In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 05-4134

TRAVELERS CASUALTY & SURETY COMPANY

OF AMERICA, INC.,

Plaintiff-Appellant,

v.

NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY and

MERRILL LYNCH, PIERCE, FENNER & SMITH INC.,

Defendants-Appellees.

____________

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 03 C 4590—Rebecca R. Pallmeyer, Judge.

____________

ARGUED OCTOBER 16, 2006—DECIDED MARCH 13, 2007

____________

Before POSNER, RIPPLE, and WOOD, Circuit Judges.

POSNER, Circuit Judge. Kenneth Zahner was the chief

financial officer of a company named Volwood. He wrote

checks on Volwood’s bank account payable to Northwestern Mutual and to Merrill Lynch, but directed Northwestern to use the money to buy him a life insurance policy

and Merrill Lynch to deposit the money in his personal

account with Merrill Lynch. Volwood owed no money to

either defendant; nor had it authorized Zahner to transfer
2 No. 05-4134

these corporate funds to himself. Zahner was embezzling.

He is now in prison.

Travelers, the plaintiff, had insured Volwood against

losses from employee embezzlers. So after receiving the

insurance proceeds from Travelers, Volwood assigned to

it whatever rights Volwood might have to shift the loss

to the defendants on the ground that the defendants had

failed to alert Volwood to the suspicious circumstances of

the deposits. Travelers then filed this suit against the

defendants in the federal district court in Chicago, basing

federal jurisdiction on diversity. The parties agree that the

substantive issues in the case are governed by California

law, and as usual we defer to their choice. Wood v. MidValley, Inc., 942 F.2d 425, 426-27 (7th Cir. 1991). The district

judge dismissed the claim against Northwestern Mutual

on the ground that the amount in controversy was below

the statutory minimum, since the total amount of the

checks that Zahner had written on Volwood’s account

to Northwestern Mutual had been only $17,000. The

judge dismissed the claim against Merrill Lynch as barred

by the statute of limitations.

If the judge was right about the amount in controversy,

the claim against Northwestern Mutual must indeed be

dismissed for want of federal subject-matter jurisdiction;

it cannot be retained as a supplement to the claim against

Merrill Lynch, because it arises out of a different transaction. 28 U.S.C. § 1367(a); Hutchinson ex rel. Baker v.

Spink, 126 F.3d 895, 898, 902 (7th Cir. 1997); Highway

Equipment Co. v. FECO, Ltd., 469 F.3d 1027, 1038-39 (Fed.

Cir. 2006); Kirschner v. Klemons, 225 F.3d 227, 239 (2d Cir.

2000). Travelers argues, however, that the amount in

controversy is not $17,000 but is instead the present value

of a $700,000 life insurance policy (actually two policies,
No. 05-4134 3

but we’ll suppress that irrelevant detail) that Zahner

bought from Northwestern Mutual with the money that

he had embezzled from Volwood.

Zahner didn’t actually want life insurance. He wanted

cash. Two years after obtaining the life insurance policy,

he surrendered it to Northwestern Mutual in exchange

for its cash surrender value, some $13,000. So not only

was the loss to Volwood from Zahner’s embezzlement of

the company’s account with Northwestern Mutual a

meager $17,000, but the gain to Northwestern Mutual was

even smaller ($4,000—the $17,000 in premium payments

that it received from Volwood minus the almost $13,000

that it paid Zahner when he surrendered the policy).

Travelers seeks, however, to impress a constructive trust on

the policy in its favor as Volwood’s assignee, on the ground

that it is the beneficial owner of the policy. “Constructive

trust” is legalese for seeking to wrest ownership of a

thing from its nominal owner, which is to say the holder

of legal title. It is not a real trust; in law, “constructive”

often and here means “fictional.”

Now it is far from certain, and indeed unlikely, that the

present value of a $700,000 policy of insurance on the life

of a man age 44 (as Zahner now is) exceeds $75,000. In a

competitive market, one expects the cost of a future benefit to be the actuarial equivalent of that benefit: $17,000

would thus be the present value of the insurance policy.

No doubt the assumption can be challenged. The life

expectancy of a 44-year-old American male is 33.7 years,

and the present value of $700,000 to be received that

far hence is $28,000 at a discount rate of 10 percent.

Well, that is still a good deal less than $75,000. But 10

percent is a guess; we do not know what discount rate

would be appropriate; at a rate of 5 percent, the present
4 No. 05-4134

value of a $700,000 insurance policy leaps to almost

$140,000—though that would raise acutely the question

why the insurance company would accept $17,000 to confer

such a benefit. But maybe the insurance company has

a higher discount rate than an individual insured.

Still another complication is that $17,000 was just the

amount of premiums that Zahner paid during the first

two years of the insurance policy. Travelers would have

to keep paying premiums to keep the policy in force, and

that would reduce the policy’s net present value. But

maybe Travelers hopes somehow to force Zahner to pay

the premiums, and perhaps even reimburse it for the

$17,000.

All this is a great muddle. But since satisfaction of the

jurisdictional minimum in the diversity statute requires

merely that the plaintiff have a colorable, which is to say a

nonneglible, prospect of being able to recover that amount

in a trial, e.g., Freeman v. Sports Car Club of America, Inc.,

51 F.3d 1358, 1362 (7th Cir. 1995), we shall give Travelers

the benefit of the doubt and assume, though with considerable reluctance, that if it does have a constructive

trust in the insurance policy, it has satisfied the amount

in controversy requirement. That is a giant if. But it is

important to keep jurisdictional issues separate from the

merits of a plaintiff’s claim. Otherwise, suits that lacked

merit would be dismissed on jurisdictional grounds,

allowing the plaintiff to start over in state court. Johnson

v. Wattenbarger, 361 F.3d 991, 992-94 (7th Cir. 2004).

Remember that Travelers’ (that is to say Volwood’s) loss

as a result of Northwestern Mutual’s alleged negligence in

failing to prevent Zahner’s embezzlements was only

$17,000. And while a tort victim can seek restitution of the

defendant’s gain as an alternative to seeking damages for
No. 05-4134 5

his own loss, on the theory that making the wrongdoer’s

wrongful conduct worthless to him is a good method of

deterring such conduct, e.g., In re African-American Slave

Descendants Litigation, 471 F.3d 754, 760 (7th Cir. 2006);

Williams Electronics Games, Inc. v. Garrity, 366 F.3d 569,

576 (7th Cir. 2004); Douglas Laycock, “The Scope and

Significance of Restitution,” 67 Tex. L. Rev. 1277, 1288-90

(1989), Northwestern Mutual’s net gain was, as we know,

even less.

The meagerness of both Travelers’ loss and Northwestern

Mutual’s gain is the reason Travelers is trying to get its

hands on the $700,000 life insurance policy that Northwestern Mutual issued to Zahner; more precisely, to force

Northwestern Mutual to issue an identical policy on

Zahner’s life to Travelers. The imposition of a constructive

trust is a standard equitable remedy in restitution cases,

Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204,

212-14 (2002), but it requires the plaintiff to trace property

that is rightfully his to the defendant. A life insurance

policy is property, but there is no life insurance policy on

which to impress a constructive trust in this case because

Zahner, the owner of the policy, surrendered it in exchange for cash. And while when a defendant takes

property that is rightfully the plaintiff’s and then sells it the

plaintiff can seek to impress a constructive trust on the

proceeds, United States v. Pegg, 782 F.2d 1498, 1500 n. 2 (9th

Cir. 1986) (California law); 1 Dan B. Dobbs, Dobbs Law of

Remedies § 4.3(2), pp. 589-90 (2d ed. 1993), the proceeds

here were a meager $4,000—way less than Travelers’ loss.

A constructive trust of the proceeds would yield Travelers

less than its damages remedy would.

Anyway Travelers could not be the beneficiary of a

policy on Zahner’s life, even if there were such a policy,
6 No. 05-4134

because it has no insurable interest in that life. “A man

cannot take out insurance on the life of a total stranger,

nor on that of one who is not so connected with him as

to make the continuance of the life a matter of some real

interest to him.” Connecticut Mutual Life Ins. Co. v. Schaefer,

94 U.S. 457, 460 (1877); see also Mortenson v. National Union

Fire Ins. Co., 249 F.3d 667, 672 (7th Cir. 2001); HarleyDavidson v. Minstar, Inc., 41 F.3d 341, 343 (7th Cir. 1994);

Herman v. Provident Mutual Life Ins. Co., 886 F.2d 529, 533

(2d Cir. 1989). “A contract of insurance upon a life in

which the insured has no interest is a pure wager that

gives the insured a sinister counter interest in having the

life come to an end.” Grigsby v. Russell, 222 U.S. 149, 154

(1911) (Holmes, J.).

But as Holmes went on to explain, this rule does not

preclude an insured from voluntarily assigning the policy:

“The danger that might arise from a general license to all

to insure whom they like does not exist. Obviously it is a

very different thing from granting such a general license,

to allow the holder of a valid insurance upon his own life

to transfer it to one whom he, the party most concerned, is

not afraid to trust.” Id. at 155. Such assignments are

common. We learn from a recent newspaper article that

“two years ago, Mr. Margolis bought a large life insurance

policy. Now, he’s considering selling it to a group of

investors, a deal that should give him as much as $2

million to enjoy in his final years. In return, the investors

will get the policy’s $7 million payout when he

dies—which they hope will be soon, so they can stop

paying his premiums . . . . Such policies are known as

speculator-initiated life insurance, or ‘spin-life’ policies.

Investors estimate that spin-life policies worth as much as

$13 billion will change hands next year.” Charles Duhigg,

“Late in Life: Finding a Bonanza in Life Insurance,” N.Y.
No. 05-4134 7

Times, Dec. 17, 2006, p. 1. Travelers, however, is asking that

Northwestern Mutual be compelled to issue it a policy on

Zahner’s life even though Travelers has no insurable

interest in Zahner and Zahner has not consented to having his life insured for the benefit of Travelers.

There is still more that is wrong with Travelers’ claim for

a constructive trust in the insurance policy. The imposition

of a constructive trust is, as we said, a device for obtaining restitution. And restitution is available only in cases

in which the defendant’s wrong has enabled the defendant to profit at the plaintiff’s expense. See, e.g., Cross v. Berg

Lumber Co., 7 P.3d 922, 935-36 (Wyo. 2000); Warren v.

Century Bankcorporation, Inc., 741 P.2d 846, 851-52 (Okla.

1987); Nelson v. Serwold, 687 F.2d 278, 281 (9th Cir. 1982);

1 Dobbs, supra, § 4.1(1), p. 555. That is why restitution is

not awarded in a run-of-the-mill accident case; in such a

case the defendant’s wrong confers no benefit on him. See

Restatement of Restitution, ch. 7, introductory note (1937).

Northwestern Mutual’s alleged wrong did not result in

Northwestern Mutual’s obtaining an insurance policy. It

resulted in its obtaining $4,000. Since the present value

of a $700,000 insurance policy on Zahner’s life is more

than $4,000, imposing a constructive trust in such a policy

in favor of Travelers (the only relief it seeks) would

give Travelers a benefit greater than Northwestern Mutual’s wrongful gain.

So Travelers’ claim against Northwestern Mutual fails,

and we move on to its claim against Merrill Lynch. The

claim is that Merrill Lynch was negligent, and, worse,

violated its fiduciary duty to Volwood, by allowing

Zahner to deposit a check issued by Volwood to Merrill

Lynch in Zahner’s personal account. Section 3-307 of the

Uniform Commercial Code, in force in California, makes

any taker of a negotiable instrument (such as a check)—and
8 No. 05-4134

thus Merrill Lynch—liable to the drawer of the instrument

if the taker knows that the instrument is signed by a

fiduciary of the drawer (an agent, as Zahner clearly

was) yet it is deposited in the fiduciary’s personal account

rather than in his principal’s account.

Travelers might well have a good claim (cf. Travelers

Casualty & Surety Co v. Wells Fargo Bank N.A., 374 F.3d 521,

525-26 (7th Cir. 2004)) were it not for the statute of limitations for suits under section 3-307, which is three years.

UCC § 3-118(g). The last transfer from Volwood’s bank

account to Zahner’s account with Merrill Lynch was

made in 1998; the suit was not filed until 2003. But Travelers contends that Volwood did not discover the fraud

until 2001, and in the present posture of the case we

must assume that the contention is true.

Merrill Lynch ripostes that a claim under section 3-307

accrues when the fraud is complete, not when it is discovered, because section 3-118(g) does not mention discovery.

But courts often graft a discovery rule onto a statute of

limitations that does not mention discovery. E.g., Field v.

Century 21 Klowden-Forness Realty, 63 Cal. App. 4th 18,

25 (1998); Strasberg v. Odyssey Group, Inc., 51 Cal. App. 4th

906, 915-16 (1996); Hopkins v. Dow Corning Corp., 33 F.3d

1116, 1120 (9th Cir. 1994) (California law); Fidelity National

Title Ins. Co. v. Howard Savings Bank, 436 F.3d 836, 839-

40 (7th Cir. 2006). The Uniform Commercial Code is not

self-contained. It was promulgated against an ever-changing background of common law principles on which

judges draw to complete the law’s edifice. The Code itself

states that “unless displaced by the particular provisions

of the [Code], the principles of law and equity, including

the law merchant and the law relative to capacity to

contract, principal and agent, estoppel, fraud, misrepresen-
No. 05-4134 9

tation, duress, coercion, mistake, bankruptcy, or other

validating or invalidating cause shall supplement its

provisions.” UCC § 1-103(b); see California Commercial

Code § 1103(b); Roy Supply, Inc. v. Wells Fargo Bank, 39 Cal.

App. 4th 1051, 1058 (1995) (“the general law applies

when a case is not covered by statute”). If a discovery

rule is a sensible graft onto section 3-118(g), either generally or with respect to claims under section 3-307, grafted

it will be.

In favor of the graft is that a plaintiff can hardly prepare

and file a suit if he doesn’t know he’s been injured. Against

the graft in a case such as this is the length of the statutory period and the fact that the kind of injury that

Volwood sustained occurs in an information-rich environment, as the weapon that inflicted an injury was the

victim’s own check. There is the additional fact that

tolling doctrines—principally equitable tolling and equitable estoppel—enable a plaintiff to extend the statute of

limitations in exigent circumstances. The decisive consideration is that someone who fails to discover within

the statutory period that his property has been stolen has

only himself to blame for the belatedness of his discovery.

So we are not surprised that the overwhelming majority

of cases reject a discovery rule for conversion of a negotiable instrument. E.g., Pero’s Steak & Spaghetti House v.

Lee, 90 S.W.3d 614, 616, 620-24 (Tenn. 2002); Menichini v.

Grant, 995 F.2d 1224, 1229-30 (3d Cir. 1993); Haddad’s of

Illinois, Inc. v. Credit Union 1 Credit Union, 678 N.E.2d 322,

325-26 (Ill. App. 1997).

In any event the rule would not help Travelers. A

discovery rule postpones accrual not to when the claim is

discovered, but only to when the claim should have been

discovered. Fox v. Ethicon Endo-Surgery, Inc., 110 P.3d 914,
10 No. 05-4134

919-20 (Cal. 2005); McKelvey v. Boeing North American, Inc.,

74 Cal. App. 4th 151, 160 (1999); Borello v. United States Oil

Co., 388 N.W.2d 140,145-46 (Wis. 1986); Barry Aviation Inc.

v. Land O’Lakes Municipal Airport Commission, 377 F.3d 682,

688 (7th Cir. 2004); Restatement (Second) of Torts § 899,

comment e (1977). Volwood should have discovered the

embezzlement long before 2001. Elementary controls over

employees, such as Zahner, who have check-writing

authority would have matched the checks he wrote on

Volwood’s bank account to Northwestern Mutual and

Merrill Lynch with debts that Volwood owed those companies, and quickly revealed that there were no debts,

so that the money was either being pocketed by the two

payees by mistake or had been diverted into someone

else’s pocket. Cf. UCC § 4-406(c) (duty of bank’s customer

to be reasonably prompt in notifying bank of any discrepancy between the bank’s statement and the customer’s

records—a provision inapplicable to this case because

Volwood was not a customer of Merrill Lynch). Volwood

was of course responsible for the laxness of its employees

who failed to notice the defalcation. Sun’n Sand, Inc. v.

United California Bank, 582 P.2d 920, 941 (Cal. 1978).

Such laxness is a general feature of cases in which the

victim of conversion tries to sue after the statute of limitations (dated from the conversion) has run, and it makes

us wonder whether the cases we cited earlier reject, or

exemplify, the discovery rule. We need not pursue that

issue.

Travelers also tries to get out from under the statute of

limitations in section 3-118(g) by recharacterizing its

claim against Merrill Lynch as something other than a

claim under section 3-307, such as a common law fraud

claim. Since section 3-307 fits the facts of the case to a T, no
No. 05-4134 11

room is left for recharacterizations intended to circumvent the statute of limitations applicable to such claims. It

is one thing to fill gaps in the Uniform Commercial Code

and another to contradict it by calling a UCC claim something else. Lee Newman, M.D., Inc. v. Wells Fargo Bank, 87

Cal. App. 4th 73, 79-80 (2001); Stenseth v. Wells Fargo Bank,

41 Cal. App. 4th 457, 465-66 (1995); United Catholic Parish

Schools v. Card Services Center, 636 N.W.2d 206, 213 (Wis.

App. 2001); A. Brooke Overby, “Check Fraud in the Courts

After the Revisions to U.C.C. Articles 3 and 4,” 57 Ala. L.

Rev. 351, 391-92 (2005).

The judgment of the district court is modified to make

the dismissal of the plaintiff’s claim against Northwestern

Mutual a dismissal on the merits rather than for want of

federal jurisdiction, and as so modified is

AFFIRMED.

RIPPLE, Circuit Judge, concurring in the judgment. In

my view, the district court correctly dismissed the case

against Northwestern for lack of jurisdiction. In all other

respects, I agree with the disposition reached by my

colleagues.
12 No. 05-4134

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—3-13-07