Batts Restaurant, Inc. v. Commercial Ins. Co. of Newark

• Decision Date: 06 January 1969
• Docket Number: No. 16935.,16935.
• Parties: BATTS RESTAURANT, INC., Plaintiff-Appellant, v. COMMERCIAL INSURANCE COMPANY OF NEWARK, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

406 F.2d 118 (1969)

BATTS RESTAURANT, INC., Plaintiff-Appellant, v. COMMERCIAL INSURANCE COMPANY OF NEWARK, Defendant-Appellee.

No. 16935.

United States Court of Appeals Seventh Circuit.

January 6, 1969.

George C. Rabens, Chicago, Ill., for appellant.

Samuel Levin, Daniel J. Leahy, Chicago, Ill., for appellee.

Before CASTLE, Chief Judge, and SWYGERT and CUMMINGS, Circuit Judges.

CUMMINGS, Circuit Judge.

Plaintiff, an Illinois corporation, operates Batt's Mama Restaurant at 114 East Cermak Road, Chicago, Illinois. In 1960, plaintiff purchased from defendant insurer, a New Jersey corporation, a $10,000 fidelity policy covering the loss of money or property sustained through any fraudulent or dishonest acts of employees.

In 1962, Rose Marie Wolf, a cashier at plaintiff's restaurant, started to misappropriate funds belonging to plaintiff. The losses were first discovered about November 15, 1964, and Miss Wolf was arrested three days thereafter and pleaded guilty to a felony charge. Nathan Batt had discovered Miss Wolf's guilt by noticing "that she was misplacing or taking meal checks and issuing them to waitresses and she was not ringing them up." After three or four days' observation, plaintiff "caught her tampering with the numbers on the meal checks and mishandling the checks," thus causing some of them to be missing.

To disguise her defalcations, Miss Wolf would substitute meal checks made out for smaller amounts than the actual meal checks, converting the difference to her own use. She destroyed the original, larger amount meal checks, so that only the forged meal checks remained in plaintiff's possession. Because of the destruction of the genuine meal checks and the failure to maintain other documentary safeguards, the company's records did not reveal the amount of Rose Marie Wolf's conversions.

Irving H. Waller, certified public accountant for plaintiff, stated in a deposition that he could not determine from plaintiff's books how much money had been taken by Rose Marie Wolf. In her deposition, Mrs. Rebecca Batt said that none of plaintiff's records would show how many meal checks were actually taken by Miss Wolf, and that Mrs. Batt could not tell how much money had been taken.¹ In her deposition, Miss Wolf testified that she did not know how much money she was taking each week or month, nor did she recall how many meal checks she gave to the waitresses, nor how much they would average. She said she never knew how much money she took from the plaintiff.

Plaintiff's complaint was filed in the Circuit Court of Cook County, Illinois, Municipal Division, and was removed by defendant to the district court pursuant to Section 1441 of the Judicial Code (28 U.S.C. § 1441). There the defendant moved for summary judgment. The policy contained the following general provision: "THE FOREGOING INSURING AGREEMENTS INCLUDING EMPLOYEE DISHONESTY COVERAGE AND GENERAL AGREEMENTS ARE SUBJECT TO THE FOLLOWING CONDITIONS AND LIMITATIONS:". One of these conditions and limitations appears in Section 6 of the policy, providing that "The Insured shall keep records of all the insured property in such manner that the insurance Company can accurately determine therefrom the amount of loss." The summary judgment motion was based on plaintiff's failure to comply with Section 6.

The district court held that the insured must comply with the record-maintenance provision contained in Section 6 of the policy and that there had been no such compliance. The court pointed out that the insurer has a legitimate interest in requiring the insured to keep accurate records since losses are more easily and earlier discoverable if accurate records are kept. The court noted too that the records-maintenance provision prevents fraud or overreaching by the insured. We agree that judgment was properly entered for the defendant for want of plaintiff's compliance with Section 6.²

First of all, we are met with a jurisdictional hurdle, for the complaint "prays judgment against the defendant in the amount of $10,000.00, together with lawful interest thereon, and, pursuant to the Statute of the State of Illinois relating thereto, for an additional sum of $500.00 for its attorneys fees as part of the taxable costs of this action, in addition to all other costs as provided by the laws of the State of Illinois." On our own initiative, we must be sure that more than the $10,000 jurisdictional minimum is in controversy. Peacock & Peacock, Inc. v. Stuyvesant Insurance Co., 332 F.2d 499 (8th Cir. 1964). But to justify dismissal, it must appear to a legal certainty that the claim is really for less than the jurisdictional amount. St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 289, 82 L.Ed. 845.

To recover $500 for attorney fees, plaintiff relies on Ill.Rev.Stats.1967, ch. 73, § 767, permitting recovery of attorney fees in the event that an insurer refuses to pay a claim where the "refusal is vexatious and without reasonable cause." In that event, reasonable attorney fees are to be awarded "as a part of the taxable costs."

Although the diversity provision grants federal jurisdiction of civil actions between citizens of different states only "wherein the matter in controversy exceeds the sum or value of $10,000, exclusive of interest and costs" (28 U.S.C. § 1332), it is well settled that the amount claimed for attorney fees must be added to the principal sum sued for in determining the amount in controversy, even though the state statute labels the fees as costs. Missouri State Life Insurance Co. v. Jones, 290 U.S. 199, 54 S.Ct. 133, 78 L.Ed. 267. Therefore, the requisite jurisdictional amount has been claimed here. Peacock & Peacock, Inc. v. Stuyvesant Insurance Co., supra, 332 F.2d at p. 502; cf. Powers v. Fultz, 404 F.2d 50 (7th Cir. 1968).

Plaintiff insists that substantial compliance with Section 6 of the policy is sufficient, citing Kaplan v. United States Fidelity & Guaranty Co., 255 Ill. App. 437 (1930), affirmed, 343 Ill. 44, 174 N.E. 834 (1931), and Beaird v. New Jersey Plate Glass Co., 157 Ill.App. 1 (1910). However, in those and other cases on which plaintiff relies,³ the insureds did maintain sufficient records to reflect their loss, whereas here plaintiffs concededly kept no records of its meal receipts "in such manner that the insurance Company can accurately determine therefrom the amount of loss" (Section 6), even though plaintiff's bookkeeping system was consistent with accepted accounting principles.

In Cox v. Aetna Casualty & Surety Co., 286 Ill.App. 515, 3 N.E.2d 964 (1936), the court enforced a recordmaintenance provision such as the one at bar, stating that it requires the insured to keep such records as will enable the insurer to determine its loss therefrom unaided by oral testimony (286 Ill.App. at p. 531, 3 N.E.2d 964).⁴ Therefore, in the absence of such records, the court upheld the trial court...