First State Bank of Monticello v. Ohio Cas. Ins.

Decision Date05 February 2009
Docket NumberNo. 06-3794.,No. 06-3685.,06-3685.,06-3794.
Citation555 F.3d 564
PartiesFIRST STATE BANK OF MONTICELLO, Plaintiff-Appellee, Cross-Appellant, v. OHIO CASUALTY INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

Tracy C. Litzinger (argued), Jeffrey G. Sorenson, Howard & Howard, Peoria, IL, for Plaintiff-Appellee, Cross-Appellant.

Edward M. Kay, Chip G. Schoneberger (argued), Clausen Miller PC, Chicago, IL, for Defendant-Appellant, Cross-Appellee.

Before WOOD, SYKES, and TINDER, Circuit Judges.

SYKES, Circuit Judge.

This insurance-coverage dispute arises from a fraudulent scheme perpetrated against First State Bank of Monticello causing a $307,000 loss. James Stilwell repeatedly exchanged bad checks for the bank's money orders—instruments backed by the resources of the bank and as good as cash. The bank filed a claim for the loss with its insurer, Ohio Casualty Insurance Company, under a Standard Form No. 24 Financial Institution Bond. Ohio Casualty denied the claim and this lawsuit followed. The district court held the loss was covered and granted summary judgment in favor of First State Bank. Ohio Casualty appealed; the bank cross-appealed on the issue of its entitlement to prejudgment interest.

We affirm. Stilwell's scheme was a covered risk under Insuring Agreement B of the bond, which covers losses from theft or false pretenses occurring on the bank's premises. The bank's loss resulted "directly from" Stilwell's "on-premises" fraud and therefore came within the coverage specified in this provision of the bond. We also conclude that Exclusion (h), excluding losses "caused by an employee," does not apply. Finally, the bank's tardy application for statutory prejudgment interest, first made in the district court in a motion to alter or amend the judgment under Rule 59(e) of the Federal Rules of Civil Procedure, was brought too late to entitle it to an award.

I. Background

For several months in 2002 and 2003, James Stilwell of Atwood, Illinois, carried on an extensive scheme of writing and cashing worthless checks. First State Bank in nearby Monticello was his victim. Stilwell was a prominent entrepreneur who owned several businesses and some development property in central Illinois, but he was also illiquid.1 To acquire cash, Stilwell devised a scheme whereby he (or more commonly, one of his associates) would draw checks on one of his accounts at Tuscola National Bank and tender them to First State Bank in return for bank money orders, instruments backed by the resources of First State Bank. But Stilwell's account at Tuscola National Bank was empty, or less than empty; Tuscola National Bank allowed him to maintain negative balances for months at a time, returning some items and paying others that Stilwell directed to be paid when he put funds into the account after the fact. So First State Bank unwittingly allowed Stilwell to exchange his worthless checks for the bank's money orders, giving him access to immediately available funds. Stilwell carried out this scheme for three months at the end of 2002 and into early 2003, tendering checks daily to First State Bank through January 24, 2003. Over that time First State Bank "sold" Stilwell 130 bank money orders for a total of $1,945,672.16.

Cashing checks for noncustomers was against the bank's policy (Stilwell had no accounts at First State Bank), but when bank officers questioned Stilwell about the transactions, he concocted a cover story that he was conducting a year-end tax maneuver recommended by his accountant to reduce his tax liability on a future sale of land. On one occasion, to quell the doubts of a bank officer, Stilwell dialed Tuscola National Bank's automated banking system and handed the officer the phone, allowing her to listen to a statement of the current balance in his—or what he claimed was his—account. So while some at First State Bank expressed concerns, others believed him, and the bank continued to accept his business based on his facade of being a successful businessman. The scheme collapsed on January 24, 2003, when Tuscola National Bank froze Stilwell's accounts. First State Bank was left holding worthless checks totaling $307,000 from the last three days of the scheme.

First State Bank and Stilwell entered into an agreement requiring Stilwell to repay the bank in a series of installments and to admit that he had engaged in unlawful conduct. But Stilwell died before fulfilling the terms of that agreement. First State Bank filed a claim with its insurer, Ohio Casualty, after one of Stilwell's corporations filed for bankruptcy, preventing the bank from recovering its loss from the corporation. Ohio Casualty denied the bank's claim, asserting that Stilwell's scheme was not covered under the bond's "on-premises" fraud coverage (Insuring Agreement B of the Standard Form No. 24 Financial Institution Bond) or was excluded because it fell under Exclusion (h) of the bond, which excluded losses "caused by an employee."

First State Bank then brought this lawsuit in state court, which Ohio Casualty removed to federal court based on the parties' diverse citizenship. On cross-motions for summary judgment, Ohio Casualty asserted several grounds for noncoverage. It claimed that the bank did not suffer a "loss" as that term is understood in the bond; or if there was a loss, it did not "result directly from" Stilwell's conduct; or if the loss was attributable to Stilwell's scheme, the failure of the bank's employees to follow bank policy was an intervening and the predominant cause of the loss, removing coverage under Exclusion (h) of the bond for losses "caused by an employee." The district court rejected these arguments, granted First State Bank's motion, and awarded judgment to the bank. First State Bank then moved to alter or amend the judgment under Rule 59(e), asking the court to clarify the amount of the award and to add statutory prejudgment interest. The district court agreed to clarify the award amount in the judgment ($292,000—the amount of the loss less the deductible), but denied First State Bank's request to add prejudgment interest to the award. Ohio Casualty appealed the summary judgment, and First State Bank cross-appealed the denial of its Rule 59(e) motion for prejudgment interest.

II. Discussion

We review the district court's grant of summary judgment de novo, and because the district court had cross-motions for summary judgment before it, "we construe all facts and inferences therefrom `in favor of the party against whom the motion under consideration is made.'" United Air Lines, Inc. v. HSBC Bank, USA (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 movant is entitled to judgment as a matter of law." FED.R.CIV.P. 56(c). Illinois law, the parties agree, governs this case.

We review the interpretation of a fidelity bond de novo. Private Bank & Trust Co. v. Progressive Cas. Ins. Co., 409 F.3d 814, 816 (7th Cir.2005) (Illinois law). A bond "that contains no ambiguity is to be construed according to the plain and ordinary meaning of its terms, just as would any other contract." Id. (internal quotation marks omitted); see also RBC Mortgage Co. v. Nat'l Union Fire Ins. Co., 349 Ill.App.3d 706, 285 Ill.Dec. 908, 812 N.E.2d 728, 734 (2004). Standard fidelity bonds are drafted by sophisticated parties (representatives of the banking and insurance industries); therefore, the traditional rule of construing any ambiguity in favor of coverage does not apply. First Nat'l Bank of Manitowoc v. Cincinnati Ins. Co., 485 F.3d 971, 977 (7th Cir.2007); RBC Mortgage Co., 285 Ill.Dec. 908, 812 N.E.2d at 734. The bond that Ohio Casualty sold to First State Bank was a standard financial-institution bond that contained an "on-premises" clause generally covering fraudulent acts occurring on the bank's physical premises.

The standard financial-institution bond is a unique insurance instrument with a long and detailed history. Some of it bears repeating here because part of what makes the bond unique is that nearly every provision "has been developed in response to and tested by case law." J. Kelly Reyher, A Brief Review of the Financial Institution Bond Standard Form No. 24 and Commercial Crime Policy, 563 PLI/Lit 57, PLI Order No. H4-5259, 61 (May 1997). The Standard Form No. 24 Financial Institution Bond is the latest incarnation of a series of bonds once known as "banker's blanket bonds." First Nat'l Bank of Manitowoc, 485 F.3d at 977-78; see also 9A JOHN ALAN APPELMAN & JEAN APPELMAN, INSURANCE LAW AND PRACTICE § 5701, at 375-76 (1981); Peter I. Broeman, An Overview of the Financial Institution Bond, Standard Form No. 24, 110 BANKING L.J. 439, 442-43 (1993). These bonds were first developed in response to the uniform contract marketed by Lloyd's of London, which was the only contract to provide fidelity, theft, burglary, holdup, and other types of coverage in one contract. See Private Bank, 409 F.3d at 816. The Surety Association of America and the American Bankers Association worked together in 1916 to draft their first bond, the Standard Form No. 1 Banker's Blanket Bond, to compete with the uniform contract offered by Lloyd's. Id.; see also Edward G. Gallagher et al., A Brief History of the Financial Institution Bond, in FINANCIAL INSTITUTION BONDS 7 (2d ed. Duncan L. Clore ed., 1998). Today, Standard Form No. 24 is the descendant of that first bond, containing six Insuring Agreements (Agreements A-F). In this case, we are concerned with Insuring Agreement B of the Standard Form No. 24 (1986 Revision) that Ohio Casualty sold to First State Bank.2 Agreement B is the "on-premises" fraud clause of the bond. Its relevant portion provides as follows:

The Underwriter ......

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