Appeal from the District Court of the United States for the Western District of Pennsylvania; Robert M. Gibson, Judge.
Before BUFFINGTON and BIGGS, Circuit Judges, and DICKINSON, District Judge.
BUFFINGTON, Circuit Judge.
In a state court, Chaplin & Co. brought suit against the defendant insurance company to recover damages sustained by it for which defendant, as alleged, was liable on its indemnity bond given to the plaintiff. No facts being in dispute, the case was heard by the court on the plaintiff's motion for judgment for want, as was alleged, of a sufficient affidavit of defense. After hearing, the court, in an opinion entered judgment for the defendant. Whereupon plaintiff took this appeal.
The pleaded pertinent facts are that plaintiff, a stock brokerage firm, was requested by the Sterling Investment Corporation (hereafter called Sterling) to buy for it 100 shares of Le Moyne Steel Company stock at $140.50 per share, which the plaintiff did. Plaintiff alleged in its pleadings that, with the intent to defraud it, Sterling made false statements to plaintiff to induce it to buy said stock, inter alia, that such stock was being purchased "in the course of a bona fide sale from a third party," and that "said stock had a market value of approximately the suggested purchase price for said stock," and that "for the purpose of defrauding the plaintiffs, Sterling created a fictitious market value for said Le Moyne Steel Company stock, by making false sales and false purchases of the stock of said Company," and which procedure is known as "wash sale," when in fact Sterling "well knew the said LeMoyne Steel Company stock was worthless and without value." It was further alleged that "at or about the same time that Sterling Investment Corporation gave to its New York agent the said order to sell the said LeMoyne Steel Company stock, it gave to plaintiff orders to buy the same stock." It was further alleged: "That relying upon the said false statements and fraudulent acts made by and for the Sterling Investment Corporation and being falsely induced by them, the plaintiff at its office in Pittsburgh, ordered its New York office to purchase in New York City, the said two hundred (200) shares of stock at the prices fixed by the agent of the Sterling Investment Corporation with plaintiffs." It was further alleged, that "certificates for the said two hundred (200) shares of Le Moyne Steel Company stock were received from the Sterling Investment Corporation's New York Agent by Plaintiffs' Agent, the former forwarding the said money in the sum of $28,150.00, to the Sterling Investment Corporation," and that "the said Sterling Investment Corporation received the said money of the plaintiffs in the sum of $28,150.00 which it had thus fraudulently obtained from the premises of the plaintiff and from the plaintiff's bankers and recognized place of safe deposit."
In accord with the above allegations, plaintiff, on the discovery of the alleged fraud some four months thereafter, thus summarized its claim in the notice and proofs of loss furnished to defendant:
"On the 9th day of January, 1935, a loss was sustained by us through fraudulent means amounting to $24,003.34. The circumstances were as follows:
On the aforesaid date of January 9, 1935, the Sterling Investment Company, Pittsburgh, Pennsylvania by fraudulent means caused the loss to J. H. Holmes & Company in the sum of $24,003.34 by false and malicious representation as to the transactions involving the ownership of and value of 200 shares LeMoyne Steel Company Stock."
On its part defendant in its affidavit of defense alleged, inter alia: "The bond sued upon provides that it does not cover 'any loss resulting directly or indirectly from trading, actual or fictitious, whether in the name of the Insured or otherwise, and whether or not within the knowledge of the Insured.' The loss which it is alleged the plaintiffs suffered was a loss resulting directly from trading."
Referring to this defense that the transaction was a trading loss, the court below, so holding, said:
"This bond does not cover * * *
"(f) Any loss resulting directly or indirectly from trading, actual or fictitious, whether in the name of the Insured or otherwise, and whether or not within the knowledge of the Insured, and notwithstanding any act or omission on the part of any employee in connection therewith, or with any account recording the same.'
"If that portion of the statement relating to the stock transactions of plaintiffs with the Sterling Investment Corporation is to be considered other than as surplusage, the pleading discloses just such a loss as is contemplated by the paragraph quoted. The word 'trading,' as used, means the operation of the usual occupation of buying and selling stocks. In this connection it must not be forgotten that a stockbroker differs from the ordinary broker who is merely a conduit between buyer and seller. The stockbroker buys the stock with his own money, thereby becoming a creditor of the buyer as well as a trustee of the stock. The loss of plaintiffs resulted from trading -- a fictitious trading and without the knowledge of the insured, it is true, but still the trading contemplated by the bond."
But for present purposes assuming, but only assuming, that the transaction was not a trading loss, defendant alleges another defense; namely, that the transaction, ...