Security Nat. Fire Ins. Co. v. Schott Drug Co.

• Decision Date: 21 June 1939
• Docket Number: No. 7278.,7278.
• Citation: 129 S.W.2d 632
• Parties: SECURITY NAT. FIRE INS. CO. et al. v. SCHOTT DRUG CO. et al.
• Court: Texas Supreme Court

129 S.W.2d 632

SECURITY NAT. FIRE INS. CO. et al. v. SCHOTT DRUG CO. et al.

No. 7278.

Commission of Appeals of Texas, Section B.

June 21, 1939.

Error to Court of Civil Appeals of First Supreme Judicial District.

Action by the Schott Drug Company and another against the Security National Fire Insurance Company and others, to recover on fire policies. Judgment for plaintiffs was affirmed by the Court of Civil Appeals, 103 S.W.2d 979, and defendants bring error.

Judgments of the Court of Civil Appeals and of the trial court affirmed in part, and reversed and rendered in part.

Newton Gresham, King, Wood & Morrow, and Bryan & Bryan, all of Houston, and Frank S. Anderson and Terry, Cavin & Mills, all of Galveston, for plaintiffs in error.

Williams, Neethe & Williams, of Galveston, for defendants in error.

TAYLOR, Commissioner.

This suit was filed by defendants in error, Schott Drug Company and its assignee, First National Bank of Galveston, against Security National Fire Insurance Company and fifteen others, plaintiffs in error here, which had issued fire policies covering the company's stock of drugs and fixtures. Judgment was rendered in favor of the drug company for $18,000 for the loss of the stock, and for $3,000 for the loss of fixtures. The Court of Civil Appeals, all members sitting, affirmed the judgment. 103 S.W. 2d 979. The original opinion of the court was upheld upon rehearing by only a majority of the court in a brief majority opinion. Chief Justice Pleasants dissented upon rehearing, holding that the court erred in that part of its original opinion which affirmed the trial court's judgment for loss of the stock, and set forth his reasons for such holding in a dissenting opinion. 103 S.W.2d 985. There was no difference of opinion on the part of the members of the court with respect to the correctness of that part of the judgment awarding recovery for loss of fixtures and no complaint was made upon appeal of such recovery. Writ of error was granted because of the dissent upon application of the insurers.

The proof developed that the fixtures and stock of a corporation known as J. J. Schott Drug Company were utilized by the assured in the organization and operation of its business. The old company, after many years of business, had been declared a bankrupt on May 15, 1933. Between that date and June 1st following, when the present company was organized, the bankrupt stock, depleted to some extent by a bankruptcy sale conducted by the trustee in bankruptcy, A. C. Farb, was purchased by one Seaman, who in turn transferred it to the new corporation. The new corporation was organized by Farb, Seaman and one Mehan, ninety-eight per cent of the stock being owned after organization by Farb, who became its president and general manager. None of the stockholders of the new corporation had been stockholders of the old, nor had had any interest in it. The new corporation was a separate and distinct entity from the old. The new business continued in the old location to February 23, 1934, when the fire occurred.

The case turns upon the construction of the iron safe, or record warranty clause, which is set out in full in the majority opinion of the Court of Civil Appeals. Briefly analyzed, it requires, (1) the taking of inventories by the assured, (2) the making and preparation by the assured of a set of books, and (3) the keeping and preserving of such inventories and books.

The inventory requirements with respect to the time or times of taking are (1) the taking of at least one inventory each year and within twelve months of the one last preceding and (2) the taking of an inventory within thirty days after the date of the policy unless one has been taken by the assured within twelve months prior thereto. The requirements as to kind of inventory to be taken are that it shall be (1) an itemization of the stock on hand when taken and (2) that it shall be complete.

The bookkeeping requirement with respect to what the books shall reflect is that it shall clearly and plainly present "a complete record of business transacted." It is expressly stated in this connection that the term "complete record of business transacted" is used to show that it "is meant to include in said set of books, a complete record of all the property which shall * * * be added to the stock, and all of the property taken from the stock." (Italics ours.)

The requirements with respect to keeping and preserving the records kept are, (1) that the assured shall keep and preserve all those inventories taken during the current and preceding years, and all those taken after the issuance of the policy; and (2) that the assured shall keep and preserve all books on hand showing a record of business transacted during the current and preceding years, as well as all those made and prepared after the issuance of the policy. The alternative requirement as to where the books and inventories shall be kept and preserved is that the assured shall keep them either securely locked in a fire-proof safe during the time specified, or in some secure place not exposed to a fire which would destroy the building. The concluding essential requirement in the matter of preserving the records kept is that the assured must deliver them to the insurer for examination in event of a loss or damage insured against.

The companies defended on the ground that the terms of the record warranty clause had been violated by the assured's failing to take an inventory required, and also had either failed to keep the necessary records, or had failed to keep them in a place such as was stipulated, and that such records had been destroyed by the fire in question.

The undisputed evidence shows that the method used by the assured to keep what is claimed to be a complete record of its additions to stock by purchase was that when a shipment of goods arrived the bookkeeper made from the original invoice a journal record showing the name of the seller and the date and total value of the invoice. No record was made of the unit price, the total sum of the invoice only being recorded. The invoices were assembled in a filing cabinet outside the safe and in a place on the premises exposed to the fire, and were destroyed by the fire.

A similar method was followed in keeping a record of credit-sales. The journal showed the total of such sales by the month, but the books showed nowhere to whom made. Charge tickets were made giving this information, but they were destroyed by the fire, being kept in the safe for the current month only. Customer's accounts were kept also but such account sheets were taken out of the ledger at the end of each month and were filed in another book. Only those sheets covering a period of three months were salvaged after the fire. The sales tickets for the month current at the time of the fire were available, but no others were found. Such was the method employed by the assured of keeping in the regular course of business a set of books showing what goods were taken from stock and the manner of preserving such record.

The undisputed evidence discloses also that at the time of the issuance of certain of the policies not necessary to enumerate there was no inventory on hand taken by the assured, within the preceding year, and no inventory was taken by the assured within thirty days thereafter.

The assured contended that since the stock destroyed was employed in the drug business conducted continuously upon the same premises by the assured and its predecessor in business, the requirements of the record warranty clause with respect to the taking and keeping of inventories in so far as the companies designated were concerned, were sufficiently met by the production by the assured upon the trial of the inventory taken by its predecessor within twelve months of the issuance of the policies referred to, together with a set of books presently to be described.

The assured points out that it was not engaged in conducting any character of business other than the drug business and that it produced for inspection after the fire a set of four books which it claims presented substantially the records required to be kept and preserved. The first mentioned is the journal. The nature of its entries are pointed out above. The assured itself has the following to say descriptive of the record of the merchandise purchase-account presented by the journal: "The merchandise account in that journal also contains a record of all merchandise returned, that record consisting of entries charging the firms to which the entries were made with the amounts. * * * The records on the books of merchandise returned as well as of that purchased do not contain an itemization of the articles and as to the purchases consist of entries showing the date and total amount of each invoice and the seller's name and in cases of returned goods entries charging the firm to which they were returned with the value thereof." (Italics ours.)

The following is also the assured's own statement concerning the record presented by the journal's credit sales-account: "The journal also contains a complete record of the total credit sales made each month during the above mentioned periods, no credit sales having been made while the bankruptcy receiver was conducting the business. The entries as to the credit sales show the total amounts of such sales for each month but do not reflect the articles sold or the names of the purchasers." (Italics ours.)

It should be stated in this connection that the receiver conducted a bankruptcy cash sale for a period of twelve days prior to the time the new corporation purchased the fixtures and remaining stock.

The second book of the set is a customer's ledger which appears in the evidence in the form of four exhibits containing the accounts with various purchasers buying on credit in which the total amounts of the purchases made each month by each purchaser are shown.

The third is a...