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September 17, 1986


The opinion of the court was delivered by: LASKER


This case concerns the question of whether the seller of an ocean shipment of cottonseed oil can recover from its insurance carrier under an open marine cargo insurance policy for conversion of cargo resulting from fraudulent procurement of bills of lading. The issues were initially presented to the court on cross-motions for summary judgment, both of which were denied, the court concluding

that in spite of the wide area of agreement between the parties as to the facts, we are unable to discern the meaning of the various clauses of the policy on papers alone. Because the construction of the policy is not self-evident, even as supplemented by the agreed facts, its meaning will have to be determined on the basis of the testimony of appropriate witnesses so that findings as to the intention of the parties can be made.

 Buckeye Cellulose Corp. v. Atlantic Mutual Insurance Co., 612 F. Supp. 1184, 1190 (S.D.N.Y. 1985). After hearing the testimony of five witnesses and examining a number of documents presented at a two day non-jury trial, I now conclude that the insurance policy at issue did not apply to the lost cargo claim and that the defendant is entitled to judgment accordingly. *fn1"


 There is little dispute between the plaintiff, Buckeye Cellulose Corporation ("Buckeye"), and the defendant, Atlantic Mutual Insurance Company ("Atlantic"), as to the basic facts underlying the transaction, the cargo loss, and the conduct of the parties regarding the subject insurance policy. *fn2"

 A. Buckeye, a subsidiary of the Procter & Gamble Company ("P&G"), entered into three contracts in late December 1978 and early January 1979 to sell to the Thomas P. Gonzalez Corporation ("TPGC") 3500 metric tons of cottonseed oil valued at over $2.5 million. The three broker's contracts each contained after the legend, "TERMS," the printed language: "Sight Draft. Bill of Lading, attached, free of exchange to buyer." The three contracts also contained after the legend, "REMARKS," the typewritten language respectively: "Letter of credit to be opened by January 12, 1979," "Letter of credit to be opened five (5) days prior to loading," and "Letter of credit to be opened five (5) days prior to shipment." Each contract provided that the oil was to be delivered "F.O.B. vessel" at Texas and Louisiana ports. *fn3"

 TPGC had contracted in turn to sell the oil to an agency of the Egyptian government. For this purpose, TPGC chartered the vessel M/V Globe Venus to load cottonseed oil at Bayport and Houston, Texas and New Orleans, Louisiana for carriage to Alexandria, Egypt.

 In accordance with the terms of the Buckeye-TPGC contracts, TPGC opened three irrevocable letters of credit at the Credit Lyonnais Bank in Los Angeles for the contract price of the oil. The three letters were issued on January 22, 1979 and were to expire on February 12, *fn4" although the expiration dates were later amended to February 16. The letters of credit provided that Credit Lyonnais would pay Buckeye upon presentation of sight drafts accompanied by clean negotiable mate's receipts, among other specified documents, which verified that the cargo of oil had been completely loaded in good condition on the M/V Globe Venus. In a separate transaction, the Egyptian consignee to whom TPGC had contracted to sell the oil opened a letter of credit at Wells Fargo Bank in Los Angeles. The Wells Fargo letter of credit provided that TPGC would receive payment for its part in the deal upon presentation of negotiable bills of lading, among other documents. These bills of lading, which would serve the ultimate purpose of authorizing the Egyptian consignee to take up the cargo in Alexandria, were to be issued by the agent for the Globe Venus, Universal Transport Corporation ("Universal"), upon surrender by TPGC of the corresponding mates receipts. A stamped legend on the face of the mate's receipts stated: "BILL OF LADING NOT TO BE ISSUED UNTIL ORIGINAL DULY SIGNED AND ENDORSED MATES RECEIPT HAS BEEN SURRENDERED IN EXCHANGE FOR BILL OF LADING." *fn5"

 The foregoing arrangements having been made Buckeye contracted with its suppliers to have 3500 metric tons of cottonseed oil delivered to the tanks of the Globe Venus. The oil was loaded at the three Gulf Coast ports between January 31 and February 2, 1979, and Buckeye received from the suppliers, in return for payment to the suppliers in early February, the negotiable mate's receipts and other documents that had been issued at the time of the actual physical delivery of the oil.

 Had the transaction proceeded at this juncture in a regular fashion, Buckeye would have presented the documents and mate's receipts specified in TPGC's letter of credit along with sight drafts for some $2.5 million to Credit Lyonnais. Credit Lyonnais would then have paid Buckeye, taken up the documents, and delivered the mate's receipts to TPGC. TPGC would in turn have surrendered the mate's receipts to Universal in exchange for negotiable bills of lading, which it would then have presented along with other required documents to Wells Fargo in order to obtain payment under the terms of the Egyptian consignee's letter of credit. With the bills of lading in hand, the Egyptian consignee would then have proceeded to take delivery of the oil in Alexandria.


 The actual series of transactions followed a different progression. As described above, all the cottonseed oil in the shipment passed the ship's rail from various ports by February 2, 1979, at which time the Globe Venus set sail for Egypt. It was also on February 2 that TPGC succeeded in obtaining bills of lading for the shipment from Universal, the vessel's agent, without surrendering the required mate's receipts. (Although no explanation for this irregularity has emerged from the litigation of this case, it is not an issue between the parties.) In fact, on February 2 the mate's receipts were still in the hands of Buckeye's suppliers, who had not yet been paid for the oil.

 Bills of lading in hand, TPGC proceeded to obtain payment from the Egyptian consignee, accomplishing this by presenting the bills of lading and other documents required in the Wells Fargo letter of credit to Wells Fargo for payment. Wells Fargo paid on the letter of credit on February 8, 1979, and Credit Lyonnais applied the funds to various debts owed to Credit Lyonnais by TPGC.

 At the same time that these transactions were taking place unbeknownst to Buckeye, Buckeye went ahead and paid its suppliers for the cottonseed oil delivered to the Globe Venus, receiving the negotiable mate's receipts in return. Buckeye did not obtain all the mate's receipts from its suppliers until February 16, and it was not until February 20 that Credit Lyonnais received from Buckeye's agent, Central Trust Company of Cincinnati, all of the documents and mate's receipts required under the letter of credit terms. The letters of credit, however, had expired on February 16. Credit Lyonnais advised Central Trust that late presentation of the documents would not be waived and returned the negotiable mate's receipts to Buckeye. Although TPGC had already been paid by the Egyptian consignee, the funds having been credited against debts owed by TPGC to Credit Lyonnais, and TPGC offered upon learning of the late presentation to sign notes to Credit Lyonnais so as to permit the bank to pay Buckeye, Credit Lyonnais refused to follow this course because it believed that TPGC's financial condition would not permit it to repay a $2.5 million loan.

 The Globe Venus arrived in Alexandria on February 28, and the cargo was unloaded by March 5. As late as March 6 or 7, Buckeye, still ignorant as to the true facts regarding the improper release of the bills of lading covering the cargo, instructed Universal that the cottonseed oil was to be unloaded only for Buckeye's own account since it continued to hold title to the cargo by virtue of its retention of the mate's receipts. At this point Buckeye expected to be able to resell the oil at a price higher than the contract price with TPGC, given then-current market conditions. Shortly thereafter, but no later than March 9 (as evidenced by a telex from Buckeye to TPGC and Universal notifying them that Buckeye had cabled the Egyptian purchaser on that date regarding its claim of title to the oil), *fn6" Buckeye learned of the unauthorized issuance of the bills of lading to TPGC and that TPGC had been paid by the Egyptian consignee. A March 14 telex from Universal to Buckeye confirmed that the oil had been discharged to shore tanks for the account of the Egyptian consignee. *fn7" Buckeye's attempts to assert control over the cargo or alternatively to secure payment of the contract price from TPGC and Credit Lyonnais were unsuccessful.


 In April 1979 Buckeye sued the owner of the Globe Venus, Universal, TPGC, and Credit Lyonnais to recover for the loss of the cottonseed oil. The case was eventually settled out of court for $2,412,500. P&G, however, maintained its right to recover the remainder of its loss under the cargo insurance policy issued by Atlantic that was in effect at the time of the sale and shipment of the cottonseed oil cargo which is the subject of this lawsuit. The parties agree that if the loss is covered by the policy, the insured value of the shipment is either the cargo invoice value of approximately $2.51 million or 110% of that sum -- $2.76 million -- depending on which clause of the policy would govern.

 The insurance contract that lies at the heart of this litigation is an open marine cargo policy that insured P&G and its subsidiaries, including Buckeye, for cargo losses beginning in 1968 and continuing through the period relevant to this litigation. By telephone and letter on April 17 and 18, 1979 respectively, P&G informed its insurance broker, Johnson & Higgins, of the circumstances of the cargo loss. *fn8" Johnson & Higgins subsequently advised Atlantic of the loss by letter dated April 26 in keeping with the normal mode of communication between underwriter and assured. *fn9" In a letter dated April 30, Atlantic informed Johnson & Higgins that it was declining the claim, stating:

 As we understand the situation, our assured has "lost" a shipment of cottonseed oil valued at $2,506,539.00 as a result of what appears to be a breakdown of a rather complex financial arrangement covering sale of this cargo.

 There is no indication in the documentation forwarded to us of any physical loss or damage to the cargo in question. We presume the shipment was received sound and intact by the Egyptian consignee and should this be the case, you will appreciate we would not be involved in this matter. *fn10"

 The parties have stipulated that Atlantic took the positions that the occurrence of loss was not covered under the insurance policy, as well as that the shipment in suit was not insured under the policy. *fn11"

 The regular and accepted practice between the parties as to the reporting or declaration of shipments covered under the insurance policy was for P&G to make such reports on a quarterly basis to Johnson & Higgins, which would in turn advise Atlantic. The purpose of the quarterly reports was to identify the value of cargo shipments covered under the policy so as to permit the calculation of premiums owed to Atlantic. *fn12" In the report dated May 23, 1979, covering the three-month period ending February 28, 1979, P&G did not include the Buckeye cottonseed oil shipment; nor did Johnson & Higgins' May 30 premium invoice for P&G, which appears to correspond to the May 23 quarterly report, charge P&G an insurance premium for the cottonseed oil shipment. *fn13"


 The open marine cargo policy at issue consists of a two-page printed cover form prepared by Atlantic and twenty-one typewritten pages and numerous endorsements drafted or compiled by P&G and Johnson & Higgins, acting as P&G's agent. *fn14" While they differ in their interpretation. of the policy clauses and their application to the loss in suit, both sides agree that the policy "was a conglomeration of things, it wasn't designed to be []consistent internally, it sort of grew like topsy" (counsel for plaintiff) *fn15" and could be "refer[red] to . . . as a hodgepodge of clauses" (defendant's expert). *fn16" The court joins in this sentiment.

 Set forth below are the controlling clauses of the insurance policy, the relevance of which, may become apparent only upon further reading. Clause 3 provides in pertinent part that goods covered under the policy include

 goods and/or merchandise of every description, under and/or on deck, shipped by or to the Assured or by or to others for the Assured's account or in which the Assured may have an interest in any way. . . . ...

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