First National Bank of South Carolina v. Glens Falls Ins. Co.

• Decision Date: 28 May 1962
• Docket Number: No. 8494.,8494.
• Parties: The FIRST NATIONAL BANK OF SOUTH CAROLINA OF COLUMBIA, Appellee, v. GLENS FALLS INSURANCE COMPANY, Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

304 F.2d 866 (1962)

The FIRST NATIONAL BANK OF SOUTH CAROLINA OF COLUMBIA, Appellee, v. GLENS FALLS INSURANCE COMPANY, Appellant.

No. 8494.

United States Court of Appeals Fourth Circuit.

Argued March 26, 1962.

Decided May 28, 1962.

Walter H. Hood, Anderson, S. C. (Francis R. Fant, Anderson, S. C., on the brief), for appellant.

W. C. Boyd, Columbia, S. C. (Boyd, Bruton & Lumpkin, Columbia, S. C., on the brief), for appellee.

Before SOPER and HAYNSWORTH, Circuit Judges, and FIELD, District Judge.

SOPER, Circuit Judge.

This suit was brought by the Bank against the Insurance Company to recover a loss of $12,000 which the Bank suffered on loans to the Shirtmaster Company, Inc., a South Carolina corporation, which were secured by fictitious invoices falsely represented by the borrower to be genuine. Liability is based on a blanket bond in the sum of $100,000 issued by the Insurance Company to the Bank whereby the Insurance Company agreed amongst other things to indemnify the Bank against any loss through the insured's having, in good faith and in the course of business, extended credit on the faith of or otherwise acted upon any securities or written instruments which prove to have been counterfeited or forged as to the signature of any maker. The full wording of the relevant portion of the bond is as follows:

"(E) — SECURITIES:

"Any loss through the insured\'s having in good faith and in the course of business whether for its own account or for the account of others, in any representative, fiduciary, agency, or any other capacity, either gratuitously or otherwise, purchased or otherwise acquired, accepted or received, or sold or delivered or given any value, extended any credit or assumed any liability, on the faith of, or otherwise acted upon any securities, documents or other written instruments which prove to have been counterfeited or forged as to the signature of any maker, drawer, issuer, endorser, assignor, lessee, transfer agent or registrar, acceptor, surety or guarantor, or as to the signature of any person signing in any other capacity, or raised or otherwise altered or lost or stolen, or through the insured\'s having, in good faith and in the course of business, guaranteed in writing or witnessed any signature, whether for valuable consideration or not and whether or not such guaranteeing or witnessing is ultra vires, the insured, upon any transfers, assignments, bills of sale, powers of attorney, guarantees, endorsements or other documents upon or in connection with any securities, obligations or other written instruments and which pass or purport to pass title to such securities, obligations or other written instruments; EXCLUDING, HOWEVER, any loss through FORGERY OR ALTERATION of, on or in any checks, drafts, acceptances, withdrawal orders or receipts for the withdrawal of funds or property, certificates of deposit, letters of credit, warrants, money orders or orders upon public treasuries; and excluding, further, any loss specified in subdivisions (1) and (2) of Insuring Clause (D) as printed in this bond, whether or not any amount of insurance is applicable under this bond to Insuring Clause (D).

"Mechanically reproduced facsimile signatures are treated the same as handwritten signatures."

In "Exclusions" under the section of the Bond designated, "THE FOREGOING AGREEMENT IS SUBJECT TO THE FOLLOWING CONDITIONS AND LIMITATIONS", the following exclusion is found in Section 1(d):

"Any loss, the result of the complete or partial nonpayment of or default upon any loan made by or obtained from the insured, whether procured in good faith or through trick, artifice, fraud or false pretenses, except when covered by Insuring Clauses (A), (D), or (E)".

The losses in this case occurred in connection with loans made by the Bank to the Shirtmaster Company on its promissory notes secured by what appeared to be accounts receivable which the company assigned to the Bank. On December 6, 1957 the Bank loaned to the company the sum of $7000 for which the company gave the Bank its promissory note executed in the name of the company by Joseph Kaplan, Secretary-Treasurer, wherein it assigned to the Bank as collateral security two attached invoices for $1975 and $5568, respectively, purporting to show that the company had sold and delivered merchandise in these amounts to Bud Berman Sportswear, Inc., of New York. On December 18 a similar loan of $10,000 was made for which the company gave to the Bank its promissory note executed in the name of the company by Joseph Kaplan, Secretary-Treasurer, wherein it assigned to the Bank as collateral security three attached invoices in the sum of $3315.73, $2557.50 and $5259.75, respectively, purporting to show that the company had sold and delivered merchandise in these amounts to Bud Berman Sportswear, Inc., of New York.

At the times these loans were made, the notes given, and the invoices assigned the Shirtmaster Company represented to the Bank that Bud Berman Sportswear, Inc. was indebted to it for the merchandise described in the invoices, but the merchandise had never been ordered and had never been received by Sportswear, and it was not indebted to Shirtmaster for these amounts.

The Shirtmaster notes to the Bank were never paid and the bank made claim on the Insurance Company for $17,000 less $5000 since, under the terms of an endorsement on the bond, $1000 was deductible for each of the five spurious accounts receivable, but the Insurance Company denied coverage.

The case was submitted to the District Judge upon an agreed statement of facts and the Judge found for the Bank and entered judgment for $12,000. D.C., 197 F.Supp. 264. He was of the opinion that the invoices were "counterfeit" within the meaning of this term as defined in Webster's Twentieth Century Dictionary as something made in imitation of something else with intention to defraud by passing the false copy for genuine. He found support for his conclusions in the decision of the Third Circuit in Fidelity Trust Company v. American Surety Company of New York, 268 F.2d 805, where, under a similar bond issued by an insurance company to a bank, judgment was given for the bank which had suffered losses for moneys loaned on promissory notes secured by fictitious invoices. The court held that the words "counterfeit" and "forged" were not synonymous and, without deciding whether the invoices were forged, held that they were counterfeited in that they purported to be something they were not. The case is directly in point and supports the judgment below.

We find difficulty, however, in following this line because neither the opinion of the District Judge in the pending case nor the opinion in the Third Circuit gives adequate consideration to the limitation of the bond which confines the recovery to losses on securities or written instruments which prove to have been counterfeited or forged as to the signature. In the case at bar as in the Third Circuit the promissory notes were signed...