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Atwood Vacuum Mach. Co. v. Continental Cas. Co.

MARCH 18, 1969.

ATWOOD VACUUM MACHINE COMPANY, AN ILLINOIS CORPORATION, PLAINTIFF-APPELLANT,

v.

CONTINENTAL CASUALTY COMPANY OF CHICAGO, DEFENDANT-APPELLEE, AND THE GUILD HALL OF LONDON, MUCHENER RUCKV, OF MUNICH, REINSURANCE CORPORATION, OF LONDON, STORE BRAND, OF OSLO, ATLAS REINSURANCE, OF STOCKHOLM, GLOBO REINSURANCE, OF TORONTO, BRITISH NATIONAL, OF LONDON, BRITISH & OVERSEAS, OF LONDON, THE GREAT LAKES, OF TORONTO, NORTHERN ASSURANCES CO. OF LONDON, AND THE VICTORY INSURANCE CO. OF LONDON, DEFENDANTS.



Appeal from the Circuit Court of Cook County; the Hon. EDWARD G. SCHULTZ, Judge, presiding. Judgment reversed and cause remanded with directions.

MR. JUSTICE BURKE DELIVERED THE OPINION OF THE COURT.

Atwood Vacuum Machine Company brought this action as assignee of nine bills of exchange, after the bills had been presented for payment upon maturity and dishonored, against the twelve named insurance companies which had allegedly joined with an insurance company of Venezuela, Compania Anonima de Seguros Republica (Republica), for the purpose of guaranteeing payment of bills of exchange drawn in Venezuela, among which were the bills at bar. It appears that of the twelve insurance companies named in the original and amended complaints only defendant-appellee, Continental Casualty Company (Continental), was served with summons. Republica was not joined as a defendant.

The original and the first two amended complaints were stricken on motion of Continental and plaintiff was given leave to file a third amended complaint, which was thereafter filed. The trial court deferred action on Continental's motion to strike the third amended complaint pending tender of a fourth amended complaint and a consideration thereof by the court. Leave to file the tendered fourth amended complaint was denied on the ground that none of the four counts therein stated a good cause of action. The court further ordered that plaintiff not be allowed to plead over or amend the third amended complaint, that Continental's motion to strike the third amended complaint, which was still pending, be allowed, and that the litigation with respect to Continental be terminated as a whole with prejudice to plaintiff and costs to this defendant. Judgment was entered for Continental, and plaintiff prosecutes this appeal.

Count I of the tendered fourth amended complaint alleged generally that between the years 1952 and 1959, business institutions in Venezuela were experiencing difficulties in securing working capital due to a rapidly expanding economy. The count alleged that there developed a procedure and common usage in Venezuela whereby capital was secured by Venezuelan businessmen through the cooperation of small Venezuelan insurance companies and large foreign insurance companies. The procedure and usage was alleged to have been as follows:

An individual Venezuelan businessman would draw a bill of exchange on a nominal drawee and, in order for the bill to acquire value and stability in the money market, its payment was guaranteed by a Venezuelan insurance company. The guaranty on the bill appeared as "bueno por aval" ("good for guarantee"), or an equivalent thereof, written on the bill or on an attached paper, followed by the name of the Venezuelan insurance company granting the aval and the signature of the appropriate officer of that company. However, since the guaranty of the Venezuelan insurance company was not of itself acceptable in the money markets, it was necessary that its aval be backed by well-known, financially reliable foreign insurance companies. It therefore became the practice that the foreign insurance companies would back the individual Venezuelan insurance company, the latter acting for and on behalf of the former in granting the avals.

Count I further alleged that the Venezuelan insurance company and the foreign insurance companies involved in any particular such association shared premiums and risks in accordance with previously agreed fixed percentages. It was the custom of the brokers and investors in the Venezuelan money markets to inquire of and receive the names of the insurance companies. Venezuelan and foreign alike, which were participating in the guaranty on a particular bill of exchange, as well as the respective percentage interests each participating insurance company had in the guaranty or aval.

The individual Venezuelan businessman would secure repayment of the bill of exchange by depositing securities or executed mortgages with the Venezuelan insurance company granting the aval. A brokerage firm was then engaged to sell the bill to an investor and the proceeds thereof went to the businessman as working capital. When the bill fell due, it would be repaid by the businessman out of funds paid to him by the Venezuelan government for completing his contract as previously agreed. Count I further alleged that all of the defendant companies herein were aware and knew of this custom and procedure, and also knew that those dealing in the Venezuelan money markets would follow this practice.

Count I further alleged that until late 1959, no losses were incurred by any of the insurance companies participating in such ventures in Venezuela. In March 1955 Republica, a small insurance company, was organized to engage in the guaranty operations detailed above. During June 1955, Sterling Offices of Toronto, Canada, organized a group of foreign insurance companies to participate with Republica, under various forms of business associations, in the business of guaranteeing bills of exchange in Venezuela.

In July 1958, Sterling notified Republica of a change in the makeup of the foreign participating insurance companies. Republica was informed that defendants herein were the new participating foreign insurance companies which would act in conjunction with Republica in guaranteeing bills of exchange, and that the premiums and losses would be shared as follows:

Continental Casualty Company 10% The Guild Hall 10% Munich Reinsurance, A.G. 10% Reinsurance Corporation 10% Store Brand 10% Republica 10% Atlas Reinsurance 7.5% Globe Reinsurance 7.5% British National 5% British & Overseas 5% The Great Lakes 5% Northern Assurance Co. 5% The Victory Insurance Co. 5%

Count I further generally alleged that in 1957, Seth B. Atwood, plaintiff's assignor, traveled to Caracas, Venezuela, and investigated the financing operations detailed above. Atwood and two of his associates conferred with officers of a number of Venezuelan insurance companies, as well as with the manager of a New York bank operating in Caracas. It was alleged that all of those consulted described the Venezuelan financing operations as detailed above.

The count further alleged that on October 27, 1957, Seth B. Atwood began to purchase bills of exchange, as guaranteed in the manner set out above. It was alleged that prior to each purchase, Atwood inquired as to the identity of the Venezuelan insurance company granting the aval, and also secured representations as to the participating foreign insurance companies. In the case of the bills of exchange at bar, plaintiff's assignor was advised by Republica that the defendants were the participating foreign insurance companies. Between October 27, 1957, and August 12, 1959, Atwood purchased approximately $2,900,000 worth of bills of exchange, all of which were honored in full at maturity. The bills of exchange at bar, dated August 11, 1958, and thereafter, one of which fell due in October 1959 and the balance of which fell due in August 1960, bore the avals of Republica. The bill which fell due in October 1959 was not honored by the drawer and the acceptor, and the defendants were so notified.

Count I then charged defendants with negligence and specifically alleged that shortly prior to April 15, 1959, Pedro Torres, the president of Republica, and other Republica employees acting with Torres, filed with and collected a false claim against the defendant insurance companies, said false claim having been based upon a bill of exchange which was never in fact guaranteed by Republica. It was alleged that the fact of the fraud was announced in the Caracas newspapers on April 15, 1959. It was also alleged that in June 1959 defendant learned that Republica had ceased honoring its avals. The bill of exchange involved herein, which fell due in October 1959, was thereafter dishonored by the drawer and the acceptor, and by Republica. It was alleged that in December 1959, Torres approached the defendants with a "scheme to help the said insurance company defendants avoid payment of the liabilities under their agreement" with Republica, amounting to approximately 40,000,000 Venezuelan Bolivars, by making a cash payment of approximately 6,000,000 Bolivars to Torres for the defaulting Republica. Count I alleged that the defendants knew or should have known that the 6,000,000 Bolivars paid to Torres would not be deposited into the treasury of Republica to be made available to holders such as plaintiff's assignor. Republica was closed by Venezuelan executive order in February 1960. The 6,000,000 Bolivars was never paid into Republica's treasury by Torres, who fled the country. Count I alleged that defendants failed to honor the avals on any of the bills of exchange at bar when the bills were presented to them at maturity, after the bills had been presented to the drawers, the acceptors and Republica. Plaintiff alleged that defendants' act in paying the 6,000,000 Bolivars to Torres was intentional and constituted negligence under the laws of Venezuela since defendants knew that Torres had defrauded them of 400,000 Bolivars approximately eight months previous, and since defendants afforded the holders of the bills of exchange guaranteed by Republica neither protection nor opportunity to protect themselves through notice of Torres' acts.

Count II of the tendered fourth amended complaint realleged the general allegations of Count I and specifically alleged that the unwritten agreement entered into between Republica and the defendants, for the purpose of guaranteeing bills of exchange, constituted an attempt to create either a limited partnership or a general partnership under the laws of Venezuela. Count II alleged that because Republica and the defendants engaged in the aforementioned business without having executed a written document, without having filed such document with the local court, without having published an extract of such document in a local newspaper, and without having adopted a name under which they were to have engaged in said business, all of which was required by Venezuelan law, the association was not a "legally constituted partnership" as specifically provided by the pertinent Venezuelan statute. Since the statute rendered all "founding partners, administrators or any other persons who may have acted" in the name of the partnership personally and jointly liable for its operations, Count II alleged that defendants, as such founding partners of a partnership not legally constituted, were liable on the avals after dishonor of the bills of exchange at bar by the drawers and the acceptors thereof, and by Republica. Count I of the third amended complaint corresponds to Count II of the tendered fourth amended complaint.

Count III of the tendered fourth amended complaint realleged the general provisions of Count I and further alleged that Republica, in granting the avals on the bills of exchange at bar, acted as agent for the defendants within meaning of the statutes of Venezuela. The count alleged that defendants are liable as principals on the guarantees of Republica. Count II of the third amended complaint corresponds to Count III of the tendered fourth amended complaint.

Count IV of the tendered fourth amended complaint realleged the general allegations of Count I and specifically alleged that, under the laws of Venezuela, defendants were guilty of fraud. Plaintiff alleged that defendants, through their agent Republica, "with the intention of deceiving and defrauding plaintiff's assignor," represented to Seth B. Atwood that Republica was authorized to assure the prospective purchasers of the bills of exchange at bar that the guarantees would be honored by Republica and the defendants, in the percentages set out above, in the event of nonpayment by the drawers and acceptors of the bills. Plaintiff further alleged that "such statements of fact were either untrue and known to be untrue or were recklessly made without regard for their truth." Plaintiff alleged that the representations of Republica were false, in that at the time they were made, defendants had not in fact agreed that the avals on the bills in question would be honored by Republica and the defendants in the percentages set forth, and that they had no intention of making such payments. It was finally alleged that plaintiff's assignor relied upon such representations and purchased the bills at bar, which were worthless. Count III of the third amended complaint corresponds to Count IV of the tendered fourth amended complaint. The third amended complaint contained a fifth count, dealing with third party beneficiaries, which was not incorporated into the tendered fourth amended complaint nor in any way raised as an issue on this appeal.

Attached to the complaint as exhibits, in addition to the dishonored bills of exchange in question, were the Spanish texts and the English translations of the Venezuelan statutes relied upon by plaintiff; English translations were also provided by Continental. The statutes and their translations consisted of Venezuelan law governing negotiable instruments, avals, business ventures such as corporations and partnerships, agency, negligence, and fraud. It is undisputed that the translations provided by the parties hereto accurately state the verbiage in English of the Spanish texts cited.

The trial court held that Count II of the tendered fourth amended complaint failed to state a cause of action on the same grounds as Count I of the third amended complaint, namely, since Republica and defendants failed to enter a written contract of their business association and register the same with the appropriate local court in Venezuela, since they failed to publish their partnership status in the newspaper, and since they failed to secure a name under which the partnership was to act, all as required by Venezuelan law in order to create a "legally constituted partnership," only Republica could be held liable for its operations since only Republica did in fact act in granting the avals. The court reasoned that, under the language of the pertinent Venezuelan statute, the "founding partners" of an illegally constituted partnership were not liable for the operations thereof unless they "acted in the name of" the illegally formed partnership, which defendants here did not do.

The court held Count III of the tendered fourth amended complaint did not state a cause of action in agency since, under the meaning of the pertinent provisions of the Venezuelan Commercial Code, only the party whose name appears on the aval can be liable thereunder. The court held that since defendants' names did not ...


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