FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION
Cite as Federated States of Micronesia Development Bank v Bruton, 7 FSM Intrm. 246 (Chk. 1995)

FEDERATED STATES OF MICRONESIA DEVELOPMENT BANK,
Plaintiff,

vs.

LARRY BRUTON,
Defendant.

CIVIL ACTION NO. 1994-1006

ORDER

Richard H. Benson
Associate Justice

Decided: September 19, 1995

APPEARANCES:

For the Plaintiff:
Kathleen B. Alvarado, Esq.
Law Offices of R. Barrie Michelsen
P.O. Box 1450
Kolonia, Pohnpei FM 96941

For the Defendants:
Fredrick L. Ramp, Esq.
P.O. Box 1480
Kolonia, Pohnpei FM 96941

Ron Moroni, Esq.
P.O. Box 1618
Kolonia, Pohnpei FM 96941

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HEADNOTES

Constitutional Law - Case or Dispute - Standing
A surviving co-obligor has standing to sue for failure to obtain credit life insurance for a deceased co-obligor. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 249 (Chk. 1995).

Civil Procedure - Admissions; Civil Procedure - Pleadings; Evidence - Judicial Notice
A court may consider as evidence against pleader, in the action in which they are filed, a party's earlier admissions in its responsive pleadings even though it was later withdrawn or superseded by amended pleadings. A court may take judicial notice of them as part of the record. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 249 (Chk. 1995).

Civil Procedure - Summary Judgment
When the moving party has made out a prima facie case that there are no triable issues of fact and that it is entitled to summary judgment as a matter of law, the nonmoving party then has the burden to show by competent evidence that there is a triable issue of fact. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 249 (Chk. 1995).

Debtors' and Creditors' Rights; Insurance
Where a creditor accepts a premium payment for insurance that he has agreed to procure, where he makes a diligent effort to fulfill his agreement to do so, promptly notifies the debtor of his inability to procure insurance, he would not be held liable to the debtor, as he would have fulfilled his contract to attempt to procure insurance which is not a contract of insurance. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 250 (Chk. 1995).

Debtors' and Creditors' Rights; Insurance
The general rule is that where a creditor has failed to both procure credit insurance paid for by the debtor and to notify the debtor of his failure to procure the insurance requested, prior to loss, the debtor may plead such failure as a defense or setoff. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 250 (Chk. 1995).

Contracts - Damages
The measure of damages for the breach of an agreement to procure insurance is the amount of loss that would have been subject to indemnification by the insurer had the insurance been properly obtained. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 250 (Chk. 1995).

Contracts - Parol Evidence
The parol evidence rule bars evidence of a contemporaneous or prior oral agreement that contradicts or alters the terms of the written agreement. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 250 (Chk. 1995).

Contracts - Parol Evidence
Parol evidence of a collateral agreement that does not alter or contradict the written agreement is not barred by the parol evidence rule if the collateral agreement is one that in the circumstances might naturally be omitted from the writing. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 250 (Chk. 1995).

Contracts - Parol Evidence
The parol evidence rule does not bar evidence of subsequent modification of the contract. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 251 (Chk. 1995).

Debtors' and Creditors' Rights; Insurance
Both contract and tort theories can be pursued by a debtor who alleges that a creditor has failed to procure credit insurance. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 251 (Chk. 1995).

Debtors' and Creditors' Rights; Insurance; Torts - Negligence
A creditor who undertakes to secure credit insurance for a debtor is liable to the debtor for negligent performance of that duty or of duty to notify debtor if insurance not obtained. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 251 (Chk. 1995).

Debtors' and Creditors' Rights; Insurance; Torts - Damages; Torts - Negligence
Failure of a creditor to notify the debtor of its failure to obtain insurance is negligence. As a consequence the creditor is liable to the debtor for the entire amount of the debtors' loss, otherwise the debtor is only entitled to return of full amount of insurance premiums paid. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 251 (Chk. 1995).

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COURT'S OPINION

RICHARD H. BENSON, Associate Justice:

Plaintiff's complaint alleged that the defendant had defaulted on a secured loan of $108,000.00 and requested judgment for the $70,088.33 allegedly still due and the foreclosure of the underlying chattel mortgage. Defendant's answer, although containing a general denial, admitted, by raising affirmative defenses, that he and his deceased wife had borrowed money from the plaintiff and not fully repaid it, and counterclaimed for the alleged arrearages. Various amendments to the pleadings have been filed. Plaintiff's Amended Answer to Defendant's Counterclaims (Jan. 10, 1995); Plaintiff's Second Motion to Amend Pleadings (Jan. 13, 1995); Defendant's Answer and Counterclaim [to plaintiff's amended pleading of same date] (Jan. 13, 1995); Plaintiff's Third Answer to Defendant's Third Set of Counterclaims (Jan. 27, 1995). I have considered all of these pleadings as if they had been amended.

Defendant moved for judgment on the pleadings. He later requested that that motion be considered a motion for summary judgment. On April 11, 1995, I approved a stipulation withdrawing defendant's motion for judgment on the pleadings and allowing defendant's briefs and supporting materials to be considered a motion for summary judgment. Plaintiff opposed defendant's motion on the merits, moved to dismiss the defendant's counterclaims, and requested that summary judgment be granted in its favor.

Facts

These material facts are undisputed. On March 30, 1989, Flavia Bruton, acting on her own behalf, and on her husband Larry's behalf with his power of attorney, executed a loan agreement with, and a promissory note and chattel mortgage in favor of the plaintiff Federated States of Micronesia Development Bank (FSMDB) for the sum of $108,000.00 at 5% per annum. This sum consisted of a "principal amount" of $104,208.77 and $3,791.23 "insurance cost." The insurance cost was to prepay the premium on credit life insurance required by paragraph seven of the loan agreement executed between the parties. The purpose of this requirement was to protect the parties to the loan by carrying insurance that would pay off the outstanding loan balance in the event that one or both of the borrowers passed away before the loan had been entirely repaid. The insurance cost premium was not paid out to the borrowers, but was retained by the bank and included in the principal "disbursement" amount upon which the borrowers paid interest. See Loan Ledger Card at 1 (Attach. to Aff. Richard H. Northey (May 23, 1995)). Borrowers thus prepaid the premium.

On March 6, 1991, the bank's Chuuk branch manager wrote to Flavia Bruton requesting that she sign an insurance application for credit life insurance because they had "never got around to accomplishing it . . . at the time of loan application." He also stated that the insurance premium would now be only $3,168 with the balance credited to the borrowers' outstanding balance. Letter from Sisinio Willy, FSMDB Chuuk Branch Manager, to Flavia Bruton (Mar. 6, 1991) (Pl.'s Ex. A, Dep. Larry Bruton (Jan. 13, 1995)). Flavia signed the insurance application form on June 22, 1991. The insurance company denied the bank's application because it was made more than one year after the date of the loan. The bank did not notify the borrowers of this denial. Unfortunately for all concerned, Flavia Bruton died on June 29, 1992. According to bank records, the outstanding balance at that time was $70,088.33. No loan payments were made after that date. Up until then the borrowers' loan repayments had been timely.

The Chuuk branch manager then informed Larry Bruton that Larry was expected to continue making the $1,367.28 monthly payments "until such time that the covering costs from the insurance company is being received." Letter from Anselmo Daniel, FSMDB Chuuk Branch Manager, to Larry Bruton (Sept. 16, 1992) (Def.'s Ex. E, Dep. Larry Bruton (Jan. 13, 1995)). A later letter notified Larry Bruton that the loan had never been insured and requested that he continue remitting the monthly payments. Letter from Anselmo Daniel, FSMDB Chuuk Branch Manager, to Larry Bruton (Sept. 30, 1992) (Def.'s Ex. D, Dep. Larry Bruton (Jan. 13, 1995)). He did not. Eventually this suit ensued.

Analysis

A surviving co-obligor has standing to sue for failure to obtain credit life insurance for a deceased co-obligor. Annotation, Failure of Creditor, or Creditor's Assignee to Secure Credit Insurance as Affecting Rights or Liabilities of Debtor, Upon Debtor's Loss, 88 A.L.R.3d 794, 824-25 (1978).

A. Contract to Procure Insurance

The bank admitted that it agreed to procure credit life insurance for Flavia Bruton in all of its responsive pleadings except for Plaintiff's Third Answer to Defendant's Third Set of Counterclaims (Jan. 27, 1995) in which it now denies any such agreement. Instead the bank now contends that it is ambiguous as to whose responsibility it was to procure the credit life insurance and that this is a triable issue of fact. Evidence of the bank's agreement to procure this insurance includes the requirement in the Loan Agreement that credit life insurance be maintained, the bank's inclusion of the insurance premium in the loan amount in the promissory note, retention of the premium by the bank, and the debtors' payment of interest on the premium amount. See also Letter from Manny Mori, FSMDB President, to FSMDB Truk Branch Manager (Mar. 28, 1989) ("If borrower agrees with terms and conditions of the loan, accomplish the Loan agreement, Promissory Note, Real Estate Mortgage forms and application for CLI [credit life insurance].") (Def.'s Ex. B, Dep. Larry Bruton (Jan. 13, 1995)). Other documentary evidence dispels any remaining doubt as to who the parties thought responsible for procuring the credit life insurance. Letter from Sisinio Willy, FSMDB Chuuk Branch Manager, to Flavia Bruton (Mar. 6, 1991) ("Enclosed is an insurance application which requires your signature please sign on the bottom line . . . . You don't need to fill in any other blanks for we will do that at our end . . . .") (Pl.'s Ex. A, Dep. Larry Bruton (Jan. 13, 1995)). Additionally, I may consider as evidence the bank's earlier admissions in its responsive pleadings that it did agree to procure credit life insurance even though the admission was withdrawn or superseded. Pennsylvania R.R. v. City of Girard, 210 F.2d 437, 440 (6th Cir. 1954) ("pleadings withdrawn or superseded by amended pleadings are admissions against pleader in the action in which they are filed"; a court may "take judicial notice of them as part of the record"). Defendant has thus made out a prima facie case that the bank agreed to procure credit life insurance for Flavia Bruton.

The bank offers no evidence that it did not agree to procure the insurance. When the moving party has made out a prima facie case that there are no triable issues of fact and that it is entitled to summary judgment as a matter of law, the nonmoving party then has the burden to show by competent evidence that there is a triable issue of fact. Alik v. Kosrae Hotel Corp., 5 FSM Intrm. 294, 295 (Kos. 1992); Federated Shipping Co. v. Ponape Transfer & Storage Co., 4 FSM Intrm. 3, 11 (Pon. 1989). The bank has not met its burden. I therefore conclude that no genuine triable issue exists here. The bank unquestionably undertook the duty to procure credit life insurance.

The bank also contended that no contemporaneous consideration existed to support a contract to procure insurance. I cannot agree. The agreement to procure insurance was contemporaneous with the agreement for the loan. There was an exchange of promises. Furthermore, the borrowers prepaid the insurance premium at the same time the loan was made and thereafter paid interest on the premium. Thus contemporaneous consideration to support a contract to procure insurance exists here.

The bank further contends that any duty it had to procure insurance was discharged once the insurance company refused to accept coverage. This argument has some merit. "[W]here a creditor accepts a premium payment for insurance that he has agreed to procure, where he makes a diligent effort to fulfill his agreement to do so, promptly notifies the debtor of his inability to procure insurance, he would not be held liable to the debtor, as he would have fulfilled his contract to attempt to procure insurance which is not a contract of insurance." Annotation, supra, 88 A.L.R.3d at 831. Cf. National Motors, Inc. v. Newman, 484 P.2d 125, 126-27 (Colo. Ct. App. 1971) (no liability for failure to procure insurance if exercised reasonable care and diligence in attempting to procure and notified debtor of failure to procure). But that is not the present case. The creditor bank did not make a diligent effort to fulfill its agreement to procure insurance. It procrastinated for two years. See Letter from Sisinio Willy, FSMDB Chuuk Branch Manager, to Flavia Bruton (Mar. 6, 1991) ("the FSMDB is in the process of filing a credit life insurance application which, by the way, we never got around to accomplishing it while you were in Chuuk at the time of loan documentation") (Pl.'s Ex. A, Dep. Larry Bruton (Jan. 13, 1995)). And when the bank did notify the debtor, two years later, that it had not yet procured the insurance, it informed her that all she had to do was sign a blank form and the bank would still procure it for her. Id. She signed, but the bank's insurance company declined to assume coverage because of the application's untimeliness. Letter from Anselmo Daniel, FSMDB Chuuk Branch Manager, to Larry Bruton (Sept. 30, 1992) ("Eventhough [sic] we did write you a memo dated March 06, 1991 which was approximately two full years after the approval date the Insurance Company would just no longer accept the Insurance Application (CLI) as this filing period had already exceeded the allowable one year maximum requirement.") (Def.'s Ex. D, Dep. Larry Bruton (Jan. 13, 1995)). The bank did not promptly notify the debtor of its failure to procure insurance. The bank did not even notify prior to debtor's loss. Even after debtor's loss the bank still maintained for some time that it had obtained the insurance.

I am satisfied that the general rule is that "[w]here a creditor has failed to both procure credit insurance paid for by the debtor and to notify the debtor of his failure to procure the insurance requested, prior to loss, the debtor may . . . plead such failure as a defense or setoff . . . ." Annotation, supra, 88 A.L.R.3d at 845. That is just this case. I conclude that as a matter of law defendant Larry Bruton is entitled judgment on his defense of breach of contract to procure insurance. The measure of damages for the breach of an agreement to procure insurance is the amount of loss that would have been subject to indemnification by the insurer had the insurance been properly obtained. Les Shellabarger Chevrolet, Inc. v. Romero, 490 P.2d 98, 99-100 (Colo. Ct. App. 1970). In this case it is undisputed that that amount is equal to the borrowers' remaining indebtedness to the bank.

B. Parol Evidence Rule

The bank also contends that the parol evidence rule prevents the introduction of evidence of any agreement by the bank to procure credit life insurance for Flavia that is not in writing. The parol evidence rule, briefly stated, bars evidence of a contemporaneous or prior oral agreement that contradicts or alters the terms of the written agreement. The bank's agreement to procure the insurance, however, does not contradict or alter the loan agreement, or the promissory note, or the chattel mortgage. It merely supplements them with a collateral agreement that is in harmony with all the other agreements. Evidence of a collateral agreement that does not alter or contradict the written agreement is not barred by the parol evidence rule "if the collateral agreement is one that 'in the circumstances might naturally be omitted from the writing.'" E. Allan Farnsworth, Contracts 458 (1982).

Furthermore, the bank's contention does not take into account that the bank's agreement to procure insurance was modified subsequent to the original agreement when almost two years after the loan it notified the borrowers of the lack of credit life insurance and still offered to procure it. Flavia accepted the offer by signing the application form. Valuable consideration was paid by using $3,168 of the earlier prepaid premium as prepayment for the premium now due instead of using it to reduce the principal of the loan. This later agreement, the breach of which has caused damages to the borrowers, is outside the scope of the parol evidence rule. "[T]he parol evidence rule . . . does not bar evidence of subsequent . . . modification of the contract." Id. at 474.

Therefore assuming, but not deciding, that the parol evidence rule is operable in the FSM that rule does not bar the introduction of evidence of an agreement by the bank to procure credit life insurance for Flavia Bruton. Furthermore, the parol evidence rule is a contract defense and is inapplicable if a tort analysis is used.

C. Negligence Cause of Action

"[B]oth contract and tort theories can be pursued by a plaintiff who alleges that a defendant has failed to procure insurance." Bradley v. Oregon Trail Sav. & Loan Ass'n, 617 P.2d 263, 271 (Or. Ct. App. 1980). If I had analyzed this case as a negligence cause of action - breach of duty to procure insurance, or of duty to inform debtor of failure to procure, the result would have been the same. See, e.g., Hudson v. Wenatchee Federal Sav. & Loan Ass'n, 588 P.2d 1192, 1197-99 (Wash. Ct. App. 1978) (liability can be founded on negligence for breach of duty to disclose information of which customer is ignorant; duty created by quasi-fiduciary relationship between creditor and borrower seeking credit life insurance); Hardcastle v. Greenwood Sav. & Loan Ass'n, 516 P.2d 228, 231 (Wash. Ct. App. 1973) (one who undertakes to secure insurance for another is liable to the other for negligent performance of that duty or of duty to notify other if insurance not obtained or replaced).

In this case the bank initially breached its duty of care by not applying for the credit life insurance in a timely manner. And it breached its duty of care a second time when, having applied and been rejected, it failed to inform the borrowers that it was unable to obtain credit life insurance for Flavia. This second breach of duty was the proximate cause of damages to the borrowers.

[E]ven though the bank may have been a volunteer in procuring [debtor's] insurance payments, nevertheless, there was liability placed upon it either to furnish the insurance paid for, or to notify [debtor] that he did not have insurance. Failure to so notify the [debtor] . . . [is] negligence. As a consequence the . . . bank is liable to the [debtor] for the entire amount of the loss.

Jonas v. Bank of Kodiak, 162 F. Supp. 751, 754 (D. Alaska 1958) (if no insurance and bank not negligent in any way debtor only entitled to return of full amount of premiums paid to bank). Therefore under a negligence analysis, as under a contract analysis, the amount of Larry Bruton's damages is equal to the borrowers' remaining indebtedness to the bank.

Conclusion

The defendant is accordingly granted partial summary judgment. The plaintiff's case is hereby dismissed. Defendant is entitled to a decree of cancellation of the note and of discharge of the mortgage. There being no just cause for delay let judgment be entered accordingly with costs of suit to be borne by the plaintiff.

The defendant's counterclaim for punitive damages is hereby dismissed. Plaintiff's motion to dismiss defendant's counterclaims is otherwise denied. The defendant may proceed on his counterclaims for attorneys' fees and loss of credit rating and good business reputation as he thinks proper.

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