What’s a “counterfeit”?

Bank of Brewton v. Travelers Cos., No. 14-12472 (11th Cir. Feb. 9, 2015).

 As worthless as a Continental

As worthless as a Continental

The Bank of Brewton is a small institution that claims to be Alabama’s oldest bank. Over a period of years, it made a number of loans to a long-time customer, Jackson Hines. As collateral for one of those loans, Hines gave the Bank a certificate representing 180 shares of stock in a company called TSG. The Bank later figured out that this certificate was a copy, not an original, so it demanded an original from Hines. To satisfy the Bank’s demand, Hines lied to TSG and told the company that he had lost the original certificate for the 180 shares—so could TSG please give him a replacement? TSG complied, issuing Hines a second certificate that represented the same 180 shares. Hines gave that second certificate to the Bank. 

As the Bank later learned, the first stock certificate was a copy for a very good reason: Hines had given the original to another bank as collateral for another loan. It was only that original certificate that actually represented the 180 shares. The second certificate that Hines gave the Bank was procured by fraud and didn’t represent any real shares in TSG. It was worthless. As for Hines, he defaulted on his loans and filed for bankruptcy.

The Bank, however, was insured by Travelers in case it extended credit based onand then lost money because ofa “counterfeit” security. The insurance coverage defined “counterfeit” as “an imitation which is intended to deceive and to be taken as an original.” The question in this appeal is whether the second certificate that Hines gave the Bank was a “counterfeit.” 

Applying Alabama law, the Eleventh Circuit holds that it wasn’t a counterfeit. A counterfeit refers to a document that imitates the appearance of an authentic document. The certificate here, however, was an authentic document: it was really and truly issued by TSG. Yes, the certificate was a lie. But that’s because Hines lied about its value—that is, he lied to the Bank that it really represented an ownership interest in TSG. He didn’t lie about the certificate’s authenticity, though, so it’s not a “counterfeit.” The Bank’s losses are not covered by the insurance.