Hackney v. Stonebridge Life Insurance Company

Filing 16

OPINION AND ORDER denying 6 Motion to Dismiss. Signed by Judge James L Graham on 12/23/2014. (ds)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
David L. Hackney,
Plaintiff,
v.

Case No. 2:14-cv-1216

Stonebridge Life Insurance
Company,
Defendant.
OPINION AND ORDER
This is an action brought by plaintiff David L. Hackney, a
citizen of North Carolina, against Stonebridge Life Insurance
Company, a Vermont corporation with its principal place of business
in Baltimore, Maryland.

The complaint was originally filed in the

Court of Common Pleas of Noble County, Ohio, on July 11, 2014.

On

August 12, 2014, defendant filed a notice of removal of the action
to this court on the basis of diversity of citizenship.
Plaintiff alleges in his complaint that he is the son of
Virginia Mildred Hackney, and the beneficiary of a life insurance
policy

in

the

amount

of

$25,000.00

defendant on June 8, 2011.

issued

to

his

Complaint, ¶¶ 6-7.

mother

by

The policy

application indicates that Virginia Hackney was a resident of
Caldwell, Ohio.

Plaintiff alleges that he submitted a claim for

benefits following his mother’s death on February 26, 2013.
Complaint, ¶ 10.

Plaintiff further states that by letter dated

March

defendant

21,

2014,

denied

his

claim

for

benefits.

Complaint, ¶ 12. Plaintiff alleges that defendant’s refusal to pay
benefits was without reasonable justification, that defendant
failed to take reasonable efforts to investigate, negotiate and

adjust the claims, and that defendant breached the implied covenant
of good faith and fair dealing.

Complaint, ¶¶ 16-19.

In its answer filed on August 18, 2014, defendant asserted as
an affirmative defense that Virginia Hackney was required to
provide truthful information on her policy application but did not
do so, and that her answers were willfully false, fraudulently made
and were material to defendant’s acceptance of the risk, thereby
rendering the policy void ab initio.
¶¶3-4.

Doc. 3, Affirmative Defenses

Defendant further stated that it was entitled to rescind

the policy based on the material misrepresentations made on the
application for insurance.

Doc. 3, Affirmative Defenses, ¶ 2.

Defendant also asserted a counterclaim for rescission.

Defendant

alleged that Virginia Hackney responded “No” on her application to
the question of whether she had been diagnosed or treated by a
licensed medical doctor in the past seven years for a brain,
mental, or nervous disorder.

Counterclaim, ¶¶ 8-9.

Defendant

further alleges that because Virginia Hackney died within the twoyear contestability period provided by the policy, it investigated
the claim and obtained medical records from her treating physicians
which revealed that from August 30, 2009, through September 2,
2009, and from October 30, 2010 to November 12, 2010, she was
treated

for

a

seizure

Counterclaim, ¶¶ 14-17.

disorder

on

an

inpatient

basis.

Based on her allegedly false answer,

defendant notified plaintiff by letter dated March 21, 2014, that
it was rescinding the policy, and returned the premiums paid to
plaintiff.

Counterclaim, ¶¶ 19-20.

Plaintiff did not accept the

premium refund, and chose instead to file the instant action.
Counterclaim, ¶ 21.

Defendant alleges that it is entitled to

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rescind the policy and return the premiums paid because Virginia
Hackney gave knowingly false answers on her application which were
willfully false, fraudulently made; that her answer was material to
defendant’s decision to issue the policy; that defendant had no
knowledge of the falsity of her answer because the policy did not
require medical underwriting; and that, but for her answer, the
policy would not have been issued.

Counterclaim, ¶¶ 24-25.

This matter is before the court on plaintiff’s motion pursuant
to Fed.R.Civ.P. 12 to dismiss defendant’s counterclaim.

Although

plaintiff does not identify the specific branch of Rule 12 upon
which he relies, the court will construe plaintiff’s motion as a
motion to dismiss for failure to state a claim for which relief may
be granted under Fed.R.Civ.P. 12(b)(6).
dismiss

under

Rule

12(b)(6),

the

In ruling on a motion to

court

must

construe

the

counterclaim in a light most favorable to the defendant, accept all
well-pleaded allegations in the counterclaim as true, and determine
whether defendant undoubtedly can prove no set of facts in support
of those allegations that would entitle it to relief. See Erickson
v. Pardus, 551 U.S. 89, 94 (2007); Bishop v. Lucent Technologies,
Inc., 520 F.3d 516, 519 (6th Cir. 2008); Harbin-Bey v. Rutter, 420
F.3d 571, 575 (6th Cir. 2005).

To survive a motion to dismiss, the

counterclaim “must contain either direct or inferential allegations
with respect to all material elements necessary to sustain a
recovery under some viable legal theory.”

Mezibov v. Allen, 411

F.3d 712, 716 (6th Cir. 2005).
In

arguing

for

dismissal

of

defendant’s

counterclaim,

plaintiff notes that defendant purportedly rescinded the policy in
its letter dated March 21, 2014.

Plaintiff contends that because

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the policy has already been rescinded, defendant’s counterclaim
must be construed as a request for the court’s ratification of that
action through the entry of a declaratory judgment. Plaintiff then
notes authority for the proposition that a declaratory judgment
action does not take precedence over another pending case when the
pending case will necessarily dispose of all the issues between the
parties, citing Fuller v. German Motor Sales, Inc., 51 Ohio App.3d
101, 103, 554 N.E.2d 139 (1988). From there, plaintiff argues that
the counterclaim should be dismissed because any issues regarding
defendant’s right to rescind will be resolved in the litigation of
plaintiff’s claims.
The first problem with plaintiff’s theory is his statement
that rescission of the policy has already occurred.

However,

defendant’s attempted rescission of the policy achieved no final
resolution

of

the

parties’

contractual

obligations

because

plaintiff refused to accept the tendered premiums and instead filed
the instant action.
courts

in

When plaintiff invoked the assistance of the

resolving

the

parties’

contractual

disputes,

the

defendant’s right to rescind the policy was no more settled than
plaintiff’s right to benefits under the policy. Both plaintiff and
defendant are entitled to litigate those issues in this case.
The

court

further

notes

that

plaintiff’s

attempts

to

characterize defendant’s counterclaim as an action for declaratory
judgment finds no support in the wording of the counterclaim.
Although

defendant’s

counterclaim

requests

the

“[e]ntry

of

a

Judgment rescinding the Policy,” see Doc. 3, p. 9, nowhere does the
counterclaim mention the phrase “declaratory judgment.”

There is

no indication in the answer or counterclaim that defendant is

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invoking this court’s discretionary authority under the Declaratory
Judgment Act.

The cases relied upon by plaintiff are inapposite.

For example, in
App.3d

183,

186,

Arbor Health Care Co. v. Jackson, 39 Ohio

530

N.E.2d

928

(1987),

the

court

stated:

“Ordinarily, a declaratory judgment is a remedy in addition to
other legal and equitable remedies and is to be granted where the
court finds that speedy relief is necessary to the preservation of
rights which might otherwise be impaired.”
plaintiff

sought

a

declaratory

judgment

In that case, the

rather

statutorily provided administrative remedies.

than

pursuing

The court concluded

that since those administrative remedies provided a “specialized
procedure” for the type of relief sought by plaintiff, declaratory
relief was inappropriate.

Id.

No administrative procedure is

alleged to be available to the defendant in this case.
In Fuller, another case cited by plaintiff, the defendants, a
car distributor and its president, filed a “motion” for declaratory
judgment on the claims of conversion, negligence and interference
with contract asserted by the plaintiff car purchasers after the
distributor sold the vehicle they had purchased to a third party.
The

trial

court

granted,

rescinded the sale.

concluding

that

the

purchasers

had

The court of appeals stated that “[i]t would

be inconsistent with the orderly presentation of a plaintiff’s case
to allow a defendant to proceed first to prove his defenses to the
claim by way of a motion for declaratory judgment.”
Ohio App.3d at 103.

Fuller, 51

The court further found that a “motion” for

declaratory judgment was procedurally incorrect and that the trial
court’s summary procedure did not comply with the requirements for
granting summary judgment.

Id. at 103-04.

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In contrast, no

“motion” for declaratory judgment has been filed in this case. The
counterclaim gives no indication that defendant is attempting to
subvert the orderly litigation of plaintiff’s claims by using the
vehicle of declaratory judgment as some sort of preemptive strike.
Even assuming that defendant’s counterclaim is construed as an
action for declaratory relief, there is support for the use of
declaratory judgment procedures as a vehicle for seeking rescission
of an insurance policy.

For example, in Martin v. Mike Lovasz

Agency, No. 2002-L-173 (11th Dist. unreported), 2004 WL 457298
(Ohio App. Mar. 12, 2004), the defendants, an insurance agency and
insurance company, asserted a counterclaim for declaratory relief
seeking rescission of the health insurance policy issued to the
plaintiff on the ground that plaintiff provided willfully false
statements regarding her medical history on her application.

The

trial court entered summary judgment in favor of the defendants.
Id., 2004 WL 457298 at *2. Although the court of appeals reversed,
holding

that

factual

issues

precluded

summary

judgment

on

defendants’ right to rescind the policy, the defendants failed to
meet their burden of proof, see id. 2004 WL 457298 at *4, at no
point did the court of appeals indicate that a counterclaim for
declaratory

relief

was

an

inappropriate

vehicle

for

seeking

rescission

See also Chicago Ins. Co. v. Capwill, 514 F.App’x 575,

576-77 (6th Cir. 2013)(upholding summary judgment for insurer on
rescission claim in declaratory judgment action).
Plaintiff is also incorrect in arguing that defendant’s right
to rescind would necessarily be resolved during the litigation of
plaintiff’s claims.

Plaintiff’s complaint asserts claims for

breach of contract due to defendant’s failure to pay death benefits

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under the policy, failure to investigate, and breach of the implied
covenant of good faith and fair dealing.

However, the complaint

makes no reference to the defendant’s rescission of the policy.
Plaintiff could prove the elements of his claims without touching
on any of the elements which defendant is required to prove to
establish its right to rescind the policy.

As discussed below,

defendant’s pursuit of rescission introduces a whole new set of
issues into the case, upon which defendant bears the burden of
proof.
Although defendant’s counterclaim is styled as a counterclaim
for rescission, the counterclaim essentially asserts a claim for
fraudulent inducement and seeks rescission as a remedy. Rescission
is, strictly speaking, not a separate cause of action, but rather
is an equitable remedy.

Carr v. Acacia Country Club Co., 970

N.E.2d 1075, 1090 (Ohio App. 2012)(citing J.A. Industries, Inc. v.
All Am. Plastics, Inc., 133 Ohio App.3d 76, 83, 726 N.E.2d 1066
(1999)); Camp St. Mary’s Assoc. of the West Ohio Conference of the
United Methodist Church, Inc. v. Otterbein Homes, 176 Ohio App.3d
54, 71, 889 N.E.2d 1066 (2008)( rescission is an equitable remedy
for breach of contract). Rescission is not merely a termination of
the contract; it is an annulment of the contract.

Mid-America

Acceptance Co. v. Lightle, 63 Ohio App.3d 590, 599, 579 N.E.2d 721
(1989). The primary purpose of rescission is to restore the status
quo and to return the parties to the position they would have been
in had the contract not been formed.

Otterbein Homes, 176 Ohio

App.3d at 71. “‘Returning the parties to status quo is an integral
part of rescission, and in doing so it is generally necessary to
award the party seeking rescission at least his out-of-pocket

7

expenses.’”

Rosepark Properties, Ltd. v. Buess, 167 Ohio App.3d

366, 384, 855 N.E.2d 140 (2006)(quoting Lightle, 63 Ohio App.3d at
599).
“At common law, generally, a party who has been fraudulently
induced to enter into a contract has the option of rescinding the
contract or retaining the contract and suing for damages based upon
the tort of fraudulent inducement.”
599.

Lightle, 63 Ohio App.3d at

A party (in this case, the defendant) who is seeking to

rescind a contract procured by the fraudulent representations of
another party to the contract must prove the following elements by
clear and convincing evidence: (1) that there were actual or
implied representations of material matters of fact; (2) that such
representations were false; (3) that such representations were made
by one party to the other with knowledge of their falsity; (4) that
they were made with intent to mislead a party to rely thereon; and
(5) that such party relied on such representations with a right to
rely thereon.

Cross v. Ledford, 161 Ohio St. 469, 475, 120 N.E.2d

118 (1954); Spriggs v. Martin, 115 Ohio App. 529, 534-35, 182
N.E.2d

20

(1961)(applying

insurance policy).

these

elements

in

the

case

of

an

A fraudulent misrepresentation claim also

requires proof of a resulting injury proximately caused by the
reliance.

Burr v. Bd. of County Com’rs of Stark County, 23 Ohio

St.3d 69, 73, 491 N.E.2d 1101 (1986).

The defendant will bear the

burden of proving that it is entitled to rescind the policy, either
in summary judgment proceedings or in a trial on the merits.
Examples of rescission pursued as part of a counterclaim can
be found in Ohio cases.
App.3d

238,

874

N.E.2d

For example, in Bell v. Turner, 172 Ohio
820

(2007),

8

the

court

entertained

a

counterclaim seeking rescission of a land sale contract which was
filed by the purchasers in an action brought by the sellers to
collect the balance due on the contract.

See also Rylee Ltd. v.

Izzard Family Partnership, 178 Ohio App.3d 172, 897 N.E.2d 208
(2008)(upholding

judgment

in

favor

of

vendor

on

vendor’s

counterclaim for rescission of building sale contract based on
mistake).

In fact, there is authority for the proposition that in

an action for enforcement of an insurance policy, a counterclaim
for rescission of the policy is a compulsory counterclaim under
Fed.R.Civ.P. 13(a).
state

as

a

See Fed.R.Civ.P. 13(a)(1)(A)(“A pleading must

counterclaim

any

claim

that–at

the

time

of

its

service–the pleader has against an opposing party if the claim: (A)
arises out of the transaction or occurrence that is the subject
matter of the opposing party’s claim[.]”); Pizzulli v. Northwestern
Mutual Life Ins. Co., No. 05 Civ. 1889(LAP) (unreported), 2006 WL
490097 at *2 (S.D.N.Y. Feb. 28, 2006)(claims for rescission and
enforcement arise of the same transaction or occurrence)(citing
Adam v. Jacobs, 950 F.2d 89, 92 (2d Cir. 1991)).
A dismissal of defendant’s counterclaim for rescission at this
juncture would deprive the defendant of the opportunity to seek and
prove its entitlement to the equitable remedy of rescission.

The

facts alleged in the counterclaim are sufficient to state a claim
for rescission based on fraudulent inducement under Ohio law.
Plaintiff’s motion to dismiss (Doc. 6) is denied.

Date: December 23, 2014

s/James L. Graham
James L. Graham
United States District Judge

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