General Cigar Co. v. Lancaster Leaf Tobacco Co.

• Decision Date: 03 March 1971
• Docket Number: 20489.,Civ. No. 20229
• Citation: 323 F. Supp. 931
• Parties: GENERAL CIGAR CO., Inc., to its own use and to the use of Home Insurance Co., N. Y., and General Cover Underwriters Association, Plaintiffs, v. LANCASTER LEAF TOBACCO CO., and Farmer's Warehouse, Inc., Defendants. GENERAL CIGAR CO., Inc., to its own use and to the use of Home Insurance Co., N. Y., and General Cover Underwriters Association, Plaintiffs, v. James SCHULTZ and John V. Thompson, Defendants.
• Court: U.S. District Court — District of Maryland

323 F. Supp. 931

GENERAL CIGAR CO., Inc., to its own use and to the use of Home Insurance Co., N. Y., and General Cover Underwriters Association, Plaintiffs, v. LANCASTER LEAF TOBACCO CO., and Farmer's Warehouse, Inc., Defendants.

GENERAL CIGAR CO., Inc., to its own use and to the use of Home Insurance Co., N. Y., and General Cover Underwriters Association, Plaintiffs, v. James SCHULTZ and John V. Thompson, Defendants.

Civ. Nos. 20229, 20489.

United States District Court, D. Maryland.

March 3, 1971.

COPYRIGHT MATERIAL OMITTED

Donald A. Krach, Barrett W. Freedlander and Niles, Barton & Wilmer, Baltimore, Md., for plaintiffs.

Herbert F. Murray, Robert E. Powell and Michael A. Pretl, Baltimore, Md., for defendant Lancaster Leaf Tobacco Co.

W. Hamilton Whiteford and William B. Whiteford, Baltimore, Md., and Rudolph A. Carrico, LaPlata, Md., for defendants Farmer's Warehouse, Inc., James Schultz, and John V. Thompson.

HARVEY, District Judge:

On March 27, 1966, a fire occurred in a tobacco warehouse in Hughesville, Maryland, belonging to Farmer's Warehouse, Inc. ("Farmer's Warehouse"), completely destroying 7526 bales of tobacco owned by General Cigar Co., Inc. ("General Cigar"). The tobacco was insured under two separate policies issued by Home Insurance Company and General Cover Underwriters Association, who paid General Cigar a total of $429,086 for its loss and received "subrogation receipts" in return. As subrogees, the two insurance companies now seek reimbursement in these two civil actions from Lancaster Leaf Tobacco Company ("Lancaster Leaf"), which arranged for the purchashing and storage of the tobacco, from Farmer's Warehouse and from the latter's owners and operators, James Schultz and John V. Thompson.¹ Jurisdiction exists because of diversity of citizenship and the amount of damages claimed.

Having paid General Cigar for its loss, the plaintiff insurance companies, as subrogees, have alleged in two separate counts of the amended complaints negligence and breach of contract on the part of all the defendants. In addition, the amended complaints contain a third count asserted against only Farmer's Warehouse and the two individual defendants. This count is based upon a theory of absolute liability because of the alleged failure of such defendants to comply with § 51(a) of Article 48, Annotated Code of Maryland (1965 Repl.Vol.), a Maryland statute which requires the proprietor of every privately-owned tobacco warehouse to insure the contents of his warehouse against fire, subject to certain exceptions. Farmer's Warehouse, in turn, has filed a cross-claim against Lancaster Leaf, alleging breach of contract by the latter in failing to obtain insurance and negligence in storing and stacking the tobacco.

Presently before the Court are (1) plaintiffs' motions for partial summary judgment against defendants Farmer's Warehouse, Shultz, and Thompson solely on the issue of liability under the third count; (2) defendants' motions to dismiss the third count; and (3) defendants' motions for judgment on the pleadings as to all counts. In support of their respective motions, the parties have relied upon the extensive discovery undertaken to date in these cases, including numerous depositions that have been filed. In view of the depositions and exhibits which have been submitted in support of the motions, this Court will, pursuant to Rules 12(b) and (c) of the Federal Rules of Civil Procedure, consider all the pending motions to be for summary judgment or partial summary judgment.

The essential facts are not in dispute. Lancaster Leaf, a subsidiary of Universal Leaf Tobacco Company, has long been in the business of buying tobacco both on order for various cigarette and cigar manufacturers and also on its own behalf for subsequent resale to such manufacturers. Since about 1960, it has bought tobacco for the account of General Cigar, a New York manufacturer, receiving a commission on the purchase itself and charging additional sums for baling, storage, and processing. From April through July of 1964, Lancaster Leaf bought for General Cigar's account about 4 million pounds of 1963 Maryland leaf tobacco from various suppliers, each of which packed the purchased tobacco into bales. Since Lancaster Leaf had agreed to undertake processing and storing for General Cigar, it began moving this tobacco into its storage warehouses in Lancaster, Pennsylvania, as it was purchased and baled.

Finding that it had space only for the first 2.7 million pounds, Lancaster Leaf requested one of its suppliers, Free State Tobacco Co., Inc., ("Free State"), to arrange for continued storage of the remainder of the tobacco, as it was bought, in facilities maintained by Farmer's Warehouse.² Although Farmer's Warehouse was not generally in the business of storing tobacco for prolonged periods of time, it agreed with Free State to let Lancaster Leaf use a small auction warehouse building for storage until around the middle of April, 1965, when that facility would be needed for the sale of the 1964 crop. On May 27, 1964, Free State wrote Farmer's Warehouse confirming this temporary storage agreement, and promising that the tobacco "will be insured by Lancaster Leaf Tobacco Co.," on behalf of whom Free State represented it was acting as agent. A copy of such letter was sent to Lancaster Leaf. Subsequently, on October 20, 1964, Lancaster Leaf wrote to General Cigar, confirming the former's purchase of tobacco in the latter's behalf and stating:

"The tobacco in this purhase will be insured by us, or our suppliers, from the time it is purchased until it is packed at a valuation of 30 cents per pound with no premium cost to you. "We are moving the tobacco as it is packed into our storages at which time you will cover with insurance." (Emphasis added)

General Cigar did in fact already carry two "manufacturer output policies" issued by Home Insurance Company and General Cover Underwriters Association, which covered all property purchased for its ultimate account or use by its "agent or others or stored in its name or in the name of others." It is undisputed that the tobacco in question, though located in the warehouse owned by Farmer's Warehouse, was covered by these policies.³

In the spring of 1965 (which was the beginning of the 1964 tobacco auction season), Lancaster Leaf was still unable to provide storage space in its own facilities. It therefore moved General Cigar's tobacco into an unused quonset hut owned by Farmer's Warehouse with the understanding that the agreement of May 27, 1964 would remain in effect and the tobacco would be removed as soon as possible. The entire 7526 bales remained in storage there for slightly more than a year until, on March 27, 1966, the aforementioned fire broke out, destroying the quonset hut and its contents.

Plaintiffs' Rights as Subrogees

Suing here as subrogees, the insurance company plaintiffs possess only those rights against a third party which their insured might have, and any action taken by such insured which would bar its recovery against a third party would also be binding on the insurers. This rule was clearly recognized by the Maryland Court of Appeals in Poe v. Philadelphia Casualty Co., 118 Md. 347, 84 A. 476 (1912), at page 353, 84 A. at page 478:

"In 27 Amer. & Eng. Enc. of Law 212, the author of that article, says: `The surety is entitled to all the rights of the person to whose place he is subrogated, but to no greater rights.' And again, on page 206, he says: `The rights acquired by a party entitled to subrogation cannot be extended beyond the rights of the party under whom subrogation is claimed. Subrogation contemplates some original privilege on the part of him to whose place substitution is claimed; and where no such privilege exists, or where it has been waived by the creditor, there is nothing on which the right can be based. While a surety who pays the debt of his principal is subrogated to the rights of the holder of the claim, he takes such rights subject to all disqualifications and limitations which attached to them in the hands of his predecessor.'

"It is clear from these accepted definitions that the only element of substitution in subrogation is of one person in the place of another; and that the person so substituted can exercise no right not possessed by his predecessor, and can only exercise such right under the same conditions and limitations as were binding on his predecessor." (Emphasis in original)

See also Western Casualty & Surety Co. v. Brooks, 362 F.2d 486, 491 (4th Cir. 1966); Security Ins. Co. of New Haven-The Connecticut Indemnity Co. v. Mangan, 250 Md. 241, 245-246, 242 A.2d 482 (1968); Maryland Title & Escrow Corp. v. Kosisky, 245 Md. 13, 225 A.2d 47 (1966); 11 Appleman, Insurance Law & Practice § 6505 (1944); 13 Maryland Law Encyclopedia, Insurance § 274 (1961), at 60.

In analyzing the rights and obligations of the parties here, this Court must then in the first instance consider them insofar as General Cigar, the owner of the destroyed tobacco, is concerned. Any conditions or limitations to General Cigar's rights against the defendants, resulting from agreements to which General Cigar was a party or otherwise, must necessarily attach to the claims being asserted here by the insurance company plaintiffs.

Applicability of the Maryland Statute

Under Count 3 of the amended complaints, the plaintiffs assert a right to recover from Farmer's Warehouse and its owners and operators because of § 51(a) of Article 48, Annotated Code of Maryland (1965 Repl.Vol.). That statute provides as follows:

"§ 51. Insurance (a) Duty to provide; charge for expense. —The proprietor or manager of every warehouse except the State tobacco warehouses holding tobacco for sale or storage shall keep an open policy of insurance upon the contents of his warehouse sufficient to cover every loss by fire, and coverage for loss by water if same may be obtained at reasonable cost,

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