As reported in our July 2014 post, “More Federal Decisions Highlight Need to Invoke Original Document Defense in Financial Institution Bond Cases,” several recent federal decisions have served as reminders of the importance of the original document requirement defense under Insuring Agreement (D) or (E) in Financial Institution Bond coverage disputes. One of the cases discussed, Bank of Brewton v. The Travelers Companies, Inc., 2014 U.S. Dist. LEXIS 69567 (S.D. Ala. May 21, 2014), in which summary judgment was granted to the insurer, was recently affirmed on appeal, 777 F.3d 1339 (11th Cir. 2015).
In this case the bank, in exchange for a series of loans consolidated and renewed beginning in 2005, obtained assignment of several stock certificates from its customer. Comparing the certificates in 2009, the bank realized one was not an original but a color copy. The customer provided a replacement certificate, and the bank renewed certain loans totaling $1.5 million. Then in 2010, the bank discovered the customer had actually pledged the prior original certificate to another bank, rendering the replacement null and void, as representing the same shares as the pledged original.
The FIB provided coverage under Insuring Agreement (E) for an extension of credit “on the faith of any item listed in (a)(i) through (a)(iv) above [including a “Certificated Security”], which is a Counterfeit.” The Bond defined “Counterfeit” as meaning “an imitation which is intended to deceive and to be taken as an original.” The bank argued that the replacement certificates qualified as counterfeit because they “appeared for all intents and purposes to be a valuable stock certificate.” 777 F.3d at 1342.
The 11th Circuit rejected this argument, stating “[a]n attempt to deceive by means of a document that imitates the appearance of an authentic original is not the same as an attempt to deceive by means of false factual representations implicit in an authentic document. To conflate the two, as the Bank would have us do, would obliterate elementary distinctions among the techniques of deceptions,…distinctions [which] are recognized in ordinary and commercial usage and preserved in the bond.” Id. at 1343 (internal quotation marks and citation omitted). The 11th Circuit recognized: “The Bond does not cover losses resulting from every document tainted by fraud. Instead, the Bond provides coverage for a subset of deception-based losses—those stemming from documents that imitate an original. The difference hinges on the nature of the underlying misrepresentation. While counterfeit documents deceive by misrepresenting authenticity, [the replacement certificates’] deception concerned a misrepresentation of value.” Id. (emphasis in original). While the replacement certificates were authentic (issued, numbered, dated, and signed), they had no value because they were obtained under false pretenses. Thus, the replacement certificates were not “counterfeit” under the terms of the Bond. Id.
For further information, contact Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605, or Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603.