In re Zitron

GEIGER, District Judge (after stating the facts as above). The •question is whether the intervener can claim an equitable lien upon the insurance fund now in the hands of the trustee. Treating .the bankrupt and the intervener as original parties, the facts are briefly these: The intervener, as vendor, agreed to manufacture for and sell to the bankrupt, as vendee, a certain equipment, the title to which was to remain in the vendor until the purchase price was paid. The vendee agreed to insure the property for the benefit of the vendor. The contract of conditional sale was not filed. The property is destroyed by fire, and the vendee is then adjudicated a bankrupt. [1J What were the rights of the parties at the time when the fire occurred? Clearly, bankruptcy not having intervened, the contract of conditional sale was valid between the parties. The contract for insurance was equally valid, though it had not been in form executed for the benefit of the vendor. The latter, the fire having occurred, could then, as against the vendee, have asserted its right to a lien against the insurance proceeds; and the vendee, having breached his obligation, could not urge that such proceeds belonged to him freed from such lien. Wilder v. Watts (D. C.) 138 Fed. 426; Hanson v. Blake (D. C.) 155 Fed. 342; Re Little River Lumber Co. (D. C.) 92 Fed, 585; Re West Norfolk Lumber Co. (D. C.) 112 Fed. 759; Chipman v. Carroll, 53 Kan. 163, 35 Pac. 1109, 25 L. R. A. 305; Miller v. Aldrich, 31 Mich. 408; Re Sands Brewing Co., 3 Biss. 175, Fed. Cas. No. 12,307. These cases and many others treat as elementary the doctrine that, where a covenant has been entered into to provide insurance as additional security, such covenant, though the mortgagor or vendee breaches it by taking the insurance in his own name, will nevertheless he given effect in equity through a lien against the proceeds after a loss has occurred. [2] It is equally clear that the matter is not to be considered as an effort by the intervener to follow property previously covered by a conditional contract of sale. The proceeds are not to be deemed as the equivalent of the property, but, on the contrary, the mortgagee or vendor is awarded the benefit of the covenant, giving to him that which, 'had such covenant been performed, would have come directly from the insurer as of the time when the loss occurred. Viewing it in this light, it is clear that, immediately upon the occurrence of the fire and before bankruptcy had intervened, the equitable lien against the fund arose, and could have been enforced by appropriate action. So, too, if the bankrupt, instead of being obliged to go through the form of preparing and submitting proofs, could have instantly received the insurance proceeds, he could have forthwith paid the proper proportion to the intervener in satisfaction of its lien. In neither event could the trustee contend that a preference was sought or allowed. The situation, in my judgment, is different from that disclosed in Brown City Savings Bank v. Windsor (C. C. A.) 198 Fed. 28, where it was held that insurance proceeds arising from a loss on property covered by a preferential mortgage should he deemed the equivalent of the property, and therefore subject to be reclaimed by the trustee. It was there observed that, the mortgage having been given [82] within four months and therefore preferential, the insurance covenant was likewise infirm. But, in the matter at bar, the contract, though not filed, was at the time of the fire valid between the parties, and, when bankruptcy intervened, the property was no longer in existence. The insurance fund at once became impressed with the lien arising under a covenant valid against the trustee, regardless of filing or record. The contention of the trustee may be fairly tested by 'considering whether creditors who had attached the insurance fund could claim a right superior to that of the intervener. They clearly would not be regarded as purchasers of the fund without notice; but, on the contrary, would attach merely the vendee’s interest. The trustee, under the bankruptcy act, as amended by act of June 25, 1910, is in no better position. [3] The filing of an ordinary claim by the intervener was consistent with his assertion of the lien, and cannot be considered as an election to waive it. Neither can the failure to file the conditional sale contract be urged as laches. The petition to intervene was filed soon after the funds came to the hands of the trustee, and it does not appear that the delay, if any, was prejudicial. Upon argument, reference was made to an erroneous calculation of the proportion of the insurance fund to be subjected to the lien. The matter may be held open for correction by the referee of such error. The order of the referee, except as last noted, is affirmed.