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December 28, 1938


The opinion of the court was delivered by: BYERS

BYERS, District Judge.

The above entitled action was instituted on the law side, and the complaint (verified November 27, 1937) recites that the deceased, Lewis C. Smith, on June 13, 1930, was the sole owner of an unincorporated business known as Lewis C. Smith Agency, an insurance enterprise which he conducted at 24 Stone Street in the Borough of Manhattan, and that on or about that date he conveyed a one-half interest therein to his wife, the plaintiff, "however, retaining entire control of the active management of said business as well as all the profits therefrom from the date of the assignment up to the time of his death".

It elsewhere appears that the latter event occurred on July 31, 1937.

 The complaint continues, that on or about December 5, 1931, the said Smith entered into an insurance agency agreement with the defendant company, which continued without interruption until his death, and that, shortly before the latter event, the defendant company authorized Mrs. Smith to operate the agency with all the authority which had been possessed by her husband, and that on or about August 6, 1937, she was induced to permit the defendant company to audit and examine the records and files of the insurance agency, as the result of wrongful representations made to her on behalf of the defendant; that as a result of the latter, she permitted the defendant to make the inventory and examination in question, in the course of which the defendant removed from the office of the agency all records, books, documents and files thereof, the return of which has been refused, although duly demanded by the plaintiff.

 That about September 1, 1937, the defendant wrongfully advised the customers of the agency that the latter had terminated "but that the customers' contract with the defendant continued and that all premiums should be paid directly to the defendant".

 That the defendant wrongfully converted, usurped or appropriated the business of the agency, and took into its employ all the employees of the agency, to the damage of the estate of Smith in the sum of $50,000.00.

 The second cause alleges the same conversion, to the damage of the plaintiff in her individual capacity, in a like sum.

 The answer (verified March 28, 1938) contains, in addition to denials, two affirmative defenses and two equitable counterclaims, which are pleaded in lieu of a separate bill in equity.

 To the latter, a replication was filed, containing several affirmative defenses to the equitable counterclaims.

 In this state of the pleadings, a motion was made by the defendant, which resulted in an order, dated May 27, 1938, directing that the issues raised by the equitable defenses and counterclaims, in the defendant's answer and the replication thereto, be transferred to the equity side of this court for hearing and determination prior to the trial of any issue in the law suit; the trial of the latter was stayed until the determination of the equitable issues. The latter were brought on for hearing October 17, and continued on all court days until November 2. The testimony and exhibits are so considerable in the aggregate as to forbid extended comment herein.

 From the evidence so adduced, it is found that the Smith agency for the defendant company had its origin in an interchange of correspondence which did not ripen into a single document constituting a contract between Smith and the defendant company. In substance, a power of attorney was granted to the former to sell baggage insurance policies of the defendant company, the premiums upon which were to be collected by Smith, and he was to deduct therefrom 47 1/2% as his commission for procuring the businness.

 He was to pay his own office expenses and the commissions allowed by him to solicitors, and their license fees where exacted by local law, and also the fees of adjusters employed to adjust losses arising under policies issued by or for the Smith agency.

 Such losses, when adjusted, were paid by the defendant company.

 During 1937, the defendant agreed that Smith should participate in the defendant's net profits from the Smith agency business, to the extent of 20%. An earlier understanding for a smaller participation was thus superseded, and that of 1937 continued in effect until Smith's death.

 The business of the agency consisted in the sale of such insurance policies through agents (herein called solicitors, for convenience) who solicited the business from travelers upon railways, steamship lines, and intending travelers who purchased their tickets at the offices of tourist agencies.

 So much of the business as was written in connection with railway travel does not present any matter for consideration in the equity aspect of this litigation. Steamship and tourist agency business alone are presently involved.

 The policies were written in triplicate by the issuing agents, and the first or white copy was delivered to the insured; a blue copy was forwarded to the Smith agency, and a third copy, which was either pink or buff, was retained by the solicitor.

 When the blue copies were forwarded to the Smith agency, they were customarily accompanied by a check to the order of the latter for the amount of the premiums less the solicitor's commission; Smith in turn forwarded the blue copy to the defendant company, together with his check for the premium less his 47 1/2% commission.

 In practise, it was found expedient to perform this latter operation by assembling a group of policies and sending one check to cover the company's share of the premiums, because the policies were individually for small amounts and in many cases the company's share of the premium was only a few cents.

 In order that the necessary information respecting each policy covered by a given payment might be tersely and accurately set forth, a form was devised, conveniently spaced in columns, and this accompanied a group of policies and a check of the Smith agency for the total amount due to the defendant. This form was called a bordereau.

 So long as that practise continued, the defendant had complete advice respecting the policies under which it was liable, the gross premiums charged, and its percentage thereof.

 On or about April 11, 1932, the defendant consented, at Smith's request, to forego receiving the blue copies of the policies and to accept only the bordereaux and check accompanying each, because the packages containing the policies were bulky and expensive to send.

 That opened the door to Smith to withhold knowledge from the company of the total policies actually issued, and to retain such of the premiums as were forwarded to him by the solicitors, as he chose to keep. He could not pursue such a practise blindly, because, if a claim of loss were to be made, the company had to respond, and consequently under such circumstances the company had to know of the issuance of the policy.

 Because this was a large business on a small scale, and because of the expense of maintaining the records in the Smith agency which involved considerable clerical assistance, the attitude of the company was somewhat lenient with respect to ...

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