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Note: Citizens Bank Holdings Inc. (Bank) entered into a repurchase agreement with Pendant Management Inc. (Broker) for USD 15,000,000 worth of loans guaranteed by the U.S. Department of Agriculture (USDA). Bank subsequently discovered that the loan transactions were fraudulent and that the borrower and collateral were fictitious, and the CPA who had audited the loan transaction did not exist. When Bank contacted the USDA, it was discovered that there were no records of the loans or the guarantees. When Bank requested repurchase of the loans by First Farmers Financial LLC (Fraudster), Fraudster refused.

At this point, Bank made a claim under its Financial Insurance Bond issued by Atlantic Specialty Insurance Co. (Insurer). When Insurer denied the claim, Bank sued Insurer for damages. The United States District Court for the Eastern District of Wisconsin, Jones, M.J., granted summary judgment in favor of Insurer.

Noting that the terms of the bond only covered losses of certified securities, or corporate, partnership or personal guarantees, the Judge ruled that the USDA guarantee did not fall within these categories, and therefore was not insured.

[ARB]

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