Opinion ID: 870443
Heading Depth: 2
Heading Rank: 1

Heading: Rhode Island Law on Retention of Premiums

Text: The Trust's first argument centers on what the Trust characterizes as Rhode Island's tender back rule. According to the Trust, a party who seeks rescission of a contract -- even when that contract was procured by fraud which imposes losses -- is always required to return the entire consideration received under the contract to the other party, under all circumstances. This argument is based on an erroneous reading of Rhode Island law. The cases primarily relied upon by the Trust do not stand for such a broad and inflexible proposition. Rather, a court sitting in equity under Rhode Island law has the power to make 9 The Trust does not contest that part of the Memorandum and Order declaring the Policy rescinded. -14- whole a party who seeks rescission of a contract procured by fraud, and that is exactly what the district court did. In Wells v. Great Eastern Casualty Co., 100 A. 395, a beneficiary of an insurance policy sued the insurer for policy benefits, and one of the insurer's defenses was that it had rescinded the contract before the death of the insured, based on the insured's fraudulent misrepresentations. Id. at 395-96. At the time of the suit, the insurer had already returned the policy premiums. Id. at 396. It was in this context that the Rhode Island Supreme Court stated that upon the discovery of the false and fraudulent nature of a material statement contained in [an insurance] application . . . , the [insurer is] entitled to return the premiums paid and rescind the contract of insurance -- in other words, it found that the insurer's actions were a valid defense to a suit on the policy. Id. The court did not hold that the insurer's actions were the only way to effect rescission. Similarly, in Pelletier v. Phoenix Mutual Life Insurance Co., 141 A. 79 (R.I. 1928), the Rhode Island Supreme Court stated that an insured's release of a claim under an insurance policy is a bar to an action on [the released] claim, including when the release was allegedly procured by fraud, so long as the release is not rescinded or avoided by a return or offer to return the money or other valuable consideration given for it. Id. at 80. This conclusion was based on the commonsense recognition that a -15- plaintiff cannot affirm the release as valid and operative so far as it is for his benefit, and disaffirm that part which is beneficial to the releasee. Id. While Pelletier's holding recognizes that an offer to return consideration is generally part of seeking rescission, it does not establish an ironclad rule. Here, PHL at no time attempted to affirm [the Policy] as valid, id., and in fact, in its complaint, PHL stated that it stood ready, willing, and able to refund or otherwise make payment of all or any portion of the premiums paid for the Policy as directed by the Court. PHL fully and unconditionally tender[ed] the Policy's premiums to the Court's registry. Thus, to the extent that Pelletier endorses a tender back requirement, PHL undoubtedly fulfilled it. The Trust's implication that PHL, during the pendency of its lawsuit for rescission, had to hand over the premiums to the Trust (the party that PHL alleged had conspired to defraud it in the first place), rather than to the court, is not supported by any cited authority. In fact, at least one Rhode Island case suggests the opposite. Cf. Cruickshank v. Griswold, 104 A.2d 551, 552 (R.I. 1954) ([A] bill in equity to obtain a rescission is not like an action at law brought on the footing of a rescission previously completed; rather, the foundation of the bill is that the rescission is not complete and that the plaintiff asks the aid of the court to make it so.). -16- Moreover, the Trust's argument that the tender back requirement flatly prohibited the court from using the Policy premium to offset PHL's consequential damages runs contrary to other settled rules of Rhode Island law. The Rhode Island courts have held that a trial court sitting in equity has discretion to determine the appropriateness of, and to formulate, equitable relief, and that this discretion should be guided by 'basic principles of equity and justice.' Ruggieri v. City of E. Providence, 593 A.2d 55, 57 (R.I. 1991) (quoting City of E. Providence v. R.I. Hosp. Trust Nat'l Bank, 505 A.2d 1143, 1146 (R.I. 1986)). One of these basic principles is that contract rescission seeks to create a situation the same as if no contract ever had existed, Dooley v. Stillson, 128 A. 217, 218 (R.I. 1925), an endeavor that may include allowing a party to recover costs it would not have incurred but for the formation of the contract, see Lummus Co. v. Commw. Oil Ref. Co., 280 F.2d 915, 927 (1st Cir. 1960) (describing [t]he purpose of an action for rescission as to permit the defrauded party to obtain restitution of the benefits conferred by him, including such special damages as are necessary to make [the defrauded party] whole); Tarpinian v. Daily, No. 95-0104, 1997 WL 838150, at -4 (R.I. Super. Ct. Aug. 15, 1997). Another such principle is that parties should not gain advantage from their own fraud. See Silva v. Merritt Chapman & -17- Scott Corp., 156 A. 512, 514 (R.I. 1931). And yet another is that a court of equity, when its jurisdiction has been invoked for any equitable purpose, will proceed to determine any other equities existing between the parties which are connected with the main subject of the suit [and] grant all relief necessary to an entire adjustment of the litigated matters, provided they are authorized by the pleadings. Sparne v. Altshuler, 90 A.2d 919, 923 (R.I. 1952). Taken together, these equitable principles provide ample support for the district court's decision to make PHL whole by allowing it to retain the premium. PHL paid a commission to Rainone of $172,365 that it would not have paid but for the misrepresentations that led it to issue the Policy.10 Mere rescission of the contract would not have compensated PHL for this expense. While PHL apparently did not provide a precise accounting of the other costs it incurred with respect to the Policy, see PHL Variable, 889 F. Supp. 2d at 277 n.1, it was reasonable for the district court to conclude that the costs alleged in PHL's complaint -- including underwriting, administration, and servicing of the Policy, as well as investigation into the misrepresentations 10 The Trust's argument that PHL could not recover this amount as damages against the Trust is discussed below. -18- in the application -- justified awarding PHL the remaining $19,635 from the premium, particularly in light of the Trust's fraud.11 The district court, following Rhode Island law, was warranted in refusing to reward the Trust for its unclean hands. See, e.g., Cullen v. Tarini, 15 A.3d 968, 975, 979 (R.I. 2011) (affirming lower court's finding that, in equitable suit regarding real property, defendants had come to court with unclean hands and this could have been a basis for rejecting their affirmative defenses). The court could reasonably view the record as demonstrating that the Trust did not pay the premium from its own funds; indeed, it had no funds. The payment was funded by the loan from Imperial meant to perpetrate the fraud. If PHL were ordered to refund all or part of the premium to the Trust, the Trust would be enriched with money that it never had in the first place. That is, the Trust would not be placed back in its pre-contract position, but in a better position, while PHL would be worse off than it would have been had the contract never existed. Or, whether or not the Trust would be put in a better position,12 as 11 The district court denied PHL's motion for attorneys' fees, PHL Variable, 889 F. Supp. 2d at 284, and as such we interpret the court's award of special damages to include expenses incurred by PHL other than amounts paid to its attorneys in this action. 12 It is worth noting that, under the terms of the Amended and Restated Trust Agreement, the Trust would be obligated to turn over any premium refund to Imperial. If it did so, the refund would result in an inequitable windfall to Imperial rather than to the Trust itself. Imperial has already received a kickback of $67,025 from Rainone's commission, and the entire refunded premium would be -19- between the Trust and PHL it was entirely equitable to impose the costs of the fraud on the former. See Randall v. Loftsgaarden, 478 U.S. 647, 663 (1986) ([I]t is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them. (quoting Janigan v. Taylor, 344 F.2d 781, 786 (1st Cir. 1965)) (internal quotation marks omitted)). The flexibility of equity is designed to avoid unjust results. Next, the Trust argues that the district court's decision violated Rhode Island's election of remedies rule. Under Rhode Island law, a party who asserts that a contract was procured by fraud can choose either to seek rescission of the contract or to affirm the contract and sue for damages. See LaFazia, 575 A.2d at 184. The Trust asserts that the district court's order, which both granted rescission and awarded damages, ran afoul of this rule. In its view, once PHL obtained rescission, it was barred from seeking any damages. Again, the Trust misstates the law. The election of remedies rule simply does not apply in this case. PHL did not seek damages on the Policy: that is, it did not affirm the contract and then file an action on that contract, seeking contractually based damages. Instead, PHL elected its equitable remedy of rescission, more than the original principal amount of its loan to the Trust ($189,000). Imperial would thus realize a profit of up to $70,025 on the fraudulent transaction, while PHL would be worse off than it began. -20- and, consistent with the purposes of rescission, sought only such damages as would return it to the position it would have been in had it never entered the contract. Cf. FUD's, Inc. v. State, 727 A.2d 692, 696-97 (R.I. 1999) (citing Justice Story for the proposition that money damages are available in cases at equity when they are incidental to the equitable relief sought (quoting 2 Commentaries on Equity Jurisprudence § 794, at 1-2 & n.1 (12th ed. 1877))); R.I. Dairy Queen, Inc. v. Burke, 187 A.2d 521, 526 (R.I. 1963) (same). The damages that the district court awarded in this case were for expenses incidental to the rescinded contract, and reimbursement for those expenses was necessary to craft an equitable remedy that would make PHL whole. Finally, the Trust argues that the district court's decision was contrary to Rhode Island law holding that a party who has an adequate remedy at law cannot seek relief in equity. See Kocon v. Cordeiro, 200 A.2d 708, 710 (R.I. 1964). The Trust alleges that PHL had an adequate remedy at law because it could have sued Rainone to recover the commission it paid him. However, Rhode Island law also provides that, in order to defeat equity jurisdiction, the remedy at law must be as certain, prompt, complete and efficient as can be granted by a chancellor. Id. The evidence does not support a conclusion that any alleged remedy at law would meet this standard. -21- First, PHL was clearly entitled to invoke the court's equity jurisdiction by seeking rescission of the Policy: no award of damages against any party involved in procuring the Policy would have adequately compensated PHL for the prospect of having to pay a death benefit of $5 million. Once PHL was properly before the court on its claim for rescission, the court had authority to proceed to determine any other equities existing between the parties which are connected with the main subject of the suit, Sparne, 90 A.2d at 923 -- including the special damages associated with the Trust's role in the fraud. Further, the Trust has not put forth any evidence to show that PHL's supposed remedy at law against Rainone is at all certain or complete. PHL has alleged that Rainone is judgmentproof, and the Trust has not argued to the contrary. See Thew Shovel Co. v. McCormick, 166 A. 354, 355 (R.I. 1933) (holding that claim against insolvent estate would be neither a complete nor an adequate remedy at law). Additionally, if the Trust believed that Rainone – or Bowie, or Vianello, or Imperial -- was the party liable to PHL for the company's losses, the Trust could have impleaded any one or more of those parties in this action.