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]

Conclusion

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.)