UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
TRI-COUNTY HOME CENTER, INC.
DEBTOR CASE NO. 92-60474
JAMES R. WESTENHOEFER, TRUSTEE PLAINTIFF
VS. ADV. NO. 93-6043
AMERICAN ALLIANCE INSURANCE
COMPANY; TRI-COUNTY HOME CENTER,
INC.; MR. BILL ABRAMS; FIRST
NATIONAL BANK & TRUST COMPANY OF
CORBIN, INC.; WHIRLPOOL FINANCIAL
CORPORATION OF ILLINOIS; WALLACE
HARDWARE COMPANY, INC. DEFENDANTS
FINDINGS OF FACT
CONCLUSIONS OF LAW
This matter came before the Court for trial on May 4, 1994, and May 6, 1994. The Court having considered testimony offered at trial, the joint stipulation of the parties, the briefs of the parties, and the documentary and other pertinent evidence of record in this case, and being otherwise fully advised, now, in accordance with Rule 52 of the Federal Rules of Civil Procedure, made applicable herein by Rule 7052 of the Federal Rules of Bankruptcy Procedure, makes the following Findings of Fact and Conclusions of Law:
Findings of Fact
As a result of compromised settlements reached prior to the trial of this matter in a separate adversary proceeding, "James R. Westenhoefer, Trustee for the Bankruptcy Estate of Tri-County Home Center, Inc. v. Wallace Hardware Company, Inc.", Adversary No. 93-6017, defendants Wallace Hardware Company, Inc., First National Bank & Trust of Corbin, Inc., and Whirlpool Financial Corporation of Illinois are not participating in this proceeding. Defendant Bill Abrams did not file a responsive pleading in this matter, nor did the debtor. The debtor made a late entry into this proceeding, and filed a trial brief.
The plaintiff and defendants American Alliance Insurance Company ("American Alliance") and Tri-County Home Center, Inc. ("Tri-County") entered into a Joint Stipulation that set out the following facts:
This matter relates to a Chapter 7 case commenced by an involuntary petition for relief filed by unsecured creditors on March 13, 1992, being Case No. 92-60199. Defendant Tri-County is also the debtor in Case No. 92-60474, a voluntary Chapter 7 proceeding filed on June 25, 1992. These case were consolidated for the administrative convenience of the court and bear Case No. 92-60474.
Defendant Bill Abrams is an unsecured creditor in the consolidated bankruptcy proceeding. He loaned L.D. Abrams, the president and sole shareholder of Tri-County, $200,000.00 to start the business. Bill Abrams was an employee of Tri-County and gave advice to L.D. Abrams concerning the business.
On October 22 (sic), 1991, Bill Abrams purchased real estate and a building in Laurel County, Kentucky, that Tri-County used as a warehouse. The purchase price of the property was $165,000.00. It was subsequently insured for $250,000.00. Bill Abrams leased the warehouse to Tri-County on November 1, 1991, for $3,250.00 per month for one year with an option to renew for ten years.
Tri-County's main supplier, Wallace Hardware Company, Inc. ("Wallace") recommended the agency through which Tri-County obtained its insurance policy from American Alliance insuring it against various losses including casualty and theft. Wallace understood that it was named as a loss-payee on this policy. The effective period for the insurance policy was September 4, 1991, until September 4, 1992, with Tri-County and Bill Abrams as the named insureds. No parties were named as loss payees.
On October 11, 1991, American Alliance issued an endorsement to the insurance policy adding the real estate and building used as a warehouse by Tri-County. On November 21, 1991, a fire occurred at Tri-County's leased warehouse. The cause of the fire was arson. On the date of the fire, and after it occurred, L.D. Abrams reported a burglary at the warehouse in which certain items of inventory and supplies were alleged to have been stolen. The insured value of the destroyed property is $194,876.35, and is within the policy limits.
American Alliance has been requesting documentation regarding Tri-County since January 23, 1992. Other than proof of loss, American Alliance did not receive any documents requested under the terms of the policy until after the Complaint was filed in this matter.
Denver Mayes, L.D. Abrams' uncle, worked for Tri-County from time to time. He was the only person at the fire scene when Kentucy State Trooper Alan Lewis arrived. Trooper Lewis and Denver Mayes spoke at the fire scene before the fire department arrived. Steve Faulconer, a Kentucky State Police arson investigator, investigated the fire and concluded that it was the result of arson. He stated that the perpetrators spent over an hour in the warehouse preparing the inventory and contents for arson. Denver Mayes has been indicted by the Laurel County grand jury on allegations of arson in the second degree, and L.D. Abrams has been indicted on complicity to commit arson and false reporting of a burglary.
On December 13, 1991, L.D. Abrams, on behalf of Tri-County, assigned all rights to the insurance policy which is the subject of this litigation to Bill Abrams in consideration of the above-referenced $200,000.00 loan. Tri-County contined its operations after the fire until approximately December 22, 1991. During that period it continued to receive inventory from various suppliers, including Wallace. Tri-County was current with its financial obligations to Wallace at the time of the fire, but a $50,000.00 payment was due within three weeks of the fire.
Tri-County filed suit against Wallace for breach of contract in Laurel Circuit Court on December 17, 1991. Wallace filed suit against Tri-County for breach of contract on December 19, 1991. Pursuant to an agreement between the parties, Wallace repossessed a "vast majority" of Tri-County's inventory on December 24, 1991.
There was extensive testimony elicited at trial concerning the fire at Tri-County's warehouse. Trooper Lewis stated that Denver Mayes told him that he was responsible for the fire because his truck had backfired while he was working on it in the warehouse. Denver Mayes denied making this statement and denied having had anything to do with setting the fire. He testified that unidentified individuals in a red pickup truck were on the scene when he arrived at the warehouse.
Detective Faulconer testified that because of the time involved in setting up the arson, the perpetrator would have to be someone who was not afraid of being caught. The set up of the fire included a dozen large tires having been spread throughout the warehouse floor. Three 55 gallon drums of paint thinner had been opened and emptied or siphoned off into smaller containers, some of which were blue 5 gallon kerosene jugs. These were spread throughout the building where paint thinner had been poured. Several containers of roof coating had been opened and their contents spread through the building. Detective Faulconer further testified that he was not able to substantiate whether the burglary reported by L.D. Abrams had occurred, and that pry marks on the back doors of the warehouse had been there before the fire.
Jerry Plapertt, a C.P.A., testified concerning Tri-County's financial condition pursuant to a review of information made available to him. He stated that the company maintained two checking accounts which demonstrated two types of receipts, loans made to the business at its inception and revenue generated by the business. The total of receipts attributable to sales for the period the business was open, September 1991 to December 1991, was $284,000.00. He stated that of this total, $187,000.00 was generated in October 1991, with the total dropping to $59,000.00 in November, and $16,000.00 in December.
Mr. Plapertt testified that a checking account at Corbin Deposit Bank was opened with a $100,000.00 deposit in July 1991. At the end of August 1991 it had a balance of $49,000.00, at the end of September $1,300.00, and at the end of October $643.00. That balance remained constant through the end of December and in January 1992 went to zero. A second checking account was opened at Cumberland Valley Bank and Trust with a $50,000.00 deposit in July 1991. At the end of July the balance in the account was $33,000.00, at the end of August $17,000.00, at the end of September $11,000.00, at the end of October $25,000.00, at the end of November just under $33,000.00, and at the end of December just over $1,700.00. At the end of January 1992 there was nothing left in the account.
Mr. Plapertt further testified that the total of deposits made into this account was approximately $492,000.00. This total was gone by January 1992, as was the total in the Corbin Deposit Bank account, for a total at both banks of just under $600,000.00. Mr. Plapertt stated that Tri-County could not have continued operations going into December 1991 and January 1992 because there was inadequate cash flow to fund the expenses of the business. It was his opinion that the insufficient cash flow was caused by the fact that the business's selling level was too low.
Schedules filed by Tri-County in its bankruptcy case indicate that it owed almost $1,700,000.00 to its creditors at the time it filed. Of the $938,000.00 it listed as assets, $920,000.00 was attributable to inventory which had been repossessed by Wallace Hardware.
Conclusions of Law
This is a core proceeding pursuant to 28 U.S.C. §157(b)(3) in that the nature of the plaintiff's claims are "otherwise related to" the administration of this case, and therefore the Court may hear and decide this matter in accordance with 28 U.S.C. §157(c)(1). The standard of proof as to the defense of arson is a preponderance of the evidence. As stated in Asher v. Fox, 134 F.Supp. 27 (E.D.Ky. 1955), "'In civil actions where the questions at issue are involved in doubt the preponderance of the evidence determines the rights of the parties,....'" (Cites omitted). At page 29.
While there is no case law in Kentucky holding that arson may be proven as a defense to liability under an insurance contract by circumstantial evidence, other jurisdictions have so held. See O-So Detroit, Inc. v. Home Insurance Company, 973 F.2d 498 (6th Cir. 1992); Haygood v. Auto Owners Ins. Co., 995 F.2d 1512 (11th Cir. 1993). In Kentucky, the standard for circumstantial evidence is as set out in United Electrical Coal Companies v. Brown, Ky., 354 S.W.2d 502 (1962):
A fact is not proved by circumstantial evidence if it is merely consistent with such fact .... In other words, the circumstantial evidence must go far enough to induce a reasonable conviction that the facts sought to be proved are true and tend to eliminate other rational theories.
At page 503.
In order for an insurer to prevail in an arson defense based on circumstantial evidence, it must show that the fire was of incendiary origin, and that the insured had both motive and opportunity to set the fire or have it set. As set out above, the fact of arson has been stipulated. Therefore, in order for defendant American Alliance to prevail in this matter, it had to demonstrate motive and opportunity by the insured Tri-County.
American Alliance contends that it has established motive by evidence that Tri-County experienced severe financial problems almost from the time it opened its doors. As set out above, this evidence consisted of testimony by a C.P.A. concerning Tri-County's sales levels, cash flow, and the two bank accounts that it maintained. The plaintiff contends that such evidence is not sufficient, in and of itself, to establish that Tri-County was in financial trouble. He emphasizes that Tri-County had an accomodating arrangement with its main supplier, Wallace Hardware.
However, neither the plaintiff nor Tri-County could produce any business records or other evidence that would counter the evidence presented by American Alliance. In addition, the record in this case shows that Tri-County owed substantial amounts to many suppliers, not just Wallace Hardware. There was no evidence presented that Tri-County had other than the usual arrangements for the payment of bills with its other creditors. This Court concludes that the evidence presented by American Alliance concerning Tri-County's financial condition is sufficient to establish motive.
Evidence of opportunity to set the fire or have the fire set consisted of testimony concerning the presence of Denver Mayes at the fire scene, and the set up of the fire itself. An experienced arson investigator testified that the perpetrator of the arson had spent at least an hour setting up the fire, leading him to believe that the fire had been planned and executed by someone with easy access to the building such as the owner or an employee.
The Court considers the evidence concerning whether or not Denver Mayes claimed responsibility for the fire to be secondary. The plaintiff did not offer any convincing alternative evidence of a person or persons who might have had opportunity to set the fire. This Court therefore concludes that the evidence presented by American Alliance is sufficient to establish opportunity by a principal or representative of Tri-County.
In consideration of all the evidence concerning the arson fire at Tri-County's warehouse, this Court concludes that the circumstantial evidence presented by American Alliance "....go[es] far enough to induce a reasonable conviction that the facts sought to be proved are true and tend[s] to eliminate other rational theories." This Court therefore further concludes that American Alliance has established arson as a defense to liability under the subject insurance contract.
Another issue raised by the plaintiff is whether the interests of co-insureds should be separated. The plaintiff has raised this issue because he entered into an assignment with Bill Abrams, the co-insured on the subject insurance policy. This document purports to assign Bill Abrams' interest in the insurance policy to the trustee, and to assign the plaintiff's interest in the insurance policy to Bill Abrams. It further purports to waive any claim of preferential transfer that the plaintiff may have against Bill Abrams in regard to mortgage payments made to him by Tri-County.
The plaintiff maintains that there has been no evidence offered to implicate Bill Abrams in the arson, and that as an innocent insured he should be able to collect the proceeds. The plaintiff cites American Mutual Ins. Co. v. Mitchell, 870 S.W.2d 783, Ky. (1994), in support of his position. That decision states that "[a]n insurance policy which covers the interests of more than one insured should be considered several or separate as to each person insured." At page 785.
While this Court agrees with the plaintiff's position that the interests of co-insureds are separate, there can be no practical application of that fact in this matter as approval of the compromise of an asset of the estate has not been sought, nor has the plaintiff sought to amend his Complaint to assert his interest in place of Bill Abrams as against American Alliance. This Court therefore declines to rule on the question of whether the plaintiff may recover from American Alliance on that basis.
Finally, this Court concludes that defendant American Alliance Insurance Company should have judgment upon its Answer, and that the plaintiff's Complaint should be dismissed. Counsel for American Alliance shall submit an appropriate judgment in this matter specifically reserving as to any claims the trustee may have as a result of any assignment between Bill Abrams and the trustee.
By the Court -
Robert L. Brown III, Esq.
Robert J. Brown, Esq.
Richard W. Edwards, Esq.
James R. Westenhoefer, Esq., Trustee
Baxter Bledsoe Jr., Esq.