Dunn v. Prudential Ins. Co.

Decision Date15 October 1934
Docket NumberNo. 3365.,3365.
Citation8 F. Supp. 799
PartiesDUNN v. PRUDENTIAL INS. CO. OF AMERICA.
CourtU.S. District Court — District of Minnesota

Irving J. Clark, of Minneapolis, Minn., for plaintiff.

Shearer, Byard & Trogner, of Minneapolis, Minn., for defendant.

NORDBYE, District Judge (after stating the facts as above).

Defendant takes the position that, in that it has interposed the defense of an equitable plea, the proper practice is to order the equity cause transferred to the equity side of the court. It maintains that this practice is implied from the language to be found in 28 USCA § 398, and recognized in Liberty Oil Co. v. Condon Nat. Bank, 260 U. S. 235, 43 S. Ct. 118, 67 L. Ed. 232, which gives to the defendant the same rights as if it had filed a bill embodying the relief prayed for in said answer. Defendant further advances the contention that the fraud set up in its answer cannot be proved at law, and that a court of equity is the only tribunal in which the defendant can avail itself of the fraud which it contends that the insured perpetrated; that the fraud refers to a representation which induced defendant to issue the policy, and does not pertain to the execution of the instrument; that is, the fraud occurred in the application, in the negotiations, so to speak, which defendant contends is cognizable only in equity, as distinguished from the fraud which goes to the question of the legal existence of the instrument. Defendant admits that fraud may be interposed as a defense to an instrument where there was no meeting of the minds, and hence no contract came into existence, but that only equity can vitiate a contract where fraud occurred in the inducement. Defendant refers to the often-cited cases of Hartshorn v. Day, 19 How. 211, 222, 15 L. Ed. 605, and George v. Tate, 102 U. S. 564, 26 L. Ed. 232.

In Hartshorn v. Day, supra, the court stated:

"The general rule is, that in an action upon a sealed instrument in a court of law, failure of consideration, or fraud in the consideration, for the purpose of avoiding the obligation, is not admissible as between parties and privies to the deed; and, more especially, where there has been a part execution of the contract. The difficulties are in adjusting the rights and equities of the parties in a court of law; and hence, in the States where the two systems of jurisprudence prevail, of equity and the common law, a court of law refuses to open the question of fraud in the consideration, or in the transaction out of which the consideration arises, in a suit upon the sealed instrument, but turns the party over to a court of equity, where the instrument can be set aside upon such terms as, under all the circumstances, may be equitable and just between the parties. A court of law can hold no middle course; the question is limited to the validity or invalidity of the deed.

"Fraud in the execution of the instrument has always been admitted in a court of law, as where it has been misread, or some other fraud or imposition has been practised upon the party in procuring his signature and seal. The fraud in this aspect goes to the question whether or not the instrument ever had any legal existence. (Vrooman v. Phelps 2 Johns. N. Y. 177; Dorr v. Munsell 13 Johns. N. Y. 430; Franchot v. Leach 5 Cow. N. Y. 506; Stevens v. Judson 4 Wend. N. Y. 471; Taylor v. King 6 Munf. 20 Va. 358 8 Am. Dec. 746; Wyche v. Macklin 2 Rand. 23 Va. 426; Stoever v. Weir 10 Serg. & R. Pa. 25; Stubbs v. King 14 Serg. & R. Pa. 208; Mordecai & Wanroy v. Tankersly 1 Ala. 100; Burrows & Jennings v. Alter 7 Mo. 424; Ingersoll v. Long 4 Dev. & Bat. 20 N. C. 436; C. and H., Notes, part 2, p. 615, Note 306, ed. Gould & Banks, 1850.)"

In George v. Tate, supra, the court used the following language (page 570 of 102 U. S.): "It is well settled that the only fraud permissible to be proved at law in these cases is fraud touching the execution of the instrument, such as misreading, the surreptitious substitution of one paper for another, or obtaining by some other trick or device an instrument which the party did not intend to give. Hartshorn et al. v. Day, 19 How. 211 15 L. Ed. 605; Osterhout v. Shoemaker and Others, 3 Hill (N. Y.) 513; Belden v. Davies, 2 Hall (2 N. Y. Super. Ct.) 466; Franchot v. Leach, 5 Cow. (N. Y.) 506. The remedy is by a direct proceeding to avoid the instrument. Irving v. Humphrey, 1 Hopk. ch. (N. Y.) 284."

These two cases have caused considerable confusion and diversity of opinion in our federal courts. Some courts have recognized them as authority for holding to the strict common-law distinction between a court of law and a court of equity in all proceedings where fraud is the basis of relieving a contracting party where the instrument is under seal. Great solemnity was attached to an instrument under seal at common law. It was not to be overthrown lightly; consequently, where it appears that there was a meeting of the minds between the contracting parties, and a contract came into being, it was said to require the decree of a chancellor to vitiate any such contract under seal on the grounds of fraud. Judge Taft, in Wagner v. National Life Ins. Co., 90 F. 395 (C. C. A. 6), while not referring to the Hartshorn and George Cases, entered upon a lengthy and learned treatise of the common-law distinction herein referred to, and stated (page 404 of 90 F.):

"Except for the peculiar sanctity anciently attaching to a sealed writing at common law, which is now disappearing, it is difficult to see how there could be any doubt about the right in an action at law to avoid a release by a reply of fraud. The release or surrender is a contract (and in the case at bar not under seal), in which, for a valuable consideration, the releasor agrees to give up all claim and interest in his right of action. In the case of a contract of sale of personal property, a party may, by tendering back either the money or the property, as the case may be, rescind the sale for fraudulent misrepresentation as to any material fact inducing him to enter into the contract, and, if sued on the contract, may plead such rescission and justify it. Why may not one on the same ground and in the same way rescind a release, or, when it is produced against him as a bar to an action, avoid it by showing the fraud? In this case the Wagners tendered the money received to the company, and thereafter declined to acknowledge its validity. This is an ordinary remedy as to all other contracts. Leake, Cont. 320, 321. Why not as to this? On page 802, Mr. Leake says:

"`In the case of a releasing creditor having been induced to give the release by the fraud of the debtor, he may avoid it at his election without the aid of the court, and he may meet a plea of release in an action by replying that the release was obtained by fraud.'

"Our conclusion is, therefore, that it is proper in a suit at law for the plaintiff to meet a plea of release by a replication that the release was obtained by fraud, whether the fraud is in the execution, or in misrepresentation as to material facts inducing execution."

The Hartshorn and George Cases were discussed by the Circuit Court in Such v. Bank of State of New York, 127 F. 450 (S. D. N. Y.), but the court refused to extend the doctrine of these cases where a receipt or release not under seal was attacked on the grounds of fraud in a court of law.

The Circuit Court of Appeals in the Sixth Circuit, in Southern Ry. Co. v. Clark, 233 F. 900, page 905, followed the Wagner Case, and made the following comment:

"It is a long-settled rule that fraud which enters into the execution of an instrument may be proved at law as well as in equity. Hartshorn v. Day, 19 How. 211, 223, 15 L. Ed. 605; George v. Tate, 102 U. S. 564, 570, 26 L. Ed. 232. The rule prevailing in this court (Wagner v. National Life Ins. Co., 90 F. 395, 404, 33 C. C. A. 121), is that in a suit at law it is proper for the plaintiff `to meet a plea of release by a replication that the release was obtained by fraud, whether the fraud is in the execution, or in misrepresentation as to material facts inducing execution.' This rule was laid down by Judge Taft, and it does not differ in principle from that stated and supported by Judge Lurton when considering a sealed instrument in the Lumley Case, supra, and who said (76 F. 73, 22 C. C. A. 67):

"`If the release had in fact been procured by fraud, he (the plaintiff) could have shown this at law, if the fact that the release was under seal (had been) out of the way.'"

And, referring to the case of George v. Tate, supra, the court stated (page 905 of 233 F.): "We think the decision in that case and the decisions in other cases of a kindred character are sufficiently distinguished by the fact that they deal with sealed instruments, and so, for that reason alone, the rule in the Wagner Case cannot be said to be in conflict with those decisions."

In Kansas City Southern R. Co. v. Martin, 262 F. 241 (C. C. A. 5), the plaintiff brought an action for damages and defendant set up a written release. Plaintiff replied that he was induced to execute the release by reason of fraudulent representations and sought in an action at law to have the release rendered null and void. The following view of the court is to be found on page 243 of 262 F.: "The sustaining of a replication such as the one in question does not require the giving of any equitable remedy or the application of any peculiarly equitable doctrine. The result is to sustain, on a ground cognizable in a court of law, a denial of the defendant's asserted right to maintain a defense based upon an instrument which is unenforceable because the plaintiff was led into making it by fraudulent misrepresentations. There seems to be no necessity of resorting to a court of equity to prevent the enforcement, by action or by defense, of an unsealed instrument procured by fraud. The cancellation and surrender of such an instrument are not necessary to...

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