Friday, April 6, 2012

FYI: 7th Cir Rules Against Lender on Insurance Bond Claim for "Counterfeit" Certificate of Origin

The U.S. Court of Appeals for the Seventh Circuit recently held that an insurer was not liable to cover a bank's loss resulting from the bank's reliance on a fraudulent certificate of origin as part of the collateralization of a loan, where the loss did not result from reliance on a "counterfeit" within the plain language of the insurance bond.
A copy of the opinion is available at: 
Plaintiff lending bank ("Bank") extended a loan to a borrower for purposes of purchasing a motor home from the borrower's own dealership.  Pledging the motor home as security for the loan, the borrower allegedly presented to the Bank a certificate of origin for the motor home.  The borrower ultimately defaulted on the loan and, when the Bank sought to repossess the motor home, the Bank discovered that the specific motor home purportedly represented by the certificate of origin did not exist and that the certificate of origin was fabricated using a fictitious vehicle identification number. 
After discovering the fraud, the Bank sought to recover its loss through the Bank's insurance bond with defendant insurer ("Insurer").  The Bank claimed that the certificate of origin presented by the borrower was "counterfeit" and thus a covered loss under the bond.    The Insurer denied coverage, asserting that the insurance bond did not cover the particular fake certificate of origin because the certificate was not "counterfeit" as defined by the insurance bond.
The Bank filed suit in district court.  The parties filed cross motions for summary judgment.  Agreeing with the Insurer, the district court determined that the fraudulent certificate of origin was not "counterfeit" within the meaning of the insurance bond and granted summary judgment in favor of the Insurer.
The Bank appealed.  The Seventh Circuit affirmed, and ruled that the fraudulent certificate of origin was not "counterfeit" within the plain language of the insurance bond.
The applicable insurance bond defined the term "counterfeit" as "a written imitation of an actual, valid Original which is intended to deceive and to be taken as the Original."  Further, the bond in turn defined term "Original" as "the first rendering or archetype, and does not include photocopies or electronic transmissions . . . "
Noting that the terms in the applicable insurance bond have a long history of interpretation by the courts, the Seventh Circuit also noted that the applicable version of the insurance bond contained a definition of "counterfeit" that reflected case law requirements that a "counterfeit" document be an imitation of an actual, valid original. 
In so ruling, the Seventh Circuit rejected the Bank's argument that the fake certificate of origin was an imitation of an actual, valid certificate of origin, because the fake certificate merely imitated other certificates in general, but not the actual, original certificate of origin for the specific motor home purportedly used as the collateral.  The Court observed that the fake certificate was a complete fabrication bearing a fictitious vehicle identification number. 
The Seventh Circuit thus held that, because the fake certificate did not correspond to any actually existing certificate of origin and, as such, could not be an imitation "of an actual, valid Original," the fake certificate could not qualify as a "counterfeit" for purposes of the insurance bond. 
In so ruling, the Court also noted that the denial of coverage based on the nature of the fake certificate was consistent with the rationale for not insuring the risk of reliance on a document that purports to be something that never existed.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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