Pittsburgh Life & Trust Co. v. Northern Cent Life Ins Co.

• Decision Date: 14 October 1905
• Docket Number: 34.
• Citation: 140 F. 888
• Parties: PITTSBURG LIFE & TRUST CO. v. NORTHERN CENT. LIFE INS. CO.
• Court: U.S. District Court — Western District of Pennsylvania

140 F. 888

PITTSBURG LIFE & TRUST CO. v. NORTHERN CENT. LIFE INS. CO.

No. 34.

United States Circuit Court, W.D. Pennsylvania.

October 14, 1905

Frank Ewing and John S. Ferguson, for plaintiff.

W. S Dalzell and H. W. Frazer, for defendant.

ARCHBALD District Judge. ^[1]

This is an action of deceit, based upon alleged misrepresentations made in the course of a sale by the defendants to the plaintiffs of their property and business. A compulsory nonsuit was entered at the trial and the question is whether this was justified. It appears from the evidence, that sometime early in 1903, the plaintiff company, which was then recently organized, being desirous of getting hold of an established business, made inquiry, through Mr. Baldwin, its vice president and general manager, of Mr. M. M. Dawson, who was its consulting actuary, whether he knew of a company which wished to reinsure, promising him a commission if he could secure one. Mr. Dawson was also consulting actuary of the defendant company, which was located at Toledo, Ohio, and suggested that it might possibly be in the market. He stated that he was about to make an examination there, and would ask leave to disclose what he found. Later on, he went to Toledo and told the officers of the company of the proposal, asking them whether they would be open to negotiations, and receiving permission to make use of the information which he got from his investigation of the company's affairs. The examination which he then proceeded to make was conducted in the usual way, and was completed some time in July. With the consent of the defendants, it was given to Mr. Baldwin, who on the strength of its shortly afterwards notified Mr Dawson, that if cash or assets were turned over sufficient to equal the full legal reserve required by the state law on outstanding policies, he would pay $15 a thousand for the insurance in force. This offer was laid before the defendants, but was rejected. Subsequently, however, Mr. Baldwin was advised by Mr. Dawson to come to Toledo, which he did, and the amount was there raised to $17 a thousand, the business to be brought down to August 1st; which was also declined. In the conference which followed, the officers of the defendant company frankly stated that they must realize enough to bring the stockholders, who had paid cash for stock, out whole, which they had Mr. Dawson figure for them. And in order to get the price up to what was so required, Mr. Baldwin finally offered to pay $11,000 more if agents' balances, furniture, and other similar assets were turned over; and this was accepted. Mr. Dawson was then directed to bring his estimates down to August 1st, which he did by carrying forward the reserves on policies ending in July, according to a list furnished him by the officers of the defendant company. The result of this and his previous work was then embodied in a formal statement; and at the request of the parties, a writing, expressive of the understanding between them, was drawn up by him, which they duly executed. By it the defendant company agreed to go out of business, and to transfer to and reinsure in the plaintiff company all its policies, which that company undertook on its part to guaranty; and also to assign and deliver certain specified assets, consisting of real estate mortgages, policy loans, lien notes, and due and deferred premiums, amounting to $197,205.15; as well as agents' balances, furniture, fixtures, books, and supplies, without any particular value affixed to them. In consideration of this, the defendants were to receive $104,515.30, made up, as otherwise appears, of $93,515.30, on account of insurance turned over, at the rate of $17 a thousand, and of $11,000 for agents' balances, etc., already spoken of. The insurance reserve on their policies, however, as computed by Mr. Dawson, was not up to the mark by $52,741.14; and this sum the defendants agreed to pay in cash in addition to the assets parted with, from which they were to be relieved to a partial extent, in case the Ohio insurance commissioner could be persuaded to re-rate certain subordinary policies. The bargain as so agreed upon was subsequently carried out by the parties

After, however, the plaintiffs had been put in possession of the business, discrepancies began to appear with regard to it. It was found upon the examination of certain policies, that they were not of the character apparently indicated on the list furnished to Mr. Dawson, on which he had based his computation, requiring in consequence a larger reserve than he had calculated on. Some, for instance, which had been rated as 20-year policies, called for a return of part of the premiums in case of death, and a return of the whole at the end of 20 years, should the party live so long; features which are not present in ordinary 20-year policies. Upon others, payment of premiums had been made in advance, and no record of it entered on the balance sheet. While, on still others, there was an extra or excessive guaranty, which practically left no margin for expenses. Upon going over the records of the company thoroughly, particularly the original applications and card registry, it was found that additional reserve would be required, on account of these three classes of policies, to bring them up to the legal standard, amounting to $9,772.73. This the plaintiff company was compelled to make good to the insurance department of Ohio, and now seeks to recover in this action, on the ground, that the list of policies furnished to Mr. Dawson by the officers of the defendant company, which they knew was required to be accurate, was so radically wrong that it amounted to fraud, for which the company is liable.

Disposing of this branch of the case before proceeding to another, it is to be noted that the plaintiffs are not suing on the agreement, to have the defendants make good the insurance reserve, which it might possibly be claimed, notwithstanding the figures there found, that they were bound for; although they are in reality asking damages, in a way, quite foreign to the action, that would effectively do so. Neither are they seeking to set the agreement aside, on the ground of material misrepresentation; to which relief they might possibly be entitled. They hold to the bargain, but claim that they were overreached and cheated in making it, which must therefore be established in order to entitle them to a verdict. This is the gist of the action, and as a clear apprehension of it is necessary to a correct disposition of the case, let us look at some of the authorities.

'The action for deceit at common law,' says Lord Fitzgerald in Derry v. Peek, L.R. 14 App.Cas. 337, 'is founded on fraud. It is essential to the action that moral fraud should be established, and since the case of Collins v. Evans, 5 Q.B. 804, 820, in the exchequer chamber, it has never been doubted that fraud must concur with the false statement to maintain the action. It would not be sufficient to show that a false representation had been made. It must further be established that the defendant knew, at the time of making it, that the representation was untrue, or, to adopt the language of the learned editors of the Leading Cases, that 'the defendant must be shown to have been actually and fraudulently cognizant of the falsehood of his representation, or to have made it fraudulently without belief that it was true.' ' In the same case it is said by Lord Herschel:

'I think the authorities establish the following propositions; First, in order to sustain an action of deceit there must be a proof of fraud, and nothing short of that will suffice; secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly or (2) without belief in its truth or (3) recklessly, careless whether it be true or false.'

So in Lord v. Goddard, 13 How. 198, 14 L.Ed. 111, it is said by Mr. Justice Catron:

'The gist of the action is fraud in the defendants, and damage to the plaintiff. Fraud means intention to deceive. If there was no such intention; if the party honestly stated his own opinion, believing at the time that he stated the truth, he is not liable in this form of action, although the representation turned out to be entirely untrue.'

Similarly it was declared in Union Pacific R.R. v. Barnes, 64 F. 80, 12 C.C.A. 48, that an action of deceit 'requires for its foundation a false statement knowingly made, or a false statement made in ignorance of, and in reckless disregard of its truth or falsity, and of the consequences such a statement may entail. The evil intent-- the intent to deceive-- is the basis of the action. ' And in Hindman v. Bank, 112 F. 931, 50 C.C.A. 623, 57 L.R.A. 108, it is said by Judge Lurton:

'Before the plaintiff can recover in an action of deceit he must prove two things: That the representation was false; and that the person making it knew it was false. * * * Such an action differs essentially from one brought for rescission of a contract on the ground of misrepresentation. In the latter kind of suit it is immaterial whether the representation was made dishonestly or not. If the contract was obtained by misrepresentation, however honestly made, it cannot stand. But when the action is for fraud and deceit, it is not enough to show that the representation was untrue, for, if it was honestly believed to be true, that is a good defense.'

It is also well said by Judge Hook, in Kimber v. Young (C.C.A.) 137 F. 744:

'The basis of the action of deceit is the actual fraud of defendant-- his moral delinquency; and therefore his knowledge of the falsity of the representation, or that which in law is the equivalent thereto, must be averred and proved. There is much confusion in the authorities upon this

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