Westerfeld v. New York Life Insurance

Plaintiffs sue as executors of the last will of one William Westerfeld, late of the city of San Francisco. Defendant is an insurance corporation of the state of New York. Plaintiffs allege in their complaint, among other things, that on April 19, 1890, the defendant issued to their testator a policy of insurance upon his life in the sum of ten thousand dollars, which policy included a provision that at the expiration of five years from its date the insured might surrender the policy and receive its "then cash value"; that after Westerfeld had paid four annual premiums thereon an arrangement was effected between him and the defendant whereby the latter executed to him a new policy of date February 19, 1894, for the same amount as the former but on a different plan, and promised that it would compute the surrender value, in cash, of said first issued policy and apply the surplus thereof above the fifth premium, to become due the following April, in payment of premiums on said second policy, Westerfeld agreeing on his part to give up the first policy as soon as the company should have determined its value as aforesaid and given him credit therefor on its books; that Westerfeld died February 18, 1895, having yet in his possession both said policies, and having received from defendant no notice of the cash surrender value of the first policy, which, however, was a sum more than sufficient, after deducting the fifth premium on the first policy, to pay the first premium on the second.

Plaintiffs further allege that as executors aforesaid they afterward demanded of defendant the payment of the amount of the said second policy; that defendant refused to pay any part thereof, and by false and fraudulent representations — to the general effect that the policy of February, 1894, never was in force, but had been delivered to Westerfeld for examination only, that he never accepted it nor paid any premiums thereon, and had been notified to return it to defendant; also that the first policy had become void by failure of Westerfeld to pay the fifth annual premium — the defendant inveigled plaintiffs into a compromise whereby they surrendered both said policies and gave a release of all demands thereunder in consideration of the sum of two thousand six hundred and sixty-six dollars and sixty-six cents then paid to them by defendant. That but for the said representations, the falsity of which was then unknown to plaintiffs, they would not have accepted less than the face of the last policy, and that prior to the commencement of this action plaintiffs notified defendant that they "repudiated said settlement upon the ground that it was procured by fraud," and demanded payment of the difference between the sum paid as just mentioned "and the amount due them under the terms of said policy issued February 19, 1894." The prayer of the complaint was for judgment in the sum of seven thousand three hundred and thirty-three dollars and thirty-three cents, and interest from March 27, 1895, the date of proofs of death.

For defense to the action defendant admitted making the representations alleged by plaintiffs, but denied their falsity and averred that they were true; it contested its lability on the policy of 1894, and claimed that if its local agents (with whom alone Westerfeld dealt) made any arrangement looking to the application of a surrender value of the first policy in payment of premiums on the second, they violated the provisions of the first policy, which allowed a surrender value to the same only after it had been in force for five years, and exceeded their powers, and that their acts were never ratified. Defendant also contended that plaintiffs could not maintain the action without rescinding the contract of compromise and restoring or offering to restore the money they then received as the fruit thereof. The trial was by jury and resulted in a verdict and judgment for plaintiffs for the sum demanded in their complaint.

The decision of but one of the several questions debated by counsel will suffice for the disposition of the case. Notwithstanding the elaborate and very able argument with which plaintiffs' counsel have supported their contention that no restoration or offer of restoration of the money received by their clients upon the compromise was necessary to the success of this action, we are unable to accept that view.

It is said in the first place that the action is to be treated, not as founded on the policy, but as in tort for deceit and to recover damages for the fraud practiced by defendant. The complaint, however, was not drawn upon that theory. It is, of course, true that a party who has been led by fraud into a settlement whereby he accepted less than is justly due him in extinguishment of legal claims may, on discovering the fraud, sue for the damage he has sustained without taking any steps to rescind the settlement; the law allows such an action, although, as has been said here, "Even in that case great wrong is sometimes done when rescission is not required" (Bancroft v.Bancroft, 110 Cal. 379); but it proceeds on the assumption that the plaintiff affirms the contract of compromise — abandons the cause of action which it superseded — and claims damage for the fraud which induced the new contract. In the present instance the plaintiffs distinctly aver in their complaint that they "repudiated said settlement upon the ground that it was procured by fraud upon the part of defendant," and demanded payment of the difference between the sum they had received and the "amount due them under the terms of said policy issued February 19, 1894." The frame of the complaint shows that the action is bottomed on the policy itself as a subsisting contract, and that in consequence of the fraud charged the release is treated as simply void. This is contrary to the rule of our statute; a consent to a contract procured by fraud "is nevertheless not absolutely void, but may be rescinded by the parties in the manner prescribed by the chapter on rescission.' (Civ Code, sec. 1566) The like view of the plaintiffs' cause of action was submitted to the jury at the trial. The court instructed them in substance that if they believed the averments of the complaint to be true their verdict should be for plaintiffs — not for such amount of damage as they might find to have been caused by the alleged fraud — but "in the sum of seven thousand three hundred and thirty-three dollars and thirty-three cents, with interest thereon from March 27, 1895, at seven per cent per annum,' which was the exact amount of the policy, less the compromise payment, with interest on the difference. Plaintiffs maintain that this statement of the measure of damages was appropriate to an action sounding in tort for the fraud, but it seems to us to proceed on an unwarranted assumption, viz., that the jury must necessarily find that plaintiffs sustained the same damage by release of the policy on which defendant denied any liability, and which might have been the subject of possibly doubtful litigation, that they would have sustained if the policy had been wholly undisputed. There was evidence in the case from which the jury might have concluded that, without regard to the false representations, plaintiffs could better afford to accept less than the face of the policy than to sue on it; but the instruction took this question from their consideration, and so was not a correct statement of the law if the case is to be regarded as in tort. This subject has been considered by the court of appeals of New York in an action for obtaining by fraud a compromise of a disputed contractual liability. The court said that the measure of damages "is not the extinguished balance, and cannot be without making the rule as to rescission an idle and useless formality, [but] its measure is indemnity for the real loss sustained, which may very well prove to be less, and even much less, than the contract balance. . . . . What the plaintiff sold and what the defendant bought [the court thus describing the effect of the compromise agreement] was not a conceded but a disputed claim; worth, therefore, ordinarily, something less than its face for purposes of sale, transfer, or cancellation; how much less depending upon the continuing solvency of the debtor, and the probability of its successful enforcement, and that upon the underlying facts of the case; and depending also upon the probable extent and expense of the expected litigation." (Gouldv. Cayuga etc. Bank, 99 N.Y. 333.) Plaintiffs inveigh strongly against the doctrine of that case, but in our opinion it is correct.

It is also contended that the case is within the rule that one-who seeks to rescind a compromise on the ground of fraud is not required to restore the money or other benefits he has received from his adversary, if, whatever might be the result of his action, he would be entitled to keep what he has obtained. Cases of that nature arise when a party has been led by fraudulent contrivance to accept less money than was due him on an undisputed claim, as in Gilson etc. Co. v. Gilson, 47 Cal. 597, and in some other instances not necessary to be illustrated now. But in the present case, assuming, as plaintiffs did, that the bar to the action arising from the compromise, settlement and release, was avoided by allegations of fraud in the procurement of the same, then, of course, both parties were relegated to their original situation where plaintiffs asserted and defendant contested the liability of the latter on the policy (Kley v.Healy, 149 N.Y. 346); suppose plaintiffs should fail to establish such liability, it would then appear that they had two thousand six hundred and sixty-six dollars and sixty-six cents of defendant's money to which — the compromise under which it was paid being void, and the consideration moving to defendant for such payment, viz., immunity from suit on the policy, having failed — they could show no right, and it seems quite elementary to say that in such event they could not lawfully keep what they had obtained. It is no answer to say that plaintiffs did prove to the satisfaction of the jury that the policy they surrendered was an enforceable obligation in their favor; or, what is much the same thing, that the judgment, by which the plaintiffs recover only the difference between the face value of the policy and the sum paid by defendant on the compromise, is a sufficient restoration of such payment. These things were problematical until judgment rendered; and to adopt such a test for determining whether restoration was necessary before suit is to say that the plaintiffs could gain their right of action — to wit, of recovery on the policy, which was barred by the compromise — as the result of the action; whereas the settled rule is that the right must exist when a plaintiff commences his action. As remarked by Mr. Bigelow (1 Bigelow on Fraud, 82): "The compromise is a binding contract until rescinded; it is binding them when he brings his suit." And so are Civ. Code, sec. 1566; Morrison v. Lods, 39 Cal. 381;Bohall v. Diller, 41 Cal. 532; Herman v. Haffenegger, 54 Cal. 161; Wainwright v. Weske, 82 Cal. 193.

Another contention is that the action may be regarded as one for a rescission of the compromise by judgment of the court, and that in cases of that character no attempt at rescission by the plaintiff himself before suit brought is necessary. Rescission by the court in this case necessarily involved the setting aside of the compromise and cancellation of the release — powers exercisable only by the court in equity and not by a jury(Mesenburg v. Dunn, 125 Cal. 222); such jurisdiction of the court below was neither invoked nor exerted, and the judgment is wholly silent touching a rescission; it is therefore erroneous in any aspect. But, aside from considerations arising from the practice at the trial, the complaint is insufficient treated as a bill in equity for rescission; it is the law of this state (except under circumstances which, it is believed, we have sufficiently shown do not attend the present case) that the offer to restore what has been received under the contract impeached is a condition precedent to maintaining an action for a judicial rescission, as well as an action founded on the assumption that rescission has been accomplished by simple act of the party. (Kelley v. Owens,

120 Cal. 502, citing most of the previous cases on the subject.) Plaintiffs lay stress on Watts v. White, 13 Cal. 321. That was a suit between partners — plaintiff seeking to set aside a deed of his interest in partnership property procured by fraud of defendant, and to enforce an accounting. The court said that plaintiff risked his case on the result of the accounting, and since he alleged that a greater sum was due him than he had received for the deed no offer to restore the consideration for the deed was necessary before suit. We may observe that in such a case the money received by the plaintiff becomes part of the subject of the accounting; in any possible event he has an interest in it, and until the adjustment of the accounts is, it would seem, as much entitled to its possession as the defendant. Other distinctions might be drawn; as pointed out in a recent text-book, "tender in a case of rescission between parties to the sale of a partner's interest in business stands upon a footing of its own." (1 Bigelow on Fraud, 426.) Watts v. White, supra, does not aid the plaintiff's case here.

Some other points made by plaintiffs in this connection do not require special notice. We must hold that the compromise was a good contract until rescinded, and not having been rescinded when plaintiffs sued it was a bar to the action not removed by the subsequent verdict of the jury or judgment of the court. (Civ. Code, secs. 1566, 1567, 1689, 1691; Dobinson v. McDonald, 92 Cal. 33; Jurgens v. Insurance Co., 114 Cal. 161; Hill v. Den, 121 Cal. 42; Kelley v. Owens, 120 Cal. 502, and cases cited. See, also, the following, most of which are quite in point: Gould v. CayugaBank, 86 N.Y. 75; Graham v. Meyer, 99 N.Y. 611; Yeomans v. Bell,151 N.Y. 230; Potter v. Monmouth Ins. Co., 63 Me. 440; Brown v.Hartford Fire Ins. Co., 117 Mass. 479; Moore v. MassachusettsBen. Assn., 165 Mass. 517; Ewing v. Brake Shoe Co., 169 Mass. 72;Home Ins. Co. v. Howard, 111 Ind. 544; Harkey v. Mechanics' etc.Ins. Co., 62 Ark. 274¹⁴; Och v. Missouri etc. Ry. Co.,130 Mo. 27; Bigelow on Fraud, 82.) The authorities cited by plaintiffs, so far as pertinent to this question, are in the main distinguishable from the case at bar either for the reason that they treated the release as wholly void, which it cannot be under the statute of this state, or that the plaintiff suing in disregard of the release had been fraudulently led to compromise an undisputed demand, and so was in any case entitled to keep what he had received. Admitting that there is some conflict of authority, we are yet satisfied that the conclusion we have reached accords with the strong preponderance of adjudication both in this state and elsewhere. The judgment and order denying a new trial should be reversed.

Chipman, C., concurred.

For the reasons given in the foregoing opinion the judgment and order denying a new trial are reversed.

Temple, J., McFarland, J., Henshaw, J.

Rehearing denied.

¹⁴ 54 Am. St. Rep. 295.