Fidelity and Casualty Company v. Bank of Altenburg, 15052.

• Decision Date: 27 October 1954
• Docket Number: No. 15052.,15052.
• Citation: 216 F.2d 294
• Parties: The FIDELITY AND CASUALTY COMPANY OF NEW YORK, a corporation, Appellant, v. BANK OF ALTENBURG, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

216 F.2d 294 (1954)

The FIDELITY AND CASUALTY COMPANY OF NEW YORK, a corporation, Appellant, v. BANK OF ALTENBURG, Appellee.

No. 15052.

United States Court of Appeals Eighth Circuit.

October 27, 1954.

Gerald B. Rowan and Allen L. Oliver, Cape Girardeau, Mo. (Oliver & Oliver, Cape Girardeau, Mo., with them on the brief), for appellant.

Rush H. Limbaugh, Cape Girardeau, Mo. (Limbaugh & Limbaugh, Cape Girardeau, Mo., on the brief), for appellee.

Before GARDNER, Chief Judge, and THOMAS and COLLET, Circuit Judges.

COLLET, Circuit Judge.

This action is brought by the plaintiff, a small bank, to recover on a bond executed by defendant insuring it against losses caused by "false pretenses". The loss resulted from a "check kiting" scheme conceived and carried out by one William J. Schneier. Usually there are two banking institutions involved in such a scheme. In this instance they were the plaintiff and the Brazeau Bank. Both were small banks in rural communities only a few miles apart. Both incurred losses in substantial amounts. The Brazeau Bank closed as a result. It was taken over by the Federal Deposit Insurance Corporation, which instituted an action on a bond substantially similar to the one involved herein for its loss. That case was determined by this court on appeal in Hartford Accident & Indemnity Co. v. Federal Deposit Ins. Corp., 8 Cir., 204 F.2d 933. The factual details in this case are amply stated in the trial court's memorandum opinion, Bank of Altenburg v. Fidelity & Casualty Co., D.C., 118 F.Supp. 529, 530:

"This case is a sequel to Hartford Accident & Indemnity Co. v. Federal Deposit Ins. Corp., 8 Cir., 204 F.2d 933.

"William J. Schneier obtained money by false pretenses, from the Brazeau Bank, by depositing checks in his personal account in the Brazeau Bank, drawn on his partnership account in the name of H & F Truck Service in the plaintiff bank. Schneier, as an integral part of the fraud perpetrated on the Brazeau Bank, was drawing checks on his personal account in the Brazeau Bank and depositing them in the H & F Truck Service account in plaintiff bank, to cover checks deposited in the Brazeau Bank. Schneier was engaged in `check kiting\' and on a large scale.

"The plaintiff bank apparently first broke the chain when it refused payment on a check, drawn on it and deposited in the Brazeau Bank, for `insufficient funds.\' Thereafter, and within a period of days, each of the banks named returned all outstanding checks drawn by Schneier.

"Schneier\'s relations with plaintiff bank extend from February to late December, 1950. The Brazeau Bank lost $18,490 and the loss forced it to close. Suit was brought and recovery had by the Brazeau Bank on a bond of the Hartford Accident & Indemnity Co., v. Federal Deposit Ins. Corp., 8 Cir., 204 F.2d 933, protecting against loss resulting from false pretense. In this case the Bank of Altenburg seeks recovery of $15,338.71, plus interest, damages and attorney\'s fees, on the same basis. Jury was waived. We now have the case for ruling on its merits.

"The principal issue now turns on defendant\'s claim that plaintiff did not rely on Schneier\'s representation that checks deposited in it would be paid on presentation and Schneier did not deceive the plaintiff, and that the transactions between plaintiff and Schneier were in fact granting of loans and plaintiff\'s loss results from nonpayment of the loans.

"The terms in the policy relied on for recovery are:

"`(B) Any loss of Property through robbery, larceny (whether common-law or statutory), burglary, theft, false pretenses, hold-up, misplacement, mysterious unexplainable disappearance, damage thereto or destruction thereof, whether effected with or without violence or with or without negligence on the part of any of the Employees, * * *.\'

"The record shows that at the very time Schneier opened his account with plaintiff in February, 1950, he initiated his check kiting scheme and that it continued regularly thereafter until December 30, 1950. On December 26th Schneier deposited in the H & F Truck Service account in plaintiff bank a check in the sum of $6,963.14 drawn on the Brazeau Bank. On December 28th he made a deposit of a like check for $6,894.70. On December 30th he made a deposit of a like check for $6,930.42. On December 30, 1950, a check was presented to plaintiff bank drawn by Schneier on the H & F Truck Service account which had been deposited in the Brazeau Bank. There were not sufficient funds in the account to pay it and the check was returned to the Brazeau Bank. In due course (three, four or five days), clearing through a St. Louis bank, the three checks drawn on the Brazeau Bank described above were returned to plaintiff marked `insufficient funds\' by the Brazeau Bank. Prior to the return of these three checks plaintiff had permitted Schneier to check out most of the money purported to be represented by the three checks. Plaintiff was able to reduce its loss from a balance in the account and by other means, from $20,788.26 to $15,338.71. After notice to defendant of such loss, payment on the bond was refused. This suit followed. There is no controversy as to the physical manner in which Schneier operated to obtain the funds from the two banks, or the amount of plaintiff\'s loss on the three checks.

"Defendant charges, and plaintiff concedes, before recovery can be had in this suit, plaintiff must establish that the essential elements of obtaining money by false pretenses existed at the time it paid out funds on the three checks which caused its loss. One essential element of a case based on false pretense, and which is brought into issue, is that `the representation must be believed by the person allegedly defrauded and must be relied on and be the effective cause in inducing the party to whom it was made, to part with his property.\' (Defendant\'s brief.) By brief, defendant reduces its defense to a charge that plaintiff `was in fact simply loaning Schneier the money represented by the checks for the three, four or five days it took them to clear through the St. Louis Clearing House.\'

"The details of Schneier\'s fraudulent operations are more fully developed in this case than in the Brazeau Bank case. To reach a conclusion as to whether plaintiff did or did not believe and rely upon Schneier\'s representations that the three checks involved would be paid on presentation to the Brazeau Bank, we must view the case as the situation was presented to those in charge of plaintiff bank on the occasions and at the time under inquiry.

Objectively, the issue before the court is not a simple one. This results in part from a record that reveals at once all the facts of Schneier\'s transactions with the plaintiff, from the inception of his account until the fraud was stripped of all pretense, rather than as Schneier\'s operations were presented from day to day to those in charge of plaintiff bank\'s operations.

"The deposit slips and the records of the H & F Truck Service account in plaintiff bank shed light on the question as to how the situation developed to those in charge of plaintiff bank, at the time the deposits were made. From the inception of the account on February 14th until December 30th, the deposit slips are uniform in some particulars. Excepting one on April 20, 1950, for $22.50, all deposits are for large sums. They vary from $6,000 to $8,000. With the exception of two deposits they were always made up of one large check and a number of small items, and in some cases currency was included. The large check in each deposit was, according to the undisputed testimony, drawn on the Brazeau Bank. The large check in each deposit did not change significantly in the account throughout the whole period. They were for odd sums and varied between $6,000 and $7,000. The one included in the initial deposit was for $6,361.69, in a total deposit of $6,431.43. The last one was for $6,930.42, included in a total deposit of $7,064.11. The deposit slips show deposits made with substantial regularity, generally from two to three to four days apart.

"The ledger sheets are also material on the issue. They show the account, opening on February 14, 1950, was first overdrawn on April 14th in the sum of $4,026.80. This overdraft was taken up the following day by a deposit of $6,546.33, including a check on the Brazeau Bank for $6,352.25. Thereafter the overdrafts were as follows: On May 24, $122.34; May 26, $4.78; May 29, $97.76; June 12, $766.62; June 16, $1,101.95; June 19, $926.50; June 23, $1,140.02. There were no more overdrafts until October 13 when there was one for $5,398.32. On October 30 there was an overdraft of $103.07; November 3, $521.93; November 6, $10.28; November 10, $264.19; November 13, $232.40; November 29, $46.88; December 15, $313.09; December 16, $827.55; December 18, $919.88. In every instance of overdraft it was taken up the day following by a substantial deposit which always included a check drawn by defendant on his personal account in the Brazeau Bank. The average daily balance was in excess of $3,400.

"The large checks included in Schneier\'s deposits drawn on the Brazeau Bank eventually gave concern to the employees in charge of plaintiff bank. After the November board meeting Mr. Poppitz, the cashier, told Mr. Mueller, a member of the Board of Directors, of the large checks being deposited by Schneier. Mueller lived in the same village as Schneier and was acquainted with him. Poppitz asked Mueller to see Schneier `and find out why he was writing such big checks.\' Mueller talked to Schneier with the result:

"`Mr. Schneier told me that he was buying a lot of poultry and eggs and livestock, that he was selling that here in St. Louis, collecting the money in his name, taking it to Brazeau and depositing it in his account, and then he would write a check to the H. & F. Truck Line to settle it, trucking and all.\'

"The regularity of the inclusion by Schneier in his deposits in p

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