Petition — Citizens Casualty Co. v. Slotkin
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79-1529
ne ibe
Supreme Court of the Bnited States
OCTOBER TERM 1979
—_>
CITIZENS CASUALTY COMPANY OF NEW YORK,
Petitioner,
_V—
STEVEN JOHN SLOTKIN, an infant by his mother and
natural guardian, CHARLOTTE SLOTKIN, and
CHARLOTTE SLOTKIN, as Executrix of the Estate
of Bert Slotkin, deceased,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Davip W. SILVERMAN
q . GRANIK, SILVERMAN, SANDBERG,
Ad 4 KIRSCHNER, CAMPBELL & NOWICKI
q Y | 120 North Main Street
New City, New York 1095y
(914) 634-8822
Attorney for Petitioner
TABLE OF CONTENTS
Opinions Below ..................
Jurisdiction ...............
The Date of Judgment...........
Constitutional and Statutory Provisions Involved
The Federal Questions are Substantial
DON Bide e640 od 050d chs ae
APPENDIX
Opinion of Motley, J., Southern District of
New York, dated June 20,1972........
Opinion of Pollack, J., Southern District of
New York, dated March 1, 1974........
Opinion of the United States Court of Ap-
| PEPPER RPE Peo Po ee oe
Order of the United States Court of Appeals
filed January 31, 1980...................
Order of the United States Court of Appeala
filed January 31, 1980...............
VAGUE
N©
YN AN DW
ao
1]
12
14
16
A
TABLE OF AUTHORITIES
Cases:
Ahern v. General Accident Fire & Life Assur-
ance Corp., 19 A.D.2d 883, 244 N.Y.S.2d
Ma SG, BOs crc seridetaceneboves
Alleghany Corporation v. Kirby, 218 F. Supp.
164 affd 333 F.2d 327 (2d Cir. 1964) cert.
SS SE Se ee mere ae
American Surety Co. v. Baldwin, 287 U.S. 156
I aa ku as oe a dy i he eo
Ardoyno v. Kyzar, 426 F. Supp. 78 (D.C. La.
Bank of U.S. v. Braverman, 259 N.Y. 65, 18)
2 A a arte
Blake v. McClung, 172 U.S. 239.............
Bohlinger v. Ward & Co., Inc., 113 A.2d 38,
34 N.J. Sup. Ct. 583, 120 A.2d 1, 20
EE ty Ee ool 3) bts a's 9 aie 0 eeu’
Bradford Electric Light Co. v. Clapper, Admin-
istratrix, 286 U.S. 145 (1932)............
Brooks-Pruitt Tire Co. v. Brooks & Zucker Tire
Co., 16 8.E. 2d 423, 192 Ga. 644.........
Clark v. Williard, 292 U.S. 112, 54 Sup. Ct.
as 6g ds 6 bb ba OD
Crouse v. McVichar, 207 N.Y. 213 (1912).....
Doyle v. Chatham and Phoenix National Bank,
so a eg alan weed 4
Erie Railroad v. Thompkins, 304 U.S. 64 (1938)
General. Radio Co. v. Superior Electric Co., 293
F.2d 949 (C.A. Mass. 1961)..............
PAGE
12
PAGE
Gerseta Corp. 0. Equitable Trust Co., 241 N.Y.
418, 150 N.E. 501, 43 A.L.R. 1320 ....... 16
Gillis v. Keystone Mut. Cas Co., 172 F.2d 826
ES hn do o.0 A ales oe ke MEL ad 14
Griffith vu. Bank of N.Y., 147 F.2d 899
(C.C.A.N.Y. 1945) cert. denied 65 Sup. Ct.
POSE, Se War OIG chen c di accrotios stale 1
Halley et al, v. General American Life Ins. Co.
Pg Pa Ef ht anes he ior ae 14
Insurance Company ov. Harris, 97 US. 331
EE ae re i a EE Oe ae ees 13
Klaxon v. Stentor Electric Manufacturing Co.,
ee Seen er ee eed eo hee wea 14
Kountze v. Kennedy, 147 N.Y. 124, Al NE.
Re Pe aria rie 17
Krichmar v. Krichmar, 42 N.Y.2d 85% (1977)... 12
Lassiter vu. Rellstav, 146 N.YS.2d 263, 1
UE 2S akan ey oo 90ers dees 17
Maager v. Hoye, 122 F. Supp. 932 (B.D.N.C.
I nah ilas dome ke ads ai ars nigh oo aes eae as 12,13
Marchand v. Frellsen, 105 U.S. 423 (1881) .... 12
Miller v. Meinhard-Commercial Corp., 462 ¥.2d
(FB Oe Co Aer err ser oe 12
Motlow v. Southern Holding & Sec. Corp., 95
F.2d 721, 725-726 (8th Cir. 1938) cert.
Gomied. Te GE ect cccdedeorevneve 14
Oliver v. McBrides Industries, Inc., 412 F.Supp.
Se ens MP ec eeiurctivecties , 12
Paul v. Virginia, 8 Wall 168................ 15
Penn Central Casualty Co. v. Commonwealth,
ey See, Ms bo cae ek Ae Oe what ea eA 14
PAGE
Sheridan Drive-In v. The State of ‘New York, 16
A.D.2d 400, 228 N.Y.S.2d 576........... 17
Slothin v. Brookdale Hospital Center, 357 F.
Supp. 705 (8.D.N.Y. 1972)............... 14
State ex rel Mo. State Life Ins. Co. v. Hall, 330
ey ee ne 14
Stratter v. Stratter, 2 N.Y.2d 668 (1975)...... 12
Thistle-Thwaite v. City of New York, 362 F.
ee. Oe G.n-S, 19TOD bck bcicceeens 13
U.S. v. Bank of New York & Trust Co., 296
SPS RAYS ee Pe i ee eee ee 14
Van Slyke v. Kleazer, 6 A.D.2d 887, 177 N.Y.S.
2a 467 (2nd Dept. 1958) ................ 12
Wilbur Boat Co. v. Firemen’s Fund Ins. Co.,
348 U.S. 310 rehearing denied, 349 US.
Winters v. Lavine, 574 F.2d 46 (2nd Cir. 1978) 13
Statutes:
Bankruptcy Act, 11 U.S.C.A, §22............ 15
McCarran Ferguson Insurance Regulations Act,
Public Law 15, 79th Cong., 15 US.C.A.
SEES PE Soe ern in nee 15
ee Wr We Is kb oko otek 0 0 0-o be rebaced ben 2
ee SE Se ee nn 5, 7, 13
Authorities:
Article II] of the Constitution of the United
Fourteenth Amendment to the Constitution of
the United States
eo 8. 8 8 € OC 2 8.86. © 28 £2 O58 8.86.8 6
N.Y. Civ, Prac. Law & Rules §1207..........
Tenth Amendment to the Constitution of the
CS I at hc So ki owas ow cae vale
PAGE
'.%
IN THE
Supreme Court of the United States
OCTOBER TERM 1979
>
STEVEN JOHN SLOTKIN, an infant by his mother and
natural guardian, CHARLOTTE SLOTKIN, and CHAR.
LOTTE SLOTKIN, as Executrix of the Estate
of Bert Slotkin, deceased,
Plaintiffs-A ppellants,
—_—Vo—
CITIZENS CASUALTY Co. OF NEW YorK, ALLSTATE IN.
SURANCE COMPANY, AMERICAN MOrTORISTS — INSUR-
ANCE Co., AMERICAN MUTUAL INSURANCE COMPANY
OF BOSTON, EMPLOYERS MUTUAL LIA3ILITY INSUR.
ANCE COMPANY OF WISCONSIN, GUARANTY REINSUR-
ANCE COMPANY, URBAINS FIRE INSURANCE COMPANY,
GRANGE LEAGUE INSURANCE Co., NATIONAL CASU-
ALTY Co., ARKWRIGHT-BOSTON MFRS. MUTUAL IN.
SURANCE COMPANY, HARDWARE MUTUAL CASUALTY
Co., PAUL RATNER, GEORGE BERKOWITZ, CHRISTO.
PHER MCGRATH, JR. and JOHN MCGRATH,
Defendants-A ppellees.
>
PETITION FOR A WRIT OF CERTIORARI, ON BEHALF OF
CITIZENS CASUALTY CO, OF NEW YORK, TO THE
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
2
OPINION BELOW
The opinions of the Court of Appeals are not at this
time contained in the official reports, but are repro-
duced in the Appendix.
The opinions of the United States District Court for
the Southern District of New York are reported at 357
F. Supp 705 (S.D.N.Y. 1972) and 447 F. Supp 253
(S.D.N.Y. 1978) and are reproduced in the Appendix.
The applications for a rehearing and reargument in
the United States Court of Appeals with a suggestion
for en banc consideration were denied, and copies of
the order of denial are set forth in the appendix
herein.
JURISDICTION
Jurisdiction of this court is invoked pursuant to 28
USC 1254. The application for a writ of certiorari
follows a judgment by the United States Court of Ap-
peals for the Second Circuit.
The United States Court of Appeals for the Second
Circuit reversed the trial court’s judgment dismissing
plaintiff's complaint. The reversal of the judgment of
dismissal extended federal judicial power over state
court judgments into areas which have hitherto been
exclusively reserved to the states. The plaintiff's claim
brought in the United States District Court was based
upon diversity of citizenship. The complaint sought to
recover damages for fraud which occurred in the settle-
ment of an infant’s claim. The settlement and judg-
ment entered thereon had been consummated in the
Supreme Court of the State of New York, County of
3
Kings. The settlement of the infant’s claim for
$185,000.00, and the order and judgment following
said settlement, were based upon representation by the
appellant, Citizens Casuaity Company, and its attor-
neys, as to the limits of insurance coverage afforded to
its assured, Brookdale Hospital. The limits of insurance
coverage stated by Citizens Casualty Company to be
available for the defendant hospital was $200,000.00.
The limits available to the hospital were, in actuality,
$1,200,000.00 for the hospital had a policy of
$1,000,000.00 in the nature of excess written by cer-
tain Lloyds carriers. Neither the hospital nor the
Lloyds carriers was a party defendant in this Federal
action at the time of trial.
The misrepresentation concerning insurance limits
was discovered within “ourteen days of a Stipulation of
Settlement. The true tivcts were immediately communi-
cated to the trial justice in the Supreme Court, as well
as all counsel involved. Some three months later the
Supreme Court, Kings County, notwithstanding the
full disclosure of insurance coverage available to the
hospital, issued an order and judgment that the
amounts set forth in the Stipulation of Settlement
were approved. The order and judgment represented a
judicial determination that the amounts set forth and
subsequently paid constituted full, fair, and adequate
compensation for the claim of the infant. This adjudi-
cation and order of infant’s compromise still stand of
record at the time of this application for certiorari.
Presented to this court for review is the power of
the United States courts to ignore the finality of a
state court order and judgment. In a diversity case
based upon fraud, may the court undertake jurisdiction
4
when there is, of record, an adjudication that the
amounts paid prior to commencement of the federal
court action constituted full, fair, and adequate settle-
ment? Does the power of the United States District
Court in a diversity case allow it to undertake jurisdic-
tion when all elements of fraud, which is the gravamen
of the federal action, were fully known prior to the
adjudication and order of infant's compromise? The
fact that the fraud was.antecedent and fully known
prior to an order and adjudication of the infant’s claim
was held by the District Court to constitute a bar to
the federal fraud action. The United States Court of
Appeals, in reversing, held, in essence, that the ante-
cedent fraud was subject to federal judicial relief,
notwithstanding the state court judgment with respect
to the fullness, fairness, and adequacy of the settle-
ment.
This conflict concerning the force and effect of a
state court judgment was set forth by the District
Court (Pollack, J.) in the following language
“In view of the determination reached hereafter, it
becomes unnecessary to construe the effect of the
judgment ultimately directed by Justice Williams.
The parties are in dispute on whether the Judge's
compromise order constituted a settlement value
judgment and an independent adjudication of the
fairness of the settlement, and an expression on
the best interest of the infant, the validity of
which cannot now be questioned collaterally for
error which does not affect the jurisdiction of the
Court which rendered it. It is a settled principle
that a valid judgment should not be subject to a
collateral attack. Crouse v. MeVickar, 207 NY.
213, 100 N.E. 697 (1912).
The United States Court of Appeals for the Second
Circuit answered this contention by its reversal in the
following language
“The court below used both the words ‘inchoate’
and ‘unenforceable. And, technically, before judi
cial approval the settlement was both, But the
characterizations are relevant only from the stand
point of determining the defendants’ obligations
under the applicable state law. They do not go to
the question of plaintiffs’ detrimental reliance
which occurred on settlement and dismissal of the
jury and not on the court’s approval of the settle
ment.”
The petition herein seeks certiorari to this court be
cause, notwithstanding the characterization of the Un
ited States Court of Appeals, the settlement antedated
the order and judgment of infant's compromise, The
misrepresentation, and full knowledge thereof by the
court and counsel, antedated the order and adjudica
tion of infant’s compromise. Is an order and judgment
of infant's compromise an exception to 28 USC 17348,
which provides that the records of judicial proceedings
of any state court shall be granted full faith and credit
in every court within the United States?
Citizens Casualty Company, which seeks review of
the determination herein, was at the time of the order
and judgment of infant's compromise subject to judicial
dissolution, the Commissioner of Insurance of the State
of New York by statute the liquidator thereof, The
Supreme Court of the State of New York had issued an
order that all actions against Citizens Casualty Com
pany were stayed, and that all claims against Citizens
Casualty Company were to be filed and allowed or
denied in the liquidation proceedings. Upon service of
the sumone and complaint in the United States Dis
trict Court, an application was brought before Judge
Motley requesting that the state court injunction be
honored in thin diversity case, and that any proceed
Inge againeat Citizens Casualty Company be part of the
liquidation proceeding in accordance with New York
law, “ncompassed within the same application, a mo
hon to diamies the complaint was made based upon the
judgment of record of the Supreme Court, Kings
County
In her decision Judge Motley held that the plaintiff's
claim wae in personam and federal jurisdiction would
only establish the validity of the claims. Since federal
litigation would not interfere with the rem or the as
aele under dissolution, federal jurisdiction would be
sustained. The question likewise to be resolved by the
court in whether or not, in a diversity case, the deter
mination of the state court, in undertaking dissolution
of an insolvent insurance carrier and in enjoining ac
hone in personam as well as in rem, is likewise entitled
lo finality in a federal court action. If not. citizens of
oll atetes but New York have the opportunity to liti
wate the validity and extent of their claim in the fed
eral courts. Only New York residenta would be denied
this forum because of their lack of diversity standing
The United States Court of Appeals found that the
misrepresentation as to the extent of insurance cov
erage made by your petitioner, Citizens Casualty Com
pany, and ite attorneys was a protestation of
knowledge where none existed or a protestation of
knowledge where the true facta could have been readily
discoverable. The courte of the State of New York have
umtormly held that the relief for such actions ia re
7
scission and not the measure of damages reinstated by
the United States Court of Appeals. The determination
of the court in this diversity action is diametrically
opposed to the applicable New York State Law
IHhk DATE OF JUDGMENT
The judgment of the Court of Appeals was dated
Atigust 29, 1979. The orders denying reargument and
suggestion for en bane determination were dated Janu
ary $1, 19#O
CONSTITUTIONAL AND STATUTORY PROVI-
SIONS INVOLVED
This case involves Article IL of the Constitution of
the United States. This case involves the Tenth
Amendment to the Constitution of the United States
and the Fourteenth Amendment to the Constitution of
the United States
This case involves state judicial proceedings, and full
faith ar. 1 credit, as set forth in 28 USC 1738
QUESTIONS PRESENTED
Does the Federal Court have power to ignore a State.
Court judgment determining that the amount paid to
an infant for personal injuries is full, fair, and ade.
quate?
Does the Federal Court have the power to make a
determination that the amounts paid pursuant to the
State Court judgment are inadequate and to enter a
judgment for the amount, which in the opinion of the
Federal Court, is adequate?
8
Does the Federal Court have the power in a. fraud
action to disregard a State Court judgment wherein,
prior to its entry by the state court, the litigants, and
their counsel, and the court were aware of the misrep-
resentation which was the gravamen of the federal
action?
Does the United States District Court as a matter of
discretion, have the right to ignore a state court in-
junction prohibiting litigation against an insurance car-
rier subject to judicial liquidation? May the federal
courts be used as a forum to prove claims in personam
against an insolvent insurance carrier, thereby allowing
the federal court in diversity cases to fix the amount of
claims in personam and to deny the residents of the
state which issued the injunction a similar right due to
lack of diversity?
Does the Federal Court have the power in a diversity
case to disregard the established law dealing with the
measure of damages in cases concerned with material
misrepresentation?
STATEMENT OF FACTS
Plaintiff, Steven John Slotkin, commenced an action
in the Supreme Court, State of New York, Kings
County, claiming injuries due to medical malpractice.
The infant’s counsel was Max Toberoft, Esq., and the
matter came on for trial during the year 1971. During
the trial of the action discussions were had concerning
settlement. The matter was ultimately settled, during
the presentation of plaintiffs case. It is the nature of
the statements made during the course of settlement
and the entry of a stipulation of settlement on behalf
9
of the infant that give rise to this federal action. The
essence of the statements was to the effect that
Brookdale Hospital, one of the defendants in the Kings
County action, had only $200,000.00 of insurance cov-
erage written by Citizens Casualty Company. Based
upon this representation made by Messrs. McGrath
(Hospital Counsel), Paul Ratner (Vice-President of Citi-
zens Casualty, the Hospital’s Insurance Carrier) and
George Berkowitz (a Hospital Trustee and Hospital
Counsel) the action against the hospital was settled for
$185,000.00 on March 4, 1971. Fourteen days after
the Stipulation of Settlement was entered on the re-
cord, the inaccuracy of the hospital’s total coverage
was discovered. Plaintiff's counsel, the trial justice, and
all other parties were informed on March 18, 1971 that
the amount of coverage available to the hospital was
actually $1,200,000.00, comprising the $200,000.00 by
Citizens Casualty and an additional million dollars in
excess coverage available through Lloyds of London.
Conferences were held for three months before the
trial justice in order to seek a resolution of counsel for
the plaintiffs claim that the settlement was inadequate
in view of the increased insurance available. Plaintiff's
attorney claimed a fraudulent inducement to settle a
claim for the infant plaintiff. No resolution of these
claims was attained. Plaintiff's counsel was successful
in having the trial justice sign a single order of the
infant’s compromise on June 4, 1971. This order and
judgment. provided for the payment of $185,000.00 for
settlement of the claim against the hospital and an
additional $20,000.00 by other carriers for settlerne at
of the malpractice claim against Drs. Feder and Zeich-
ner, Mrs. Slotkin’s personal physicians. Following the
entry of the order and judgment of infant’s compro-
10
mise and the payment of the monies provided thereun-
der, plaintiff commenced the action in the Federal)
Court for fraud. The damaye aspect of the fraud ac-
tion, was the arnount of money ($145,000.00) received
on behalf of the hospital, contrasted with the settle-
ment value of the case had plaintiffs counsel been
informed that coverage e¢visted in the amount of
$1 200,000.00.
Immediately upon the receipt of the summons and
complaint, the Superintendent of Insurance, aa liquida-
tor of Citizens Casualty Company, brought an applica-
tion in the United States District Court to stay the
action as far as Citizens Casualty Company was con-
cerned because of ita judicial liquidation and injunction
order against proceedings involving the company. Citi-
zens Casualty Company, at the time of the misrep-
resentation concerning insurance coverage, waa subject
to an order of rehabilitation. Some three montha later
when the order and judgment of infant's compromise
was signed, Citizens Casualty Company waa subject ta
an order of dissolution, ita previous rehabilitation hav-
ing been unsuccessful. During the course of judicial
dissolution, all actions againat the cornapany had been
stayed by an order of the New York Supreme Court. It
was this injunctive order which waa presented to the
United States District Court, together with an applica-
tion to dismiss the proceedings on the ground that the
state court order and judgment of the infant's compro-
mise was a bar. The application for dismiasal waa de-
nied,
The action was tried in the United States District
Court, and a judgment was rendered against all defen-
dants for an amount of money which, pursuant to
instructions of the court, represented the difference
1]
hetween what the case had been settled for and what it
would have been settled for had the full extent of
insurance coverage been known. The application to set
aside the verdict, and to dismiss the complaint, was
granted. The United States Court of Appeals reversed
and reinstated the verdict. The United States Court of
Appeals denied applications for reargument and _ re-
hearing and denied the suggestion that the matter be
considered en banc. As set forth in this petition, it is
urged that serious questions and issues relating to fed-
eral judicial power are involved.
THE FEDERAL QUESTIONS ARE SUBSTANTIAL
As set forth herein, the serious and substantial ques-
tion involves the power of a federal court, even in a
fraud action, to disregard a state court judgment. In a
diversity case, the judgment of the state court is en-
titled to full faith and credit.
What makes this a substantial issue is not only the
har of a judgment but the nature of the claim of fraud.
The fraud and material misrepresentation were made
known to the state court and to all parties and counsel
prior to the entry of judgment.
What, in effect, this extension of federal judicial
power provides is that the federal courts will hear the
claim of a plaintiff who is prohibited from suing in the
State of New York unless a judgment and order of
infant’s compromise are vacated or modified. This ex-
tension of federal judicial power, in effect, states that
fraud antecedent to a state court judgment renders
that judgment subject to collateral attack.
Plaintiffs in personam claim against Citizens Ca-
sualty Company has been decided in a federal court.
12
Other claimants are denied this independent forum and
trial by jury, for others are bound by the state court
injunction. Diversity of citizenship was never intended
to confer such substantive and procedural rights.
POINT I
In New York, by statute and holdings of the Court
of Appeals, an order settling an infant’s claim has the
effect of a judgment. (CPLR 1207, Krichmar v. Krich-
mar, 42 NY2d #54, 1977).
It is an established principle of law that a valid
judgment should be immune from collateral attack.
Crouse v. MeVickar, 207 NY 213 (1912); Marchand v.
Frellsen, 105 US 423 (1881); Alleghany Corporation v.
Kirby, 21% F. Supp 164, affd 333 F.2d 327 (2d Cir.
1964); cert. denied, 344 US 2%, Stratter v. Stratter, 2
NY2d 66% (1975); Miller v. Meinhard—Commercial
Corp., 462 F.2d 35% (5th Cir. 1972); Oliver v. McBrides
Industries, Inc., 412 F. Supp 4990 (SDNY 1975);
Maager v. Hoye, 122 ¥. Supp 932 (EDNC, 1954).
A Stipulation of Settlement of the infant plaintiffs
claim Was procured by fraud. Subsequent thereto an
order and judgment of settlement was signed by the
justice presiding. Thereafter, further relief could be
granted only in the original action, not by collateral
federal attack. Crouse v. McVickar, supra; Ahern ov.
General Accident Fire & Life Assurance Corp., 19
AD2d #83, 244 NYS2d 347 (1st Dept. 1963); Van
Slyke vu. Eleazer, 6 AD2d 887, 177 NYS2d 467 (2d
Dept. 195%).
“The . . . judicial proceedings of any Court of any
State . . . shall have the same full faith and credit in
ls
every court within the United States... as they
have by law or usage in the Courts of such
State .. . from which they are taken.” 28 USCA Sec-
tion 1754.
The Supreme Court of the State of New York, Kings
County, in which this action originated, is a court of
competent jurisdiction. The order of infant’s compro-
mise entered by that court, having the effect of a
judgment, should have been afforded full faith and
credit by the Federal Court. Thistle-thwaite v. City of
New York, 362 ¥ Supp 4% (SDNY 1973); American
Surety Co. v. Baldwin, 287 US 156 (1932); Maager v.
Hoye, 122 ¥. Supp 932 (ADNC 1954); Insurance Com-
pany v. Harris, 97 US 331 (1877); Bradford Electric
Light Co., Inc. v. Clapper, Administratrix, 286 US 145
(1932).
In the original state court action, in Supreme Court,
Kings County, a Stipulation and Settlement was en-
tered into, the plaintiff having been fraudulently in-
duced to enter into the Stipulation of Settlement by a
misrepresentation of fact. The fraud was discovered
within fourteen days of the Stipulation and the court
and all counsel were duly notified. If the plaintiff at
that juncture, had commenced a federal action, the
Stipulation would not act as a bar. However, the plain-
tiff, wrth full notice and knowledge oi the fraud, pro-
ceeded to obtain a judgment in the state court which
contained a definitive finding that it was a full, fair,
and adequate settlement of plaintiffs claim. By obtain-
ing a judgment under those circumstances plaintiff is
estopped or collaterally estopped from thereafter plead-
ing fraud in a federal court.
Winters v. Lavine, 574 F2d 46 2nd Cir. (1978).
i4
POINT Il
When this diversity action was commenced in Fed-
eral Court, defendant, Citizens Casualty Company,
moved to dismiss the action against it. Its motion was
based on the fact that on June 17, 1971 Citizens Ca-
sualty Company was liquidated, and pursuant to the
Insurance Law of New York, Section 528, (McKinney’s
1966), the Supreme Court of the State of New York
enjoined all persons from prosecuting any action
against the corporation.
However, jurisdiction was granted, and the Court
held that the state court injunction issued in aid of the
liquidation proceeding did not bar the diversity action
(Slothkin v. Brookdale Hospital Center, 357 ¥. Supp 705
(SDNY 1972). The retention of federal jurisdiction vio-
lated the pre-existing decided case law concerning com-
ity between state and federal courts. (Halley et al v.
General American Life Ins. Co., et al, 101 F.2d 1723,
1974; Penn Central Casualty Co. v. Commonwealth,
294 US 189; U.S. v. Bank of New York & Trust Co.,
296 US 463; Gillis v. Keystone Mut. Cas. Co., 172 F.2d
#26 (6th Cir., 1949); Motlow v. Southern Holding &
Sec, Corp., 95 ¥.2d 721, 725-26, 8th Cir. 1938 Cert.
denied 305 US 609.)
Since jurisdiction in this case was based upon diver-
sity, the federal court applies the law of the forum
state (Erie Railroad v. Thompkins, 304 US 64 (1938);
Klaxon v. Stentor Electric Manufacturing Co., 313
U.S. 487 (1941). The law of the forum is that the State
of New York has the exclusive right to administer the
assets in personam and in rem of insolvent insurance
companies. (Clark v. Williard, 292 US 112, 54 Sup Ct.
615; State ex rel Mo. State Life Ins. Co. v. Hall, 330
=u
15
Mo. 1107, 55 S.W.2d 174; Rankruptcy Act, 11 USCA,
Section 22; McCarran Ferguson Insurance Regulation
Act Public Law 15, 79th Cong. 15 USCA 1011; Paul v.
Virginia, 8 Wall 168; Wilbur Boat Co. v. Firemen’s
Fund Ins. Co., 348 US 310; Rehearing denied 349 US
907.)
District courts have discretion in entertaining diver-
sity actions. In exceptional circumstances, a district
court has power to decline jurisdiction even though the
elements required for diversity jurisdiction exist.
General Radio Co. v. Superior Electric Co., 293 F2d
949 (CA Mass. 1961).
A federal court has discretion to refuse equitable
relief where state procedure is intended to be exclu-
sive. (Griffith v. Bank of New York, 147 F2d 899 (2d
Cir. 1945), cert. denied 65 Sup. Ct. 1414, 325 US 874).
A federal court should not entertain a diversity case
that a state court would be likely to dismiss. (Ardoyno
v. Kyzar, 426 F.Supp 78 (DC La. 1976).
The exceptional circumstances that existed in the
instant case were the liquidation of defendant, Citizens
Casualty Company, and the state court injunction.
That imjunction was intended to be exclusive, as it
precluded any person from proceeding outside of the
liquidation proceedings against Citizens Casualty Com-
pany. A state court would have dismissed any such
action.
The fact that jurisdiction was granted raises the
anomalous result that a non-resident plaintiff could
obtain a judicial adjudication of a claim against Citi-
zens Casualty Company, while a New York plaintiff
would be relegated to the state liquidation proceeding.
Diversity jurisdiction was clearly not intended to give
16
such an advantage to a non-resident over a resident.
(Blake v. McClung, 172 US 239; Bohlinger v. Ward &
Co., Inc., 113 A.2d 38, 34 NJ Sup Ct. 583, 120 A2d 1,
20 NJ 321; Bank of U.S. v. Braverman, 259 NY 65,
181 NE 50, 82 ALR 658; Gerseta Corp. v. Equitable
Trust Co., 241 NY 418, 150 NE 501, 43 ALR 1320;
Brooks-Pruitt Tire Co. v. Brooks & Zucker Tire Co., 16
SEK2d 423, 192 Ga. 644.)
POINT Il
Infants are wards of the state courts and not of the
federal courts. The preservation and protection of as-
sets of minors have traditionally been the exclusive
prerogative of the state juduciary. Even if this case
should be affirmed, any monies paid, pursuant to or-
ders of distribution would be state court orders. The
assumption of jurisdiction by the federal courts, and
the holding of the United States Court of Appeals, are
to the effect that, in the performance of its traditional
duties and entry of an order and judgment of infant’s
compromise, the state court was deficient to the extent
of the jury verdict rendered and reinstated. Such a
holding violates the basic grant of power given to the
federal judiciary in Article III of the Constitution of
the United States and the Tenth Amendment of the
Constitution of the United States. The favoring of this
infant to the detriment of any other resident of the
State of New York by granting diversity of jurisdiction
is violative of the Fourteenth Amendment to the Con-
stitution of the United States. To apply law diametri-
cally opposed to the state holdings concerning fraud of
this nature in a diversity case violates the basic pre-
cept that the law of the forum controls. The jury ver-
17
dict reinstated by the United States Court of Appeals
granted damages for a misrepresentation of fact negli-
gently made. The law of the State of New York is that
the remedy is rescission. (Sheridan Drive-In v. The
State of New York, 16 AD2d 400; 228 NYS2d 576;
Kountze v. Kennedy, 147 NY 124, 41 NE 414, 19 LRA
360; Doyle v. Chatham and Phoenix National Bank,
253 NY 369 (at page 377); Lassiter v. Rellstav, 1
AD2d 672; 146 NYS2d 263.)
It is submitted that the remedy available under state
law to the plaintiff herein is an application to the
Supreme Court, Kings County, to vacate the order and
adjudication of infant’s compromise. The proceedings
in the Federal Court effectively preclude any opposi-
tion to that application. Under state law the matter
would then be tried egainst the defendants responsible
for the injury to the infant plaintiff. This memoran-
dum does not take the position that the misrepresenta-
tion of a fact can be made with impunity. This
memorandum does, however, take the position that all
costs, expenses, and damages incurred as a result of
this misrepresentation are properly assessable. How-
ever, the measure of damages in the State of New York
is not that as found by the United States Court of
Appeals, namely the difference between what the
plaintiff would have settled for had he known the full
extent of the insurance proceeds as compared to the
settlement made without such knowledge. As the plain-
tiff stated to the United States Court of Appeals, he
had substituted one cause of action for malpractice for
a better cause of action in fraud. Such substitution
likewise has no standing under New York law.
18
CONCLUSION
It is respectfully submitted that the federal issues in
the within proceedings are pervasive and, substantial,
and affecting the very relationship between the State
Judicial System and the Federal Judicial System. It is
submitted that the resolution of the constitutional is-
sues involved herein should be made by the Supreme
Court of the United States and that certiorari be
granted.
Respectfully submitted,
GRANIK, SILVERMAN, SANDBERG,
< KIRSCHNER, CAMPBELL & NOWICKI,
Attorneys for Petitioner,
Citizens Casualty Company
DAVID W. SILVERMAN,
PAUL V. NowIck1,
Of Counsel
Dated: March 25th, 1980
APPENDIX
la
Opinion of Motley, J.,
Southern District of New York
Dated June 20, 1972
Unie Srates Dieter Coun
Sournkin Distcrn ofr New Yorwe
>
Seven JouwN SiarkKin, an Infant by his Father and
Natural Guardian Beer SLoOKIN, and Beer SiOTKIN,
Plaintiffs,
BrooKknaALeE Hosrirar Centen, et al,
Defendants
AVE AHANCES
ZALK and Tonenors
450 bifth Avenue
New York, New York LOOO]
Attorneys for Plaintiffs
(AHANIK, GARSON, SILVERMAN
& Nowicki
120 North Main Street
New City, New York LO956
Attorneys for Benjamin RR
Schench, [Supt. of Insurance,
State of New York, as
Liquidator of Citizens Casualty
f'n of New York]
ClOonnTANcK BAKER Morey, D J
This is a diversity action for damages for fraud and
misrepresentation. One of the defendants, Citizens Ca-
sualty Company (Citizens), moves by its liquidator,
Benjamin RK. Schenck, Superintendent of Insurance of
the State of New York, to dismiss the action against it.
The facts alleged in the complaint, which are of
vome importance to this motion, as as follows. Plain-
tiffs several years ago instituted a malpractice suit
ayainst Beth-El Hospital a/k/a Brookdale Hospital Cen-
ter in New York State Supreme Court, Kings County.
The trial, before a jury, began on February 25, 1971.
During the course of the trial there were settlement
negotiations in which certain individuals represented
Citizens. These persons, plaintiffs charge, represented
that Brookdale Hospital had $200,000 in insurance
coverage from Citizens and other (reinsurance) compa-
nies, and that this was the total amount of malpractice
insurance protecting Brookdale in plaintiffs’ case.
Plaintiffs, in reliance on the truth of these representa-
tions agreed to settle the case for $185,000, and the
trial was terminated after plaintiffs had completed
their direct case. A stipulation of settlement was read
into the record on March 4, 1971.
Sometime soon after that date plaintiffs learned that
Brookdale had an additional policy of $1,000,000. Nev-
ertheless, they cho-e not to rescind the stipulation and
instead presented a compromise order to the trial
judge, which he signed, settling the case for $185,000
At that time plaintiffs specifically reserved their right
to sue Citizens, its agents, and others for fraud, and
have done so in this case.
3a
Defendant now moves to dismiss the complaint for
failure to state a claim upon which relief can be
granted. The gist of defendant’s position is that plain-
tiffs knew the actual amount of insurance available
before they signed the compromise order and presented
it to the judge for his approval, and therefore could
not have relied on any representations of a $200,000
maximum insurance pool.
Defendants miss the point of plaintiffs’ claim. Plain-
tiffs contend that the settlement stipulation, made be-
fore they knew of the additional insurance, was the
contract that was induced by defendants’ misrepresen-
tations. As a result of the stipulation plaintiffs termi-
nated the trial without a verdict. It has long been the
law in New York that one who has been fraudulently
induced to enter into an agreement may affirm the
agreement, retaining whatever benefits he has ob-
tained, and still maintain an action for damages.
Strong v. Strong, 102 N.Y. 69 (1886); Vail v. Reynolds,
118 N.Y. 197, 23 N.E. 301 (1890); Smith v. Saloman,
184 App. Div. 544, 172 N.Y.S. 515 (1st Dept. 1918);
Byrnes v. National Union Ins. Co., 34 App. Div. 2d
872, 310 N.Y.S. 2d 781 (8d Dept. 1970). See also 12
Williston on Contracts §§ 1523, 1524 (3d ed. 1970). In
fact in Strong v. Strong, supra, the New York Court of
Appeals specifically approved the right to recover dam-
ages for fraud in the inducement of a claim settlement
without the prior rescission of the settlement. See also
Byrnes v. National Union Ins. Co., supra, and cases
cited therein.
On the allegations of this complaint plaintiffs may
be able to show that defendants’ fraud was a proxi-
mate cause of damage to them. For example, plaintiffs
4a
may be able to prove that, because of the passage of
time, the unavailability of witnesses and the defen-
dants preview of their direct case, their likelihood of
success on a second trial would have been less than it
would have been at the first trial if it had gone to a
verdict and less than the amount of the stipulation. We
certainly cannot say that there is no possibility plain-
tiffs will prove they were damaged.
Defendant also moves to dismiss on the ground that
the instant action is stayed by an order of the Supreme
Court of the State of New York. As mentioned above,
on June 17, 1971 Citizens was liquidated. Pursuant to
Insurance Law § 528 (McKinney’s 1966) the court on
that date enjoined all persons from prosecuting any
action against the corporation.
This injunction would require our dismissal of the
instant proceeding only if the state court requires ex-
clusive jurisdiction to protect the res—the corporate
assets. Thus, if two suits are in rem or quasi in rem,
the court first assuming jurisdiction over the property
may maintain and exercise that jurisdiction to the ex-
clusion of the other in order “to avoid unseemly and
disastrous conflicts in the administration of our dua!
judicial system. . . .” Penn General Casualty Co. v.
Pennsylvania, 294 U.S. 189, 195 (1935). But two ac-
tions may proceed simultaneously where one is in rem
and the other is in pesonam. “{(W]here the state court
has control of the administration of . . . [an] estate,
an action in personam may be instituted in the federal
court . . . to establish the validity and amount of a
claim against the estate, since the federal court’s action
in no way interferes with the state court’s control of
the res.” 1A Moore’s Federal Practice 2607 (2ed 1965);
A
Kiehle v. Margolis, 279 US. 214, 224 (1929). See alan
Barrett v. International Underwriters, Inc GAG ¥ &d
545 (7th Cir. 1965); Dempsey v. Pink, 92 ¥ 2d 572 (2d
Ar. 1937). Here plaintiffs seek to eatabliah Citizens’ in
personam liability for its allegedly fraudulent acts.
This cause of action, to decide a claim ayainst funds
being administered by the State court, in no way inter.
feres with the State’s custody or control of the reg
We therefore hold that the State Court injunction
issued in aid of the liquidation proceeding does not bar
this action, and that this court has jurisdiction
Motion denied.
Dated: New York, New York
June 20, 1972
St ORDERED
CONSTANCE, BAKER Morey
US DJ
Ha
Opinion of Pollack, J.,
Southern District of New York,
Dated March 1, 1978
Unirep States District Court
SOUTHERN District OF NEW YORK
>
Sreven JOHN SLOTKIN, an infant by his mother and
natural guardian, CHARLOTTE SLOTKIN, and
CHARLOTTE SLOTKIN, as Executrix of the Kstate
of Bert SLOTKIN, deceased,
Plaintiffs,
—V—
Crozens Casuaury Co. or New York, ALLSTATE
INSURANCE COMPANY, AMERICAN MOTORISTS INSUR-
ANCE COMPANY, AMERICAN MUTUA!, INSURANCE
COMPANY OF BOSTON, EMPLOYERS MUTUAL LIABIL,
try INSURANCE COMPANY OF WISCONSIN, GUARANTY
REINSURANCE COMPANY, URBAINE FIRE INSURANCE
COMPANY, GRANGE LEAGUE INSURANCE Co., Na.
TIONAL CASUALTY Co., HARDWARE MUTUAL CASU.
ALTY Co., ARKWRIGHT-BOSTON MFRS. MuTUAL IN.
SURANCE COMPANY, PAUL RATNER, GEORGE BERKO-
witz, CHristopHER McoGRratH, JR. and JOHN
McGRATH,
Defendants.
—_>—
OPINION
APPEARANCES:
ARKUM, FRIEDMAN & Katz
Attorneys for Plaintiffs
450 Park Avenue
New York, N.Y. 10022
By: Theodore H. Friedman, Esq.
GRANIK, SILVERMAN, SANDBERG
& Nowicki
Attorneys for Defendant (Citizens
Casualty Co)
120 North Main Street
New City, N.Y. 10956
By: David Silverman, Ksq.
JULIEN & SCHLESINGER
Attorneys for Defendant
(Paul Ratner)
2 Lafayette Street
New York, N.Y. 10007
By: Stuart A. Schlesinger, Kisq. and
David Jaroslawicz, Esq.
TELL, CHESER, BREITBART & LEFKOWITZ
Attorneys for Defendant (George
Berkowitz)
116 John Street
New York, N.Y. 10038
By: Seymour Lefkowitz, Ksq.
Hart & Hume
Attorneys for Defendant
(Christopher McGrath, Jr.)
10 Kast 40th Street
New York, N.Y. 10016
By: Joseph A. Bergadano, Esq.
MILTON POLLACK, District Judge.
A jury has returned a verdict that the moving defen-
dante herein committed fraud, inducing plaintiffs to
gettle a medical malpractice action for less than they
otherwise would have obtained. Now before the Court
are defendants’ motions to dismiss the complaint and
ty direct. a verdict in their favor, reserved during trial,
and post-trial motions to set aside the verdict and for
judgment n.o.v,
The following facts have been amply proved, and
indeed are uncontested. The infant plaintiff, Steven
Slotkin, was born at the Brookdale Hospital in 1963 to
a diabetic mother who had been admitted to the hospi-
tal in a state of toxemia. Early in his life he was
diagnosed as suffering from cerebral palsy. He and his
father sued the hospital in the New York Supreme
Court, Kings County, alleging that Steven’s disability
stermmed from a condition of acetonuria in the mother
due to the negligence of the hospital staff. The case
went to trial before Justice Williams in late February
1970.
The hospital had a liability insurance policy issued
by defendant Citizens Casualty Company, in the
amount of $200,000, which was applicable to the
claim. Shortly before commencement of the trial, Citi-
zens retained defendant Christopher McGrath to repre-
yent the hospital. Karly in the proceedings in the trial
Court, plaintiffs’ counsel, Max Toberoff, Esq. received
the impression that the Citizens policy was the only
liability insurance covering the hospital and applicable
to the claim, and he telephoned the hospital to warn it
that it was exposed to a potential liability exceeding its
Qa
insurance coverage. In response, the hospital sent de-
fendant George Berkowitz, a trustee of the hospital
and a lawyer, to the courthouse to protect the
institution’s interests. As the trial progressed through
the plaintiffs’ case, the parties discussed the possibility
of a settlement. On March 4, defendant Paul Ratner, a
claims manager for Citizens, arrived at the courthouse
and joined the discussions. On the same day, a stipula-
tion settling the case for $185,000 ws read into the
record, the Judge orally indicated approval thereof,
and the jury was discharged.
Plaintiffs allege, and the jury apparently found, that
the individual defendants mentioned above represented
to Toberoff, during the settlement negotiations, that
the $200,000 Citizens policy was the only insurance
applicable to the claim. The jury must also have ac-
cepted plaintiffs’ allegation that they were unwilling to
demand more from the hospital than its insurance
would cover,’ and that therefore they relied on defen-
dants’ representations concerning the insurance.
Finally, the jury must have concluded that the hospital
had an umbrella policy providing a million dollars’
worth of “excess” insurance under certain circum-
stances, with Lloyds Insurers unrelated to Citizens,
which was applicabie to the Slotkins’ claim. The Lloyds
group was not notified of the pendency of the trial and
did not participate therein or in the negotiations and
stipulation of settlement. The defendants allege that
they were unaware at the time of the excess insurance
above the primary coverage by Citizens, and the jury
was instructed that it could return a verdict for the
' Mr. Toberoff testified that he assumed that the hospital could
satisfy any judgment that plaintiffs might obtain.
10a
plaintiffs on a finding that the defendants conveyed a
pretense of knowledge when they were recklessly ig-
norant of the truth.
The following facts are also both amply proved and
uncontested. Because it determined the claims of an
infant, the settlement stipulation was unenforceable?
unless it was followed by a judicial order finalizing the
arranyement, providing for the distribution of the set-
tlement fund and terminating the suit. NYCPLR
§§ 1207-08. Such a judicial order has the effect of a
judgment. NYCPLR § 1207.
Within a fortnight after the stipulation was read
into the record, and before the requisite order was
made and judgment accordingly entered, Ratner was
alerted to the existence of the excess insurance cov-
erage. He promptly telephoned McGrath, and McGrath
immediately notified Justice Williams and Toberoff. In
a conference before Justice Williams, representatives
of the excess carriers declined to recognize the settle-
ment stipulation since they had not been aware of the
trial, were not represented at the trial and had not
participated in the stipulation. The hospital and Citi-
zens offered to drop the settlement stipulation, to re-
* Mr. Toberoff conceded that failure or refusal of the Judge to
make and enter a compromise order pursuant to NYCPLR
§§ 1207, 1208 would render the stipulation for settlement unen-
forceable. Mr. Toberoff testified:
“He [the Judge] had it in his power to refuse to sign the
compromise order . . . If he didn’t, I would say that by logi-
cal operation the stipulation would be rendered valueless
.. . » We wouldn't be able to collect without the compromise
order,”
Moreover, the trial Judge had the unquestioned power to reject
the settlement as inadequate or insufficient for the infant after
learning of the existence of excess insurance coverage.
lla
commence trial of the claim before either a judge or a
jury, and to permit introduction of the transcript of
the medical and any other testimony from the earlier
proceeding. The carriers of the excess insurance offered
to appear if the case were retried and to recognize any
obligation thereon owing to the hospital if given an
opportunity to come in and defend the claim. The
Judge, too, urged the plaintiffs to accept the proposals
of a retrial made by the hospital, Citizens and the
excess carriers, to no avail.
Insisting that retrial would be impractical because
no medical experts were willing to testify, and vowing
to seek damages for fraud, Toberoff orally and in for-
mal papers demanded that Justice Williams finalize the
arrangement, make the requisite compromise order and
direct judgment thereby on the settlement stipulation.
After considering the matter for over two months, Jus-
tice Williams acceded to plaintiffs’ demand for execu-
tion of the settlement arranged, with an order of
infant’s compromise that does not mention the possibil-
ity of a fraud action." The compromise was paid the-
reunder and the funds were distributed as ordered in
the judgment. This suit followed. It went to the jury
only as against the lawyers, Citizens, which was the
"In view of the determination reached hereafter, it becomes
unnecessary to Gonstrue the effect of the judgment ultimately
directed by Justice Williams. The parties are in dispute on
whether the Judge’s compromise order constituted a settlement
value judgment and an independent adjudication of the fairness of
the settlement, and an expression on the best interest of the
infant, the validity of which cannot now be questioned collaterally
for error which does not affect the jurisdiction of the Court which
rendered it. It is a settled principle that a valid judgment should
not be subject to a collateral attack. Crouse v. Mc Vickar, 207 N.Y.
213, 100 N.E. 697 (1912),
12a
primary insurance carrier, and its claims agent. The
jury verdict was for the plaintiffs in sums stipulated
separately as against each defendant in varying
amounts.
The Court finds, as a matter of law, that plaintiffs’
insistence on proceeding with and thereby obtaining
the execution of the stipulation of settlement with full
knowledge of the facts bars this action.
Under the governing law of New York, the victim of
fraud generally may, upon learning the truth, affirm
and complete performance of the contract, retain, what-
ever benefits he has received thereunder, and maintain
an action for damages. Vail v. Reynolds, 118 N.Y. 297,
302-03, 23 N.E. 301, 303 (1890); Strong v. Strong, 102
N.Y. 69, 73, 5 N.E. 799, 800 (1886); Byrnes v. Na-
tional Union Insurance Co., 34 App. Div. 2d 872, 310
N.Y.S. 2d 781 (1970). But see Glatzer v. Ax, 63 N.Y\S.
2d 551 (Sup. Ct. 1946) (alternate ground). If a victim
of misrepresentation learns the truth when perform-
ance of the contract has just begun, and he could re-
scind without significant prejudice, however, he waives
the fraud if he proceeds to execute the agreement. See
A.G. Concrete Breakers, Inc. v. State, 9 App. Div. 2d
995, 996, 194 N.Y.S.2d 743, 745 (1959) (alternate
ground); Kelly v. Otis Elevator Co., 283 App. Div. 363,
368, 128 N.Y.S. 2d 39, 43 (1954), affd mem. 308 N.Y.
805, 125 N.E.2d 864 (1955) (dictum); General Valua-
tions Co., Inc. v. City of Niagara Falls, 253 App. Div.
156, 157-59, 1 N.Y.S. 2d 880, 882-83, affd on this
point mem, 278 N.Y. 273, 15 N.E. 2d 802 (1938).
Other jurisdictions take the same view. See Simon v.
Goodyear Metallic Rubber Shoe Co., 105 F. 573 (6th
Cir. 1900); Kingman & Co. v. Stoddard, 85 F. 740 (7th
~ 7
3a
Cir. 1898); Advance Aluminum Castings Corp. v.
Davenport, 224 Ark. 440, 274 S.W. 2d 649 (1955);
Lewis v. Carsh, 79 Colo. 51, 244 P. 598 (1926); Christy
v. Heil, 255 lowa 602, 123 N.W. 2d 408, 411 (1963)
(dictum); Eckstein v. Storck, 199 lowa 1375, 203 N.W.
796, 797-98 (1925); Defiel v. Rosenberg, 144 Minn.
166, 174 N.W. 838 (1919). Were the rule otherwise, a
plaintiff would be able to recover damages for a self
inflicted injury, and exchange the right to rescind for a
speculation on a jury's appraisal of his damages. Fy,
Thompson v. Libby, 36 Minn. 287, 31 N.W. 52 (1886).
Further, it would extend the principle allowing a vic
tim of fraud to complete the contract and sue for
damages beyond its original rationale, of assuring that
one who is no longer in a position to rescind would not
be deprived of all remedy. Gould v. Cayuga County
National Bank, 99 N.Y. 333, 337, 2 N.E. 16, 17 (1885).
In the instant case, plaintiffs had not significantly
changed position to their prejudice before learning the
truth. No such prejudice can be attributed to the diffi-
culties asserted by Toberoff with respect to retrying
the malpractice case. There was no impairment of the
facts giving rise to claims of malpractice by the hosp.
tal. Under New York law, plaintiffs were required to
prove malpractice of the hospital in order to recover
for fraud in the inducement of the stipulation of settle-
ment. Urtz v. New York Central & Hudson River R.R.,
202 N.Y. 170, 175-76, 95 N.E. 711, 712-18 (1911).
Thus, retrying the malpractice case would have been
no more burdensome than pursuing this action. for
fraud. Further, by obtaining a verdict in the present
litigation, plaintiffs have proved that such a retrial
was indeed practicable.
Ida
In reaching this decision, the Court has carefully
considered Judge Motley'’s contrary conclusion ato an
earher state of this: litigation, Slothin ov. Brookdale
Hospital Center, S57 FO Supp. 705, 707 (5 DENY
1972). Judge Motley did not have the benefit of a full
record, including: plaintiffs’ demonstration of the prac
licability of retrying: the malpractice claim, when she
was required to render a decision. In any event, the
Court is not obliged to adhere to another judge's earher
decision in the same litigation. LeRoy oo Sabena Te
Iyian World Atrlines, 344 B2d 266, 274 (2d Cir), cert
dented, 382. US. 878 (1965) (dictum), Dretograph Prod
ucts Co. v. Sonotone Corp., 2450 2d Tab, baa at6 (2d
Cir), petition for cert. dismissed per stipulation, 852
US. 8838 (1956) (Learned Hand, J). The earher ruling
does not relieve this Court of the obliation to present
the Court of Appeals with what it believes to hea
correct judgment. Scehmeider oo Hall, 421 BO Supp
12OwK, PARMA (S 1) N Z ), aff d, DAD hd TO (Ya (‘i
1976), cert. dented, A480 US. 955 (L977), Rodriymes v
Olaf Pedersen’s Redert AIS, 387 VO Supp. 754, 757
(WDN.Y. 1974), affd, 527 F2d 1282 (d Cin 1975),
cert. dented, 425 US. 951 (L976)
Accordingly, defendants are entitled to judgment. Tn
the alternative, a new trial is required. The jury re
turned separate awards of $20,000) against MeGrath,
$60,000 against Ratner, $100,000 against Berkowitz,
and $500,000 against Citizens. The verdict is imecorrect
as mo omatter of law, for two reasons. First, separate
wrongs resulting ina single, indivisible injury, as here,
create jount and several liability for the whole hearin
Hill vo Kdmonds, 26 App. Div. 2d 554, 270 NYS 2d
1020 (1966), Hawking vo Goll, 256 App. Div. 940, 9
bow
NYS Y%d O24, affd mem, 21 NY. BOK, 24 NE 2d 484
(1959), Insurance Company of North Ameria vo. Lind
wey, WA Mies Yd 495, 494%-99, 472 NYS Yd 164, 167
(Sup (bt 1975) Seeond, the only basia on which the
jury was soetructed that it could hold Citizens liable
wie a theory of respondeat supertor with respect to
Hatner's lability There ia no justification for a verdict
ayoinet Citizens more than eaht times as great as that
ayomel Hatner This error so clearly demonstrates that
the jury yielded to ite sympathy for a severely crippled
Child, and determined to provide for hin without re
yord for the law, that at tainte not only ite findings as
lo damayves, but ite entire verdict
The jury's verdict is set aside, judgment notwith
ahonding the verdict ia directed for the defendants, the
complaint i dienissed, and judgment shall be entered
in favor of the defendants and against the plaintiffs,
with coaute to be taxed by the Clerk
So ORDERED
March 1b, LOH
MILTON POLLACK
Milton Pollack
1S Dratrict Judpe
, l6a
Opinion of the United States
Court of Appeals
UNITED STATES COURT OF APPEALS
kor THE SECOND Cineurr
>
No. 353—August Term, 1974
(Argued January 17, 1979 Decided )
Docket No. 7#%-7167
7
GrevEN JOHN SLOTKIN, an infant by his mother and
natural guardian, CHARLOTTE SLOTKIN, and
CHuantorrk SUOTKIN, as Executrix of the Estate of
Bert SLOTKIN, deceased,
Appellants,
Crizens Casuarry Co. or New York, ALLSTATE
INSURANCE Co., AMERICAN Movorists INSURANCE
Co., AMERICAN MUTUAL INSURANCE Co. OF BOSTON,
Euproveres Mutua Liasiuiry INSURANCE Co. OF
WISCONSIN, GUARANTY REINSURANCE CO., URBAINE
Fine INnsuRANCE Co., GRANGE LEAGUE INSURANCE
Co.. National Casuarty Co., HakbwAkE MUTUAL
Casuaury Co.. ArkKwricut-BOstON MANUFACTURERS
MuruaL INSURANCE Co., PauL RATNER, GEORGE
Berxowrr, Consrorner MoGratu, Jk., aad JOHN
McG RATH,
Appellees
17a
Before:
OAKES, GURFEIN, and VAN GRAAFEILAND,
Circuit Judges.
>
In an action for fraud arising out of representa-
tions as to insurance coverage in connection with the
settlement of a medical malpractice case, the United
States District Court for the Southern District of
New York, Milton Pollack, Judge, dismissed the com-
plaii.c against appellees John McGrath and the rein-
surance companies and granted judgment not-
withstanding the verdict to the other appellees. Held,
that appellants could maintain their action for fraud
without first rescinding the settlement and thus the
judgment n.o.v. is vacated except as to one individual
defendant; and that the complaint against John
McGrath and the reinsurance companies should not
have been disinissed.
—~<+>—
THEODORE H. FRIEDMAN, Arum, Freidman
& Katz, New York, N.Y. (Fred R.
Profeta, Jr., Max Toberoff, of coun-
sel), for Appellants.
SEYMOUR LEFKOWITZ, Tell, Cheser, Breitbar
& Lefkowitz, New York, N.Y. (Sol-
omon M. Cheser, of counsel), for Ap-
pellee Berkowitz.
JOSEPH A. BERGADANO, Hart & Hume,
New York, N.Y. (Leslie F. Ruff, of
counsel), for Appellees McGrath.
18a
DAVID W. SILVERMAN, Granik Silverman
Sandberg & Nowicki, New York,
N.Y., for Appellee Citizens Casualty
Co. of New York.
HOWARD R. COHEN, Bower & Gardner,
New York, N.Y., for Appellee Guar
anty Reinsurance Co.
KENNETH SAGET, D’Amato & Lynch, New
York, N.Y. (John P. Higgins, of coun-
sel), for Appellees Allstate Insurance
Co., Urbaine Fire Insurance Co.,
Arkwright-Boston Manufacturers Mu
tual Insurance Co., Hardware Mutual
Casualty Co., and National Casualty
Co.
DANIEL H. MAHONEY, New York, N.Y.
(Kathryn D. Nealon, of counsel), for
Appellee American Mutual Insurance
Co. of Boston.
STUART A. SCHLESINGER, David Jaroslawicz,
Julien, Schlesinger & Finz, P.C., New
York, N.Y., for Appellee Ratner.
>
OAKES, Circuit Judge:
Any personal injuries lawyer knows that the
amount of a defendant’s assets or insurance coverage
is generally a factor to be weighed in evaluating a
case for settlement. The instant diversity action is
one for fraud, or its legal equivalent; but it arises
from a state court malpractice case that the plain-
)9%a
tiffs, a brain-damaged child and hia mother,’ settled
on the record after trial commenced for $145,000,
just under the so-called “policy limit.” Slothin v
Beth-El Hospital, No. 65-6253 (N.Y. Sup. Ct, Kings
County, June 4, 1971) (order approving wettlement of
March 4, 1971). The Hospital defendant and its pri
mary insurer represented that the policy limit was
$290,000 when in fact there was an additional $]
million in excess coverage. Plaintiffs then brought
this suit in the United States District Court for the
Southern District of New York, Milton Pollack,
Judge, under the court’s diversity jurisdiction. The
jury found certain of the defendantappellees lable
for misrepresenting the insurance coverage. Those de
fendant-appellees were Citizens Casualty Co. of New
York (Citizens), the Hospital’s primary insurer, Paul
Ratner, Citizens’ assistant vice president, who was
present at the malpractice tral, Christopher
McGrath, Jr., and John McGrath, partners in the
firm of McGrath, Cohen & MeGrath and nominal
trial counsel for the Hospital but actually appearing
for the insurers, and George Berkowitz, a Hospital
trustee and attorney. The complaint against the in
gurance companies that had reinsured Citizens cov
erage were dismissed by Judge Pollack in the federal
trial. The jury awarded damages in the amount of
$640,000, representing the difference between the ac:
tual settlement in the state action and a likely settle
} Plaintiffs in the state malpractice artior were tre nfant
Steven John Slotkin, and his father, Bert Sietain Bert Slotkin
having died before the initiation of the fraud action, plaintiff in
the court below and appellants here are the infant again and
Charlotte Slotkin, his mother, as executria of the estate of Bert
Slotkin
204
ment amount had there been no misrepresentation of
the coverage.’
Judge Pollack, however, granted judgment not
withstanding 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 af-
firming the malpractice settlement after discovering
the misrepresentations. Judge Constance Baker Mot-
ley had denied appellees’ motion to dismiss the com-
plaint 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 re-
scind the settlement and retry the case in state court
2 The courts charge was in part as follows
The plaintiffs did not sustain any damayes 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
wMlement in 1971 and the amount which would have been
the Mair settlement value of the Slotkin case if plamtiffs had
not beso deceived
Assuming the parties meant to avoid further litigation and
to compromyse their dispute and that nothing but true facts
were diseloged, how much could plaintiffs reasonably have
demanded and the Brookdale Hospital reasonably have allowed
ws a final compromise? That is the fair settlement value
Zla
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 alter-
native.
I. THE Facts
A. Introduction
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-Kl 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 Hos-
pital’s failure properly to administer insulin to Mrs.
Slotkin during the period immediately preceding
delivery had caused Steven’s brain damage.
224
BB The State Court Proceedings
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 pro-
ceedings. Appellant Steven and his father, Bert
Slotkin, since deceased, commenced the state court
action against Beth-Kl 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,’ reinsured $150,000 of this coverage. Sub-
seribing underwriters at Lloyd’s of London under-
wrote $1 million worth of excess insurance.
On Kebruary 22, 1971, at the jury selection, Chris-
topher McGrath, the attorney for Citizens who was
representing the defendant Hospital, told Max Tob-
eroff, 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 coun-
vel that the case was on trial, and he refused Tob-
f Plaintiffs orwinally filed their complaint against ten rein
surers They were Allstate Insurance Co., American Motorists
Insurance Co American Mutual Insurance Co. of Boston,
Kraployers Mutual laability Insurance Co of Wisconsin, Guar
anty Heimmurance Co, Urbaine Fire Insurance Co., Grange
Leayue Insurance Co, National Casualty Co., Hardware Mutual
Insurance Co. and Arkwright-Boston Manufacturers Mutual
Insurance Co Two of the remsurers, Employers Mutual Liability
Ineurance Co of Wisconsin and Grange Léague Insurance Co.,
were diamimeed in 1977 by stipulation when it was shown that
they had no conceivable connection to this matter, Another of
the remaurers, Amerncan Motorists Insurance Co., was a named
defendant but was apparently never served, and it never ap
peared in the cave (although Judge Pollack included it in his dis
miseol of all remeurers). Hereafter, when we refer to “the rein
surers, we refer only to the seven active participants, 1e., all
the above named remesurers except American Motorists Insurance
Co. bkmployers Mutual Insurance Co. of Wisconsin, and Grange
laayue Insurance Co
23a
eroff's request that he notify the Hospital’s attorney.
Toberoff, concerned about the collectibility of plain-
tiffs’ likely judgment, then notified the Hospital ad-
ministrator 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 tele-
phone call, appellee George Berkowitz, an attorney
and trustee of the Hospital, appeared at the court-
house on behalf of the Hospital. Berkowitz told Tob-
eroff at that time that the insurance coverage was
$200,000, According to Berkowitz’s. testimony in his
depos:tion taken shortly before the trial below, he
had iesrned 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 Tob-
eroff'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 informa-
tion.’ Toberoff stated that both he and Justice Wil-
1 Although Berkowitz insisted that the MeGraths and Ratner
told him about the $200,000 “policy limit,” Berkowitz has not
disputed Toberoffs statement that at this preliminary conference
Berkowitz represented the coverage to be only $200,000) and
that to the best of his knowledge there were no other policies
In fact, he has admitted that he did make such a representation
to Justice Willams, although it is unclear from his deposition
and his cross-complaint whether he made the statement at the
prelimunary conference or the final settlement negotiations. We
note that in a colloquy that took place in Justice Williams’
24a
liams 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’ ad-
vantage. Dr. Gerald Bernstein, an internist and assis-
tant 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.’ Dr.
chambers at the March 4 conference Christopher McGrath stated
that Berkowitz had told him that the Hospital had no coverage
other than Citizens Casualty. We also note that Ratner also
stated on deposition that he had asked Berkowitz whether there
was any excess insurance above the $50,000 Citizens coverage
(presumably a reference to the amount for which Citizens would
ultimately be responsible) and that Berkowitz had said no. But
see note 20 infra.
h The doctor explained, as is well known, that because diabetics
lack the insulin necessary to break down the sugar in their
bodies, their blood sugar (glucose) rises. As a result, there is an
excessive loss of water as the body attempts to expel the extra
sugar that the kidneys cannot absorb. Additionally, because
sugar is not reaching the cells, other things, such as fats, begin
to act as substitutes for the sugar. The liver cannot accommo-
date the extra fats; and they turn into ketone acids, called ace-
tones. When acetone is produced it will appear in the urine; this
condition is termed acetonuria. If acetonuria is allowed to con-
tinue unchecked the chemistry of the body becomes acidic, a con-
dition known as acidosis. This acidosis is sometimes called keto-
acidosis because it consists of acids which are ketone bodies,
products of fatty-acid catabolism. The result can be fatal and, in
a pregnant woman, fatal or permanently damaging to the fetus.
See Churchill, Berendes & Nemore, Neuropsychological Deficits
in Children of Diabetic Mothers, 105 Am. J. Obst. & Gyn. 257
(Sept.-Dec. 1969). Thus, by measuring the amounts of sugar and
acetone in the urine, a doctor can determine whether a patient
requires insulin at that time.
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 Novem-
ber 14, 1963, two days before Steven's birth, Mrs.
Slotkin had acetonuria. This condition was_ short-
lived; 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 show-
ed high levels of sugar and acetone, indicating the
condition of acetonuria of so much concern. Her own
physician administered insulin, and made the follow-
ing 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 diag-
nosed congenital -brain damage; at trial he cor-
roborated the testimony of Drs. Bernstein’ and Olninc
that the failure to check ‘Mrs. Slotkin’s urine
264
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.
C. The Settlement
On March 1, 1971, just shortly before the close of
plaintiffs’ case in the state court and just prior to
the time that plaintiffs settled on the basis of the
representations of insurance coverage of $200,000,
the expert on diabetes for the defense, Dr. Harold
Zarowitz, sent appellee Christopher McGrath a letter
summarizing their telephone conversation of February
27, 1971. This letter substantiated the negligence of
the Hospital and corroborated the opinions of plain-
tiffs’ doctors. The parties held a_ settlement con-
ference on March 4, 1971, before Justice Williams.
At that conference Christopher McGrath agevin stated
on the record that the total insurance coverage, in-
cluding reinsurance, was $200,000 and that he knew
that the Hospital did not have additional insurance
with other companies.’
6 The letter reads in part:
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
physictans could have averted the acidotic state on the morn-
ing of the 15th. This significant ketoacidosis, in my opinion,
can be an adequate cause of brain injury in the premature
newborn.
MR. [Christopher) McGRATH: The total coverage is
$200,000, including reinsurance.
MR. TOBEROFF: So far as you are concerned.
MR. McGRATH: Correct.
-2
(footnote continued)
27a
The parties drafted a stipulation of settlement that
was read into the record; the settlement provided in
pertinent part:
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 alloca
tion 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. Tonerorr: So stipulated.
Mr. [Christopher] MCGRATH: So stipulated.
Mr. Berkowitz: So stipulated.
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: | 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 waa no
other coverage, we construe his statement as being a denial of
excess insurance also.
VALI
D Uneovering the Misrepresentation
Appellees Christopher MeGrath and Berkowitz stip
Ulated that to the best of them knowledye there was
only $200,000 worth of coverage The former.
however, had complete access to documents that
demonstrated otherwise. In the files of Citizens
there were letters from Robert Gilroy, an attorney
with the firm of Mendes & Mount who represented
the exeess insurer, speciheally inquiring about the
Slothin case." The file with the Gilroy letters. whieh
4 One ocample of the Gilroy letters i ae follows
MENDES & MOUNT
YT Willan Street
New York NY loooOs
March 41 bo /
Citizens Casualty Company of New York
bt Maiden Lane
New York, NY LoOudH
[Attention, Mr David Quigley. bocaminer
Your Hef 74 4d0K5
Claimant Steven Joho Slothin
IDA November TL Lond
hur hive YLOBOO
Dear Mr Qhuipley
We are the attorneye representing the interest of the excous
maurers for Beth El Brookdale Houptal Center We have
received various letters sent by you to the oasured atatung
that the Titivation involves an amount on excess of your policy
lirriate
We would like to have the opportunity in appromately
two monthe time to review your file and discuss thee clare
with you We will accordingly be telephoning you in several
weeks to arrange a mutually convenient time for auch oo
review and discussion
Very truly yours
MENDES & MOUNT
Hy
RORERT GILMOY
290n
Clearly indicated that there was excess coverage, was
in the powsesson of the MeGrathe’ firm during the
utate court trol Berkowitz, who was oa trustee of the
Hoswpitel and vice chamnnan of the Laval Committee,
did not speak with anyone in the Hospital ad
minietration nor check any of the Hospital records to
determine whether they showed any excess meurance
covernye, inetend, he stated, he had relied wlely
upon the statements of Christopher and John
MeGroth, although Christopher MeGrath, of cours,
moitone that Berkowitz told him what the coverage
wan See note A supra, Vatner, who took over the
“witlement neyotitions on March 4, contends that
the MeGrathe and Berkowitz had told him that the
covyernye was only %Z00,000, But two of the Gilroy
letters were specifically directed to Hatners atten
tion Indeed. Hatner had briefly spoken with Gilroy
reyarding the Slotkin case before the trial and saw
the letters from Gilroy shortly before the tral’
A week to ten days after the parties entered into
the stipulation on the record, Katner advised
Chretopher MeGrath, and Christopher MeGrath in
) Hotner wae apparently in Florida during the tral below, and
hin depombion teatinony taken i preparation for the trial wan
admitted nto evidence ae requested by plaintiffs counsel In a
May 17. 1972, deyomation Hatner stated that at the end of 196"
wm wnnehime in 1909 he became aware that the Hoapital had ex
tense insurance when he “read # file for the first time and saw
ime on two letters from Mendes & Mount menthonng excess
a
meauranee bhut ne tated twehween the time that he rend the
file wad the tome of the atate trial, he had “forgotten” that there
von excows sneureoce tn an April 9, 1975, depomtion Hatner
Joted thet when he looked at the file shortly tefore trial, he
notwed the letters from Mendes & Mount tut that becaum the
firm (wae the remmurer and not the excess carner in Chun
Aveda fh ofher come, he “neminted [the firm| with ther role a
, feinmurer Mut terwuee the lettera themmlyvesn explicitly dv
tite the excess insurance. Hatner cannot excum his representa
tame on the tae Of a failure of memory Of mistake
40a
turn advised Justice Willams and Toberoff, that
there was $1 million in excess coverage and that the
representations a8 to insurance coverage had been
erroneous.” At this point Justice Williams had not
yet signed an order under N.Y. Civ. Prac. Law
61207 and Rule 12048 (McKinney) allocating the
gums paid in settlement. Justice Williams held a con-
ference on March 31, 1971. The judge attempted to
have the excess imeurer participate in new settlement
discussions, but it refused to do so because it claimed
0 According to Hatner's testimony in depomtion, two or three
days after the trial ended, Robert Gilroy of Mendes & Mount as
attorney for the excess insurer saw a story in the newspaper
vhout the settlement and called Katner to congratulate him
Hatner testified that he did not understand the purpose of the
call. wo he called Gilroy three or four days later to ask why Gil
roy had called Gilroy then stated that “lwie had an excess on
it.” and only then according to Hatner did he remember that
there woe additional coverage
hi 61207 Settlement of action or clam by imfant or jude rally
declared imcompetent, by whom motion made, special
proceeding, notice, order of settlement
Upon motion of a guardian of the property or yuerdian ad
lien of an infant or, if there im no such guardian, then of a
paren’ having legal custody of an infant, or if there m no
such parent, by another person having legal custody, or if the
infant is manned, by an adult spouse remding with the unfant
or of the committee of the property of a person judicmlly de
clared to be incompetent, the court may order settlement of
any action commenced by or on behalf of the infant or meom
petent Tf no action has been commenced, a special prot coding
may be commenced upon petition of such a representative for
witlioment of any claun by the infant or mecompetent in any
court where an action for the amount of the proposed settle
ment could have been commenced Tf no motion term m bemg
held and there im no justice of the supreme court available un
a county where the action on an action on the claun uw triable
such a motion may be made, or special proceeding may be
commenced. ina 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 jurwudy
hional linite of the county court) Notice of the motion on peti
tion shall be given as directed by the court. An order on such
» motion shall have the effect of a judgment Such order, or
the judgment in a special proceeding, shall be entered without
3la
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.
costs and shall approve the fee for the infant’s or incompe-
tent’s attorney, if any.
Rule 1208. Settlement procedure; papers: representation
(a) Affidavit of infant’s or incompetent’s representative. An
affidavit of the infant’s or incompetent’s representative shall
be included in the supporting papers and shall state:
1. his name, residence and relationship to the infant or
incompetent;
2. the name, age and residence of the infant or incompe-
tent;
3. the circumstances giving rise to the action or claim;
4. the nature and extent of the damages sustained by the
infant or incompetent, and if the action or claim is for
damages for personal injuries to the infant or incompetent,
the name of each physician who attended or treated the in-
fa), or incompetent or who was consulted, the medical ex-
penses, the period of disability, the amount of wages lost
and the present physical condition of the infant or incompe-
tent;
5. the terms and proposed distribution of the settlement
and his approval of both;
6. the facts surrounding any other motion or petition for
settlement of the same claim, of an action to recover on the
same claim or of the same action;
7. Whether reimbursement for medical or other expenses
has been received from any source; and
8. whether the infant’s or incompetent’s representative or
any member of the infant's or incompetent’s family has
made a claim for damages alleged to have been suffered as
a result of the same occurrence giving rise to the infant's
or incompetent's claim and, if so, the amount paid or to be
paid in settlement of such claim or if such claim has not
been settled the reasons therefor.
(b) Affidavit of attorney. If the infant or incompetent or
his representative is represented by an attorney, an affidavit
of the attorney shall be included in the supporting papers and
shall state:
1. his reasons for recommending the settlement;
2. that directly or indirectly he has neither become con-
cerned in the settlement at the instance of a party or per-
32a
Toberoff insisted that it was impossible to retry
the case. Mrs. Slotkin, who had testified at trial and
whose testimony was important because it con-
tradicted the hospital record in part, had still not
recovered completely from a heart attack. Her physi-
cian, who examined her shortly after the trial, stated
that she should not be asked to testify again. Addi-
tionally, 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 plain-
tiffs’ 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
son Opposing, or with interests adverse to, the infant or in
competent nor received nor will receive any comps .sation
from such party, and whether or not he has represented or
now represents any other person asserting a claim arising
from the same occurrence; and
3. the services rendered by him.
(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 attor-
ney shall attend before the court unless attendance is excused
for good cause.
(e) Representation. No attorney having or representing any
interest conflicting wit 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.
554
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 plain
tiffs’ case. Therefore, at the insiatence of Toberoff
and the plaintiffs, Justice Williams on June 4, 1971,
signed the “infant's compromise order,” see note 1)
supra, approving the settlement. Toheroffs intention
to sue all parties involved for fraud waa well-known
at the time.
kK The Federal Court Suit
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 inaurer, the rein
surers; Ratner, Berkowitz; and the McGrathea At the
close of plaintiffs’ case Judge Pollack dismissed the
complaint against the reinsurers. The jury found both
underlying malpractice on the one hand’? and fraud
on the other; it rendered a verdict in the total sum
of $640,000, allocating it in accordance with Judge
Pollack’s “supplemental instructions’’' as follows
Citizens, $500,000; Berkowitz $100,000; Katner,
$60,000; Christopher McGrath, $20,000, and John
McGrath, nothing.
12 There is substantial evidence of the medical malpractice In
addition to the testimony of plaintiffa experta, Dra HKernatein
Olnine, and Greenspan, in text supra at note %. there ia the let
ter from defendants’ expert, Dr Zarowitz, note © supra See alao
note 5 supra
14 In fact there were no real supplementary inatructions wut
rather colloquy and direction The entire tranewript of what took
place in the jury's presence ia aa follows
THE COURT: Madam Forelady, has the jury agreed upon
a verdict? (footnote continued)
¢
44a
Subsequent to the verdict Judge Pollack ruled
on a reserved motion and dismissed the complaint
THR FORELADY: Yes
THR 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
THR CLERK: What is your verdict as to the defendant
Citizens Casualty Company of New York?
THR FORELADY, We have decided against
THE COURT. Is that your whole verdict?
THR FORELADY: Yes
THRE COURT. Is there any amount of verdict ayainst
them?
You decided ayainst them, did you say?
THRE FORELADY: Yes
THE COURT: In what amount, if any?
THR FORELADY: We have an amount for all
THR COURT. What is the amount that the jury has
found? In other words, you have found the same amount
ayainst all defendants?
THRE FORRELADY. A total of $680,000 total against all of
them
THRE COURT: Your verdict against the Citizens Casualty is
what?
THRE FORELADY: We didn't break it down, your Honor
THE COURT. Has the jury found that each of the defen
dants is lable for the $640,0007 Is that what you are saying?
THR FORELADY: Yes, your Honor
THE COURT. In other words, as to the defendant Citizens
Casualty, Paul Katner, Chris McGrath, John MeGrath and
George Berkowitz, your verdict is $640,000?
THE FORELADY: Yes, your Honor
THE COURT. Poll the jury
(Jury roll callecd—all present.)
THE CLERK: You say that you find in favor of the plain
tiff 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
$640,000
JUROK NUMBER TWO: Combined
THE COURT: When you say total combined, let me under
stand that. You have reached one verdict?
JUROK NUMBER FOUR: One verdict, one total against
all combined. I hope it wasn’t misunderstood that it was
againat each one
THE FORELADY: A total.
THE COURT: The way the verdict stands now, it is a ver
dict against each one for $640,000
(footnote continued)
against John McGrath." He also granted to all ap-
pellees judgment notwithstanding the verdict, relying
14
THRE FORELADY: No, all told
THE COURT: The only collectibility will be a total of
$640,000.
In that what you are saying?
THE FORELADY: Yes
THE COURT: That means that each one is held individu-
ally
JUROK NUMBER TWO: A fraction of
JUKOK NUMBER FOUR: A portion of, pro rated
THRE COURT. Tf it is a pro rated verdict, that is one
thing, On the other hand, if you intend a proportionate ver
dict only, that is, for each one in a particular amount that’s a
different thing. So, | have to send you back for you to decide
what verdict you wish to regder, The defendants are sued in-
dividually, and although you/say there is only one total recov
ery, 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 $640,000
So, you better go out and decide what it is that you are
trying to call to our attention ,
Will the jurors yo back for a moment while I talk to coun
wl, to be sure | have a correct understanding of what it is
Juror Number kour, | think it was, tried to convey to me
THRE COURT: Bring in the jury
(Jury present.)
THE CLERK: Madam Forelady, has the jury agreed upon
a verdict?
THRE FORELADY: Yes, we have
THRE COURT: Read the verdict
THE CLERK: (Reading) We have a verdict in favor of the
plaintiff for $640,000 to be apportioned in thie manner: Citi-
wns Casualty $500,000, Mr. Berkowitz $100,000, Mr. Ratner
$60,000, Chris McGrath $20,000, John McGrath nothing.
Signed Anna D. O'Shea, Foreiady
THE COURT: Poll the jury.
(Kach juror, upon being asked by the Clerk “Is that your
verdict?”, answered in the affirmative.)
THRE COURT: All right, ladies and yentlemen, that com
pletes your service in this case Thank you very much for
your attention and the time that you spent. You are now ex
cused
(Jury discharged )
The ground for dismissal is not readily discernible although it
appears to be that the jury did not find John McGrath liable.
(footnote continued)
46a
on one proposition and one fact. The proposition was
that, because the case concerned a minor, “the settle-
ment stipulation was unenforceable unless it was fol-
lowed by a judicial order finalizing the arrangement,
providing for the distribution of the settlement fund
and terminating suit.” Slotkin v. Citizens Casualty
Co. of New York, 447 FF. Supp. 253, 255-56
(SDNY 1974) The fact upon which Judge Pollack
relied was that plaintiffs had learned of the excess
Insurance before that final order was made and judg-
ment entered so that their “insistence on proceeding
with and thereby obtaining the execution of the
stipulation of settlement bars this action.” Id. at
26. Judge Pollack reasoned that “ijn the instant
case, plaintiffs had not significantly changed position
to their prejudice before learning the truth.” Jd. at
257. He first noted that there was “no impairment
of the facts yiving rise to claims of malpractice by
After the jury rendered ite allocated verdict, counsel for the
MeGrathe teyan Ww make a motion as to “George McGrath.” The
court interrupted, saying that there was no verdict against John
MeGrath Counsel quickly ayreed, stating that zero damages was
really a verdict in John MeGrath’s favor. The court did not dis
ayree and immediately dismissed the complaint as to him
Viaintiffe attorney excepted to the dismissal on the ground
that the jurye@ verdict of lability, before it apportioned damages,
was a verdict ayainet all the defendants, including John
McGrath The court responded that “there was no competent evi
dence within the burden of proof obligatory in a fraud case” of
any intent on hie part to deceive nor gross negligence or pre
tens of knowledye Viaintiffe attorney began to catalogue the
evidence ayainet John MeGrath to show that it was sufficient
ty tai a triable ieaue of fact” The court, however, countered
that “lalny verdict ayainet John MeGrath would have been
Clearly ayainet the weyht of the credible evidence and would
have teen clearly wet aside on that ground as well as the ground
already mentioned” Ky this last ground the judge further dis
lowed tis belef that the jury» failure to allocate any damages
to John McGrath wae in effect a finding of no lability; we note
that he stated that a verdict ayainst John McGrath “would have
heun wet gaye
37a
the hospital”; he then noted that because the plain-
tiffs had to prove the underlying malpractice even in
the fraud action," retrying the malpractice case
would have been no more burdensome than pursuing
the action for fraud. Id. He held that by obtaining a
verdict in the present litigation “plaintiffs have
proved that such a retrial was indeed practicable.”
Id.
I]. DISCUSSION
A. Judyment Notwithstanding the Verdict
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. vu. Sonotone Corp., 230 F.2d 131,
134-36 (2d Cir.), petition for cert. dismissed per stip-
ulation, 352 U.S. 883 (1956). See also Messenger v.
Anderson, 225 U.S. 436, 444 (1912); LeRoy v.
Sabena Belgian World Airlines, 344 F.2d 266, 274
(2d Cir.), cert. denied, 382 U.S. 878 (1965).
As a matter of law, however, we agree with Judge
Motley’s ruling. As she said, it was the settlement
stipulation entered into before the plaintiffs knew of
the excess coverage that was the contract induced by
appellees’ misrepresentations; and as a result of the
If Appellants do not contest Judge Pollack’s ruling that they had
to prove in the federal trial that they had a valid malpractice
cla in the state court, a ruling based on Urtz v. New York
Central & Hudson River RR. Co.. 202 NY 170, 175-76, 95
NE. 711, 712-15 (911)
38a
stipulation plaintiffs terminated the state court jury
trial without a verdict. 357 F. Supp. at 707, The law
of New York is clear that one who has been induced
by fraudulent misrepresentation to settle a claim may
recover damages without rescinding the settlement.
Strong v. Strong, 102 N.Y. 69, 73, 5 N.E. 799, 800
(1886); Byrnes v. National Union Insurance Co., 34
A.D).2d 872, 310 N.Y.S.2d 781 (1970); Inman uv. Mer-
chants Mutual Casualty Co., 274 A.D. 320, 323-24,
83 N.Y.S.2d 801, 804 (1948)."®
Kven if the underlying premises of this New York
rule allowing rescission on the one hand or ratifica-
tion and suit for damages on the other were un-
sound, we would of course nevertheless be bound by
that rule. The premises for the rule, however, are
quite sound. If all that will result from a = mis-
representation is a new trial, then the party making
it has everything to gain and nothing to lose. The
plaintiffs would be placed at a disadvantage by a
new trial: the defendants would not. If anything, de-
fendants would benefit by having a preview of plain-
tiffs’ case. As McCormick notes in the case of willful
fraud:
(I|f the defendant by willful falsehood has coz-
ened the plaintiff into risking his property upon
a bargain, which, upon the information given by
the defendant, would have been profitable, a
remedy which merely seeks to place the plaintiff
ts See also Automobile Underwriters v. Rich, 222 Ind, 384, 53
N.E.2d 775 (1944); Southern Ry. Co. v. Jaynes, 86 Ind. App.
451, 140 N.E. 556, 558 (1923), Ware v. State Farm Mut. Auto.
Ins. Co., 181 Kan. 291, 311 P.2d 316, 320-21 (1957); Mlnazek v.
Libera, 83 Minn. 288, 86 N.W. 100, 101-02 (1901), Brown v.
Ocean Accident & Guar. Corp., 153 Wis. 196, 140 N.W. 1112,
1114-15 (1913)
39a
back in the position he was in before seems
hardly adequate. The plaintiff might well be
given the value of the expected bargain. A will-
ful fraud should cost as much as a broken prom-
ise. If the cheat can anticipate that the worst
that can happen is that he shall be called upon
to pay back his profit upon the trade, he may be
encouraged to defraud."’
,
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 ex-
ample, 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 ar-
rangement was made. He relied heavily on this char-
acterization in determining that defendants’ misrepre-
sentations had not prejudiced plaintiffs. But even if
the March 4, 1971, stipulation of settlement was
technically “inchoate,” it was treated as final at the
time; and plaintiffs reasonably relied upon defen-
dants’ representations in agreeing to the settlement
17 ~The fraud here was a statement that the defendants knew
that there was no additional insurance when, in fact, they did
not know that.
1H The court below used both the words “inchoate” and “unen-
forceable.” And, technically, before judicial approval the settle-
ment was both. But the characterizations are relevant only from
the standpoint of determining the defendants’ obligations under
the applicable state law. They do not go to the question of plain-
tiffs’ detrimental reliance which occurred on settlement and dis-
missal of the jury and not on the court's approval of the settle-
ment.
40a
and allowing the judge to dismiss the jury. Thus al-
though it is true that plaintiffs could have avoided
yoing through with the settlement, this does not di-
minish 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 “[iJf a victim of misrep-
resentation 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, eg. A.G. Concrete Breakers, Inc. v.
State, 9 A.D.2d 995, 996, 194 N.Y.S.2d 744, 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.B.2d 864
(1955). This rule prevents a, plaintiff from recovering
damages for “self inflicted” injury. See, e.g., Thomp-
son 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 settle-
ment 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. Plain-
tiffs were already injured, and their only choices
were to accept the settlement and sue for fraud or to
4la
retry the malpractice case with all that) retrial in
volved 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.
The true measure of damages was as Judge Pol
lack charged initially: the difference in settlement
value before and after discovery of the fraud, note 2
supra. We note that there is no problem here of
plaintiffs’ failure to mitigate damages by this suit
rather than electing to retry the malpractice action
It is true that on retrial the exposure of appellees
would have been less because the excess insurer
would have been in the case. Nevertheless, plaintiffs
were not obliged to incur the risks that retrial would
have presented. At retrial, so far as then appeared,
plaintiffs would stand a chance of receiving a verdict
smaller than the original settlement amount or pos
sibly losing everything in a verdict for the defen
dants. This risk was additional prejudice to them if
they proceeded by retrial because they had already
eliminated this risk from the first trial by settling.
Having passed the point in the first trial where they
could have received nothing or less than $185,000,
they should not be required to face this risk again in
a second malpractice trial. The law of damages is
clear:
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 im.-
poses no disability against recovering — full
damages.
C. McCormick, supra, § 35.
AZn
Of course by hindsight it may appear that the riek
of a defendant's verdict was minimal, but that ois by
hindsight only. At the time that) plaintiffs had to
make them election there was a definite possibility
that no live medical evidence could be had for a re
broad
We stress avain that it was appellees who corns:at
ted the fraud, that plartiffs did significantly change
position by allowing the judge to dismiss the jury be
fore learning the truth, and that obtaming a verdict
in the present litigation under more favorable cir
cumstances does not at all show that a retraal ino the
atate court would not have resulted inp still further
injury to plaintiffs.’ Thus Judge Pollack was in er
ror in granting judgment notwithstanding the verdict
on the ground that plaintiffs had not significantly
chanyed ther position before learning the truth
my We note that according to the expert testimony of former
Justice Bernard Meyer (now Judge of the Court of Appeala and
Justice Krank BO MeCullough, both retired from the New Tork
Supreme Court, under New York law doctors could not be forced
to provide live opinion testimony in etate court Thus in a retrial
of the malpractice action in the atate court, plaintiffe would
have heen unable to obtam the oral testimony of them key wit
newweu after they refused to teatify voluntarily This ie true even
though under federal law one can compel expert teatunony by
subpoena Indeed, although Dre Bernstein and Greenspan agreed
io testify voluntarily in the federal fraud action, they didi iw
only after being told that if they refused they would be aub
poenned (Dr Olnine wae unavailable by reason of a failure of
memory with age, and hie teatunony from the etate court tral
wae read into the federal record) Thus one cannot equate sur
cons un the 1977 federal fraud action with a lack of detriment
and damage in the L971 atate malpractice achon ae Judge Vol
lack did) Slothin uo Citizena Casualty Co of New York, 447 +
Supp 25d, 207 (SDNY. 107K)
Moreover, even without regard to the difference between the
state and federal procedure, Judge Pollack position proves too
much By proceeding with the fraud action, plaitiffe did- not
chiminate the prejudice that they had suffered When the defen
danta conduct put plantiffe ina disadvantayeous position, plain
Asn
MOT Mhe baahility of the Parties
Herne we beheyo that the jury could properly
have found, ve it cid under appropriate instructions,
mifra note 19, that fraudulent misrepresentations
made to plaintiffs amounted to leyal fraud, and that
they did not waive ther night to sue for the myjury
that they suffered as a result of those representa
hone, we address the remaming principal question on
appeal of who wae responsible and who is therefore
hitile
} (nr Lapner MeCrrath
We teheve that the jury could properly find that
Chretopher McGrath conduct rendered him lable
under New Lork law oe charyed. MeGrath was in
tharye of the wettleoment nevotiations until Hatner
took over, ml the while MeGrath’s position — of
authority heyvhtened the impact of his reprem@enta
hone #6 tw the insurance coveraye, MeGrath stip
ulated that “to the heat of his knowledge” there was
only &Z00 000 worth of coveraye in spite of the in
formation in the documents in his possession. See
note *% supra. MeGrath’s insistence that the policy
hit wae %200,000, see note 7 supra, renders him
hotle under the New York definition of acienter as
a rerklows indifference to error, “a pretenm of exact
ff were njpurTed ney aid net Mou rrony inj red just ryt mim
iney were able ty overcome the injury Under Judye VPollace
WOW" he yvyurtin of fraud » nild never te able to recover hei
Annayes wy eectng to affirm the wettlement and sue for Nam
ys i detest no matter what the prejudice. ti ue Cems In proy
ny rye wie riyiny (nium af mhion nould demoneatrate rie
‘ /
srnence Of prejudice in proceeding Wy retrial Hecaum New Tork
low wlivwe the fraud vetin to proceed by affirmance and an
rita for here if we ‘ynnet itm ritA a Judye Vea llack Aion of
ne feiationeanip tat ween tne two Cam of action
aaa 2 2.2.0
AAa
knowledge,” or “an assertion of a false material fact
‘susceptible of accurate knowledge’ but stated to be
true on the personal knowledge of the representer.”
See Burgundy Basin Inn v. Watkins Glen Grand
Prix, 51 AD 2d 140, 379 NYS 2d #75, #79 (1976).
and cases cited. This, of course, attunes with the
Classic formulation of Judge Cardozo in the touch
stone case of Ultramares Corp. ov. Touche, Niven &
Co., 255 N.Y. 170, 174 NE. 441, 449-50 (19931).
2 Paul Ratner
Katner took over the settlement negotiations on
March 4, and again, his position of authority in and
of itself made his misstatements more egregious. Rat
ner contends that the MeGraths and Berkowitz" told
him that the coverage was only $200,000; but again,
the documents are evidence against him. See note 9
AD The tral court's instructions quite accurately presented to the
jury theme alternative bases for a finding of fraud) The court
charged that the jury muat find acienter and that
a person makes a misrepresentation with seenter, meaning
knowingly, if he knows that the representation im falae, or he
neither knows nor cares whether it im true or false. or if he
has no genuine belief that it is true If a speaker actually be
heves that what he saya ia true, then he does not act with
scienter, even though that belief ia negligent, in that + reason
able man would not believe it
There is one exception to what | 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 hos
patale insurance was true to hie personal knowledge and in
tended that the plaintiffs should act on the basia of what he
said, then you should find that anid defendant acted with aci
enter if he didn't know what he [anid] wan true To this ex
tent, » person who assertea a falsehood aa true to his personal
knowledge may be anid to have acted with acienter, that um,
knowingly, even though he believes what he saya to be true
Z\ We note that Hatner did not apeak with Berkowitz until after
the McGratha had informed Berkowitz about the policy limit
45a
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 ‘upra, and, as in the case of Christopher
McGrath, to find scienter under Burgundy Basin and
Ultramares, supra.
3. George Berkowitz
The jury’s finding as to Berkowitz is more troub-
ling. Berkowitz did not speak with anyone in the
Hospital adminisvration nor check any of the
Hospital records to determine the insurance coverage,
instead relying solely upon the statements of Chris-
topher and John McGrath. We could easily hold that
Berkowitz was negligent, perhaps even grossly negli-
gent, 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 repre-
senter.”
Indeed, we note that plaintiffs in fact did not
premise their action against Berkowitz on the theory
that he had intentionally or even recklessly misrep-
resented 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.” Fur-
thermore, plaintiffs do not make a claim against
Berkowitz for a representation of absolute knowledge.
46a
Their reference to the record discloses, insofar as
Berkowitz is concerned, only the testimony on deposi-
tion by Berkowitz that he told Toberoff after con-
versing 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 evi-
dent in his statement to Justice Williams that be-
cause he believed that the Hospital itself would be li-
able above the $200,000 limit, he wanted the record
to reflect bad faith on the part of the insurance car-
rier if it failed to settle the case within the $200,000
limit. The district court itself noted the “extraor-
dinarily 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 evi-
dence in granting Berkowitz’s motion for judgment
notwithstanding the verdict.
4. Dismissal of John McGrath
The court should not, however, have dismissed the
complaint as to John McGrath.” Although he may
have been only minimally at fault, there was suffi-
cient 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 ap-
22 See note 14 supra.
ATa
pearance of personal knowledge when he apecifically
ratified his brother’s misrepresentation: “What Chris
told you is true... . All the coverage there ia on
the case is $200,000. _ , Thats 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 draftung of
the March 4 stipulation which contained exphat rep
reventations 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 hasia of this evi
dence, Judge Pollack reversed hia earlier ruling
granting John McGrath’s motion for diamissal, 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 ia
in accordance with New York Jaw under Burgundy
Basin and Ultramares, supra.
Finally, even though the case was not tied 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, 26%
N.Y. 445, 448, 19% NE. 23, 24 (1955), see also
Pedersen v. Manitowoc Co., 25 N.¥.2d 412, 419, 255
N.E.2d 146, 150, 306 N.Y.S.2d 90%, 909 (1969) Goint
venture).
5 Dismissal of the Keinsurers
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
Aka
matter affecting their coverage. Moreover, their con-
sent was needed for any settlement within the rein-
sured range, .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 re-
insurers 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 bet-
ter 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 tes-
timony in the court below, Berkowitz told him at the
time of the settlement negotiations that Ratner was
talking to the reinsurers; Christopher MeGrath con-
firmed that Ratner told him that he, Ratner, had ob-
tained the reinsurers’ consent to the settlement.
For the reinsurers to be liable for misrepresenta-
tion, plaintiffs needed to prove that Katner was act-
ing as their agent or representative when he mis-
represented 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 Katner’s
testimony was inadmissible against them to prove
agency and thus that there was a complete absence
of probative evidence of an agency relationship.
AYa
In dismissing the complaint against the reinsurers,
Judge Pollack relied on the rule of law that he para-
phrased as “lalcts and declarations of a person
assuming to be the representative of another are not
competent to prove the agency.” Compare Restate-
ment (Second) of Agency §& 285 (1958). That rule,
however, does not deal with testimony by an agent.
See id. comment a. As there stated, “la] person can
properly testify as to the facts which it is alleged
constitute his authority, and his testimony can be in-
troduced 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
Qld Colony Insurance Co. v. Trivedi, 93 Mise. 2d
566, 403 N.Y.S.2d 169 (197%). Thus Ratner’s testi-
mony 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
“lijf 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,
50a
although deceitfully made.” Restatement (Second) of
Apency, supra, 4257, comment a.“ We note, how-
ever, that the jury’s verdict indicates a finding that
Hatner’s comments were made within the scope of
his agency with Citizens. We believe that there is
alao 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
Katner’s ayency relationship with Citizens and with
the reinsurers was the same; if so we can see no dif-
ference in the fact of liability of the two as prin-
cipals
We note further on the issue of the sufficiency of
the evidence that on the basis of Ratner’s declara-
tions, we must reject the reinsurers’ contention that
the Restatement rule prohibiting out of court declara-
tions renders “inadmissible and substantively in-
competent” on the issue of agency the testimony of
Toberoff, Berkowitz, and Christopher McGrath. Sec-
tion 245 provides that:
Kvidence of a statement by an agent concerning
the existence of extent of his authority is not
admissible ayainst the principal to prove its ex-
istence or extent, unless it appears by other
evidence that the making of such statement was
within the authority of the agent or, as to per-
yons dealing with the agent, within the apparent
authority or other power of the agent.
2: See alan Sohne Hophine Univ. vo. Hutton, 422 F.2d 1124, 1130
(Ath Cir 1970), cert. denied, 416 US. 916 (1974); Jerger v
Kubin, 106 Ariz 114, 471 BP 2d 726, 731 (1970) ;
Hla
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.
C. Allocation of Damages
4
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,
Judge Pollack’s subsequent comments and actions
amounted to an instruction to the jury to determine
contribution rights under Dole v. Dow Chemical Co.,
SO N.Y.2d 143, 282 N.E.2d 288, 331 N.Y.S.2d 382
(1972), something that has no bearing upon the joint
and several liability to the plaintiffs of the defen-
dants found liable. Kelly v. Long Island Lighting Co.,
OL N.Y.2d 25, 286 N.E.2d 241, 334 N.Y.S.2d 851
(1972). In his written opinion, Judge Pollack cor-
rectly concluded that although the allocated verdict
was in accordance with his instruction, it was erro-
52a
neous as a matter of law because liability for the
whole harm was joint and several. 447 F. Supp. at
257-58."
Thus the crucial question is whether the subse-
quent submission to the jury can be treated as void,
allowing plaintiffs to reinstate the $680,000 verdict.
We find that under Alepper 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, 300 N.E.2d 148, 151-52, 346
N.Y.S.2d 806, 811 (1953) (trial judge properly
disregarded jury’s attempt to apportion damages _be-
tween defendants and entered jr; dgment 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
24 The parties alluded at trial to a stipulation among the defen-
dants to try the “cross claims” to the court in a nonjury trial if
the jury found liability. Why this was abandoned in favor of a
resubmission to the jury after the basic verdict—if that is what
occurred—does not appear in the record on appeal, which does
not contain the stipulation. How to proceed on the cross claims
for contribution, indemnification, and the like ‘s, of course, a
matter for the district court on remand.
against Citizens and the three individuals, or they
may retry the case ab initio against all appellees ex-
cept George Berkowitz on both liability and damages.
They may not do both. If plaintiffs elect reinstate-
ment of the verdict already rendered, the case will
be remanded for a_ separate trial before Judge
Pollack on the cross claims for contribution and ap-
portionment among the appellees (again except
George Berkowitz) as per their stipulation, note 24
supra.
Judgment in accordance with opinion.
>
VAN GRAAFEILAND, Circuit Judge, dissenting:
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 con-
trolled 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 writ-
ten by Lloyds of London. The hospital’s attorneys
had nothing to gain by hiding from plaintiffs the ex-
istence of the umbrella policy. The insurance was
there to be used; that is why the hospital purchased
it.' If the attorneys fraudulently concealed its ex-
1 Ratner and appellee carriers likewise had little if anything to
Kain by concealing the existence of the umbrella policy. The
maximum exposure of Citizens Casualty Co,, Rainer’s employer,
was $50,000, all of which was on the table when the several set-
tlement offers were made. Fraudulent settlement for $185,000
54a
istence, 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 hos-
pital’s carriers held derivatively liable because of
their wrongdoing. Oceanic Steam Navigation Co. v.
Compania Transatlantica Espanola, 134 N.Y. 461,
467 (1892); Opper v. Tripp Lake Estates, Inc., 274
App. Div. 422, 423-24 (1948), aff'd, 300 N.Y. 572
(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 Rainer have
been sued for fraud and misrepresentation. Although
the personal liability to which these men are thus ex-
posed is in no way determinative of the issues on
this appeal, it precludes us from comfortably ra-
tionalizing 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 re-
commenced, successfully importune the state judge te
approve settlement for $185,000, and thereafter re-
would save the seven reinsurance carriers a total of $15,000, In
the case of one carrier, which carried only five percent of the
reinsurance, the saving would amount to $750.
2 As a general rule, malpractice policies do not insure against
fraudulent acts or omissions. See, e.g., St. Paul Fire & Marine
Insurance Co. v. Clarence-Rainess & Co., 70 Misc, 2d 1082, 1083
(1972), aff'd, 41 App. Div. 2d 604 (1973). The McGraths’ policy
so provides, and they are being defended by their insurance car-
rier pursuant to a stipulation that the carrier will not be respon-
sible for the payment of any judgment aginst them which
sounds in fraud.
5ha
cover substantial damages from appellees because the
settlement. approved at plaintiff's insistence did not
represent their claim’s true settlement value. [be
lieve that the district court was correct. in concluding
that they could not.
I disagree at the outset with the majority's inter
pretation 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 ap
proved 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 Jus
tices, 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, deciined to sign the
order approving the $185,000 settlement, ino 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 pro
ceedings” 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 (1959), and New
York’s “rules of practice abound in provisions of an
cient origin designed to safeguard their legal rights.”
Greenburg v. New York Central and H.R.R.R. Co.
210 N.Y. 505, 509 (1914). Today’s rules, as embodied
56a
in CPLER 1207 and 1208, require that applications
for approval of an infant settlement be made upon
motion supported by affidavits of the infants repre
sentative and attorney setting forth certain specified
facta.’ The order entered on such a motion has the
effect of a judgment. CPLE 1207, Krichmar ov
Krichmar, 42 N.Y. 2d #54, #60 (1977)
Until the requirements of CPLR 1207 and 120%
are complied with, there can be no binding compro
mise agreement. Farraro vu Stripehis, 60 App. Diy
9d 461 (1974), Caphotty vo. Medi Cah, Inc, 52 App
Div 2d 544 (1976), Valdimer ov. Mount Vernon
Hebrew Camps, Inc, 9 App. Div. 2d 900, affd, 9
NY 2d 21 (961), 26 NY. Jur. Infants §65 Any
compromise reached in anticipation of a courbap
proved settlement 16 unenforceable, because the stat
utes prescribe the only method by which a defendant
may secure a binding release from an infant. 2 Wein
gtein. Korn & Miller, New York Practice § 1207 06"
It is undisputed that plaintiffs had full knowledge
of the amount of Brookdales insurance coverage
some three months before they succeeded in securing
f The applicable Rules of Practice of the Appellate Divimvon
Kirst Department, also required that an application far court ap
proval of a settlement of a claim or cause of action belonging
wn infant be made as provided in CPLKE 1207 and 120% See 22
Coded Hules and Kegulations of the State of New York & 414%
if the procedures mandated by these sections were not complied
with, the application for approval of the settlement had to te
denied Speyhta vo Motor Vehicle Avoident Indemnification
Corp Th Miwe 2a Wi4'/ (174) Mittner ” Mator Vehiele Arvvident
Indemnification Corp, 45 Miae 2d GBA 9G)
| If the atate court judge had indicated that he would not aye
the order of settlement, one wonders how much eitner of my
learned colleagues would have been willing to pay for an aemyn
ment of plamntiffe rights under the “technically mecnoate ayres
ment
la
ryurt approval, Tt is alee undisputed that plaintiffs
inportunes Judge Williams to approve the $145,000
ytiionent in order that they might bring suit
ayainet appellees for fraud. In wo deing, they com
gletely removed from the com one of the requisite
elernenta for a claim im fraud, .e¢., reliance. To re
cyver for miareprewentation, a plaintiff must establien
that he rehed upon the misrepresentation and that
the damayes for which recovery i sought flawed
from the reliance. Ocha uv. Woods, 221 NY. 445,
44H ANGAS COIT), Karacher vo. DeWald, 246 App
fiy ZI. 2224 955), 24 NY Jur, Fraud and Decett
WS at ZZA
Contrary to Judge Ookes’ desertion, the damages
which are the bas of plaintiffs’ claim for recovery
Aid not weur at the time the state action was dis
continued and the jury dismissed. Although plaintiffs
did ayree ty a diweontinuance in reliance upon ap
phloem mimetatements, and, a8 a result, undoubtedly
suatained wane damaye, this was not the damage for
wich they sued. The jury's verdict was based upon
the alleyediy inadequate settlement which plaintiffs
inmiated the Court approve after they had full know!
edye of the facta Under the doctrine of volenti non
fit injuria, recovery cannot be had where an agree
ment hea wen consurmmated in thie manner, Oleet v
Pennayluania Kachange Bank, 265 App Div An)
A fale reyresentatvon im not cognizable ty the law aa derert
lew 1 in teheved and relied upon aa an inducement VW ar
hits
fhe uy Woods, supra, 72) NO at 4AM
‘The maver of a fraudulent misrepresentation ia not lable
one why done ner rely upon ite truth but upon the expectation
that the maker will te held liable in damages for ite falaity
t Meatatement uf Torte 4 LAW
Wat)
(W955), Kelly vo Otis Elevator Co., 2635 App. Div. 365
(1954), affd, 50% NY #O5 (1955). General Valua
tions Co. vo. City of Niagara Falls, 253 App. Div
156, affd on this point, 27% NY. 275 (193%) Com
modity Credit’ Corp. vu. Rosenbergs Bros. & Co, 243
k2d 5OA (9th Cir) cert. dented, 455 US. #37
(1957)
The rationale of the foreyoiny cases is not con
fined to commercal contracts. The proper measure of
damages is inseparably connected with the right. of
achion, Chesapeake & Ohio Ry. vo. Kelly, 241 US
ABD, ADL (1915), and two basic and closely related
doctrines of the law of damayes are (1) that a
wrongdoer is responsible only for the natural and
proximate consequences of his misconduct, Steitz v
(ifford, 280 N.Y. 15, 20 (1959), and (2) that an in
jured person must take reasonable steps to minimize
his losses. Pearlstein vo. Scudder & German, 527 ¥ 2d
1141, 1145 (2d Cir, 1975), Industrial Supars, Ine. v
Standard Accident Insurance Co, SOK FF 2d G75, 676
(7th Cir, 1964) Under the doctrine of “avoidable con
sequences, a plamtiff cannot recover damages re
sulting 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 NY. BAT, 358-59 (1990)
(Cardozo, C.J, concurring), W. Bo Moses & Sons v
Lachwood 295 ¥. 946, 941 (DLC. Cir, 1924)
Here, the plaintiffs deliberately and knowingly re
jected $1,000,000 in available insurance in order that
they might impose liability upon appellees. In view
of this conduct, | am at a loss to understand the ma-
59a
jority’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 sec-
ond time. They would have to do this in any event
in their fraud action against appellees.* It is likewise
no answer to say that plaintiffs would have to re-
scind their settlement and give up $185,000. Until
court approval was obtained, plaintiffs had no bind-
ing 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 cov-
erage.
rr The majority opinion would lead one to believe that the retrial
of an action is such a rare occurrence as to justify drastic sanc-
tions for the party causing it. This simply is not so. Retrials are
constantly being ordered with no greater sanctions imposed than
the liability for additional costs and disbursements. See, ¢.4.,
Dunbar v. Ingraham, 275 App. Div. 898 (1949).
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 ob-
servations. 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.
60a
“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 mo-
tivated retaliation as an alternative. Because | 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 in-
dividual defendants, he was nonetheless correct in
dismissing as against the reinsurers. The sole obliga-
tion 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 rein-
surance as between carriers varying from five per-
cent to fifteen percent. Although settlement of plain-
tiffs’ 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 fraud-
ulently 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 com-
pany 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, ie., the obligation to indemnify.
Greenman v. General Reinsurance Corp., 237 App.
Div. 648, 649 (1933).
hla
“Keinsurance, to an insurance lawyer, means one
thing only—the ceding by one insurance company
to another of all or a portion of its risks for a
stipulated portion of the premium, in which the
liability of the reinsurer is solely to the rein.
sured whith 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.”
14 Appleman, Insurance Law and Practice & 764) at
479-80.
Giving plaintiffs the benefit of the broadest read-
ing of all the testimony concerning the in-court and
out-of-court statements of Ratner,’ his wole contact
with the reinsurers was through telephone conversa-
tions 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”.” I disagree.
7 The only testimony given by Ratner waa by deposition, in
which he said that he obtained the consent of the remaurera tw
weitle for $145,000. I disagree with the majority'« holding that
this established an agency relationship with the reinsurers and
opened the floodgates to any hearsay ataternenta of Katner that
plaintiffs were thereafter prepared to offer See OA. Shutt, Inc
v do & Ho Goodwin Lid, 251 App. Div. 44, 4% 997), United
States v. Consolidated Laundries Corp, 291 ¥ 2d A, G16 (2d
Cir, 1961). However, for purposes of thie opinion, | need not
enter the dispute between my colleagues and Judge Pollack con
cerning out-of-court declarations Accepting all of the testimony
offered by plaintiffs, it ia nonetheless insufficient to establah
that Hatner was the agent of the seven reimeuring carriers
” My brothers do not say whether Katner'« subordinates at Cit
iene were alae acting as agenta for the reimaurers
62a
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 (’th Cir. 1976), cert. denied, 429
1.8. 1097 (1977); Aetna Insurance Co. v. Glens Falls
Insurance Co., 455 ¥.2d 687, 690-91 (5th Cir, 1972):
Globemaster Midwest, Inc. v. United States, 337 ¥.
Supp. 465, 470 (Cust. Ct. 1971); Restatement (Sec
ond) of Agency &1. The vourported agent must have
heen assigned and instructed by the purported prin-
cipal to carry out the task he was performing. Parou
tian v. United States, 370 F.2d 631, 632 (2d Cir.),
cert. denied, 387 U.S. 943 (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.’
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 com-
pletely at odds with the fiduciary obligation that
Ratner, as an agent, would owe.
In today’s world of high verdicts, where substan-
tial 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 set-
” The securing of consent is not the equivalent of submission to
control, For example, the approval of at least one other judge is
required every time an opinion is filed in this Court. If this
were sufficient to make the writing judge the agent of his con.
curring brothers, this Court might at one time have lost several
of its most able and distinguished members. See United States v.
Manton, 107 F.2d #34, #46 (2d Cir, 1939), cert. denied, 309 US
664 (1940).
—
63a
tlement 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. vo. 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 2d
19, 25 (2d Cir. 196%); Hedeman vo. Fairbanks, Morse
and Co,, 286 N.Y, 240, 24% (1941)
CONCLUSION
In dismissing the infant’s claim against the rein-
surers and in setting aside the verdict against the re-
maining 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. | have written at some length in a los-
ing cause because | want to make clear that, in the
opinion of one appellate judge, the law of New York
gave Judge Pollack no happier choice.
I would affirm.
HAa
Order of the United States Court of Appeals
Filed January 31, 1980
At a Stated Term of the United States
Court of Appeals, in and for the Second
Circuit, held at the United States Court
House, in the City of New York, on the
Slet day of January, one thousand nine
hundred and eighty.
Present: HON. JAMES L. OAKES
Hon, Murkay I. GURFEIN
Hon. ELLSwortH A. VAN GRAAFEILAND
Circuit Judges.
UNITED STATES COURT OF APPEALS
S¥COND CIRCUIT
i on
[SAME TITLE]
>
A petition for a rehearing having been filed herein
by counsel for the defendant-Appellee Citizens Casu-
alty Co, of NLY,
Upon consideration thereof, it is
Ordered that said petition be and hereby is
DENIED,
/s/ A. DANIEL FusARO, Clerk
65a
Order of the United States Court of Appeals
Filed January 31, 1980
At a Stated Term of the United States
Court of Appeals, in and for the Second
Circuit, held at the United States Court
House, in the City of New York, on the
sist day of January, one thousand nine
hundred and eighty,
UNITED STATES COURT OF APPEALS
SECOND Circurr
——_—
[SAME TYTLE]
—~»—
A petition for rehearing containing a suggestion
that the action be reheard in banc having been filed
herein by counsel for the appellee Citizens Casualty
Co, of New York, and no active judge or judge who
was a member of the panel having requested that a
vote be taken on said suggestion,
Upon consideration thereof, it is
Ordered that said petition be and_ it hereby is
DENIED,
Due to his untimely death on December 16, 1979,
Judge Gurfein took no part in the consideration of
the petition to rehear this matter en banc.
/
/s/ IRVING R. KAUFMAN
Chief Judge
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