Bank of Brewton v. TheTravelers Companies, Inc. et al
ORDER granting 49 Motion for Summary Judgment; denying 64 Motion for relief under Rule 56(h). The Bank's claims against the defendants are dismissed with prejudice.. Signed by Chief Judge William H. Steele on 5/21/2014. (tgw)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
BANK OF BREWTON,
) CIVIL ACTION 13-0176-WS-B
THE TRAVELERS COMPANIES, INC., )
This matter is before the Court on the defendants’ motion for summary
judgment and on the plaintiff’s motion for relief under Rule 56(h). (Docs. 49, 64).
The parties have filed briefs and evidentiary materials in support of their
respective positions, (Docs. 50-52, 56-57, 61-62, 64, 67-68), and the motions are
ripe for resolution. After careful consideration, the Court concludes that the
defendants’ motion is due to be granted and the plaintiff’s motion denied.
The plaintiff (“the Bank”) was at all relevant times covered under a
financial institution bond (“the Bond”) issued by the defendants. As relevant here,
the Bond provides that the underwriter “agrees to indemnify the Insured for …
[l]oss resulting directly from the Insured having, in good faith, for its own account
or for the account of others … extended credit … on the faith of any item listed in
(a)(i) through (a)(iv) above [including a “Certificated Security”], which is a
Counterfeit.” (Doc. 52, Exhibit A at 5, 7-8). “Counterfeit means an imitation
which is intended to deceive and to be taken as an original.” (Id. at 15).
Most of the facts recounted herein are taken from the plaintiff’s version; the
balance come from the defendants but are unchallenged by the plaintiff.
Over a period of years, the Bank made a number of loans to Jackson Hines
and certain businesses (collectively, “Hines”). Over time, these loans began to be
consolidated and renewed. In 2005, Hines assigned the Bank 180 shares in The
Securance Group (“TSG”) as security and delivered to the Bank a stock certificate
reflecting these shares (“Certificate No. 2”). (Doc. 56 at 5). At some point, Hines
delivered to the Bank a second stock certificate reflecting an additional 180 shares
in TSG (“Certificate No. 7”). In March 2009, a Bank employee compared the two
certificates and realized that Certificate No. 2 was not an original stock certificate
but a color copy of the original. (Id. at 6).
When approached, Hines told the Bank he had mistakenly given the Bank a
copy rather than the original of Certificate No. 2 and that he had since lost the
original. Hines advised TSG he had lost the original of Certificate No. 2 and
asserted he had not pledged or encumbered Certificate No. 2 other than with the
Bank. (Doc. 56 at 6; Plaintiff’s Exhibit 13). TSG issued a replacement certificate
(“Certificate No. 11”), which the Bank received in April 2009. (Doc. 56 at 6).
In December 2009, Hines executed a promissory note in favor of the Bank
in the principal amount of approximately $1.5 million. This represented a renewal
of several prior loans to Hines. Another note of approximately $95,000, was
executed to cover fees associated with the larger transaction. The Bank would not
have entered these transactions absent the entirety of the collateral, including the
360 shares of TSG. (Doc. 56 at 4).
In April 2010, the Bank discovered that Hines had actually pledged the
original of Certificate No. 2 to another bank in 2007. This rendered replacement
Certificate No. 11 null and void, since it represented the same shares as Certificate
No. 2. Hines failed to replace the 180 shares with other collateral, defaulted on the
December 2009 loans, and filed for bankruptcy. (Doc. 56 at 6-7). The Bank
promptly submitted a proof of loss to the defendants, but they have not paid the
The complaint asserts claims for breach of contract and bad faith. (Doc. 17
at 41-42). The defendants seek summary judgment as to both claims.
Summary judgment should be granted only if “there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a). The party seeking summary judgment bears “the initial
burden to show the district court, by reference to materials on file, that there are no
genuine issues of material fact that should be decided at trial.” Clark v. Coats &
Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991). The moving party may meet its
burden in either of two ways: (1) by “negating an element of the non-moving
party’s claim”; or (2) by “point[ing] to materials on file that demonstrate that the
party bearing the burden of proof at trial will not be able to meet that burden.” Id.
“Even after Celotex it is never enough simply to state that the non-moving party
cannot meet its burden at trial.” Id.; accord Mullins v. Crowell, 228 F.3d 1305,
1313 (11th Cir. 2000); Sammons v. Taylor, 967 F.2d 1533, 1538 (11th Cir. 1992).
“If the party moving for summary judgment fails to discharge the initial
burden, then the motion must be denied and the court need not consider what, if
any, showing the non-movant has made.” Fitzpatrick v. City of Atlanta, 2 F.3d
1112, 1116 (11th Cir. 1993); accord Mullins, 228 F.3d at 1313; Clark, 929 F.2d at
“If, however, the movant carries the initial summary judgment burden ...,
the responsibility then devolves upon the non-movant to show the existence of a
genuine issue of material fact.” Fitzpatrick, 2 F.3d at 1116. “If the nonmoving
party fails to make ‘a sufficient showing on an essential element of her case with
respect to which she has the burden of proof,’ the moving party is entitled to
summary judgment.” Clark, 929 F.2d at 608 (quoting Celotex Corp. v. Catrett,
477 U.S. 317 (1986)) (footnote omitted); see also Fed. R. Civ. P. 56(e)(2) (“If a
party fails to properly support an assertion of fact or fails to properly address
another party’s assertion of fact as required by Rule 56(c), the court may …
consider the fact undisputed for purposes of the motion ….”).
In deciding a motion for summary judgment, “[t]he evidence, and all
reasonable inferences, must be viewed in the light most favorable to the
nonmovant ….” McCormick v. City of Fort Lauderdale, 333 F.3d 1234, 1243
(11th Cir. 2003).
I. Breach of Contract.
In order to prevail on this claim, the Bank’s loss must have resulted directly
from its conduct in extending credit, in good faith, on the faith of a counterfeit
stock certificate. There are two candidates: Certificate No. 2 and Certificate No.
A. Certificate No. 2.
Certificate No. 2 cannot support the Bank’s claim because, even if it is a
“counterfeit” as defined by the Bond, the Bank suffered no loss resulting directly
from having relied (or having relied in good faith) on that certificate as a genuine
original document. As the Bank repeatedly insists, its only loss occurred in
connection with the December 2009 loans. (Doc. 56 at 15, 23, 24, 26, 29). As of
April 2009, the Bank knew that Certificate No. 2 was a copy, not an original.
(Nall Affidavit at 2). Moreover, in April 2009 the Bank announced that it
“considers Certificate #2 null and void and releases Certificate #2 and accepts
Certificate #11 as collateral on [Hines’s] current debts.” (Doc. 52, Exhibits K,
M).3 As the defendants correctly note, (Doc. 61 at 2), after April 2009 the Bank
The Bank concedes that Certificate No. 7 is not counterfeit. (Doc. 56 at 7 n.7).
“The Bank’s practices require physical possession of a stock certificate used as
collateral for a loan,” (Nall Affidavit at 2), because “[a] copy of a stock certificate would
not constitute an assignment ….” (Doc. 56 at 20). Thus, once the Bank knew that
Certificate No. 2 was a copy, it also knew the certificate was worthless.
could not possibly have relied in good faith on Certificate No. 2 in extending
credit to Hines.4 The Bank agrees, insisting that all of the defendants’ arguments
concerning Certificate No. 2 are “irrelevant.” (Doc. 56 at 28 & n.17).
B. Certificate No. 11.
Certificate No. 11 cannot support the Bank’s claim because it is not
“counterfeit” within the contemplation of the Bond. As noted, “[c]ounterfeit
means an imitation which is intended to deceive and to be taken as an original.”
(Doc. 52, Exhibit A at 15). The Bank insists that Certificate No. 11 is an
“imitation” of Certificate No. 2 because it “simulate[d]” Certificate No. 2 and
“purported to be” Certificate No. 2. (Doc. 56 at 18; Doc. 67 at 3-4). The Bank is
Certificate No. 11 is certainly similar to Certificate No. 2. (Doc. 52,
Exhibit U). It has the same emblem, the same border, and the same pre-printed
language as Certificate No. 2 (as presumably do all stock certificates of TSG).5
Both certificates fill in the blanks for owner and number of shares with the words,
“Jack W. Hines, Jr.” and “One hundred eighty,” respectively.
But there are important and obvious differences as well. First, Certificate
No. 2 is dated December 6, 2004, while Certificate No. 11 is dated April 6, 2009.
Second, the name and signature of TSG’s president are different. Third, the name
and signature of its secretary-treasurer are different. Finally, and definitively, the
prominently displayed certificate number is different: Certificate No. 2 announces
that it is number “2,” while Certificate No. 11 states that it is number “11.”
First National Bank v. Cincinnati Insurance Co., 2005 WL 2460719 at *4 (E.D.
Wis. 2005) (to satisfy the “good faith” requirement, “the bank must have relied on the
document at issue without any inside knowledge of its falsity or any incentive to act on it
knowing it was false”).
It presumably has the same color as well but, since the parties provided only
black-and-white photocopies, the Court cannot verify this similarity.
In light of these uncontroverted facts, the Bank’s suggestion that Certificate
No. 11 purports to be the original of Certificate No. 2 is untenable. Certificate No.
11 purports to be precisely what it says it is: Certificate No. 11. The Bank –
which still had a copy of Certificate No. 2 in its possession for comparison, (Nall
Affidavit at 2); which understood that the original Certificate No. 2 was lost;
which had expressly declared Certificate No. 2 null and void; which considered
Certificate No. 11 a “replacement” for Certificate No. 2, (id.); and which had
expressly released Certificate No. 2 in exchange for Certificate No. 11 – could not
possibly have believed that Certificate No. 11 was really the long-lost original of
Certificate No. 2. Notably, the Bank does not assert that it harbored such a belief,
and any such assertion would be ludicrous.6
The Bank’s problem is fatal because, in order to be a counterfeit under the
Bond, a document must be a fake version of an existing, genuine document, and it
must possess sufficient similarity to the original to render it plausible that it is the
genuine original of that which it imitates. The “consistent line of authority”
among the “[n]umerous other courts [that] have interpreted the same definition of
‘counterfeit’ [as used in the Bond] … requires a fake document that is an imitation
or duplicate of a preexisting original document.” Dakota West Credit Union v.
CUMIS Insurance Society, Inc., 532 F. Supp. 2d 1110, 1115 (D.N.D. 2008) (citing
cases).7 “‘Counterfeit’ also means the imitation of an instrument that is authentic
such that a party is deceived on the basis of the quality of the imitation.” Id.
Without asserting that it believed this to be true, the Bank represents that TSG’s
president has sworn that “Certificate No. 11 was in fact No. 2” and that
“Certificate No. 11 represented Certificate No. 2.” (Doc. 56 at 6, 28). He has done no
such thing. Instead, the affiant testified only that “Certificate No. 11 represented the
exact shares as No. 2, and was intended to be the equivalent of Certificate No. 2.”
(Lovelace Affidavit at 2 (emphasis added)).
See also First Federal Savings Bank v. Continental Casualty Co., 768 F. Supp.
1449, 1456 (D. Kan. 1991); State Bank of the Lakes v. Kansas Bankers Surety Co., 1999
WL 674739 at *3 (N.D. Ill. 1999); National City Bank v. St. Paul Fire & Marine
Insurance Co., 447 N.W.2d 171, 178-79 (Minn. 1989).
(citing cases).8 The original of Certificate No. 2 is an underlying genuine
document, but Certificate No. 11 is not a fake version of Certificate No. 2 but
rather a genuine original of Certificate No. 11, and this is so painfully obvious that
Certificate No. 11 has not the slightest capacity to deceive anyone – least of all the
Bank – into believing it is the original of Certificate No. 2.
The Bank concedes that a document cannot be a counterfeit under the Bond
unless it “purports to be something that it is not.” (Doc. 67 at 3 (internal quotes
omitted)). Because Certificate No. 11 patently does not purport to be the original
of Certificate No. 2, it cannot be a counterfeit under the Bond.9
The Bank devotes most of its attention, not to supporting its assertion that
Certificate No. 11 is counterfeit, but to insisting that the defendants should not be
allowed to point out the pellucid bankruptcy of its position. First, the Bank
complains that the defendants did not deny that Certificate No. 11 is counterfeit
until their reply brief. (Doc. 63 at 1-3). Second, the Bank argues that the
defendants waived this argument, or are estopped to assert it, because they did not
See also North Shore Bank v. Progressive Casualty Insurance Co., 674 F.3d
884, 888 n.2 (7th Cir. 2012); Reliance Insurance Co. v. Capital Bancshares, Inc., 912
F.2d 756, 757 (5th Cir. 1990); French American Banking Corp. v. Flota Mercante
Grancolombiana, S.A., 752 F. Supp. 83, 92 (S.D.N.Y. 1990), aff’d, 925 F.2d 603 (2nd Cir.
It is true that the 180 shares referenced in Certificate No. 11 are the same 180
shares referenced in Certificate No. 2. But that fact only makes the subject matter of the
two documents the same; it does not render the documents themselves the same
document or convert Certificate No. 11 into a fake version of Certificate No. 2.
It is also true that there is a misrepresentation lurking in Certificate No. 11 – the
representation that the shares represented by Certificate No. 2 had not been pledged
elsewhere – but that is not a misrepresentation that Certificate No. 11 is in fact the
original of Certificate No. 2. The Bond covers only the latter type of misrepresentation.
E.g., North Shore Bank, 674 F.3d at 887 (“Earlier courts considering prior versions of the
bond [i.e., the version used in the Bond] discussed the requirement that a counterfeit be
not simply a fraudulent document meant to deceive, but also an imitation or duplicate of a
preexisting genuine original document.”) (internal quotes omitted); accord French
American Banking Corp. v. Flota Mercante Grancolombiana, S.A., 925 F.2d 603, 604
(2nd Cir. 1991).
mention it during the almost three years between receipt of the Bank’s proof of
loss and the filing of this lawsuit. (Doc. 67 at 5-6).
“District courts, including this one, ordinarily do not consider arguments
raised for the first time on reply.” Samuels v. Midland Funding, LLC, 921 F.
Supp. 2d 1321, 1333 (S.D. Ala. 2013). But the qualifier – “ordinarily” – admits of
exceptions. For example, when the issue goes to subject matter jurisdiction, the
Court will consider an argument first raised in reply. New Hampshire Insurance
Co. v. Wiregrass Construction Co., 2010 WL 2038298 at *2 n.2 (S.D. Ala. 2010).
Another exception arises when the non-movant in its responsive brief for
the first time articulates a theory of recovery that was not fairly disclosed by the
pleadings or by other communications from the non-movant. In such a situation,
the reply brief represents the movant’s first opportunity to assert an argument in
opposition to the newly advanced theory.
That is precisely what occurred in this case. The Bank’s complaint alleges
generally a loss “based on a forged or counterfeit stock certificate.” (Doc. 17 at
41). The Bank’s supplement to the Rule 26 report likewise speaks only of a
“counterfeit stock certificate.” (Doc. 38 at 1). Note in both cases the singular
“certificate,” which justified the defendants in concluding that only one certificate
was at issue.10 The defendants understood the alleged counterfeit stock certificate
to be Certificate No. 2, (Doc. 40), and they proceeded on that basis. Their
assumption was perfectly reasonable since, as discussed above, Certificate No. 2
was plausibly a counterfeit11 while Certificate No. 11 patently was not, and they
were justified in assuming that the Bank was not advancing a facially indefensible
Indeed, since the complaint limits the Bank’s claim to a single stock certificate,
and since the time for amending the pleadings has long since passed, the defendants
presumably could have moved successfully to foreclose the Bank from relying on
Certificate No. 11 as a second counterfeit certificate.
As explained in Part I.A, the defendants are entitled to summary judgment as to
Certificate No. 2 not because that certificate is not a counterfeit but because other
elements of coverage are unsatisfied.
argument. The Bank has throughout this litigation focused on Certificate No. 2,
not Certificate No. 11, further justifying the defendants’ understanding.12 The
Bank, which ignores these facts, has pointed to nothing that reasonably should
have put the defendants on notice it was advancing a claim that Certificate No. 11
was counterfeit. Accordingly, the Court concludes that it is appropriate to
consider the defendants’ argument that Certificate No. 11 was not counterfeit.13
As for waiver or estoppel based on the defendants’ pre-litigation failure to
deny that Certificate No. 11 is counterfeit, there are at least two fatal flaws in the
Bank’s position. First, the Bank has not shown that it ever advised the defendants
that it contends Certificate No. 11 is counterfeit and, absent such an assertion,
there was nothing for the defendants to deny. Second, the Bank has offered no
authority or other support for the proposition that the defendants’ silence (had they
been informed of the Bank’s position) precludes them from challenging the
Bank’s position now.14
II. Bad Faith.
“[C]ontractual liability is a prerequisite for liability for bad faith.
Therefore, one who cannot prove she was entitled to benefits under an insurance
policy cannot recover on a bad-faith claim.” Acceptance Insurance Co. v. Brown,
Even its 35-page brief in opposition to the instant motion is focused almost
entirely on Certificate No. 2. (Doc. 56).
The Bank, which sought and received permission to file a sur-reply brief
addressing this argument, has not been prejudiced by the Court’s consideration of the
The Bank asserts (but the defendants dispute) that the defendants denied the
Bank’s claim years ago on the grounds there was no forgery, without considering whether
there was coverage under the “counterfeit” provision. (Doc. 67 at 5). The Bank argues
that the defendants, having once denied its claim on one ground (no forgery), cannot now
justify their denial on another ground (no counterfeit). (Doc. 56 at 2 n.3). Their single
authority actually stands only for the proposition that an insurer, having denied a claim
based on non-coverage, cannot thereafter assert forfeiture. Because the defendants are
not asserting forfeiture but non-coverage, the Bank’s authority is inapposite.
832 So. 2d 1, 16 (Ala. 2001). The same rule applies to both normal and abnormal
claims of bad faith. State Farm Fire & Casualty Co. v. Slade, 747 So. 2d 293, 318
(Ala. 1999) (“[W]e make clear that in order to recover under a theory of an
abnormal case of bad-faith failure to investigate an insurance claim, the insured
must show … that the insurer breached the contract for insurance coverage with
the insured when it refused to pay the insured’s claim.”); accord Hillery v. Allstate
Indemnity Co., 705 F. Supp. 2d 1343, 1364 (S.D. Ala. 2010). The defendants
point out this requirement, (Doc. 50 at 26), and the Bank has not responded. (Doc.
56 at 34-35). Because the Bank cannot establish a claim for breach of contract,
neither can it establish a claim of bad faith.
The defendants filed a counterclaim, which seeks a declaration that they are
not obligated to the Bank with respect to its claimed loss. (Doc. 21 at 15-18). One
asserted ground is that the Bank did not suffer loss directly resulting from having
relied in good faith on the assumed validity of Certificate No. 2. (Id. at 17-18).
As discussed in Part I.A, the defendants are correct. Accordingly, the defendants
are entitled to summary judgment on their mirror-image counterclaim.
IV. Rule 56(h).
The Bank argues that paragraph 4 of the affidavit of Donna Williams was
submitted in bad faith and that, as a sanction under Rule 56(h), the defendants’
motion for summary judgment should be denied. (Doc. 64 at 1, 7).
Rule 56(g) was amended in 2010 and reclassified as Rule 56(h). Before the
amendment, sanction was mandatory upon a finding of bad faith, and the only
identified sanctions were contempt and an award of expenses. Fed. R. Civ. P. 56
advisory committee notes, subdivision (h). Now, “[s]anctions are made
discretionary, not mandatory, reflecting the experience that courts seldom invoke
the independent Rule 56 authority to impose sanctions.” Id. Moreover, the Court
“has wide discretion in deciding what constitutes ‘bad faith.’” 10B Charles A.
Wright, Arthur R. Miller &. Mary K. Kane, Federal Practice and Procedure § 2742
at 447 (3rd ed. 1998).
The Court is unpersuaded that paragraph 4 of Williams’ affidavit was
submitted in bad faith. Even had that paragraph been submitted in bad faith,
denial of summary judgment would be an inappropriate sanction, given that
paragraph 4 has absolutely no bearing on the Court’s resolution of the motion for
summary judgment.15 Accordingly, the motion for relief under Rule 56(h) is
For the reasons set forth above, the defendants’ motion for summary
judgment is granted. The Bank’s claims against the defendants are dismissed
with prejudice. Judgment shall be entered accordingly by separate order.
DONE and ORDERED this 21st day of May, 2014.
s/ WILLIAM H. STEELE
CHIEF UNITED STATES DISTRICT JUDGE
Paragraph 4 is relevant to the quality of the defendants’ investigation for
purposes of the Bank’s bad faith claim but, as discussed in Part II, that claim fails
regardless of the quality of the defendants’ investigation, since the Bank is unable to
establish a breach of the Bond.
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