The Court recognizes that a claimant faced with a dilemma as to which of two bonding companies might be responsible for losses sustained would, in the exercise of caution, file duplicate proofs of loss and would consider the institution of legal actions against both companies. Competent counsel might well advise a client to pursue such a course of action in order to protect and preserve whatever rights might exist against either or both companies.
Plaintiff asserts that the defendant having initiated another action predicated upon an allegation that the losses were in fact discovered prior to the issuance of the bond by plaintiff is now precluded from asserting and proving a contrary fact in this proceeding. Plaintiff argues that the filing of the pleading in said action in and of itself would be sufficient to obtain a dismissal of the within action. The Court cannot accept that concept. If plaintiff is correct in its position, the defendant by filing such inconsistent actions would in effect cancel out the claims against both companies. If F&D had the right to a dismissal on the merits because of the allegations made by the Bank against Employers, then likewise Employers would have the right to a dismissal of the Bank's action against it because of its proceeding against F& D. Such a result would be intolerable. Therefore, the Court concludes that the mere filing of duplicate proofs of claim and complaints, although concededly inconsistent as a matter of fact and law, does not entitle either bonding company to a dismissal.
However, at some point the claimant is called upon to prove when in fact it learned of the employee dishonesty, a fact peculiarly within its own knowledge. By its very nature, the claim asserted by the Bank in this matter is valid as against one of the two companies, but not both. Since it is predicated upon the time when it discovered the loss, that is a fact requiring proof by the Bank. Plaintiff urges that having asserted in the Employers action, not only by pleading but the subsequent proofs, that it had discovered the employee's dishonesty during the term of the Employers' bond and therefore before the issuance of the F&D bond, the Bank cannot in this action assert a contrary fact, namely that it did not know of the employee's dishonesty before the F&D bond was issued.
Plaintiff denominates the principle of law involved here as a "judicial admission" which is "universally conceded to be its conclusiveness upon the party making it." (Plaintiff's Proposed Conclusions of Law at 29). Pleadings may be judicial admissions but only in the cause in which they are made. "When used in other causes as ordinary admissions, they are of course . . . not conclusive : . . .." IV Wigmore on Evidence, § 1066 at 86 (3d ed. 1940). Accord, Lapayowker v. Lincoln College Preparatory School, 386 Pa. 167, 125 A.2d 451, 456 (1956), overruled on other grounds, Butler v. Butler, 464 Pa. 522, 347 A.2d 477 (1975); Drake v. United States, 153 Ct.Claims 433 (1961). This is especially true where the party has taken a position inconsistent with a prior unadjudicated proceeding where he never had an opportunity to prove the allegations or recitals, E.g., Ham v. Gouge, 214 Pa.Super. 423, 257 A.2d 650, 653 (1969) ("At most, the defendants' pleadings in the prior action were admissible as admissions and which they had the right to contradict by other evidence."); Associates Discount Corp. v. Kelly, 169 Pa.Super. 74, 82 A.2d 689 (1951).
For the reasons already expressed, the Court does not deem it necessary to rely upon the position taken by the Bank in its suit against Employers in order to hold that it failed in its duty of disclosure to F&D, since the Court has concluded that the Bank breached its duty of disclosure, even in the absence of a finding that it was aware of employee dishonesty prior to the issuance of F& D's bond. However, if a finding of the Bank's actual knowledge of employee dishonesty prior to the issuance of said bond were necessary, there is evidence to support said finding in the admissions contained in the suit filed by the Bank against Employers.
The Bank offered testimony in this proceeding in direct contradiction of the pleadings and facts relied upon by it in the suit against Employers. Based upon that testimony, the Court concluded that although there might have been some grounds to be suspicious of employee dishonesty, the Bank had an honest belief that such employee dishonesty was not involved at the time it sought the issuance of a bond from F&D. The question remains, however, whether this Court should consider such testimony in the light of the position taken by the Bank in the Employers' action, wherein it pleaded and proved that it had knowledge of employee dishonesty prior to the issuance of the F&D bond. This Court is sympathetic to the view espoused by F&D that a claimant not be permitted to use the courts to assert a legal and factual position in one proceeding and then be permitted to offer evidence in another proceeding in direct contradiction of the factual and legal position taken by it in the earlier proceeding.
The courts have always recognized the right of a litigant to be inconsistent in certain instances, Fed.R.Civ.P. 8(e)(2), but this case involves more than inconsistent pleadings. It involves verifications and certifications under oath with penalties of perjury asserting an essential fact necessary to recovery which, by its very nature, is not susceptible of two versions. Certainly, if this had been a single action instituted against both bonding companies, the Bank would have been required to elect which factual contention it sought to pursue. The requirement is not different merely because two separate actions are involved.
Therefore, it is the conclusion of the Court that the Bank is estopped to assert in this proceeding that it did not learn of the employee dishonesty until after the issuance of the F&D bond. A litigant should not be permitted to alter its factual position to serve its own purposes. Having submitted and relied upon facts in another proceeding, although there are proofs to the contrary, it has forfeited its right to rely upon such proofs in a subsequent proceeding. New Jersey law accords with this conclusion. In Tabloid Lithographers, Inc. v. Israel, 87 N.J.Super. 358, 365-66, 209 A.2d 364, 369 (Law Div.1965), the court ruled that the plaintiff could not present evidence under oath contradicting his prior affidavit, stating: "If one statement is true, the other cannot be. In In re Perrone, 5 N.J. 514, 76 A.2d 518 (1950), Chief Justice Vanderbilt said for the Supreme Court: "Although a party may argue inconsistent principles of law, he cannot be heard here to contend for two diametrically opposed sets of facts." (at p. 524, 76 A.2d at p. 524.) In Stretch v. Watson, 6 N.J.Super. 456, 69 A.2d 596 (Ch.Div.1949), Judge . . . Haneman said: " "A party will not be permitted to play fast and loose with the courts, nor to assume a position in one court entirely different from and inconsistent with that taken by him in another court or proceeding with reference to the very same matter or thing. (at p. 469, 69 A.2d at p. 603)' " Although not quoted by the court in Tabloid, supra, Judge Haneman in Stretch continued in similar vein, adopting the following from Am.Jur., § 72, p. 704 et seq.:
"The rule that a party will not be allowed to maintain inconsistent positions is applied in respect of positions in judicial proceedings. As thus applied it may be regarded not strictly as a question of estoppel, but as a matter in the nature of a positive rule of procedure based on manifest justice and, to a greater or less degree, on considerations of orderliness, regularity, and expedition in litigation . . .. The principle requiring consistency in judicial proceedings is, however, customarily considered a form of equitable estoppel."
One further comment is appropriate regarding the suit which the Bank instituted against Employers. The Court conditionally accepted proof of the terms and conditions of the settlement consummated in that matter. F&D argues that the acceptance of monies by the Bank in that proceeding was a further admission on its part that the employee dishonesty was discovered prior to the issuance of a bond. F&D urges that such settlement is a further fact which this Court should consider in establishing the course of conduct by the Bank in the Employers' proceeding, namely that it filed a proof of claim, a pleading and proofs, entered a default judgment, opposed the vacation of said judgment, and ultimately accepted monies in that proceeding, all of which should be considered by this Court as being inconsistent with its present assertion that it had no knowledge of employee dishonesty during the term of the Employers' bond and prior to the issuance of the F&D bond. Rule 408 of the Federal Rules of Evidence
clearly prohibits admission of compromises and offers of compromise to prove liability for or invalidity of a claim or its amount. It is argued that the settlement of the Employers' matter is not being offered as an admission of liability by any party thereto but rather as an admission of the existence of a claim, and, therefore, that the Court should consider the acceptance by the Bank of monies from Employers as a further admission by it that the employee's dishonesty was discovered during the course of the Employers' bond. In other words, the Bank should not have accepted any monies from Employers unless it believed in good faith that the loss was discovered during the term of the Employers' bond. For the reasons already expressed, it would not be necessary for this Court to rely upon such evidence in reaching its final determination. There is sufficient evidence in this matter to justify the granting of relief sought by F&D without reliance upon the settlement. However, it is the Court's view that the objection to the admissibility of such evidence pertaining to the terms and conditions of the settlement and even the fact of same should be sustained. The admission of such testimony would violate the underlying purpose of the rule which is to encourage settlement.
The Rule codifies the general practice of the federal courts that compromise agreements are inadmissible as proof of invalidity of the claim. E.g., Broadway & Ninety-Sixth St. Realty Co. v. Loew's Inc., 21 F.R.D. 347, 358-359 (S.D.N.Y.1958), Meek v. Miller, 1 F.R.D. 162, 163 (M.D.Pa.1940), Milton S. Kronheim & Co. v. United States, 163 F. Supp. 620, 143 Ct.Cl. 390 (1958). In Kronheim, the Court said, "(t)he reason for the refusal of the courts to infer an admission of liability from the mere fact of a compromise or settlement lies both in the policy of the law to encourage settlement of litigation and in the realization that it is often more advantageous, economical and desirable for a party to "buy his peace' than to go through litigation even when his chances of prevailing are great." 163 F. Supp. at 628. The federal policy encourages negotiation of settlements "by preventing the parties to the compromise from being tied elsewhere to the concession they made inter sese. See, F.R.Ev. 408 Adv.Comm.Notes." McShain, Inc. v. Cessna Aircraft, 563 F.2d 632, 635, n.5 (3d Cir. 1977).
The Court sees no distinction between utilizing the settlement as an admission of liability and using it as an admission of the validity of a claim. If the settlement should not have been utilized against the party recognizing the claim and making payment in settlement thereof, it should likewise not be utilized against the party asserting the claim and accepting payment thereunder. Therefore, the Court did not rely upon the terms and conditions of the settlement nor the fact thereof in reaching its final determination that the Bank is estopped from now asserting a position contrary to that which it asserted in the Employers' litigation.
The facts presented entitle the plaintiff to rescission. Equitable Life Assur. Soc. v. New Horizons, Inc., supra; Metropolitan Life Ins. Co. v. Tarnowski, supra; Metropolitan Life Ins. Co. v. Lodzinski, supra; Russ v. Metropolitan Life Ins. Co., supra; Formosa v. Life Assurance Society, supra; Travelers Insurance Company v. Evslin, supra; Gallagher v. New England Mutual Life Ins. Co., supra; State Farm Mutual Insurance Co. v. Wall, supra. The Bank made representations upon which the bonding company was entitled to rely. The bonding company in fact relied upon said representations and issued its bond. The underwriter for the bonding company testified that had he received the information which was in the possession of the Bank prior to the issuance of the bond, the bond would not have been written. Said testimony was uncontradicted, and no expert or other testimony was offered to the contrary. Certainly, F&D would be substantially damaged if it was required to honor the loss claims which have been filed by the Bank.
The Court considered alternatives short of the drastic remedy of rescission. The bank argues that, had the appropriate facts been disclosed to F&D, that rather than denying coverage, it would have adjusted its premium. There was testimony to the effect that F&D was anxious to procure additional insurance from the Bank and that it might have considered a premium adjustment rather than a rejection of the Bank's bond application in order to obtain the additional business. The Court finds that there is no basis for it to reach such a conclusion and that to do so would be mere speculation on its part. The Bank cannot compel the bonding company to accept a premium adjustment, when its acts deprived F&D of the opportunity to make that judgment at the time of the issuance of the bond, because of the Bank's failure to disclose to F&D all of the pertinent and essential facts necessary to reach such decision at the time.
The Court also considered whether an appropriate remedy in this matter would be to exclude from the bond coverage the losses pertaining to Mr. Potter, the dishonest employee, and any activities on his part, but otherwise to continue the bond as to those losses which in no way related to the employee dishonesty ultimately discovered. Why should the bonding company be relieved from paying losses unrelated to the dishonesty of said employee, such as a robbery loss? The answer simply is that the bonding company was entitled to make a decision as to whether it would or would not issue a bond after a full disclosure by the Bank of all relevant information. Having failed to meet that duty, the bonding company is entitled to assert and has shown through competent expert testimony that it would not have undertaken the risk if the relevant facts had been disclosed to it. Therefore, under the circumstances of this case, the Court cannot compel the bonding company to continue any part of the coverage offered by said bond, when the uncontradicted evidence reveals that the bond would not have been written, if the information within the possession of the bank had been disclosed.
Therefore, the Court concludes that F&D is entitled to rescission of the bond, unless it waived its right of rescission. The leading New Jersey case on the doctrine of waiver of the right to rescind an insurance contract is Merchants Indemnity v. Eggleston, 37 N.J. 114, 130-131, 179 A.2d 505, 513-14 (1962) in which the Supreme Court stated:
When a contract is obtained by fraud, the law grants the injured party a choice. He may rescind or affirm. If he rescinds, he must return what he received. . . . On the other hand, he may choose to affirm the contract, whereupon he retains the consideration he received and has as well a claim for money damages for deceit, which in the circumstances of a liability policy would probably be at best a claim for such additional premium as should have been paid for the coverage. But the defrauded party must thus elect which course he wishes to follow. He cannot pursue both. If he elects to continue with the contract, the election is final and the contract is affirmed, not because he wants it to be, but because the law makes it so. And if by his conduct he affirms the contract, he cannot be heard to say that he did not "voluntarily" or "intentionally" relinquish his right to call off the deal. (cites omitted) Neither consideration nor detriment is necessary to support the finality of the choice. (cite omitted).
. . . In short, if a carrier receives information suggesting fraud or breach of contract, it must seek the facts with reasonable diligence, and having acquired them it must within a reasonable period decide whether to continue to perform. What is a reasonable time depends upon the circumstances.