The Eleventh Circuit Court of Appeals recently issued an opinion in Bank of Brewton v. The Travelers Companies, Inc., 777  F.3d 1339 (11th Cir. February 9, 2015), addressing whether, under Alabama law, a duly authorized stock certificate procured under false pretenses constituted a “counterfeit” document triggering coverage under a financial institution bond.  The Court found that it did not.

The case arose out of several loans made by the Bank of Brewton to a customer named Hines.   As collateral, Hines had assigned to the bank certain shares of stock in a company named The Securance Group (“TSG”).  Hines first delivered a certificate representing 180 shares in TSG (“Certificate No. 2″), and then later delivered a second stock certificate for 180 more shares in TSG (Certificate No. 7), for a total of 360 shares as collateral.  In 2009, the bank discovered that Certificate No. 2 was a color copy rather than an original certificate.  When confronted, Hines claimed that he had lost the original, and he then solicited TSG to issue a replacement certificate after representing to TSG that Hines had lost and had not pledged or encumbered the original Certificate No. 2.   Based on Hines’ representations, TSG issued a new certificate (“Certificate No. 11″). Hines then delivered the duly issued Certificate No. 11 to the bank.  That same year, the bank consolidated all loans into one loan which were secured, in part, by the 360 shares in TSG (Certificate No. 7 and the newly issued Certificate No. 11).

In 2010, the bank discovered that Hines had actually pledged the original 180 shares represented by Certificate No. 2 to another bank.  Hines then defaulted on the loan and filed for bankruptcy.  The bank filed a claim under their financial institution bond issued by Travelers, a type of insurance coverage available to banks to insure against certain fraudulent dealings by employees and third parties.  Id. at 1340 n.1.  The bank contended that coverage was afforded for “loss resulting directly from the [Bank] having, in good faith, . . . extended credit . . . on the faith of [a certificated security], which is a Counterfeit.”  Id.  “Counterfeit” was defined as “an imitation which is intended to deceive and to be taken as an original.”  Id.

When Travelers did not pay, the bank brought suit.  The United States District Court for Southern District of Alabama granted summary judgment for Travelers, holding that there was no coverage because  (1) the bank did not suffer a loss based on Certificate No. 2 because the bank, after discovering it was a mere copy and not an original, relied instead on Certificate No. 11 as collateral; and (2) Certificate No. 11 was not a “counterfeit” because it was not an imitation purporting to be an authentic document — it was in fact authentic, but had simply been obtained under false pretenses.  Id. at 1341.

The Eleventh Circuit affirmed, noting the key distinction between fraudulently procured documents and “counterfeit” documents.  The Court explained that “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.”  Id. at 1343.  The falsity here was in the representation of facts in Certificate No. 11, not in the genuineness of its execution.  Id.  “While counterfeit documents deceive by misrepresenting authenticity, Certificate No. 11’s deception concerned a misrepresentation of value.”  Id. (italics in the original).  As such, the Court held that though Certificate No. 11 had no value, it “was an authentic document and thus not ‘counterfeit’ under the terms of the Bond.”  Id.

The Bank of Brewton decision, while perhaps not readily intuitive on its face, highlights the very particular coverage that is provided under a standard form financial institution bond.  Indeed, the Court felt compelled to write that a financial institution 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.”  Id. at 1341.

The Eleventh Circuit’s apparent view of recognizing limited coverage for forgeries can be seen in the Eleventh Circuit’s unpublished decision a month later in Metro Brokers v. Transportation Ins. Co., 2015 WL 925301 (11th Cir. March 5, 2015) (not selected for publication).  In Metro, the Eleventh Circuit upheld a denial of coverage under a “Fraud and Alteration” endorsement to an insurance policy issued to Metro,  The endorsement provided coverage for loss “resulting directly from ‘forgery’ or alteration of, on, or in any check, draft, promissory note, bill of exchange, or similar written promise, order or direction to pay a sum certain . . . ”  Id. at *2.  Thieves had logged into Metro’s bank accounts using stolen access ID’s and passwords and electronically transferred funds out of the accounts.  The Court agreed there was no coverage under the endorsement because, among other reasons, the unauthorized electronic fund transfers did not involve a check, draft, promissory note, bill of exchange or similar written promise, noting that electronic fund transfers are treated differently under federal and Georgia law than transfers made by paper instrument.  Id.  Further, there had been no “forgery,” which was defined as the “signing of the name of another person or organization with intent to deceive.”  Id.  The Metro Court held that the unauthorized use of access ID’s and passwords did not constitute the signing of the name of another person, explaining that ID’s and passwords are not “signatures” under the unambiguous terms of the policy.  Id.