Coke v. Fireman's Fund American Insurance

CHRISTIAN, J. Defendant Fireman’s Fund American Insurance Companies appeals from a money judgment rendered against it in an action brought by respondent Director of Agriculture in behalf of three milk producers, upon a bond given by appellant as surety that the principal, Santa Clara Creamery, Inc., would pay its milk and cream suppliers minimum prices established by the Director of Agriculture pursuant to the Milk Stabilization Act (Agr. Code, § 4200 et seq. [now § 61801 et seq.]; references herein are to the Agricultural Code prior to its recodification in 1967). In compliance with Agricultural Code section 4376, the bond was “conditioned upon the payment in the manner required hy this chapter, of all amounts due to producers for fluid milk and fluid cream purchased by such licensee or applicant . . .” (Italics added.)

In March and April of 1962 the principal, Santa Clara Creamery, Inc. (hereinafter Creamery), entered into contracts with the three producers for the purchase of certain amounts [442]of milk monthly from each producer at lawful prices. Creamery did in fact purchase the agreed-upon amounts of milk and sent the producers cheeks for the correct minimum prices. But there was also evidence that the making of the contracts, or their continued performance by Creamery, was conditioned upon the producers’ paying to Gene Collins—the president, general manager and 90 percent majority stockholder of Creamery—fees of 4% cents per gallon of milk sold. The payments were made by means of checks made payable to Collins personally and mailed to his residence; however there was evidence that Collins was using the money—or representing to the producers that he was—to meet the obligations of Creamery and to enable it to remain in business as a milk distributor. Because the payments to Collins were not entered on Creamery’s books, state audits intended to insure lawful pricing did not disclose the scheme. Appellant surety likewise had no knowledge of the rebate payments during the period of the bond.

The producers testified that they were forced to pay these rebates in order to get or retain the milk sales contracts and that economic pressure compelled them to pay Collins even though they knew that he had no lawful right to exact such payments.

The trial judge found that the producers’ payments to Collins constituted rebates to Creamery, that they were required of the producers as a condition to obtaining milk contracts, and that they were a means of Creamery’s evading payment of the lawful minimum price. The judge also found that Collins dominated and controlled Creamery and concluded (1) that he was merely its alter ego for the purpose of soliciting and collecting the rebates, and (2) that Creamery had thus defaulted on its obligation to pay minimum prices for milk. The court held appellant liable on its bond.