Maryland Casualty Co. v. State Bank & Trust Co.

• Decision Date: 05 June 1970
• Docket Number: No. 28464.,28464.
• Citation: 425 F.2d 979
• Parties: MARYLAND CASUALTY COMPANY, Plaintiff-Appellant, v. STATE BANK & TRUST COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

425 F.2d 979 (1970)

MARYLAND CASUALTY COMPANY, Plaintiff-Appellant, v. STATE BANK & TRUST COMPANY, Defendant-Appellee.

No. 28464.

United States Court of Appeals, Fifth Circuit.

May 6, 1970.

Rehearing Denied June 5, 1970.

Will G. Barber, Austin, Tex., for plaintiff-appellant.

James P. Hart, Austin, Tex., Tom G. Oliver, Jr., Ernest Morgan, San Marcos, Tex., for defendant-appellee.

Before THORNBERRY, DYER and CLARK, Circuit Judges.

DYER, Circuit Judge:

In this appeal we are called upon to decide, on undisputed evidence, whether a loss suffered by State Bank was covered by its standard form banker's blanket bond issued by Maryland. The District Court found that the bond insured against the loss and entered judgment for State Bank. We disagree and reverse.

The facts are uncomplicated. Behring and Behring, a partnership composed of Arthur H. Behring and Melvin A. Behring, owned and operated San Marcos Compress, a licensed and bonded warehouse, located in San Marcos, Texas. As bales of cotton were received at the warehouse for storage, warehouse receipts, in bearer form, were issued by the Compress. When bales of cotton were removed from the warehouse, Texas law required the surrender of the receipts to and their cancellation by the Compress.

Contrary to law, Melvin Behring apparently ordered the employees at the Compress not to cancel the warehouse receipts held by the partnership when the bales of cotton that they represented were sold and shipped out of the Compress. A large number of receipts, including the seven hundred receipts here involved, were purchased by the Behring partnership.

Melvin Behring negotiated a loan with State Bank. He told the president that the partnership would give the Bank seven hundred bales of cotton as security. Before the loan by State Bank to the partnership was made, six hundred and ninety-six of the seven hundred bales of cotton were sold for $69,914.64 without cancellation of the warehouse receipts here in suit. Ultimately the Bank loaned $50,000.00 to the partnership. The debt was evidenced by a partnership promissory note in that amount which was secured by a security agreement — pledge of the partnership under which it pledged seven hundred bales of cotton represented by negotiable warehouse receipts in bearer form issued by the Compress.

In making the loan the Bank did not rely upon the financial statements furnished by the partnership but relied solely upon the security of the warehouse receipts, believing that the partnership owned seven hundred bales of cotton purportedly covered by the warehouse receipts which cotton should have been in the Compress. The Bank would not have issued its check to the partnership if it had known that in fact the cotton was not in the Compress as represented.

When the Bank received information that substantially all of the cotton represented by the warehouse receipts held by it had been sold to others and had been shipped out of the warehouse, it made demand on the partnership for payment of the note. The partnership defaulted and it was subsequently adjudicated a bankrupt.

Melvin Behring was charged with theft of the $50,000 from the Bank's president. He pleaded guilty to theft by false pretenses and was adjudged guilty of that offense by the District Court of Hays County, Texas.

Maryland brought this action seeking a declaratory judgment that there was no liability under its bond for the Bank's loss. The Bank answered and counterclaimed seeking recovery of its $50,000 loss.

The Bank relies upon Clause B of the bond which provides, in pertinent part, that Maryland agrees to indemnify the Bank against:

Any loss of property through robbery, burglary, common-law or statutory larceny, theft, false pretenses, hold-up, misplacement, mysterious unexplainable disappearance * * *.

Maryland, on the other hand, relies upon a loan exclusion clause in the bond which excludes from coverage:

(d) Any loss the result of the complete or partial non-payment of or default upon any loan made by or obtained from the Insured, whether procured in good faith or through trick, artifice, fraud or false pretenses, except when covered by Insuring Clause (A), (1) or (E).

The crux of this appeal is the correct interpretation of these clauses and Insuring Clause (E) which we discuss infra.

The District Court concluded that "the transaction cannot be called a loan within the language of the exclusion clause" because "Behring knew * * * not only that the warehouse receipts were valueless but also that he never intended to repay the money. He wanted to steal the money, not to obtain a loan, and he simply used the mechanics of the loan procedure to effect the theft. With Behring having such an intent, the transaction cannot be called a loan within the language of the exclusion clause. There being no loan, there is no exclusion." The Court then held that since the loss was the result of theft it was covered under Clause B of the bond.

For the reasons that we will delineate, we are convinced that the District Court's interpretation of the loan exclusion clause is erroneous. No authority to support its conclusion that the clause was inapplicable was mentioned in the trial judge's memorandum opinion. Bank's counsel has been unable to authoritatively support the judgment. And we have, after considerable search, turned up nothing that has the slightest persuasiveness that the exclusionary clause of the bond can be nullified by the subjective fraudulent intent of the borrower, notwithstanding that the objective indicia all point one way — that a loan was made by the Bank to the partnership.

The district court\'s finding on this ultimate issue, * * * is not to be garrisoned by the clearly erroneous rule. Though it has factual underpinnings this ultimate issue is inherently a question of law. Obeisance to the clearly erroneous rule must yield when the facts are undisputed and we are called upon to reason and interpret. This is the law obligation of the court as distinguished from its fact finding duties. United States v. Winthrop, 5 Cir.1969, 417 F.2d 905, 910.

In Community Federal Savings & Loan Association of Overland v. General Casualty Co., 8 Cir.1960, 274 F.2d 620, which we recently cited with approval in East Gadsden Bank v. United States Fidelity and Guaranty Co., 5 Cir.1969, 415 F.2d 357, the borrower furnished the lender with false affidavits to the effect that buildings had been completed on various lots that were taken as security for a loan made by the lender. Upon subsequent default by the borrower, the lender sued on its bond which excluded "any loss the result of the complete or partial non-payment of or default upon any loan made by or obtained from the Insured, whether procured in good faith or through trick, artifice, fraud or dishonesty * * *". In finding that the loan exclusionary clause applied, the court said:

Plaintiff insists that its loss is not the result of a complete or partial non-payment of or default in any loan made or obtained by it. Plaintiff argues that if the statements as to the payment of lien claims had been true, completion of the buildings and the no loss would have been suffered; hence, the fraud was the cause of the loss. The same type of claim could doubtless be made in almost any type of loan induced by fraud. It is undisputed that loans were made which remain unpaid in part. While the loan was induced by fraud, it seems clear that the immediate cause of the loss was the nonpayment of the loans. It is entirely clear from the exclusion provision as written that the exclusion extends to losses on loans induced by fraud.

274 F.2d at 624, 625.

We are unpersuaded by State Bank's argument that Community Federal can be distinguished because fraud was there involved, while here there was a theft. As we pointed out earlier, we are not bound by the conclusionary characterization of "theft" based upon the borrower's subjective intent that the District Court ascribed to the transaction. We perceive no basic difference in the case sub judice and Community Federal. In this case the promissory note was accepted by the Bank as the legal liability of the partnership. Upon that evidence of indebtedness, secured by the warehouse receipts, the Bank made its loan. It is uncontradicted "that the basic transaction was a loan," that it remained unpaid, and that the default was the "immediate cause" of the loss. East Gadsden,supra, 415 F.2d at 360. The transaction thus fell squarely within the terms of the loan exclusion clause. See, First National Bank of Memphis v. Aetna Casualty & Surety Co., 6 Cir.1962, 309 F.2d 702, cert. denied, 372 U.S. 953, 83 S.Ct. 951, 9 L.Ed.2d 977 (1963).

The Bank next presses its argument that the clause in question is ambiguous and should be construed against the insurer because "a distinction is intended between a loan procured through a crime, such as theft, and a loan which, though wrongfully procured, was obtained under such circumstances as to create only a civil liability and not a criminal liability." We are unable to accept this periphrastic proposition. The District Court did not rest its decision on the premise here urged by the Bank. It found that there was no loan but that "the mechanics of the loan procedure" were used "to effect a theft." The distinction of criminal vis-a-vis civil liability sought to be drawn by the Bank as the benchmark of coverage vel non has support in neither the language of the loan exclusion clause nor in precedent.

In Texas whether an ambiguity exists in the language of an exclusionary...