On August 10, 2023, a judge of the United States District Court for the Central District of California denied Banc of California, National Association’s (“plaintiff”) motion for summary judgment in a case against Federal Insurance Company (“defendant”). This case involved a fifteen million dollar loan the plaintiff made to a woman claiming to be an original investor in the McDonnell Douglas Corporation and one of the two proposed heirs to the McDonnell family trust. The plaintiff relied on a falsified twenty-eight million dollar account with Northern Trust as well as a statement saying the woman owned the account and a control agreement signed and notarized by a Northern Trust Officer as collateral to secure the fifteen million dollar loan. Subsequently, it was discovered the control agreement partially relied on by the plaintiff in extending the fifteen million dollar loan was a forgery and that the woman defrauded the plaintiff. The plaintiff subsequently filed suit against the defendant for breach of their insurance contract and breach of the implied covenant of good faith and fair dealing after the defendant refused to cover the plaintiff’s losses.

Ensuing Litigation

The plaintiff and the defendant filed cross motions for summary judgment in August of 2021, and the district court granted summary judgment in favor of the defendant on both the plaintiff’s claims.[i] The plaintiff then appealed the district court’s ruling as to the breach of contract claim to the United States Court of Appeals for the Ninth Circuit. To be covered under the applicable policy, the plaintiff needed to demonstrate six elements:

(1) the forgery appeared on one of the eight listed types of collateral, including, a “Security Agreement” or an “Evidence of Debt”; (2) the loan was issued “in good faith”; (3) the forged document was “original”; (4) the loss was one “resulting directly” from giving the loan; (5) the document “b[ore] a Forgery”; and (6) the insured relied on the forged document in making a loan.[ii]

The Ninth Circuit reversed the ruling of the district court, holding the first element was met by the plaintiff.[iii] The court then remanded the case back to the district court to consider whether any of the other five aforementioned elements were met.

Following the remand, the district court concluded that questions of material fact remained as to element two, whether the loan was issued in good faith, and as to element four, whether the loss was one resulting directly from giving the loan.[iv] As a result, plaintiff’s motion for summary judgment was denied. As to whether the loan was issued in good faith, the district court stated in relevant part:

In sum, the evidence shows that the executive charged with managing risk at Banc raised his concerns that the loan was not truly cash-secured with other key decisionmakers. Again, “good faith” is a subjective standard that hinges on what the insured believed at the time. Based on this evidence, a factfinder could find that even though Banc knew damage was highly likely to result if it issued McDonnell a loan without cash security, Banc issued the loan without in fact believing it was cash secured. In other words, a factfinder could find that Banc issued the non-cash-secured loan “with knowledge that damage [was] highly probable or substantially certain to result.” California Amplifier, 94 Cal. App. 4th at 116–17. If that were the case, Banc’s loss would not be the result of “good faith,” but the result of willful conduct as it has been interpreted under section 533. Coverage under the Policy would be precluded. Because there is a factual inquiry on this prong, the Court DENIES summary judgment for Banc.[v]

As to element four concerning whether the loss was one ‘resulting directly’ from giving the loan, the district court stated in pertinent part:

Whether the forgery was the efficient proximate cause of Banc’s loss is a question for the trier of fact. See Pyramid Techs., 752 F.3d at 821 (reversing summary judgment for business insurer because “[u]nder California’s efficient proximate cause doctrine, whether the damage” was caused by a covered event “is an issue for the jury”). The Court therefore DENIES summary judgment on this prong as well.[vi]

Takeaway

It is uncertain whether the plaintiff will prevail on its claims against the defendant. As summary judgment was denied, the plaintiff’s claims will have to be determined by a jury. In essence, a jury will have to find that the plaintiff has satisfied all six elements to establish coverage under the applicable policy issued by the defendant. If the jury finds even one element lacking, the plaintiff will not be covered and will be on the hook for any losses which resulted from the fifteen-million-dollar loan issued. This case will no doubt provide guidance regarding what “good faith” in issuing a loan means and when insurers will and will responsible for providing coverage on loans involving fraudulent conduct by the applicant.

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Sources

[1] Trial court’s Ruling on Defendant’s Motion For Summary Judgment, Banc of California, National Association v. Federal Insurance Company Case. No. 8:20-cv-00132-WLH-DFM, 9th Circ. Ct. of Appeals (August 2021)

[1] 9th Circ. Ct. of Appeals Memorandum, Banc of California, National Association v. Federal Insurance Company Case. No. 8:20-cv-00132-WLH-DFM, 9th Circ. Ct. of Appeals (Dec. 2022)

[1] 9th Circ. Ct. of Appeals Ruling on Defendant’s Motion For Summary Judgment, Banc of California, National Association v. Federal Insurance Company Case. No. 8:20-cv-00132-WLH-DFM, 9th Circ. Ct. of Appeals (August 2021)

[1] Trial court’s Ruling on Plaintiff’s Motion For Summary Judgment, Banc of California, National Association v. Federal Insurance Company Case. No. 8:20-cv-00132-WLH-DFM, 9th Circ. Ct. of Appeals (August 10, 2023)

[1] Trial court’s Ruling on Plaintiff’s Motion For Summary Judgment, Banc of California, National Association v. Federal Insurance Company Case. No. 8:20-cv-00132-WLH-DFM, 9th Circ. Ct. of Appeals (August 10, 2023)

[1] Trial court’s Ruling on Plaintiff’s Motion For Summary Judgment, Banc of California, National Association v. Federal Insurance Company Case. No. 8:20-cv-00132-WLH-DFM, 9th Circ. Ct. of Appeals (August 10, 2023)