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Thursday, March 28, 2024 | Back issues
Courthouse News Service Courthouse News Service

No Relief for Victim of Unusual Loan Fraud

CHICAGO (CN) - An insurer does not have to cover a $400,000 loss suffered by a bank because falsified loan documents upon which the lender relied do not qualify as counterfeit, the 7th Circuit ruled.

In October 2006, Russell Ott applied for a personal loan at North Shore Bank in Wisconsin to finance the purchase of a 2007 Beaver Marquis motor home. Ott, who had never done business with the bank before, planned to buy the vehicle for $600,000 from a dealership that he owned. He requested a $400,000 loan, presenting the home's certificate of origin as collateral.

Bank employee William Hintz inspected the motor home and dealer, taking photos of the vehicle and accepting Ott's original certificate of origin for the home. Hintz confirmed that the vehicle identification number number on the certificate matched the VIN number on the vehicle.

Illinois later issued a security interest on the home and issued a title with the bank as a lien holder.

When Ott stopped making payments two years later, the bank moved to repossess the motor home, only to discover that the home never existed and the certificate of origin was a fake.

Beaver Marquis manufacturer Monaco Coach confirmed that it never made a vehicle with that VIN number. This scheme had allowed Ott to defraud several other institutions of millions of dollars.

North Shore Bank sought reimbursement of more than $370,000 from Progressive, its insurance provider, but the company denied coverage.

The insurance bond that governs the relationship between North Shore Bank and Progressive covers, as relevant to the case, "loss resulting directly from the Insured having, in good faith ... acquired, sold or delivered, or given value, extended credit or assumed liability, on the faith of any item listed in (a) through (e) above which is a counterfeit."

"Counterfeit" is defined as "a written imitation of an actual, valid original which is intended to deceive and to be taken as the original."

Because Ott's documentation did not duplicate any original, Progressive claimed the loss was not the result of counterfeiting and thus its contract did not apply.

U.S. District Judge Aaron Goodstein agreed with Progressive, and the 7th Circuit affirmed last week.

"Certainly, Ott's certificate of origin may imitate other certificates of origin in general, perhaps including that of the unidentified older motor home inspected by Hintz," Judge Daniel Manion wrote for a three-judge panel.

"The real problem, however, is that Ott's certificate of origin does not imitate and actual, original certificate of origin for a 2007 Beaver Marquis motor home because it is undisputed that there never was 'an actual, valid original' certificate of origin for the 2008 motor home pledged to the Bank as collateral for the loan," he added.

Court precedent supports such narrow construction of the term "counterfeit," which aims to limit the coverage insurance companies offer, the decision states.

"A bank can easily verify through minimal investigation if a fake document purports to be something that never was in existence," Manion wrote. "On the other hand, verifying the authenticity of a duplicate or imitation of a genuine document is unlikely to result in the discovery of the fraud."

"The parties' bond is intended to cover the risk of reliance on an imitation of a genuine document; it is not intended to cover the risk of reliance on a document that purports to be something that has never existed."

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