New York Law Review

Tag: UCC Article 8

  • Vigilant Ins. Co. of America v. Housing Authority of City of El Paso, 87 N.Y.2d 36 (1995): Statute of Limitations for Declaratory Judgment on Stolen Bearer Bonds

    Vigilant Ins. Co. of America v. Housing Authority of City of El Paso, 87 N.Y.2d 36 (1995)

    The statute of limitations for a declaratory judgment action regarding rights to bearer bonds accrues when the right to sue on the bond’s principal debt arises, which is typically the day after the bond’s maturity date, not when the theft or initial dispute occurred.

    Summary

    Vigilant Insurance, as subrogee of Drexel Burnham Lambert, sought a declaration of superior right and title to stolen bearer bonds issued by the El Paso Housing Authority. The key issue was determining the applicable statute of limitations and accrual date for the declaratory judgment action. The Court of Appeals held that because the bonds are governed by UCC Article 8, not Article 3, the statute of limitations began to run the day after the bond’s maturity date, not when Drexel first discovered the bonds were stolen. However, causes of action for tortious conversion and breach of contract related to the bonds were time-barred, accruing when the actions occurred.

    Facts

    In 1983, Drexel Burnham Lambert purchased 41 El Paso Housing Authority bearer bonds. Drexel then sold the bonds to Irving Trust, which discovered the bonds had been reported stolen prior to Drexel’s purchase. Drexel, per NYSE rules, replaced the bonds for Irving and received an assignment of Irving’s rights. Drexel then sought indemnification from Vigilant Insurance, who paid the claim and received an assignment of Drexel’s rights to the bonds. In 1989, the FBI returned the seized bonds to Vigilant, who then presented interest coupons for payment, which was refused by Morgan Guaranty Trust, the transfer agent. A “stop” was placed on the bonds.

    Procedural History

    Vigilant sued the Housing Authority and Morgan Guaranty in 1990, seeking a declaration of rights, damages for conversion, and damages for breach of bond obligations. The Supreme Court dismissed the complaint based on the statute of limitations, holding that all claims accrued in 1983 when Drexel learned of the theft. The Appellate Division reversed, concluding the declaratory judgment claim accrued the day after the bond maturity in 1997. The Court of Appeals modified the Appellate Division’s order, affirming that the declaratory judgment action was timely but dismissing the tort and contract claims.

    Issue(s)

    1. What statute of limitations applies to a declaratory judgment action concerning rights to bearer bonds?

    2. When does the cause of action accrue for a declaratory judgment action concerning rights to bearer bonds?

    3. Are the causes of action for tortious conversion and breach of contract time-barred?

    Holding

    1. The applicable statute of limitations is the six-year catch-all period under CPLR 213(1) because no specific limitation period applies.

    2. No, because the cause of action for the declaratory judgment accrued the day after the bonds matured, July 2, 1997.

    3. Yes, because the statute of limitations for both tortious conversion and breach of contract had expired.

    Court’s Reasoning

    The Court determined the declaratory judgment action was timely because the claim did not accrue until the day after the bonds matured. The court reasoned that UCC Article 3, which governs negotiable instruments, does not apply to investment securities like bearer bonds; Article 8 of the UCC governs those. While UCC 3-122(1) states that a cause of action on a time instrument accrues the day after maturity, Article 3 explicitly excludes investment securities. The court then reasoned that, since there was no other specifically applicable statute of limitations, the general six-year period applied, running from the date the cause of action accrued. Quoting LaBello v Albany Med. Ctr. Hosp., 85 NY2d 701, 705, the Court stated, “a cause of action does not accrue until an injury is sustained…when all of the facts necessary to sustain the cause of action have occurred, so that a party could obtain relief in court.” Applying Phoenix Acquisition Corp. v Campcore, Inc., 81 NY2d 138, the court found that the right to sue on the bond’s principal debt only accrues when the debt is due and payable. Therefore, the statute of limitations would not begin to run until the maturity date of the bond. However, the causes of action for conversion and breach of contract accrued in 1983 when the “stops” were placed on the bonds, making those claims time-barred. The court cited Employers’ Fire Ins. Co. v Cotten, 245 NY 102, 105, for the definition of conversion as the “unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner’s rights.”

  • Vigilant Insurance v. Housing Authority, 87 N.Y.2d 36 (1995): Statute of Limitations for Stolen Bonds and Declaratory Judgment Actions

    87 N.Y.2d 36 (1995)

    In a declaratory judgment action regarding rights to stolen bearer bonds, the statute of limitations begins to run from the date the bonds mature, not from the date the theft was discovered, as bearer bonds are considered investment securities under UCC Article 8, not Article 3.

    Summary

    Vigilant Insurance, as subrogee of Drexel Burnham Lambert, sued the Housing Authority of El Paso seeking a declaration of superior right and title to stolen bearer bonds. Drexel had purchased the bonds, later found to be stolen, and was forced to replace them, receiving an assignment of rights. Vigilant, after indemnifying Drexel, sued when the Housing Authority refused to honor the bonds. The key issue was when the statute of limitations began to run. The Court of Appeals held that the statute began to run upon the bonds’ maturity date, not the date of discovery of the theft, as the UCC Article 8 governs investment securities like bearer bonds.

    Facts

    Drexel Burnham Lambert purchased bearer bonds issued by the El Paso Housing Authority in July 1983 from Chessed Anstalt.
    Drexel sold the bonds to Irving Trust Co., who discovered they were previously reported stolen.
    Under NYSE and SEC rules, Drexel reclaimed the stolen bonds and replaced them for Irving Trust Co.
    Irving assigned all rights to the stolen bonds to Drexel.
    Vigilant insured Drexel and paid Drexel’s claim after Drexel replaced the bonds. Drexel assigned its rights to Vigilant.
    The FBI seized the bonds in 1983 and returned them to Vigilant in 1989.
    Vigilant presented interest coupons in 1989, but the Housing Authority refused payment and confiscated the coupons, maintaining a “stop” on the bonds.

    Procedural History

    Vigilant sued the Housing Authority in 1990, seeking declaratory judgment, damages for conversion, and breach of contract.
    The Supreme Court dismissed the complaint based on the statute of limitations, ruling the claims accrued in 1983 when Drexel learned of the theft.
    The Appellate Division reversed, reinstating the complaint, holding that the statute of limitations accrued on the maturity date of the bonds.

    Issue(s)

    1. What is the applicable statute of limitations period for a declaratory judgment action concerning rights to bearer bonds?
    2. When does the statute of limitations accrue in such an action: when the theft is discovered, when the bonds are presented for payment and refused, or on the bonds’ maturity date?

    Holding

    1. The applicable statute of limitations is six years, per CPLR 213(1), because no other specific statute of limitations applies. No because CPLR 211(a) (20 years) is inapplicable because the bonds are not secured *only* by the faith and credit of the issuer, and CPLR 213(4) is inapplicable as the bonds are not secured by mortgage upon real property.

    2. No, because the statute of limitations begins to run on the day after the bonds’ maturity date, July 2, 1997, as bearer bonds are investment securities governed by Article 8 of the UCC and the injury occurs when payment is due but refused.

    Court’s Reasoning

    The Court of Appeals analyzed the statute of limitations for declaratory judgment actions, noting that New York law requires courts to examine the underlying claim to determine the applicable period (Solnick v. Whalen, 49 N.Y.2d 224). Although CPLR 211(a) provides a 20-year limitation for actions on bonds of public corporations, it does not apply here because these bonds are backed by the “full faith and credit of the United States,” and not just the issuer. CPLR 213(4) does not apply because the bonds are not secured by a mortgage. The court determined that the six-year catch-all statute of limitations under CPLR 213(1) was appropriate.

    Crucially, the court rejected the argument that UCC Article 3, which governs negotiable instruments, applied, because UCC 3-103 explicitly excludes “investment securities.” Instead, the court looked to UCC Article 8, which governs stocks, bonds, and other evidences of indebtedness. UCC 8-102 defines a security as an instrument issued in bearer or registered form that is traded on exchanges or markets, fitting the description of the bonds in this case. Thus, the accrual provision of UCC 3-122(1), which would have set the accrual date as the day after maturity, was deemed inapplicable.

    Despite the inapplicability of UCC Article 3, the court held that the cause of action accrued on the bonds’ maturity date, reasoning that a cause of action accrues when all facts necessary to sustain the action have occurred (Aetna Life & Cas. Co. v. Nelson, 67 N.Y.2d 169). The court analogized to Phoenix Acquisition Corp. v. Campcore, Inc., 81 N.Y.2d 138, where the right to sue on a debt accrued at maturity, even though an earlier default could have triggered acceleration. The court stated that “since the right to sue on the bond’s principal debt does not accrue until the debt is ‘due and payable’… we perceive no reasonable basis to bar on Statute of Limitations grounds plaintiffs’ opportunity to seek a declaration of those seriously disputed rights on the debt instrument prior to maturity of the bond.”

    However, the court agreed with the Supreme Court that the causes of action for tortious conversion and breach of contract were time-barred. The court noted that an action for conversion is subject to a three-year limitation period (CPLR 214[3]), accruing from the date of the conversion (Sporn v. MCA Records, 58 N.Y.2d 482), which it deemed to be July 1983, when the Housing Authority first placed “stops” on the bonds.

    Lastly, the court noted that regarding past-due coupon interest, the Statute of Limitations runs on each installment from the date it becomes due (Phoenix Acquisition Corp. v. Campcore, Inc., 81 N.Y.2d 138).