Bank of Bozeman v. Bancinsure, Inc.

FILED
NOT FOR PUBLICATION NOV 19 2010

MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S . CO U RT OF AP PE A LS

FOR THE NINTH CIRCUIT

BANK OF BOZEMAN; DAKOTA No. 09-36088
WESTERN BANK; BANK OF
HAZELTON; BANK FORWARD, AKA D.C. No. 2:08-cv-00005-CSO
Security State Banµ of North Daµota;
WADENA STATE BANK; MCVILLE
STATE BANK, MEMORANDUM *

Plaintiffs - Appellants,

v.

BANCINSURE, INC., an Oµlahoma
corporation,

Defendant - Appellee.

Appeal from the United States District Court
for the District of Montana
Carolyn S. Ostby, Magistrate Judge, Presiding

Argued and Submitted October 6, 2010
Seattle, Washington

Before: KOZINSKI, Chief Judge, THOMAS and M. SMITH, Circuit
Judges.

A condition precedent to coverage under BancInsure's Financial Institution

*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
 Page 2

Bond (FIB) is '[a]ctual physical possession of [original security documents] by the

Insured . . . or [its] authorized representative.' Appellants (Participant Banµs) did

not present evidence that they or an authorized representative had 'actual physical

possession' of the original security documents before they extended credit. Cf.

BancInsure, Inc. v. Marshall Banµ, N.A., 453 F.3d 1073, 1075-76 (8th Cir. 2006).

The banµs that sold the loan participations (Lead Banµs) did not agree to act as the

Participant Banµs' 'authorized representatives' for purposes of the FIB. To the

contrary, the Loan Participation Agreements (LPAs) provide that the Lead Banµs

'maµe[] no warranty or representation of any µind or character relating to . . . the

[c]ollateral,' and that each Participant Banµ 'is relying upon its own due diligence,

credit investigation and credit analysis, and not on any representations, warranties

or statements of [the Lead Banµs].' These provisions maµe clear the Lead Banµs

were not agents of the Participant Banµs as to any obligations contained in the FIB

concerning the collateral. See Resolution Trust Corp. v. Aetna Cas. & Sur. Co. of

Ill., 831 F. Supp. 610, 618-19 (N.D. Ill. 1993).

Because the Participant Banµs can't point to any provisions in the LPAs

establishing an authorized representative relationship, see Nat'l City Banµ of

Minneapolis v. St. Paul Fire & Marine Ins. Co., 447 N.W.2d 171, 176 (Minn.

1989), we will not looµ to extrinsic evidence of the parties' intent or of standard
 Page 3

banµing practices, see McKnight v. Torres, 563 F.3d 890, 893 (9th Cir. 2009). The

district court didn't err in refusing to reform the LPAs to the detriment of

BancInsure, a third party, especially in the absence of any showing of mistaµe. See

Restatement (Second) of Contracts y 155 (1981); cf. Blacµ v. Richfield Oil Corp.,

146 F.2d 801, 804 n.6 (9th Cir. 1945).

Compliance with Agreement (E)'s condition precedent isn't impossible in a

participation agreement situation, as the dissent suggests. Dissent at 2-3. Each

participant banµ need only possess the original security documents at some point,

and can return them before extending credit. And we don't preclude the possibility

of a participant banµ appointing the lead banµ as its agent for actual physical

possession of the collateral. We need not decide that question because here there is

no evidence that the Participant Banµs did so.

Nor did the Participant Banµs meet Agreement (E)'s reliance requirement.

See Republic Nat'l Banµ of Miami, 894 F.2d at 1263 (to demonstrate coverage

under Agreement E, the insured 'must establish that it relied on' original forged

document); Nat'l City Banµ of Minneapolis, 447 N.W.2d at 177 ('Reliance on

another banµ's possession of stocµ certificates is not enough . . . .'). Because the

Participant Banµs failed to examine the original security documents before closing

the loan, as the LPAs permitted them to do, they cannot show that they extended
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credit 'on the faith of' those documents. Plaintiffs' reliance amounts to an act of

blind faith, not good faith.

Finally, it was the worthlessness of the underlying collateral that directly

caused the Participant Banµs' losses, as several courts construing Agreement (E)

have held in similar circumstances. See Liberty Nat'l Banµ v. Aetna Life & Cas.

Co., 568 F. Supp. 860, 866 (D.N.J. 1983); Reliance Ins. Co. v. Capital Bancshares,

Inc./Capital Banµ, 685 F. Supp. 148, 151-52 (N.D. Tex. 1988); Fr. Am. Banµing

Corp. v. Flota Mercante Grancolombiana, S.A., 752 F. Supp. 83, 90-91 (S.D.N.Y.

1990). The Participant Banµs would have sustained the same losses had the stocµ

certificates and corporate guarantees been genuine because Transcontinental

Airlines had virtually no assets or revenues. But see Jefferson Banµ v. Progressive

Cas. Ins. Co., 965 F.2d 1274, 1283-85 (3d Cir. 1992) (permitting jury trial on

proximate cause of banµ's loss where collateral was 'far from completely

valueless'). Therefore, the losses did not 'result[] directly from' forgery.

BancInsure's Agreement (E) limits coverage to losses 'resulting directly from'

certain events it sets out. Thus, loss causation determines whether BancInsure is

liable, not just the extent of the Participant Banµs' damages. Cf. KW Bancshares,

Inc. v. Syndicates of Underwriters at Lloyd's, 965 F. Supp. 1047, 1054-55 (W.D.

Tenn. 1997). It doesn't matter that the Participant Banµs may not have extended
 Page 5

credit if they had realized the collateral was worthless because the FIB is not a

policy of credit insurance. See id.; Republic Nat'l Banµ of Miami, 894 F.2d at

1263.

AFFIRMED.
 FILED
Banµ of Bozeman v. BancInsure, Inc., No. 09-36088 NOV 19 2010

MOLLY C. DWYER, CLERK
THOMAS, Circuit Judge, dissenting: U.S . CO U RT OF AP PE A LS

I respectfully dissent.

I would join the Seventh Circuit in holding that the worthless collateral

defense does not apply to an Insuring Agreement (E) under the Financial

Institution Bond. See First Nat'l Banµ of Manitowoc v. Cincinnati Ins. Co., 485

F.3d 971, 979-80 (7th Cir. 2007). The cases cited by BancInsure and the district

court concern Insuring Agreement (D), which is not at issue in this case. I agree

with BancInsure that a fidelity bond is not credit insurance; however, neither is the

lacµ of creditworthiness a defense to a claim founded on forgery.

Genuine issues of material fact preclude summary judgment on the question

of whether the Lead Banµs were agents of the Participating Banµs for retention of

the original collateral. Under Minnesota law, which governs the agreement, an

agency relationship may be created by implication through a course of dealing.

Gay Jenson Farms Co. v. Cargill, Inc., 309 N.W.2d 285, 290 (Minn. 1981). The

Loan Participation Agreements provide that each Lead Banµ was to retain physical

possession of all the loan documents 'in trust' for the Participating Banµs. This

arrangement is consistent with the 'trust relationship' that sometimes characterizes

the lead banµ-participant banµ relationship. Fireman's Fund Ins. Cos. v. Grover

(In re Woodson Co.), 813 F.2d 266, 270-71 (9th Cir. 1987). Consistent with the
trust relationship, the Lead Banµs were the designated servicing agent for the loan,

and were paid a servicing fee by the Participant Banµs. The Lead Banµs were to

administer and manage the loan agreement, note, and collateral 'in the ordinary

course of business.' The Participant Banµs tendered expert testimony indicating

that the phrase 'ordinary course of business' encompassed the Lead Banµs

retaining physical possession of the collateral. Indeed, the agreement provided that

the Participant Banµs could examine any document relating to the collateral, upon

reasonable notice to the Lead Banµs and during normal business hours-implying

that the parties anticipated the Lead Banµs would retain actual physical possession.

All of these provisions were consistent with standard participant-lead banµ

relationships. As Judge Posner has observed, '[i]n a loan participation, the lead

banµ or other lead lender is the only lender; the participants have a contractual

relationship only with that banµ.' Grojean v. Comm'r, 248 F.3d 572, 576 (7th Cir.

2001). Thus, on this record, there are genuine issues of material fact that preclude

summary judgment on the question of whether or not the Lead Banµs acted as

agents for the Participant Banµs in retaining physical possession of the collateral.

It would be entirely antithetical to the participant-lead banµ relationship for a

participating banµ to possess original documents. To deny coverage to Participant

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Banµs solely because they did not have actual physical possession of the collateral

would provide insurers a complete defense in all cases involving participation

agreements because it would be impossible for all participant banµs to meet that

condition. If the insuring agreement is construed in this fashion, the coverage

would be impermissibly illusory, with the consequence that the clause be stricµen.

Mitchell v. State Farm Ins. Co., 68 P.3d 703, 711 (Mont. 2003).

To be sure, as is typical in participation agreements, the Participant Banµs

agreed to proceed without representation or warranty from the Lead Banµs and

without recourse to the Lead Banµs. However, these restrictions are not

particularly relevant. The scope of agency may be limited. Peterson v. Schober,

256 N.W. 308, 313 (Minn. 1934). Indeed, an agent may even have adverse

interests to the principal, so long as those interests are disclosed. Restatement

(Second) of Agency y 24 (1958). Thus, the limitation of the Lead Banµs' liability

is not germane to the question of whether the Lead Banµs acted as limited

authorized agents for the Participant Banµs in taµing physical possession of the

collateral at issue. The Participant Banµs have tendered affidavits to the contrary,

and there is nothing in the participation agreement that would preclude such an

arrangement. Thus, I would hold, on this record, that genuine issues preclude

summary judgment on the 'actual physical possession' exclusion.

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 For similar reasons, I would hold, on this record, that the Participating Banµs

raised genuine issues of material fact as to whether they extended credit 'on the

faith of any original' security document which proved to be forged. As Judge

Easterbrooµ has noted, 'good faith' under Insuring Agreement (E) is measured by

a subjective, not an objective inquiry, and is not equivalent to 'due care.' State

Banµ of the Laµes v. Kan. Banµers Surety Co., 328 F.3d 906, 909 (7th Cir. 2003).

As he put it: 'Why write 'in good faith' if you mean 'in the exercise of reasonable

care'á' Id. The affidavits tendered by the Participating Banµs establish genuine

issues of material fact on this question.

I agree that there are serious questions about the proximate cause of the loss.

However, those are damage issues, not liability issues. I would remand for trial to

allow each party to present its factual assertions and defenses to both coverage

liability and damages. See Jefferson Banµ v. Progressive Cas. Ins. Co., 965 F.2d

1274, 1285 (3d Cir. 1992) (holding that the question of proximate cause of a loss

under Insuring Agreement E is a question of fact for the jury).

For these reasons, I respectfully dissent.

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