United Bank & Trust Co. of Norman, Okl. v. Kansas Bankers Sur. Co.

• Citation: 901 F.2d 1520
• Decision Date: 24 April 1990
• Docket Number: No. 89-6115,89-6115
• Parties: UNITED BANK & TRUST COMPANY OF NORMAN, OKLAHOMA, an Oklahoma state banking corporation, Plaintiff-Appellee, v. The KANSAS BANKERS SURETY COMPANY, a Kansas corporation, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1520

901 F.2d 1520

UNITED BANK & TRUST COMPANY OF NORMAN, OKLAHOMA, an Oklahoma

state banking corporation, Plaintiff-Appellee, v. The KANSAS BANKERS SURETY COMPANY, a Kansas corporation,

Defendant-Appellant.

No. 89-6115.

United States Court of Appeals, Tenth Circuit.

April 24, 1990.

Steven M. Dickey (Todd Markum with him on the brief) of Dickey & Dickey, Oklahoma City, Okl., for plaintiff-appellee.

Gregory J. Bien of Sloan, Listrom, Eisenbarth, Sloan & Glassman, Topeka, Kan., for defendant-appellant.

Before MOORE and EBEL, Circuit Judges, and SAM, District Judge. ^*

JOHN P. MOORE, Circuit Judge.

This appeal arises from a dispute over whether a bankers blanket bond issued by The Kansas Bankers Surety Company (KBS) to United Bank & Trust Company of Norman, Oklahoma, covers a loss suffered by United as a result of its accepting counterfeit securities as collateral. The facts were undisputed, and the parties filed cross-motions for summary judgment. The district court held that the bond covered the loss and entered judgment for $38,000 in favor of United. KBS appeals this ruling. We conclude the district court incorrectly determined United sustained the loss while covered by KBS's bond; therefore, we reverse.

On October 1, 1984, United loaned Jack Taylor $25,721.23 in exchange for which Mr. Taylor executed a promissory note and security agreement and delivered to United original stock certificates as collateral. Mr. Taylor timely renewed the note on four occasions, reducing the principal amount each time. On May 23, 1985, more than seven months after the Taylor transaction, KBS issued a bankers blanket bond to United. The bond incorporates a Loss Sustained Rider which provides that the bond "applies to loss sustained and discovered by [United] after 12:01 a.m. of [May 23, 1985,] and while this bond is in force." (emphasis added). The Rider also provides that "[l]oss sustained occurs at the time of the act, casualty or event which caused the loss." (emphasis added). Finally, Insuring Agreement (E) of the bond covers "[l]oss resulting directly from the insured having, in good faith, ... extended credit ... on the faith of ... any original ... security" which is counterfeit.

Mr. Taylor defaulted in November 1986. Pursuant to the security agreement, Merrill, Lynch, Pierce, Fenner & Smith sold the collateral on United's behalf for $33,957.30. United applied part of the proceeds to the balance due on Mr. Taylor's note and the remainder to another loan in the name of Jack Taylor and Elizabeth Bertinot. Merrill Lynch subsequently informed United that the securities were counterfeit. United then timely notified KBS of a possible claim. KBS denied coverage, asserting that United had sustained the loss at the time it extended credit to Mr. Taylor and, therefore, prior to the effective date of the bond.

Merrill Lynch obtained a judgment against United for the sales price of the counterfeit securities plus $4,042.70 in attorneys' fees. KBS again denied coverage, and United filed this action against KBS to recover the $38,000 which it had paid to Merrill Lynch. The parties cross-moved for summary judgment on the issue whether United sustained the loss during the coverage period of KBS's bond. The district court held for United. It rejected KBS's argument that United sustained the loss at the time it extended credit to Mr. Taylor and, therefore, prior to the bond's effective date. It reasoned that if Mr. Taylor had not defaulted, United would have suffered no loss. The court found instead that United's actual loss occurred when Merrill Lynch obtained its judgment against United as a result of United's resort to the counterfeit collateral to satisfy Mr. Taylor's outstanding balance. The court found, alternatively, that United sustained the loss when Mr. Taylor defaulted. Since both Mr. Taylor's default and the judgment in favor of Merrill Lynch occurred during the period of coverage, the court concluded KBS was liable to United for the $38,000 loss which United had sustained.

This court conducts a de novo review of a district court's ruling on summary judgment. Osgood v. State Farm Mut. Auto. Ins. Co., 848 F.2d 141, 143 (10th Cir.1988). When the district court grants a motion for summary judgment, we must examine the record to determine whether a triable issue exists; if one does not, the only issue we face is whether the district court properly applied the substantive law. Id. Since the parties do not dispute the facts of this case, the only issue we face is whether the district court properly held, as a matter of law, that United sustained the loss at the time Merrill Lynch obtained its judgment against United.

Courts interpreting fidelity bonds follow the liberal rules applicable to insurance contracts, not the strict rules of suretyship. Texas Nat'l Bank v. Fidelity & Deposit Co., 526 S.W.2d 770, 774 (Tex.Civ.App.1975). Where a contract is complete and unambiguous, its plain language is the only legitimate evidence of the parties' intent. Mercury Inv. Co. v. F.W. Woolworth Co., 706 P.2d 523, 529 (Okla.1985). The language in a contract is given its plain and ordinary meaning unless some technical term is used in a manner meant to convey a specific technical concept. Id. ¹

KBS contends that the district court erroneously interpreted the bankers blanket bond. It asserts that fidelity bonds, absent a clear showing of contrary intent, are presumed to have prospective operation only. 13 Couch on Insurance 2d Sec. 46:176, 137 (Rev. ed. 1982). KBS argues that by applying the bond's protection to an act which occurred prior to the inception of coverage, the district court gave the bankers blanket bond retrospective application despite the parties' express intent to limit KBS's liability to prospective losses. Without such a limitation, KBS contends, it would be unable to calculate the period for which it is liable under the bond.

To support its position that the district court's interpretation would result in retrospective application of the bond contrary to the parties' intent, KBS points to Insuring Agreement (E) which defines the "act, casualty or event which caused the loss" as the "exten[sion] of credit ... on the faith of ... any original [counterfeit] security." KBS further asserts that the bond does not cover losses resulting from the borrower's default or from a judgment against the insured for the sale of counterfeit securities because these events are not insured risks. Since United extended credit to Mr. Taylor in reliance on counterfeit securities prior to the effective date of the policy, United sustained its loss before coverage began and, therefore, cannot recover from KBS.

KBS cites several cases to support its contention that the extension of credit on the faith of counterfeit securities, and not the borrower's default or the insured's resorting to counterfeit collateral, determines when the insured sustained a loss. Eliot Sav. Bank v. Aetna Casualty & Sur. Co., 310 Mass. 355, 38 N.E.2d 59, 63 (1941), for example, holds a bank insured under a bond similar to Insuring Agreement (E) sustained a loss at the time it extended credit in reliance on forged securities and a forged power of attorney although, as in this case, the bank did not discover the forgeries until after the borrower had defaulted and judgment had been obtained against the bank based on the sale of the forged notes. The court reasoned that the bank sustained the loss at the time it exchanged its money for valueless securities regardless of when it discovered the loss. Id.

KBS also cites Citizens Bank v. American Ins. Co., 289 F.Supp. 211, 213 (D.Or.1968), in which a bonding company sought to avoid coverage under Insuring Agreement (E) for a loss resulting from the insured bank's extending credit in reliance...