Atlas Life Ins Co v. Southern

Citation306 U.S. 563,59 S.Ct. 657,83 L.Ed. 987
Decision Date17 April 1939
Docket NumberNo. 598,598
PartiesATLAS LIFE INS. CO. v. W. I. SOUTHERN, Inc
CourtUnited States Supreme Court

Messrs. Elmer J. Lundy and Logan Stephenson, both of Tulsa, Okl., for ins. co.

[Argument of Counsel from pages 564-565 intentionally omitted] Mr. Austin Flint Moss, of Tulsa, Okl., for W. I. Southern, Inc.

Mr. Justice STONE delivered the opinion of the Court.

In this case the Court of Appeals for the Tenth Circuit has certified to us questions of law concerning which it asks instructions for the proper decision of the cause pending in that court. Judicial Code, § 239, 28 U.S.C. § 346, 28 U.S.C.A. § 346.

The certificate states that on March 13, 1936, Atlas Life Insurance Company, an Oklahoma corporation, plaintiff below, issued, on a single application, three policies of insurance on the life of one Southern, in amounts of $10,000, $15,000 and $25,000 respectively, each naming as beneficiary W. I. Southern, Inc., a Delaware corporation. All of the policies contained an incontestable clause reading:

'This policy will be incontestable after two years from date of issue except for the nonpayment of premium and except as to provisions and conditions relating to disability benefits and those granting additional insurance specifically against death by accident, if any.' and a clause relating to statements of the insured in his application as follows:

'All statements made by the Insured shall, in the absence of fraud, be deemed representations and not warranties, and no such statement shall void this policy unless it be contained in the written application and a copy of the application is endorsed upon or attached to this policy when issued.'

The insured died February 23, 1938, and on March 7, 1938, the corporate beneficiary began suit against the insurance company in the Oklahoma state district court. On the following day the insurance company brought a suit in equity against the beneficiary in the federal district court for northern Oklahoma for cancellation of the policies, on the ground that in his application the insured had intentionally and fraudulently given false answers to questions material to the risk. The trial court sustained a motion to dismiss the equity suit, made on the ground that the insurance company had an adequate remedy at law by setting up the alleged fraud as a defense to the action pending in the state court. D.C., 23 F.Supp. 334. The insurance company electing not to plead further, a decree was entered dismissing the bill, from which the insurance company appealed to the Circuit Court of Appeals.

Under the Oklahoma practice the insurance company can set up the fraud as a defense to the action at law on the policies, or can interpose a cross-complaint in that action for cancellation of the policies. Farmers' & Merchants' Bank v. Hoyt, 29 Okl. 772, 120 P. 264. The action on the policies in the state court is not removable by the insurance company, since it is not a non-resident of Oklahoma within the meaning of § 28 of the Judicial Code, 28 U.S.C. § 71, 28 U.S.C.A. § 71.

The questions certified are as follows:

'1. Is the remedy at law available in the state court by setting up the alleged fraud as a defense to the action on the policies, such an adequate remedy at law as will constitute a valid defense to the suit in equity for cancellation of the policies?

'2. In order to constitute a defense to a suit in equity to cancel a policy of life insurance on the ground of fraud, is it essential that the remedy at law be available to the complainant in an action at law pending in the federal court?

'3. Is the principle that the adequate remedy at law which will preclude a federal court of equity from granting relief must be one available in the federal courts, applicable in the instant case where the relief sought is affirmative in form but defensive in character?'

Section 11 of the Judiciary Act of 1789, 1 Stat. 78, provided that the circuit courts should have 'cognizance * * * of all suits of a civil nature at common law or in equity' in cases appropriately brought in those courts. This provision is perpetuated in § 24(1) of the Judicial Code, 28 U.S.C. § 41(1), 28 U.S.C.A. § 41(1), which declares that the district courts shall have jurisdiction of such suits. The 'jurisdiction' thus conferred on the federal courts to entertain suits in equity is an authority to administer in equity suits the principles of the system of judicial remedies which had been devised and was being administered by the English Court of Chancery at the time of the separation of the two countries. Payne v. Hook, 7 Wall. 425, 430, 19 L.Ed. 260; In re Sawyer, 124 U.S. 200, 209, 210, 8 S.Ct. 482, 486, 487, 31 L.Ed. 402; Matthews v. Rodgers, 284 U.S. 521, 525, 52 S.Ct. 217, 219, 76 L.Ed. 447; Gordon v. Washington, 295 U.S. 30, 36, 55 S.Ct. 584, 587, 79 L.Ed. 1282. This clause of the statute does not define the jurisdiction of the district courts as federal courts, in the sense of their power or authority to hear and decide, but prescribes the body of doctrine which is to guide their decisions and enable them to determine whether in any given instance a suit of which a district court has jurisdiction as a federal court is an appropriate one for the exercise of the extraordinary powers of a court of equity. See Massachusetts State Grange v. Benton, 272 U.S. 525, 528, 47 S.Ct. 189, 190, 71 L.Ed. 387; Pennsylvania v. Williams, 294 U.S. 176, 181, 55 S.Ct. 380, 383, 79 L.Ed. 841, 96 A.L.R. 1166, and cases cited.1

Section 16 of the Judiciary Act of 1789, 1 Stat. 82, continued without material change as § 267 of the Judicial Code, 28 U.S.C. § 384, 28 U.S.C.A. § 384, declares that suits in equity shall not be sustained in the courts of the United States in any case where a 'plain, adequate and complete remedy may be had at law.' The command of § 267 is but a declaration of the equity rule established long before the enactment of the Judiciary Act, and it serves by emphasis of the rule to protect the states from the encroachments which would result from the exercise of equity powers by federal courts failing to observe it. Matthews v. Rodgers, supra, 284 U.S. page 525, 52 S.Ct. page 219, 76 L.Ed. 447; Stratton v. St. Louis Southwestern R. Co., 284 U.S. 530, 52 S.Ct. 222, 76 L.Ed. 465.

By long-settled construction, the accepted test of legal adequacy which the section prescribes is the legal remedy which the federal, rather than state, courts afford.2 Smyth v. Ames, 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819; Risty v. Chicago, M. & St. P.R. Co., 270 U.S. 378, 388, 46 S.Ct. 236, 240, 70 L.Ed. 641; Di Giovanni v. Camden Insurance Ass'n, 296 U.S. 64, 56 S.Ct. 1, 80 L.Ed. 47; Petroleum Exploration, Inc., v. Public Service Commission, 304 U.S. 209, 217, 58 S.Ct. 834, 838, 82 L.Ed. 1294. But although the adequacy of the legal remedy precludes resort to a federal court of equity, it does not follow that the converse is true—that the want of a legal remedy in the federal courts gives the suitor free entrance to a fed- eral court of equity. Absence of legal remedy does not dispense with the necessity of alleging and proving a cause of action in equity as a prerequisite to equitable relief in a federal court. enelow v. new York Life Insurance Co., 293 U.S. 379, 55 S.Ct. 310, 79 L.Ed. 440; Di Giovanni v. Camden Insurance Ass'n, supra; American Life Insurance Co. v. Stewart, 300 U.S. 203, 57 S.Ct. 377, 81 L.Ed. 605, 111 A.L.R. 1268.

The insurance company in the circumstances disclosed by the certificate is without remedy in a suit at law. The federal courts can render no judgment at law directing cancellation of a contract for fraud in its inception or preserving evidence of the fraud. These are forms of relief which a court of equity alone can give. But the basis of equitable relief is that the cancellation asked is necessary to protect the suitor from irreparable injury when there is manifest danger that his defense at law on the policy will be lost or prejudiced. Enelow v. New York Life Insurance Co., supra; Di Giovanni v. Camden Insurance Ass'n, supra; American Life Insurance Co. v. Stewart, supra.

Ordinarily when the defense of fraud may be interposed to an action at law on the policy and such an action is imminent or pending, there is no occasion for equitable relief and the parties will be left to their rights as determined in the suit at law. In such a case the bill is dismissed without prejudice, not because there is want of jurisdiction in the federal court, but because the plaintiff has made no case for equitable relief. Phoenix Mut. L. Insurance Co. v. Bailey, 13 Wall. 616, 20 L.Ed. 501; Cable v. United States Life Insurance Co., 191 U.S. 288, 24 S.Ct. 74, 48 L.Ed. 188; Enelow v. New York Life Insurance Co., supra; Di Giovanni v. Camden Insurance Ass'n, supra. And since the issue is not one of jurisdiction but of the need and propriety of equitable relief, the mere fact that the suit at law which is imminent can be brought only in the state court, or that it is pending there, is immaterial. Cable v. United States Life Insurance Co. supra; Di Giovanni v. Camden Insurance Ass'n, supra; cf. Phoenix Mut. L. Insurance Co. v. Bailey, supra. It is no ground for equitable relief that the suit at law is brought in a state rather than a federal court, for the insurance company's defense may be protected there as well as in a federal court, and in that case there is no threat of irreparable injury. See Cable v. United States Life Insurance Co., supra. On comparable grounds a federal court may withhold its aid when a plaintiff has failed to resort to a state administrative remedy. Natural Gas Pipeline Co. v. Slattery, 302 U.S. 300, 310, 311, 58 S.Ct. 199, 204, 82 L.Ed. 276. Only when special circumstances are shown which subject the insurer to the hazard that his defense to the suit at law, whether in the state or federal court, will be lost or prejudiced, is there occasion for equity to...

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