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Allstate Insurance Co. v. Howard Savings Institution

Decided: March 22, 1974.


Antell, J.s.c.


This is an action for declaratory relief by an insurance carrier seeking adjudication of its nonliability to defendants who were named as loss payees on a fire insurance policy and proof of loss. Defendants counterclaim for judgment in the amount of damage by fire to the insured building. The controversy arises from the issuance by plaintiff of its draft in settlement of loss in the amount of $200,682.82 payable only to the tenant of the insured premises and the fire adjuster who settled the claim. Omitted therefrom were the names of defendants who are the owner and the first mortgagee of the property. The term employed by plaintiff to explain its conduct is "inadvertence," and the stakes in this proceeding are dramatically signified by the tenant's advent into bankruptcy after depositing the moneys in its general account.

The three propositions on which plaintiff rests its claim are that (1) defendants are barred from recovering under the policy by reason of conduct amounting to waiver or laches; (2) assuming their right to recover, recovery is limited to only that portion of the $200,682.82 settlement allocable to building damage, exclusive of moneys paid to the tenant for damage to "contents," and (3) in the event of recovery by the mortgagee, plaintiff is entitled to an assignment of the mortgage and the mortgagee's rights thereunder. The last of these is significant in that, for reasons to be explained, if allowed it would diminish the owner's

recovery under the policy by the amount of the outstanding mortgage balance, now approximately $90,000.

On March 25, 1959 Suss Leaf New Jersey, Inc., then the owner of premises at 393 Main Street, Chatham, entered a 21-year net-net lease with Good Deal Supermarkets, Inc. On August 7, 1959 Suss Leaf mortgaged the property to defendant Howard Savings Institution and on December 1, 1960 sold the premises to defendant Titan Supermarket Associates, a partnership. The conveyance was made subject to the Howard mortgage, but no formal novation was ever entered into by the interested parties. Suss Leaf also assigned the Good Deal lease to Howard on August 7, 1959 and to Titan on December 1, 1960. Paragraph 42 thereof obliges Good Deal to secure and maintain for the benefit of all parties fire and liability insurance.

Plaintiff's policy covering the premises against loss by fire was issued June 23, 1971, to expire June 23, 1972. In it the insured is described thus:

Good Deal Supermarkets, Inc., and/or its affiliated and subsidiary companies are now or may thereafter be constituted as their respective I/M/A., 550 Division St. Elizabeth, N.J.

The loss payable clause of the policy provides:

Subject to the provisions of the mortgage clause attached hereto, loss, if any, on building items shall be payable to: 1st mtgee: Howard Savings Institution 768 Broad St. Newark, N.J. and National State Bank of Elizabeth, 68 Broad St Elizabeth, and Titan Supermarket Assoc. Chrysler Building, East 666 3rd St. N.Y.N.Y. A/T/I/M/A.

It is stipulated that by "A/T/I/M/A" is meant "as their interest may appear."

By a general change endorsement the name of First National was removed as a loss payee on August 2, 1971. No explanation was given why defendant Titan was not specifically described in the foregoing clause as owner.

On April 12, 1972 an extensive fire damaged the building. The resulting loss was adjusted by Good Deal through the Sarasohn Co., Inc., a public fire adjuster. On June 24, 1972 it submitted its proof of loss executed by Good Deal as "owner," and naming defendants Howard and Titan as co-loss payees.

It is timely here to note that paragraph 30 of the lease imposes upon Good Deal the duty to restore the building in the event of fire in the following terms:

If during the term of this lease the buildings or any of them erected on the demised premises be totally or partially destroyed by any cause whatsoever, there shall be no abatement of rent and the Tenant shall, at its own expense, repair, replace, rebuild and/or restore the said buildings with all reasonable diligence. The Landlord agrees that any insurance proceeds payable under the policies required herein to be maintained by the Tenant shall be used to reimburse the Tenant for, or to pay, as herein provided the costs and expenses incurred in the repairing, replacing, rebuilding and restoration of any damage to property on the demised premises in respect of which such insurance proceeds are payable, or any loss of use of the said premises.

In connection therewith, during the weeks and months following the fire, before and after issuance of the draft, Jeffrey Aidekman, Esq., house counsel for Good Deal, regularly conferred with Messrs. Kranzdorf or Lotterman, managing partners in Titan and respectively members of the Pennsylvania and New York Bars, about the progress of restoration and the payment of rent. Aidekman repeatedly assured them that Good Deal not only intended to meet its obligations under paragraph 30 of the lease but that in fact restoration was actually already in progress. Such assurances were in fact given in writing under dates of June 6, August 14 and September 20, 1972 to Titan and Howard.

The extent to which Titan was then being deceived by Good Deal can be appreciated only in retrospect. The Good Deal chain was then in serious financial difficulty and was freely utilizing the mechanics of naked fraud in order to prolong its survival. The most audacious falsehoods were relied on to neutralize any show of militancy by Titan in

the protection of its interests. One such incident was testified to by Mr. Kranzdorf wherein, as he recounted, he visited the premises in July 1972 to check on the status of the work which, as he had been told, was in progress. Finding the premises locked and no sign of activity evident, he returned to his office and telephoned Jeffrey Aidekman for an explanation. Aidekman, in response to this demand, was able to convince Kranzdorf that he had misinterpreted the facts, that although the doors were locked, the workmen were inside carrying on interior repairs, but so silently as to be inaudible from the outside. Actually, no repairs were either made on the building or intended to be made, and the financial circumstances of Good Deal deteriorated so badly that it was decided in September 1972 not to reopen that location under any circumstances.

On August 25, 1972, a Friday, plaintiff issued two drafts dated August 28, 1972, one in the amount of $200,682.82 payable to Good Deal Supermarkets, Inc. and Sarasohn Co., Inc., reciting that it was in payment for building damage, and a separate draft in the amount of $72,178 to the same payees covering contents. Both were picked up by the insurance broker servicing Good Deal on that day and negotiated August 28. On August 25 Sam Aidekman, the president of Good Deal, sent a letter to Titan which noted, in passing, that Good Deal had "already received the settlement from the insurance company." That letter was received by Titan August 29. The larger of the two instruments, however, was paid that same day and the funds irretrievably commingled with Good Deal's receding cash flow. It is parenthetically observed that ...

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