In re Little River Lumber Co.

• Decision Date: 16 March 1899
• Citation: 92 F. 585
• Parties: In re LITTLE RIVER LUMBER CO.
• Court: U.S. District Court — Western District of Arkansas

92 F. 585

In re LITTLE RIVER LUMBER CO.

United States District Court, W.D. Arkansas, Texarkana Division.

March 16, 1899

Williams & Arnold, for proving creditors.

Kirby &amp Carter, for opposing creditors.

The Little River Lumber Company is a corporation organized under the law of Arkansas. O'Dwyer & Ahern are merchants and partners doing business at Texarkana, Ark. They were both stockholders of the Little River Lumber Company, and owned a large majority of the stock. In 1897 O'Dwyer was treasurer. In 1898 Ahern became president, and O'Dwyer continued as treasurer. In the fall of 1897, about October the Little River Lumber Company, at a meeting of the stockholders, concluded to enlarge its business by running the mill on full time. It was solvent at that time, but to carry out the scheme to enlarge its business it required money. It had no means of raising it, except through the assistance of O'Dwyer & Ahern. It was accordingly agreed by the company and O'Dwyer & Ahern that the company should insert in all its insurance policies the usual clause making the insurance 'payable to O'Dwyer & Ahern as their interest might appear,' and deliver them to O'Dwyer & Ahern as collateral security for any advances they might make,

and also to secure them for guarantying the Texarkana National Bank for any moneys advanced by it to the Little River Lumber Company. This agreement was in parol, and was carried out. Accordingly the business was enlarged as contemplated. The company bought large bills of goods from O'Dwyer & Ahern and drew large sums of money from the Texarkana Bank. During the year 1898, as the old policies expired, new policies were taken out, containing the 'loss-payment clause' as before, and delivered to O'Dwyer & Ahern, who continued to guaranty the bank for advances, and to sell goods to the company. On December 29, 1898, the mill burned. At the time it burned, the company was insolvent, and had been since the spring of 1898, a few months after the agreement was entered into. At the time of the fire the company owed O'Dwyer & Ahern for advances made by the bank, and guarantied or taken up by them, and for goods sold, $18,511,90, and held insurance policies for $11,950, under the parol agreement referred to. This parol agreement was never expressly renewed, but the parties thereto continued the original arrangement, as stated, up to the fire, in December, 1898. On January 11, 1899, a petition in involuntary bankruptcy was filed against the Little River Lumber Company, and on the 14th day of January, 1899, it was adjudged a bankrupt. O'Dwyer & Ahern now offer to prove up claim against the bankrupt corporation for the full amount of their claim, less the amount of insurance policies. The referee held that they could not prove up their claim until they surrendered their policies. The case is before the judge for review, upon the application of O'Dwyer & Ahern.

ROGERS, District Judge (after stating the facts).

The question is whether the creditors should be compelled to surrender the insurance policies before they are allowed to prove up their claim. Or, to put it in another form, have they received a preference, within the meaning of the bankrupt law, and therefore not entitled to prove their claim until they surrender the policies, or the proceeds thereof, which in this case constitutes, if at all, the preference? It is important to understand the nature of the contract between the parties. It is settled law that O'Dwyer & Ahern acquired no interest whatever in the policies by reason of what is called the 'loss-payment clause,' for the reason that it does not appear that they had any insurable interest in the property covered by the policies. The law is believed to be settled in this country and in England that the assured must have an interest in the thing insured, and that, if he has no interest in the property insured when it is destroyed, he is not injured by the destruction, and therefore is not entitled to recover. Bibend v. Insurance Co., 30 Cal. 79, and cases there cited. I do not stop to inquire whether a mere stockholder in an insolvent corporation has such an interest in the property of the corporation as is insurable. I pass both these questions, to look further into the nature of the agreement; for it is evident that while both parties, no doubt, relied, at the time the agreement was made, on the 'loss-payment clause,' they also looked beyond that, because they agreed that the policies should be delivered to O'Dwyer & Ahern. Delivery was not necessary at all, if the 'loss-payment clause' was available to them. So far as that clause was concerned, possession of the policies was wholly unimportant. The clause spoke for itself, and gave the insurance companies notice as to whom the payment should be made. These policies, by the agreement, were to be delivered, and they were delivered, in the beginning, before the moneys or credits were extended, and afterwards, when renewed, immediately upon the renewal. From this it may be fairly inferred that the original agreement was by both parties regarded as in force when the renewals were made. What was the effect of this agreement? It simply pledged the policies as collateral for the moneys and credits given. It was not a sale of the policies. They were at all times the property of the lumber company, and it had only to pay what it owed O'Dwyer & Ahern, under the agreement, to be entitled to their possession. True, after the fire, the company, by its officers, formally assigned the policies to O'Dwyer & Ahern,-- as O'Dwyer says, to facilitate their collection; but if this assignment was void, under the bankrupt law, it did not deprive O'Dwyer & Ahern of the rights vested in them by the pledge. Prior to the fire these policies were not assets, like notes, mortgages, and other choses in action, to which creditors could look for security. Indeed, the company could not collect them. There had been no loss, and their collection depended on the loss. When the loss did occur, O'Dwyer & Ahern held them as collateral, and equity, eo instanti, assigns the proceeds to them, because they held the policies under the pledge. Cromwell v. Insurance Co., 44 N.Y. 42. In Bibend v. Insurance Co., 30 Cal., 86, the court said:

'Courts of equity are in the habit of giving effect to assignments of trusts and possibilities of trusts, and contingent interests and expectancies, whether they are in real estate or in personal property, as well as to assignments of choses in action. Contingent rights and interests are not ordinarily assignable at law, but they are in equity. Assignments of such rights and interests, in being, are upheld and enforced by courts of equity. And, more than this, these courts support and give effect to assignments of 'things which have no present actual or potential existence, but rest in mere possibility,--not, indeed, as a present, positive transfer, operative in praesenti, for that can only be done of a thing in esse, but as a present contract, to take effect and attach as soon as the thing comes in esse.' 2

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