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Gruss v. Lumbermens Mutual Casualty Co.

March 3, 1970


Lumbard, Chief Judge, and Friendly and Feinberg, Circuit Judges.

Author: Feinberg

FEINBERG, Circuit Judge:

In 1961, Lumbermens Mutual Casualty Company issued a policy of insurance, known as a Brokers Blanket Bond, to Oscar Gruss & Son, a partnership dealing in securities. The policy insured Gruss against loss caused by fraudulent acts of employees. In July 1962, Gruss notified Lumbermens that a Gruss employee had apparently committed fraudulent acts which might cause substantial claims against Gruss. Claims in large amounts did subsequently descend upon Gruss and were finally settled at great expense. The reaction of Lumbermens, however, was to disclaim liability under the Brokers Blanket Bond policy and to resist to the end any claim for reimbursement by Gruss thereunder. Gruss eventually had to sue its insurer. In the fall of 1968, after four years of litigation in the United States District Court for the Southern District of New York, Gruss finally obtained a judgment against Lumbermens on the policy in the amount of $436,601.52, with costs of $4,321.95. Lumbermens appeals from that judgment and Gruss cross-appeals from the denial of one item of claimed loss and one item of costs. For reasons indicated below, we affirm on both appeals. We also invoke 28 U.S.C. ยง 1912 and F.R.A.P. 38 and award Gruss a total of ten per cent interest on its judgment, counsel fees of $7,500 on the appeal and double costs.


The action by Gruss against Lumbermens was brought in the New York Supreme Court in 1964, and was thereafter removed to the court below on grounds of diversity. The case was tried on a complaint which contained three causes of action, two of which concern us on this appeal. The first claimed $356,382 for loss sustained by plaintiff Gruss as a result of the dishonest acts of its employee, Isidor Buchmann, manager of plaintiff's wholly-owned Swiss subsidiary, Valoren & Handels, A.G. ("Valoren"). The second sought to recover court costs and attorney's fees amounting to $116,038, paid by Gruss in defending litigation brought against it because of Buchmann's fraudulent acts.*fn1 The first cause of action was tried to a jury, which returned a special verdict resulting in judgment for Gruss of $275,000 plus interest of six per cent from June 6, 1966, apparently the date of payment by Gruss on claims brought against it. The second cause of action was tried by the court, Richard H. Levet, J., who awarded Gruss $103,599.77, with interest of six per cent from varying dates. Before discussing the arguments of Lumbermens as to why we should set aside these awards, it will be helpful to state the facts.

From the evidence before it, the jury could have found the following: The policy in question was issued October 1, 1961, in the amount of $700,000. The policy insured Gruss against

Any loss through any dishonest, fraudulent or criminal act of any * * * Employees, committed anywhere whether committed alone or in collusion with others * * *.

Later riders to the policy also added Valoren, the Swiss subsidiary, as a named insured and its office as a covered office. Buchmann, a Swiss national, had been employed by Gruss since 1955 as manager of Valoren. Valoren paid him a small salary, but his major compensation was in the form of commission payments sent to him monthly by Gruss on the brokerage orders transmitted to Gruss by Valoren from Swiss financial institutions for execution on the New York or American Stock Exchange. Before Gruss opened the Valoren office, the New York Stock Exchange had required Gruss, a member firm, to guarantee all liabilities of Valoren and to make Buchmann a direct employee and a Gruss registered representative, in accordance with Stock Exchange policy. Thereafter, a course of business dealing ensued between Gruss, on the one hand, and its subsidiary and Buchmann, on the other. There were periodic reports and audits, and the relationship was apparently uneventful and profitable.

In 1962 -- after seven years -- Gruss discovered that its confidence in Buchmann had been misplaced. Alerted by a telephone call from a Swiss banker that Valoren and Buchmann were in difficulty, one of the Gruss principals flew to Switzerland to confront Buchmann. At a meeting which lasted several hours, attended by lawyers for Gruss and Buchmann and by others, Buchmann revealed a series of fraudulent acts and concealed transactions. These included the conversion of securities belonging to previously undisclosed customers of Valoren, the embezzlement of the funds so obtained, the concealment of these transactions by means of entries on Valoren's books, and false reports to Gruss. The story thus uncovered was typical -- Buchmann had set up his own vehicle for speculation with funds of Valoren customers and the then current collapse of the stock market brought matters to a head. What was unusual, perhaps, was that at another meeting that evening Buchmann signed a four-page typewritten document, which set forth the substance of his unhappy venture and his own dishonest acts. This statement and the testimony of three of the participants in the meetings were received at trial.

As a result of Buchmann's activities, both Valoren and Buchmann were placed into bankruptcy in Switzerland. Various Valoren customers demanded that Gruss compensate them for their losses, which totalled far more than the slight unpledged assets of Buchmann and Valoren. Beginning in the latter part of 1962, some 30 Valoren creditors started actions against Gruss in the Supreme Court, New York County, claiming damages of $764,000, essentially on theories of respondeat superior. After three years of vigorous litigation, the cases were settled, with the approval of a court-appointed referee, for a cash payment of $275,000 for distribution to Valoren's creditors; Gruss also agreed to subordinate its own claim as a creditor for $34,867. In addition to these losses, Gruss suffered the costs and legal fees of defending the actions against it because Lumbermens refused to undertake the defense. Not only did Lumbermens refuse Gruss any assistance, but in at least one respect discussed below, appeared to form a litigation alliance with Buchmann. In any event, Gruss sued Lumbermens on its policy, claiming the damages and obtaining the judgment set forth above. Both parties appeal from the determinations of the trial court, although the complaints of Gruss, as cross-appellant, are few. Those of Lumbermens, however, are assuredly not and to them we now turn.


Lumbermens has favored us with a barrage of reasons why the two awards to Gruss must be reversed. For example, we are told that the judgment should be vacated in toto and the complaint dismissed because there was no proof of dishonest acts by Buchmann, the proof of financial loss to Gruss was inadequate, and Buchmann was not an employee of Gruss. Lumbermens also argues that a new trial is necessary because Judge Levet struck four out of twelve defenses in a proposed amended answer, Lumbermens was deprived of an opportunity to take necessary pre-trial testimony, there were many erroneous rulings on evidence, including the admission of Buchmann's confession, and the trial judge was unfair. Finally, the award for attorney's fees is attacked as insufficiently supported by the record. We think that only two of these contentions require discussion.

Lumbermens objects to a pre-trial ruling of Judge Weinfeld and to admission of Buchmann's statement at trial. The facts as to the former are as follows: In October 1966, Lumbermens moved for the issuance of letters rogatory to take the depositions of Buchmann and two of his confederates, one of whom was present when Buchmann signed his statement. Because Switzerland does not allow oral depositions of its residents, the depositions would have had to be taken on written interrogatories only. Judge Weinfeld pointed out that prior to the application, representatives of Lumbermens, including its attorney in the action, had

made several trips to Switzerland where, with local counsel, accountants and investigators, they have, over extended periods, conferred and worked closely with the proposed deponents. The defendant's records of the conferences and interviews with the three alleged malefactors leave no doubt that they have cooperated and continue to cooperate with the defendant's representatives. Indeed, ...

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