In re West Norfolk Lumber Co.

• Citation: 112 F. 759
• Parties: In re WEST NORFOLK LUMBER CO.
• Decision Date: 07 January 1902
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

112 F. 759

In re WEST NORFOLK LUMBER CO.

United States District Court, E.D. Virginia.

January 7, 1902

Ivor A Page, for petitioning creditors.

Ross &amp Lambeth, for bankrupt.

Heath &amp Heath, for Farmers' Bank of Delaware.

R. C Marshall, for Merchants' & Farmers' Bank of Portsmouth.

White Tunstall & Thom, J. W. Willcox, Starke & Starke, J. L. McLemore, J. C. Parker, J. Saunders Taylor, and Hughes & Little, for sundry supply lien creditors.

T. S. Purdie, for general creditors.

The West Norfolk Lumber Company was on the 21st day of August, 1900, at the instance of its creditors, duly adjudged an involuntary bankrupt, the said company having been engaged since 1894 in the operation of a plant, situated at West Norfolk, Va., for the manufacture of rough lumber into flooring, ceiling, box shooks, and other dressed material. On the night of the 11th of May, 1900, the plant, together with a large portion of the lumber on hand, was consumed by fire. At the time of the fire, and for several years prior thereto, the lumber company was indebted to the Farmers' Bank of the State of Delaware, at Georgetown, in a large amount, for money borrowed by the lumber company, originally for the purpose of repairing its plant, and from time to time for the general conduct of its business. At the time of the fire the indebtedness amounted to $58,434.56, evidenced by notes of the company discounted at the bank, and by bills receivable assigned or discounted with the bank theretofore. This indebtedness was secured by policies of insurance issued upon the property of the company, which, by agreement between the bank and the company, had been made payable, in case of loss by fire, to the bank, as its interest might appear. The company was also indebted to the Merchants' & Farmers' Bank of the City of Portsmouth in the sum of $5,000, evidenced by a promissory note to the bank, secured by a deed of trust on the land and buildings of the lumber company, duly recorded, and also by two certain policies of insurance on the buildings of said company, aggregating $3,000, made payable to the trustee in the deed securing the bank's debt, as his interest might appear. After the fire, to wit, on the 24th day of May, 1900, the Gray Lumber Company filed in the clerk's office of the county court of Norfolk county a memorandum showing the amount and consideration of the claim held by it against the lumber company, and claimed a prior lien under sections 2485 and 2486 of the Code of Virginia, as amended, on all the property, real and personal, of the said company, other than that forming a part of its plant, to the extent of the money due them for supplies claimed to have been furnished the company, necessary to its operation. Shortly after the said sections of the Code of Virginia, filed similar memoranda against said lumber company. Subsequent to the filing of these liens, and before the bankrupt proceedings were inaugurated, the insurance companies having policies of insurance on the property of the defendant company paid to the Bank of Delaware the sum of $11,806.56, and to the Portsmouth bank $1,178.34, which amounts the said banks, respectively, applied as credits upon the debts due to them; and since the adjudication of bankruptcy the said insurance companies have paid into court on account of policies of insurance held by the Delaware bank $13,316.49, and on account of the Portsmouth bank $1,179.34,-- said last-named amounts having been so paid by agreement between the bankrupt's trustee, the insurance companies, and the banks, respectively, that it was to be without prejudice to the rights of any of the parties in interest.

WADDILL, District Judge (after stating case as above).

This case is now before the court upon exceptions taken to the report of the referee, D. Lawrence Groner, Esq., and the questions to be determined are: The owner of the insurance money aforesaid; whether the supply lien creditors have any claim thereto; the validity of the supply lien creditors' claims against the company; together with the order of priority, as among themselves, and what preferences, if any, have been given by the bankrupt to any of its creditors.

1. The claim of the Bank of Delaware to the fund derived from the policies of insurance on the burned buildings, which were payable to it at the time of the fire, will be considered. This money the bank insists is not a part of the bankrupt's estate, 'but belongs to it,' and that, as the amount is less than the indebtedness to the bank, the same should be applied, independently of the bankruptcy proceedings, as a credit on its debt; while the supply claimants, on the other hand, urge that the insurance money constitutes a part of the bankrupt estate, taking the place of the buildings and property burned, and should be applied in satisfaction of their liens under the Virginia statute; that said statute gives them a prior lien superior to any other lien by 'mortgage, deed of trust, hypothecation, sale, or conveyance'; that it is necessarily a superior claim to that of a mere pledge or hypothecation of policies of insurance; and cite, in support of their position, Fidelity Ins., Trust & Safe Deposit Co. v. Roanoke Iron Co. (C.C.) 81 F. 439.

The statute of Virginia is exceedingly broad, and it may be conceded that liens properly perfected under it take precedence of claims due for money advanced before the supplies are furnished; but the question presented here is as to whom the money actually belongs. If the bankrupt company had no interest in the money other than a mere equitable interest in any surplus that might arise after the payment of the debt for which the insurance policies were pledged, and there was no such surplus, then there would be nothing belonging to the company. There was no estate upon which the supply lien creditors' claims could attach. This arises from the character of the contract, viz., a policy of insurance against loss by fire, which is a mere personal contract of indemnity against a possible loss on account of the interest of an insured in the thing insured. Money derived on policies of insurance taken out by the mortgagor upon property is in no way liable for the payment of a lien or mortgage thereon, except by express agreement between the parties. Such contracts for indemnity do not attach to the property insured, nor go with the same as incident, by any conveyance or assignment, unless there is some special stipulation to that effect between the insurer and the insured. This is the result of the decisions, and it follows that the money received from policies of insurance, being less than the amount for which the pledge was made, held by the Bank of Delaware upon the property and estate of the bankrupt, taken out and assigned to it for its protection, belongs to the bank, and not to the estate of the bankrupt.

The supreme court of the United States has quite recently had under review this subject, and there seems to be no doubt from their decisions as to the correctness of the conclusions herein reached. Wheeler v. Insurance Co., 101 U.S. 439, 25 L.Ed. 1055, was a case of insurance upon certain buildings and improvements upon real estate upon which there was a lien, and on a certain cotton gin and cotton. Policies of insurance had been taken out by one who made advances to the owner of the property, and, a fire occurring, the holders of the notes, previously secured upon the same property, claimed the benefit of the insurance money, and insisted that the insurance was really taken out by the policy holders as the agent of the debtor, and for his benefit, and that the owner of the property having paid the premiums to secure the insurance, and having in the mortgage securing the notes on the property agreed to insure for the benefit of the mortgagees, and to transfer such policies to them, the holders of said notes were equitably entitled to the insurance, and that the persons who effected the insurance had in fact no insurable interest in the property insured; but the supreme court held that, the mortgage debtor having no insurance policy taken out and transferred to him, as was contemplated by the mortgage, there was no privity of contract between the note holders and the person in whose interest the insurance policies in question were taken out, and that, the policies having been taken out by a creditor, with the assent of the property owner, for his own protection, he was entitled to be paid his debt out of the insurance money.

The City of Norwich, 118 U.S. 468, 6 Sup.Ct. 1150, 30 L.Ed. 134, was a case of marine insurance, arising in a limited liability proceeding in admiralty, and in which the supreme court, in determining the extent of the owner's interest in the ship insured, held that the policy of insurance on the ship lost was no part of the owner's interest in the ship, and did not enter into the amount for which the ship could be held liable. In a word, the supreme court held the shipowner free from liability under the act of congress, and decreed him the money due himself under insurance policy taken to indemnify him against hazard incurred by the ship, leaving persons who had sustained loss by reason of the disaster to the ship unpaid. In this case Mr. Justice Bradley, in the course of a very exhaustive and learned opinion, in discussing the extent of the interest of the shipowner in the property destroyed, at page 494, 118 U.S., page 1156, 6 Sup.Ct., and page 144, 30 L.Ed., said:

'This view is corroborated by reference to a rule of law which we suppose to be perfectly well settled, namely, that the insurance which a person has on property is not an interest in the property itself, but is a collateral contract, personal to the insured, guarantying him against loss of

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