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H.S. Equities Inc. v. Hartford Accident and Indemnity Co.

decided: October 1, 1981.

H.S. EQUITIES, INC. PLAINTIFF-APPELLANT CROSS-APPELLEE,
v.
HARTFORD ACCIDENT AND INDEMNITY COMPANY DEFENDANT AND THIRD PARTY PLAINTIFF-APPELLEE-CROSS-APPELLANT, V. JOSEPH DECKER, THIRD-PARTY DEFENDANT-APPELLEE



Plaintiff appeals from a judgment entered in the United States District Court for the Southern District of New York, Metzner, J., awarding plaintiff $64,512.90 and interest, from an order denying in part plaintiff's post-trial motion to increase the award, and from an order partially granting defendant's motion for summary judgment. Defendant appeals from the judgment awarding plaintiff $64,512.90 and interest and dismissing defendant's third party complaint, from an order denying defendant's post-trial motion to decrease the award, and from an order denying in part defendant's motion for summary judgment. Reversed in part and affirmed in part.

Before Timbers and Waterman, Circuit Judges, and Lasker, District Judge.*fn*

Author: Lasker

HS Equities, Inc. (HS) appeals from a judgment entered after a bench trial before the United States District Court for the Southern District of New York (Metzner, District Judge)*fn1 in which it was awarded $64,512.90 and interest on its claim for $130,000. asserted against Hartford Accident and Indemnity Company (Hartford), and from a post-trial order denying its motion to amend the findings of fact by increasing the award. In addition, HS appeals from an order granting Hartford summary judgment on HS' separate claim for $49,730.61, for attorney's fees and costs.

Hartford cross appeals from the judgment of the district court awarding HS $64,512.90 and interest and from the dismissal of Hartford's third-party complaint against Joseph Decker (Decker), as well as from the order denying its claim that HS' action was not commenced within the contractual period of limitation.

I.

HS brought this action to recover, under a blanket brokers bond (the Bond) issued by Hartford, the sum of $130,000. paid by HS in settlement of actions brought against HS and Decker, its registered representative, and for attorney's fees. The Bond, which Hartford issued to HS*fn2 in 1967, covered "(a)ny loss through any dishonest, fraudulent or criminal act of any of the Employees...." In addition, it separately provided for indemnification against court costs and reasonable attorneys fees incurred and paid by Hartford in defending against a claim which, if established, would constitute a collectible loss under the Bond. In consideration for this provision, HS agreed that it would "promptly give notice to (Hartford) of the institution of any such suit or legal proceeding" and that Hartford could undertake defense of the suit if it elected to do so. The Bond required that a suit under the Bond must be "begun within twenty-four months after (HS) shall learn of such loss...."*fn3

The earlier action for which HS seeks indemnity was instituted in the fall of 1970 by two customers of HS, the Draicchios, on account of alleged violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and breaches of common-law fiduciary duties. The Draicchios charged that their accounts had been churned, that unauthorized trading had taken place, that unsuitable securities had been purchased for their accounts, that HS and Decker had engaged in self-dealing, and that a series of margin violations had occurred. They sought over $225,000. in actual damages and $350,000. in exemplary damages and attorneys fees.

On August 11, 1971, HS gave notice to Hartford of the pendency of the Draicchio suits and forwarded copies of the Draicchios' complaints to Hartford. Hartford declined to undertake the defense of the actions. On June 25, 1975, HS notified Hartford that the cases had been consolidated for trial on July 25, 1975, and that HS had refused a settlement demand of $155,000. by the Draicchios. At that time, HS invited Hartford to participate in settlement discussions and inquired if Hartford objected to HS settling the suits. Hartford responded that since it had elected not to defend the suits, it would neither approve nor disapprove the settlement and that a settlement would not prejudice HS' rights to proceed under the Bond but that this statement did not constitute a waiver by Hartford of any defenses it had under the Bond.

The Draicchio trial began on July 25, 1975. After a week of trial principally devoted to Mr. Draicchio's direct testimony, the trial was adjourned for the weekend and the court suggested that counsel further consider settlement. The following Monday morning settlement was reached. HS agreed to pay the Draicchios $130,000. on account of all claims against HS and Decker.

Decker, who was represented by the same counsel as HS, did not contribute to the settlement, HS had secured counsel to represent Decker and itself, paid all legal fees, and paid Decker's expenses in connection with the suit. Decker voiced satisfaction with the settlement and was told by counsel that he could return home. Decker was not informed that as a result of the settlement he might be sued by Hartford if Hartford was called to pay under the Bond, and HS did not execute a release in favor of Decker. Thereafter, HS paid the settlement and stipulations of dismissal were executed on August 5, 1975.

On August 5, 1975, HS advised Hartford of the settlement and demanded reimbursement for the $130,000. as well as $42,530.61 in attorneys fees and $2,200. in expert witness fees. HS returned a completed proof of loss form to Hartford on September 4, 1975, for these amounts. After discussions between HS and Hartford, Hartford denied the claim in writing on December 11, 1975 on the ground that there was no evidence of Decker's dishonesty.

In July, 1977, HS filed its complaint in the present action to enforce Hartford's asserted liability under the Bond. Hartford answered and filed a third-party complaint against Decker alleging that it was entitled to judgment against Decker for any amount for which it might be found to be liable to HS. All parties then moved for summary judgment. In an opinion dated October 17, 1978, the district court denied the motions except for that portion of Hartford's motion for summary judgment dismissing HS' claim for reimbursement of attorneys fees and litigation expenses. The district court held that HS' nine month delay in informing Hartford of the institution of the Draicchio suits did not comply with the prompt notice requirement of the attorneys fees provision of the Bond and that Hartford had not waived the notice provisions by denying liability under the Bond for the actions.

A bench trial was held in May, 1980, and the district court filed its findings of fact and conclusions of law on June 23, 1980. It found that the settlement of the Draicchio actions had been in good faith and that Hartford had been accorded a reasonable opportunity to defend the actions and had declined to do so. Relying on Feuer v. Menkes Feuer, Inc., 8 A.D.2d 294, 187 N.Y.S.2d 116 (1959) and other New York decisions, it held that the settlement conclusively established Hartford's liability under the Bond for the portion of the settlement attributable to the claims that Decker had committed fraudulent or dishonest acts. The district court determined that $65,000. of the settlement was attributable solely to HS' liability for margin violations and that the remainder was attributable to the allegations of Decker's misconduct.

In addition, the district court dismissed Hartford's claim against Decker. It held that Decker would have a defense against a claim by HS to recover any part of the loss allegedly due to his misconduct because HS was responsible for the conflict of interest in the representation of Decker in the Draicchio actions and had failed to protect his interests by providing him a release from HS. Since Hartford's rights against Decker could be no greater than HS' rights against Decker, the district court concluded that Hartford could not maintain its claims against Decker. It held further that Hartford's inability to proceed against Decker did not constitute an impairment by HS of Hartford's right of subrogation since Hartford's refusal to defend the Draicchio actions had the same effect as a denial of liability under the Bond, which in turn constituted a waiver by Hartford of the defense of impairment of subrogation rights.*fn4 HS appeals from the district court's decision on the grounds that it was entitled to the full $130,000. ...


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