Court Opinion

ID: 9642179
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:51:08.554977+00
Date Added: 2024-06-11T18:10:43.702567
License: Public Domain

DENISON, Circuit Judge
(dissenting).
Having reached the conclusion that the question discussed in the opinion of the court is the controlling one, and being unable to agree with the result reached, the importance of the question seems to justify a statement of my reasons for dissent.
Where a life insurance policy provides that it “shall be incontestable after two years,” I would have supposed that the limitation period referred to the maturing of the claim, which would for the first time give something to be contested, and that, if death did not create a cause of action until after the two-year period, then a suit on the policy would be incontestable; otherwise, not. The clause does not speak of a contest to be made, but of a right which cannot be contested; it would have seemed (to me) to fix the status of the policy claim- — -to contemplate a defense continuously existing, not a long continuing-burden. However, the contrary has been expressly ruled (Mutual Co. v. Hurni Co., 263 U. S. 167,176, 44 S. Ct. 90, 68 L. Ed. 235, 31 A. L. R. 102), and this ruling must, of course, be accepted, and to its full extent. This court now goes further, and holds that the insurer must, within the two years, not only initiate a “contest,” but it must be a judicial eqntest; the liability must not only be challenged, but the challenge is ineffective, unless it is made according to a code not mentioned in the contract. Are we compelled to this contract extension ?
The answers to the questions whether the *283policy was rescinded, and whether it was contested, depend upon the effect to be given to the notice and tender of April 14th. Was this a mere notice of intention, substantially ineffective until some later judicial decision based thereon, or was it presently effective, subject only to a future contingency? The opinion takes the former view.
The law is full of instances of acts which depend for their justification and validity upon the existence of certain facts, and it often happens that the matter is not closed until there has been a later judicial decision as to whether this fact-justification exists; but, when this decision is reached, it relates back to and takes effect upon the act when it was done, and all subsequent steps which depend upon that act are as valid as if their basis had never been m question; they are not made valid by this decision; the decision is in effect that they always were valid.
Either party to a contract may, if there is lawful reason therefor, rescind it, thereby (subject to some limitations) destroying it from the beginning, or may denounce and repudiate it, thereby destroying it for the future. In either case this is his absolute right, not because some court may subsequently approve, but because the facts existed which gave him the right. I understand that the textbooks (not only those cited in the opinion, but perhaps without exception) all take this view o‘f the matter.1 The illustration of the defrauded vendor is only one instance. Undoubtedly he may decláre a rescission and retake his goods, ex parte, or, if necessary, by replevin. If he proceeds ex parte, his original title, temporarily parted with, is fully reinstated, subject only to be divested, if the vendee should later successfully assert the lack of fraud. This is only a kind of taint upon the vendor’s title, which taint may thus develop into a complete decay; but, unless it does, the title is good enough. If the vendor resorts to replevin, he may and commonly does sell the goods over again, and his second vendee gets title, subject only to the contingency that a court later may decide that no rescission-justifying fraud existed. In such later litigation, the question is not, “Shall this sale he now rescinded?” It is, “Was this sale effectively rescinded by the vendor’s action ?”
It is sometimes said that, as it takes two to make a contract, it takes two to rescind it In a broad sense I think this fallacious, because one party can rescind if he has good ground for it, though, in a narrower sense it may be correct, because, in the illustration just used, we may well say that the vendee gives cause for rescission and practically, looking into the future, gives his implied consent thereto, and indeed tenders it, when he commits the fraud; the vendor upon discovery accepts the tender, and the court’s later decree does not confirm any unilateral rescission, but declares the effect of the combined conduct of the two parties.
Coming for further illustration to the repudiation of an executory contract in which the vendor is to continue to make and ship, and the vendee is to continue to receive and pay for: Either party may be guilty of conduct which justifies the other in repudiation and termination, and, if the facts justify him in this step, he may thereafter proceed upon the theory that the contract is ended. He may buy from another or sell to another, but he does so subject to the contingency that the court may later decide against him as to the essential, fact. Here, also, I understand that, if there is no acquiescence, litigation goes on, and if the judgment is in his favor, all his acts in disregard of the contract prevail, not as of the time of the judgment, hut as of the time when they were done, because the judgment merely is that at that time they were rightfully done.
The language of the present contract has a bearing. Such a contract usually says, “This policy shall be void if.” It does not sa-y that, in such event, the insurer may maintain or defend some legal proceeding. True, “void” would mean “voidable by election”; but, after the election is rightfully exercised, the policy becomes and is “void.” We may at least say that the line of cases holding that resort must be had to equity to effect a rescission of sealed instruments for certain frauds - (see Southern Ry. v. Clark, infra) could not apply to contracts expressly stipulating their invalidity, if that same fraud had occurred.
With all deference, I think the case of a supposed rescission by mutual consent does present an analogous question. As to such a rescission, the dispute may be whether it was in fact made, or whether it was procured by fraud. If of the first character, the insurer *284may insist that there was an agreement to cancel and the insured may deny it. Each party will stand upon his insistence and act accordingly, until the issue is decided by the judgment of the court; but, when decided, the judgment must take effect as of the date of the supposed rescission, and all acts subsequent thereto will stand or fall upon the conclusion that the policy was or was not canceled by agreement on the day in question, and had or had not been in force thereafter. If the dispute about the agreed rescission is of the second character, then by stating it we are only restating precisely the problem here existing. So also, it seems to me, of the illustration of a repudiation or rescission of a contract of compromise and settlement in a personal injury case. If plaintiff claims this contract was fraudulently procured, he may proceed regardless of it. It is the rule in this circuit that, when such contract is presented as a defense, plaintiff may attack it as fraudulent, even though he has filed no bill. Southern Ry. v. Clark (C. C. A.) 233 F. 900, 905. This is because fraud vitiates it; and if it is fraudulent, and if plaintiff elects to repudiate, it is no contract. Its failure as a defense is not because it is judicially set aside; its failure is because it never had any lawful existence.
I see no escape from the conclusion that the effect of the proceeding of April 14 depends upon what the facts were. If there had been sufficient fraud, the company had a right to rescind, and by this notice did rescind. The company had the right to stand provisionally upon that position. The insured had the right to stand upon the position that there had been no rescission because there had been no ground for it. If and when this dispute reached the point of a judicial decision, the issue would be whether, on April 14, the contract had or had not been rescinded. True, this distinct issue might later be lost sight of, or merged in the continuing right to defend upon the same facts which had justified the rescinding; but this would be, I think, a confusion of issues.
It does not follow that an election to rescind, based upon actual fraud, can be made at any time. Even though an effective rescission, it is also, I think,- a “contest,” or a fact creating contestability, and it is competent for the parties to agree that any denial of liability, on any ground, or made in any way, must yield to a time limitation; and this they have done by the very broad word “incontestable.” A rescission by agreement would not be within the limitation, for that would be, not a contest, but a new contract.
With these views, and agreeing with the District Judge as to the proved existence of sufficient fraud, I must think that the decree below was right; but, even if the contingency attending such a transaction is so great that it ought not to be defined as rescission, I must think that it is at least a “contest,” and that, after receiving such a notice, the insured can no longer say that his claims are not under contest. This question the Supreme Court of the United States has never passed upon. It was presented by the Humi Case. As there had not been any contest, except by this notice of rescission, until' after the two years had certainly run, it would have been easy for the Supreme Court to say that this notice was not a contest, and hence it was unnecessary to determine the exact beginning of the limitation period.
The eases cited in the present majority opinion, to the effect that there must be a judicial contest initiated by the insured within the period, do not indicate to me an appealing “weight of authority.” A study of all the cases which are cited by counsel to that effect indicates that the doctrine is based on a mere dictum in an early ease in the Supreme Court of New York, and that, in most of the later cases cited, whatever is said to that effect was also dictum. The two or three late federal cases which accept the rule as if it were a settled one do not disclose any analysis of the authorities, and the occasional state court cases — like that in Powell v. Mutual Life Ins. Co. of New York, 313 Ill. 161,144 N. E. 825, 36 A. L. R. 1239 — in which the pronouncement is not dictum have, it seems to me, taken a wrong view as to the principle of rescission for fraud.
I find myself in substantial, if not complete, accord with the views of Judge Cochran in'(D. C.) 294 F. 122, 132-134.

 Bishop on Contracts (2d Ed.) § 679; Black on Rescission and Cancellation, § 578, citing Cunningham v. Pettigrew (C. C. A. 8) 169 F. 335, 341: “Rescission is a fact, the assertion by one party to a voidable contract of his right (if such he has) to- avoid it, and when the fact is made known to the other party [with necessary tender] whether by suit or in any other unequivocal way, the rescission is complete.” See, also, section 579.
Parsons on Contracts, § 679 (note a); § 681, note (Ed.) ; 832 (9th Ed.); Wald’s Pollock on Contracts (3d Ed.) p. 706 (note 26), 716 (notes 42, 43).