First National Bank, Manitowoc v. Cincinnati Ins.

• Decision Date: 11 May 2007
• Docket Number: No. 06-1144.,No. 06-2044.,No. 05-4762.,05-4762.,06-1144.,06-2044.
• Citation: 485 F.3d 971
• Parties: FIRST NATIONAL BANK OF MANITOWOC, Plaintiff-Appellee/Cross-Appellant, v. CINCINNATI INSURANCE COMPANY, Defendant-Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

485 F.3d 971

FIRST NATIONAL BANK OF MANITOWOC, Plaintiff-Appellee/Cross-Appellant, v. CINCINNATI INSURANCE COMPANY, Defendant-Appellant/Cross-Appellee.

No. 05-4762.

No. 06-1144.

No. 06-2044.

United States Court of Appeals, Seventh Circuit.

Argued September 6, 2006.

Decided May 11, 2007.

Nathaniel Cade, Jr. (argued), Michael Best & Friedrich, Milwaukee, WI, for Plaintiff-Appellee/Cross-Appellant.

Nancy K. Tordai, Victor C. Peters (argued), Hanson Peters Nye, Barrington, IL, for Defendant-Appellant/Cross-Appellee.

Before ROVNER, EVANS, and SYKES, Circuit Judges.

SYKES, Circuit Judge.

First National Bank of Manitowoc extended credit to a local used-car dealership based in part on the dealership's presentation of leases signed by its customers. Unbeknownst to the Bank, in many instances the dealership's president forged customers' signatures on leases that were fabricated or altered. The dealership eventually defaulted on the loans, and the Bank lost more than $1.7 million. The Bank filed a claim for the loss with its insurer, Cincinnati Insurance Company. The policy Cincinnati had issued to the Bank was similar but not identical to an outdated version of the standard Bankers Blanket Bond, now known as a Financial Institutions Bond. Generally speaking, these bonds provide coverage to financial institutions for losses caused by specified dishonest, fraudulent, or criminal acts.

Cincinnati denied the Bank's claim and this suit ensued. Both parties moved for summary judgment. The district court denied Cincinnati's motion and granted the Bank's in substantial part, rejecting only its claim for statutory interest. Both parties appealed. Because the Cincinnati policy covers the Bank's losses and statutory interest was properly denied, we affirm.

I. Background

First National Bank of Manitowoc is a national bank headquartered in Manitowoc, Wisconsin. In 1991 the Bank began doing business with West Town Auto, Inc., a used-car dealership also located in Manitowoc. The Bank had several lending relationships with West Town, including a line of credit through which West Town purchased vehicles to lease. West Town would enter into a preliminary lease agreement with a customer at the dealership, and Lee Kust, West Town's president, would procure a loan to purchase the vehicle.

Kust would call the Bank or fax it the lease terms and wait for the Bank's approval.¹ Once the lease was approved (sometimes several days later), Kust would finalize the transaction with his customer and bring the signed lease agreement to the Bank. At that time Kust would execute several documents, including a business note, an assignment of lease payments, and a chattel security agreement granting the Bank a security interest in the vehicle. Under the terms of its line of credit with the Bank, West Town was responsible for making loan payments to the Bank; West Town's customers made their lease payments directly to West Town.

The facts surrounding Kust's fraud are undisputed. The scam worked in one of two ways: Kust either fabricated a lease agreement for a nonexistent vehicle and transaction or altered the terms of a valid lease agreement and submitted the altered version to the Bank.² (As examples of the latter fraud, Kust would alter a vehicle's condition, make, or model, thereby enabling him to obtain a larger loan.) Under both scenarios, Kust forged customer signatures by tracing a valid signature onto a fabricated or altered lease form. In 2001 Kust suddenly disappeared and West Town defaulted on the loan. Until then, however, West Town had been making monthly payments as required, although the Bank had assessed late charges on several occasions.

Cincinnati does not suggest that any Bank employees were aware of Kust's fraudulent scheme, but the insurer does point to what it says are "red flags" during the course of the lending relationship that it believes ought to affect coverage. For example, the Bank did not have a copy of each vehicle's certificate of title and relied on Kust to record and perfect its security interest. Bank employees were aware that lien confirmations were not on file for many vehicles, and those that were on file contained discrepancies (the vehicle identification number ("VIN") on the confirmations did not always match the VIN number identified on the lease and loan documents). On several occasions one VIN number served as collateral for two separate loans. After Kust disappeared it only took a few phone calls to West Town lessees for the Bank to realize there was a problem.

After the Bank assessed its losses, it sought coverage under an insurance policy it had purchased from Cincinnati in 2001 called the Depository Institutions Blanket Bond, No. B80-534208. The Cincinnati Bond borrows from the Bankers Blanket Bond, Standard Form No. 24, an industry-standard insurance policy for commercial banks offered by several carriers. The standard Bankers Blanket Bond is "a two-party agreement between the underwriter and the insured financial institution, pursuant to which the underwriter agrees to indemnify the insured against loss sustained by reason of specific perils described under six `Insuring Agreements,' which are commonly referred to by the letter designating them in the bond." Peter I. Broeman, An Overview of the Financial Institution Bond, Standard Form No. 24, 110 BANKING L.J. 439, 439-40 (1993). The standard Bond also includes several exclusions which subtract from coverage provided by the insuring agreements. Cont'l Corp. v. Aetna Cas. & Sur. Co., 892 F.2d 540, 546 (7th Cir.1989) ("[E]xclusions are expressly intended to modify coverage clauses and to limit their scope."); D'Angelo v. Cornell Paperboard Prods. Co., 59 Wis.2d 46, 207 N.W.2d 846, 849 (1973); Bulen v. West Bend Mut. Ins. Co., 125 Wis.2d 259, 371 N.W.2d 392, 394 (Ct.App. 1985).

Here, we are primarily concerned with Insuring Agreement E and Exclusion H. Insuring Agreement E covers loss resulting from a financial institution's good-faith reliance on forged or counterfeit documents. Cincinnati's version of Insuring Agreement E reads as follows:

E. ALL RISK FORGERY

Loss by reason of the Insured (a) having in good faith and in the usual course of business . . . extended any credit or assumed any liability or otherwise acted upon any security, document, or other written instrument which proves to have been a forgery or to have been altered or raised or counterfeited....

....

Actual physical possession of such security, document or other written instrument by the Insured ... is a condition precedent to the Insured's having relied on the faith of, or otherwise acted upon, such security, document or, other written instrument.

Forgery is defined in the Cincinnati policy as "the signing of the name of another with intent to deceive." Exclusion H excludes coverage for "loss caused by an Employee, except when covered under Insuring Agreement A." (Insuring Agreement A covers losses "resulting directly from dishonest or fraudulent acts of an Employee.")

The Bank submitted a Proof of Claim to Cincinnati for coverage under Insuring Agreements D and E of the Policy.³ Cincinnati denied coverage and the Bank filed suit in state court. Cincinnati removed the case to federal court based on diversity jurisdiction, and both parties moved for summary judgment. The district court denied Cincinnati's motion and granted the Bank's motion in part, holding that Insuring Agreement E covered the Bank's loss but that questions of fact existed with respect to damages. To move the case along, the parties stipulated to damages (about $1.75 million), and the district court awarded the Bank common-law prejudgment interest at a rate of 5%. The court denied the Bank's request for statutory interest at the higher rate of 12%.

Both parties appealed. Cincinnati appealed from the district court's orders partially granting the Bank's motion for summary judgment on coverage, denying Cincinnati's motion for summary judgment, denying Cincinnati's motion to strike an affidavit,⁴ and awarding the Bank common-law prejudgment interest. The Bank appealed from the district court's order awarding interest, arguing that it is entitled to statutory prejudgment interest at a rate of 12% under section 628.46 of the Wisconsin Statutes.

II. Discussion

We review a district court's grant of summary judgment de novo. "With cross summary judgment motions, we construe all facts and inferences therefrom `in favor of the party against whom the motion under consideration is made.'" In re United Air Lines, Inc., 453 F.3d 463, 468 (7th Cir.2006) (quoting Kort v. Diversified Collection Servs., Inc., 394 F.3d 530, 536 (7th Cir.2005)). Summary judgment is appropriate if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(c). The parties agree that Wisconsin law governs this diversity suit.

A. Coverage Under the Cincinnati Bond

The interpretation of an insurance policy is a question of law that is reviewed de novo. Cont'l Corp., 892 F.2d at 543 (citing Kraemer Bros. v. United States Fire Ins. Co., 89 Wis.2d 555, 278 N.W.2d 857, 860 (1979)); Folkman v. Quamme, 264 Wis.2d 617, 665 N.W.2d 857, 864 (2003). An insurance policy is construed to give effect to the intent of the parties as expressed in the language of the policy, which is interpreted as a reasonable person in the position of the insured would understand it. Folkman, 665 N.W.2d at 864; Danbeck v. Am. Family Mut. Ins. Co., 245 Wis.2d 186, 629 N.W.2d 150, 153 (2001). If the language of the policy is plain and unambiguous, it is enforced as written, without resort to rules of construction. Folkman, 665 N.W.2d at 864; Danbeck, 629 N.W.2d at 154. Policy language is interpreted not in isolation but in the context of the policy as a whole. Folkman, 665 N.W.2d at 866. If the policy language is ambiguous, it is construed against the insurer and in favor of coverage....