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Oxford Bank and Trust v. Hartford Accident and Indemnity Co.

July 21, 1998


The opinion of the court was delivered by: Justice Rathje delivered the opinion of the court:


Appeal from the Circuit Court of Du Page County.

No. 92--MR--428

Honorable John W. Darrah, Judge, Presiding.

Defendant, Hartford Accident & Indemnity Company, appeals from the judgment of the circuit court of Du Page County, which found defendant liable on the claim made pursuant to an indemnity bond by plaintiff, Oxford Bank & Trust Company, f/k/a Addison State Bank. Said liability totaled $251,459.93, a sum which included statutory prejudgment interest.

On appeal, defendant raises four arguments, namely, (1) that the subject loss suffered by plaintiff was not covered because the acts of bank official, James Porcaro, were neither dishonest nor fraudulent and Porcaro did not have manifest intent to cause harm to defendant; (2) that the loss was not covered because it arose out of a loan and, further, that Porcaro did not act in collusion with Kenneth Vincenzo, Sr., nor did he obtain a financial benefit with a value of $2,500; (3) that the trial court erred in granting plaintiff's motion for summary judgment as to defendant's second affirmative defense; and (4) that plaintiff's loss is excluded under the exclusion governing uncollected deposits.

The following facts are taken from the record on appeal. Defendant issued a fidelity bond to plaintiff that was in effect from January 1, 1989, to January 1, 1992. This fidelity bond agreement provided defendant with coverage for:

"(A) Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others. Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:

(a) to cause the Insured to sustain such loss, and

(b) to obtain financial benefit for the Employee or another person or entity.

However, if some or all of the Insured's loss results directly or indirectly from Loans, that portion of the loss is not covered unless the Employee was in collusion with one or more parties to the transactions and has received, in connection therewith, a financial benefit with a value of at least $2,500.00." Further, the bond defines loan as:

" 'all extensions of credit by the Insured and all transactions creating a creditor relationship in favor of the Insured and all transactions by which the Insured assumes an existing creditor relationship.' "

Also, the subject bond contained the following pertinent exclusions:

"(e) loss resulting directly or indirectly from the complete or partial nonpayment of, or default upon, any Loan or transaction involving the Insured as a lender or borrower, or extension of credit, including the purchase, discounting or other acquisition of false or genuine accounts, invoices, notes, agreements or Evidences of Debt, whether such Loan, transaction or extension was procured in good faith or through trick, artifice, fraud or false pretenses, except when covered under insuring Agreement (A), (D), or (E).

(o) loss resulting directly or indirectly from payments made or withdrawals from a depositor's account involving items of deposit which are not finally paid for any reason, including but not limited to Forgery or any other fraud, except when covered under Insuring Agreement (A)."

In October 1991, James Porcaro was hired by plaintiff to the position of vice-president, cashier, and chief operating officer. His primary duty was to run plaintiff's day-to-day banking operations, including the overseeing of checking accounts. When hired by plaintiff, Porcaro had been working in the banking business for 22 years. From his experience, Porcaro knew the warning signs that a customer was involved in a check-kiting scheme.

Testimony at trial described the nature of check kiting, which occurs when a person draws on an account at one bank, deposits the checks in another bank, and then secures the cash before the checks' actual collection by the first bank. Further, check kiting involves the continual movement of funds from bank to bank. Due to such a scheme, the check-kiting customer's account will show a positive balance due to deposits into the account. However, these are "ledger balances" which do not represent actual funds in the subject account. If the scheme is successful, a bank will be left with an overdraft balance.

Early in Porcaro's tenure with plaintiff he had prepared a report on a prior check-kiting scheme, which was forwarded to the Federal Bureau of Investigation. Because of this prior scheme, plaintiff's president, Ronald Peterson, had expressly directed Porcaro to be on the alert for evidence of possible check kiting involving any of plaintiff's accounts. Peterson instructed Porcaro to review personally each large check over $2,500, along with the check's endorsement. This daily inspection was necessary to determine if a check-kiting scheme was afoot. Further, Peterson told Porcaro to inform him of any actual or potential check kites in any customer's account. Without Peterson's prior approval, Porcaro was not authorized to approve any overdrafts exceeding $25,000.

Prior to his employment with plaintiff, Porcaro had been employed for 10 years as vice-president and cashier of Lakeside Bank (Lakeside). During his time at Lakeside, Porcaro came to know a Lakeside customer by the name of Kenneth Vincenzo, Sr. (Vincenzo), who ran an automobile auction business. Vincenzo had a collections account, which meant that Lakeside, in a fiduciary role, held title to automobiles for its sellers. Typically, prior to the issuance of the seller's title, Lakeside had to receive the actual funds collected from the customer. When it had received the money, Lakeside would then release the title to the automobiles and pay the seller with an official bank check or cashier's check.

While at Lakeside, Porcaro authorized the release of automobile titles to Vincenzo and, in one instance, issued a Lakeside check to Vincenzo in excess of $80,000 against uncollected funds. As a result of this transaction, Lakeside lost over $30,000. Following this incident, Lakeside's executive vice-president, Norman Arnos, told Porcaro that he believed Porcaro's behavior in this incident was very unusual. Arnos subsequently reported Porcaro's involvement in this incident to Lakeside's executive committee.

After being hired by plaintiff, Porcaro informed Vincenzo that he was working for plaintiff. On January 18, 1991, Vincenzo opened an account with plaintiff. Based on plaintiff's practice, Porcaro was the bank officer in charge of this account. Vincenzo also maintained an account at Old Second Community Bank of North Aurora (Old Second).

In the first month after opening the subject account, Vincenzo deposited approximately $43,000 into the subject account from his Old Second account. Within a short time, overdrafts in Vincenzo's account with plaintiff began to occur. Gloria Distel, plaintiff's bookkeeping manager, who reported directly to Porcaro, informed him of the overdrafts, asking whether to approve or deny the overdraft. On each occasion, Porcaro told Distel to approve the overdraft; he advised her that "there would not be a problem."

In February 1991, Vincenzo deposited approximately $362,000 into his account with plaintiff from his accounts at other banking institutions. During this month, there were separate overdrafts on the subject account. At the same time, Vincenzo was moving large checks in amounts up to $65,000 to and from his Old Second account.

Further, in March 1991, Vincenzo, from a variety of his other accounts, deposited $1,628,800 into his account with plaintiff. Numerous large checks, including one for $156,000, were drawn on Vincenzo's Old Second account and deposited in the subject account. At the same time, virtually identical large withdrawals were made from the subject account payable either to Vincenzo or one of his businesses, which were then deposited in his Old Second account. In this month, Porcaro approved of overdrafts on the subject account of $17,152.91, $54,312.07, $113,955.54, $57,979.07, $6,904.72, and $140,808.52. At this time, Distel told Porcaro that the overdrafts on Vincenzo's account were "suspicious." ...

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