## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N os. 06

- 3685 & 06

- 3794 F IR S T S TATE B ANK OF M ONTICEL LO, P la intif f-A pp ellee, C ross -App el lant, v.

O H I O C ASU ALT Y I NSURANCE C OMPAN Y, D ef endant-Appellant, C ross-A pp ellee.

A pp ealsfr o m the United S t ates Di strictC our t fo r the C entral D istricto f Illino is. No . 04 C2089

—H aro ld A . Bak er, Judge .
A RGUED J AN UA RY 9, 2008

— D ECI DE D F EB RU AR Y 5, 2009

Befo re W OO D , S YKES, an d T INDER, C ircu it Judges . S YKES, Cir cu i tJudg e . Thi s insurance- covera ge dispute a r i s e s fr o m a fr a ud ul e nts c he me pe r pe t r a t e d a g a i ns tF i rs t St ate Bank o fM onti cel l o causing a $307, 000 l oss . J am es Stil w ellrepe ated ly ex ch an ged bad che ck s for the ba nk ’s2 N os. 06

- 3685 & 06

- 3794

m one y orde rs

— i ns trum en ts bac k ed bythe re so ur ce s o fthe ba nka nd a s g o o d a s ca sh

. The b an kfi l ed a cl ai m f o r the l oss with i ts i nsurer, Ohio Casual ty I nsurance Com pany, und era St andard For m N o. 24 Financi alInsti tuti on B on d . Oh i o C a s u alt y d en ied th e c laim an d th is law su it f ol l owed

. The di str i ct c ou rthel d the l oss was cov er ed and gra nted sum m ar y j ud gm ent in f avo r ofFi rs t S tat e Bank. Ohio Casual ty appea led ; the bank cro ss- appeal ed on the i ssue ofi ts enti tl em ent t o prej ud gm ent inter est
. W e a ffi rm . S ti lw ell’s schem e was a cove re d ri sk und er I nsuri ng Agree m ent B o fthe bond, wh i c h cov er s l oss es from the ft or false preten ses occ urring on the ba nk ’s p r e mi s e s . T h e b a n k ’ s l o s s r e s ul t e d “ d i r e c t l y fr o m” St ilw ell’s “o n -p re m ise s” fr a u d an d th er efo re ca m e w ith in th e c o v e r a g e s p e c i fi e d i n th i s p r o v i s i o n o fth e b o n d

. We al so concl ud e that Excl usi on ( h), excl ud i ng l oss es “cause d b y a n e mpl o y e e , ” do e s no tap pl y . F i na l l y, the b a nk ’ s t a r dy a pp l i c a t i o n f o r s t a t ut o r y p r ej ud g m en ti nt e r e s t, fi r s tma de i n the di st r i ctc o ur t i n a mot i o n t o a ltero r a m en d the j u d gm ent under Rule 59( e) o fthe Federal Rules of Civil P roc edu re, wa s b r o ughtt o o l a t e t o e nt i t l e i tt o a n a wa r d.

I . B a c kg r o und Forse ver al m onths i n 200 2 a nd 20 03, J am es St i l w el lo f Atwoo d, I l l i no i s, c ar r i ed o n a n e xt en si ve s ch eme o fwri ting and c ashi ng w or thl ess checks

. Fi rs t St ate Bank in n ea rby M o nt i ce l l o was hi s vi ct i m . S ti l wel lwas a pr o m i ne nt e n t r e p r e n e u r w h o o wn e d s e v e r a lb u s i n e s s e s a n d s o me devel opm ent pr oper ty i n centr alI l l i noi s, but he w as al soN os. 06

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- 3794 3

J am es St il w el l’ s financi al act iviti es are at i ss ue in another 1 in s u r a n ce -la w ca se d ec id ed to d a y . S ee S tilw ell v . A m . G en . L ife Ins. C o. , N os. 07- 2613 & 07-2684. i l l i q u i d

. T o a c q u i r e c a s h, S t i l we l ld e v i s e d a s c h e me

1 w he r e b y h e ( o r mo r e c o mm o nly, o ne o fh i s a s s o c i ate s) w ou ld d ra w ch ec ks on on e o f h i s a c c ou n ts atT u sc ola N atio nal Bank and t ender them to Fi rs t St ate B an k in r etur n f o r ba nk m o ne y o r der s, i ns trum en ts ba ck ed by the re sour ces o fFi rs t S tat e Bank. But St i l w el l ’ s a ccount at Tuscol a N ati onalB an k was em pty, o r l ess than em pty; T u sc ola N at ion al B an k allow ed h im to m ain ta in n e g a t i v e b a l a n c e s f o r mo n th s a t a t i me , r e t u r n i n gs o me ite m s a n d p a y in g ot h er s t h at Stilw ell d ire c te d to be p aid w he n h e pu t fun d s into the accou nt after t h e f act. So Fi rs t S tat e Bank unw i ttingl y a l l owed Sti l w el lto exchange hi s wor th l es s ch ecks f o r the b an k ’ s m o ne y o r der s, g i ving h im ac c es s t o im m ed iat ely av aila b le fu n d s. St ilw ell c a r r i e d o ut thi s s c he me f o r thr e e mon ths a t the end of 2002 and i nto ear l y 2 003, te nd er i ng checks dail y t o Fi rs t S t a t e B a n kth r o u g h J a n u a r y 2 4 , 2 0 0 3
. O v e r th a tt i me First S t a te B an k “sold” Sti lw ell130 ban k m one y orde rs f ora tot alo f$1 , 945, 672. 16. Cas hi ngc he ck s f o r no nc us to m er s was a g ains t th e bank’ s poli cy ( St i l w el lhad no a ccounts at Fi rs t S tat e Ban k ) , b utwhenb an ko ffi ce r s que st i o ne d S ti l wel labo ut the t ra nsact ion s, he co ncocte d a co verst or y that he w as conducti ng a year- end tax m aneuverr eco m m ended by h is a c c ou n ta n t t o re d u c e h i s t ax liab ility on a fu tu re sa le o fl an d

. On o ne o cc as i o n, t o que l lthe do ubt s o fa b an k4 N os. 06

- 3685 & 06

- 3794 offi cer, St i l w el l dial ed Tuscol a N ati onalBank’ s a utom ate d banki ng sy ste m and handed the o ffi certhe phone, al l o wi nghe r t o l i st en to a s ta te m en t o fthe c ur r en t b ala n c e in h is

— orwh at he cl ai m ed w as h is

— a c c ou nt
. So w hile som e at First S tate B an k exp ressed conc erns , others b elie ve d h i m , an d th e b an k c on tin u ed to ac c ep t h is b u siness base d on hi s f acade ofb ein g a succe ssful busi nessm an. The sc hem e co l l apsed on J anuary24, 20 03, wh en Tuscol a N ati onalBank fro ze St ilw el l ’ s a ccounts. Fi rs t S ta te Ba nkwas l eft h ol di ngwor th l es s ch ec k s to ta l i ng $307, 000 fro m the l astthr ee days o fthe schem e. F i r stS ta te Ba nk and S ti l wel le nt er ed i nt o a n a g r ee m en t re q u i ring S ti l w el lto r epay the banki n a s er i es ofi nstallm en ts a nd to a dm i t th athe ha d e ng ag ed i n un l awful conduct. But St i l w el ldi ed bef or e ful fi l l i ng the term s ofthat agreem en t. First State Ba nk fil ed a clai m w it h i ts insu rer, Ohio Casual ty, aftero ne o f St i l w el l ’ s cor pora ti ons fi l ed f or bankr up tcy, pre venting the bankfro m r eco ver i ng i ts l oss from the c orp oration. Oh io C asu alty den ied th e ban k’s c l ai m , as ser ti ng tha t S ti l w el l ’ s s chem e was notco ver ed unde r the bo nd’ s “o n- pr emi se s” fr au d c o ve r ag e ( I ns ur i ng A gr eem ent B o fthe St andard Fo rm N o. 24 Financi al I n st itu ti on Bond) orwas excl ud ed beca use i t fel lunder Ex cl usi on ( h) ofthe bond, w h ich e xcl ud ed l oss es “cause d b y a n em p loy ee .” Fi rs t S tat e Bank then bro ught thi s l aw sui t in sta te cour t, w hi ch Ohio Casual ty re m ove d to fed er al c ourtbas ed on the par ti es’ di ver se ci ti zenshi p. On cro ss- m oti ons f or sum m ar y j ud gm ent, Ohio Casual ty ass er ted se ver al gr ounds f orn oncov er age . Itcla i m ed that the b ank di d notN os. 06

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- 3794 5

su ffer a “lo ss ” a s t h at te rm is u n d er st oo d inth e b on d ; or if th ere w as a loss, it d id not “ resu lt directly from ” Stil w ell ’s conduct; o r i fthe l oss was att ributabl e t o St i l w el l ’ s s chem e, the f ai l ure ofthe bank’ s e m ploye es to f ol l ow bank pol i cy w as an i nter veni ng and the predom i nant ca use o fthe l oss , re m oving co ver age under Excl usi on (h) o fthe bond f or l oss es “cause d b y an em plo yee . ” The di str i ct c ourtr ej ecte d th es e ar g um en ts , g r an te d F i r stS ta te Ba nk ’ s m o ti o n, a nd aw ar ded j ud gm ent t o the b ank. Fi rs t Sta te B ank then m oved to a l te r o r a m en d the j udg m en t unde r Rul e 59 ( e), ask i ng the co urt to cl ar i fy the am ount ofthe aw ar d and to ad d statu tory prej ud gm en t interest. Th e d istrict cou rt ag r ee d t o c l ar i fy the a war d a m o unti n the j udg m en t ( $292 , 000

— th e amoun t o fthe l o ss l es s the deduct ibl e) , b ut den i ed F irst St at e Ban k ’ s r eque stt o a dd pr ej udg m en t i n t e r e s tt o th e a wa r d

. O h i o C a s u a l t y a p p e a l e d th e s u mm ary j udg m en t, a nd F i r stS ta te Ba nkcr o ss - appe al ed th e denia lo fi ts Rule 59( e) m oti on f orprej ud gm ent inter est
.
I I . Discussi on W e r evi ew the dist ri ct c ourt ’ s g ra nt o fsum m ar y j ud gm ent de novo , and beca use th e d ist ri ct c ourthad cr oss m o ti o ns f o r s um m ary j udg m en t be f o r e i t, “ we c o ns true al lf acts and i nfe re nces th erefro m ‘ i n f avo r ofthe party ag ain st w hom the m oti on under c onsi derat i on is m ade. ’ ” U ni t e d Air Li ne s , Inc . v. H SBC Bank, U SA (In re U nited A ir Lin es, Inc .) , 4 53 F
. 3d 463, 46 8 ( 7th Ci r. 20 06) ( quoti ng Kort v. D iversi fi ed Collec ti on Servs. , Inc. , 39 4 F.3 d 53 0, 53 6 (7 th C i r . 20 04 )). Su m m ar y jud gm en t is appropri ate i f“there i s no ge nuine i ssue as to any m ate ri al6 N os. 06

- 3685 & 06

- 3794 f act and .

. . the m ova nt i s enti tl ed to j ud gm ent a s a m att er ofl aw . ” F ED . R. C IV . P. 56( c)
. I l l i noi s l aw , the parti es agr ee, gov er ns thi s ca se. W e r e v i e w the i nt e r pr e t a t i o n o fa fi de l i t y b o nd de n ov o. Pri vat eBank & Trus tCo. v. Pr ogre s s i veC a s. In s . Co. , 409 F. 3d 814, 816 (7th Cir
. 2005) (I l l i noi s la w )
. A bond “that conta i ns no am bi gui ty i s t o be c onst rued acc or ding to the pl ai n and or dinar y m eani ng o fi ts ter m s, j u st as w ou ld any o therco ntra ct. ” Id. ( i nter nalquotat i on m ar ks om itt ed ); see also R B CM o rtga ge C o . v . Na t’l U nio n F ire Ins. Co. , 812 N
. E
. 2d 728, 734 (I ll

. A p p . Ct
. 2004). Stan d ard fi del i ty b on ds ar e dra fted byso phist i cate d parti es ( re presen tatives of the b a n king an d i ns ura nc e ind us tries); th e r e f o r e , th e t r a d i t i o n a lru l e o fc o n s t r u i n ga n y a mb i g u ity in fa vo r of c ov er ag e d oe s n otap p ly. F i rs tNat’l B a nk of M ani t owoc v. Ci nc i nna t iIns . Co. , 4 8 5 F
. 3 d 9 7 1 , 97 7 (7t h C i r . 2 00 7); RB C M or tgageCo. , 8 12 N. E. 2d at7 34
. The bond that Ohio Casual ty sol d to Fi rs t S tat e Bank w as a sta nd ar d financi al

- i nstitu ti on bo nd thatco ntai ned an “on- prem i ses ” c lause gener al l y c ove ring fra ud ule nt act s occur ring o n the bank’ s physi calpre m i ses . The st an dar d fi na nc i al

- i ns ti tu ti o n bo nd i s a uni que i nsuranc e ins tr um ent with a l ong and detai l ed hi sto ry . So m e o fi t be ar s r epeating her e be cau se p art o fwh at m ake s the b on d u ni que i s that nea rl y e ver y pr ovi si on “has been devel oped i n re sponse to and test ed by case law .” J. K elly R ey h er , A Bri e f Re vi e w of

the Fi nan ci al Ins t i t ut i o n Bo n d S t a n d a r d F o r m No
. 2 4 a n d C o mme r c i a l C r i me P olicy, 56 3 PLI/Li t 5 7, PLI Ord er N o. H 4- 5259 , 61 ( M ay 1997 )
. The S tandard Fo rm N o. 24 Financi alInsti tuti onN os. 06

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B eca u se the s t anda rd bo nd i s s om et i m es m odi fi ed by the 2 p arties an d v ario u s i t e ratio ns o f it are in u se, it is im p or tan t to det er m i ne w hic h ve rs i on ofthe bond i s unde r c ons i der at i on. Cas el aw i nt er pre t i ng o the r ver s i ons m ay be unhe l pful or ir re le v a n t to a co u rt ’s in te rp re ta tio n o ft h e b o n d

. S ee F irs t N a t’l Bank of M ani t ow oc, 485 F. 3d at 977. Bond i s the l ate st i ncarnat i on o fa se rie s o fbo nd s o nce known as “ba nker ’ s bl anketbo nd s. ” Fi rs tNat ’ l B a nk of M a nito w o c, 485 F. 3d at 977 -78 ; see also 9 A J OHN A LA N A PPE LMA N & J EA N A PPE LMA N , I NSURANCE L AW A ND P RAC TI CE § 5701 , at 37 5-7 6 (1 98 1); P et er I. B ro em an , A n O verv iew of theFi nancia l Ins t i t ut i on Bond, St anda r d F or m No. 24 , 11 0 B ANK I NG L
. J. 439, 442-43 (1993 ). T h ese bon d s w ere fi rst d evelop ed in resp ons e to th e un iform con trac t m a rket ed by Llo yd’s o fLond on , w hi ch w as the o nl y c ontr act to provi de fi del i ty, theft, burg l ar y, hol du p , a nd o ther ty p es of co ve ra ge in o n e c on tr ac t. See P riva te B a n k, 409 F
. 3d a t 8 1 6
. T h e S u r e t y As s o c i a t i o n o f Ame r i c a a n d t he A m er i can Banker s Associa ti on work ed to gether i n 191 6 to d raft th eir fi rst bon d , th e Stan d ard Form N o. 1 Ba nk er’s Bl a nk e tBo nd , t o c o mpe t e wi th the u ni f o r m co ntra ct offe re d by L loy d ’s. Id. ; s e eal s o E d w ar d G . G alla gh er etal., A Bri e f H i s t ory of

theFi nan ci al Ins t i t ut i on Bond, i n F I NAN CI AL I NS T I T UT I ON B ONDS7 ( 2d ed

. Du nc an L . C lore ed

. , 1998). Today, S tandard Fo rm N o. 24 is the descendant ofthat fi rs t b ond, co ntai ni ng si x I nsuring Agree m ents ( A gr eem en ts A- F )
. In thi s ca se , we ar e co nc erne d wi thIns uri ng Agr ee m en t B o f th e S ta nda r d F o r m N o . 24 ( 19 86 Re vi si o n) that Ohio Casual ty sol d to Fi rs t S tat e Bank. A gr eem ent B 2 i s th e “o n- pr emi se s” fr au d c l au se o fthe bo nd. I ts r el ev an t port i on pro vi des as f ol l ows:8 N os. 06

- 3685 & 06

- 3794 The U nd er w ri ter
. . . agr ees to i nd em ni fy the Insured for : (B )(1) L os s o f P ro p er ty res u ltin g d ire c tly from

. . . ( b) theft, f al se prete nses, c om m on- l aw o r sta tutory l ar ceny, c om m i tte d by a per son pr es en t i n a n o ffi ce o r o n th e pr emi se s o fthe I nsured wh i l e the pro pertyi s l odged ordeposi ted withi n offi ces orpre m i ses l oca ted anyw h er e. Ohi o Cas ua l ty do es no t di spu te th at S ti l well ’s f r au dul en t co nduc t ( o r tha t o f h i s as so ci at es ) was c o m m i tt ed o n the bank’ s pre m i ses . I t a rgues that F i rst State Bank did not in c u r a “ los s . . . re su ltin g d ire c tly from

. . . fals e p re te n se s.” The fi rst part ofOhio Casual ty’ s a rgum ent i s that F i rs t St ate Bank di d not, i n f act, suffera l oss because i t r ecei ved a va l i d a nd e nf o r ce ab l e i ns trum en t

— na m ely, Sti lw ell ’s check draw n on hi s ( em p ty) acco unt at Tuscol a N ati onal Ban k

— i n exchange f ori ts m on ey or der. I fFi rs t S tat e B an k in c u rre d an y los s, O h io C as u alt y a rg u es t h at itw ou ld have occur re d l ate r w hen Fi rs t S tat e Ban k w as unabl e t o col l ect on S ti l w el l ’ s che ck. T h at, Ohio Casual ty ass er ts, w oul d not hav e be en a c ov er ed l oss bec ause that ev en t w ou ld n either h ave tak en place on Fi rst State B a n k’s prem i ses n or“res ult ed dir ectly fr om ” a ny f al se prete nses. U n d er Il lin ois law , an d i n m o s t jur isd ict ion s, a los s is an “a ctualdeple ti on o fbankfund s”; bo okk eepi ng o r th eo r et i ca ll o ss es a r e no t co ve r ed bythe fi na nc i al

- i ns ti tu
tio n bo n d

. RB C M or tgageCo. , 812 N .E .2d at73 3; see also Re s e r v eIn s . C o . v . G e n . In s . C o . o f A m. , 3 9 5 N. E. 2 d 9 3 3 , 93 9 (Ill. A p p . C t. 19 79 ); Pri vat eBank, 409 F.3d at81 7 (Illin oisN os. 06

- 3685 & 06

- 3794 9 law ); Cin ci nna t i Ins . Co. v. St ar Fi n. Bank, 35 F. 3d 1186, 11 91 ( 7 th Ci r . 1 9 9 4 ) ( I nd i a na l a w) ( r e qu i r i ng a n a c t ua l l oss in st ea d of m er ely a b oo kk ee p in g or th eo re tic al los s); FD IC v. U ni t e d Pac
. Ins . Co. , 2 0 F
. 3 d 1 0 7 0 , 1 0 8 0 ( 1 0 th Ci r. 19 94) ( f ede r a l l a w) ( the b o nd do e s no t c o v e r “ [ b ] o o k k e e pi ngo r th eo re tic al los se s, n ota c c om p an ied by ac tu al w ith d ra w als of cash or oth er s uc h p ecu niary loss”); W il li am T. Bogae rt & A n d re w F. C ap lan , Los s and C aus at i on U nde rtheFi nan ci al In s t i t u t i o n Bond , in F INANCIAL I NS T I T UT I ON B ONDS, sup ra , at 38 5-8 7. Fir st Sta te B an k’s loss w as s u c h a n “ ac tu al los s.” I t i s t rue th at Fi rs t S tat e Bank did notexper i ence a l oss at the pr eci se m om ent Sti l w el lexchange d his check s for the b ank’ s m oneyo rder s; although hi s a ccount w as em pty, i t was not ce r t ai n that the c hecks would be re tu rn ed u n p aid , as e vid en c ed by th e fa c t t h at T u sc ola N ati onalBank had p aid so m e o fS ti l w el l ’ s e ar l i ercheck s des pi te the ne g at i ve b al an ce in h i s ac co unt
. At the m om en t of th e ex ch an ge, an y loss from acq uiring Stil w ell ’s c h ec ks w as m er ely th eo re tic al. B u t F irs t St at e B an k e x p er ienced an a ctu all oss wh en Tuscol a N ati onalBank r efused to ho no r S ti l wel l ’ s ch ecks. Onc e i t di d s o , F i r stS ta te Ba nk necess ar i l y had few erava i l abl e a sse ts. That the ac t o f nonpaym ent o ccurr ed “offpre m i ses ” i s o fno m om ent. I nsuri ng Agree m ent B r equi re s onl y that the fa lse pretenses be com m i tte d by a per son on F i rs t S tat e Bank’ s pre m i ses , and that’ s e xactl y what hap p en ed her e. ( W e wil ldefer f ora m om ent the questi on o fwh etherthe bank’ s l oss re su lte d “d ire c tly from ” S tilw ell’s on -p re m ise s fra u d .) Ohio Casual ty al so m ake s a w eakar gum ent that St i l w el l ’s conduct did notam ount t o f al se prete nses.10 N os. 06

- 3685 & 06

- 3794 I l l i no i s l aw c o ns i der s th e te r m “ f alse pr et en se s” i n the fi nanci al

- i nsti tuti on bo nd to i ncl ud e, at the l eas t, decepti ve p ra c tic es u n d er th e Illino is c r i m i n al s ta tu te s. FirstNat’l Ban k of De c a t u rv . In s . C o . o

f N. A m. , 4 2 4 F
. 2 d 3 1 2 , 3 1 7( 7th Cir
. 19 70) ( ci ti ng wh at i s no w 72 0 I LL . C OM P . S T AT . 5 /1 7 -1 ( 2006 ) ) . Se cti on 5 /1 7- 1( B)( d) o fthe I l l i noi s S tatutes m ake s it a crim e for an i nd ivi d ua l to “issue [] or d eli ver[] a c h ec k . .

. kn ow in g t h at it w ill no t b e p aid by th e d ep os ito ry . Failu re to h av e s u fficie n t fu n d s . . . is p rim a fa c ie ev id en c e t h a t t h e o ffen d er kn ow s t h at it w ill no t b e p aid by th e d ep os i tory, and that he o r she has the i ntent to d efr au d .” A s w e h av e n ot ed , Stilw ell kn ew th at h e d id no t ha ve a ny funds a t Tus co l a N at i o na lBa nko n the dat es i n que st i o n. Al la l o ng, he c o nc o cted and m aintained an el abor ate co verst or y to effectuat e hi s s chem e, an d the r e i s no e vi d en ce in the r ec o r d t o o ve r co m e th e s t a t ut o r y p r e s umpt i o n tha tS t i l w el li nt e nd e d t o de fr a ud

. That he occa si onal l y pu t m oney i n hi s acco unt at T u sc ola N ati onalBank t o c ov erso m e o fhi s e ar l i erbad chec ks aft er th e fa c t d oe s n otn eg at e h is in te n t t o d e f r au d . H is wi l l i ng ne ss t o s ign a n ins ta l l m en t r epa y m en t ag r ee m en t afterhi s dece pti on was uncove re d i s i rr el evant
. W e n ow r eturn to Ohio Casual ty’ s a rgum ent that F i rs t State B an k’s l oss d id not resu lt “directly from ” Stil w ell ’s f al se prete nses. Thi s l anguage i n the fi nanci al

- i nsti tuti on bond has underg one a s er i es ofr evi si ons. Earl i er ver si ons ofthe bond re quired m erel y a “l oss thr ough” a c ov er ed ev en t o r tr an sa c tio n . B ra d for d R . C ar ve r, Lo ss and Caus at i on , in H ANDL I NG F IDE LITY B OND C L A I MS36 3, 37 9 ( 2d ed. M i chaelKeel ey & Sean D uffy eds. , 20 05)
. The 19 86 ver si on o fthe bond speci fi cally m odi fi ed the bond toN os. 06

- 3685 & 06

- 3794 11

r equi r e, i n th e ca se o f so m e co ve r ag es , a loss “ r es ul ting di r e c t l y fr o m” the c o v e r e d pe r i l

. Th i s wa s a r e s po ns e t o cer tain cour t int er preta ti ons that appli ed to rtco ncepts of c au sa tio n to th e bon d ’s loss -c au sa tio n req u ire m en ts
. Id. I nd eed , l oss cau sation h as been a som etim es-m isun d erst o o d c o nc ept i n the c as el aw i nt er pr et i ngfi na nc i al

- i ns ti tu
tio n b onds. Even afterthe 1986 r evi si on, so m e co urts have continued to l oo k to proxi m ate cause and o thercausa ti on princi ple s bo rr owed fro m t ort l aw to deci de l oss c a us a t i o n i s s ue s u nd e r the fi na nc i a l

- i ns ti tut i o n b o nd

. See, e.g., R esolu tio n Trust C o rp. v. Fid . & D epo sit C o . of M d., 205 F.3 d 61 5 , 6 5 5 ( 3 d C ir. 20 00 ); E m pireBa nk v. Fid. & D eposi t C o ., 82 8 F . Su p p . 675 , 679 , af f ’ d 27 F. 3d 333 (8t h Ci r. 19 94); Je f f e rs on Bank v. Prog r e s s i ve Cas. Ins. C o. , 96 5 F
. 2d 1274, 1 2 8 2 (3 d C ir. 19 92 ); FirstNat’l Ba nk of Louisvi ll e v. Lustig, 9 6 1 F .2 d 11 62 , 116 7-6 8 (5 th C ir. 19 92 ), am ended by, N o. 90

- 3820 , 1992 U
. S. A p p . LE X I S 14873 ( 5th C ir. J un e 29, 1992 ); Hans on PLC v. Nat ’ l U ni on Fire Ins
. Co. of Pit t s b urgh, Pa. , 79 4 P.2 d 66, 73 ( W ash. Ct. A pp . 19 90)
. Thi s a pp ro ach is m i sdir ecte d; tor t- causat i on co ncepts l i ke proxim ate ca us e, “ su bs ta nt i alf ac to r ” ca us at i o n, a nd i nt er ve ni ng cause ar e inapp ro pri ate her e. In part i cul ar, the concept of proxi m ate cause i s probl em ati c i n thi s co n te x t; proxi m ate cause i s a shiftin g stand ar d that dr aw s the l i ne o fcausa ti on “ because o fco nveni ence, o fpubli c pol i cy, o fa ro ugh sense of j usti ce . . . . I t i s pra cti calpol i ti cs. ” Palsgraf v. Lo ng Is l an d R. R. , 162 N .E . 99, 10 3 (N .Y . 192 8) (A n d r e w s, J., diss enti ng)
. Insurance- cove ra ge case s a re notco ncer ned w ith th e ph il osop hical s o cial- d ut y un d erp inn ings of tort l aw . T h e acti on s ounds i n contr act, and ourta sk i s t o12 N os. 06

- 3685 & 06

- 3794 i nter pret the par ti es’ ag re em ent. J usti ce ( then J ud ge) Cardozo expl ai ned the inapp l i cabi l i ty ofto rt
- causat i on pri nci ple s in thi s co ntext ne ar l y a century ago : Ge ne r a lde fi ni t i o ns o fa p r o xi mat e ca us e gi v e l i t t l e a i d. Ou r gui de i s the r eas onabl e e xpectati on a nd p u rpos e of th e o rd in ar y b u s i n es s m an w h en m ak in g a n ord inarybusi ness contr act. I t i s hi s intenti on, expre sse d or f ai rl y t o be i nfe rr ed, that counts. There ar e ti m es w hen the l aw per m i ts us to go f arbac k in tr aci ng ev ents to cau s e s . Th e i nqui r y f o r us i s ho w f a r the pa r t i e s to th is c on tr ac t in te n d ed u s t o go . . . . The questi on is n ot w hat m en o ught t o thi nk o fas a cause. The questi on i s what theydo thi nk of as a ca use. Bir d v
. St
. Paul Fi r e & M ar i neIns . Co. , 1 20 N. E. 8 6, 8 7 ( N
. Y. 19 18 ). A ccor dingl y, co ntra ct

— not tort

— pr i nc i pl es a ppl y t o the determ i nati on o fl oss causa ti on; I l l i noi s fol l ows thi s r ule

. Se eRBC M or tgageCo. , 8 12 N. E. 2d at 73 3- 36 ( r ej ec ting p ro x im at e-c au se an aly sis of los s c au sa tio n i n fina n c ialin st itu tio n bo n d co n te x t); Spearm an In dus. , Inc. v. St
. Paul F i r e& Mar i n eIn s . C o. , 138 F. S up p. 2 d 1 0 8 8 , 1 1 0 0

- 0 1 ( N. D. I ll

. 2001) (I ll inois l aw ); s e eal s o B ra d for d R . C ar ve r, Lo ss and Caus at i on , sup ra , at 3 80 ; M au ra Z . Pe llet er i, C ausation i n Lo a n L o ss C a ses , in L OAN L O SS C OV ERAGE U NDER F INANCIAL I NS T I T UT I ON B ONDS 258 ( G ilbert J

. Schroed er & Jo hn J
. To m aine eds

. , 20 07 )
. I ns ur i ng Agr ee m en t B ’s cove ra ge ofl oss es resul ti ng “di re ctl y fro m ” o n-pr em i ses f al se prete nses m eans w hat i t say s. The bo nd ’ s “ dir ect l oss ” r e q u irem en t “m us t be afforded i ts p lai n an d ordina ryN os. 06

- 3685 & 06

- 3794 13

m ea n in g; ‘d ire c t’ m ea n s ‘d ire c t.’ ” RBC M or tga geCo. , 81 2 N
. E
. 2d at 736-37 (citation om itted ). W e h a v e already noted that the ba nk ’s assets w ere deplet ed as a r esul t o fS tilw ell ’ s fra ud ule nt m oney - or der tr ansact i ons at the b ank o n J anuary22 , 23 , and 24, 20 03. The bank disb urse d i m m edi ate l y avai l abl e fund s to St i l w el l ; S ti lw ell’s acco unt at Tuscol a N ati onalBank was frozen an d , i n an y even t, em p ty; an d the c h e cks w ere r etur ne d unpa i d. Thi s su ffi ces t o s at i sfy a c o m m o n a nd or dinar y unders ta n d in g o fa l oss r esul ti ng di re ctl y fro m a fra ud o ccurr i ng o n the bank’ s p rem i ses . The sl i ght g ap i n t i m e be twe enthe mone y - o r dert r an sactions an d the nonpa ym ent o fthe checks m ake s no di ffer ence; the l oss fl o we d d i r e c t l y fr o m S t i l we l l ’ s o n- pr e mi s e s fr a ud

. Ohi o Ca su al ty ’ s ar g um en ts abo uti nt er ve ni ngo r c o ntr ibuti ng ca uses

— su cha s S ti l wel l ’ s dea th, his corp oration’s ba nk r upt cy, a nd the b an ko ffi ce r s’ f ai l ur e t o f o l l o w ba nk pol i cy

— d o not m ake th e b a nk ’s l oss from Sti lw ell ’s f al se prete nses any l ess dir ect. W e have al re ady expl ai ned that tor t co ncepts l i ke contr ibuti on a nd i nter veni ng ca use do no t apply . Those e ve nt s o r o m i ss i o ns , s ta ndi nga l o ne o r i n c o m bina ti o n, di d no t ca us e the b an k ’ s l o ss i n the sen s e me a ntb y the b o nd ; n o r do the y o pe r a t e t o ma ke St i l w el l ’ s o n-pr em i ses fra ud m er el y a n “i nd i re ct” cause of th e ban k’s l oss. W ha t is im p ortan t is th at w ithou t Stil w ell ’s on- prem ises m i sco nd uct

— w i thout the f al se prete nses und erwh i ch he t endered hi s che cks

— F i r stS ta te Ba nk woul d no t ha ve s uffer ed a l o ss . F i r st S ta te Ba nk ’ s l o ss thus re sul ted “di re ctl y fro m ” S tilw el l ’ s o n-pr em i ses f al se prete nses, and ther e i s co ver age u n der Insuri ng Agree

men tB.14 N os. 06

- 3685 & 06

- 3794 A l lthatr em ai ns i s Ohi o Casual ty’ s argum ent that E xc l us i o n ( h) o per at es t o e xc l ude c o ve r ag e. Exc l us i o n ( h) is c on ta in ed in Se c tio n 2 of th e b on d a n d ap p lies to all six I nsuri ng Agree m ents. I t e xcl ud es: ( h) l oss caused by an Em plo yee , exce pt w hen cov er ed und erInsur i ng Agree m ent ( A ) o r w hen cov er ed und er In su rin g A gr ee m en t (B ) or ( C ) a n d res u ltin g d ire c tly fr o m m i s pl a c e men t, my s t e r i o us u ne xp l a i nab l e di s a pp ea ra n c e o r d es tr u c tio n of or d am ag e to P ro p er ty
. . . . Ohio Casual ty a rgues that F i rs t S tat e Bank’ s l oss was ac tu al l y c au se d b y i ts e m p l o y ee s’ f ai l ur e to f o l l o w ba nk p olic y in ac c ep tin g St i l w ell’s ch ec ks an d th er efo re falls w i thi n Exclusi on ( h). Thi s a rg u m en t i s ba sed o n an o ve rbroa d r ea di ngo fthe e xc l us i o n. S ti l wel l ’ s o npr emi se s fr au d was the a ctuala nd di r ec t ca us e o fthe ba nk ’ s l o ss ; the b an ke m pl o y ee s’ fa il uret o pre vent th e l o ss do es no t tr i g g er Exclus i o n ( h)

. Ohi o Cas ua l ty ’ s ex pan si ve i nter preta ti on o fE x cl usi on ( h) w oul d sw al l ow all

— o r n ea rly all

— ofthe bond’s co ver age s be cause a b an k m u st n ec e s s a r i ly op er at e t h ro u gh its em p loy ee s. See Fi rs tNat ’ l Bank o

f M ani t owoc, 48 5 F.3d at 98 0-8 1. In d ee d , i f the e xcl usi on were appli cabl e und erthe ci rcum sta nces pr esen t h er e, the r e m i g htne ve r b e co ve r ag e f o r a ny o nprem i ses fra ud ule nt tr ansact i on be cause al lsuch t ra nsact i o ns a r e h a ndl ed

— at one l eve lo r anothe r

—bya b an k em p loy ee . Se ei d. I f w e w ere to accep t O hio C asu alty’s in ter preta ti on o fExclusi on ( h), we w oul d evi scer ate m u c h of th e c ov er ag e g ra n te d u n d er th e b on d

. Id. On thi s p oin t, Ohi o Ca su al tyr el i es mos t he av i l y o n the Ei g hth Ci r cui t’ s dec i si o n in Em pi r eBank, 27F
. 3d at3 35 , b utN os. 06

- 3685 & 06

- 3794 15

Ohio Cas ual t y al so cites Parks R ea l Est at e Pu rc has i ng G ro up v. 3 S t. P au l Fire & M ar ine In su ra n ce C o., 472 F. 3d 3 3 , 4 8 -4 9 ( 2d C ir
. 2006) , app lyi ng N ew Y ork law and a s o- cal le d “ef fic ie nt c ause” rule. Il li nois has no si m il ar rul e i n thi s co ntex t, and given its rejection of pr ox im ate ca u se an d oth er tor t-cau sation p rinc ip le s in th e i n te rp re ta tio n o f fid el ity b o n d s, se e R BC M or tgage C o., 81 2 N. E. 2d a t73 3- 36 , we d ou b t it woul d adoptthe P ar ks R ea l E state appr oac h. w e rej ec t t h e a n alo gy . A s w e h av e n ot ed , Em pi r eBank i m port ed a pr oxi m ate
- cause anal ysi s fr om to rtl aw , wh i ch is in c on sis te n t w i t h I l lin ois law an d th e g en er al ru le in th is contex t. T he case is al so d istin gu ishab le. Em p ire Ba nk ’ s e mpl o y ees k new that tw o cu stom ers w ere en g ag ed i n a fraud ; i n f ac t, o ne s upe r vi so r a i ded i n the c om m iss ion of th at frau d . B u t t h e b an k e m p loy ee s in th is case were unaw ar e that S ti l w ell’s checks were wri tte n agains t an ac cou nt w ith a neg ative b alanc e. Stil w ell ’s fra u d, not the b ank e m plo yee s’ f ai l ure to i nvest i gat e, ca us ed F i r stS ta te Ba nk ’ s lo ss i n the s en se mean t bythe bond; Exclusi on ( h) does not apply. 3 W e ne ed o nl y br i efl y addr es s F i r stS ta te Ba nk ’ s ar g um en t th at it w as en tit led to st at u t o ry p rej u d gm en t in te re st
. See 815 I LL . C OM P . S T AT . 205/2 ( 200 6). T he bankfi rs t r eque st ed pr ej udg m en t i nt er es t i n a m o ti o n to al te r ora m en d th e j u d g me n t u n d e r R u l e 5 9 ( e ) , h a v i n g f a i l e d t o r a i s e t he i s s u e i n i t s e a r l i e r mo t i o n f o r s u mm ar y j u d g me n t
. An aw ar d ofp rej ud gm ent i nter estm ay be w i thi n the scope of R u le 5 9(e ), O sterneck v. E rnst & W hin ney, 489 U.S
. 16 9, 175- 78 (19 89 ); E m plo yers In s . of Wau s au v. Ti t an In t ’ l, Inc. , 40 0 F.3d 48 6, 48 8 ( 7th Ci r. 20 05) , but the rule m ay not be use d16 N os. 06

- 3685 & 06

- 3794 by “a partyto com ple te prese nti ng his case ” to the di str i ct c ou rt
. In re R eese, 91 F. 3d 37, 3 9 (7t h Ci r. 19 96) ( i nter nal quotati on m ar ks om i tte d); s e eal s o Uphoff v. ElegantBat h, Lt d. , 1 76 F
. 3d 39 9, 4 09

- 10 ( 7th Ci r . 1 99 9)
. “ ‘ [ P] r ej udg m en t i nt e r e s t, un l i k e po s t
-j ud g men t i nt e r e s t, n o r mal l y i s c o ns i der ed an el em ent o fthe j ud gm ent i tse l f, that is , o fthe re l i ef on the m er i ts
. . . . ’ ” Uph o ff, 176 F. 3d at 410 ( quoti ng Healy Co. v. M i l wauke eM e t r o. Se werage, 60 F. 3d 305, 308 (7th Cir. 1995 ))
. So w hile w e hav e no q ua rrel w ith First State Ba nk ’s c on tenti on that pr ej ud gm ent inter est m ay be a pro per subj ect f ora Rule 59( e) m oti on, “s o l ong as the r equi re m en ts o fRul e 59 ( e) ha ve b ee n c o m pl i ed wi th, ” th e bank “shoul d have r equeste d the pre j ud gm ent inter est pr i orto j ud gm en t. ” Id. Th e di s t r i c tc o ur twa s e nt i t l e d t o c o nc l ud e that ra i si ng the i ssue ofprej ud gm ent int erestf orthe fi rs t ti m e in a Rul e 5 9( e) m oti on, after sum m ar y j ud gm ent was enter ed, was to o l ate
. A FFI RMED .

2- 5- 09