102 Misc. 2d 77 | N.Y. Sup. Ct. | 1979
OPINION OF THE COURT
On December 19, 1967, Charles Hinton was seriously injured when the car which he was driving was struck by an automobile operated by Stanton Brannin. Brannin’s liability for Hinton’s grave injuries was so apparent that the Insurance Company of North America (INA) — which covered Brannin for liability to the extent of $50,000 on the accident — established a reserve of $45,000 for the case. On July 30, 1969, during the taking of depositions in the lawsuit that followed, Hinton’s lawyer declared for the record that his client would accept
Pursing recovery of the excess judgment, Hinton obtained the appointment of the instant plaintiff as receiver of Brannin’s assets. In the instant action, the receiver seeks to recover Brannin’s damages for INA’s alleged bad faith failure to settle Hinton’s case within the policy limits. At the trial, evidence adduced on the issue of Brannin’s damages revealed that when the accident occurred he was barely solvent — earning $150 per week — and that his meager assets were, and always have been, insufficient to satisfy the excess judgment. The only significant change in Brannin’s condition in the seven and one-half years which elapsed between the entry of the excess judgment and the current trial was his acquisition of an engineering degree.
During the course of the trial both the court and INA’s attorney were under the impression that Brannin had not filed a petition to discharge the excess judgment in bankruptcy. Nevertheless, INA argued that it should be permitted to raise the issue of a potential bankruptcy discharge before the jury as relevant to Brannin’s claimed damages. This contention was regarded by the court and the plaintiff as an effort to pose a mitigation question to the jury even though mitigation of damages had not been pleaded as an affirmative defense by INA (see CPLR 3018, subd [b]; Davis v Davis, 49 AD2d 1024). After in camera hearings on the issue, INA’s attorney was forbidden to question Brannin on the subject of bankruptcy or to mention it in summation. Ultimately, the
THE CURRENT MOTION
INA has now moved to set aside the verdict on the ground that it is against the weight of the evidence and excessive, or in the alternative for judgment or for a new trial pursuant to CPLR 5015. Since INA’s attorney’s oral CPLR 4404 motion similar to the first branch of the current motion was denied immediately upon rendition of the verdict, only the alternative requests for relief will be considered here.
INA argues that it recently discovered that Brannin had filed a petition in bankruptcy in the United States District Court for the Western District of New York on January 21, 1977, more than a year before the instant trial. Conceding that the petition was a matter of public record from the date of. its filing in the Western District (where Brannin resided), INA contends it is entitled to judgment as a matter of law because of the filing or, in the alternative, to a new trial upon the grounds of newly discovered evidence and suppression of evidence, fraud and misrepresentation on the part of plaintiffs attorneys. INA’s attorneys assert that they assumed and they are "confident that the court assumed, that the answer to the [bankruptcy] question would have been in the negative. Plaintiffs counsel knew that the answer would have been in the negative [sic], yet they did not reveal that to the court.” Brannin’s bankruptcy schedule lists assets of $1,185 and debts of only $411 owed in 1976 taxes and the $165,400.48 balance due on the judgment. It is not claimed that Brannin was ever discharged in bankruptcy.
INA’S RIGHT TO RELIEF
To merit relief on the ground of newly discovered evidence (CPLR 5015, subd [a], par 2), the movant must show that the evidence is material, that it is not merely cumulative, that it is not of such a nature as would merely impeach the credibility of an adverse witness, that it would probably change the results if a new trial were granted and that the
THE PAYMENT RULE
The earlier and now generally discredited view of damages in bad faith cases was that no damage existed unless the insured has paid and could pay the excess judgment or a portion of it, on the theory that actual pecuniary loss must be
THE JUDGMENT RULE
In most jurisdictions it is not necessary for the insured to allege that he has paid or can pay the excess judgment (see, e.g., Lee v Nationwide Mut. Ins. Co., supra; Wessing v American Ind. Co. of Galveston, Tex., 127 F Supp 775; Chitty v State Farm Mut. Auto. Ins. Co., 38 FRD 37; Alabama Farm Bur. Mut. Cas. Ins. Co. v Dalrymple, 270 Ala 119; Brown v Guarantee Ins. Co., 155 Cal App 2d 679, supra; Wolfberg v Prudence Mut. Cas. Co. of Chicago, supra; Henke v Iowa Home Mut. Cas. Co., 250 Iowa 1123; Sweeten v National Mut. Ins. Co. of D. C, 233 Md 52; Jenkins v General Acc. Fire & Life Assur. Corp., supra; Lange v Fidelity & Cas. Co. of N. Y, 290 Minn 61; Gray v Nationwide Mut. Ins. Co., 422 Pa 500; Southern Fire & Cas. Co. v Norris, 35 Tenn App 657; Ammerman v Farmers Ins. Exch., 22 Utah 2d 187; see 7 Am Jur 2d, Automobile Insurance, § 158, p 490-491; Ann. 63 ALR3d 627). Under this approach, as stated in Wolfberg v Prudence Mut. Cas. Co. of Chicago (supra, 197) ”[t]he very fact of the entry of judgment itself constitutes damage and harm sufficient to permit recovery * * * The rule of damages is that incurrence is equivalent to outlay.” The mere entry of the excess judgment is viewed as causing legal damage since it impairs credit, subjects the
THE RULES IN NEW YORK
The judgment rule has been adopted in the First Judicial Department to the extent that actual payment of the excess judgment is held not to be a condition precedent to suit against a bad faith insurer. Thus, "An insurer which has been guilty of bad faith, one which has deliberately shackled its insured with the crippling jeopardy of a large excess judgment, may not insist that the insured must sacrifice his assets and pay the judgment before suit. The very nature of the risk insured against prohibits the imposition of such prerequisite.” (Henegan v Merchants Mut. Ins. Co., 31 AD2d 12, 13.) The Henegan court noted that to insist on prior payment would permit the insurer to take advantage of the financial status of its insured and deprive the ultimate beneficiary claimant of his judgment and concluded that damage and loss are sustained and the cause of action accrues upon the entry of the excess judgment.
Where the insured is judgment proof, however, Henegan is not dispositive and the rule to be applied seems obscure, more jurisprudence on the question being available from the United States Court of Appeals for the Second Circuit than from New York courts. In Harris v Standard Acc. & Ins. Co. (297 F2d 627, cert den 369 US 843), where the insured was insolvent before rendition of the excess judgment, paid none of it and subsequently obtained a bankruptcy discharge of the obligation, it was held that the insured was not harmed by the bad
The rule in Harris generally has been held applicable only where the insured was insolvent prior to trial (see, e.g., Anderson v St. Paul Mercury Ind. Co., 340 F2d 406; Jessen v O’Daniel, 210 F Supp 317, affd sub nom. National Farmers Union Prop. & Cas. Co. v O’Daniel, 329 F2d 60). It has been criticized by commentators on the grounds that it revives the discredited payment rule (see 60 Mich L Rev 517), that its assumption that an insolvent insured suffers no loss by reason of the excess judgment is contrary to fact, and that it opens avenues for the insurer to drive down the amount of a settlement without additional risk to it (7A Appleman, Insurance Law and Practice, § 4711 [Supp 1970]; see, also, 41 Tex L Rev 595). The Kansas Supreme Court explicitly rejected Harris (and Bourget) in Farmers Ins. Exch. v Schropp (222 Kan 612, 624) declaring: "We do not think that the prepayment rule serves the ends of justice, and decline to adopt it. On the contrary, we see no reason why the insolvency of an insured or his estate should excuse the insurer from exercising the same good faith it would be expected to exercise, were the insured fully financially responsible.” The Kansas court concluded that the bad faith action lies whether or not the insured has paid or can pay an excess judgment. This appears to be the majority rule in this country (see Wolfberg v Prudence Mut. Cas. Co. of Chicago, 98 Ill App 2d 190, supra, and cases cited therein).
Nevertheless, Harris still seems to enjoy some favor in this State. It was cited with apparent approval in Henegan for the "proposition that an insured is not damaged by an excess judgment where he was insolvent before the rendition of the judgment and, furthermore, was discharged in bankruptcy from paying the judgment” (Henegan v Merchants Mut. Ins. Co., 31 AD2d 12, 14, supra); it was cited in Judge Fold’s
The concurring and dissenting opinions in Gordon contain the only guidance available from the Court of Appeals as to how damages should be evaluated where the assured is judgment proof or impecunious. The Gordon assured’s only asset was the eight-year-old car involved in the accident; he had been a gas station attendant without credit standing in the community, resided in a low rent area and disappeared during the pendency of the litigation. Although the Gordon majority affirmed dismissal of the action without reaching the damage issue, Judge Fuld’s concurrence cited Harris favorably and added that there was (p 441) "no proof that the insured suffered any damage.”
In an opinion written by Judge Breitel, the three Gordon dissenters devoted extensive attention to the damage issue. In their view, where a solvent insured is involved, the damages should be fixed as the amount of the excess judgment, but they also cite to Harris and Bourget for the proposition that an insured suffers no damage by virtue of an uncollectible judgment adding, however, that the rule in the latter situation is "evidently limited to insureds, dead and leaving no assets, or discharged in bankruptcy and insolvent at the time the excess judgment was rendered (see Young v. American Cas. Co., 416 F. 2d 906 [C. A., 2d], supra, involving a bankrupt, solvent at the time the excess judgment was recovered).” (30 NY2d 427, 450.) Where the insolvent insured does not subsequently file a petition in bankruptcy, the dissenters propose that damages be fixed by the jury on the basis of economic factors which they list. This proposal has been broadened by the drafters of Pattern Jury Instructions who suggest that the issue of damages be submitted to the jury in accordance with the rule in the Gordon dissent "[w]hen there is evidence that the insured was insolvent or had less assets than sufficient to pay the tort judgment at the time that the judgment was entered.” (2 PJI 4:67; emphasis supplied.) The PJI view also is consistent with the opinion in Peterson v Allcity Ins. Co. (472 F2d 71, 79-80) to the effect that: "The dicta in the opinions in Gordon suggest that realistically there is a distinction between a thoroughly solvent insured and one who while not technically insolvent, is of such meager means that a judgment in a comparatively large amount is practically worth something less than the face amount of the excess verdict.
Where the assured has meager assets and is unable to pay the judgment, the Pattern Jury rule thus permits the jury to consider the age, economic status, economic prospects, skills, health, and any other matters presently existing which would be reasonably predictive of the insured’s economic future, or that of his estate if it were likely to receive assets or benefactions and to assess the pecuniary and tangible harm done to insured now and in the reasonably anticipated future by the overhanging excess judgment. It may also consider other tangible harms such as the loss of the right to operate motor vehicles or to obtain employment or insurance. The instant jury was charged in accordance with the PJI formulation.
In sum, then, the New York rule is threefold: (1) where the assured pays part of the judgment or is solvent enough to do so at the time of the excess judgment, the judgment rule applies and he is entitled to the full amount of the excess as his damages; (2) where he was insolvent before the judgment and obtained a bankruptcy discharge after it, he is not damaged and may not recover for it; and (3) where he was insolvent or nearly insolvent prior to the judgment the jury must consider his past, his prospects, and other economic factors and assess his damages.
Brannin’s situation fell within the ambit of the third phase of the New York rule: he was not insolvent but his limited assets rendered him nearly so. Under prevailing law, the fact that Brannin filed a petition in bankruptcy did not entitle INA to judgment as a matter of law as claimed. However, the jury, which was told to evaluate Brannin’s damages based upon the factors suggested by the Gordon dissenters and PJI, was not aware of the bankruptcy petition either. Whether the rulings, which excluded mention of bankruptcy or the alleged fraud or misrepresentation by the receiver’s attorneys, were
BANKRUPTCY AS A DEFENSE UNDER THE NEW YORK RULE
In New York no recovery may be had for losses which might have been prevented by reasonable effort and expenditure (Wilmot v State of New York, 32 NY2d 164), although there is no duty to take extraordinary measures (Reichert v Spiess, 203 App Div 134; People's Gas & Elec. Co. v State of New York, 189 App Div 421; Salembier, Levin & Co. v North Adams Mfg. Co., 178 NYS 607; O'Connor v New York & Yonkers Land Improvement Co., 8 Misc 243). A plaintiff is not obligated to surrender a right of substantial value in order to minimize loss (Restatement, Torts, § 918, Comment j) or to institute and prosecute a lawsuit to accomplish the purpose (Lipshie v Lazarus, 235 NYS2d 764). Nor should a plaintiff be required to undergo a bankruptcy in order to benefit the wrongdoer who has caused his financial distress in the first place (see Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv L Rev 1136). To be compelled to seek a bankruptcy discharge under such circumstances may be a significant loss for the sensitive or those who have a reasonable likelihood of ever requiring credit (see dissent in Gordon v Nationwide Mut. Ins. Co., 30 NY2d 427, supra, see, e.g., Smoot v State Farm Mut. Auto. Ins. Co., 299 F2d 525, supra [construing Georgia law]; Southern Fire & Cas. Co. v Norris, 35 Tenn App 657, supra) and may constitute legal damage for which recovery may be sought (Anderson v St. Paul Mercury Ind. Co., 340 F2d 406, supra; cf. Colegrove v City of Corning, 54 AD2d 1093). Not only does a discharge in bankruptcy of an insured, solvent when the tort judgment was rendered, not bar recovery (Young v American Cas. Co., 416 F2d 906, supra), but it is common practice for bankruptcy trustees to act as plaintiffs in bad faith actions against insurers (see, e.g., Young v American Cas. Co., supra; Anderson v St. Paul Mercury Ind. Co., supra; Brown v Guarantee Ins. Co., 155 Cal App 2d 679, supra; Smith v State Farm Mut. Auto. Ins. Co., 278 F Supp 405).
Of further relevance to the final issues is the fact that an insurer’s liability for a bad faith failure to settle within the policy limits is ex delicto even though it arises out of a contract (Brown v Guarantee Ins. Co., supra; Southern Fire & Cas. Co. v Norris, supra; see Rutter v King, 57 Mich App 152) and most courts treat the action as sounding in tort rather
From these principles it may be concluded that, while Brannin was under no obligation to render himself a bankrupt in order to limit INA’s liability to him, proof of the bankruptcy petition might have been offered by the receiver in an attempt to establish additional damages. How the exclusion of proof of additional damages, no matter by whom offered, could have prejudiced INA, has not been demonstrated in this record, nor has INA established any reasonable probability that the verdict of the jury would have been altered in its favor had that body been made aware of Brannin’s petition. In the totality of these circumstances and the law applicable to them, it must be concluded that granting the relief sought by INA would do nothing to promote the interests of justice and would constitute a futile exercise of discretion.
The motion is dismissed.