United States District Court, N.D. Illinois, Eastern Division
THE FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver for PARK NATIONAL BANK, Plaintiff,
RLI INSURANCE COMPANY, Defendant
For The Federal Deposit Insurance Corporation, receiver, Park National Bank, Plaintiff: Debra Devassy Babu, LEAD ATTORNEY, Askounis & Darcy, P.C., Chicago, IL; Douglas A. Black, PRO HAC VICE, Mary L. Wolff, Wolff and Ardis, P.C., Memphis, TN.
For RLI Insurance Company, Defendant: Christopher M. Kahler, Regina A Ripley, Sara H. Gronkiewicz-Doran, Scott L. Schmookler, Gordon & Rees LLP, Chicago, IL.
MEMORANDUM OPINION AND ORDER
Milton I. Shadur, Senior United States District Judge.
This case presents an insurance dispute between Federal Deposit Insurance Corporation (" FDIC" ), as receiver for Park National Bank (" Park National" ), and RLI Insurance Company (" RLI" ). FDIC suffered losses stemming from loans that were purportedly collateralized by equipment leases -- leases that ultimately proved to contain forged signatures and were therefore worthless. FDIC unsuccessfully sought reimbursement for those losses under a financial institution bond (" the Bond" ) issued by RLI and, after RLI denied that the losses were covered, commenced this action for breach of contract.
Both sides largely agree in their factual accounts, and accordingly they have filed cross-motions for summary judgment under Fed.R.Civ.P. (" Rule" ) 56. Because the few factual disagreements between the parties do not rise to the level of materiality, the issue is appropriate for resolution in this procedural posture. For the reasons described below, FDIC's loss comes within the scope of the Bond's coverage and FDIC therefore prevails on its motion.
Summary Judgment Standards
Every Rule 56 movant bears the burden of establishing the absence of any genuine issue of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). For that purpose courts consider the evidentiary record in the light most favorable to nonmovants and draw all reasonable inferences in their favor (Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002)). Courts " may not make credibility determinations, weigh the evidence, or decide which inferences to draw from the facts" in resolving motions for summary judgments. (Payne v. Pauley, 337 F.3d 767, 770 (7th Cir. 2003)). But a nonmovant must produce more than " a mere scintilla of evidence" to support the position that a genuine issue of material fact exists (Wheeler v. Lawson, 539 F.3d 629, 634 (7th Cir. 2008)) and " must come forward with specific facts demonstrating that there is a genuine issue for trial" (id.). Ultimately summary judgment is warranted only if a reasonable jury could not return a verdict for the nonmovant (Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
As with any summary judgment motion, this Court accepts each nonmovant's version of any disputed facts, but only so long as it is supported by record evidence. Where as here cross-motions for summary judgment are involved, the principles of Rule 56 demand a dual perspective that this Court has sometimes described as Janus-like: As to each motion the nonmovant's version of any disputed facts must be credited, an arrangement that sometimes causes the denial of both motions. In this case that unproductive result has been avoided because the underlying material facts are not in dispute. Instead the parties differ as to the scope of coverage provided by the Bond and as to whether the undisputed facts fall within that scope, issues to which this Court can competently speak in the current posture.
Forged Lease Transactions
This case concerns a series of nested transactions. First of those is a leasing arrangement between equipment lender Sysix Financial, LLC (" Sysix" ) and Moody Bible Institute of Chicago (" Moody" ). On December 14, 2001 Moody's Vice President Robert L. Gunter (" Gunter" ) executed Master Lease Agreement No. 1121 (" Master Lease" ) between Moody and Sysix (F. St. ¶ 21) -- an undertaking by Moody to lease equipment from Sysix in the future, with each transaction to be memorialized in a separate Lease Schedule negotiated and executed by Sysix and Moody.
Among its provisions, the Master Lease specified that each of those Lease Schedules would incorporate by reference the terms of the Master Lease and " when signed by the parties shall constitute a separate enforceable lease" (RLI Ex. G at 1).
Two Lease Schedules are of interest here: Lease Schedule S080 (" First Lease" ) dated March 10, 2008 and Lease Schedule S084 (" Second Lease" ) dated December 8, 2008 (F. St. ¶ ¶ 24, 39). Both Lease Schedules identified equipment that Sysix would lease to Moody and acknowledged Moody's receipt of that equipment, specified a monthly rent and described the rights and responsibilities of the parties in case of default (F. St. ¶ ¶ 24-28, 39-43).
Both Lease Schedules were purportedly signed by Sysix President John Sheaffer (" Sheaffer" ) and by Gunter (F. St. ¶ ¶ 29, 44). In both cases, however, Sheaffer had forged Gunter's signature and fabricated the entire leasing transaction (F. St. ¶ ¶ 30, 45). Indeed, Moody never received any of the equipment described in the forged Lease Schedules (RLI St. ¶ 24).
Park National's Loans to Rockwell
Those fraudulent Leases served as the basis for the loans at issue in this case. In 2008 Rockwell Financial Group, LLC (" Rockwell" ) approached Park National, a national bank headquartered in Chicago and insured by FDIC (F. St. ¶ ¶ 1-2), with a request to secure two loans (" the Loans" ) to finance the purported equipment leases between Sysix and Moody (F. R. RLI St. ¶ ¶ 13-14). Those two Loans were substantial: Park National paid out $2,978,334.68 on the First Loan and $1,131,989.75 on the Second Loan (F. St. ¶ ¶ 32, 47). Each Loan corresponded to one of the Lease Schedules supposedly executed by Sysix and Moody. On each Loan Sysix assigned to Rockwell all its right, title and interest in the corresponding Lease -- including the right to receive rental payments -- and Rockwell in turn assigned its right, title and interest in that Lease to Park National as collateral. Repayment of the Loans was to be made in monthly installments, with the amount of each installment paralleling the monthly rent for each Lease (see F. St. ¶ ¶ 26, 32, 41, 47). After it received lease payments from Moody on the Leases, Sysix was then to make payments directly to Park National (F. St. ¶ 56).
Park National had funded an earlier loan involving a lease financing arrangement to which Sysix was a party, and it had been conducting business with Rockwell for approximately six years before the First and Second Loans (F. St. ¶ ¶ 60-61). Park National's approval of the Loans at issue here was based on loan presentations made to its officials -- presentations that included financial statements as well as a summary of Moody's financial position (F. St. ¶ ¶ 58-59). But those presentations did not include research into the authenticity of the Leases or the existence of the leased equipment -- an inquiry that was later undertaken (before the actual funding of the Loans) by Park National employees Luisa Helmlinger and Mary Herschberg (RLI St. ¶ 25; F. St. ¶ 64). Based on the loan presentations and Luisa Helmlinger's approval,
the Loans were funded in 2008 (F. St. ¶ ¶ 37, 52).
Default and Purchase Agreement
All went smoothly until July 2009, at which point payment on the Loans ceased (F. St. ¶ 68). Park National demanded payment from Sysix and thereafter filed suit against Moody and Rockwell (F. St. ¶ 70).
Soon after, the Office of the Comptroller of the Currency closed Park National, and FDIC was named receiver of the bank (F. St. ¶ 12). FDIC then entered into a Purchase and Assumption Agreement (" Purchase Agreement" ) with U.S. Bank National Association (" U.S. Bank" ) (F. St. ¶ 12). Purchase agreements are used by FDIC to minimize the cost of bank liquidations and to maintain public confidence in the national banking system (F. St. ¶ 71). Under the Purchase Agreement U.S. Bank acquired both the assets and liabilities of Park National, but FDIC was required to pay U.S. Bank 80% of the loss on each commercial loan, with U.S. Bank absorbing the remaining 20% of such loss (F. St. ¶ 72). In accordance with that arrangement FDIC transferred the Loans to U.S. Bank and paid U.S. Bank 80% of what FDIC characterizes as the total loss on each loan -- $1,560,694.50 on the First Loan and $776,270.78 on the Second Loan (F. St. ¶ ¶ 73-74).
Financial Institution Bond
All that past history is merely prologue to the present dispute between FDIC and RLI. Soon after learning of the forgery Park National sought coverage of its loss under a financial institution bond (" the Bond" ) that had been issued by RLI in favor of Park National. Financial institution bonds (a more modern name for what used to be called by the alliterative label " bankers blanket bonds" ) offer bundled indemnification coverage for various specific risks, typically including financial loss from forgeries, employee dishonesty and theft (see 9A John and Jean Appleman, Insurance Law and Practice § 5701, at 377-78 (1981 and 2010 Supp.)). At issue here is the coverage provided by Insuring Agreement E of the Bond, which protects an insured bank against losses resulting from credit extended on the faith of certain documents that contain forged signatures (F. Ex. 4 at 3):
(E) Loss resulting directly from the Insured having, in good faith, for its own account or for the account of others,
(1) . . . extended credit or assumed liability, on the faith of any Written, Original
(a) Certificated Security,
(b) Document of Title,
. . . or
(h) Security Agreement,
which (i) bears a handwritten signature of any . . . lessee . . . or of any other person whose signature is material to the validity or enforceability of the security, which is a Forgery. . . .
Insuring Agreement E also requires " Actual physical possession" of the Security Agreement by the Insured as " a condition precedent to the Insured's having relied on the faith of such items" (id.).
On October 6, 2009 Park National gave timely notice to RLI of its discovery of a potential loss caused by the Rockwell Loans (F. St. ¶ 11). After FDIC was appointed as Receiver for Park National and transferred the Loans to U.S. Bank pursuant to the Purchase Agreement, U.S. Bank settled the action against Rockwell (F. St. ¶ 70). FDIC then filed this action to seek coverage under the Bond for 80% of what it calculates to be the remaining loss after
settlement (F. St. ¶ ¶ 76-77).
Interpreting Financial Institution Bonds
This Court has ample guidance on which to draw in interpreting the scope of coverage provided by the Bond. That is because the Bond at issue here is an exemplar of Standard Form No. 24, which has been exhaustively interpreted over the past decades (Universal Mortgage Corp. v. Wurttembergische Versicherung AG, 651 F.3d 759, 761 (7th Cir. 2011)):
A bankers blanket bond, sometimes called a fidelity bond or financial institution bond, offers bundled indemnification coverages for various specific risks, typically including financial loss from forgeries, employee dishonesty, and theft. See 9A John Alan Appleman & Jean Appleman, Insurance Law and Practice § 5701, at 377-78 (1981 & Supp. 2010). The most common bankers blanket bond is the Standard Form No. 24, which has a well-chronicled history. See, e.g., Private Bank & Trust Co. v. Progressive Cas. Ins. Co., 409 F.3d 814, 816 (7th Cir. 2005), and sources cited below. Over the last century, nearly every term in the Form 24 bond has been developed in reaction to court interpretations of prior versions of the bond. As a result, certain terms within the bond carry nuanced and well-established meanings. Peter I. Broeman, An Overview of the Financial Institution Bond, Standard Form No. 24, 110 Banking L.J. 439, 445 (1993).
One noteworthy feature of financial institution bonds is that the normal rule of interpretation governing insurance contracts, under which any ambiguity is construed in favor of the insured, cannot be invoked by FDIC. As First State Bank of Monticello ...