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Jefferson Bank v. Progressive Cas. Ins. Co.

filed: June 10, 1992.

JEFFERSON BANK, APPELLANT
v.
PROGRESSIVE CASUALTY INSURANCE COMPANY



On Appeal From the United States District Court For the Eastern District of Pennsylvania. (D.C. Civil Action No. 90-00584)

Before: Becker, Scirica, and Roth, Circuit Judges

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

This appeal, from a grant of summary judgment in a diversity case governed by Pennsylvania law, requires us to construe a Banker's Blanket Bond, a policy that insures against bank losses resulting from various types of criminal activity. Plaintiff-appellant Jefferson Bank ("Jefferson") brought suit on a Banker's Blanket Bond against its insurer, Progressive Casualty Insurance Company ("Progressive"), to recover for the loss of $600,000, which Jefferson had loaned to an unscrupulous lawyer engaged in a scheme to defraud Jefferson and several other Philadelphia banks. Jefferson attempted to secure repayment of the loan by taking a first mortgage on a residential property owned by the lawyer. That mortgage, however, ultimately proved worthless to Jefferson for two reasons.

First, unbeknownst to Jefferson, the mortgage was acknowledged not by a notary public but by an imposter posing as a notary. This deficient acknowledgement rendered the mortgage unrecordable and therefore incapable of achieving priority over third parties under Pennsylvania law. Second, also unbeknownst to Jefferson, its mortgage was never left for recording. This failure to record proved fatal to Jefferson because the lawyer-mortgagee was insolvent and had mortgaged the same property to a number of other lenders, including one whose mortgage was effectively recorded before Jefferson's.

The district court held that the policy did not cover the loss and therefore granted summary judgment for Progressive. Although we agree with the district court that coverage was clearly not provided under one portion of the insurance policy, we believe that Jefferson was potentially covered under another portion and that there is a genuine issue of material fact as to the existence of such coverage. We will therefore reverse the judgment of the district court and remand for further proceedings.

I. BACKGROUND FACTS

Late in 1988, Jefferson agreed to loan $600,000 to Frederick Shapiro, a lawyer with whom it had previous financial dealings. As security for the loan, Shapiro agreed to grant Jefferson a first mortgage lien on his real property located at 1708 Locust Street, Philadelphia, Pennsylvania, and to obtain title insurance on the property by the time of the closing.

On December 16, 1988, Shapiro met with Jefferson's agent, Charles Kerrigan, to close the loan. Also attending the closing was a woman who claimed to be "Sandra Stevenson." Shapiro represented to Kerrigan that "Stevenson" was both a notary and a vice president of Sterling Abstract Corporation, which, Shapiro claimed, was an authorized agent for Ticor Title Insurance Company ("Ticor"). Shapiro presented Kerrigan with a supposedly current title commitment issued by Ticor on the Locust Street property. During the closing, "Stevenson" acknowledged the mortgage and notarized it with a notary's seal and stamp. Kerrigan witnessed Shapiro's signature on the mortgage. Shapiro and Kerrigan agreed that "Stevenson," acting as a representative of Sterling Abstract, would have the mortgage recorded.

Unfortunately for Jefferson, Shapiro, using similar schemes and the same real estate as security, also borrowed money from six or seven other banks. Shapiro secured one loan before the Jefferson loan and the remainder of the loans afterward. Ultimately, he found himself in such a hopeless financial situation that he surrendered to the U.S. Attorney and confessed. The U.S. Attorney began contacting the banks and, in August 1989, informed Jefferson that it had been one of the victims of Shapiro's scheme.

Jefferson soon discovered the extent of the fraud perpetrated against it by Shapiro and "Stevenson." The Ticor title commitment presented at closing was counterfeit. To create this document, Shapiro had altered an authentic Ticor title commitment that he had obtained in connection with an earlier real estate transaction. In addition, Sterling Abstract, a creation of Shapiro's, was not an authentic title insurer. "Sandra Stevenson" was an imposter. She held no position with either Sterling Abstract or Ticor and was not an authorized notary public. Moreover, she never recorded the mortgage that was executed at the closing.

"Stevenson's" invalid notarization and failure to record proved particularly damaging for Jefferson because on December 15, 1988, one day before the Jefferson closing, Shapiro had borrowed money from Royal Bank. In exchange for that loan, Royal Bank apparently had obtained a validly notarized first mortgage on Shapiro's property at 1708 Locust Street.*fn1 Under Pennsylvania law, the Royal Bank purchase-money mortgage would have had priority over other liens from the time it was delivered to the mortgagee, if it was recorded within ten days after its date. 42 Pa Cons Stat Ann § 8141(1) (Purdon 1982).*fn2

The Royal Bank mortgage was not recorded, however, until January 26, 1989, forty-two days after the Jefferson closing. Thus, under section 8141(1), Royal's priority did not begin until the date of actual recording, January 27, 1989. Because the Royal Bank mortgage was not promptly recorded, had the Jefferson mortgage on the Locust Street property been properly notarized and recorded between December 16, 1988 and January 26, 1989, it would have had priority, and Jefferson would have been adequately secured against the loss it now claims. However, the mortgage was not properly notarized and recorded, and, by the time Jefferson discovered the fraud, the Royal Bank mortgage was recorded and had first priority as a lien on the property.*fn3 Because the value of the Royal mortgage equalled the equity Shapiro had in the Locust Street property, Jefferson would have been unable to recover its loan through foreclosure of its subordinate lien.

Realizing that it could not recover on the Locust Street property or from Shapiro's other assets, Jefferson filed a claim under the Banker's Blanket Bond issued by Progressive. Progressive denied the claim, and Jefferson filed the present complaint. On November 19, 1990, the district court denied Jefferson's motion for summary judgment while granting Progressive's motion. Jefferson moved for reconsideration, which the district court denied without opinion. This appeal followed. The district court had subject matter jurisdiction under 28 USC § 1332, and we have appellate jurisdiction under 28 USC § 1291.

II. THE INSURANCE POLICY

The Banker's Blanket Bond covers Jefferson for losses from embezzlement, robbery, larceny, false pretenses, forgery, receipt of counterfeit money and other criminal acts. Within these broad categories of covered loss, however, certain types of loss are excluded from coverage. One such exclusion, the Loan Exclusion Clause, limits recovery for losses resulting from defaulted loans:

Section 2. This bond does not cover:

(e) loss resulting directly or indirectly from the complete or partial non-payment of, or default upon, any Loan or transaction involving the insured as a lender or borrower, or extension of credit, including the purchase, discounting or other acquisition of false or genuine accounts, invoices, notes, agreements or Evidences of Debt, whether such loan, transaction or extension was procured in good faith or through trick, artifice, fraud or false pretenses, except when covered under Insuring Agreements (A), (D) or (E);

Pursuant to various exceptions to the Loan Exclusion Clause, however, the Bond does provide coverage for certain types of loan losses. Two exceptions are relevant in this case. First, the Fraudulent Mortgage Rider to the Bond provides an exception to the Loan Exclusion Clause for loan losses resulting from mortgages or "like instruments" that contain a fraudulently obtained signature:

Loss through the Insureds having in good faith and in the course of business in connection with any loan, accepted or received or acted upon the faith of any real property mortgages real property deeds of trust or like instruments pertaining to realty or assignments of such mortgages, deeds of trust or instruments which prove to have been defective by reason of the signature thereon of any person having been obtained through trick, artifice, fraud or false pretenses or the signature on the recorded deed conveying such real property to the mortgagor or grantor of such mortgage or deed of trust having been obtained by or on behalf of such mortgagor or grantor through trick, artifice, fraud or false pretenses.

Second, Insuring Agreement E provides coverage for loan losses which result because one or more of certain enumerated loan documents used in transacting the mortgage are stolen or contain forgeries or alterations. Specifically, Insuring Agreement E provides coverage for:

SECURITIES

(E) loss resulting directly from the insured having, in good faith, for its own account or for the account of others,

(1) acquired, sold, 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 conveying title to, or discharging a ...


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