610 F.2d 1258 (5th Cir. 1980), 77-2804, First Nat. Bank of Lamarque v. Smith

Docket Nº:77-2804.
Citation:610 F.2d 1258
Party Name:FIRST NATIONAL BANK OF LAMARQUE et al., Plaintiffs-Appellants, v. James E. SMITH, Comptroller of the Currency, Defendant-Appellee, State Insurance Board of the State of Texas et al., Defendants-Appellants.
Case Date:February 01, 1980
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 1258

610 F.2d 1258 (5th Cir. 1980)

FIRST NATIONAL BANK OF LAMARQUE et al., Plaintiffs-Appellants,


James E. SMITH, Comptroller of the Currency, Defendant-Appellee,

State Insurance Board of the State of Texas et al.,


No. 77-2804.

United States Court of Appeals, Fifth Circuit

February 1, 1980

Page 1259

James Patrick Cooney, E. D. Vickery, Houston, Tex., Thomas Pollan, Asst. Atty. Gen., Austin, Tex., for plaintiffs-appellants.

William L. Bowers, Jr., Sp. Asst. U. S. Atty., Houston, Tex., Ford Barrett, Asst. Chief Counsel, Comptroller of the Currency, James V. Elliott, Atty., Thomas P. Vartanian, Washington, D. C., for defendant-appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before GOLDBERG, FAY and ANDERSON, Circuit Judges.

FAY, Circuit Judge:

In this action for declaratory judgment, five national banks in Texas question the authority of the Comptroller of the Currency to issue certain letter directives pertaining to credit life and disability insurance. The contested letters prohibit the banks from distributing credit life insurance income to bank officers, directors, controlling stockholders, or any other "insiders". Holding that the letter directives are a valid exercise of the Comptroller's authority under 12 U.S.C. § 1818(b) (1976), we affirm in part and vacate in part the judgment and memorandum opinion of the district court in First National Bank of La Marque v. Smith, 436 F.Supp. 824 (S.D.Tex.1977).


The five appellant banks 1 are national banking associations organized under the National Bank Act, 12 U.S.C. § 21 et seq. (1976). Each of the banks has followed a similar practice in making credit life, health and accident insurance (hereinafter "credit life") available to its loan customers. 2 A

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bank loan officer who is also an insurance agent licensed by the Texas State Board of Insurance informs the customer of the availability of credit life insurance. If the customer desires to obtain credit life coverage, an entry is made on a loan disclosure form; the customer initials the form and signs an application. The insurance premium may either be added to the loan principal or paid by the customer when the loan is made. Once the loan transaction is completed, a bank clerical employee completes the policy schedule and mails the policy to the customer. The premium is placed in a trust account. At the close of each month a report is prepared and furnished to the insurance company, along with copies of all policy schedules for the coverage written that month and the portions of the premiums payable to the insurer. The portions of the premiums which constitute agents' commissions are transferred to an account maintained in the name of a designated agent. The designated agent is then responsible for the distribution of the commission income to each agent contractually entitled to receive it. Each loan officer/insurance agent has a contract with the credit life insurance company which entitles him to commissions for the sale of credit life insurance. The income accruing under the contract between the loan officers and the insurance carrier inures not to the banks themselves, but to the bank's officers and principal shareholders.

In April, 1976 appellee Comptroller of the Currency sent a letter 3 to each of the appellant banks stating:

The policy of this Office is that all credit life insurance income, whether in the form of commissions, experience refunds or reimbursement for administrative expenses, must ultimately be credited on the bank's books for the benefit of all shareholders. We will not permit a national bank to distribute this income to its officers as a substitute for salary, nor will we allow the income or any portion thereof to be paid to a director, controlling stockholder(s), partnership or corporation other than a wholly owned subsidiary of the bank.

The imperative nature of this language was softened in the balance of the letter. The Comptroller acknowledged that

some lawyers dispute whether a national bank may act as agent for the sale of credit life insurance and receive commission income. Even if a national bank is not so authorized, the board of directors may not distribute the income to persons or entities other than the bank. Rather, the board and its members have a fiduciary obligation to investigate alternative methods of selling credit life insurance which will yield income to the bank that it can legally receive.

The letter suggested several alternative arrangements for the sale of credit life which would enable all of the bank's stockholders to receive their proper share of the economic benefits resulting from the placement of credit life. The letter then stated that failure of the bank's board of directors to make such alternative arrangements would constitute a violation of fiduciary duty and might result in the commission of an unsafe and unsound banking practice warranting supervisory action by the Comptroller. 4

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The thrust of the Comptroller's letter was clear: " 'self-dealing' relating to credit life must stop!" First National Bank of La Marque v. Smith, 436 F.Supp. 824, 829 (S.D.Tex.1977).

Shortly after receiving the Comptroller's letter directive, appellant banks brought this action for declaratory judgment, naming as defendants both the Comptroller of the Currency and the Texas State Board of Insurance. 5 The banks alleged that the Comptroller's directive required them to take credit life insurance commissions into income. This practice, they argued, was in direct conflict with recent constructions of 12 U.S.C. § 92 6 prohibiting the receipt of

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insurance commissions by national banks. See Saxon v. Georgia Ass'n of Independent Insurance Agents, 399 F.2d 1010, 1013 (5th Cir. 1968) ("national banks have no power to act as insurance agents in cities of over 5,000 population"); Accord, Commissioner v. First Security Bank of Utah, 405 U.S. 394, 401, 92 S.Ct. 1085, 1090, 31 L.Ed.2d 318 (1972) (national bank "could never have received a share of the (credit life insurance) premiums"). After a hearing on motions by the parties, the district court issued its full and final judgment, followed by a memorandum opinion. First National Bank of La Marque v. Smith, 436 F.Supp. 824 (S.D.Tex.1977). The court first determined that the conflict was ripe for adjudication. It then upheld the Comptroller's directive requiring appellant banks to seek an arrangement for providing credit life without conferring personal benefits on insiders. The court declared that credit life insurance income properly belongs to the banks as institutions, and that the diversion of such income to directors, officers, or controlling shareholders, i. e., "insiders," constitutes a breach of fiduciary duty which the Comptroller "is obligated to discourage, initially by persuasion and later by a cease and desist proceeding, if necessary." Id. at 838.

The court resolved the apparent conflict between the Comptroller's letter and 12 U.S.C. § 92 by determining that the handling of credit life by the banks does not constitute the bank or its employees "agents" as that term is used in section 92. As a result, the court found that section 92 did not prevent the banks from receiving the full benefit of all income, moneys or other economic benefits generated by credit life sales. Although the district court's opinion suggests that the banks are required to take credit life commissions into income, the requirement is not absolute. The court noted that "(i)f state or federal laws prevent the income or economic benefits generated by (credit life sales) from accruing directly to the bank (and this Court holds they do not), then the directors have a compelling fiduciary duty to make certain that the economic benefits . . . redound to the benefit of all stockholders, and not merely directors, officers or principal shareholders." Id. at 839.


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