2nd Circuit: Insurer Must Pay for Merchandise Lost in Warehouse’s Bankruptcy Sale

Chubb’s Federal Insurance Co. must pay more than $2 million to a fabric company that lost 22 trailer loads of merchandise when the Mississippi warehouse company that stored it filed for bankruptcy, sold the goods and pocketed the proceeds.

A panel of the 2nd Circuit Court of Appeals rejected the insurer’s arguments that coverage was barred by a dishonest acts exclusion in the ocean cargo policy it issued, and also that the coverage applied only to shipments from one location owned by the insured to another. The panel affirmed a decision by the U.S. District Court in New York City that found that coverage was owed under an ocean cargo policy issued to Fabrique Innovations Inc.

Fabrique, which does business as Sykel Enterprises, sells fabrics with licensed designs, such as sports logos or popular art images. The company shipped 22 truckloads of “fabrics and plush merchandise,” worth about $1.2 million, from a warehouse in Chino, California to a warehouse in Mississippi owned by Hancock Fabrics.

Hancock filed for bankruptcy in February 2016 and received permission from the bankruptcy court to liquidate its holdings. Fabrique objected, but the court approved the proposed “closing sale.” Hancock sold Fabrique’s merchandise and kept the money for itself, Fabrique alleges.

Fabrique filed a theft claim, which Federal denied. The Chubb unit said the policy covered only “intracompany” shipments, not intercompany shipments — meaning the transfer of goods from premises owned by Fabrique to premises owed by another company.

Also, Federal argued that if Hancock had indeed sold the merchandise and kept the money, that constitutes a fraudulent or dishonest act for which coverage is barred under the ocean cargo policy.

The district court rejected those arguments and granted summary judgment in favor of Fabrique, awarding $2,006,814.09 in damages.

On appeal, Federal argued that Fabrique had admitted that Hancock committed a dishonest act when it filed a claim for the “theft” of its merchandise.

“While Hancock may have had the bankruptcy court’s permission to sell Fabrique’s goods, Hancock did not have permission from that court to retain the proceeds from the sale of those goods,” Federal argued.

The 2nd Circuit panel said the dishonest acts exclusion requires “tortious misconduct,” which goes far beyond a willful breach of contract.

“We are hard pressed to find tortious misconduct or dishonesty where a party openly sought and obtained leave from a court before engaging in the conduct at issue, and where the opposing party had an opportunity to object,” the panel said in its opinion.

The appellate court also rejected Federal’s argument that coverage wasn’t owed because only “intracompany” transfers were covered by the policy.

“Given the common meaning of ‘intracompany shipments’ in everyday speech, a businessperson would reasonably expect that the endorsement covered Fabrique’s goods, which remained titled to Fabrique as they were shipped to and stored at Hancock’s warehouse,” the opinion says.

Photo courtesy of Fabrique Innovations.