On November 16, 2016, the U.S. District Court for the Eastern District of Wisconsin released its decision in Citizens Bank Holding Inc. v. Atlantic Specialty Insurance Co. The Court held that forged business loan guarantees purportedly issued by the U.S. Department of Agriculture (USDA) did not qualify for indemnity under Insuring Agreements D or E of a Financial Institution Bond. The decision is notable in that it reaffirms the interpretive principle that the Bond is not to be interpreted contra proferentem, as it is a product of negotiation between the banking and fidelity insurance industries.

The Facts

Citizens Bank maintained an investment advisory agreement with Pennant Management, Inc. (“Pennant”), a company engaged in acquiring USDA-guaranteed loans on behalf of community banks. Pursuant to this agreement, Citizens Bank began purchasing shares in loan pools administered by Pennant.

In 2013, Pennant entered into a master repurchase agreement with First Farmers Financial LLC (“First Farmers”), a company approved by the USDA as an eligible lender for certain USDA loans. Under the terms of the master repurchase agreement, Pennant, on behalf of its clients, agreed to purchase from First Farmers guaranteed portions of USDA loans and supporting agreements, documents, and instruments, including USDA-issued Assignment Guarantee Agreements (AGAs).

Beginning in 2013, Pennant purchased, on behalf of Citizens Bank, 25 USDA-guaranteed loans purportedly originated by First Farmers. Citizens Bank’s investment in the loan pool totaled $15 million. For each loan, Citizens Bank’s custodian received an original USDA AGA that contained an original ink signature purporting to be that of a USDA state director.

In 2014, Pennant discovered that the First Farmers loans were fictitious and that the signatures on the AGAs were forged. The identified borrowers and collateral were fictitious and the CPA who allegedly audited First Farmers did not exist. First Farmers refused Pennant’s request to repurchase the loans it purportedly originated, and the USDA refused Pennant’s demand to honor the AGAs, reasoning that it had not guaranteed any valid loans. As a result, Citizens Bank lost its investment.

The Coverage

Citizens Bank pursued a claim under Insuring Agreements D (Forgery) and E (Securities) of its Bond, and ultimately moved for summary judgment against its insurer, Atlantic. Before the District Court, Citizens Bank contended that certain provisions of the Bond had to be interpreted contra proferentem. The District Court reviewed the principles for interpreting Financial Institution Bonds and rejected Citizens Bank’s contention, applying the principle, recognized since at least Sharp v. FSLIC in 1988, that the contra proferentem rule “generally does not apply where the policy in question is a standard Bankers Blanket Bond, drafted by representatives from both the banking and insurance industries.”

The Court then considered coverage under Insuring Agreement E(1), which indemnified for:

 Loss resulting directly from the Insured having, in good faith, for its own account or for the account of others: … acquired, sold, delivered, or given value, extended credit or assumed liability, on the faith of any original Written document that is a:

 (a)   Certificated Security … [or]

 (g)   corporate, partnership or personal Guarantee …

 which … bears a handwritten signature of any … guarantor … that is a Forgery.

Citizens Bank asserted that the forged AGAs qualified as certificated securities, or as corporate or personal guarantees. Atlantic took the view that the AGAs did not fall within either category of documents.

The Court first determined that the AGAs were not certificated securities. The Bond defined a “Certificated Security” as:

 a share, participation or other interest in property of, or an enterprise of, the issuer or an obligation of the issuer, which is:

 (a)        represented by an instrument issued in bearer or registered form;

 (b)        of a type commonly dealt in on securities exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a medium for investment; and

 (c)        either one of a class or series or by its terms divisible into a class or series of shares.

Citizens Bank contended that an AGA “is a ‘class’ of obligation ‘issued by the USDA’ in ‘registered’ form and ‘commonly recognized’ as a ‘medium of investment’ in the secondary market for USDA guaranteed loans.” Atlantic responded that the Bond defined guarantees and certificated securities separately, and that the documents in issue were self-identified as guarantees. Further, an AGA was not a share, nor was it divisible into shares.

The Court held that a reasonable insured would not expect the AGAs to qualify as certificated securities under the Bond, observing that, while one could try to classify an AGA as a certificated security by separating each of the terms used in defining the document, “such terms must be viewed in context of the Bond as a whole and not in isolation.” As the AGAs were labeled as guarantees, and fit within the definition of “guarantee” used in the Bond, it was not reasonable to accept that the parties intended such documents to also qualify as certificated securities.

The Court then considered whether the AGAs were “corporate, partnership or personal” guarantees. Citizens Bank contended that they represented (i) corporate guarantees, because the USDA acts in a corporate capacity in providing loan guarantees; and (ii) personal guarantees, because the USDA, as a political body, is an artificial “person” akin to a corporation or partnership. The Court rejected these arguments, holding that the USDA is a government agency and not a corporation. As the types of guarantees in Insuring Agreement E(1)(g) expressly included only corporate, partnership or personal guarantees, accepting Citizens Bank’s definition would be “unreasonable as it would render those expressly included terms superfluous.” As a result, the AGAs did not fall within Insuring Agreement E(1).

The Court then considered coverage under Insuring Agreement D, which indemnified for, inter alia, loss resulting directly from forgery of, on, or in any Letter of Credit. “Letter of Credit” was defined as:

 an engagement in writing by a bank or other person made at the request of a customer that the bank or other person will honor drafts or other demands for payment upon compliance with the conditions specified in the Letter of Credit.

Citizens Bank contended that the USDA acted as a “bank” by facilitating the transmission of funds to lenders and borrowers, and also argued that the USDA was an “other person”, on the basis that that term encompassed human beings, corporations and partnerships.

The Court held that the AGAs were not letters of credit:

 The Court finds that a reasonable insured in Citizens Bank’s position would not expect the [AGAs] to qualify as letters of credit under the terms of the Bond. For one, the [AGAs] are labeled as guarantees and clearly fit within the definition of a guarantee as used in the Bond and for which coverage is provided under Insuring Agreement E. That other instruments, for example certificates of deposit, may qualify for coverage under multiple insuring agreements does not mean that a document expressly labeled as a guarantee — a term defined in the Bond — should be treated as an instrument with an entirely different definition.

 Even if the Court were to ignore this unambiguous label, it would nevertheless find that a USDA [AGA] does not satisfy the definition of a letter of credit. … the USDA is neither a “bank” nor an “other person.” [emphasis added]


Citizens Bank is notable for three reasons. First, the holdings by the Court regarding Insuring Agreements D and E(1) will undoubtedly be of interest to fidelity professionals dealing with claims involving government-issued guarantees. Second, the Court expressly reaffirmed the principle that Financial Institution Bonds are not to be interpreted contra proferentem, as they are effectively products of joint authorship.

Third, the Court took a robust approach to interpreting the Bond, exemplified by its observation that:

 This failure of the contracting parties to consider government guarantees explains why Citizens Bank has pressed a highly creative interpretative stratagem, urging a microscopic focus on the dictionary or statutory definitions of individual words. … Such an approach, however, runs contrary to the general rule that interpretation must take into account the whole of the contract.

Citizens Bank militates against an interpretive approach which seeks to generate coverage by “stitching together” definitions of individual words and phrases to try to fit the circumstances of a loss within coverage, and in favour of an approach whereby courts give effect to the wording of the Bond, read as a whole. The latter approach is consistent with the interpretive methodology used by U.S. courts generally, and is expressly mandated by the Supreme Court of Canada as the “primary interpretative approach” to be taken in our country.

Citizens Bank Holding Inc. v. Atlantic Specialty Insurance Co., 15-CV-782 (E.D. Wis. November 16, 2016) [Note: this decision does not appear to be accessible online; please contact us if you would like a copy.]

On March 3, 2015, the Eighth Circuit Court of Appeals released its decision in BancInsure, Inc. v. Highland Bank. The decision provides guidance with respect to (i) what constitutes a “direct loss” under the Securities Coverage of the Financial Institution Bond; and (ii) the nature of the reliance required for an insured to demonstrate that it has “extended credit … on the faith of” a forged guarantee.

The Facts

In 2005, First Premier Capital (FPC), an equipment lease finance company, entered into a Master Lease Agreement with Equipment Acquisition Resources (EA). Player and Malone, who were spouses, each owned 50 per cent of EA. The Master Lease Agreement provided that FPC would lease EA pieces of equipment, as described in individual lease agreements. Player and Malone provided FPC with personal guarantees of EA’s indebtedness. FPC and EA ultimately entered into approximately 20 separate lease agreements under the Master Lease Agreement.

To finance its equipment purchases, FPC entered into Collateral Assignment agreements with several banks, whereby it assigned EA’s lease payment streams to those banks in exchange for up-front funds. In 2006 and 2007, Highland Bank obtained assignments of payments due from EA to FPC under three such lease agreements, in exchange for advancing almost $4 million to FPC. FPC also expressly assigned its ownership interest in the leased equipment to Highland Bank, and warranted that “[t]he Lease and any accompanying guarantees … are genuine and enforceable in accordance with their terms.” FPC purchased the leased equipment at the direction of EA, usually from a distributor named Machine Tools Direct (MTD). MTD delivered the equipment directly to EA.

Before entering into the Collateral Assignment agreements and funding FPC’s equipment purchases, Highland Bank:

  • reviewed copies of the Master Lease Agreement and individual lease documents, as well as the personal guarantees of Player and Malone; and,
  • obtained a joint personal financial statement of Player and Malone, in which they reported total assets of $63 million (including their shares in EA, which Player and Malone valued at $47 million); a negative after-tax net worth of $4.5 million; and $38 million in contingent liabilities (primarily guarantees of EA debts).

However, Highland Bank did not inspect the purchased equipment, and had no direct contact with EA, Player or Malone.

The Loss

The lease payments were kept current until September 2009. At that time, EA ceased making lease payments and filed for bankruptcy. The bankruptcy proceedings revealed that EA had essentially been run as a Ponzi scheme. EA had colluded with MTD in order to inflate the purchase prices of some of the equipment; other equipment simply never existed. EA had used some of the proceeds from the lenders’ purchases of equipment to make EA’s lease payments, thereby keeping the Ponzi scheme running. Other proceeds were used to fund distributions to EA’s shareholders, and to pay for EA’s principals’ gambling and other personal expenses.

In December 2009, Highland Bank concluded that the unpaid lease payments under the Collateral Assignment agreements were uncollectible and wrote off over $2 million in losses. In July 2010, Highland Bank was advised that Malone’s signature on the guarantee was likely forged. Malone subsequently swore an affidavit of forgery to this effect.

The Securities Coverage Claim

Highland Bank asserted a claim under the Securities Coverage of its Financial Institution Bond, which indemnified it for:

Loss resulting directly from the Insured having … acquired, sold or delivered, given value, extended credit or assumed liability on the faith of any original … personal Guarantee … which bears a signature of any … guarantor … which is a Forgery.

Highland Bank asserted that Malone’s Guarantee Agreement was a “personal Guarantee” within the scope of the coverage, and that Malone’s signature had been forged. Highland Bank argued that it would not have entered into the Collateral Assignment agreements with FPC, had Player and Malone not personally guaranteed EA’s obligations under the Master Lease Agreement. As a consequence of the forgery of Malone’s signature, Highland Bank sustained a loss.

The Decision

The District Court below held that Highland Bank had failed to demonstrate a direct loss. Highland Bank never obtained a legal interest in Malone’s guarantee, through assignment or other transfer; at all times, Malone’s guarantee was in favour of FPC only. Consequently, Highland Bank could not demonstrate reliance on the guarantee in extending credit. Further, and in any event, the Malone guarantee was worthless when Highland Bank extended credit, because Highland Bank’s own credit assessment showed that Malone and Player had a substantial negative tangible net worth and contingent liabilities of over $38 million.

The Eighth Circuit Court of Appeals affirmed the District Court’s decision. The Court of Appeals first observed that the test for causation under the Securities Coverage (i.e., Loss resulting directly from…”) suggested a stricter standard than proximate causation. (There is, incidentally, support for this more stringent test in Canadian insurance law as well.) The Court also noted that there was authority supporting the District Court’s conclusion that a “loan loss is not directly caused by reliance on forgeries in documents constituting or referencing collateral when the collateral is worthless at the time of the loan.”

However, the primary focus of the Court of Appeals’ decision was on Highland Bank’s inability to demonstrate reliance on Malone’s guarantee when it entered into the Collateral Assignment agreements with FPC in 2006 and 2007. As Highland Bank did not obtain any legal interest in Malone’s guarantee, it could not demonstrate such reliance:

It was FPC that obtained the personal guarantees of Player and Malone. Although Highland Bank examined copies of the guarantees before entering into Collateral Assignment agreements with FPC, Highland Bank relied on FPC’s due diligence and warranties, taking an assignment of FPC’s rights to the lease payments, and an assignment of FPC’s interest in the leased equipment as collateral, but not an assignment of FPC’s right to enforce the personal guarantees. … In these circumstances, we agree with the district court that the guarantees were worthless at least to the Bank. Therefore, Highland Bank failed to show the “direct relation between the injury asserted and the injurious conduct alleged” [emphasis in original]

As a result, the reliance requirement of the Securities Coverage was not made out.


Much like the Eleventh Circuit’s recent Bank of Brewton decision (which we discussed in our February 10 post), Highland Bank demonstrates the careful factual and legal analysis that must be performed in applying the Securities Coverage. As a factual matter, Highland Bank may indeed have “relied” on the personal guarantees in deciding whether to advance funds to FPC, in the sense that the existence of the guarantees may have factored into the bank’s decision. However, that “reliance” did not meet the requirements of the Securities Coverage in this case. The Court’s analysis suggests that the result might have been different, if (i) Highland Bank had obtained a proper assignment of Malone’s guarantee; and (ii) the guarantee would have had some real value, but for the forgery of Malone’s signature.

BancInsure, Inc. v. Highland Bank, 2015 WL 871806 (8th Cir.)

On February 9, 2015, the Eleventh Circuit Court of Appeals released its decision in Bank of Brewton v. The Travelers Companies, Inc. The Court’s decision reinforces the distinction between counterfeit documents and documents which, although fraudulently-procured and without intrinsic value, are nonetheless authentic.

The Facts

The Bank of Brewton (the “Bank”) is a private bank located in Alabama. Its customer, Hines, obtained a series of loans for which he pledged various assets as collateral. In 2005, Hines assigned 180 shares of The Securance Group (“TSG”) as collateral for a loan, and delivered to the Bank a share certificate representing these shares (Certificate No. 2). At around the same time, Hines assigned another 180 shares of TSG, and delivered a second stock certificate to the Bank (Certificate No. 7).

In March 2009, a Bank employee compared Certificate No. 2 and Certificate No. 7, and discovered that the “Certificate No. 2” in the Bank’s possession was actually a colour copy of the original Certificate No. 2. The Bank questioned Hines, who explained that he had inadvertently given the Bank a copy, and had since lost the original. Hines also asserted that he had not pledged the shares represented by Certificate No. 2 to any other bank. Based on Hines’ representations, TSG issued a replacement certificate, Certificate No. 11, to him. Hines in turn delivered it to the Bank.

In December 2009, the Bank consolidated Hines’ loans and advanced additional credit, all secured by the 360 shares of TSG as represented by Certificate Nos. 7 and 11.

In April 2010, TSG’s president, who also sat on the Bank’s board of directors, discovered that Hines had in fact assigned the original Certificate No. 2 to another financial institution in 2007. TSG then informed the Bank that, as a result, Certificate No. 11 was void. The Bank asked Hines to replace the shares, but he defaulted and filed for bankruptcy.

The Financial Institution Bond Claim

The Bank maintained a Financial Institution Bond with Travelers and submitted a claim under the Securities coverage, asserting that its loss arose from its reliance on Certificate Nos. 2 and/or 11 (Certificate No. 7 having been conceded to be genuine). The Securities coverage indemnified the Bank for “loss resulting directly from the [Bank] having, in good faith, … extended credit … on the faith of [a certificated security], which is a Counterfeit.” The Bond defined “Counterfeit” as “an imitation which is intended to deceive and to be taken as an original.”

The Bank asserted that it sustained a covered loss due to either Certificate No. 2 or Certificate No. 11. In the Bank’s view, the “Certificate No. 2” that had been in its possession had, in fact, been a phony, and thus came within the Bond’s definition of “Counterfeit”. Similarly, Certificate No. 11 should be considered to be a counterfeit, because (i) it was intended to replace Certificate No. 2, on which the Bank had relied in originally extending credit to Hines; and, (ii) Hines had fraudulently procured Certificate No. 11 from TSG by representing that it was needed to replace Certificate No. 2. Once TSG learned that Certificate No. 11 was procured by Hines’ fraud, it was inevitable that TSG would void Certificate No. 11.

Travelers did not accept coverage, reasoning that:

  • The phony “Certificate No. 2” was not directly related to the Bank’s loss. The Bank had ascertained that Certificate No. 2 was a phony by March 2009, and had required Hines to replace it, which he did with Certificate No. 11. When the Bank refinanced Hines’ indebtedness in December 2009, it did so expressly on the basis of Certificate Nos. 7 and 11.
  • Certificate No. 11 was not a “Counterfeit” within the meaning of the Bond, because it was not an imitation purporting to be an authentic document. Rather, Certificate No. 11 was an authentic document, but lacked any intrinsic value because it had been procured by Hines’ misrepresentations to TSG.

The Decision

The U.S. District Court had accepted Travelers’ position with respect to both certificates and had granted summary judgment. On appeal to the Eleventh Circuit, the Bank challenged only the finding with respect to Certificate No. 11. The Eleventh Circuit rejected the Bank’s contention, holding that the distinction between counterfeit documents and fraudulently-procured, but authentic, documents was an essential limiting principle in the Bond coverage. The Eleventh Circuit’s reasoning is worth setting out in detail:

An attempt to deceive by means of a document that imitates the appearance of an authentic original is not the same as an attempt to deceive by means of false factual representations implicit in an authentic document. To conflate the two, as the Bank would have us do, would “obliterate elementary distinctions among the techniques of deceptions[,] … distinctions [which] are recognized in ordinary and commercial usage and … preserved in the bond.”


Here, … the falsity at issue “lies in the representation of facts contained in [Certificate No. 11] and not in the genuineness of [its] execution.” The Bond does not cover losses resulting from every document tainted by fraud. Instead, the Bond provides coverage for a subset of deception-based losses — those stemming from documents that imitate an original. The difference hinges on the nature of the underlying misrepresentation. While counterfeit documents deceive by misrepresenting authenticity, Certificate No. 11’s deception concerned a misrepresentation of value.


… there is no question that the document at issue was authentic – Certificate No. 11 was issued by TSG and numbered, dated, and signed by the appropriate officer just like every other stock certificate it issues; the problem, simply, was that because it was obtained under false pretenses, it had no value. [emphasis in original]


Bank of Brewton is a useful reminder of the distinction between counterfeit documents and documents which, although intrinsically worthless, are nevertheless authentic. The Eleventh Circuit’s decision will be helpful in rebutting creative arguments which seek to generate coverage by expanding the definition of “Counterfeit” to encompass genuine documents which contain misrepresentations, or which are otherwise tainted by fraud.

Bank of Brewton v. The Travelers Companies, Inc., 2015 WL 508036 (11th Cir.)