The opinion of the court was delivered by: BRODERICK
On November 24, 1974, H.S. Equities, Inc. ("HS")
commenced this action against Hartford Accident & Indemnity Company ("Hartford") under a Brokers' Blanket Bond ("the Bond") that had been issued by Hartford to HS on October 29, 1967.
Hartford proceeded on a third party complaint herein against Marvin Michael, a former registered representative of HS. The relief sought by HS is judgment against Hartford for moneys paid by HS in connection with the settlement of an action entitled Paul H. Odessey and Rosaline L. Odessey v. Hayden Stone Inc. and Marvin Michael, 69 Civ. 5444 ("Odessey action").
The Odessey action was commenced in the Southern District of New York in 1969. Plaintiffs therein claimed violations of the federal securities laws and the Commodities Exchange Act, breach of fiduciary duty, and negligence. The primary allegations of the complaint were that Michael, a registered representative in the employ of HS (then Hayden Stone), churned the Odesseys' securities accounts, engaged in unauthorized transactions, and made fraudulent misrepresentations to the Odesseys.
Prior Proceedings. Michael moved for summary judgment herein on the ground that in 1973 HS had released him from all liability in connection with the handling of the Odessey accounts, including the alleged churning thereof. Hartford moved for summary judgment on the ground that by releasing Michael without the knowledge or consent of Hartford, HS had injured the subrogation rights of Hartford. HS opposed Hartford's motion and moved for summary judgment on its claim.
Judge Metzner granted Michael's motion but denied the motions of Hartford and HS. Judge Metzner held that HS had in fact injured Hartford's right of subrogation by releasing Michael in the Odessey action but that a triable issue of fact subsisted:
This release of the third party responsible for the loss discharges Hartford from its obligation under the bond If it had not yet denied liability.
(emphasis added). Memorandum Order dated November 10, 1976, pp. 3-4. Thus there was a triable issue of fact as to whether Hartford had denied liability under the Bond prior to the settlement of the Odessey action.
Plaintiff's contentions. Plaintiff contends in this action that the matters complained of in the Odessey action primarily churning by Michael and false representations by Michael to the Odesseys would, if established, have constituted fraudulent or dishonest acts within the meaning of the Bond. Plaintiff further contends that Hartford is liable to it for attorneys' fees and disbursements incurred and paid in defending the Odessey action, pursuant to the Attorneys' Fees Clause of the Bond.
Defendant's contentions. Hartford contends that it has no liability to HS under the Bond. It claims that HS received commissions amounting to at least $ 360,000 with respect to transactions in the accounts of the Odesseys and that that sum should be set off against the amount which might otherwise be due under the Bond. It claims that HS settled the Odesseys' claims without the knowledge, consent or authority of Hartford. It also claims that a general release delivered by HS to Michael in connection with the settlement of the Odessey action was not authorized by Hartford, interfered with any rights of subrogation which Hartford might have had, and served to discharge Hartford from liability under the Bond.
Hartford further maintains that the Odessey action, in the course of which HS incurred the attorneys' fees and costs sought herein, did not establish liability on the part of HS on account of any loss, claim or damage which would constitute a valid and collectible loss that was covered by the Bond; hence HS is not entitled to recover either the amount it paid in settlement of the Odessey action or the attorneys' fees and costs it incurred in connection with that action.
Hartford contends that it never denied liability under the Bond prior to the release of Michael and the settlement of the Odessey action. It claims that prior to the Odessey settlement it requested HS to forward copies of papers in the Odessey action but that HS failed to do so; this, it asserts, violated the Attorneys' Fee Clause of the Bond, and therefore the Attorneys' Fee Clause did not become operative.
A bench trial was had herein. I find the ...