Liberty Nat. Bank v. Aetna Life & Cas. Co.

• Decision Date: 24 June 1983
• Docket Number: Civ. A. No. 78-1843.
• Citation: 568 F. Supp. 860
• Parties: LIBERTY NATIONAL BANK, Plaintiff, v. AETNA LIFE & CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — District of New Jersey

568 F. Supp. 860

LIBERTY NATIONAL BANK, Plaintiff, v. AETNA LIFE & CASUALTY COMPANY, Defendant.

Civ. A. No. 78-1843.

United States District Court, D. New Jersey.

June 24, 1983.

Sills, Beck, Cummis, Zuckerman, Radin & Tischman by Lee Alan Adlerstein, Newark, N.J., for plaintiff.

Lum, Biunno & Tompkins by Roger P. Sauer, Newark, N.J., for defendant.

OPINION

SAROKIN, District Judge.

In this diversity action, Liberty National Bank ("the Bank"), a New Jersey corporation, seeks recovery under a Bankers Blanket Bond ("the Bond") issued by Aetna Life & Casualty Company ("Aetna"), a corporation incorporated under the laws of the State of Connecticut. In 1976 the Bank made a demand loan in the amount of $112,500 to Edward M. Vaughn and a similar loan in the amount of $112,000 to his mother, Ruth D. Martin. The loans were secured by certificates of deposit ("the CDs") purportedly issued by the National Bank of Commerce, LTD., ("NBC"), an entity which had been chartered as a bank in St. Vincent, British West Indies, but which had no assets. The loans were never repaid and the CDs proved to be worthless.

The Bank made a timely claim of loss to Aetna which denied coverage. The Bank instituted an action in the Superior Court of New Jersey, Law Division, Bergen County, which was removed to this court on August 2, 1978. The jurisdiction of the court arises pursuant to 28 U.S.C. §§ 1332, 1441, 1446. The action was stayed pending final disposition of a separate state court action by the Bank against Mr. Vaughn and Mrs. Martin on the demand notes. After entry of final judgment in the state court action, the matter was reinstated. A related federal criminal action against Mr. Vaughn for fraudulently misrepresenting the value of securities in violation of 18 U.S.C. § 1014 resulted in a guilty verdict, which has been affirmed by the Third Circuit Court of Appeals.

Section 2(e) of the Bond provides in pertinent part:

Section 2. THIS BOND DOES NOT COVER:

. . . . .

(e) loss resulting from the complete or partial nonpayment of, or default upon,

(1) any loan, or transaction in the nature of, or amounting to, a loan made by or obtained from the Insured ...

whether procured in good faith or through trick, artifice, fraud or false pretenses unless such loss is covered under Insuring Agreement (A), (D) or (E); ...

(See Exhibit A to Affidavit of Donald Simpson dated November 19, 1982, hereafter "Simpson Affidavit"). The parties do not dispute that this loan exclusion clause is generally applicable to these transactions. The issue is whether the Bank can prove its right to recover under one of the enumerated Insuring Agreements.

The Bank now moves for partial summary judgment with regard to its right to recover under Insuring Agreements D and E; Aetna has cross-moved for partial summary judgment to deny recovery to the Bank under Insuring Agreement A.

Although many of the facts in the complicated chain of events that ended with the Bank's loss have not been clearly established, the following summary will suffice for the purposes of these motions. In June 1976, a South Carolina businessman named Raymond Starns was interested in finding a partner to finance the acquisition of certain businesses. Through a series of intermediaries, including an attorney, Donald Jones, and a Florida businessman, Richard Holtzman, Mr. Starns was introduced to Mr. Vaughn. On June 30, 1976, a charter for NBC was filed in St. Vincent. Mr. Starns was involved in the creation of this entity and persuaded a St. Vincent resident, Fitzroy Clarke, to act as president of the new entity. At that time, NBC had no assets, no depositors, no offices, no employees and no telephones.

At a meeting in Florida sometime in June 1976, at which Jones, Starns, Holtzman and others were present, Starns subscribed Clarke's name to a group of CDs on which the name of NBC was printed. It is disputed whether this meeting occurred before or after June 30, or whether Starns had Clarke's authorization to use Clarke's name. At a second meeting in July, Starns also signed Clarke's name to a second set of CDs. It was agreed at that meeting that the CDs would be given to Vaughn in order for Vaughn to "beef up" his financial statements and increase his line of credit.

Sometime early in August, Holtzman brought the CDs to Vaughn in New Jersey. During a meeting attended by Vaughn, Holtzman and others, Vaughn used a check-writing machine to fill in the names of the payees, amounts and maturities on certain CDs bearing Clarke's name.

The CDs, in denominations of $50,000 and $75,000, were made payable to Vaughn, one of his business associates and various members of his family. On August 26, 1976, Vaughn procured a loan from the Bank in the amount of $112,500 secured by two such CDs in the amount of $50,000 and $75,000. He induced his mother to obtain a similar loan in the amount of $112,000 on September 1. The loans were called by the Bank in mid-September.¹

Vaughn and Martin received the proceeds of these loans with deductions made for outstanding loans. Some of the proceeds were channeled to Holtzman and Starns. In mid-September 1976 a small office in the name of NBC was opened in St. Vincent and a single employee engaged. At approximately the same time, Clarke executed a written power of attorney authorizing Starns to sign Clarke's name to papers acknowledging the collateral assignment of the CDs to the Bank.

In order to prevail on a motion for summary judgment, the moving party must demonstrate that (1) there are no genuine issues of material fact which must be resolved by a factfinder and (2) the undisputed facts establish the moving party's right to recover under the relevant law. Fed.R. Civ.P. 56; Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976), cert. denied, 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977).

After a review of the record, the court has concluded that Aetna's motion for summary judgment must be denied because material issues of fact remain to be resolved in connection with the Bank's right to recover under Insuring Agreement A. The court has further concluded, however, that it will grant, on its own motion, summary judgment to Aetna with regard to the right of the Bank to recover under either Insuring Agreements D or E, on the ground that even if certain remaining issues of fact were resolved in the Bank's favor, the Bank could not establish its right to recover under these Agreements. Accordingly, the Bank's motions are denied. See Defelice v. Philadelphia Board of Education, 306 F.Supp. 1345 (E.D.Pa.1969), aff'd per curiam, 432 F.2d 1358 (3d Cir.1970); 6 Moore's Federal Practice ¶ 56.12 (1982).

Although the reasoning underlying these conclusions is set forth in detail hereafter, the analysis of the court may be briefly summarized. If the plain language rule applied to this type of bond, the coverage could be simply stated as follows:

The bond insures that the documents submitted to the bank in connection with a loan are genuine and authentic. If they are not, and a loss is caused thereby, the bonding company guarantees the loss. On the other hand, the bonding company does not guarantee the truth of said documents. If they are not truthful, and a loss results therefrom, it is not guaranteed.

The allocation of such losses undoubtedly arises from the practicality of the situation. A bank cannot protect against counterfeit and forged documents. It can, on the other hand, investigate the assertions made therein through credit checks, appraisals, title searches, financial statements and the like.

In this particular case the documents relied upon were not counterfeit but may have been forged. But even if counterfeit and forged, the loss sustained by the Bank was not caused by the lack of authenticity or genuineness of the documents. On the contrary, the loss was caused by the fact that the statements contained in the document were not true. The assets represented thereby did not exist. If the documents were authentic and their signatures genuine and authorized, the loss nonetheless would have occurred. The failure of the security was not because they were counterfeit or forged, but solely because the assets purportedly represented thereby were nonexistent. This loss falls upon the Bank and not the bonding company by the terms and intent of the bond. Summary judgment for the bonding company on these issues is therefore appropriate.

Whether the losses result from the dishonest acts of an employee presents issues of fact requiring a plenary trial for the reasons hereinafter set forth.

Insuring Agreement E

Insuring Agreement E provides in pertinent part that Fidelity will indemnify the Bank for:

Loss (1) 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, ... extended any credit ... on the faith of or otherwise acted upon any securities, documents, or other written instruments which prove to have been

(a) counterfeited or forged as to the signature of any maker, drawer, issuer, endorser, signor, lessee, transfer agent or registrar, acceptor, surety or guarantor or as to the signature of any other person signing in any other capacity ....²

Insuring Agreement E defines "counterfeited" to mean "only the imitation of a security document or other written instrument, ... which is intended to deceive and be taken for an original." There is no dispute that the CDs in question come within the meaning of "securities, documents or other written instruments" as defined by Insuring Agreement E or that the Bank had physical possession as is also required by that Agreement. With respect to Insuring Agreement E, therefore, the issue is solely whether what occurred under these facts was a counterfeiting.

The Bank argues that the CDs were not actually issued by NBC "but rather were imitations, intended to deceive and be taken for authentic CDs issued by a `National Bank of Commerce'"...