Beach Cmty. Bank v. St. Paul Mercury Ins. Co.

• Decision Date: 16 March 2011
• Docket Number: No. 10–11049.,10–11049.
• Citation: 635 F.3d 1190
• Parties: BEACH COMMUNITY BANK, Plaintiff–Appellant,v.ST. PAUL MERCURY INSURANCE COMPANY, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

635 F.3d 1190

22 Fla. L. Weekly Fed. C 1902

BEACH COMMUNITY BANK, Plaintiff–Appellant,

v.ST. PAUL MERCURY INSURANCE COMPANY, Defendant–Appellee.

No. 10–11049.

United States Court of Appeals, Eleventh Circuit.

March 16, 2011.

Kenneth Bradley Bell, William Emile Bond, Jr., Jason W. Peterson, Robert Powell, Clark, Partington, Hart, Larry, Bond & Stackhouse, Pensacola, FL, for Plaintiff–Appellant.Matthew J. Conigliaro, Carlton Fields, PA, St. Petersburg, FL, Daniel Hernandez, Patrica H. Thompson, Carlton Fields, PA, Miami, FL, for Defendant–Appellee.Appeal from the United States District Court for the Northern District of Florida.Before WILSON, PRYOR and ANDERSON, Circuit Judges.PRYOR, Circuit Judge:

This appeal concerns whether the provision of a financial institution bond that insures a bank against losses from forgery applies to a loss suffered by a bank upon the default of a loan that had been secured by a forged guaranty. The bank obtained the guaranty to secure property held in a tenancy by the entirety. Beach Community Bank appeals the summary judgment in favor of St. Paul Mercury Insurance Company against a complaint that alleged that St. Paul failed to honor a financial institution bond it had issued to Beach Community that covered “loss[es] resulting directly from the ... exten[sion of] credit ... on the faith” of a forgery. Beach Community secured a loan to Dellwood Properties, Inc., with guaranties from the owner of Dellwood, Charles Faircloth, and Charles's wife, Juanita Faircloth, but after Charles died and Dellwood defaulted on the loan, Beach Community learned that Juanita's signature on the guaranty was a forgery. Beach Community sued St. Paul to recover under the bond and alleged that it had suffered a loss directly from reliance on the forged guaranty. The district court ruled that the loss did not result directly from reliance on the forgery because the purported guarantor had few assets when the default occurred, and Beach Community could not have recovered its loss even if the guaranty had been authentic. St. Paul argues that we should affirm for that reason or, alternatively, on three separate grounds: Beach Community did not rely on the forgery, did not act in good faith, and did not have physical possession of the forgery when it extended credit. We conclude that the district court misinterpreted the bond and that Beach Community suffered a loss that resulted directly from its extension of credit to Dellwood. We also conclude that the record does not entitle St. Paul to a summary judgment in its favor on any of its three alternative grounds. We vacate and remand.

I. BACKGROUND

In August 2004, Dellwood Properties, Inc., applied for a loan of $10 million from Beach Community Bank to finance the purchase of beachfront property in Panama City Beach, Florida. Dellwood was a Florida corporation, and its sole officer, director, and shareholder was Charles Faircloth, a 75-year-old developer. When it assessed the risk of the proposed loan, Beach Community examined the tax returns that Charles filed jointly with his wife, Juanita Faircloth, conducted a credit analysis of Charles, and obtained credit reports for both Charles and Juanita, but submitted only Charles's credit report to its loan committee. Beach Community determined that Charles had a net worth of over $130 million, an average annual income of $2.6 million, and no direct liabilities.

The loan committee approved the loan to Dellwood on September 2, 2004, conditioned on the receipt of guaranties from Charles and Juanita. Beach Community had presumed that Charles shared ownership of many of his assets with Juanita. Florida recognizes tenancies by the entirety, and a representative of Beach Community testified that Beach Community conditioned the loan on the receipt of personal guaranties from both Charles and Juanita because “it [is] very easy for [an owner of property held in a tenancy by the entirety] to transfer ... assets over to the spouse or just make them joint, and then they're impossible for [a lender] to get.” Another officer of Beach Community stated that “[Beach Community] would not have extended credit to Dellwood in the absence of [Juanita's] personal guaranty.” Even though the credit analysis that the loan committee examined provided that “Charles Faircloth will offer his unconditional personal guarantee,” the “Loan Worksheet/Credit Approval” form that the loan committee also used said that “Mr. & Mrs. Charles Faircloth” would guarantee the loan.

On September 10, 2004, Beach Community and Dellwood closed the loan. Beach Community hired a lawyer to prepare its documents, but the lawyer did not attend the closing. Charles's business associate, Derrick Bennett, instead closed the loan. Even though he was not employed by Beach Community, Bennett testified that he was obligated at the closing to “have signatures obtained [for the guaranties] and/or placed on the documents, collect them up, and send them back [to Beach Community] just like all the other documents [Beach Community] provide[s] me.” Bennett was not responsible for verifying the authenticity of signatures on documents.

Juanita did not attend the closing, but Charles handed Bennett a personal guaranty at the closing that purportedly bore Juanita's signature. The guaranty provided, “I absolutely and unconditionally guarantee to you the payment and performance of each and every debt, of every type and description, that the borrower may now or at any time in the future owe you.” The guaranty was not witnessed or signed by a notary public. Bennett notified Beach Community when he received the guaranty, and Beach Community then gave Bennett permission to disburse funds to Dellwood. Three days after the closing, Beach Community received from Bennett the guaranty purportedly signed by Juanita.

Beach Community later purchased from St. Paul Mercury Insurance Company a financial institution bond, also known as a bankers blanket bond, which insured Beach Community against several risks, including losses due to “forgery and alteration of securities and other instruments.” St. Paul agreed to indemnify Beach Community for “[l]oss resulting directly from [Beach Community] having, in good faith ... extended credit ... on the faith of any original Written document,” including a guaranty, “which bears a handwritten signature ... that is a Forgery.” The bond also provided that “[a]ctual physical possession of the [forged document] by the Insured is a condition precedent to the Insured's having relied on the faith of such items.” Beach Community obtained loan participation coverage under the bond, which allowed Beach Community to satisfy the requirement of “[a]ctual physical possession” when a “representative authorized to possess [documents such as guaranties]” possessed the documents “on behalf of [Beach Community].” The bond insured losses caused by forgery for up to $4 million and had a deductible of $50,000. The bond “applie[d] to loss discovered by the Insured during the Bond Period[ ] ... regardless of when the act or acts causing or contributing to such loss occurred.”

Beach Community discovered a loss soon after it purchased the bond. Charles died in 2007. Even though he had assets of $130 million in 2004, Charles left an estate three years later that had less than $100,000 in cash and several million dollars in debt. Dellwood defaulted on the loan from Beach Community the month after Charles died.

Beach Community accelerated the full debt, sued Dellwood, and obtained a judgment for $11,798,725.05. Beach Community collected about $950,000 of this amount from debtors of Dellwood. Beach Community then sought to collect the outstanding balance of the debt from Juanita, but these efforts were futile. Juanita had few assets, namely a homestead, income from Social Security, and income of $2,000 each month from a mortgage. Juanita owned a condominium unit in 2008 that was not a homestead, but she later sold that property.

Juanita denied that she had signed the guaranty, and a handwriting expert confirmed that the signature on the guaranty that she had purportedly signed was a forgery. Beach Community notified St. Paul of its loss and sought coverage under the forgery provision of the bond.

St. Paul refused coverage, and Beach Community filed a lawsuit against St. Paul in state court for breach of contract, which St. Paul removed to the district court. Both St. Paul and Beach Community moved for summary judgment. St. Paul argued that Beach Community had failed to satisfy the requirements for coverage under the bond. St. Paul alleged that Beach Community did not rely on Juanita's guaranty and had requested it to reach only Charles's assets. St. Paul also argued that Beach Community did not physically possess the guaranty when it extended credit, did not make the loan in good faith, and did not suffer a loss that was directly caused by the forgery because Juanita had no assets from which Beach Community could have collected even if the signature on the guaranty had been authentic.

The district court granted summary judgment in favor of St. Paul on the ground that Beach Community failed to demonstrate that its loss “result[ed] directly from the forged guarantee.” The district court ruled that Beach Community had to “show that it would have been able to collect on the loan but for the forged signature of Mrs. Faircloth's guarantee.” The district court reasoned that “it was not the forged guarantee that precluded [Beach Community] from collecting on the loan, but rather Mr. and Mrs. Faircloth's diminished assets and the crashed real estate market that caused [Beach Community's] loss.” Quoting from our decision in Republic National Bank v. Fidelity & Deposit Co. of Maryland, 894 F.2d 1255, 1264 (11th Cir.1990), the district court expressed concern that a ruling in favor of Beach Community would transform the bond into credit insurance and encourage “sloppy banking...