National City Bank of Minneapolis v. St. Paul Fire & Marine Ins. Co.

• Decision Date: 03 November 1989
• Docket Number: No. C6-88-1378,C6-88-1378
• Citation: 447 N.W.2d 171
• Parties: NATIONAL CITY BANK OF MINNEAPOLIS, Respondent, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, petitioner, Appellant.
• Court: Minnesota Supreme Court

Page 171

447 N.W.2d 171

NATIONAL CITY BANK OF MINNEAPOLIS, Respondent, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, petitioner, Appellant.

No. C6-88-1378.

Supreme Court of Minnesota.

Nov. 3, 1989.

Syllabus by the Court

1. A bank did not qualify as a correspondent bank or an authorized representative of respondent for purposes of complying with the Bankers Blanket Bond actual physical possession condition precedent. A violation of the condition precedent requiring actual physical possession of securities by an insured bank before remitting loan proceeds precludes recovery by respondent.

2. Fake stock certificates are not "counterfeited" under the Bankers Blanket Bond definition if the certificates do not imitate genuine original stock certificates that are in existence.

R.D. Blanchard, Thomas H. Crouch, Meagher, Geer, Markham, Anderson Adamson, Flaskamp & Brennan, Minneapolis, for appellant.

John H. Daniels, Jr., Robert R. Nardi, Willeke & Daniels, Minneapolis, for respondent.

David H. Gregerson, Lang, Pauly & Gregerson, Ltd., Minneapolis, for Transamerica Ins. Co. of California--Amicus.

Gregory M. Bistram, Leonard W. Glewwe, Moore, Costello & Hart, St. Paul, for Continental Ins. Co.--Amicus.

Heard, considered, and decided by the court en banc.

OPINION

POPOVICH, Chief Justice.

As a result of the acceptance by respondent National City Bank of Minneapolis ("National City") of two fake stock certificates as collateral for a loan, the bank sought indemnification, following default by the borrower, under its Bankers Blanket Bond ("Bond") from appellant St. Paul Fire & Marine Insurance Company ("SPF & MI"). Appellant denied coverage under the Bond because the fake stock certificates were not "counterfeited" and because respondent failed to comply with the condition precedent requiring actual physical possession of the certificates before making the loan. The trial court held respondent did not comply with the condition precedent, but it need not because it would have made the loan in any event; the court, however, denied respondent's contract action because the fake stock certificates were not "counterfeited." A Minnesota Court of Appeals panel affirmed on the condition precedent, but reversed and found the fake certificates were "counterfeited," thus granting respondent indemnification. National City Bank v. St. Paul Fire & Marine Ins. Co., 435 N.W.2d 57, 61-63 (Minn.App.1989). We reverse.

I.

During 1979 or 1980, R.E. Clemens prepared or caused to be prepared two fake stock certificates that purported to have been issued by the Panhandle Eastern Pipe Line Corporation ("Panhandle") to R.E. Clemens. Panhandle is an actual corporation, with its stock publicly traded on the New York Stock Exchange. The first fake certificate bore the date August 2, 1976, CUSIP number "NCO 27399," and purported to represent 4,560 shares of Panhandle common stock. The second certificate, dated May 30, 1980, had a CUSIP number of "H 49467" and also purported to represent 4,560 shares of Panhandle common stock. A specimen copy of a Panhandle stock certificate had CUSIP numbers, engraving, signatures, a corporate seal, and a basic format that differed from the fake Panhandle stock certificates. R.E. Clemens Company, Inc., was the registered owner of three genuine Panhandle certificates representing four shares of Panhandle common stock, with serial numbers and dates similar to the fake certificates. Clemens apparently did not attempt to exactly duplicate the genuine Panhandle certificates.

On May 14, 1979, Clemens delivered to First National Bank of Minneapolis ("First Bank") the first fake stock certificate as security for a loan he was obtaining from it. Clemens pledged and delivered to First Bank the second fake certificate on August 20, 1980. Subsequently, Clemens was referred to respondent by an officer of another bank.

Clemens negotiated a loan with a senior vice-president of National City on December 17, 1981. Clemens included as assets in his financial statement the two fake Panhandle stock certificates, and it was determined the stock would adequately secure the loan. On December 17, 1981, Clemens and respondent entered into a loan agreement, which included Clemens' executing a $225,000 promissory note made payable to National City. Clemens also executed a security agreement in which he pledged to respondent the 9,120 shares of Panhandle common stock.

Before remitting loan proceeds to Clemens, National City telephoned First Bank to verify First Bank had possession of Clemens' two Panhandle stock certificates. Respondent did not obtain actual physical possession of the certificates before remitting loan proceeds to Clemens on December 18, 1981, because First Bank still had possession of the fake certificates as security for the balance of its loan to Clemens. Respondent, moreover, did not contact Panhandle to verify issuance of the two certificates to Clemens. In fact, neither National City nor First Bank had a policy requiring verification of certificates with a publicly-held issuer, absent suspicious circumstances. If contacted, Panhandle would have had no record of the two certificates' being issued to Clemens.

On December 18, 1981, respondent loaned $194,000 to Clemens. National City made arrangements to pay Clemens' outstanding loan at First Bank and receive the Panhandle certificates. Respondent issued Clemens a bank money order made payable to First Bank. On December 18, 1981, National City prepared a letter on behalf of Clemens addressed to First Bank, instructing it to "forward [to respondent] by messenger the 9,100 + shares of Panhandle Eastern Pipe Line Company (two certificates) securing the loan." Clemens delivered the letter and money order as directed. On December 30, 1981, after the money order had been paid by respondent, First Bank delivered the two fake certificates to a National City loan officer, who looked at them, determined they were Panhandle stock certificates, and sent them to the vault. No one in respondent's collateral department questioned the authenticity of the certificates.

On December 31, 1981, the Federal Bureau of Investigation notified respondent that Clemens' two Panhandle stock certificates might not be genuine. By February 8, 1982, National City demanded from Clemens immediate repayment of the loan, which had an outstanding principal balance of $194,000.00 and accrued interest of $2,675.08. Respondent duly deducted $2,323.07 from Clemens' checking account. On November 22, 1985, Clemens paid respondent $21,400.00 as restitution against the loan obligation.

A Bankers Blanket Bond issued by SPF & MI to National City was in effect at all times material. The American Bankers Association and the Surety Association of America created a standardized bond form, commonly called the Bankers Blanket Bond "Form 24," which is used for insuring banks against all forms of losses. Following Clemens' default, National City sought, on February 23, 1982, indemnification from appellant under the Bond, but SPF & MI denied coverage. Insuring Clause (E) of the Bond provides coverage for losses resulting from an insured bank's good faith extension of credit in reliance on a counterfeit security. Clause (E) provides in relevant part:

The Underwriter agrees to indemnify the Insured * * * 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

* * * * * *

Actual physical possession of such securities, documents or other written instruments by the Insured, its correspondent bank or other authorized representative is a condition precedent to the Insured's having relied on the faith of, or otherwise acted upon, such securities, documents or other written instruments.

The word "counterfeited" as used in this Insuring Clause shall be deemed to mean only an imitation of a security, document or other written instrument * * * which is intended to deceive and to be taken for an original.

National City, on February 10, 1983, brought a contract action against SPF & MI under Clause (E) of the Bond for indemnification of the loan losses resulting from its reliance on the fake Panhandle stock certificates. Appellant denied coverage, claiming respondent failed to comply with the condition precedent requiring actual physical possession of securities before advancing loan proceeds and that the fake certificates did not meet the "counterfeited" definition of the Bond. At trial on November 17, 1987, the parties stipulated the basic facts. The trial court held the actual physical possession condition precedent, though violated, did not bar recovery because the purposes of the condition were served since the Clemens loan would have been made even if the condition had been followed. The court, however, held the fake Panhandle certificates were not "counterfeited" because they did not imitate genuine certificates; thus respondent's contract action was denied.

The court of appeals panel affirmed in part and reversed in part, holding the trial court did not err in finding the failure to comply with the physical possession condition did not bar respondent's recovery. National City Bank, 435 N.W.2d at 61. The panel, however, held the fake stock certificates were "imitations intended to deceive and be taken for originals" and therefore were "counterfeit" under the Bond. Id. at 63. As a result, the panel remanded for entry of judgment in favor of National City and for consideration of attorney fees. Id. at 64. Appellant petitioned this court for review, which we granted.

II.

"[I]nterpretation of the...