No. 2402.

Cancellation of instruments 13-Insurer may sue for cancellation of policy incontestable after one year, where insured died before expiration of year, notwithstanding notice of rescission and annulment were given beneficiary and estate of insured.

Where the insured in a policy incontestable after one year from date of issuance died within the year, insurer had the right to proceed in equity for cancellation of policy on ground of fraud, notwithstanding that notice of rescission and annulment had been given beneficiary and estate of insured prior to instituting suit.

Appeal from the District Court of the United States for the District of Maryland, at Baltimore; Morris A. Soper, Judge.

Bill by the Reliance Life Insurance Company of Pittsburgh, Pa., against Ethel R. Jones, individually, and Ethel R. Jones and the Union Trust Company of Maryland, executors of the estate of Dr. Howard W. Jones, deceased. From a decree overruling a motion to dismiss the bill, and enjoining the prosecution of suit at law pending the determination of the suit in equity, respondents appeal. Affirmed.

Albert C. Tolson, John C. Tolson, and Charles F. Harley, all of Baltimore, Md., for appellants.

William N. McFaul and Walter L. Clark, both of Baltimore, Md., for appellee.

Before WADDILL, ROSE, and PARKER, Circuit Judges.

WADDILL, Circuit Judge. This is an appeal from a decree of the United States District Court for the District of Maryland, rendered on the 4th of May, 1925. The decree overruled a motion to dismiss the complainant's bill, which sought an injunction to restrain the prosecution of a suit at law by plaintiffs in error to enforce the collection of a contested policy of insurance issued by defendant in error upon the life of the deceased, Howard W. Jones.

Briefly, the facts in the case are: On the 14th of March, 1924, the Reliance Life Insurance Company, by its policy No. 295585, insured the life of Howard W. Jones in the sum of $15,000, the beneficiary being Ethel R. Jones, the wife of the insured. The policy was issued pursuant to a written application made therefor, which, with the policy, constituted the entire contract between the parties. In the application for insurance,

sundry questions were asked, and answered, regarding the past and present health of the insured, to all of which the applicant made affirmative answer as to his freedom from disease, and particularly as to the ailments especially inquired about; that is, as to diseases of the stomach, liver, intestines, kidThe applicant further neys, and bladder. certified that his answers were full, complete, and true, and that he believed himself to be a proper subject for life insurance. He further represented that he had not been under the care of, nor consulted, a physician concerning himself for any cause within five

years.

The complainant insurance company averred that, acting upon the truthfulness of the representations thus made, the policy was issued, and, but for such representations, the contract of insurance would not have been entered into. The complainant averred that as a matter of fact the insured was, at the time of making the representations aforesaid and entering into the contract, as he well denal ulcer, as he had been for about five knew, a sufferer from, and afflicted with, duoyears, and of which malady he ultimately died. The complainant further averred that eleven months after the issuance of the poluntil the 28th of January, 1925, within some icy, the represented conditions as to the said Jones' health were not known to be untrue; that such false statements were of a vital and most material character in procuring the contract and influencing the issue of the policy; and that but for such misrepresentations and false statements the policy would not have been issued; that complainant was in total ignorance of the existence of the health conditions of the insured mentioned, and did not learn of the same until after his death.

The policy contained the following incontestability clause: "Incontestability. The policy and the application therefor, a copy of which is hereto attached, constitute the entire contract between the parties, and shall be incontestable after one year from its date, except for the non-payment of premiums."

Promptly upon learning of the true health conditions of the insured, which knowledge was acquired after the death of the policy holder, as aforesaid, the complainant company gave notice, on the 7th of March, 1925, to the beneficiary, Mrs. Ethel R. Jones, and to her and the Union Trust Company as executors of the estate of Howard W. Jones, deceased, that, by reason of the circumstances upon which the policy was procured as aforesaid, the company would rescind and cancel

the same as of the date of issue, together with all claims thereunder, and a proper tender was made covering the amount of the premiums paid upon the policy, with interest thereon, and on the 12th day of March, 1925, within two days of the expiration of the twelve months' period provided by the incontestability clause, filed its bill in equity in this cause to rescind the said insurance contract, and to cancel and annul the same because it was fraudulently procured as aforesaid. The complainant brought its suit in equity, as well because in that tribunal it was afforded a clear, more speedy and adequate remedy than could be had at law, as because therein it could alone with certainty save for itself the right reserved in the one year's incontestability clause of the policy. After the twelve months' period, the appellants did institute a suit at law to enforce the policy and likewise moved to dismiss the bill filed herein. The District Court overruled the motion to dismiss and enjoined the prosecution of the suit at law pending the determination of the suit in equity. It is from the decree thus entered that this appeal is taken.

The legal questions raised by the assignments of error turn almost entirely upon whether the defendant in error has the right to proceed in equity, instead of at law, to have determined the rights of the parties under the policy of insurance in the light of the incontestable clause set forth in the policy. Appellants apparently concede that this right would exist in the absence of an action at law to recover under the policy, but for appellee having given notice, after the death of the policy holder, of rescission and annulment to the beneficiary and the estate of the insured under the policy. The question raised is not a new one in this court, as the same was precisely passed upon, after much consideration was given thereto, in the case of Jefferson Standard Life Insurance Co. v. Keeton, 292 F. 53. By that decision we feel bound, and to it and the authorities therein cited we refer, as containing the law properly applicable to this The reason for the granting of equitable relief in this class of cases is apparent, and is distinctly illustrated by what occurred in this case. The insured lived some 102 months after the issuance of the policy of insurance, and between that time and the expiration of the year period, about six weeks' information respecting the validity of the contract was procured, and it was within two days of the expiration of the time that this suit, seeking rescission of the contract,

case.

was instituted. A few days later, on the 6th of April, and after the expiration of the twelve months' period, however, under the incontestable clause, the suit at law to enforce the collection of the amount of the policy was instituted. Had not the suit in equity been timely filed, the issues upon the suit at law would have been to recover the face value of the policy, with the defendant company's ground of defense eliminated. The giving of the notice of rescission prior to the institution of the suit in equity, and after the death of the insured, should in no manner affect the right of the complainant to go into equity to make its defense under the policy if the same existed theretofore. The institution of the suit in equity was the step necessary to the preservation of the rights of the complainant to rescind and cancel the insurance contract and to the legal enforcement of the claim of which mere notice of rescission to the parties was made by formal indication of the purpose to annul. The complainant, appellee herein, was under no obligation in the institution of its suit to bring an action at law, and what happened in this case merely demonstrates the risk and danger of so doing. The fact that the beneficiary under the policy could sue at law to recover the amount of the policy if due is well enough, but a different condition existed so far as the appellee was concerned. The company was not suing to collect on the policy, but, on the contrary, to rescind, cancel, and annul the same, on account of fraud and deception practiced upon it incident to its procurement. Relief from such matters is furnished more readily under the latitude allowed in the courts of equity than by the stringent rules of law governing legal proceedings.

Counsel for appellants cite and rely upon the case of Stiegler v. Eureka Life Ins. Co., 127 A. 397, 146 Md. 629, as containing the correct interpretation of incontestability clauses in insurance policies, with the proper rules governing the enforcement thereof. The case cited is of interest, and contains an able and interesting discussion of the subject-matter under consideration, but we do not feel, having regard to the facts and the issues therein involved, that we would be justified in departing from the decision of this court in the Jefferson Standard Life Insurance Company Case, supra. See, also, Chun Ngit Ngan v. Prudential Ins. Co., 9 F.(2d) 340 (C. C. A. 9th Circuit) decided November 16, 1925.

The decree of the lower court is affirmed.

4) 423

Appeal from the District Court of the United States for the Western District of North Carolina, at Greensboro; Edwin Y. Webb, Judge.

Suit by the Maryland Casualty Company against J. E. Fouts, receiver of the People's National Bank of Salisbury, in which B. R. Lacy, Treasurer of the State of North Carolina intervened. From the decree, plaintiff appeals. Affirmed.

Kerr Craige, of Salisbury, N. C., and Sidney S. Alderman, of Greensboro, N. C. (George W. Dexter, of Baltimore, Md., Burton Craige, of Winston-Salem, N. C., and Wm. P. Bynum and F. P. Hobgood, Jr., both of Greensboro, N. C., on the brief), for appellant.

James S. Manning, of Raleigh, N. C., Dennis G. Brummitt, of Oxford, N. C., and Hayden Clement and John L. Rendleman, both of Salisbury, N. C. (Frank Nash and John H. Manning, both of Raleigh, N. C. on the brief), for appellees.

Before WADDILL and ROSE, Circuit Judges, and WATKINS, District Judge.

WADDILL, Circuit Judge. This is an appeal from a decree of the United States District Court for the Western District of North Carolina, in a case in equity pending therein, in which the appellant was plaintiff and the appellees defendants. The suit was originally brought by the appellant, the Maryland Casualty Company, against the receiver of the People's National Bank of Salisbury, and subsequent to its institution the treasurer of the state of North Carolina was, upon his petition, permitted to intervene as a defendant, and he did appear and file his answer to the plaintiff's bill.

The appellant, the Maryland Casualty Company, executed, as surety for the People's National Bank of Salisbury aforesaid,

a depository bond to B. R. Lacy, treasurer of the state of North Carolina, in the sum of $50,000. The bond was dated the 10th of January, 1922, and was for one year, and it' was renewed and extended from the 10th of January, 1923, to the 10th of January, 1924. On the 8th of June, 1923, the People's National Bank of Salisbury was closed by the Comptroller of the Currency, and J. E. Fouts appointed its receiver. At the time of the failure of the bank, it was indebted to B. R. Lacy, the state treasurer, in the sum of $89,579.14. The bond executed by the defaulting bank as principal, with the Maryland Casualty Company as surety, contained these provisions:

the

"Whereas, in the month of above bound People's National Bank, Salisbury, N. C., was designated by the treasurer of the state of North Carolina one of the

depositories of the funds belonging to the state of North Carolina:

"Now, the condition of the above obligation is such that if the above bound People's National Bank, Salisbury, N. C., shall well and faithfully pay over and upon demand of said Benjamin R. Lacy, or his legal representative, all moneys belonging to said Benjamin R. Lacy, personally or as treasurer, or to those to whom he may from time to time, personally or as treasurer, by check or draft or bill of exchange, direct payment to be made, all moneys which said Benjamin R. Lacy, may, either personally or as treasurer of the state of North Carolina, deSalisbury, N. C., which may in any manner posit with said People's National Bank, ing as said state depository, or which may come into its custody or possession while actbe received by it by virtue of its being said state depository, then this obligation to be void; otherwise, to remain in full force and effect."

The treasurer of the state of North Carolina duly notified the appellant surety company of the failure of the People's National Bank of Salisbury, and called upon that company to make good its liability under the depository bond aforesaid to the state. On the 9th of May, 1924, approximately 12 months after the failure of the bank, the surety company did pay the treasurer of the state of North Carolina the sum of $50,000, the penal amount of its bond. The said amount was paid by appellant without waiving any of its rights under the bond, and expressly reserving its right to hold the People's National Bank of Salisbury under an agreement between the bank and it for the reimbursement of any loss sustained by the

surety company under the bond. It appeared that, at the time the Maryland Casualty Company executed the bond of $50,000 to B. R. Lacy, state treasurer, the People's National Bank of Salisbury entered into an agreement with the casualty company in connection with the application for, and execution of, said depository bond, the second provision of which agreement is as follows:

"Second. That said applicant shall and will at all times indemnify, and keep indemnified, and save harmless the said company from and against any and all liability asserted against said company, and from and against all loss, liability, costs, damages, charges, counsel fees, and expenses whatsoever which said company shall or may for any cause, at any time, sustain, incur, or be put to, for, or by reason or in consequence of said company's having executed said bond, and said applicant further covenants and agrees to pay to said company or its representatives all damages which said company or its representatives shall become liable for, by reason of said bond, before said company or its representatives shall be compelled to pay the same, any sum so paid, however, to be applied to the payment of such damages.

The appellant, plaintiff below, alleged: (1) That when it paid to the state treasurer of North Carolina $50,000 it was entitled to prove its claim for that sum. (2) That it was subrogated by reason of the payment of $50,000 to the claim of the state treasurer of North Carolina to that amount against the bank and its assets. (3) That it was entitled to dividends as any other creditor of the bank upon the $50,000. (4) That the excess of the claim of the state treasurer over $50,000, to wit, $39,579.14, and interest upon it, constituted a preferred claim upon the assets of the bank, and that the state treasurer was entitled to the payment of said amount as a preferred claim, because it constituted a trust fund due to the state, and that appellant was entitled to all dividends declared on the $50,000 paid by it to the state treasurer. On the propositions thus submitted the judge of the District Court decreed as follows:

"That the plaintiff, Maryland Casualty Company, is not entitled to receive any dividends from the defendant, J. E. Fouts, receiver of the People's National Bank of Salisbury, until intervener, B. R. Lacy, treasurer of the state of North Carolina, has received his entire deposit, and that the said plaintiff, Maryland Casualty Company, after payment has been made to the said B. R.

That the plaintiff is not entitled to recover of the defendant, J. E. Fouts, receiver of the People's National Bank of Salisbury, on its indemnity agreement with the said bank, and that the said Maryland Casualty Company is only entitled to subrogation to the rights of B. R. Lacy, treasurer of the state of North Carolina, as hereinbefore set forth."

That the receiver of said bank, to wit, J. E. Fouts, pay to the said intervener, B. R. Lacy, treasurer of the state of North Carolina, the full sum of 20 per cent. dividends now declared by him as such receiver upon the sum of $89,579.14."

The court thereupon vacated a temporary restraining order enjoining the payment to the treasurer of the state of the amount of said 20 per cent. dividend, and ordered the same to be paid. From this decree the appeal in this case is taken.

While the assignments of error are quite numerous, they relate almost entirely to the questions (1) whether the appellant, the Maryland Casualty Company, should be paid dividends upon the sum of $50,000 paid by it under its bond of indemnity for said amount given in behalf of the state until the entire sum due the state, to wit, $39,579.14, in excess of the penalty of such bond, is fully paid; (2) whether, having paid the penal amount of the bond to the state treasurer, the appellant should not be subrogated to the rights of the state, and paid its dividends upon the amount thus paid by it in the distribution of the assets of the insolvent bank, notwithstanding the fact that the bank's indebtedness was not paid in full, and that the amount thereof exceeded the indemnity bond by $39,579.14; (3) whether the deposit of the state of North Carolina in excess of the security taken by its treasurer therefor should not have been held to be a trust fund, and paid directly as such to the state.

The determination of appellant's rights and liabilities depends upon the effect and meaning of the undertaking given by it to indemnify the state on account of its money deposited in the bank, and the agreement of

the bank with the appellant surety company to indemnify it on account of the indemnity bond.

The right of subrogation for the amount paid by appellant to the state depends upon whether the sum paid was in full of the liability on the indemnity bond, or only on account thereof. If appellant was not lawfully entitled, out of the general assets of the defaulting bank, to be substituted to the rights of the state, whose indebtedness it paid, under its indemnity bond, to the extent of $50,000, then no right of subrogation existed in its behalf. To allow the appellant to assert such indebtedness, based upon its alleged claim as a creditor for the amount paid by it under its bond of indemnity to the state, and claimed to be in full of such liability, would be to permit the assertion of a claim in behalf of a guarantor against those it undertook to indemnify, in advance of the latter being paid in full the amount due them.

The penalty of the bond in this case, it is true, was $50,000, and, subsequent to the bank's failure, the amount of the penalty was paid by the surety; but the whole obligation to the state was by no means extinguished. On the contrary, there remained a balance of $39,579.14 due. The condition of the indemnity bond was to pay upon demand all money deposited in said bank, no limitation in amount being placed thereon, as set forth in full in the provision of the bond herein before given. Manifestly, the surety therein could not assert a claim, either by way of subrogation or otherwise, on account of what it saw fit to pay on its bond indemnity, as an admitted liability, leaving unpaid such portions thereof as it saw fit not to settle.

The law applicable to this case is well settled, and when applied to the facts, concerning which there is little or no dispute, there can be no serious doubt as to what the outcome should be. The appellant, plaintiff in the District Court, is asking equitable relief, in that it may be, by way of subrogation, placed in the position of one whose indebtedness it paid, under an indemnity bond executed by it to the Bank of Salisbury to cover any indebtedness of that bank to the state.

The very essence of the right of subrogation, by one in the position of the appellant, is that the debt on account of which the indemnity was given, has been paid by the one setting up the equity. As long as the undertaking on account of which the security was given remains unpaid, in whole or

in part, the one giving the indemnity cannot invoke the aid of a court of equity to save it from the consequence of having to make payments on account of the obligation it gave, by decreeing to it dividends from the estate of the insolvent bank, and leaving the debts of such institution indemnified against unpaid. To allow this to be done would operate most unfairly against the state, whose debt was secured, and hence shows why the right of subrogation in such circumstances as in this case cannot be considered. The doctrine sought to be availed of rests upon purely equitable principles. The fact of the indebtedness, on account of which the surety was given, not having been paid in full, alone requires the denial of the relief prayed for, as the right of subrogation cannot be availed of to collect an indebtedness by one himself liable for the debt, and which obligation he has not met. The decisions of the courts of last resort, federal and state, and the text writers of the highest standing, have given full and frequent consideration to this subject, and with one accord they sustain the views herein given.

In United States v. National Surety Co., 41 S. Ct. 29, 30, 254 U. S. 73, 76 (65 L. Ed. 143), Mr. Justice Brandeis, speaking for the Supreme Court, said:

While the priority given the surety by the statute attaches as soon as the obligation upon the bond is discharged, it cannot ripen into enjoyment unless or until the whole debt due the United States is satisfied. This result is in harmony with a familiar rule of the law of subrogation under which a surety liable only for part of the debt does not become subrogated to collateral or to remedies available to the creditor unless he pays the whole debt or it is otherwise satisfied." Sheldon on Subrogation (2d Ed.) § 127; Pomeroy, Equity Jurisprudence (4th Ed.) § 2350; 25 R. C. L. 1318; Peoples v. Peoples Bros. (D. C.) 254 F. 489, 491, 492; United States Fidelity & Guaranty Co. v. Union Bank & Trust Co., 228 F. 448, 455, 143 C. C. A. 30; National Bank of Commerce v. Rockefeller, 174 F. 22, 28, 98 C. C. A. 8.

In United States Fidelity & Guaranty Co. v. Union Bank & Trust Co., 228 F. 448, 455, 143 C. C. A. 30, 37, supra, the Circuit Court of Appeals of the Sixth Circuit, speaking through Judge Denison, said:

66 #

The right of a surety on a bond to be subrogated for the obligee in a right of action against one wrongfully causing the liability is founded on payment by the surety to the obligee, and it does not