Penn-National Hardware Mutual v. General Finance Corp.

• Decision Date: 10 December 1926
• Docket Number: No. 4792.,4792.
• Citation: 16 F.2d 36
• Parties: PENN-NATIONAL HARDWARE MUTUAL et al. v. GENERAL FINANCE CORPORATION.
• Court: U.S. Court of Appeals — Fifth Circuit

16 F.2d 36 (1926)

PENN-NATIONAL HARDWARE MUTUAL et al. v. GENERAL FINANCE CORPORATION.

No. 4792.

Circuit Court of Appeals, Fifth Circuit.

December 10, 1926.

Allen R. Grambling, of El Paso, Tex. (Jones, Hardie & Grambling, Lea, McGrady, Thomason & Edwards, and McBroom & Scott, all of El Paso, Tex., on the brief), for plaintiffs in error.

Wm. H. Burges and Joseph G. Bennis, both of El Paso, Tex. (A. H. Culwell, of El Paso, Tex., on the brief), for defendant in error.

Before WALKER, BRYAN, and FOSTER, Circuit Judges.

BRYAN, Circuit Judge.

This is an action to recover for losses insured against by a policy of indemnity insurance. The policy was dated May 10, 1924, and was issued by the defendant Penn-National Hardware Mutual in favor of the plaintiff, General Finance Corporation. It provided against "loss resulting from the violation of the terms of any trust receipt, mortgage or lease agreement, conditional sales agreement in which the assured shall have a pecuniary interest, which, for the purpose of this policy, shall hereinafter be known as obligations, by reason of the wrongful sale, mortgage, pledge, conversion, concealment, or disposing, by any person or persons who shall have executed an obligation to the assured, of any motor vehicle in the possession of said person or persons, or by the conversion of the proceeds of sale thereof by said person or persons, or by reason of the nondelivery to any person or persons, or fraudulent or fictitious sale of the motor vehicle described in said trust receipt, mortgage, conditional sale, or lease agreement (or bills of lading therefor), subject to the warranties, stipulations, agreements, and conditions hereinafter set forth."

The policy also contains the following provisions: "This entire policy shall be void if the assured has concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or in any case of fraud, attempted fraud, or false swearing willfully or intentionally done by the assured touching any matter relating to this insurance or the subject thereof whether before or after a loss." "If the assured shall make any claim, knowing the same to be false or fraudulent, as regards amount or otherwise, said insurance shall become void, and all claims thereunder shall be forfeited."

Paragraph XII of the form of policy usually issued by defendant required the assured to make monthly a physical checking of automobiles. That paragraph was not satisfactory to plaintiff, and upon its insistence was changed, so as to provide for a regular monthly checking of wholesale or dealer's obligations accepted as security for loans made by the assured. There remained unchanged a sentence in that paragraph reading, "unless at the cost of the company, however, the method of monthly checking adopted by the assured shall be acceptable to the company," except that for the word "checking" the word "check" was substituted. The American Surety Company was joined as a defendant by reason of its having become surety on the policy to the extent of $10,000.

Plaintiff's claim is based upon its acceptance of 93 retail obligations, representing mortgages upon that number of Paige and Jewett automobiles purporting to have been sold by the Cooke Motor Company to individual purchasers, and upon 7 wholesale obligations; that is mortgages by the Cooke Motor Company upon automobiles purporting to have been purchased from the factory. The retail obligations aggregated upwards of $105,000, and the wholesale obligations $7,916; but both classes of obligations included 15 per cent., or about $16,000, of profit which the plaintiff expected to make. As a matter of fact, automobiles bearing the numbers described in the obligations had been manufactured, but not a single one of them had ever been delivered to the Cooke Motor Company; so that all such obligations were fraudulent and fictitious, and did not represent any automobile that had ever been in its possession. Therefore the fraud of the Cooke Motor Company in issuing the obligations is established beyond dispute.

Plaintiff claims that it had no knowledge of the fraudulent and fictitious character of the obligations. The defenses interposed included the following: (1) That plaintiff did have such knowledge — in fact, was a participant in the fraudulent scheme — and should be denied any recovery whatever; (2) that recovery for the face of the obligations could not be had for the reasons (a) that, at the time the policy became effective, plaintiff had in its possession fraudulent and fictitious obligations of the Cooke Motor Company aggregating about $52,000, and worthless paper bringing the total up to nearly $100,000, which fraudulent, fictitious, and worthless paper was exchanged for equally worthless paper issued subsequently to the date of the policy; (b) that a...