533 F.2d 290 (5th Cir. 1976), 74-3918, Calcasieu-Marine Nat. Bank of Lake Charles v. American Emp. Ins. Co.

Docket Nº:74-3918, 75-1427.
Citation:533 F.2d 290
Party Name:CALCASIEU-MARINE NATIONAL BANK OF LAKE CHARLES, Plaintiff-Appellee, v. AMERICAN EMPLOYERS' INSURANCE CO., Defendant-Appellant. LOUISIANA BANK & TRUST CO., Plaintiff-Appellee Cross Appellant, v. The EMPLOYERS LIABILITY ASSURANCE CORP., Defendant-Appellant Cross Appellee.
Case Date:June 14, 1976
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 290

533 F.2d 290 (5th Cir. 1976)




LOUISIANA BANK & TRUST CO., Plaintiff-Appellee Cross Appellant,



Cross Appellee.

Nos. 74-3918, 75-1427.

United States Court of Appeals, Fifth Circuit

June 14, 1976

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Karl E. Boellert, John A. Jeansonne, Jr., Lake Charles, La., for Calcasieu-Marine Nat. Bank.

Marian Mayer Berkett, Charles F. Seemann, Jr., New Orleans, La., for American Emp. Ins. Co. and Emp. Liability Assur. Corp.

Nolan J. Edwards, Homer Ed Barousse, Jr., Edmond M. Reggie, O. W. Boswell, II, Reggie Harrington & Boswell, Crowley, La., for La. Bank & Trust.

Appeals from the United States District Court for the Western District of Louisiana.

Before WISDOM, COLEMAN and GEE, Circuit Judges.

WISDOM, Circuit Judge:

Before us are two diversity cases in which the critical legal question is substantially the same. American Employers' Insurance Company appeals from a judgment, on a bankers blanket bond, in favor of the Calcasieu-Marine National Bank (Calcasieu). The Employers' Liability Assurance Corporation, Ltd., appeals from a judgment, on a similar bond, in favor of the Louisiana Bank and Trust Company of Crowley, Louisiana (Louisiana Bank). In view of this Court's disposition of the two appeals, only one opinion is necessary.

Each bank claimed that losses incurred by it, with respect to various transactions culminating in the bankruptcy of a bank customer, were covered by the respective bonds. The defendants denied liability on numerous grounds. We reverse the district court judgments for the plaintiffs. First, we hold that the losses sustained by Calcasieu and by Louisiana Bank fell within a bond provision that excluded coverage for losses due to bank loans. Second, we hold that the remainder of the alleged loss suffered by Louisiana Bank was not a loss at all.



Both cases arise out of the transactions of the banks with two rice mills and with Jack R. Smith, the president of both mills. The Lake Rice Mill, Inc., (Lake) and the Rex Rice Co. (Rex) were in the business of purchasing "rough" rice from farmers, milling and cleaning the rice, packaging the rice in varying quantities, and selling the rice to food companies.

The Calcasieu/Lake transaction began when Lake deposited with Calcasieu a draft on the Grace-Kennedy Company (Grace-Kennedy), a Canadian purchaser of rice, for $63,300. Calcasieu, according to its custom, immediately credited Lake for the amount of the draft and forwarded the draft to its correspondent bank in New York for collection. This draft was not honored by Grace-Kennedy for a number of reasons: some of the rice had been damaged and some, apparently, had never been shipped. Instead of honoring the draft, Grace-Kennedy drew a check in the amount of $40,594.40, the adjusted purchase price, to the order of Rex and sent this check to Rex. The check was deposited in Rex's account at Louisiana Bank on February 10, 1969.

Meanwhile, however, another draft on Grace-Kennedy was prepared by Lake and was supported by a Rex invoice. 1 This draft also reflected the adjusted purchase price of $40,594.40 and, on February 6, 1969, was deposited, as the first draft had been, with Calcasieu for collection. Because money due on the same transaction had already been advanced, Calcasieu adjusted Lake's bank balance to reflect the lower purchase price; it continued to credit Lake

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with $40,594.40, minus a "service charge" that amounted to interest on its previous advance. Of course, when Grace-Kennedy was presented with the second draft, it did not pay that draft because it had already paid Rex for the same rice directly by check. Calcasieu was notified of the dishonor of the second draft after one and one-half months had elapsed and both rice mills had been closed. Calcasieu's claim arises from the loss on this second draft.

The events which led to Louisiana Bank's claim against its bondsman occurred closer to the demise of the two mills. Louisiana Bank had given Rex credit on seven drafts drawn by Rex on Connell Rice and Sugar Co. (Connell) to cover the purchase of rice sold to Connell. These drafts were not accepted by Connell because the attached documentation was either incomplete or incorrect. Again, by the time the bank became aware of the dishonor, Rex had collapsed.

Louisiana Bank also claims to have lost money by honoring two checks, deposited with it by Jack Smith for the Rex account, that were returned for insufficient funds (NSF) and for which no collection was ever made. Louisiana Bank was, at the time Smith deposited the checks, holding numerous "rough rice drafts" drawn on Rex's account for the benefit of farmers who had sold rice to Rex. These drafts, having been held by the bank for more than twenty-four hours without acceptance or dishonor, were considered "stale". Under Louisiana law at that time, Louisiana Bank would have been liable itself on these drafts if they had been regular on their faces. 2 The bank, anxious about the stale drafts, asked Jack Smith to pay for some of them. Smith drew two checks, totalling $110,509.80, on Lake's account with Calcasieu and deposited these into the Rex account with Louisiana Bank. He then wrote a Rex check to Louisiana Bank for $104,566.84, and the bank paid off a similar amount in stale rough rice drafts with its own cashier's check. The Lake checks, sent through normal banking lines for collection, were returned NSF.



The bonds contained the following exclusionary provision:


(d) any loss the result of the complete or partial nonpayment 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, . . . .

With respect to the Grace-Kennedy drafts and the Connell drafts, the bondsmen contend that the extensions of credit to the rice mill accounts, pending collection of those drafts, constituted a "loan" for the purposes of the bond exclusion. The banks argue that there was no loan; rather, they argue that the transactions were merely advances of credit pending the collection of various items in the normal course of business and that such advances, not commonly referred to in banking terms as loans, cannot be deemed included in the bond exclusion.

This is, as far as we can determine, a question of first impression in the federal courts of appeals. The analysis begins with a review of prior cases considering related problems.

The closest case on the facts is National Bank of Paulding v. Fidelity and Casualty Co., S.D.Ohio 1954, 131 F.Supp. 121. Stoller, who bought, sold, and warehoused seeds and grain, was in the practice of drawing sight drafts on his purchasers. His bank would, upon receipt of the draft, an invoice to the customer, and a bill of lading, credit Stoller's account with the amount of the draft and forward the papers for collection. While the draft was being collected, the bank would charge Stoller's account with interest. The bank lost money when it advanced credit on drafts supported by fictitious accompanying documents. The defendant

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bondsman tried to relieve itself from liability by reference to the same bond exclusion as is involved here. The district court held that the transaction was not a loan. A loan was described as "a contract (for which) there must be a meeting of the minds". There was no meeting of the minds because "(t)he plaintiff bank expected a return of its money in the same manner that it had received it in the previous transactions". The district courts in Calcasieu and Louisiana Bank relied on Paulding in finding that the instant transactions did not amount to loans. See, e. g., 388 F.Supp. at 468.

The bonding companies argue that Maryland Casualty Co. v. State Bank and Trust Co., 5 Cir. 1970, 425 F.2d 979, has modified, in this circuit, the availability of the Paulding -based argument. In Maryland Casualty, Behring negotiated a loan with the bank; the loan was secured by valueless warehouse receipts. The district court held the loan exclusion clause inapplicable, 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". 425 F.2d at 981. We reversed, observing nothing of "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". Id. It is possible to read the two district court opinions here as having fallen into the same mistake as the district court in Maryland Casualty ; that is, the district courts may have relied upon that part of Paulding in which the court focused on Stoller's obviously fraudulent intent. The Paulding court had emphasized "the elements of the transactions which constitute . . . false pretenses . . . . There were no elements of loans in these transactions". This observation was quoted in Calcasieu, and the Louisiana Bank court approved of Calcasieu's reading of Paulding.

Finally, we note National Bank of Commerce in New Orleans v. Fidelity and Casualty Co., E.D.La.1970, 312 F.Supp. 71. There, the bank was victimized by a check-kiting scheme. 3 The district court rejected the bonding company's argument that the loan exclusion applied. 4 It stated that "(t)he policy...

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