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March 25, 1976

In the Matter of F. O. BAROFF COMPANY, INC., Debtor. AMERICAN BANK & TRUST COMPANY, Plaintiff-Appellant,
Edward S. DAVIS, Trustee, Defendant-Appellee

The opinion of the court was delivered by: PIERCE


 PIERCE, District Judge.

 This action arises in the context of the liquidation of the business of F. O. Baroff Company, Inc. (the Debtor or the Insured) pursuant to the provisions of the Securities Investor Protection Act (SIPA), 15 U.S.C. §§ 78aaa-78 III. The instant dispute, which represents the last substantive matter open in this liquidation proceeding, is an appeal from the ruling of the Hon. Edward J. Ryan, Bankruptcy Judge and Special Master for this liquidation, granting the Trustee's motion for summary judgment with respect to the claim of American Bank & Trust Co. (American) for recovery of certain proceeds of an indemnity insurance policy of the Debtor, paid to the Debtor by the Insurance Company of North America (INA or the Insurer). The Special Master held that American was not entitled to the insurance proceeds recovered by the Trustee for the General Estate of the Debtor, except for that portion as to which American's application was unopposed. American's cross motion for summary judgment was denied.

 The sole issue presented on this appeal concerns the application of the provisions of Section 167 of the Insurance Law of the State of New York to the facts of this case. For the reasons stated below, the Court affirms the Order of the Bankruptcy Judge.

 The Facts

 The facts which are relevant to this appeal as found by the Court below are not in dispute and may be stated briefly. F. O. Baroff and Company, Inc. was engaged in business as a securities broker-dealer prior to being placed in liquidation by order of this Court dated January 6, 1972. As a member of the National Association of Securities Dealers, Inc. the Debtor was required to obtain and on July 9, 1970 did obtain an insurance policy known as a "Broker Blanket Bond". This policy, issued by INA, provided coverage, inter alia, for claims arising from loss sustained through dishonest and fraudulent acts of the Debtor's employees. The Debtor paid premiums on the policy and it was in full force and effect on January 6, 1972, the date of the commencement of the instant liquidation.

 In January, 1970, the Debtor entered into a Collateral Loan and Security Agreement (Security Agreement) which provided that in connection with the rendering of certain services to the Debtor by American, the Debtor would deliver negotiable securities as collateral for liabilities and indebtedness to American arising under the Security Agreement. American held securities pledged by the Debtor pursuant to this Security Agreement at the time the Debtor was placed in liquidation. These securities were subsequently sold by American and the proceeds were placed in an escrow fund pending a determination of the rights of the respective parties to the proceeds of the sale.

 In April, 1971, securities owned by one Esther Corey (Corey), a customer of the Debtor, were stolen from her and were sold through an office of the Debtor by means of a forged endorsement. The Debtor guaranteed the forged endorsement and the Bank, pursuant to its agreement to clear securities transactions for the Debtor, also guaranteed the signature.

 Subsequently, in November, 1971, Corey brought an action against the Debtor for recovery of her losses. It is not disputed that this claim was within the terms of the INA insurance policy held by the Debtor.

 In the course of negotiating with Corey concerning her claim, the Debtor agreed to pay and did pay to Corey $5,128.54 representing accrued dividends on the stolen securities. In connection with the Corey claim, the Debtor also paid to Loeb Rhodes & Co., a member of the New York Stock Exchange which had effected the sale of certain of the stolen securities on the New York Stock Exchange and which agreed to return the shares to Corey, the sum of $9,240.87 to cover the redelivery of the shares to Corey. Thus, prior to commencement of the liquidation proceeding, the Debtor paid a total of $14,369.41, directly or indirectly, in partial satisfaction of the Corey claim.

 After the commencement of the instant liquidation proceeding, American applied to the Court for an order directing that certain claims which it had against the Debtor for unpaid loans and advances, interest thereon, and attorneys' fees be paid to American from the escrow fund; and, such payments, not at issue here, were made to American, leaving a balance of $79,321.62 in the escrow fund. American also contended that the "dragnet" clause of the Security Agreement with the Debtor covered certain contingent claims including the Corey claim. This position was initially disputed by the Trustee, but the issue of whether contingent claims were covered by the Security Agreement was mooted when American paid $180,449.58 to Corey in full settlement of her claim. Thereafter, the Trustee acquiesced in the payment to American of the $79,321.62 remaining in the escrow fund as partial reimbursement for American's liability to Corey.

 Having previously filed a claim with INA for $14,369.41 in connection with losses incurred with respect to the Corey claim, the Trustee filed an amended claim on July 10 and September 18, 1974 for $100,000, the limit of the Debtor's policy. This amount was received and added to the Debtor's General Estate.

 In June, 1974, American filed the instant complaint asserting a right to the $100,000 proceeds of the insurance policy as compensation for American's loss of $101,127.96 on the Corey claim. The Trustee did not object to American's being paid $6,308.97 from the $100,000, representing the balance remaining after reimbursement to the Debtor of the $93,691.03 total paid by it with respect to the Corey claim. American's application was denied insofar as it ...

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