National City Bank of Minneapolis v. St. Paul Fire and Marine Ins. Co.
| Decision Date | 17 January 1989 |
| Docket Number | No. C6-88-1378,C6-88-1378 |
| Citation | 435 N.W.2d 57 |
| Parties | NATIONAL CITY BANK OF MINNEAPOLIS, Appellant, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Respondent. |
| Court | Minnesota Court of Appeals |
Syllabus by the Court
1. The actual physical possession clause of a bankers blanket bond requiring a bank to have actual physical possession of the security before making a loan will not bar recovery where compliance would not have prevented the loss and the purposes of the clause were served.
2. In the context of fake stock certificates, the counterfeit provision of a bankers blanket bond extends to and covers all losses as a result of value extended on the faith of counterfeit securities whether the counterfeit arises as a result of a non-genuine signature or in some other manner.
3. The reasonable expectation doctrine is not applicable in this case because there are no relevant hidden major exclusions, unequal bargaining power or insured's lack of insurance expertise.
John H. Daniels, Jr., Robert R. Nardi, Willeke & Daniels, Minneapolis, for appellant.
Roderick D. Blanchard, Galen L. Bruer, Meagher, Geer, Markham, Anderson, Adamson, Flaskamp & Brennan, Minneapolis, for respondent.
Heard, considered and decided by PARKER, P.J., and FOLEY and RANDALL, JJ.
National City Bank appeals from the April 6, 1988 declaratory judgment dismissing with prejudice its claim against respondent St. Paul Fire and Marine Insurance Company for indemnification under a bankers blanket bond. National City's claim arises as a result of loss incurred from a loan default secured by fake stock certificates. St. Paul noticed review on that portion of the trial court's judgment holding the condition precedent, i.e., the requirement that the bank have actual physical possession of the securities before making the loan, did not bar recovery. We affirm the trial court's finding that the condition precedent clause did not bar recovery, but we reverse dismissal of National City's claim for indemnification and remand for entry of judgment in favor of National City in the amount of $194,000 plus interest, and consideration of an award of attorney fees in that court to National City.
This case of first impression involves interpretation of clause E of a bankers blanket bond. On December 17, 1981, National City loaned $194,000 to R.E. Clemens in good faith and in the course of business. This loan was secured by two stock certificates purporting to represent a total of 9,120 shares of stock owned by Clemens in the Panhandle Eastern Pipe Line Company. On December 31, 1981, the Federal Bureau of Investigation notified National City that Clemens' Panhandle stock certificates might not be genuine.
National City demanded Clemens repay the loan together with accrued interest. When Clemens defaulted, National City sought recovery from St. Paul under clause E of the bankers blanket bond for loss incurred due to counterfeit stock. St. Paul denied coverage, claiming National City had not complied with the condition precedent clause of the policy requiring actual physical possession of the certificates before making the loan. St. Paul also denied coverage, claiming the stock was not counterfeit within the meaning of the policy. This lawsuit followed.
The evidence shows Clemens had prepared or caused to be prepared two fake Panhandle stock certificates. Clemens actually owned four shares of Panhandle, none of which are involved in this matter. Although the fake certificates were not copies of genuine existing documents, they were clearly imitations of Panhandle's stock certificates, including forged signatures of Panhandle's president and secretary, and were intended to deceive and be taken for originals.
Clemens was referred to National City by an officer of another bank who was a long-time personal friend of Clemens. The senior vice president of National City met with Clemens, reviewed his financial statement, was satisfied the value of the 9,120 shares of Panhandle would adequately secure the loan, and orally approved the loan. The Panhandle certificates were not reviewed at this time because another bank had physical possession of the certificates as security for a loan Clemens intended to pay off with the National City loan proceeds. National City did communicate with the other bank by telephone and verified possession of the certificates. National City did not contact Panhandle to verify the authenticity of the certificates.
On December 18, 1981, National City prepared a letter on behalf of Clemens addressed to the other bank instructing it to "forward by messenger the 9,100 + shares of Panhandle Eastern Pipe Line Company (2 certificates) securing the loan" to National City. That same date, National City issued to Clemens a bank money order made payable to the other bank. Clemens delivered the money order and letter to the other bank.
On December 30, 1981, after the bank money order was collected, the other bank delivered the certificates to National City. Upon receipt, National City's loan officer reviewed the certificates and seeing nothing wrong with them, sent them to the vault. Neither National City nor the other bank have a policy that requires verifying stock certificates with the issuer of a publicly held company absent suspicious circumstances. National City then extended additional credit on the promissory note.
While the bankers blanket bond generally excludes coverages for loan losses, it does provide coverage for loan losses under Insuring Clause E, Forgery and Alteration of Securities, etc. In that clause coverage is extended for any loss
through the Insured's having, in good faith and in the course of business, * * * 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, assignor, lessee, transfer agent or registrar, acceptor, surety or guarantor or as to the signature of any person signing in any other capacity, or * * *.
It is uncontested that National City made the loan to Clemens in good faith and in the course of business. Stock certificates are "securities, documents or other written instruments" as used in clause E of the bankers blanket bond. In a declaratory judgment action, the trial court dismissed National City's claim with prejudice.
1. With respect to the actual physical possession clause, the trial court concluded: "The 'actual physical possession' clause of the bond was not complied with" by National City. Nevertheless, "its application is irrelevant and will not be used to deny coverage."
2. With respect to whether the securities were counterfeit, the trial court concluded:
"Counterfeited" as defined in the Bankers Blanket Bond means a copy of an actual genuine document with respect to which an original is in existence.
* * * The fake securities pledged by Mr. Clemens to National City Bank were not "counterfeited" within the meaning of the Bankers Blanket Bond.
* * * The securities pledged by Mr. Clemens were not genuine in any way, therefore the term "forged as to signature" does not describe these securities. That term is meant to apply to only documents that are genuine to the point of signature and contain an unauthorized or incorrect signature.
* * *
* * *
* * * the loss here is a loss from a bad loan, a loan which was made in the ordinary course of the bank's business, and which should not have been made, but for the inappropriate representations of the borrower * * *.
* * *
* * *
* * * Compensable losses, had they been covered in this case include the principal amount advanced to Mr. Clemens in the sum of $194,000.00, together with interest at the prejudgment rate thereon from the time of the submission of the proof of loss herein to defendant, less the $21,400.00 received and applied to the principal on November 22, 1985. Had plaintiff prevailed in this action, it would have been entitled to reasonable attorneys' fees and costs incurred by it in the prosecution of this action, as this action is in the nature of a declaratory judgment action for coverage.
3. With respect to the reasonable expectations doctrine, the trial court concluded: "The application of the reasonable expectations doctrine is not appropriate in this case." Both National City and St. Paul "are large commercial enterprises" and "no vast disparity of bargaining power exists."
4. With respect to whether National City was entitled to a jury trial, the trial court concluded:
The application of the doctrine of reasonable expectations is in reality a request for reformation of a contract. Accordingly, because the Court has accepted the facts stipulated to and the offers of proof of the parties, and because the only remaining questions are questions of equity, contract interpretation, and law, plaintiff is not entitled to a jury trial on any matter raised in the pleadings. The written Stipulation of facts agreed to by the parties and their offers of proof constitute sufficient facts upon which the court can base its ruling.
1. Did the trial court err when it held the condition precedent of the bond, i.e., the requirement that the bank have actual physical possession of the securities before making the loan, did not bar recovery?
2. Did the trial court err when it held the fake securities were not counterfeit within the meaning of the bond?
3. Did the trial court err by not applying the reasonable expectation doctrine?
4. Did the trial court err by concluding National City was not entitled to a jury trial?
"Interpretation of the language of an insurance contract is a question of law, as applied to the facts presented." Iowa Kemper Insurance Co. v. Stone, 269 N.W.2d 885, 887 (Minn.1978). The appellate court makes an independent review of the trial court's interpretation of...
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