Cincinnati Ins. Co. v. Star Financial Bank
| Decision Date | 19 September 1994 |
| Docket Number | No. 93-1160,93-1160 |
| Citation | 35 F.3d 1186 |
| Parties | CINCINNATI INSURANCE COMPANY, Plaintiff-Appellant, v. STAR FINANCIAL BANK f/k/a Central Bank and Trust Company, Merchants National Bank of Muncie, and United States Fidelity & Guaranty Company, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Michael E. Brown, Jeffrey A. Doty (argued), Kightlinger & Gray, Indianapolis, IN, for plaintiff-appellant.
Peter H. Drumm (argued), John B. LaRue, Richard L. Ludwick, Benadum Cecil & Drumm, Muncie, IN, for Star Financial Bank.
Peter H. Drumm, Muncie, IN, for Merchants Nat. Bank of Muncie, U.S. Fidelity and Guar. Co.
Before WOOD, Jr. and KANNE, Circuit Judges, and FOREMAN, District Judge. *
The Cincinnati Insurance Company ("Cincinnati") filed this declaratory judgment action against Star Financial Bank ("Star Bank"), Merchants National Bank of Muncie ("Merchants Bank"), and United States Fidelity & Guaranty Company ("USF & G"). 1 Cincinnati is Star Bank's insurance company. Cincinnati sought a determination that the insurance policy it issued to Star Bank (called a "depository institutions blanket bond") provided no coverage for Star Bank's potential liability in an action that Merchants and USF & G filed against Star Bank in Indiana state court. Cincinnati also sought a declaration by the court that it had no duty to defend Star Bank in the action.
The facts of this case are scant, but they are undisputed. On September 14, 1986, Michael R. Garrison applied for a $50,000 business loan from Merchants Bank. He told Merchants Bank that he needed the money to purchase some farm equipment that his grandfather, Michael A. Garrison, owned. In reality, neither Michael A. Garrison nor his farm equipment existed.
Merchants Bank failed to uncover Michael R. Garrison's misrepresentations, and proceeded to loan him the money he requested. Merchants Bank first executed a direct reduction collateral note with Michael R. Garrison for $50,000. It then gave him a bank money order, made payable to the fictitious grandfather, Michael A. Garrison. (Perhaps Merchants Bank intended for Michael R. Garrison to pay Michael A. Garrison for the equipment by giving him the bank money order directly, but we cannot know this for sure from the record). The same day that Merchants Bank gave him the bank money order, Michael R. Garrison endorsed the name "Michael A. Garrison" on the back of the money order, and deposited the proceeds into a checking account he maintained at Star Bank. He deposited the entire loan, except for $100, which he opted to receive in cash.
In addition to a checking account, Michael R. Garrison had two outstanding loans at Star Bank. After he had presented the money order for deposit at Star Bank, Michael R. Garrison went to a different branch of Star Bank, wrote a check for approximately $14,000, and applied it against one of these loans. He then went to yet another branch of the Bank, and wrote a check for $18,000 in satisfaction of his other Star Bank loan. 4
For eighteen months, Michael R. Garrison made payments on his loan from Merchants Bank, but then he defaulted. Upon the default, Merchants Bank investigated the loan, and discovered that neither Michael A. Garrison nor the collateral securing the note existed. Merchants Bank then made a demand upon Star Bank for payment of the $50,000 bank money order, on the ground that Star Bank had wrongfully paid Michael R. Garrison over a forged endorsement. Star Bank refused to pay Merchants Bank the $50,000. On July 20, 1989, Merchants Bank and its insurer, USF & G, filed suit against Star Bank in state court to recover the amount of the wrongful payment. 5
During this time, Star Bank was insured by Cincinnati, under the terms of its depository The Cincinnati Insurance Company ... in consideration of an agreed premium, ... agrees to indemnify the Insured for:
institution blanket bond. The blanket bond provides, in relevant part:
* * * * * *
D. Forgery, Alteration and Unauthorized Signatures
Loss Resulting directly from
(1) Forgery or alteration of, on or in any Negotiable Instrument (except an Evidence of Debt), Acceptance, withdrawal order, receipt for the withdrawal of Property, Certificate of Deposit or Letter of Credit;
* * * * * *
GENERAL AGREEMENTS
* * * * * *
G. Court Costs and Attorney Fees
The Company shall indemnify the Insured against court costs and reasonable attorneys' fees incurred and paid by the Insured in defending any suit or legal proceeding brought against the Insured to enforce the Insured's liability or alleged liability on account of any loss, claim or damage which, if established against the Insured would constitute a collectable loss under this bond in excess of any Deductible Amount.
* * * * * *
(1) the word "Forgery" means the signing of the name of another with intent to deceive; it does not include the signing of one's own name with or without authority, in any capacity, for any purpose....
Star Bank notified Cincinnati of the claim Merchants Bank and USF & G had filed against it. Cincinnati refused to provide Star with legal defense and denied coverage for the claim under the bond. It then filed this declaratory action.
We review de novo a district court's grant of summary judgment, viewing the record and all reasonable inferences drawn from it in the light most favorable to the party opposing the motion. Sarsha v. Sears, Roebuck & Co., 3 F.3d 1035, 1038 (7th Cir.1993). Summary judgment is appropriate only when the materials before the court demonstrate that there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Id.
The sole question in this appeal is whether the depository institutions blanket bond requires Cincinnati to indemnify Star Bank against the judgment Merchants Bank and USF & G may obtain against Star Bank in its state court action. This issue is exclusively a matter of contract interpretation.
The language of the bond clearly indicates that it covers "losses resulting directly from" forgery of a negotiable instrument. Whether there is coverage under the bond in this case depends on two conditions: (1) whether Michael R. Garrison's endorsement of Michael A. Garrison's name constitutes a "forgery" as that term is defined in the blanket bond; and (2) whether Star Bank will have suffered a "loss" if it is required to pay Merchants Bank and USF & G for alleged wrongful payment of the money order over a forged endorsement. We begin by noting that in Indiana, the clear and unambiguous language of an insurance policy must be given its plain and ordinary meaning. Fidelity & Guaranty Ins. Underwriters v. Everett I. Brown Co., 25 F.3d 484, 486 (7th Cir.1994) (citing City of Muncie v. United Nat'l Ins. Co., 564 N.E.2d 979, 982 (Ind.Ct.App.1991)).
According to the unambiguous terms of the bond, forgery requires "the signing of the name of another" and explicitly excludes the signing of one's own name. Here, the parties agree that Michael R. Garrison did not sign his own name on the back of the bank money order--he signed the name of his fictitious grandfather, Michael A. Garrison. Thus, if Garrison did not sign his own name, it logically follows that he must have signed the name of "another." 6
In addition to requiring the signing of the name of another, the definition of forgery also requires that the name be signed "with the intent to deceive." At first glance, it would seem obvious that Garrison intended to deceive by signing the name of the fictitious grandfather. Merchants Bank issued the money order in the name of the grandfather, Michael A. Garrison, rather than in the name of their borrower, Michael R. Garrison. Michael R. Garrison was able to induce Merchants Bank to issue the money order only because he professed to have needed the loan to buy his grandfather's farm equipment, which in turn was to be the collateral on the loan. A reasonable inference may be drawn from these circumstances that Michael R. Garrison's endorsement in Michael A. Garrison's name was crucial to the execution of a scheme to personally acquire the proceeds of a fraudulently obtained loan. Thus, one could conclude that with the endorsement, Michael R. Garrison intended to deceive both Merchants Bank and Star Bank.
Such conclusions, however, would be mere inferences on our part, and they would have been drawn in favor of the movant, Star Bank. Cincinnati, on the other hand, argues that because Michael R. Garrison was the "intended owner" of the loan proceeds, neither Merchants Bank nor Star Bank was deceived by Michael R. Garrison signing the false name and using the proceeds to pay off his debts. Cincinnati asserts that "since the intended owner in fact did receive the proceeds, no forgery occurred." 7 Ironically, Star agrees wholeheartedly that Michael R. Garrison was the "rightful, lawful owner" of the proceeds. 8 Yet, it maintains that the money order was nonetheless forged, and that "Michael R. Garrison acted with deceit when he negotiated the money order." Star Bank alleges that "[t]hat act was the last step in a lengthy process of fraud and deceit he had perpetrated on Merchants and subsequently Star."
Despite our strong suspicions, from the record it...
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