E:ELLriER V· .MUTUAL LIFE

'co. OF.

NEW YORE:.

quantity oflan.d within.the indemnitylimits, which would noHall within the nearest,tiers of Elections. I have thus indicated the conclusions I but have reached upon the, general propositions discussed by have not attempted to deal with the question of details. If, in the application of these rules to the special facts, counsel cannot as to the results, such differences must be hereafter presented; but I trust the foregoing opinion is sufficiently explicit .to enable ·counsel to frame a proper decree:thereunder.

j'

KELLlttR tJ.

MuTU'ALLtFE!NS.

CO. OF NEW

YonL

(C'rouU courl;D. New Jersey. Beptember28,1890.)
1.

!

Where a complainant makes no reply to the pless filed by. defendant, but sets them down for argument, the truth of all the facts stated in thEliD and well pleaded i .is admitted, and no o1;>jection Qan be ma411 to,their form or
Slll;B-PLEA-SUFFIPIlINCY.

TO REPLT-EE'FBQT.

. .

·...

..

ll. .

A bill to ascertain the surret!dei' value of a policy of insurance' upon the life. of complainant alleged that the principles and methods of the appol'tionment made by defendant of its surplus funds failed to award to complainant's policy the ·amoul!I·t equita1;lly due, to it.. Held, t4a,t a plea alleging thllot complainant a!'\:reed to ratify any plans ad()pted by tile company for the equitable distribution of Its surpluilani! profits was not an'answer; 'for, if the methods adopted resulted in an ineqUitable division, as alleged, it was not the method complainant agreed to ratify.
'

8. LIFE INSURANOB-CONDITI.ONSOF POLIOY-PAYMBNTOF P·REMIUMS. .

Where a life iqsurance .policY is conditioned. that, if the premiums be .Dpt paid when due, the consid\!ration 01 'the contract shall be deemed to have failed, .snd the companyshall'bereleased: from all liability, afailure to perform the condition opellates as sformalreiease to:the company of all its liabilitl iln<1er the policy, snd precludeli\ any relief in li\quity 1:Iy a bill for accounting·
.. .·. . . .. . .

.. SAME-RESCISSION.

A Cllloimthat the non;paymeI\t of the premiums wall simply a rescission by the "policy-b'6hfer of the contract. induced Dythe discoverydf 'Imeged trauds on ,the part of the company, cannot be sustained, where it appears that he has had tb.e benefit of an iDsurance upon his life for 10 years at a rate of premium fixed upon the hypbthesisthat tb.e premiUIX1swould be paid for a llluch:}onger period.

InEquity. Bill to ascertain value of life insurance policy. , B.A. Vail, for complainant. and Robt. Sewell,' for defendant.
GREEN; J. The bill of complaint in this cause has for its prime objectthe ascertainment of the value of a policy of insurance taken by the complainant upon his own life in the year 1878, and surrendered, as the 'bill alleges, to the defendant corporation in 1888. The bill states the making of fhe coh'tract of insurance by the complainant and the defendant, whereby, inconsideration of the payment of $96.95 to the defendcorpoiation,llnd of the: further payment, to be made at the offiee 'Of sum on the 7th day of January andJllly in 'the of the r dgl111g the the coptract, the defelldan,t ;agreed that it would pay to the complah1aut on the 7t4 of; 190.3,

624

DDERAL REPORTER,

vol. 48.

the sliBi of 85;OOO,and; in the event of the complainant's death before that date, it would said 8UUl to his legal representatives. The bill further alleges that the complainant was entirely ignorant of the business of life insurance and the mallner in which it was conducted, and that, although. he saW the annual reports which were issued by the de'fendant alter the execution of the said contract, he did not understand 'th'em, but, having confidence·in theintegnty of the officers and managers of the company, he accepted the reports and statements as true. That in 1887, however, he caused aU the allnual statements made by the company to be examined by persoIls llk,illE,ld in the business of life insurance, and expert in the examination and analysis of the accounts appertaining thereto, and that, from the reports made to him by these skilled accountthe said annual ants, he made with reports 110 made by the defendant were untrue, the intention. to deceive, an4 mil;llead ,him. . The bill then specifies with some particularity the alleged untruthfulness of the reports which had ,been ex;awined by for instance, 'in paragraph 16 et seq. :it the,- '. ',' . "Sworn repol;ts of the' defendant 'corporation showed that it bad received in membElr!!!.from 1859 to 1888, inclusive, upwards and upwards of $100,000,000 of interest upon invested assets. of That 'fr()lnthe ,1st day of January, 1879, to the 1st day of January, 1889, the aml:lllnt of said premium receipts, as reported by said defendant corpora.tion, the sum of $68.000,000 and $54,000,000 of interest income."
That in respect to these items, the complainant. "Charges the truth to be ihat:the ,said sums of lOoney so reported as premium JleceiptsJol' the SHveral years during the term from 1866 to 1888, inclusive, so r{'ported as premium receipts during those are falsely reported; the years covering and embraeing'larg'esums of money' which were received in year prior to that of which th,e was made, and being already in the hands of the said corporation either as invested assets or as deposit 'in The complainant further charges the truth to be, in this respect"That the Sl1ms so falsely reported as premium receipts exceeded the sum of $143,000;000. Thattl\is! lIum, so falsely reported as. premium income. was made up lind consisted of dividends, declared and surrendered values, reported as premium receipts. in truth a large part thereof bad been appropriated to the payment of surrendered values and dividends to policyholders."
';,

j,' , ' '. " .,; ,. ;:, '. ;", " · ' "

oth(lr. allegations of. of the annual reports chiefly one account with ,}Ilyge sums' 'of 11loneywhic9JigptfullyaI;ldproperly should have been ,charged Ol' liJr,edited ,to other, IlCCPl:Jllts,.Rpq the ]:)il1 then states- ! .:. f'That the, purpose andi nlention the !latd. defenqant .corporation. in thus :lictitiouslyand faljJely. premium and amount of new and!"rtQunj ,of a false an,d de:ceptlyeshowing of It!! bUSIness for the purposeof deCelymg the complamant 'and members of saJd cbrpoflltion. and the Insul'ing public, and conceal· 'jug t'hetrueatiilte -iuid cOlidition; df,Wlaffau:s/' · l "'.' .

,;,

.::In) ;': ; X": ':

KELLNER V. MUTUAL LIFE INS. CO. OF :;EW YORK.

625

And, further, To create false and fictitious ratios of expense to actual premium income. sucb as would sbow to the complainant and the insuring public that its affairs were economically administered. when in truth and fact the expenses of the defendant corporation were of far greater proportion to its actual premium income than they should have been. " The bill then alleges that, upon informed of the manner in which the defendant was conducting its business, the complainant discovered,that the result was to defraud him and the other members out of the equitable share of the surplus and profits due to them under the provisions of the charter of the Company. That thereupon the romplainant demanded an accouuting should be made upon his policy of insurance, and he be paid by the defendant the equitable cash surrender value thereof, which the defendant refused to do at that time, but in August, 1888, did offer the complainant $850 as the full value of his policy. That this slim the complainant refused, insisting tbat such value exceeded $3,000, and thereupon he filed his bill of complaint. The prayer Of the bill is for an account to be taken of all the business and transactious of the company from the 1st day of January, 1878, to and including the 21st day of December, 1888, and that the defendant be decreed to pay to the complainant the full, fair, and equitable surrender value of his policy, and for other relief. To this bill of complaint th,e defendant has, by leave of the court, interposed four special pleas, and, in pursuance of the requirements of the thirty-second rule in equity, has fortified the pleas with an answer denying explicitly the fraud specially charged'in the bill; that the complainant was induced to enter into the contract ofinsurilDce by false and fictitious statements made by the defendant; and also denying that the complainant ever surrendered his contract or policy, or that the defendant ever accepted such surrender, or that it ever offered to pay the sum of $850, or any other sum, as the fun. and' equitable value of the complainant's policy, or for any other obj!'lct or purpose whatever. 'fhe pleas, stripped of their legal and formal verbiage, are practically as follows: "(1) That in making application for the policy. the complainant. in writing, agreed that tbe contract about to be entered into between himself and the de'fendant was to be in all respects construed and interpreted under and by virtue of. and in accordance with, the law of New York. the place of the contract being expressly agreed to be the principal office of the company in the city of New York; that by the policy the conditions of the application became a part Qf the contract, and could not be waived except by formal release; that they were in fact never waived; that the contracts of the defendant company made with other policy-holders. in all respects similar to the one made with the complainant. have been construed by the highest court in the state of New York, and by that court it has been held that no relationship of trustee .and Cestui que t1'USt exists between the parties by virtue of the contract; that "the policy-holder has a full. complete. and adequate remedy at bw for any' breach ofthe contract made with him, and cannot cla,im relief in eqUity bya bill for an accounting. (2) That the contract in question was brokehby the complainant, and. by its terms. forfeited by his repeated defaults in payment 'of premium due before the commencement of tbis suit, andtherebytbe" dev .43J.".no.1 0-40

626

,lll.n'.

fendant was released from all liability under it. (3) Thattbere Is no provis1.0 tl.le.. ,.c.ontr.a,<;to."f '. topay to. . Iderany .. of the,p.9Ucy, ,but Jlayment IS rorbldden. (4) Th,l;l Msagreed to ratIfy, ahd accept any plan adopted by the comits

The bill and pleas were set dbw'tl for hearing under the ru1J:l, in':f:lquity.As the, complltinant, has made no reply to the pleas, but seUhEj'ill ,down for argument, the truth of allfaets stated in them a,nd is v. K#tson, U. S. 303, 7 Sup. ,Ct. Rep. :53,4. ,1I10I;oon. thecoDlplain/lDt tak,e any exceptioI), to the reg. oBhe ple!lS. If.he, desired to,dispute either,h'e,shonld havetUed/e;xceptions. "Foot. Fed.: FJ:. § 203. $uydam v. Joh'n8O'T/" 16 N. J.Eq.. ,112."",,, ", question DOW to be, consiliered relates solely to the sufficiency .of pleas, in point pf la;w"IlS;,llbarto the complainant's action. If theNi)t:,(titherp.. defellae, the bill of complaint must be dismissed. The, last ,plea, stated, a1:)oye is intended, Il$ all, answer to the chatgj:J, pfthei rbill that the pfofi,ts and moneys of. the company and or by the CQQlpnny,.to the,lpss of the It in substance, tbattbe:CQwplainant.l;tgreed,.in apportionme,nt or dis:and ang. methods adopted by t'be [e,pwp@y i,J:;l, :such distribijtion, aug. in its of the amount equif.Q,bly due ()l".,belon,gi9g, to ,his. Policy. But the complainant charges thaUhe PJI\IlcipJes ar.4 of apportionment made by tpeCOlll,pany of its sllrpl\}s in that very particular of awarddue It is 13vident upon ing .<,lp, Iti$policy. the the melle"liItawment ofthe charge ple!"is not, an answer. Admitting. that the complainant did ill ,aqvan«e ratify the .plan thereafter to be aclopt;eq by company in surplus among,policywould give to < lIis:policy its equita.ble share, it is quite holders. clear that,:he assented to DPthing PJ,ore·. "The plan which <he; ratified, if there could be, under these circumstances, .such a precedent rat,ificll;tion of a. J;Uethoq tpereafter to, be originll-ted, ,was such as would give him his equitable,share. , :The Illeth'od of and. tb,l;) ,share of surplus Were inseparably connected, ,Because and result. If the method resu\ted in aninequimble divisiollj,'then it follows that the method adopted was not.the method w hichthe tlotnpll1inant agreed to ratify. The charge in the bill Of c()mplaint is the result of th,e principles and IDethodsadop,ted. to say that com'plainant ;tll-tified other pril+QipIe. or ll}etp09. of. This "plea is overruled. ' , . The plea. of the defendaht)by it secondly pleaded., raises a very seriolis question.' In: effect; it' ttvers that the complainant has no right of ,the voluntarily failed orrefused to ,:tq premiums due, accordiIlg to th,e itl'lrma of:the contract, of on the 8th day of 7th ,day.ofJ':uly, 1889, before the commencement. of his suit; that this de-

KELLNER V. 'MUTUAL LIFE INS;. C<>.,OF NEW YORK.

627

fault worked not only a forfeiture of the contract of insurance, but as well defeated and made void all obligatione of the defendant arising under that contl'adt; and that the contract thorebybecame, by its very tetms and the force of null and absolutely void, and thereat'ter had no in fact. These facts. are well pleaded, and are to be taken astr\le; It is difficult to see how the complainant, under these circumstances, has any standing in court. The business of life insurance is 8U!i generiS. It differs widely from fire insurance, and is controlled by principles essentially variant from those which limit the latter. Briefly stated ,it may be said to rest upon the operation of two distinct, yet closely connected, factors, - the average expectation of life and the cumulative power of interest compounded. In other words, the two somewhat Uncertain. 'elements which life insurance seeks to reduce to the precision and certainty of a mathematical proposition are the average of life accorded to a thoroughly well man, on the one hand, and the earning capacity, for a certain definite term of years, of a certain sum of money to be paid certainly on a fixed date during that life, on the other. It is by the skillful use of these two factors that life insurance corporations are enabled to fix and, determine, as the very foundation of their business, the sum of money or premium which must be paid by the insuJled to I1S a just consideration lor their contract of insurance; to enable to fulfill, ,honestly and promptly I their part of the contract. theni, It is perfectly clear, therefore, that promptness of payment of such 'yearly premium. when fixed at the times designated for such payment, is n,eeessary,and absolutely essential to the honest conduct of life insurance. If there be uncertainty as to such payment of premium. all calculations based tipohits prompt and certain receipt must be seriously disturbed. if not radically destroyed. resulting, finally and surely, in the disastrous collalise oithe entire business scheme. And it is because of this: that the courts, both United States and state, have. almost without exception, held' thl;i,tin a contract of life insurance the condition of payment of preriliUIh on a certain fixed date is of its very essence; and if the Contract provides. as a IJenalty for the brel!.ch of such condition, that it shall thereupOn hecome null and void, and all payments theretofore made shall be forfeited to the company, equity will not affol'dany relief. This principle is stated very strongly by Mr. Justice BRADLKY. in delivering the opiniori of the court in Insurance 00. v. Stathapl,93 U. S. 24. He says:
"It !Qllst be l'oncf'ded that promptness of. paympnt is in the business of .life insurance. All the caleulations of the insurance cumpany itre basf'd ontbe hypothesis of !>fompt payments. 'fhey not only calculate on the receipt of the premiums whE'n due, bllt 011 interest up6n t1ll'm. It is on this basis that they are enalJled to olIer assurance at the' favomble ratl's Forfeitlll'e for non-payment is a necessary means of protecting tbemlle1ves from embarrassment. Unless it wt'le enJorceablll, tilt' .business would be thrQwninto lItter confusion. It is like thefol'fl'iture of shares. in nlinihgenle:ri!isps. and all other hazardons undertakings. 'fht'fll must ,Power to cut off or the ot' the Whole s'Ch.. 18 endangert!d. The insured partllis ar.. associlttes 'tn a grf'3t 'fIllS asBociateu'reJ.atlon exists whether the company be a mutual one or not. Each

628

FEDERAL REPORTER,

vol. 43.

is interested fnthe engagements of all, for out of the co-existence of mauy risks ariseS the law of average, which underlies the whole l)usfness.· '" '" "'. Delinquency cannot be tolerated or redeemed except at the option of the company. '" '" '" When no stipulation exists, it is the general understanding that time is material, and that the forfeiture is absolute if the premium be not paid. '" '" '" The case, therefore, is one in which time is material, and of the essence of the contract. Non-payment at the day involves absolute forfeiture, if such be the terms of the forfeiture. Courts oannot. with safety, vary the stipulation of the parties by introducing equities for the relief of the assured against their own negligence." The same principle was asserted in Klein v. Insurance Co., 104 U. S. 88. In this case it was held by court that a condition in a policy· of life insurance that if the stipulated premium shall not be paid on or before a certain day the policy shall cease and determine· is of the very essence of the contract, and that a court of equity could not afford any relief against a forfeiture caused by afaHure to pay the premium at the time fixed .. Mr. Justice WooDs,in delivering theopinion,ofthecourt,' says: ' ! . "A life insurance policy usually stipulates:-Fipst. for thepaymant of premil.lms; second. fortheir payment on a day certain; and, thi1'd, for the forfeiture of the policy in:default of punctual paYment. Such are the pro;vfsfons of the policy whichis,th.e basis of this Of these provtsions olJ cisely the same footing. If,the of the premiums. and theirpayptent oil the day they fall due, are of the essence of the so is the tion for the release Of the company fl'om liability in default of punctual payment. No compensation can be made a life insurance'c()mpanyfor tbegeneral want of punctuality on the part oflts : llC'" '" If the·assured caR nrglect payment at maturity, and Yet suffel' noloss or premi· urns will not be punctually paid. To hold .3 company to .its promise, to pay the insurance. notWithstanding the default of the assllred punctual payment of the premiumsis to destroy the very substance' of the contract: This a court of equity cannot do." " " " , .
,

\

\

. The issue raised by the plea which is now being, seemstq bring this case directly within the rulings of the cases cited.·, The trMt into which the complainant. entered with thedefelldiirit, atter pro.: viding forthepaymept of a su.m upon'a tain day named"(,}ontains this condition: , "If any pJ:emiQm,·or installm.entofapremium, on this pQ1icy: shaU:not be paid when due,the consideration shaID,ledetjmeq. to, failed, and the company shall be released from all liability." 'It is ari admitted f!lct that,prMioustothe coihll1eIlCemeriti OHhis suit for an accotintingupon his p'olicy, the qefault in the pannent of premiurp.s, were due." On the 7th day of January and the 7thday,ofJuly,1889. 'Clearly the complainant has failed to .perform the condition' by: which his contract was to bekept:alivellnd in force. That failure oom}>rt$sed the death of his policyof and as well operated as a formal release to the «ompauy of all IiaNUty that tlwne:x.;isted or BY. his own act. he destroyedjhe Gpntract ,whi,eh he Pl:l<l;Uy toen-; force. How, can a non-existept contract, iLthere can be: 8nchla.thing,

KELLNER fl. MUTUALLIFJJ: INS. CO. (.ll1' NEW YORK.

629.

have any value, pecuniary or otherwise? Or, if this contract can be said to have value, can it be in any sense an obligation of the defendant, to whom the complainant has given a full release from all liability arising under or out of it? The only answer which is made on behalf of the complainant to the defendant in this behalf is that the complainant's failure to pay the premium when due was a simple rescission by' hiu) of the contract, induced by the discovery of the alleged frauds, set out in the bill of complaint,which rescission did not affect any right theretofore accrued to him under the policy. That fraud in the inception of a contract will justify and authorize a rescission is well settled. But it is equally well settled that a contract cannot be rescinded unless the parties thereto can be restored to the same condition in which they were when the contract was made. It is apparent from the nature; of the contract into which these parties entered that this cannot be done. ' For a period of 10 years, or thereabouts, the life of the complainant has been insuredJor a large sum of money by thedeflmdant. Such obligation of aSSUl'l),Dce has been a burden upon, and borne by, the defendant, for whicl). it has received no adequate, or, at least, no fairly' ,adjusted, compensation. The rate of annual payments by the complainant the, defendant wasJixedand determined upon the hypothesistha;t the priemi';'" . ums would be paid, without interruption or failure, for a much longer term than 10 years. For an insuranceseclired by a contract whicl:i is to terminate in 10 years a much larger annual premium would be required and demanded than for one which is to terminate in 25 years, which was the life of the' contract in question.,' Hence it is apparent that for a period of 10 years the complainant has had the bel1efit o(an insurance upon his life at a rate of premium much lower than the risk fairly and honestly required, apd which rate has been made too low 'by his own act M,il,lleged rescission. In other words, iihe has worked a rescission of the contract, in the legal acceptation of that term, instead, thereby, of restoring the defendant to the condition in which it ",afl'at; the time the contract was entered into, he has compelled it to assume the burden of:a contract from which before it was entirely free,for which it has received no adequate consideration, and which, by his act, has, in a m'ost important particular,been 'rendered, wholly varia,ntfrom the contract into which the complainant and the deferidant actually did " The default of the complainant cannot operate as 8' legal rescission of the contract upon his part. Its legal effect was to. cause a willful breach ()f a condition, thereby working a forfeiture of the contract by its very tel1;ns, aud the defendant from all liability under it" The plea, therefore, raises a complete bar to the action of the complainant; and upon it the defendant must have judgment. , This, conclusion rendors it unnecessary to consider ,the questions raised by thtt other pleas.

to

,

....

",

630 1

(C'irettft

court,

W. D. Wa,71tngton. August 20,1890.)

1. PuBLIO LANDS-,.;O"fiCBLI,ATION
   

lanqs in California other !'acUlo coast, states, lands whioh. had been offered at public sale, but, not sold br. the United States, and which were thereafter with· from saillbecause tHttiated within tHe limits of the land grontto the North. er\! I'l!.clfic Railroad belong to the class of unoffered4'Ilds, and may be lawful1y sold I!.S timher.Jandsunder said act. ' & SAME. ' , " The billy stony land, covered with flrAAd,Qedar forest trees, common In the westpah 01 this state, are chiefly vl!.luable for timber, and unfit for cultivation. W.ithini,t.,b.ll meaning 0.fs8I,d'act, 81thGu g h the SO.iI is no.t barren, and may be made. to . yield,l{ooo cro,ps after. removal of and stumps. The true interpretation of tbe 'aetdoes not require the substitution of tbll, word "solely" for the "chiefly, ",nor, do the words "unflt for cultivation" mean" notcapable of being made tor AUl,tivation. n :" , , I

2.. SAME-'-SALE oF1'IMllER.LAND;. ',' " .Within thE! :U\eaningofthe act of JuneS, ,1878, providing for the, sale of timber.

. When thegoverl'ltileri"t olthe applies for equitable relief, it must, :. like au Indlvidu&! sUitor, do equity on itlfpa:rt; In a suit to cancela patent for land on the ground 'f,n iSSUing it,when thepatenteeJs not guilty of fraud, it is essentiaUor the to to ,.

ern

'" BAME-IMfROVEMENTS.

",

The' 'Word "improvement8, "as' used in' iald act, meantl valuable improvemeuts. An and dilapidate4 cabin !:Lndremnant of ana.bandoned fence, which are of no,use,,,renotsuch improvements.', . '

5. BAMB.:....hAUD.'

a paten tal! oithe United States having conveyed the land within one of his patent to montb',after enterlngU in. the, iand-office. and prior to the 'a vendee, ':OVhp llt about tbe time of saId transaction also purchased other lands from, a,numbeulf pel'80nS, who witbin areeent'periGld entered the'lands so conveyed by is not a 9ircumstance from whicn all. inference, much less a conclusfQn. CB,n be faIrly drawn that there was an, , ,said ,patJentee aM his vendee, made prior to ,the entry, whereby .tb,e to be.a9Qulred shOllld inure and. being no eViqence tend. ing to connllct with any conspIracy, no mference unfavorable to him .. ,cau be,drawn from evidence ,tending til prove 'that his vendee had receIved conveyfrolJl pursuant to agreements I!.Dtedating ances of . entry . ',' " .. .
' ,,"

,'I

8. 'BAtoiE=-tl.IGiITS 01" PATENTED.

,A.p,urcbaserfrom the,United tbeact above referred to, is not re'quirea ,to retain the land. ,After perfecting his rigbt tO,it In good faith, tbe jlls dds- , \pmwmdi immediately becomes' vested in him, and, in a suit to' cancel a patent on the !. g;roiJIjdof frAU,,d, Wi,thO\l.t',nce' 0.1 t'r· . au,d, on t.he part of the patentee Other than above iuaicate4, the prayer of the biU will be denied. " · (SyUablJj'ZriI'thllCou,rt.), ".,',. .

In Equity. , P. JI.,WinBtont,UI S. AttY.,'tlndP.;O'Sullivan, Asst. U.S. Atty. B. Ji'. 'DCltnwonal1dRaleigh Stott,fordefenuants. , . .
, HANFoRD,I. The I;lefendant' David· E. Budd acquired title by a patent from the United States to a tract o,f,li:ttld described aathe S. E. 1-of township' 9-NJ; range 1 Willamette meridian, situated in Cowlitz. county,; in, thUletate. and; by :direction iflfthe attorney general this suit to cancel snid patent was commenced in the district court of the second judicial district of Washington Territory, holding terms at Vancouver, in which court the issues were made up, a trial was had, and a decree for the defendant was rendered. The cause was then removed

"