10.5.4.2 Notes - Phelps v. Herro | rauvinj | October 31, 2012

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10.5.4.2 Notes - Phelps v. Herro

Original Creator: Kessler, Gilmore & Kronman Current Version: rauvinj
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NOTE

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1. The facts in New York Life Insurance Co. v. Viglas, quoted by Judge Hammond in his dissent, were these: Viglas had taken out a life insurance policy with the defendant. Under the terms of the policy, if the insured became totally disabled before the age of 60, he was to received monthly benefit payments from the defendant and be relieved of any obligation to pay the semi-annual insurance premiums that would otherwise be due. The policy provided, however, that “[b]efore making any income payment or waiving any premium the company might demand due proof of the continuance of total disability. . . ." If the insured failed to provide such proof or performed any work for profit, his disability benefits were to be terminated and his obligation to make all subsequent premium payments was revived. Thereafter, a failure on the part of the insured to make such payments as they came due would constitute a default of his obligations under the insurance contract. Even after default, however, the insured could collect the cash surrender value of his policy or reinstate the policy itself (within five years after default) by paying all past-due premiums.

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The insured became totally disabled, within the meaning of the policy, on September 11, 1931. According to the statement of facts in Justice Cardozo's opinion,

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Upon proof of his condition the company paid [the insured] the monthly benefits called for by the policy from October 11, 1931, to July 11, 1933, and during the same period waived the payment of semi-annual premiums. It refused to make a monthly payment in August, 1933, and refused the same month to waive a semi-annual premium,

asserting to the plaintiff as its ground for such refusal that since it appeared to the defendant that for some time past the plaintiff had not been continuously totally disabled within the meaning of the disability benefit Provision of the policy, the defendant would make no further monthly disability payments, and that the premiums due on and after August 7, 1933, would be payable in conformity with the terms of the contract.

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Later, upon the expiration of a term of grace, "the defendant, on or about September 19, 1933, declared the policy as lapsed upon its records."

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297 U.S. at 675.

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The insured sued to recover an amount equal to the total disability benefits he would receive under the policy if he lived for the full period of his present life expectancy. In rejecting the plaintiff's claim, Cardozo had this to say:

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Upon the showing made in the complaint there was neither a repudiation of the policy nor such a breach of its provisions as to make conditional and future benefits the measure of recovery.

Repudiation there was none as the term is known to the law. Petitioner did not disclaim the intention or the duty to shape its conduct in accordance with the provisions of the contract. Far from repudiating those provisions, it appealed to their authority and endeavored to apply them. If the insured was still disabled, monthly benefits were payable, and there should have been a waiver of the premium. If he had recovered the use of hand or foot and was not otherwise disabled, his right to benefits had ceased, and the payment of the premium was again a contractual condition. There is nothing to show that the insurer was not acting in good faith in giving notice of its contention that the disability was over. . . . If it made a mistake, there was a breach of a provision of the policy with liability for any damages appropriate thereto. We do not pause at the moment to fix the proper measure. Enough in this connection that at that stage of the transaction there had been no renunciation or abandonment of the contract as a whole. . . .

Renunciation or abandonment, if not effected at that stage, became consummate in the plaintiff's view at the end of the period of grace when the company declared the policy "lapsed upon its records." Throughout the plaintiff's argument the declaration of a lapse is treated as equivalent to a declaration that the contract is a nullity. But the two are widely different under such a policy as this. The policy survived for many purposes as an enforceable obligations, though default in the payment of premiums had brought about a change of rights and liabilities. The insurer was still subject to a duty to give the insured the benefit of the stipulated surrender privileges, cash or new insurance. It was still subject to a duty upon proof within six months that the disability continued to reinstate the policy as if no default had occurred. None of these duties was renounced. None of them was questioned. . . . Viewing the case before us independently, we hold that upon the facts declared in the complaint the insurer did not repudiate the obligation of the contract, but did commit a breach for which it is answerable in damages.

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297 U.S. at 676, 677, 678.

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Does Cardozo's distinction between breach and repudiation seem to you persuasive? Would you classify the plaintiff's insurance contract as unilateral or bilateral, in the sense in which these terms are used by the court in Phelps v. Herro?

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2. In his opinion in Phelps, Judge Prescott quotes an earlier case that states that "[a] tenant's repudiation of his lease does not give his landlord an immediate right of action for future rent." In reality, the case law has been less consistent than this black-letter proposition might suggest. In Hermitage Co. v. Levine, 248 N.Y. 333, 162 N.E. 97 (1928) (another Cardozo opinion), the defendant, a tenant under a 21-year lease that ran from 1924 to 1945, was dispossessed for non-payment of rent at the end of 1924. After Levine's dispossession, the landlord made a "diligent effort" to relet the seven-story building covered by the lease. By August, 1925, it had relet 3 ½ floors for 15 years, 2½ floors for 10 years and 1 floor for 3 years. In March, 1926, the landlord brought his action to recover damages. The tenant was credited with a $30,000 "security deposit" which the landlord retained as well as with the rents under the new leases and profits that had been made by operating a garage in part of the building. The claimed deficiency was $25,529.39. Held, by a unanimous court, that no action could be brought, even for accrued rent, until 1945.

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To hold [the tenant] for monthly deficits is to charge him with the obligations of a tenant without any of the privileges. He must pay in the Jean months, without recouping in the fat ones. He must do this, though it may turn out in the end that there has been a gain and not a loss. A liability so heavy may not rest upon uncertain inference. We do not overlook the hardship to the landlord in postponing the cause of action until October, 1945.

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Id. at 338, 162 N.E. at 98. Compare the result in the Hermitage case with Pakas v. Hollingshead, digested in Note 5 following Roehm v. Horst, supra p. 1279. Cardozo suggests in his Hermitage opinion that the tenant could have been made liable for "monthly deficits" by an aptly drawn damage clause, but no such clause appeared in the lease.

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In Sagamore Corp. v. Willcutt, 120 Conn. 315, 180 A. 464 (1935), a tenant under a lease running from October, 1934, to October, 1935, quit the premises on February 1, 1935 and notified the landlord that he would pay no further rent. Banks, J., explained that the doctrine of anticipatory breach was not applicable, since the tenant's obligation was unilateral and anticipatory breach doctrine requires "dependency of performance." However, the tenant's failure to pay the February 1 rent followed by his statement that he would pay no further rent made the breach "a total one justifying an immediate action by the [landlord] to recover the damages which would naturally follow from such a breach." The landlord apparently recovered the rent reserved until the end of the term less the "reasonable rental value" of the premises for that period.

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Do you prefer the New York approach or the Connecticut approach? Of course, there is a considerable difference, when it comes to calculating damages, between a one-year lease broken after 5 months and a 21-year lease broken before the end of the first year.

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3. Judge Hammond in his dissent in Phelps v. Herro states that "[t]o require immediate payment of sums that were to have been paid in the future does not give the promisee something he did not bargain for, if a discount that reflects the earlier date of payment is imposed." But isn't it true that in addition to having the use of the money earlier than he expected, the plaintiff in Phelps would (if he had won his lawsuit) also have been spared the risk that the defendant might become insolvent or unavailable before the time originally set for payment? Can his recovery be "discounted" to reflect this latter benefit as well?

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4. Suppose the contract at issue in Phelps v. Herro had contained an "acceleration" clause that by its terms made all of the defendant's outstanding obligations immediately "due and payable" upon his failure to make timely payment of any single installment. Sales contracts and leases routinely contain provisions of this sort and their validity is almost always upheld, suggesting that the parties to a contract have considerable power to alter the legal rules governing anticipatory repudiation, if they choose to do so. Can the result in Phelps v. Herro be explained on the grounds that the contract in that case (somewhat anomalously) did not contain an acceleration clause? See Jackson, "Anticipatory Repudiation" and the Temporal Element of Contract Law: An Economic Inquiry into Contract Damages in Cases of Prospective Nonperformance, 31 Stan. L. Rev. 69, 118 n.173 (1978).

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5. Section 253 of the Restatement Second (Effect of a Repudiation as a Breach and on Other Party's Duties) provides:

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(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.

(2) Where performances are to be exchanged under an exchange of promises, one party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance.

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Comment c to §253 states that "an obligor's repudiation alone . . . gives rise to no claim for damages at all if he has already received all of the agreed exchange for it." As the Reporter's Note to §253 makes clear, this proviso is meant to codify the rule in Phelps v. Herro and similar cases. Supposing it involved a contract for the sale of goods rather than real property, how would Phelps v. Herro be decided under §2-610 of the Uniform Commercial Code, reprinted infra p. 1307?

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February 15, 2015

10.5.4.2 Notes - Phelps v. Herro

10.5.4.2 Notes - Phelps v. Herro

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