Source: https://law.justia.com/cases/federal/appellate-courts/F2/614/301/147614/
Timestamp: 2019-04-25 16:35:38+00:00

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Theodore H. Friedman, Arum, Friedman & Katz, New York City (Fred R. Profeta, Jr., Max Toberoff, New York City, of counsel), for appellants.
Seymour Lefkowitz, Tell, Cheser, Breitbar & Lefkowitz, New York City (Solomon M. Cheser, New York City, of counsel), for appellee Berkowitz.
Joseph A. Bergadano, Hart & Hume, New York City (Leslie F. Ruff, New York City, of counsel), for appellees McGrath.
David W. Silverman, Granik, Silverman, Sandberg & Nowicki, New York City, N.Y., for appellee Citizens Cas. Co. of New York.
Howard R. Cohen, Bower & Gardner, New York City, for appellee Guaranty Reinsurance Co.
Kenneth Sagat, D'Amato & Lynch, New York City (John P. Higgins, New York City, of counsel), for appellees Allstate Ins. Co., Urbaine Fire Ins. Co., Arkwright-Boston Manufacturers Mut. Ins. Co., Hardware Mut. Cas. Co., and National Cas. Co.
Daniel H. Mahoney, New York City (Kathryn D. Nealon, New York City, of counsel), for appellee American Mut. Ins. Co. of Boston.
Stuart A. Schlesinger, David Jaroslawicz, Julien, Schlesinger & Finz, P.C., New York City, for appellee Ratner.
Before OAKES, GURFEIN and VAN GRAAFEILAND, Circuit Judges.
Judge Pollack, however, granted judgment notwithstanding the verdict to appellees. Appellees had argued earlier in the proceedings that, as a matter of law, plaintiffs had waived any claim for fraud by affirming the malpractice settlement after discovering the misrepresentations. Judge Constance Baker Motley had denied appellees' motion to dismiss the complaint on this ground, holding that plaintiffs were entitled under New York law to retain the benefits of the settlement and nevertheless to proceed with the fraud action. Slotkin v. Brookdale Hospital Center, 357 F. Supp. 705 (S.D.N.Y. 1972).
Judge Pollack's original charge to the jury also stated that as a matter of law plaintiffs had not waived their right to sue for fraud. Nevertheless, subsequent to the verdict he reversed his previous holding and also ruled contrary to Judge Motley. He granted judgment to defendants notwithstanding the verdict on the ground that plaintiffs' failure to rescind the settlement and retry the case in state court when given the opportunity to do so constituted a waiver of the fraud action.
We reverse this grant of judgment to appellees notwithstanding the verdict except as to appellee Berkowitz. We also reverse the alternative holding that appellees are entitled to a new trial because the jury improperly allocated the damage award after it returned a verdict of liability and in response to a request of the court for clarification of the verdict. Additionally, we reverse the lower court's finding of insufficient evidence to support the verdict against defendant John McGrath and its dismissal of the complaint against the reinsurers of Citizens. Because such a result does not permit a single appropriate judgment our mandate is expressed in the alternative.
Appellants here are Steven John Slotkin and his mother, Charlotte Slotkin. Mrs. Slotkin, a diabetic, gave birth to Steven at Brookdale Hospital Center, then Beth-El Hospital, on November 16, 1963. Steven sustained brain damage at birth which his doctors diagnosed as congenital cerebral palsy. As a result of the brain damage, he is paralyzed, confined to a wheelchair, and will require constant care for the rest of his life. Plaintiffs claimed, and the jury in the action below subsequently found, that the Hospital's failure properly to administer insulin to Mrs. Slotkin during the period immediately preceding delivery had caused Steven's brain damage.
In order to understand the issue of waiver, the principal issue that all appellees raise, it is necessary to detail what happened in the state court proceedings. Appellant Steven and his father, Bert Slotkin, since deceased, commenced the state court action against Beth-El Hospital. Citizens had $200,000 of primary liability insurance coverage but was undergoing liquidation and rehabilitation by the State of New York. Ten companies, here called the reinsurers,3 reinsured $150,000 of this coverage. Subscribing underwriters at Lloyd's of London underwrote $1 million worth of excess insurance.
On February 22, 1971, at the jury selection, Christopher McGrath, the attorney for Citizens who was representing the defendant Hospital, told Max Toberoff, plaintiffs' attorney, that the Hospital had only $200,000 worth of insurance coverage. McGrath also stated that he had not told the Hospital's own counsel that the case was on trial, and he refused Toberoff's request that he notify the Hospital's attorney. Toberoff, concerned about the collectibility of plaintiffs' likely judgment, then notified the Hospital administrator by telephone, letter, and telegram that the case was on trial and that the Hospital faced possible exposure to liability for a verdict in excess of $1 million. In response to the Administrator's telephone call, appellee George Berkowitz, an attorney and trustee of the Hospital, appeared at the courthouse on behalf of the Hospital. Berkowitz told Toberoff at that time that the insurance coverage was $200,000. According to Berkowitz's testimony in his deposition taken shortly before the trial below, he had learned about the policy limit from Christopher McGrath, John McGrath, also trial counsel for Citizens, and Paul Ratner, assistant vice-president and claims manager of Citizens.
On February 25, 1971, New York State Supreme Court Justice Oliver D. Williams, the trial judge, held a conference for the parties. According to Toberoff's testimony in the court below, both Berkowitz and Christopher McGrath affirmed to the judge that the total insurance coverage was $200,000, although as we have noted, Berkowitz stated that the McGraths and Ratner were the source of his information.4 Toberoff stated that both he and Justice Williams found it difficult to believe that the Hospital's coverage was so low. Despite the very low "policy limit" and the plaintiffs' willingness to settle within the limit, the parties reached no agreement; and the case went to trial.
The state court trial proceeded to plaintiffs' advantage. Dr. Gerald Bernstein, an internist and assistant professor at Albert Einstein College of Medicine and acknowledged specialist in diabetes, testified that Mrs. Slotkin's doctor had ordered fractional urine specimens to be examined for sugar and acetone q.i.d. (four times a day); his orders hence required a test before each meal and at bedtime. Based upon the results of these tests, insulin should have been administered as necessary to avoid acetonuria.5 Dr. Nicholas Olninc, a neurosurgeon who participated in a National Institutes of Health study introduced at the trial, corroborated Dr. Bernstein's testimony. The health study demonstrated the relationship between acetonuria in diabetic mothers and neuropsychological defects in their children. See note 5 supra. The evidence showed that on the morning of November 14, 1963, two days before Steven's birth, Mrs. Slotkin had acetonuria. This condition was shortlived; she was given regular insulin and responded very readily. By that afternoon the condition had cleared up; her 6:00 p. m. test was also negative. However, she was not given the remaining q.i.d. test before bedtime on the 14th. The following morning she did not feel well; her fractional urine test showed high levels of sugar and acetone, indicating the condition of acetonuria of so much concern. Her own physician administered insulin and made the following note in the hospital record: "Acetonuria noted this a. m. Probably due to the fact that patient has not received any insulin for almost 18 hours." Mrs. Slotkin responded slowly to the insulin, indicating that the acetonuria was quite severe and that she was in a state of acidosis. These episodes were the only acetonuria she had had during her pregnancy.
Steven was born on November 16 with symptoms of brain damage; when he was eleven months old and still not sitting up, his parents took him to Dr. Leon Greenspan, director of the Children's Division at the Institute of Rehabilitation Medicine, also known as the Rusk Institute. Dr. Greenspan diagnosed congenital brain damage; at trial he corroborated the testimony of Drs. Bernstein and Olninc that the failure to check Mrs. Slotkin's urine before bedtime on November 14 and to administer the needed insulin had resulted in maternal acidosis which in turn had caused Steven's brain damage.
It is further stipulated and agreed that the settlement of $185,000 is hereby approved by the trial judge and that he is to make the allocation of the said sum of $185,000 after all the facts and affidavits are submitted to him by trial counsel as to the allocation of the $185,000 between the plaintiffs Slotkin as to the loss of services and medical expenses and the balance paid to the plaintiff.
It is further stipulated that the attorney for the defendant represents that the total insurance coverage of the defendant is the sum of $200,000, under a policy with Citizens Casualty, and to the best of his knowledge there are no other policies covering this event.
The settlement in the sum of $185,000 is to be paid without interest, costs or disbursements.
MR. (Christopher) McGRATH: So stipulated.
A week to ten days after the parties entered into the stipulation on the record, Ratner advised Christopher McGrath, and Christopher McGrath in turn advised Justice Williams and Toberoff, that there was $1 million in excess coverage and that the representations as to insurance coverage had been erroneous.10 At this point Justice Williams had not yet signed an order under N.Y.Civ.Prac. Law § 1207 and Rule 1208 (McKinney)11 allocating the sums paid in settlement. Justice Williams held a conference on March 31, 1971. The judge attempted to have the excess insurer participate in new settlement discussions, but it refused to do so because it claimed that Citizens had not notified it that the case was going to trial (although it did know that an action was pending). Attorneys for the excess insurer did state that it would participate if there were a retrial.
Toberoff insisted that it was impossible to retry the case. Mrs. Slotkin, who had testified at trial and whose testimony was important because it contradicted the hospital record in part, had still not recovered completely from a heart attack. Her physician, who examined her shortly after the trial, stated that she should not be asked to testify again. Additionally, all of the plaintiffs' expert witnesses Dr. Bernstein, Dr. Greenspan, Dr. Olninc indicated that they would not testify again. Toberoff contacted a number of other doctors, but they also refused to testify. Moreover, the Slotkins did not have the funds for a new trial. The cost of the plaintiffs' case had been $6,800, and they had borrowed $3,000 to make partial payment.
Toberoff also rejected the offer to forfeit the plaintiffs' jury rights and continue the trial before the judge on the original record. He similarly refused the offer of a new jury trial that would rely on the record from the original trial because he believed that having his clients' case put to the jury in the form of a record when the defendants' case would be put in on live testimony would disadvantage plaintiffs' case. Therefore, at the insistence of Toberoff and the plaintiffs, Justice Williams on June 4, 1971, signed the "infant's compromise order," see note 11 supra, approving the settlement. Toberoff's intention to sue all parties involved for fraud was well-known at the time.
Plaintiffs initiated the instant diversity action for fraud, but prior to trial they voluntarily discontinued the case against the Hospital; its administrator and deputy administrator; the excess insurer; its attorney, Robert Gilroy, and his law firm, Mendes & Mount. The case went to trial against the other defendants, who were Citizens, the primary insurer; the reinsurers; Ratner; Berkowitz; and the McGraths. At the close of plaintiffs' case Judge Pollack dismissed the complaint against the reinsurers. The jury found both underlying malpractice on the one hand12 and fraud on the other; it rendered a verdict in the total sum of $680,000, allocating it in accordance with Judge Pollack's "supplemental instructions"13 as follows: Citizens, $500,000; Berkowitz, $100,000; Ratner, $60,000; Christopher McGrath, $20,000; and John McGrath, nothing.
Initially, we note that Judge Pollack had the power to rule as he did on the waiver point, even though Judge Motley (and he) had held otherwise previously. It is well established that "the law of the case" does not constitute a limitation on the court's power but merely expresses the general practice of refusing to reopen what has been decided. Dictograph Products Co. v. Sonotone Corp., 230 F.2d 131, 134-36 (2d Cir.), petition for cert. dismissed per stipulation, 352 U.S. 883, 77 S. Ct. 104, 1 L. Ed. 2d 82 (1956). See also Messenger v. Anderson, 225 U.S. 436, 444, 32 S. Ct. 739, 56 L. Ed. 1152 (1912); LeRoy v. Sabena Belgian World Airlines, 344 F.2d 266, 274 (2d Cir.), cert. denied, 382 U.S. 878, 86 S. Ct. 161, 15 L. Ed. 2d 119 (1965).
C. McCormick, Handbook on the Law of Damages § 121, at 453 (1935). Thus the New York rule serves to deter fraud. Moreover, the rule does not present a problem of double recovery. In this case, for example, Judge Pollack appropriately instructed the jury that in fixing damages it should deduct from the "fair settlement value" the $185,000 received under the settlement. See note 2 supra.
Judge Pollack considered that the settlement was "inchoate" until the judicial order finalizing the arrangement was made. He relied heavily on this characterization in determining that defendants' misrepresentations had not prejudiced plaintiffs. But even if the March 4, 1971, stipulation of settlement was technically "inchoate,"18 it was treated as final at the time; and plaintiffs reasonably relied upon defendants' representations in agreeing to the settlement and allowing the judge to dismiss the jury. Thus although it is true that plaintiffs could have avoided going through with the settlement, this does not diminish the prejudice that they had already suffered by irrevocably changing their position.
In holding that plaintiffs had waived their right to sue by not rescinding the settlement, Judge Pollack relied upon a series of commercial cases which he cited for the proposition that "(i)f a victim of misrepresentation learns the truth when performance of a contract has just begun, and he could rescind without significant prejudice, . . . he waives the fraud if he proceeds to execute the agreement." 447 F. Supp. at 256, citing, e. g., A. G. Concrete Breakers, Inc. v. State, 9 A.D.2d 995, 996, 194 N.Y.S.2d 743, 745 (1959) (alternative ground); Kelly v. Otis Elevator Co., 283 A.D. 363, 368, 128 N.Y.S.2d 39, 43 (1954) (dictum), aff'd mem., 308 N.Y. 805, 125 N.E.2d 864 (1955). This rule prevents a plaintiff from recovering damages for "self inflicted" injury. See, e. g., Thompson v. Libby, 36 Minn. 287, 31 N.W. 52, 53 (1886). But these cases are distinguishable because they all involve an exchange of money or value for goods or services after the defrauded party has learned of the fraud and when he has not incurred any damages at the time that he has the opportunity to rescind.
Involved here, however, is the release or settlement of an underlying personal injury claim where, in contrast to the commercial cases, the plaintiffs had already been injured by the dismissal of the jury before they discovered the fraud. Plaintiffs here never had the opportunity to avoid any injury. Plaintiffs were already injured, and their only choices were to accept the settlement and sue for fraud or to retry the malpractice case with all that retrial involved in terms of obtaining witnesses and the like. Given these choices, their decision to proceed by way of the fraud action was understandable, as we discuss below.
If the effort, risk, sacrifice, or expense which the person wronged must incur in order to avoid or minimize a loss or injury is such that under all the circumstances a reasonable man might well decline to incur it, a failure to do so imposes no disability against recovering full damages.
C. McCormick, supra, § 35.
Of course by hindsight it may appear that the risk of a defendant's verdict was minimal, but that is by hindsight only. At the time that plaintiffs had to make their election there was a definite possibility that no live medical evidence could be had for a retrial.
We stress again that it was appellees who committed the fraud, that plaintiffs did significantly change position by allowing the judge to dismiss the jury before learning the truth, and that obtaining a verdict in the present litigation under more favorable circumstances does not at all show that a retrial in the state court would not have resulted in still further injury to plaintiffs.19 Thus Judge Pollack was in error in granting judgment notwithstanding the verdict on the ground that plaintiffs had not significantly changed their position before learning the truth.
Because we believe that the jury could properly have found, as it did under appropriate instructions, supra note 19, that fraudulent misrepresentations made to plaintiffs amounted to legal fraud, and that they did not waive their right to sue for the injury that they suffered as a result of those representations, we address the remaining principal question on appeal of who was responsible and who is therefore liable.
Ratner took over the settlement negotiations on March 4; and again, his position of authority in and of itself made his misstatements more egregious. Ratner contends that the McGraths and Berkowitz21 told him that the coverage was only $200,000; but again, the documents are evidence against him. See note 9 supra. The letters then in his possession explicitly disclose the excess insurance; and there was ample evidence, to permit the jury to reject any defense of failure of memory or simple mistake on his part, note 10 supra, and, as in the case of Christopher McGrath, to find scienter under Burgundy Basin and Ultramares, supra.
The jury's finding as to Berkowitz is more troubling. Berkowitz did not speak with anyone in the Hospital administration nor check any of the Hospital records to determine the insurance coverage, instead relying solely upon the statements of Christopher and John McGrath. We could easily hold that Berkowitz was negligent, perhaps even grossly negligent, in so failing to check or in so relying; but there is, we think, insufficient evidence to permit a jury to find recklessness or a representation "stated to be true on the personal knowledge of the representer."
Indeed, we note that plaintiffs in fact did not premise their action against Berkowitz on the theory that he had intentionally or even recklessly misrepresented the amount of the insurance coverage. Both Charlotte Slotkin and Toberoff testified that they did not believe that Berkowitz had lied. Rather, Mrs. Slotkin stated that "he just didn't know any better about any of the insurance companies"; and Toberoff stated that "it was my impression that George Berkowitz may have been guilty of a fraudulent representation in that he was grossly careless." Furthermore, plaintiffs do not make a claim against Berkowitz for a representation of absolute knowledge. Their reference to the record discloses, insofar as Berkowitz is concerned, only the testimony on deposition by Berkowitz that he told Toberoff after conversing with the McGraths that he "was informed that there was $200,000 insurance."
Finally, we note that Berkowitz not only had no motive to conceal the excess insurance; but rather, to protect the Hospital, he had every reason to seek to tap whatever insurance coverage there might have been. His unawareness of the excess insurance is evident in his statement to Justice Williams that because he believed that the Hospital itself would be liable above the $200,000 limit, he wanted the record to reflect bad faith on the part of the insurance carrier if it failed to settle the case within the $200,000 limit. The district court itself noted the "extraordinarily thin reed on which it is suggested that there may be a claim against" Berkowitz, and we hold that the court did not err in recognizing this lack of evidence in granting Berkowitz's motion for judgment notwithstanding the verdict.
The court should not, however, have dismissed the complaint as to John McGrath.22 Although he may have been only minimally at fault, there was sufficient evidence for the case against him to go to the jury; and the jury found him liable (even though in subsequently apportioning the damages it allocated none to him). As to John McGrath the verdict was not against the weight of credible evidence. There was evidence that John McGrath gave the appearance of personal knowledge when he specifically ratified his brother's misrepresentation: "What Chris told you is true . . . . All the coverage there is on the case is $200,000 . . . . That's it. How many times do you want to hear it?" Berkowitz stated that John McGrath was one of his sources of information about the insurance coverage. There was evidence that John McGrath participated in the drafting of the March 4 stipulation which contained explicit representations as to the coverage limit. Moreover, the letters from the excess insurer's counsel were in his firm's file. We note that on the basis of this evidence, Judge Pollack reversed his earlier ruling granting John McGrath's motion for dismissal. On the renewed motion at the close of all the evidence, Judge Pollack recognized that it would be best to get the jury's verdict on the fact questions. The evidence supports the verdict that the jury rendered, and it is in accordance with New York law under Burgundy Basin and Ultramares, supra.
Finally, even though the case was not tried on a partnership theory, as a matter of law John McGrath was liable for his partner's tort. N.Y. Partnership Law §§ 24, 26 (McKinney); Caplan v. Caplan, 268 N.Y. 445, 448, 198 N.E. 23, 24 (1935); see also Pedersen v. Manitowoc Co., 25 N.Y.2d 412, 419, 306 N.Y.S.2d 903, 909, 255 N.E.2d 146, 150 (1969) (joint venture).
The reinsurers were closely involved in all the transactions leading up to the settlement. They had written notice of the state court trial, and they had an absolute right to all information concerning any matter affecting their coverage. Moreover, their consent was needed for any settlement within the reinsured range, i. e., over $50,000. There was abundant evidence, including Ratner's own testimony, that throughout the trial Ratner communicated with each of them either directly or through his subordinate. Ratner told Toberoff that he had to telephone the reinsurers as soon as the settlement talk crossed the $50,000 line. Indeed, Toberoff provided Ratner with a copy of the National Institutes of Health study better to enable Ratner to persuade the reinsurers to settle. Ratner testified that he contacted each of the reinsurers to obtain their final consent to the $185,000 settlement. And according to Toberoff's testimony in the court below, Berkowitz told him at the time of the settlement negotiations that Ratner was talking to the reinsurers; Christopher McGrath confirmed that Ratner told him that he, Ratner, had obtained the reinsurers' consent to the settlement.
For the reinsurers to be liable for misrepresentation, plaintiffs needed to prove that Ratner was acting as their agent or representative when he misrepresented the amount of coverage. A crucial point to remember is that although the reinsurers' consent was required for any settlement above $50,000, they did not have an employee present at the trial. Because a settlement stipulation was agreed upon, one can infer that the reinsurers' consent to the settlement was obtained through some intermediary, some agent. The reinsurers contend that Ratner's testimony was inadmissible against them to prove agency and thus that there was a complete absence of probative evidence of an agency relationship.
In dismissing the complaint against the reinsurers, Judge Pollack relied on the rule of law that he paraphrased as "(a)cts and declarations of a person assuming to be the representative of another are not competent to prove the agency." Compare Restatement (Second) of Agency § 285 (1958). That rule, however, does not deal with testimony by an agent. See id. comment a. As there stated, "(a) person can properly testify as to the facts which it is alleged constitute his authority, and his testimony can be introduced either by or against the alleged principal." See F. Mechem, Outlines of the Law of Agency § 95 (P. Mechem ed. 1952). See also Steuerwald v. Jackson, 123 A.D. 569, 108 N.Y.S. 41 (1908); Boston Old Colony Insurance Co. v. Trivedi, 93 Misc.2d 566, 403 N.Y.S.2d 169 (1978). Thus Ratner's testimony was admissible on the issue of agency. The reinsurers themselves concede in their brief that "(t)he deposition testimony of Mr. Ratner . . . is not prohibited by the rule regarding the out of court acts and declarations of a purported agent." Rather, their argument is that Ratner's statements do not prove the existence of agency. We agree with plaintiffs that their burden of proof to avoid dismissal of the complaint was not to prove the agency but merely to adduce sufficient evidence to take the issue to the jury. The jury should have been allowed to resolve the fact questions, as is its province.
This is not to say that Ratner's misrepresentations as to excess coverage were within the scope of his agency. This too is a question of fact that the fact-finder must decide. The rule in this regard is that "(i)f the statement is one which, if true, the agent would be authorized or apparently authorized to make, the principal is subject to liability for it, although deceitfully made." Restatement (Second) of Agency, supra, § 257, comment a.23 We note, however, that the jury's verdict indicates a finding that Ratner's comments were made within the scope of his agency with Citizens. We believe that there is also sufficient evidence for a jury to conclude that if Ratner was acting as agent for the reinsurers, his comments were similarly within the scope of his agency. The evidence could support a finding that Ratner's agency relationship with Citizens and with the reinsurers was the same; if so we can see no difference in the fact of liability of the two as principals.
Evidence of a statement by an agent concerning the existence of extent of his authority is not admissible against the principal to prove its existence or extent, unless it appears by other evidence that the making of such statement was within the authority of the agent or, as to persons dealing with the agent, within the apparent authority or other power of the agent.
Thus if the jury finds that Ratner's declarations establish the agency and the scope of his authority as encompassing his statements, then it may properly consider the testimony of others as well. Thus on the basis of all of the testimony, there was sufficient evidence of an agency relationship to send the case against the reinsurers to the jury.
Appellees argue that in any event a new trial is called for because of the jury's allocation of damages. The jury first brought in a verdict of $680,000 "total against all of them." See note 13 supra. In response to a question by the court, "Has the jury found that each of the defendants is liable for the $680,000?," the forelady said, "Yes, Your Honor." At this point, the court raised the spectre of multiple liability against the defendants in the amount of $680,000 each and sent the jury out to determine whether it wanted to allocate the verdict. Id. The jury returned the second time with the allocated verdict as noted above.
Thus the crucial question is whether the subsequent submission to the jury can be treated as void, allowing plaintiffs to reinstate the $680,000 verdict. We find that under Klepper v. Seymour House Corp., 246 N.Y. 85, 98-99, 158 N.E. 29, 34 (1927), the jury properly found a general verdict in accordance with the law; their subsequent action of allocation under direction of the court is surplusage which may be disregarded. See also Dextone Co. v. Building Trades Council, 60 F.2d 47, 49 (2d Cir. 1932) (where jury verdict, which attempted to apportion damages, had found both liability and amount of plaintiff's loss, form of verdict may be disregarded); Gleich v. Volpe, 32 N.Y.2d 517, 523-24, 346 N.Y.S.2d 806, 811, 300 N.E.2d 148, 151-52 (1953) (trial judge properly disregarded jury's attempt to apportion damages between defendants and entered judgment against both defendants for full amount awarded plaintiffs). We hold that the $680,000 verdict against Citizens, Ratner, and both McGraths, jointly and severally, may be reinstated.
Because we have also held that the court below should not have dismissed the complaint against the reinsurers, plaintiffs have an option: they may either reinstate the verdict and judgment of $680,000 against Citizens and the three individuals, or they may retry the case ab initio against all appellees except George Berkowitz on both liability and damages. They may not do both. If plaintiffs elect reinstatement of the verdict already rendered, the case will be remanded for a separate trial before Judge Pollack on the cross claims for contribution and apportionment among the appellees (against except George Berkowitz) as per their stipulation, note 24 supra.
Judgment in accordance with opinion.
In February 1971, a medical malpractice action against Brookdale Hospital was reached for trial in New York State Supreme Court. The suit had been brought on behalf of Steven Slotkin, an infant, who allegedly sustained permanent brain damage at the time of his birth because of the improperly controlled toxemia of his diabetic mother.
The hospital had $1,200,000 of liability insurance, $200,000 of primary coverage written by Citizens Casualty Co. and a $1,000,000 umbrella policy written by Lloyds of London. The hospital's attorneys had nothing to gain by hiding from plaintiffs the existence of the umbrella policy. The insurance was there to be used; that is why the hospital purchased it.1 If the attorneys fraudulently concealed its existence, they exposed themselves to personal liability which might not be covered by their own malpractice policy.2 They would be liable to the plaintiffs and would also be required to indemnify all of the hospital's carriers held derivatively liable because of their wrongdoing. Oceanic Steam Navigation Co. v. Compania Transatlantica Espanola, 134 N.Y. 461, 467, 31 N.E. 987 (1892); Opper v. Tripp Lake Estates, Inc., 274 App.Div. 422, 423-24, 84 N.Y.S.2d 461 (1948), aff'd, 300 N.Y. 572, 89 N.E.2d 527 (1949); 42 C.J.S. Indemnity § 21 at 597-98.
Notwithstanding the foregoing, the existence of the Lloyds policy was not disclosed, and, as a result, the attorneys and claim representative Ratner have been sued for fraud and misrepresentation. Although the personal liability to which these men are thus exposed is in no way determinative of the issues on this appeal, it precludes us from comfortably rationalizing that this litigation involves merely the shifting of liability from one insurance carrier to another. It also highlights what I believe to be the basic weakness in plaintiffs' case.
The fundamental issue on this appeal is whether plaintiffs could reject Lloyds' offer to make $1,000,000 in coverage available if the trial were recommenced, successfully importune the state judge to approve settlement for $185,000, and thereafter recover substantial damages from appellees because the settlement approved at plaintiff's insistence did not represent their claim's true settlement value. I believe that the district court was correct in concluding that they could not.
I disagree at the outset with the majority's interpretation of the New York law governing infants' settlements. Prior to court approval, the settlement herein was not, as the majority would have it, only "technically" inchoate. Until the compromise was approved by the court in the manner prescribed by the New York statutes, it was not a legal settlement, and it could not be enforced by either the plaintiffs or the defendants.
Two former New York State Supreme Court Justices, one of whom is now a Judge of the New York Court of Appeals, testified as experts on the trial below. They were in agreement that Judge Williams could have, and should have, declined to sign the order approving the $185,000 settlement, in which event the stipulation of compromise would have had no binding effect. Plaintiffs' trial counsel in the state court action also testified that "Judge Williams had a right to refuse to sign the compromise papers, which would have nullified the entire settlement proceedings" and that "if he didn't sign the papers I did know that the settlement is a nullity." These were correct statements of the New York law.
Infant plaintiffs are wards of the court, Glogowski v. Rapson, 20 Misc.2d 96, 97, 198 N.Y.S.2d 87 (1959), and New York's "rules of practice abound in provisions of ancient origin designed to safeguard their legal rights." Greenburg v. New York Central and H. R. R. R. Co., 210 N.Y. 505, 509, 104 N.E. 931, 932 (1914). Today's rules, as embodied in CPLR 1207 and 1208, require that applications for approval of an infant settlement be made upon motion supported by affidavits of the infant's representative and attorney setting forth certain specified facts.3 The order entered on such a motion has the effect of a judgment. CPLR 1207; Krichmar v. Krichmar, 42 N.Y.2d 858, 860, 397 N.Y.S.2d 775, 366 N.E.2d 863 (1977).
Contrary to Judge Oakes' assertion, the damages which are the basis of plaintiffs' claim for recovery did not occur at the time the state action was discontinued and the jury dismissed. Although plaintiffs did agree to a discontinuance in reliance upon appellees' misstatements, and, as a result, undoubtedly sustained some damage, this was not the damage for which they sued. The jury's verdict was based upon the allegedly inadequate settlement which plaintiffs insisted the Court approve after they had full knowledge of the facts. Under the doctrine of volenti non fit injuria, recovery cannot be had where an agreement has been consummated in this manner. Oleet v. Pennsylvania Exchange Bank, 285 App.Div. 411, 137 N.Y.S.2d 779 (1955); Kelly v. Otis Elevator Co., 283 App.Div. 363, 128 N.Y.S.2d 39 (1954), aff'd, 308 N.Y. 805, 125 N.E.2d 864 (1955); General Valuations Co. v. City of Niagara Falls, 253 App.Div. 156, 1 N.Y.S.2d 880, aff'd on this point, 278 N.Y. 273, 15 N.E.2d 802 (1938); Commodity Credit Corp. v. Rosenberg Bros. & Co., 243 F.2d 504 (9th Cir.), cert. denied, 355 U.S. 837, 78 S. Ct. 62, 2 L. Ed. 2d 48 (1957).
The rationale of the foregoing cases is not confined to commercial contracts. The proper measure of damages is inseparably connected with the right of action, Chesapeake & Ohio Ry. v. Kelly, 241 U.S. 485, 491, 36 S. Ct. 630, 60 L. Ed. 1117 (1915), and two basic and closely related doctrines of the law of damages are (1) that a wrongdoer is responsible only for the natural and proximate consequences of his misconduct, Steitz v. Gifford, 280 N.Y. 15, 20, 19 N.E.2d 661 (1939), and (2) that an injured person must take reasonable steps to minimize his losses. Pearlstein v. Scudder & German, 527 F.2d 1141, 1145 (2d Cir. 1975); Industrial Sugars, Inc. v. Standard Accident Insurance Co., 338 F.2d 673, 676 (7th Cir. 1964). Under the doctrine of "avoidable consequences", a plaintiff cannot recover damages resulting from consequences he could reasonably have avoided. Restatement of Torts § 918. Put another way, if a plaintiff could reasonably have avoided the consequences, the defendant's wrongdoing is not the proximate cause of their occurrence. McClelland v. Climax Hosiery Mills, 252 N.Y. 347, 358-59, 169 N.E. 605 (1930) (Cardozo, C. J., concurring); W. B. Moses & Sons v. Lockwood, 54 App.D.C. 115, 295 F. 936, 941 (D.C. Cir. 1924).
Here, the plaintiffs deliberately and knowingly rejected $1,000,000 in available insurance in order that they might impose liability upon appellees. In view of this conduct, I am at a loss to understand the majority's statement that "(p)laintiff's here never had the opportunity to avoid any injury." Plaintiffs had every opportunity to avoid the injury for which they now seek recovery. It is no answer to say that, if they wanted to take advantage of Lloyds' umbrella policy, they would have to present their proof a second time. They would have to do this in any event in their fraud action against appellees.6 It is likewise no answer to say that plaintiffs would have to rescind their settlement and give up $185,000. Until court approval was obtained, plaintiffs had no binding settlement, no $185,000, and no right to demand payment of it. Moreover, there is nothing in the record to indicate that appellee insurers would have withdrawn their settlement offer if the case were ordered retried. Indeed, because appellees' entire $200,000 would have to be expended before the $1,000,000 in umbrella coverage became available, appellees would almost certainly have offered the full amount of their policies in order that plaintiffs would not be denied the benefit of the umbrella coverage.
"To err is human" is a phrase inscribed in the records of antiquity. Where, as here, defendants have erred, the law does not impose upon plaintiffs the divine obligation of forgiveness. Justice will not be served, however, if this Court accepts financially motivated retaliation as an alternative. Because I believe this is what my colleagues are doing in the instant case, I respectfully dissent.
Assuming, for the argument only, that the district judge erred in dismissing the complaint as to the individual defendants, he was nonetheless correct in dismissing as against the reinsurers. The sole obligation of the seven reinsurers was the contractual duty to indemnify Citizens Casualty Co. for the amount of its policy loss in excess of $50,000, the share of reinsurance as between carriers varying from five percent to fifteen percent. Although settlement of plaintiffs' case for $185,000 resulted in a saving for the five percent reinsurer of only $750, my colleagues hold nonetheless that a jury could find that Ratner was acting as this carrier's agent when he fraudulently concealed the existence of Lloyds $1,000,000 policy. They say that the "evidence could support a finding that Ratner's agency relationship with Citizens and with the reinsurers was the same." With all due respect for my brothers' perspicacity, I do not find this to be so.
Ratner was a paid employee of Citizens, the company whose policy was issued to Brookdale and whose duty it was to handle all liability claims against the hospital. The reinsurers' sole obligation was to Citizens, i. e., the obligation to indemnify. Greenman v. General Reinsurance Corp., 237 App.Div. 648, 649, 262 N.Y.S. 569 (1933).
"Reinsurance, to an insurance lawyer, means one thing only the ceding by one insurance company to another of all or a portion of its risk for a stipulated portion of the premium, in which the liability of the reinsurer is solely to the reinsured which is the ceding company, and in which contract the ceding company retains all contact with the original insured, and handles all matters prior to and subsequent to loss."
13 Appleman, Insurance Law and Practice § 7681 at 479-80.
Giving plaintiffs the benefit of the broadest reading of all the testimony concerning the in-court and out-of-court statements of Ratner,7 his sole contact with the reinsurers was through telephone conversations with their "claims people" in which either he or his subordinates at Citizens attempted to "sell them", to "push them", to "get them to up the offer". This, my brothers say, is sufficient to permit a finding that Ratner was acting as the agent for all seven "pushees".8 I disagree.
Agency is a fiduciary relationship which arises when one acts on behalf of another and is subject to his control. Northern v. McGraw-Edison Co., 542 F.2d 1336, 1343 (8th Cir. 1976), cert. denied, 429 U.S. 1097, 97 S. Ct. 1115, 51 L. Ed. 2d 544 (1977); Aetna Insurance Co. v. Glens Falls Insurance Co., 453 F.2d 687, 690-91 (5th Cir. 1972); Globemaster Midwest, Inc. v. United States, 337 F. Supp. 465, 470 (Cust.Ct.1971); Restatement (Second) of Agency § 1. The purported agent must have been assigned and instructed by the purported principal to carry out the task he was performing. Paroutian v. United States, 370 F.2d 631, 632 (2d Cir.), cert. denied, 387 U.S. 943, 87 S. Ct. 2077, 18 L. Ed. 2d 1331 (1967).
There is not one iota of evidence to establish that Ratner, the Assistant Vice President of Citizens, was under the control and supervision of the reinsurers.9 He denied categorically that he was or that he acted on their behalf. Moreover, the testimony that Ratner attempted to "sell" and "push" these companies, the only testimony offered to establish agency, is completely at odds with the fiduciary obligation that Ratner, as an agent, would owe.
In today's world of high verdicts, where substantial insurance coverage is a must, it is rare indeed that the entire risk on a policy is carried by the named insurer. Reinsurance is the rule rather than the exception. Under my colleagues' version of the law, a reinsuring carrier would not dare discuss settlement of a case with the primary carrier's claim representative for fear that it would be making him its agent. This is not, and should not be, the law. See Aetna Insurance Co. v. Glens Falls Insurance Co., supra, 453 F.2d at 690-91. Where, as here, plaintiffs failed completely to establish the existence of a principal-agent relationship, the district court had no alternative but to dismiss the complaint as to the reinsuring carriers. Cramer v. Hoffman, 390 F.2d 19, 23 (2d Cir. 1968); Hedeman v. Fairbanks, Morse and Co., 286 N.Y. 240, 248, 36 N.E.2d 129 (1941).
In dismissing the infant's claim against the reinsurers and in setting aside the verdict against the remaining defendants, Judge Pollack was performing a most unpleasant task. He was, however, carrying out his duties in accordance with the highest traditions of his office. I have written at some length in a losing cause because I want to make clear that, in the opinion of one appellate judge, the law of New York gave Judge Pollack no happier choice.
On petitions for rehearing by the reinsurers, Allstate Insurance Co., American Motorists Insurance Co., American Mutual Insurance Co. of Boston, Employers Mutual Liability Insurance Co. of Wisconsin, Guaranty Reinsurance Co., Urbaine Fire Insurance Co., Grange League Insurance Co., National Casualty Co., Hardware Mutual Casualty Co., and Arkwright-Boston Manufacturers Mutual Insurance Co. The petitions for rehearing by the reinsurers, in addition to making the same argument made in their main briefs, argue that not to dismiss the case would have "serious consequences for the entire insurance industry" (Petition for Guaranty Reinsurance Co. at 5); "Now, reinsurers will be held directly liable as principals of the reinsured to third parties" (Petition for American Mutual Insurance Co. of Boston at 4); and that "the decisions of the New York Courts have uniformly followed a rule of strict privity to even the extent that insureds of the direct insurer do not generally have an action against reinsurers" (Petition for other reinsurers at 3-4).
If plaintiffs exercise their option under our opinion to "retry the case ab initio against all appellees except George Berkowitz on both liability and damages," at 318, an option which they may not elect to take, and plaintiffs on a retrial meet their burden of proof to take the issue of agency to the jury, it will of course be open to the reinsurers to adduce contrary proof on the existence of the agency relationship or whether Ratner's misrepresentations as to excess coverage were within the scope of his agency for them. Similarly the factual issue whether Ratner contacted the reinsurers to obtain their consent to the $185,000 settlement,2 to the extent it has a bearing on those issues and the case, will be subject to proof ab initio.
Under the foregoing circumstances OAKES and GURFEIN Circuit Judges adhere to their previous opinion, and VAN GRAAFEILAND, Circuit Judge adheres to his dissent.
Petitioners Christopher McGrath, Jr., and John McGrath move separately for rehearing and rehearing en banc of this court's August 29, 1979, decision. Christopher McGrath, Jr., claims that the court distorted New York law, and John McGrath that the verdict below was misinterpreted with respect to him and that he should not have been held liable on a partnership theory.
PETITION OF CHRISTOPHER McGRATH, JR.
Petitioner Christopher McGrath, Jr., claims that the opinion both misconstrues the facts of his involvement and applies the wrong law. The first argument remains unconvincing. The second is inaccurate. It is petitioner who misstates the scienter requirements of New York law under Burgundy Basin Inn v. Watkins Glen Grand Prix, cited at 314, petitioner acted with intent.
Petitioner's best argument is that the judicially approved New York state settlement had the force of a judgment, barring plaintiff from instituting and appealing his federal case. He places primary reliance on Holm v. Shilensky, 388 F.2d 54 (2d Cir. 1968), in which this court, also applying New York law in diversity jurisdiction, declined to review an earlier Nevada decree allegedly obtained via fraud. But the ratio decidendi of Holm is solely that New York courts must give full faith and credit to the decree of the rendering state, and since the decree would not have been reviewable in Nevada, a New York court could not review it. Holm supports petitioner only if New York forbids the sort of challenge to an earlier decree here permitted. In support of that position, petitioner adduces Grossman v. Kass, 124 N.Y.S.2d 416 (Sup.Ct.1953). Grossman is, however, effectively supplanted by Byrnes v. National Union Insurance Co., cited at 312, quoted approvingly in National American Corp. v. Federal Republic of Nigeria, 597 F.2d 314, 323 (2d Cir. 1979). Byrnes holds that when plaintiffs do not ask for rescission of a release (which, as in the instant case, was judicially approved) but rather affirm it and sue for damages for fraud in its procurement, the new trial is legitimate. 310 N.Y.S.2d at 782. It is not barred by res judicata because it is for a different, albeit related, cause of action. See Inman v. Merchants Mutual Casualty Co., cited at 312, 83 N.Y.S.2d at 803.
The opinion reinstates the first general verdict against all defendants. Petitioner John McGrath's new, separate counsel makes the new arguments that that verdict was vague, tentative, uncertain, and possibly not unanimous, see at 310-311 n. 13, and that the judge sent the jury back for further deliberation before petitioner had an opportunity to poll them, as was his right under Humphries v. District of Columbia, 174 U.S. 190, 194, 19 S. Ct. 637, 43 L. Ed. 944 (1899). Accordingly, the argument runs, it is unfair to hold petitioner liable under the first verdict the jury may or may not have intended to find against him.
Even accepting this as true the second verdict rather than the first would have to be reinstated. The jury therein found petitioner liable but assessed no monetary damages against him. While in state courts there is some disagreement as to whether a verdict against defendant for $0.00 amounts to judgment for plaintiff or defendant, see Annotations, 116 A.L.R. at 834; 49 A.L.R.2d at 1331, 1334, most federal cases interpret the verdict as a finding of defendant's liability to a given extent, viz., $0, e. g., Joseph v. Rowlen, 425 F.2d 1010, 1013 (7th Cir. 1970) ("We believe any distinction between an award of 6< and '0' damages is more of form than substance"); Wingerter v. Maryland Casualty Co., 313 F.2d 754, 756 (5th Cir. 1963) (verdict neither invalid nor ambiguous, no retrial needed); but see Association of Western Railways v. Riss & Co., 112 U.S.App.D.C. 49, 51, 299 F.2d 133, 135 (D.C. Cir.), cert. denied, 370 U.S. 916, 82 S. Ct. 1555, 8 L. Ed. 2d 498 (1962) (remanding for entry of judgment for defendant since finding of no damage meant plaintiff had not proven claim).
Under this interpretation, the jury by its second verdict found petitioner a joint tortfeasor. Acting under erroneous apportionment instructions, however, it allocated none of the damages to him. This allocation, however, must be set aside under New York law which holds tortfeasors jointly and severally liable.
Therefore, even if petitioner should be judged by the second rather than the first verdict, his liability remains the same.
We are persuaded, however, that the alternative holding finding John McGrath liable as a matter of law for his partner's torts, at 316, is erroneous and should be eliminated. The case was not tried on this theory; were it, John McGrath could have taken steps, now foreclosed, to decrease his liability. He could have joined as a defendant both his partnership, see N.Y.C.P.L.R. § 1025, and his other partner, see N.Y.Partnership Law § 24. He may not be able hereafter to sue them for contribution. Because of the prejudice to petitioner of affirming on the basis of a theory not advanced below, the alternative holding should be and it hereby is stricken from the opinion.
The petitions for rehearing are otherwise each denied.
VAN GRAAFEILAND, Circuit Judge, adheres to his dissent.
The plaintiffs did not sustain any damages unless they had a valid malpractice claim against the Brookdale Hospital. I have already explained to you how to determine whether they had such a valid claim. You must then determine the actual pecuniary loss, if any, suffered by the plaintiffs, that is, the difference between the amount which was actually paid on the settlement in 1971 and the amount which would have been the fair settlement value of the Slotkin case if plaintiffs had not been deceived.
Assuming the parties meant to avoid further litigation and to compromise their dispute and that nothing but true facts were disclosed, how much could plaintiffs reasonably have demanded and the Brookdale Hospital reasonably have allowed as a final compromise? That is the fair settlement value.
In conclusion, it seems apparent that this mother developed moderately severe ketoacidosis somewhere between the evening of November 14 and the morning of November 15. This was due to the fact that an appropriate urine analysis was not done at 10 P.M. on the evening of November 14 or thereafter, when acetone in the urine would have been detected. Had this been done, the administration of insulin as ordered by the physicians could have averted the acidotic state on the morning of the 15th. This significant ketoacidosis, in my opinion, can be an adequate cause of brain injury in the premature newborn.
MR. TOBEROFF: So far as you are concerned.
MR. TOBEROFF: You have no knowledge as to whether the hospital has additional coverage with other companies? You have no knowledge of that?
MR. McGRATH: I do have knowledge of that. We were the only company on the line at that time.
Because Mr. McGrath indicated that he knew that there was no other coverage, we construe his statement as being a denial of excess insurance also.
We are the attorneys representing the interest of the excess insurers for Beth El-Brookdale Hospital Center. We have received various letters sent by you to the assured stating that the litigation involves an amount in excess of your policy limits.
We would like to have the opportunity in approximately two months time to review your file and discuss these claims with you. We will accordingly be telephoning you in several weeks to arrange a mutually convenient time for such a review and discussion.
Upon motion of a guardian of the property or guardian ad litem of an infant or, if there is no such guardian, then of a parent having legal custody of an infant, or if there is no such parent, by another person having legal custody, or if the infant is married, by an adult spouse residing with the infant, or of the committee of the property of a person judicially declared to be incompetent, the court may order settlement of any action commenced by or on behalf of the infant or incompetent. If no action has been commenced, a special proceeding may be commenced upon petition of such a representative for settlement of any claim by the infant or incompetent in any court where an action for the amount of the proposed settlement could have been commenced. If no motion term is being held and there is no justice of the supreme court available in a county where the action or an action on the claim is triable, such a motion may be made, or special proceeding may be commenced, in a county court and the county judge shall act with the same power as a justice of the supreme court even though the amount of the settlement may exceed the jurisdictional limits of the county court. Notice of the motion or petition shall be given as directed by the court. An order on such a motion shall have the effect of a judgment. Such order, or the judgment in a special proceeding, shall be entered without costs and shall approve the fee for the infant's or incompetent's attorney, if any.
(c) Medical or hospital report. If the action or claim is for damages for personal injuries to the infant or incompetent, one or more medical or hospital reports, which need not be verified, shall be included in the supporting papers.
(d) Appearance before court. On the hearing, the moving party or petitioner, the infant or incompetent, and his attorney shall attend before the court unless attendance is excused for good cause.
(e) Representation. No attorney having or representing any interest conflicting with that of an infant or incompetent may represent the infant or incompetent.
(f) Preparation of papers by attorney for adverse party. If the infant or incompetent is not represented by an attorney the papers may be prepared by the attorney for an adverse party or person and shall state that fact.
THE COURT: Madam Forelady, has the jury agreed upon a verdict?
THE COURT: This says that you have reached a verdict. You may make inquiries, Mr. Clerk.
The Clerk will ask you about each name and then you will advise what your verdict is.
THE CLERK: What is your verdict as to the defendant Citizens Casualty Company of New York?
THE FORELADY: We have decided against.
THE COURT: Is that your whole verdict?
THE COURT: Is there any amount of verdict against them?
You decided against them, did you say?
THE COURT: In what amount, if any?
THE FORELADY: We have an amount for all.
THE COURT: What is the amount that the jury has found? In other words, you have found the same amount against all defendants?
THE FORELADY: A total of $680,000 total against all of them.
THE COURT: Your verdict against the Citizens Casualty is what?
THE FORELADY: We didn't break it down, your Honor.
THE COURT: Has the jury found that each of the defendants is liable for the $680,000? Is that what you are saying?
THE FORELADY: Yes, your Honor.
THE COURT: In other words as to the defendant Citizens Casualty, Paul Ratner, Chris McGrath, John McGrath and George Berkowitz, your verdict is $680,000?
THE COURT: Poll the jury.
THE CLERK: You say that you find in favor of the plaintiff Steven John Slotkin as against the defendant Citizens Casualty Company of New York, Paul Ratner, Christopher McGrath, John McGrath and George Berkowitz in the sum of $680,000.
THE COURT: When you say total combined, let me understand that. You have reached one verdict?
JUROR NUMBER FOUR: One verdict, one total against all combined. I hope it wasn't misunderstood that it was against each one.
THE COURT: The way the verdict stands now, it is a verdict against each one for $680,000.
THE FORELADY: No, all told.
THE COURT: The only collectibility will be a total of $680,000.
JUROR NUMBER TWO: A fraction of.
JUROR NUMBER FOUR: A portion of, pro rated.
THE COURT: If it is a pro rated verdict, that is one thing. On the other hand, if you intend a proportionate verdict only, that is, for each one in a particular amount that's a different thing. So, I have to send you back for you to decide what verdict you wish to render. The defendants are sued individually, and although you say there is only one total recovery, if you have all indicated the amount among them, that's one kind of a verdict.
If you have not allocated the verdict among them, any one is responsible for the whole $680,000.
So, you better go out and decide what it is that you are trying to call to our attention.
Will the jurors go back for a moment while I talk to counsel, to be sure I have a correct understanding of what it is Juror Number Four, I think it was, tried to convey to me.
THE COURT: Bring in the jury.
THE CLERK: Madam Forelady, has the jury agreed upon a verdict?
THE FORELADY: Yes, we have.
THE COURT: Read the verdict.
THE CLERK: (Reading) We have a verdict in favor of the plaintiff for $680,000 to be apportioned in this manner: Citizens Casualty $500,000, Mr. Berkowitz $100,000, Mr. Ratner $60,000, Chris McGrath $20,000, John McGrath nothing.
Signed Anna D. O'Shea, Forelady.
THE COURT: All right, ladies and gentlemen, that completes your service in this case. Thank you very much for your attention and the time that you spent. You are now excused.
Plaintiffs' attorney excepted to the dismissal on the ground that the jury's verdict of liability, before it apportioned damages, was a verdict against all the defendants, including John McGrath. The court responded that "there was no competent evidence within the burden of proof obligatory in a fraud case" of any intent on his part to deceive nor gross negligence or pretense of knowledge. Plaintiffs' attorney began to catalogue the evidence against John McGrath to show that it was sufficient "to raise a triable issue of fact." The court, however, countered that "(a)ny verdict against John McGrath would have been clearly against the weight of the credible evidence and would have been clearly set aside on that ground as well as the ground already mentioned." By this last ground the judge further disclosed his belief that the jury's failure to allocate any damages to John McGrath was in effect a finding of no liability; we note that he stated that a verdict against John McGrath "would have been set aside."
Moreover, even without regard to the difference between the state and federal procedure, Judge Pollack's position proves too much. By proceeding with the fraud action, plaintiffs did not eliminate the prejudice that they had suffered. When the defendants' conduct put plaintiffs in a disadvantageous position, plaintiffs were injured; they did not stop being injured just because they were able to overcome the injury. Under Judge Pollack's view, the victim of fraud would never be able to recover his damages by electing to affirm the settlement and sue for damages in deceit; no matter what the prejudice, his success in proving the underlying cause of action would demonstrate the absence of prejudice in proceeding by retrial. Because New York law allows the fraud victim to proceed by affirmance and an action for deceit, we cannot subscribe to Judge Pollack's view of the relationship between the two causes of action.
a person makes a misrepresentation with scienter, meaning knowingly, if he knows that the representation is false, or he neither knows nor cares whether it is true or false, or if he has no genuine belief that it is true. If a speaker actually believes that what he says is true, then he does not act with scienter, even though that belief is negligent, in that a reasonable man would not believe it.
There is one exception to what I have just told you. If you find that the defendant whom you are considering intended that it should be understood that what he said about the hospital's insurance was true to his personal knowledge and intended that the plaintiffs should act on the basis of what he said, then you should find that said defendant acted with scienter if he didn't know what he (said) was true. To this extent, a person who asserts a falsehood as true to his personal knowledge may be said to have acted with scienter, that is, knowingly, even though he believes what he says to be true.
"A false representation is not cognizable by the law as deceit unless it is believed and relied upon as an inducement to action."
Ochs v. Woods, supra, 221 N.Y. at 338, 117 N.E. at 306.
"The maker of a fraudulent misrepresentation is not liable to one who does not rely upon its truth but upon the expectation that the maker will be held liable in damages for its falsity."
I am not impressed by the argument that appellants' doctors could not have been compelled to give opinion testimony if the state court action had been retried. The doctors could have been subpoenaed and required to testify as to all of their factual observations. Had they then refused to repeat the expert testimony they had given on the prior trial, it could have been read into evidence. CPLR 4517. It is inconceivable that any doctor, sitting on the witness stand, would forego a lucrative fee for testifying as an expert, and at the same time put the medical profession and his own standing in disrepute, by repeating his factual observations but refusing to reiterate his opinion based thereon.
The reinsurers were closely involved in all the transactions leading up to the settlement. They had written notice of the state court trial, and they had an absolute right to all information concerning any matter affecting their coverage. Moreover, their consent was needed for any settlement within the reinsured range, i.e., over $50,000. There was abundant evidence, including Ratner's own testimony, that throughout the trial Ratner communicated with each of them either directly or through his subordinate. Ratner told Toberoff that he had to telephone the reinsurers as soon as the settlement talk crossed the $50,000 line. Indeed, Toberoff provided Ratner with a copy of the National Institutes of Health study better to enable Ratner to persuade the reinsurers to settle. Ratner testified that he contacted each of the reinsurers to obtain their final consent to the $185,000 settlement. And according to Toberoff's testimony in the court below, Berkowitz told him at the time of the settlement negotiations that Ratner was talking to the reinsurers; Christopher McGrath confirmed that Ratner told him that he, Ratner, had obtained the reinsurers' consent to the settlement.
While Ratner's critical testimony on deposition was most equivocal, he did testify (348A) that "(t)here might have been one conversation where I obtained (the reinsurers') consent to settle the case for $185,000," by which he said he meant, "I called each one individually but it concerned this one matter."

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