FINDINGS OF FACT AND CONCLUSIONS OF LAW
OPINION AND FINDINGS
This action was tried at a Bench Trial before the Honorable Milton Pollack, United States Senior District Judge, without a jury on May 12, 1997, May 13, 1997, May 14, 1997, May 15, 1997, May 16, 1997, May 19, 1997, May 20, 1997, May 22, 1997, May 23, 1997, May 27, 1997, May 28, 1997, May 29, 1997, May 30, 1997, June 2, 1997 and June 3, 1997; and this Court having heard and seen the witnesses, and having received and ruled on the exhibits proffered by the parties and having received deposition designations of the parties at hearings held on June 4, 1997 and June 5, 1997; and this Court having evaluated the testimony of witnesses, and having considered the documents received in evidence, and having reviewed the depositions, in whole or in part, as designated by the parties, and due deliberation having been had, reports the same in its Opinion and Findings and expresses its Conclusions, as follows.
This decade-old insurance policy dispute stems from the fraud perpetrated by a Colombian coffee exporter, Gonchecol Ltda. ("Gonchecol"), against a United States importer ("Andina")
and six financing banks (the "Banks"),
which caused losses in 1986 totalling over $ 94,500,000. Gonchecol presented fraudulent truck bills of lading as draw documents in order to obtain payment on letters of credit provided by the Banks to their customer Andina. At the outset of these consolidated actions, the Banks and Andina brought claims against two insurance companies -- Affiliated FM Insurance Company ("Affiliated") and Lloyd's of London ("Lloyd's" or the "London Insurers") -- to recover under open cargo marine insurance policies and against two insurance brokers -- Trinder & Norwood and Hogg Robinson Ltd. and Hogg Robinson & Gardner Mountain Ltd. By 1993, all the defendants except for Affiliated negotiated settlements with the Banks. In this action, the Banks seek to recover $ 44,174,000 together with pre-judgment interest from January 1, 1987 arising under forty-eight letters of credit drawn or paid prior to March 21, 1986.
Plaintiffs base jurisdiction under 28 U.S.C. § 1332. Defendant Affiliated is a citizen of Rhode Island. Each of the plaintiffs, at the commencement of the actions, was a citizen of a state other than Rhode Island or a nation other than the United States and had its principal place of business in New York.
The unique commercial context and drawn-out prelitigation history is as follows.
I. The Parties and Their Commercial Dealings
The Echeverris, Colombian nationals, owned and controlled Gonchecol and other coffee businesses in Colombia. These businesses -- Gonchecol, Goncheverri and Gonchelopez (collectively the "Gonche Group") -- exported sizable quantities of coffee to the United States, Europe, and Japan during the 1970s and 1980s up until the fraud.
The Gonche Group represented one of two of the largest private exporters of coffee in Colombia.
Julian Echeverri directed the Echeverri family enterprises; his nephew, Ruben Echeverri ("Ruben" or "Echeverri"), ran the day-to-day operations of Gonchecol. Bank files on Andina reveal that the Gonche Group also held large interests in banking,
textiles, cattle ranching and other industrial enterprises and its owners were well connected in Colombia.
The Banks believed the Echeverri family to be a leading family in Colombia, and well regarded in the political and business community.
In 1974, the Echeverris, along with several other Colombian coffee-exporting families, established Andina Coffee, Inc. in New York, New York
to serve as its agent and to facilitate the importation of coffee into the United States. Subsequently, in order to minimize the exporters' taxable income in the United States, the ownership of Andina's stock shifted from the founding individual shareholders to three Panamanian corporations, in which the Echeverris held a minority share.
In 1983, Andina Coffee, Inc. formed Andina Trading Corporation as a wholly-owned subsidiary. Andina Coffee derived its income from commissions on the sale of coffee and from financing charges imposed on the exporters. Andina Trading Corporation derived its income from profits in the sale of coffee.
At the time of the discovery of the fraud in 1986, Andina was the largest importer of Colombian coffee into the United States and enjoyed a strong reputation in terms of delivery, quality, and reliability.
Humberto Canal and Dennis Kessler managed Andina: Canal served as the chief operating officer;
Kessler served as its chief financial officer.
Based on between five and ten years of profitable collaborative experience, which was described as "increasingly close and open," the Banks knew Andina's management well and regarded them highly.
Canal and Kessler enjoyed over a long time solid reputations in the industry as reliable, respected and trustworthy merchants.
Julian Echeverri, Ruben Echeverri and Hernan Lopez -- all original individual owners of Andina -- at various times, also served as officers of Andina
and members of the board of directors.
After Gonchecol contracted for the sale of coffee to roasters int eh United States,
Andina also provided the Gonche Group with financing for the export of coffee from Colombia through documentary letters of credit charged against secured lines of credit established with various United States and European banks.
The letters of credit at issue in this case provided that the Colombian exporter, as beneficiary, could obtain payment from a Bank by presenting the following draw documents: a railroad or truck bill of lading; a commercial invoice; and a letter to the port forwarder requesting the preparation of an ocean bill of lading to the order of the financing bank. Correspondent Colombian banks forwarded the draw documents to the financing banks, which in turn advanced the funds. As a general rule, Andina did not receive copies of the truck bills of lading or other draw documents.
This mode of transactional financing enabled Andina to finance the purchase of specified lots of coffee and to repay the letters of credit with the proceeds of the sales of coffee.
Through this asset conversion cycle plaintiff Banks extended hundreds of millions of dollars of credit to Andina, all of which was timely repaid prior to 1986.
Up until the discovery of the fraud, Andina proved a reliable and profitable customer of the Banks. Canal and Kessler maintained good relations with the Banks' officers. The Banks' officers maintained in-depth files on Andina and kept abreast of industry developments. While some of the Banks endeavored to improve upon the security underlying the transactional financing -- especially in light of the uncommon challenges posed by conducting business in Colombia during the 1980s -- on the whole, Andina had established an excellent track record of credit trustworthiness and profitability.
Andina, for its part, profited from its commercial arrangements. Gonchecol had kept up with their shipment obligations. Canal, Andina's president, testified (by deposition) that prior to 1986 Andina did not need to interfere in the manner in which the Gonche Group transported coffee from the warehouses to the ports because they had exported over the years between 13 to 14 million bags without incident. These volumes both impressed and pleased Andina's management.
Canal expected Andina to make sizable profits in 1986;
and, some of the Banks noted Gonchecol's profitable operations through the first quarter of 1986. In addition, Andina's minutes of its board meetings in September, 1985 and May, 1986 indicate that the Gonche Group hoped to increase its monthly exports to over 130,000 bags, and that Kessler sought additional lines of credit with other banks to augment Andina's available credit to at least $ 250 million.
II. The Insurance Policy
As a condition of financing, the Banks routinely obtained through Andina suitable insurance against false draw documents. Andina obtained a marine open cargo insurance policy issued by Affiliated (the "Affiliated Policy" or "Policy") on July 23, 1980. Each of the Banks was named in the Affiliated Policy as an additional assured as evidenced by separate Banker's Endorsements. The Affiliated Policy expressly extended coverage to losses caused by fraudulent bills of lading, shipping receipts or messenger receipts.
In addition, each of the Banker's Endorsements, in relevant part, stated: (1) that the Bank's interest would not be impaired or invalidated by an act or neglect or breach of warranty of Andina; (2) that the Bank must receive 10 days prior written notice of any cancellation; and, (3) that "the policy does not insure against conversion, misappropriation or other dishonest acts committed by or on behalf of the named Assured."
Affiliated did not deal directly with Andina, but rather dealt with Trinder & Norwood, an insurance broker.
In the summer of 1985, Affiliated decided to cancel the Affiliated Policy because the Andina account had proven to be unprofitable and contacted Trinder & Norwood about replacing it with another policy. In the fall of 1985, the manager of Affiliated's marine cargo department, David Pemmerl, called Trinder & Norwood to inform them of Affiliated's intention to cancel the policy. Shortly thereafter, on November 27, 1985, Pemmerl sent notice of cancellation for the insurance policy effective March 1, 1986.
Pemmerl did not send a copy of the letter to Andina or to any of the Banks.
Because Trinder & Norwood feared marketing the Andina account under a notice of cancellation, it asked and Affiliated agreed to rescind the cancellation, and Trinder & Norwood assured Affiliated that it would seek a replacement policy as soon as possible.
On February 25, 1986, Pemmerl received a telex from Trinder & Norwood notifying Affiliated that a second insurance policy with Lloyd's of London was placed with their underwriters and became effective as to all shipments made on and/or beginning on and/or after February 25, 1986.
Affiliated, however, did not send notice of cancellation to the Banks until March 11, 1986, and under the 10-day prior written notification of cancellation requirement the Affiliated Policy was not cancelled until March 21, 1986.
III. The Discovery of the Fraud
During the 1980s, among other business endeavors, the Gonche Group constructed a large office building in Cali, Colombia called the Cali Tower. The Cali Tower proved to be an unsuccessful business venture and a financial drain for the Gonche Group.
In addition, the Gonche Group looted Gonchecol to cover debts incurred by Goncheverri and Gonchelopez, and Goncheverri's director speculated in coffee futures on the commodities market and thus incurred further debts.
Over time, Gonchecol's financial situation grew dire as debts mounted.
Nonetheless, as noted above, throughout 1985 and into 1986, the Gonche Group sustained a steady rate of coffee exports, and kept up with its asset conversion cycle.
In the winter of 1985, Ruben Echeverri requested that Andina increase the amount of available financing in order to augment the exports of coffee.
Andina's management imposed as conditions of their securing additional lines of credit that the Gonche Group increase their working capital and that they shorten the asset conversion cycle.
In April, 1986, Canal travelled to Colombia to assist the Echeverris in increasing their working capital. During this trip, Canal discovered that the Gonche Group faced a cash flow liquidity problem, which he attributed to several factors -- each of which compounded the other. First, the Colombian peso had undergone a substantial devaluation. Second, the Echeverris had taken out significant loans in dollars, which they were forced to repay with devalued pesos at high exchange rates. Finally, a shift in tax policy, which required exporters to pay an export tax with increasingly greater cash contributions rather than in-kind payments and which moved up the time of payment from the port to the mill, further exacerbated the Gonche Group's cash flow liquidity problem.
The Echeverris informed Canal that the requirement to pay ever-increasing portions of the tax in cash -- and the Gonche Group's liquidity crisis -- were causing delays in the anticipated deliveries of coffee.
Andina held a board of director's meeting on May 19, 1986, at which time Canal discussed the Gonche Group's cash flow liquidity problem and the resulting delays in coffee shipments. Canal assured the Board that the situation in Colombia did not jeopardize Andina's collateral position, and that he believed the liquidity problem to be temporarily resolvable. Canal outlined a plan of the Gonche Group to sell $ 30 million in hard assets in order to infuse Andina with working capital and to shorten the asset conversion cycle. At the meeting, Ruben Echeverri, a senior executive of Gonchecol and a director of Andina, stated that even if the Banks suspended all the lines of credit, the Gonche Group would nonetheless export all financed coffee. Ruben Echeverri further noted that he had signed a subordination agreement covering all amounts due Gonchecol as unrepatriated earnings.
At this point, Kessler did not notify the Banks that the Gonche Group faced a cash flow liquidity problem. Ruben Echeverri had personally assured the Andina management that the Gonche Group could and would deliver the financed coffee. Because the exporters had always complied with past promises, had met their obligations in a timely fashion, had sustained the necessary export volumes, and had substantial wealth and assets in Colombia, Canal and Kessler trusted that the exporters would resolve the liquidity crunch that they faced.
In late May or early June, 1986, Andina noticed a marked elongation in the cycle with increased delays in the exportation of coffee and repayment of letters of credit. In June and July, Gonchecol's shipments began to lag appreciably,
and the exporters requested on at least two occasions that Andina send funds to Colombia. Canal and Kessler declined to do so.
Relations between the Gonche Group and Andina's management became strained. Nonetheless, in order to maintain Andina's economic viability, when the exporters asked Andina to request 60-day extensions of payment of Andina's letters of credit coming due, Andina complied. Starting in early July, Andina began to contact and meet with individual financing Banks to discuss the liquidity crunch and to request additional short-term financing, which request at least one Bank granted.
Chemical Bank, with whom Andina had the largest line of credit, refused Andina's request because its management found the exporters' explanations inadequate. Chemical Bank informed Andina that it needed greater details regarding the changes in the taxes before it would extend credit.
Shortly thereafter, the Banks and Andina were quickly overtaken by events.
The Gonche Group failed to sell any hard assets to raise working capital for Andina as promised by Ruben Echeverri at the Andina board meeting of May 19, 1986.
As the situation deteriorated, the Banks' officials conferred with one another and confirmed that Andina's loans were due with all the financing institutions. On August 12, 1986, Robert Nead ("Nead"), an American Express bank official, joined joined Canal in Colombia to investigate the situation.
On August 14, 1986, Kessler arranged a meeting of the Banks in New York to discuss potential solutions to the liquidity problem.
At the same time, Nead and Canal arranged to meet Ruben Echeverri at Gonchecol's offices in Bogota. At the Bogota meeting, Ruben Echeverri stated that he was in financial difficulty with the Colombian banks, that he had pledged coffee to them, and that approximately 200,000 bags of coffee financed by the Banks was missing.
Ruben Echeverri further stated that because he was in a liquidity crisis and needed money, he had drawn against letters of credit with false documents.
Ruben Echeverri's admissions infuriated Canal.
Immediately thereafter, Canal and Nead placed two separate conference calls to the Banks' group meeting in New York at which time they informed the group of Ruben Echeverri's admissions. The attendees, including Kessler, responded to the news of the missing coffee and the fraudulent draw documents with shock and surprise.
At the August 14, 1986 meeting, the Banks decided to send a representative group to Colombia to investigate the situation and determine what steps the Banks could take to identify and secure their collateral. The Banks met in Bogota on August 19, 1986 at a meeting attended by Ruben Echeverri, another employee from Gonchecol, eleven representatives from the financing Banks, and attorneys from two of the Banks' local Colombian counsel. Subsequently, Ruben indicated that twenty people were present. Canal did not attend. In the presence of this large group, Echeverri offered the same explanation for the missing coffee that he had given at the first meeting: he stated that he was in a liquidity crisis due to other business ventures, foreign exchange losses and illiquid investments.
Echeverri elaborated that he had borrowed money from Colombian banks, that they sought repayment, and that he presented false truck bills of lading (through a trucking company called Enaltra, which he had previously bought) to draw on letters of credit.
At this August 19, 1986 meeting, Nead specifically asked Echeverri whether Andina was aware of the fraudulent draw documents. Echeverri responded that Andina was not aware and complained that Andina was causing him discomfort by pressuring him to deliver coffee, exacerbating his financial difficulties, and risking a financial scandal.
Canal later expressed anger at being excluded from attending this meeting.
In the events leading up to and after the discovery of the fraud, Andina broke completely from the Gonche Group. In addition to refusing to send further funds to the Gonche Group, subsequent to the discovery of the fraud, Andina placed its liquid assets into an escrow account for the benefit of the Banks. Further, after August, 1986 and on the advice of its counsel, Andina's personnel ceased all direct communications with the Echeverris.
A preponderance of the credible evidence shows that at the very least Echeverri began to present fraudulent draw documents upon becoming financially strapped and desperate and that Andina's management neither knew nor participated in the fraud. Echeverri offered consistent explanations at the August 14, and August 19, 1986 meetings for the cause of the missing coffee -- specifically, the Gonche Group's financial difficulties and Gonchecol's subsequent presentation of fraudulent truck bills of lading. At the latter meeting, in the presence of twenty witnesses, Echeverri not only unqualifiedly exonerated Andina of any wrongdoing but expressed irritation at Andina for "exacerbating" his difficulties. Eyewitness testimony of Canal's reaction to both Echeverri's confession of the fraud and to his exclusion from the August 19, 1986 meeting further support a conclusion of Andina's lack of knowledge of Gonchecol's fraud.
The discovery that 200,000 bags of coffee were missing and that Gonchecol had presented fraudulent truck bills of lading for payment came as a complete shock and surprise to the Banks and Andina's management. Neither the financing Banks nor Andina had any inkling that their moneys had been misappropriated in an age-old type of fraud -- through the use of false draw documents to obtain payments of letters of credit. The Banks had enjoyed a close working relationship with a major, reputable, and profitable importer, which in turn had dealt with and trusted its founding principals -- members of one of the largest, best respected, and most successful Colombian coffee exporting families.
Another reason why the discovery of the fraud came suddenly, unexpectedly, and unbelievably for the Banks and Andina was because Gonchecol had continued to supply coffee up until May or June, 1986. Andina obtained coffee for its sales to the roasters and used the payments it received therefor to repay the Banks millions of dollars of outstanding letter of credit loans.
Moreover, prior to the discovery of the fraud, Andina had experienced similar delays in shipments of coffee. Periodically, Andina's inventory would accumulate in Colombia and its inland portion of the financing cycle would lengthen due to port congestion, strikes, or problems in securing military escorts for the transport of coffee from the mills to the port.
For example, in 1983, a protracted dock strike in Colombia caused a buildup of 92 percent of Andina's inventory in Colombia.
Not surprisingly, the debacle of 1986 caught the Banks and Andina wholly by surprise.
In the aftermath of the discovery and confession of the fraud, the Banks notified Affiliated of the losses and filed timely proofs of losses. At no time did the Banks conceal any material information regarding the fraud.
IV. Affiliated's Pre-Trial Conduct
The subsequent chapter of this case concerns the conduct of Affiliated in preparation for trial, specifically its efforts to concoct a defense to the Banks' claims. In 1990, Affiliated retained the firm of Podvey, Sachs, Meanor, Catenacci, Hildner & Cocoziello ("Podvey, Sachs") as its sole counsel in the instant litigation. As Affiliated readily admitted at trial, at that time, Affiliated had no witnesses to help advance a cognizable defense.
Among its numerous attempted theories, Affiliated reasoned that proof of Andina's and the Banks' complicity in the fraud would bar recovery under the Policy's "dishonesty" clause. To that end, between 1990 and 1994, Affiliated engaged in secret, questionable negotiations to induce Ruben Echeverri and his brothers, Luis and Jorge Hernan, to impute to the Banks and Andina knowledge of and participation in the fraud. Affiliated's pretrial strategy, which is summarized below, at a minimum casts doubt on the management's integrity in its attempt to find a cognizable defense.
A. Affiliated's Activities in 1990
In 1990, as part of its casting about for a defense strategy, Affiliated retained an investigator named Josiah Thompson ("Thompson") to conduct research related to the coffee business and this case in Colombia. He allegedly spent months interviewing unnamed sources. While in Colombia, Thompson repeatedly contacted the Echeverris' counsel, Juan Parada ("Parada"). Thompson sought and failed to arrange for Affiliated to meet with the Echeverris, but succeeded in obtaining a memorandum from Parada, which responded to questions Thompson had posed to the Echeverris.
In violation of its pretrial discovery obligations, Affiliated did not disclose to the Banks or Andina either Thompson's contacts with Parada or Parada's memorandum; several years later Affiliated was finally compelled to make the requisite disclosures of its activities.
B. Affiliated's Activities in 1992
In 1992, Thompson contacted Parada again to renew Affiliated's efforts to interview the Echeverris.
On May 13, 1992, Thompson and a Podvey, Sachs attorney named Michael O'Kane ("O'Kane") met Parada in Bogota. At the meeting, Thompson specifically stated that he "wanted Kessler." Andina by that time had been destroyed by Ruben Echeverri's fraud; the flourishing coffee importation business and Kessler long since were gone. Little further damage could result from making Ruben a turncoat as to Andina, for a price. O'Kane and Thompson proposed that the Echeverris should collaborate with the insurance company by "cooperating fully in debriefings"
and in exchange Affiliated would take measures in an attempt to obtain immunity for the Echeverris from state and federal prosecution in the United States for the host of matters overhanging them, including bank fraud.
After the meeting, Thompson and Parada arranged for a meeting of Affiliated's representatives, including their counsel, with Ruben and his brothers in Panama City, Panama. The Echeverris had been advised by Affiliated's representatives that a meeting should not be conducted on United States' soil. Affiliated disclosed none of these contacts to the Banks or to Andina until compelled to do so by the Magistrate Judge assigned to this case.
For two days, on June 3 and 4, 1992, Affiliated's representatives, including their lawyers, accountants, investigators, and sundry personnel met with Ruben, his brothers, and Parada in Panama City, Panama. Affiliated's counsel elected to obtain a Court Reporter from his home base in New Jersey, to accompany counsel to Panama to record in detail the interview sessions, which the Court Reporter did. At the conclusion of the two-day session, Affiliated's counsel instructed the Court Reporter to prepare only one copy of the transcript of her notes and to destroy her notes. She complied with the instructions. Affiliated knew, of course, that Ruben was the only witness who could testify to his fraud and who had knowledge of it. Although this lawsuit was in full progress at the time, Affiliated's representatives gave no notice to the plaintiffs of the two-day interview or the destruction of the record thereof.
A second meeting for another interview was then arranged to convene in Key Biscayne, Florida, despite Affiliated's advice to the Echeverris to stay out of the country. Affiliated followed the same procedure as before. Affiliated brought along the Court Reporter from New Jersey; she took the notes of the interview and was given the same instruction -- to deliver one copy to counsel and to destroy her notes. She did.
At each meeting, remarkably considering what was at stake and promised to the Echeverris for their input, Ruben made clear, if it had been missed before, that the Banks had had no knowledge of Ruben's fraudulent activity and that he could not provide Affiliated with any documentary evidence to the contrary. As to the defunct Andina, he was willing to say that Andina's officers knew Ruben had manufactured false truck bills of lading. Nonetheless, Affiliated's representatives continued insistently to condition assistance with obtaining immunity from criminal prosecution on Ruben's inculpating the Banks.
After the Florida meeting, O'Kane or Thompson, or both, prepared a statement for Ruben's signature. On August 26, 1992, Ruben travelled to the New Jersey offices of Podvey, Sachs to sign it in exchange for the promised help on the immunity effort.
Affiliated's counsel represented that he then destroyed his copies of the transcripts of the interviews. Counsel explained his actions with respect to the instructions to the Court Reporter and his destruction of the transcripts by stating that this was his practice for every witness interview that was followed by a sworn statement. Counsel added that he had given the Court Reporter those instructions at the time she was retained and prior to his knowing the substance of the interview.
Also in August, 1992, Thompson and O'Kane met again with Luis Echeverri in Cali, Colombia. In fact, between 1990 and approximately 1993, Thompson and O'Kane met with Ruben Echeverri between five and ten times in Colombia.
At these meetings, O'Kane always stressed that the only way the Echeverris could obtain immunity would be by accusing Andina and the Banks of knowledge of the fraud that Ruben had perpetrated.
Affiliated's representatives did not disclose the extended, recorded meetings they had with the Echeverris, the pressures imposed to procure inculpatory statements from them, or the destroyed transcripts taken over three days from their most significant witness, discovery rules non constat.
In October or November, 1992, Affiliated's counsel, without notifying Andina or the Banks, met with the Manhattan District Attorney's office ("Manhattan D.A.") and alleged that some of the plaintiffs, their officers and counsel had committed criminal offenses. To support its charges, Affiliated provided the Manhattan D.A. with the proffers of the signed Echeverri statements in order to instigate a criminal investigation of the Banks, Andina, their officers and counsel for plaintiffs. Affiliated also disclosed documents and testimony subject to a confidentiality order of Judge Broderick of this Court who was administering this case at that time, without informing the Manhattan D.A. that such an order was in effect.
The Banks and Andina learned of the secret meetings between Affiliated and the Echeverris in February, 1993, when Affiliated filed a motion to amend its complaint and assert a third-party complaint for insurance fraud against the Banks and Andina, their counsel, and several Andina officers. Affiliated's motion was denied. Disclosure of the statements and events at Panama City, Panama and Key Biscayne, Florida did not surface for another year.
C. Affiliated's Activities in 1993
In the spring of 1993, Affiliated's representatives continued to convene secret meetings with the Echeverris. Affiliated sought to obtain further statements and documentary evidence from Ruben Echeverri implicating not only Andina but also the Banks with knowledge of the fraud. Affiliated persisted in this pursuit even though Ruben Echeverri had previously remained firm in his assertion to Affiliated's representatives that he could not comply because he had no knowledge of -- and could offer no documents that showed -- any awareness on the part of the Banks of the fraud.
Nonetheless, Parada brought to Echeverri's offices a statement dated May 6, 1993 ("the May 6, 1993 statement"), which implicated the Banks with knowledge of the fraud and which Affiliated had drafted for Echeverri to sign. At the time, Parada indicated that the statement would furnish Echeverri with a "passport" to obtain immunity, and Echeverri signed the statement without reading it.
Thus, despite the fact that Ruben was Affiliated's key witness on its contentions that the Banks and Andina knew of the fraud -- in direct repudiation of the Banks' and Andina's contentions as to their ignorance of the fraud -- Affiliated's representatives prepared this subsequent statement, which charged the Banks' with knowledge of the fraud and which contention Ruben himself had successively disavowed. Affiliated's counsel made no effort at trial to set the record straight on Ruben's disavowal of the Banks' knowledge of the fraud. Affiliated did not disclose to the Banks or Andina any of its dealings with the Echeverris or furnish copies of any of the statements or proffers obtained.
On June 30, 1993, the Manhattan Assistant District Attorney in charge of investigating the fraud notified Judge Broderick that his office had terminated its investigation of the matter. On July 6, 1993, based on this notice and on alleged verbal statements by federal prosecutors in New York and in Florida to Affiliated's representatives that those offices would not investigate the fraud further, Affiliated's lead counsel sent a letter to Parada. The letter concluded that "the result of all this is that your clients are free from any criminal prosecution arising from the events surrounding the collapse of Andina in 1986."
On July 14, 1993, Affiliated gave notice to Andina and the Banks to depose the Echeverris in Cali, Colombia, but continued to withhold the Echeverri statements. The Magistrate Judge assigned to the case ordered the depositions to be held in London, and further ordered Affiliated to produce the written proffers of the Echeverris' statements.
D. Affiliated's Activities in 1994
Affiliated finally produced to Andina and the Banks copies of the written proffers of the Echeverris' statements on January 18 and 19, 1994. Several weeks later Affiliated produced copies of the signed statements. Approximately ten days before the scheduled depositions in London, Ruben Echeverri and Parada met with Affiliated's representatives in Miami.
During this meeting, Echeverri understood that Affiliated again wanted him to testify that both Andina and the Banks knew of the fraud despite Echeverri's prior steadfast denial of any knowledge that the Banks knew of the fraud.
On February 9, 1994, at the Miami airport while en route to London for the deposition, federal agents arrested Ruben Echeverri, who subsequently pleaded guilty to and was convicted of bank fraud. After his arrest, notwithstanding a clear conflict of interest, Echeverri was represented initially by O'Kane and then by a former partner of Affiliated's lead counsel. Eventually, Echeverri retained new counsel. In 1996, while serving two concurrent four-year terms of imprisonment, the parties deposed Ruben Echeverri at a federal prison in North Carolina. Affiliated furnished a video of that deposition, which the Court received for its content and credibility value.
V. The Banks' or Andina's Alleged Complicity in the Fraud
A. The Banks
Affiliated failed to produce a scintilla of evidence that the Banks knew of or participated in the fraud. The evidence overwhelmingly shows that the Banks had no inkling whatsoever, prior to the discovery of the fraud, that Gonchecol created and presented false truck bills of lading in order to draw down on letters of credit. Credible witness testimony indicated, without exception, the Banks' total ignorance of Gonchecol's fraudulent intent and practices. Trial exhibits spoke on two sides of the issue making it necessary to evaluate them in light of the other evidence. Moreover, Ruben Echeverri, Affiliated's "primary witness"
-- except for the highly suspect May 6, 1993 statement, which Echeverri was told was his "passport" to immunity
-- exonerated the Banks absolutely in every statement he provided to Affiliated prior to his arrest and to law enforcement personnel and to the Banks after his arrest. Following his arrest, Echeverri further acknowledged that, had the Banks known the Gonche Group manufactured false truck bills of lading, the Banks unquestionably would have ceased financing Andina.
Similarly, Affiliated also failed to present by a preponderance of the credible evidence that Andina's management engaged in "conversion, misappropriation or other dishonest acts committed by or on behalf of the named Assured" regarding any matter covered by the Affiliated policy either through their knowledge of or participation in Gonchecol's presentation of false truck bills of lading or otherwise. Affiliated offered only two witnesses who had personal knowledge regarding Andina's affairs during the time in question: Ruben Echeverri and Mark Rudnick, a computer analyst in charge of Andina's information systems. Both witnesses -- either because of their lack of credibility or because of the statements they made at the time of the discovery of the fraud -- thoroughly discredit Affiliated's contention that Andina knew of or participated in the fraud.
In his second public statement regarding the Gonchecol fraud, at the August 19, 1986 Bogota meeting, Ruben Echeverri expressly exonerated Andina of any knowledge or wrongdoing related to the fraud. Six and seven years later (on August 26, 1992 and on May 6, 1993), in a desperate and futile attempt to keep Gonchecol viable, in part, by staving off prosecution, Echeverri agreed to collaborate with Affiliated and signed statements implicating Andina. Echeverri's motivations for implicating Andina are various: possibly revenge for Andina's refusal to send moneys immediately before and after the discovery of the fraud; and, possibly a fruitless desire to avoid prosecution and force the United States financing banks to negotiate a commercial resolution to the debacle. The fact that Echeverri continued to implicate Andina following his arrest in no way diminishes his motivation to punish Andina for its assertion of autonomy from the Gonche Group.
Equally important in disproving Affiliated's contrived theory is the testimony of Mark Rudnick. Rudnick served as the director of Andina's computer department starting in the Spring of 1985.
Rudnick testified that during his tenure as director of the computer department, even though he had frequent contact with Kessler and was in charge of the computer system that tracked Andina's finance cycle, he never suspected Andina to be involved in a fraud or suspected the Gonche Group of defrauding Andina or the Banks. After Ruben Echeverri's arrest, when interviewed by federal law enforcement personnel, Affiliated's witness, Rudnick, reported that "there was nothing that [he] had ever seen . . . that would raise a red flag in any reasonable person's mind."
Similarly, as to the Banks, although the Banks' officers supervised the exporters and the Andina account in a relaxed manner, as testified by the Banks' witnesses and as shown in the documentary evidence, the circumstances at the time did not give rise to the level of "red flags in any reasonable person's mind" of fraud by Gonchecol.
Rudnick's testimony at trial and Echeverri's confessions in August, 1986 if taken alone support the conclusion that Andina's management did not engage in any conversion, misappropriation, or dishonest acts by or on behalf of Andina or the Banks.
ADDITIONAL SPECIFIC FINDINGS
1. Plaintiffs commenced these actions against defendant Affiliated FM Insurance Company for breach of its contractual obligations under an insurance policy entitled "Marine Open Cargo Policy OCP-302" issued by Affiliated to Andina on or about July 23, 1980.
2. At the commencement of these actions each of the plaintiffs was a citizen of a state other than Rhode Island or a nation other than the United States and had its principal place of business within the United States in the Southern District of New York. Defendant Affiliated is a citizen of the State of Rhode Island.
3. The matter in controversy for each of the actions commenced by the plaintiffs exceeds $ 50,000, exclusive of interest and costs, and this Court has subject matter jurisdiction over these cases based upon 28 U.S.C. § 1332(a).
4. Each of the Banks is named in the Affiliated Policy as an additional assured, as provided in Clause 2 of the Affiliated Policy and in separate endorsements (Nos. 6 (as amended by No. 32), 10, 13, 30, 31 and 34) entitled "Special Terms and Conditions" (the "Bankers' Endorsements").
5. Clause 37(D) of the Affiliated Policy (as amended by Endorsement No. 33, the "FBOL Clause") specifically provides, in a section entitled "Special Conditions," that:
This policy covers loss or damage occasioned through the acceptance by the Assured and/or their agents or shippers of fraudulent Bills of Lading and/or shipping receipts and/or messenger receipts and/or warehouse receipts and/or truckmen's receipts.
6. Each of the Bankers' Endorsements provides, among other things, that:
This policy shall not be canceled nor materially changed as to the interest of the Bank unless 10 days' . . . prior written notice of such change or cancellation shall have been given to the Bank.