
    JOHN A. TAYLOR et al. v. GLOBE & RUTGERS FIRE INSURANCE COMPANY AND THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA.
    Eastern Section,
    December 19, 1931.
    Petition for Certiorari denied by Supreme Court, March 9, 1932.
    
      Cos, Taylor & Epps, of Johnson City, for appellants.
    Miller, Seiler & Hunter, of Elizabethton, for- appellees.
   PORTRUM, J.

On the 31st day of August and the 2nd day of

September, 1925, John A. Taylor purchaser the stock of goods and fixtures of the Buladeen Supply Company, a partnership composed •of D. R. Grindstaff, S. R. Estepp, and Jake Shoun, located on Stony Creek, in Carter County, Tennessee, for the purchase price of $2578.52, evidenced by twenty-five $100 notes, and one note of $78.52, payable consecutively on the first of each month, and to secure the payment an attempt was made to retain the title in the seller under a conditional sales contract. But as additional security Taylor and wife executed a trust deed upon their home, securing the twenty-six notes. The purchaser went into possession and began to carry on a retail mercantile business.

On the 18th day of February,. 1926, the purchaser, John A. Taylor, procured, or continued fire insurance covering the stock of goods and fixtures, by insuring his merchandise in the sum of $2000, and his fixtures in the sum of $150; this coverage was carried by two companies, each issuing a policy in the sum of $1075.

On the night of March 8, 1926, the store and all its contents were destroyed by fire. The insured filed proof of loss, and upon request filed an additional and supplemental proof of loss; thereafter he was called by the attorney representing the insurance companies and examined under oath in reference to his method of bookkeeping, for the purpose of determining if the iron safe clause of the policies had been violated. From this evidence the companies denied liability upon the policies, and expressed their intention to resist payment of the claims, for the reason the insured had not complied with the iron safe clause of the policies.

In the meantime the insured had assigned his claims under the policies to his creditors, the former partners of the Buladeen Supply Company, and the holders of the unpaid $100 purchase money note series. His general creditors learning of this had filed an involuntary petition in bankruptcy against him, and because of this the secured creditors, and the insured, agreed to set aside the assignment, by making another assignment to Lee F. Miller, Attorney for the insured, as Trustee, to secure the claims of all creditors, named in the assignment, and in this manner and for this purpose “John A. Taylor hereby joins in assigning, selling, delivering and passing to the said Lee F. Miller, Trustee, all their rights, title, claims, interest and equity, of every kind and character, and without exception or reservation, in and to said policies and said insurance contracts, and any proceeds or avails to be derived therefrom, for the purpose and to the end that he, as representing all of the parties hereto, shall negotiate, institute and prosecute claims and demands, or suits, if necessary, against one and both of said insurance companies, for the purpose of collecting the proceeds and avails thereof by law; or, for the purpose of negotiating and consummating compromise or settlement with one or both of said companies, all to the end of securing in the quickest time and way, the maximum amount therefrom; and which trust the said Lee F. Miller hereby accepts without incurring any obligations, whatsoever, excepting to properly account for any funds coming into his hands by the proper pro rata distribution thereof, as hereinafter explained, after making deductions for fees and expenses in connection with the collection of same.”

Then follows the manner of disposition of the proceeds realized on a pro rata basis, and then provides “said net avails thus ratably distributed, or to give the said Taylor proper credit therefor, and to be an extinguishment of the said Taylor’s indebtedness to them to that extent only.” Having thus secured the claims of all creditors, the petition in bankruptcy was dismissed.

The Trustee began negotiations with counsel representing the insurance companies for a settlement of the claim. The companies denied liability because of an alleged violation of the iron safe clause; and particularly this provision of the clause: “ (2) That the insured shall keep a set of books showing a complete record of business transacted, including all purchases and sales both for cash and credit;” but the companies consented to negotiate.

These negotiations v'ere carried on by correspondence; the companies offered to settle on the basis of forty per cent of the claims, and the Trustee and his legal associate then apprehensive of their ability to reduce the claims to judgment because of the failure of the insured to keep a book account of his cash sales, concluded it was advisable to accept the forty per cent offer. (The Trustee states further that he was not aware that the insured had any books in his safe upon which to base a claim of loss.) Having determined to accept the offer of settlement the Trustee communicated with the creditors named in the assignment and with the insured Taylor, for the purpose of obtaining their assent to the settlement. The creditors assented and authorized the settlement, but the insured Taylor would not agree to the settlement. These facts were communicated by the Trustee to counsel representing the companies, with the offer on the part of ■ the Trustee to 'make the settlement, notwithstanding the objection of the insured, if the companies would recognize his authority to act independently under his trust agreement. Counsel representing the insurance companies then communicated with the adjuster, who was representing and carrying on the compromise, and stated that the Trustee, Miller, was reliable, and in effect recommended the acceptance of the Trustee's offer to make the compromise independent of the insured. The adjuster writes counsel representing the companies referring to the reliability of the Trustee, and relying on the Trustee’s representation of his power to act independently, accepted the proposition on behalf of the companies with the following provision, namely, that the creditors named in the assignment join with the Trustee in executing the release.to the companies. The Trustee procured the signatures of the creditors and assigned and transmitted to counsel representing the companies the release, to be forwarded to the home offices of the companies, and checks representing the settlements Were turned over to the Trustee, but before he cashed the checks he received a communication from the insured protesting against the settlements, and threatening to hold him personally liable for making the settlements over his objection and protest. The insured called upon the Trustee who then claimed to have first learned that the insured in fact had books in the safe at the time of the fire from which proof of loss could be made, and the Trustee immediately returned the checks with the statement that the compromised agreement was made under a misapprehension of facts.

This suit Was then instituted in the name of the Trustee and the insured against the two insurance companies, to recover upon the two policies of insurance. The bill refers to the-Trustee’s compromised settlement, but alleges it was procured through fraud on the part of the defendant companies. By an amendment this charge of fraud was modified so as to exonerate counsel representing the insurance companies. The bill prays for general relief.

The defendants answered the bill setting up the compromised settlement and relied upon its binding force. The allegations of fraud were denied. But as an alternative the companies defended upon the ground of the violation of the iron safe clause by the insured. The answer was then filed as a cross-bill seeking relief upon the compromised agreement, and asking for a penalty of twenty-five per cent against the insured because of his failure to carry out tbe agreement. Tbe cross-bill was answered and “it is denied that tbe minds of all of tbe parties ever met on tbe subject of tbe alleged compromised settlement. . . . It is denied tbat any final settlement was reached by and between all tbe parties, or tbat any fair settlement was ever sought to be reached by tbe defendants. Tbe cross-defendants deny tbat tbe defendants are acting or have acted in good faith in this matter. . . . It is also denied tbat tbe defendants have tendered to tbe complainants any sums whatever in such way and manner as to amount to a legal tender.”

Tbe Chancellor first disposed of tbe issues raised under tbe cross-bill, and held tbat tbe Trustee’s powers were analogous to tbe powers of an agent, and SO' be bad no authority to act over tbe protest of one of bis principals and bind tbe principal. That tbe insured bad such an interest in tbe trust agreement as authorized him to veto tbe action of tbe Trustee, in compromising a claim for a sum which he thought was inadequate. Tbe Chancellor dismissed tbe cross-bill; and upon this holding the companies have assigned error.

We think tbe bolding of tbe Chancellor w!as correct; to approve tbe action of tbe Trustee participated in by the creditors and tbe insurance companies over tbe protest of tbe insured is to approve a constructive fraud. Tbe secured creditors represent a claim of more than $2000, protected by a trust deed upon tbe home of tbe insured, while the general creditors are represented by claims of less than $300. If these creditors can force a settlement of tbe claim against tbe insurance companies for $800, or forty per cent'of tbe face of tbe claim, they may be enabled to collect their debt in full, out of tbe property of tbe insured, and leave him denuded of all assets. If tbe insured can prevent this settlement, and collect the face of tbe policy, be will find himself free of debt with the exception of less than $400, and his home free of encumbrance. At the date of tbe execution of this trust agreement tbe insured was not relieved of one dollar of primary liabilities. Tbe sum realized under agreement was to be applied only‘in partial discharge of tbe liabilities. Tbe Trustee acts for the best interest of all the beneficiaries, and when the Court sees he acts to tbe prejudice of one, bis action will be restrained. Under tbe circumstances of this case tbe insured bad a voice in this settlement, and so long as be is acting in good faith, and for the protection of bis interests his right to act will be recognized.

The primary purpose of this trust agreement was to sequestrate the funds in tbe interest of tbe creditors, and not to denude the insured of bis rights in tbe settlement. At first this purpose was recognized by all parties; tbe Trustee consulted with the creditors and tbe insured, and tbe insurance companies prepared a release to be executed by the insured. Later the companies agreed to accept a releáse signed by the creditors and the Trustee, then why was it necessary for the creditors to sign the release if the companies recognized the rights of the Trustee to bind all the parties? And even then the companies made the settlements upon the reliability and representation of the Trustee. The companies had full knowledge of the facts, and under the circumstances as is detailed, the companies had no .right to rely upon the sole authority of the Trustee to act for the insured, they cannot coerce the insured, by such a method. There was no binding compromised agreement consummated; the minds of the parties to be bound never met, and • the pleadings were sufficient.

The Chancellor found as a fact that the iron safe clause had been substantially complied with. He also held that no question was made by the insurance companies as to the three-fourths value clause, and this holding is not questioned by an assignment of error. The court found that on the night of the fire the insured had within his safe three books which contained first the inventory made at the date of the purchase, August 31, 1925; second, the entry of invoices of goods purchased from the date of the sale to the date of the fire; third, and a list of the credit sales during this period. These books were exhibited in evidence. The Chancellor further found "said Taylor’s cash sales, as shown by the deposition of E. H. Holly, Vice-President and Cashier of the First National Bank of Elizabethton, Tennessee, and as shown by the original ledger sheets of said First National Bank covering the amount of said Taylor, amounts to $2381.51,” to which is to be added Taylor’s board for six months and eight days at $17 per month, amounting to $104.40, represents the cash sales. By adding the inventory and invoices and subtracting the sum of the cash and credit sales, less twenty-five per cent gross profits, we obtain the value of the goods at the date of the fire. The Chancellor found this value to be $2958.20. The cash sales are only determinable by the bank’s statement, and the companies insist it was incumbent upon the insured to keep a book account of his cash sales. The companies except to the introduction of the bank statement. The evidence shows, and the Chancellor found, that the insured regularly deposited the cash derived from the cash sales in bank, and the statement reflects the value of the stock reduced to cash. This, he held, to be a substantial compliance with the provision of the policies. The purpose of the iron safe clause is to provide a reliable method for the determination of the loss; it is not necessary to keep the books within the safe so long as they are preserved, for they may be kept in another house. If .the merchant elects to keep a record of his cash sales by bis bank statement, and keeps it accurately, or at least not to tbe detriment of tbe insurance companies, then we can! see no objection to tbe method. Tbe method is as reliable as an entry at tbe end of tbe day of tbe cash sales in a book. Tbe merchant is not required to keep tbe cost and sale price of each article sold, so tbe bank account will reflect tbe same facts as tbe books would reflect. An accountant was introduced, who bad bad experience in determining tbe value of tbe destroyed stock of goods, and be demonstrated tbe correctness of tbe Chancellor’s figures. Counsel crit-icised tbe court in permitting tbe use of tbe bank’s statement, in determining tbe amount of tbe cash sales. We will examine these criticisms to see if injury is done, or could be done, to tbe insurance companies;

It is said tbe merchant would exchange bis goods for produce; but he would sell tbe produce for cash and deposit tbe proceeds, and if be made a double profit it rebounded to tbe ibterest of tbe insurance company by increasing bis cash sales.

And sometimes be would take cheeks in as cash from bis customers and refund to them tbe difference, but when be deposited tbe checks as cash, tbe difference rebounded to tbe interest of tbe insurance companies. Sometimes he wouldn’t have tbe money to repay tbe difference to tbe customer, and be would take tbe checks to tbe bank, obtain tbe money and return and pay it to tbe customer. Tbe same result followed.

Some of Taylor’s customers issued orders on tbe store to their laborers, and Taylor would pay these orders in cash and charge to tbe customer’s account. These items were not reflected in the bank account, but were reflected in tbe charge account, and the companies were in no w'ay injured.

Tbe next criticism is that tbe Chancellor allowed twenty-five per cent as gross profits, and tbe profits were not reflected by tbe bank account. Had the insured kept a book account, of his cash sales bis profits would not have been reflected by tbe boobs; a cash sale would not reflect the profits. To name the article Would be of no advantage, for it may represent one of two invoices carrying different prices. The Chancellor sustained an exception to tbe evidence given by tbe insured in reference to bis profits, but in bis opinion he used this evidence in making his calculations and determining the value of tbe stock of goods destroyed. He therefore must have reversed himself upon tbe ruling of the evidence. But if we exclude the evidence and do not deduct tbe twenty-five per cent profits, still tbe value of tbe goods destroyed exceeds the amount of the" recovery, since there is no issue made upon the three-fourths value clause. We concur in the holding of the Chancellor that the bank’s statements substantially reflect the cash sales, and the companies are benefited and not injured by the figures or totals representing the cash sales.

Exceptions were taken to the introduction of the inventory and invoice accounts on the ground that these papers have been altered since the fire, by identification marks, calculations and the addition of the omitted items. It is said an inspection of the instruments justified this conclusion, and they should have been excluded as evidence. If the instruments appear upon their face to have been altered, the presumption of law is that the alteration was made at the time of the execution of the instruments; but these papers are not contractual and contain no part of the terms of the contract, and an addition will not defeat the entire instrument by requiring its exclusion as evidence. There is no reason why the insured could not correct his invoice accounts by- the insertion of an omitted invoice; this or any other invoice could be attacked as spurious, but the court is not justified in excluding the entire account because it appears that an omitted invoice has been inserted.

We concur in the findings of fact as found by the Chancellor, and are satisfied with the justness and soundness of his decree, which is affirmed with costs. The recovery against each of the companies is for the sum of $1028.75 with interest from February 28, 1927.

Snodgrass and Thompson, JJ., concur.  