Court Opinion

ID: 9643217
Source: CourtListenerOpinion
Date Created: 2023-08-22 20:22:29.142473+00
Date Added: 2024-06-11T18:10:57.416483
License: Public Domain

MORROW, Circuit Judge
(dissenting). At the time these policies were issued on May 19, 1921, the insured property had been mortgaged by a mortgage dated April 25, 1921, and executed by the plaintiffs. It was provided in the mortgage that, if default be made in the payment of any of the sums secured by the mortgage, then the balance of unpaid principal and interest should, at the election of the mortgagee, become immediately due without notice, and the mortgage might be foreclosed. The mortgage had been duly filed, recorded, and indexed in the auditor’s office of Whitman county, Wash., as a real estate and chattel mortgage, pursuant to law, on June 6, 1921, and from that date was a notice to all the world of the- existence and conditions thereof (Remington’s Washington Codes and Statutes, vol. 1, § 3662), and became a first lien and prior to all other liens and incumbrances upon such property.
On August 23, 1921, riders were attached to the policies covering buildings, providing in identical terms on all three policies for the security of the trustee or mortgagee, among other things as follows:
“Loss or damage, if any, under this policy, on buildings only, shaU be payable to assigns, Dolph Coolidge, trustee, for mortgagees, or mortgagee (or trustee), as interest may appear. Subject to all the terms and conditions hereinafter set forth in this rider, this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership of the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy.”
In condition 1 it was provided:
“In ease the mortgagor or owner shaU neglect to pay any premium due under this policy, the mortgagee (or trustee) shall, on demand, pay the same.”
In condition 2 it was provided:
“The mortgagee (or trustee) shall notify this company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee), and unless permitted by this policy it shall be noted thereon and the mortgagee (or trustee) shall, on demand, pay the premium for such increased hazard for the term of the use thereof; otherwise, this policy shaU be null and void.”
On November 22, 1921, Dolph Coolidge, as trustee for the holders of the notes hereinbefore mentioned, brought suit in the state court to recover the sum of $22,581.98, the amount of such notes, with interest thereon at the rate of 8 per cent, per annum from the 23d day of April, 1921, untU paid. To this complaint the plaintiffs herein interposed a demurrer, which was overruled by *909the court. The plaintiffs thereupon answered, denying the material allegations of the complaint, and alleging affirmatively that the notes and mortgage were without consideration, and that plaintiffs had received nothing of value in connection with or on account of said instruments; that there was no competent or other authorization for the execution of said instruments; and that the execution thereof was ultra vires.
At the time the defendants attached the mortgage clause as riders to the policies of insurance on August 23, 1924, the mortgage was subject to foreclosure proceedings, by reason of the default in the payment of the note due July 1, 3921. The defendants had therefore constructive notice of the condition of the mortgage security when the mortgage was filed, recorded, and indexed in the auditor’s office in Whitman county, Wash., on June 6, 1921. They had actual notice of the mortgage, and contracted with the mortgagee with full knowledge of its conditions when it attached the mortgage riders to the policies on August 23, 1921, and it conclusively appears by such riders that the defendants contemplated the foreclosure proceedings when they provided in the mortgage clause of the riders that the interest of the mortgagee in the insurance policy should not be invalidated by an act or neglect of the mortgagor or owner of the property by any foreclosure or other proceedings. But it is nowhere provided in the policies of insurance that the policies shall be void in part only; that is to say, that the interest of the mortgagors shall alone he forfeited “if, with the knowledge of the insured, foreclosure proceedings be commenced.” The condition is that the entire poliey should be void “if, with the knowledge of the insured, foreclosure proceedings be commenced.” The forfeiture clause is attached to and operates, if at all, with respect to the entire policy, and not to ■a part. The defendants have, by their contract with the mortgagee, expressly waived a forfeiture of the entire policy, but they •are now insisting upon the validity of that .part only which secures the mortgagee.
In some of the cases the forfeiture under this clause of poliey has been justified by the courts on the ground that the commencement of the foreclosure proceedings increases the risk of the insurance hazard. With respect to the policy in suit it was expressly provided in condition 2 of the riders attached to the policies in this case that the mortgagee should notify the insurance company of any increase of hazard which should come to the knowledge of the mortgagee, and unless permitted by the poliey it should be noted thereon and the mortgagee on demand should pay the premium for such increased hazard for the term of the use thereof. If, then, the commencement of foreclosure proceedings increased the insurance hazard, the fault is chargeable under this contract to the mortgagee, who commenced the foreclosure proceedings, and not to the mortgagors, who are resisting such proceedings.
In Insurance Co. v. Norton, 96 U. S. 234, 242, 24 L. Ed. 689, the court said:
“Forfeitures are not favored in the law. They are often the means of great oppression and injustice.”
In May on Insurance, it is said, in section 174:
“Having indemnity for its object, the contract is to be construed liberally to that end, and it is presumably the intention of the .insurer that the insured shall understand that in ease of loss he is to be protected to the full extent which any fair interpretation will give.”
In section 175 the author says:
“No rule, in the interpretation of a policy, is more fully established, or more imperative and controlling, than that which declares that, in all cases, it must be liberally construed in favor of the insured, so as not to defeat without a plain necessity his claim to the indemnity, which, in making the insurance, it was his object to secure.”
In Michigan State Insurance Co. v. Lewis, 30 Mich. 41, 46, 47, the policy of insurance provided that, if any proceedings for the sale of the insured property should be had, commenced, or taken without the consent of the insurance company, the poliey should he void and of no effect. The property had been mortgaged before being destroyed by fire. The company refused payment of the insurance poliey after the fire on the grounds, among others, that foreclosure proceedings had been taken, and the mortgagor had neglected to notify the company and obtain its assent. The court below had refused to instruct the jury that the commencement of foreclosure proceedings without the company’s consent had voided the policy. Judge Cooley, that much respected and eminent .judicial authority, stating the opinion of the Supreme Court of Michigan, said:
“It only remains to be seen whether the institution of the foreclosure proceeding, of itself, and irrespective of any delay what*910ever in giving notice [to the insurance company], relieved the company from further liability. * * * But we are all of the opinion that where insurance is taken upon mortgaged property, and the insurer is notified of the mortgage, and, of course, understands that proceedings may at any time be taken to foreclose it when the mortgage is overdue, as seems to have been the ease when this insurance was taken, it would be a most unreasonable and unjust construction of such a provision to hold that, by the mere commencement of foreclosure proceedings, the policy would be annulled. * * * We cannot suppose the insured in this ease understood that his contract was liable to be terminated, on the very day it was made, by the act of a third party in beginning the foreclosure of a mortgage of which the insurers were fully advised, and subject to which they had accepted the risk.”
In the course of Judge Cooley’s opinion he refers to the printed form of the policy and its general conditions, and says:
“The condition appears in a printed form of policy made use of by the company, and probably designed to be sufficiently general in its conditions to answer in all eases. Such a general form cannot be supposed to have had special and exceptional eases particularly in view, and it is therefore more likely to suggest troublesome questions of construction than a contract specially prepared for the case.”
The same comment is applicable here, where the conditions are in printed form, numerous, general, and technical, and so framed and indorsed upon the policies by the defendants. It is doubtful if the plaintiffs ever saw the clause under consideration, or, if seen, understood it as meaning what defendants now claim.
But there is a still further and more fundamental objection to this forfeiture. The defendants knew, or ought to have known, when they contracted with the mortgagee for the security of his interest, that the mortgagors were entitled by law to protect their interest in the property in the foreclosure proceedings, and, having paid their insurance premiums and otherwise complied with their insurance contract, they were also entitled to the protection of the insurance contract for their interest.
It appears from the transcript of record that the attorney for the defendants in open court stated that as to the mortgagee, Dolph Coolidge, the insurance companies had not and did not deny liability. He said:
“We would be paying Dolph Coolidge right now, except for the fact that plaintiffs claim this mortgage is void and of no effect. * * * There is no issue in this ease between the insurance company and Coolidge. * * * We have agreed and stipulated that we will not wage such defense against Coolidge by reason of our mortgage clause. * * * I have agreed with attorneys for Dolph Coolidge that at the time of determination of this ease, if judgment is rendered in favor of the defendants, in other words, if the jury find that” plaintiffs “take nothing,' that the judgment may then be entered as between Dolph Coolidge and the insurance companies for the amount we°have agreed on as the value of the buildings, without cost. Now, that judgment could be entered now, except for the one fact that Neil Bros, claim that the mortgage clause attached in favor of Dolph Coolidge is void.”
How, then, upon this record, can a separate, distinct, and independent contract between the insurers and the mortgagee invalidate the interest of the mortgagors and prevent them from litigating their rights? Are the latter not entitled to the protection of the guaranties of the Constitution that they shall not be deprived of their property without due process of law?
In Insurance Co. v. Morse, 87 U. S. (20 Wall.) 445, 451, 22 L. Ed. 365, the Supreme Court held illegal and void a statute of the state of Wisconsin, by the terms of which, as a condition precedent to the obtaining of permission as a foreign corporation to do business in the state, it should enter into an agreement with the state that such corporation would not remove a suit for trial into the United States circuit or federal courts. The court also held that an agreement executed by the corporation to that effect was invalid. The court declared the law to be that:
“Every citizen is entitled to resort to all the courts of the country, and to invoke the protection which all the laws or all those courts may afford him. A man may not barter away his life, or his freedom, or his substantial rights. * * * In a civil case he may submit his particular suit by his own consent to an arbitration, or to the decision of a single judge. So he may omit to exercise his right to remove his suit to a federal tribunal, as often as he thinks fit, in each recurring ease. In these aspects any citizen may no doubt waive the rights to which he may be entitled. He cannot, however, bind himself in advance by an agreement, which may be specifically enforced, thus to forfeit *911his rights at all times and on all occasions, whenever the case may be presented.”
I am of opinion that it was not the intention of tho defendants, when they attached the riders to the policies of insurance providing for the security of the mortgagee, to claim a forfeiture from the mortgagors for the “commencement of foreclosure proceedings” by the mortgagee, pursuant to the conditions of such mortgage. If such intention existed, it was not clearly expressed, and was not known to the plaintiffs.
The validity of the mortgage is not an issue in this court. That question is pending in the state court. The question here was: What was the effect of the “commencement of foreclosure proceedings in the state court” upon the rights of the plaintiffs in the insurance policies? What the effect of a judgment in that court will he, will be determined when that question arises.
I am of the opinion that the judgment should he reversed, with instructions to grant a new trial.