United States District Court, E.D. New York
May 10, 2005.
SUPERIOR STEEL STUDS, INC. and ACTION STEEL CORP., Plaintiffs,
ZURICH NORTH AMERICA, INC. and MARYLAND CASUALTY COMPANY, Defendants.
The opinion of the court was delivered by: I. LEO GLASSER, Senior District Judge
MEMORANDUM AND ORDER
This action involves the application of an exclusion clause in
the insurance contract (the "Policy") between the parties.
Plaintiffs Superior Steel Studs, Inc. ("Superior Steel") and
Action Steel Corp. ("Action Steel") (collectively, "plaintiffs")
assert a cause of action for breach of the Policy against Zurich
North America, Inc. and Maryland Casualty Company (collectively,
"defendants"). Pending before the Court is defendants' motion for
The following facts are undisputed unless otherwise noted.
Plaintiffs are engaged in the business of distributing steel to
end users and other distributors. See Affirmation of Lewis
Tesser ("Tesser Aff.") ¶ 3. In connection with that activity,
plaintiffs do business with steel processing companies. Those
companies store plaintiffs' steel, maintain inventories of the
stored steel and, upon receiving instructions from plaintiffs,
process orders from those inventories. Compl. ¶¶ 11-12.
Plaintiffs used R&R Metals, Inc. ("R&R"), a Florida steel
processing company, to maintain an inventory of steel plaintiffs
owned for processing orders and to occasionally ship steel to
plaintiffs' customers. Tesser Aff. ¶ 5. In or about June 2002,
plaintiffs requested that R&R process certain steel coils it was
storing for them and were told by R&R that those steel coils were missing from the R&R site. Id.; Compl. ¶ 18.
Plaintiffs then hired an investigative firm, Decision Strategies,
to conduct an investigation into the disappearance of the steel.
The Investigation Report containing the investigator's findings
indicated, among other things, that Robert O'Neil ("O'Neil") and
Henry Valdivia ("Valdivia"), the President and sole shareholder
and Chief Operating Manager of R&R, respectively, acknowledged
responsibility for the loss of the steel. See Affidavit of Gil
M. Coogler ("Coogler Aff.") Ex. I. Despite plaintiffs' demands,
R&R refused to return the steel coils or pay them the fair market
value of the coils, $454,738.89. Compl. ¶ 24; Tesser Aff. ¶ 5.
Thereafter, plaintiffs submitted to defendant insurance
companies*fn1 a claim for their loss under the all-risk
policy number CMM 40123430, which was in effect at the time of
the loss. Compl. ¶ 6. That policy excluded from coverage loss
caused by a "[d]ishonest or criminal act by you . . . or anyone
to whom you entrust the property for any purpose." On or about
November 7, 2003, defendants denied plaintiffs' claim citing that
entrustment exclusion. See Coogler Aff. Ex. B; Tesser Aff. ¶ 6;
Def. 56.1 Statement ¶ 5. On May 28, 2004, plaintiffs*fn2 brought an action against
R&R in the federal court in Florida alleging fraud, "misplacement
of goods" and negligence. See Coogler Aff. Ex. H (attaching
complaint). That action resulted in a stipulation of settlement
between the parties and the Florida district court entered a
final judgment in favor of plaintiff. The judgment remains
unsatisfied due to R&R's subsequent dissolution.
On May 27, 2004, plaintiffs filed a complaint against
defendants in New York state court asserting two causes of action
for breach of contract and bad faith denial of insurance
coverage.*fn3 Defendants removed the action to this Court
pursuant to 28 U.S.C. § 1441(b) based on diversity of citizenship
under 28 U.S.C. § 1332.*fn4 See Coogler Aff. Ex. D
(attaching Notice of Removal dated June 30, 2004). By stipulation
dated July 14, 2004, plaintiffs consented to removal. See id.
Defendants now move for summary judgment.
Federal Rules of Civil Procedure 56(c) provides that summary
judgment "shall be rendered forthwith if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law." Summary judgment is
precluded only where the factual issue is genuine, which means
that "the evidence is such that a reasonable jury could return a
verdict for the nonmoving party." Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). In order to survive a motion for
summary judgment, "the opponent must do more than simply show
that there is some metaphysical doubt as to the material facts."
Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 475 U.S. 574,
586 (1986). To that end, the non-moving party "may not rest upon
the mere allegations or denials" in its pleadings; rather, it
"must set forth specific facts showing that there is a genuine
issue for trial." Fed.R.Civ.P. 56(e). When evaluating a motion
for summary judgment, "the inferences to be drawn from the
underlying facts . . . must be viewed in the light most favorable
to the party opposing the motion." Matsushita, 475 U.S. at 587.
Guided by these principals, the Court turns to the parties'
arguments in this case.
I. Whether plaintiffs entrusted the goods to R&R
This dispute centers on whether the defendants wrongfully
denied coverage of plaintiffs' loss under the Policy's
entrustment exclusion. The Policy insures plaintiffs for the loss
of personal property, including that which is located at sites
other than plaintiffs' primary place of business. Coogler Aff.
Ex. F at Section I.E. Additionally, the policy excludes certain
causes of loss from coverage:
We will not pay for loss or damage caused by or
resulting from any of the following:. . . .
Dishonest or criminal act by you . . . or anyone to
whom you entrust the property for any purpose (a)
Acting alone or in collusion with others; or (b)
Whether or not occurring during the hours of
employment. (2) This exclusion does not apply to: (a)
Acts by "employees" that are covered in Employment
Dishonesty Additional Coverage section. . . .
See Coogler Aff. ¶ 8; Ex. F (attaching copy of insurance
policy) at Section III.A.2.e. In a case such as this one, "[o]nce
the insured shows that a loss occurred, the insurer shoulders the
burden of demonstrating that the loss claimed is excluded
expressly from coverage under the policy terms." M.H. Lipiner &
Son, Inc. v. Hanover Ins. Co., 869 F.2d 685
, 687 (2d Cir. 1989). Here, it is
undisputed that plaintiffs' steel coils were missing. With
respect to the exclusionary clause, as an initial matter, it
applies to goods that are "entrusted" to a third party.
Plaintiffs do not dispute that their delivery of the steel to R&R
constituted entrustment. See generally Pl. 56.1 Statement.
Accordingly, that requirement for the application of the
exclusion clause is satisfied.
II. "Dishonest or Criminal Act"
A. Florida Action and Judicial Estoppel
In view of the fact that plaintiffs entrusted the steel to R&R,
the Court turns to whether the causes of excludable loss bar
plaintiffs from recovering under the Policy. Defendants contend
that plaintiffs' loss is excluded from coverage because it
resulted from R&R's commission of a criminal or dishonest act.
Def. Mem. at 5. In opposition, plaintiffs argue that there is a
question of fact as to whether the loss of the steel coils was
occasioned by negligence and therefore the exclusion does not
apply as a matter of law. See Pl. 56.1 Statement ¶ 1.
Defendants contend that the doctrine of judicial estoppel
precludes plaintiffs from asserting a position that is
inconsistent with the one they adopted in the Florida litigation,
namely, that R&R acted fraudulently, and therefore dishonestly,
in handling plaintiffs' goods. See Def. Reply Mem. at 6.
According to the equitable doctrine of judicial estoppel,
"where a party assumes a certain position in a legal proceeding,
and succeeds in maintaining that position, he may not thereafter,
simply because his interests have changed, assume a contrary
position, especially if it be to the prejudice of the party who
has acquiesced in the position formerly taken by him." New
Hampshire v. Maine, 532 U.S. 742, 749 (2001). Judicial estoppel
is designed to "protect judicial integrity by avoiding the risk
of inconsistent results in two proceedings." Simon v. Safelite
Glass Corp., 128 F.3d 68, 71 (2d Cir. 1997) (citation omitted).
A party invoking judicial estoppel must show that "(1) his
adversary advanced an inconsistent factual position in a prior proceeding, and (2) the prior inconsistent position was
adopted by the first court in some manner." Wight v. Bank
America Corp., 219 F.3d 79, 90 (2d Cir. 2000).*fn5
Additionally, courts should consider "whether the party seeking
to assert an inconsistent position would derive an unfair
advantage or impose an unfair detriment on the opposing party if
not estopped." New Hampshire, 532 U.S. at 751.
On May 28, 2004, Action Steel sued R&R in the United States
District Court for the Southern District of Florida. See
Coogler Aff. Ex. H. In the complaint, Action Steel alleged the
facts as described above surrounding the disappearance of the
steel, including that it was informed by R&R "that some of Action
Steel's steel had been misplaced or inadvertently used." See
id. ¶¶ 10-13. Significantly, Action Steel asserted a cause of
action against R&R for fraudulent misrepresentation alleging that
R&R engaged in "fraudulent behavior" in that it knowingly made
false misrepresentations regarding the quantities of steel coils
in inventories it provided to Action Steel. Id. ¶¶ 24-27;
Coogler Aff. Ex. H.*fn6 In this action, plaintiffs adopt the position that the policy
exclusion from coverage of losses due to dishonest or criminal
acts does not apply to their loss and therefore defendants
erroneously denied their claim. Moreover, in opposition to
defendants' summary judgment motion, plaintiffs contend that
there is a genuine issue of material fact as to whether R&R's
negligence caused the loss of the steel. Plaintiffs' position in
the Florida action that R&R acted fraudulently is "clearly
inconsistent" with their posture in this litigation that the loss
of the steel was not caused by dishonesty on the part of R&R or
at least that such misconduct is disputed. Thus, the first factor
for judicial estoppel is satisfied.
Pursuant to a stipulation between the parties, the Florida
district court entered a final judgment dated December 3, 2004
against R&R and ordered it to pay Action Steel $454,738.89 plus
prejudgment interest in the amount of $77,617.07, for a total of
$532,355.96. See Tessler Aff. Ex. L. That the final judgment
was entered pursuant to the parties' stipulation raises the
issue, a subject of debate among courts, whether judicial
estoppel applies to prior actions that resulted in settlements.
In Bates v. Long Island Railroad Co., the Second Circuit
stated, "A settlement neither requires nor implies any judicial
endorsement of either party's claims or theories, and thus a
settlement does not provide the prior success necessary for
judicial estoppel." 997 F.2d 1028, 1038 (2d Cir. 1993) (citations
omitted).*fn7 The Plaintiffs' prior litigation in the
Florida court resulted in a stipulation followed by entry of a
final judgment in their favor. Accordingly, Bates compels the
conclusion that judicial estoppel does not bar plaintiffs from
advancing the position in this litigation that R&R did not act
dishonestly with respect to the steel coils.
B. Investigation Report and Other Evidence
In any event, the evidence submitted by defendants establishes
that R&R's dishonesty caused the loss. Plaintiffs' own Investigation Report establishes that the
loss was caused by dishonesty within the meaning of the policy.
See Def. Reply Mem. at 8. That report states that "O'Neil and
Valdivia then stated that they took Action Steel's property and
used it without Action's knowledge or permission" and describes
that act as "unauthorized conversion of Action Steel's
property."*fn8 Coogler Aff. Ex. I at 6-7. Moreover, in
defendants' letter dated November 7, 2003 denying plaintiffs'
claim, they characterize the event precipitating the loss as a
theft by R&R. See Coogler Aff. Ex. B. Plaintiffs do not present
evidence to rebut the proof presented by defendants that R&R
acted dishonestly or criminally.
This case is analogous to Cougar Sport, Inc. v. Hartford Ins.
Co., 737 N.Y.S.2d 770, 771-72 (N.Y. Sup. Ct. 2000), which
involved the application of an exclusion clause identical to the
one here. Plaintiff, an importer of children's apparel, deposited
goods with Yankee Clipper, a warehouse, for temporary storage.
Yankee Clipper sold the goods to a salvage company in order to
cover plaintiff's arrears. Id. at 772. Defendant insurance
company denied plaintiff's claim for the loss and plaintiff
brought an action for breach of contract. Unlike in this case,
however, the plaintiff in Cougar conceded that the loss was
caused by the "dishonest acts" of the owners of Yankee Clipper.
Id. The court found that because plaintiff entrusted the goods
to Yankee Clipper and the theft by that entity constituted a
dishonest act within the meaning of the policy, the exclusion
barred plaintiff's recovery for its loss as a matter of law.
Id. at 775. As in Cougar, plaintiffs in this case entrusted
the goods to R&R and that entity's dishonest acts in taking the
steel without authorization caused the loss. Cougar supports
the conclusion that plaintiffs are precluded from recovering for the loss of the steel under defendants' policy.
Accordingly, the Court finds that plaintiffs entrusted the
steel to R&R and that the dishonest acts of that entity caused
the loss of the goods. Therefore, the exclusion clause bars
plaintiffs from recovering the value of the lost steel.
C. Acts of "Employees"
Plaintiffs seek to immunize this loss from the reach of the
exclusion clause by arguing that R&R's employees, namely, O'Neil
and Valdivia, stole the steel, and that since the goods were
entrusted to their employer, R&R, the exclusion does not apply to
bar plaintiffs' recovery. See Pl. Opp. at 4. In arguing that
O'Neil and Valdivia are responsible for the loss of the steel,
plaintiffs analogize this case to Facet Industries, Inc. v.
Wright, 62 N.Y.2d 769, 770 (1984). In that case, the parties
stipulated to the following facts. Paul Sergio ("Sergio"), a
buyer for International Diamond & Gem ("International"),
contacted plaintiff, a jeweler, to obtain merchandise to be sold
by International. Thereafter, plaintiff shipped its loose
diamonds to International. Sergio then stole the diamonds.
Plaintiff filed a proof of loss with defendant insurance company,
which defendant denied on the basis of a policy provision similar
to the one in this case that excluded from coverage losses
resulting from theft or "other act or omission of a dishonest
character . . . on the part of any person to whom the property
hereby insured may be delivered or entrusted by whomsoever for
any purpose whatsoever." Id. at 770. The court held that the
policy "excludes only acts of a person to whom property is
delivered or entrusted." Id. at 771. Given the stipulated fact
that plaintiff delivered the jewels to International, Sergio was
not the "person to whom the property [was] delivered or
entrusted" within the language of the policy and therefore his
theft of the diamonds was not a covered cause of loss under the
policy. Moreover, the court refused to infer from the fact that
Sergio was an employee of International that plaintiff entrusted
the diamonds to him. Id. Based on those findings, the court held that the exclusion did not apply to bar plaintiff's
recovery under the insurance policy. Id. at 772.
While Facet involved an insurance policy exclusion similar to
the one at issue here, it is distinguishable from this case.
First, there is no evidence that O'Neil and Valdivia were
employees of R&R. To the contrary, the evidence establishes that
they were principals or managers of that corporation. A sworn
statement submitted by O'Neil in the Florida action indicates
that he is "the President, Registered Agent, and sole shareholder
of R&R Metals, Inc." See Tesser Aff. Ex. K (motion by O'Neil to
vacate final default judgment filed in Southern District of
Florida); see also Coogler Reply Aff. Ex. M (attaching
documents from Florida Department of State indicating that O'Neil
is the President of R&R). Similarly, plaintiffs' Investigation
Report indicates that O'Neil is the "owner" and Valdivia is the
"chief operating manager" of R&R. See Coogler Aff. Ex. I at 2.
Moreover, in their memorandum of law plaintiffs acknowledge that
O'Neil and Valdivia owned or held management positions at R&R.
See Pl. Opp. at 5.*fn9
Moreover, plaintiffs present insufficient evidence to raise a
genuine issue of material fact as to whether O'Neil and Valdivia
caused the loss of the steel in their individual capacities. They
rely on the Investigation Report in arguing that O'Neil and
Valdivia admitted personal responsibility for the loss. Yet that
document does not support this contention. According to the
report, O'Neil and Valdivia
acknowledged there were `mistakes' and stated they
would accept full responsibility and wanted to find a
way to reach a settlement. They advised that they
would consent to a repayment plan. . . . Both O'Neil
and Valdivia then stated that they took Action
Steel's property and used it without Action's
knowledge or permission. . . . [and] admitted that no
attempt had been made on the part of R&R to inform Action Steel relating to the unauthorized
conversion of Action Steel's property.
Coogler Aff. Ex. I at 5-7 (emphasis added). Contrary to
plaintiffs' contention, a reasonable reading of that excerpt
compels the conclusion that R&R's President/owner and manager
were speaking on behalf of the corporation. Therefore, those
statements do not raise a question of fact as to whether O'Neil
and Valdivia admitted responsibility for the loss in their
individual capacities.*fn10 Accordingly, because there is no
evidence either that O'Neil and Valdivia were employees of R&R or
that O'Neil and Valdivia caused the loss of the steel in their
individual capacities, Facet does not compel the Court to find
that plaintiff is entitled to recover under the Policy.*fn11
See also Abrams v. Great Am. Ins. Co., 269 N.Y. 90, 92 (1935)
(setting forth rule that exclusion applies where the individual
or entity to whom goods are entrusted acts dishonestly or
criminally). Defendants have met their "burden of proving that
the loss is within the exclusion of the policy" and thus
plaintiffs are precluded from recovering for their loss. See
Facet, 62 N.Y.2d at 771.
For the reasons stated above, the Court grants defendants'
motion for summary judgment. The Clerk of Court is respectfully
directed to close this case. SO ORDERED.