Stearns Salt & Lumber Co. v. Hammond

• Decision Date: 04 November 1914
• Docket Number: 2482.
• Citation: 217 F. 559
• Parties: STEARNS SALT & LUMBER CO. v. HAMMOND.
• Court: U.S. Court of Appeals — Sixth Circuit

217 F. 559

STEARNS SALT & LUMBER CO. v. HAMMOND.

No. 2482.

United States Court of Appeals, Sixth Circuit.

November 4, 1914

Charles McPherson, of Grand Rapids, Mich., for plaintiff in error.

H. T Heald, of Grand Rapids, Mich., for defendant in error.

Before WARRINGTON, KNAPPEN, and DENISON, Circuit Judges.

KNAPPEN Circuit Judge.

This is a suit by the trustee in bankruptcy of the Handy Things Company against the Stearns Salt & Lumber Company, under section 60b of the Bankruptcy Act (Comp. St. 1913, Sec 9644), to recover certain alleged preferential payments by the bankrupt. Plaintiff recovered verdict and judgment. The important facts are these:

On May 23, 1908, the Handy Things Company gave a trust mortgage for $35,000 upon its manufacturing plant and substantially all its property of every kind, to secure indebtedness to the Stearns Salt & Lumber Company (hereafter called the Lumber Company) and to a bank of which the mortgage trustee was cashier. One of the factories and part of the personal property was destroyed by fire on February 23, 1911. The mortgage trustee collected, under fire insurance policies upon the property so destroyed, $34,359.04. At this time the Lumber Company held a large unsecured running account against the Handy Things Company, in addition to its mortgage claim. At its request, the Handy Things Company gave the Lumber Company an order on the mortgage trustee to turn over to the Lumber Company $15,000 of the insurance money to be applied upon the open unsecured account mentioned. This payment and application were so made March 23, 1911. The remaining insurance money was applied upon the obligation secured by the mortgage, less $345 premiums upon the insurance policies in question. The mortgage indebtedness was thus entirely paid except about $15,000 still owing the Lumber Company, and the mortgage was continued in force. Between March 15 and March 31, 1911, which was in the month following that of the fire the Handy Things Company turned over to the Lumber Company certain machinery, lumber, and other supplies, at a price of $3,227.20, which was also applied upon the unsecured claim of the Lumber Company. On April 4, 1911, the Handy Things Company was adjudicated bankrupt, upon involuntary petition, the Lumber Company being the principal petitioning creditor, the mortgage trustee being appointed trustee in bankruptcy, as well as receiver. The Lumber Company filed in the bankruptcy proceedings an unsecured claim for $25,888.76, being the amount remaining after the application of the alleged preferential payments, viz., the $15,000 insurance money and the $3,227.20 referred to. The Lumber Company also made proof of claim under the mortgage. To both these claims objections were made on account of the alleged preferences, with request that the trustee be directed to bring suit for the recovery of the preferential payments. Both claims were allowed, and the suit ordered. The total remaining assets of the bankrupt, after payment of expenses, were applied upon the Lumber Company's secured claim, leaving, after the inclusion of interest, a deficit of $1,235.88, and of course leaving nothing (unless through the proceeds of this litigation) for application upon the unsecured claim of the Lumber Company, or upon the claims of other creditors, amounting to upwards of $17,000. The alleged preferences were all within 20 days of bankruptcy. The verdict and judgment were for the full amount of the alleged preferences.

At the close of the testimony, defendant moved for directed verdict on the ground that the $15,000 of insurance money never belonged to the bankrupt's estate, and is therefore not recoverable by the trustee. In this connection it is urged that the policies ran to the mortgage trustee, and not to the mortgagor, a proposition we shall later refer to. It is to be noted that the case presents no controversy respecting the right of the trustee in bankruptcy to the proceeds of insurance upon property conveyed fraudulently or preferentially, under the Bankruptcy Act or otherwise, as was the case in certain decisions relied upon by defendant, such as Forrester v. Gill, 11 Colo.App. 410, 53 P. 230, and Insurance Co. v. Grocery Co., 113 Ga. 786, 39 S.E. 483. The mortgage in question was free from taint of fraud or preference. Nor is there here any question of insurable interest on the part of the mortgagee, either on behalf of the insurance company or as between the mortgagor and the mortgage trustee. The insurance company has paid the loss. It must be conceded that, as between the mortgagor and mortgagee, the latter had the prior claim to the insurance money, to the extent necessary to satisfy the mortgage debt, and that it could properly receive the money directly from the insurance company.

The simple question is whether the insurance money to which the mortgagee voluntarily, and for its own supposed benefit, relinquished all claim under the mortgage became thereby, as between the mortgagor and mortgagee, the property of the mortgagor, and so within section 60 of the Bankruptcy Act. The mortgage obligated the mortgagor to insure the property for the benefit of the mortgage trustee, 'as a further security' for the mortgage indebtedness, and, in case of the mortgagor's failure to so insure, authorized the trustee to effect insurance, the premium paid to be an additional lien upon the mortgaged property, whose nonpayment immediately authorized foreclosure.

We find no evidence that the policies insured only the mortgagee's interest, as distinguished from a policy insuring the mortgagor, with loss payable to the trustee as his interest might appear, unless contained in the testimony of the trustee that:

'Under this mortgage I caused insurance policies to be taken out payable to me as trustee, and it was upon these insurance policies that I collected a little less than $35,000.'

In view of the provisions of the mortgage, we do not think the necessary inference from this testimony would be that the policies insured only the mortgagee's interest. In our opinion the natural inference would be that the usual practice in such cases was followed, viz., the issuance of the policies in the name of the mortgagor as the insured with the well known standard-policy mortgage loss clause, making loss, if any, payable to the mortgagee (trustee) as its 'interest may appear.' The statement that the insurance was effected under the mortgage naturally, we think, so implies. It is noticeable that the testimony is not that the policies ran to the trustee, or that they insured only his interest, but that they were 'payable' to him 'as trustee.' Under such a policy the mortgagor, under familiar principles, would plainly be entitled to the insurance, except so far as needed or desired by the mortgagee for the payment of his mortgage. But if the testimony is to be interpreted as meaning that the policy actually ran to the trustee, and did not in terms secure the mortgagor's...