Wednesday, February 16, 2011

FYI: 10th Cir Holds Financial Institution Bond Only Applied to Losses Due to Forgery or Alteration of Guaranty

The United States Court of Appeals for the Tenth Circuit recently held
that a provision in a Financial Institution Bond was unambiguous, and
applied to protect against loss resulting from extending credit based on a
good faith reliance on a corporate guaranty only where that Guaranty was
forged or altered. A copy of the opinion is attached.

A bank extended credit to a customer, which was secured by a corporate
guaranty. After the customer defaulted, the corporate guaranty also
failed. The bank obtained a judgment against the guarantor, but it was

The bank then sought recovery from its insurer under a Financial
Institution Bond, asserting that Insuring Agreement (E)(1) protected it
from a loss resulting from having extended credit based on its good faith
reliance on a corporate guaranty. The insurer refused to indemnify the
bank based on the qualifying language following (E)(1)(i), which it
claimed applied to all of Insuring Agreement (E)(1) and limited recovery
under Insuring Agreement (E)(1) to documents that contained a forged
signature, that were altered, or that were lost or stolen. The bank sued
alleging breach of the Financial Institution Bond and for breach of the
duty of good faith and fair dealing. Following cross-motions for summary
judgment, the district court found in favor of the insurer.

In upholding the ruling of the lower court, the United States Court of
Appeals for the Tenth Circuit noted that the issue revolved around the
meaning of the language in the bond and whether it was ambiguous. The
bond began with an introductory sentence, which stated: "The Underwriter .
. .agrees to indemnify the Insured for:" The bond then proceeds to set
out Insuring Agreements (A) through (F).

Insuring Agreement (E)(1) states as follows:


(E) Loss resulting directly from the Insured having, in good faith,
for its own account or for the account of others,

(1) acquired, sold or delivered, or given value, extended credit or
assumed liability, on the faith of, any original

* * *

(f) Corporate, partnership or personal Guarantee,
(g) Security Agreement,
(h) Instruction to a Federal Reserve Bank of the United States, or
(i) Statement of Uncertificated Security of any Federal Reserve Bank
of the United States


(i) bears a signature of any maker, drawer, issuer, endorser,
assignor, lessee, transfer agent, registrar, acceptor, surety, guarantor,
or of any person signing in any other capacity which is a Forgery, or
(ii) is altered, or
(iii) is lost or stolen[.]

In ruling in favor of the insurer, the appellate court found that Section
(E)(1) subsections (i)-(iii) unambiguously applied to (E)(1)(a)-(i), and
not just (E)(1)(i) as the bank claimed. Thus, it applied to (E)(1)(f)
under which the bank claimed to be entitled to indemnification. Because
there was no forgery, the appellate court held that the bank was not
entitled to indemnification.

The appellate court also held that there was no ambiguity created by the
fact the bond already included an Insuring Agreement (D), which provided
indemnification for forgeries and alterations. The court found that this
did not create an ambiguity as "Insuring Agreement (D) and Insuring
Agreement (E) cover[ed] different types of forgeries and alterations."

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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