United States v. McDonald Grain and Seed Company

• Decision Date: 18 November 1955
• Docket Number: Civ. No. 2997.
• Citation: 135 F. Supp. 854
• Parties: UNITED STATES of America, Plaintiff. v. McDONALD GRAIN AND SEED COMPANY, a corporation; Cecil McDonald; Public Service Commission of the State of North Dakota; The McCabe Company, a corporation; Tri-State Mutual Grain Dealers Fire Insurance Company, a corporation; and American Surety Company of New York, a corporation, Defendants.
• Court: U.S. District Court — District of South Dakota

135 F. Supp. 854

UNITED STATES of America, Plaintiff. v. McDONALD GRAIN AND SEED COMPANY, a corporation; Cecil McDonald; Public Service Commission of the State of North Dakota; The McCabe Company, a corporation; Tri-State Mutual Grain Dealers Fire Insurance Company, a corporation; and American Surety Company of New York, a corporation, Defendants.

Civ. No. 2997.

United States District Court D. North Dakota, Southeastern Division.

November 18, 1955.

COPYRIGHT MATERIAL OMITTED

Robert L. Vogel, U. S. Atty., Fargo, N. D., and Ralph B. Maxwell, Asst. U. S. Atty., Fargo, N. D., for plaintiff.

Mort B. Skewes, Luverne, Minn., and Herbert G. Nilles, of Nilles, Oehlert & Nilles, Fargo, N. D., for defendant Tri-State Mut. Grain Dealers Fire Ins. Co.

DAVIES, District Judge.

This is an action brought by the United States on a claim of the Commodity Credit Corporation against six defendants including Tri-State Mutual Grain Dealers Fire Insurance Company, a Minnesota corporation authorized to do business in North Dakota.

The claim against the insurance company arose out of a warehouse fire at Barney, North Dakota, on 14 June 1954 which destroyed merchandise worth $892.80 and Commodity Credit Corporation grain valued at $42,622.29. The liability of the company is based on the terms of its fire policy, insuring the defendants, McDonald Grain and Seed Company and McCabe Brothers Company (succeeded by The McCabe Company), as their interests might appear. Under this policy loss was payable sixty days after filing proof of loss. The proof was filed on 29 June 1954, and the company conceded that its liability accrued on 27 August 1954.

The instant action was commenced by the United States on 10 August 1954. On 13 January 1955 the United States filed its amended complaint demanding $42,622.29 plus interest from 14 June 1954. Service of the amended complaint was made upon the insurance company on 17 January 1955. On 7 February 1955 the company served its separate answer, admitting liability under the insurance policy to pay $43,515.09, but contending that no interest was payable because the money was being held awaiting the decision of the Court as to entitlement.

On 14 March 1955, pursuant to Federal Rules of Civil Procedure, Rule 67, 28 U.S.C.A., the insurance company filed its notice of motion, to be heard on 21 March 1955, for an order permitting the deposit in Court of $43,515.09 plus such interest and costs as might be required by the Court. The Clerk of this Court promptly informed the company's Minnesota attorney that U. S. Circuit Judge Charles J. Vogel, sitting by assignment, had disqualified himself from hearing the motion, and appointment of a new Judge was being awaited; and that it would be necessary for the company attorney to associate local counsel. On 28 March 1955, shortly after securing local counsel, the company attorney died, and it was not until the end of June, 1955, that a new company attorney from Minnesota made an appearance.

Hearing of the motion eventually was held on 9 September 1955. Attorneys for the company argued against the imposition of interest and moved that the company be permitted to deposit the principal sums into Court and then be dismissed from the action. The Court took the matter under advisement, requesting concurrent briefs on the problem of interest to be filed by 29 September 1955.

The problem is whether an insurance company must pay interest on a liquidated insurance debt which it voluntarily retained as a stakeholder for seven months without taking any action, while conflicting claims were being asserted in the courts, and for nearly the same length of time after filing a notice of motion to deposit the money into Court.

As a general rule, interest on money is allowed (1) when provided for by contract, (2) when authorized by statute, or (3) when treated as an element of compensatory damages for wrongful detention of money by a party liable to pay. New York Life Ins. Co. v. Cooper, D.C.N.Y.1944, 76 F.Supp. 976, 979.

(1) Interest is not allowable by contract in the present case since there was no express contract requiring the insurance company to pay interest on the insurance proceeds from the date liability accrued, but it is allowable by statute or as damages.

(2) By statute in North Dakota it is provided: "Interest for any legal indebtedness shall be at the rate of four percent per annum unless a different rate not to exceed 7% is contracted for in writing." N.D.Rev.Code (1943) Sec. 47-1405, first sentence (italics supplied). Interest is defined as "the compensation allowed for the use, or forbearance, or detention of money, or its equivalent." Id. Sec. 47-1404. Another statute provides: "The detriment caused by the breach of an obligation to pay money only is deemed to be the amount due by the terms of the obligation, with interest thereon." Id. Sec. 32-0310 (italics supplied). This Court relied on that statute in Drexel State Bank v. City of La Moure, D.C.N.D.1913, 207 F. 702, as the basis for holding that where no interest upon a contractual obligation to pay money is expressly specified for the period after maturity, the obligation shall bear interest from maturity at the legal rate fixed by statute in North Dakota.

Although the insurance company in the present case did not expressly contract to pay a specified rate of interest, the rate authorized by statute is applicable because of the company's failure to pay the loss when due. The legal rate at the place of payment is regarded as the agreed rate. Pana v. Bowler, 1883, 107 U.S. 529, 2 S.Ct. 704, 27 L.Ed. 424; Restatement, Conflict of Laws (1934), Secs. 418 and 413; Goodrich, Conflict of Laws (3d ed. 1949), 256. In other words, where the insurance contract contains no express provision as to interest, the legal rate at the place of performance will be read into the contract.¹ Therefore, by its breach of contract in failing to pay over the proceeds, the insurance company is obligated by statute to pay interest at the rate of 4% on the loss from the date it became due under North Dakota law.²

(3) Even in the absence of statute, under a fire insurance contract interest is ordinarily recoverable as damages from the date the insurance company becomes liable to pay the loss. Concordia Ins. Co. of Milwaukee v. School Dist. No. 98 of Payne County, 1931, 282 U.S. 545, 51 S.Ct. 275, 75 L.Ed. 528; J. Purdy Cope Hotels Co. v. Fidelity-Phenix Fire Ins. Co., 1937, 126 Pa.Super. 260, 191 A. 636. See Restatement, Contracts (1932), Sec. 337: When Interest is Recoverable as Damages. The theory is that when liability accrues the insurance company is no longer entitled to the insurance proceeds, and it receives an unmerited benefit by its use of the funds thereafter. See Twohig v. Lawrence Warehouse Co., D.C.Iowa 1954, 118 F. Supp. 322, 330; Restatement, Restitution (1937), Secs. 156 and 157; Restatement, Torts (1939), Sec. 913.

Interest will be allowed on equitable considerations to prevent unjust enrichment even though neither the insured nor the company has consciously acted wrongly. In Thorp v. American Aviation & General Ins. Co., D.C.Pa.1953, 113 F. Supp. 764, where the insured owners of a motion picture theater brought action against six insurance companies to recover for destruction of the theater by fire, and the amount of the loss was uncertain because of honest differences of opinion among the owners and the companies, the court nevertheless held that the companies were liable to pay 3% interest because they had use of the money for over two years. The Court stated that "to financial institutions (like banks), and to semi-financial institutions (like insurance companies) which derive much of their income from interest or capital gains on investments, money is the means through which income is derived. All the time the defendant insurance companies have been withholding payment they have had the use of the money due to the plaintiffs with the consequent possibility of realizing income therefrom. At the same time plaintiffs have not had the use of the money and have not had the opportunity to derive income from it. Under the circumstances, it would not be fair and just to refuse an allowance of interest to the plaintiffs." 113 F.Supp. at page 766 (italics supplied). The Court in that case expressly exercised discretionary power not only in awarding interest but in determining the rate of interest; and imposed interest at less than the legal rate because the insurance companies had not been unreasonable in their handling of the matter.

Different considerations would, of course, apply in the case of an insurance company acting with reasonable diligence. In New York Life Ins. Co. v. Cooper, D.C.N.Y.1944, 76 F.Supp. 976, where the insurance company on a life policy was constantly being advised by the parties that negotiations between conflicting claimants were approaching a settlement, and it did not interplead the claimants until over a year after the loss became payable, the court held that the company would not be required to pay interest because it had not been negligent in relying on the information concerning the expected settlement. The Court stated, 76 F.Supp. at page 979: "It was to the benefit of the claimants that an action for interpleader be not filed, that they be not put to this additional expense and that they be afforded every opportunity to compose their differences. Plaintiff should not be penalized for acceding to their desires. * * * In making this decision I have in mind the opinion of Cardozo, C. J., in Prager v. New Jersey Fidelity & Plate Glass Ins. Co., 245 N.Y. 1, 156 N.E. 76, 52 A.L.R. 193, in which he pointed out that if a claimant is to be made whole, interest should be awarded since he...