Petition — AMERICAN MUTUAL INSURANCE COMPANY OF BOSTON v. SLOTKIN (Nos. 79-1719, 79-1524, 1535, 1571)

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Giproms Cour, Ua wh

APR 80 j989

IN THE

Supreme Court of the Wnited—Siieie. cern

OctoseR Term, 1979

No. 29-1719

AMERICAN MUTUAL INSURANCE COMPANY

OF BOSTON,

Petitioner,

Vv.

STEVEN JOHN SLOTKIN, an infant by his mother and

natural guardian, CHARLOTTE SLOTKIN, and

CHARLOTTE SLOTKIN, as Executrix of the Estate

of Bert SLorKin, deceased,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Wruum F. O’Connor

Counsel for Petitioner

1 East 57th Street

New York, New York 10022

(212) 593-0770

TABLE OF CONTENTS

Opinions BELOW

J URISDICTION

CoNSTITUTIONAL PROVISIONS INVOLVED ....-

STATEMENT OF Facts ‘

QUESTIONS PRESENTED .

ReEAsoNS FOR GRANTING THE WRIT:

Point I—The decision of the Court of Appeals

violates the principle of Full Faith and Credit

Powmt II—The decision of the Court of Appeals

is in direct conflict with the law of the State

of New York

Point IIJ—The decision of the Court of Appeals

causes a split among the Circuits

CoNCLUSION

APPENDIX:

Transcript of the Trial in the United States

District Court at which the Petitioner was Dis-

missed from the Action

Decision Denying the Petition for Rehearing ....

Opinion of Pollock, J., Southern District of New

York, dated March 1, 1978

Opinion of the United States Court of Appeals

PAGE

ow ow pp bo

16a

il TABLE OF CONTENTS

Cases Cited

Aetna Insurance Company v. Glens Falls Insurance

Company, 453 F. 2d 687 (5th Cir. 1972) 0.

Cummings Wholesale Elec. Co. Inc. v. Home Owners

Ins. Co., 492 F. 2d 268 (7th Cir. 1974)

Erie R.R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817,

82 L. Ed. 1188 (1938)

Frank Ford v. Unity Hospital, 32 N.Y. 2d 464, 346

N.Y.S. 2d 238, 299 N.E. 2d 659 (1973)

Glogowski v. Rapson, 20 Mise. 2d 96, 198 N.Y.S. 2d

87 (Sup. Ct. 1959)

Hirsch v. Badler, 3 A.D. 2d 921, 62 N.Y.S. 2d 720

(2nd Dept. 1977)

Insurance Company of Pennsylvania v. Park and

Pollard Co., 229 N.Y. 631, 129 N.E. 936 (1920),

afi’g 190 A.D. 388, 180 N.Y.S. 743 (1920) 200...

Klaxon Co. v. Stentor Elec. Mfg. Co., 13 U.S. 487,

61 S. Ct. 1020, 85 L. Ed. 1477 (1941)

Krichmar v. Krichmar, 42 N.Y. 2d 858, 397 N.Y.S.

2d 775, 366 N.E. 2d 863 (1977) i

O. A. Skutt, Inc. v. J & H Goodwin, 251 A.D. 84,

295 N.Y.S. 772 (4th Dept. 1937)

Pink v. American Security Co., 283 N.Y. 290, 28 N.E.

2d 842 (1940) eae

Sofia Bros. v. General Reinsurance Corp., 153 Mise.

6, 274 N.Y.S. 565 (Sup. Ct. 1934)

Taggart v. Keim, 103 F. 2d 194 (3d Cir. 1939)

PAGE

TABLE OF CONTENTS ili

PAGE

United States, to the use of Colonial Brick Cor-

poration v. Federal Surety Co., 72 F. 2d 964 (4th

Cir. 1934) 9

Wen Kroy Realty Co. v. Public National Bank &

Trust Co. of New York, 260 N.Y. 84, 183 N.E. 73

(1932) 8

United States Constitution Cited

Article IV, Section 1 3, 6

Statutes Cited

28 U.S.C.:

See. 1254 (1) ... 2

See. 1332 s A

Sec. 1783

OP.LR.:

1207 4)

1208 5)

~ IN THE

Supreme Court of the United Statew

Octoser Term, 1979

No.

AMERICAN MUTUAL INSURANCE COMPANY

OF BOSTON,

Petitioner,

STEVEN JOHN SLOTKIN, an infant by his mother and

natural guardian, CHARLOTTE SLOTKIN, and

CHARLOTTE SLOTKIN, as Executrix of the Esiate-

of Bert Srorkrn, deceased,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

American Mutual Insurance Company of Boston re-

spectfully prays for a writ of certiorari; to review the

judgment and opinion of the United States Court of Ap-

peals for the Second Circuit entered in this proceeding

on August 29, 1979, its orders filed January 31, 1980 on

its petition for rehearing in banc in the case. Petitioner

is informed that Christopher McGrath, Jr., John McGrath

and Citizens Casualty Company of New York intend to

file petitions for a writ of certiorari in this matter also.

Petitioner joins in all questions presented 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 its interests.

Additional appellees before the Court of Appeals were

Guaranty Reinsurance Company, Allstate Insurance Com-

pany, Arkwright-Boston Manufacturers Mutual Insurance

Company, Hardware Mutual Casualty Co., National Casu-

alty Co., George Berkowitz and Paul Ratner.

Additional parties who may retain an interest in the

litigation are Morrell Goldberg, Bernard Fuss and Brook-

dale Hospital Medical Center who were and remain cross-

claim defendants only in the action.

Opinions Below

The opinions of the Court of Appeals (16a) and the

order denying petitioner’s petition for a rehearing and

suggestion for a rehearing in banc, the opinion of the

U. S. District Court for the Southern District of New

York, 447 F. Supp. 253 (SDNY 1978) and the decision of

the District Court for the Southern District of New York

dismissing the complaint as to the petitioner and the other

reinsurers (la) appear in the Appendix.

Jurisdiction

The jurisdiction of this Court is invoked under 28 USC

1254 (1).

The Court of Appeals for the Second Circuit reversed

the judgment of the United States District Court for the

Southern District of New York dismissing the complaint

against the petitioner in its judgment entered August 29,

1979.

A timely petition for rehearing with a suggestion for

rehearing in bane was denied January 31, 1980 (4a).

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 Congress may by general Laws prescribe the

Manner in which such Acts, Records and Proceedings

shall be proved, and the Effect thereof.”

Statement of Facts

The District Court action involved herein arises out

of a prior New York State Court action which was brought

in the Supreme Court, Kings County, That action was

instituted by the infant plaintiff and his parents seeking

damages for personal injuries caused by medical mal-

practice against a hospital and two doctors. The hos-

pital was represented by Petitioners John McGrath and

Christopher McGrath who were retained as trial counsel

by the Petitioner Citizens Casualty Company. Petitioner

Citizens was in rehabilitation at the time of the State

Court action.

The State Court action proceeded to trial in 1971. On

March 3, 1971, the Plaintiffs agreed to settle that action

for $185,000.00., allegedly on the basis that the hospital

had only $200,000.00 available in coverage. This repre-

sentation was allegedly made by the McGraths, by Paul

Ratner on behalf of Citizens Casualty Company and by

George Berkowitz as a Trustee of and counsel for the

hospital to Max Toberoff, Esq., as counsel for the plain-

tiffs. |

After the Stipulation of Settlement but before the

execution of the Infant’s Compromise Order required by

the law of the State of New York, it was discovered by

the McGraths that the hospital had a $1,000,000.00 excess

policy. All parties and the trial judge were notified of

this fact and several conferences were held.

Plaintiffs’ counsel in the State Court action insisted that

an Infant’s Compromise Order be signed in the amount

of $185,000.00; he refused to retry his case stating that he

would instead bring suit in the Federal Court on the basis

of fraud. This action, brought in the District Court for

the Southern District of New York ensued based on diver-

sity jurisdiction under 28 USC 13832.

The Petitioner, together with various other insurers,

pursuant to treaty had reinsured the Petitioner Citizens

Casualty Company for a specific percentage of loss be-

tween $50,000.00 and $200,000.00 on an excess of loss

basis. Petitioner’s treaty specified that Petitioner would

indemnify Citizens for 15% of the loss in the range of

$50,000.00 to $200,000.00 for any one loss or occurrence.

The Petitioner and the other reinsurers were dismissed

from the action at the close of the plaintiff’s case in the

District Court (la). The Court of Appeals reversed

(16a). <A timely petition for rehearing with the sug-

gestion for a rehearing in banc was denied (4a).

Questions Presented

1. Did the Court of Appeals follow the principle of

Full Faith and Credit regarding the State Court Infant’s

Compromise Order?

2. Did ths Court of Appeals apply the law of the forum

in this diversity action?

3. Does the Court of Appeals Decision cause a split

among the circuits as to the potential liability of the re-

insurers?

REASONS FOR GRANTING THE WRIT

POINT I

The decision of the Court of Appeals violates the

principle of Full Faith and Credit.

According to the laws of the State of New York no

infant’s claim for personal injuries may be settled until

and unless the settlement has received judicial approval

in the form of an Infant’s Compromise Order which has

the force and effect of a judgment. C.P.L.R. 1207, 1208,

Krichmar v. Krichmar, 42 N.Y. 2d 858, 397 N.Y.S. 2d 775,

366 N.IE. 2d 863 (1977).

The infant is, of course, considered a ward of the Court,

Glogowski v. Rapson, 20 Mise. 2d 96, 198 N.Y.S. 2d 87

(Sup. Ct. 1959) and the Court is obliged to make an inde-

pendent determination that the settlement is fair and rea-

sonable.

A judge has the right and is obligated to refuse to sign

the Order if the terms are not in the infant’s best inter-

ests.

The Infant’s Compromise Order in the State Court pro-

ceeding was signed well after all parties and the Court

were made aware of the excess coverage available.

In spite of this and after several hearings the Order

was approved and it contained no reference to the antici-

pated Federal Court action and reserved no rights rela-

tive to such action.

That Order is a final judgment of a Court of competent

jurisdiction acting with knowledge of all the facts.

Under the Constitution, Article IV, § 1, Full Faith and

Credit is guaranteed to the judicial proceedings of each

state; 28 USC 1783 makes this principle applicable so that

Federal Courts must respect the Orders and Judgments

of state Courts.

It is respectfully submitted, that by its decision the

Court of Appeals has ignored the principle of Full Faith

and Credit. The Court of Appeals has dismissed the

Order which was an independent finding that the infant

plaintiff had received a fair and reasonable settlement

and had no right to look elsewhere for further damages.

By its decision, the Court of Appeals has opened the

Order to a collateral attack which it would not be sub-

ject to in the State of New York. This is precisely the

result that the doctrine of Full Faith and Credit is de-

signed to prevent.

POINT II

The decision of the Court of Appeals is in direct

conflict with the law of the State of New York.

It is axiomatic that a Federal Court sitting in diversity

must apply the law of the forum state on substantive

issues. Klaxon Co. v. Stentor Elec. Mfg. Co., 318 US

487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941); Erie R.R.

v. Tompkins, 304 US 64, 58 S. Ct. 817, 82 L Ed. 1188

(1938).

The decision rendered by the Court of Appeals how-

ever is directly opposite to the law of the State of New

York with regard to reinsurance and the alleged principal-

agent relationship between Petitioner and Paul Ratner.

Most notably, the Court of Appeals relies upon the

notion that the State Court settlement could not have

been effected without the consent of the reinsurers.

The reinsurance agreement or treaty is strictly a crea-

ture of contract and established a relation between the

petitioner and Citizens Casualty Company. It has been

held, repeatedly, that such treaties are purely indemnity

agreements between the reinsurer and the reinsured. In-

surance Company of Pennsylvania v. Park and Pollard Co.,

229 N.Y. 631, 129 N.E. 936 (1920), aff’g 190 AD 388, 180

N.Y.S. 743 (1920).

The treaty does not alter or change the reinsured’s ob-

ligation to its insured; it is totally distinct from and un-

connected with the original contract, no privity exists be-

tween the insured and the reinsurer. Pink v. American

Security Co., 283 N.Y. 290, 28 N.E. 2d 842 (1940).

It has been held that the insured is not even entitled

to bring an action against the reinsurer when the insurer

becomes insolvent because there is no privity between the

insured and the reinsurer. Sofia Bros. v. General Reimsur-

ance Corp., 153 Mise. 6, 274 N.Y.S. 565 (Sup.Ct. 1934).

If the reinsurer is not even directly obligated to the

original insured, it can hardly be held to be in privity and

therefore obligated to some third party such as Respond-

ents herein.

The treaty itself contains no reference to the necessity

for the reinsurer’s “consent” to any settlement, the only

basis on which it could be held such consent was neces-

sary was the testimony of Paul Ratner.

Ratner, in his testimony, says he called the reinsurers

for their “consent”. By virtue of this testimony the Court

of Appeals sought to turn Ratner into an agent of rein-

surers.

However, under the law of the State of New York, the

declarations of an alleged agent are not competent to

prove the alleged agency. Hirsch v. Badler, 3 A.D. 2d

921, 62 N.Y.S. 2d 720 (2nd Dept. 1977); O. A. Skutt, Ine. v.

J & H Goodwin, 251 A.D. 84, 295 N.Y.S. 772 (4th Dept.

1937).

Statements by Mr. Ratner that he called and asked for

“consent” do not make him an agent nor could they give

the reinsurers the actual power of consent or control.

Under New York Law, Mr. Ratner did not have any

apparent authority. An alleged agent’s apparent authority

extends only so far as the principal’s consent as mani-

fested to a third party. Wen Kroy Realty. Co. v. Public

National Bank & Trust Co. of New York, 260 N.Y. 84, 183

N.E. 73 (19382); Frank Ford v. Unity Hospital, 32 N.Y.

2d 464, 346 N.Y.S. 2d 238, 299 N.E. 2d 659 (1973).

Clearly, there is no basis for any relationship between

Ratner and the Petitioner under the law of the State of

New York. The treaty was a contract of indemnity only;

Petitioner had no right or power of control over the

settlement; and Petitioner did nothing that would have

clothed Ratner with apparent authority to act on its be-

half.

POINT III

The decision of the Court of Appeals causes a split

among the Circuits.

The law of reingurance as set forth above in the New

York cases has been applied in several of the Cireuit

Courts. It is respectfully submitted that none of the other

Cireuits would have held that a reinsurer could be directly

liable to a party who is injured by the original insured.

A reinsurance treaty is one of indemnity between the

reinsurer and reinsured with no privity arising between

the reinsurer and the original assured. Taggart v. Keim,

103 F 2d 194 (3d Cir. 1939); Cummings Wholesale Elec.

Co. “ne. v. Home Owners Ins. Co., 492 F 2d 268 (7th Cir.

1974); United States, to the use of Colonial Brick Corp-

oration v. Federal Surety Co., 72 F 2d 964 (4th Cir. 1934).

The reinsurer receives no right to control over the em-

ployees of the reinsured. Aetna Insurance Company v.

Glens Falls Insurance Company, 453 F 2d 687 (5th Cir.

1972).

Further, it should be noted that to allow the decision

of the Court of Appeals to stand in this action will have

severe economic effects on the insurance and reinsurance

industries.

At present, the reinsurance business represents over nine

billion dollars of annual premiums in the United States

alone and far more internationally. The reinsurance busi-

ness is subject to different organization and structure

than the general liability insurance business.

An alteration in potential liability such as that set in

motion by the Court of Appeals will greatly increase the

cost of doing business for reinsurers since they will be

forced to maintain extensive claims sections and, to pre-

vent occurrences such as the ones in the Slotkin case, to

send their own representatives to court.

CONCLUSION

For all the above stated reasons Petitioner’s applica-

tion for a Writ of Certiorari should be granted.

Respectfully submitted,

Wru1aMm F. O’Connor

Counsel for Petitioner

APPENDIX

Transcript of the Trial in the United States District

Court at which the Petitioner was Dismissed from

the Action

Unitep Srates District Court

SoutHERN District or New York

»™

~ a

StEvEN JoHN SLorKrn, an infant by his mother and natural

guardian, CHARLOTTE SLOTKIN, and CHARLOTTE SLOTKIN,

as Executrix of the Estate of Berr Storxin, deceased,

Plaintiffs,

Citizens CasuaLty Co. or New York, ALLSTATE INSURANCE

Company, American Mororists Insurance Company,

American Mutvuau Insurance Company or Boston, Em-

PLOYERS Mutua Liasinitry INsurance Company oF WIs-

CONSIN, GuARANTY RernsurANCE Company, URBAINE Fire

InsuraANCcE CompaNy, Grance Leacue Insurance Co.,

NationaL Casuatty Co., Harpware Mutuat Casvuatty

Co., ArRKwricHT-Boston Mrrs. Mutua Insurance Com-

PANY, Paunt Ratner, Grorce Berkowitz, CHRISTOPHER

McGraru, Jr. and Joun McGratau,

Defendants.

(2137)* The motion as to the defendant George Berko-

witz, on that I will reserve decision. The extraordinarily

* Figures in parentheses refer to each new page of the steno-

graphic transcript.

[1a]

thin reed on which it is suggested that there may be a

claim against him for the matters referred to in this suit

apart from any basic infirmity of the case make it ap-

propriate that he remain a defendant in the case, at least

until all the proof is concluded.

The motion as to the defendant Paul Ratner is denied.

There is but one stat. aent that implicates Paul Ratner

in this case but that statement involves an issue of eredi-

bility which the jury will have to resolve.

The motions of the reinsurer defendants to dismiss the

claims against them are granted. Acts and declarations

of a person assuming to be the representative of another

are not competent to prove the agency. A principal is

responsible only for that appearance of authority which

he himself has created and not for that which is produced

by the agent alone.

Agency as against the alleged principals, the rein-

surers, cannot be established by the out-of-court declara-

tions of the alleged agent. There has been no evidence

at this trial from the alleged agent that was admissible

against the reinsurers that he acted as their agent in

respect either of the settlement or, more particularly, in

respect to the umbrella insurance.

(2188) The position of the reinsurers in this case was

as indemnitors of some portion of the insurance issued

to the hospital by Citizens Casualty. Their position was

not that of co-insurers of the hospital. Their position

was akin to that of indemnitors on arrangements personal

to Citizens Casualty and the reinsurers. The reinsurers

had no business or other obligation or connection or in-

terest in whether the hospital was or was not insured

over and above the Citizens Casualty line. Their busi-

ness concern was only the amount payable by Citizens

Casualty to the plaintiffs pursuant to the reinsurance

policies and the evidence indicates that they have never

paid anything.

No employee of the reinsurer was present, no employee

of the reinsurer participated in, no employee of the rein-

surers was held out by the reinsurers as being present

or participating in any discussions or negotiations of or

resulting in the settlement.

Neither Citizens Casualty nor any employee of Citi-

zens Casualty nor of the Liquidation Bureau of the Su-

perintendent of Insurance or any of its employees were

acting as agent or sub-agents of the reinsurers even if

they received their acquiescence to the settlement figure.

There has been no allegation or charge of any direct

act or participation of the reinsurers in the alleged fraud.

(2139) There is no evidence that the primary insurer

was an agent of the reinsurers or that the insurer’s agents

were sub-agents of the reinsurer.

The settlement by the plaintiffs was not made with any

reinsurer. No reinsurer obligated itself to the Slotkins.

In sum, the reinsurers were not defendants in the Slot-

kin malpractice case; they were not parties to the settle-

ment; no employee or agent of theirs spoke to or on the

settlement in the discussions and negotiations in Su-

preme Court, Kings County, nor was the subject of excess

insurance or insurance of the hospital other than the

line carried by the Citizens Casualty Company within

the scope of the business interests or affairs of the rein-

surers of Citizens Casualty.

It was not within the scope of Ratner’s authority or

duties, actual or by any appearance created by the rein-

surers, for Ratner to function for the reinsurers or to

deal with or speak about umbrella coverage for the hos-

pital.

Accordingly, the complaint as to the following defend-

ants is dismissed with costs: American Mutual, All-

State, Urbame, Arkwright Home, Hardware Mutual, Na-

tional Casualty and Guaranty Reinsurance.

Decision Denying the Petition for Rehearing

(Filed—January 31, 1980)

UNITED STATES COURT OF APPEALS

Seconp CrrcultT

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.

——

STEVEN JoHN SLorkrn, an infant by his mother and natural

guardian CuHarLotrre Siorkr, and CuHariorre SLorKin,

as Executrix of the Estate of Bert Slotkin, deceased,

Plaintiffs-Appellants,

Vv.

Citizens Casuautty Co. or New York, ALLSTATE INSURANCE

Company, American Mororists INsurANCE Co., AMERICAN

Murtvuat Insurance Co. or Boston, Empitoyvers Mutua

Liasmity Insurance Co. or Wisconsin, Guaranty REIN-

SURANCE Co., Ursarns Fire [NsurANCE Co., GRANGE LEAGUE

InsurANCE Co., Natrona Casuautty Co., ARKWRIGHT-

Boston Mrrs. Mutuat Insurance Company, Harpware

Mutvat Casuatty Co., Paut Ratner, Grorce BrerKo-

witz, CHRISTOPHER McGratu, Jr. and Joun McGrata,

Defendants-Appellees.

A petition for rehearing containing a suggestion that

the action be reheard in bane having been filed herein by

counsel for the appellee American Mutual Insurance Com-

pany of Boston, and no active judge or judge who was

a member of the panel having requested that a vote be

taken on said suggestion,

Upon consideration thereof, it is

Ordered that said petition be and it hereby is denied.

Due to his untimely death on December 16, 1979, Judge

Gurfein took no part in the consideration of the petition

to rehear this matter en bance.

Irvine R. KavrMan

Chief Judge

Opinion of Pollack, J.,

Southern District of New York,

Dated March 1, 1978

UNiItED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

—~<e—

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,

—_—-V.—

CITIZENS CASUALTY Co. OF NEW YorK, ALLSTATE

INSURANCE COMPANY, AMERICAN MOTORISTS INSUR-

ANCE COMPANY, AMERICAN MuTUAL INSURANCE

COMPANY OF BOSTON, EMPLOYERS MUTUAL LIABIL-

ITY INSURANCE COMPANY OF WISCONSIN, GUARANTY

REINSURANCE COMPANY, URBAINE FIRE INSURANCE

ComMPANY. GRANGE LEAGUE INSURANCE Co., NA-

TIONAL CASUALTY Co., HARDWARE MUTUAL CASU-

ALTY Co., ARKWRIGHT-BosTON Mrrs. MUTUAL IN-

SURANCE COMPANY, PAUL RATNER, GEORGE BERKO-

WITZ, CHRISTOPHER McGRATH, JR. and JOHN

McGRATH,

Defendants.

OPINION

APPEARANCES:

ARUM, FRIEDMAN & KATZ

Attorneys for Plaintiffs

450 Park Avenue

New York, N.Y. 10022

By: Theodore H. Friedman, Esq.

GRANIK, SILVERMAN, SANDBERG

& NOWICKI

Attorneys for Defendant (Citizens

Casualty Co.)

120 North Main Street

New City, N.Y. 10956

By: David Silverman, Esq.

JULIEN & SCHLESINGER

Attorneys for Defendant

(Paul Ratner)

2 Lafayette Street

New York, N.Y. 10007

By: Stuart A. Schlesinger, Esq. and

David Jaroslawicz, Esq.

TELL, CHESER, BREITBART & LEFKOWITZ

Attorneys for Defendant (George

Berkowitz)

116 John Street

New York, N.Y. 10038

By: Seymour Lefkowitz, Esq.

Hart & HUME

Attorneys for Defendant

(Christopher McGrath, -Jr.)

10 East 40th Street

New York, N.Y. 10016

By: Joseph A. Bergadano, Esq.

MILTON POLLACK, District Judge.

A jury has returned a verdict that the moving defen-

dants herein committed 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.0.v.

The following facts have been amply proved, and

indeed are uncontested. The infant plaintiff, Steven

Slotkin, was born at the Brookdale Hospital in 1963 to

a diabetic mother who had been admitted to the hospi-

tal in a state of toxemia. Early in his life he was

diagnosed as suffering from cerebral palsy. He and his

father sued the hospital in the New York Supreme

Court, Kings County, alleging that Steven’s disability

stemmed from a condition of acetonuria in the mother

due to the negligence of the hospital staff. The case

went to trial before Justice Williams in late February

1970.

The hospital had a liability insurance policy issued

by defendant Citizens Casualty Company, in the

amount of $200,000, which was applicable to the

claim. Shortly before commencement of the trial, Citi-

zens retained defendant Christopher McGrath to repre-

sent the hospital. Early in the proceedings in the trial

Court, plaintiffs’ counsel, Max Toberoff, Esq. received

the impression that the Citizens policy was the only

liability insurance covering the hospital and applicable

to the claim, and he telephoned the hospital to warn it

that it was exposed to a potential liability exceeding its

insurance coverage. In response, the hospital sent de-

fendant George Berkowitz, a trustee of the hospital

and a lawyer, to the courthouse to protect the

institution’s interests. As the trial progressed through

the plaintiffs’ case, the parties discussed the possibility

of a settlement. On March 4, defendant Paul Ratner, a

claims manager for Citizens, arrived at the courthouse

and joined the discussions. On the same day, a stipula-

tion settling the case for $185,000 ws read into the

record, the Judge orally indicated approval thereof,

and the jury was discharged.

Plaintiffs allege, and the jury apparently found, that

the individual defendants mentioned above represented

to Toberoff, during the settlement negotiations, that

the $200,000 Citizens policy was the only insurance

applicable to the claim. The jury must also have ac-

cepted plaintiffs’ allegation that they were unwilling to

demand more from the hospital than its insurance

would cover,' and that therefore they relied on defen-

dants’ representations concerning the insurance.

Finally, the jury must have concluded that the hospital

had an umbrella policy providing a million dollars’

worth of “excess” insurance under certain circum-

stances, with Lloyds Insurers unrelated to Citizens,

which was applicable to the Slotkins’ claim. The uloyds

group was not notified of the pendency of the trial and

did not participate therein or in the negotiations and

stipulation of settlement. The defendants allege that

they were unaware at the time of the excess insurance

above the primary coverage by Citizens, and the jury

was instructed that it could return a verdict for the

* Mr. Toberoff testified that he assumed that the hospital could

satisfy any judgment that plaintiffs might obtain.

10a

plaintiffs on a finding that the defendants conveyed a

pretense of knowledge when they were recklessly ig-

norant of the truth.

The following facts are also both amply proved and

uncontested. Because it determined the claims of an

infant, the settlement stipulation was unenforceable?

unless it was followed by a judicial order finalizing the

arrangement, providing for the distribution of the set-

tlement fund and terminating the suit. NYCPLR

§§ 1207-08. Such a judicial order has the effect of a

judgment. NYCPLR § 1207.

Within a fortnight after the stipulation was read

into the record, and before the requisite order was

made and judgment accordingly entered, Ratner was

alerted to the existence of the excess insurance cov-

erage. He promptly telephoned McGrath, and McGrath

immediacely notified Justice Williams and Toberoff. In

a conference before Justice Williams, representatives

of the excess carriers deciined to recognize the settle-

ment stipulation since they had not been aware of the

trial, were not represented.at the trial and had not

participated in the stipulation. The hospital and Citi-

zens offered to drop the settlement stipulation, to re-

* Mr. Toberoff conceded that failure or refusal of the Judge to

make and enter a compromise order pursuant to NYCPLR

§§ 1207, 1208 would render the stipulation for settlement unen-

forceable. Mr. Toberoff testified:

“He [the Judge] had it in his power to refuse to sign the

compromise order .. . If he didn’t, I would say that by logi-

cal operation the stipulation would be rendered valueless

. . . . We wouldn’t be able to collect without the compromise

order.”

Moreover, the trial Judge had the unquestioned power to reject

the settlement as inadequate or insufficient for the infant after

learning of the existence of excess insurance coverage.

lla

commence trial of the claim before either a judge or a

jury, and to permit introduction of the transcript of

the medical and any other testimony from the earlier

proceeding. The carriers of the excess insurance offered

to appear if the case were retried and to recognize any

obligation thereon owing to the hospital if given an

opportunity to come in and defend the claim. The

Judge, too, urged the plaintiffs to accept the proposals

of a retrial made by the hospital, Citizens and the

excess carriers, to no avail.

Insisting that retrial would be impractical because

no medical experts were willing to testify, and vowing

to seek damages for fraud, Toberoff orally and in for-

mal papers demanded that Justice Williams finalize the

arrangement, make the requisite compromise order and

direct judgment thereby on the settlement stipulation.

After considering the matter for over two months, Jus-

tice Williams acceded to plaintiffs’ demand for execu-

tion of the settlement arranged, with an order of

infant’s compromise that does not mention the possibil-

ity of a fraud action.* The compromise was paid the-

reunder and the funds were distributed as ordered in

the judgment. This suit followed. It went to the jury

only as against the lawyers, Citizens, which was the

*In view of the determination reached hereafter, it becomes

unnecessary to construe the effect of the judgment ultimately

directed by Justice Williams. The parties are in dispute on

whether the Judge’s compromise order constituted a settlement

value judgment and an independent adjudication of the fairness of

the settlement, and an expression on the best interest of the

infant, the validity of which cannot now be questioned collaterally

for error which does not affect the jurisdiction of the Court which

rendered it. It is a settled principle that a valid judgment should

not be subject to a collateral attack. Crouse v. McVickar, 207 N.Y.

213, 100 N.E. 697 (1912).

12a

primary insurance carrier, and its claims agent. The

jury verdict was for the plaintiffs in sums stipulated

separately as against each defendant in varying

amounts.

The Court finds, as a matter of law, that plaintiffs’

insistence on proceeding with and thereby obtaining

the execution of the stipulation of settlement with full

knowledge of the facts bars this action.

Under the governing law of New York, the victim of

fraud generally may, upon learning the truth, affirm

and complete performance of the contract, retain what-

ever benefits he has received thereunder, and maintain

an action for damages. Vail v. Reynolds, 118 N.Y. 297,

302-03, 23 N.E. 301, 303 (1890); Strong v. Strong, 102

N.Y. 69, 73, 5 N.E. 799, 800 (1886); Byrnes v. Na-

tional Union Insurance Co., 34 App. Div. 2d 872, 310

N°Y.S. 2d 781 (1970). But see Glatzer v. Ax, 63 N.Y.

2d 551 (Sup. Ct. 1946) (alternate ground). If a victim

of misrepresentation learns the truth when perform-

ance of the contract has just begun, and he could re-

scind without significant prejudice, however, he waives

the fraud if he proceeds to execute the agreement. See

A.G. Concrete Breakers, Inc. v. State, 9 App. Div. 2d

995, 996, 194 N.Y.S.2d 743, 745 (1959) (alternate

ground); Kelly v. Otis Elevator Co., 283 App. Div. 363,

368, 128 N.Y.S. 2d 39, 43 (1954), affd mem. 308 N.Y.

805, 125 N.E.2d 864 (1955) (dictum); General Valua-

tions Co., Inc. v. City of Niagara Falls, 253 App. Div.

156, 157-59, 1 N.Y.S. 2d 880, 882-83, affd on this

point mem. 278 N.Y. 273, 15 N.E. 2d 802 (1938).

Other jurisdictions take the same view. See Simon v.

Goodyear Metallic Rubber Shoe Co., 105 F. 573 (6th

Cir. 1900); Kingman & Co. v. Stoddard, 85 F. 740 (7th

13a

Cir. 1898); Advance Aluminum Castings Corp. v.

Davenport, 224 Ark. 440, 274 S.W. 2d 649 (1955);

Lewis v. Carsh, 79 Colo. 51, 244 P. 598 (1926); Christy

v. Heil, 255 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 vic-

tim of fraud to complete the contract and sue for

damages beyond its original rationale, of assuring that

one who is no longer in a position to rescind would not

be deprived of all remedy. Gould v. Cayuga County

National Bank, 99 N.Y. 333, 337, 2 N.E. 16, 17 (1885).

In the instant case, plaintiffs had not significantly

changed position to their prejudice before learning the

truth. No such prejudice can be attributed to the diffi-

culties asserted by Toberoff with respect to retrying

the malpractice case. There was no impairment of the

facts giving rise to claims of malpractice by the hospi-

tal. Under New York law, plaintiffs were required to

prove malpractice of the hospital in order to recover

for fraud in the inducement of the stipulation of settle-

ment. Urtz v. New York Central & Hudson River R.R.,

202 N.Y. 170, 175-76, 95 N.E. 711, 712-13 (1911).

Thus, retrying the malpractice case would have been

no more burdensome than pursuing this action for

fraud. Further, by obtaining a verdict in the present

litigation, plaintiffs have proved that such a retrial

was indeed practicable.

L4a

In reaching this decision, the Court has carefully

considered Judge Motley’s contrary conclusion at an

earlier state of this litigation, Slotkin v. Brookdale

Hospital Center, 357 F. Supp. 705, 707 (S.D.N-Y.

1972). Judge Motley did not have the benefit of a full

record, including plaintiffs’ demonstration of the prac-

ticability of retrying the malpractice claim, when she

was required to render a decision. In any event, the

Court is not obliged to adhere to another judge’s earlier

decision in the same litigation. LeRoy v. Sabena Be-

lsian World Airlines, 344 F.2d 266, 274 (2d Cir.), ceri.

denied, 382 U.S. 878 (1965) (dictum); Dictoyraph Prod-

ucts Co. v. Sonotone Corp., 230 F.2d 131, 134-36 (2d

Cir.), petition for cert. dismissed per stipulation, 352

U.S. 883 (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 n.6 (S.D.N.Y.), affd, 545 F.2d 768 (2d Cir.

1976), cert. denied, 430 U.S. 955 (1977); Rodriguez v.

Olaf Pedersen’ Rederi A/S, 387 F. Supp. 754, 757

(E.D.N.Y. 1974), affd, 527 F.2d 1282 (2d Cir. 1975),

cert. denied, 425 U.S. 951 (1976).

Accordingly, defendants are entitled to judgment. In

the alternative, a new trial is required. The jury re-

turned separate awards of $20,000 against McGrath,

$60,000 against Ratner, $100,000 against Berkowitz,

and $500,000 against Citizens. The verdict is incorrect

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 App. Div. 2d 554, 270 N.Y.S.2d

1020 (1966); Hawkins v. Goll, 256 App. Div. 940, 9

15a

N.Y.S.2d 924, affd mem. 281 N.Y. 808, 24 N.E.2d 484

(1939); Insurance Company of North America v. Lind-

sey, 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 justification 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 re-

gard for the law, that it taints not only its findings as

to damages, but its entire verdict.

The jury’s verdict is set aside, judgment notwith-

standing the verdict is directed for the defendants, the

complaint is dismissed, and judgment shall be entered

in favor of the defendants and against the plaintiffs,

with costs to be taxed by the Clerk.

So ORDERED.

March 1, 1978

MILTON POLLACK

Milton Pollack

U.S. District Judge

l6a

Opinion of the United Siates

Court of Appeals

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

ities

No. 353—August Term, 1978.

(Argued January 17, 1979 Decided )

Docket No. 78-7167

———~p>_ —__

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,

-_—V.—_—

CITIZENS CASUALTY Co. OF NrwW 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

FIRE 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.

17a

Before:

OAKES, GURFEIN, and VAN GRAAFEILAND,

Circuit Judges.

In an action for fraud arising out of representa-

tions as to insurance coverage in connection with the

settlement of a medical malpractice case, the United

States District Court for the Southern District of

New York, Milton Pollack, Judge, dismissed the com-

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.

—~p>—

THEODORE H. FRIEDMAN, Arum, Freidman

& Katz, New York, N.Y. (Fred R.

Profeta, Jr., Max Toberoff, of coun-

sel), for Appellants.

SEYMOUR LEFKOWITZ, Tell, Cheser, Breitbar

& Lefkowitz, New York, N.Y. (Sol-

omon M. Cheser, of counsel), for Ap-

pellee Berkowitz.

JOSEPH A. BERGADANO, Hart & Hume,

New York, N.Y. (Leslie F. Ruff, of

counsel), for Appellees McGrath.

l&a

Davin W. SILVERMAN, Granik Silverman

Sandberg & Nowicki, New York,

N.Y... for Appellee Citizens Casualty

Co. of New York.

HowaARD 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, NY.

(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-

19a

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 v.

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 actually appearing

for the insurers; and George Berkowitz, a Hospital

trustee and attorney. The complaint against che 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.

20a

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. l

have already explained to you how to determine whether they

had such a valid claim. You must then determine the actual

pecuniary loss, if any, suffered by the plaintiffs, that is, the

difference between the amount which was actually paid on the

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.

2la

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.

22a

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-El Hospital. Citizens had

$200,000 of primary liability insurance coverage but

was undergoing liquidation and rehabilitation by the

State of New York. Ten companies, here called the

reinsurers,’ reinsured $150,000 of this coverage. Sub-

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-

8 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 participants, /e., all

the above named reinsurers except American Motorists Insurance

Co., Employers Mutual Insurance Co. of Wisconsin, and Grange

League Insurance Co.

23a

eroff's request that he notify the Hospital's attorney.

Toberoff, concerned about the collectibility of plain-

tiffs’ likely judgment, then notified the Hospital ad-

ministrator by telephone, letter, and telegram that

the case was on trial and that the Hospital faced

possible exposure to liability for a verdict in excess

of $1 million. In response to the Administrator's tele-

phone call, appellee George Berkowitz, an attorney

and trustee of the Hospital, appeared at the court-

house on behalf of the Hospital. Berkowitz told Tob-

eroff at that time that the insurance coverage was

$200,000. According to Berkowitz’s testimony in his

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-

1 Although Berkowitz insisted that the MeGraths and Ratner

told him about the $200,000 “policy limit,” Berkowitz has not

disputed Toberoff's 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 setthkement negotiations. We

note that in a colloquy that took place in Justice Williams’

24a

liams found it difficult to believe that the Hospital’s

coverage was so low. Despite the very low “policy

limit” and the plaintiffs’ willingness to settle within

the limit, the parties reached no agreement; and the

case went to trial.

The state court trial proceeded to plaintiffs’ ad-

vantage. Dr. Gerald Bernstein, an internist and assis-

tant professor at Albert Einstein College of Medicine

and acknowledged specialist in diabetes, testified that

Mrs. Slotkin’s doctor had ordered fractional urine

specimens to be examined for sugar and acetone

q.i.d. (four times a day); his orders hence required a

test before each meal and at bedtime. Based upon

the results of these tests, insulin should have been

administered as necessary to avoid acetonuria.’ Dr.

chambers at the March 4 conference Christopher McGrath stated

that Berkowitz had told him that the Hospital had no coverage

other than Citizens Casualty. We also note that Ratner also

stated on deposition that he had asked Berkowitz whether there

was any excess insurance above the $50,000 Citizens coverage

(presumably a reference to the amount for which Citizens would

ultimately be responsible) and that Berkowitz had said no. But

see note 20 infra.

5 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 aci’s which are ketone bodies,

products of fatty-acid catabolism. The result can be fatal and, in

a pregnant woman, fatal or permanently damaging to the fetus.

See Churchill, Berendes & Nemore, Neuropsychological Deficits

in Children of Diabetic Mothers, 105 Am. J. Obst. & Gyn. 257

(Sept.-Dec. 1969). Thus, by measuring the amounts of sugar and

acetone in the urine, a doctor can determine whether a patient

requires insulin at that time.

25a

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 insulins 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

26a

hefore 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 be an adequate cause of brain injury in the premature

newborn.

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)

27a

The parties drafted a stipulation of settlement that

was read into the record; the settlement provided in

pertinent part:

It is further stipulated and agreed that the

settlement of $185,000 is hereby approved by

the trial judge and that he is to make the alloca-

tion of the said sum of $185,000 after all the

facts and affidavits are submitted to him by

trial counsel as to the allocation of the $185,000

between the plaintiffs Slotkin as to the loss of

services and medical expenses and the balance

paid to the plaintiff.

It is further stipulated that the attorney for

the defendant represents that the total insurance

coverage of the defendant is the sum of

$200,000, under a policy with Citizens Casualty,

and to the best of his knowledge there are no

other policies covering this event.

The settlement in the sum of $185,000 is to

be paid without interest, costs or disbursements.

Mr. 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 knowiedge 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.

28a

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

® 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 Larne

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

By:

ROBERT GILROY

29a

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

) 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 1962

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

4 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.

30a

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 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 “[wlJe had an excess on

it,” and only then according to Ratner did he remember that

there was additional coverage.

11 § 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 behalt of the infant er 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 ray 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

sla

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 oth®™miotion or petition for

settlement of the same claim, of an action to recover on the

same claim or of the same action;

7. Whether reimbursement for medical or other expenses

has been received from any source; and

8. whether the infant's or incompetent's representative or

any member of the infant’s or incompetent's family has

made a claim for damages alleged to have been suffered as

a result of the same occurrence giving rise to the infant's

or incompetent’s claim and, if so, the amount paid or to be

paid in settlement of such claim or if such claim has not

been settled the reasons therefor.

(b) Affidavit of attorney. If the infant or incompetent or

his representative is represented by an attorney, an affidavit

of the attorney shall be included in the supporting papers and

shall state:

1. his reasons for recommending the settlement;

2. that directly or indirectly he has neither become con-

cerned in the settlement at the instance of a party or per-

32a

Toberoff insisted that it was impossible to retry

the case. Mrs. Slotkin, who had testified at trial and

whose testimony was important because it con-

tradicted the hospital record in part, had still not

recovered completely from a heart attack. Her physi-

cian, who examined her shortly after the trial, stated

that she should not be asked to testify again. Addi-

tionally, all of the plaintiffs’ expert witnesses—Dr.

Bernstein, Dr. Greenspan, Dr. Olninc—indicated that

they would not testify again. Toberoff contacted a

number of other doctors, but they also refused to

testify. Moreover, the Slotkins did not have the

funds for a new trial. The cost of the plaintiffs’ case

had been $6,800, and they had borrowed $3,000 to

make partial payment.

Toberoff also rejected the offer to forfeit the plain-

tiffs’ jury rights and continue the trial before the

judge on the original record. He similarly refused the

offer of a new jury trial that would rely on the

record from the original trial because he believed

son opposing, or with interests adverse to, the infant or in-

competent nor received nor will receive any 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.

damages for personal injuries to the infant or incompetent,

one or more medical or hospital reports, which need not be

verified, shall be included in the supporting papers.

(d) Appearance before court. On the hearing, the moving

party or petitioner, the infant or incompetent, and his attor-

ney shall attend before the court unless attendance is excused

for good cause.

(e) Representation. No attorney having or representing any

interest conflicting wit? that of an infant or incompetent may

represent the infant or incompetent.

(f) Preparation of papers by attorney for adverse party. If

the infant or incompetent is not represented by an attorney

the papers may be prepared by the attorney for an adverse

party or person and shall state that fact.

33a

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.

EK. 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;600; and John

McGrath, nothing.

12 There is substantial evidence of the medical malpractice. In

addition to the testimony of plaintiffs’ experts, Drs. Bernstein,

Olainc, 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

ict?

a verdict? (footnote continued)

34a

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 isk you about each name and then you will

advise what your /erdict 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 ameunt for all.

THE COURT: What is the amount that the jury has

found? In other words, you have found the same amount

against all defendants?

THE FORELADY: A total of $680,000 total against all of

them.

THE COURT: Your verdict against the Citizens Casualty is

what?

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 inst each

ct against each one for $680,000 Gestncte contin

35a

against John McGrath." He also granted to all ap-

pellees judgment notwithstanding the verdict, relying

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: Thai 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-

cused.

(Jury discharged.)

14 The ground for dismissal is not readily discernible although it

appears to be that the jury did not find John McGrath liable.

(footnote continued)

36a

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 cv. 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.” Jd. 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 tavor. The court did not ais-

agree and immediately dismissed the complaint as to him.

Plaintiffs’ attorney excepted to the dismissal on the ground

that the jury's verdict of hability, 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 “lalny 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 lability, we note

that he stated that a verdict against John McGrath “would have

heen set aside.”

37a

the hospital”; he then noted that because the plain-

tiffs had to prove the underlying malpractice even in

the fraud action,'’® retrying the malpractice case

would have been no more burdensome than pursuing

the action for fraud. 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 point, even

though Judge Motley (and he) had held otherwise

previously. It is well established that “the law of the

case” does not constitute a limitation on the court’s

power but merely expresses the general praetice 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 v.

Sabena Belgian World Airlines, 344 F.2d 266, 274

(2d Cir.), cert. denied, 382 U.S. 878 (1965).

As a matter of law, however, we agree with Judge

Motley’s ruling. As she said, it was the settlement

stipulation entered into before the plaintiffs knew of

the excess coverage that was the contract induced by

appellees’ misrepresentations; and as a result of the

15 Appellants do not contest Judge Pollack’s ruling that they had

to prove in the federal trial that they had a valid malpractice

claim in the state court, a ruling based on Urtz v. New York

Central & Hudson River R.R. Co., 202 NY. 170, 175-76, 95

N.E. 711, 712-13 (1911).

38a

stipulation plaintiffs terminated the state court jury

trial without a verdict. 357 F. Supp. at 707. The law

of New York is clear that one who has been induced

by fraudulent misrepresentation to settle a claim may

recover damages without rescinding the settlement.

Strong v. Strong, 102 N.Y. 69, 73, 5 N.E. 799, 800

(1886); Byrnes v. National Union Insurance Co., 34

A.D.2d 872, 310 N.Y.S.2d 781 (1970); Inman 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 allowing rescission on the one hand or ratifica-

tion and suit for damages on the other were un-

sound, we would of course nevertheless be bound by

that rule. The premises for the rule, however, are

quite sound. If all that will result from a_ mis-

representation is a new trial, then the party making

it has everything to gain and nothing to lose. The

plaintiffs would be placed at a disadvantage by a

new trial; the defendants would not. If anything, de-

fendants would benefit by having a preview of plain-

tiffs’ case. As McCormick notes in the case of willful

fraud:

[I]f the defendant by willful falsehood has coz-

ened the plaintiff into risking his property upon

a bargain, which, upon the information given by

the defendant, would have been profitable, a

remedy which merely seeks to place the plaintiff

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); Ware 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).

39a

back in) the position he was in) before seems

hardly adequate. The plaintiff might well be

given the value of the expected bargain. A will-

ful fraud should cost as much as a broken prom-

ise. If the cheat can anticipate that the worst

that can happen is that he shall be called upon

to pay back his profit upon the trade, he may be

encouraged to defraud."

C. McCormick, Handbook on the Law of Damages

§ 121, at 453 (1935). Thus the New York rule serves

to deter fraud. Moreover, the rule does not present a

problem of double recovery. In this case, for ex-

ample, Judge Pollack appropriately instructed the

jury that in fixing damages it should deduct from

the “fair settlement value” the $185,000 received

under the settlement. See note 2 supra.

Judge Pollack considered that the settlement was

“inchoate” until the judicial order finalizing the ar-

rangement was made. He relied heavily on this char-

acterization in determining that defendants’ misrepre-

sentations had not prejudiced plaintiffs. But even if

the March 4, 1971, stipulation of settlement was

technically “inchoate,”'® it was treated as final at the

time; and plaintiffs reasonably relied upon defen-

dants’ representations in agreeing to the settlement

17 The fraud here was a statement that the defendants knew

that there was no additional insurance when, in fact, they did

not know that.

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.

40a

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 “fiJf 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., 283 A.D. 363, 368, 128 N.Y.S.2d 39, 43 (1954)

(dictum), affd 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

4la

retry the malpractice case with all that retrial in-

volved in terms of obtaining witnesses and the like.

Given these choices, their decision to proceed by way

of the fraud action was understandable, as we

discuss below.

The true measure of damages was as Judge Pol-

lack charged initially: the difference in settlement

value before and after discovery of the fraud, note 2

supra. We note that there is no problem here of

plaintiffs’ failure to mitigate damages by this suit

rather than electing to retry the malpractice action.

It is true that on retrial the exposure of appellees

would have been less because the excess insurer

would have been in the case. Nevertheless, plaintiffs

were not obliged to incur the risks that retrial would

have presented. At retrial, so far as then appeared,

plaintiffs would stand a chance of receiving a verdict

smaller than the original settlement amount or pos-

sibly losing everything in a verdict for the defen-

dants. This risk was additional prejudice to them if

they proceeded by retrial because they had already

eliminated this risk from the first trial by settling.

Having passed the point in the first trial where they

could have received nothing or less than $185,000,

they should not be required to face this risk again in

a second malpractice trial. The law of damages is

clear:

If the effort, risk, sacrifice, or expense which

the person wronged must incur in order to avoid

or minimize a loss or injury is such that under

all the circumstances a reasonable man might

well decline to incur it, a failure to do so im-

poses no disability against recovering full

damages.

C. McCormick, supra, § 35.

42a

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.

iv 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 ayreed

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. Olnine 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-

43a

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 iegal 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 and 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.

44a

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. 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.

45a

supra. The letters then in his possession explicitly

disclose the excess insurance; and there was ample

evidence, to permit the jury to reject any defense of

failure of memory or simple mistake on his part,

note 10 supra, and, as in the case of Christopher

McGrath, to find scienter :nder 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.

46a

Their reference to the record discloses, insofar as

Berkowitz is concerned, only the testimony on deposi-

tion by Berkowitz that he told Toberoff after con-

versing with the McGraths that he “was informed

that there was $200,000 insurance.”

Finally, we note that Berkowitz not only had no

motive to conceal the excess insurance; but rather, to

protect the Hospital, he had every reason to seek to

tap whatever insurance coverage there might have

been. His unawareness of the excess insurance is evlI-

dent in his statement to Justice Williams that be-

cause he believed that the Hospital itself would be li-

able above the $200,000 limit, he wanted the record

to reflect bad faith on the part of the insurance car-

rier if it failed to settle the case within the $200,000

limit. The district court itself noted the “extraor-

dinarily thin reed on which it is suggested that there

may be a claim against” Berkowitz, and we hold that

the court did not err in recognizing this lack of evi-

dence in granting Berkowitz’s motion for judgment

notwithstanding the verdict.

4. Dismissal of John McGrath

The court should not, however, have dismissed the

complaint as to John McGrath.” Although he may

have been only minimally at fault, there was suffi-

cient evidence for the case against him to go to the

jury; and the jury found him liable (even though in

subsequently apportioning the damages it allocated

none to him). As to John McGrath the verdict was

not against the weight of credible evidence. There

was evidence that John McGrath gave the ap-

22 See note 14 supra.

47a

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

48a

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.

49a

In dismissing the complaint against the reinsurers,

Judge Pollack relied on the rule of law that he para-

phrased as “{ajcts 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, “fa] 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 ov.

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

“lilf the statement is one which, if true, the agent

would be authorized or apparently authorized to

make, the principal is subject to liability for it,

50a

although deceitfully made.” Restatement (Second) of

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).

5la

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 liability

against the defendants in the amount of $680,000

each and sent the jury out to determine whether it

wanted to allocate the verdict. 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-

52a

neous as a matter of law because liability for the

whole harm was joint and several. 447 F. Supp. at

257-58."*

Thus the crucial question is whether the subse-

quent submission to the jury can be treated as void,

allowing plaintiffs to reinstate the $680,000 verdict.

We find that under 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 Trades

Council, 60 F.2d 47, 49 (2d Cir. 1932) (where jury

verdict, which attempted to apportion damages, had

found both liability and amount of plaintiff's loss,

form of verdict may be disregarded); Gleich v. Volpe,

32 N.Y.2d 517, 523-24, 300 N.E.2d 148, 151-52, 346

N.Y.S.2d 806, 811 (1953) (trial judge properly

disregarded jury’s attempt to apportion damages be-

tween defendants and entered 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 und 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.

53a

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 wiil

be remanded for a_ separate trial before Judge

Pollack on the cross claims for contribution and ap-

portionment among the appellees (again except

George Berkowitz) as per their stipulation, note 24

supra.

Judgment in accordance with opinion.

—~—

VAN GRAAFEILAND, Circuit Judge, dissenting:

In February 1971, a medical malpractice action

against Brookdale Hospital was reached for trial in

New York State Supreme Court. The suit had been

brought on behalf of Steven Slotkin, an infant, who

allegedly sustained permanent brain damage at the

time of his birth because of the improperly con-

trolled toxemia of his diabetic mother.

The hospital had $1,200,000 of liability insurance,

$200,000 of primary coverage written by Citizens

Casualty Co. and a $1,000,000 umbrella policy writ-

ten by Lloyds of London. The hospital’s attorneys

had nothing to gain by hiding from plaintiffs the ex-

istence of the umbrella policy. The insurance was

there to be used; that is why the hospital purchased

it.' If the attorneys fraudulently concealed its ex-

1 Ratner and appellee carriers likewise had little if anything to

gain by concealing the existence of the umbrella policy. The

maximum exposure of Citizens Casualty Co., Ratner’s employer,

was $50,000, all of which was on the table when the several set-

tlement offers were made. Fraudulent settlement for $185,000

54a

istence, they exposed themselves to personal liability

which might not be covered by their own malpractice

policy.2. They would be liable to the plaintiffs and

would also be required to indemnify all of the hos-

pital’s carriers held derivatively liable because of

their wrongdoing. Oceanic Steam Navigation Co. v.

Compania Transatiantica Espanola, 134 N.Y. 461,

467 (1892); Opper v. Tripp Lake Estates, Inc., 274

App. Div. 422, 423-24 (1948), affd, 300 N.Y. 572

(1949); 42 C.J3.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-

tionalizing that this litigation involves merely the

shifting of liability from one insurance carrier to

another. It also highlights wnat 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.

2 As a general rule, malpractice policies do not insure against

fraudulent acts or omissions. See, e.g., St. Paul Fire & & ne

Insurance Co. v. Clarence-Rainess & Co., 70 Misc. 2d 1082, 1L83

(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.

55a

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.

| 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 hinding effect. Plaintiffs’ trial counsel in the state

court action also testified that “Judge Williams had a

right to refuse to sign the compromise papers, which

would have nullified the entire settlement pro-

ceedings” and that “if he didn’t sign the papers I did

know that the settlement is a nullity.” These were

correct statements of the New York law.

Infant plaintiffs are wards of the court, Glogowski

v. Rapson, 20 Misc. 2d 96, 97 (1959), and New

York’s “rules of practice abound in provisions of an-

cient origin designed to safeguard their legal rights.”

Greenburg v. New York Central and H.R.R.R. Co..

210 N.Y. 505, 509 (1914). Today’s rules, as embodied

56a

in 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 v.

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

4 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).

1 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.

57a

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.

58a

(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., 2438

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 v.

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 asvother

way, if a plaintiff could reasonably have avoided the

consequences, the defendant's wrongdoing is not the

proximate cause of their occurrence. McClelland v.

Climax Hosiery Mills, 252 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-

59a

joritys 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.

ti 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. Ketrials are

constantly being ordered with no greater sanctions imposed than

the lability for additional costs and disbursements. Sve. CL.

Dunbar v. Ingraham, 275 App. Div. 898 (1949).

[ 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

und his own standing in disrepute, by repeating his factual

observations but refusing to reiterate his opinion based thereon.

60a

“To err is human” is a phrase inscribed in the

records of antiquity. Where, as here, defendants have

erred, the law does not impose upon plaintiffs the

divine obligation of forgiveness. Justice will not be

served, however, if this Court accepts financially mo-

tivated retaliation as an alternative. Because 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, i.e., the obligation to indemnify.

Greenman v. General Reinsurance Corp., 237 App.

Div. 648, 649 (1933).

——

6la

“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 whith is the ceding company, and _ in

which contract the ceding company retains all

contact with the original insured, and handles all

matters prior to and subsequent to loss.”

13 Appleman, /nsurance 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.

i 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 dec irations. Accepting all of the testimony

offered by plaintiffs, it is nonetheless insufficient to establish

that Ratner was the agent of the seven reinsuring carriers.

x My brothers uo not say whether Ratner’s subordinates at Cit-

izens were also acting as agents for the reinsurers.

62a

Agency is a fiduciary relationship which arises

when one acts on behalf of another and is subject to

his control. Northern v. McGraw-Edison Co., 542

F.2d 1336, 1343 (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-

i) The securing of consent is not the equivalent of submission to

control. For example, the approval of at least one other judge is

required every time an opinion is filed in this Court. If this

were sufficient to make the writing judge the agent of his con-

curring brothers, this Court might at one time have lost several

of its most able and distinguished members. See United States v.

Manton, 107 F.2d 834, 8146 (2d Cir. 1939), cert. denied, 309 US.

664 (1940).

63a

tlement of a case with the primary carrier's claim

representative for fear that it would be making him

its agent. This is not, and should not be, the law.

See Aetna Insurance Co. v. Glens” Falls Insurance

Co., supra, 4538 F.2d at 690-91. Where, as_ here,

plaintiffs feiled 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 [ 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.

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.