Vigilant Ins. Co. of America v. Housing Authority of City of El Paso, Tex.

• Decision Date: 01 November 1995
• Citation: 637 N.Y.S.2d 342,660 N.E.2d 1121,87 N.Y.2d 36
• Parties: , 660 N.E.2d 1121, 27 UCC Rep.Serv.2d 1285 VIGILANT INSURANCE COMPANY OF AMERICA et al., Respondents, v. HOUSING AUTHORITY OF THE CITY OF EL PASO, TEXAS, et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

Page 342

637 N.Y.S.2d 342

87 N.Y.2d 36, 660 N.E.2d 1121, 27 UCC

Rep.Serv.2d 1285

VIGILANT INSURANCE COMPANY OF AMERICA et al., Respondents, v. HOUSING AUTHORITY OF THE CITY OF EL PASO, TEXAS, et al., Appellants.

Court of Appeals of New York.

Nov. 1, 1995.

Bondy & Schloss, New York City (Joel S. Forman and Jacqueline I. Meyer, of counsel), for appellants.

D'Amato & Lynch, New York City (Ronald H. Alenstein, Donna Marie Hughes and Jeffrey Underweiser, of counsel), for respondents.

OPINION OF THE COURT

BELLACOSA, Judge.

Plaintiffs, collectively referred to as "Vigilant," are subrogees of Drexel Burnham Lambert. They plead three discretely denominated causes of action that have some overlapping features. A predominant objective is the declaration of their superior right and title with respect to certain bearer bonds and interest coupons issued by defendant Housing Authority of the City of El Paso. The stolen bonds have had a checkered history culminating in two key legal issues on this appeal. First, we must determine the respective Statutes of Limitations applicable to plaintiffs' various causes of action and, second, the governing accrual events. The merits of the causes of action and the appropriate relief are not before us on this appeal.

Supreme Court dismissed the complaint, but the Appellate Division reinstated all the causes. The Appellate Division then certified the following question to this Court: "Was the order of this Court, which reversed the order of Supreme Court, properly made?" We modify the order of the Appellate Division and, thus, answer the certified question, in the main, in the negative.

Plaintiffs had jointly issued a brokers bond and policy to the Drexel firm, a former member of the New York Stock Exchange. The policy covered Drexel for any loss caused by alleged stolen securities. On or about July 21, 1983, Drexel's Switzerland office purchased 41 El Paso Housing Authority bearer bonds for $112,681 from Chessed Anstalt, a Liechtenstein corporation. The bonds, originally issued in 1967, bore a maturity date of July 1, 1997. Plaintiffs allege that Drexel purchased the bonds in good faith, for value, without notice of adverse claims and thus qualified as a bona fide purchaser for value (see, Uniform Commercial Code § 8-302). On July 27, 1983, Drexel sold the bearer bonds to Irving Trust Co. for $118,218. Plaintiffs assert that Irving also took possession of the bonds in good faith, for value and without notice of any adverse claims. Irving shortly discovered that a holder previous to Drexel had reported the bonds stolen. Under these circumstances, New York Stock Exchange rule 272 and Securities Exchange Commission rule 17f-1 (17 CFR 240.17f-1) required Drexel to reclaim and replace the bonds for its purchaser, Irving. Drexel complied by going to the open market and purchasing replacement bonds. Irving then assigned to Drexel all of its right, title and interest in the stolen bonds and coupons.

Drexel sought indemnification from plaintiffs for its losses. Plaintiffs paid the claim and Drexel, in turn, assigned to plaintiffs all of its right, title and interest in the bonds. Plaintiffs claim, therefore, also to be bona fide purchasers as assignees through the bona fide purchasers' chain of transfers.

Plaintiffs also note that the Federal Bureau of Investigation seized the bonds and their interest coupons from Drexel as evidence in 1983 as part of its investigation of the bond theft. The FBI first returned the bonds and coupons to plaintiffs in 1989. At that first opportunity, plaintiffs detached the interest coupons then due and payable and presented them to the El Paso Housing Authority via its transfer agent, Morgan Guaranty Trust Company. Morgan refused payment, confiscated the coupons and declined to remove "stops" placed against the bonds themselves, as requested by plaintiffs.

Plaintiffs sued in 1990, seeking relief under three separate causes of action: a declaration of their rights and title to the bonds and coupons; tortious conversion of the bonds and interest coupons by Morgan; and breach of the bond obligations.

At Supreme Court, defendants successfully resisted the suit on Statute of Limitations grounds. The court held that plaintiffs' rights were wholly derivative from Drexel and that all the claims thus accrued in 1983, when Drexel first learned of the theft.

The Appellate Division reversed on the law and reinstated plaintiffs' complaint, with two Justices dissenting (201 A.D.2d 58, 614 N.Y.S.2d 533). It applied UCC 3-109, concluding that accrual of the declaratory judgment claim would occur on the first day after maturity of the bonds in 1997 (see, UCC 3-122). As to other claims, the Court held that "[a]ny of these interest [coupon] claims which accrued six years prior to the commencement of this action are presumably precluded by the period of limitations" (201 A.D.2d, at 61, 614 N.Y.S.2d 533). By implication, the others were held viable and not stale. Defendants-appellants seek reinstatement of Supreme Court's dismissal of the entire complaint.

In Solnick v. Whalen, 49 N.Y.2d 224, 425 N.Y.S.2d 68, 401 N.E.2d 190, the Court stated that the CPLR prescribes no general period of limitation for a declaratory judgment action. Courts must look to the underlying claim and the "nature of the relief sought" to determine the applicable period of limitation (id., at 229, 425 N.Y.S.2d 68, 401 N.E.2d 190; see also, Sears, Roebuck & Co. v. Enco Assocs., 43 N.Y.2d 389, 395, 401 N.Y.S.2d 767, 372 N.E.2d 555). Stated another way, a court's inquiry focuses on the "substance of [the] action to identify the relationship out of which the claim arises and the relief sought" (Solnick v. Whalen, supra, at 229, 425 N.Y.S.2d 68, 401 N.E.2d 190; New York City Health & Hosps. Corp. v. McBarnette, 84 N.Y.2d 194, 201, 616 N.Y.S.2d 1, 639 N.E.2d 740; Save the Pine Bush v. City of Albany, 70 N.Y.2d 193, 202, 518 N.Y.S.2d 943, 512 N.E.2d 526; Press v. County of Monroe, 50 N.Y.2d 695, 701, 431 N.Y.S.2d 394, 409 N.E.2d 870). When the rights of parties sought to be stabilized in a declaratory judgment action are, or have been, open to resolution through a particular procedural route for which a specific limitation period is statutorily provided, then that period generally governs the time for commencement of the declaratory judgment action ( Solnick v. Whalen, 49 N.Y.2d 224, 229, 425 N.Y.S.2d 68, 401 N.E.2d 190, supra). Otherwise, the six-year catch-all Statute of Limitations set forth in CPLR 213(1) applies (see, New York City Health & Hosps. Corp. v. McBarnette, supra, 84 N.Y.2d at 201, 616 N.Y.S.2d 1, 639 N.E.2d 740; Solnick v. Whalen, supra, 49 N.Y.2d at 230, 425 N.Y.S.2d 68, 401 N.E.2d 190; Sears, Roebuck & Co. v. Enco Assocs., supra, 43 N.Y.2d at 396, 401 N.Y.S.2d 767, 372 N.E.2d 555; Press v. County of Monroe, supra, 50 N.Y.2d at 701, 431 N.Y.S.2d 394, 409 N.E.2d 870).

The gravamen of plaintiffs' declaratory judgment action is that they are bona fide purchasers entitled to payment on the bonds upon maturity and on the interest coupons when due. The declaratory prayer for relief includes that "plaintiffs right and title to the El Paso bonds and coupons is superior to all other parties [and] that defendants withdraw all stops and other impediments preventing plaintiffs from freely negotiating the aforesaid bearer bonds."

We note initially that CPLR 211(a) grants a 20-year limitation period to recover on a bond. It provides:

"An action to recover principal or interest upon a written instrument evidencing an indebtedness of the state of New York or of any person, association or public or private corporation * * * secured only by a pledge of the faith and credit of the issuer, regardless of whether a sinking fund is or may be established for its redemption, must be commenced within twenty years after the cause of action accrues."

Although defendant City of El Paso Housing Authority qualifies as a public corporation under CPLR 211(a), plaintiffs cannot avail themselves of that lengthy stretch of repose. The bonds at issue on their face declare that they are backed by the "full faith and credit of the United States." Since the bonds are not secured "only" by a pledge of full faith and credit of the "issuer," the long relaxation allowed under CPLR 211(a) is unavailing.

Next, CPLR 213(4) relates specifically to actions on bonds. Subdivision (4) provides that "an action upon a bond or note, the payment of which is secured by a mortgage upon real property, or upon a bond or note and mortgage so secured, or upon a mortgage of real property" must be commenced within six years. Because the bonds at issue are not secured by a mortgage upon real property, that prerequisite discounts its applicability. Without any other specific limitation periods being statutorily applicable to plaintiffs' declaratory relief claims, the cow-catcher six-year period obtains (see, CPLR 213[1]; Solnick v. Whalen, 49 N.Y.2d 224, 230, 425 N.Y.S.2d 68, 401 N.E.2d 190, supra).

The dispositive fulcrum, thus, becomes the accrual date. The question is whether 1983, 1989 or 1997 controls. Defendants-appellants urge 1983, when Drexel first became aware that the bonds were stolen (Cruden v. Bank of N.Y., 957 F.2d 961 [2d Cir.1992]; Insurance Co. v. United States, 561 F.Supp. 106 [E.D.Pa.1983]; Rieser v. Baltimore & Ohio R.R. Co., 123 F.Supp. 44, affd. 228 F.2d 563 [2d Cir.1955]. That was Supreme Court's view and ruling, though the Appellate Division differed.

Plaintiffs seek to uphold the 1997 accrual date on the ground that the bearer bonds are time instruments governed by UCC 3-109 (see also, UCC 3-122). UCC 3-109(1) provides that "[a]n instrument is payable at a definite time if by its terms it is payable (a) on or before a stated date or at a fixed period after a stated date." Subdivision (1) of UCC 3-122 provides that "[a] cause of action against a maker or an acceptor accrues (a) in the case of a time...