N.H. Ins. Co. v. MF Global Fin. USA Inc., Appeal No. 14812

CourtNew York Supreme Court Appellate Division
Writing for the CourtKAPNICK, J.P.
Citation204 A.D.3d 141,165 N.Y.S.3d 510
Parties NEW HAMPSHIRE INSURANCE COMPANY et al., Plaintiffs-Appellants-Respondents, Vigilant Insurance Company et al., Plaintiffs, v. MF GLOBAL FINANCE USA INC., Defendant-Respondent-Appellant.
Docket NumberAppeal No. 14812,Index No. 601621/09,Case No. 2021-01994
Decision Date17 March 2022

204 A.D.3d 141
165 N.Y.S.3d 510

NEW HAMPSHIRE INSURANCE COMPANY et al., Plaintiffs-Appellants-Respondents,

Vigilant Insurance Company et al., Plaintiffs,
v.
MF GLOBAL FINANCE USA INC., Defendant-Respondent-Appellant.

Appeal No. 14812
Index No. 601621/09
Case No. 2021-01994

Supreme Court, Appellate Division, First Department, New York.

ENTERED March 17, 2022


Selendy & Gay PLLC, New York (Caitlin J. Hallighan and Ester Murdukhayeva of counsel), and Mansukhani, LLP, New York (Joseph Salvo and Gordon Rees Scully of counsel), for New Hampshire Insurance., Company, appellant-respondent.

Kaufman Borgeest & Ryan LLP, Valhalla (Kevin M. Mattessich and Paul C. Fonseca of counsel), for Liberty Mutual Insurance Company, appellant-respondent.

Clyde & Co US LLP, New York (Nicholas Magali of counsel), for Axis Reinsurance Company, appellant-respondent.

Mintz Levin Cohn Ferris Glovsky and Popeo P.C., New York (Therese M. Doherty and LisaMarie F. Collins of counsel), and Covington & Burling LLP, New York (P. Benjamin Duke and Russell M. Squire of counsel), for respondent-appellant.

Barbara R. Kapnick, J.P., Peter H. Moulton, Lizbeth González, Julio Rodriguez III, Bahaati E. Pitt, JJ.

KAPNICK, J.P.

165 N.Y.S.3d 512
204 A.D.3d 143

This 2009 declaratory judgment action involves a $141 million insurance coverage dispute between plaintiffs New Hampshire Insurance Company, Liberty Mutual Insurance Company, and Axis Reinsurance Company (Insurers) and defendant, commodity futures broker MF Global Finance USA, Inc. (MF Global). New Hampshire issued the primary bond insurance policy to MF Global's predecessor1 and Liberty Mutual and Axis Reinsurance each issued excess financial institution bonds, covering the same policy period and incorporating the provisions and terms of the primary bond.2 Defendant MF Global seeks coverage under those bonds for a trading loss incurred in February 2008 by Evan Brent Dooley, a broker for

204 A.D.3d 144

MF Global, who in 2012 pleaded guilty to exceeding speculative position limits in violation of 7 USC §§ 6a and 13(a)(5). Dooley was sentenced to five years’ imprisonment and one year of supervised release and was ordered to pay restitution of over $141 million to MF Global upon release from prison.

For the reasons set forth below, we hold that defendant is covered under the fidelity bonds for its loss and is entitled to summary judgment in its favor.

This is the second time that an appeal in this action has been before us. In the first appeal ( New Hampshire Ins. Co. v. MF Global, Inc. , 108 A.D.3d 463, 970 N.Y.S.2d 16 [1st Dept. 2013] ) plaintiffs appealed from an order which denied their motion for summary judgment declaring that they are not obligated under their fidelity bonds to cover defendant's loss and, upon a search of the record, granted summary judgment to defendant. We modified, on the law, to vacate the grant of summary judgment to defendant and to grant defendant partial summary judgment to the extent of declaring that defendant sustained

165 N.Y.S.3d 513

a direct financial loss under the fidelity bonds, and otherwise affirmed.

On this appeal, plaintiffs appeal from an order of the Supreme Court, New York County (Marcy S. Friedman, J.) to the extent it denied their motion for summary judgment to declare there is no coverage under the fidelity bonds they issued to defendant MF Global and granted defendant's motion for summary judgment to the extent of dismissing certain of the Insurers’ affirmative defenses to defendant's counterclaim for breach of contract, and partially dismissed another affirmative defense. Defendant cross-appeals from the order to the extent it denied defendant's motion for summary judgment on its counterclaim for breach of contract in which it seeks the full amount of its claimed loss under the bonds with prejudgment interest.

BACKGROUND

As we explained in our order determining the first appeal:

"Defendant MF Global, Inc. is a commodities futures broker and is subject to the regulatory rules and oversight of the various exchanges on which it executes trades, including the Chicago Mercantile Exchange (CME). The CME is registered with, and must comply with regulations of, the United States Commodities Futures Trading Commission (CFTC). MF Global is a Clearing Member of the CME, and

204 A.D.3d 145

is approved to clear trades through the CME Clearing House. To maintain the integrity of the market, the CME Clearing House and clearing members such as MF Global become effective counterparties on each trade placed. In other words, the CME Clearing House assumes the position of direct legal counterparty to MF Global on all futures contracts submitted by MF Global to the Clearing House.

"In addition, as a clearing member, MF Global assumes complete responsibility for the financial obligations attendant to all trades and orders executed, and for all trading activity routed through its electronic trading systems. Thus, at the end of each trading day, or sometimes intraday, MF Global has to settle with the CME Clearing House for all losses on trades cleared through MF Global accounts, regardless of whether the customers initiating those trades are able to meet their payment obligations. This arrangement protects the market from risk of default by individual traders by transferring that risk to clearing members such as MF Global.

"Plaintiff New Hampshire Insurance Company issued a fidelity bond to MF Global's predecessor company covering the policy period from April 30, 2007 to April 30, 2008. The remaining plaintiffs are insurance companies that issued excess bonds to MF Global that incorporated the terms of the primary bond.

* * * * *

"Nonparty Evan Brent Dooley was a commodities broker associated with MF Global's Memphis, Tennessee office who was paid on a commission basis. During the evening of February 26, 2008, Dooley began trading commodities futures on the CME from his personal trading account using MF Global's electronic trading system. Dooley entered into a large number of ‘sell contracts,’ primarily for May wheat, and in doing so, exceeded his available margin credit. These ‘sell contracts’ created an aggregate open position that would be liquidated when corresponding ‘buy contracts’ were executed. If the price of May wheat decreased, the trades would be profitable, but if the price increased, a loss would ensue.

165 N.Y.S.3d 514
204 A.D.3d 146

"After trading resumed the next morning, the price of May wheat rose quickly, and Dooley liquidated his positions, sustaining a loss over $141 million. Because of the large amount, the CME Clearing House requested an intraday settlement to cover the loss. By midday on February 27, 2008, MF Global transferred approximately $150 million from its settlement bank to the CME Clearing House. MF Global recorded the $141 million loss on its books as a bad debt, and thereafter submitted a claim under the bonds. Plaintiffs denied coverage asserting, inter alia, that MF Global did not suffer a ‘direct financial loss’ and that Dooley was not an ‘employee’ " (108 A.D.3d at 464-465, 970 N.Y.S.2d 16 ).

THE BONDS

The "Insurance Cover" clause of the bonds requires the Insurers to indemnify MF Global for its loss sustained for:

"(i) any wrongful act committed by any employee , or

"(ii) any theft, fraudulent act or malicious act committed by any other person , which is committed with the intent to cause the insured to sustain a loss or with the intent to obtain financial gain for themselves or another person or entity they intended to obtain such gain and is first discovered by the insured during the bond period or the discovery period " (Section I [italics in original]. The bond provides that "words in italics have special meaning and are defined").

Loss means "the direct financial loss sustained by the insured as a result of any single act, single omission or single event, or a series of related or continuous acts, omissions or events" (Section 2.38).

The bonds define wrongful act with respect to trading as "any theft, dishonest or fraudulent act committed with the intent to obtain improper financial gain for: (i) an employee ; or (ii) any person or organization in collusion with such employee who committed the wrongful act " (Section 2.53). The definition of employee is broad with eleven subparts of categories of individuals, including, for example, a natural person under "a contract of employment written or implied" or "working under the direct control and supervision of the insured " (Section 2.25). The bonds

204 A.D.3d 147

provide that the term "employee does not mean any independent broker, independent financial adviser, or any similar agent or independent representative remunerated on a sales or commission basis unless specifically agreed by the insurer and endorsed to this bond" (id. ). Alternatively, the bonds...

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1 practice notes
  • Silo v. City of New York, 16754
    • United States
    • New York Supreme Court Appellate Division
    • November 29, 2022
    ...with an earlier assumed position which could warrant judicial estoppel (see New Hampshire Ins. Co. v MF Global Fin. USA Inc., 204 A.D.3d 141, 155 [1st Dept 2022]). Plaintiff's argument for a new trial based on attorney misconduct is not preserved for appellate review (see Smith v Rudolph, 1......
1 cases
  • Silo v. City of New York, 16754
    • United States
    • New York Supreme Court Appellate Division
    • November 29, 2022
    ...with an earlier assumed position which could warrant judicial estoppel (see New Hampshire Ins. Co. v MF Global Fin. USA Inc., 204 A.D.3d 141, 155 [1st Dept 2022]). Plaintiff's argument for a new trial based on attorney misconduct is not preserved for appellate review (see Smith v Rudolph, 1......

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