New York Law Review

Tag: New York Stock Exchange

  • New York Stock Exchange, Inc. v. Continental Insurance Company, 40 N.Y.2d 269 (1976): Fraudulent Scheme Exception to Perjury Rule

    New York Stock Exchange, Inc. v. Continental Insurance Company, 40 N.Y.2d 269 (1976)

    A cause of action for fraud and deceit will lie, even when perjury is involved, if the perjury is merely a means to accomplish a larger fraudulent scheme that extends beyond the issues determined in the prior proceeding.

    Summary

    The New York Stock Exchange (NYSE) and its subsidiary, Newin Corporation, sued Continental Insurance Company and its subsidiary, Fidelity & Casualty Company, alleging fraud and deceit during the bankruptcy proceedings of Ira Haupt & Co., a member firm of the NYSE. The NYSE claimed that the defendants suborned perjury to minimize the recovery on Haupt’s primary insurance bonds, thereby frustrating the NYSE’s ability to recover losses under its excess insurance coverage. The court held that a cause of action for fraud exists, even with perjury, when the perjury is part of a broader scheme to defraud that extends beyond the issues in the original case.

    Facts

    Ira Haupt & Co., an NYSE member, went bankrupt following the “salad oil swindle” of 1963. As required by NYSE rules, Haupt carried blanket bonds underwritten by Fidelity & Casualty Company. The NYSE also had excess insurance coverage, with Continental Insurance Company as one of the carriers. Haupt’s bankruptcy trustee sued on the primary bonds, alleging employee infidelity caused the firm’s collapse. The NYSE alleged that Continental and Fidelity corrupted a key witness, Jack E. Stevens, causing him to change his testimony, which led to a settlement for a fraction of the claim’s value. Subsequently, the insurers refused to pay under the excess coverage, claiming the primary coverage hadn’t been exhausted.

    Procedural History

    The NYSE and Newin Corporation filed suit against Continental and Fidelity, alleging fraud and other causes of action. Special Term rejected the defendants’ motion to dismiss. The Appellate Division affirmed but granted leave to appeal to the New York Court of Appeals on a certified question.

    Issue(s)

    Whether a civil action for damages can be maintained based on alleged subornation of perjury in a prior civil proceeding, where the perjury is part of a larger fraudulent scheme designed to defeat claims beyond those litigated in the initial proceeding.

    Holding

    Yes, because a cause of action for fraud and deceit will lie, even though perjury is present, where the perjury is merely a means to the accomplishment of a larger fraudulent scheme. The rule against civil actions for subornation of perjury does not apply when the perjury is part of a broader scheme extending beyond the issues of the original lawsuit.

    Court’s Reasoning

    The Court of Appeals acknowledged the general rule that civil actions for damages arising from subornation of perjury in a prior civil proceeding are barred, based on the policy of preventing endless litigation and re-trials of cases. However, the court recognized an exception to this rule: “A cause of action for fraud and deceit will lie, even though perjury is present, where the perjury is merely a means to the accomplishment of a larger fraudulent scheme.” The court cited Verplanck v. Van Buren, 76 N.Y. 247, in support of this exception. The court reasoned that the plaintiffs had alleged a fraud that extended beyond the scope of the trustee’s lawsuit involving only the Haupt bonds. The alleged fraud was intended to defeat recovery under the excess coverage as well. The court distinguished this case from those where recovery was precluded because the plaintiffs had no effective remedy in the prior action. According to the court, “Plaintiffs have alleged that the fraud committed in the bankruptcy proceedings is extrinsic and part of a larger scheme which goes beyond the scope of the trustee’s law suit, which involved only the Haupt bonds… Rather, they accept the fact of settlement but seek damages because Fidelity’s fraud was intended to extend beyond those bonds, so as to defeat or make more difficult any recovery under the excess coverage as well.” The court emphasized that the plaintiffs were not seeking to re-litigate the Haupt bonds issue but rather sought damages for the broader fraud impacting their excess coverage. The court further held that the plaintiffs could potentially sue as third-party beneficiaries of the Haupt bonds, despite not being named insureds, if the circumstances evidenced a clear intent to protect them, citing McClare v. Massachusetts Bonding & Ins. Co., 266 N.Y. 371. Therefore, the court found that the plaintiffs had pleaded legally sufficient causes of action.