FIREMEN'S FUND AMER. INS. CO. v. Ken-Lori Knits, Inc.
| Decision Date | 08 May 1975 |
| Docket Number | No. 73 C 1242.,73 C 1242. |
| Citation | 399 F. Supp. 286 |
| Parties | FIREMEN'S FUND AMERICAN INSURANCE CO., Plaintiff, v. KEN-LORI KNITS, INC., et al., Defendants. |
| Court | U.S. District Court — Eastern District of New York |
Berman & Frost, New York City, for plaintiff.
Frank P. Greenberg, New York City, for Sapperstein, Hochberg & Haberman, Inc.
Borden & Ball, New York City, for Ambassador Factors Corp.
English, Cianciulli, Reisman & Peirez, Mineola, N. Y., for Ken-Lori Knits Inc. and Barrington Knitted Fabrics, Ltd.
David G. Trager, U. S. Atty., E. D. N. Y., Brooklyn, N. Y., for the United States.
Baker & McKenzie, New York City, for Courtaulds North America, Inc.
United States of America, Ambassador Factors Corporation (Ambassador), Sapperstein, Hochberg and Haberman, Inc. (Sapperstein) and Courtaulds North America, Inc. (Courtaulds) move for partial (Ambassador filed a further motion for total) summary judgment against a fund in the amount of $96,750 deposited by plaintiff in this interpleader action with the Treasurer of the United States pursuant to an order dated March 27, 1974.1 Ken-Lori Knits, Inc., (Ken-Lori) and Barrington Knitted Fabrics, Ltd. (Barrington) concede in their answer that they have no present interest in the fund and allege that their interest had been assigned to Ambassador. The other defendants have not answered the motions or appeared in opposition to the motions.
Ken-Lori was engaged in the business of converting yarn into cloth in premises which it leased at 500 Stagg Street, Brooklyn. It installed knitting machinery and equipment and conducted its business at that address. Ken-Lori operated a service to the trade by converting the yarn of others for which it charged a fee computed by the pound. Ken-Lori was a contract knitter and also converted its own yarn. All the machinery, equipment, fixtures and furniture on the premises at 500 Stagg Street were owned by Ken-Lori at all the pertinent times referred to herein.
Barrington delivered yarn to Ken-Lori for conversion to cloth. The interests that controlled Ken-Lori also controlled Barrington.2 Barrington was a domestic corporation with offices at 135 West 35th Street in the City and County of New York.
On January 4, 1972, Ambassador loaned Ken-Lori $100,000. Ken-Lori at the time of the loan or prior thereto, executed a security agreement in favor of Ambassador. Ambassador filed financing statements in the office of the Register of Kings County on January 27, 1972, and in the office of the Secretary of State of New York on January 28, 1972. At the time of the execution of the promissory note in favor of Ambassador and the security agreement, there existed a policy of fire insurance (policy number MXPL 158 87 75) issued by Firemen's Fund American Insurance Companies (Firemen's) effective April 10, 1971, for a term of three years, insuring "the furniture, fixtures, machinery and equipment usual to the manufacture of knitwear" and "the contents of yarn of Ken-Lori" in the amount of $300,000. A rider to the policy dated January 4, 1972 stated that:
"Loss, if any, due to the insured under all of the terms and conditions of this policy, to be payable to Ambassador Factors, Corp., 1470 Broadway sic, N.Y., N.Y., as interest may appear."
A rider to the same policy dated February 14, 1972, apparently intending to add Barrington as a named insured, named "Barrington Mills, Inc." and insured "contents of yarn while contained in the building" in the amount of $50,000. A subsequent rider dated May 15, 1972, corrected the name to read "Barrington Knitted Fabrics, Ltd."
On June 12, 1972, Ambassador loaned Ken-Lori an additional $100,000, and Ken-Lori executed a promissory note in the amount of $200,000 and a security agreement in favor of Ambassador. A rider to the security agreement provided:
". . . Debtor hereby appoints the Secured Party the attorney for the Debtor in obtaining, adjusting and cancelling any such insurance and endorsing settlement drafts and hereby assigns to the Secured Party all sums which may become payable under such insurance . . . as additional security for the indebtedness."
On the day of the fire, i. e., October 16, 1972, Handelsman retained Sapperstein to adjust the fire loss claim at a fee of 12% of the amount of recovery and assigned to Sapperstein the amount of the claim due to the extent of this fee. The retainer was signed:
"Robert Handelsman, Pres Ken-Lori Knits, Inc."3
The United States of America's claim of priority is based on assessments made against Ken-Lori and Barrington for withholding, Federal Insurance Contributions Act, and Federal Unemployment Tax Act taxes, penalties and interest. The taxes assessed against Ken-Lori are alleged to be as follows:
Assessment Unpaid
Taxable Notice And Assessed Balance
Period Demand Note Balance Due
3/31/72 11/20/72 $ 263.80 $ 287.53
6/30/72 3/14/73 12,082.56 13,146.60
9/30/72 3/14/73 8,485.77 9,088.30
12/31/72 3/14/73 2,600.64 2,768.04
12/31/72 3/14/73 470.59 504.71
The taxes assessed against Barrington are alleged to be as follows:
Assessment Unpaid
Taxable Notice And Assessed Balance
Period Demand Note Balance Due
9/30/72 6/18/73 $ 3,597.66 $ 3,905.83
12/31/72 6/18/73 2,091.91 2,173.97
12/31/72 6/25/73 225.62 239.37
6/30/72 5/14/73 824.15 870.46
The government claims that each notice of assessment was served on the taxpayer on the date of notice and demand above set forth. On March 16, 1973, notices of the liens against Ken-Lori were filed in the office of the Register of Kings County, and on March 19, 1973, in the office of the Secretary of State of New York. With regard to the Barrington liens, notices were filed in the office of the Register of Kings County on July 11, 1973, and on September 11, 1973.
Courtaulds lays claim to the portion of the proceeds due Barrington through a judgment obtained against Barrington in the amount of $29,244.26, which judgment was filed in the Supreme Court of the State of New York, New York County, on August 15, 1973, and docketed in the office of the Clerk of Kings County on August 20, 1973. Execution was issued to the Sheriff of the City of New York. The Sheriff served an "Execution with Notice to Garnishee" on Firemen's on August 30, 1973.
The policy limits were $300,000 for furniture, fixtures, machinery and equipment, and $50,000 for yarn and finished goods. The fire loss claim for furniture, fixtures, machinery and equipment was $154,858, and the claim for yarn and finished goods was $60,112.91. Firemen's representative and Sapperstein4 compromised the claims. The furniture, fixtures, machinery and equipment claim was settled for $75,136.60 and the yarn and finished goods claim for $21,985.56. Further adjustments were made in these figures and the final total settlement figure was $96,750.5 There was no allocation of the proceeds from the loss of contents, i.e., yarn and finished goods, between Ken-Lori and Barrington.6
At the time of the fire, Ken-Lori was indebted to Ambassador under the terms of the security agreement in an amount in excess of $200,000; Barrington was indebted to Ambassador in a sum in excess of $4,500. Ken-Lori and Barrington both assert that Ambassador has succeeded to their interests in the fund. Courtaulds concedes that Ambassador is entitled to $74,845.80 as a secured creditor of Ken-Lori.7
Ambassador's priority right to the proceeds from the fire loss of the furniture, fixtures, machinery and equipment is challenged primarily by the government. The government concedes that Ambassador may have had a perfected security interest with regard to the original collateral. Section 9-306(1) of the Uniform Commercial Code (UCC) defines proceeds as "whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of." According to the government, this definition does not include proceeds from an insurance policy. Two cases are cited in support of this position, Universal C.I.T. Credit Corp. v. Prudential Investment Corp., 101 R.I. 287, 222 A.2d 571 (1966), and Quigley v. Caron, 247 A.2d 94 (Me. 1968). In the first case, the court held that the casualty loss of a tractor, the collateral for the security agreement at issue, was not a sale, exchange, collection or other disposition for the purposes of UCC § 9-306(1). Therefore, the secured creditor was not entitled to the insurance proceeds paid on the loss of the tractor. Similarly in Quigley, the court stated that a security agreement does not create a continuing security interest in payments due from an insurance company on a loss. Both cases may be distinguished from the case presently under consideration, however, for in neither security agreement was there an obligation on the part of the debtor to procure insurance to protect the secured party who ultimately attempted to collect the insurance proceeds. In contrast, the court in In re Hunter, 9 UCC Rep. 928 (S.D.Ohio 1971) held that where the debtor was required by the security agreement to procure insurance on the collateral with a loss payable clause to the benefit of the secured party, then any proceeds from that insurance policy on the destruction of the collateral should go to the secured party as proceeds under UCC § 9-306(1). Where such an insurance...
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