First State Bank of Monticello v. Ohio Casualty Insurance Compa

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 06-3685 & 06-3794
F IRST S TATE B ANK OF M ONTICELLO,
Plaintiff-Appellee,
Cross-Appellant,
v.
O HIO C ASUALTY INSURANCE C OMPANY,
Defendant-Appellant,
Cross-Appellee.
Appeals from the United States District Court
for the Central District of Illinois.
No. 04 C 2089—Harold A. Baker, Judge.
A RGUED JANUARY 9, 2008—D ECIDED F EBRUARY 5, 2009
Before W OOD , S YKES, and T INDER, Circuit Judges.
S YKES, Circuit Judge. This insurance-coverage dispute
arises from a fraudulent scheme perpetrated against First
State Bank of Monticello causing a $307,000 loss. James
Stilwell repeatedly exchanged bad checks for the bank’s
2 Nos. 06-3685 & 06-3794
money orders—instruments backed by the resources of the
bank and as good as cash. The bank filed a claim for the
loss with its insurer, Ohio Casualty Insurance Company,
under a Standard Form No. 24 Financial Institution
Bond. Ohio Casualty denied the claim and this lawsuit
followed. The district court held the loss was covered
and granted summary judgment in favor of First State
Bank. Ohio Casualty appealed; the bank cross-appealed
on the issue of its entitlement to prejudgment interest.
We affirm. Stilwell’s scheme was a covered risk under
Insuring Agreement B of the bond, which covers losses
from theft or false pretenses occurring on the bank’s
premises. The bank’s loss resulted “directly from”
Stilwell’s “on-premises” fraud and therefore came within
the coverage specified in this provision of the bond. We
also conclude that Exclusion (h), excluding losses “caused
by an employee,” does not apply. Finally, the bank’s tardy
application for statutory prejudgment interest, first made
in the district court in a motion to alter or amend the
judgment under Rule 59(e) of the Federal Rules of Civil
Procedure, was brought too late to entitle it to an award.
I. Background
For several months in 2002 and 2003, James Stilwell of
Atwood, Illinois, carried on an extensive scheme of writing
and cashing worthless checks. First State Bank in nearby
Monticello was his victim. Stilwell was a prominent
entrepreneur who owned several businesses and some
development property in central Illinois, but he was also
Nos. 06-3685 & 06-3794 3
illiquid.1 To acquire cash, Stilwell devised a scheme
whereby he (or more commonly, one of his associates)
would draw checks on one of his accounts at Tuscola
National Bank and tender them to First State Bank in
return for bank money orders, instruments backed by the
resources of First State Bank. But Stilwell’s account at
Tuscola National Bank was empty, or less than empty;
Tuscola National Bank allowed him to maintain
negative balances for months at a time, returning some
items and paying others that Stilwell directed to be paid
when he put funds into the account after the fact. So
First State Bank unwittingly allowed Stilwell to exchange
his worthless checks for the bank’s money orders, giving
him access to immediately available funds. Stilwell
carried out this scheme for three months at the end of
2002 and into early 2003, tendering checks daily to First
State Bank through January 24, 2003. Over that time
First State Bank “sold” Stilwell 130 bank money orders
for a total of $1,945,672.16.
Cashing checks for noncustomers was against the
bank’s policy (Stilwell had no accounts at First State
Bank), but when bank officers questioned Stilwell about
the transactions, he concocted a cover story that he was
conducting a year-end tax maneuver recommended by
his accountant to reduce his tax liability on a future sale
of land. On one occasion, to quell the doubts of a bank
1
James Stilwell’s financial activities are at issue in another
insurance-law case decided today. See Stilwell v. Am. Gen. Life
Ins. Co., Nos. 07-2613 & 07-2684.
4 Nos. 06-3685 & 06-3794
officer, Stilwell dialed Tuscola National Bank’s automated
banking system and handed the officer the phone,
allowing her to listen to a statement of the current
balance in his—or what he claimed was his—account. So
while some at First State Bank expressed concerns, others
believed him, and the bank continued to accept his busi-
ness based on his facade of being a successful business-
man. The scheme collapsed on January 24, 2003, when
Tuscola National Bank froze Stilwell’s accounts. First
State Bank was left holding worthless checks totaling
$307,000 from the last three days of the scheme.
First State Bank and Stilwell entered into an agreement
requiring Stilwell to repay the bank in a series of install-
ments and to admit that he had engaged in unlawful
conduct. But Stilwell died before fulfilling the terms of that
agreement. First State Bank filed a claim with its insurer,
Ohio Casualty, after one of Stilwell’s corporations filed for
bankruptcy, preventing the bank from recovering its loss
from the corporation. Ohio Casualty denied the bank’s
claim, asserting that Stilwell’s scheme was not covered
under the bond’s “on-premises” fraud coverage (Insuring
Agreement B of the Standard Form No. 24 Financial
Institution Bond) or was excluded because it fell under
Exclusion (h) of the bond, which excluded losses “caused
by an employee.”
First State Bank then brought this lawsuit in state court,
which Ohio Casualty removed to federal court based on
the parties’ diverse citizenship. On cross-motions for
summary judgment, Ohio Casualty asserted several
grounds for noncoverage. It claimed that the bank did not
Nos. 06-3685 & 06-3794 5
suffer a “loss” as that term is understood in the bond; or if
there was a loss, it did not “result directly from” Stilwell’s
conduct; or if the loss was attributable to Stilwell’s scheme,
the failure of the bank’s employees to follow bank policy
was an intervening and the predominant cause of the loss,
removing coverage under Exclusion (h) of the bond for
losses “caused by an employee.” The district court rejected
these arguments, granted First State Bank’s motion, and
awarded judgment to the bank. First State Bank then
moved to alter or amend the judgment under Rule 59(e),
asking the court to clarify the amount of the award and to
add statutory prejudgment interest. The district court
agreed to clarify the award amount in the judgment
($292,000—the amount of the loss less the deductible), but
denied First State Bank’s request to add prejudgment
interest to the award. Ohio Casualty appealed the sum-
mary judgment, and First State Bank cross-appealed the
denial of its Rule 59(e) motion for prejudgment interest.
II. Discussion
We review the district court’s grant of summary judg-
ment de novo, and because the district court had cross-
motions for summary judgment before it, “we construe
all facts and inferences therefrom ‘in favor of the party
against whom the motion under consideration is
made.’ ” United Air Lines, Inc. v. HSBC Bank, USA (In re
United Air Lines, Inc.), 453 F.3d 463, 468 (7th Cir. 2006)
(quoting Kort v. Diversified Collection Servs., Inc., 394
F.3d 530, 536 (7th Cir. 2004)). Summary judgment is
appropriate if “there is no genuine issue as to any material
6 Nos. 06-3685 & 06-3794
fact and . . . the movant is entitled to judgment as a matter
of law.” FED. R. C IV. P. 56(c). Illinois law, the parties agree,
governs this case.
We review the interpretation of a fidelity bond de
novo. Private Bank & Trust Co. v. Progressive Cas. Ins. Co.,
409 F.3d 814, 816 (7th Cir. 2005) (Illinois law). A bond “that
contains no ambiguity is to be construed according to
the plain and ordinary meaning of its terms, just as
would any other contract.” Id. (internal quotation marks
omitted); see also RBC Mortgage Co. v. Nat’l Union Fire Ins.
Co., 812 N.E.2d 728, 734 (Ill. App. Ct. 2004). Standard
fidelity bonds are drafted by sophisticated parties (repre-
sentatives of the banking and insurance industries);
therefore, the traditional rule of construing any am-
biguity in favor of coverage does not apply. First Nat’l
Bank of Manitowoc v. Cincinnati Ins. Co., 485 F.3d 971, 977
(7th Cir. 2007); RBC Mortgage Co., 812 N.E.2d at 734. The
bond that Ohio Casualty sold to First State Bank was a
standard financial-institution bond that contained an
“on-premises” clause generally covering fraudulent acts
occurring on the bank’s physical premises.
The standard financial-institution bond is a unique
insurance instrument with a long and detailed history.
Some of it bears repeating here because part of what
makes the bond unique is that nearly every provision
“has been developed in response to and tested by case
law.” J. Kelly Reyher, A Brief Review of the Financial Institu-
tion Bond Standard Form No. 24 and Commercial Crime
Policy, 563 PLI/Lit 57, PLI Order No. H4-5259, 61 (May
1997). The Standard Form No. 24 Financial Institution
Nos. 06-3685 & 06-3794 7
Bond is the latest incarnation of a series of bonds once
known as “banker’s blanket bonds.” First Nat’l Bank of
Manitowoc, 485 F.3d at 977-78; see also 9A JOHN A LAN
A PPELMAN & JEAN A PPELMAN, INSURANCE L AW AND P RAC-
TICE § 5701, at 375-76 (1981); Peter I. Broeman, An Overview
of the Financial Institution Bond, Standard Form No. 24, 110
B ANKING L.J. 439, 442-43 (1993). These bonds were
first developed in response to the uniform contract mar-
keted by Lloyd’s of London, which was the only contract
to provide fidelity, theft, burglary, holdup, and other
types of coverage in one contract. See Private Bank, 409
F.3d at 816. The Surety Association of America and the
American Bankers Association worked together in 1916
to draft their first bond, the Standard Form No. 1 Banker’s
Blanket Bond, to compete with the uniform contract
offered by Lloyd’s. Id.; see also Edward G. Gallagher et al.,
A Brief History of the Financial Institution Bond, in F INANCIAL
INSTITUTION B ONDS 7 (2d ed. Duncan L. Clore ed., 1998).
Today, Standard Form No. 24 is the descendant of that
first bond, containing six Insuring Agreements (Agree-
ments A-F). In this case, we are concerned with Insuring
Agreement B of the Standard Form No. 24 (1986 Revision)
that Ohio Casualty sold to First State Bank.2 Agreement B
is the “on-premises” fraud clause of the bond. Its relevant
portion provides as follows:
2
Because the standard bond is sometimes modified by the
parties and various iterations of it are in use, it is important to
determine which version of the bond is under consideration.
Caselaw interpreting other versions may be unhelpful or
irrelevant to a court’s interpretation of the bond. See First Nat’l
Bank of Manitowoc, 485 F.3d at 977.
8 Nos. 06-3685 & 06-3794
The Underwriter . . . agrees to indemnify the Insured
for:
(B)(1) Loss of Property resulting directly from . . .
(b) theft, false pretenses, common-law or
statutory larceny, committed by a person
present in an office or on the premises of the
Insured while the property is lodged or depos-
ited within offices or premises located any-
where.
Ohio Casualty does not dispute that Stilwell’s fraudulent
conduct (or that of his associates) was committed on the
bank’s premises. It argues that First State Bank did not
incur a “loss . . . resulting directly from . . . false pretenses.”
The first part of Ohio Casualty’s argument is that First
State Bank did not, in fact, suffer a loss because it received
a valid and enforceable instrument—namely, Stilwell’s
check drawn on his (empty) account at Tuscola National
Bank—in exchange for its money order. If First State
Bank incurred any loss, Ohio Casualty argues that it would
have occurred later when First State Bank was unable to
collect on Stilwell’s check. That, Ohio Casualty asserts,
would not have been a covered loss because that event
would neither have taken place on First State Bank’s
premises nor “resulted directly from” any false pretenses.
Under Illinois law, and in most jurisdictions, a loss is
an “actual depletion of bank funds”; bookkeeping or
theoretical losses are not covered by the financial-institu-
tion bond. RBC Mortgage Co., 812 N.E.2d at 733; see also
Reserve Ins. Co. v. Gen. Ins. Co. of Am., 395 N.E.2d 933, 939
(Ill. App. Ct. 1979); Private Bank, 409 F.3d at 817 (Illinois
Nos. 06-3685 & 06-3794 9
law); Cincinnati Ins. Co. v. Star Fin. Bank, 35 F.3d 1186, 1191
(7th Cir. 1994) (Indiana law) (requiring an actual loss
instead of merely a bookkeeping or theoretical loss); FDIC
v. United Pac. Ins. Co., 20 F.3d 1070, 1080 (10th Cir. 1994)
(federal law) (the bond does not cover “[b]ookkeeping or
theoretical losses, not accompanied by actual withdrawals
of cash or other such pecuniary loss”); William T. Bogaert
& Andrew F. Caplan, Loss and Causation Under the Financial
Institution Bond, in F INANCIAL INSTITUTION B ONDS, supra,
at 385-87. First State Bank’s loss was such an “actual loss.”
It is true that First State Bank did not experience a loss
at the precise moment Stilwell exchanged his checks for
the bank’s money orders; although his account was
empty, it was not certain that the checks would be
returned unpaid, as evidenced by the fact that Tuscola
National Bank had paid some of Stilwell’s earlier checks
despite the negative balance in his account. At the
moment of the exchange, any loss from acquiring Stilwell’s
checks was merely theoretical. But First State Bank experi-
enced an actual loss when Tuscola National Bank refused
to honor Stilwell’s checks. Once it did so, First State Bank
necessarily had fewer available assets. That the act of
nonpayment occurred “off premises” is of no moment.
Insuring Agreement B requires only that the false pretenses
be committed by a person on First State Bank’s premises,
and that’s exactly what happened here. (We will defer
for a moment the question of whether the bank’s loss
resulted “directly from” Stilwell’s on-premises fraud.)
Ohio Casualty also makes a weak argument that
Stilwell’s conduct did not amount to false pretenses.
10 Nos. 06-3685 & 06-3794
Illinois law considers the term “false pretenses” in the
financial-institution bond to include, at the least, deceptive
practices under the Illinois criminal statutes. First Nat’l
Bank of Decatur v. Ins. Co. of N. Am., 424 F.2d 312, 317 (7th
Cir. 1970) (citing what is now 720 ILL. C OMP. S TAT. 5/17-1
(2006)). Section 5/17-1(B)(d) of the Illinois Statutes makes
it a crime for an individual to “issue[] or deliver[] a
check . . . knowing that it will not be paid by the deposi-
tory. Failure to have sufficient funds . . . is prima facie
evidence that the offender knows that it will not be paid
by the depository, and that he or she has the intent to
defraud.” As we have noted, Stilwell knew that he did
not have any funds at Tuscola National Bank on the
dates in question. All along, he concocted and main-
tained an elaborate cover story to effectuate his scheme,
and there is no evidence in the record to overcome the
statutory presumption that Stilwell intended to defraud.
That he occasionally put money in his account at Tuscola
National Bank to cover some of his earlier bad checks
after the fact does not negate his intent to defraud. His
willingness to sign an installment repayment agreement
after his deception was uncovered is irrelevant.
We now return to Ohio Casualty’s argument that First
State Bank’s loss did not result “directly from” Stilwell’s
false pretenses. This language in the financial-institution
bond has undergone a series of revisions. Earlier
versions of the bond required merely a “loss through” a
covered event or transaction. Bradford R. Carver, Loss
and Causation, in H ANDLING F IDELITY B OND C LAIMS 363, 379
(2d ed. Michael Keeley & Sean Duffy eds., 2005). The 1986
version of the bond specifically modified the bond to
Nos. 06-3685 & 06-3794 11
require, in the case of some coverages, a loss “resulting
directly from” the covered peril. This was a response to
certain court interpretations that applied tort concepts
of causation to the bond’s loss-causation requirements. Id.Indeed, loss causation has been a sometimes-misunder-
stood concept in the caselaw interpreting financial-institu-
tion bonds. Even after the 1986 revision, some courts
have continued to look to proximate cause and other causa-
tion principles borrowed from tort law to decide loss-
causation issues under the financial-institution bond. See,
e.g., Resolution Trust Corp. v. Fid. & Deposit Co. of Md., 205
F.3d 615, 655 (3d Cir. 2000); Empire Bank v. Fid. & Deposit
Co., 828 F. Supp. 675, 679, aff’d 27 F.3d 333 (8th Cir. 1994);
Jefferson Bank v. Progressive Cas. Ins. Co., 965 F.2d 1274,
1282 (3d Cir. 1992); First Nat’l Bank of Louisville v. Lustig,
961 F.2d 1162, 1167-68 (5th Cir. 1992), amended by, No. 90-
3820, 1992 U.S. App. LEXIS 14873 (5th Cir. June 29, 1992);
Hanson PLC v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.,
794 P.2d 66, 73 (Wash. Ct. App. 1990). This approach is
misdirected; tort-causation concepts like proximate
cause, “substantial factor” causation, and intervening
cause are inappropriate here. In particular, the concept of
proximate cause is problematic in this context; proximate
cause is a shifting standard that draws the line of causa-
tion “because of convenience, of public policy, of a rough
sense of justice . . . . It is practical politics.” Palsgraf v. Long
Island R.R., 162 N.E. 99, 103 (N.Y. 1928) (Andrews, J.,
dissenting). Insurance-coverage cases are not concerned
with the philosophical social-duty underpinnings of tort
law. The action sounds in contract, and our task is to
12 Nos. 06-3685 & 06-3794
interpret the parties’ agreement. Justice (then Judge)
Cardozo explained the inapplicability of tort-causation
principles in this context nearly a century ago:
General definitions of a proximate cause give little aid.
Our guide is the reasonable expectation and purpose
of the ordinary business man when making an ordi-
nary business contract. It is his intention, expressed or
fairly to be inferred, that counts. There are times when
the law permits us to go far back in tracing events to
causes. The inquiry for us is how far the parties to
this contract intended us to go. . . .
The question is not what men ought to think of as a
cause. The question is what they do think of as a cause.
Bird v. St. Paul Fire & Marine Ins. Co., 120 N.E. 86, 87 (N.Y.
1918).
Accordingly, contract—not tort—principles apply to the
determination of loss causation; Illinois follows this rule.
See RBC Mortgage Co., 812 N.E.2d at 733-36 (rejecting
proximate-cause analysis of loss causation in financial-
institution bond context); Spearman Indus., Inc. v. St. Paul
Fire & Marine Ins. Co., 138 F. Supp. 2d 1088, 1100-01 (N.D.
Ill. 2001) (Illinois law); see also Bradford R. Carver, Loss
and Causation, supra, at 380; Maura Z. Pelleteri, Causation in
Loan Loss Cases, in L OAN L OSS C OVERAGE U NDER
F INANCIAL INSTITUTION B ONDS 258 (Gilbert J. Schroeder &
John J. Tomaine eds., 2007). Insuring Agreement B’s
coverage of losses resulting “directly from” on-premises
false pretenses means what it says. The bond’s “direct loss”
requirement “must be afforded its plain and ordinary
Nos. 06-3685 & 06-3794 13
meaning; ‘direct’ means ‘direct.’ ” RBC Mortgage Co., 812
N.E.2d at 736-37 (citation omitted).
We have already noted that the bank’s assets were
depleted as a result of Stilwell’s fraudulent money-order
transactions at the bank on January 22, 23, and 24, 2003.
The bank disbursed immediately available funds to
Stilwell; Stilwell’s account at Tuscola National Bank was
frozen and, in any event, empty; and the checks were
returned unpaid. This suffices to satisfy a common and
ordinary understanding of a loss resulting directly from
a fraud occurring on the bank’s premises. The slight gap
in time between the money-order transactions and the
nonpayment of the checks makes no difference; the loss
flowed directly from Stilwell’s on-premises fraud.
Ohio Casualty’s arguments about intervening or con-
tributing causes—such as Stilwell’s death, his corporation’s
bankruptcy, and the bank officers’ failure to follow bank
policy—do not make the bank’s loss from Stilwell’s
false pretenses any less direct. We have already explained
that tort concepts like contribution and intervening cause
do not apply. Those events or omissions, standing alone
or in combination, did not cause the bank’s loss in the
sense meant by the bond; nor do they operate to make
Stilwell’s on-premises fraud merely an “indirect” cause of
the bank’s loss. What is important is that without Stilwell’s
on-premises misconduct—without the false pretenses
under which he tendered his checks—First State Bank
would not have suffered a loss. First State Bank’s loss thus
resulted “directly from” Stilwell’s on-premises false
pretenses, and there is coverage under Insuring Agree-
ment B.
14 Nos. 06-3685 & 06-3794
All that remains is Ohio Casualty’s argument that
Exclusion (h) operates to exclude coverage. Exclusion (h)
is contained in Section 2 of the bond and applies to all six
Insuring Agreements. It excludes:
(h) loss caused by an Employee, except when covered
under Insuring Agreement (A) or when covered under
Insuring Agreement (B) or (C) and resulting directly
from misplacement, mysterious unexplainable disap-
pearance or destruction of or damage to Property . . . .
Ohio Casualty argues that First State Bank’s loss was
actually caused by its employees’ failure to follow bank
policy in accepting Stilwell’s checks and therefore falls
within Exclusion (h). This argument is based on an
overbroad reading of the exclusion. Stilwell’s on-
premises fraud was the actual and direct cause of the
bank’s loss; the bank employees’ failure to prevent the
loss does not trigger Exclusion (h). Ohio Casualty’s expan-
sive interpretation of Exclusion (h) would swallow
all—or nearly all—of the bond’s coverages because a
bank must necessarily operate through its employees. See
First Nat’l Bank of Manitowoc, 485 F.3d at 980-81. Indeed, if
the exclusion were applicable under the circumstances
present here, there might never be coverage for any on-
premises fraudulent transaction because all such transac-
tions are handled—at one level or another—by a bank
employee. See id. If we were to accept Ohio Casualty’s
interpretation of Exclusion (h), we would eviscerate
much of the coverage granted under the bond. Id.
On this point, Ohio Casualty relies most heavily on the
Eighth Circuit’s decision in Empire Bank, 27 F.3d at 335, but
Nos. 06-3685 & 06-3794 15
we reject the analogy. As we have noted, Empire Bank
imported a proximate-cause analysis from tort law, which
is inconsistent with Illinois law and the general rule in
this context. The case is also distinguishable. Empire
Bank’s employees knew that two customers were
engaged in a fraud; in fact, one supervisor aided in the
commission of that fraud. But the bank employees in this
case were unaware that Stilwell’s checks were written
against an account with a negative balance. Stilwell’s
fraud, not the bank employees’ failure to investigate,
caused First State Bank’s loss in the sense meant by the
bond; Exclusion (h) does not apply.3
We need only briefly address First State Bank’s argument
that it was entitled to statutory prejudgment interest. See
815 ILL. C OMP. S TAT. 205/2 (2006). The bank first re-
quested prejudgment interest in a motion to alter or amend
the judgment under Rule 59(e), having failed to raise the
issue in its earlier motion for summary judgment. An
award of prejudgment interest may be within the scope of
Rule 59(e), Osterneck v. Ernst & Whinney, 489 U.S. 169, 175-
78 (1989); Employers Ins. of Wausau v. Titan Int’l, Inc., 400
F.3d 486, 488 (7th Cir. 2005), but the rule may not be used
3
Ohio Casualty also cites Parks Real Estate Purchasing Group v.
St. Paul Fire & Marine Insurance Co., 472 F.3d 33, 48-49 (2d Cir.
2006), applying New York law and a so-called “efficient cause”
rule. Illinois has no similar rule in this context, and given
its rejection of proximate cause and other tort-causation princi-
ples in the interpretation of fidelity bonds, see RBC Mortgage
Co., 812 N.E.2d at 733-36, we doubt it would adopt the
Parks Real Estate approach.
16 Nos. 06-3685 & 06-3794
by “a party to complete presenting his case” to the district
court. In re Reese, 91 F.3d 37, 39 (7th Cir. 1996) (internal
quotation marks omitted); see also Uphoff v. Elegant Bath,
Ltd., 176 F.3d 399, 409-10 (7th Cir. 1999). “ ‘[P]rejudgment
interest, unlike post-judgment interest, normally is consid-
ered an element of the judgment itself, that is, of the relief
on the merits . . . .’ ” Uphoff, 176 F.3d at 410 (quoting Healy
Co. v. Milwaukee Metro. Sewerage, 60 F.3d 305, 308 (7th Cir.
1995)). So while we have no quarrel with First State Bank’s
contention that prejudgment interest may be a proper
subject for a Rule 59(e) motion, “so long as the require-
ments of Rule 59(e) have been complied with,” the bank
“should have requested the prejudgment interest prior to
judgment.” Id. The district court was entitled to conclude
that raising the issue of prejudgment interest for the first
time in a Rule 59(e) motion, after summary judgment was
entered, was too late.
A FFIRMED.
2-5-09