Prudential Ins. Co. of Am. v. Merritt-Chapman & Scott Corp.

• Decision Date: 05 August 1932
• Parties: PRUDENTIAL INS. CO. OF AMERICA v. MERRITT-CHAPMAN & SCOTT CORPORATION.
• Court: New Jersey Court of Chancery

162 A. 139

PRUDENTIAL INS. CO. OF AMERICA

v. MERRITT-CHAPMAN & SCOTT CORPORATION.

Court of Chancery of New Jersey.

Aug. 5, 1932.

Syllabus by the Court.

The Court of Chancery has cognizance of matters involving all classes of fraud and a bill seeking the surrender and cancellation of a policy of life insurance on the ground that it was obtained by fraud may be maintained in this court whether the allegations are of legal or equitable fraud and irrespective of the quantum of proof required by section 94 of the Insurance Act as amended by chapter 179, P. L. 1925, p. 436 (Comp. St Supp. § 99—94).

Suit by the Prudential Insurance Company of America against Merritt-Chapman & Scott Corporation. On motion to strike out the bill of complaint.

Motion denied,

McCarter & English and George W. C. McCarter, all of Newark, for the motion.

Lindabury, Depue & Faulks, of Newark, opposed.

BERRY, Vice Chancellor.

The motion to strike the bill of complaint is based upon five separate and distinct grounds, all of which may be combined into the contention that the bill does not state an equitable cause of action, and that this court is without jurisdiction to entertain the bill because complainant has an adequate remedy at law. The bill seeks the rescission and cancellation of a certain contract and policy of life insurance issued by the complainant company on the life of one William H. Baker, the president of the defendant corporation, on the ground that it was obtained by fraud. There is also a prayer for an injunction against the assignment of, or action at law on, said policy.

The bill alleges that complainant was induced to issue its policy by the false and fraudulent statements of fact by the insured which they believed were true and upon which they relied; that, if the insured had truthfully answered the medical examiner's questions, the complainant would have declined to issue the policy; that the insured was not in good health at the effective date of the policy; and that the policy is therefore void. Facts constituting the alleged fraud are set out in detail, and, if true, there can be no question as to complainant's right to relief. The bill also alleges that the policy contained a two-year incontestability clause; that no action at law on said policy is pending; the death of the insured on May 13, 1932, and proof thereof; tender to the defendant of all premium paid with accrued interest, refusal of such tender, and complainant now tenders payment of such sum into court.

On this motion all facts well pleaded are admitted by the defendant.

The argument in support of this motion is that the fraud alleged in the bill may be pleaded in defense to an action at law on the policy, and, if proved, would bar any recovery thereon; and that, the remedy at law therefore, being complete, this court has no jurisdiction. In other words, since complainant alleges legal or conscious fraud, instead of equitable fraud, unwittingly committed, it is entitled to relief only in a legal forum. In support of this argument the defendant cites Metropolitan Life Insurance Company v. Sussman, 109 N. J. Eq. 582, 158 A. 406; Shapiro v. Metropolitan Life Insurance Company, 110 N. J. Eq. 287, 159 A. 680, and section 94 of the Insurance Act (P. L. 1907, p. 136, as amended P. L. 1925, p. 436; Supp. to Comp. St. pp. 862-864, § 99—94). Under these authorities it is insisted that contracts of life insurance are distinguished from all other contracts, in that relief from their apparent obligations cannot be had except upon proof of conscious, or legal, fraud, and that having alleged such fraud in its bill, the complainant has ousted itself from this court if this is true, it marks a radical departure from equitable jurisdictional procedure heretofore maintained in this court.

This court has inherent jurisdiction in all cases involving fraud. Eggers v. Anderson, 63 N. J. Eq. 264, 49 A. 578, 581, 55 L. R. A. 570; Commercial Casualty Insurance Company v. Southern Surety Company, 100 N. J. Eq. 92, 135 A. 511, affirmed 101 N. J. Eq. 738, 138 A. 919. Its jurisdiction is coextensive with that of the Court of Chancery of England as it existed at the time of the adoption of our first Constitution on July 2, 1776. Paterson's Laws, 1800, p. 38. In fact, the Court of Chancery of this state has exercised such jurisdiction since the adoption of Lord Cornbury's ordinance establishing a High Court of Chancery in 1705, although it is from the ordinance of Governor Franklin adopted in 1770 that our Court of Chancery, as it exists today, derives its jurisdiction and powers. See 19 N. J. Eq. 577; In re Vice Chancellor's Appointment, 105 N. J. Eq. 759, 148 A. 570. "New Jersey is distinguished from her sister states by her adherence to the standards of the mother* country respecting both rights and remedies in equity." Eggers v. Anderson, supra. See, also, Hubbard v. International Mercantile Agency, 68 N. J. Eq. 434, 59 A. 24; Dawson v. Leschziner, 72 N. J. Eq. 1, 65 A. 449; Mazzolla v. Wilkie, 72 N. J. Eq. 722, 66 A. 584. In fraud cases there can be no question of jurisdiction in this court, but only as to the propriety of its exercise. L. Martin Company v. L. Martin & Wilckes Company, 75 N. J. Eq. 39, 71 A. 409, reversed 75 N. J. Eq. 257, 72 A. 294, 21 L. R. A. (N. S.) 526, 20 Ann. Cas. 57, but this rule not affected. The existence of a complete defense at law, in fraud cases, has never been considered a bar to the exercise of this ancient jurisdiction by the Court of Chancery, because "mere defense, however perfect, is not relief" (SmithAustermuhl Company v. Jersey Railways Advertising Company, 89 N. J. Eq. 12, 103 A. 388, 389) and thus proves an inadequate remedy (New York Life Insurance Company v. Steinman, 103 N. J. Eq. 403, 143 A. 529). In suits to cancel and compel the surrender of written instruments the execution of which by the complaining party was procured by fraud. legal or equitable, this rule has been uniformly applied. Cornish v. Bryan, 10 N. J. Eq. 146; Metler's Administrators v. Metier, 18 N. J. Eq. 270, affirmed 19 N. J. Eq. 457; O'Krien v. Paterson Brewing & Malting Company, 69 N. J. Eq. 117, 61 A. 437; Gallagher v. Lembeck & Betz Eagle Brewing Company, 86 N. J. Eq. 188, 98 A. 461; Morgan Realty Company v. Pazen, 102 N. J. Eq. 33, 139 A. 712: Chapin Publicity Company v. Saybrook Holding Corporation, 105 N. J. Eq. 215,147 A. 490; Kunz v. Barnegat Pines Realty Company, 109 N. J. Eq. 115, 156 A. 417; indeed, almost eighty years ago Chancellor Williamson said that the jurisdiction of this court to order such an instrument to be delivered up for cancellation had then "been too frequently exercised to be now called in question." Cornish v. Bryan, supra. The reason and "propriety" of its exercise rests upon the more complete and effective remedy in equity. Morse v. Nicholson and Cook, 55 N. J. Eq. 705, 38 A. 178; Schoenfeld v. Winter, 76 N. J. Eq. 511, 74 A. 975, affirmed 79 N. J. Eq. 219, 81 A. 1134; Commercial Casualty Insurance Company v. Southern Surety Company, supra; Chapin Publicity Company v. Saybrook Holding Corporation, supra; SmithAustermuhl Company v. Jersey Railways Advertising Company, supra. This jurisdiction has continued to be exercised by this court in suits to cancel policies of life insurance almost to the present moment; Ætna Life Insurance Company v. Sussman (unreported, decided by Vice Chancellor Fallon February 5, 1929) docket 70, p. 473; Travelers' Insurance Company v. Evslin, 101 N. J. Eq. 527, 139 A. 520 (1927); and the latest decision of this court in point is Prudential Insurance Company of America v. Holmes, 162 A. 135, decided by Vice Chancellor Fallon on July 22, 1932, and not yet reported [in State report]. Even in Metropolitan Life Insurance Company v. Sussman, supra, and Shapiro v. Metropolitan Life Insurance Company, supra, cited in support of this motion, the jurisdiction was exercised, the court apparently entertaining no doubt of its inherent right to do so, although in the Sussman Case a motion to strike the bill was made in this court. Both cases, however, were decided on the merits; and in the Sussman Case the Court of Errors and Appeals made no comment on the motion to strike in the court below.

It is not now necessary for me to pass upon the question of the degree or quantum of the proof of fraud which is required in this court in suits of this kind since the enactment of section 94 of the Insurance Act, supra; suffice it to say that that act did not, and could not, deprive this court of any of its previous inherent jurisdiction. The purpose of that portion of the act providing that "all statements purporting to be made by the insured shall, in the absence of fraud, be deemed representations and not warranties," seems to be misunderstood by counsel for the defendant. prior to this enactment, life insurance policies were frequently vitiated by misrepresentation, however slight, conscious or unconscious, material or immaterial, on the theory of breach of warranty, and thus an unconscionable advantage was sometimes taken of policyholders by the insurance companies. In Dewees v. Manhattan Insurance Company, 34 N. J. Law, 244, the distinction between representations and warranties as applied to insurance policies was pointed out by Mr. Justice Depue in the following language: "In contracts of insurance a representation differs from a warranty, and from a condition expressed in the policy, in that the former is part of the preliminary proceedings which propose the contract, and the latter is part of the contract when completed. The validity of the entire contract depends upon the truth or fulfillment of the warranties and conditions expressed therein; and non-compliance is a...