Niagara Fire Ins. v. Adams , 117 C.C.A. 464 ( 1912 )

PUTNAM, Circuit Judge.

To state this case in a short way, but sufficient for our purposes in view of our references to the opinions of the learned judge of the Circuit Court, this is a bill filed by two fire insurance companies, which issued three fire policies, two by the Niagara Company and one by the Glens Falls Company, to the two respondents, who are each asserting certain interests in the property to which the policies relate. The bill alleges frauds in obtaining the policies which, if proved, would be a full defense to them at either law or equity. It also alleges that a portion of the property was destroyed by fire during the currency of the policies, but that only a portion of the property was so destroyed. It also alleges that the respondents hold the policies, and refuse to surrender the same, and pretend to have a Haim thereon for possible future loss, “so that, if the remainder of said property should be destroyed by fire, they would have an additional claim under said policies.”

The two policies issued by the Niagara Company expired after the decree in the Circuit Court, and after the appeal to this court was perfected. Therefore as to them the appeal becomes a moot appeal, and necessarily fails.

The bill was amended to cover a certain lack of specific allegations, and demurred to in its amended form. The demurrer was sustained, and a decree entered for the respondents, whereupon the complainants appealed to us. No question of pleading now remains, and the case is before us on the merits.

The bill, in addition to the charge of fraud, alleges that there are certain questions of contribution between the two companies, and certain other questions of adjustment, which threaten a complication and multiplicity of litigation, enough to furnish a basis for this bill in equity. There is, however, nothing here beyond the ordinary questions of contribution, which always occur, in the main, as between concurrent underwriters; and as to this proposition we accept the reasoning and conclusion of the Circuit Gourt.

Also, as to the principal relief sought for by the bill, which is for cancellation of the policies by reason of the alleged fraud in obtaining them, we observe that the topic has been fully discussed by the learned judge of the Circuit Court in two opinions passed down by him; and we are satisfied with the reasoning of the opinions and the conclusions reached therein. We adopt the same, with some additions thereto, as follows:

The conclusions of the Circuit Court on this branch of the case depend on the general proposition that the complainants have full remedy at law; so that, within the authorities cited by the court, among which is Cable v. Ins. Co., 191 U. S. 288, 24 Sup. Ct. 74, 48 L. Ed. 188 (1903), the bill cannot be maintained, inasmuch as none of the exceptional reasons for maintaining it appears. However, the complainants maintain .that, in accordance with the decision of the, Supreme Judicial Court of Massachusetts, constituting the district in which these occurrences arose and this litigation was carried on, state courts in equity would have full jurisdiction'‘on the facts shown here, for which see Commercial Ins. Co. v. McLoon, 14 Allen (Mass.) 351, the Circuit Court should have accepted the jurisdiction as claimed ,by the complainants, even though, independently of the local practice, it could not have been required to do so. Of course, the complainants understand that, in matters of equity, the statutes of the United States do not require the federal courts to follow the rules of practice prevailing in the state courts, as they require this in common-law proceedings'. Nevertheless the complainants rely on the fact that in some cases, by certain analogies, the federal courts do accept special rules of the locality of the district within which the litigation is pending, giving rights and privileges in equity beyond those usually recognized by the courts of the United States. This, however, never has gone so far as now asked for by the complainants. Perhaps Cowley v. Northern P. R. Co. (1895) 159 U. S. 569, 582, 583, 16 Sup. Ct. 127, 131 (40 L. Ed. 263) states this exceptional rule as well as it can be stated anywhere, in the following language:

“Although the statute of a state or territory may not restrict or limit the equitable jurisdiction of the federal courts, and may not directly enlarge such jurisdiction, it may establish new rights or privileges which the federal courts may enforce on their equity or admiralty side, precisely as they may enforce a new right of action given by statute upon their common-law side.’

Of course, all the decisions in this direction limit this to matters which are of an equitable nature, while in the case at bar there is at the outset no_ state statute establishing a new right or privilege. We are asked to follow in equity a practice of the state courts not based on any particular legislation, but on general rules, of law. If we should admit that proposition here, it would follow that we must in every case in equity follow the practice of the local tribunals. This, of course, no one would undertake to maintain. But. this is not all.

It cannot be questioned that in England at the time to which the rules of the Supreme Court in equity refer us, and according to the practice which prevailed in the United States prior to the later decisions of the Supreme Court, and aside from the statute to which they refer, there was a general equity power to set aside instruments obtained by fraud, whether there was a full defense at law or not, and whether or not the case had so far ripened that the parties against whom a bill in equity was brought had a right of action which might be immediately enforced. This was an old rule, as ancient as the period in England when the courts of common law had only limited powers with reference to defenses based on fraud. That equitable right having once originated was never lost, and was early recognized by various Chancellors in the United States, and by the text-writers. Eor example, Story’s Equity Jurisprudence, the first edition of which was published before the decision in Ins. Co. v. Bailey, hereinafter referred to, affirmed the general right to compel delivery up and cancellation of agreements, securities, deeds or other instruments obtained by fraud, without any limitation. This was a wholesome doctrine, and was free from the uncertainties and embarrassments connected with the new rule of the federal courts, as fully manifested in Ins. Co. v. Bailey, 13 Wall. 616, 20 L. Ed. 501, decided at the December term, 1871, and Buzard v. Houston, 119 U. S. 347, 7 Sup. Ct. 249, 30 L. Ed. 451 (1886). These decisions were based on the Judiciary Act of 1789. While ordinarily the Supreme Court has not applied that act to cut down the ancient equitable jurisdiction, it has clearly done so with reference to the particular topic concerned here. The extent to which this line of decisions reaches is shown in Buzard v. Houston. There the rule of Ins. Co. v. Bailey is fully developed and explained; and this line of decisions necessarily reaches the case at bar, and every aspect of it, notwithstanding there may be a remnant of one of the policies, the Glens Falls policy, which has not yet ripened, so far as an existing right of action is concerned.

We thus refer to Buzard v. Houston, first as demonstrating the application of the limitation of the exceptional practice relied on by the complainants, to the effect that in some cases the federal courts may adopt in equity the peculiar rules of the state courts. Ins. Co. v. Bailey and Buzard v. Houston show that the rules as to cancellation of instruments governing the federal courts grow out of a statute of the United States, which, of course, controls the federal courts, whatever may be the local practice, or even local statutes. Therefore, for this special reason, no federal court would be justified in adopting the local procedure under the circumstances arising here.

We also refer to Buzard v. Houston for the second reason, that it establishes the proposition that the learned judge of the Circuit Court was right in holding that there are no peculiar circumstances here which take this case out of the general rules with reference to the cancellation of instruments. In Buzard v. Houston certain untruthful representations were involved which were shown to be false; and yet the court set up the statute of 1789 as a full defense to a proceeding in equity, because it said, at page 253, that “the present bill states a case for which an action of deceit could be maintained at law, and would afford full, adequate, and complete. remedy.” In the present case, if the complainants should bring an action of deceit for fraudulent representations, and maintain their suit, they would obtain a judgment which would create a complete estoppel as against any suits on the policies. This is a fundamental proposition, which disposes of the case in any aspect.

The decree of the Circuit Court is affirmed, and the respondents recover their costs of appeal.