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