NATIONAL BANK OF COM. IN NEW ORLEANS v. Fidelity & Cas. Co., Civ. A. No. 69-848.

• Decision Date: 10 April 1970
• Docket Number: Civ. A. No. 69-848.
• Citation: 312 F. Supp. 71
• Parties: The NATIONAL BANK OF COMMERCE IN NEW ORLEANS, Plaintiff, v. FIDELITY AND CASUALTY COMPANY OF NEW YORK, the Travelers Indemnity Company, Firemen's Fund Insurance Company, Defendants.
• Court: U.S. District Court — Eastern District of Louisiana

312 F. Supp. 71

The NATIONAL BANK OF COMMERCE IN NEW ORLEANS, Plaintiff, v. FIDELITY AND CASUALTY COMPANY OF NEW YORK, the Travelers Indemnity Company, Firemen's Fund Insurance Company, Defendants.

Civ. A. No. 69-848.

United States District Court, E. D. Louisiana, New Orleans Division.

April 10, 1970.

Merrill T. Landwehr, John V. Baus, New Orleans, La., for plaintiff.

Stanley E. Loeb, New Orleans, La., for defendants.

Sidney M. Bach, New Orleans, La., for defendant-intervenor.

RUBIN, District Judge:

I. FINDINGS OF FACT

Hughes Walsh, a contractor, had lots of bills and no money. It had accounts in a Dallas bank and a New Orleans bank, so it resorted to a classic method of robbing Peter to pay Paul: on September 10, 1968, it drew a check for $87,450 on the New Orleans bank and deposited it in the Dallas bank. It drew a check for $87,500 on the Dallas bank and deposited it in the New Orleans bank. It thus created the illusion that it had money in both banks. Then, to pay its bills, it wrote checks against the image of solvency it had created in Dallas. The check drawn on the New Orleans bank was deposited in Dallas on September 11. The check drawn on the Dallas bank was received for deposit by the New Orleans bank on September 12.

Meanwhile the check drawn on the New Orleans bank was presented to it by the Dallas bank on September 13. This was paid because the New Orleans bank failed to discover that the check deposited with it had not yet been honored. That check had been sent to the Federal Reserve Bank in Dallas for clearance. But, as a result of an intervening weekend and other events, the New Orleans bank was not notified until September 18 that the check deposited with it had not been honored because the customer had insufficient funds on deposit in Dallas.

Thus the check kite was launched, and it flew. When Hughes Walsh wrote the check on the Dallas bank, it had an overdraft there of approximately $55,000.00; at the same time the balance in its New Orleans account was only $611.00.

The New Orleans bank had a Bankers Blanket Bond issued by the defendants and three other surety companies, who are not sued. It claims its loss was covered by clause B of that bond, which reads:

"ON PREMISES

(B) Any loss of Property through robbery, burglary, common-law or statutory larceny, theft, false pretenses, hold-up, misplacement, mysterious unexplainable disappearance, damage thereto or destruction thereof, whether effected with or without violence or with or without negligence on the part of any of the Employees, and any loss of subscription, conversion, redemption or deposit privileges through the misplacement or loss of Property, while the Property is (or is supposed to be) lodged or deposited within any offices or premises located anywhere, except in an office hereinafter excluded or in the mail or with a carrier for hire, other than an armored motor vehicle company, for the purpose of transportation."

The bonding companies say this was not a loss occasioned by false pretenses because Hughes Walsh expected the Dallas bank to honor the overdraft and pay the check that had been deposited in New Orleans, or because Hughes Walsh believed it would be able to deposit funds in Dallas sufficient to cover the check before it was presented for payment. Even if Hughes Walsh did make deliberate misrepresentations to the New Orleans bank, the bonding companies contend the false pretenses were made off the bank's premises, so that the loss would be excluded from coverage under clause B. Alternatively, they urge that the transaction was in fact a loan, excluded from policy coverage.

There is no evidence to support the claim that Hughes Walsh in fact acted in reliance on the assumption that the Dallas bank would honor its overdraft. That bank had done so on many occasions in the past, but Hughes Walsh had no reason to believe that it would honor the $87,500 overdraft this time, particularly since the Dallas account was already $55,000 in the red. In addition, Clifford E. Hughes, the president and principal stockholder of Hughes Walsh, testified that he signed the check deposited in New Orleans because, "We expected to get money from receivables that people owed us." Had he been confident that the Dallas bank would pay overdrafts, there would have been no reason to create the false fund in it by depositing a check drawn on the New Orleans bank: it would have been simpler and easier merely to draw the checks to pay Hughes Walsh's creditors directly on the Dallas account. Instead, as Hughes admitted, the New Orleans check was deposited in the Dallas bank for the express purpose of creating an artificial credit in the Dallas checking account.

Hence Hughes Walsh engaged in a deliberate effort to make the New Orleans bank believe that the Dallas bank would honor its check. Hughes testified that he was buying time. But he didn't pay anything for it.

I cannot credit Hughes' statement that he trusted money would be forthcoming from accounts receivable. He testified that only a garnishment, issued by a company involved in another litigation, prevented the expected payments. The only testimony to this effect is his own, and no other credible evidence supports it. I am convinced he had no sincere expectation that was defeated at the last minute by the garnishment, but rather that he was engaging in a fruitless day to day effort to gain more time.

II. CONSTRUCTION OF THE BOND

The plaintiff has urged that the bond should be construed adversely to the insurers. The bonding companies say this was not a unilaterally composed document, and the rule of hostile construction should not be applied.

In fact the form of Broker's Bond involved here resulted from the joint efforts and negotiations of the American Bankers Association and the Surety Association of America. There is no need to apply any rule of construction applicable only to ambiguities because the language of the bond is clear. It need be read with neither favoritism to one party nor severity toward the other.

III. DID THE LOSS RESULT FROM FALSE PRETENSES?

The bond covers any loss through "false pretenses." This phrase has been interpreted by the courts as including losses sustained by a bank through check kiting. By presenting the check to the New Orleans bank, the customer represented that it was drawn against an account with sufficient funds. Since it knew at the time that it did not have enough money to cover the check, the customer was deliberately using a false impression—a "pretense"—so that it could draw on the artificial credit created in the New Orleans bank. That pretense caused the bank to sustain this loss. See Hartford Accident and Indemnity Co. v. Federal Deposit Insurance Corp., 8 Cir. 1953, 204 F.2d 933; Fidelity and Casualty Company v. Bank of Altenburg, 8 Cir. 1954, 216 F.2d 294; United States for use of First Continental National Bank & Trust Co., Lincoln, Nebraska v. Western Contracting Corporation, 8 Cir. 1965, 341 F.2d 383; United Pacific Insurance Co. v. Idaho First National Bank, 9 Cir. 1967, 378 F.2d 62; Indemnity Insurance Co. of North America v. Pioneer Valley Savings Bank, 8 Cir. 1965, 343 F.2d 634.

It is argued that these cases are so distinguishable on their facts from the case at bar that their holdings are irrelevant. This is to insist that to apply Palsgraf we must find scales in a depot. In all the cases the courts found that obtaining funds or credit from banks through the knowing circulation of worthless checks amounted to "false pretenses," and that the banks' resultant losses were covered by the Bankers' Blanket Bond. Although the details of the check kiting operations vary from case to case, the logic of the opinions is both pertinent and persuasive. See also Liberty Nat. Bank & Trust Co. v. Travelers Indemnity Co., 1968, 58 Misc.2d 443, 295 N.Y.S.2d 983, and Annotation (1951), Insurance of bank against larceny and false pretenses, 15 A.L.R.2d 1006.

This diversity case turns on Louisiana law. But the principles appear to be no different from those of Missouri, as applied by the Eighth Circuit in Fidelity and Casualty Company v. Bank of Altenburg, supra:

"Check kiting, as practiced here, involves more than the mere use of the check with insufficient funds in the bank to meet it. It involves a series of acts which together constitute a scheme, a studied device, false pretenses built upon a series of false representations designed to lull the banks involved into a feeling of confidence and security. The bad check is given. Money or credit is received from a bank other than the one on which the check is drawn. If credit is taken, that credit is usually drawn upon immediately. The check kiter then deposits a check in the bank upon which the first check is drawn before the first check arrives there. The second check is drawn on the bank from which the first money or credit is received. Credit is taken from it and that credit covers the first check when it comes in and possibly additional credit." 216 F.2d at 302.

Louisiana's criminal...