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Note:Parkans International LLC, Applicant, purchased scrap metal from a supplier, Adusa Export, Beneficiary, using a letter of credit issued by Marine Midland. The LC required presentation of "a commercial invoice, a packing list, a certificate of weight, a quality and weight certificate issued from a qualified surveying firm, on board bills of lading issued to the order of Marine Midland by the shipper, and [Beneficiary's] signed statement certifying that one set of non-negotiable documents sent by courier to [Applicant] immediately after shipment." The Supplier/Beneficiary used forged documents to obtain payment under the LC from Wells Fargo, the Confirmer. Applicant suffered a loss of approximately US$ 1 million when Issuer withdrew the funds from its account to reimburse Confirmer.

When Applicant submitted a claim under its primary insurance policy, which included crime coverage and a Custom Cover Policy issued by Zurich Insurance Co., Insurer denied the claim. Applicant then sued Insurer for breach of contract under the policy for failing to indemnify it for the loss. Insurer argued that the LC fraud was not covered under the policy.

The U.S. District Court for the Southern District of Texas, Hittner, J., concluded that the beneficiary had obtained "payment on the letter of credit by presenting 'forged documents' to Wells Fargo, including forged certificates and a forged bill of lading." While recognizing that Applicant was not "technical drawee in the transaction", the trial court concluded that it was in effect the drawee because it had ultimately suffered the loss. On the issue of coverage, the court granted Beneficiary's motion ruling that coverage existed under the policy. On the remaining issues, the jury found that Insurer had breached its contract.

On appeal, the U.S. Court of Appeals' for the Fifth Circuit, Duhe and Barksdale, JJ., with Dennis, J. dissenting, reversed the partial summary judgment in favor of the applicant and rendered judgment for Insurer, finding no coverage under the primary policy.

By its terms, the policy covered losses "involving Covered Instruments resulting directly from the Covered Causes of Loss." The "covered Instruments" included "[c]hecks, drafts, promissory notes, or similar written promises, orders or directions to pay a sum certain in 'money' that are: a. Made or drawn by or drawn upon [insured]; b. Made or drawn by one acting as [the insured's] agent; or that are purported to have been so made or drawn." "Covered Causes of Loss" included "Forgery or alteration of, on, or in a Covered Instrument".

Insurer argued that the forgeries were not of "covered instruments" because the documents were not made by, drawn by, or drawn on the applicant or on one acting as its agent. It also argued that the LC was not a covered instrument for the same reasons.

The Majority reviewed the meaning of the terms of the policy in the context of commercial paper, noting that the terms "are not ambiguous and have a definite legal meaning."

Looking to the terms of the LC, the Majority noted that it identified the issuer as the "drawee" and that "[n]either the letter of credit nor any of the fraudulent documents presented by [Beneficiary] were made or drawn by or drawn upon [Applicant]."

As to the argument that the issuer was acting as agent for Applicant, the court stated that in the LC transaction, the bank "acted as principal for itself and not as agent for [Applicant]".

Accordingly, the Majority ruled that none of the documents in the case were covered by the policy.

The Dissent suggested that the Majority gave the term "draw" in the policy an overly technical meaning. Instead, the Dissent favored using the plain and ordinary meaning of "draw" in accordance with Texas insurance law, unless the policy defined a term in some other way. If there were ambiguities under a plain meaning analysis, then they should be resolved in favor of the insured. Following these guidelines, the Dissent noted that the popular definition of "draw" was "'to withdraw' or 'to take or receive money from a source or supply.'" Therefore, under the plain meaning, Beneficiary stole the funds from the Applicant in the LC transaction because the funds ultimately came from its account to reimburse the Issuer. As such, the insurance policy should have covered the fraud. The Dissent acknowledged that Texas courts sometimes interpreted a term in an insurance policy according to its usage within a particular "vocation, trade, or industry," but reliance on trade usage was only appropriate when the insured was acquainted with and had adopted the usage. Since the Applicant was not familiar with commercial paper terminology and the policy was for general coverage, such was not the case here. As such, the Dissent urged that the Majority's holding was incorrect and the argument in favor of reading the policy in a specialized commercial-law sense should have been rejected.

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