A Bridge Too Far: Pennsylvania Federal Court Declines to Extend Coverage Beyond Policy’s Plain and Unambiguous Terms

It’s apt to name a blog post after one of history’s great action movies when the case involves a “conceptual artillery duel” that “ends in a draw,” and that is exactly how U.S. District Judge Gerald Austin McHugh Jr. of the Eastern District of Pennsylvania described the parties’ conflicting textual interpretations in KMS Development Partners LP v. Federal Insurance Co. Keep reading to find out why the insured’s hyper-technical interpretation of the phrase “Forgery or alteration of a Financial Instrument” in a business insurance policy was, like the unfortunate operation at Arnhem in the Netherlands, a bridge too far for the court.

KMS was a real estate development group that had been redeveloping the Frank Sinatra Post Office in Hoboken, New Jersey, for more than a decade. On January 4, 2023, Marcus Hamilton Chandler offered to finance the project. Two weeks later, KMS and Chandler agreed to a $157 million construction loan to be paid from Chandler’s trust account. Pursuant to this agreement, KMS placed $300,000 into an escrow account it believed was owned by the trust.

As the financial requirements of the construction project grew, so did the amount of the loans KMS requested from Chandler. Eventually, based on additional amounts supposedly loaned by Chandler, KMS deposited an additional $500,000 into the trust account. Shortly thereafter, KMS discovered that Marcus Hamilton Chandler, the purported wealthy Englishman, was actually Mark John Chandler, an inmate serving a federal prison sentence for defrauding real estate investors. Unsurprisingly, Chandler refused to return any of KMS’ money.

With Chandler’s unmasking, the time of subterfuge was ending, and an all-out coverage war was looming. KMS had an insurance policy in effect at the relevant time issued by Federal Insurance Co. The policy contained a crime coverage part, which extended coverage to certain enumerated crimes, including for “direct loss sustained by an Insured resulting from Forgery or alteration of a Financial Instrument.” The policy defined the term “forgery,” in relevant part, as “the signing of another natural person’s name with the intent to deceive.” Further, the policy defined the phrase “financial instrument” as “checks, drafts or similar written promises, orders or directions to pay a sum certain in money, that are made, drawn by or drawn upon an Organization or by anyone acting as an Organization’s agent, or that are purported to have been so made or drawn.”

The issue was then clear: while Chandler had defrauded KMS and fraudulently signed emails, a term sheet, an equity letter, and an introduction letter, those documents were not “financial instruments.” KMS requested coverage, Federal denied, and the fight was on.

The parties opening salvos were the canons of statutory interpretation. First, KMS argued that the insuring agreement covered losses stemming from forgeries on documents generally, including, but not limited to, a forgery of a financial instrument. KMS relied on the “rule of the last antecedent,” which provides that “a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows.” Federal responded with the “series-qualifier” canon, which provides that, where “there is a straightforward, parallel construction that involves all nouns or verbs in a series, a modifier at the end of the list normally applies to the entire series.”

The court relied on two cases interpreting nearly identical language to Federal’s policy in Taylor & Lieberman v. Federal Insurance Co., 681 F. App’x 627 (9th Cir. 2017), and Medidata Solutions Inc. v. Federal Insurance Co., 268 F. Supp. 3d 471 (S.D.N.Y. 2017), to reject KMS’ position. KMS argued that these cases were distinguishable because KMS, unlike the plaintiffs in the other cases, had argued that the mere possibility of the application of the rule of the last antecedent rendered the policy ambiguous. However, the court cut through KMS’ arguments relying on Viera v. Life Insurance Co. of North America, 642 F.3d 407 (3d Cir. 2011), for the proposition that a “disagreement between the parties over the proper interpretation of a contract does not necessarily mean that a contract is ambiguous” and that, where the policy’s meaning is otherwise clear, the court should not rely on the rule of the last antecedent to create ambiguity. The court also rejected KMS’ argument that the policy would read as nonsensical if the term “forgery” were replaced by the term’s definition in the policy, observing that “a policy must be construed as written.”

Thus, Federal carried the day when the court found the policy “requires not just a forgery, but a forgery of a financial instrument.” The result: summary judgment in Federal’s favor.

At least in this case, asking a federal judge to rely on a technical canon to read an entire phrase out of a coverage provision was simply a bridge too far.