Advancement When Bank Customer Had Insufficient Funds Not a “Transaction in the Nature of a Loan”

The United States Court of Appeals for the Eleventh Circuit, applying Georgia law, has held that an advancement made by a bank similar to that made in connection with overdraft protection was not a “loan” within the meaning of a definition of “Lending Services” in a bankers’ professional liability policy. Greater Community Bancshares, Inc. v. Fed. Ins. Co., 2015 WL 4897467 (11th Cir. Aug. 18, 2015).

A bankruptcy trustee filed an adversary complaint against an insolvent entity that allegedly operated a Ponzi-like scheme. The complaint also alleged that an insured bank knew or should have known that transfers of money made by the now-insolvent entity that were routed through the insured bank were fraudulent, and sought to void those transfers as fraudulent transfers. The complaint additionally alleged that when the now-insolvent entity had “insufficient funds,” the bank “paid out” those funds on the now-insolvent entity’s behalf, obligating the now-insolvent entity to repay the bank. Ultimately, the insured bank won summary judgment in the adversary proceeding, rejecting the bankruptcy trustee’s theory that the bank lent money to the now-insolvent entity.

The insured bank held a duty-to-defend E&O policy that provided specified coverage for “Lending Services,” defined to include any act “in the course of extending or refusing to extend credit or granting or refusing to grant a loan or any transaction in the nature of a loan.” The carrier denied coverage, arguing that the temporary advancements did not constitute “Lending Services” and thus did not implicate coverage.

In the ensuing coverage action, the court of appeals affirmed the district court’s decision to grant summary judgment to the insurer. The court explained that the underlying complaint did not indicate that the purported “debt” to the bank could be understood as a loan or extension of credit, as there were no indicia commonly associated with loans such as a “claim of a loan agreement, an interest rate, or even a due date.” According to the court, the conduct alleged relating to advancements made when the now-insolvent entity had insufficient funds, at most, was “some form of overdraft protection, rather than a loan” as the term “loan” is commonly understood.