Opposition Brief — Pereira v. Aetna Casualty & Surety Co., 120 S. Ct. 1419 (2000) (No. 99-1016)

| FILED |

& FEB 0.9 99m

No. 99-1016

y— CLERK

IN THE om

Supreme Court of the United States

JOHN S. PEREIRA, Esq., as Chapter 11 Trustee of the

Estate of Payroll Express Corporation, et al.,

Petitioner,

-against-

AETNA CASUALTY & SURETY COMPANY; FEDERAL

INSURANCE COMPANY; CHUBB GROUP OF INSURANCE

COMPANIES; ANGUS JOHN ROBERTS, an Underwriter at Lloyd's

London, on behalf of himself and all those other Lloyd's Underwriters

subscribing to Insurance Policy Nos. C92163400F and C92163500F,

(Action continued on inside of cover)

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

RESPONDENT'S BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

ARTHUR N. LAMBERT

Counsel of Record

ALAN M. GOLDBERG

M. DIANE DUSZAK

LAMBERT & WEISS

Attorneys for Respondent

Aetna Casualty & Surety Company

61 Broadway

New York, NY 10006

(212) 344-3100

, tune

de en

et al., SPHERE DRAKE INSURANCE PLC; INSURANCE

COMPANY OF NORTH AMERICA (UK) LIMITED "G"

ACCOUNT; INSURANCE COMPANY OF NORTH AMERICA

(UK) LIMITED CE MAR A/C; ZURICH RE (UK) LIMITED;

NIPPON INSURANCE COMPANY OF EUROPE LIMITED;

EXCESS INSURANCE CO., LTD.; OCEAN MARINE

INSURANCE CO., LTD; ASSICURAZIONI GENERALI S.P.A.;

THE THREADNEEDLE INSURANCE CO. LTD.; PHOENIX

ASSURANCE PLC LSA ACCOUNT; COLONIA INSURANCE

(UK) LIMITED "TR" ACCOUNT; THE PRUDENTIAL

ASSURANCE COMPANY LIMITED TRUST ACCOUNT NO. 2;

CORNHILL INSURANCE PLC "D" ACCOUNT; SIRIUS (UK)

INSURANCE PLC; NORWICH NO. 1 "M" ACCOUNT;

COMMERCIAL UNION ASSURANCE CO. PLC; PHOENIX

ASSURANCE PLC; WURTTEMBERGISCHE FEUER

VERSICHERUNG AG "AW" ACCOUNT; NORTHERN

ASSURANCE COMPANY LIMITED NO. 6 ACCOUNT;

YORKSHIRE INSURANCE COMPANY LIMITED; LONDON

AND HULL MARITIME INSURANCE COMPANY LIMITED

AXA T ACCOUNT,

Respondents.

THE REPORTER COMPANY, Printers and Publishers, Inc.

30 Vesey Street, New York, NY 10007—212-732-6978

(8086 — 2000)

Printed on Recycled Paper

i

CORPORATE DISCLOSURE STATEMENT

In accordance with Rule 29.6 of the Rules of the Supreme Court

of the United States, I certify the following: Travelers Casualty and

Surety Company, successor to Aetna Casualty and Surety

Company, is 100% directly owned by Travelers Property Casualty

Corp., a publicly traded company. Travelers Property Casualty

Corp. is approximately 84% indirectly owned by Citigroup, Inc.

which is a publicly traded company.

TABLE OF CONTENTS

Page

CORPORATE DISCLOSURE STATEMENT ........... i

TPES AE PR 6c Nee aa awe Cea nals ill

PURE APRINAES © EPL RESIUENE 0 bc be cctanvieeeekeuns |

COUNTER-STATEMENT OF THE CASE ............ |

Rr hd cS x ok ane a cae ee Aaa eek cas l

FO PR ahs BS SA de 2

Fee Boreas Coane FUE cs ik a aR 2

The Second Circuit's Judgment Affirming the

semen OF te CAE COU sia ene ras 00 es 4

WORMS FR 6 Se Cae ais Kea each 5

POINT I

The Second Circuit's affirmance of the District Court's

granting of partial summary judgment to Aetna is not

re Ge os a a i ee See 6

POINT II

Petitioner has failed to establish any conflict between

different United States Courts of Appeals on an important

UE RPS CORRS CESSES BR ae een eG 7

eee

TABLE OF AUTHORITIES

Cases Pages

Adair State Bank v. American Cas. Co. of Reading, Pa..

Dae te One CPO FONE) ey eae cele e 9,10

Aetna Cas. & Surety Co. v. Kidder, Peabody & Co. Inc.,

246 A.D.2d 202, 676 N.Y.S.2d 559 (Ist Dept. 1998),

lv. to appeal denied, 93 N.Y.2d 805, 689 N.Y.S.2d

EW RD es Ob 0 es CaN Las awe ck a Seek 8, 12

American Mfg. Mut. Ins. Co. v. Tison Hog Market, Inc..

IGS oe tae Chee, 199) ooo i ok kk. 11-13

Bank of Marin v. England, 385 U.S. 99 (1966) ............ 8

City of Oklahoma City v. Tuttle, 471 U.S. 808 (1985) ...... 6

Dawson v. National Union Fire Ins. Co. of Pittsburgh, PA..,

285 N.J.Super. 137, 666 A.2d 604 (App.Div. 1995),

cert. denied, 143 N.J. 517, 673 A.2d 276 (1996) ...... 8, 12

Federal Deposit Insurance Corp. v. Aetna Cas. & Sur. Co..

See sae Fae Ce Pe 5s oo ee hn ek. 9

Izumi Seimitsu Kogyo Kabushiki Kaisha v. U.S. Phillips

Corporation, 510 U.S.27 (1994)... ccc ccc ccc eee 6

Levitt v. Riddell Sports, Inc. (In re MacGregor Sporting

Goods, Inc.), 199 B.R. 502 (Bankr. D. N.J. 1995) ....... 10

Liberty Mutual Fire Ins. Co. v. Kahlaid, Inc., 199 N.J.Super.

494, 489 A.2d 1231 (App.Div. 1985), cert. denied, 101

N.J. 300, 501 A.2d 958 (1986) ... 2.2.0.6... eee. 8, 12

iv

TABLE OF AUTHORITIES - CONT'D

PAGES

175 East 74th Corp. v. Hartford Accident & Indem. Co.,

51 N.Y.2d 585, 416 N.E.2d 584, 435 N.Y.S.2d

FOE ree oa cao oak CRED hs hd ea es 7-8, 12

Puget Sound Nat'l Bank v. St. Paul Fire & Marine Ins. Co.,

32 Wash. App. 32, 645 P.2d 1122 (Wash. App. Div. 1982),

review denied, 97 Wash.2d 1036 (Wash. 1982) ....... 9, 11

Stone v. Powell, 428 U.S. 465 (1967) 2... ... cee ce eeees 7

Yee v. City of Escondido, California, 503 U.S. 519 (1992) 7

Zartman Trustee v. First National Bank, 216 U.S. 13 (1910) . 8

PRELIMINARY STATEMENT

Respondent, Travelers Casualty and Surety Companiy, successor

to Aetna Casualty and Surety Company (hereinafter Aetna’),

respectfully submits this brief in opposition to the petition for a writ

of certiorari filed by John S. Periera, Esq., as Chapter 1 | trustee of

the estates of Payroll Express Corporation and Payroll Express

Corporation of New York (collectively referred to as "Payroll

Express"), which seeks review of the Order of the United States

Court of Appeals for the Second Circuit which was entered on J uly

29, 1999.

COUNTER-STATEMENT OF THE CASE

This section corrects the inaccuracies and omissions in the

statement of the case set forth in the petition for certiorari.

Respondent Aetna respectfully submits that a thorough under-

standing of the facts is essential to enable this Court to make a

reasoned determination whether to grant the petition and review

this matter.

Background

This action, which alleges breach of contract by the

respondent insurers by reason of their having declined coverage

for the insurance claim submitted by the Trustee, claims that

Payroll Express sustained a loss as a direct result of employee

dishonesty. The claimed loss is alleged to have resulted from the

alleged dishonest activities of Robert Felzenberg and Barbara

Felzenberg, husband and wife (collectively "the Felzenbergs"),

who were Payroll Express' sole shareholders, directors and

officers, and who were allegedly assisted by others. The Trustee

had alleged that the Felzenbergs transfe*red Payroll Express

funds to other entities owned by the Felzenbergs, to brokerage

accounts in the names of the Felzenbergs, and to relatives of the

Felzenbergs, and that the Felzenbergs made personal use of such

funds. It is undisputed that the Felzenbergs dominated and

controlled Payroll Express, and that no one at Payroll Express

had the right to govern and direct the Felzenbergs' activities.

(App. A, 81(a).)

2

Following his appointment by the Bankruptcy Court, the

trustee, on behalf of the estate of Payroll Express, submitted a

Proof of Loss to Aetna, Federal Insurance Company ("Federal"),

Chubb Group of Insurance Companies ("Chubb"), and The

London Excess Underwriters ("LEU") in which the trustee

alleged a loss caused by employee dishonesty. The respondent

insurers all denied coverage for the claimed loss on various

grounds, including that the Felzenbergs constituted the alter ego

of Payroll Express, and that any alleged loss was not caused by

employee dishonesty. The trustee commenced this action against

the respondent insurers following their declination of coverage

for the claimed loss. (A short description of the litigation is set

forth below.)

Aetna's Policy

Aetna had issued to Payroll Express a Comprehensive

Dishonesty, Disappearance, and Destruction Policy - Form A

which provided coverage to Payroll Express for loss caused by

employee dishonesty. Aetna's policy does not cover losses

sustained by third parties, such as customers or creditors of

Payroll Express. As the Second Circuit noted, the Preamble and

Insuring Agreement I of Aetna's policy provide, inter alia, as

follows:

"The Company...agrees with the Insured...to_ pay the

Insured for:...Loss of Money, Securities and other

property which the Insured shall sustain...through any

fraudulent or dishonest act or acts committed by any of

the Employees, acting alone or in collusion with others."

(Emphasis supplied.) (App. A, 6a.)

Aetna's policy defines "Employee" as:

3

any natural person (except a director or trustee of the

Insured, if a corporation, who is not also an officer or

employee thereof in some other capacity) while in the

regular service of the Insured in the ordinary course of the

Insured's business during the Policy Period and whom the

Insured compensates by salary, wages or commissions and

has the right to govern and direct in the performance of

such service. (App. A, 6a - 7a.)

Endorsement 28 of Aetna's policy excludes Robert Felzenberg

from the definition of "employee". (App. A, 7a.)

The District Court's Judgment

Aetna and the other respondent insurers moved for summary

judgment before the District Court. The District Court granted

summary judgment to LEU, Chubb, and Federal, and granted

partial summary judgment to Aetna. In connection with Aetna,

the District Court noted that the trustee had previously

discontinued its claim against Aetna pertaining to losses caused

by Robert Felzenberg (App. D, 80a.) In granting partial summary

judgment to Aetna, the District Court determined that Barbara

Felzenberg was not an "employee", as that term is defined in

Aetna's policy, and that she constituted the contractual alter ego

of Payroll Express. (App. D, 88a.) The District Court also

determined that there was no evidence in the record to support

the trustee's allegation that the alleged loss was caused by the

dishonesty of Alicia and Emily Felzenberg, the Felzenbergs'

children. (App. D, 92a.)

The remaining claims which had not been dismissed by the

District Court, and which pertained to the alleged dishonesty of

George Gillmore, Robert Gussow, Rose Felzenberg and Howard

Messer, were later discontinued with prejudice pursuant to a

stipulation entered into by the Trustee and Aetna. (App. A, 15a - 16a.)

4

The Second Circuit's Judgment Affirming

the Judgment of the District Court

The United States Court of Appeals for the Second Circuit

affirmed the judgment of the District Court. In affirming the

judgment, the Second Circuit agreed with the District Court's

holding that the Felzenbergs were the contractual alter egos, and

not employees, of Payroll Express. (App. A, 14a - I5a.) The

Second Circuit also agreed with the District Court that there was

no evidence to support the claim that any losses sustained by

Payroll Express were caused by the dishonesty of Alicia and

Emily Felzenberg. (App. A, 15a.)

The Trustee's Petition

The trustee's petition does not contest that portion of the Second

Circuit's judgment which affirmed the granting of summary

judgment to Aetna, Chubb and Federal. Although the trustee

initially requests a writ of certiorari "'to review the judgment of the

United States Court of Appeals for the Second Circuit...in this case"

(Petition, p.1), he subsequently narrows the scope of his petition

when he states that he seeks this Court's review of only "the Court

of Appeals' affirmance of the District Court's decision granting

summary judgment to the LEU." (Petition, p.6.) Other than briefly

mentioning Aetna in describing the background of this matter, the

Trustee makes no mention whatsoever of Aetna in his arguments,

and the arguments appear to be directed solely against LEU.

(Petition, pp.6-16.)

Further, none of the trustee's arguments can logically be directed

against Aetna. In argument I of his petition (pp.6-13), the trustee

argues that the imputing of the dishonesty of Robert Felzenberg to

the trustee and creditors is in conflict with decisions of other United

States Courts of Appeals. As Aetna's policy only covers the insured

for loss sustained by it as a result of employee dishonesty (App. A,

6a), as Endorsement 28 of Aetna's policy specifically excluded

5

Robert Felzenberg from the policy's definition of "employee" (App.

A, 7a), and as the trustee specifically discontinued all claims against

Aetna which pertained to Robert Felzenberg's dishonesty (App. D,

80a), the arguments asserted by the trustee on pages 6-13 of his

petition simply cannot apply to Aetna.

In addition, the trustee's arguments set forth in argument II of his

petition (pp. 13-16) pertain to Robert Felzenberg's

misrepresentations in his application, on behalf of Payroll Express,

for insurance coverage from LEU. Accordingly, such arguments can

only apply to LEU, and cannot apply to Aetna.

As the trustee has presented no argument which even remotely

pertains to Aetna, it is apparent that the petition does not contest the

granting of summary judgment to Aetna. Therefore, as set forth in

Point I below, the granting of summary judgment to Aetna is not

before this Court.

The trustee's petition also contains inaccuracies. In his petition,

the trustee claims that Payroll Express' customers demanded

protection under the fidelity policies which had been issued to

Payroll Express, and that Payroll Express purchased fidelity poticies

from the respondents in order to protect itself and its customers

from losses caused by employee dishonesty. Yet, whether customers

in fact requested such protection from Payroll Express or not is

irrelevant to the trustee's action against Aetna, since, as stated

above, Aetna's fidelity insurance pol icy does not provide coverage

to third parties, but only to the insured, Payroll Express (App A, 6a).

In arguing that he seeks to recover insurance proceeds on behalf

of the creditors of Payroll Express (Petition, p. 17), the trustee

contradicts his own allegation, set forth in paragraphs "1"',"2"", "5"

and "12" of the Complaint, that he represents the Estate of Payroll

Express. Consistent with that allegation, the trustee previously

admitted, in response to Aetna's Local Civil Rule 56.1 statement of

uncontested facts, that he stands in the shoes of Payroll Express,

6

that he has no greater rights than Payroll Express, and that he is

subject to the same defenses that Payroll Express would have been

subject to had Payroll Express submitted the insurance claims at

issue in this action.

POINT I

The Second Circuit's affirmance of the District Court's

granting of partial summary judgment to Aetna is not

before this court

The only issues presented for review by this Court in the

petition for a writ of certiorari pertain to the District Court's

granting of summary judgment in favor of LEU and the Second

Circuit's affirmance of same. The petition does not address, and

therefore, does not contest, the granting of summary judgment

to Chubb and Federal, or the granting of partial summary

judgment to Aetna. (As stated above on pages 4-5, the

arguments presented by the petitioner cannot logically apply to

Aetna.) Accordingly, those issues addressed by the Second

Circuit concerning the trustee's claims against Aetna, Federal and

Chubb are not before this Court.

In accordance with Rule 14.1(a) of the Rules of this Court,

"only the questions set out in the petition, or fairly included

therein, will be considered by the Court." This Court has

repeatedly declined to address issues not raised in the petition for

certiorari or in a cross-petition for certiorari. See, Izumi Seimitsu

Kogyo Kabushiki Kaisha v. U.S. Philips Corporation, 510 U.S.

27, 30-31 (1994) (declining to address issue “neither presented

as a question in the petition for certiorari nor fairly included

therein"); City of Oklahoma City v. Tuttle, 471 U.S. 808, 814

n.2 (1985) (Court’s holding confined to question actually

presented in petition for certiorari). And there are no exceptional

circumstances at bar in this routine contract case which would

justify a departure from this Court's stated policy of declining to

7

address issues not set forth in the petition for certiorari. Yee v,

City of Escondido, California, 503 U.S. 519, 535 (1992) (Rule

14.1(a), although prudential in nature, is only to be disregarded

in the most exceptional case, "where reasons of urgency or

economy suggest the need to address the unpresented

question"); Stone _v. Powell, 428 U.S. 465, 482 n.15 (1976)

(“only in the most exceptional cases will we consider issues not

raised in the petition"),

Accordingly, we respectfully submit that the Second Circuit's

judgment affirming the District Court's granting of partial

summary judgment to Aetna should not be reviewed by this

Court.

POINT I

Petitioner has failed to establish any conflict between

different United States Courts of Appeals on an important

matter

This Court should also deny the trustee's petition because the

trustee has failed to set forth any compelling reason which merits

this Court's review of the Second Circuit's judgment.

This action involves nothing more than a simple contract dispute

between various insurers and an insured (or in this case, a trustee

who stands in the shoes of the insured.) Therefore, this is not the

type of case which compels review by this Court.

That the trustee claims to look out for the interests of the third-

party creditors of Payroll Express, rather than the Estate of Payroll

Express, does not change the contractual nature of this dispute. Nor

are the interests of the third party creditors even relevant, as it is

well-recognized that fidelity policies of insurance, such as Aetna's

policy, provide coverage only for losses sustained by insureds

thereunder, and not for losses sustained by third parties. 175 East

8

74th Corp, v. Hartford Acc. & Indem. Co., 51 N.Y. 2d 585, 416

N.E.2d 584, 435 N.Y.S.2d 584 (1980); Aetna Cas. & §

Kidder, Peabody & Co, Inc., 246 A.D.2d 202, 209, 212, 676

N.Y.S.2d 559, 563, 565 (Ist Dept. 1998), lv. to appeal denied, 93

N.Y.2d 805, 689 N.Y.S.2d 429 (1999). And New Jersey law

precludes recovery by Payroll Express' creditors under Aetna's

policy. Dawson v. National Union Fire Ins. Co. of Pittsburgh, PA.,

285 N.J.Super. 137, 141-43, 666 A.2d 604, 606-07 (App.Div.

1995), cert. denied, 143 N.J. 517, 673 A.2d 276 (1996); Liberty

Mutual Fire Ins. Co. v. Kahlaid, Inc., 199 N.J.Super, 494, 497-98,

489 A.2d 1231, 1232 (App.Div. 1985), cert. denied, 101 N.J. 300,

SO! A.2d 958 (1986).

Further, the fact that the trustee claims to speak for the creditors

does not change the fact that the trustee, as a matter of law, is

subject to the same policy defenses as the insured would be subject

to had it submitted the insurance claims at issue, Bank of Marin v.

England, 385 U.S. 99, 101 (1966), (App. A, 28a), since a trustee

obtains no greater rights in connection with the submission of an

insurance claim (or the commencement of an action) than the

insured debtor would have had had it submitted the claim (or

commenced the action). Zartman Trustee v. First National Bank,

216 U.S. 134, 138 (1910).

Further, the trustee has failed to comply with Rule 10 of this

Court in that he has not set forth any compelling reason why this

Court should grant his petition for a writ of certiorari. Despite his

claim to the contrary, the trustee has not established the existence of

a conflict between different United States Courts of Appeals on the

same important matter, nor has he shown that the Second Circuit

decided an important Federal question in a way which conflicts with

a decision by the state court of last resort. (In fact, there is no federal

question involved in this action, only the application of state law to

this routine contract dispute.)

9

Petitioner mischaracterizes the decision by the Second Circuit

and decisions from other Courts of Appeals in an effort to

manufacture a purported conflict between the Circuits. In doing so,

the trustee fails to point out that (a) the facts in this case are different

from the facts in those cases relied upon by the trustee; (b) this

action was determined under New Jersey law, which, as the Second

Circuit noted, has not adopted the legal theories espoused by the

trustee, while certain of the cases relied upon by the trustee were

decided under the laws of other states which mandated contrary

rulings; and (c) the question presented by the trustee-whether a

bankruptcy trustee and creditors receive less protection from the

United States Court of Appeals for the Second Circuit than from

other United States Courts of Appeals-is phrased in a manner which

is inconsistent with the holdings relied upon by the trustee.

Petitioner argues that the United States Courts of Appeals for the

Fifth and Tenth Circuits and the Washington Court of Appeals

refused to impute the wrongdoing of respective agents to their

principals, whereas the Second Circuit imputed the wrongdoing of

Robert Felzenberg to Payroll Express in connection with his

misrepresentations in applying for insurance from LEU. Yet, the

cases cited by the trustee, Adair State Bank v, American Cas. Co.

of Reading, Pa., 949 F.2d 1067 (10th Cir. 1991); Federal Deposit

Insurance Corp. v. Aetna Cas. & Sur. Co., 426 F.2d 729 (Sth Cir.

1970); and Puget Sound Nat'l Bank v. St. Paul Fire & Marine Ins.

Co., 32 Wash. App. 32, 645 P.2d 1122 (Wash. App. Div. 1982),

review denied, 97 Wash.2d 1036 (Wash. 1982), are plainly

distinguishable from the case at bar.

The cases cited by the trustee all involved boards of directors of

banks which actively oversaw the activities of the dishonest officers,

and from whom the dishonest officers had hidden their dishonest

conduct. In the case at bar, however, the trustee has admitted, and

the District Court noted, that no one at Payroll Express had the right

to oversee the activities of the dishonest individual, Robert

Felzenberg. (App. D, 81a.) (The District Court noted that both

10

Robert and Barbara Felzenberg, who were Payroll Express' sole

shareholders, officers and directors, dominated and controlled

Payroll Express, and that no one at Payroll Express had the right to

govern and direct either of their activities. (App. D, 81a.)

Further, in Adair State Bank, the Tenth Circuit applied

Oklahoma law as an aid in interpreting whether coverage existed

under certain fidelity bonds. As the Court stated: "Because the bond

in question is required by statute, we review the bond in light of the

statute and read its terms into the bond." 949 F.2d 1067, 1072. One

provision of the Oklahoma statute required that any bank officer or

employee who fraudulently paid out any bank funds upon a check

where there was no deposit with the bank of a sum equal to that

check would be personally liable to the bank for said sum, and his

liability would be covered by the fidelity bond. 949 F.2d 1067, 1073.

As the Court found that certain bank officers had actively hidden

their dishonest acts from the bank's board of directors, and because

the statute required that the officers' dishonesty be covered under

the fidelity bonds, the dishonest acts of the officers were not

imputed to the insured bank so as to defeat recovery under the

bonds. In reaching this determination, the court apparently applied

the "adverse domination" theory, which is referred to by the trustee

in his petition.

In the case at bar, the Second Circuit applied New Jersey law

(which the trustee had requested that the District Court apply) in

reaching its determination. New Jersey, however, has not adopted

the adverse domination theory. Levitt v. Riddell Sports, Inc, (In_re

MacGregor Sporting Goods, Inc.), 199 B.R. 502, 515 (Bankr. D.

N.J. 1995), (App. A, 20a). Nevertheless, even assuming, arguendo,

New Jersey had adopted the "adverse domination" theory, that

theory would still not apply to the case at bar where the trustee has

admitted, and the Second Circuit has noted, that no one at Payroll

Express governed or directed Robert Felzenberg's activities at

Payroll Express, and that Robert and his wife, his alleged co-

conspirator, were the 100% shareholders of Payroll Express.

|

In Puget Sound Nat'l Bank, relied upon by the trustee, the

Washington Court of Appeals, after stating the general rule that "a

principal is chargeable with notice of facts which are within the

knowledge of his agent, acquired within the scope of the agent's

authority", 32 Wash. App. 32, 40, pointed out the exception to the

rule, that knowledge will not be imputed to the principal where it is

to the advantage of the agent to conceal knowledge which he has

acquired from his principal. 32 Wash. App. 32, 40. However, as the

Court also noted, the exception to the rule is qualified by another

rule that "if the agent is the sole representative of the principal, or

the only person or means by which the principel acts, then the

knowledge of the agent will be imputed to the principal, and the

general rule applies... ."" 32 Wash. App. 32, 40.

In Puget Sound Nat'l Bank, the dishonest employee, one

Dreitzler, was held not to be the sole representative of the insured

bank, and his dishonesty was therefore not imputed to the bank. In

the case at bar, however, it is undisputed that Robert Felzenberg

was the sole representative of Payroll Express insofar as applying for

and obtaining insurance coverage for Payroll Express, and that, as

Stated above, no one at Payroll Express had the right to govern and

direct Mr. Felzenberg's activities. (App. D, 81a.)

The trustee further erroneously argues that the Second Circuit's

decision in the case at bar is in conflict with a decision of the

Eleventh Circuit in American Mfg. Mut. Ins. Co. v. Tison Hog

Market, Inc., 182 F.3d 1284(1 1th Cir. 1999), This argument is also

erroneous.

Tison Hog involved the interpretation of a surety bond in which

the surety had guaranteed the principal of payment to the principal's

creditors. As the trustee states, on page 10 of his petition, in quoting

from the Eleventh Circuit's discussion in Tison Hog concerning the

nature of suretyship contracts: "A creditor does business with a

principal in reliance upon the existence of a bond." (Emphasis

supplied by trustee.) 182 F.3d at 1288. The trustee then argues that

12

the Eleventh Circuit and two courts within the Third Circuit have

determined that misrepresentations by dishonest agents should not

be imputed to principals or principals’ creditors. Yet, none of the

arguments asserted by the trustee have any applicability to the case

at bar.

The case at bar involves the interpretation of fidelity policies of

insurance, and not surety contracts as were involved in the Tison

Hog case. While a suretyship contract is a tri-part agreement among

the surety, the principal and the obligee, in which payment to the

obligee is guaranteed in the event of a default by the principal, a

fidelity policy is a first-party policy of insurance between the insurer

and the insured in which the insurer agrees to pay the insured, and

not third-parties, for certain covered losses sustained by the insured.

175 East 74th Corp. v. Hartford Acc. & Indem. Co., 51 N.Y.2d

585, 416 N.E.2d 584, 435 N.Y.S.2d 584 (1980); Aetna Cas. &

Surety Co. v. Kidder, Peabody & Co. Inc., 246 A.D.2d 202, 209,

212, 676 N.Y.S.2d 559, 563, 565 (1st Dept. 1998), lv. to appeal

denied, 93 N.Y.2d 805, 689 N. Y.S.2d 429 (1999). And New Jersey

law, under which the present action was determined, precludes

recovery by Payroll Express' creditors. Dawson v. National Union

Fire Ins. Co. of Pittsburgh, PA., 285 N.J.Super. 137, 141-43, 666

A.2d 604, 606-07 (App.Div. 1995), cert. denied, 143 N.J. 517,673

A.2d 276 (1996); Liberty Mutual Fire Ins. Co. v. Kahlaid, Inc., 199

N.J.Super. 494, 497-98, 489 A.2d 1231, 1232 (App.Div. 1985),

cert. denied, 101 N.J. 300, 501 A.2d 958 (1986).

Aetna's fidelity policy provides indemnity coverage for only

certain direct losses sustained directly by the insured, Payroll

Express, by reason of employee dishonesty as defined by the policy,

and not for those losses allegedly sustained by its

customers/creditors.

On page 12 of his petition, the trustee erroneously argues that in

applying Tison Hog to the case at bar, the creditors in this action

would not have done business with Payroll Express but for the

Chee nal *

Gael att wags

13

carriers’ issuance of commercial crime coverage for losses caused by

the dishonesty of Payroll Express’ agents. This argument, however,

simply ignores the distinct difference between the terms of the surety

contract in Tison Hog and the terms of the fidelity policies issued to

Payroll Express in the case at bar, Accordingly, the trustee's reliance

upon Tison Hog is misplaced.

Based on the foregoing, the trustee has failed to establish any

conflict among the Circuit Courts over an important matter of law.

14

CONCLUSION

As stated above, the trustee has set forth no arguments

specifically directed to Aetna, and, therefore, does not contest that

portion of the Second Circuit's judgment which affirms the granting

of summary judgment to Aetna. As the trustee has failed to set forth

any arguments with respect to the granting of summary judgment to

Aetna, Chubb and Federal, the granting of summary judgment to

those respondents are not before this Court, and cannot later be

raised by the trustee.

Further, the trustee has failed to come forth with any compelling

reason why this Court should grant the trustee's petition, and the

argument that this Court needs to urgently review a disagreement

between various Courts of Appeals concerning an important matter

is simply unfounded.

Accordingly, respondent Aetna respectfully requests that the

trustee's petition for a writ of certiorari be denied.

Respectfully submitted,

ARTHUR N. LAMBERT,

Counsel of Record

ALAN M. GOLDBERG

M. DIANE DUSZAK

LAMBERT & WEISS

Attomeys for Respondent

Aetna Casualty and Surety

Company

61 Broadway, Suite 2020

New York, New York 10006

(212) 344-3100

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