                NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 13a0730n.06

                                             No. 11-2575                                   FILED
                                                                                       Aug 08, 2013
                           UNITED STATES COURT OF APPEALS                        DEBORAH S. HUNT, Clerk
                                FOR THE SIXTH CIRCUIT


SEAWAY COMMUNITY BANK,                                   )
                                                         )
       Plaintiff-Appellee,                               )
                                                         )
v.                                                       )    ON APPEAL FROM THE UNITED
                                                         )    STATES DISTRICT COURT FOR
                                                         )    THE EASTERN DISTRICT OF
PROGRESSIVE CASUALTY INSURANCE                           )    MICHIGAN
COMPANY,                                                 )
                                                         )
       Defendant-Appellant.                              )



Before: MARTIN, SILER, and DONALD, Circuit Judges.

       BOYCE F. MARTIN, Jr., Circuit Judge. This appeal involves Progressive Casualty

Insurance Company’s refusal to pay its insured, Seaway Community Bank, based on an exclusion

in the bankers’ bond agreement into which they entered. Under Michigan law, which applies in this

diversity action, courts must construe ambiguous exclusionary clauses strictly in favor of the insured.

Exclusion (o) of the bankers’ bond stated that Progressive did not have to compensate Seaway for

a loss resulting from checks that were not “finally paid,” but Exclusion (o) did not specify that

checks drawn upon Canadian banks were excluded. Applying Michigan’s version of the Uniform

Commercial Code, the checks were finally paid because the midnight-deadline rule applied. We

therefore AFFIRM the district court’s judgment in favor of Seaway.
No. 11-2575
Seaway Community Bank v. Progressive Casualty Insurance

       Seaway, a Michigan-based bank, bought a Financial Institutions Bond (also called a blanket

bond) from Progressive, an Ohio-based insurer. The Bond was a form contract: it stated at the top

that it was “Standard Form No. 24.” The American Bankers Association and the American Surety

Association jointly drafted Standard Form No. 24. See Oritani Sav. and Loan Ass’n v. Fidelity and

Deposit Co. of Maryland, 989 F.2d 635, 643 (3d Cir. 1993). Neither Seaway nor Progressive

modified the boilerplate language in the Bond.

       The Bond provided coverage for losses caused by forged checks. Insuring Agreement (D)

of the Bond, “Forgery or Alteration,” provided coverage for: “Loss resulting directly from the

Insured [Seaway] having, in good faith, paid or transferred any Property in reliance on any Written,

Original (1) Negotiable Instrument . . . which . . . is altered, but only to the extent the alteration

causes the loss.”

       The Bond excluded coverage for checks that were not “finally paid.” Exclusion (o) provided

that the Bond excluded coverage for “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. . .” (emphasis added).

       A Seaway customer deposited three checks, made payable to him through a Canadian bank,

into his Seaway account: $66,672.13, deposited on October 26, 2009; $88,474.83, deposited on

November 11, 2009; and $228,945.05, deposited on December 3, 2009. Seaway allowed the

customer to withdraw the proceeds from the three checks from his account.

       Unbeknownst to Seaway, however, the checks had been fraudulently altered. Before the

Seaway customer received them, someone had deleted the original payee and inserted the Seaway

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customer’s name as the payee. The Canadian bank, the payor of the checks, returned the three

checks to Seaway on December 13, 2009; December 18, 2009; and January 18, 2010 and the

provisional credits were reversed. Seaway alleged it lost (after the right of offset) $375,412.19.

       Seaway notified Progressive of the loss, and, in February 2010, submitted a proof of claim

to Progressive. But Progressive denied the claim on the basis of the Bond’s Exclusion (o), claiming

that the checks were not “finally paid,” because checks from Canadian banks are provisional and

subject to reversal—i.e., not “finally paid.” For this reason, Progressive claimed, Exclusion (o)

applied.

       Seaway sued Progressive for coverage. The district court had jurisdiction over this case

based on diversity of the parties. 28 U.S.C. § 1332(a). Both parties moved for judgment on the

pleadings pursuant to Federal Rule of Civil Procedure 12(c). After a hearing, the district court

entered an order, without a written opinion, granting Seaway’s motion for judgment on the pleadings

and denying Progressive’s motion for judgment on the pleadings. Progressive timely appealed.

       We review motions for judgment on the pleadings pursuant to Federal Rule of Civil

Procedure 12(c) under the same de novo standard as we review motions to dismiss under Federal

Rule of Civil Procedure 12(b)(6). Sensations, Inc. v. City of Grand Rapids, 526 F.3d 291, 295 (6th

Cir. 2008) (citing Penny/Ohlmann/Nieman, Inc. v. Miami Valley Pension Corp., 399 F.3d 692, 697

(6th Cir. 2005)).

       A federal court sitting in diversity must apply the choice of law provisions of the forum state.

Gass v. Marriott Hotel Servs., Inc., 558 F.3d 419, 425 (6th Cir. 2009) (citing NILAC Int’l Mktg.

Group v. Ameritech Servs., Inc., 362 F.3d 354, 358 (6th Cir. 2004)). Given that Seaway filed this

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Seaway Community Bank v. Progressive Casualty Insurance

case in Michigan state court, and that it was removed to the Eastern District of Michigan, Michigan

choice of law provisions apply. Id. Specifically, we apply Article 4 of the Michigan Uniform

Commercial Code, Mich. Comp. Laws Ann. § 440.4101 et seq. It provides that the “‘liability of a

bank for actions or non-action with respect to any item handled by it for purposes of presentment,

payment or collection is governed by the law of the place where the bank is located.’” Colorado

Nat’l Bank v. First Nat’l Bank & Trust Co., 459 F. Supp. 1366, 1368 n.4 (W.D. Mich. 1978)

(quoting Mich. Comp. Laws Ann. § 440.4102(2)).

       We begin by outlining the check-collection procedure that banks use. We then apply it to

this case’s facts. Article 4 of the Michigan Uniform Commercial Code describes the check-

collection procedure used by banks which are members of or participants in the Federal Reserve

System. Id. The check-collection process begins when a customer deposits a check for collection

in a “depository” bank, defined as “‘the first bank to which an item is transferred for collection even

though it is also the payor bank.’” Id. at 1368 n.5 (quoting Mich. Comp. Laws Ann. § 440.4105(a)).

Here, Seaway was the depository bank. Seaway paid its customer, and then it sought payment on

each check he had deposited by transferring each of them through one or more “intermediary” banks,

defined as “‘any bank to which an item is transferred in the course of collection except the depository

or payor bank.’” Id. at 1368 n.6 (quoting Mich. Comp. Laws Ann. § 440.4105(c)). Each bank in

the collection process “settles” for a check by various means, including by paying cash. Id. at 1368.

Giving credit to the prior intermediary bank is the most common method of settlement. Id. (citing

Mich. Comp. Laws Ann. § 440.4101, Official Comment 5). In other words, each intermediary bank

that transfers the check to the next intermediary bank receives a provisional credit from the

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Seaway Community Bank v. Progressive Casualty Insurance

transferee, with the penultimate intermediary bank in the collection chain receiving its provisional

credit from the bank upon which it was drawn, called the “payor” bank, which means “‘a bank by

which an item is payable as drawn or accepted.’” Id. at 1369 n.8 (quoting Mich. Comp. Laws Ann.

§ 440.4105(b)). Here, the payor bank for each of the checks was a Canadian bank.

       To revoke a settlement, the payor bank must return the item before its midnight deadline,

defined as “midnight on its next banking day following the banking day on which it receives the

relevant item or notice or from which the time for taking action commences to run, whichever is

later.” Mich. Comp. Laws Ann. § 440.4104(j). If the payor bank decides not to finally pay the

check—perhaps because it is fraudulent—then these provisional credits are reversed. Whether the

payor bank decides to finally pay the check or dishonor it, under Article 4 of the Uniform

Commercial Code, the payor bank must take action before midnight on the next banking day

following the banking day on which the payor bank receives the check. This is known as the

“midnight deadline” rule. See Mich. Comp. Laws Ann. § 440.4302(1). Under the midnight deadline

rule, if the payor bank receives a check and does nothing by midnight on the following banking day,

then the bank must pay the check.

       Here, the checks from the Canadian payor bank were “finally paid” as that phrase is defined

in the Uniform Commercial Code. Progressive states that the Uniform Commercial Code, and the

midnight deadline rule, do not apply to Canadian banks. Therefore, the Canadian payor bank in this

case could—and did—decide days after receiving the checks from the collecting bank that it was

going to dishonor the checks because they were fraudulent. The Canadian bank reversed the

provisional credits all the way down the chain to Seaway. Because the fraudulent checks at issue

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No. 11-2575
Seaway Community Bank v. Progressive Casualty Insurance

in this case could never be “finally paid,” Progressive argues, they fall under Exclusion (o), which

provided that Progressive did not have to pay Seaway for losses incurred on checks not “finally

paid.” The phrase “finally paid” has a clear meaning within the banking industry: it means when the

midnight-deadline rule applies under the Uniform Commercial Code.

          Under Michigan law, an insured loses coverage under a policy if one of the policy’s

exclusions applies to the insured’s particular claims. Auto-Owners Ins. Co. v. Churchman, 489

N.W.2d 431, 434 (Mich. 1992) (citing Fresard v. Michigan Millers Mut. Ins. Co., 327 N.W.2d 286,

289 (Mich. 1982)). Nevertheless, “[e]xclusionary clauses in insurance policies are strictly construed

in favor of the insured.” Id. (citing Shelby Mut. Ins. Co. v. United States Fire Ins. Co., 162 N.W.2d

676, 678 (Mich. Ct. App. 1968)). We must give effect only to “[c]lear and specific exclusions.” Id.

We may not hold an insurance company liable for a risk that it did not assume. Id. (citing

Kaczmarck v. La Perriere, 60 N.W.2d 327, 330 (1953)). But it is possible to hold an insurance

company liable for a risk that it did assume, especially given that we must strictly construe an

exclusionary clause in the insured’s favor. We must construe an ambiguity in an insurance contract

against the insurer and in favor of coverage. Wielinga v. Am. Way Life Ins. Co., 473 N.W.2d 730,

731 (Mich. Ct. App. 1991) (citing Auto Club Ins. Ass’n v. DeLaGarza, 444 N.W.2d 803, 806 (Mich.

1989)).

          We must construe Exclusion (o) strictly—in Seaway’s favor and in favor of coverage. The

Exclusion does not say whether or not checks drawn on Canadian banks are to be exempted from

Michigan’s version of the Uniform Commercial Code’s definition of “not finally paid.” Applying



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Seaway Community Bank v. Progressive Casualty Insurance

the Uniform Commercial Code, the checks were finally paid. Therefore, Exclusion (o) could not

apply, and Progressive must indemnify Seaway. We AFFIRM the district court’s judgment.




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No. 11-2575
Seaway Community Bank v. Progressive Casualty Insurance

BERNICE B. DONALD, Circuit Judge, dissenting.


       While I agree that under Michigan’s choice-of-law rules, Michigan law applies, I do not agree

that we can apply the Michigan Uniform Commercial Code to this case because application of the

Michigan Uniform Commercial Code is limited. Michigan law makes clear that the Michigan

Uniform Commercial Code only applies to “banks that are members of or participants in the Federal

Reserve System.” Colo. Nat’l Bank v. First Nat’l Bank & Trust Co., 459 F. Supp. 1366, 1368 (W.D.

Mich. 1978). The statutory canon expressio unius est exclusio alterius (the mention of one thing is

the exclusion of another) is instructive here. Marx v. Gen. Revenue Corp., 133 S. Ct. 1166, 1175

(2013) (recognizing that the expressio unius est exclusio alterius canon applies when it is “fair to

suppose that Congress considered the unnamed possibility and meant to say no”); see also TRW, Inc.

v. Andrews, 534 U.S. 19, 28 (2001) (same); Beaudry v. TeleCheck Servs., Inc., 579 F.3d 702, 706

(6th Cir. 2009) (same). Only members or participants of the Federal Reserve System are covered

by the Michigan Uniform Commercial Code. Canadian banks, like the one on which the fraudulent

checks were written, are not members or participants of the Federal Reserve System and, therefore,

are not covered by the Code. This negative inference is bolstered by the fact that other courts

recognize that what qualifies as final payment varies with foreign instruments, and that final payment

is not determined by the Uniform Commercial Code adopted in that state. See generally, Mercantile

Bank & Trust Co. v. Hunter, 501 P.2d 486 (Colo. App. 1972) (determining that a check drawn on

a British bank and returned 129 days after its deposit was provisional); Gossels v. Fleet Nat’l Bank,

902 N.E.2d 370, 374 (Mass. 2009) (determining that a check drawn on a Grand Cayman bank and

returned twenty-one days after its deposit was provisional); Cumis Mut. Ins. Soc’y, Inc. v. Rosol,
No. 11-2575
Seaway Community Bank v. Progressive Casualty Insurance

2011 WL 589397 (N.J. Super. Ct. App. Div. Feb. 22, 2011) (finding that a check drawn on a

Canadian bank and returned twenty-four days after its deposit was provisional). As such, what

triggers final payment in this case is not governed by the Michigan Uniform Commercial Code or

the midnight deadline rule in M.C.L. § 440.4302.1

        Therefore, we properly turn to Michigan common law to interpret the bond provisions.

Bituminous Cas. Corp. v. J&L Lumber Co., Inc., 373 F.3d 807, 815 (6th Cir. 2004) (determining that

state law applies to the interpretation of insurance contracts); Morley v. Auto. Club of Mich., 581

N.W.2d 237, 240 (Mich. 1998) (holding that the construction and interpretation of an insurance

contract is a question of law). Generally, rules of contract construction apply when interpreting

insurance policies. Universal Image Prod., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 707 (E.D.

Mich. 2010). A fidelity insurance bond, however, is not a typical insurance policy. Flagstar Bank,

FSB v. Fed. Ins. Co., No. 05-70950, 2006 WL 3343765, at *2 (E.D. Mich. Nov. 17, 2006), aff’d, 260

F. App’x 820, 820–825 (6th Cir. 2008). Rather, it is the product of a collaborative effort between

the underwriter and the insured financial institution. Id. The standard form bond at issue here has

been designed to deter courts from interpreting coverage broader than intended by the parties. See

id. Where the policy language is clear, a court must enforce the specific language of the contract and

not create ambiguity where none exists. See also Pac. Emp’rs Ins. Co. v. Mich. Mut. Ins. Co., 549

N.W.2d 872, 875 (Mich. 1996); Heniser v. Frankenmuth Mut. Ins. Co., 534 N.W.2d 502, 505 (Mich.


        1
          A payor bank is accountable for a demand item presented on and received by the bank
“whether properly payable or not if the bank . . . retains the item beyond midnight of the banking day
of receipt without settling for it or . . . does not pay or return the item or send notice of dishonor until
after its midnight deadline.” M.C.L. § 440.4302.

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Seaway Community Bank v. Progressive Casualty Insurance

1995); see also First Nat’l Bank of Manitowoc v. Cincinnati Ins. Co., 485 F.3d 971, 977 (7th Cir.

2007) (acknowledging that the traditional rule of construing any ambiguity in favor of coverage does

not apply because the standard fidelity bond is drafted by representatives from both the banking and

insurance industries). The policy as I read it is clear. The provisional payments for the three

Canadian checks were properly revoked and never became final; thus, they were not finally paid.2

       Moreover, we must only enforce those obligations actually assented to by the parties. Wilkie

v. Auto-Owners Ins. Co., 664 N.W.2d 776, 787 (Mich. 2003). Foreign checks pose a greater risk

than domestic checks due to the fact that foreign checks are not subject to the Uniform Commercial

Code’s midnight deadline rule. See generally EEOC v. Regions Fin. Corp., No. H-07-2491, 2010

WL 173371, at *2-3 (S.D. Tex. Jan. 12, 2010). The American Bankers Association, which co-

drafted the Bond, explains:

       [F]oreign banks, such as Canadian banks, are not subject to the UCC or the Federal
       Reserve CC. Instead, Canadian banks’ right to revoke settlement may be as long as
       one year from the date that the item is discovered as fraudulent, regardless of when
       the fraud is discovered. Because the discovery period can be indefinite, an item is
       never finally paid like domestic items. Therefore, foreign checks, are unavoidably
       subject to Exclusion (o) of the Financial Institution Bond. The Foreign Check Rider
       remedies this issue.

See ABA Insurance S ervices, Foreign                         Check      Rider,      available      at
http://www.abais.com/1foreign-check-rider.aspx.



       2
          The Bond expressly excludes from coverage losses resulting from payments made or
withdrawals from a depositor’s account involving items of deposit that are not “finally paid.”(“[T]his
bond does not cover: . . . (o) 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. .
. .”) Canadian, unlike domestic, instruments can always be reversed in the instance of fraud. 1-8A
Doing Business in Canada § 8A.01(c), (g).

                                                -10-
No. 11-2575
Seaway Community Bank v. Progressive Casualty Insurance

       Progressive did not agree to cover such risk, and Seaway failed to negotiate a Foreign Check

Rider to provide the coverage that it now improperly seeks. As the Eastern District of Michigan

observed in another case involving the application of an exclusion in a financial institution bond

modeled after Standard Form 24, “Both [the insured bank] and [the insurer] are large, sophisticated

financial institutions. They are well aware of the risks of the transactions in which they are involved

and can easily bargain with each other to allocate those risks.” Flagstar Bank, FSB, 2006 WL

3343765, at *2. Seaway failed to bargain for insurance coverage for fraudulent Canadian checks.

We simply cannot rewrite an insurance policy under the guise of interpretation. McKusick v.

Travelers Indem. Co., 632 N.W.2d 525, 531 (Mich. Ct. App. 2001).

       For this reason, I would hold that the bond does not provide coverage in this situation. I am

concerned that the majority’s opinion essentially condones a court’s rewriting of the terms of the

fidelity insurance bond, and could render meaningless the terms of other similar bonds where banks

negotiated and paid for foreign check coverage. In the present case, Seaway receives a gifted

windfall as a resulted of a judicially revised insurance policy. For these reasons, I respectfully

dissent.




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