Mutual Life Ins. v. Smith , 33 L.R.A.N.S. 439 ( 1911 )

ALDRICH, District Judge.

This is a bill in equity by a trustee in bankruptcy, who offers to surrender certain insurance contracts entered into between the bankrupt and an insurance company, and asks that the company be ordered to pay to the trustee upon their surrender all sums which the company received from the bankrupt.

The case is a novel one in the sense that it involves a kind of insurance or indemnity which has not been in general use, if in use at all.

One Edwin J. Dunning, who was insolvent at the time, secured from the Mutual Life Insurance Company of New York three policies, which are designated by the appellee, andl perhaps correctly, as “deferred annuity contracts,” whereby the company obligated itself to pay to Dunning $1,000 yearly under each contract or policy, commencing in 1916, 1921, and 1926, respectively, provided Dunning was then alive, and the payments were to continue as long as punning should live.

The total amount paid by Dunning for these policies or contracts was $4,920. There were three payments' — one in January, another in Februaiy, and another in July, 1901.

There is no substantial argument against the general proposition that Dunning was insolvent, and that he was acting in general bad faith with respect to his creditors, and that he was scheming to get money by ’fraudulent means from the Brooks family, and perhaps others, which he never intended to pay; and we think the record discloses a condition of things from which it should be assumed that at a time at least as early as the date of the policies Dunning" was engaged in transactions of a hazardous and fraudulent character, whereby he was to secure financial- advantages and securities for which he never intended to pay; but we are not aware that the proofs establish any precise fact connecting- any particular fraudulent transaction under which he was to receive money with the particular transaction of securing the deferred annuities or insurance. It is, however, probably quite true that the policies were paid for with money which he fraudulently -obtained.

It is neither alleged nor argued that the insurance company had any knowledge of Dunning’s fraudulent career, and it is admitted that the company acted in good faith and without having any ground to suspect the existence of an}r fraudulent intent on Dunning’s.part.

The position of the trustee in bankruptcy is that Dunning’s payments were transfers in fraud of creditors, and that the insurance company, though acting bona fide, is not a purchaser for value, because it has not paid the purchase money, or secured) it in such a manner that it cannot be relieved against payment.

In support of this position counsel rely upon that class of eases which are concerned with transactions between seller and purchaser, and transactions between grantors and grantees with respect to which it has sometimes, and perhaps generally, been held that the execution and delivery of nonnegotiable notes and bonds, and other things done by the purchaser or grantee less than actual payment before notice, do not constitute one a bona fide purchaser or grantee, and therefore that the creditors may have property restored to them where the purchaser or grantee may be placed in statu quo.

There is, of course, some diversity of authority in respect to the particular circumstances under which rescission and restoration is justifiable ; but in our view we are not called upon to consider the large number of cases relating to such situations, because they have no direct application to the question involved in this case, and have very little bearing, if any, by way of analog)'.

If we are right in this position, it is because the relations here are not those of seller and buyer, and because the insurance company was in no sense a purchaser. The fundamental idea of the remedy for restoration is that it directs itself against the purchaser, and if either of the parties to the insurance contract in question could be considered a purchaser it would be Dunning, while the remedy is sought against the insurance company.

The courts are, of course, reluctant to give any aid whatever to parties tainted with fraud; but this is not a case between the trustee in bankruptcy and Dunning, but between the trustee and the insurance company, against whom there is no suggestion of fraud, and is therefore a case where the rights between these particular parties do not depend so much upon the bad faith and the wrongful intent of Dunning. who is one of the parties to the contract, as upon the good faith and innocent intent of the insurance company, who is the other party to the. contract.

As stated at the outset, the contract between the insurance company and Dunning, or the policy of insurance from the company to Dunning, if it may properly be called that, is novel in kind; but that is no reason why it should be rescinded by the parties or repudiated by the law, provided it does not offend the law or general considerations of public policy.

All insurance was once new, and insurance in its early stages covered few contingencies; but the business under the law has grown until the idea of insurance now spreads itself broadly over many subj ects and many contingencies.

Generally speaking the contingency, so far as contingency is coh-cerned, in life insurance, is death, with, of course, endowment plans, under which there is payment of a certain sum at a particular age.

'i'lie policies in question provide for payments of annuities beginning in U)l(), if the insured is alive at that time, and for the continuance of annuities during his life.

Aside from what is urged in respect to the fraudulent purpose of Dunning to secure this insurance and pay for it by funds which were realized out of fraudulent transactions, and which, if used for such a purpose, would divert funds which equitably belonged to creditors, we see very little to be urged against insurance of. the nature in question, and, indeed, that does not go to the merit of the insurance itself. It is not unnatural that one should act upon the idea that, in the days when he is handling money, it is' the part of wisdom to safeguard the period of old age, in which business and earning capacity will have become a thing of the past. Under modern conditions in the various industries, as well as in business and in official life, .men are influenced to enter upon a particular work by various old! age safeguards which become operative at the end of a specified period of service.

We see nothing, therefore, in the contract itself, disassociated from the general fraudulent purpose of Dunning, which offends public policy or any particular principle of law. The question whether the contract of insurance is one which should be repudiated upon principles of law, or as something offending public policy, is a very pertinent one, because, if the contract is a lawful and proper one in kind, the insurance company, acting in good faith, as it did, acquired certain rights and advantages upon which it is entitled to stand.

It is urged by the company that the nature of the contract and the business acts in pursuance of it by the insurance company put it in a situation where it is not possible to place it in statu quo.

It is suggested that brokers’ commissions were paid, that the costs of doing business are an element, that the fund had been classified and entered upon its books, and had assumed a certain status with respect to other contingencies, and that there is no offer in the bill to place the insurance company in statu quo in these respects. But, however that may be, we think the other ground, that it has acquired rights and advantages upon which it is entitled to stand, involves weightier considerations.

.The business of a mutual insurance company is in a degree for profit as well as for security, and the enterprise involves large expenditures; and whether the margin is one way or the other depends upon whether the contingencies are well or ill-advised; and if there is nothing in the contract itself which offends the law, there is no reason apparent why the company, if it has acquired 'adlvantages or rights under a particular transaction, should be deprived of its advantages obtained in good faith.

If there were no question of creditors, and if Dunning had died a week after the contract and before bankruptcy, the contingency upon which the insurance was to become effective would have ceased to exist, or if he should die any time before 1916 such would! be the case. That was the insurer’s side of the contract, and the right, being created in good faith and without any purpose to defraud, it is difficult to find any principle upon which the advantage can be wrested from, the insurance company by Dunning’s creditors. Whatever advantage Dunning is to receive under the contract would doubtless go to the creditors.

The plaintiff, as trustee in bankruptcy, in his bill, offers to surrender the contract to the insurance company; but the insurance company says it is entitled to stand upon the contract entered into on its part in good faith, and under which it has acquired certain rights, and that it is willing that the trustee shall succeed to all the rights of the insured, and take all the benefits which may result under the contingencies and terms of the contract.

The trustee’s position in this respect is that a right which is only partially operative in 193 6, and not wholly operative until 1926, is not an available and efficient beneficial right in the bankruptcy sense, because the law contemplates that matters concerning bankruptcy estates must be speedily adjusted and closed.

We do not perceive that to be a justifiable legal or equitable ground for dispossessing the insurance company of its legitimate contracliial rights and advantages.

The contingent right of the insured, like the statutory right to seize and hold and sell remainder and contingent interests in real estate, is doubtless something that the trustee may seize and hold for the benefit of the creditors, or doubtless he may waive it altogether under circumstances which justify it.

The decree of the Circuit Court is reversed, and that court is directed to dismiss the bill without prejudice to any right the trustee may have to claim whatever beneficial interest the bankrupt has, or may hereafter have, under the insurance contracts described in the bill; and the respondent, now the appellant, recovers its costs of this court, and of the Circuit Court, so far as the same can be paid from the estate in bankruptcy