United States v. Aetna Life Ins. Co. of Hartford, Conn., 74.

• Citation: 46 F. Supp. 30
• Decision Date: 08 January 1942
• Docket Number: No. 74.,74.
• Parties: UNITED STATES v. ÆTNA LIFE INS. CO. OF HARTFORD, CONN., et al.
• Court: U.S. District Court — District of Connecticut

46 F. Supp. 30

UNITED STATES v. ÆTNA LIFE INS. CO. OF HARTFORD, CONN., et al.

No. 74.

District Court, D. Connecticut.

January 8, 1942.

COPYRIGHT MATERIAL OMITTED

Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe and F. A. Michels, Sp. Assts. to the Atty. Gen., and Robert P. Butler, U. S. Atty., and Valentine J. Sacco, Asst. U. S. Atty., both of Hartford, Conn., for plaintiff.

Day, Berry & Howard, by Cyril Coleman, all of Hartford, Conn., for defendant.

HINCKS, District Judge.

1. The taxpayer, one Frank P. Nistle of Pennsylvania, on or about March 4, 1920, entered into a policy of life insurance having substantial endowment features with the defendant, the Aetna Life Insurance Company of Hartford, Connecticut. Under the terms of the policy, power was reserved to the taxpayer to elect to receive in lieu of the specified endowment benefits the stated cash value of the policy; also to change the beneficiary designated to receive the death benefit upon his written request "accompanied with the policy for proper endorsement." Ever since April 5, 1935, taxpayer's wife had been duly named as death beneficiary under the policy if living at the date of his death; otherwise his daughter.

2. Prior to April 1, 1937, the Commissioner of Internal Revenue had made additional income-tax assessments against the taxpayer for the years 1926 and 1932 aggregating upwards of $10,000, and no part of said assessments has been paid.

3. On April 1, 1937, the Government notified the defendant, the Aetna Life Insurance Company, that there was owing from the taxpayer to the Government an internal revenue tax amounting to $8,187.72, and that all property and rights to property then in its possession belonging to the taxpayer were "thereby seized and levied upon for the payment of said taxes and interest", and made demand upon the Company for the payment of said tax, and demand was made for the payment of said sum or for such lesser sum as the Company was indebted to the taxpayer. The demand was reiterated on December 9, 1937. These demands were refused by the Company although on April 1, 1937, the policy had a net cash value of $3,605.22.

4. Thereafter on December 28, 1938, the Government brought this action under Section 3710 of the Internal Revenue Code. Said action, as also the earlier demand and purported levy upon the defendant, were seasonably made.

5. The taxpayer, Frank P. Nistle, alleged by the Government to be a resident of Pennsylvania, was named as a co-defendant and served not otherwise than by registered mail and publication pursuant to order of court purportedly under 28 U.S.C.A. § 118. No appearance has been entered in behalf of the said Nistle.

Opinion.

As the case stands, the only defendant within the jurisdiction of the court is the Insurance Company. The mere naming of the insured, the taxpayer, as a defendant and the purported service upon him by registered mail and publication were wholly nugatory. As the complaint expressly states, the action is brought under Section 3710, Int.Rev.Code, 26 U.S.C. A. Int.Rev.Code, § 3710, and as such is one to enforce a penalty against the defendant Insurance Company. Section 57 of the Judicial Code, 28 U.S.C.A. § 118, goes no further than to authorize substituted service on nonresident defendants in actions brought to enforce liens upon, or to assert claims to, "real or personal property within the district where such suit is brought."

The central issue of the case is whether or not the taxpayer, the insured, has property or a right of property which at the time of the Government's demand was in the possession of the Insurance Company. And this issue depends at least in part upon the question whether the defendant's wife as beneficiary under the policy has a property interest therein. And so it is that the court is asked to make an adjudication herein, ascertaining the rights of the taxpayer and his wife, although they are not parties subject to the jurisdiction of the court. As a result an adjudication against the Insurance Company herein based upon a finding that at the critical date it was in possession of property rights of the insured, although enforceable against the Insurance Company, will not be available to it as a bar to any action which the insured or the beneficiary may later bring against it in some other court which might quite possibly upon another record reach a decision upon the fundamental issues in conflict with that embodied in an adjudication here.

In my view such a possibility does not absolutely preclude the maintenance of an action such as this against the insurance company alone; the Venue Act occasionally makes it impossible for a federal court — even in a case in which jurisdiction over the subject-matter is confined to a federal court — to have all the parties necessary for a final determination of the entire controversy before it. In such cases there is no alternative but to let the controversy develop step by step even though a party, as the Insurance Company here, is thereby subjected to the hazard of paying twice. Nevertheless, there is manifest throughout the Federal Rules of Civil Procedure a prevailing policy that an entire controversy shall be dealt with in a single action, thus reducing to a minimum the hazard of double recoveries and a circuity and multiplicity of actions. And Rule 19 of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, attempts to give some definition to the distinction between indispensable parties and necessary parties.

Under Rule 19, I think the taxpayer-insured and his beneficiary may not properly be classified as indispensable parties; such a classification indeed might possibly completely frustrate the Government's remedy under the Act. I hold, however, that in this case the relationships of the taxpayer and his beneficiary to the subject-matter of controversy are such that they "ought to be parties if complete relief is to be accorded between those already parties", within the meaning of Rule 19(b). For surely the position of the Insurance Company is one of such hazard that it can have complete relief only if they are joined. Under this rule, to be sure, "the court in its discretion may proceed in the action without making such persons parties." And doubtless, it would constitute an abuse of discretion if the court should refuse to proceed in a case in which the Government was powerless under the limitations of the Venue Act to bring all the necessary parties into the jurisdiction of any federal court. But this is not such a case. For Rule 19(c) provides as follows:

"In any pleading in which relief is asked, the pleader shall set forth the names, if known to him, of persons who ought to be parties if complete relief is to be accorded between those already parties, but who are not joined, and shall state why they are omitted."

With this requirement the Government has not complied. For aught that appears it would have been entirely feasible for the Government to bring all the parties before a federal court in Pennsylvania having jurisdiction over the insured and his beneficiary as well as the Insurance Company. Consequently, in my view, the case is a proper one for dismissal for a lack of necessary parties under the discretion recognized in Rule 19(b). However, since the parties have united in submitting on the merits, I proceed on that basis.

I incline to the view that the taxpayer's rights as the insured under the policy here involved constitute "property" within the meaning of Section 3670 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev.Code, § 3670, which imposes a sweeping lien for unpaid taxes upon "all property and rights to property" of the taxpayer. To be sure, the taxpayer's rights as the insured under the policy are only the rights of an obligee under an executory and conditional contract and in certain aspects are intertwined with somewhat analogous rights in the third-party beneficiary. A conditional right so intangible and complex we do not generally view as "property"; nor indeed as a mere chose in action. Nevertheless I assume, at least for all present purposes, that it is a form of "property" within the sweeping language of Section 3670.

But we must bear in mind that the rights and privileges of the insured are not commensurate with the correlative duties and obligations of the defendant insurer. This is so because the contract creates a whole bundle of enforceable rights which are scattered amongst the insured, the insurer, the beneficiary, and assignees, if any; and the duties and obligations of the insurer, which perhaps in a sense may be viewed as commensurate with the aggregate of all the outstanding rights and privileges in others, not only are subject to many conditions — some within the control of the insured and others not — but also flow to others than the insured.

In such a situation, the cash value of the policy in dollars is no true measure of the value of the power of the insured to demand the cash surrender value of his policy and his right thereafter, upon a physical surrender of the policy, to receive the cash value thereof. As was observed in United States v. Massachusetts Mutual Life Ins. Co., D.C., 38 F.Supp. 333, the actual value of the policy may exceed its cash surrender value. With equal truth it may be said that the right of the insured therein may be less than the cash surrender value. For even if we could assume that the stated cash value of the policy measures the obligation of the insurer, as observed above this obligation flows to the beneficiary as well as the insured. For instance, the beneficiary may have paid the premiums under the policy and hence have an equitable interest therein which if, timely asserted, would nullify the right of the insured either to receive the entire cash value or to assign. Neary v. Metropolitan Life Ins. Co., 92 Conn. 488, 103 A. 661, L.R.A.1918F, 306. And possession of the policy by one...