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Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

UNITED BANK & TRUST COMPANY OF ) 

NORMAN, OKLAHOMA, an Oklahoma ) 

state banking corporation, ) 

) 

Plaintiff-Appellee, ) 

) 

v. ) 

) 

THE KANSAS BANKERS SURETY ) 

COMPANY, a Kansas corporation, ) 

) 

Defendant-Appellant. ) 

No. 89-6115 

FILED 

(Jnited States Court of Appeals 

Tench Circuit 

APR 2 4 1990 

ROBERT L. I-IOECKER 

Clerk 

Appeal from the United States District Court 

For the Western District of Oklahoma 

D.C. No. CIV-88-727-W 

Steven M. Dickey (Todd Markum with him on the brief) of Dickey & 

Dickey, Oklahoma City, Oklahoma, for Plaintiff-Appellee. 

Gregory J. Bien of Sloan, Listrom, Eisenbarth, Sloan & Glassman of 

Topeka, Kansas, for Defendant-Appellant. 

Before MOORE and EBEL, Circuit Judges, and SAM, District Judge.* 

MOORE, Circuit Judge. 

*Honorable David Sam, United States District Judge for the 

District of Utah, sitting by designation. 

Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 1 
This appeal arises from a dispute over whether a bankers 

blanket bond issued by The Kansas Bankers Surety Company (KBS) to 

United Bank & Trust Company of Norman, Oklahoma, covers a loss 

suffered by United as a result of its accepting counterfeit 

securities as collateral. The facts were undisputed, and the 

parties filed cross-motions for summary judgment. The district 

court held that the bond covered the loss and entered judgment for 

$38,000 in favor of United. KBS appeals this ruling. We conclude 

the district court incorrectly determined United sustained the 

loss while covered by KBS's bond; therefore, we reverse. 

On October 1, 1984, United loaned Jack Taylor $25,721.23 in 

exchange for which Mr .. Taylor executed a promissory note and 

security agreement and delivered to United original stock 

certificates as collateral. Mr. Taylor timely renewed the note on 

four occasions, reducing the principal amount each time. On 

May 23, 1985, more than seven months after the Taylor transaction, 

KBS issued a bankers blanket bond to United. The bond 

incorporates a Loss Sustained Rider which provides that the bond 

"applies to loss sustained and discovered by [United] after 12:01 

a.m. of [May 23, 1985,] and while this bond is in force." 

(emphasis added). The Rider also provides that "[l]oss sustained 

occurs at the time of the act, casualty or event which caused the 

loss." (emphasis added). Finally, Insuring Agreement (E) of the 

bond covers "[l]oss resulting directly from the insured having, in 

good faith, ••• extended credit •.• on the faith of ••• any 

original •.• security" which is counterfeit. 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 2 
Mr. Taylor defaulted in November 1986. Pursuant to the 

security agreement, Merrill, Lynch, Pierce, Fenner & Smith sold 

the collateral on United's behalf for $33,957.30. United applied 

part of the proceeds to the balance due on Mr. Taylor's note and 

the remainder to another loan in the name of Jack Taylor and 

Elizabeth Bertinot. Merrill Lynch subsequently informed United 

that the securities were counterfeit. United then timely notified 

KBS of a possible claim. KBS denied coverage, asserting that 

United had sustained the loss at the time it extended credit to 

Mr. Taylor and, therefore, prior to the effective date of the 

bond. 

Merrill Lynch obtained a judgment against United for the 

sales price ·of the counterfeit securities plus $4,042.70 in 

attorneys' fees. KBS again denied coverage, and United filed this 

action against KBS to recover the $38,000 which it had paid to 

Merrill Lynch. The parties cross-moved for summary judgment on 

the issue whether United sustained the loss during the coverage 

period of KBS's bond. The district court held for United. It 

rejected KBS's argument that United sustained the loss at the time 

it extended credit to Mr. Taylor and, therefore, prior to the 

bond's effective date. It reasoned that if Mr. Taylor had not 

defaulted, United would have suffered no loss. The court found 

instead that United's actual loss occurred when Merrill Lynch 

obtained its judgment against United as a result of United's 

resort to the counterfeit collateral to satisfy Mr. Taylor's 

outstanding balance. The court found, alternatively, that United 

sustained the loss when Mr. Taylor defaulted. Since both Mr. 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 3 
Taylor's default and the judgment in favor of Merrill Lynch 

occurred during the period of coverage, the court concluded KBS 

was liable to United for the $38,000 loss which United had 

sustained. 

This court conducts a de novo review of a district court's 

ruling on summary judgment. Osgood v. State Farm Mut. Auto. Ins. 

Co., 848 F.2d 141, 143 (10th Cir. 1988). When the district court 

grants a motion for summary judgment, we must examine the record 

to determine whether a triable issue exists; if one does not, the 

only issue we face is whether the district court properly applied 

the substantive law. Id. Since the parties do not dispute the 

facts of this case, the only issue we face is whether the district 

court properly held, as a matter of law, that United sustained the 

loss at the time Merrill Lynch obtained its judgment against 

United. 

Courts interpreting fidelity bonds follow the liberal rules 

applicable to insurance contracts, not the strict rules of 

suretyship. Texas Nat'l Bank v. Fidelity & Deposit Co., 526 

S.W.2d 770, 774 (Tex. Civ. App. 1975). Where a contract is 

complete and unambiguous, its plain language is the only 

legitimate evidence of the parties' intent. Mercury Inv. Co. v. 

F.W. Woolworth Co., 706 P.2d 523, 529 (Okla. 1985). The language 

in a contract is given its plain and ordinary meaning unless some 

technical term is used in a manner meant to convey a specific 

technical concept. Id. 1 

1united filed its complaint in the District Court of Cleveland 

County, Oklahoma. The United States District Court for the 

(Continued to next page.) 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 4 
KBS contends that the district court erroneously interpreted 

the bankers blanket bond. It asserts that fidelity bonds, absent 

a clear showing of contrary intent, are presumed to have 

prospective operation only. 13 Couch on Insurance 2d § 46:176, 

137 (Rev. ed. 1982). KBS argues that by applying the bond's 

protection to an act which occurred prior to the inception of 

coverage, the district court gave the bankers blanket bond 

retrospective application despite the parties' express intent to 

limit KBS's liability to prospective losses. Without such a 

limitation, KBS contends, it would be unable to calculate the 

period for which it is liable under the bond. 

To support its position that the district court's 

interpretation would result in retrospective application of the 

bond contrary to the parties' intent, KBS points to Insuring 

Agreement (E) which defines the "act, casualty or event which 

caused the loss'' as the "exten[sion] of credit ••• on the faith 

of • • • any original [counterfeit] security." KBS further 

asserts that the bond does not cover losses resulting from the 

borrower's default or from a judgment against the insured for the 

sale of counterfeit securities because these events are not 

insured risks. Since United extended credit to Mr. Taylor in 

reliance on counterfeit securities prior to the effective date of 

(Continued from prior page.) 

Western District of Oklahoma asserted jurisdiction pursuant to 28 

U.S.C. §§ 1332, 1441. Neither the parties nor the district court 

discusses which state's law governs this case. United, however, 

does not dispute these general principles of contract law which 

KBS forwards in its brief. 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 5 
the policy, United sustained its loss before coverage began and, 

therefore, cannot recover from KBS. 

KBS cites several cases to support its contention that the 

extension of credit on the faith of counterfeit securities, and 

not the borrower's default or the insured's resorting to 

counterfeit collateral, determines when the insured sustained a 

loss. Eliot Sav. Bank v. Aetna Casualty & Sur. Co., 38 N.E.2d 59, 

63 (Mass. 1941), for example, holds a bank insured under a bond 

similar to Insuring Agreement (E) sustained a loss at the time it 

extended credit in reliance on forged securities and a forged 

power of attorney although, as in this case, the bank did not 

discover the forgeries until after the borrower had defaulted and 

judgment had been obtained against the bank based on the sale of 

the forged notes. The court reasoned that the bank sustained the 

loss at the time it exchanged its money for valueless securities 

regardless of when it discovered the loss. Id. 

KBS also cites Citizens Bank v. American Ins. Co., 289 

F. Supp. 211, 213 (D. Or. 1968), in which a bonding company sought 

to avoid coverage under Insuring Agreement (E) for a loss 

resulting from the insured bank's extending credit in reliance on 

forged securities by claiming that the insured did not sustain a 

loss until it exhausted all its remedies against the borrower and 

against the endorser of the counterfeit collateral. The court 

rejected this argument, holding the bank sustained the loss when 

it advanced money in reliance on the forged securities. Id. at 

214. 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 6 
KBS points out that the Citizens Bank court relied on 

Fitchburg Sav. Bank v. Massachusetts Bonding & Ins. Co., 174 N.E. 

324 (Mass. 1931). In that case, a bonding company also sought to 

avoid liability under an insuring agreement which defined ''loss" 

similarly to the definition of "loss" in Insuring Agreement (E) by 

asserting that the insured bank did not sustain a loss until it 

had exhausted its remedies against the borrower. Fitchburg held, 

however, that the insured suffered the loss, without regard to its 

possible remedies, when its funds were diverted through fraud. 

Id. at 328. 

KBS also distinguishes Continental Casualty Co. v. First 

Nat'l Bank, 116 F.2d 885, 887 (5th Cir.), cert. denied, 313 U.S. 

575 (1941), which interpreted a bonding agreement that insured 

''against the direct loss sustained, while this bond is in force" 

to cover only an actual loss, as opposed to a theoretical or 

bookkeeping loss. The district court relied on Continental to 

support its conclusion that KBS did not sustain a loss at least 

until Mr. Taylor defaulted because, until then, any loss resulting 

from the extension of credit in reliance on counterfeit securities 

was theoretical. KBS contends that Continental is inapposite 

because the Loss Sustained Rider defines the timing of a loss 

sustained not as the time of an actual loss but when the act 

causing the loss occurs. Insuring Agreement (E) then defines that 

act as the extension of credit in reliance on counterfeit 

securities. 

United contends that the district court correctly held that 

United sustained its loss when Merrill Lynch obtained judgment 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 7 
against United and, therefore, during the effective period of the 

loan. It asserts that Chase Nat'l Bank v. Fidelity & Deposit Co., 

79 F.2d 84 (2d Cir. 1935), on which the district court relied, 

governs this case. In Chase, Chase Bank made a loan secured by 

municipal bonds to a bank which subsequently became insolvent and 

defaulted on the loan. After the municipality repudiated its 

obligation on the bonds and the court declared the bonds invalid, 

Chase sought to recover under its indemnity policy which covered 

direct losses sustained by reason of Chase's having taken 

securities which proved to be invalid. Id. at 85. The court held 

that the loss was sustained when it became inevitable that Chase 

would have to resort to the collateral, and not when Chase made 

the loan. Indeed, the court noted, "Certainly [the loss] was not 

suffered so long as the borrower remained solvent." Id. at 87. 

United asserts that Chase is indistinguishable from this case 

because, like Chase Bank, United did not sustain a loss at least 

until Mr. Taylor defaulted on his loan. United contends, 

moreover, that Continental Casualty supports this interpretation 

of the bond. As the district court noted, Continental Casualty 

holds that a bond covering direct losses sustained while it is 

effective insures only against actual losses and not against 

theoretical or bookkeeping losses. United posits that had it 

discovered Mr. Taylor's deception prior to his default, KBS would 

have denied a claim by United, asserting that United's loss was 

theoretical until Mr. Taylor defaulted or until United had to 

resort to the collateral. Mr. Taylor's default, therefore, 

logically marks the time at which United sustained its loss. 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 8 
t7 

Under the district 

blanket bond, which 

court's interpretation of the bankers 

interpretation United champions, the bond 

covers losses resulting from an insured bank's extending credit in 

reliance on counterfeit securities, even though it makes the loan 

prior to the effective date of the bond. United argues that as 

long as the actual damages which result from the bank's later 

resorting to the counterfeit securities or, alternatively, from 

the borrower's subsequent default occur during the coverage 

period, United is protected by the bond. This interpretation 

ignores the plain language of the bond and effectively imposes 

retrospective liability on KBS for which it neither bargained nor 

was paid. Moreover, there is no evidence to negate the 

presumption that the parties intended the application of that 

language to provide prospective coverage only. The Loss Sustained 

Rider states that a loss is sustained "at the time of the act, 

casualty or event which caused the loss," and Insuring Agreement 

(E} expressly insures against losses resulting from the extension 

of credit in reliance on counterfeit securities. Since the bond 

does not cover injury resulting from the insured's foreclosure of 

counterfeit collateral or from the borrower's default, neither of 

those events can constitute the act or event causing the loss to 

which the Loss Sustained Rider refers. 

Although neither party nor our research yields any applicable 

precedent from Oklahoma or Kansas, the weight of authority 

supports KBS's interpretation of the bond. Eliot Sav. Bank, 

Citizens Bank, and Fitchburg all held that under bonds with terms 

similar to KBS's, the insured bank sustained a loss when it 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 9 
1' 

exchanged its money for valueless securities, regardless of when 

it discovered the loss or exercised its remedies. Chase, no 

doubt, holds directly to the contrary. But the district court's 

reliance on Chase to support the conclusion that United could not 

sustain a loss while Mr. Taylor's loan remained 

the plain language of the Loss Sustained Rider. 

current ignores 

The Rider does 

not define ''loss sustained" as occurring when the insured's loss 

becomes an actionable claim but, rather, when the act or event 

which caused the loss occurs. Since Insuring Agreement (E) 

defines the risk as the extension of credit in reliance on 

counterfeit securities, United sustained a loss within the terms 

of the bond when it extended credit to Mr. Taylor, even though it 

might not have had an actionable claim against KBS until Mr. 

Taylor defaulted or Merrill Lynch obtained judgment against it. 

The district court, relying on Continental Casualty, 

dismissed this interpretation of the bond because the court 

believed until damages are sustained by the insured, any loss is a 

theoretical or bookkeeping loss. The district court's view, 

however, fails to give effect to the Loss Sustained Rider. That 

provision is a timing device to determine whether the insured has 

sustained a loss during the bond's period of coverage. The Rider 

does not define what constitutes a recoverable loss but, instead, 

the time at which the insured sustained that loss within the terms 

of the bond. In this case, United sustained a loss within the 

terms of the bond when it extended credit to Mr. Taylor in 

reliance on counterfeit securities regardless of whether United 

had sustained damages at that time. Since the district court 

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Appellate Case: 89-6115 Document: 01019623154 Date Filed: 04/24/1990 Page: 10 
erroneously held that United sustained a loss when Merrill Lynch 

obtained judgment against United or, alternatively, when Mr. 

Taylor defaulted, we REVERSE the district court's granting of 

summary judgment in favor of United and direct entry of judgment 

for The Kansas Bankers Surety Company. 

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