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September 10, 1990


The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:


Plaintiff French American Banking Corporation ("FABC") brings this diversity action seeking to recover approximately $4 million, plus accrued interest, from defendant Fireman's Fund Insurance Company ("Fireman's") under a Banker's Blanket Bond ("Bond") issued by Fireman's to FABC. FABC alleges that it incurred that loss as a result of loan made to Colombian Coffee Company ("CCC") on the faith of certain ocean bills of lading for coffee shipments issued by Flota Mercante Grancolombiana, S.A. ("Flota")*fn1 and pledged to FABC in connection with amounts FABC loaned CCC. FABC contends that these bills of lading were both "forgeries" and "counterfeits" under Insuring Agreement (E) of the Bond, which provides coverage for losses resulting from an insured bank's good faith extension of credit in reliance on a counterfeit or forged security or document of title. Fireman's contends that the bills of lading were neither forged nor counterfeit under the Bond and further asserts two affirmative defenses: (1) that FABC did not give timely notice of its claim under the Bond; and (2) that a "risk-only" participation agreement between FABC and its sister company BNP-Panama reduces the amount by which FABC can recover from Fireman's to half the loss.

A non-jury trial was held before me on May 22 through May 25, 1989. The following constitutes my findings of fact and conclusions of law after consideration of all the evidence and exhibits presented.


The facts in this case have been detailed in four prior Memorandum and Orders and will be repeated only as necessary here.*fn2

At all relevant times, there was in effect a Banker's Blanket Bond, on Standard Form 24, issued by Fireman's as insurer in favor of FABC as insured, with a limit of liability of $10 million and a deductible of $100,000. See Joint Trial Exh. ("JTE") 68. By its terms, the Bond covers a loss, in appropriate circumstances, resulting from FABC having, in good faith, acquired a "Document of Title" which is "Counterfeit" or which bears a signature which is a "Forgery."

In January 1981, FABC extended to CCC an $8 million line of credit to finance the importation of coffee from Colombia. CCC is a New York corporation engaged in the business of selling coffee to roasters, primarily roasters in the United States. Most of the coffee that CCC imported was purchased by it from an affiliated company Luis A. Duque Pena E. Hijos, Ltda. ("Duque Ltda."). CCC was the United States importing arm of Duque Ltda. and, like Duque Ltda., was owned and/or controlled by the Duque family. For the most part, the coffee was transported by truck to Colombian ports, where it was loaded onto ships, including ships owned by Flota. The ocean bills of lading, which were issued by Flota once the coffee was on board, would then be forwarded by Duque Ltda. to CCC in New York, which used them to obtain financing from banks such as FABC. Financing was made available for the inland portion of the shipments as well as the transportation of the coffee from Colombian ports to the United States.

When FABC opened the credit facility for CCC, it also entered into a Risk Participation Agreement (the "Participation Agreement"), with the Banque Nationale de Paris, Panama ("BNP Panama"), an affiliate of BNP. Pursuant to the Participation Agreement, BNP Panama agreed to have a fifty-percent "risk-only" participation in the risk of the CCC facility; FABC would participate in the remaining fifty percent of the risk.

FABC provided financing with respect to the oceangoing portion of the shipments for 100 percent of the coffee value. Typically, a representative of CCC would deliver duly endorsed bills of lading to FABC. FABC agreed to forward the bills of lading to CCC in return for trust receipts. CCC agreed to hold the bills and the coffee covered thereby in trust for FABC and subject to FABC's security interest pursuant to Uniform Commercial Code ("UCC") § 9-304(5), thereby permitting CCC to arrange for receipt and delivery of the coffee to a buyer. CCC further agreed to account to FABC by delivering to FABC, immediately upon receipt, the proceeds of the sale of the coffee. In addition, FABC had a duly filed security interest in CCC's inventory and receivables. Agreed Fact 14. Prior to July 1982, FABC supplied financing to CCC under a line of credit both against the pledge of negotiable order ocean bills of lading covering coffee shipped from Colombia and against the pledge of non-negotiable inland bills of lading issued by a trucking company in Colombia.

In July 1982, Banco Nacional, a Colombian bank, collapsed, causing liquidity problems for the Duque interests in Colombia. CCC thereafter informed FABC that it diverted to Duque Ltda. in Colombia approximately $1 million in trust receipt proceeds owing to FABC. Agreed Fact 15. FABC then decided to supply new financing only against the pledge of non-negotiable ocean bills of lading and only on an ad hoc basis. Agreed Fact 15.

On July 15, 1982, CCC owed FABC $9.3 million. Between July and mid-November 1982, CCC reduced that indebtedness to $4.4 million and supplied additional collateral. Agreed Fact 16. Of the $4.9 million reduction, CCC made a $2 million cash payment to FABC and supplied current bills of lading for $1.8 million for shipments to Germany and Japan to secure the existing indebtedness owed against overdue trust receipts.

In November 1982, FABC agree to finance a single pre-sold coffee shipment to the United States for $2 million against receipt of seven ocean bills of lading presented by CCC. JTE 22-25. FABC asserts that its decision to provide financing in this instance was based on CCC's progress in reducing its indebtedness and CCC's plan to negotiate with another bank, Banque Worms, for a $5-10 million line of credit. The bills of lading were surrendered by FABC for trust receipts. The documents were on Flota's printed forms and appeared to FABC to be full sets of valid original negotiable order ocean bills of lading of Flota. Agreed Fact 18, Tr. 41-42. The value of the coffee purportedly covered by these bills of lading exceeded $2 million. Agreed Fact 19. It would later be discovered that these bills of lading were false documents created by the Duques, or others working on their behalf, and reflected either coffee shipments that had previously been shipped under previously issued valid bills or fictitious shipments. Agreed Fact 18.

At the time of the financing and pledge, CCC executed, endorsed, and delivered to FABC three sixty-day sight drafts, due January 17, 1983, in the amounts of $1.4 million, $400,000, and $200,000, which then were accepted by FABC, thereby becoming bankers acceptances. Agreed Fact 20. After receiving the bills of lading and the sight drafts, FABC immediately exchanged the purported bills of lading for trust receipts, due January 17, 1983.

By late December 1982, CCC had reduced its outstanding indebtedness to FABC of $4.4 million by $450,000 and supplied additional collateral for the remaining outstanding amount. Agreed Fact 23. These loans were secured by $1.8 million in current bills of lading and approximately $2.2 million in current trust receipts.

On December 22, 1982, FABC agreed to finance, against bills of lading, another specific shipment of coffee to the United States in the amount of $1.3 million. Financing was conditioned on CCC first supplying ocean bills of lading to cover coffee worth $537,000 that was previously financed but which was covered only by inland bills of lading, and on CCC paying $880,000 that was due on existing trust receipts. Agreed Fact 24. On December 30, 1982, CCC paid the $880,000 and delivered the two ocean bills of lading to cover most of the unaccounted-for coffee. However, because the bills of lading covering the shipment for which FABC was going to extend $1.3 million were for a shipment to Japan rather than the United States, as was originally agreed, and one was not signed, FABC refused to make the $1.3 million loan. Agreed Fact 24.

On December 30, 1982, in anticipation of the expected $1.3 million advance from FABC, CCC had already drawn on and delivered a check for $653,000 to another bank, Societe General. FABC advanced $650,000 to CCC on January 3, 1983, to cover the check to Societe General against the pledge by CCC to FABC of three ocean bills of lading. JTE 27-29. Agreed Fact 24-25. Those bills of lading appeared to FABC to be facially valid original bills of lading of Flota, but again proved to be false documents created by the Duques. Agreed Fact 26. The value of the coffee purportedly covered by these bills was approximately $1 million. Agreed Fact 27.

On January 13, 1983, at a meeting between officers of CCC and FABC, CCC advised FABC that it would, the next day, apply the $1.8 million secured by the bills of lading that had been pledged to FABC in November. On January 14, 1983, CCC paid FABC the $1.8 million. Agreed Fact 28.

On January 17, 1983, CCC paid the three sight drafts issued by CCC to FABC on November 18, 1982, by a check for $2 million made payable to CCC, endorsed to FABC, and drawn by General Coffee Corporation, a corporation under common control with CCC, on Royal Trust Bank N.A., in Miami, Florida. Agreed Fact 30. FABC, by inquiry to Royal Trust Bank, determined that, at that time, there were insufficient funds in General Coffee's account to cover the check. FABC nevertheless caused the check to be sent forward through normal bank collection channels for collection. Agreed Fact 31.

On January 18, 1983, FABC advanced $3 million to CCC and CCC presented to FABC ten purported bills of lading. JTE 34-40-C. The documents again appeared to FABC to be full sets of valid original negotiable order ocean bills of lading of Flota. Agreed Fact 33. Again, the bills of lading proved to be false. The value of the coffee purportedly covered by said bills of lading was at least $3,107,000. Agreed Fact 34. FABC and CCC agreed that $2 million of this loan was to be applied to cover the $2 million check of General Coffee given by CCC to FABC, and that CCC would cause General Coffee to stop payment on the check. Agreed Fact 35.

Between January 18 and the end of April 1983, CCC reduced its indebtedness by another $818,000, and in April 1983 presented its various banks, including FABC, with a refinancing proposal. Agreed Fact 37.

In May 1983,*fn3 FABC presented to Flota the bills of lading accepted by FABC in connection with the $650,000 and $3 million loans, JTE 27-29, 34-40-C, made in January 1983, and Flota denied that said bills of lading were valid. Agreed Fact 40. On May 13, 1983, FABC commenced an action against CCC and others in the Supreme Court of the State of New York. On May 18, 1983, FABC first notified Fireman's of its alleged loss. Agreed Fact 43. Thereafter, on July 8, 1983, FABC commenced the present action against Flota alone. During this time, FABC was participating in bankruptcy proceedings in Florida involving the Duque group. On August 10, 1983, FABC submitted its proof of ...

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