297 F.2d 702 (9th Cir. 1961), 16196, Anderson v. Knox

Docket Nº:16196.
Citation:297 F.2d 702
Party Name:J. Leland ANDERSON, Appellant, v. Roger I. KNOX, Appellee.
Case Date:December 04, 1961
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 702

297 F.2d 702 (9th Cir. 1961)

J. Leland ANDERSON, Appellant,


Roger I. KNOX, Appellee.

No. 16196.

United States Court of Appeals, Ninth Circuit.

December 4, 1961

Page 703

Ivan E. Lawrence, Reseda, Cal., and Mitchel J. Ezer, Beverly Hills, Cal., for appellant.

J. Russell Cades and William B. Borthwick, Honolulu, Hawaii, for appellee.

Smith, Wild, Beebe & Cades, Honolulu, Hawaii, of counsel.

Before CHAMBERS, POPE and HAMLIN, Circuit Judges.

POPE, Circuit Judge.

The appellee Knox, who was plaintiff below, brought this action to recover damages alleged to have been incurred by him in consequence of alleged fraud and misrepresentation on the part of Anderson, the appellant, in inducing Knox to purchase a certain life insurance contract of the New York Life Insurance Co. Anderson was the company's agent. Knox had judgment in the court below from which this appeal is taken. The trial judge's opinion in the case, which was tried without jury, is reported under the title of Knox v. Anderson, D.C., 159 F.Supp. 795. The Judge's formal findings are also reported at 162 F.Supp. 338. For the purpose of keeping the length of this present opinion within acceptable limits we shall not here undertake to set forth at length those findings but will assume that the readers of this opinion have acquainted themselves with the trial judge's opinion and findings.

The negotiations which led to the purchase of the insurance began in August, 1952. Knox, then 36 years of age, lived with his wife and three children on the Island of Maui where he was employed as a field superintendent on a sugar plantation. Anderson, a resident of Los Angeles, had been for many years an insurance representative and salesman, and in 1952 he established an office in Honolulu in association with one Kreidler,

Page 704

also an insurance agent, with a view to selling insurance in the Hawaiian Islands. Anderson had specialized in the sale of what is referred to throughout the record as bank financed insurance or insurance under the bank loan plan. The features of this type of insurance as it was sold to Knox may be illustrated by describing the method of financing the policy which he purchased covering his own life. This was a $100,000 ten payment life policy. As the annual premiums on this policy were $7,265 and Knox's total annual cash income was only in the neighborhood of $10,000, the insurance was offered to him under this bank financed plan which involved among other things these features:

1. Knox turned over to Anderson his existing life policies with various life insurance companies. These had been issued in sundry face amounts aggregating something in excess of $35,000. In doing so he authorized Anderson to convert them in the manner which will hereafter be described, and to borrow thereon sufficient cash to pay the first premium of $7,265, and to pledge the remaining cash values of those policies as collateral for the bank loans hereafter mentioned.

2. The plan was that subsequent premiums would be provided by borrowing the amounts thereof from a bank and securing the bank by assignment of the old and new policies. It was calculated that by the time the first such loan was procured the assignable cash value for security purposes would be such that the necessary loan would not exceed 95 per cent of the assigned values.

3. Knox, the insured, would pay each year only the interest on the bank loans, but since his interest payments would be tax deductible the annual net out-of-pocket payment required to be made by Knox in order to carry the plan would be only the interest on the loan less the amount of taxes he would be able to save be deducting this interest in his income tax return. (Obviously the net cost to Knox calculated in this manner would depend in a substantial degree upon the tax bracket in which his income tax was calculated. This saving through deduction of interest paid was deemed to be the main attractive feature of the bank financed plan of paying life insurance.)

4. The purported advantages of obtaining this extra $100,000 of life insurance was that it would at once provide for Knox a large coverage at an early age when the premiums would be low and for a minimal outlay, that outlay being as above indicated merely the interest on bank loans for successive premiums reduced by his tax savings. (As against this, as we shall later have occasion to note, as each year's premium came due, the insured must increase his loan at the bank by the amount of the annual premium and in ten years he finds himself with a very substantial amount owing to the bank, and each year his interest payments increase accordingly.)

5. An aspect of this plan primarily attractive to the selling agent was the size of the agent's commission, computed on the basis of an annual premium far in excess of what would ordinarily be procurable through selling a person in Knox's financial situation the type of policy which an insurance agent might be likely to be able to sell.

For a man whose income and financial condition is such that his income tax puts him in high brackets and who has the means to liquidate the steadily increasing debt out of other sources, the bank finance plan can well be useful. Much use has been made of the plan under these conditions. Thus X paying taxes in a high income bracket, with resources which he currently wishes to use for other purposes, as for instance in the stock market, may find the bank finance plan of insurance an attractive arrangement. Such a man gets an immediate large coverage of insurance with premiums based on his early age at a time when he is sure of his own insurability.

It is clear from the record that what brought about this controversy, wholly apart from its merits, was that Knox was not that kind of man. Knox had an annual salary of $8100 per year; he had

Page 705

investment income which was not in excess of $1600 per year. 1 This came from securities which he testified had a value of about $12,000. In addition, in his position as superintendent of the sugar plantation, Knox had the free use of an ample dwelling house and the free use of a company automobile. The court found that Knox's income was such that he was placed in the 26 per cent tax bracket. 2 It also found that Knox had expectations of being raised at some time in the future to be assistant manager of the sugar plantation at a salary of $12,000 per year.

The court found that Knox was induced to buy the life insurance policies above mentioned by certain representations made to him by Anderson which were false and fraudulent. These representations upon which plaintiff relied are listed at length and in some detail under paragraph 8 of the findings beginning on page 340 of 162 F.Supp.

In a subsequent paragraph 9, the court found that Anderson failed to disclose to plaintiff certain material information and facts which he knew with respect to the proposed insurance plan; that Anderson was under a duty to make disclosure because of a relationship of trust and confidence, and because of Anderson's superior knowledge; and the court concluded that liability on the part of Anderson accrued not only from the alleged false and fraudulent representations, but also from these failures to disclose.

We think that for the purpose of disposing of this appeal we need go no further than to consider the facts relating to what the court found to be the central and primary representation made by Anderson with respect to the policies purchased, namely, that Anderson represented to Knox, under circumstances permitting him to rely thereon, that the proposed plan for bank financed insurance which Knox agreed to purchase 'was a suitable program for plaintiff and his family and fitted their needs.' 3

We shall note as we proceed that the trial court treated this representation as one of fact and not as a mere expression of opinion. Our discussion of that question will await our primary inquiry: did the evidence here warrant the judge in finding that there was such a representation and that the representation as made was false.

It is our opinion that the evidence before the trial court warranted its findings that there was such a representation of suitability and that such representation was not true in that the insurance program sold to Knox was in fact not a suitable one in view of all the facts then existing with respect to him-- his income, his financial condition, his prospects, his family, and their prospective needs.

The question whether the representations made by Anderson to Knox were actually false or made with such recklessness as to make them substantially fraudulent, is a more difficult one; it turns in part upon a decision as to whether the representation of suitability was in truth a representation of fact and not a mere expression of opinion. In approaching these matters it is not the function of this court to find the facts initially but merely to ascertain whether the facts as found by the trial court were, in view of the record, clearly erroneous.

Our inquiry is directed to the determination as to whether a case was made here upon a claim of false and fraudulent misrepresentation of facts upon which

Page 706

Knox relied to his detriment. There is some language in the findings which suggests that the trial court might have proceeded upon the theory that there was a fiduciary relationship of some kind between Anderson and Knox. Thus the court's finding 9 (162 F.Supp. at 341), refers to the defendant's failure to disclose material information and facts 'which Defendant was under a duty to disclose to Plaintiff because of the relationship of trust and confidence which existed between Plaintiff and Defendant and the superior...

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