Federal Deposit Ins. Corp. v. Aetna Casualty & Surety Co.

• Decision Date: 30 July 1970
• Docket Number: No. 27254.,27254.
• Citation: 426 F.2d 729
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Receiver of the First National Bank of Marlin, Marlin, Texas, Plaintiff-Appellee, v. The AETNA CASUALTY AND SURETY COMPANY, the Travelers Indemnity Company, and United States Fidelity and Guaranty Company, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

426 F.2d 729 (1970)

FEDERAL DEPOSIT INSURANCE CORPORATION, Receiver of the First National Bank of Marlin, Marlin, Texas, Plaintiff-Appellee, v. The AETNA CASUALTY AND SURETY COMPANY, the Travelers Indemnity Company, and United States Fidelity and Guaranty Company, Defendants-Appellants.

No. 27254.

United States Court of Appeals, Fifth Circuit.

April 13, 1970.

Rehearing Denied and Rehearing Denied July 30, 1970.

COPYRIGHT MATERIAL OMITTED

R. T. Bailey, James A. Williams, Bailey, Williams, Weber & Allums, James A. Knox, Dallas, Tex., Elmer W. Beasley, Hartford, Conn., Cullen Smith, Waco, Tex., for defendants-appellants.

Frank L. Skillern, Jr., Royal H. Brin, Jr., Dallas, Tex., Douglas Boyd, Waco, Tex., John J. Slocum, Leslie Fisher, Federal Deposit Ins. Corp., Washington, D. C., James W. Duvall, Federal Deposit Ins. Corp., Marlin, Tex., for plaintiff-appellee.

Before THORNBERRY, GODBOLD and MORGAN, Circuit Judges.

Rehearing Denied and Rehearing En Banc Denied July 30, 1970.

LEWIS R. MORGAN, Circuit Judge.

This is an appeal from a judgment for the plaintiff, Federal Deposit Insurance Corporation (hereinafter, the FDIC), rendered by the District Court for the Northern District of Texas, sitting without a jury, in an action seeking indemnity under two banker's blanket employee fidelity bonds and an excess bank employee dishonesty bond (hereinafter, the bonds) which were executed and delivered by the defendant insurance companies to the First National Bank of Marlin, Texas (hereinafter, the Bank) for a loss sustained from the purchase by the Bank of 101 real estate notes (hereinafter, the notes) in violation of the National Banking Act, 12 U.S.C. § 21 et seq., alleged to have been caused by the dishonest and fraudulent acts of persons whose acts were covered under the bonds.

On February 7, 1962, The Travelers Indemnity Company executed and delivered to the Bank its Banker's Blanket Bond, Standard Form 24, for $40,000. On December 28, 1961, United States Fidelity and Guaranty Company executed and delivered to the Bank its Banker's Blanket Bond, Standard Form No. 2, for $80,000, subject to a deductible of $40,000. On May 10, 1963, The Aetna Casualty and Surety Company executed and delivered to the Bank its Excess Bank Employee Dishonesty Blanket Bond, Standard Form No. 28, for $1,000,000, subject to a deductible of $120,000. All three of the bonds continued in force until the Bank was closed on March 10, 1964. In all three bonds, the insurance companies agreed to indemnify the Bank against any loss sustained through the dishonest or fraudulent acts of any employee, as that term is defined in the bonds.¹

Each of the bonds provides under the heading "Exclusions":

Section 1. This bond does not cover * * * (c) Any loss resulting from any act or acts of any director of the Insured other than one employed as a salaried, pensioned or elected official or an Employee of the Insured, except when performing acts coming within the scope of the usual duties of an Employee, or while acting as a member of any committee duly elected or appointed by resolution of the board of directors of the Insured to perform specific, as distinguished from general, directorial acts on behalf of the Insured. (Emphasis supplied.)

The events leading up to the purchase of the bonds began with the acquisition of a controlling interest in the Bank by Joseph B. Morris and Bernard S. Garrett, through their agent Matthew D. Steiner, on July 18, 1963. The Continental Bank and Trust Company of Houston, Texas, agreed to finance the purchase of the stock on the condition that Morris and Garrett would not be stockholders of record. Consequently, the stock was purchased in the names of Steiner; his wife, Mary Jo Steiner; Vince Sanfilippo; and the Republic National Finance Company, which was organized by Morris and Garrett as their alter ego and instrumentality and had Steiner as its president and chairman of its board of directors. Steiner, his wife, Sanfilippo and Republic National all made declarations of trust, wherein they agreed to hold the shares of the Bank's stock registered in their names in trust for the benefit of Morris and Garrett. On July 17, 1963, Morris and Garrett instructed Steiner to go to Marlin, Texas, in order to consummate the purchase of the Bank's stock and to call a meeting of the Bank's board of directors and have himself, his wife and Sanfilippo elected as directors in order to control the Bank. This was done by Steiner on July 19th.

On September 6, 1963, Morris and Garrett agreed through their agents, Goree Mock and Brown Walker, doing business as Liberty Realty Company, to purchase certain notes and mortgages with unpaid balances totalling $1,001,382 from the First American Life Insurance Company, Houston, Texas, and further agreed to deposit the approximate amount of $1,000,000 with the San Jacinto Title Company to be disbursed by First American and in accordance with separate disbursing instructions from Liberty Realty.

On September 11, 1963, the Bank's board of directors passed upon Steiner's motion, a resolution authorizing the Bank to accept a deposit of $500,000 from the Guaranty Depository of California and $500,000 from the Mainland Bank and Trust Company of Texas City, Texas, which was controlled by Morris and Garrett and had Steiner as its president and chairman of its board of directors, and to invest a like amount in Houston real estate notes.² Steiner made this motion pursuant to instructions given him by Morris and Garrett. At the time of the September 11th meeting, Steiner told J. J. Gallaher, Jr., the Bank's president, that he had applied for a charter for a savings and loan association and that when the charter had been granted he would transfer the notes and mortgages to the savings and loan association, so that they would remain in the Bank only a short time. In reply, Gallaher informed Steiner that the Bank was a national bank and that under the National Banking Act, supra, it could not take any one loan in excess of $20,000 with a maturity date in excess of twenty years.

On September 18, 1963, Steiner conferred with Norman R. Dunn, Deputy Comptroller of the Currency of the United States, in Dallas, Texas, and informed him that he was acting as a front for Morris and Garrett in that they were the beneficial owners of the stock registered in the names of Steiner, his wife, Sanfilippo, Roger Harrold and Republic National. This information, however, was never made available to the minority members of the board of directors or to the Bank's officers. Dunn, in turn, instructed Steiner that no assets were to be purchased by the Bank which were out of the Marlin trade area, and the Bank was not to be involved in any transaction with Morris or Garrett or their business interests. These instructions were, likewise, never conveyed to the minority members of the board or to the Bank's officers.

On October 3, 1963, the Bank's board of directors passed a resolution authorizing The Riverside National Bank of Houston to purchase first lien real estate notes for the Bank's account subject to the approval of Steiner.³ Two letters, one on October 2nd and one on October 3rd, were written to The Riverside National Bank by Gallaher, as president of the Bank, and both these letters stated that the purchase of the notes was to be subject to the approval of Steiner.⁴ Although The Riverside National Bank did not purchase the notes mentioned in the October 3rd resolution nor service the notes that were eventually purchased by the Bank, the uncontradicted testimony indicates that the notes Steiner was authorized to approve by the October 3rd resolution and the notes that were eventually purchased were identical. Pursuant to this authority and upon instruction from Morris and Garrett, Steiner went to the San Jacinto Title Company on October 5, 1963, and examined the notes for delinquency. Steiner testified that he merely checked notations that had been made on the outside of the packets containing the individual notes and mortgages, and at no time scrutinized the notes to ascertain whether they conformed to the requirements established for the National Banking Act, supra, as they applied to the Bank.

On October 7, 1963, Morris and Garrett sent Sanfilippo to the Bank to pick up a cashier's check for $970,000 with which to purchase the notes. While Sanfilippo was at the Bank, Steiner, who was in Houston, had a telephone conversation with Gallaher, the Bank's president, during which Steiner told Gallaher that an attorney in Houston had checked the titles to the mortgaged property for the Bank, while, in fact, no attorney had done so, and instructed him to issue the check. Sanfilippo returned to Houston and delivered the check to Morris and Garrett, but it is unclear who delivered the check to the San Jacinto Title Company.

Steiner was not involved in any of the negotiations leading to the purchase of the notes, and he was present at the closing of the transaction at the offices of the San Jacinto Title Company on October 8, 1963, only for about the last ten minutes. At this time Steiner signed a document which on its face purports to be a "Purchaser-Borrower Statement" and which is referred to in the testimony as the closing statement. Although Steiner's signature does not indicate in what capacity he signed, he was the only representative of the Bank present at the closing. On October 9, 1963, Steiner personally delivered the notes and mortgages to the Bank, along with checks drawn by San Jacinto for $22,319.26 and $1,878.60 after closing the deal, the first representing the Bank's discount on the notes, the second the difference between the purchase price and the $970,000.

Out of the $968,121.40 paid to San Jacinto, $189,186.04 was paid to Valley National Mortgage Company, a Morris-Garrett front, as the "net discount realized" in the purchase, and this money ultimately ended up in the hands of Morris and Garrett....