In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 02-2534 & 02-2665
STATE BANK OF THE LAKES,
Plaintiff-Appellee, Cross-Appellant,
v.
KANSAS BANKERS SURETY CO.,
Defendant-Appellant, Cross-Appellee.
____________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 98 C 3212—Elaine E. Bucklo, Judge.
____________
ARGUED APRIL 18, 2003—DECIDED MAY 12, 2003
____________
Before EASTERBROOK, KANNE, and DIANE P. WOOD, Circuit
Judges.
EASTERBROOK, Circuit Judge. For more than a decade,
State Bank of the Lakes loaned money to Pistakee Marina,
Inc., to finance its inventory. The Bank took custody of
each Manufacturer’s Statement of Origin (MSO), a document
that Pistakee needed before it could deliver good title to
a customer. Release of the MSO was linked to repayment
of the advance. The Bank also checked Pistakee’s premises
to see whether the boats identified by the certificates
were there; they always were, and Pistakee always repaid
2 Nos. 02-2534 & 02-2665
the loans—until 1997. That year Pistakee went under, and
the Bank discovered that it had been duped by William
Slater, Pistakee’s owner. Slater trumped up MSOs in order
to obtain loans from multiple sources against the same
collateral. One lender would get the real MSO (and thus
the security interest); others would receive fakes. Slater
diverted the extra proceeds to personal use. For this
scheme Slater was convicted of bank fraud and served
46 months’ imprisonment. See United States v. Slater, No.
00-2767 (7th Cir. Jan. 18, 2001) (unpublished order). The
Bank turned to Kansas Bankers Surety Co. seeking indem-
nity on account of those loans against boats for which
some other lender held the real MSO and thus obtained the
value of the collateral.
Kansas Bankers Surety issued a “Crime Bond” insuring
the Bank against losses caused by borrowers’ crimes. The
critical language promises to indemnify the Bank for:
Loss resulting directly from the Insured having, in
good faith, for his own account or for the account
of others,
(1) acquired, sold or delivered, or given value,
extended credit or assumed liability, on the
faith of, any original
(a) Certificated Security,
(b) Document of Title,
(c) deed, mortgage or other instrument con-
veying title to, or creating or discharging a
lien upon, real property,
(d) Certificate of Origin or Title,
***
which
(i) bears a signature of any maker,
drawer, issuer, endorser, assignor,
Nos. 02-2534 & 02-2665 3
lessee, transfer agent, registrar, accep-
tor, surety, guarantor, or of any person
signing in any other capacity which is
a Forgery, or
(ii) is altered;
***
(3) acquired, sold or delivered, or given value,
extended credit or assumed liability, on the faith
of any item listed in (a) through (d) above which is
a Counterfeit.
A MSO is a “Certificate of Origin or Title” within the scope
of subsection (1)(d). Coverage depends on the Bank hav-
ing physical possession of the bogus document (a condi-
tion concededly met). Yet another clause defines “counter-
feit” as “an imitation which is intended to deceive and to
be taken as an original”; the bond does not define the
phrase “good faith.”
Slater took great care to make his impostures look like
the real McCoys. He used the same kind, size, texture
and color of paper as the originals; he employed identical
inks and typefaces and duplicated manufacturers’ logos.
It was easy to supply the correct information about the
model and serial numbers of the boats, which Pistakee had
in its possession. And Slater forged signatures that passed
for those of the manufacturers’ authorized representa-
tives. Sometimes Slater presented unsigned MSOs, and the
Bank advanced funds against both signed and unsigned
certificates. Kansas Bankers Surety, however, distinguished
the two. It conceded that signed certificates are “counter-
feit” under the bond’s terms and that a lender acting
with due care would have been taken in by them. But the
unsigned bogus MSOs were not “counterfeit,” it contended,
adding that lending against unsigned documents also
did not evince “good faith.” This suit under the diversity
jurisdiction followed. Judge Marovich denied the under-
4 Nos. 02-2534 & 02-2665
writer’s motion for summary judgment, ruling that mate-
rial disputes require a trial. 1999 U.S. Dist. LEXIS 13269
(N.D. Ill. Aug. 19, 1999). Judge Bucklo then conducted
a bench trial, concluded (as we have already mentioned)
that Slater’s fakes looked like the real things, and held
that the Bank is entitled to about $290,000 to cover its
losses on advances to Pistakee against unsigned imitation
MSOs. Judge Bucklo concluded, however, that the insurer’s
position had been neither unreasonable nor vexatious
and denied the Bank’s request for penalties and attor-
neys’ fees under 215 ILCS 5/155. Both sides have appealed.
They agree that Illinois law applies.
Kansas Bankers Surety’s first contention is that unsigned
documents cannot be “counterfeit.” Yet nothing in that
word’s definition—“an imitation which is intended to
deceive and to be taken as an original”—requires a signa-
ture. A $50 bill, printed in green ink on rag paper with
an imitation Treasury watermark and a fine etching of
Ulysses S. Grant, looking for all the world like a real
Federal Reserve Note but lacking a facsimile of the Trea-
surer’s signature in the lower left hand corner, would be
a “counterfeit” for purposes of federal laws against coun-
terfeiting. See 18 U.S.C. §472; United States v. Gomes, 969
F.2d 1290 (1st Cir. 1992). Such a document would deceive
even wary recipients. Under the bond’s definition it is
enough if an “imitation” is “intended to deceive”. Slater’s
fraudulent intent is conceded, and the district judge, as
trier of fact, was entitled to conclude that these fakes
were close enough to be “imitations”.
For all we know, genuine MSOs are accepted in the
trade even though unsigned. Neither side adduced any
evidence about the likelihood that genuine MSOs bear
signatures, or banks’ willingness to extend credit against
unsigned MSOs. It is possible that Slater left some of the
fakes unsigned because otherwise they would be too per-
fect. A skilled swindler creates documents with the same
Nos. 02-2534 & 02-2665 5
degree of variability as the originals—for example, some
signed clearly, others in an illegible scrawl, and some not
at all. Perhaps Slater followed the originals to the last
detail, omitting signatures when the originals had none.
(The record unfortunately does not permit a test of this
hypothesis.) A trier of fact was entitled to conclude that
a phony that looks like an original is an “imitation” wheth-
er or not signed, and thus is a counterfeit. The bond itself
implies this possibility. Section (1) deals with documents
that have either forged (subsection (i)) or altered (sub-
section (ii)) signatures. Section (3), covering counterfeits,
does not mention signatures. This confirms the district
court’s understanding (and ours) that an unsigned docu-
ment may be “an imitation which is intended to deceive
and to be taken as an original” and thus be a “counterfeit.”
Kansas Bankers Surety’s other contention is that the
Bank did not act in “good faith,” as the bond’s introductory
language requires. The bond does not define the phrase
“good faith”, nor does the Illinois Insurance Code offer
an off-the-rack definition; in this litigation the insurer
equates it with “due care.” Yet “good faith” usually estab-
lishes a subjective standard, while due care is objective.
Why write “in good faith” if you mean “in the exercise
of reasonable care”? Many negligent acts are committed
with pure hearts and empty heads. More than that: it is
hard to see how equating “good faith” with “due care”
could help Kansas Bankers Surety, for then it would add
little if anything to the definition of “counterfeit.” An
“imitation” is something that will bilk a person using
ordinary care—which is to say, an unsuspecting person
who is not negligent. See United States v. Turner, 586 F.2d
395, 397-98 (5th Cir. 1978) (another decision about the
meaning of “counterfeit” in the criminal law). Something
that will deceive only a child or a bonobo is not an “imita-
tion” under the bond; it has to be good enough to fool a
banker. By concluding that the documents were “imita-
6 Nos. 02-2534 & 02-2665
tions,” the district court implicitly found that the Bank had
used due care in accepting them. And a decision at trial
that one or another course of conduct evinced due care
may be upset on appeal only if unreasonable. We will not
disturb the district court’s resolution; as we have ob-
served, the insurer did not proffer any evidence suggest-
ing that bankers regularly reject genuine but unsigned
certificates, so there is no evidentiary foundation for a
conclusion that these fakes would not have got by loan
officers who used ordinary prudence.
Insurers worry about moral hazard—that a bank, know-
ing that someone else will pick up the tab, becomes slov-
enly. This is not a major worry when coverage is limited
to criminal frauds, however; banks must protect them-
selves against many other hazards of secured lending.
Banks also must ensure that the chattel paper refers to
real collateral; several decisions have held that fake
documentation pertaining to nonexistent chattels is not
“counterfeit.” See Capitol Bank of Chicago v. Fidelity &
Casualty Co. of New York, 414 F.2d 986, 988-89 (7th Cir.
1969); Bank of the Southwest v. National Surety Co., 477
F.2d 73, 77 (5th Cir. 1973); Exchange National Bank
of Olean v. Insurance Co. of North America, 341 F.2d 673,
676-77 (2d Cir. 1965). That’s why the Bank checked to
ensure that Pistakee had in inventory the boats specified
by the certificates. Moreover, Kansas Bankers Surety
reviewed its clients’ loss experience annually and ad-
justed the premiums. Over the long run, State Bank of
the Lakes pays a price that reflects, not the average loss
in the business, but its own loss rate, which gave the Bank
a strong incentive to take care. If the insurer wanted
additional protection against moral hazard, it had to put
that in the contract. “Good faith” is just too far removed
from the question whether a lender took cost-justified
precautions. Insurers must write clearly; ambiguities are
resolved in policyholders’ favor. See, e.g., May Department
Stores Co. v. Federal Insurance Co., 305 F.3d 597, 600
Nos. 02-2534 & 02-2665 7
(7th Cir. 2002). But this doctrine does not come into play
here; “good faith” is in a different phylum from “due care,”
so there is no linguistic tie to break. (Even Article 3 of
the UCC, which contains a definition of “good faith” resem-
bling what Kansas Bankers Surety proposes—“honesty
in fact and the observance of reasonable commercial
standards of fair dealing”, 810 ILCS 5/3-103(a)(4)—links
commercial reasonableness to “fair dealing.” Avoidance
of advantage-taking, which this section is getting at,
differs from due care.)
As for the Bank’s contention that Kansas Bankers
Surety behaved unreasonably and vexatiously by declin-
ing to pay unless ordered to do so by a judge: here, too,
the decision reached by the trier of fact must be respected
unless clearly erroneous—which this decision is not.
The insurer paid promptly with respect to the signed
fakes, reserving for judicial decision only legal questions
that (as the absence from this opinion of citations to
decisions interpreting similar policy language reveals) have
not been the subject of appellate decisions. It is never
unreasonable to seek resolution of novel interpretive
points. Kansas Bankers Surety did not lie or stall in the
process; it simply disagreed with the Bank about the
meaning of the bond. Such disagreements are normal in
business, and taking a legal position that promotes one’s
self-interest is entirely lawful.
AFFIRMED
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-12-03
State Bank of Lakes v. Kansas Bankers
Combined Opinion