United States District Court, Southern District of New York
October 7, 1991
BROADWAY NATIONAL BANK, PLAINTIFF,
PROGRESSIVE CASUALTY INSURANCE COMPANY, DEFENDANT.
The opinion of the court was delivered by: Mukasey, District Judge.
OPINION AND ORDER
Plaintiff, Broadway National Bank ("Broadway") sues its
insurer, the Progressive Casualty Insurance Company
("Progressive"), under a Financial Institution Bond (the
"Bond"), for losses sustained when credit card sales drafts
deposited by a merchant customer proved uncollectible.
Progressive contends that recovery is barred by two
exclusionary clauses in the Bond. The parties have cross-moved
for summary judgment. For the reasons set forth below,
plaintiff's motion is denied, and defendant's motion is
In January 1989, Broadway entered into an Associate Agreement
("Agreement") with Chemical Bank, enabling Broadway to process
credit card transactions for its merchant customers. Chemical
is a member of MasterCard International Incorporated, the
network of financial institutions that processes MasterCard and
VISA credit card transactions. Under the Agreement, Chemical
named Broadway an associate of MasterCard, thereby giving
Broadway access to the network through Chemical. (Plaintiff's
Rule 3(g) Statement ¶¶ 7-9)
As a member bank, Chemical plays a variety of roles. It
issues credit cards, serves as a clearinghouse for credit card
transactions, and recruits associate banks to serve as
collection agents for credit card sales slips generated by
local businesses. (Plaintiff's Rule 3(g) Statement ¶¶ 7-9) An
associate bank, such as Broadway, enters into agreements with
local merchants — merchants agreements — pursuant to which a
merchant agrees to accept certain credit cards in satisfaction
of a sale, and the associate agrees to redeem the sales slips
either by crediting an account or paying the merchant by check
in the amount of the sales slip less a standard discount.
Russell Merchant Agreement ¶¶ 1, 4; Plaintiff's Rule 3(g)
Statement ¶ 13)
As set forth in a document entitled the Merchant Bank Program
("Program"), Broadway, as an associate of Chemical, was bound
to follow specific procedures in dealing with its merchant
customers. The Program specified that on a daily basis,
merchants were to place sales slips in a sealed envelope,
prepare a summary report, and attach an adding machine tape
tallying the enclosed slips. The package would then be mailed
or delivered to Broadway, which would reimburse the merchant.
Under the terms of the Program, Broadway was entitled to check
the merchant's calculations, but could not open the sealed
envelope and verify that it contained the slips detailed on the
summary report and adding machine tape. (Program pp. 9-12)
After receiving a package of slips from a merchant, it was
Broadway's policy to make the amount credited to the merchant's
account available for withdrawal after one business day.
(Complaint in New York State Action Broadway National Bank v.
Barton Russell Corp. ¶ 12) However, it was only after a lengthy
procedure that Broadway would learn that some slips were
invalid and could not be redeemed: Broadway would send the
sealed envelope along with the attached tape and summary report
to Chemical for processing. Upon receipt of the slips, Chemical
would credit Broadway's maintenance account, and then forward
the slips to the network. The network would charge the issuer
of the card in the amount of the slip, and the issuer in turn
would bill the cardholder, usually by a monthly statement. If
the charge was contested, the issuer, on behalf of itself or
its cardholder, would remit the charge through the network to
Chemical. Without notifying Broadway, Chemical could then send
the slip back through the network for reprocessing. If after
two attempts at processing, an invalid charge slip was returned
unpaid from the network to Chemical, Chemical would then charge
back Broadway's service account. That process could take up to
six months, and only when it was charged back would Broadway
learn that a slip was invalid. Having credited the merchant's
account upon receipt of the slips, Broadway would then be left
to collect from the merchant in order to avoid a loss on the
contested charge. (Cardone Aff. ¶¶ 12-18)
The delay in processing credit card sales slips presents
unscrupulous merchants with an opportunity to abuse the system.
That opportunity was seized by the officers of the Barton
Russell Corporation ("Barton Russell"), an erstwhile merchant
customer of Broadway. Barton Russell began its banking
relationship with Broadway in November 1987, and began its
credit card merchant relationship in January 1988. Ostensibly
an art gallery, Barton Russell was in actuality a front for a
male escort service. Its business, however, was not limited to
the provision of escorts. Through the manipulation of card
numbers and authorization codes, Barton Russell employees
created numerous fraudulent sales slips which they deposited in
the merchant account the corporation maintained at Broadway.
Taking advantage of the long lag between the credit to the
corporation's account at Broadway and Chemical's notification
of Broadway that the slips were fraudulent, they then withdrew
the funds before Broadway could act to protect its interests.
(Cardone Aff. ¶¶ 19, 20) In its complaint, Broadway alleges
that the withdrawals against the fraudulent receipts amounted
to $196,065.25, and its loss, after the seizure of Barton
Russell funds still on deposit, was $179,479.90.
This dispute arose when Broadway attempted to recover its
losses under the Financial Institution Bond it had received
from Progressive on July 15, 1988. Broadway notified
Progressive of its claim, and a proof of loss was submitted on
October 20, 1989. Progressive declined coverage, and this suit
was filed on September 28, 1990. (Defendant's Rule 3(g)
Statement ¶¶ 33-35) Plaintiff moved for summary judgment,
arguing that under the Bond's clear and unambiguous terms it
was entitled to recovery. Defendant cross-moved, asserting that
under the circumstances of this case, the terms of the Bond
exclude coverage of Broadway's claim.
Defendant relies on two exclusionary clauses in the Bond to
defeat Broadway's claim. The first excludes from coverage
losses that result from the use of various types of credit and
charge cards. Referred to as the "Credit Card Exclusion," this
This bond does not cover: loss resulting
directly or indirectly from the use or purported
use of credit, debit, charge, access, convenience,
identification, or other cards (1) in obtaining
credit or funds . . . whether such cards were
issued, or purport to have been issued, by the
Insured or by any one other than the Insured.
(Bond § 2(k)) The second clause excludes losses that result
from unpaid depository instruments. This clause, which is
referred to by the parties as the "Uncollected Funds
This bond does not cover: loss resulting
directly or indirectly from payments made or
withdrawals from a depositor's account involving
items of deposit which are not finally paid for
any reason, including but not limited to Forgery
or any other fraud.
(Bond § 2(o)) Progressive argues that both of the above clauses
allow it to decline coverage. Broadway asserts that the clauses
do not apply to its claim.
Under Federal Rule of Civil Procedure 56(c), a trial judge
must grant summary judgment if the evidence demonstrates that
"there is no genuine issue as to any material fact and [that]
the moving party is entitled to judgment as a matter of law."
Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250, 106 S.Ct.
2505, 2511, 91 L.Ed.2d 202 (1986). "Summary judgment is
properly regarded not as a disfavored procedural shortcut, but
rather as an integral part of the federal rules as a whole,
which are designed `to secure the just, speedy, and inexpensive
determination of every action.'" Celotex Corp. v. Catrett,
477 U.S. 317, 327, 106 S.Ct. 2548, 2555, 91 L.Ed.2d 265 (1986)
(quoting Fed.R.Civ. p. 1).
That the parties have cross-moved for summary judgment does
not necessarily mean that there is no material issue of fact to
be tried. Home Ins. Co. v. Aetna Casualty & Surety Co.,
528 F.2d 1388, 1390 (2d Cir. 1976) (per curiam). "[C]ross motions
for summary judgment do not warrant the granting of summary
judgment unless the Court finds that `one of the moving parties
is entitled to judgment as a matter of law upon facts that are
not genuinely disputed.'" Bollenbach v. Board of Education,
659 F. Supp. 1450, 1456 (S.D.N.Y. 1987) (quoting Frouge Corp. v.
Chase Manhattan Bank, 426 F. Supp. 794, 796 (S.D.N.Y. 1976)).
In contract actions, summary judgment is appropriate only
where the language of the relevant agreement is unambiguous. If
a contract is clear on its face, its proper construction is a
matter of law. United States Naval Institute v. Charter
Communications Inc., 875 F.2d 1044, 1048 (2d Cir. 1989).
Furthermore, extrinsic evidence is inadmissible to contradict
an unambiguous contract.
Language whose meaning is otherwise plain is not
ambiguous merely because the parties urge
different interpretations in the litigation. The
court should not find the language ambiguous on
the basis of the interpretation urged by one
party, where that interpretation would `strain the
contract language beyond its reasonable and
The parties' rights under an ambiguous contract
should be fathomed from the terms expressed in the
instrument itself rather than from extrinsic
evidence as to terms that were not expressed or
judicial views as to what terms might be
preferable. In its efforts to preserve the
parties' rights and the status quo, the court must
be careful not to alter the terms of the
agreement. "The parties having agreed upon their
own terms and conditions, `the courts cannot
change them and must not permit them to be
violated or disregarded.'"
Metropolitan Life Ins. Co. v. RJR Nabisco Inc., 906 F.2d 884
889 (2d Cir. 1990) (quoting Breed v. Insurance Co. of North
America, 46 N.Y.2d 351, 355, 413 N.Y.S.2d 352, 355,
385 N.E.2d 1280, 1282 (1978);
Bethlehem Steel Co. v. Turner Construction Co., 2 N.Y.2d 456,
459, 161 N.Y.S.2d 90, 93, 141 N.E.2d 590, 592-93 (1957); and
Diversified Mortgage Investors v. U.S. Life Title and Trust
Ins. Co. of New York, 544 F.2d 571
, 575 (2d Cir. 1976))
In their construction and interpretation, insurance contracts
are treated like other business contracts. Hartol Products
Corp. v. Prudential Ins. Co., 290 N.Y. 44, 47, 47 N.E.2d 687
(1943); Sullivan County Gas Service Inc. v. Phoenix Mut. Life
Ins. Co., 111 A.D.2d 542, 489 N.Y.S.2d 415 (3d Dept. 1985).
Thus, where the terms of an insurance policy are unambiguous,
they must be given their plain and ordinary meaning, and a
court must refrain from rewriting the agreement. U.S. Fidelity
& Guaranty Co. v. Annunziata, 67 N.Y.2d 229, 501 N.Y.S.2d 790,
791, 492 N.E.2d 1206, 1207 (1986); HS Equities, Inc. v.
Hartford Accident & Indemnity Co., 609 F.2d 669, 673 (2nd Cir.
1979). Under such circumstances, the question is one of law,
and summary judgment is proper. In the words of Judge Weinfeld:
Contracts of insurance, like other contracts are
to be construed to effectuate the parties' intent
as expressed by the words the parties used, and if
the terms of the contract are clear and
unambiguous, the Court must enforce the plain,
ordinary and common meaning of those terms.
IBM Poughkeepsie Employees Federal Credit Union v. Cumis
Insurance Society, 590 F. Supp. 769, 772 (S.D.N.Y. 1984)
(granting summary judgment based on clear terms of insurance
contract). Thus, the issue presented by these motions for
summary judgment is whether the language contained in either or
both of the clauses is "reasonably susceptible" to only one
interpretation. See Cable Science Corp. v. Rochdale Village
Inc., 920 F.2d 147
, 151 (2d Cir. 1990). Each clause will be
considered in turn.
A. The Credit Card Exclusion
The Credit Card Exclusion is broad. On its face, the language
"loss resulting directly or indirectly from the use or
purported use of credit . . . cards" appears to exclude
recovery for any loss suffered by Broadway as a result of the
use or misuse of credit cards. Both parties cite a standard
form for financial institution bonds which states:
Unless employee dishonesty is involved, all
losses resulting from the use of credit . . .
cards is excluded . . . The language is clear and
has resulted in no reported decisions.
Annotated Banker's Blanket Bond, First Supplement (American Bar
However, in the context of this case, the Credit Card
Exclusion may be construed as susceptible to more than one
interpretation. It is arguable that the clause may be unclear
regarding schemes, such as that perpetrated by Barton Russell,
whereby, rather than the actual credit cards, authorization
codes and card numbers serve as the basis for fraud. The clause
lends slight support to this view in that it speaks only of
"credit cards" and not of account numbers or authorization
codes. Ambiguity conceivably could arise from the reference
only to "cards" and not to "card numbers" or a similar term,
raising the question of whether use of card numbers is
"directly or indirectly . . . purported use of . . . cards." To
be sure however, it is at least arguable that the clause's
exclusion of losses resulting "indirectly" from the "purported
use" of credit cards, is enough to cover situations where card
numbers and codes are used to commit fraud. Moreover, the
standard form cited by both parties to explain the terms of the
Bond, confirms that the language of the clause "address[es] the
situation in which funds are obtained through the fraudulent
use of the card number." Annotated Financial Institution Bond,
Second Supplement (American Bar Association 1983).
Nevertheless, I hesitate to base a decision for the defendant
on the Credit Card Exclusion for two reasons. First, in a
motion for summary judgment on a contract, extrinsic evidence
which may clarify the meaning of a clause, such as the standard
form, is inadmissible for the purposes
of interpreting and applying a clause. Metropolitan Life, 906
F.2d at 889. Second, "[i]n New York, when an insurer seeks to
disclaim liability through an exclusion clause in the policy
the insurer must prove that the insured clearly is not covered
by the policy. [citation of cases omitted]. Any ambiguities are
to be resolved in favor of the insured." Marino v. New York
Telephone Co., 944 F.2d 109, 112 (2d Cir. 1991). Given these
rules, if there is even a possible ambiguity as to the
applicability of the Credit Card Exclusion, summary judgment is
However, I need not and do not decide that issue. The
alternative exclusionary clause relied upon by defendant, the
Uncollected Funds Exclusion, is entirely unambiguous and
excludes Broadway's claim. Thus, although the argument that the
Card Exclusion is ambiguous seems far fetched, resolution of
that issue is unnecessary.
B. The Uncollected Funds Exclusion
The Uncollected Funds Exclusion covers losses resulting from
"items of deposit" to a customer's account which are ultimately
unpaid. The sole dispute regarding this clause is whether
"items of deposit" includes credit card sales slips. The clause
admits of no other interpretation than that advocated by
Progressive; Broadway's argument that "items of deposit" does
not cover credit card slips is meritless.
In general, courts which have applied the Uncollected Funds
Exclusion have found the clause as a whole "unambiguous," and
have given the language its ordinary meaning. See Mitsui Mfrs.
Bank v. Federal Insurance Co., 795 F.2d 827, 830 (9th Cir.
1986); Bradley Bank v. Hartford Accident & Indemnity Co.,
737 F.2d 657, 660 (7th Cir. 1984). Although no court has yet
construed "items of deposit," like the other terms used in the
clause, its meaning is plain. The ordinary and obvious meaning
of the words "items of deposit" is any financial instruments
accepted by a bank for deposit.
That the term "items of deposit" is unambiguous is evident
not only from the clarity of the language, but also from the
accepted practice of the banking industry. The general practice
for banks is to accept credit card sales slips for deposit by
a merchant. As part of the agreement with an associate bank,
most merchants maintain a regular depository account with the
associate bank, to which all charges and credits arising from
credit card transactions are entered. See Barkley Clark, The
Law of Bank Deposits, Collections and Credit Cards ¶
11.02[b] (1990). Moreover, Article 4 of the Uniform
Commercial Code, which governs Bank Deposits and Collections,
suggests that "items," as used in the banking industry
generally, is a broad enough term to encompass credit card
sales slips. The U.C.C. defines "items" to include "any
instrument for the payment of money even though it is not
negotiable but does not include money." N.Y. Uniform Commercial
Code § 4-104(g) (McKinney 1991) (emphasis added). On its face,
such a definition would include credit card slips. A recent
decision from another jurisdiction, construing an identical
provision, held that credit card slips are "items" within the
cited U.C.C. provision. See First United Bank v. Philmont
Corp., 533 So.2d 449 (Miss. 1988).
Furthermore, in processing credit card transactions, Broadway
treated credit card slips as "items of deposit." For instance,
it is uncontested that Barton Russell maintained an account
with Broadway which was credited when sales slips were
redeemed. (Defendant's Rule 3(g) Statement ¶ 20; Complaint in
New York State Action Broadway National Bank v. Barton Russell
Corp. ¶ 13). This was a regular practice with merchant
customers. The pre-printed form used for merchant agreements
included a provision which stated that, if the merchant chose,
Broadway would reimburse for sales slips by "credit to the
Merchant's checking account with the Bank." (Merchant Agreement
§ 4) Moreover, Broadway regularly exchanged the credit card
slips it had redeemed for credit to an account maintained at
Chemical. (Cardone Aff. ¶ 8) Thus, at Broadway, credit card
slips were used regularly as the basis for crediting a
and for deposit to the Bank's own account; in other words, they
were accepted and used by Broadway as instruments for deposit.
Broadway's attempts to obfuscate the term only serve to
emphasize its clarity. Broadway argues first that "items of
deposit" includes checks only, and therefore the policy would
not cover losses from the fraudulent use of credit card drafts.
However, the exclusion applies to "items of deposit" and is not
limited to checks. Instead, use of the plural "items," in lieu
of naming any specific kind of instrument, necessarily means
that more than one type of depository instrument is covered.
Limiting application of the exclusion to a single instrument,
as advocated by Broadway, runs counter to the plain language
contained in the clause and results instead in a strained
In addition to checks which are deposited, the plain meaning
of "items of deposit" also includes credit card slips which are
deposited. Ironically, this point is clearly demonstrated by
the flaws in one of Broadway's arguments. Broadway asserts that
because the Merchant Agreement does not require the merchant to
maintain an account with the Bank and allows the slips to be
exchanged for a check, the slips cannot be considered "items of
deposit." In making this argument, Broadway's Memorandum of Law
asks rhetorically: "If no account was required, into what was
the sales slip or item of deposit to be deposited?"
(Plaintiff's Memorandum of Law p. 10). Presumably, the argument
is that because the Merchant Agreement did not require that
credit card drafts be deposited, those instruments could not
possibly be "items of deposit" even when they are deposited.
The necessary implication is that "items of deposit" includes
only those instruments which must be deposited. However, that
the Barton Russell Merchant Agreement did not require the
deposit of credit card slips is irrelevant. This is evident
when one considers plaintiff's prototypical item of deposit —
the check. Checks, like the credit card slips here in question,
may be deposited in a bank, but they may also be exchanged for
cash, goods or another check. Nevertheless, plaintiff asserts
that checks are unquestionably "items of deposit" while credit
card slips could not possibly be "items of deposit" because
their deposit was not required. However, even as to a check,
which plaintiff insists must be an "item of deposit," it is not
the nature of the instrument itself but rather how it is used,
i.e. whether it is in fact deposited, that determines whether
it is an "item of deposit". Following the reasoning inherent in
plaintiff's own check example, credit card slips are "items of
deposit" when they are deposited by the merchant and received
for deposit by the bank. Cf. Bay Area Bank v. Fidelity &
Deposit Co., 629 F. Supp. 693 (N.D.Cal. 1986) (where both the
court and the parties assumed "items of deposit" included
credit card slips).
By its plain and unambiguous terms the Uncollected Funds
Exclusion applies to this case, and bars recovery by plaintiff.
Plaintiff's motion for summary judgment is denied; defendant's
motion is granted, and the complaint is dismissed.
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