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FDIC v. NATIONAL SUR. CORP.

January 19, 1977

FEDERAL DEPOSIT INSURANCE CORPORATION, in its Corporate Capacity and as Receiver of FRANKLIN NATIONAL BANK, Plaintiff,
v.
NATIONAL SURETY CORPORATION, FIREMAN'S FUND INSURANCE COMPANY, THE AETNA CASUALTY AND SURETY COMPANY, INSURANCE COMPANY OF NORTH AMERICA and SOL NEIL CORBIN, as Trustee in Bankruptcy of FRANKLIN NEW YORK CORPORATION, Defendants. SOL NEIL CORBIN, as Trustee in Bankruptcy of FRANKLIN NEW YORK CORPORATION, Plaintiff, v. NATIONAL SURETY CORPORATION, AETNA CASUALTY AND SURETY COMPANY and INSURANCE COMPANY OF NORTH AMERICA, Defendants



The opinion of the court was delivered by: PLATT

MEMORANDUM AND ORDER

 PLATT, D.J.

 In the second of the above entitled actions defendant bonding companies have moved, pursuant to Rule 56 of the Federal Rules of Civil Procedure, for summary judgment, and the Trustee in such action has cross-moved for partial summary judgment under such Rule for a determination that the notice and proof of loss requirements of the bonds issued by the defendants have been satisfied with respect to the Trustee's first and second claims and that the notice provision in such bonds is not a bar to the Trustee's third claim in his complaint.

 Since last July the parties have inundated this Court with memoranda, answering memoranda, reply memoranda, supplemental memoranda, etc., and innumerable affidavits to the point where it has become exceedingly cumbersome to define the key issues for determination on these motions. In addition the Court has difficulty with ridding itself of the impression that the defendant bonding companies are operating under the mistaken assumption that a torrent of words and paper will either overwhelm the Court or somehow otherwise do away with their obligation to defend on the merits lawsuits brought against them by their insured.

 In reality, when the excess verbiage is stripped away, the questions presented by the motions are relatively simple.

 Plaintiff's amended complaint, around which most of the controversy herein appears to rage, alleges that jurisdiction of the action is based upon diversity under § 1332 of Title 28 of United States Code and, particularly with respect to the second claim therein, under §§ 2201 and 2202 of Title 28 of United States Code.

 Plaintiff alleges that he is the Trustee in Bankruptcy of the Franklin New York Corporation ("FNYC"), a New York corporation which filed a voluntary petition in bankruptcy in United States District Court for the Southern District of New York on October 16, 1974. Prior to that date FNYC owned all the outstanding common stock, other than directors' qualifying shares, of Franklin National Bank ("FNB"), a national banking association organized in 1926 under the laws of the United States.

 On October 8, 1974, FNB was declared insolvent by the Comptroller of the Currency and the Federal Deposit Insurance Corporation ("FDIC") was appointed its Receiver. During the years 1969 through 1972 the defendants executed and delivered to FNB Bankers Blanket Bonds insuring FNYC and FNB against any loss through any dishonest or fraudulent act of employees of either of said corporations with amounts of coverage as follows: Bond # Insurer Deductible Limit of Liability HFR 2327632 NSC $ 100,000 $4,000,000 HFR 2327633 NSC $ 4,100,000 $4,000,000 1 F-19232-BC Aetna $ 8,000,000 $2,000,000 S-72-47-07 INA $10,100,000 $5,000,000

 Plaintiff further alleges in his complaint that all premiums on such bonds were paid and that the insured performed or satisfied all applicable terms and conditions.

 For his first claim the plaintiff alleges that in 1973 and 1974, while such bonds were in full force and effect, certain fraudulent or dishonest acts were committed by one or more of the employees of the insured who were engaged in foreign exchange trading and the processing of foreign exchange contracts resulting therefrom; that in May 1974, immediately upon discovery by the plaintiffs that losses resulted from such trading, defendants were given written notice by the FNB of the same and thereafter proofs of loss were filed with the defendants on or about June 1974, and as a result of the aforesaid losses the value of FNYC's investment in FNB declined in an amount in excess of $45,000,000, and that therefore plaintiff is entitled to be indemnified and held harmless by defendants from losses within the limits of the above-specified bonds.

 For his second claim plaintiff realleges all of the foregoing and says further that in 1972 through 1974 certain fraudulent or dishonest acts were committed by one or more employees in the investment department of FNB who were responsible for the purchase and sale, for either a trading account or an investment portfolio of United States Government or other securities as a result of which the value of FNYC's investment in FNB declined in an amount in excess of $15,100,000, and that plaintiff therefore is entitled to be indemnified and held harmless by defendants for the aforesaid losses within the limits of the above-indicated bonds.

 For his third claim plaintiff alleges that as a result of the fraudulent and dishonest acts alleged in the complaint four class actions against FNYC and FNB were filed by purchasers of FNYC securities and are currently pending in this Court, and that as a consequence thereof plaintiff has been substituted as a defendant in each of these actions and has incurred legal and other expenses in their defense. Plaintiff says that he has demanded that the defendants indemnify and hold him harmless for legal and other expenses as well as for any losses resulting from judgments entered in such actions and that he is entitled to a declaratory judgment against the defendants for the same.

 For his fourth claim, plaintiff alleges that he gave the defendants written notice of the losses heretofore alleged and filed proofs of loss and despite this fact defendants in bad faith and in gross disregard of their obligations under the bonds, have failed and refused to make payment therefor and that plaintiff is therefore entitled to recover his legal and other expenses incurred in instituting and prosecuting this action.

 Defendants claim that the Trustee's first and second claims are derivative claims which the Trustee lacks standing to maintain directly and, as is customary in all insurance policy claims, they allege that the Trustee's first, second and third claims are barred because of the Trustee's alleged failure to give proper written notice and file adequate proofs of loss. As to the Trustee's fourth claim, they ...


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