Standard Acc. Ins. Co. v. Pellecchia

• Decision Date: 05 April 1954
• Docket Number: No. A--92,A--92
• Citation: 15 N.J. 162,104 A.2d 288
• Parties: STANDARD ACC. INS. CO. v. PELLECCHIA et al.
• Court: New Jersey Supreme Court

Page 162

15 N.J. 162

104 A.2d 288

STANDARD ACC. INS. CO. v. PELLECCHIA et al.

No. A--92.

Supreme Court of New Jersey.

Argued Feb. 15 and 23, 1954.

Decided April 5, 1954.

Louis Auerbacher, Jr., Newark, argued the cause for the appellant.

Charles S. Barrett, Jr., Newark, argued the cause for the respondent (Lum, Fairlie & Foster, Newark, attorneys).

The opinion of the court was delivered by

VANDERBILT, C.J.

The plaintiff Standard Accident Insurance Company appeals from a summary judgment entered in the Law Division of the Superior Court, 27 N.J.Super. 189, 98 A.2d 706, in favor of the Federal Trust Company, one of the defendants.

I.

On January 10, 1946 Standard issued to the Columbus Trust Company two fidelity bonds totalling $175,000 to protect that institution, among other things, against loss arising out of any fraudulent, dishonest or criminal acts of its officers and employees, and effective March 1, 1948 this coverage was increased to $200,000. While these bonds were in effect P. James Pellecchia, Jr., also a defendant in this action, was vice-president and counsel of Columbus, the stock of which was largely controlled by his family. Between January 1946 and July 1948 Pellecchia looted Columbus of about $657,000 through his fraudulent handling of mortgage loan transactions as counsel of Columbus. On 20 different occasions during this period Pellecchia caused funds to be loaned by Columbus on notes purporting to be secured by real estate mortgages and then converted these monies to his own use.

Although all his defalcations involved mortgage loans by Columbus, Pellecchia adopted various techniques in carrying out his fraudulent activities. In 14 instances he prepared mortgage applications in the names of fictitious persons seeking loans on real property in or near Newark that was being advertised for public sale. After each application had been approved by the board of directors, it would be turned over to Pellecchia as the bank's attorney to make the necessary examination of title. In due course he would report to the bank that the title was clear and the bank would then issue its treasurer's check in the full amount of the loan to the order of the fictitious mortgagors and deliver it to Pellecchia to consummate the mortgage transaction. He would thereupon endorse the check to his own order by signing the name of the fictitious payees and would give the bank fraudulent mortgage papers. In another instance the purported mortgagors were actual persons who held title to the property involved, but they had not submitted the mortgage application in question and had no knowledge of it. They, of course, received no part of the proceeds of the check of the bank to their order, for Pellecchia signed their names in endorsing the check and converted it to his own use. On two other occasions the mortgage applications were Bona fide, but prior mortgages on the property were to be paid off by Pellecchia out of the checks of the bank, but instead he converted these monies to his own use and let these preexisting mortgages remain as prior liens on the properties on which the bank thought it was procuring first liens. In each of three remaining transactions Pellecchia used the name of one or another of the corporations he had formed on the mortgage applications and listed property therein which was not owned by the applicants. After depositing the proceeds of each of these mortgages to the account of the payee corporation, he soon withdrew the funds and appropriated them to his own use.

Of the 20 checks issued by Columbus in these fraudulent mortgage transactions only 18, totalling $587,000, were deposited by Pellecchia in the Federal Trust Company, 16 to his personal account and two to the accounts of the dummy corporations formed by him, the other two checks of Columbus clearing through other banks. In this action, however, only 15 of the checks of Columbus, representing some $516,500, are involved. After stamping the checks 'prior endorsements guaranteed, Federal Trust Company,' Federal forwarded them for collection to Columbus and credited the proceeds of 14 of them to Pellecchia's personal account in Federal while the fifteenth was credited to the account of a dummy corporation. Pellecchia drew the funds out of his personal account and the corporate account in Federal for his own purposes, largely for the payment of gambling debts.

Pellecchia's personal account in Federal was opened on December 29, 1941 with a deposit of $1,900. From that date until January 23, 1946, a four-year period, Pellecchia drew 59 checks on this account, or an average of slightly more than one a month, while he made 29 deposits, or an average of approximately three deposits every five months. On the other hand, during the 2 1/2 year period of his defalcations from January 23, 1946 until July 13, 1948, Pellecchia drew approximately 700 checks on the account, or an average of about 24 a month, while at the same time he made about 350 deposits to the account, or approximately 11 a month. While withdrawals and deposits during the earlier 4 year period totalled about $74,000, those in the later 2 1/2 year period amounted to approximately $1,600,000, including the sum of $587,000 fraudulently obtained by him from Columbus. Of the 15 checks here involved 14 ran into five figures, ranging in amount from $24,000 to $50,000. One check in the amount of $45,000 deposited to this account was endorsed to the order of 'P. James Pellecchia, Jr., attorney' while another in the amount of $35,000 was drawn to the order of 'P. James Pellecchia, Jr. attorney.' Both were deposited to his personal account. All the rest of the 15 checks in question were drawn to the order of the mortgagors and endorsed by Pellecchia personally and, except for the one check payable to the corporate mortgagor, were deposited in his personal account with Federal.

When Pellecchia's fraudulent activities became known in July 1948, Columbus collapsed, and on July 12, 1948 its assets were taken over by the Federal Deposit Insurance Corporation. Meanwhile Pellecchia pleaded guilty to criminal charges and was sentenced to prison, where he still remains. The Federal Deposit Insurance Corporation called on Standard to pay under its fidelity bonds to Columbus, which it did to the full extent of its liability of $200,000. While still in the possession of the assets of Columbus, the Federal Deposit Insurance Corporation in July and August 1949 made claim in writing against Federal for $516,500, based upon its guaranty of the forged or fraudulent endorsements on the 15 checks of the treasurer of Columbus deposited by Pellecchia in Federal. No suit was instituted to enforce this claim. Federal maintained that it had valid defenses to the claim, contending among other things that the loss was occasioned not by any negligence on its part but rather by the laxity of the officials of Columbus in permitting these fraudulent mortgage transactions by Pellecchia. Federal also claimed that many of the checks were drawn to the order of fictitious persons, giving rise to the contention that they should be construed as bearer checks drawn with knowledge imputable to Columbus through Pellecchia, its vice-president and counsel, and that in some instances the payee was nonexistent and hence that there was no forgery by Pellecchia and therefore no liability on the part of Federal on its guaranty of endorsements.

Meanwhile the liquidating agents of Columbus were considering the purchase from the Federal Deposit Insurance Corporation of the assets of that bank, including any claim which Columbus might have against Federal on account of the guaranty of the endorsements on its checks. Before consummating any such transaction the liquidating agents negotiated with Federal to see if Federal would pay all or any part of the claim of Columbus on the guaranty of endorsements by Federal. On learning of these negotiations Standard notified Federal and the liquidating agents of Columbus of its claim to be subrogated to the rights of Columbus against Federal by reason of its payment to Columbus under the fidelity bonds and that it would not be bound by any settlement on account of this claim made without Standard's consent. The Commercial Casualty Insurance Company, which had insured Federal against loss by the negligence of its officers and employees, entered into the negotiations for a possible settlement of the claim of Columbus against Federal. Ultimately it was agreed that Federal would pay Columbus $175,000 (one-half of which was to be paid by Commercial Casualty and one-half by Federal) in full settlement of the claim of Columbus against it on account of its guaranty of the check endorsements. The liquidators, aware of Standard's claim of subrogation, were reluctant to enter into any such settlement with Federal in the absence of some protection against the eventuality that Standard would attempt to hold them liable for settling a claim possibly worth $516,500 for a lesser figure, thus defeating Standard's subrogation rights. Federal therefore agreed to guaranty Columbus and its stockholders against any such claims asserted by Standard, and this guaranty was made a part of the agreement whereby Federal was to pay Columbus $175,000 in settlement of its claims on Federal's guaranty of the check endorsements.

On September 25, 1950 Columbus bought back its assets, including the claim against Federal, for $170,994.89, the full balance then due to the Federal Deposit Insurance Corporation, and on the same day consummated the proposed settlement with Federal and its surety, Commercial Casualty Insurance Company, for $175,000.

Standard refused to be bound by this settlement agreement between Federal and Columbus and made demand on Federal for $516,500 on account of the guaranty of check endorsements, which Federal declined to pay. Standard thereupon instituted this action against Federal and...