William Iselin & Co., Inc. v. Fireman's Fund Ins. Co.

• Decision Date: 08 May 1986
• Citation: 117 A.D.2d 86,501 N.Y.S.2d 846
• Parties: WILLIAM ISELIN & CO., INC., Plaintiff-Respondent-Appellant, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant-Appellant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 846

501 N.Y.S.2d 846

117 A.D.2d 86

WILLIAM ISELIN & CO., INC., Plaintiff-Respondent-Appellant, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant-Appellant-Respondent.

Supreme Court, Appellate Division First Department.

May 8, 1986.

Peter M. Dodson, of counsel (John E. Beerbower and Daniel J. Kramer, with him on brief, Cravath, Swaine & Moore, New York City, attorneys), for plaintiff-respondent-appellant.

Jerome Murray, of counsel (Robert Wang and Robert G. Post, with him on brief, Hendler & Murray, P.C., New York City, attorneys), for defendant-appellant-respondent.

Before KUPFERMAN, J.P., and SANDLER, ROSS, ASCH and MILONAS, JJ.

MILONAS, Justice.

On or about June 17, 1975, plaintiff William Iselin & Company entered into an accounts receivable financing agreement with the W.C. Lawson Cotton Company of Georgia, Inc. Pursuant to this arrangement, Iselin was to make advances to Lawson Cotton based upon ninety percent of the net amount of accounts receivable generated by Lawson Cotton. W. Carlton Lawson was the chief executive and chief operating officer of Lawson Cotton, a company engaged in the business of purchasing and reselling bulk cotton. Iselin extended its advances to Lawson Cotton upon receipt at its New York office of an assignment, with invoices attached, setting forth the goods that Lawson Cotton had shipped to its customer and including a bill of lading or other delivery document issued by the carrier who made the delivery.

The carrier which generally delivered the orders of Lawson Cotton was the Lawson Trucking Company, Inc., owned and operated by Jordan Lawson, the brother of W. Carlton Lawson. Almost every bill of lading and delivery document assigned to Iselin bore the stamped signature of "Lawson Trucking Co., Inc., J. Lawson, President." However, Jordan Lawson subsequently testified at a deposition that he had never authorized anyone to purchase the stamp or to use it, while one of Lawson Cotton's employees admitted that it was he and not a representative of Lawson Trucking who invariably stamped the signature on the documents in question.

In August of 1979, Iselin discovered that Lawson Cotton was engaged in a scheme to defraud Iselin into purchasing fictitious accounts receivable. The fraud consisted primarily of assigning forged bills of lading, forged delivery documents and invoices reflecting non-existent transactions. These spurious invoices were frequently exact handwritten duplications of previously assigned invoices. Another form of the fraud occurred by means of the establishment by Lawson Cotton of bogus checking accounts in the names of three of its customers. In order to create the appearance of periodic customer payments of the false invoices, W. Carlton Lawson would draw checks upon these accounts and himself forge the names of the payors.

In September of 1979, Iselin notified its insurer, defendant Fireman's Fund Insurance Company, of the losses which it had sustained as a result of the Lawson Cotton fraud. The policy involved was a standard Bankers Blanket Bond which had been issued to the C.I.T. Financial Corporation and certain of its subsidiaries, among them Iselin. The Bond consisted of sixteen riders, one of which was entitled "Cosurety Rider" and contained a pro rata clause apportioning liability among three cosureties with Fireman's Fund denoted as the "Controlling Company". Unlike the other riders, the cosurety provision did not have a signature line for the insured to indicate its acceptance. A sworn proof of loss was filed by Iselin in June of 1980 detailing the fraud and accompanied by copies of each invoice for which Iselin did not receive payment, along with the delivery documents bearing the unauthorized stamp of Lawson Trucking.

Although defendant investigated the claim for two years, and on four occasions extended the time in which Iselin might commence suit under the Bond, it never advised plaintiff that in its opinion the fictitious invoices were not counterfeited or that the bills of lading and delivery documents were not forged or that coverage would be declined. Finally, in September of 1982, plaintiff commenced the instant action seeking recovery of $4,430,060.41. In that regard, Iselin alleged in its complaint that the bills of lading and delivery documents upon which it relied in making advances to Lawson were forged as to signature and that these documents, along with the invoices, were counterfeited within the contemplation of Insuring Agreement (E) of the Bond.

According to Insuring Agreement (E), Iselin was to be indemnified against any:

Loss (1) through the Insured's having, in good faith and in the course of business, whether for its own account or for the account of others, in any representative, fiduciary, agency or any other capacity, either gratuitously or otherwise, purchased or otherwise acquired, accepted or received, or sold or delivered, or given any value, extended any credit or assumed any liability, on the faith of, or otherwise acted upon any securities, documents or other written instruments which prove to have been

(a) "counterfeited" or forged as to the signature of any maker, drawer, issuer, endorser, assignor, lessee, transfer agent or registrar, acceptor, surety or guarantor or as to the signature of any person signing in any other capacity ....

Fireman's Fund answered by raising some eleven affirmative defenses. It subsequently moved for summary judgment, which motion was denied by Special Term. The court did, however, grant plaintiff's cross-motion to strike the fourth, fifth, sixth and seventh affirmative defenses only to the extent of striking the seventh affirmative defense relating to defendant's assertion that pursuant to the Cosurety Rider it had no more than a limited liability of one-third of any covered loss. In its fourth, fifth and sixth defenses, Fireman's Fund contends that plaintiff's alleged losses were excluded from coverage because the documents at issue herein were neither counterfeited nor forged as to signature within the meaning of the Bond.

At the outset, it should be noted that nearly all of the bills of lading and delivery documents herein contained false signatures. The stamped printed signatures of "Lawson Trucking Co., Inc., J. Lawson, President" affixed to the bills of lading and delivery documents were forged by an employee of Lawson Cotton since the stamp was being so utilized without the knowledge or consent of Jordan Lawson. Yet, Fireman's Fund claims that the documents were not "forged as to signature" because nowhere did they include a handwritten or facsimile handwritten signature. Neither New York law nor the Unifo Commercial Code, however, supports defendant's hypertechnical definition of the word "signature" (see General Construction Law 46; U.C.C. 3-401[2] ). Pursuant to section 46 of the General Construction Law:

The term signature includes any memorandum, mark or sign, written, printed, stamped, photographed, engraved or otherwise placed upon any instrument or writing with intent to execute or authenticate such instrument or writing.

Nor can the statement in the Bond that "mechanically reproduced facsimile signatures are treated the same as handwritten signatures" be reasonably read to mean that only script signatures are valid within the context of the Bond. Indeed, Lawson Trucking did, in fact, generally sign its documents in precisely the manner undertaken by Lawson Cotton in the furtherance of its fraudulent scheme. Since it is evident that the instruments were forged as to signature, the fourth, fifth and sixth affirmative defenses should have been dismissed.

Defendant also argues that an insured may only collect under the policy where the supposed fraud involved an attempt to imitate genuine documents and not simply because the instruments relied upon contained false representations. In that regard, a divergence of opinion has developed in the federal courts as to whether documents reflecting entirely fictitious transactions can be considered counterfeited under the Bond. The majority view has adopted the restrictive position urged by defendant, which is exemplified by the Second Circuit's decision in Exchange National Bank of Olean v. Insurance Company of North America, 341 F.2d 673 (2nd Cir.). In that case, the bank made payments on documents in which the signatures were valid and authorized (unlike the situation before us) and referred to existing accounts but contained misrepresentations as to facts--specifically, shipments were not made as alleged. The court declared therein that:

A document or writing is counterfeit if it is an imitation, if it attempts to simulate another document or writing which is authentic. The deceptive and fraudulent quality of these invoices, however, arose not from the effort to imitate or simulate authentic invoices, but from the falsity of the implicit and explicit representations of fact, to wit, that certain goods had already been shipped to a customer. (at 676)

In accordance with this holding, any losses suffered by the insured are recoverable under the Blanket Indemnity Bond only where the instruments themselves imitate the genuine or where they contain a forgery. (See Whitney National Bank of New Orleans v. Transamerica Insurance Company, 476 F.2d 632 [Third Cir.]; Maryland Casualty Company v. State Bank & Trust Company, 425 F.2d 979 [Fifth Cir.]; Capital Bank of Chicago v. Fidelity and Casualty Company of New York, 414 F.2d 986 [Seventh Cir.]; First National Bank and Trust Company of Oklahoma City v. United States Fidelity and Guaranty Company, 347 F.2d 945 [Tenth Cir.]; North Carolina National Bank v. United States Casualty Company, 317 F.2d 304 [Fourth Cir.]; First National Bank of South Carolina of Columbia v. Glens Falls Insurance Company, 304 F.2d 866 [Fourth Cir.] ) It is significant that even under the restrictive view, the insured will be compensated for its losses where, as in the present matter, the...