First Nat. Bank of La Marque v. Smith

• Decision Date: 24 August 1977
• Docket Number: Civ. A. No. 76-G-51.
• Citation: 436 F. Supp. 824
• Parties: FIRST NATIONAL BANK OF LA MARQUE, Texas National Bank of Baytown, First National Bank of Deer Park, First National Bank of Bellaire, and Madison-Southern National Bank, Plaintiffs, v. James E. SMITH, Comptroller of the Currency, the State Insurance Board of the State of Texas and its Members, Joe Christi, Ned Price and Durwood Manford, Jr., Defendants.
• Court: U.S. District Court — Southern District of Texas

436 F. Supp. 824

FIRST NATIONAL BANK OF LA MARQUE, Texas National Bank of Baytown, First National Bank of Deer Park, First National Bank of Bellaire, and Madison-Southern National Bank, Plaintiffs, v. James E. SMITH, Comptroller of the Currency, the State Insurance Board of the State of Texas and its Members, Joe Christi, Ned Price and Durwood Manford, Jr., Defendants.

Civ. A. No. 76-G-51.

United States District Court, S. D. Texas, Galveston Division.

August 24, 1977.

COPYRIGHT MATERIAL OMITTED

James Patrick Cooney, Royston, Rayzor, Vickery & Williams, Houston, Tex., for plaintiffs.

William L. Bowers, Jr., Asst. U. S. Atty., Houston, Tex., for defendant.

Thomas M. Pollan, Thomas A. Rutledge, Asst. Attys. Gen., Austin, Tex., for Insurance Board.

MEMORANDUM OPINION

COWAN, District Judge.

Issues:

The judgment of this Court, attached hereto as Exhibit A, itemizes the documentary material presented to the Court and the procedural posture. The key issues are:

1. Is this controversy "ripe" for judicial determination?

2. Has the Comptroller acted unlawfully in demanding that the officers and principal shareholders of plaintiff banks terminate practices relating to credit life and disability insurance which result in diversion of economic benefits rightfully belonging to the banks to "insiders" (i. e., directors, officers, and controlling shareholders)?

The case presents a question of first impression with reference to the handling of credit life insurance by national banks.

Factual Background:

Plaintiffs are five national banks located in relatively small communities within the Gulf Coast megapolis. None of the communities in which the plaintiffs conduct their business has fewer than five thousand inhabitants.

There is no evidence presently before the Court that the practices in issue have caused severe economic loss to any of the plaintiffs; the Court presumes (but does not find) that the practices challenged have not caused severe loss to any of the plaintiffs.

There is no evidence before the Court that the plaintiff banks are unsound, insolvent, or unstable. The Court therefore presumes (but does not find) that the practices in question have not materially interfered with the soundness, security or stability of any of plaintiff banks.

There is no evidence presently before the Court that the officers, directors, employees, or controlling shareholders of any of the plaintiff banks have acted in bad faith; and the Court presumes (but does not find) that all actions and positions taken by the officers, employees, and controlling shareholders of plaintiffs have been taken in complete good faith, on advice of counsel, and with no intent to violate fiduciary duties.

This controversy involves economic benefits arising from the placement of credit life and disability insurance (hereinafter "credit life"). Credit life is a transaction whereby a potential borrower consents to pay an amount, in addition to the amount of the borrowing, and the lending institution or other entity makes an arrangement with an insurer whereby if the borrower dies, or becomes disabled, before his loan is repaid, the insurer discharges the loan balance. Credit life, properly used, confers benefits upon the borrower, the bank, and the insurer. On the other hand, there are clearly cases where other security, i. e., other than the credit life, is sufficient so that credit life is unneeded. The placing of credit life presents a significant profit opportunity for all lending institutions. See in this regard the economic facts spelled out in the Texas cases, discussed infra.

The exact manner in which the plaintiff banks make arrangements for credit life is spelled out in the affidavit of Mr. Warren Coles. The method is:

During the discussions by which arrangements are made for the extension of credit by the bank, the loan officer explains the functions and availability of credit life insurance to the loan customer. The borrower states whether he wishes or does not wish to receive the benefits of and pay the price for credit life and disability insurance. If the borrower states that he wishes to accept the benefits of and pay the price for credit life, the amount of money which the borrower will be required to pay for this protection is set forth in the disclosure statement, which is initialed by the borrower. Typically, the cost of the credit life insurance is added to the principal of the loan.

The entire credit life transaction is memorialized in a written contract attached to this Opinion as Exhibit B.

This Court assumes that the loan officer complies with the antitrust laws of the United States and Art. 3.53(4) of the Texas Insurance Code. Assuming compliance with those laws, it cannot properly be said that the loan officer "solicits" credit life.

The "paper work" is commendably simple. The entire contractual relationship between the lending institution, the insurer and the debtor is set forth on an easily read, one-page document with clearly legible printing on both sides (see Exhibit B). This document starts off with a brief form entitled "Schedule." The "Schedule" contains the debtor's name, his permanent address, his occupation, his age at his last birthday, the names of the beneficiary in the event credit life in addition to credit disability insurance is obtained, and a statement that the maximum liability under the policy is $25,000. The form also contains blanks in which the person completing the form indicates the type of coverage, the effective date of the insurance, the term in months, the expiration date of the insurance, and the single premium for the term. The "Schedule" also specifies the date upon which disability benefits accrue, and the duration of the benefits in the event of disability, and provide that such disability benefits cannot exceed $350 per month. The debtor, in executing the "Schedule," also makes certifications concerning health and employment. Typically, this "Schedule" is filled out by a clerical employee of the bank, not the loan officer. The "Schedule" is signed by the insured in certifying his health and medical background.

The most significant aspect of the "Schedule," is its statement that the bank is a group life policyholder. The group life policy number is 2127. The plaintiff bank is identified as "First Beneficiary: (Group Life Policyholder)."

The "general provisions" of the group policy contain these significant provisions:

1. The document constitutes the entire contract between all parties, i. e., the debtor, the bank (identified as the "Group Life Policyholder"), and the insurer, Allied Bankers Life Insurance Company of Dallas, Texas.

2. Benefits are payable to the "First Beneficiary: (Group Life Policyholder)", (i. e., the bank) for the purpose of extinguishing all unpaid indebtedness and only amounts in excess of such indebtedness are to be paid to the "contingent beneficiary" (i. e., the borrower or his beneficiary).

3. Premiums due insurer are to be paid by the creditor (i. e., the bank). This premium is payable and due to the insurer as of the effective date of the policy.

The lending institution is both the premium payer and the real beneficiary. It is true that the bank may recover the amount of the premium from the debtor, but the obligation to pay the premium rests upon the bank. The manner in which the bank obtains reimbursement from the debtor is a matter totally between the bank and the debtor.

4. The amount of insurance in force on the life of a particular debtor shall not at any time exceed the debtor's aggregate indebtedness. Thus, under most, if not all, circumstances there would never be a payment of money to a debtor or to his beneficiaries, since the amount of the insurance never exceeds the debt.

5. With reference to the disability insurance, the policy provides that "the amount of monthly disability benefit provided an insured debtor shall be equal to the initial amount of the insured's indebtedness to the creditor divided by the number of months in the term of the contract, provided however, that such benefits shall never exceed $350 per month . . ." Again, this provision makes it clear that under most, if not all, circumstances, monetary benefits would not be paid to the debtor.

The activities described in the factual portions of the Coles' affidavit do not place a bank in the insurance business, do not constitute it an ". . . agent for any fire, life or other insurance company . ." as that phrase is used in 12 U.S.C. § 92 and do not constitute the bank an "insurance agent" as that term is defined in Art. 21.02, Texas Insurance Code. Instead, the bank is properly classified, as the policy itself says, as "First Beneficiary: (Group Life Policyholder)."

The Coles' affidavit emphasizes that the amount of time consumed in the clerical work described there is negligible and that the bank has obtained insurance agent licenses for lending officers. Both of these facts are immaterial. The Coles' affidavit also described the loan officer's activities as "solicitation," but this portion of the Coles' affidavit — as will be explained in more detail below — merely expresses a legal conclusion because loan officers cannot properly "solicit" credit life because of the antitrust laws and Art. 3.53, Texas Insurance Code.

The Coles' affidavit also points out that "each loan officer/insurance agent has a contract with the company writing credit life insurance which entitles him to commissions for the sale of credit life insurance." The income accruing by virtue of the contract between the loan officers and the insurance carrier inures not to the banks themselves, but to officers and principal shareholders of plaintiff banks. Plaintiff banks contend that the income generated from the placement of credit life properly inures to the officers of the banks, and not to the banks themselves, because of 12 U.S.C. § 92 as construed in Saxon v. Georgia Assn of Independent...