Continental Insurance Co. of New York v. Cotten

Decision Date22 May 1970
Docket NumberNo. 22907.,22907.
Citation427 F.2d 48
PartiesThe CONTINENTAL INSURANCE COMPANY OF NEW YORK, New York, a corporation, Appellant, v. Richard B. COTTEN et al., Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Jerome F. Downs (argued), of Thornton & Taylor, San Francisco, Cal., for appellant.

H. C. Mack, Jr. (argued), of Mack, Bianco & Means, Bakersfield, Cal., for appellees.

Before CHAMBERS and BROWNING, Circuit Judges, and THOMPSON, District Judge.*

CHAMBERS, Circuit Judge:

On January 27, 1966, a house at 924 Oleander Avenue, Bakersfield, California, burned down. It was occupied by Mrs. Peggy Lawrence under a lease (badly in default) which contained an option to purchase for $25,000. The property was subject to a California security deed of trust in the face amount of $23,500. This had been executed by Richard B. Cotten and Madelyn M. Cotten, record owners of the property and lessors of Mrs. Lawrence. The Cottens are among the plaintiffs-appellees herein. The deed of trust names Kern County Title Company as trustee and Lloyd L. Roe, M. Laurene Roe, Wendell H. Russell, Lorna E. Russell, LaMontie Vest and Audrey Vest as beneficiaries. (The six beneficiaries are also among the plaintiffs and appellees herein.) Lloyd Roe, Mrs. Russell and Mrs. Vest are children of Mabel P. B. Roe, a Bakersfield widow and a central figure in this case, who was never joined as a party.

In 1960, Mabel Roe, then 80 years of age, had been the seller to Cotten. At that time, she was the owner of the property encumbered by a balance under a first trust deed placed thereon by a former owner, Glasser.1 It was she who dictated that the bulk of the consideration be represented by the trust deed in favor of her children and their spouses. (This was a pattern she had used with respect to many of the items of her extensive assets.) Although the children may have known of her general pattern, they had no knowledge that they were beneficiaries of the trust deed on the Cotten-Lawrence house. For example, LaMontie Vest, a key figure herein, never knew about it. Cotten's payments, like those of Mrs. Lawrence, were raggedly intermittent. Generally the balance due on the trust deed's note was always going up. Strangely, all payments seem to have been made to Mrs. Mabel Roe. She appears to have kept those that were made, treating them as her own. More often than not, she herself was paying the real property taxes and fire insurance which Cotten and Mrs. Lawrence had failed to pay. But the record indicates no default was ever declared.

Mrs. Mabel Roe seems to have been both a real estate broker and a dealer and investor for her own account in residential properties and residential mortgages. She had an office in Bakersfield which she shared with her son-in-law, LaMontie Vest. In 1965 and 1966, Vest was a licensed real estate broker. Until about 1965, he had been a licensed insurance agent.

He had been prior to October, 1965, an agent for the Travelers Insurance Company, but he lost his agency and did not renew his insurance agency license. But he continued to produce some insurance business, which he placed with Robert J. Newell of Bakersfield, an agent for the defendant-appellant, Continental. Newell would share his commissions with Vest, if the latter produced a piece of business. Apparently Mrs. Mabel Roe, Vest's office associate, was his (Vest's) best insurance customer. (It is not clear that Mrs. Mabel Roe and Vest were partners, but in his testimony Vest refers to the Roe-Vest office and to both mother-in-law and son-in-law using the same files.)

In October, 1965, Mrs. M. Roe asked Vest to take care of new insurance on the Cotten-Lawrence property. At this point, it seems clear that the Cottens had left California.

Vest ordered a policy from Newell (to replace a policy written by Travelers). It was issued by Newell as of October 19, 1965, in the amount of $15,000 in the Continental Insurance Company, defendant-appellant herein. In compliance with Vest's instructions to Continental, the policy named Peggy Lawrence as the insured and Mrs. M. P. Roe as the loss payee. The policy was given to Vest. Mrs. Roe paid for it and Vest shared the seller's commission. Under the circumstances Mrs. Roe knew of the contents of the policy. It is doubtful if Mrs. Lawrence or the Cottens ever knew of the insurance before the time of the fire. After leasing with option to buy to Mrs. Lawrence, the Cottens left the state of California. There are some earmarks of abandonment by the Cottens of their interest, but we cannot say that they had done so. And, of course, they were liable under the note and deed of trust they had put on the property at the direction of Mrs. Roe for her children. The Cottens had an insurable interest and we assume that Mrs. Lawrence did, too.

It should be noted that in 1962 Vest had written for Mrs. Roe a three-year insurance policy in Travelers on the property showing the Cottens as the insured and Mrs. Roe as mortgagee.

After the fire, Continental declined to pay. The Cottens, the Lloyd Roes, the Russells and the Vests sued Continental in a California state court. Removal on the ground of diversity of citizenship to the Eastern District of California followed. The plaintiff-appellees' requested relief was that the insurance policy be reformed to name as insureds Richard B. Cotten and Madelyn M. Cotten, and to name as loss payees under the mortgage clause of the policy, Lloyd L. Roe, M. Laurene Roe, Wendell H. Russell, Lorna E. Russell, LaMontie Vest and Audrey Vest.

At the threshold of this case is the jurisdictional question of whether all of the necessary parties have been joined. Neither of the parties raised the jurisdictional question but it is the duty of a federal court to enforce jurisdictional requirements where a defect is apparent even though its jurisdiction has not been challenged. At the request of this court, both parties submitted supplemental briefs addressed to the question of whether Peggy Lawrence and Mrs. M. P. Roe are necessary parties to this cause. Appellant and appellees both urge that Peggy Lawrence and Mrs. M. P. Roe are not necessary parties. The rationale is that Peggy Lawrence has lost any rights she might have had under the policy because she did not make a claim and that Mrs. Roe has disclaimed any interest in the policy because of her testimony that she gave her interest in the Cotten deed of trust to her children and their spouses. Appellees submit that reversal for a new trial because of jurisdictional defects would not change the posture of the case.

Considering the requirements of Federal Rule of Civil Procedure 19 and the arguments of the parties, we conclude that Mrs. M. P. Roe and Peggy Lawrence are not necessary (indispensable) parties (they would have been proper parties) and that the district court properly exercised jurisdiction. The main point is that it appears unlikely that either absentee would be adversely affected in a practical sense. An additional factor is defendant-appellant's failure to object to non-joinder at trial. See Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 88 S.Ct. 733, 19 L.Ed.2d 936 (at the appellate stage there is reason not to throw away a judgment just because it did not theoretically settle the whole controversy).

The district court held that plaintiff-appellees had an insurable interest and were entitled to reformation as requested and recovery pursuant to the policy because "defendant intended to insure the dwelling at 924 Oleander Ave. in Bakersfield, California; there was no fraud or misrepresentation on the part of the insured; there was no increase of hazard because of the error in the name of the loss payee; and the defendant accepted and retained the premiums."

The general principles applicable to reformation of contracts are applicable to insurance contracts. See generally, Annot. 1 A.L.R.3d 885; 25 A.L.R.3d 580; 26 A.L.R.3d 6. Applying contract principles, California courts have allowed reformation of insurance contracts in a number of situations. Where an...

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