Sutro Bros. & Co. v. INDEMNITY INSURANCE CO. OF NO. AMER.

• Decision Date: 11 December 1967
• Docket Number: Docket 31218.,No. 43,43
• Citation: Sutro Bros. & Co. v. INDEMNITY INSURANCE CO. OF NO. AMER., 386 F.2d 798 (2nd Cir. 1967)
• Parties: SUTRO BROS. & CO., Plaintiff-Appellant, v. INDEMNITY INSURANCE COMPANY OF NORTH AMERICA, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

386 F.2d 798 (1967)

SUTRO BROS. & CO., Plaintiff-Appellant, v. INDEMNITY INSURANCE COMPANY OF NORTH AMERICA, Defendant-Appellee.

No. 43, Docket 31218.

United States Court of Appeals Second Circuit.

Argued September 26, 1967.

Decided December 11, 1967.

Marvin Schwartz, New York City, (Sullivan & Cromwell, John F. Cannon, New York City, on the brief), for appellant.

Alfred J. Morgan, Jr., New York City, (Bigham, Englar, Jones & Houston, Robert B. Budelman, Jr., New York City, on the brief), for appellee.

Before MOORE, SMITH and KAUFMAN, Circuit Judges.

MOORE, Circuit Judge:

Sutro Bros. & Co. (Sutro), plaintiff, appeals from a judgment dismissing its complaint against Indemnity Insurance Company of North America (INA), defendant.¹ The controversy arose over the construction of a provision in an indemnity bond issued by INA in favor of Sutro. The issue is whether the facts are such as to create liability under the bond.

The Bond

INA issued to Sutro, a brokerage firm, its standard Brokers' Blanket Bond, Form 14 (the Bond), to cover such losses as might be sustained by Sutro because of larceny, theft and misappropriation. More specifically, the clause of the Bond relied upon by Sutro to establish liability reads:

"In Transit

"(C) Any loss of Property (occurring with or without negligence) through robbery, common-law or statutory larceny, embezzlement, misappropriation, theft, holdup, misplacement, mysterious unexplainable disappearance, being lost or otherwise made away with, damage thereto or destruction thereof, and any loss of subscription, conversion, redemption or deposit privileges through the misplacement or loss of Property, while the Property is in transit anywhere in the custody of any person acting as messenger or in the custody of any armored motor vehicle company, except while in the mail and while being transported by express or as freight after receipt of the Property by a carrier for hire other than an armored motor vehicle company, such transit to begin immediately upon receipt of such Property by the transporting person or company, and to end immediately upon delivery thereof at destination."

Another provision of the Bond must also be read in connection with Sutro's claim. This paragraph provides:

"(e) Any loss resulting directly or indirectly from trading, with or without the knowledge of the Insured, in the name of the Insured or otherwise, whether or not represented by any indebtedness or balance shown to be due the Insured on any customer\'s account, actual or fictitious, except when covered under Insuring Clause (A), (D) or (E)."

The Issue on Appeal

The facts, therefore, must be examined in the light of the above provisions to determine (1) whether the loss sustained resulted from common-law or statutory larceny, misappropriation or theft while the property was in transit anywhere in the custody of any person acting as a messenger, the transit "to end immediately upon delivery thereof at destination"; or (2) whether the loss resulted "directly or indirectly from trading * * * whether or not represented by any indebtedness or balance shown to be due the Insured Sutro on any customer's account, * * *."

I. The Business Background

The business transactions which gave rise to Sutro's claim under the Bond consisted of the purchase by Sutro for the account of its customer, Arlee Associates, Inc. (Arlee), of various securities ordered by Arlee. The principals of Arlee were Arthur Katz (Katz) and Leo Sinsheimer (Sinsheimer).

Since May 1958 and for over two years, Sutro had had business transactions with Katz and Sinsheimer in their names and in the names of certain of their corporations. Katz and Sinsheimer financed security purchases for customers of Sutro and, also, purchased and sold securities through their accounts with Sutro.

In May 1960 the New York Stock Exchange suggested to Sutro that it close all accounts with Katz and Sinsheimer. Despite this warning, Sutro resumed business with Katz and Sinsheimer, who conducted this business under the name of Arlee. Between August 1960 and June 1961, some 950 purchase orders from Arlee for securities valued at some $13,400,000 were executed and confirmations were mailed on the day the orders were executed.

The Arlee-Sutro Transactions

On the delivery date (customarily four days after purchase), Sutro delivered the stock certificates by messenger to Arlee in New York City in the forenoon against Arlee's receipt therefor. The receipt states:

"Receipt is hereby acknowledged of the described securities which Sutro Bros. & Co. have declared to us in advance of payment therefor, solely for the purpose of enabling us to inspect and verify the same. Title thereto passes to us only against receipt by Sutro Bros. & Co. of payment therefor, but all risks to such securities, including risk of loss, are assumed by the undersigned."

In the afternoon of the same day the messenger returned and received Arlee's uncertified check for the amount of the purchase orders. Within one day of its purchase order, Arlee sold the same securities through other brokers. When Arlee received the securities from Sutro's messenger, it delivered them to its selling brokers. Arlee received from these brokers a certified check on a New York City bank which it could collect immediately. The check given to Sutro's messenger, on the other hand, was drawn on a suburban bank and took as long as four days to clear. Arlee thus had the use of large amounts of money until a deposit was required at the suburban bank to cover the checks given to Sutro. The "float" which was thereby created eventually exceeded one million dollars.

Originally, Sutro's managing partner had approved the receipt of up to $25,000 daily of Arlee's uncertified checks, but during the period of August 1960 to May 1961, Sutro actually accepted from Arlee some 838 uncertified checks without regard to amount. Of this number, the last 63 checks were not collected because Arlee had stopped payment thereon. The amount of the loss has been stipulated to be $1,137,775.54. Sutro made a claim under the Bond for the loss sustained. INA rejected the claim on the ground that it was not covered under the Bond.

The proceedings by the Securities and Exchange Commission (SEC) against Arlee, Sutro and its managing partner and the criminal charges against Katz and Sinsheimer who pleaded guilty and received prison sentences are noted but only the facts giving rise to such proceedings are here considered.

The Bond

On its face, the Bond would appear clearly to express its coverage and its limitations, namely, to insure against loss while property was in Sutro's possession or "in transit." By Bond definition, transit was to begin immediately upon receipt of the property by Sutro's messenger and was "to end immediately upon delivery thereof at destination." And this is exactly what occurred. Not a single certificate was lost "through robbery, common-law or statutory larceny, embezzlement, misappropriation, theft, holdup, misplacement, mysterious unexplainable disappearance, being lost or otherwise made away with, damage thereto or destruction thereof * * *." The cause of the loss is equally clear — Arlee did not pay for the securities which Sutro had delivered to it.

Conversely, the Bond excluded any loss, direct or indirect, resulting from trading, whether or not represented by an indebtedness or balance due to Sutro on any customer's account. And this is exactly the situation here.

In an effort by Procrustean methods to fit the facts to the Bond coverage, Sutro argues that it was Arlee's intention to steal the securities and that such intent is established by the check-kiting practices of Arlee. Sutro points to Arlee's insolvency, to the fact that check-kiting gives rise to civil and criminal liability and to violations of mail fraud statutes and to the guilty pleas of Katz and Sinsheimer in the criminal proceedings. But these facts do not establish liability under the Bond. The "in transit" provision of the Bond is primarily concerned with such perils as might thwart delivery. Here delivery of all the securities had been made — they were no longer "in transit." Sutro contends that the securities were unlawfully taken by trick or device, namely, by the giving of uncertified checks against accounts containing inadequate funds to meet them, and that until they were validly paid for, they were still "in transit." But it must be remembered that Sutro had been willing to deliver the securities as a regular and accepted course of business against 838 uncertified checks of which 775 were paid. But for the fact that every Ponzi-type scheme has its ultimate breaking point, the 63 checks might have been paid, leaving to others in the future the role of being the victims of the swindle. Therefore, Sutro's assertion that "Arlee's theft occurred while the securities were in transit" (Brief, Pt. II) cannot be accepted. The district court properly held that, if theft there were, it did not occur in transit. This conclusion is supported by the fact that there would have been no "theft" until days later and...