Petition — McGRATH v. SLOTKIN (Nos. 79-1571, 79-1524, 1535, 1719)
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= oe | * MICHAEL RODAK, JRe CLE
Supreme Court of the United States
October Term, 1979
No. 79-1571
CiurristoPpHeR McGratu, JR.,
Petitioner,
v.
Steven JoHNn SiorKrn, an infant by his mother and natural
guardian, CHARLOTTE SiorKin, 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
JospEPH A, BERGADANO
Hart & Hume
10 East 40th Street
New York, New York 10016
(212) 686-0920
Counsel for Petitioner
Christopher McGrath, Jr.
TABLE OF CONTENTS
RN SN ogo cccsece rsa bare ee ene ee beara
I er ere ance tigen ara eaareeeronnaa!
INE FI esc cetec cath etnirereniecivacnpcenrscntion
Constitutional Provisions Involved .............0.0....00....4
Oe YE ere en reenact eerie Sen
Reasons for Granting the Writ .............0.......: es
Point I—The Court of Appeals failed to give full
faith and credit to the state court’s judgment
settling the infant’s claim in the state court
ERE A Pas Sot amcor a Pee Ae Dee AH ees
Point II—The Court of Appeals violated the prin-
ciples established in Erie R.R. v. Tompkins by
failing to apply the laws of New York State
with respect to the scienter requirement for
(Bee ne OCP TT EMER i nT
Be le orate mee oaeer eae ies
Bi aM ol oricgencsyomaces corte, ianeantent W
ROI EEN ODE DE TSE LR LE
Appendix
Opinion of the District Court .......................cee
Judgment of the District Court 0.0...
Opinion of the Court of Appeals 2.0.0.
Order on Petitions for Rehearing ...........................
Order Decling Action on Suggestion for Rehear-
I co ates ese sae
Order Extending Time to File Petition for Writ
Oe eon ado od phe ode openers
10
II
TABLE OF AUTHORITIES
PAGE
Cases:
Alleghany Corporation v. Kirby, 218 F.Supp. 164,
aff’d, 333 F.2d 327 (2nd Cir. 1964), cert. dismissed
RO te IP MIDs acccsconcavenscsonteasinvtssseansasessesecdnargees 11
American Surety Company v. Baldwin, 287 U.S. 156
TENSE IESG, Spl? AOD da 13
Angel v. Bullington, 330 U.S. 183 (1946) ooo... 16
Bose v. Wehrli, 186 Mise. 325 (Sup. Ct. 1945) .0.00000......... 12
Burgundy Basin Inn, Ltd. v. Watkins Glen Grand
Prix Corp., 51 A.D.2d 140 (1976) oo... 20
Byrnes v. National Union Insurance Company, 34
A.D,2d 872 (1970) . Aa Ate Rod tt Serene Biph y Boo 18
Cagliotti v. Medi-Cab, Inc., 52 A.D.2d 544 (1976) ........ 11
Cobb v. Hatfield, 46 N.Y. 533 (1871) oo... ~=—18
Crouse v. McVickar, 207 N.Y. 213 (1912) 0.0.0. 11
Krie R.R. v. Tompkins, 304 U.S. 64 (1988) ooo... 3, 15, 16
Ernst and Ernst v. Hochfelder, 425 U.S. 185 (1976)... 21
Farraro v. Stripekis, 60 A.D.2d 861 (1978) .................. 11
Glogowski v. Rapson, 20 Mise.2d 96 (Sup. Ct. 1959)... 10
Grossman v. Kass, 124 N.Y.S.2d 416 (Sup. Ct. 1953)
GI: AECL RSPR Non ee 12
Holm v. Shilensky, 388 F.2d 54 (2nd Cir. 1968) ............ 13
Kelly v. Otis Elevator Company, 283 App. Div. 363
(1954), aff’d, 308 N.Y. 805 (1955) ooo. 18
Kingman v. Col. v. Stoddard, 85 Fed. 740 (7th Cir.
St 220 ses Sessa Gove lecitaicdcciassexerusetice, 18
III
PAGE
Naujokas v. H. Frank Carey H.S., 57 Mise.2d 175,
rev’d on other grounds, 33 A.D.2d 703 (1969)... 12
Rooker v. Fidelity Trust Compeny, 263 U.S. 413
(1923) | | Gs A ae 13
v
Slotkin v. Citizens Casualty Co. of New York, 447
F.Supp. 253 (S.D.N.Y. 1978) .. 2
State Street Trust Company v. Ernst, 278 N.Y. 104
(1988) .... eee re
Strong v. Strong, 102 N.Y. 69 (1886) . 18
Tomasello Bros., Inc. v. Friedman, 57 Mise.2d 817
(Sup. Ct. 1968) ie ee Spee
Ultramares Corp. v. Touche, Niven and Company, 255
N.Y. 170 (1951) | a AS 19
Valdimer v. Mount Vernon Hebrew Camps, Inc., 9
A.D.2d 900 (1959), aff’d, 9 N.Y.2d 21 (1961) ........ 11,17
Vale v. Reynolds, 118 N.Y. 297 (1890) o.oo 18
Wayside Transportation Company v. Marcell’s Motor
Express, 288 F.2d 864 (1st Cir. 1960) 0.0.0.0... 13
Will of Silver, 72 Misc.2d 864 (1st Cir. 1973) 0.00.00... 12
Winters v. Lavine, 574 F.2d 46 (2nd Cir. 1978)... 18
Statutes:
NO es i ethan atest eating 3
28 U.S.C. 1738 . re 3, 13
New York Civil Practice Law and Bules, Section 1207
and Rule 1208 .... ee avcitetoln amie unas 6, 10, 11, 17
Miscellaneous Sources:
26 Cornell Law Quarterly 149-153 (1943) oo... 10
23 New York University Law Quarterly 164-166
(1941)
IN THE
Supreme Court of the United States
October Term, 1979
No.
oo
CuristopHEeR McGrath, JR.,
Petitioner,
Vv.
STEvEN JoHN Siorkin, an infant by his mother and natural
guardian, CHarRLoTre SLorkin, 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
Christopher McGrath, Jr. respectfully prays for a writ
of certiorari to review the judgment and opinion of the
United States Court of Appeals for the Second Cireuit en-
tered in this proceeding on August 29, 1979, its order and
opinion entered December 10, 1979 on his petition for re-
hearing and on the order entered January 31, 1980 on his
petition for rehearing ix banc in this case. Petitioner is in-
formed that John McGrath, Citizens Casualty Company of
2
New York and American Mutual Insurance Company of
Boston intend to file petitions for a writ of certiorari in
this matter also. Petitioner joins in all questions pre-—
sented and reasons which shall be advanced by those parties
for granting the writ to the extent that such questions and
reasons are not adverse to his interests. Additional appel-
lees before the Court of Appeals were Guaranty Reinsur-
ance Company, Allstate Insurance Company, Urbaine Fire
Insurance Company, Arkwright-Boston Manufacturers Mu-
tual Insurance Company, Hardware Mutual Casualty Co.,
National Casualty Co. (all of whom, together with Amer-
ican Mutual Insurance Company of Boston, are hereafter
collectively referred to as the ‘‘reinsurers”’ or the ‘‘reinsur-
ance companies’’), George Berkowitz and Paul Ratner.
Additional parties who may retain an interest in this litiga-
tion are Morrell Goldberg and Bernard Fuss, both citizens
of New York, and Brookdale Hospital Medical Center, a
New York corporation, having its principal place of busi-
ness in New York, who were and remain cross-claim defend-
ants only in the action.
Opinions Below
The opinions of the Court. of Appeals (A 20) not yet re-
ported and the orders denying petitioner’s petition for re-
hearing and suggestion for rehearing in banc, also not yet
reported (A 74, 76), and the opinion of the United States
District Court for the Southern District of New York
(A 1), reported at 447 F.Supp. 253 (S.D.N.Y. 1978), appear
in the Appendix.
Jurisdiction
The judgment of the United States Court of Appeals
for the Second Circuit, entered on August 29, 1979, reversed
the judgment of the United States District Court for the
Southern District of New York dismissing the complaint
against petitioner Christopher McGrath, Jr. A timely peti-
tion for rehearing was denied on December 10, 1979 by a
written opinion and order which appears in the Appendix,
and petitioner’s suggestion for rehearing in banc was de-
nied on January 31, 1980 (A 74). Mr. Justice Marshall, by
order dated February 29, 1980, granted petitioner an exten-
sion of time to and including April 8, 1980 in which to file
the instant petition (A 76). The jurisdiction of this Court
is invoked under 28 U.S.C., Section 1254 (1).
Questions Presented
(1) Whether the Court of Appeals violated the statutory
mandate of 28 U.S.C., Section 1738 and the United States
Constitution by refusing to grant full faith and credit to a
valid judgment of a state court.
(2) Whether the Court of Appeals violated the prin-
ciples established in Erie R.R. v. Tompkins by failing to
properly apply the law of the State of New York in ad-
judicating a state-law created fraud cause of action arising
under its diversity jurisdiction.
Constitutional Provisions Involved
United States Constitution, Article IV, Section 1, pro-
vides, in pertinent part, as follows: ‘‘Full Faith and Credit
shall be given in each State to the public Acts, Records, and
Judicial Proceedings of every other State. And the Con-
gress may by general Laws prescribe the Manner in which
such Acts, Records and Proceedings shall be proved, and
the Effect thereof.’’
Amendment X to the United States Constitution pro-
vides, in pertinent part, as follows: ‘‘The powers not
delegated to the United States by the Constitution, nor
prohibited by it to the States, are reserved to the States
respectively, or the people.’’
Statement of the Case
In this diversity case, the infant respondent and his
father (‘‘plaintiffs’’) originally commenced an action in the
Supreme Court of the State of New York, Kings County,
against a hospital and the estates of two physicians claim-
ing injuries due to medical malpractice. Prior to the trial,
the plaintiffs settled their claims against the two doctors’
estates for a total of $20,000. Just before the case was as-
signed for trial, the hospital’s insurance carrier (Citizens
Casualty Company) retained the firm of McGrath, Cohen
& McGrath to defend the hospital in that case (A 5). Peti-
tioners Christopher McGrath, Jr. and John McGrath in this
action (two of the three partners in the aforesaid firm)
were the hospital’s trial counsel in the state court trial. The
matter came on for trial in early 1971. During the trial of
—
J
4)
that action settlement negotiations were conducted among
the parties. Ultimately, during the course of the plain-
tiffs’ case, the action was settled by the parties. It is the
nature of the statements made with respect to the settle-
ment and the state trial court’s judicial order approving the
settlement of the infant’s claim that give rise to this federal
action for fraud.
At the start of the state court trial and at the request
of plaintiffs’ counsel, the plaintiffs’ counsel was informed
by petitioner Christopher McGrath, Jr. and defendant
George Berkowitz (a hospital trustee and hospital counsel)
that the hospital had only $200,000 of insurance coverage,
written by Citizens Casualty Company, the hospital’s in-
surer (A 6). ($150,000 of that coverage was reinsured by
the reinsurers.) Subsequent to the above conversations,
put also during the trial, defendant Paul Ratner, Citizen
Casualty’s Claim Manager, arrived at the court and also
stated that the hospital had only $200,000 of insurance
coverage (A 33).
Just shortly before the close of the plaintiffs’ case in the
state court trial and after several days of settlement dis-
cussions, the plaintiffs agreed to settle their claims for
$185,000, which was within the stated insurance policy lim-
its. A stipulation of settlement was entered on the record
(but not formally approved by the Court at that time),
and the jury dismissed (A 31). Approximately 14 days
later it was discovered that the hospital had ‘‘excess’’ in-
surance policies totaling $1,000,000 which covered the
period of time when the alleged medical malpractice con-
cerning the infant plaintiff and his mother occurred, and
that there were several letters in Citizen Casualty’s file stat-
6
ing that there was such excess insurance, although not giv-
ing the amount thereof (A 32-34). That discovery was made
by defendant Ratner when he received a telephone call from
the excess insurance carrier’s counsel. When later ques-
tioned about the matter, it was Ratner’s testimony that
he had forgotten about the excess insurance (A 33). At
that point the trial judge had not yet approved the settle-
ment of the infant’s claim by signing the ‘‘infant’s com-
promise order’’ required pursuant to New York Civil Prac-
tice Law and Rules (‘‘CPLR’’) Section 1207 and Rule 1208
(A 34). Ratner promptly informed petitioner Christopher
McGrath, Jr. of the additional insurance who, in turn, im-
mediately advised that state court trial judge and plaintiffs’
counsel of the additional insurance coverage which the hos-
pital had.
The trial judge then called a conference in which the
plaintiffs’ attorney, the hospital’s attorneys, the ‘‘excess’’
insurance carriers’ attorneys and others all participated.
At that time an offer was made to plaintiffs’ attorney to
retry the case in virtually any manner in which it possibly
could be done, i.e., ab initio with a new jury, or to continue
the trial without a jury before the trial judge on the original
record and exhibits, or to have a new jury trial on the basis
of the record and exhibits in the original trial without the
plaintiffs being required to produce any additional proof
(unless they wished to do so) (A 35-37).
Despite the urging of the state court trial judge that
the plaintiffs retry their case, plaintiffs’ counsel rejected
all offers, alleging that the plaintiffs could not proceed to
a new trial because they allegedly had ‘fexposed their
hand’’, because the infant plaintiff’s mother was ill, because
7
the plaintiffs could not afford the cost of a new trial and
because he allegedly could not get the doctors who testified
on behalf of the plaintiffs at the original trial to come back
and testify again. He and the plaintiffs insisted that the
plaintiffs be permitted to proceed with the settlement and
that the plaintiffs would thereafter sue all parties involved
in a federal court action for fraud (A 37). Three months
after the original ‘‘settlement’’ was placed on the state
trial court’s record, with full knowledge of all of the fore-
going facts and at plaintiffs’ counsel’s and the plaintiffs’
insistence, the state court trial judge signed an ‘‘infant’s
compromise order’’
approving the settlement for the sum
of $185,000. That order contains no mention or condition
of any further action or proceeding by the plaintiffs against
anyone, or anything else of any like, kind or nature what-
soever.
A few months thereafter the plaintiffs commenced the
instant diversity action for fraud in the United States
District Court for the Southern District of New York
against the hospital, the ‘‘excess’’ insurers, the ‘‘excess’’
insurers’ legal counsel, the hospital’s administrator and
deputy administrator, Citizens Casualty Company, Citizens
Casualty’s reinsurers, Ratner, Berkowitz, Christopher Mc-
Grath and John McGrath. Plaintiffs claimed that the rep-
resentations which had been made to plaintiffs’ attorney
as to the hospital’s insurance coverage by the defendants
during the negotiations for settlement of the state court
action constituted a fraud. The damage aspect of the
fraud action was the difference between the amount of
money ($185,000) which plaintiffs received on the settlement
with the hospital and the alleged settlement value of the
ease had plaintiffs and their counsel been informed that the
8
actual insurance coverage for the hospital was $1,200,000.
There was no ‘‘federal’’ cause of action or question in-
volved in the diversity action.
At the time of trial of the federal action only Citizens
Casualty, its reinsurers, Ratner, Berkowitz and the two
McGraths remained as defendants to the plaintiffs. Prior
to the trial the plaintiffs had consented to dismissal of the
action against the hospital, its administrator and deputy
administrator, the ‘‘execess’’ insurers and those insurers’
attorneys, all of whom had originally been named as de-
fendants by the plaintiffs. However, the hospital and its
two administrators remained in the action as eross-claim
defendants to other defendants only. At the end of the
plaintiffs’ case in the trial below, the Court dismissed the
action as to the reinsurers, leaving only Citizens Casualty,
Berkowitz, Ratner and the two MecGraths as defendants
when the case went to the jury. The action was tried
before Hon. Milton Pollack, District Judge.
The jury’s verdict was in the total amount of $680,000
in favor of the plaintiffs. Subsequently, the District Judge
granted the defendants’ motions for judgment n.o.v. in a
written opinion for the reasons set forth therein, a copy of
which opinion is in the Appendix (A 1).
On appeal by the plaintiffs, the United States Court of
Appeals for the Second Circuit reversed and reinstated the
verdict as to all of the remaining defendants except Berko-
witz by a 2-1 decision, with a strong dissent by Van Graafei-
land, J. The Cireuit Court denied the applications for
reargument and rehearing and denied suggestions that the
matter be considered in banc (A 68, 74).
9
The majority of the Cireuit Court held, inter alia, that
the law of New York is that one who has been induced by
a fraudulent misrepresentation to settle a claim may sue
for and recover damages for fraud without rescinding the
settlement, despite knowledge of the actual facts before
entering into the settlement.
In his petition for rehearing, petitioner Christopher
McGrath, Jr. restated the argument that the New York
court’s ‘‘infaut’s compromise order’’ approving the settle-
ment had the effect of a judgment under New York law
and could not be collaterally attacked in the federal court
action. The Circuit Court again rejected that argument
and stated that the New York law permitted the plaintiffs
to sue on their new canse of action for fraud in the procure-
ment, which was not barred by the prior, judicially ap-
proved settlement and which was not res judicata (A 69-
70).
It is respectfully submitted that the Cireuit Court mis-
construed and misapplied New York law with respect to
fraud and failed to give full faith and credit to the prior
state court judgment which is binding on the parties in this
action.
10
Reasons for Granting the Writ
POINT I
The Court of Appeals failed to give full faith and
credit to the state court’s judgment settling the infant’s
claim in the state court action.
The Circuit Court, by reversing the District Court and
permitting the plaintiffs to maintain this diversity fraud
action after the ‘‘infant’s compromise order’’ had been
entered in state court, has seriously impaired the constitu-
tional and statutory rights protecting state court judg-
ments. The effect of such a decision could cause a sub-
stantial influx of cases in the federal courts seeking what
would amount to a ‘‘second bite of the apple’’ in the federal
courts after plaintiffs have settled or lost at the state court
level and a judgment entered to that effect. In this instance
particularly, the Circuit Court has completely disregarded
the order of a state trial judge which judicially approved
the settlement of the infant’s underlying state court action.
In New York, as in other jurisdictions, infant plaintiffs
are wards of the court. Giogowski v. Rapson, 20 Mise.2d 96
(Sup. Ct. 1959). Accordingly, New York, in protection of
its infants, long ago enacted statutes designed to insure the
rights of infants in the prosecution of litigation claims.*
The present New York rules on settlement of infants’
claims are currently contained, in part, in the New York
Civil Practice Law and Rules (CPLR), Section 1207 and
* For general background history of New York statutory law with
respect to infantis’ actions, see 26 Cornell Law Quarterly 149-153
(1943) and 23 New York University Law Quarterly 164-166 (1941).
11
Rule 1208, which require that settlement of an infant’s
claim must be approved by a judge on application to the
court, supported by affidavits of the infant’s representative
and attorney setting forth certain specified facts. The set-
tlement is then independently reviewed by the court and, if
it is acceptable to the court, an order is entered pursuant to
CPLR 1207 settling the infant’s claim. Such an order
‘¢shall have the effect of a judgment.’’ CPLR 1207; Krich-
mar v. Krichmar, 42 N.Y.2d 858 (1977).
The New York law is explicitly clear that there cannot be
any settlement of an infant’s claim without independent
judicial approval as evidenced by the court’s ‘‘infant’s com-
promise order.’’ Farraro v. Stripekis, 60 A.D.2d 861
(1978) ; Cagliotti v. Medi-Cab, Inc., 52 A.D.2d 544 (1976) ;
Valdimer v. Mount Vernon Hebrew Camps, Inc., 9 A.D.2d
900, aff’d, 9 N.Y.2d 21 (1961). Without such an ‘‘infant’s
compromise order’? any proposed or proported ‘‘settle-
ment’’ of an infant’s claim is unenforceable and uncol-
lectable. Conversely, a signed ‘‘infant’s compromise or-
der’’ has the effect of a judgment and may be enforced in a
court of law.
It is a further settled principal of law in New York (as
elsewhere) that a valid judgment is immune from collateral
attack. Crouse v. McVickar, 207 N.Y. 213 (1912) ; Alleghany
Corporation v. Kirby, 218 F.Supp. 164, aff’d, 333 F.2d 327
(2nd Cir. 1964), cert. dismissed 384 U.S. 28 (1966).
Stated another way:
‘¢it is a settled polic; of the law not to allow the effec-
tiveness of a judgment to be impeached in another law-
suit, even where perjury and fraud were used to pro-
12
cure it. The remedy for that lies exclusively in the
lawsuit itself, for instance, by a motion for a new
trial.’’ Tomasello Bros., Inc. v. Friedman, 57 Mise.2d
817 (Sup. Ct. 1968).
Consequently, the New York courts have held that an
infant’s compromise order signed by a judge is equally
safe, absent fraud by the guardian at litem, from sub-
sequent direct or collateral attack. In re Will of Silver,
72 Mise.2d (Surr. Ct. 1973) ; Grossman v. Kass, 124 N.Y.S.2d
416 (Sup. Ct. 1953) (n.o.r.).
It is undisputed that the instant plaintiffs not only failed
to appeal or even question the infant’s compromise order
signed by state trial judge which is here involved, but that
they affirmatively insisted that it be signed by the trial
judge. Of even greater importance is the fact that at that
time both the plaintiffs and the state court judge were fully
apprised of the actual facts of the alleged ‘‘fraud’’ com-
mitted by the defendants, and that the compromise order
was nevertheless signed by the state court judge with full
knowledge of those facts. The signing of the order (judg-
ment) by the state court judge under those circumstances
constituted an independent judicial determination that the
settlement of the infant’s claim was fair and reasonable in
the premises and in the best interests of the infant. Nau-
jokas v. H. Frank Carey H.S.,57 Mise.2d 175, rev’d on other
grounds, 33 A.D.2d 703 (1969); Bose v. Wehrli, 186 Mise.
325 (Sup. Ct. 1945).
Despite the state court’s approval and determination
that there was a full, fair and adequate settlement of
the infant’s claim and despite the fact that the infant, his
13
attorney and guardian had full opportunity to relitigate
their original claim in the state court in any one of several
ways as they might elect, if they wished to do so, the plain-
tiffs insisted upon accepting the settlement and then bring-
ing the instant fraud action in the federal court while
retaining the proceeds of the settlement. By permitting this
suit to be maintained the Circuit Court has seriously in-
fringed upon the judicial powers of the state courts which
are protected by the United States Constitution. It has
been a long-standing principle, as codified by 28 U.S.C. Sec-
tion 1738, that:
‘“‘the . . . judicial proceedings of any court of any
state ... shall have the same full faith and credit in
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 U.S.C. Section 1738, is, of course, the statutory en-
actment which applies the ‘‘full faith and credit clause’’ of
the Constitution (Article IV, Section 1), to the federal
court system with respect to state court judgments. Amer-
ican Surety Company v. Baldwin, 287 U.S. 156 (1932) ;
Rooker v. Fidelity Trust Company, 263 U.S. 413 (1923);
Winters v. Lavine, 574 F.2d 46 (2nd Cir. 1978); Wayside
Transportation Company v. Marcell’s Motor Express, 288
F.2d 864 (1st Cir. 1960). .
In a similar situation, in Holm v. Shilensky, 388 F.2d
54 (1968), the Second Circuit rejected the plaintiff’s claims
based on a state court judgment incorporating a settlement
which allegedly was procured by fraud. The claims there
involved the value of two paintings which were part of a
settlement agreement which, in turn, was incorporated into
14
the state court decree. In that case, the plaintiff alleged
that the true value of the paintings was far less than had
been represented at the time of the settlement. She also
claimed that the fraud was not discovered until long after
the decree (judgment) had been entered. New York law
also applied in that case. In rejecting the plaintiff’s claims
there, the Circuit Court stated:
‘Thus, in order properly to compute damages un-
der these five causes of action the district court would
have to second-guess the Nevada divorce court by de-
termining whether the Nevada court would have pro-
vided a different property settlement arrangement if
the true worth of the paintings were known at the time
of the decree, and, if so, to what extent it would have
been different. This clearly would be an impairment
of the Nevada decree.”’
We respectfully submit that the same reasoning applies
in the instant case, only more so, since the Cireuit Court
majority’s decision here results in an impairment of the
New York court’s judgment settling an infant-plaintiff’s
claim and is contrary to the settled New York law. By al-
lowing the federal courts to, in effect, ignore the state
court’s judgment (infant’s compromise order), the Circuit
Court’s decision creates an effective way to allow plaintiffs
multiple opportunities to litigate and relitigate the same
claims and permits an action to be brought in federal court
which impermissibly collaterally attacks a state court judg-
ment.
The grant of a writ is especially appropriate in this
case because the Circuit Court’s decision would impose a
substantial burden upon the federal court system. The
15
decision opens the door for every state court litigant to
seek a way in which to gain access to the federal court by
attacking the state court’s judgment under the guise of a
fraud action. The problem is particularly acute in this in-
stance because the settling of infants’ claims occurs almost
daily in every court in the United States. To permit such
collateral attacks would open the proverbial ‘‘flood gates’’
to new litigation in the federal courts on cases previously
settled in state courts.
Given the plain inconsistency of the decision and the
prescribed mandate of this Court and Congress that full
faith and credit must be given to state judgments, we re-
spectfully submit that this case is ripe for summary rever-
sal and remand to the Cireuit Court for reinstatement of the
District Court’s judgment dismissing the action.
POINT II
The Court of Appeals violated the principles estab-
lished in Erie R.R. v. Tompkins by failing to apply the
laws of New York State with respect to the scienter
requirement for fraud.
This case involves consideration of the responsibility of
the federal courts in diversity cases to correctly apply state
law and to avoid creating or expanding state-law causes of
action. Here the Circuit Court has permitted a fraud ac-
tion to be maintained in federal court against an attorney
acting in his capacity as counsel for a defendant in a state
court action. By the Cireuit Court’s majority’s interpreta-
tion of the scienter requirement for fraud, they have sub-
jected every attorney in this country to a possible fraud ac-
16
tion any time the attorney incorrectly states a fact to an
adversary, however innocent or without fault he may be.
This question is also particularly ripe for consideration by
this Court at this time in view of the increasing number of
legal actions brought against professionals of all disciplines
for alleged constructive fraud due to the professional’s al-
leged failure to investigate his client’s activities. The Cir-
cuit Court’s ruling is of potentially great importance be-
cause of the effect which it has to permit fraud actions to
be brought against professionals when the professional,
such as an attorney or an accountant, has relied upon repre-
sentations made to him by his client in making representa-
tions himself to third parties.
As this Court is all too well aware, in the exercise of the
diversity jurisdiction federal courts are mandated to en-
force state-created rights and apply the laws of the appro-
priate state. Erie R.R. v. Tompkins, 304 U.S. 64 (1938).
For the purpose of diversity jurisdiction a federal court is,
in effect, only another court of a state. The essence of di-
versity jurisdiction is that the federal court enforces state
law and state policy. What is more important, diversity
jurisdiction must follow state law and policy. Angel v.
Bullington, 330 U.S. 183 (1946).
Although it is conceded by all parties and the lower
courts that the law of New York applies in this case, it is
respectfully submitted that the Cireuit Court misconstrued
and misapplied the New York law on fraud with respect to
two specific issues. One: the Circuit Court misconstrued
the New York law on fraud by permitting the plaintiffs to
maintain their fraud action even though the plaintiffs in-
sisted on affirming and having judicial approval of the
17
settlement which allegedly was based upon fraud after they
had full knowledge of the facts constituting the alleged
fraud, which under New York law constitutes a waiver of
any fraud of action. Two: the Circuit Court expanded the
New York definition of fraud by permitting a party not in
direct privity with the actual facts to be found ‘‘grossly
negligent’’ for failure to independently ascertain the actual
facts when there was no duty to do so.
1. Waiver
Within two weeks after the ‘‘settlement’’ was made
during the state court trial and before that settlement had
the required state court judicial approval, the instant peti-
tioner, upon learning of the facts concerning additional in-
surance policies which the hospital had, immediately in-
formed both the trial judge and plaintiffs’ counsel of those
facts (A 8). At that time there was no ‘‘infant’s com-
promise order’’ which was required for the approval of
that ‘‘settlement.’’ Despite the offer by the state court
trial judge and the defendant’s and its insurers’ counsel to
permit the plaintiffs to retry their case in any one of the
several possible ways, plaintiffs’ counsel and parents re-
fused and insisted that the state court judge sign the ‘‘in-
fant’s compromise order’’ which would then have the effect
of a judgment against the defendant in that action. As
more fully set forth above, New York law is settled by both
statute and decision that the settlement of an infant’s claim,
such as the instant one, is not effective and binding until
‘the settlement has been approved by order of the trial court
and upon certain specific procedures, documents and bases.
--@PLR 1207; Valdimer v. Mount Vernon Hebrew Camps,
Inc., supra.
18
The Cireuit Court found that the plaintiffs’ insistence
in confirming the settlement did not amount to a waiver of
the ‘‘fraud’’ by relying on New York cases which state that
when a victim of a fraud learns of the fraud after the
transaction has been consummated, he may retain whatever
benefits he has received and then maintain an action for
damages. Vale v. Reynolds, 118 N.Y. 297 (1890) ; Strong v.
Strong, 102 N.Y. 69 (1886); Byrnes v. National Union In-
surance, 34 A.D.2d 872 (1970). However, the New York
law which applies in this instance is that if the alleged
victim of the misrepresentation learns the truth before the
transaction is consummated, he may not consummate the
transaction, take the benefits and still sue in fraud. If he
proceeds with the transaction under those circumstances,
he waives the fraud. Kingman v. Col. v. Stoddard, 85 Fed.
740 (7th Cir. 1898) ; Cobb v. Hatfield, 46 N.Y. 533 (1871);
Kelly v. Otis Elevator Company, 283 App. Div. 363 (1954),
aff’d, 308 N.Y. 805 (1955).
The operative words which control in this case are
‘‘hefore the transaction is consummated.’’ As shown
above, the ‘‘settlement’’ here involved was not and could
not be ‘‘consummated’’ before the infant’s compromise
order was signed. It was inchoate and unenforceable until
judicially approved. Therefore, when the plaintiffs learned
of the alleged fraud before the ‘‘transaction was consum-
mated’’ (before the settlement of the infant plaintiff’s
claim was judiciaily approved) and still elected to accept
the benefits of the settlement, there could not be any fraud
at that point. In any event, they waived the prior ‘‘fraud’’
by insisting on proceeding to have the ‘‘settlement’’ judi-
cially approved and become enforceable after having full
knowledge of the actual facts involved.
19
No New York case has been found where the ‘‘de-
frauded’’ party was fully aware and informed of the facts
of the alleged fraud before the settlement or the transaction
was consummated and where such party was permitted to
then consummate the settlement or transaction and subse-
quently sue for damages for fraud. By permitting this suit
to be maintained despite the waiver of the alleged fraud by
the plaintiffs, the Circuit Court violated a basic cannon of
our federal system by creating a state cause of action
where none existed before. The effect of the decision
below is to alter the New York law and to permit a fraud
action to be brought in a federal court in New York in any
instance when a misrepresentation is made to a party and
that party, with actual knowledge that the representation
is incorrect, elects to proceed with the transaction. We
respectfully submit that is both improper and imper-
missible.
2. Scienter
The Circuit Court also misconstrued and expanded the
New York law with respect to ‘‘nonwilful’’ fraud based on
a misrepresentation of a material fact susceptible of accu-
rate knowledge, but stated to be true on personal knowledge
of the representor, particularly insofar as petitioner Chris-
topher McGrath, Jr. is concerned.
It has been a long-standing rule in New York that
‘gross negligence’’ may be substituted for actual scienter
as an element of fraud. See, e.g., Ultramares Corp. v.
Touche, Niven and Company, 255 N.Y. 170 (1931); State
Street Trust Company v. Ernst, 278 N.Y. 104 (1938).
Both of those cases involved accountant/auditors retained
20
for the sole purpose of certifying the accuracy of a client’s
financial statements. The auditor necessarily had before
him and became familiar with the actual books and records
before the statement and certification was made. In cases
not involving accountants, the ‘‘representor’’ charged with
scienter or gross negligence was a principal who unques-
tionably was perceived by others to be and actually was act-
ing upon his own knowledge, rather than upon knowledge
supplied to him by another who had actual, direct knowl-
edge of the facts. See, e.g., Burgundy Basin Inn, Ltd. v.
Watkins Glen Grand Prix Corp., 51 A.D.2d 140 (1976).
The Circuit Court majority’s decision below expanded
the New York scienter requirement for fraud in this case
by permitting a fraud action to be brought against a de-
fendant who did not have actual, direct knowledge or the
means to ascertain the truth of a matter being represented
without making inquiry of a third person concerning the
matter (as was the case with petitioner) and those cireum-
stances were known to the ‘‘defrauded”’ party. The Cir-
cuit Court majority so held despite the fact that there are
no New York cases which we can find which hold that an in-
dividual is ‘‘grossly negligent’’ in such circumstances.
Petitioner and his firm were retained shortly before
trial, and only as trial counsel, to defend the hospital in the
state court action. Neither he nor his firm had any first-
hand knowledge of the hospital’s insurance. It was clear
to everyone involved, including and particularly the plain-
tiffs’ counsel, that petitioner actually relied upon his client
for the information with respect to their insurance cover-
age (A 27-28).
21
The potential effect of the Circuit Court majority’s deci-
sion here is to create a fraud action where a party relies on
the facts given to him by a third party and such reliance is
known by all of the parties involved including the party to
whom a representation of such facts is made. For example,
attorneys in the course of their professional representation
of clients must often make various statements with respect
to their clients’ position and the facets relying on statements
to them by the clients. The logical extension of the Circuit
Court’s ruling is that the attorney may be subject to an
action for fraud if the information given to him by the client
and stated by the attorney relying thereon to a third party
is false or misleading. The impact of such a ruling would
be to require every attorney to make an independent inves-
tigation of every single statement of fact or allegation
which may be made to him by his client under penalty of
being subject to liability for fraud if such statement is
incorrect. It is respectfully submitted that would create
utter havoc in our court system and slow the judicial proc-
ess to less than the proverbial ‘‘snail’s pace’’. It is further
respectfully submitted that the granting of the instant peti-
tion will both afford this Court an opportunity to remedy
the situation created by the Cireuit Court majority’s deci-
sion and also to discuss the requirements of fraud actions
in federal courts outside of the statutory limitations and
confines of the Securities Acts. See Ernst and Ernst v.
Hochfelder, 425 US. 185 (1976).
22
Conclusion
For the foregoing reasons, it is respectfully submitted
that the petition for writ of certiorari on behalf of Chris-
topher McGrath, Jr. should be granted and the ease re-
manded to the Court of Appeals for the Second Cireuit for
reinstatement of the District Court’s decision dismissing
the action wita respect to Christopher McGrath, Jr.
Respectful submitted,
JosEPpH A. BERGADANO
Hart & Hume
Counsel for Petitioner
Christopher McGrath, Jr.
APPENDIX
APPENDIX
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
March 1, 1978.
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,
Plaintiffs,
Vv.
CITIZENS CASUALTY CO. OF NEW YORK,
Allstate Insurance Company,
American Motorists Insurance Com-
pany, American Mutual Insurance
Company of Boston, Employers Mutual
Liability Insurance Company of
Wisconsin, Guaranty Reinsurance
Company, Urbaine Fire Insurance
Company, Grange League Insurance
Co., National Casualty Co., Hard-
ware Mutual Casualty Co., Arkwright-
Boston Mfrs. Mutual Insurance Com-
pany, Paul Ratner, George Berkowitz,
Christopher McGrath, Jr. and John
McGrath, Defendants.
No. 71 Civ. 4044 (MP).
On return of a verdict that
moving defendants had committed fraud,
A 2
inducing plaintiffs to settle a medical
malpractice action for less than they
otherwise would have obtained, defen-
dants' motions to dismiss the complaint
and to direct a verdict in their favor,
reserved during trial, and post-trial
motions to set aside the verdict and
for judgment n.o.v. came before the
court. The District Court, Pollack,
J., held that: (1) where plaintiffs seek-
ing recovery on charge of malpractice
on behalf of an infant alleged that they
were unwilling to demand more from defen-
dant hospital than its insurance would
cover, yet plaintiffs after learning of
additional insurance coverage but before
the court's approval of a settlement on
behalf of the infant insisted on proceed-
ing with and thereby obtaining execution
of the stipulation of settlement, with
full knowledge of the facts, plaintiffs
were barred from thereafter seeking dam-
ages for fraud; (2) the court was not
obliged to adhere to another judge's
earlier decision in the same litigation,
and (3) where the only basis on which
the jury was instructed that it could
hold insurance company liable was the
theory of respondeat superior with re-
spect to liability of its claims manager,
there was no justification for a verdict
against the insurer more than eight
times as great as against the agent,
and such error tainted not only findings
as to damages but the entire verdict.
Verdict set aside, judgment
n.o.v. directed for defendants, com-
plaint dismissed and judgment entered
in favor of defendants.
Arum, Friedman & Katz, New York
City, for plaintiffs; by Theodore H.
Friedman, New York City.
Granik, Silverman, Sandberg &
Nowicki, New City, N.Y., for defendant
Citizens Casualty Co.; by David W.
Silverman, New City, N.Y.
Julien & Schlesinger, New York
City, for defendant Paul Ratner; by
Stuart A. Schlesinger and David
Jaroslawicz, New York City.
Tell, Cheser, Breitbart & Lefkowitz,
New York City, for defendant George
Berkowitz; by Seymour Lefkowitz, New
York City.
Hart & Hume, New York City, for
defendant Christopher McGrath, Jr.; by
Joseph A. Bergadano, New York City.
OPINION
POLLACK, District Judge.
A jury has returned a verdict
that the moving defendants herein commit-
ted fraud, inducing plaintiffs to settle
a medical malpractice action for less
than they otherwise would have obtained.
Now before the Court are defendants'
motions to dismiss the complaint and to
direct a verdict in their favor, reserved
during trial, and post-trial motions to
set aside the verdict and for judgment
n.O.Vv.
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 hospital in a state of
toxemia. Early in his life he was diag-
nosed as suffering from cerebral palsy.
He and father sued the hospital in the
New York Supreme Court, Kings County,
alleging that Steven's disability stemmed
from a condition of acetonuria in the
mother due to the negligence of the hos-
pital 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, Citizens retained defen-
dant Christopher McGrath to represent
the hospital. Early in the proceedings
in the trial court, plaintiffs' counsel,
Max Toberoff, Esq. received the impres-
sion 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 insurance cover-
age. In response, the hospital sent
defendant 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 law-
yers discussed the possibility of a set-
tlement. On March 4, defendant Paul
Ratner, a claims manager for Citizens,
arrived at the courthouse and joined
the discussions. On the same day, a
stipulation settling the case for
$185,000 was read into the record, the
Judge orally indicated approval thereof,
and the jury was discharged.
Plaintiffs allege, and the
jury apparently found, that the individ-
ual defendants mentioned above represent-
ed 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
accepted plaintiffs' allegation that
they were unwilling to demand more from
the hospital than its insurance would
cover,+ and that therefore they relied
on defendants' representations concern-
ing the insurance. Finally, the jury
must have concluded that the hospital
had an umbrella policy providing a mil-
lion dollars' worth of "excess" insur-
ance under certain circumstances, with
Lloyds Insurers unrelated to Citizens,
which was applicable to the Slotkins'
claim. The Lloyds group was not noti-
fied of the pendency of the trial and
did not participate therein or in the
1/ Mr. Toberoff testified that he as-
sumed that the hospital could satisfy
any judgment that plaintiffs might obtain.
negotiations and stipulation of settle-
ment. 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
plaintiffs on a finding that the defen-
dants conveyed a pretense of knowledge
when they were recklessly ignorant of
the truth.
The following facts are also
both amply proved and uncontested. Be-
cause it determined the claims of an
infant, the settlement stipulation was
unenforceable unless it was followed
2/ Mr. Toberoff conceded that failure
or refusal of the Judge to make and enter
a compromise order pursuant to NYCPLR
§§ 1207-08 would render the stipulation
for settlement unenforceable. 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 they by logical opera-
tion the stipulation would
be rendered valueless ...
We wouldn't be able to
collect without the compro-
mise order."
Moreover, the trial Judge had the unques-
tioned power to reject the settlement
as inadequate or insufficient for the
infant after learning of the existence
of excess insurance coverage.
by a judicial order finalizing the ar-
rangement, providing for the distribu-
tion of the settlement fund and terminat-
ing 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 ex-
cess insurance coverage. He promptly
telephoned McGrath, and McGrath immedi-
ately notified Justice Williams and
Toberoff. In a conference before Jus-
tice Williams, representatives of the
excess carriers declined to recognize
the. settlement 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 Citizens offered to
‘drop the settlement stipulation, to rec-
ommence trial of the claim before either
a judge or a jury, and to permit intro-
duction 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 obli-
gation thereon owing to the hospital if
given an opportunity to come in and de-
fend the claim. The Judge, too, urged
the plaintiffs to accept the proposals
of a retrial made by the hospital, Citi-
zens 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 formal papers demanded that Jus-
tice Williams finalize the arrangement,
make the requisite compromise order and
direct judgment thereby on the settlement
stipulation. After considering the mat-
ter for over two months, Justice Williams
acceded to plaintiffs' demand for execu-
tion of settlement arranged, with an order
of infant's compromise that does not men-
tion the possibility of a fraud action.>
2/ In view of the determination reached
ereafter, it becomes unnecessary to
construe the effect of the judgment ul-
timately directed by Justice Williams.
The parties are in dispute on whether
the Judge's compromise order constituted
a settlement value judgment and inde-
pendent adjudication of the fairness of
the settlement, and an expression on
the best interest of the infant, the
A 10
The compromise was paid thereunder 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 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 set-
tlement 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 whatever benefits he has received
thereunder, and maintain an action for
damages. Vail v. Reynolds, 118 N.Y.
validity of which cannot now be ques-
tioned collaterally for error which does
not affect the jurisdiction of the Court
which rendered it. It is a settled prin-
ciple that a valid judgment should not
be subject to a collateral attack.
Crouse v. McVickar, 207 N.Y. 213, 100
N.E. 697 (1912).
A 11
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. National
Union Insurance Co., 34 A.D.2d 872, 310
N.Y¥.S.2d 781 (1970). But see Glatzer v.
Ax, 63 N.Y.S.2d 551 (Sup. Ct. 1946) (al-
ternate ground). If a victim of misrep-
resentation learns the truth when per-
formance of the contract has just begun,
and he could rescind without significant
prejudice, however, he waives the fraud
if he proceeds to execute the agreement.
See A.G. Concrete Breakers, Inc. v. State,
9 A.D.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), aff'd mem.
308 N.Y. 805, 125 N.E.2d 864 (1955) (dic-
tum); General Valuations Co., Inc. Vv.
City of Niagra Falls, 253 App. Div. 156,
157-59, 1N.Y.S.2d 880, 882-83, aff'd on
this point mem. 278 N.Y. 273, 15 N.E.2d
802 (1938).
Other jurisdictions take the
same view. See Simon v. Goodyear Metal-
lic Rubber Shoe Co., 105 F. 573 (7th
Cir. 1900); Kingman & Co. v. Stoddard,
85 F. 740 (7th Cir. 1898); Advance Alumi-
A 12
num 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 Iowa 602, 123 N.W.2d
408, 411 (1963) (dictum); Eckstein v.
Storck, 199 Iowa 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. E.g., Thompson
v. Libby, 36 Minn. 287, 31 N.W. 52 (1886).
Further, it would extend the principle
allowing a victim 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 attrib-
uted to the difficulties asserted by
A 13
Toberoff with respect to retrying the
malpractice case. There was no impair-
ment of the facts giving rise to claims
of malpractice by the hospital. Under
New York law, plaintiffs were required
to prove malpractice by the hospital in
order to recover for fraud in the induce-
ment of the stipulation of settlement.
Urtz v. New York Central & Hudson River
R.R., 202 N,Y. 170, 175-76, 95 N.E. 711,
712-13 (1911). Thus, retrying the mal-
practice case would have been no more
burdensome than pursuing this action
for fraud. Further, by obtaining a ver-
dict in the present litigation, plain-
tiffs have proved that such a retrial
was indeed practicable.
In reaching this decision,
the Court has carefully considered Judge
Motley's contrary conclusion at an ear-
lier stage of this litigation, Slotkin
v. Brookdale Hospital Center, 357 F.
Supp. 705, 707 (S.D.N.Y¥Y. 1972). Judge
Motley did not have the benefit of a
full record, including plaintiffs' demon-
stration of the practicability of retry-
ing the malpractice claim, when she was
required to render a decision. In any
A 14
event, the Court is not obliged to ad-
here to another judge's earlier decision
in the same litigation. LeRoy v. Sabena
Belgian World Airlines, 344 F.2d 266,
274 (2d Cir.), cert. denied, 382 U.S.
878, 86 S. Ct. 161, 15 L. Ed. 2d 119
(1965) (dictum); Dictograph Products Co.
v. Sonotone Corp., 230 F.2d 131, 134-36
(2d Cir.), petition for cert. dismissed
per stipulation, 352 U.S. 883, 77 S.
Ct. 104, 1 L.Ed.2d 82 (1956) (Learned
Hand, J.). The earlier ruling does not
relieve this Court of the obligation to
present the Court of Appeals with what
it believes to be a correct judgment.
Schmeider v. Hall, 421 F. Supp. 1208,
1213 a. 6 {8.D.N.Y.), akt'S4, 3457.26
768 (2d Cir. 1976), cert. denied, 430
U.S. 955, 97 S. Ct. 1601, 51 L.Ed.2d
805 (1977); Rodriguez v. Olaf Pedersen's
Rederi A/S, 387 F. Supp. 754, 757 (E.D.
N.Y. 1974), aff'd, 527 F.2d 1282, (2d
Cir. 1975), cert. denied, 425 U.S. 951,
96 S. Ct. 1726, 48 L.Ed.2d 195 (1976).
Accordingly, defendants are
entitled to judgment. In the altcrna-
tive, a new trial is required. The jury
returned separate awards of $20,000 a-
A 15
gainst McGrath, $60,000 against Ratner,
$100,000 against Berkowitz, and $500,000
against Citizens. The verdict is incor-
rect as a matter of law, for two reasons.
First, separate wrongs resulting in a
Single, indivisible injury, as here,
create joint and several liability for
the whole harm. Hill v. Edmonds, 26
A.D.2d 554, 270 N.Y.S.2d 1020 (1966);
Hawkins v. Goll, 256 App. Div. 940, 9
N.Y.S.2d 924, aff'd mem. 281 N.Y. 808,
24 N.E.2d 484 (1939); Insurance Company
of North America v. Lindsey, 83 Misc.2d
495, 498-99, 372 N.Y.S.2d 164, 167 (Sup.
ct. 1975). Second, the only basis on
which the jury was instructed that it
could hold Citizens liable was a theory
of respondeat superior with respect to
Ratner's liability. There is no justi-
fication for a verdict against Citizens
more than eight times as great as that
against Ratner. This error so clearly
demonstrates that the jury yielded to
its sympathy for a severely crippled
child, and determined to provide for
him without regard for the law, that it
taints not only its findings as to dam-
ages, but its entire verdict.
A 16
The jury's verdict is set aside,
judgment notwithstanding the verdic:: is
directed for the defendants, the complaint
is dismissed, and judgment shall be en-
tered in favor of the defendants and
against the plaintiffs, with costs to
be taxes by the Clerk.
SO ORDERED.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
STEVEN JOHN SLOTKIN, an infant
by his mother and natural
guardian, CHARLOTTE SI.OTKIN,
and CHARLOTTE SLOTKIN, as Filed Mar.
Executrix of the Estate of 6, 1978
BERT SLOTKIN, deceased
71 Civil
Plaintiffs 4044 (MP)
-against- JUDGMENT
CITIZENS CASUALTY CO., OF
NEW YORK, et al.,
Defendants
The issues in the above enti-
tled action having been brought on regu-
larly for trial, before the Honorable
Milton Pollack, United States District
Judge, and a jury, on September 15, 16,
iS, 20, 23, 23, 26. 27, 202 a0: 22 ane
October 3, 4, 5, 6, 7 and il, i977, and
at the conclusion of the plaintiffs’
evidence all the defendants having moved
the Court to dismiss the complaint, and
the Court having granted the said motions
to dismiss made on behalf of all defen-
dants except on behalf of defendants
Citizens, Paul Ratner, George Berkowitz
A 18
Christopher McGrath and John McGrath,
and the jury thereafter having returned
a verdict in favor of the plaintiffs,
as against defendants CITIZENS, PAUL
RATNER, GEORGE BERKOWITZ and CHRISTOPHER
MCGRATH, and in favor of JOHN MCGRATH,
and the said defendants having moved
the Court for judgment notwithstanding
the verdict, and for a directed verdict
in favor of the said defendants, and
the Court thereafter on March 1, 1978,
having handed down its opinion setting
aside the jury verdict, and having di-
rected that judgment notwithstanding
the verdict be entered for the defen-
dants dismissing the complaint, it is
ORDERED, ADJUDGED and DECREED:
That. defendants CITIZENS CASUALTY CO.
OF NEW YORK, PAUL RATNER, GEORGE BERKOWITZ
and CHRISTOPHER MCGRATH have judgment
against plaintiffs STEVEN JOHN SLOTKIN,
an infant by his mother and natural guard-
CHARLOTTE SLOTKIN, and CHARLOTTE SLOTKIN,
as Executrix of the Estate of Bert Slotkin,
deceased, dismissing the complaint on
the merits, with costs to be taxed, and
it is further,
ORDERED, ADJUDGED and DECREED:
A 19
That the complaint be and it is hereby
dismissed as to the remaining defendants,
with costs to be taxed.
Dated: New York, New York
March 6, 1978
/s/Raymond F. Burghardt
Clerk
Opinion of the United States
Court of Appeals
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
—~*-
No. 353—August Term, 1978.
(Argued January 17, 1979 Decided Aug. 29,1979.)
Docket No. 78-7167
—~>
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,
Appellants,
_—Vi—
CrT1zzENS CASUALTY Co. OF NEW YORK, ALLSTATE
INSURANCE Co., AMERICAN MOTORISTS INSURANCE
Co., AMERICAN MUTUAL INSURANCE CO. OF BOSTON,
EMPLOYERS MUTUAL LIABILITY INSURANCE Co. OF
WISCONSIN, GUARANTY REINSURANCE CO., URBAINE
FrrE INSURANCE Co., GRANGE LEAGUE INSURANCE
Co., NATIONAL CASUALTY CO., HARDWARE MUTUAL
CASUALTY CO., ARKWRIGHT-BOSTON MANUFACTURERS
MUTUAL INSURANCE CO., PAUL RATNER, GEORGE
BERKOWITZ, CHRISTOPHER MCGRATH, JR., and JOHN
MCGRATH, —
Appellees.
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-
plaint 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 dismissed.
——<——
-THeoporE 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.
JosEPpH A. BERGADANO, Hart & Hume,
New York, N.Y. (Leslie F. Ruff, of
counsel), for Appellees McGrath.
A 22
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-
¢ A 23
tiffs, a brain-damaged child and his mother,’ settled
on the record after trial commenced for $185,000, .
just under the so-called “policy limit.” Slotkin ov.
Beth-El Hospital, No. 65-6253 (N.Y. Sup. Ct., Kings
County, June 4, 1971) (order approving settlement of
March 4, 1971). The Hospital defendant and its pri-
mary insurer represented that the policy limit was
$200,000 when in fact there was an additional $1
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 defendant-appellees liable
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 trial; Christopher
McGrath, Jr., and John McGrath, partners in the
firm of McGrath, Cohen & McGrath and nominal
trial counsel for the Hospital but ac.ually appearing
for the insurers; and George Berkowitz, a Hospital
trustee and attorney. The complaint against the in-
surance companies that had reinsured Citizens’ cov-
erage were dismissed by Judge Pollack in the federal
trial. The jury awarded damages in the amount of
$680,000, representing the difference between the ac-
tual settlement in the state action and a likely settle-
1 Plaintiffs in the state malpractice action were the infant,
Steven John Slotkin, and his father, Bert Slotkin. Bert Slotkin
having died before the initiation of the fraud action, plaintiffs in
the court below and appellants here are the infant again and
Charlotte Slotkin, his mother, as executrix of the estate of Bert
Slotkin.
A 24
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 court's charge was in part as follows:
The plaintiffs did not sustain any damages unless they had
a ‘valid malpractice claim against the Brookdale Hospital. I
have alréady explained to you how to determine whether they
had such a valid claim. You must then determine the actual
pecuniary loss, if any. suffered by the plaintiffs, that is, the
difference between the amount which was actually paid on the
settlement in 1971 and the amount which would have been
the fair settlement value of the Slotkin case if plaintiffs had
not been deceived.
Assuming the parties meant to avoid further litigation and
to compromise their dispute and that nothing but true facts
were disclosed, how much could plaintiffs reasonably have
demanded and the Brookdale Hospital reasonably have allowed
as a final compromise? That is the fair settlement value.
A 25
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-El Hospital, on November 16, 1963.
Steven sustained brain damage at birth which his
doctors diagnosed as congenital cerebral palsy. As a
result of the brain damage, he is paralyzed, confined
to a wheelchair, and will require constant care for
the rest of his life. Plaintiffs claimed, and the jury
in the action below subsequently found, that the Hos-
pital’s failure properly to administer insulin to Mrs.
Slotkin during the period immediately preceding
delivery had caused Steven’s brain damage.
A 26
B. 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-E] Hospital. Citizens had
$200,000 of primary liability insvrance 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-
scribing underwriters at Lloyd’s of London under-
wrote $1 million worth of excess insurance.
On February 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-
sel that the case was on trial, and he refused Tob-
% Plaintiffs originally filed their complaint against ten rein-
surers. They were: Allstate Insurance Co., American Motorists
Insurance Co., American Mutual Insurance Co. of Boston,
Employers. Mutual Liability Insurance Co. of Wisconsin, Guar-
anty Reinsurance Co., Urbaine Fire Insurance Co., Grange
League Insurance Co., National Casualty Co., Hardware Mutual
Insurance Co., and Arkwright-Boston Manufacturers Mutual
Insurance Co. Two of the reinsurers, Employers Mutual Liability
Insurance Co. of Wisconsin and Grange League Insurance Co.,
were dismissed in 1977 by stipulation when it was shown that
they had no conceivable connection to this matter. Another of
the reinsurers, American Motorists Insurance Co., was a named
defendant but was apparently never served; and it never ap-
peared in the case (although Judge Pollack included it in his dis-
missal of all reinsurers). Hereafter, when we refer to “the rein-
surers,” we refer only to the seven active purticipants, i.e., all
the above named reinsurers except American Motorists Insurance
Co., Employers Mutual Insurance Co. of Wisconsin, and Grange
League Insurance Co.
A 27
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
deposition taken shortly before the trial below, he
had learned about the policy limit from Christopher
McGrath, John McGrath, also trial counsel for
Citizens, and Paul Ratner, assistant vice-president
and claims manager of Citizens.
On February 25, 1971, New York State Supreme
Court Justice Oliver D. Williams, the trial judge,
held a conference for the parties. According to 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-
4 Although Berkowitz insisted that the McGraths 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 Williams, although it is unclear from his deposition
and his cross-complaint whether he made the statement at the
preliminary conference or the final settlement negotiations. We
note that in a colloquy that took place in Justice Williams’
A 28
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.id. (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.
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,
vr
requires insulin at that time.
A 29
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
A 30
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 again 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
physicians could have averted the acidotic state on the morn-
ing of the 15th. This significant ketoacidosis, in my opinion,
can — adequate cause of brain injury in the premature
new
7 MR. [Christopher) McGRATH: The total coverage is
$200,000, including reinsurance.
MR. TOBEROFF: So far as you are concerned.
MR. McGRATH: Correct.
(footnote continued)
A 31
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. TOBEROFF: 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: I do have knowledge of that. We were the
only company on the line at that time.
Because Mr. McGrath indicated that he knew that there was no
other coverage, we construe his statement as being a denial of
excess insurance also.
A 32
D. Uncovering the Misrepresentation.
Appeilees Christopher McGrath and Berkowitz stip-
ulated that to the best of their knowledge 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 excess insurer, specifically inquiring about the
Slotkin case." The file with the Gilroy letters, which
8 One example of the Gilroy letters is as follows:
MENDES & MOUNT
27 William Street
New York, N.Y. 10005
March 31, 1967
Citizens Casualty Company of New York
33 Maiden Lane
New York, N.Y. 10038
{Attention} Mr. David Quigley, Examiner
Your Ref: 7-8-44085
Claimant: Steven John Slotkin
D/A: November 11, 1963
Our File: 210,609
Dear Mr. Quigley:
We are the attorneys representing the interest of the excess
insurers for Beth El-Brookdale Hospital Center. We have
received various letters sent by you to the assured stating
that the litigation involves an amount in excess of your policy
limits.
We would like to have the opportunity in approximately
two months time to review your file and discuss these claims
with you. We will accordingly be telephoning you in several
weeks to arrange a mutually convenient time for such a
review and discussion.
Very truly yours,
MENDES & MOUNT
ROBERT GILROY
A 33
clearly indicated that there was excess coverage, was
in the possession of the McGraths’ firm during the
state court trial. Berkowitz, who was a trustee of the
Hospital and vice-chairman of the Legal Committee,
did not speak with anyone in the Hospital ad-
ministration nor check any of the Hospital records to
determine whether they showed any excess insurance
coverage; instead, he stated, he had relied solely
upon the statements of Christopher and John
McGrath, although Christopher McGrath, of course,
maintains that Berkowitz told him what the coverage
was. See note 4 supra. Ratner, who took over the
settlement negotiations on March 4, contends that
the McGraths and Berkowitz had told him that the
coverage was only $200,000. But two of the Gilroy
letters were specifically directed to Ratner’s atten-
tion. Indeed, Ratner had briefly spoken with Gilroy
regarding the Slotkin case before the trial and saw
the letters from Gilroy shortly before the trial.°
A week to ten days after the parties entered into
the stipulation on the record, Ratner advised
Christopher McGrath, and Christopher McGrath in
9 Ratner was apparently in Florida during the trial below, and
his deposition testimony taken in preparation for the trial was
admitted into evidence as requested by plaintiffs’ counsel. In a
May 17, 1972, deposition Ratner stated that at the end of 1968
or sometime in 1969 he became aware that the Hospital had ex-
cess insurance when he “read a file for the first time and saw
one or two letters from Mendes & Mount mentioning excess
insurance.” But, he stated, between the time that he read the
file and the time of the state trial, he had “forgotten” that there
was excess insurance. In an April 9, 1975, deposition Ratner
stated that when he looked at the file shortly before trial, he
noticed the letters from Mendes & Mount but that because the
firm “was the reinsurer and not the excess carrier” in “hun-
dreds” of other cases, he “associated [the firm] with their role as
a reinsurer.” But because the letters themselves explicitly dis-
close the excess insurance, Ratner cannot excuse his representa-
tions on the basis of a failure of memory or mistake.
A 34
turn advised Justice Williams and Toberoff, that
there was $1 million in excess coverage and that the
representations as to insurance coverage had been
erroneous.’® At this point Justice Williams had not
yet signed an order under N.Y. Civ. Prac. Law
§ 1207 and Rule 1208 (McKinney)" allocating the
sums paid in settlement. Justice Williams held a con-
ference on March 31, 1971. The judge attempted to
have the excess insurer participate in new settlement
discussions, but it refused to do so because it claimed
10
ll
According to Ratner’s testimony in deposition, 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
about the settlement and called Ratner to congratulate him.
Ratner testified that he did not understand the purpose of the
call, so he called Gilroy three or four days later to ask why Gil-
roy had called. Gilroy then stated that “[wle had an excess on
it,” and only then according to Ratner did he remember that
there was additional coverage.
§ 1207. Settlement of action or claim by infant or judicially
declared incompetent, by whom motion made; special
proceeding; notice; order of settlement
Upon motion of a guardian of the property or guardian ad
litem of an infant or, if there is no such guardian, then of a
parent having legal custody of an infant, or if there is no
such parent, by another person having legal custody, or if the
infant is married, by an adult spouse residing with the infant,
or of the committee of the property of a person judicially de-
clared to be incompetent, the court may order settlement of
any action commenced by or on behalf of the infant or incom-
petent. If no action has been commenced, a special proceeding
may be commenced upon petition of such a representative for
settlement of any claim by the infant or incompetent in any
court where an action for the amount of the proposed settle-
ment could have been commenced. If no motion term is being
held and there is no justice of the supreme court available in
a county where the action or an action on the claim is triable,
such a motion may be made, or special proceeding may be
commenced, in a county court and the county judge shall act
with the same power as a justice of the supreme court even
though the amount of the settlement may exceed the jurisdic-
tional limits of the county court. Notice of the motion or peti-
tion shall be given as directed by the court. An order on such
a motion shall have the effect of a judgment. Such order, or
the judgment in a special proceeding, shall be entered without
A 35
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-
fant 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-
A 36
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 compensation
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,
cne 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 reprebenting any
interest conflicting witff 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.
—
sw
A 37
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 insistence of Toberoff
and the plaintiffs, Justice Williams on June 4, 1971,
signed the “infant’s compromise order,” see note 11
supra, approving the settlement. Toberoff's intention
to sue all parties involved for fraud was well-known
at the time.
E. 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 insurer; the rein-
surers; Ratner; Berkowitz; and the McGraths. At the
close of plaintiffs’ case Judge Pollack dismissed the
complaint against the reinsurers. The jury found both
underlying malpractice on the one hand” and fraud
on the other; it rendered a verdict in the total sum
of $680,000, allocating it in accordance with Judge
Pollack’s “supplemental instructions” as follows:
Citizens, $500,000; Berkowitz $100,000; Ratner,
$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 plaintiffs’ experts, Drs. Bernstein,
Olninc, and Greenspan, in text supra at note 5, there is the let-
ter from defendants’ expert, Dr. Zarowitz, note 6 supra. See also
note 5 supra.
13. In fact there were no real supplementary instructions but
rather colloquy and direction. The entire transcript of what took
place in the jury’s presence is as follows:
THE COURT: Madam Forelady, has the jury agreed upon
a verdict? (footnote continued)
A 38
Subsequent to the verdict Judge Pollack ruled
on a reserved motion and dismissed the complaint
THE FORELADY: Yes.
THE COURT: This says that you have reached a verdict.
You may make inquiries, Mr. Clerk.
The Clerk will ask you about each name and then you will
advise what your verdict is.
THE CLERK: What is your verdict as to the defendant
Citizens Casualty Company of New York?
THE FORELADY: We have decided against.
THE COURT: Is that your whole verdict?
THE FORELADY: Yes.
THE COURT: Is there any amount of verdict against
them? :
You decided against them, did you say?
THE FORELADY: Yes.
THE COURT: In what amount, if any?
THE FORELADY: We have an amount for ai.
THE COURT: What is the amount that the jury has
found? In other words, you have found the same amount
against all defendants?
‘ue FORELADY: A total of $680,000 total against all of
em.
ou COURT: Your verdict against the Citizens Casualty is
at?
THE FORELADY: We didn’t break it down, your Honor.
THE COURT: Has the jury found that each of the defen-
dants is liable for the $680,000? Is that what you are saying?
THE FORELADY: Yes, your Honor.
THE COURT: In other words, as to the defendant Citizens
Casualty, Paul Ratner, Chris McGrath, John McGrath and
George Berkowitz, your verdict is $680,000?
THE FORELADY: Yes, your Honor.
THE COURT: Poll the jury.
(Jury roll called—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
$680,000.
JUROR NUMBER TWO: Combined.
THE COURT: When you say total combined, let me under-
stand that. You have reached ‘one verdict?
JUROR NUMBER FOUR: One verdict, one total against
all combined. I hope it wasn’t misunderstood that it was
against each one.
THE FORELADY: A total.
THE COURT: The way the verdict stands now, it is a ver-
dict against each one for $680,000. (footnote continued)
A 39
against John McGrath." He also granted to all ap-
pellees judgment notwithstanding the verdict, relying
14
THE FORELADY: No, all told.
THE COURT: The only collectibility will be a total of
$680,000.
Is that what you are saying?
THE FORELADY: Yes.
THE COURT: That means that each one is held individu-
ally—
JUROR NUMBER TWO: A fraction of.
JUROR NUMBER FOUR: A portion of, pro rated.
THE COURT: If it is a pro rated verdict, that is one
thing. On the other hand, if you intend a proportionate ver-
dict only, that is, for each one in a particular amount that's a
different thing. So, I have to send you back for you to decide
what verdict you wish to render. The defendants are sued 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 $680,000.
So, you better go out and decide what it is that you are
trying to call to our attention.
Will the jurors go back for a moment while I talk to coun-
sel, to be sure I have a correct understanding of what it is
Juror Number Four, I think it was, tried to convey to me.
THE COURT: Bring in the jury.
(Jury present.)
THE CLERK: Madam Forelady, has the jury agreed upon
a verdict?
THE FORELADY: Yes, we have.
THE COURT: Read the verdict.
THE CLERK: (Reading) We have a verdict in favor of the
plaintiff for $680,000 to be apportioned in this manner: Citi-
zens Casualty $500,000, Mr. Berkowitz $100,000, Mr. Ratner
$60,000, Chris McGrath $20,000, John McGrath nothing.
Signed Anna D. O'Shea, Forelady.
THE COURT: Poll the jury.
(Each juror, upon being asked by the Clerk “Is that your
verdict?”, answered in the affirmative.)
THE COURT: All right, ladies and gentlemen, 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-
(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)
A 40
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 F. Supp. 253, 255-56
(S.D.N.Y. 1978). 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.” Jd. at
256. Judge Pollack reasoned that “ijn the instant
case, plaintiffs had not significantly changed position
to their prejudice before learning the truth.” Id. at
257. He first noted that there was “no impairment
of the facts giving rise to claims of malpractice by
After the jury rendered its allocated verdict, counsel for the
McGraths began to make a motion as to “George McGrath.” The
court interrupted, saying that there was no verdict against John
McGrath. Counsel quickly agreed, stating that zero damages was
really a verdict in John McGrath's favor. The court did not dis-
agree and immediately dismissed the complaint as to him.
Plaintiffs’ attorney excepted to the dismissal on the ground
that the jury's verdict of liability, before it apportioned damages,
was a verdict against all the defendants, including John
McGrath. The court responded that “there was no competent evi-
dence within the burden of proof obligatory in a fraud case” of
any intent on his part to deceive nor gross negligence or pre-
tense of knowledge. Plaintiffs attorney began to catalogue the
evidence against John McGrath to show that it was sufficient
“to raise a triable issue of fact.” The court, however, countered
that “lajny verdict against John McGrath would have been
clearly against the weight of the credible evidence and would
have been clearly set aside on that ground as well as the ground
already mentioned.” By this last ground the judge further dis-
closed his belief that the jury's failure to allocate any damages
to John McGrath was in effect a finding of no liability, we note
that he stated that a verdict against John McGrath “would have
been set aside.”
A, 41
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. Jd. He held that by obtaining a
verdict in the present litigation “plaintiffs have
proved that such a retrial was indeed practicable.”
Id.
II. DISCUSSION
A. Judgment Notwithstanding the Verdict
Initially, we note that Judge Pollack had the
power to rule as he did on the waiver poin*, even
though Judge Motley (and he) had held otherwise
previously. It is well established that “the law of the
case” does not constitute a limitation on the court’s
power but merely expresses the general practice of
refusing to reopen what has been decided. Dictograph
Products Co. v. Sonotone Corp., 230 F.2d 131,
134-36 (2d Cir.), petition for cert. dismissed per stip-
ulation, 352 U.S. 883 (1956). See also Messenger v.
Anderson, 225 U.S. 436, 444 (1912); LeRoy uv.
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
15 Appellants do not contest Judge Pollack’s ruling that they had
to prove in the federal trial that they had a valid malpractice
claini in the state court, a ruling based on Uriz v. New York
Central & Hudson River R.R. Co., 202 N.Y. 170, 175-76, 95
N.E. 711, 712-13 (1911).
A 42
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 v. Mer-
chants Mutual Casualty Co., 274 A.D. 320, 323-24,
83 N.Y.S.2d 801, 804 (1948).”*
Even if the underlying premises of this New York
rule aliowing 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
16 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); Wave v. State Farm Mut. Auto.
Ins. Co., 181 Kan. 291, 311 P.2d 316, 320-21 (1957), Minazek 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).
A 43
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.
18 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.
A 44
and allowing the judge to dismiss the jury. Thus al-
though it is true that plaintiffs could have avoided
going 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 743, 745
(1959) (alternative ground); Kelly v. Otis Elevator
Co., 288 A.D. 363, 368, 128 N.Y.S.2d 39, 43 (1954)
(dictum), aff'd mem., 308 N.Y. 805, 125 N.E.2d 864
(1955). This rule prevents a plaintiff from recovering
damages for “self inflicted” injury. See, e.g., 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
A 45
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.
A 46
Of course by hindsight it may appear that the risk
of a defendant’s verdict was minimal, but that is by
hindsight only. At the time that plaintiffs had to
make their election there was a definite possibility
that no live medical evidence could be had for a re-
trial.
We stress again that it was appellees who commit-
ted the fraud, that plaintiffs did significantly change
position by allowing the judge to dismiss the jury be-
fore learning the truth, and that obtaining a verdict
in the present litigation under more favorable cir-
cumstances does not at all show that a retrial in the
state court would not have resulted in 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
changed their position before learning the truth.
19 We note that according to the expert testimony of former
Justice Bernard Meyer (now Judge of the Court of Appeals) and
Justice Frank B. McCullough, both retired from the New York
Supreme Court, under New York law doctors could not be forced
to provide live opinion testimony in state court. Thus in a retrial
of the malpractice action in the state court, plaintiffs would
have been unable to obtain the oral testimony of their key wit-
nesses after they refused to testify voluntarily. This is true even
though under federal law one can compel expert testimony by
subpoena. Indeed, although Drs. Bernstein and Greenspan agreed
to testify voluntarily in the federal fraud action, they did so
only after being told that if they refused they would be sub-
poenaed. (Dr. Olninc was unavailable by reason of a failure of
memory with age, and his testimony from the state court trial
was read into the federal record.) Thus one cannot equate suc-
cess in the 1977 federal fraud action with a lack of detriment
and damage in the 1971 state malpractice action as Judge Pol-
lack did. Slotkin v. Citizens Casualty Co. of New York, 447 F.
Supp. 253, 257 (S.D.N.Y. 1978).
Moreover, even without regard to the difference between the
state and federal procedure, Judge Pollack’s position proves too
much. By proceeding with the fraud action, plaintiffs did not
eliminate the prejudice that they had suffered. When the defen-
dants’ conduct put plaintiffs in a disadvantageous position, plain-
A 47
B. The Liability of the Parties
Because we believe that the jury could properly
have found, as it did under appropriate instructions,
infra note 19, that fraudulent misrepresentations
made to plaintiffs amounted to legal fraud, and that
they did not waive their right to sue for the injury
that they suffered as a result of those representa-
tions, we address the remaining principal question on
appeal of who was responsible and who is therefore
liable.
1. Christopher McGrath
We believe that the jury could properly find that
Christopher McGrath’s conduct rendered him liable
under New York law as charged. McGrath was in
charge of the settlement negotiations until Ratner
took over; all the while McGrath’s position of
authority heightened the impact of his representa-
tions as to the insurance coverage. McGrath stip-
ulated that “to the best of his knowledge” there was
only $200,000 worth of coverage in spite of the in-
formation in the documents in his possession. See
note 8 supra. McGrath’s insistence that the policy
limit was $200,000, see note 7 supra, renders him
liable under the New York definition of scienter as
“a reckless indifference to error,” “a pretense of exact
tiffs were injured; they did not stop being injured just because
they were able to overcome the injury. Under Judge Pollack’s
view, the victim of fraud would never be able to recover his
damages by electing to affirm the settlement anc sue for dam-
ages in deceit: no matter what the prejudice, his success in prov-
ing the underlying cause of action would demonstrate the
absence of prejudice in proceeding by retrial. Because New York
law allows the fraud victim to proceed by affirmance and an
action for deceit, we cannot subscribe to Judge Pollack’s view of
the relationship between the two causes of action.
A 48
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 A.D.2d 140, 379 N.Y.S.2d 873, 879 (1976),
and cases cited. This, of course, attunes with the
classic formulation of Judge Cardozo in the touch-
stone case of Ultramares Corp. v. Touche, Niven &
Co., 255 N.Y. 170, 174 N.E. 441, 449-50 (1931).2°
2. Paul Ratner
Ratner 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 McGraths and Berkowitz” told
him that the coverage was only $200,000; but again,
the documents are evidence against him. See note 9
20 The trial court’s instructions quite accurately presented to the
jury these alternative bases for a finding of fraud. The court
charged that the jury must find scienter and that
a person makes a misrepresentation with scienter, meaning
knowingly, if he knows that the representation is false, or he
neither knows nor cares whether it is true or false, or if he
has no genuine belief that it is true. If a speaker actually be-
lieves that what he says is true, then he does not act with
scienter, even though that belief is negligent, in that a reason-
able man would not believe it.
There is one exception to what I have just told you. If you
find that the defendant whom you are considering intended
that it should be understood that what he said about the hos-
pital’s insurance was true to his personal knowledge and in-
tended that the plaintiffs should act on the basis of what he
said, then you should find that said defendant acted with sci-
enter if he didn’t know what he [said] was true. To this ex-
tent, a person who asserts a falsehood as true to his personal
knowledge may be said to have acted with scienter, that is,
knowingly, even though he believes what he says to be true.
21 We note that Ratner did not speak with Berkowitz until after
the McGraths had informed Berkowitz about the policy limit.
A 49
supra. The letters then in his possession explicitly
disclose the excess insurance; and there was ample
evidence, to permit the jury to reject any defense of
failure of memory or simple mistake on his part,
note 10 supra, and, as in the case of Christopher
McGrath, to find scienter under Burgundy Basin and
Ultramares, supra.
3. George Berkowitz
The jury’s finding as to Berkowitz is more troub-
ling. Berkowitz did not speak with anyone in the
Hospital administration nor check any of the
Hospital records to determine the insurance coverage,
instead relying solely upon the statements of 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.
A 50
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 cla’ n against” Berkowitz, and we hold that
the court did not err in recognizing this lack of evi-
dence in granting Berkowitzs 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.
A 51
pearance of personal knowledge when he specifically
ratified his brother’s misrepresentation: “What Chris
told you is true .... All the coverage there is on
the case is $200,000 .... That’s it. How many
times do you want to hear it?” Berkowitz stated that
John McGrath was one of his sources of information
about the insurance coverage. There was evidence
that John McGrath participated in the drafting of
the March 4 stipulation which contained explicit rep-
resentations as to the coverage limit. Moreover, the
letters from the excess insurer’s counsel were in his
firm’s file. We note that on the basis of this evi-
dence, Judge Pollack reversed his earlier ruling
granting John McGrath’s motion for dismissal. On
the renewed motion at the close of all the evidence,
Judge Pollack recognized that it would be best to get
the jury’s verdict on the fact questions. The evidence
supports the verdict that the jury rendered, and it is
in accordance with New York law under Burgundy
Basin and Ultramares, supra.
Finally, even though the case was not tried on a
partnership theory, as a matter of law John McGrath
was liable for his partner’s tort. N.Y. Partnership
Law §§24, 26 (McKinney); Caplan v. Caplan, 268
N.Y. 445, 448, 198 N.E. 23, 24 (1935); see also
Pedersen v. Manitowoc Co., 25 N.Y.2d 412, 419, 255
N.E.2d 146, 150, 306 N.Y.S.2d 903, 909 (1969) (joint
venture).
5. Dismissal of the Reinsurers
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
A 582
matter affecting their coverage. Moreover, their con-
sent was needed for any settlement within the rein-
sured range, i.e., over $50,000. There was abundant
evidence, including Ratner’s own testimony, that
throughout the trial Ratner communicated with each
of them either directly or through his subordinate.
Ratner told Toberoff that he had to telephone the 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 McGrath 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 Ratner 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 Ratner’s
testimony was inadmissible against them to prove
agency and thus that there was a complete absence
of probative evidence of an agency relationship.
A 53
In dismissing the complaint against the reinsurers,
Judge Pollack relied on the rule of law that he para-
phrased as “{alcts 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, “[a] 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 uv.
Jackson, 123 A.D. 569, 108 N.Y.S. 41 (1908); Boston
Old Colony Insurance Co. v. Trivedi, 93 Misc. 2d
566, 403 N.Y.S.2d 169 (1978). Thus Ratner’s 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
“lif 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,
A 354
although deceitfully made.” Restatement (Second) of
Agency, supra, §257, comment a.* We note, how-
ever, that the jury’s verdict indicates a finding that
Ratner’s comments were made within the scope of
his agency with Citizens. We believe that there is
also sufficient evidence for a jury to conclude that if
Ratner was acting as agent for the reinsurers, his
comments were similarly within the scope of his
agency. The evidence could support a finding that
Ratner’s agency relationship with Citizens and with
the reinsurers was the same; if so we can see no 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 285 provides that:
Evidence of a statement by an agent concerning
the existence of extent of his authority is not
admissible against 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-
sons dealing with the agent, within the apparent
authority or other power of the agent.
23 See also Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1130
(4th Cir. 1970), cert. denied, 416 U.S. 916 (1974); Jerger v.
Rubin, 106 Ariz. 114, 471 P.2d 726, 731 (1970).
A 55
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
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 lability
against the defendants in the amount of $680,000
each and sent the jury out to determine whether it
wanted to allocate the verdict. Jd. 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.,
30 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.,
31 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-
A 56
neous aS 2 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 Klepper v. Seymour House Corp.,
246 N.Y. 85, 98-99, 158 N.E. 29, 34 (1927), the jury
properly found a general verdict in accordance with
the law; their subsequent action of allocation under
direction of the court is surplusage which may be
disregarded. See also Dextone Co. v. Building T rades
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 judgment against both
defendants for full amount awarded plaintiffs). We
hold that the $680,000 verdict against Citizens,
Ratner, and both McGraths, jointly and severally,
may be reinstated.
Because we have also held that the court below
should not have dismissed the complaint against the
reinsurers, plaintiffs have an option: they may either
reinstate the verdict and judgment of $680,000
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 is, of course, a
matter for the district court on remand.
A 57
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
gain by concealing the existence of the umbrella icy.
maximum exposure of Citizens Casualty Co., Ratner’s
was $50,000, all of which was on the table when the
tlement offers were made. Fraudulent settlement for $185,
ad
A 58
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 (1992); Opper v. Tripp Lake Estates, Inc., 274
App. Div. 422, 423-24 (1948), affd, 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 Ratner 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-
tionelizing 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 to
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.
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.
A 59
cover substantial damages from appellees because the
settlement approved at plaintiff's insistence did not
represent their claim’s true settlement value. I 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, declined to sign the
order approving the $185,000 settlement, in which
event the stipulation of compromise would have had
no binding effect. Plaintiffs’ trial counsel in the state
court action also testified that “Judge Williams had a
right to refuse to sign the compromise papers, which
would have nullified the entire settlement 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
A 60
in CPLR 1207 and 1208, require that applications
for approval of an infant settlement be made upon
motion supported by affidavits of the infant’s repre-
sentative and attorney setting forth certain specified
facts.* The order entered on such a motion has the
effect of a judgment. CPLR 1207; Krichmar uv.
Krichmar, 42 N.Y. 2d 858, 860 (1977).
Until the requirements of CPLR 1207 and 1208
are complied with, there can be no binding compro-
mise agreement. Farraro v. Stripekis, 60 App. Div.
2d 861 (1978); Cagliotti v. Medi-Cab, Inc., 52 App.
Div. 2d 544 (1976); Valdimer v. Mount Vernon
Hebrew Camps, Inc., 9 App. Div. 2d 900, affd, 9
N.Y. 2d 21 (1961); 28 N.Y. Jur. Infants §63. Any
compromise reached in anticipation of a court-ap-
proved settlement is unenforceable, because the stat-
utes prescribe the only method by which a defendant
may secure a binding release from an infant. 2 Wein-
stein, Korn & Miller, New York Practice § 1207.06.‘
It is undisputed that plaintiffs had full knowledge
of the amount of Brookdale’s insurance coverage
some three months before they succeeded in securing
3 The applicable Rules of Practice of the Appellate Division,
First Department, also required that an application for court ap-
proval of a settlement of a claim or cause of action belonging to
an infant be made as provided in CPLR 1207 and 1208. See 22
Codes, Rules and Regulations of the State of New York § 603.8.
If the procedures mandated by these sections were not complied
with, the application for approval of the settlement had to be
denied. Speights v. Motor Vehicle Accident Indemnification
Corp., 75 Misc. 2d 937 (1973); Bittner v. Motor Vehicle Accident
Indemnification Corp., 45 Misc. 2d 584 (1965).
4 If the state court judge had indicated that he would not sign
the order of settlement. one wonders how much either of my
learned colleagues would have been willing to pay for an assign-
ment of plaintiffs’ rights under the “technically inchoate” agree-
ment.
A 61
court approval. It is also undisputed that plaintiffs
importuned Judge Williams to approve the $185,000
settlement in order that they might bring suit
against appellees for fraud. In so doing, they com-
pletely removed from the case one of the requisite
elements for a claim in fraud, i.e., reliance. To re-
cover for misrepresentation, a plaintiff must establish
that he relied upon the misrepresentation and that
the damages for which recovery is sought flowed
from the reliance. Ochs v. Woods, 221 N.Y. 335,
338, 340-41 (1917); Karscher v. DeWald, 246 App.
Div. 21, 22-23 (1935); 24 N.Y. Jur. Fraud and Deceit
§ 25 at 224.°
Contrary to Judge Oakes’ assertion, the damages
which are the basis of plaintiffs’ claim for recovery
did not occur at the time the state action was dis-
continued and the jury dismissed. Although plaintiffs
did agree to a discontinuance in reliance upon ap-
pellees’ misstatements, and, as a result, undoubtedly
sustained some damage, this was not the damage for
which they sued. The jury's verdict was based upon
the allegedly inadequate settlement which plaintiffs
insisted the Court approve after they had full knowl-
edge of the facts. Under the doctrine of volenti non
fit injuria, recovery cannot be had where an agree-
ment has been consummated in this manner. Oleet v.
Pennsylvania Exchange Bank, 285 App. Div. 411
5 “A false representation is not cognizable by the law as deceit
unless it is believed and relied upon as an inducement to ac-
tion.”
Ochs v. Woods, supra, 221 N.Y. at 338.
“The maker of a fraudulent misrepresentation is not liable to
one who does not rely upon its truth but upon the expectation
that the maker will be held liable in damages for its falsity.”
3 Restatement of Torts § 548.
A 62
(1955); Kelly v. Otis Elevator Co., 283 App. Div. 363
(1954), affd, 308 N.Y. 805 (1955); General Valua-
tions Co. v. City of Niagara Falls, 253 App. Div.
156, affd on this point, 278 N.Y. 273 (1938); Com-
modity Credit Corp. v. Rosenberg Bros. & Co., 243
F.2d 504 (9th Cir.), cert. denied, 355 U.S. 837
(1957).
The rationale of the foregoing cases is not con-
fined to commercial contracts. The proper measure of
damages is inseparably connected with the right of
action. Chesapeake & Ohio Ry. v. Kelly, 241 US.
485, 491 (1915), and two basic and closely related
doctrines of the law of damages are (1) that a
wrongdoer is responsible only for the natural and
proximate consequences of his misconduct, Steitz uv.
Gifford, 280 N.Y. 15, 20 (1939), and (2) that an in-
jured person must take reasonable steps to minimize
his losses. Pearlstein v. Scudder & German, 527 F.2d
1141, 1145 (2d Cir. 1975); Industrial Sugars, Inc. v.
Standard Accident Insurance Co., 338 F.2d 673, 676
(7th Cir. 1964). Under the doctrine of “avoidable con-
sequences”, a plaintiff 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 uv.
Climax Hosiery Mills, 252 N.Y. 347, 358-59 (1930)
(Cardozo, C.J., concurring); W. B. Moses & Sons v.
Lockwood 295 F. 936, 941 (D.C. 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, I am at a loss to understand the ma-
A 63
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.
Fy 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. ¢.g..
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.
A 64
“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 I believe
this is what my colleagues are doing in the instant
case, I respectfully dissent.
Assuming, for the argument only, that the district
judge erred in dismissing the complaint as to the 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).
A 65
“Reinsurance, 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 which is the ceding company, and in
which contract the ceding company retains all
contact with the original insured, and handles all
matters prior to and subsequent to loss.”
13 Appleman, Jnsurance Law and Practice § 7681 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 sole 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 was by deposition, in
which he said that he obtained the consent of the reinsurers to
settle for $185,000. I disagree with the majority’s holding that
this established an agency relationship with the reinsurers and
opened the floodgates to any hearsay statements of Ratner that
plaintiffs were thereafter prepared to offer. See O.A. Skutt, Inc.
v. J. & H. Goodwin Ltd., 251 App. Div. 84, 86 (1937); United
States v. Consolidated Laundries Corp., 291 F.2d 563, 576 (2d
Cir. 1961). However, for purposes of this opinion, I 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 is nonetheless insufficient to establish
that Ratner was the agent of the seven reinsuring carriers.
- My brothers do not say whether Ratner’s subordinates at Cit-
izens were also acting as agents for the reinsurers.
A 66
Agency is a fiduciary relationship which arises
when one acts on behalf of another and is subject to
his control. Northern v. McGraw-Edison Co., 542
F.2d 1336, 1343 (8th Cir. 1976), cert. denied, 429
U.S. 1097 (1977); Aetna Insurance Co. v. Glens Falls
Insurance Co., 453 F.2d 687, 690-91 (5th Cir. 1972);
Globemaster Midwest, Inc. v. United States, 337 F.
Supp. 465, 470 (Cust. Ct. 1971); Restatement (Sec-
ond) of Agency §1. The purported agent must have
been 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-
4 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.
po per gl F.2d 834, 846 (2d Cir. 1939), cert. denied, 309 US.
).
A 67
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. v. Glens Falls Insurance
Co., supra, 453 F.2d at 690-91. Where, as _ here,
plaintiffs failed completely to establish the existence
of a principal-agent relationship, the district court
had no alternative but to dismiss the complaint as to
the reinsuring carriers. Cramer v. Hoffman, 390 F.2d
19, 23 (2d Cir. 1968); Hedeman v. Fairbanks, Morse
and Co.; 286 N.Y. 240, 248 (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. I have written at some length in a los-
ing cause because I want to make clear that, in the
opinion of one appellate judge, the law of New York
gave Judge Pollack no happier choice.
I would affirm.
A 68
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Filed: Dec. 10, 1979
No. 78-7167
Steven John Slotkin, an infant by his
mother and natural guardian, Charlotte
Slotkin, and Charlotte Slotkin, as Exe-
cutrix of the Estate of Bert Slotkin,
deceased,
Appellants,
Vv.
Citizens Casualty Co. of New York, All-
state Insurance Co., American Motorists
Insurance Co., American Mutual Insurance
Co. of Boston, Employers Mutual Liability
Insurance Co. of Wisconsin, Guaranty Re-
insurance Co., Urbaine Fire Insurance Co.,
Grange League Insurance Co., National
Casualty Co., Hardware Mutual Casualty
Co., Arkwright-Boston Manufacturers Mutu-
al Insurance Co., Paul Ratner, George
Berkowitz, Christopher McGrath, Jr., and
John McGrath,
Appellees.
ORDER ON PETITIONS FOR
REHEARING OF PETITIONERS
CHRISTOPHER MCGRATH, JR.,
AND JOHN MCGRATH
Petitioners Christopher McGrath,
Jr., and John McGrath move separately
for rehearing and rehearing en banc of
A 69
this court's August 29, 1979, decision.
Christopher McGrath, Jr., claims that
the court distorted New York law, John
McGrath that the verdict below was mis-
interpreted with respect to him and that
he should not have been held liable on
a partnership theory.
PETITION OF CHRISTOPHER MCGRATH, JR.
Petitioner Christopher McGrath,
Jr., Claims that the opinion both miscon-
strues the facts of his involvement and
applies the wrong law. The first argu-
ment remains unconvincing. The second
is inaccurate. It is petitioner who
misstates the scienter requirements of
New York law -- Burgundy Basin Inn v.
Watkins Glen Grand Prix, cited slip op.
at 4441, petitioner acted with intent.
Petitioner's best argument is
that the judicially approved New York
state settlement had the force of a judg-
ment, barring plaintiff from instituting
and appealing his federal case. He places
primary reliance on Holm v. Shilensky,
388 F.2d 54 (2d Cir. 1968), in which this
court, also applying New York law in
diversity jurisdiction, declined to re-
A 70
view an earlier Nevada decree allegedly
obtained via fraud. But the ratio deci-
dendi of Holm is soley that New York
courts must give full faith and credit
to the decree of the rendering state,
and since the decree would not have been
reviewable in Nevada, a New.York court
could not review it. Holm supports peti-
tioner only if New York forbids the sort
of challenge to an earlier decree here
permitted. In support of that position,
petitioner adduces Grossman v. Kass,
124 N.Y.S.2d 416 (Sup. Ct. 1953). Gross-
man is, however, effectively supplanted
by Byrnes v. National Union Insurance Co.,
cited slip. op. at 4435, quoted approv-
ingly in National American Corp. v. Fed-
eral Republic of Nigeria, 597 F.2d 314,
323 (2d Cir. 1979). Byrnes holds that
when plaintiffs do not ask for rescis-
sion of a release (which, as in the in-
stant case, was judicially approved)
but rather affirm it and sue for damages
for fraud in its procurement, the new
trial is legitimate. 310 N.Y.S.2d at
782. It is not barred by res judicata
because it is for a different, albeit
related, cause of action. See Inman v.
A ‘71
Merchants Mutual Casualty Co., cited slip
op. at 4435, 83 N.Y.S.2d at 803.
PETITION OF JOHN MCGRATH
The opinion reinstates the
first general verdict against all defen-
da..ts. Petitioner John McGrath's new,
separate counsel makes the new arguments
that that verdict was vague, tentative,
uncertain, and possibly not unanimous,
see slip op. at 4430 n. 13, and that
the judge sent the jury back for further
deliberation before petitioner had an
opportunity to poll them, as was his
right under Humphries v. District of
Columbia, 174 U.S. 190, 194 (1899).
Accordingly, the argument runs, it is
unfair to hold petitioner liable under
the first verdict -- the jury may or
may not have intended to find against
him. —
Even accepting this as true
the second verdict rather than the first
would have to be reinstated. The jury
therein found petitioner liable but as-
sessed no monetary damages against him.
While in state courts there is some dis-
agreement as to whether a verdict against
A %2
defendant for $0.00 amounts to judgment
for plaintiff or defendant, see Annota-
tions, 116 A.L.R. at 834; 49 A.L.R.2a
at 1331, 1334, most federal cases inter-
pret the verdict as a finding of defen-
dant's liability to a given extent, viz.,
$0, e.g., Joseph v. Rowlen, 425 F.2d
1010, 1013 (7th Cir. 1970) ("We believe
any distinction between an award of 67
and '0' damages is more of form than
substance"); Wingerter v. Maryland Casu-
alty Co., 313 F.2d 754, 756 (5th Cir.
1963) (verdict neither invalid nor ambig-
uous, no retrial needed); but see Associ-
ation of Western Railways v. Riss & Co.,
299. F.24 133, 135 (D.C. Cir.), cert.
denied, 370 U.S. 916 (1962) (remanding
for entry of judgment for defendant since
finding of no damage meant plaintiff
had not proven claim).
Under this interpretation,
the jury by its second verdict found
petitioner a joint tortfeasor. Acting
under erroneous apportionment instruc-
tions, however, it allocated none of
the damages to him. This allocation,
however, must be set aside under New
York law which holds tortfeasors joint-
ly and severally liable.
A %3
Therefore, even if petitioner
should be judged by the second rather
than the first verdict, his liability
remains the same.
We are persuaded, however,
that the alternative holding finding
John McGrath liable as a matter of law
for his partner's torts, slip op. at
4444, is erroneous and should be elimi-
nated. The case was not tried on this
theory; were it, John McGrath could have
taken steps, now foreclosed, to decrease
his liability. He could have joined as
a defendant both his partnership, see
N.Y.C.P.L.R. § 1025, and his other part-
ner, see N.Y. Partnership Law § 24. He
may not be able hereafter to sue them
for contribution. Because of the preju-
dice to petitioner of affirming on the
basis of a theory not advanced below,
the alternative holding should be and
it hereby is stricken from the opinion.
The petitions for rehearing
are otherwise each denied. Judge Van
Graafeiland adheres to his dissent.
/s/James L. Oakes
Zs/Murray I. Gurfein
Circuit Judges.
A 74
Order Declining Action on Suggestion for
Rehearing In Banc
Filed January 31, 1980
UNITED STATES COURT OF APPEALS
Seconp Circuit
Docket No. 78-7167
At a stated term of the United States Court of
Appeals, in and for the Second Cireuit, held
at the United States Court House, in the City
of New York, on the 31st day of January, one
thousand nine hundred and eighty.
(a re 0 te
STEVEN JoHN Storr, an infant by his mother and natural
guardian CuHarLorre Siorkin, and CHarLorre SLOTKIN, as
Executrix of the Estate of Bert Slotkin, deceased,
Plaintiffs-Appellants,
Vv.
Citizens Casvatty Co. or New Yorx, ALLSTatE INSURANCE
Company, American Motorists Insurance Co., AMERICAN
MutvaL Insurance Co. or Boston, EmMpitovers Mutua
Liasitity Insurance Co. or Wisconstn, Gusranty REINsUR-
ANCE Co., Ursatns Fire Insurance Co., Grancr LEAGUE
InsuRANCE Co., NationaL Casuaury Co., ArKwricut-Boston
Mrrs. Mutrvat Insurance Company, Harpware Mutvan
Casuatty Co., Paut Ratner, Grorce Berkowitz, CuHRIs-
TOPHER McGraru, Jr. and Jonn McGrarnu,
Defendants-Appellees.
ee
A petition for rehearing containing a suggestion that
the action be reheard in banc having been filed herein by
A 75
counsel for the appellee Christopher McGrath, Jr., and no
active judge or judge who was a member of the panel hav-
ing 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 bance.
/s/ Irvine R. KaurMan
Chief Judge
Irvine R. KaurMan
A 76
Order Extending Time to File Petition for
Writ of Certiorari
SUPREME COURT OF THE UNITED STATES
No. A-73
a et Oe ———__—_——_
CuristopHeR McGratn, JR.,
Petitioner,
v.
STEVEN JOHN SLOTKIN, ETC., ET AL.
ee
Upon Conswerarion of the application of counsel for
petitioner,
Ir Is Onpverep that the time for filing a petition for writ
of certiorari in the above-entitled cause be, and the same
is hereby, extended to and including April 8, 1980.
/s/ Tuurcoop MarsHaLL
Associate Justice of the Supreme
Court of the United States
Dated this 29th
day of February, 1980.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.