Kline Bros. & Co. v. Royal Ins. Co.

• Decision Date: 10 July 1911
• Citation: 192 F. 378
• Parties: KLINE BROS. & CO. v. ROYAL INS. CO., Limited.
• Court: U.S. District Court — Southern District of New York

192 F. 378

KLINE BROS. & CO. v. ROYAL INS. CO., Limited.

United States Circuit Court, S.D. New York.

July 10, 1911

On Rehearing, December 1, 1911. [Copyrighted Material Omitted]

Fried &amp Czaki, for plaintiff.

T. A Hammond, Herbert D. Mason, and Randolph W. Childs, for Liverpool & London & Globe Ins. Co., Ltd., and Insurance Co. of North America.

Hartwell Cabell, for London & Lancashire Fire Ins. Co.

Cardozo & Nathan, for Royal Ins. Co., Ltd.

HAND District Judge.

These are four actions upon fire insurance policies issued by four different companies. Various defenses are interposed by the defendant companies, of which not all apply to every defense. The most convenient way will be to take up the defenses as such, noting in each case those defendants to which each defense applies.

First Defense. That the policies were issued before the organization of the plaintiff.

The policy to the Royal Insurance Company was issued on July 22, 1908. The organization papers of the plaintiff were filed in the Secretary of State's office at Tallahassee on July 30th, and on the 31st of August letters patent were issued by the Governor and Secretary of State. Therefore the legal existence of the corporation dates from the 31st day of August, 1908. I have not been able to appreciate the force of the defendant's suggestion that the date of the first meeting of the directors December 16, 1908, had any materiality. Much has been said about the de facto existence of this corporation, but that doctrine can play no part here. There are no cases, so far as I know, in which it is held that the incorporators' mistake as to the time when the corporate existence begins will supply for the time being any of those formalities, upon which alone the state creates the legal entity. The judge below seems to have so thought in Whitney v. Wyman, 101 U.S. 392, 25 L.Ed. 1050, but it was not on appeal so treated. In the case at bar, however, it affirmatively appears that both Kline and Love knew that there was no corporation in existence on July 22, 1908, so that the point cannot arise as to the Royal policy. As to the London & Lancashire y. As to the London & Lancashire Insurance Company, it does not appear whether they supposed the filing of papers on July 30th effected an incorporation, nor is it in the least material whether or not they did. The doctrine of de facto corporations only helps out a corporation in whose organization there has been some defect after the incorporators have bona fide completed all the steps that they meant to take. It implies that they have in good faith completed the organization so far as they understand the statutory requirements, but that their understanding of those requirements is defective. In the case at bar whoever had charge of the organization of the corporation understood perfectly well what were the requirements of the law and completely fulfilled them so that the corporation when it was organized was regular to the letter. Kline, who was one of its agents, if he did suppose it to have been organized on July 30, 1908, simply made a mistake of the law, but that personal mistake of his did not create the corporation any sooner than it would otherwise have come into being. The case must, therefore, be determined upon the theory that at the time when each policy was made there was no corporation. Now I agree that the person insured was the corporation, and not the associates. Kline so swears in his version of the talk between himself and Love, and Love is not produced, nor is any reason given for his silence. That testimony is competent evidence to show what the parties meant by the words 'Kline Bros. Co.' or 'Kline Bros. & Co.' which they used in the policies. Besides, it was quite natural that Kline should think the corporation would be soon organized, and that it was more convenient to take out the policies in the name of the corporation. Perhaps Kline thought that by August 19th the corporation was already formed, in which case it would have been the proper person to insure.

The defendant's answer to this is that it was inconsistent with an intention to insure the corporation not yet formed, at the same time to intend to insure the goods immediately, as Kline very frankly says that he intends to do. This argument, however, confuses intention with purpose, once we assume, as we must, that they expressed the intention of insuring the corporation. If with that specific intent they erroneously thought that the policy would cover the goods at once, it was only a mistake of theirs as to the legal consequences of their acts, which does not change the actual consequences that the law will attribute to them. If they agreed to insure the corporation and only the corporation, the only insurance they effected was of the corporation, whether or not they expected that such an insurance would do more than in law it actually would.

What, then, was the effect of issuing two policies insuring the corporation before it existed? If the corporation subsequently ratified the agreement, it became theirs as much as though originally authorized while the corporation was in existence. Stanley v. Chester & Berkenhead Ry. Co., 9 Simon, 264; 3 Myl. & Cr. 773; Whitney v. Wyman, 101 U.S. 392, 25 L.Ed. 1050; Rogers v. N.Y. & T.L. Co., 134 N.Y. 197, 32 N.E. 27; Seymour v. G.F.C. Ass'n, 144 N.Y. 333, 39 N.E. 365, 26 L.R.A. 859. In the case at bar the corporation certainly ratified the contract on December 16, 1908, when Kline's accounts were passed. Moreover, even if, as president and manager of the company, Kline could not virtute officii take out insurance, the corporation ratified the policies by inaction after the corporation was formed, for they were in the corporation's possession. It is of no consequence, however, to determine when the ratification occurred at the earliest, for it certainly occurred before any fire.

Second Defense. The mortgage by Kline to Littmann.

This defense is urged by all the defendants. On June 15, 1908, Littmann, who was one of the original growers under the contract of April 15, 1908, made a contract for the sale of all his tobacco to Kline, at which time the tobacco had not been delivered at the warehouse. Any rights which Kline got by virtue of the agreement were subject to the prior agreement of April 15, 1908, to which both were parties, and any rights which Littmann got by the chattel mortgage of Kline on February 9, 1909, to secure a part of the purchase price, were similarly subject to the same conditions. The contract of April 15, 1908, has been the occasion of some discussion at the bar, and there are two possible interpretations which will fit it, between which, for the purposes of this cause, I do not think that it is necessary to decide. The first is that the corporation upon delivery got title to all tobacco sent to the warehouse by any of the adventurers, and that the latter retained at most only such interest in it as was necessary to protect them for the payment of the purchase price of 60 cents a pound. The other is that the corporation remained, as it were, the factor, or agent of some less definite kind, not vested with title, but authorized to sort, cure and pack the tobacco, to sell it, and to collect and distribute the proceeds as indicated by the agreement of April 15, 1908. In the first case the corporation insured its own tobacco when it did insure; in the second case, it insured the adventurers' tobacco which it held in a more or less anomalous agency and under some sort of bailment.

These being the possible relations of the parties, what effect, if any, upon the insurance had Kline's mortgage back to Littmann on February 9, 1909, which was to secure a part of the purchase price of 60 cents between them? All the policies are taken out in this form:

'Does insure Messrs. Kline Bros. Co. (or Kline Bros. & Co.) * * * to an amount not exceeding * * * to the following described property * * * on leaf tobacco * * * their own or held by them in trust or on commission or sold but not delivered, while contained in the * * * building * * * occupied as a tobacco ware and packing house.'

This form of policy has received construction several times by the courts, and is that especially adapted to the purposes of factors and commission merchants who frequently wish to cover a more or less fluctuating stock of merchandise in which they may have every sort of ownership. It was an apt description of the relations in this case between the corporation and the growers, whether the title was in the corporation, held in trust to the extent of the growers' lien upon it, or was in the growers, the corporation being only a factor to sort pack, and sell the goods. Was the subject of insurance incumbered by a chattel mortgage? If the title was in the corporation, this could not be so, for Kline had power to mortgage only what he had title to, and he had no interest upon that assumption except an interest in the proceeds to the extent of the purchase price and perhaps a corresponding equitable interest in the res prior to sale. If, on the other hand, the title remained in the growers, then Kline's mortgage did incumber the property. Did that incumbrance fall within the terms of the covenant? The covenant means that the subject of insurance must be incumbered by the insured or with his consent. Hosford v. Hartford Ins. Co., 127 U.S. 404, 8 Sup.Ct. 1202, 32 L.Ed. 198. Assuming the title to have been still in Kline, still the corporation was the insured and the corporation did not make the incumbrance, nor did it consent to the incumbrance. There has been much talk of whether Kline's connection at the time with the corporation, he, although no longer president, being a director and vice president,...