Arkwright Mutual Insurance Co. v. Bargain City, USA, Inc.

• Decision Date: 14 February 1966
• Docket Number: Civ. A. No. 33485.
• Citation: 251 F. Supp. 221
• Parties: ARKWRIGHT MUTUAL INSURANCE COMPANY v. BARGAIN CITY, U.S.A., INC.
• Court: U.S. District Court — Eastern District of Pennsylvania

251 F. Supp. 221

ARKWRIGHT MUTUAL INSURANCE COMPANY v. BARGAIN CITY, U.S.A., INC.

Civ. A. No. 33485.

United States District Court E. D. Pennsylvania.

February 14, 1966.

COPYRIGHT MATERIAL OMITTED

George E. Beechwood, Philadelphia, Pa., for plaintiff.

Mesirov, Gelman, Jaffe & Levin, Edward Greer, Philadelphia, Pa., for defendant.

KRAFT, District Judge.

Initially before us was plaintiff's motion for summary judgment. After argument thereon, and a later argument ordered by the Court on one question not previously briefed or argued, the parties have stipulated of record that the Court shall adjudicate the matter as if each had filed a motion for summary judgment.

This case presents a rather unusual factual situation. Arkwright Mutual Insurance Company (Arkwright) sought injunctive and other relief against Bargain City, U.S.A., Inc. (Bargain City) with respect to a payment which Arkwright alleged Bargain City was about to receive from the United States to compensate Bargain City for property damage resulting from the crash of a naval aircraft.

The controversy between Arkwright and Bargain City involves the issue of ownership of $100,000, a part of the sum paid by the United States and now held in the Court Registry, pursuant to an order of May 28, 1963.

The material operative facts are undisputed. In the application of the law to these facts the parties differ widely.

Arkwright had issued a policy of insurance before August 27, 1961 insuring Bargain City, and others, against loss of rental income from the buildings and structures, designated therein as Store No. 10, in Montgomery County, Pennsylvania. Among the perils insured against was loss of rental income resulting from physical damage to the premises by the impact of aircraft. The policy was in effect when, on August 27, 1961, a jet aircraft, owned by the United States and operated by personnel of the Navy Department, crashed into the Bargain City store, causing substantial physical damage thereto, and resulting in actual loss of rental income to Bargain City in excess of $100,000. Though this loss was within the policy coverage, Bargain City made claim against the United States for the sundry damages caused by the plane crash, including loss of rental income.

Bargain City informed Arkwright that the Navy Department had agreed to recommend to the Director of the Bureau of the Budget that the United States pay $156,000 to Bargain City in settlement of its claim for loss of rental income, and that Bargain City had agreed to accept that sum in full satisfaction of that claim.

In March 1962, Bargain City requested Arkwright to advance $100,000, pending payment of the $156,000 to Bargain City by the United States. Arkwright assented and loaned $100,000 to Bargain City, under the terms of a written receipt and agreement dated March 23, 1962, and a loan receipt of like date. The agreement recited, inter alia, that as a result of the "crash," claim had been made by Bargain City against Arkwright for payment for loss of rental pursuant to the policy; that by agreement of the parties, however, such claim had been held in abeyance and Bargain City had made claim against the Department of the Navy for payment of all losses incurred as a result of the crash, including its claim for loss of rental; that Bargain City had now agreed to accept in full satisfaction of its claim against the Navy for loss of rental the sum of $156,000, and that Bargain City desired to obtain an advance of funds from Arkwright in the amount of $100,000 pending actual payment by the United States of Bargain City's claim. The agreement provided, inter alia,

"In consideration of the payment of $100,000 by Arkwright to Bargain City, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Bargain City agrees as follows:

* * * * * *

"2. Bargain City will pay to Arkwright all sums paid to it by the United States on account of its claim for loss of rental up to the amount of $100,000.

"3. At Arkwright's request Bargain City will execute and deliver such instruments of assignment or authority as will permit the disbursing authorities of the United States to make payment with respect to Bargain City's claim for loss of rentals directly to Arkwright provided, however, that it shall be a condition to or term of such instrument of assignment or authority that Arkwright shall forthwith pay over to Bargain City all sums paid by the United States in excess of $100,000."

The policy of insurance issued by Arkwright to Bargain City provided:

"Subrogation—This Company may require from the Insured an assignment of all right to recovery against any party for loss to the extent that payment therefore is made by this company * * *." (emphasis supplied)

After a meeting between representatives of Bargain City and the officials of the Navy Department, the Under Secretary of the Navy wrote to the Hon. David E. Bell, Director, Bureau of the Budget, on April 23, 1962, stating, in part:

"Bargain City, U.S.A., Inc., 2202 Walnut St., Philadelphia, Pa. On August 27, 1961, U.S. Navy FJ-3, Bureau No. 141392 while being flown by a naval aviator on a duly authorized flight, crashed into the Bargain City Department Store in Horsham, Pa., where the claimant managed the general operation of a mercantile business. As a consequence of the crash the claimant suffered losses of profits in the amount of $156,000 and damage to store fixtures in the amount of $72,404.34, which amounts the claimant has agreed to accept in full satisfaction of its claim.

Amount claimed $285,106.30; amount reported, $228,404.34."

On October 19, 1962, Bargain City filed a petition in this Court, proposing an Arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., and two receivers were appointed pursuant to 11 U.S.C. § 732. In Schedule A-3, filed by Bargain City in the Chapter XI proceedings, listing creditors whose claims are unsecured appears the following:

* Arkwright Mutual Insurance Co. ...... 100,000

* Advance re: Horsham airplane crash claim against U. S. Navy.

In Schedule B-3 in the same proceedings, listing choses in action, appears the following:

Claim against U. S. Navy Department arising out of Navy Airplane crash at Store #10, Horsham, Pa., on August 27, 1961. Claim adjusted, but not yet covered by Congressional appropriation $228,404.

Arkwright filed no claim in the Chapter XI proceedings, nor did it formally appear therein.

The Chapter XI proceedings terminated on March 12, 1963, by confirmation of an arrangement providing for payment to general unsecured creditors of 15% of their claims, payable in monthly installments. Arkwright has declined to accept payment as a general creditor.

Payment by the United States to Bargain City on its request for compensation was authorized by passage of a supplemental Appropriations Act of May 17, 1963, 77 Stat. 20. Bargain City received payment on June 8, 1963, and, as already noted, $100,000 of that payment is held in the Registry of this Court pending determination of these proceedings.

One of Arkwright's contentions is that the fund was impressed with a trust in its favor, at least to the amount of $100,000. We perceive no merit in this claim by which Arkwright seeks to transform a creditor-debtor relationship into a trust, in order to obtain a preferred status over other creditors in the Chapter XI proceedings. See Restatement of Trusts, 2d, §§ 9, 10 and 12.

Arkwright strongly urges that, under the terms of the written agreement of March 23, 1962, supra, it has an equitable lien upon the fund now in the Registry of this Court. We disagree.

"An equitable lien springs from an equitable assignment." In re Dier, et al., 296 F. 816, 819 (3 Cir. 1924); cert. denied sub nom. Ehrich, Trustee, et al., 265 U.S. 584, 44 S.Ct. 459, 68 L.Ed. 1191 (1924).

In Pomeroy's view the interest which equity recognizes, when obtained through an assignment or through an order which operates as an assignment, is in the nature of an equitable property, which, in his analysis is more than an equitable lien. Pomeroy regards it as an established doctrine in equity that an equitable assignment of a specific fund in the hands of a third person creates an equitable property in that fund. See Pomeroy's Equity Jurisprudence, 5th ed. Vol. 4, § 1280 and footnote 18 (p. 804).

The same authority states, p. 806:

"In order that the doctrine may apply, and that there may be an equitable assignment creating an equitable property, there must be a specific fund, sum of money, or debt, actually existing or to become so in futuro, upon which the assignment may operate, and the agreement, direction for payment, or order, must be, in effect, an assignment of that fund or of some definite portion of it. The sure criterion is whether the order or direction to the drawee, if assented to by him, would create an absolute personal indebtedness payable by him at all events, or whether it creates an obligation only to make payment out of the particular designated fund." (latter emphasis ours)

Pomeroy carefully distinguishes between an order on a future fund which operates as an equitable assignment and a mere promise to appropriate a future fund in discharge of an obligation or a mere promise to give an order on the fund. He states that American Courts "* * * require a present appropriation by order or otherwise, of a fund, whether existing or future, a mere promise or executory agreement to apply or to appropriate a fund does not, * * amount to an equitable assignment." Pomeroy's Equity Jurisprudence, supra, § 1283a.

"A mere agreement, whether by parol or in writing to pay a debt out of a designated fund, when received, does not give an equitable lien upon the fund, or operate as an equitable assignment of it. The agreement is personal merely." Jones on Liens, Vol. I, § 48 (emphasis supplied).

"To constitute an equitable lien on a fund, there must be some distinct appropriation of...