District Court Nixes Insurance Payout to Apparel Importer for Goods Seized from D.R. Contract Manufacturer in Bankruptcy
The Massachusetts U.S. District Court on March 12 ruled that an apparel importer can’t collect insurance on merchandise seized during a bankruptcy proceeding from its contract manufacturer in the Dominican Republic. Eveden had taken out an “all risk” insurance policy from the Northern Assurance Company of America. It said that policy covered women’s undergarments produced for Eveden by F&J International that were sitting in F&J’s facility in a duty free zone in the Dominican Republic when they were seized to cover the manufacturer’s debts. But the court said the loss was not the type of unforeseen event covered by an all risk policy, and in any case found that the garments were owned by F&J under Dominican Republic law.
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F&J had been created in 2005 specifically to make women’s undergarments for Eveden, and two companies worked closely together: Eveden employees cut and F&J employees sewed on the same factory floor at the duty free zone in San Pedro Macoris, Dominican Republic. Before F&J was formed, Eveden sourced its apparel from various facilities in the Philippines, El Salvador, and Colombia. But Eveden switched to using a single contract manufacturer in the Dominican Republic to save on freight and labor costs. To satisfy Dominican Republic law, all of the inputs and finished goods for the apparel had to be owned by F&J. On import documentation, F&J was the consignee. Finished goods were shipped out in F&J’s name.
Things went south for F&J in 2008. With F&J unable to pay its debts, its creditors got court orders to seize the company’s property. Some women’s undergarments F&J had produced for Eveden were among the property seized. Eveden said its all risk policy from Northern Assurance covered the loss. “All risk” policies cover any unspecified losses, as long as the risk of loss was unintentional and “unexpected, unusual and unforeseen.” Eveden’s covered only physical losses. Eveden said the loss occurred when its lawyer went to the facility and demanded return of the goods, but was refused. At that point, F&J had illegally taken possession of the goods, Eveden claimed.
The District Court found the loss wasn’t covered by the insurance policy. First, F&J’s refusal to give the merchandise to Eveden’s lawyer didn’t amount to the illegal exercise of control. Ownership issues aside, it was simply complying with Dominican Republic court orders to hold the goods while its debts were being sorted out, said the court. Furthermore, the loss wasn’t unforeseen or unexpected. There is nothing “fortuitous” about debtors seizing goods in a bankruptcy proceeding, it said.
(Eveden, Inc. v. The Northern Assurance Company of America, D. Mass 10-10061-GAO, dated 03/12/14, Judge O’Toole)
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