April 21, 2005
MEMORANDUM OF DECISION
The court hereby adopts verbatim the facts set forth in the stipulation of the parties:
1. On or about January 1, 2001, the plaintiff entered into a contract with the defendant under the provisions of a Credit Union Bond Policy designated as Bond No. BB060345, which was attached to the plaintiff's complaint as Exhibit A.
2. On or about August 7, 2000, the plaintiff closed a loan, upon the application of Kathleen Davis ("Davis"), dated on or about July 13, 2000, issuing a line of credit to Davis in the amount of $15,000, secured by a Home Equity Consumer Revolving Loan Agreement, Disclosure Statement and Open End Mortgage Deed on property owned by her known as 5 Charter Road, Ellington, Connecticut.
3. On or about May 14, 2001, Davis, through her attorney, Margaret M. Byrne, requested a payoff amount of the balance due on the line of credit.
4. Upon receipt of the payoff amount, Davis, by her attorney's client's fund check dated May 14, 2001 in the amount of $15,096.94 issued payment to the plaintiff. Said check was received by the plaintiff on May 21, 2001 and the plaintiff issued a release of the Open End Mortgage Deed on May 22, 2001 and mailed it to Attorney Byrne.
5. When a request for pay off is received by the plaintiff for a Home Equity Consumer Revolving Loan, plaintiff's system is forced to compute interest to the expected payoff date and the account then shows a zero credit balance preventing any further advances. In the matter involving Davis, her account did not show a zero balance after providing the payoff amount to Attorney Byrne as to the credit line amount.
6. Between May 2001 and August 2002, utilizing checks given to her by the plaintiff at the August 7, 2000 closing, Davis continued to take advances and made some payments of interest and principal on such advances, all of which were subsequent to May 21, 2001.
7. The advances between May 2001 and August 2002 and the payments on them were posted on the same account number and maintained as the same account as the Line of Credit.
8. From May 2001 through August 2002, Davis took a number of advances and made a number of payments. The plaintiff at all times charged interest on the advances.
9. From May 2001 through August 2002, the plaintiff continued to send Davis account statements.
10. On August 8, 2002, Davis applied on-line for a $2,500 personal loan. At that time, the plaintiff's Loan Officer discovered that Davis had been using the closed and terminated Equity Line of Credit. Efforts were made to work with Davis to repay the plaintiff the funds she obtained by using the checks on the closed and terminated Equity Line of Credit.
11. Upon learning of the error, the plaintiff demanded payment in full or in the alternative, demanded that Davis sign another Note and Mortgage.
12. On or about September 25, 2002, Davis e-mailed a complaint to the National Credit Union Administration complaining about a denial of a personal loan which she applied for with the plaintiff. Paul Falcone, Chairman of the Supervisory Committee, forwarded a letter to the National Credit Union Administration responding to the Davis e-mail complaint.
13. Subsequent to August 2002, Davis declared bankruptcy, thwarting the plaintiff's collection efforts.
14. Victor Petroni, Vice President of the plaintiff, signed off on the initial approval of the loan request.
15. Approval of the loan was contingent upon security from a Mortgage.
16. Davis did not have any other Home Equity Lines of Credit with the plaintiff.
17. Subsequent to the issuance of the release of the Mortgage, Davis took unauthorized advances on the closed and terminated Line of Credit on various dates up to and including August 2001.
18. The unauthorized advances taken by Davis totaled Fourteen Thousand Five Hundred Two and 00/15 ($14,502.15) Dollars.
19. Despite demand by the plaintiff, Davis failed to either repay the plaintiff any of the $14,502.15 or execute a new Note and Mortgage to the plaintiff.
20. Davis ultimately filed for relief under United States Bankruptcy Court and listed the plaintiff as a creditor.
21. The plaintiff submitted a claim under its bond policy with the defendant seeking recovery of monies lost as a result of Davis' actions.
22. The defendant has refused to honor and pay the plaintiff's claim.
Whether the policy of insurance that plaintiff Credit Union obtained from defendant CUNA should provide coverage for the loss sustained by plaintiff.
CLAIMS OF PARTIES
In addressing the question, plaintiff claims that the transaction was not a loan, as the funds advanced to the borrower, Ms. Davis, were given in error. Further, plaintiff claims that, even if the transaction were found to be a loan, the loss would still be covered under the policy, as it was obtained by fraud, deceit or theft within the meaning of the policy language.
Defendant's position is that the transaction constituted a loan and that any loan falls within the plain language of the policy exclusions.
The cases dealing with the loan exclusion language of insurance policies all virtually identical to that in the present case do not focus on questions of whether the financial institution would have lent money if aware of the lender's actual situation, or whether there was a meeting of the minds that a loan be made, or even whether the intent was to make a loan. The cases which have confronted this issue are basically in agreement that a loan exists in any situation wherein a bank expects that a customer will repay monies. In Maryland Casualty Co. v. State Bank Tr. Co., 425 F.2d 979 (5th Cir. 1970), there was a complete failure of collateral, no original intent to repay and the bank customer was found guilty of theft in criminal court. The Maryland court was not persuaded:
Plaintiff insists that its loss is not the result of a complete or partial non-payment of or default in any loan made or obtained by it. Plaintiff argues that if the statements as to the payment of lien claims had been true, completion of the buildings and [that] no loss would have been suffered; hence, the fraud was the cause of the loss. The same type of claim could doubtlessly be made in almost any type of loan induced by fraud. It is undisputed that loans were made which remain unpaid in part. While the loan was induced by fraud, it seems clear that the immediate cause of the loss was the nonpayment of the loans. It is entirely clear from the exclusion provision as written that the exclusion extends to losses on loans induced by fraud.
Maryland Casualty, p. 981.
In another case remarkably similar to the present case, a bank learned that it did not have collateral for a loan that ultimately was not paid. Interpreting policy language virtually identical to that herein, the court stated that:
The bank also argues that a paid insurance or indemnity contract must be construed most favorably to the insured. The law states that when an indemnity bond is entered into for consideration, it partakes all of the essential features of insurance contracts and should be construed most strongly against the party preparing and furnishing the bond. (Citations omitted). But because it has the characteristics of an insurance contract, not just one but all of the doctrines of construction for insurance policies apply. In Leatherman v. American Family Mutual Ins. Co., 52 Wis.2d 644, 190 N.W.2d 904 (1971), this court held that the doctrine of strict construction of such policies does not apply unless an ambiguity exists. In this case we find no ambiguity . . .
This court is in agreement with the reasoning in this line of cases. The language of the policy is not ambiguous, and the immediate cause of the loss was nonpayment. See also Franklin Nat. Bank v. St. Paul Fire Marine, 266 N.W.2d 718 (1978); East Gadsden Bank v. U.S. Fidelity Guar. Co., 415 F.2d 357 (5th Circuit 1969); First National Bk. of Memphis v. Aetna Cas. Sur., 309 F.2d 702 (6th Cir. 1962); Community Fed. Sav. Loan Ass'n v. General Cas., 274 F.2d 620 (8th Cir. 1960).
As noted, plaintiff claims the monies that came in to the hands of Ms. Davis were not a loan, and that the funds were obtained by fraud. Plaintiff argues there was never a creditor/lender relationship established with Ms. Davis, and that no "loan" ever existed within the meaning of the policy. Plaintiff cites contract law to establish there was no meeting of the minds, and gives a dictionary definition of the term "loan." Insofar as the term "loan" is defined within the contract of insurance, the court is bound by the definition as set forth:
Plaintiff's counsel has cited to many Connecticut Appellate and Superior Court cases, most dealing with the interpretation of contracts. Defendant's counsel cites to a single authority. While the narrow issue presented herein appears to be one of first impression in Connecticut, this is not true in other jurisdictions where the question has been addressed many times. This court finds those cases to be well reasoned, and has chosen to rely upon them.
a. Any extension of credit by you; or
b. Any transaction creating a creditor relationship in your favor; or
c. Any transaction by which you assume an existing creditor relationship.
Exclusion 15, Insurance Contract, Joint Exhibit 1. Section 15 of the policy states that it excludes:
Any loss resulting directly or indirectly from the complete or partial nonpayment of a default on a `loan,' whether such `loan' or transaction was obtained in good faith or through trick, artifice, fraud, or false pretenses . . . (emphasis added).
While plaintiff vehemently denies that any "loan" was ever made, the record shows that plaintiff has characterized itself as a "creditor" in its filings in bankruptcy court, and referred to the funds as a loan in other documents. See Joint Exhibit 4. This court finds these statements to be admissions that the funds constituted a "loan." Nevertheless, the court relies on the language of the policy of insurance and case law in reaching its conclusions. Plaintiff argues that the contractual definition means that the plaintiff had to "actively participate" in "`extending,' `creating,' or `assuming' a relationship" with Ms. Davis and that they did not do so. Plaintiff's Brief (no pagination in brief). Plaintiff characterizes the events as "Davis [taking] advantage of a loophole in the computer system . . ." Id. Even if it were conceded that Ms. Davis had the fraudulent intent claimed by plaintiff, there can be no doubt that plaintiff, through the computer error, "assumed" a creditor relationship with Ms. Davis. The fact that the Credit Union did not intend this result has no significance. As Ms. Davis continued to write checks, they were honored by the Credit Union, statements were issued and payments accepted. This course of conduct constitutes a "loan," that is, an existing creditor relationship under the terms of the contract exclusion.
A banker's blanket indemnity bond typically excludes from coverage any loss arising out of the non-payment of a loan. The purpose of the exclusion is to avoid the risk of writing credit insurance. See Twin City Federal SL v. Transamerica Ins. Co., 413 F.2d 494, 499 (8th Cir. 1969). This is not surprising, as it is common sense to recognize that it would not be actuarially sound for insurers to assume the risk of an unknown, and perhaps infinite, number of bad debts.
Neither party has advanced a claim of non-coverage for negligence. It appears to the court that the policy would exclude any claim based on negligence. The policy covers any loss ". . . resulting directly from a named employee's `failure to perform his/her trust.'" Coverage K, Insurance Contract, Joint Exhibit 1. The definition section of the policy specifically excludes "negligence, mistakes or oversights" from the meaning of "failure to perform his/her trust." There can be no dispute that the moving cause in this entire series of events was a bank error. The error was not a computer error per se, but the failure of a bank employee to enter the proper information to indicate Ms. Davis' home equity line of credit had been closed. Thus, the situation was caused by the Credit Union's negligence. If a loss is due to negligence, this type of insurance policy excludes coverage whether one characterizes the monies obtained as a loan, or whether the funds were obtained by fraud. See Empire Bank v. Fidelity Deposit Co., 27 F.3d 333 (8th Cir. 1994).
Finally, any attempt by plaintiff to suggest that the loss was a result of theft is unavailing. The policy of insurance defines theft as:
. . . the taking of property:
a. Without your consent and with the intent to deprive you of the property; or
b. By false pretense and with the intent to deprive you of property.
Exclusion 46, Insurance Contract, Joint Exhibit 1. There is not a scintilla of evidence of theft in this case. The policy requires proof of intent to establish theft. The evidence shows no intent on the part of Ms. Davis. See Joint Exhibit 2.
For all of the foregoing reasons, the policy at issue herein does not afford coverage for the loss sustained by the credit union. Judgment is entered for defendant.