Moore v. Mutual Reserve Fund Life Ass'n , 106 N.Y.S. 255 ( 1907 )

Smith, P. J.:

The finding of fraud by the trial judge is stoutly challenged by the defendant. That finding, is based upon the concealment by the defendant from the plaintiff, both in a personal interview and in its public report, of the existence of a contingent liability of $523,000 for death losses upon the 1st day of Jan nary, 1892. This liability was for losses of which defendant had been notified, in which, however, the proofs of loss had not been filed. The contention of defendant as to this concealment is twofold, first, that this sum was included in an estimated contingent liability of $570,000. Upon an examination of the evidence we are satisfied that the trial court was fully justified in holding that the item of $570,000 reported for contingent liability included simply liability for policies maturing within two months after January first, and was not intended to include liability for deaths occurring prior thereto of which defendant had been notified, but of which no proofs had been made. Defendant further contends that, if it be assumed for the argument that this contingent liability was concealed, nevertheless, as this liability could only be paid out of and to the extent of the funds collected upon the next assessment, the company was entitled as an offset to that liability to a credit of contingent assets of equal amount, and that,- therefore, the concealment was not of a material fact which could have influenced the making of the contract. This contention would not be without force were it not for the fact that the company has practically given itself credit for this contingent asset as an offset against the reported contingent liability of $570,000, while in fact such contingent asset could not be applied as an offset to that contingent liability of $570,000,, because it was required to pay the contingent liability of:$523,000 which was concealed. Withoút discussing in further detail the merits of defendant’s' appeal, we are content with the finding of fraud by the trial'judge and with the legal conclusion drawn therefrom. -

If, therefore* the issuance of this policy was induced by fraudulent representations on the part of the defendant, such policy was thereafter voidable db initio at the instance of the plaintiff, and the question then arises as to the amount .'of his recovery, he claiming the full amount of the assessments paid, with interest, and defendant contending that such total amount should he reduced by the cost to it. of the insurance protection heretofore afforded plaintiff under the policy which he now-seeks to rescind. Both -parties invoke the statu quo doctrine. The plaintiff argues that he new has in, his posséssiom nothing whatever of value resulting from this contract of insurance, while the'. defendant urges that plaintiff has received under, the contract a benefit equivalent-to the cost to the company of carrying the- policy for the period in question, and that its position has been altered by reason of such cost, which should, therefore, be refunded to it by the- plaintiff if any recovery for assessments is to be allowed. ■ - '

. The rule has been stated as-follows: ^The party,who would dis-affirm -a fraudulent .contract must return whatever he has received upon-it. This is on a plain and jnst principle. - He cannot hold on to such part of the-contract as- may be desirable on his part and avoid the residue, but must rescind in toto, if at all.” (Masson v. Bovet, 1 Den. 69, 74) “ The law iiot only requires a disaffirmance of the contract at the earliest-practicable moment after discovery of the cheat, but a return of all that has been received under it, and a restoration-: of- -the' other party to the condition in-which he, stood before-the contract was Inaded’ (Cobb v. Hatfield, 46 N. Y. 533, 537.) “ It is undoubtedly a general rule of law. that a party "who would ¡rescind a contract upon- .-the' -ground of fraud must act promptly and restore, or offer to restore, to the other party what he received - under it. -But this rule, only means that he must restore what he’-himself -lias received-and-has b;y force of--the-contract under •Ms ovm'tcontrbl.” (Hammond v. Pennock, 61 N. Y. 145, 152, 153.) “ The .person defrauded cannot at the same time avoid the contract and retain anything received by virtue of it, of value either to himself or to the party who committed the fraud.” (Guckenheimer v. Angevine, 81 N. Y. 394, 396.) The statu quo doctrine is thus based on the broad principles .that one electing to rescind an existing contract cannot at the same time in effect take the opposite position of affirming the contract by retaining anything of value obtained through it, nor should he be allowed to profit in the same manner by the very fraud he charges against another. Whenever, therefore, the innocent party has obtained under the contract definite property which can be returned upon the rescission of the contract the statu quo doctrine may be strictly and easily applied, but there are obviously many cases in which any such exact and literal return is impossible, and it thus becomes necessary to examine the limitations of the doctrine. .

Although the rule states that the guilty party is to be restored to his original position, the reason for the rule as shown is not that any particular regard or. consideration is due him, but simply that the attitude of the defrauded party upon bringing his action may conform to basic principles of pleading and equity and not be open to criticism in these respects as would be the case if he were allowed to retain property that came into his hands through the very fraudulent instrument that he would seek to avoid. But if the attitude of the innocent party is not open to the objections mentioned, if he does not possess and so is not seeking to retain anything that would imply an affirmance of the contract, or that would be inequitable for him to keep, the reason for the doctrine falls and the doctrine, itself' becomes inapplicable. In such ease the plaintiff’s right of action is entirely unaffected by any consideration as to whether or not the defendant is or may be put in exact statu quo. If he is not or cannot be so placed he has only himself to blame. An innocent party cannot be in any way prejudiced in his right of action by the fraudulent acts of the other party to the suit. The cases accordingly clearly recognize this important limitation to the statu quo doctrine. In Masson v. Bovet (supra) it is said : “ This (the necessity of restoration) is not exacted on account of aiiy feeling of partiality or regard for the fraudulent party. The law cares very little what; his loss may be, and exacts nothing for his sake.” ' This quotation is cited with approval in Hammond v. Pennock (supra), the opinion stating: “ If the wrongdoer has, by his own act, complicated the case, so that full restoration cannot be made, he has but himself to blame.” The case of Guckenheimer v. Angevine (supra) also holds: “TheTaw cares very little what'a fraudulent party’s loss may be, and exacts nothing for his sake. (Beardsley, J., Masson v. Bovet, 1 Den. 74.) It certainly will not undertake to indemnify him for expenditures made in the prosecution of his fraudulent purpose.” It would accordingly seem to be inconclusive on this inquiry whether the .insurance on- plaintiff’s life for any period actually cost the defendant anything or not.

There remains the principal and, in my view, the determining question of this case,, and that is whether the plaintiff, by virtue of the insurance protection he has received under his policy, now. has or .has had anything of value which he must , return to the' defend-. ant. The difficulty that arises in determining this question. results from the peculiar nature of the contract of insurance. In the case .of most contracts, even those involving things that" do not continue to exist, and so cannot be returned, the subject-matter’s cost to one party and value" to the other are practically identical, and consequently, if the subject-matter cannot itself be restored by the injured party at the time he elects to rescind, he. can easily return its exact value to him. This would evidently be the rule as regards things intended for. consumption, as food and. fuel, and also as regards such intangible things as leasehold privileges. In these instances the value to the innocent"party of the' thing received would approximaté its cost to the guilty party, and hence its value should equitably be returned or allowed for upon' a rescission"of the coil-tract. But can it be said that the value to the insured or to his estate of life insurance protection for an elapsed" period is fairly analogous, for instance, to a lessee’s interest for a like period? In the latter case a person’s present financial status may 'reasonably be said to be altered for the better as the result of his having previously en joyed .the benefits of. occupation,-"even if .he does not ever afterwards have in his possession, or- stored away, the exact money-equivalent of" such occupation, inasmuch, as otherwise he would presumably have expended money for a lease of other' premises,, even if he might not have paid out an.amount exactly éqtiál to the value of the premises "he actually did occupy. But does the insured, under a rescinded policy, occupy any such position ? Is his present financial condition at all improved over what it actually would now have been had he never had in the past any insurance protection at all % A man presumably requires a lease, if he actually does take a lease of property, in much the same way that he requires such necessaries as food and clothes. But can it be said that he requires insurance in any such sense, so that at any particular date he is measurably better off for having had insurance in the past %

An inquiry into the nature of the contract of insurance shows that it differs from ordinary contracts in that, even if the insurer is at a definite expense for every outstanding policy, the insured does not receive in the protection given him any benefit at all comparable in definiteness and certainty to its cost to the insurer. The insured “ must die to win,” so what he really receives in return for his premiums or assessments is a chance that he or his beneficiary may obtain within a certain time a certain amount. An insurance policy is analogous to a lottery ticket; both may be said to cost those who sell them approximately definite sums, but the buyer in each case obtains in return no such definite quid pro quo, but rather a chance which may or may not amount to anything. And although this chance may be claimed to have an actual computable money value at a particular time, such value entirely lapses with the termination of the policy or the drawing of the lottery. Such peculiar temporary and time values as insurance policies or lottery tickets may be said to represent to purchasers of them seem to stand in a class by themselves and to be clearly differentiated from ordinary values such as are usually given and received under contracts. Accordingly, if one has purchased such a time value, after the expiration of such time it seems clear that he has never received any actual value, in the ordinary sense of the word, at all. He is really no better off than if he had never made such purchase, and consequently he has nothing whatever of real or actual value which he should retui’n upon rescinding the contz-act under which it was obtained.

It will be noted from the above-quoted statements of the statu quo doctrine that the language used clearly has reference to the time when the innocent party elects to rescind. He must z’estore what he “7ias by force of the contz-act under his own control.” Accordingly it is not-enough to claim that the innocent party has had in the past certain things or values ; his obligation is to restore only that which he controls at the time of his election to rescind. , As before shown, a reasonable working out of this rule would probably require in most instances a restoration of the money value Of things consumed or intangible, and, therefore, impossible of actual restoration, inasmuch as the present financial status of the defrauded party might fairly be assumed to be affected thereby,.but it is not apparent how the rule can be further extended so as to require a return of limited time values, estimated on a basis of costs to the- guilty party, but which values are not in existence even in changed form or by representation at the . time of the- rescission of the contract,, and which consequently affect in no way whatever the .present status of the innocent party. - Moreover, if defendant’s position should be sustained, the result, would be that it would in fact profit by its own fraud. A mutual insurance association such as defendant does not assume to write insurance for profit, and if it may, upon being found guilty of fraud at the very beginning of its dealings with the insured, nevertheless retain upon the rescission of the policy the full mortuary cost and the usual loading by way of its own expenses, it iii effect obtains from a defrauded party all that it assumes to charge any one, and so- actually has by fraud increased its business and influence to. the extent-of one new member. If defendant’s' position be sound, a great temptation would undoubtedly exist for' insurance companies to Write insurance by fraudulent means, inasmuch as, if detected, they would still be allowed to retain all mortu-. ary costs and loadings, and this too as proved by their own officers and records, and consequently most difficult for an outsider to dispute. (See Strauss v. Life Association, 128 N. C. 465, 467, 468.)

If it be claimed that plaintiff’s position herein in, effect allows him to “ make a speculation ” out of defendant’s fraud, as said by the chief justice in the Angers case cited infra, the answer would be that plaintiff is now seeking to recover back only what he has actually paid out and that while the policy was in force he was paying for the protection lie .received the same as any other member. Furthermore, although the plaintiff has received a certain-advantage in the past in the way of insurance protection which"be would now be relieved of paying- for inasmuch as .the protection formerly received, is of no real value whatever to him now, surely the defendant cannot reasonably complain, as whatever incidental advantage plaintiff may thus obtain over defendant is solely due to the latter’s fraud. As between forcing an innocent party to make payment for questionable benefits received in the past when he now actually possesses nothing of,value, directly or indirectly, under the fraudulent contract, his present status having been in no way bettered by anything actually received thereunder, and allowing him to retain whatever of past advantage he may have received solely ás a result of the guilty party’s fraud, the equities would seem to be clearly with the latter course. “ The law cares very little what a fraudulent party’s loss may be.”

The conclusion so far reached seems also to be upheld by the weight of authority, although the cases are somewhat in conflict and the precise point involved has seldom.been passed upon. The plaintiff relies principally upon three English cases and defendant upon a Canadian decision. In Foster v. Mutual Reserve Fund Life Assn. (19 Times L. R. 342, March, 1903) an action was brought against this same' defendant for the rescission of a policy on the ground of fraudulent misrepresentations as to the cost of carrying the policy, and to recover back the premiums paid, and it was held that he was so entitled. From the Court of Appeal the case was taken to the House of Lords (20 Times L. R. 715, July, 1904), where the judgment of the lower court was affirmed. It does not appear from these reports of the case that the question of offsetting against plaintiff’s recovery the value of the insurance received was anywhere raised, although it, will be noted that Nesbitt, J., who dissented in the Canadian case, cited infra, expressly says: “ I find in the record in the Foster case in tin? House of Lords that the very point was made that there could not be a return of the premium, because the plaintiff in that case had been kept insured and had in reality suffered no damage, but, notwithstanding such an argument, the House ordered a return of the premiums with interest, and the same argument was addressed to the court in the Cross case [21 Times L. R. 15], but without avail.” In Cross v. Mutual Reserve Life Ins. Co. (21 Times L. R. 15, Nov. 1904), which was similar to the Foster case, the trial justice directed judgment for the plaintiff, and apparently regarded the Foster case as an authority against any allowance to defendant for insurance' protection, given. He is reported as saying : “ Mr. Terrell (for the defendant) had contended that, as there could be no restitutio in integrum,, there was no right to rescind. If so, the decision of the House of Lords in Foster's case was wrong.” The later case of Merino v. Mutual Reserve Life Insurance Co. (21 Times L. R. 167, Dec. 1904) expressly follows the decisions in the last two cases, the argument as to the cost of insurance being rejected by the trial justice. It is recited in the case: “ It was suggested that this relief (ah order for the payment of the premiums with interest) ought only to be given upon terms. It was said that the defendants had been under the risk of the policy for a long period. But they had suffered no loss, and.his Lordship was not aware of any case in which damages or compensation had been given under such circumstances. The defendants had only themselves to thank for the position in which they were placed by the plaintiff.”

The appeal in the Canadian case, referred to supra, and relied upon by defendant (Angers v. Mutual Reserve Fund Life Association, 35 Can. Sup. Ct. 330, Nov. 1904) was decided subsequently to the Foster case, and was similar to it except .that in the former defendant, proved the value of the insurance had to be equal to the premiums paid. The appeal from the judgment' dismissing the complaint was dismissed, the court standing three to two, but as the majority did not agree as to the grounds for dismissing the appeal, no costs were allowed. ' The chief justice, one of the majority, professes to base his opinion upon the civil law and authorities thereunder, and holds that no.return .of premiums can be allowed, inasmuch as the insured “ got for his money all the value he had bargained for.” He holds that there were,fraudulent mis representations. Davies, J., of the. majority, distinguishes that case from the Foster case on the ground that there was in the case under consideration no fraud, although he inclines to agree with the chief justice on the question of damages. Kjllam, J., of the majority, also finds that there was no fraud, and thus distinguishes the Foster case. Of the minority, Nesbitt, J., cited supra, writes a strong dissenting opinion, finding, fraud, and holding the Foster case an express authority for the return of the premiums in full. “ It may be said- that this is hard measure, but there is high authority for saying ‘ the way of the transgressor is hard.’ ” Sedgbwiok, J., of the minority, concurs entirely with Nesbitt, J. It will thus be seen that two of the court regard the Foster case as controlling here, and two more distinguish the case on the ground of no fraud, the chief justice being the only one to distinguish it on other grounds. Moreover, he was the only one of the majority who found fraud, the other two basing their opinions for dismissal upon the ground that there were no fraudulent misrepresentations. The remarks of the chief justice adverse to the plaintiff, on the ground that he had got what he had bargained for, must accordingly be deemed merely the expression of his own opinion, and not that of the court.

Further difficulties, might be suggested to the application of the rule requiring the plaintiff to restore the value of his so-called protection prior to the time when his contract was rescinded. It is not clear, where the policyholder is to receive only so much upon his policy as is contributed by his associates upon an assessment, that the actual cost of the insurance to the company is any greater than his proportion of the running expenses of the company. .Those expenses would seem to have been incurred in the consummation of the fraud, for which, under the cases cited, the defendant would not in any event be entitled to compensation. If the defendant could be held entitled to offset what could be called the value of the protection, such value is a most uncertain quantity. To what amount was he protected ? Upon the policy of his friend Reilly, who became insured at the same time, and afterwards died, his estate only recov$6,000. When the fraud was discovered, and the contract disowned, the plaintiff was fourteen years older than when the contract was taken, and his insurance rate at his advanced age would be considerably greater. Moreover, his acceptability as a risk has possibly and presumably diminished within that period. In view of these considerations it is not possible to say that the so-called protection during the period of fourteen years has not been an actual harm to plaintiff rather than a benefit. We are of opinion, therefore, that plaintiff is entitled upon rescission to recover the full amount of premiums paid without deduction by reason of any so-called value received by him.

We are asked by the plaintiff to direct judgment in his favor, instead of granting a new trial. To this we think the plaintiff is entitled. The trial court, has specifically found the amount of premiums paid to be $2,437.10, which together with interest on June 30, 1906, amounted to $3,530.34., Within the Buie stated in Crowley v. State of New York (112 App. Div. 872) we have the power, to direct judgment in accordance with the actual findings of the trial court. Moreover, there can be no object in ordering a new trial. The amount of premiums paid is undisputed by the defendant, and if we are right in our view that the, plaintiff is entitled to a judgment for the full amount thereof Without offset of any kind, the plaintiff is clearly entitled to the judgment which he asks.. Judgment should be modified so as to allow, the plaintiff the full amount of premiums paid, together with interest to date of the entry of the- judgment here directed, together with costs in the trial court. Thus modified the judgment is affirmed, with costs to the plaintiff in this court.

All concurred, except Chester, J.,. Who wrote for affirmance and Kellogg, J., who wrote for reversal. !