Hare & Chase v. National Surety Co.

• Decision Date: 18 March 1931
• Court: U.S. District Court — Southern District of New York
• Parties: HARE & CHASE, Inc., v. NATIONAL SURETY CO.

49 F.2d 447 (1931)

HARE & CHASE, Inc., v. NATIONAL SURETY CO.

District Court, S. D. New York.

March 18, 1931.

Cabell, Ignatius & Lown, of New York City (Hartwell Cabell and Milton B. Ignatius, both of New York City, and Joseph S. Clark, Sr., and Joseph S. Clark, Jr., both of Philadelphia, Pa., of counsel), for plaintiff.

Lord, Day & Lord, of New York City (Henry De Forest Baldwin, George De Forest Lord, and Sherman Baldwin, all of New York City, of counsel), for defendant.

MACK, Circuit Judge.

After the defendant moved for the appointment of an auditor in an action at law by the successor in interest of Hare & Chase, Inc., the obligee of a bond against the obligor, plaintiff's motion for a transfer of the cause to the equity side of the court to determine several equitable issues raised by the amended answer was granted. Reformation of the bond because of alleged mutual mistake, and enjoining of the further prosecution of the action at law because of an alleged equitable estoppel, were thereby sought.

Plaintiff's assignor, Hare & Chase, Inc. (hereinafter referred to as plaintiff), an automobile finance company, had its principal place of business in Philadelphia, Pa.; defendant, a surety company, in New York.

In 1920, defendant issued a bond indemnifying plaintiff against ultimate loss resulting from defaults in the installment obligations acquired by it in the course of its business; this ultimate loss was the deficiency after resale of cars, plaintiff's security for the obligations.

On October 1, 1922, the 1920 bond was superseded by two bonds, one covering losses on wholesale business, the financing by plaintiff of a purchase of cars by dealers from manufacturers or distributors; the other covering losses on retail business, the discounting by plaintiff of paper given by retail buyers of individual cars to the dealer seller. The latter notes were ordinarily without recourse on the dealer and were secured only by the car itself; in the wholesale transaction, the dealer was directly obligated on the notes discounted for the manufacturer or distributor.

All of these bonds covered paper acquired only from or through dealers whose names had been submitted to and approved by defendant; they recited that plaintiff would from time to time acquire automobile paper secured by "commercial or passenger vehicles, tractors or trailers." The wholesale 1922 bond stated that defendant's liability "shall be limited to the amount named in notice of acceptance." The 1922 bonds further limited the coverage to 70 per cent. of the wholesale and 75 per cent. of the retail purchase price of the car.

None of the bonds contained any reference to the computation or payment of the premiums other than the statement that defendant's obligation was in consideration of premiums computed at an agreed rate.

Each of the bonds bore an annotation "rate 1%," but, as to the 1922 bonds, that rate was afterwards reduced.

None of the bonds described the form or contents of reports to be rendered in respect of the business currently acquired or specified the time for premium payments. From 1920 on, however, reports were rendered monthly and the corresponding premiums remitted some weeks thereafter. The reports did not name the make of car, or indicate whether it was a passenger car, new or used, or some other motor vehicle. The last column of the form called for the amount of notes; the premiums were calculated on the amounts thereby reported.

Not all of plaintiff's business was entered in its contract register; such other dealings, including paper discounted for other finance companies, were not reported, and no premiums were paid thereon. Alfred Hare, who was in charge of the business, believed that under each of the bonds he had the right to report only such of the business as he desired covered by the bonds. While the reports currently rendered have been referred to as "liability reports," they were useless as such, inasmuch as the outstanding liability could at no time be determined from them. They reflected only the new business acquired, without any indication of the business run off.

Early in 1923, so-called "deductibles" under the bonds were dealt with by successive collateral undertakings; these "deductibles" were the definite amount or a certain percentage of losses which plaintiff alone was to bear before defendant's obligation to reimburse should be enforceable.

No formal agreement was prepared to cover the last increase of the deductible; in the course of conferences it was suggested that the bond itself should be rewritten to include the deductible in order to avoid misapprehension as to the extent of the coverage by those who might see only the bonds and not the supplemental agreements.

After lengthy negotiations during 1924, the bond in suit covering retail and wholesale transactions, with a collateral premium agreement, was executed some time in January, 1925, effective as of January 1, 1925. This bond indemnified plaintiff against ultimate loss upon secured notes held by it above a minimum deductible loss of $600,000 for each period of six months; in other words, an initial loss to that amount for each such period was to be borne by the obligee itself; in other respects, it followed substantially the texts of the 1922 bonds.

The report under the 1925 bond for the month of January, 1925, was not forwarded until May 5th; it was accompanied by a request that plaintiff be advised whether the form was satisfactory. While the record discloses no reply thereto, this form was continued without objection during the life of the bond. The simplified report, merely listing the states from which business emanated, and specifying, as to each state, only the total wholesale and the total retail paper, was apparently adapted only to determine the amount of premiums due and to enable defendant to report to the several insurance departments the business transacted by it. It did not reflect the nature of plaintiff's current business, the makes of cars financed, or the dealers from whom paper was purchased. Such detailed information, if required by defendant, could however have been obtained by inquiry of plaintiff or by examination of its records, in accordance with provisions of the bond.

1. Reformation. Because there is no provision in the bond expressly requiring plaintiff to render reports to the surety on newly acquired obligations, as an express condition precedent to coverage, the question of reformation is here presented, on defendant's contention that such a clause was omitted by mutual mistake.

Whether or not on a fair interpretation of the provisions of the bond as written and unreformed defendant is liable at law for losses on unreported transactions is not now before this court in this equity proceeding. The notes upon which loss was sustained and for which plaintiff claims indemnity under the bond were not reported to defendant in any form. Furthermore, premiums in respect thereto were never paid and were not tendered until after the losses in question had occurred and the controversy in respect to liability had arisen. The notes in question secured by 1,503 taxicabs, originally discounted by the General Finance Company of Indianapolis, were rediscounted by plaintiff for the latter company. They bore the full indorsement of the taxicab dealer that had made the sale, the Premier Motors, Inc. (manufacturers of the taxicabs), and the General Finance Company. Many of the sales involved were of fleets of taxicabs, as distinguished from the sale of an individual car to an individual purchaser.

The rediscounting by plaintiff was pursuant to a contract of March 31, 1924, by the terms of which plaintiff agreed to rediscount for the General Finance Company automobile paper up to $1,000,000. While, prior thereto, it had rediscounted such paper for other finance companies, such discounts were but rarely noted in its monthly reports to defendant.

Under the 1920 and 1922 bonds, monthly reports of the new paper acquired were sent to defendant, although, as heretofore stated, the bonds contained no express provision that made this necessary; defendant's approval of dealers alone was required thereunder. Premiums were paid on the basis of the reports. In addition to these so-called "liability reports," actual credit files of dealers whose paper was being discounted were sent to defendant until the 1925 bond became effective; thereafter, this procedure, not required by the bond, was discontinued.

While plaintiff continued to send defendant the monthly reports of new business, although in the greatly modified form above stated, during the effective period of the 1925 bond, no mention was ever made therein of the General Finance business and no premiums were paid thereon. When this business began under the contract of March, 1924, the General Finance Company was engaged almost exclusively in financing Ford car sales. In June, 1924, however, plaintiff began to rediscount fleet taxicab paper for the General Finance Company; the latter was only then entering upon this new field of activities. From June 20, 1924 to January 1, 1925, $1,300,796.50 of this paper was thus rediscounted.

The negotiations between plaintiff and defendant for the 1925 bond were begun in the spring of 1924 and consummated in January, 1925. This period of negotiation, therefore, overlaps plaintiff's discounting of the General Finance Company taxicab paper. The principal actors in the negotiations were Rathbone, defendant's vice chairman, the Hare brothers, and Watkins, a so-called "special agent" of defendant. It is largely to the testimony and correspondence of these men that we must look for the facts.

The main reasons for redrafting the 1922 bond were Rathbone's desire to increase the deductible initial loss to be borne by the obligee, to $600,000, and Alfred Hare's desire for a reduction in the premium rate. These inter-related matters were the focal...