Strouse & Bros. v. American Credit-Indemnity Co.

The record in this case is quite voluminous. There are seven bills of exception — six signed at the request of the defendant, and one at the instance of the plaintiffs. The plaintiffs offered five prayers, four of which were rejected. The defendant presented sixty-nine prayers, three of which were granted.

The Court gave six instructions drawn by the plaintiffs in accordance with the trial Court's views. There are fourteen special exceptions to these instructions; and there are twenty-five motions to strike out evidence admitted subject to exception. It will be simply impossible to treat separately each of these one hundred and twenty-six questions; and we must accordingly content ourselves with a general discussion of the controlling legal principles applicable to the whole case, and then reduce to appropriate groups these numerous points and in that way dispose of them. The suit was instituted by Strouse Brothers against the American Credit-Indemnity Company, of New York, upon a bond of indemnity.

The American Credit-Indemnity Company is a company which for a stipulated premium guarantees a creditor, to a specified amount, against losses resulting from the insolvency of his debtors. It furnishes a species of insurance. The bond which it issued is coupled with many conditions. On the fifth day of June, 1893, this company, in consideration of a written and printed application, which was made part of the contract of idemnity, and upon the payment of five hundred and eighty dollars, and *Page 259 in further consideration of the acceptance of the terms and conditions embodied in the bond, bargained and sold to Strouse Brothers a bond of indemnity guaranteeing them against loss, to the extent of and not exceeding twenty thousand dollars, resulting from the insolvency of debtors, over and above a net loss of seven thousand five hundred dollars first to be borne by the indemnified, on total gross sales and deliveries of goods, wares and merchandise amounting to one million six hundred thousand dollars, and made between June the first, 1893 and May thirty-first, 1894, to firms, corporations or individuals actually engaged in commercial and mercantile pursuits in the United States.

Most of the conditions consist of descriptions of what are provable debts and of directions as to the mode of proving them. Some of these must be stated, because upon their construction much of the controversy depends. The Indemnity Company is not liable for any debts unless the debtor had a certain rating in Dun Company's mercantile agency book; and its liability is limited as respects any one insolvent debtor to thirty-five per cent of the lowest amount of the capital rating given such debtor by that agency; and no account against any one insolvent debtor can be proved for more than ten thousand dollars. Proof of loss must be furnished within twenty days after knowledge of the insolvency of any debtor shall have been received by the indemnified; and final proof of loss must be forwarded within twenty days after the expiration of the bond; and the amount due by the company must be adjusted and is made payable within sixty days after the receipt of the final proof of loss.

Both the preliminary and the final proofs of loss are required to be made on blanks provided by the company. This scheme of indemnity includes two classes of losses. The one, an initial loss, which must be borne by the indemnified; the other, a loss in excess of the initial loss, which must be borne by the indemnitor. Both kinds of losses are such as result from the insolvency of the debtors who owe the indemnified.

Obviously, *Page 260 the inquiries which first suggest themselves are these: What is meant by the term "insolvency" as used in the body of the bond? Which are the losses that belong to the two classes respectively? What is the period of time at which the initial loss must be ascertained, as upon the location of that time the extent of the liability of the indemnitor in a large measure depends. It is insisted by the company that the term "insolvency" is limited and defined by Conditions 11A and 11B indorsed upon the bond.

These clauses are as follows: "11A. General assignments of, or attachments against insolvent debtors, the absconding of the debtors, or executions returned nulla bona, shall constitute insolvency." "11B. The appointment of a receiver, a `sell-out,' or the death of a debtor does not establish insolvency, but the indemnified may prove such claim during the term of this bond or renewal thereof, provided legal proof shall be given establishing the insolvency of the debtor." These bonds of indemnity and certificates are contracts confined to the business affairs of merchants, and relate exclusively to the insolvency of merchants. Naturally, then, it must follow that the insolvency against which they afford indemnity is insolvency as understood by merchants and as defined in bankrupt and insolvent laws relating to merchants and mercantile transactions; unless a contrary or different purpose is clearly and unequivocally manifested by some term of the contract.

On the face of the bond protection against loss "resulting from the insolvency of debtors" is afforded. The insolvency designated is the usual, legally defined insolvency — which is an inability of the debtor to pay his debts as they fall due in the ordinary course of business, and this is dependent neither upon a formal adjudication nor on an actual insufficiency of assets to meet liabilities. Castleberg v. Wheeler, 68 Md. 266 . As a defeasance clause limiting the liability of the indemnitor must be clearly expressed and strictly construed ( Credit Ind.

Co . v. Cassard, 83 Md. 272 ), conditions 11A and B cannot be held to *Page 261 narrow the meaning of the term insolvency as used in the body of the instrument. "General assignments of, or attachments against, insolvent debtors * * * shall constitute insolvency." "The absconding of debtors, or executions returned nulla bona shall constitute insolvency." Obviously, this means that these things shall constitute evidence of insolvency. It is not every general assignment, or every attachment that is declared to constitute insolvency; but such an assignment made by, or an attachment issued against, an insolvent debtor. But who is an insolvent debtor?

Unless you reason in a vicious circle the answer must be one who is unable to meet his obligations as they fall due in the ordinary course of business. An execution returned nulla bona cannot constitute insolvency. The return is the act of the officer and not of the party, and no act of a third person can constitute a debtor's insolvency. Insolvency is a status.

Brown v. Smart, 69 Md. 332 ; s.c. affirmed, 145 U.S. 457 . The return on an execution may be evidence of that status, but is not the status itself. These four things named in Clause 11A do not create the status or condition of insolvency — they are simply results which flow from the antecedent, pre-existing insolvency. They are therefore evidence of the thing from which they proceed, they are not the thing itself.

Section 11B makes this demonstrably clear. "The appointment of a receiver, a sell-out, c., does not establish, " that is, does not prove insolvency; but "legal proof" may be given "establishing the insolvency of the debtor," that is, establishing his inability to pay his debts as they fall due in the ordinary course of business. Now, if nothing but the things named in 11A constituted insolvency there could be no "legal proof" of insolvency under 11B, because there could be no insolvency to be proved unless there was a general assignment, an attachment, an absconding, or a return of nulla bona . A thing which in its very nature cannot constitute insolvency, though it may constitute evidence of insolvency, cannot, by being called insolvency, be other than it intrinsically is; namely, *Page 262 a means of proving the existence of insolvency.

This must be so unless the thing to be proved is identical with the thing that proves it — unless insolvency as a fact, and the evidence which proves that it is a fact, are one and the same thing. But the two are manifestly different. In Am. Cr.

Ind. Co . v. Carrollton Co., 95 Fed. Rep. 114, there was a suit against this same defendant on a bond issued in 1895. In bonds issued by it after 1893, Clause 11A was materially modified. Insolvency was limited and defined by the modified clause, thus indicating that the defendant did not itself consider that the precise clause now before us imposed a limitation as it stood prior to the change.

One of the difficulties with respect to the ascertainment of what losses are to be included in the initial loss of seven thousand five hundred dollars is alleged to arise out of Condition 12A, which is in these words: "To simplify adjustment and to avoid disputes, it is agreed that such sum of gross loss shall be the limit to be borne by the indemnified, as less twenty-five per cent will equal the agreed amount of annual net loss; all claims making up such said sum of gross loss to remain the property of the indemnified, the company relinquishing its claims except as hereinbefore provided." The face of the bond having limited the liability of the indemnitor to losses in excess of a net loss which the indemnified was required to sustain in the first instance, it obviously became necessary to prescribe some method by which the net loss should be ascertained. The very term net loss implies a resultant, remaining loss after credits or collections are deducted. But what credits or collections are to be deducted? It might in many, if not in most cases, be impossible to estimate in advance of their actual receipt what these credits or collections would aggregate, and yet until ascertained or estimated a net loss could not be determined; and thus there would be a wide field for controversy left open perhaps long after the period for adjustment had passed.

To preclude just such controversies this Clause 12A, which fixes by agreement an amount that *Page 263 the parties stipulate shall be the equivalent of the net loss, and shall be considered the indemnified's initial loss, was inserted. It was not possible to express the amount in dollars and cents, because the net loss of $7,500 was fixed at fifteen thirty-seconds of one per cent upon a basis of sales amounting to $1,600,000, and was to increase, under the provisions of Clause five, in the same ratio if the sales exceeded the basis just named. An equation was substituted for the specified net loss, and this was done avowedly to avoid disputes and to simplify adjustment; and this equivalent statement simply declares that a gross loss which, after twenty-five per cent of it shall be deducted from it, will equal the net loss, shall be the measure of the initial loss. In this case it is the sum of ten thousand dollars, because the sum of ten thousand dollars, less twenty-five per cent of $10,000, or $2,500, is equal to seven thousand five hundred dollars.

All sums collected on the debts forming this gross loss are to be retained by the indemnified and go to reduce the amount of the initial loss; and all sums collected on the debts which make up the liability of the indemnitor belong to the latter and diminish the total of its loss. But at what period of time is the adjustment of the gross initial loss and therefore the ascertainment of the Indemnity Company's proportion of the whole loss to be determined? Is it when and as each loss occurs, or is it only when the bond expires? The answer to these questions will settle another issue upon which the parties differ most radically.

On the part of the plaintiffs it is insisted that the initial gross loss of ten thousand dollars is to be determined as of the dates of the failures which first occur, and that the sums due at the date of the failure are alone to be reckoned without abatement on account of payments subsequently made; whilst the company contends that the time for computing this gross loss is the time when the liability under the bond is to be adjusted, that is, as of the date of the expiration of its term, and that the sums then due are the amounts to be considered. There are two proofs of *Page 264 loss required to be submitted. One, under Clause four, within twenty days after knowledge of the insolvency of any debtor has been received by the indemnified; the other, a final proof of loss under Clause C, within twenty days after the expiration of the bond. It is declared in Clause C that "the amount due by this company under final proof of loss shall be adjusted and paid within sixty days after receipt by the company of such final proof of loss." The amount due by the company is the amount ascertained under the final proof of loss.

That amount is dependent on the amount of the initial gross loss sustained. If the initial gross loss sustained is less than the initial gross loss named in the bond, then there is no loss in excess of the initial gross loss, and, consequently, no loss for which the company is liable. So the company's liability can only be ascertained when the initial gross loss has been reached, and as the company's liability is referable to the final proof of loss, necessarily the ascertainment of the initial gross loss, which fixes that of the company, must be also referable to the same period. This is made so clear by the learned Judge who heard the case below, that we quote from his opinion as follows: "In the preliminary proof the whole amount due on any claim at the time of failure is to be stated; in the final proof, which covers all claims, the indemnified is required, both as to claims which go to make up the initial gross loss, and those which make up the loss which the company must bear; to state again the whole original indebtedness and also all amounts paid since the date of failure on each claim.

The requirements of proof apply to each class of claim. See Jaeckel v. Am. Cr. Co., 54 N.Y. Supp. 505 .

"It is conceded that the liability of the company on the excess over the initial loss borne by the indemnified, is reduced by payments made between the date of insolvency and the expiration of the bond, and I think the same rule should apply in ascertaining the initial gross loss. If not, why is the indemnified required to make a statement in his *Page 265 final proof of all payments made on claims which go to make up his initial gross loss. The condition relied on by plaintiffs, which provides that the claims "making up" the initial gross loss shall remain the property of the indemnified, does not help us to dispose of the point now considered. The question still remains, what claims make up the initial gross loss?

The loss must be made up of claims as they exist when it is made up, and so we come back to the question, when is it to be made up? "If the plaintiffs be right, such a case as this may easily be imagined; for instance, early in the year some debtor fails owing the indemnified party $10,000; by the end of the year the whole debt has been paid off; in such a case, under the construction of the plaintiffs, the indemnified would have the right to hold the company for losses in excess of this $10,000 without having himself borne an initial loss of one dollar. "The case put for illustration is not altogether imaginary, nor at all impossible. The very facts suggested hypothetically have actually occurred in the case of one claim involved in this suit.

The whole debt due by McMurray at the time of his failure was paid off before the bond expired, and yet the plaintiffs claim that the full amount of this debt should be counted in making up their initial loss, although nothing has been lost on it. I cannot accept a construction that would lead to such a result, nor can I see how Condition 12A operates to fix one time for computing the initial gross loss, when Condition 12C provides another for adjusting the company's liability. "The time for computing the initial gross loss is, in my opinion, the time when the liability under the bond is to be adjusted, that is, as of the date of the expiration of its term, and therefore all these intermediate payments must be deducted." As the company's liability does not begin until the initial gross loss has been sustained it would seem to follow necessarily that this gross loss, which is the first to be borne, *Page 266 should be made up of those losses that first occur, and it equally follows that those payments which the indemnified is entitled to retain in reduction of his initial gross loss are those which are made after the time for adjustment, upon claims included in the initial loss; whilst the payments which the company is entitled to receive in reduction of its loss are those made after the same period on debts which form the basis of its liability. But this does not settle by any means all points of difference between the parties.

There is a stipulation affixed to the bond, and that stipulation, which is called a rider, has caused much of the controversy. The rider is in these words: "In consideration of the lapsing of certificate No. 1204 in the United States Credit System Company, of Newark, N.J., it is agreed that any losses which occur subsequent to the expiration of said certificate and which would be provable under a renewal of said certificate, may be proved hereunder in accordance with the terms and conditions of this bond, provided that no claim under extension at the time of payment of the premium, shall be included in the protection under this bond." Under certificate No. 1204, The United States Credit System Company agreed to pay Strouse Brothers a sum not exceeding twenty thousand dollars in excess of $6,250, on the total gross sales and shipments of merchandise made between June the first, 1892, and May the thirty-first, 1893, as said Strouse Brothers may actually lose on such shipments on legally ascertained insolvent debtors whose insolvency occurred after the payment of the guarantee fee and who had a certain credit rating in R.G. Dun Company's books, and whose debts did not exceed $5,000 for any one debtor. It was further stipulated that twelve and a half per cent of the amount due, and all amounts procured and procurable shall be deducted from all claims. By a further provision in the certificate it was stipulated that the $6,250 mentioned in the certificate was the amount of the initial loss first to be borne by the indemnified before the liability of the Credit *Page 267 System Company would arise.

Now, the question is, does the rider carry into the bond all the terms and conditions of certificate No. 1204? It will be observed that by the explicit words of the rider any losses which occur subsequent to the expiration of the certificate, that is, subsequent to May the 31st, 1893, and which would be provable under a renewal of the certificate, may be proved under the bond in accordance with the terms and conditions of the bond. The certificate covered sales and shipments from June the 1st, 1892, to May the 31st, 1893; the bond covered sales and shipments from June the 1st, 1893, to May the 31st, 1894. The two together embraced the sales and shipments for two years.

If the terms and conditions of the certificate are not carried into the bond then the company would be liable for the losses of two years, though it could not insist upon an allowance of an initial loss for more than one year. The learned Judge below decided that the initial loss of $10,000 fixed by Clause 12A of the bond was the only initial loss which could be charged to the indemnified; and that the initial loss of $6,250 prescribed by the certificate and applicable to sales made during the year preceding the date of the bond, but under the protection of the certificate, was not imported by the rider into the bond at all. In effect, therefore, the ten thousand dollars gross initial loss, which was, according to Clause 12A, "the agreed amount of annual net loss," becomes, not the equivalent of an annual net loss, but the gross loss for two years. Is this the meaning of the rider?

"Losses which occur subsequent to the expiration of said certificate and which would be provable under a renewal of said certificate, may be proved hereunder in accordance with the terms and conditions of this bond." This clause relates to two subjects. First, the thing to be proved; second, the mode of proving it. Now, the thing to be proved is not merely a loss, but a particular loss, that is, a loss which would be a loss provable under a renewal of certificate No. 1204. Then to certificate No. 1204 resort must be had to ascertain what *Page 268 losses occurring subsequent to its expiration, would be provable under a renewal of it.

A renewal of it would be simply an extension of it with all of its terms and conditions. Upon turning to it, this provision will be found: "Covered losses occurring after this certificate expires on shipments made during its term are provable under the renewal hereof, as if the goods had been shipped thereunder." If the goods had been shipped under the renewal of certificate No. 1204, that is, under a duplicate of it for another year, the thing to be proved — the loss — would have been a loss in excess of the initial loss of $6,250, and in excess of twelve and a half per cent of the claim and in further excess of all amounts procured and procurable from the debtor, because that residue, and that residue only, would have been the covered loss. The provable debt is the thing to be proved, and under the terms and conditions of the certificate, only such debts as were in excess of the initial loss and of the abatements just named, were losses which the Credit System Company undertook and stipulated to be liable for. There was a further restriction to the effect that no single indebtedness could be proved for a larger amount than $5,000.

All these conditions and restrictions were descriptive of the thing that could be proved. In the third instruction given by the Court all of these conditions,