Afterward, and before answering, the defendants served an offer to allow judgment to be entered against them for the same amount' as the premiums paid on the twenty-eighth day of March, with interest from that day and costs.

After the evidence on both sides was closed, the court held that it was the duty of the defendants at the time of the discovery of the fraud, to have returned, or offered to return, the premiums paid March 28th, 1870, and to disaffirm the new contract; and that, “ never having offered to return the premiums by which the original contract was brought into existence again, the defendants offered no defense.” Upon this ground the court directed a verdict for the plaintiff for the full amount of the policy and interest. The defendants duly excepted. The fraud practiced by the plaintiff upon the defendants, as shown by the evidence, was a bold and gross one. The proofs of death furnished by plaintiff contained facts sufficient, as it is claimed, to inform defendants that the fraud had been committed. By the terms of the policy the sum insured would be payable at the end of sixty days after the delivery of such proofs, and the suit was not brought till a few days after the lapse of that period. It is claimed, and was substantially so held by the court below, that the defendants’ only remedy for such fraud lay in a rescission of the contract, by offering, before the suit was brought, to return the premiums paid on the twenty-eighth of March, and declaring the contract void; and not having done so, they had elected to affirm the contract, and were liable

p. 730

on the policy. The plaintiff testified that, after the expiration of the sixty days, he called for payment, which was refused, the president of the defendants saying, “ You will have.to sue us.” This, certainly, was no ratification in fact. It was notice to plaintiff that defendants had not ratified the contract; and 'the only question is, 'whether, under the circumstances, the omission to tender back the premiums had such legal force or effect that the right to assert the fraud in defense was wholly gone. The effect of the failure to pay premiums was expressly stipulated by the agreement of the parties. In that event, the policy was to cease and determine. The premiums paid only covered the risk for the expired period. There was, therefore, no existing contract between the parties on the twenty-eighth day of March. By the plaintiff’s own election the policy had “ ceased and determined.” It was not, therefore, the waiver of a forfeiture which he sought, for the refusal of which he could ask for relief in a court of equity or elsewhere, but for the reinstatement of an expired contract upon such terms as the parties should agree upon. In legal effect, this was precisely equivalent to the taking out a new policy upon the terms of the old one; the only difference being that the representations as to the condition of the health of the insured should be regarded as repeated at the date of the renewal, with such modifications as the parties then made and accepted, and the premiums presently paid and thereafter to be paid, instead of being at the large rate that the advance in age might require, should be the sums that would have' kept the policy in force, if the party had chosen to pay in accordance with the original contract. W e have therefore to look at the representation in writing made by the applicant for the renewal, on the twenty-eighth day of March, and incorporate it with the contract or renewed policy, so as to find the, real intention and agreement of the parties made at" that date. By it the plaintiff represents that “ Mrs. Harris is now equally well and in good assurable condition, as on May 18th, 1869, when examined for assurance under policy Ho. 43,788, hot having been sick since that time.” This distinctly refers to and adopts the medical examination which had been made on the eighteenth of May previous, and affirms that the condition of things therein stated is the same now. It affirms also all the representations as to the condition of Mrs.

p. 731

Harris’ health when the policy was first issued, as contained in the plaintiff’s application for assurance; and it attaches to the representations now made, the' same contract and consequences that were attached by the former agreement to the representations then made. The plaintiff by that contract agreed that the statements made “ should form the basis of the contract for assurance, and also that any untrue or fraudulent answer, or any suppression of facts in regard to the person’s health * * * will render the policy null and void, and forfeit all payments made thereon.” By the new contract he repeated those representations, with the addition of those contained in the written statement, and made them the basis of the renewed contract, with the same stipulated consequence for falsity and fraud in either.

The law works out the new contract in this form, not only in the interest of justice and right, but because that is the manifest intent of the parties, unless we assume that one of them was intending trickery and bad faith. The result is, that the plaintiff made it a part of the new contract, that if his representations of March twenty-eighth were untrue or fraudulent, the renewed policy should be void, and the premiumspaid should be forfeited; and he has no right to insist that the premiums shall be returned to him before his falsity and fraud' can be set up as a defense. There is, in such case, no necessity for rescission, but only for enforcement of the contract of the parties, as the latter gives not only a complete remedy against the contract, but the additional remedy of forfeiture of the premiums, which forfeiture the plaintiff has expressly agreed shall be the consequence of his own fraud. There seems to us no good reason to doubt that the defendants might stand securely upon this ground, if the jury found the plaintiff guilty of the alleged fraud. In that case the defendants have only to affirm, and not to disaffirm the real contract to make their defense complete.

But we are also of opinion that the application to this case of the principle governing the rescission of contracts was improperly made. The substance of that principle of law is, that a party who has been defrauded in the making of a contract, and who wishes by an action at law to avoid the contract for fraud, and reinstate himself in the possession of the property parted with, or to recover its value before maturity of the contract, must return, or offer to return to

p. 732

the other party before commencing his action, whatever he has received under the contract, unless it be of such a character that its return at the trial, or in the progress of the suit, will leave such party in as good condition as the return or offer before suit would have done. This is the rule where the innocent and injured party takes the offensive against the wrong-doer, to treat the contract as a nullity because of his fraud. But what is the rule where the guilty party becomes the actor, and seeks the fruits of his fraud by enforcing the contract against the injured party ? There is certainly good reason for saying that in the latter case the rule, if applicable at all, must be subject to serious modifications. The vendor of real or personal property, who, under the form of a contract, has been led by fraud to part with its possession, or with evidence of title, occupies a relation to the transaction very different from that of a purchaser who has been induced to buy by the fraud of his vendor.

The latter may use the fraud as a sword or shield without the rescission of the contract, and he may also rescind and take his remedy for the consideration parted with, by properly electing that remedy. He never, however, loses the shield when the fraudulent vendor assails him upon the contract, but may assert the fraud as a total or partial defense. That rule was asserted in Whitney v. Allaire,^[8] in which it was held that a lessee, by taking possession at the commencement of the term, and after having discovered the fraud, waives thereby only his right to rescind the contract, but not his right to recover his damages occasioned by the fraud. In that case the defendant was induced to make a contract, through the fraudulent representations of the plaintiff that the right mentioned in the lease comprehended a parcel of land, which in "fact belonged to the corporation of Hew York. The lease was for one year from the first day of May, at the rent of $1,000. The defendant discovered the fraud before the first of May, and obtained from the corporation a lease of that parcel, at an annual rent of $1,000. It was held, in an action for the rent, that the fraud was properly set up as a defense, and that the measure of damages was what the defendant had in good faith been obliged to pay to the corporation for the second lease, and a verdict for the defendant was sustained,^[6]

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In the same case, in the Supreme Court, Cowen, J., says: “ Once establish that in all matters of pecuniary dealings, in all matters of contract, a man has a legal right to demand that his neighbor shall be honest, and the consequence follows, viz.: If he be drawn into a contract by fraud, this is an injury actionable per se.

Indeed, it would not be difficult in all such cases to show the degree of actual damage. The time of the injured party has been consumed in doing a vain thing, or one comparatively vain ; and time is money. It would not be difficult to satisfy the more ancient and strict rule of the Year Book,^[8] viz.: “ That there must riot only be a- thing done amiss but also damage, either already fallen upon the party or else inevitable. ( Waters v. Freeman, Hob., 267.) Fraud is a thing grievously amiss, and above all, odious to the law; and fraud in a contract can hardly be conceived without being attended with damage in fact.”

When Whitney v. Allaire was before the Supreme Court after the second trial, the court said, Jewett, J., delivering the opinion (speaking of frauds perpetrated by the vendor): • “A return of the property to the vendor, or an offer to return, is in no case necessary, except to enable the vendee to withhold or recover back the price. * * * In all cases of fraud, the vendee, who alone has the right of disaffirmance, may remain silent, and bring his action to recover damages for the fraud, or may rely on it by way of defense to the action of the vendor, although there has been full acceptance by him, with knowledge of the defects of the property. An affirmance of the contract by the vendor, with such knowledge, merely extinguishes his right to rescind the sale. His other remedies remain unimpaired. The vendor can never complain that the vendee has not rescinded.”^[6] It is not easy to see why the principle of these eases is not applicable to the case under consideration. The plaintiff by a gross fraud induced the defendants to reinstate a contract, which had terminated by its express terms, on payment of a small sum of money. The,contract subjects the defendants to pay $3,000 ; for that sum the plaintiff sues. The defendants set up the fraud as a defense. Their right of action for the fraud is perfect, and the measure of their damages would be the amount of

p. 734

the obligation fraudulently obtained, less, perhaps, the premiums paid.^[8] But their right to defend is as complete as their, right to sue, and the measure of damages is the same. On what ground is that defense to be cut off? Certainly, not on the ground that a rescission was necessary, for that was only essential to a particular form of remedy. Certainly, not on the ground of ratification, for nothing of that kind can be predicated of a distinct refusal to pay the fraudulent obligation, followed almost immediately by a suit and a plea of the fraud in bar. It is not a case where the parties, after knowledge of fraud, have continued to receive subsequently accruing premiums, and thereby, in continuing the contract with knowledge, have estopped themselves from alleging the fraud. It is a case rather, where the relations have not been changed since the discovery of the fraud, and where it is absurd to suppose that, with knowledge of the fraud, and while refusing to . pay, the defendants meant to ratify an obligation for $3,000, by retaining seventy-eight dollars.

If the policy had been negotiable within the law merchant, and had been assigned by plaintiff to a bona fide holder, within the well established rule, an action would have been sustained against plaintiff at the time the fraud was discovered, in which the measure of damages would have been the amount of the assurance (less, perhaps, the premium paid).^[6]

And the only reason-that can be assigned why the action would not lie against plaintiff upon the same facts, at the same time and for the same amount of damages, is, that the defense to the policy would be perfect, and therefore there could be only nominal damages in such a suit.^[7]

But if it be true that a rescission was necessary in order to establish the defense, we are of opinion that sufficient was done to accomplish that purpose. This action was brought very speedily after the right of action accrued under the policy. A plaintiff, to rescind, has the opportunity to take the necessary steps before action, because the time of commencing suit is within his control.

† † Decker v. Matthews, 2 Kernan, 313; Murray v. Burling, 10 J. R., 172; Evans v. Kymer, 1 Barn. & Adol., 528.

‡ ‡ Cases last cited.

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But even he need not offer to return, where what he has received is of such a nature that he can bring it into court and cancel or tender it, so as effectually to put the defendant in a position equally as good as an offer before suit could have done.^[8] In Ladd v. Moore, the plaintiff had received a note and money, but he was not required to bring in the money at the time of bringing in the note on the trial.

There is good reason for holding that a defendant who is sued by a party who has fraudulently obtained his obligation, is not held to any sharp rule of return, or offer to return, before suit brought. Such a rule would be Highly advantageous to sharpers, and severe oftentimes upon their victims. In such a case, if the suit be brought soon after the right of action accrues, it ought to be enough that the defendant offers to replace the party in the position in which he was when he committed his fraud. The defendants, before issue, offered judgment under the Code for the full amount of the premiums and interest, with costs ■ of the action. This was, under the circumstances, we think, a compliance with the spirit of the rule. It ought to be so Held, especially in a case where it is apparent that no offer would have been accepted whenever made. The rule itself was established to promote justice, and not to enable fraud to consummate its purposes. The application of it in this case in the strictness claimed, is to pervert the rule into a handmaid of iniquity. The judgment should be reversed, and a new trial ordered with costs to abide the event.

I concur on the ground that the policy was void, on account of the fraud shown by the evidence.

Beady, J., concurred.

Judgment reversed and new trial granted, costs to abide event.

* Ladd v. Moore, 3 Sandf., 589 ; Nichols v. Michael, 23 N. Y., 264

Footnotes

* 1 Comstock, 305.
† † See Allaire v. Whitney, 1 Hill, 484 .
* 19 H. 6 , 44, pl. 92.
† † 4 Denio, 554 , 558, and cases there cited; and see Muller v. Eno, 4 Hernan, 597.
* Decker v. Matthews, 2 Kern., 313; Ingalls v. Lord, 1 Cow., 240 .