In re Future Manufacturing Cooperative, 46033.

• Decision Date: 05 August 1958
• Docket Number: No. 46033.,46033.
• Citation: 165 F. Supp. 111
• Parties: In the Matter of FUTURE MANUFACTURING COOPERATIVE, Inc., a corporation, Bankrupt.
• Court: U.S. District Court — Northern District of California

165 F. Supp. 111

In the Matter of FUTURE MANUFACTURING COOPERATIVE, Inc., a corporation, Bankrupt.

No. 46033.

United States District Court N. D. California, S. D.

August 5, 1958.

Shapro & Rothschild, Daniel R. Aronson, Jr., James M. Conners, San Francisco, Cal., for trustee.

M. M. Smith, Hauerken, St. Clair & Viadro, San Francisco, Cal., for Scatena York Co., claimant and petitioner.

GOODMAN, Chief Judge.

The Scatena York Company petitions for review of an order of the Referee in Bankruptcy sustaining objections by the trustee of the bankrupt estate to proof of a claim which it filed against the estate. The claim of Scatena York is for $17,654.88 allegedly owing on the purchase price of refrigeration equipment sold to the bankrupt under a conditional sales contract. The contract provided that the bankrupt should insure the equipment against fire in favor of Scatena York, but that destruction of the equipment should not relieve the bankrupt from liability for the full purchase price. The bankrupt failed to insure the equipment. On its own initiative, Scatena York purchased a fire policy insuring its own interest.

When $17,654.88 of the purchase price was still unpaid, the equipment was destroyed by fire without fault on the part of the bankrupt. Scatena York recovered $810 in salvage. It was paid $13,244.20 on its fire insurance policy. The trustee objected to its claim against the bankrupt estate for the $17,654.88 owing on the purchase price of the equipment, on the ground that the claim should be reduced by the amount received from salvage and the fire policy. At the hearing upon the trustee's objections, Scatena York conceded that the claim should be reduced by the $810 salvage. But, it urged that the claim could not properly be reduced by the amount recovered on its fire policy because the bankrupt was not a party to the insurance contract and because the policy provided that the insurer should be subrogated to Scatena's rights against the bankrupt.

The Referee found that Scatena York had received payment on account of its claim in the sum of $13,244.20 from the proceeds of it insurance policy, plus the sum of $810 from salvage. He further found that neither Scatena York nor its insurer was entitled by virtue of the insurer's right of subrogation, to proceed againt the bankrupt estate for the $13,244.20 paid by the insurer on the fire policy. He therefore sustained the objections of the trustee and ordered the claim of Scatena York reduced by the amount it had recovered from salvage and its fire policy, and allowed it in the sum of $3,600.68. He further ordered that upon satisfactory proof of the amount paid by Scatena York as premiums on the fire policy, the allowed claim would be augmented by that amount.

In his certificate upon the petition for review, the Referee states the question tendered by the trustee's objections to proof of the claim of Scatena York as follows: "Where, under a contract of sale, the vendee is to procure insurance for the vendor and doesn't, is the vendee liable to the vendor or to the vendor's insurance company where the property is destroyed without fault?" He explains that his order was based on the conclusion that the vendor's insurer had no claim against the vendee for breach of his obligation to obtain insurance and that the insurance proceeds received by the vendor constituted a pro tanto mitigation of the vendor's damages for such breach. In support of this conclusion he refers to cases dealing with the measure of damages for breach of contracts to obtain insurance.

It is thus apparent that the Referee's decision was based upon an erroneous view of the question before the Court. The claim filed by Scatena York is not for damages for breach of the bankrupt's agreement to obtain insurance. All that is claimed is the balance allegedly owing by the bankrupt under the conditional sales contract on the purchase price of the refrigeration equipment.

What must be determined is the effect of the payment received by Scatena York under its fire policy upon its contractual right to recover the balance of the purchase price from the bankrupt.¹ This determination requires an appraisal of the interdependent rights and obligations of Scatena York, its insurer, and the bankrupt vendee.

At the outset, consideration must be given to the claim that the fire policy itself gave the insurer a right of subrogation to Scatena York's contractual right against the bankrupt. The subrogation clause in the fire policy provides as follows: "In the event of any payment under this policy the Company shall be subrogated to all the Assured's rights of recovery therefor against any person or organization and the Assured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The Assured shall do nothing after loss to prejudice such rights." This clause by its terms merely subrogates the insurer to any right of the assured to recover for the fire loss for which payment is made under the policy. It does not purport to subrogate the insurer to collateral rights of the assured which may indirectly diminish the loss to the assured. Cf. Fields v. Western Millers Mut. Fire Ins. Co., 1943, 290 N.Y. 209, 48 N.E.2d 489, 492, 146 A.L.R. 434. Thus any right the insurer may have to be subrogated to Scatena York's rights against the bankrupt can only arise by operation of law independent of any agreement between the insurer and Scatena York.

In the absence of any controlling agreement, there are three ways in which the law might adjust the rights and obligations of the vendor, Scatena York, its insurer, and the bankrupt vendee. (1) The vendor might be permitted to recover and retain both the full purchase price of the insured goods and the insurance proceeds. (2) The vendee might be given the benefit of the vendor's insurance and the vendor allowed to recover the purchase price less the insurance proceeds. (3) The insurer might be subrogated to the vendor's rights against the vendee to the extent of the insurance proceeds paid the vendor.

None of these three alternatives is free from objection. The first contravenes the public policy against a double recovery as well as that against placing an insured in a position where he might be tempted to cause a loss or be careless to prevent it. The second is inconsistent with the established concept of an insurance contract as a personal agreement between insurer and assured, and to some extent with the principle that an insurer is entitled to select its assured and determine its own moral risk. The third gives the insurer a windfall, if, as appears to be normally the case, its rates are not fixed in anticipation of such a collateral recovery.²

Precedent does not provide a clear-cut guide to the choice of these alternatives.³ It is the universal rule that an insurer who has indemnified his assured for a property loss is subrogated to the assured's rights against any person wrongfully causing the loss. This is true whether the assured's cause of action against the wrongdoer is in tort or contract.⁴ But, there is no such general agreement in decisional law as to the right of the insurer to be subrogated to collateral rights which the assured may have against persons who did not cause the loss.

In respect to certain types of collateral rights, the courts have generally favored giving the insurer a right of subrogation. Thus the prevailing rule is that an insurer upon indemnifying an insured mortgagee for the loss of his interest in destroyed mortgaged property is entitled to be subrogated to the mortgagee's right to enforce payment of the mortgagor's debt.⁵ Shippers' insurers, upon payment for goods lost or damaged in transit, have usually been subrogated to the shippers' contractual rights against the carrier.⁶ Insurers of leased property, upon paying the lessor for loss or damage to the property, are ordinarily subrogated to his rights against a lessee who has contracted to keep the property in good repair or to indemnify the lessor for loss or damage.⁷

But, when an insured vendor has been indemnified by his insurer for the loss of property subject to a sales contract, the tendency has been to give the vendee the benefit of the vendor's insurance rather than to subrogate the insurer to the vendor's right to recover the purchase price from the vendee. The leading English cases of Rayner v. Preston, 18 Ch.D. 1 (1881) and Castellain v. Preston, 11 Q.B.D. 380 (1883) originally adopted the rule that a vendee of destroyed real property had no claim to the vendor's insurance because the insurance contract was a personal one between insurer and vendor, and that the insurer was subrogated to the vendor's right to the purchase price to the extent of the insurance paid. But, this rule was changed in 1922 by a statute providing that the vendee should have the benefit of the vendor's insurance.⁸

In the United States nearly all of the jurisdictions, in which the question has arisen, have given the vendee of destroyed real property the benefit of the vendor's insurance.⁹ In Brownell v. Board of Education, 1925, 239 N.Y. 369, 146 N.E. 630, 37 A.L.R. 1319, the New York Court of Appeals denied the claim of a vendee to the benefits of the vendor's insurance. But, significantly in that case, the risk of loss was not on the vendee since the contract of sale permitted him to withdraw from the contract in the event of destruction of the property.

In the memoranda submitted in support of the petition for review, White v. Gilman, 1903, 138 Cal. 375, 71 P. 436 is cited as establishing the...