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Harnischfeger Sales Corp. v. National Life Ins. Co.

September 20, 1934

HARNISCHFEGER SALES CORPORATION
v.
NATIONAL LIFE INS. CO.



Appeal from the District Court of the United States for the Eastern District of Wisconsin.

Author: Sparks

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

SPARKS, Circuit Judge.

This appeal is from an order enjoining appellant, the assignee of an insurance policy issued by appellee, from prosecuting an action started by it to recover the benefits of the policy in a state court of Minnesota.

Appellee filed a bill in equity August 21, 1933, in the District Court for the Eastern District of Wisconsin, praying that the court order the policy in suit to be surrendered for cancellation on the ground that it was procured by fraud. The bill set up the following facts: The policy was issued March 6, 1933, to one Alexander William Hog who assigned and transferred it to appellant on March 17, 1933. As a part of the application, on February 18, 1933, the insured made certain statements alleged by the insurer to be false. These statements were in response to the customary questions as to the state of the applicant's health, whether or not he had ever suffered from any disease of the heart or arteries, and whether he had had occasion to consult any physician professionally or go to any hospital for treatment, observation or diagnosis within the five years preceeding the application, all of which questions the insured answered in the negative. The insurer claimed that in fact he had for some time been suffering from coronary sclerosis and a heart ailment which contributed to his death which occurred on June 10, 1933.

On August 18, 1933, appellee tendered to appellant the sum of $450.60, the amount paid by the insured as a premium on March 20, together with interest at the rate of six per cent. from the date, notifying appellant that it elected to rescind the policy. The tender was refused.

Appellee alleged that it was without adequate remedy at law by reason of the fact that the policy contained the usual provision as to incontestability after two years from its date of issue.

In answer, appellant stated that promptly upon learning of the death of the insured it delivered to the insurer proofs of death, and intended to file suit promptly if the claim were denied, and did file suit in Minnesota on September 29, 1933.

The District Court on March 28, 1934, granted the temporary injunction against the prosecution of the suit in the state court on the ground that such action would impair and defeat the jurisdiction of the federal court, and that appellee was entitled to the relief of the court of equity because it had no adequate remedy at law.

It is of course elemental that courts of equity have never taken jurisdiction over suits where an adequate remedy could be had at law. Section 723 of the Revised Statutes (28 USCA § 384) which provides that suits in equity shall not be sustained in any court of the United States in any case where a plain, adequate, and complete remedy may be had at law has been said to be merely declaratory of the existing law rather than establishing a new rule. Boyce's Executors v. Grundy, 3 Pet. 210, 7 L. Ed. 655. It was early settled that equity was not to use its power to order the cancellation of an insurance policy secured by fraud when the facts indicating that fraud could be used as a defense to a suit on the policy. Phoenix Mut. Life Insurance Company v. Bailey, 13 Wall. 616, 623, 20 L. Ed. 501. The Court there stated, "Courts of equity, unquestionably, have jurisdiction of fraud, misrepresentation, and fraudulent suppression of material facts in matters of contract, but where the cause of action is "a purely legal demand," and nothing appears to show that the defense at law may not be as perfect and complete as in equity, a suit in equity will not be sustained in a Federal court, as it is clear that the case, under such circumstances, is controlled by the sixteenth section of the Judiciary Act [28 USCA § 384]." This case was followed by the Court in Cable v. United States Life Insurance Company, 191 U.S. 288, 24 S. Ct. 74, 48 L. Ed. 188.

Both of these cases were decided before it became the custom to incorporate in policies of life insurance a clause limiting the period during which such policies could be contested except for non-payment of premiums. Since the advent of these incontestability clauses the rule seems to have been established that the mere fact that such limitation is included in a policy, rendering it impossible for the insurer to set up the facts concerning the fraud in any way after the contestable period has expired, constitutes the element of possible irreparable injury necessary to confer jurisdiction upon courts of equity to hear suits to cancel policies for fraud, and to enjoin actions brought in courts of law subsequent to the filing of the bill in equity for the purpose of recovering benefits under the policies. This results from the definition of the word "contest" adopted by a majority of the courts both federal and state, as a litigation, and requiring judicial action either by means of a suit in equity to cancel, or defense to a suit at law on the policy. See Jefferson Standard Life Insurance Company v. McIntyre (C.C.A.) 294 F. 886; Chun Ngit Ngan v. Prudential Insurance Company (C.C.A.) 9 F.2d 340; Northwestern Mutual Life Insurance Company v. Pickering (C.C.A.) 293 F. 496; Rose v. Mutual Life Insurance Company of New York (C.C.A.) 19 F.2d 280; Priest v. Kansas City Life Insurance Company, 119 Kan. 23, 237 P. 938, 41 A.L.R. 1100; Missouri State Life Insurance Company v. Cranford, 161 Ark. 602, 257 S.W. 66, 31 A.L.R. 93; American Trust Company v. Life Insurance Company of Virginia, 173 N.C. 558, 92 S.E. 706.

Appellant concedes that, although there are cases holding that an insurance company does not have a cause of action in equity to cancel a policy even where there is an incontestable clause because it has an adequate remedy at law, nevertheless the better rule is that in such cases the insurance company should have the right to bring an action in equity wherever the statute of limitations operating on the beneficiary's cause of action is longer than the incontestable period. It admits, therefore, that the District Court was right in holding that the bill of complaint stated a cause of action in equity. It argues, however, that inasmuch as both causes of action, namely, the insurer's in equity for cancellation, and the beneficiary's at law for recovery of the benefits, are strictly in personam, it follows that neither court has the right to enjoin the action in the other, but both should be allowed to proceed, and the judgment in the one completed first can then be set up in the other as a bar to further proceedings. It quotes at length from the opinion in Kline v. Burke Construction Company, 260 U.S. 226, 43 S. Ct. 79, 81, 67 L. Ed. 226, 24 A.L.R. 1077. In that case the respondent brought an action at law in a federal court for breach of a contract, asking for a money judgment. Petitioner later filed a bill in equity in a state court against respondent and a surety company as an additional party asking for an accounting and judgment for a certain sum. After a mistrial in the federal court law action, respondent filed a bill of complaint as a dependent bill to its action at law seeking to enjoin petitioners from prosecuting their equity action in the state court. The court there said:

"It is settled that where a federal court has first acquired jurisdiction of the subject-matter of a cause, it may enjoin the parties from proceeding in a state court of concurrent jurisdiction where the effect of the action would be to defeat or impair the jurisdiction of the federal court. Where the action is in rem the effect is to draw to the federal court that possession or control, actual or potential, of the res, and the exercise by the state court of jurisdiction over the same res necessarily ...


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