Kelly's Auto Parts, No. 1, Inc. v. Boughton

• Decision Date: 27 January 1987
• Docket Number: Nos. 85-1530,85-1785 and 85-1808,s. 85-1530
• Citation: 809 F.2d 1247
• Parties: , 22 Fed. R. Evid. Serv. 630 KELLY'S AUTO PARTS, NO. 1, INC., Plaintiff-Appellant, v. Barry Nicholas BOUGHTON, Defendant-Appellee. Gene and Hazel ROBERTS, Plaintiffs-Appellees, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant-Appellant. YET FOO WONG, d/b/a China Boy Restaurant, Plaintiff-Appellant, Eleanor Chen, Intervening Plaintiff, v. TRAVELERS INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1247

809 F.2d 1247

55 USLW 2430, 22 Fed. R. Evid. Serv. 630

KELLY'S AUTO PARTS, NO. 1, INC., Plaintiff-Appellant, v. Barry Nicholas BOUGHTON, Defendant-Appellee.

Gene and Hazel ROBERTS, Plaintiffs-Appellees, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant-Appellant.

YET FOO WONG, d/b/a China Boy Restaurant, Plaintiff-Appellant, Eleanor Chen, Intervening Plaintiff, v. TRAVELERS INSURANCE COMPANY, Defendant-Appellee.

Nos. 85-1530, 85-1785 and 85-1808.

United States Court of Appeals Sixth Circuit.

Argued Oct. 3, 1986.

Decided Jan. 27, 1987.

Susan Tukel (argued), Denenberg, Tuffley & Bocan, Southfield, Mich., for defendant-appellee in No. 85-1530.

Howard E. Gurwin (argued), Farmington Hills, Mich., Richard M. Taubman, Rosenbaum, Bloom, Appel, Meyerson & Gallinsky, P.C., Detroit, Mich., for plaintiff-appellant in No. 85-1530.

Lance R. Mather, Smith, Haughey, Rice & Roegge, Grand Rapids, Mich., Lawrence P. Mulligan (argued), for defendant-appellant in No. 85-1785.

James R. Seastrom (argued), Muskegon, Mich., for plaintiffs-appellees in No. 85-1785.

James W. Metz (argued), Cross, Wrock, Miller & Vieson, Troy, Mich., for plaintiff-appellant in No. 85-1808.

Walter S. Schram (argued), Denenberg, Tuffley, Bocan, Jamieson, Black, Hopkins and Ewald, P.C., Southfield, Mich., for defendant-appellee in No. 85-1808.

Before KEITH, MARTIN, and WELLFORD, Circuit Judges.

WELLFORD, Circuit Judge.

This is a consolidation of three cases, each of which presents a similar issue. Kelly's Auto Parts No. 1, Inc. v. Boughton, is an appeal from a jury verdict against an insured who had sued under a fire insurance policy. The questions involved are whether the trial court committed reversible error by refusing to admit into evidence testimony that the insured's sole shareholder was not prosecuted for arson, and whether the court committed reversible error by admitting into evidence an unsigned "1982 Michigan Annual Report" purporting to estimate the value of Kelly's inventory.

The question whether, in a civil suit against an insurer for proceeds on a fire insurance contract, it is reversible error to admit evidence that the insured was not prosecuted for arson was presented in Roberts v. State Farm Fire and Casualty Company. A second issue was also presented: whether, in a jury instruction applying Michigan law to an insurer's affirmative defense of misrepresentation and concealment of material fact, it is reversible error to instruct that the insurer must prove "actual fraud, including fraudulent intent of the insured."

Yet Foo Wong v. Travelers Insurance Company, also involves an insured suing his insurer for proceeds under a fire insurance contract. The case presents two issues: whether the trial court committed reversible error by not allowing the insured to introduce testimony that no arson charges were brought against him, and whether refusing to adopt the insured's requested jury instruction that fires are presumed to be accidental was reversible error.

For the reasons hereafter stated, we AFFIRM in Kelly's Auto Parts, on both issues; we REVERSE on the first issue and AFFIRM on the second issue in Roberts; and we AFFIRM the judgment in Yet Foo Wong.

I. ADMISSIBILITY OF EVIDENCE OF NON-PROSECUTION FOR ARSON

A. Kelly's Auto Parts, No. 1, Inc. v. Boughton

On November 15, 1982, a fire damaged Kelly's Auto Parts' building and inventory. Cynthia McCabe, the president and sole stockholder of Kelly's, made a claim under Kelly's insurance policy with Lloyd's of London. Kelly's claimed that it suffered losses totaling $166,563.25; its insurance provided coverage for up to $190,000.00. Boughton, the only named defendant, is apparently an underwriter at Lloyd's. We refer to the defendant as Lloyd's.

After investigating the facts and circumstances surrounding the fire, Lloyd's denied Kelly's claim, alleging that Kelly's, or persons in privity with Kelly's, deliberately set the fire in an attempt to defraud Lloyd's and that Kelly's intentionally and fraudulently overstated its claim. Kelly's brought suit alleging breach of the insurance policy and demanded payment. The trial resulted in a jury verdict for Lloyd's, from which Kelly's appeals.

In support of its arson defense, Lloyd's called several witnesses, including two firefighters and two fire department arson investigators. The firemen testified that there were no signs of forcible entry into the building, that there was a noticeable smell of gasoline in the building, that at least one gas can was found inside the building, that the front door was locked and secured, and that the roof was intact when the fire department arrived. The arson investigators also testified to the use of gasoline in accelerating the fire. They testified that there were three separate fires, that there was no evidence of burglary or forcible entry, and that the fire at Kelly's Auto Parts was deliberately set and was not set by vandals.

Mrs. McCabe admitted on cross-examination that no gasoline was stored in the building. She also testified that when she purchased the business with her ex-husband in April of 1976, the purchase price of $76,000 included goodwill, equipment, fixtures, and inventory. The inventory was valued at $56,000. A previous fire in August of 1981, cause unknown, partially destroyed Kelly's Auto Parts.

Testimony at trial showed that when the November 15, 1982, fire occurred, business operations had been shut down and that Mrs. McCabe had reached an agreement to sell the business to Discount Tire. In preparation for the sale, an inventory was taken, which was introduced in three separate exhibits (one was the original inventory of auto parts taken by Mrs. McCabe; another was the inventory copied for purposes of submission to Discount Tire; and a third was a copy of the inventory verified by Mrs. McCabe and Mr. Senkowski). Kelly's also introduced a letter from Discount Tire, dated November 1, 1982, addressed to Kelly's, in which Discount Tire requested verification of the inventory. The letter reflected Kelly's cost of merchandise to be $104,595.35. The parties agreed on a purchase price of $125,000, including inventory. Due to the fire, the sale was not consummated.

Lloyd's sought to impeach Mrs. McCabe's testimony about the value of the inventory. Hal Lanstra, Lloyd's investigator, testified that Mr. Senkowski (of Discount Tire) told him, shortly before the fire, that Senkowski and McCabe had calculated the inventory to have a value of $69,698.00. Mr. Lanstra's testimony was admitted without objection by plaintiff's counsel. Both Mr. Senkowski and Mrs. McCabe also testified that, for purposes of the sales transaction, they had valued the contents of Kelly's, including inventory and fixtures, at approximately $90,000. In its proof of loss, Kelly's valued the fixtures at about $22,000. To impeach Mrs. McCabe's inventory valuation evidence, Lloyd's also introduced, despite objection, a purported "1982 Michigan Annual Report". The unsigned, unverified, handwritten report reflected an inventory value of $70,000 as of May, 1982. The document was admitted during Mrs. McCabe's cross-examination. It was not established that this report had been filed with the State of Michigan, and it was not certified or verified by signature or other indicia of filing by a representative of Kelly's.

At the time of the fire, according to Mrs. McCabe's testimony, there was an operative Guardian alarm system protecting Kelly's, which system used movement sensors to detect unauthorized entry into the building. On the night of the fire, Guardian did not call Mrs. McCabe to notify her of an unauthorized entry or of a fire on the premises.

Mrs. McCabe testified that her businesses, including the one in controversy, were showing losses for the years 1980 and 1981. She also testified that in 1980 Kelly's had gross sales of $218,498.13, and that in 1981 gross sales fell to $136,792.05. ¹ There was no evidence indicating that Kelly's financial condition had improved in 1982. In fact, Mrs. McCabe testified that at the time of the fire Kelly's owed in excess of $10,000 to the federal government for delinquent withholding taxes. Kelly's also owed Michigan National Bank $19,800, and Kelly's creditor list, prepared by Mrs. McCabe's accountant, showed numerous outstanding debts totalling roughly $13,150.00.

The last person in the building on the night of the fire was Mrs. McCabe. She was the only one with keys to Kelly's, and she went inside Kelly's the night before the fire to make sure everything was "secure". Kelly's made a $40,000 claim for the building under the insurance policy. Mrs. McCabe testified that she purchased the building for $9,700 in 1981 and allegedly made $18,000 in repairs to it. Lloyd's offered a real estate appraiser's testimony that the estimated value of the building was $27,700.

A pretrial motion in limine was filed by Lloyd's. The motion sought exclusion of evidence that arson charges were never brought against anyone connected with Kelly's. The motion was granted and Kelly's was not allowed to introduce into evidence that Mrs. McCabe was not prosecuted for arson.

B. Roberts v. State Farm Fire and Casualty Co.

The house and contents belonging to the Roberts (plaintiffs-appellees) were partially destroyed by fire on February 27, 1982. State Farm (defendant-appellant) insured the house, but refused to pay the claimed loss, taking the position that the plaintiffs either burned their house, or deliberately caused it to be burned. State Farm also alleged that the plaintiffs misrepresented and concealed material facts in presenting their claim and that, therefore, under Michigan law it was not liable under the policy. The case was removed to the federal district court from state court based upon diversity jurisdiction. State Farm appeals from the jury verdict for the plaintiffs of $65,690.00 plus costs and interest.

Before the fire, the plaintiffs were separated; Mrs. Roberts...