In this case, a member of Alpine State Bank stole checks from his employer.  He then placed a stamp on the reverse side of the check indicating “for deposit only” to the member’s account.

The bank processed each deposit and the member continued to make additional deposits of misappropriated checks over a sixteen month period, all totaling more than $100,000.00.

The member was permitted to draw on these funds after each deposit.

During the course of these deposits, the employer from whom the checks were stolen, filed a Chapter 7 bankruptcy. The bankruptcy Trustee filed a complaint against the bank in an attempt to obtain the funds.

The bank filed a claim against its bond company since the funds were lost due to the member’s fraud on the bank.

The bonding insurance company for the bank insured against any loss resulting directly from forgery of a negotiable instrument. Forgery is defined as “the signing of the name of another with intent to deceive….”

The trial court held in favor of the bank and against the bond company. The trial court ruled that the member’s stamp on the back of the checks directing deposit into his own account, was tantamount to actual fraud and should be covered by the bond.

The Court of Appeals reversed the trial court and held that the bond company would not be liable to the bank since the stamp on the back of the check should not constitute “fraud” under the bond company’s insurance policy.  Alpine State Bank v. Ohio Casualty Company, (U.S. Court of Appeals, 7th Cir., No. 90-1561 & 90-1802).

Author: Charles R. Harroun, Attorney at Law