Beach Community Bank v. St. Paul Mercury Insurance

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT COURT OF APPEALS
U.S.
________________________ ELEVENTH CIRCUIT
MARCH 16, 2011
No. 10-11049 JOHN LEY
________________________ CLERK

D.C. Docket No. 5:09-cv-00106-RS-MD

BEACH COMMUNITY BANK,

lllllllllllllllllllll Plaintiff - Appellant,

versus

ST. PAUL MERCURY INSURANCE COMPANY,

lllllllllllllllllllll Defendant - Appellee.

________________________

Appeal from the United States District Court
for the Northern District of Florida
________________________

(March 16, 2011)

Before WILSON, PRYOR and ANDERSON, Circuit Judges.

PRYOR, Circuit Judge:

This appeal concerns whether the provision of a financial institution bond

that insures a bank against losses from forgery applies to a loss suffered by a bank
upon the default of a loan that had been secured by a forged guaranty. The bank

obtained the guaranty to secure property held in a tenancy by the entirety. Beach

Community Bank appeals the summary judgment in favor of St. Paul Mercury

Insurance Company against a complaint that alleged that St. Paul failed to honor a

financial institution bond it had issued to Beach Community that covered “loss[es]

resulting directly from the . . . exten[sion of] credit . . . on the faith” of a forgery.

Beach Community secured a loan to Dellwood Properties, Inc., with guaranties

from the owner of Dellwood, Charles Faircloth, and Charles’s wife, Juanita

Faircloth, but after Charles died and Dellwood defaulted on the loan, Beach

Community learned that Juanita’s signature on the guaranty was a forgery. Beach

Community sued St. Paul to recover under the bond and alleged that it had

suffered a loss directly from reliance on the forged guaranty. The district court

ruled that the loss did not result directly from reliance on the forgery because the

purported guarantor had few assets when the default occurred, and Beach

Community could not have recovered its loss even if the guaranty had been

authentic. St. Paul argues that we should affirm for that reason or, alternatively,

on three separate grounds: Beach Community did not rely on the forgery, did not

act in good faith, and did not have physical possession of the forgery when it

extended credit. We conclude that the district court misinterpreted the bond and

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that Beach Community suffered a loss that resulted directly from its extension of

credit to Dellwood. We also conclude that the record does not entitle St. Paul to a

summary judgment in its favor on any of its three alternative grounds. We vacate

and remand.

I. BACKGROUND

In August 2004, Dellwood Properties, Inc., applied for a loan of $10 million

from Beach Community Bank to finance the purchase of beachfront property in

Panama City Beach, Florida. Dellwood was a Florida corporation, and its sole

officer, director, and shareholder was Charles Faircloth, a 75-year-old developer.

When it assessed the risk of the proposed loan, Beach Community examined the

tax returns that Charles filed jointly with his wife, Juanita Faircloth, conducted a

credit analysis of Charles, and obtained credit reports for both Charles and Juanita,

but submitted only Charles’s credit report to its loan committee. Beach

Community determined that Charles had a net worth of over $130 million, an

average annual income of $2.6 million, and no direct liabilities.

The loan committee approved the loan to Dellwood on September 2, 2004,

conditioned on the receipt of guaranties from Charles and Juanita. Beach

Community had presumed that Charles shared ownership of many of his assets

with Juanita. Florida recognizes tenancies by the entirety, and a representative of

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Beach Community testified that Beach Community conditioned the loan on the

receipt of personal guaranties from both Charles and Juanita because “it [is] very

easy for [an owner of property held in a tenancy by the entirety] to transfer . . .

assets over to the spouse or just make them joint, and then they’re impossible for

[a lender] to get.” Another officer of Beach Community stated that “[Beach

Community] would not have extended credit to Dellwood in the absence of

[Juanita’s] personal guaranty.” Even though the credit analysis that the loan

committee examined provided that “Charles Faircloth will offer his unconditional

personal guarantee,” the “Loan Worksheet/Credit Approval” form that the loan

committee also used said that “Mr. & Mrs. Charles Faircloth” would guarantee the

loan.

On September 10, 2004, Beach Community and Dellwood closed the loan.

Beach Community hired a lawyer to prepare its documents, but the lawyer did not

attend the closing. Charles’s business associate, Derrick Bennett, instead closed

the loan. Even though he was not employed by Beach Community, Bennett

testified that he was obligated at the closing to “have signatures obtained [for the

guaranties] and/or placed on the documents, collect them up, and send them back

[to Beach Community] just like all the other documents [Beach Community]

provide[s] me.” Bennett was not responsible for verifying the authenticity of

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signatures on documents.

Juanita did not attend the closing, but Charles handed Bennett a personal

guaranty at the closing that purportedly bore Juanita’s signature. The guaranty

provided, “I absolutely and unconditionally guarantee to you the payment and

performance of each and every debt, of every type and description, that the

borrower may now or at any time in the future owe you.” The guaranty was not

witnessed or signed by a notary public. Bennett notified Beach Community when

he received the guaranty, and Beach Community then gave Bennett permission to

disburse funds to Dellwood. Three days after the closing, Beach Community

received from Bennett the guaranty purportedly signed by Juanita.

Beach Community later purchased from St. Paul Mercury Insurance

Company a financial institution bond, also known as a bankers blanket bond,

which insured Beach Community against several risks, including losses due to

“forgery and alteration of securities and other instruments.” St. Paul agreed to

indemnify Beach Community for “[l]oss resulting directly from [Beach

Community] having, in good faith . . . extended credit . . . on the faith of any

original Written document,” including a guaranty, “which bears a handwritten

signature . . . that is a Forgery.” The bond also provided that “[a]ctual physical

possession of the [forged document] by the Insured is a condition precedent to the

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Insured’s having relied on the faith of such items.” Beach Community obtained

loan participation coverage under the bond, which allowed Beach Community to

satisfy the requirement of “[a]ctual physical possession” when a “representative

authorized to possess [documents such as guaranties]” possessed the documents

“on behalf of [Beach Community].” The bond insured losses caused by forgery

for up to $4 million and had a deductible of $50,000. The bond “applie[d] to loss

discovered by the Insured during the Bond Period[] . . . regardless of when the act

or acts causing or contributing to such loss occurred.”

Beach Community discovered a loss soon after it purchased the bond.

Charles died in 2007. Even though he had assets of $130 million in 2004, Charles

left an estate three years later that had less than $100,000 in cash and several

million dollars in debt. Dellwood defaulted on the loan from Beach Community

the month after Charles died.

Beach Community accelerated the full debt, sued Dellwood, and obtained a

judgment for $11,798,725.05. Beach Community collected about $950,000 of this

amount from debtors of Dellwood. Beach Community then sought to collect the

outstanding balance of the debt from Juanita, but these efforts were futile. Juanita

had few assets, namely a homestead, income from Social Security, and income of

$2,000 each month from a mortgage. Juanita owned a condominium unit in 2008

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that was not a homestead, but she later sold that property.

Juanita denied that she had signed the guaranty, and a handwriting expert

confirmed that the signature on the guaranty that she had purportedly signed was a

forgery. Beach Community notified St. Paul of its loss and sought coverage under

the forgery provision of the bond.

St. Paul refused coverage, and Beach Community filed a lawsuit against St.

Paul in state court for breach of contract, which St. Paul removed to the district

court. Both St. Paul and Beach Community moved for summary judgment. St.

Paul argued that Beach Community had failed to satisfy the requirements for

coverage under the bond. St. Paul alleged that Beach Community did not rely on

Juanita’s guaranty and had requested it to reach only Charles’s assets. St. Paul

also argued that Beach Community did not physically possess the guaranty when it

extended credit, did not make the loan in good faith, and did not suffer a loss that

was directly caused by the forgery because Juanita had no assets from which

Beach Community could have collected even if the signature on the guaranty had

been authentic.

The district court granted summary judgment in favor of St. Paul on the

ground that Beach Community failed to demonstrate that its loss “result[ed]

directly from the forged guarantee.” The district court ruled that Beach

7
Community had to “show that it would have been able to collect on the loan but

for the forged signature of Mrs. Faircloth’s guarantee.” The district court

reasoned that “it was not the forged guarantee that precluded [Beach Community]

from collecting on the loan, but rather Mr. and Mrs. Faircloth’s diminished assets

and the crashed real estate market that caused [Beach Community’s] loss.”

Quoting from our decision in Republic National Bank v. Fidelity & Deposit Co. of

Maryland, 894 F.2d 1255, 1264 (11th Cir. 1990), the district court expressed

concern that a ruling in favor of Beach Community would transform the bond into

credit insurance and encourage “sloppy banking practices” and “fraud against the

insurer.” The district court did not rule on the other grounds that St. Paul raised in

its motion for summary judgment, but observed in a footnote that the failure of

Beach Community to “require proof that Mrs. Faircloth’s signature was genuine

makes it difficult to find that [Beach Community] truly ‘relied’ on Mrs. Faircloth’s

guarantee in funding the loan.”

II. STANDARD OF REVIEW

“We review de novo a summary judgment.” Am. Gen. Life Ins. Co. v.

Schoenthal Family, LLC, 555 F.3d 1331, 1337 (11th Cir. 2009). “Summary

judgment is appropriate when the pleadings, the discovery and disclosure

materials on file, and any affidavits show that there is no genuine issue as to any

8
material fact and that the movant is entitled to judgment as a matter of law.” Jean-

Baptiste v. Gutierrez, 627 F.3d 816, 820 (11th Cir. 2010).

III. DISCUSSION

We divide our discussion in two parts. First, we address whether Beach

Community suffered a loss that “result[ed] directly from” its extension of credit.

Second, we address and reject the three arguments St. Paul presents as alternative

grounds to affirm.

A. St. Paul Fails to Establish That the Loss of Beach Community Did Not Result
Directly from the Extension of Credit.

Beach Community argues that the district court misconstrued the financial

institution bond St. Paul issued to Beach Community, which provided coverage

for “[l]oss resulting directly from” the extension of credit “on the faith of” a

forgery. St. Paul argues we should affirm because “[a]n authentic guarantee from

Mrs. Faircloth would not have allowed Beach [Community] to reach Mr.

Faircloth’s assets,” nor would an authentic guaranty have “allowed Beach

[Community] to collect the outstanding debt from Mrs. Faircloth” because she had

few assets at the time of Dellwood’s default. St. Paul cites in support of its

argument decisions of other courts that have held that losses do not directly result

from the extension of credit when banks rely on forged documents that describe

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collateral that does not exist. We agree with Beach Community.

Two matters inform our interpretation of the bond. First, Florida law

governs our interpretation of the bond. Erie R.R. v. Tompkins, 304 U.S. 64, 78,

58 S. Ct. 817, 822 (1938). “Under Florida law, insurance contracts are construed

according to their plain meaning.” Taurus Holdings, Inc. v. U.S. Fid. & Guar. Co.,

913 So. 2d 528, 532 (Fla. 2005). Second, because the bond contains language

standard in financial institution bonds issued to American banks, the interpretation

of that standard language by courts in other jurisdictions is persuasive in our

resolution of this appeal. “The standard financial-institution bond is a unique

insurance instrument with a long and detailed history.” First State Bank of

Monticello v. Ohio Cas. Ins. Co., 555 F.3d 564, 568 (7th Cir. 2009). “[P]art of

what makes the bond unique is that nearly every provision ‘has been developed in

response to and tested by case law.’” Id. (quoting J. Kelly Reyher, A Brief Review

of the Financial Institution Bond Standard Form No. 24 and Commercial Crime

Policy, 563 PLI/Lit 57, 61 (1997)).

The “resulting directly” language in the bond was adopted in response to the

erroneous application of tort concepts of causation by some courts to earlier

versions of the bond. See id. at 570. “[T]ort-causation concepts like proximate

cause, ‘substantial factor’ causation, and intervening cause are inappropriate” for

10
interpreting a financial institution bond, which is instead governed by contract

law. Id.; see also Prudential Prop. & Cas. Ins. Co. v. Swindal, 622 So. 2d 467, 470

(Fla. 1993) (“Florida law has long followed the general rule that tort law

principles do not control judicial construction of insurance contracts.”). In its only

decision that interpreted the phrase “resulting directly” in an insurance policy, the

Supreme Court of Florida refused to apply a test of proximate causation. Mason v.

Life & Cas. Ins. Co. of Tenn., 41 So. 2d 153, 155 (Fla. 1949). The court in Mason

interpreted a life insurance policy that excepted from coverage “death resulting

directly from the use of intoxicating liquors,” and the court held that the provision

“refers to the effect of the use of intoxicating liquors upon the system of an

assured as distinguished from acts committed by him by reason of his being under

the influence of, or his mind being affected by, intoxicants.” Id. The court

concluded that alcohol consumption did not directly cause the death of a decedent

who was killed when she walked into traffic while intoxicated, id. at 154–55.

Beach Community persuasively argues that it suffered a loss “resulting

directly” from its extension of credit in reliance on the forgery “because [Juanita’s

forged] personal guaranty caused [Beach Community] to enter into a transaction

and extend credit where it otherwise would not have,” and the guaranty would

have had value if it had been authentic. The bond covers losses that “result[]

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directly” from the extension of credit when a bank relies on a forgery in good faith

and has physical possession of the forgery. The measure of the loss Beach

Community suffered is based on the amount of credit extended, not the amount

that could be recovered in a hypothetical collection effort. See FDIC v. United

Pac. Ins. Co., 20 F.3d 1070, 1080 (10th Cir. 1994) (“‘[T]he “loss” occurred and

was suffered by the plaintiff, without regard to its possible remedies, when its

funds in fact were diverted . . . .”’) (quoting Fitchburg Sav. Bank v. Mass.

Bonding & Ins. Co., 274 Mass. 135, 150, 174 N.E. 324, 328 (1931)). The decline

in Charles and Juanita’s wealth had nothing to do with the extension of credit to

Dellwood and should not affect the coverage of the loss.

Insurance of guaranties would be illusory if a default by the borrower or

decline in his wealth severed the direct causal relationship between reliance on a

forged guaranty and a loss because a guaranty is enforced only when the borrower

defaults and is unable to pay. The Fifth Circuit acknowledged when it interpreted

a financial institution bond that “[t]here will always be some intervening cause for

the failure of [loans issued by an insured bank] to be repaid; otherwise the bank

would suffer no loss.” First Nat’l Bank of Louisville v. Lustig, 961 F.2d 1162,

1167 (5th Cir. 1992).

We are persuaded by decisions from our sister circuits that have similarly

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held that the coverage that financial institution bonds provide for losses that

“result[] directly from” fraud or dishonesty by employees is unaffected by events

that follow the fraudulent act, such as an economic downturn, bankruptcy, or death

of the creditor, that would have limited recovery by the insured. See Ohio Cas.,

555 F.3d at 571; Lustig, 961 F.2d at 1167–68. “A loss is directly caused by the

dishonest or fraudulent act within the meaning of the Bond where the bank can

demonstrate that it would not have made the loan in the absence of the fraud.”

Lustig, 961 F.2d at 1167. St. Paul argues that Ohio Casualty and Lustig are

distinguishable because fraudfeasors intend to cause a loss, but we disagree. The

forgery of a guaranty is also intended to cause a bank to disburse funds that it

would not otherwise loan. Although St. Paul also contends that in Lustig the Fifth

Circuit used the term “proximate causation,” Lustig, 961 F.2d at 1169, the court

conducted an analysis similar to that in Ohio Casualty, where the Seventh Circuit

rejected the use of tort concepts in interpreting financial institution bonds, 555

F.3d at 570–71. See Lustig, 961 F.2d at 1167–68.

St. Paul erroneously relies on decisions from other courts that have held that

a bank did not satisfy the requirement of a financial institution bond that a loss

“result[] directly from” reliance on a forgery when the forged documents either

described non-existent collateral or misrepresented the value of collateral.

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Flagstar Bank, FSB v. Fed. Ins. Co., No. 05-70950, slip op. at 12 (E.D. Mich. Nov.

17, 2006); KW Bancshares, Inc. v. Syndicates of Underwriters at Lloyd’s, 965 F.

Supp. 1047, 1054–55 (W.D. Tenn. 1997); French Am. Banking Corp. v. Flota

Mercante Grancolombiana, S.A., 752 F. Supp. 83, 90–91 (S.D.N.Y. 1990);

Reliance Ins. Co. v. Capital Bancshares, Inc./Capital Bank, 685 F. Supp. 148,

151–52 (N.D. Tex. 1988); Ga. Bank & Trust v. Cincinnati Ins. Co., 245 Ga. App.

687, 689, 538 S.E. 2d 764, 765–66 (2000); see also Liberty Nat’l Bank v. Aetna

Life & Cas. Co., 568 F. Supp. 860, 863 (D.N.J. 1983). But see First Nat’l Bank of

Manitowoc v. Cincinnati Ins. Co., 485 F.3d 971, 979–80 (7th Cir. 2007) (loss held

to result directly from reliance on forged documents that described non-existent

collateral); Pine Bluff Nat’l Bank v. St. Paul Mercury Ins. Co., 346 F. Supp. 2d

1020, 1029–33 (E.D. Ark. 2004) (same). In these decisions, banks suffered losses

“not because [documents] were . . . forged, but solely because the assets

purportedly represented thereby were non-existent.” Flagstar Bank, No. 05-

70950, slip op. at 10 (quoting Liberty Nat’l Bank, 568 F. Supp. at 863). The rule

illustrated in the decisions that St. Paul cites is inapplicable to many situations

where a forgery was not the “but for” cause of a loss. Instead, decisions from

other courts distinguish situations where “even if [the documents that secured a

loan] had borne legitimate signatures, they still would have been worthless” from

14
situations where “if [the documents] had borne legitimate signatures, they would

have had value.” Union Planters Bank, N.A. v Cont’l Cas. Co., 478 F.3d 759, 765

(6th Cir. 2007). See also Flagstar Bank, No. 05-70950, slip op. at 14

(distinguishing between decisions that involve obligations or collateral “that [are]

fictional” and obligations or collateral “that subsequently lose[] value”).

Unlike decisions relied upon by St. Paul, an authentic guaranty from Juanita

would have had value. St. Paul makes no allegation that Juanita and Charles had

misrepresented their wealth to Beach Community before approval of the loan.

Juanita had few assets, but a guaranty from Juanita would have had value because

it would have imposed a legal obligation on her. Beach Community could have

obtained a judgment against Juanita and attached any non-exempt income or assets

that Juanita owned or would have acquired over the next twenty years, see Fla.

Stat. § 95.11(1). If Juanita were to win the Florida Lottery, for example, Beach

Community could attach her winnings.

St. Paul argues that a decision in favor of Beach Community would

transform the bond into credit insurance, but we disagree. “[T]his court has long

recognized that a [financial institution] bond ‘is not a policy of credit insurance

and does not protect the bank when it simply makes a bad business deal.’”

Republic Nat’l Bank, 894 F.2d at 1263 (quoting Calcasieu-Marine Nat’l Bank v.

15
Am. Emp’rs Ins. Co., 533 F.2d 290, 299 (5th Cir. 1976)). Observance of the direct

causation, physical possession, reliance, and good faith requirements prevents the

bond from becoming credit insurance. The bond does not contain any language

that excludes coverage when a bank would still suffer a loss absent a forgery, and

courts have allowed banks to recover losses in these situations when the forged

document described legitimate assets or obligations, see Ohio Cas., 555 F.3d at

570–71; Lustig, 961 F.2d at 1167–68.

B. The Record Does Not Support Entry of Summary Judgment on Any
Alternative Ground.

St. Paul presents three alternative grounds to affirm the entry of summary

judgment in its favor: Beach Community did not rely on the guaranty, did not have

actual physical possession of the guaranty when it extended credit, and did not

extend credit in good faith. The problem for St. Paul is that there is contrary

evidence about each of these issues, and we must view the evidence in the light

most favorable to Beach Community, Atwater v. Nat’l Football League Players

Ass’n, 626 F.3d 1170, 1175 (11th Cir. 2010). We address each of these issues in

turn.

1. St. Paul Is Not Entitled to Summary Judgment Based on a Lack of Reliance by
Beach Community.

St. Paul argues that we should affirm the summary judgment in its favor

16
because Beach Community did not “extend[] credit . . . on the faith of” Juanita’s

forged guaranty as required by the bond, but we disagree. Although we have held

that a bank “must establish that it relied on the forged” document to recover a loss

under a financial institution bond, Republic Nat’l Bank, 894 F.2d at 1263, the

record contains evidence that Beach Community, in fact, relied on the guaranty.

That evidence forecloses a summary judgment in favor of St. Paul on this ground.

St. Paul stresses that the loan committee of Beach Community did not

conduct an analysis of Juanita’s creditworthiness and approved the loan before it

received a signed guaranty, but there is more to this story. Representatives of

Beach Community explained that approval of the loan was conditioned on receipt

of a guaranty from Juanita, one official testified that the recognition of tenancies

by the entirety under Florida law can impair efforts to collect debts from a debtor

when the debtor’s spouse is not a guarantor of the debt, and Bennett testified that

Beach Community did not allow him to disburse any funds to Dellwood until he

received the guaranty that was purportedly signed by Juanita. Bennett did not take

steps to verify the authenticity of the signature on the guaranty form, but the

standard guaranty form that Beach Community used did not require signatures by

a witness or a notary.

St. Paul also erroneously argues that Beach Community did not rely on a

17
guaranty from Juanita because “Beach [Community] requested Mrs. Faircloth’s

guarantee not to make her an additional source of repayment but to help ensure

that Beach [Community] could reach Mr. Faircloth’s assets if any were held

through a tenancy by the entireties.” St. Paul fails to appreciate the property rights

that Juanita presumptively held. Property jointly owned by married persons in

Florida is presumptively held in a tenancy by the entirety, Beal Bank, SSB v.

Almand & Assocs., 780 So. 2d 45, 57–59 (Fla. 2001), and property they held in a

tenancy by the entirety “belongs to neither spouse individually, but each spouse is

seized of the whole.” Id. at 53. Charles and Juanita would have had equal

interests in any property they held in a tenancy by the entirety, and “only the

creditors of both the husband and wife, jointly, may attach the tenancy by the

entireties property.” Id. A representative of Beach Community conceded that he

did not ask whether Charles and Juanita owned any property as tenants by the

entirety, but the representative also explained that he assumed Charles and Juanita

owned property as tenants by the entirety based on his knowledge of Florida law

and his examination of Charles’s financial statements that reflected Charles had

partial interests in some properties. The representative was also aware that

Charles could hinder collection efforts by transferring assets to Juanita.

St. Paul also erroneously contended at oral argument that the bond should

18
be construed to cover Beach Community’s loss to the extent that it relied on the

guaranty so that if Beach Community knew that Juanita had $100,000 at the time

Beach Community extended credit, the bond would cover losses only up to

$100,000. We agree that reliance is a prerequisite to coverage, but we cannot hold

that coverage is limited to the value of assets held by Juanita individually at the

time the loan was approved. A lender in a state that recognizes tenancies by the

entirety may rely on a guaranty from the spouse of the borrower, even if the

spouse owns few assets individually, because the guaranty may be necessary to

reach assets held in a tenancy by the entirety. We could also imagine other

situations where a bank could rely on a guaranty to secure a loan worth more than

the net worth of the guarantor.

St. Paul argues that Republic National Bank, 894 F.2d 1255, where we held

that a bank could not have relied on a forgery, should control our resolution of this

appeal, but that opinion is distinguishable. That decision involved a bank that had

honored a letter of credit upon presentation of a forged bill of lading. Id. at

1260–63. The bank had issued the letter of credit based on the creditworthiness of

the purchaser of the letter of credit and “irrevocably committed itself to extend

credit” before it even obtained the forged bill of lading from the third party who

was the beneficiary of the letter of credit. Id. at 1262. Unlike the bank in

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Republic National Bank, Beach Community did not accept as authentic a forgery

presented after the extension of credit to Dellwood. Beach Community instead

conditioned the loan on a guaranty from Juanita and did not disburse funds to

Dellwood until Beach Community had obtained the guaranty with her forged

signature.

St. Paul also relies on United States National Bank in Johnstown v. Reliance

Insurance Co., 348 Pa. Super. 30, 501 A.2d 283 (1985), and Continental Bank v.

Phoenix Insurance Co., 24 Cal. App. 3d 909, 101 Cal. Rptr. 392 (1972), which

upheld findings that a bank had not relied on a forgery, but those decisions

involved a different procedural posture. Both United States National Bank and

Continental Bank held that evidence submitted at a trial was sufficient to support a

factual finding that a lender did not rely on a forged guaranty. Our review of the

summary judgment in favor of St. Paul raises a different issue. Our inquiry is not

whether sufficient evidence has been presented to support a finding of fact but

whether “there is no genuine issue as to any material fact.” Jean-Baptiste, 627

F.3d at 820. The evidence is disputed as to whether Beach Community relied on

the guaranty.

2. St. Paul Is Not Entitled to Summary Judgment on the Ground That Beach
Community Did Not Have Actual Physical Possession of the Guaranty.

St. Paul argues that Beach Community failed to satisfy the “actual physical

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possession” requirement of the bond, but this argument fails. At a minimum, a

factual question exists as to whether Bennett acted as an agent of Beach

Community at the closing. The bond required that Beach Community have

possession of the guaranty when it extended credit. Although no employee of

Beach Community was present at the closing, Beach Community obtained loan

participation coverage under the bond, which allowed the requirement of actual

physical possession to be satisfied when “a correspondent bank or other

representative authorized to possess [documents such as guaranties]” possesses

them “on behalf of the [insured bank].”

The parties agree that Bennett would have been an authorized representative

of Beach Community under the terms of the bond if Bennett were an agent of

Beach Community under Florida law. “‘Essential to the existence of an actual

agency relationship is (1) acknowledgment by the principal that the agent will act

for him, (2) the agent’s acceptance of the undertaking, and (3) control by the

principal over the actions of the agent.’” Villazon v. Prudential Health Care Plan,

Inc., 843 So. 2d 842, 853 n.10 (Fla. 2003) (quoting Goldschmidt v. Holman, 571

So. 2d 422, 424 n.5 (Fla. 1990)). “[A]cting as a closing agent in a loan transaction

does not create an agency or employer-employee relationship between the closing

agent and the lending institution,” United States v. Musgrave, 444 F.2d 755, 760

21
(5th Cir. 1971), but even a closing attorney selected by and paid by the borrower

may primarily owe duties to the lender, Sibley v. Fed. Land Bank of New Orleans,

597 F.2d 459, 462–63 (5th Cir. 1979).

Bennett’s testimony at his deposition creates a factual question about his

relationship with Beach Community that forecloses a summary judgment for St.

Paul on this ground. Bennett explained that as the closing agent he had a duty to

“follow closing instructions as presented to [him].” With respect to the guaranties,

he had the duty to “have signatures obtained and/or placed on the documents,

collect them up, and send them back just like all the other documents they provide

me.” Bennett explained how he, to use his term, “verif[ied]” for Beach

Community before disbursing the funds: “Delivery either by fax, e-mail, call. You

know, you don’t disburse unless lender says green light. . . . And then upon that

authorization, hopefully by then have their funds in the account, and then disburse

according to the closing statement.” Bennett said he was not responsible for

determining the authenticity of signatures, but this fact does not resolve whether

he obtained physical possession of the guaranty as a representative of Beach

Community.

3. St. Paul Is Not Entitled to Summary Judgment on the Ground That Beach
Community Did Not Act in Good Faith.

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 St. Paul also argues that it is entitled to summary judgment because Beach

Community failed to satisfy the requirement of good faith when it made no effort

to verify the authenticity of the signature on the guaranty, but St. Paul complains

of actions by Beach Community that can be described as nothing more than

negligence. We have held that the requirement of good faith in the forgery

provision of a financial institution bond does not bar recovery under Florida law

when the insured failed to verify the legitimacy of financial statements because

“[o]rdinary negligence, without more, does not convert good faith into bad.” First

Nat’l Bank of Fort Walton Beach v. U.S. Fid. & Guar. Co., 416 F.2d 52, 57 (5th

Cir. 1969). The Florida Supreme Court has also acknowledged that issuers of

financial institution bonds assume the risk of negligence by the insured bank and

that this risk is reflected in the premiums issuers charge to banks. Dixie Nat’l

Bank of Dade Cnty. v. Emp’rs Commercial Union Ins. Co. of Am., 463 So. 2d

1147, 1152 (Fla. 1985). We cannot say that the record establishes without dispute

a lack of good faith that would support a summary judgment in favor of St. Paul.

IV. CONCLUSION

We VACATE the summary judgment in favor of St. Paul and REMAND

for further proceedings.

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