People v. Mercantile Credit Guaranty Co.

Giegerich, J. The defendant corporation, engaged in the business of credit insurance, issued its policies of insurance against loss sustained by reason of the insolvency of debtors to whom the insured had extended credit for goods sold in the usual course of business. The present proceedings, in the action brought for dissolution of the corporation, involve the validity and amount of claims presented by certain policyholders against assets in the hands of the receiver, and, by the exceptions taken, the conclusions of the referee are assailed in some particulars in behalf of the receiver, and in others in behalf of the claimants. It has been contended for the 'receiver that these policies are invalid, if tested by the law of Massachusetts, and that they are to be treated as contracts made or to be performed within that State; hence that they are unenforceable as the basis of claims in this action. Upon this point the reasoning of the learned referee, favoring the view that their contracts were made and to be performed in this State, is found to be persuasive. The intention of the parties was clearly to make a contract under conditions which would render it valid, in each instance, it being apparent from the trams758 actions that the form of a Massachusetts contract was sought to be avoided, and that the parties actually knew of the state of the law. The authorities cited by the referee sustain the conclusion that the contracts may, as matter of law, be treated as contracts made and to be performed within the State of New York, and I find no necessity for further discussion of the. point. The exceptions of the claimant, Chase, Merritt & Co., bring in question the accuracy of the finding as to the amount of its claims under the policy, the dispute being as to the proper effect; to be given to a provision of a policy whereby the loss was to be adjusted only so far as it. exceeded a stated percentage of the gross sales made by the insured, the minimum of the gross sales being fixed at an arbitrary sum for the purposes of the computation. Owing to the insolvency of the company within the period of insurance and the consequent impossibility of performance of the contract for the full period, it would be manifestly inequitable to measure the rights of the insured as upon this arbitrary amount of “ gross sales ” which was fixed with a view to sales made during the full term of the policy. There is no dispute that the referee properly refused to take this total arbitrary amount as representing the gross sales for the purpose of computing the loss as determined over the agreed percentage of gross sales, and the question is whether the method adopted by him for an equitable adjustment of the loss, with a view to the business of the insured up to the time of..the failure of the insurance company, is the proper method. Since the insured was to be indemnified only so far as his losses exceeded a certain percentage of his gross sales, and the failure of the company had brought the matter to a close, leaving the rights of the insured to be adjusted as of the date of the failure, there is naturally some uncertainty whether the gross sales (for the purpose of computation) could fairly be measured by the actual sales to that date, for it might be that the sales afterward • would have been in increased or lessened proportion, and the loss payable to the insured would have been correspondingly affected. I am inclined to agree with the referee that the “ gross sales ” may best be taken by resorting to the agreed minimum of such sales, as expressed in the policy, and accepting the fraction of that [759] amount afforded by the proportion of time during which the policy was in life, taken in relation to the full term of the policy. . There is possibly some doubt whether the insured’s opportunities for trade were equal from day to day, but the fairest adjustment would seem to be that taken on the basis of the agreed minimum sales, a basis which 'the parties presumably took to be representative of the business conditions under which the insurance was effected, and no method is suggested which would result in better equity, so far as I have been able to find. Passing to the claim of W. H. H. Smith & Co., the dispute as to the amount of loss payable under the policy turns upon the extent to which the insured is entitled to indemnity upon a debt of $2,556.87 due from the Toledo Lumber & Manufacturing Company. It appears that the debtor became insolvent and a receiver of its assets was appointed. Subsequently a proposal was made looking to the full payment of its debts, in the carrying out of which proposal this creditor was to receive four promissory notes maturing at successive dates. By the terms of the policy, it became enforceable where the debtor of the insured had made a general assignment “ or the said debtor, without failing in busiriess has offered to compromise his debts and said compromise was first submitted to and approved by this company.” The meaning of the term “ general assignment ” was elsewhere in the policy defined as including a receivership, and the method of adjusting losses where a receiver of the debtor had been appointed was expressly detailed. The contention of the claimant is that the amount of this debt became payable in full as a loss under the policy, without regard to the provisions for the adjustment of losses in the case of an insolvent debtor, and that, in any event, the referee erred in his construction of those provisions, if they were applicable. According to the evidence, this claimant, when notified of the debtor’s proposal to give promissory notes in payment of the debt, wrote to the insurance company, stating the offer and inquiring, "will you guarantee the payment of any loss on this proposition after the expiration of our policy, under the readjusting clause? ” To which the company answered, “ we will, as requested, extend the condition of readjusting clause until November 9th, 1899, to cover the maturity of the last note.” [760] The readjusting clause provided, “ when an amount offered in settlement by a debtor has been deducted in an adjustment of losses under this policy, and the'reaftef the insured does not realize from the estate of said debtor, or otherwise, sufficient to pay the offer or settlement so deducted, said amount shall be readjusted in .the same manner as though such offer or settlement had not been made, provided, however, that at the time of adjustment of said losses, the said offer or settlement was noted in writing on the. final proof by this company and the insured, but no such readjustment shall be made unless the estate of such debtor has been finally closed and settled and the deficiency ascertained within twelve months from- the expiration of this policy.’.’ The policy expired March 31, 1897; therefore, without an extension, this clause could not have covered a readjustment on the basis of a deficiency which was not ascertainable until 1899, and no reason is apparent for giving to the correspondence above quoted any greater effect than the granting of a request to extend the time during which this clause was operative. There had been no actual compromise and this offer of compromise was at no time used as the basis of any adjustment of the loss. Had there been' an adjustment, then a readjustment might have followed, but, as the matter stands, the readjustment clause appears to have nothing to do with the case. The correspondence did not alter the policy in any way other than as to the time for readjustment, and, since the offer of compromise was never accepted nor concluded, and the debtor had failed in business, the matter was not one for adjustment as in a case where “ the debtor, without failing in business ” had offered a compromise, with the approval of the company. The loss, therefore, was properly to be computed in accordance with the provisions of the policy governing cases of insolvency, and the next question is whether the referee’s method of adjusting the loss is correct. <. According to the policy, in estimating the loss sustained by the insured upon a debt due from- an insolvent “ the securities of such debtor held by any one at the time of the appointment of such receiver, taken at their actual value, and the other assets of such debtor taken at the value as shown by his books * * * less twenty-five per cent., shall be deemed a payment to the extent of such value on account of the amount owing to the insured.” [761] It appears that certain of the assets of this debtor, the Toledo Company, consisted of pieces of real estate upon which were outstanding mortgages, and the contention of the insured is that these mortgages were “ securities ” of the debtor within the meaning of the policy. The referee has found that the actual value of the real estate was in a stated sum considerably below the value as appearing upon the debtor’s books, and if the actual value is taken as- the basis for computation, the insured would be entitled to some payment upon the loss; otherwise the finding of the referee that nothing is due under the policy is to be supported. I think that the referee is correct in his conclusions that the real estate and the mortgages thereon should not be classed as “ securities of the debtor.” The property of the debtor is divided into two classes “ securities ” and “ other assets,” and the securities referred to are evidently such as have the character of assets, for it is only as assets that the “ securities ” enter into the scheme of computation. In the sense of assets, these mortgages are certainly not “ securities of the debtor,” and the real estate upon which they are liens and the title to which is in the debtor, does not partake of the nature of “ securities ” as the term is naturally understood. Eor the purposes of the present question, the nature of the real estate, as an asset of the debtor, is the same whether it is encumbered or not — that is, it is no more of the class of “ securities of the debtor” because of -the presence or absence of mortgages — and the use of language in the policy, viz.: “ The securities of such debtor held by any one,” etc., would seem to forbid any such construction as would include the debtor’s real estate. Indeed, if the real estate were to be classed as “ securities ” the provisions of the policy relating to “ other assets ” would be meaningless, for all-assets would be equally “ securities,” in so far as they might be susceptible .of employment as security for a debt. The exceptions of the Cable Rubber Company relate to the referee’s deduction of certain items in estimating the loss under the policy, the ground of the deduction being that these items were chattel mortgages (or in one instance a trust deed), and not within the policy. It appears to be conceded that these items are of the same nature as those passed upon in the Winsted Hosiery Company’s claim, and the exceptions of the Cable Rubber [762] Company must, therefore, he sustained, in accordance with the conclusion lately expressed by the Court of Appeals that items of this character are within the policy. People v. Mercantile Credit Guarantee Co., 166 N. Y. 416. The motions for judgment upon the claims of the Daniel Eorbes Company and the Winsted Hosiery Company are opposed upon the ground that the proper practice calls for an order, not a judgment. This I take to be the correct view. The decision of the Court o-f Appeals settled the question as to the amount of these claims and the matter was remanded to the Special Term for further hearing. As the result of such hearing the claims are to be allowed, but the' form which the direction of the court is to take is necessarily the same as upon the original hearing. The action has not gone to judgment, and claims allowed in the course of these proceedings are payable by the receiver, when so directed, in due course of administration, but this payment is not to be enforced by execution and the rights of the respective claimants are properly preserved by an order establishing the claims as against the appropriate funds in the receiver’s hands. Upon the question of costs, it appears that the Court of Appeals reversed the orders of the Appellate Division and Special Term “ with costs,” and this covered costs in the Court of Appeals only. Matter of Water Commissioners, 104 N. Y. 677. The argument for the claimants in support of the propriety of an award to them of costs in all courts has to do with a question which was presumably considered by the Court of Appeals; but the present application, so far as it relates to costs of earlier steps in the proceedings, cannot be favorably considered because beyond the power of the Special Term. Matter of Prot. E. Pub. School, 86 N. Y. 396. The moving parties may have motion costs, but since their costs in the Court of Appeals have heretofore been made the subject of a judgment, the orders to be entered can contain no further award of costs. Exceptions of Receiver, Chase, Merritt & Co. and W. H. H. Smith overruled. Exceptions of Cable Rubber Company sustained and report modified accordingly. Ordered accordingly.