Hyland v. Millers Nat. Ins. Co.

HANEY, Circuit Judge

(dissenting.)

I dissent.

The majority opinion in finding appellant guilty of fraud in a suit in equity make the statement that, “It -is fair to presume that the conspiracy began, if not before the fire, immediately afterwards.” I cannot subscribe thereto. A man is presumed to be innocent at all-times until his guilt is established. Likewise fraud is not presumed. The presumption made, I believe to be erroneous.

The majority deny recovery on one ground and then proceed to support that conclusion by reference to and discussion of an alleged second ground. If the first is sound, the second is superfluous. I believe neither is tenable.

I. The Failure to Appraise the Loss.

The policies in question contained the following provisions:

“If the insured and this company fail to agree, in whole or in part, as to the amount of loss within ten days after such notification, this company shall forthwith demand in writing an appraisement of the loss or part of loss as to which there is a disagreement and shall name a competent and disinterested appraiser, and the insured within five days after receipt of such demand and name, shall appoint a competent and disinterested appraiser and notify the company thereof in writing, and the two so chosen shall before commencing the appraisement, select a competent and disinterested umpire.. * * *
“If for any reason not attributable to the insured, or to the appraiser appointed by him, an appraisement is not had and completed within ninety days after said preliminary proof of loss is received by this company, the insured is not to be prejudiced by the failure to make an appraisement, and may prove the amount of his loss in an action brought without such appraisement.”

After this suit was filed, all appellees, except two, pleaded as a separate defense that: “The appraisement was not had due to the acts of the plaintiff and the appraiser appointed by him.” There was no defense that the appraiser appointed by appellant was not “a competent and disinterested appraiser,” other than'might be included in the quoted phrase from the pleading.

The trial court originally held that the failure to appraise the loss was “due to the conduct of plaintiff and his appraiser.” (D.C.) 58 F.(2d) 1003, 1012. Appellant thereupon filed a petition for rehearing stating that the court erred in that holding and on several other points. The trial court by supplemental order so worded the same that it is doubtful whether or not it denied recovery on this ground. However, if it did deny recovery, it was on the ground that appellant’s appointee was not “disinterested.” 58 F.(2d) 1003, 1011.

The majority opinion, as I understand it, holds that the failure to appraise the loss was due to the act of appellant in naming an appraiser who was not “disinterested.”

In reaching such conclusion, only the evidence most favorable to appellee appears *745to have been reviewed, notwithstanding our' duty to consider all the evidence in an equity suit. The opinion infers a conspiracy to defraud, and goes so far as to say: “It is fair to presume that the conspiracy began, if not before the fire, immediately afterwards.” I believe such a presumption is erroneous for the universal rule is that fraud is never presumed. To presume a fraudulent conspiracy began at one time is to presume the fraud at that time.

However, if we assume (without so holding) that Colbert was not “disinterested,” still I believe it avails appellee nothing, because such defense was not pleaded and therefore was not an issue in the case. The pleading says the things which prevented the appraisement were “acts of the plaintiff and the appraiser appointed by him.” In the first place, no acts or facts showing prevention of appraisement are pleaded; the statement is a mere conclusion and asserts no defense. In the second place, considering the allegation sufficient, it is quite apparent that the acts referred to are acts done by both appellant and the appraiser. It therefore could not possibly mean an act of appellant alone in appointing an “interested” appraiser, because both appellant and the appraiser did not appoint an “appraiser.” Appellant alone was required to and did appoint the appraiser.

Such a construction conforms to the intentions of appellees. Had they intended to rely on the fact that the appraiser was “interested,” they would have pleaded violation of the first provision quoted, which specifies that the appraiser must be “disinterested.” Instead, they plead violation of a provision which is located three paragraphs after the first provision quoted, and the provision alleged to be violated contains not a word requiring the appraiser to be “disinterested.” And the violation pleaded, is a “catch-all” averment containing no facts. Having violated the rules of pleading, certainly they should not be encouraged or aided in an attempt to avoid contractual liability for which they were paid the premiums fixed by them.

All the evidence bearing on the question as to whether or not the appraiser was appointed by appellant should be stricken because not responsive to the issues. There is no evidence whatever o f any other act which prevented appraisement. I believe recovery cannot be denied on this point.

II. False Swearing.

(a) Origin of Fire.

The policies required appellant in his proofs of loss to state “his knowledge and belief as to the origin of the fire.” In the .proofs of loss appellant stated: “A fire occurred * * * which originated from cause unknown to this assured.” The policies also contained the following provision: “Matters Avoiding Policy. This entire policy shall be void * * * (b) in case of any fraud or false swearing by the insured touching any matter relating to this insurance or the subject thereof, whether before or after a loss.” Appellees asserted as a defense that appellant swore falsely as to his knowledge, and belief as to the origin of the fire.

The trial court found that “the evidence clearly shows that this was a ‘set’ fire and that plaintiff knew it when making his proof of loss,” and “ * * * Since the evidence of incendiarism was equally well known to both plaintiff and defendants and plaintiff knew that, there was no deception accomplished and perhaps none intended. I do not believe that this defense would alone justify a denial of recovery to plaintiff.”

The policy provision quoted requires appellant to specify as to the origin of the fire, two things: (1) Knowledge, and (2) belief. There is no evidence whatever that appellant knew what caused the fire, although there was evidence which would lead one to believe that the fire was a “set” fire as the trial court found. Such evidence cannot be said to be “knowledge” of the origin of the fire. The word “knowledge” as used in the policy evidently meant “actual knowledge” as distinguished from “opinion,” because the word “belief” is also used. Appellant could know the origin only if he set the fire, or saw it set.

There is evidence, however, that appellant had a “belief” as to the origin of the fire. As used in the policy “belief” means “opinion.” His failure to record his “belief”, in the proof of loss does not prevent recovery, because section 2570, Civil Code of California (now St.1935, p. 505, Gen.Laws Cal.Supp. 1935, Act 3748, § 339), provides: “Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question.” This defense is insufficient to bar recovery by appellant.

(b) Amount of Loss.

All appellees (except National Liberty Company which asserted false swearing in *746regard to the proofs of loss only) asserted" by separate defenses that appellant was guilty of fraud and false swearing: (1) In an instrument “prepared and served” on June 19, 1930, wherein the loss was asserted to be $76,498.62; (2) in the complaint filed alleging the loss to be in the same amount, and in the amended complaint alleging the loss to be $106,992.83; (3) and in the proofs of loss wherein the loss is stated to be $73,601.96.

With respect to the instrument of June 19, 1930,1 have found no reference thereto, no argument regarding it, and do not find it mentioned in the opinion of the trial court. Counsel do not point out what this instrument was, and further; it is not alleged that the instrument was made under oath. We should, therefore, treat this defense as abandoned,

With respect to the alleged fraud and false swearing in the complaints, appellant contends that the provision of the policy has no application to statements in pleadings or the testimony at the trial, and relies on Goldberg v. Provident Washington Ins. Co., 144 Ga. 783, 87 S.E. 1077, 1079; Third National Bank v. Yorkshire Ins. Co., 218 Mo.App. 660, 267 S.W. 445, 449; Deitz v. Providence Washington Ins. Co., 33 W.Va. 526, 11 S.E. 50, 58, 25 Am.St.Rep. 908.

I believe .this contention is correct. In Insurance Companies v. Weides, 81 U.S.(14 Wall.) 375, 377, 20 L.Ed. 894, the- policies required the insured to submit to an examination under oath by any person appointed by the companies; and provided that: “All fraud, or attempt at fraud, or false swearing on the part of the assured, shall cause a forfeiture of all claim under this policy.” The court said (14 Wall. 375, at page 382, 20 L.Ed. 894) : “It is true the policies stipulated that fraud or false swearing on the part of the assured should work a forfeiture of all claim under them. . The false swearing referred to is such as may be in the submission of preliminary proofs of loss, or in the examination to which the assured agreed to submit. .But it does not inevitably follow from the fact that there was a material discrepancy between the statements made by the plaintiffs under oath in their proofs of loss, and their statements when testifying at the trial that the former were false, so as to justify the court in assuming it, and directing verdicts for the defendants. It may have been the testimony last given that was not true, or the statements made in the proofs of loss may. have been honestly made, though subsequently discovered to be mistaken. It is only fraudulent false swearing in furnishing the preliminary proofs, or in the examinations which the insurers have a right to reguirej that avoids the policies, and it was for the jury to determine whether that swearing was false and fraudulent.” (Italics ours.) There is no substantial difference between the false swearing provision in that case, and the ones here in question, and therefore the latter, in so far as here material, apply only to the proofs of loss.

Appellees are in error in saying that “the claimant testified falsely at the trial” in Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76, and suggesting that recovery was denied on that ground. Recovery was denied because the claimant swore falsely at an examination had by the insurers in accordance with the provision of the policy, which was similar to the provision in Insurance Companies v. Weides, supra. The former case, in fact, merely follows-the rule announced in the latter case. The dictum in Atlas Assurance Co. v. Hurst (C.C.A.8) 11 F.(2d) 250, 251, regarding false swearing by a claimant “in his testimony at the trial,” is contrary to Insurance Companies v. Weides, supra, and cannot be followed. The same may be said of Cuetara Hermanos v. Royal Exchange Assurance Co. (C.C.A.1) 23 F.(2d) 270.

Of these defenses, in accordance with the foregoing, those regarding the alleged false swearing and fraud in the proofs of loss, only, can be considered. The question is whether the evidence sustains this defense.

With respect fo the overstatement of the loss by a claimant in his proof of loss, such statement, if honestly made, will not prevent recovery.1 But if the overstatement of the loss is knowingly and willfully made by *747the claimant, he cannot recover;2 and under such facts, the intention to deceive the insurer is implied, for the law presumes that he intended the natural consequences of his acts.3

As heretofore stated, the trial court, by amendment to the original opinion, found “that plaintiff was guilty of wilful and intentional fraud and false swearing in making his proofs of loss.”

In examining the evidence, the findings of the chancellor on conflicting evidence are presumptively correct and will not be set aside unless a serious mistake of fact or law appears. National Reserve Ins. Co. v. Scudder (C.C.A.9) 71 F.(2d) 884; United States v. McGowan (C.C.A.9) 62 F.(2d) 955, 957, affirmed 290 U.S. 592, 54 S.Ct. 95, 78 L.Ed. 522; Clements v. Coppin (C.C.A.9) 61 F. (2d) 552, 558; Exchange National Bank v. Meikle (C.C.A.9) 61 F.(2d) 176, 179; Jones v. Jones (C.C.A.9) 35 F.(2d) 943, 945; Easton v. Brant (C.C.A.9) 19 F.(2d) 857, 859; Gila Water Co. v. International Finance Corp. (C.C.A.9) 13 F.(2d) 1, 2.

The majority has pointed out certain evidence in favor of appellees, and without relating any of the evidence in favor of appellant, or making any statement indicating that it considered it, concludes: “This constitutes sufficient evidence to support the findings.” It is quite apparent that the majority has treated the case as an action at law, in which our duty is to ascertain whether or not there is any substantial evidence to support the findings. However, this is a suit in equity. As said in Aro Equipment Corporation v. Herring-Wissler Co. (C.C.A. 8) 84 F.(2d) 619, 621: “An appeal in equity brings before the appellate court the whole record, and the court is required to examine the record and try the case de novo. The findings of the trial court, while entitled to great weight, may be adopted or discarded by the appellate court, even though supported by substantial evidence.” That is the rule which has formerly prevailed in this court (Presidio Mining Co. v. Overton (C.C.A.9) 270 F. 388, 389 et seq.; Title Guarantee & Trust Co. v. United States (C.C.A.9) 50 F.(2d) 544, 546), and it has been universally followed in other circuits. A few of the cases are: New York Life Ins. Co. v. Simons (C.C.A.1) 60 F.(2d) 30, 32, certiorari denied 287 U.S. 648, 53 S.Ct. 93, 77 L.Ed. 560; Victor Talking Machine Co. v. George (C.C.A.3) 69 F.(2d) 871, 877, reversed on other grounds 293 U.S. 544, 55 S.Ct. 82, 79 L.Ed. 649; Holmes v. Cummings (C.C.A.5) 71 F.(2d) 364, 365; Laursen v. Lowe (C.C.A.6) 46 F.(2d) 303, 304; Updegraff v. United Fuel Gas Co. (C.C.A.6) 67 F.(2d) 431; Equitable Life Assur. Soc. v. Vaughn (C.C.A.6) 82 F.(2d) 978, 979; Johnson v. Umsted (C.C.A.8) 64 F.(2d) 316, 318; Elliott v. Gordon (C.C.A.10) 70 F.(2d) 9.

In accordance with these cases we are required to weigh the evidence, along with the presumption of correctness attending the chancellor’s findings. If, however, the chancellor has made a serious mistake of fact or law, the presumption disappears. Such mistake may be the consideration of evidence wrongfully admitted, an application of erroneous law in finding the fact, or in erroneously weighing the evidence, as shown in New York Life Ins. Co. v. Simons (C.C.A.1), supra, 60 F.(2d) 30, 32. It was there said: “For an appellate court to hold that a finding of fact by a sitting justice in an equity case is clearly wrong, it is not necessary that there shall be no substantial evidence to support it; but, if it clearly appears to the appellate court that the great weight of the evidence is clearly contrary to the factual finding of the sitting justice, or *748the ' inference’ of the sitting justice from proven facts is unreasonable, then his finding may be disregarded, and the appellate court determine the facts from the evidence before it, or may draw different conclusions from the facts found.”

I believe sufficient has been said to show that the majority has acted on an unsound basis in its decision of the case.

The loss suffered was on two classes of merchandise: (1) That totally destroyed; (2) that which was damaged. To ascertain the amount of the goods totally destroyed, it is necessary to know the complete inventory immediately prior to the fire.

Appellant’s merchandise was located in two different places. Part of it was kept at the factory, where the fire occurred, and the remainder was kept at the warehouse. Immediately after the fire the remaining merchandise at the factory was removed to the warehouse, and an inventory of the merchandise at the warehouse was taken by one Radford. Appellant' employed Sügarman. Bros, to handle the adjustment of the loss. This latter firm employed Hood & Strong, accountants, to make an examination, and to arrive at the value of the merchandise in the factory at the time of the fire.

Hood & Strong rendered their report to Sügarman Bros, on November 29, 1929, reporting the inventory at the factory to be $102,453.23. In making the report, the accountants used the figures disclosed in appellant’s books. Briefly summarized, the amount of the inventory at the time of the fire was obtained as follows:

Inventory — December 81, 1928, plus purchases and certain expenses............ $1,448,860.23

Deduct: Cost of sales January 1, 1929 to date of‘fire................................ 1,282,734.23

Apparent Inventory at time of fire....... 166,126.00

Less: Inventory at warehouse........... 63,672.77

Balance — Inventory at factory........$ 102,453.23

In computing the cost of the sales, the accountants prepared a statement for the year 1928 showing the per cent, of gross profit of the t.otal sales for that year. For the period from January 1, 1929, to the time of the fire the cost of the sáles was computed by taking the amount of sales for that period and deducting therefrom gross profits, computed at the same per cent., for the period.

Radford .was employed by appellees, and, as .stated, made a physical count of the merchandise remaining after the fire. One of ’appellant’s employees then priced the merchandise as if it had not been damaged. The total was then determined to be $86,807.98.

In the proofs of loss the amount of the Radford inventory, comprising the goods remaining after the fire, was deducted from the Hood & Strong report of the inventory comprising the value of the goods immediately prior to the fire, and the balance was $15,645.25 for goods “totally obliterated.” The claim was made as follows:

Items Value Loss

Merchandise totally destroyed.. $ 15,645.25 $15,645.25

Merchandise remaining iaf ter fire . 86,807.98 53,580.67

Damaged printing brands....... 8,541.27 250.00

Damaged stationery............. 1,490.60 496.86

Damaged sample bags........... 672.05 250.00

Salvage expenses ................ 3,373.18

Totals ........................ $113,157.15 $73,601.96

The trial court said that the report of the accountants, upon which the proofs of loss were based, was “based on data flagrantly insufficient,” and that “Such values would be entirely theoretical, and would be based upon the assumption that profits for one year would be repeated the succeeding year.” 58 F.(2d) 1003, 1009. The majority says regarding this report: “Manifestly an inventory built in this manner is very hypothetical and unreliable.”

Neither appellees, the trial court, nor the majority has questioned the admissibility of the report because of the manner in which it was prepared. All seem to concede that it is relevant and competent, and that conclusion is supported by Liberty Tea Co. v. La Salle Fire Ins. Co., 206 Wis. 639, 238 N.W. 399, 402, where it was said: “ * * * the weight to be given to it was for the jury to determine.” The objection raised concerns the weight of the testimony, that is, that little or no weight should be given such a report.

It is obvious that practically no weight is given this evidence by either the maj ority or the trial court. The weight to be given it should depend on how accurate experience shows the method to be. Ronald’s Accountant’s Handbook by Paton (2d Ed.) a recognized authority in the accounting profession and which carries a list of distinguished accountants on its editorial and advisory committee, makes this comment regarding estimated inventories on the gross-profits basis (page 402) : “The method is recommended by its simplicity and often gives quite satisfactory results, particularly in small stores where marking of goods is under personal supervision of proprietor. If merchandise passed into stock carries selling prices show*749ing an average mark-up, and if there are no extraordinary mark-downs or losses, the operations should show about an average margin, and inventories estimated in this manner will be substantially correct.” In fact, a form of inventory taken on the gross-profits basis seems to be recognized by Treasury Regulations 94, Art. 22(c)-8, relating to income taxes. 1 Federal Register 1821.

I believe it to be apparent from the above that proper weight has not been given to this evidence. However, reliance need not be placed on the above authorities to show that such an inventory is substantially correct, for a second Hood & Strong report, next discussed, definitely proves it.

An audit was made by accountants Ernst & Ernst, as of May 31, 1929, at which time they certified to an inventory made by them. About a year after the fire, Hood & Strong used that inventory as a basis, added thereto the purchases from the time of the fire, and from the total thus reached deducted the “actual cost of the material sold plus direct labor applicable thereto from May 31, 1929, to October 19, 1929.” From the figure remaining was deducted the inventory of merchandise in the warehouse, and the balance remaining was $132,947.44, which constituted the apparent inventory at the factory immediately prior to the fire.

The trial court found that included in the total of $132,947.44 were certain amounts included in the Ernst & Ernst inventory, which Hood & Strong also included subsequently, making duplications. The total of these items is $41,361.25, which, if deducted from the inventory value of $132,947.44, leaves a value of $91,596.19.

The first item of claimed duplication consists of 150 bales of burlap, said to be inventoried by Ernst & Ernst at $22,737.12, which arrived on the “Silver Elm” about the time the inventory was made. Concerning this item, appellant says in his reply brief, “We say frankly that there is a conflict of testimony on this item.”

The second item claimed to be duplicated consisted of 50 bales of burlap which were delivered in April, 1929, to appellant and said to be inventoried by Ernst & Ernst at $7,725. The evidence as to whether or not the item was included by Ernst & Ernst is conflicting, there being positive testimony on both sides.

Another item of $300 was a credit memorandum issued by the seller of the 150 bales above mentioned. The price was $22,437.12 when reduced by the credit which was made after completion of the Ernst & Ernst inventory. Appellant admits that the Hood & Strong report, based on the Ernst & Ernst inventory, should be reduced by the amount of $300.

Appellees’ claims that $9,199.13 should have been deducted from the Hood & Strong inventory because it was factory overhead, and that $1,400 should have been deducted because of a decreased unit value for finished bags, are unsound. There was evidence that Ernst & Ernst had included $9,-199.13 for factory overhead in their inventory. At the time of taking this inventory, there was a large number of finished bags on hand. Ernst & Ernst computed the value of these bags by adding to the landed cost of the raw material, the amount mentioned comprising overhead expenses in converting the raw material into finished bags. Such procedure is correct [Treasury Regulations 94, Art. 22(c)-e(3), 1 Federal Register 1820], and I do not find that appellees’ accountant questioned the propriety of such procedure.

When Hood & Strong made their inventory, they reported: “Using this [Ernst & Ernst inventory] as a basis, auditing the acfual cost of the material sold plus direct labor applicable thereto from May 31, 1929 to October 19, 1929 (but without inclusion of factory overhead), we have developed the sum of $132,947.44 * * * ”

Appellees’ accountant construed the parenthetical statement, “but without inclusion of factory overhead,” as meaning that in the figure reached by Hood & Strong ($132,947.-44) there was not included any factory overhead ; that actually, however, Ernst & Ernst had included $9,199.13 for factory overhead; and that in order to get an inventory “without inclusion of factory overhead,” it would be necessary to deduct that amount included by Ernst & Ernst. In other words, the witness construed the statement “but without inclusion of factory overhead” as meaning that Hood & Strong did not include “factory overhead” in reaching their figure. This assumption is obviously incorrect.’ It is apparent from reading the statement made by Flood & Strong, that factory overhead was not included for the period from May 31, 1929, to October 19, 1929, only. The item of $9,199.13 was properly included by Ernst & Ernst in their inventory, and their *750figure, therefore, was properly used by Hood & Strong. The trial court was plainly wrong in holding that this item should have been deducted.

The item of $1,400 mentioned in the preceding paragraph is likewise based on an assumption. Ernst & Ernst included finished bags in their inventory at a certain unit price. After the fire, an inventory at the warehouse included 68,000 bags at a lower unit price. By computing the value of the 68,000 bags at the lower unit price, it would indicate that there was $1,400 more merchandise at the factory. ' Appellees’ accountant, however, assumed that the bags were manufactured in 1928, because of a pencil notation made on the inventory of the merchandise at the warehouse. As against this assumption, the evidence is too clear that the 68,000 bags were not manufactured in 1928 but in 1929. A journal entry on appellant’s books, December 31, 1928, showed that there were no 1928 bags on hand at the time of the Ernst & Ernst inventory. This latter inventory itself shows no such bags. There was other evidence that the material, which was defective, was not received until 1929. The court was plainly wrong in holding that this item should have been deducted.

If it is conceded that the items of $22,-737.12, $7,725 and $300 are deducted from the total arrived at by Hood & Strong, the balance would be $102,185.32. The " report of the same, accountants, computed in a different manner, upon which the proof of loss was based, gave the total as $102,453.-23, showing the estimated inventory to be only $267.91 higher than the actual one.

It is difficult to see how stronger evidence of the correctness of the estimated inventory could be obtained. Such very strong and direct evidence must be considered with great care.

A former employee of appellant testified that he hauled nine truck loads of debris from the factory after the fire, which debris “was burned stuff of some kind, fabric, like burlap, and cotton, etc. * * * ” A man in the scavenger business testified that he contracted to haul seven loads of debris from the factory after the fire, which included “burned cotton goods, and twine, and burlap, and glass”, and on cross-examination testified:

“Q. Isn’t it a fact that some of that you took away was sawdust ? A. Sawdust, glass, cotton, burlap.
“Q. Wasn’t some of it old burned lumber? A. Well, pieces of lumber, yes, we didn’t get much lumber.”

One of appellant’s employees testified that the bulk of the loads hauled by the scavenger was sawdust and shavings.

Some of the appellees have computed that these loads contained 100 loads which if represented in the terms of bales, would have covered each of the four floors to a depth of 7% feet, which would leave no space for machinery or the merchandise remaining after the fire. Other computations are made all of which are based on the erroneous assumption that the entire 16 loads was all burned merchandise. Such a claim, it is exists at all, exists only in the imagination of appellees. Appellant made no such claim, and the evidence bears out no such claim.

As against this strong proof, we must weigh evidence favorable to appellees., All of it is indirect or circumstantial except some documentary evidence.

Hood & Strong also made another report based on the Ernst & Ernst inventory, by using yardage and poundage- units. The value thus shown was $106,643.29. Appellee’s accountant testified that based on the two errors above mentioned there should be deducted $32,132.00, which would leave a balance of $74,511.29. In regard to this report, however, it was said: “This inventory is priced at actual cost of materials and does not include manufacturing costs of bags on hand, nor does it include miscellaneous merchandise on hand. All the. elements entering into the computations of this inventory have been priced at actual cost.” It is quite plain that this evidence does not weaken the direct evidence of appellant.

The other documentary evidence is shown in the trial court’s opinion: “The books show a total value at both the factory and plaintiff’s warehouse of $153,056.36. Deducting from this the values at the warehouse established by count immediately after the fire we find that the books show a value at the factory of $89,383. Strikingly similar is the value shown by the perpetual inventory or summary of stock sheets. kept by Taylor, plaintiff’s accountant. * * * A summary was made of it by * * * an accountant * * *■ and it is from his work-sheet that we know the total of $88,-272.55, only $111 less than the book values. * * * Further there is a journal entry showing products on hand on the date of *751the fire made after the fire which varies from the perpetual inventory by only $14.00 ijc * sjs w

There was testimony that the perpetual inventory was incomplete, and always showed less merchandise than was actually on hand. Similar evidence was introduced regarding the book inventories. Appellant’s book inventories for a prior year varied greatly from the actual count. In Accountant’s Handbook, supra, 401, it is said: “Experience shows that the results of the complete periodic inventory seldom check exactly with the balances as shown by the book inventories, assuming such are maintained * * * In the light of the foregoing, it must be said that the perpetual and book inventories have little, if any, weight.

The circumstantial evidence is meager. Part of it was that burlap is difficult to burn. The evidence was, however, that it does burn “readily if it is exposed close enough to living fire.”

Then there was other evidence that the fire was extinguished on the fourth floor “in not more than thirty minutes” and the fires on the other floors were extinguished in five to fifteen minutes; the slight damage to the building; the testimony of the fire chiefs “that the fire" in the stock was not extensive and that probably none was obliterated by the file”; and the following, shown by the trial court’s opinion: “ * * - * It took longest to overhaul the stock (overhauling means opening up stock in which there is fire and wetting it thoroughly to prevent reignition) on the mezzanine floor where the fire was smudgy, yet that was completed in forty-five minutes. At the end of twenty minutes all but four of the companies were sent .away. The water tower never went into action. A significant comparison was made with two other recent fires in bag factories. One took eighteen hours to overhaul and the other took eleven hours to overhaul.” This evidence, however, must be considered with the knowledge that fire seems to have a habit of doing strange and unusual things.

The foregoing evidence came from the testimony of witnesses O’Neill, Mahoney, and Kelly, more particularly described by the majority. Witness O’Neill testified that “there were embers of some sort, but you could not tell whether it was burlap that had been burned up”; that he “would not say that there was no "merchandise that was reduced to ashes.” A written report of the fire was made shortly afterward. In it was stated that seven low-pressure streams were used for three hours. Two years after the report was made, O’Neill flatly said that the report was wrong. , The report also showed that 139 men were on duty at the fire and that seven high-pressure streams were used for 34 minutes. Finally, O’Neill testified: “That quality of ash produced by burnt burlap and cotton would be of such a character that water would readily wash it away.”

Witness Mahoney testified: “When I said that I had it under control in about twenty to thirty minutes I mean by that, the progress of the fire completely stopped, not spreading any more, it was confined, and the blaze that was going through the roof was knocked.”

Witness Sullivan was employed by an organization which “is composed of all insurance companies in San Francisco.” He denied making any statement to a reporter for a newspaper on the day following the fire, estimating the loss to be between $50,000 and $65,000, yet the reporter testified positively that Sullivan made the statement to him at the reporter’s request. As between the disinterested reporter, and the “interested” Sullivan, certainly some doubt is thrown on Sullivan’s evidence.

There was also evidence that less than 1 per cent, of the bags in process were destroyed, but most of the stock was not “bags in process.”

In addition to this evidence, we must consider the effect, of the trial court’s decision. If it made serious mistakes the presumption of correctness disappears. Several serious mistakes have been pointed out. The trial court said that “the suspicious circumstances surrounding the fire may be considered in connection with the defense of fraud and false swearing as to values where the estimate of value in the claim of loss is grossly excessive.” 58 F.(2d) 1003, 1006. Dictum in Orenstein v. Star Insurance Company (C.C.A.4) 10 F.(2d) 754, 757, sustains the statement. That dictum is incorrect. There is no sound reason for saying that the fact that one person set a fire to another person’s store, is evidence of fraud and false swearing to the values of the store’s contents by the latter person. The trial court also said that the amount of goods claimed in the proof of loss would tax the building beyond capacity. The evidence does not sustain the statement, and at least one of the appellees admits it. In view of *752these serious errors the presumption of correctness has disappeared.

Weighing the evidence, the strong direct evidence is not overcome by the weakened circumstantial evidence. I believe we should accept the inventory value in the second Hood & Strong report of $102,185.32 plus a small amount of factory overhead applicable to the finished bags, for the period from May 31, 1929, to October 19, 1929.

The value of the goods totally obliterated would, therefore, be the difference between the value of the merchandise remaining after the fire (without deduction for damage), and the total inventory mentioned. The best record of the value of the- merchandise remaining after the fire, is contained in the Radford inventory.

The goods remaining -after the fire, shown on the Radford inventory, ’ were shown in the proofs of loss to correspond with the Radford inventory. The trial court said that “the fraudulent padding commenced with the pricing and grading of this inventory,” and points out that because of mistakes in grading the merchandise, the value of the inventory was excessive by $6,-000. The trial court also said that “there was a deliberate deception as to price.” The amounts found by the trial court do not bear out the statements. It finds a total inventory of $88,000, and the value of the goods totally destroyed to be -$2,000 so that according to its 'findings the value of the goods remaining was $86,000. As shown by the inventory the value was $86,807.98. In the court’s computation of the goods totally destroyed it used the amount of the Radford inventory without reduction. If, as the opinion states, the Radford value was excessive, the “out of sight” loss would exceed the amount stated by the court. The Radford inventory should be substantially correct.

After receipt of the proofs of loss, all appellees but the Western Company and the National Liberty Company, through their adjusters by letter admitted values and losses

as follows:

Items Value Loss

Merchandise totally destroyed... ÑIÍ Nil

Merchandise remaining after fire $80,000.00 $20,000.00

Damaged ’printing brands........ 8,541.27 50.00

Damaged stationery ............ 1,490.60 300.00

Damaged sample bags............. 672.05 10.00

Salvage expenses ................. 2,373.38

Totals ..........................$90,703.92 $22,733.18

From these two tables it can be seen that the value of the merchandise remaining after the fire was $33,227.31 according to the proofs of loss, and $60,000 acco.rding to the admissions of certain appellees. The merchandise remaining after the fire was subsequently sold, the recovery being as shown by the following testimony of appellant : “ * * * The net recovery was approximately $34,000 — a little less. After we had paid the expenses it was $33,263.87. Then after deducting expenses which we had already paid out in salvaging this merchandise and taking care of it and reconditioning it, there was a net recovery of $26,-437.32.”

The Western Company admitted through their adjuster, by letter, that the value of the stock at the time of the fire was approximately $90,000.00. The National Liberty Company replied that it had “ascertained and determined that at the time of the fire * * * you did not have on hand property of the value of $100,000.00 * * *

With respect to the merchandise remaining after the fire, appellant claimed in his proofs of loss that it was all damaged. His adjuster estimated the damage to goods valued at $792.10 at 33% per cent.; goods valued at $51,724.18 at 50 per cent.; goods valued at $10,767.49 at 75 per cent,; goods valued at $18,213.29 at 80 per cent.; goods valued at $4,966.42 at 90 per cent.; goods valued at $344.60 at 100 per cent. These estimates were incorporated in the proofs of .loss which were executed by appellant. Appellant, introduced evidence to corroborate these figures, in addition to the amount received upon sale of the salvaged goods.

On behalf of appellees, evidence was introduced minimizing the damage. Such evidence tended to show that a part of the remaining merchandise was entirely unharmed. There was testimony that firemen covered a part of it with tarpaulins to keep it from getting wet. At auction the merchandise brought a net recovery of approximately $25,000, but there was evidence that prices had declined 15 per cent, at the time of the sale.

The trial court did not find the amount of damage to the goods remaining after the fire.

To summarize, I believe that the trial court and the majority have considered the case under an erroneous premise. I think the decree should be reversed with the following directions: (1) Determine the value of the goods remaining after the fire and the amount of damage thereto; (2) determine *753the amount of factory overhead mentioned to be added to the inventory figure of $102,-185.32; (3) deduct from the sum thus arrived at, the value found for the goods remaining after the fire, which will result in the amount of goods totally obliterated; (4) add to the amount thus obtained the amount of damage to the goods remaining, the sum of which will be the total loss; (5) apportion the liability among appellees as prayed for in the bill.

Insurance Companies v. Weides, 81 U.S.(14 Wall.) 375, 20 L.Ed. 894; Great American Ins. Co. v. Roney & Berger Co. (C.C.A. 3) 42 F.(2d) 816, 818; Orenstein v. Star Ins. Co. (C.C.A. 4) 10 F.(2d) 754, 757; Globe & Rutgers Fire Ins. Co. v. Stallard (C.C.A. 4) 68 F.(2d) 237, 241; Camden Fire Ins. Ass’n v. Peniek (C.C.A. 5) 2 F.(2d) 964, 985; Hartford Live Stock Ins. Co. v. McMillen (C.C.A. 6) 9 F.(2d) 961; Spring Garden Ins. Co. v. Amusement Syndicate Co. (C.C.A. 8) 178 F. 519, 531, 102 C.C.A. 29; Atlas Assurance Co. v. Hurst (C.C.A. 8) 11 F.(2d) 250, 251; New York Underwriters’ Fire Ins. Co. v. Malham & Co. (C.C.A. 8) 25 F.(2d) 415.

Claflin v. Commonwealth Insurance Co., supra; Cuetara Hermanos v. Royal Exchange Assur. Co., supra, certiorari denied 277 U.S. 590, 48 S.Ct. 437, 72 L.Ed. 1002; United Firemen’s Ins. Co. v. Jose Rivera Soler & Co. (C.C.A. 1) 81 F.(2d) 385, reversed on other grounds 299 U.S. 45, 57 S.Ct. 54, 81 L.Ed. 30; Great American Ins. Co. v. Roney & Berger Co. (C.C.A. 3), supra; Orenstein v. Star Ins. Co. (C.C.A. 4) 10 F.(2d) 754, 757; Fidelity-Phenix Fire Ins. Co. v. Benedict Coal Corp. (C.C.A. 4) 64 F.(2d) 347, 352, certiorari denied 289 U.S. 762, 53 S.Ct. 795, 77 L.Ed. 1505; Globe & Rutgers Fire Ins. Co. v. Stallard, supra; National Fire Ins. Co. v. Renier (C.C.A. 7) 22 F.(2d) 671; Columbian Ins. Co. v. Modern Laundry (C.C.A. 8) 277 F. 355, 20 A.L.R. 1159; Damico v. Firemen’s Fund Ins. Co. (C.C.A. 8) 5 F.(2d) 318; Atlas Assur. Co. v. Hurst (C.C.A. 8), supra. Compare American Home Fire Assur. Co. v. Juneau Store Co. (C.C.A. 7) 78 F.(2d) 1001.

Claflin v. Commonwealth Insurance Co., supra, 110 U.S. 81, 95, 3 S.Ct. 507, 28 L.Ed. 76; Globe & Rutgers Fire Ins. Co. v. Stallard (C.C.A. 4), supra; Hartford Live Stock Ins. Co. v. McMillen (C.C.A. 6) 9 F.(2d) 961, 903; Columbian Ins. Co. v. Modern Laundry (C.C.A. 8) 277 F. 355, 360, 20 A.L.R. 1159; Atlas Assur. Co. v. Hurst (C.C.A. 8), supra.