First Nat. Bank of Sikeston v. Transamerica Ins. Co.

• Decision Date: 12 May 1975
• Docket Number: Nos. 74-1487 and 74-1541,s. 74-1487 and 74-1541
• Citation: 514 F.2d 981
• Parties: FIRST NATIONAL BANK OF SIKESTON, Appellee-Cross Appellant, v. TRANSAMERICA INSURANCE COMPANY, Appellant-Cross Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 981

514 F.2d 981

FIRST NATIONAL BANK OF SIKESTON, Appellee-Cross Appellant, v. TRANSAMERICA INSURANCE COMPANY, Appellant-Cross Appellee.

Nos. 74-1487 and 74-1541.

United States Court of Appeals Eighth Circuit.

Submitted Jan. 7, 1975.

Decided April 17, 1975.

Rehearings and Rehearings En Banc Denied May 12, 1975.

Thomas C. Walsh, St. Louis, Mo., for appellant-cross appellee.

James E. Reeves, Ward & Reeves, Caruthersville, Mo., for appellee-cross appellant.

Before GIBSON, Chief Judge, and HEANEY and ROSS, Circuit Judges.

ROSS, Circuit Judge.

Transamerica Insurance Company appeals a judgment of the District Court for the Eastern District of Missouri holding it liable to its insured, First National Bank of Sikeston, Missouri (First National), on a banker's blanket bond. The claim originated from a previous lawsuit which was unsuccessfully defended by First National. ¹ First National has filed a cross-appeal seeking punitive damages and attorney's fees expended in this suit.

The earlier lawsuit held First National liable to Providence State Bank of Providence, Kentucky, for checks drawn on First National which it refused to pay. In First National's view, liability in the first lawsuit arose from the wrongful or fraudulent acts of Donald R. Bohannon, who they contend was covered by fidelity provisions of the bond issued by Transamerica. Bohannon was employed by First National from 1958 until June 1971 and served as President from 1966 until January 1971. He was also a member of the Board of Directors from 1966 until June 1971.

Bohannon acquired part-ownership of Gibson Livestock Company, Marion, Kentucky, in February 1969. Gibson Livestock was primarily engaged in buying and selling cattle; these operations were conducted by its president, Tommy Gibson. The company required large amounts of operating capital which it had difficulty obtaining. For awhile First National helped supply this capital by giving immediate credit on uncollected drafts deposited by Gibson Livestock, but this was discontinued due to objections by the Comptroller of the Currency, who considered the immediate credits to be in excess of the bank's loan limit. Bohannon's ownership of Gibson Livestock shares was also criticized as a conflict of interest by the Regional Comptroller, who recommended in May, 1970 that Bohannon resign. The criticisms of the Comptroller led Gibson and Bohannon to seek other sources of Gibson Livestock operating capital in late 1970. His business interests caused Bohannon to resign as President of First National in January, 1971, and eventually to resign from the bank altogether.

To obtain financing for the cattle operation Bohannon went to Joel Montgomery, a director and shareholder of First National. Montgomery was also a co-trustee of the Montgomery trust. Bohannan and the trust had controlling interest in the single bank holding company which owned 80-90% of First National. In December and January Bohannon and Montgomery arranged for a line of credit for Gibson Livestock with Union Planters Bank in Memphis. This provided that Union Planters would give immediate credit on uncollected drafts which the livestock company placed in its checking account. The Montgomery Trust guaranteed Union Planters against any loss it might incur in operating the account and Gibson and Bohannon agreed to guarantee Montgomery Trust against loss. Gibson and Bohannon also agreed to pay Montgomery Trust $52,000 for Joel Montgomery's assistance in obtaining the line of credit. Bohannon was the only Gibson Livestock officer authorized to draw on the Union Planters account.

About the same time that these negotiations were proceeding with Union Planters Bank, the First National Bank This banking triangle began operation in early February 1971, Gibson, in Kentucky, would sell cattle and relay the sale data to Bohannon in Sikeston, Missouri. Bohannon would write sight drafts on the buyers payable to Gibson Livestock, which were sent to Union Planters. Union Planters, in Memphis, gave Gibson Livestock's account immediate credit on these uncollected drafts and sent them through Federal Reserve channels for collection. ² When funds were needed for cattle purchases, Gibson Livestock would write checks to itself on its First National account and deposit them in its Providence State Bank account. The Providence bank, relying on Bohannon's guarantee, gave immediate credit for the checks deposited, and Gibson Livestock paid for the cattle with checks drawn on Providence State Bank. Providence State Bank sent the checks, which were already credited to Gibson Livestock's account, to First National via the Federal Reserve System. It took from four to six days for the checks to arrive at First National in Sikeston. Each day Bohannon would determine the amount required to cover these checks presented at First National for payment and would call Union Planters in Memphis. Upon receiving authorization from Bohannon, Union Planters would accomplish a wire transfer of funds to the Gibson Livestock account at First National. The funds transferred would be applied to payment of the Gibson Livestock checks that had been presented to First National for collection on that particular day.

of Sikeston's Board of Directors authorized Gibson Livestock to reopen their checking account, with the understanding that no immediate credit would be given on uncollected checks or drafts deposited. Also in December 1970 or January 1971, Bohannon and Gibson met with the president of Providence State Bank in Providence, Kentucky. Bohannon explained that Gibson Livestock was arranging for a line of credit with Union Planters Bank and therefore the cattle company would always have funds immediately available to pay for cattle purchases. He stated that funds would be transferred from Union Planters to the checking account at First National where Bohannon could easily monitor Gibson Livestock's finances. Bohannon assured the Providence bank's president that because of the credit arrangement with Union Planters, any checks which Gibson Livestock drew on its First National account would be paid; therefore, according to Bohannon, Providence State Bank could allow immediate credit on any such checks deposited at Providence with no consequent risk. Although Bohannon and Gibson gave the impression that Bohannon was speaking as the president of the bank, First National had never authorized such a guarantee.

The three bank arrangement effected a float: a system whereby Gibson Livestock had the use of hundreds of thousands of dollars for short periods without having to pay interest. The cattle company was thus able to buy cattle, resell them quickly, and pay for them with the money realized from their sale.

The dollar volume handled by Gibson Livestock's banking triangle steadily increased. ³ The volume in April 1971 was so great that Bohannon began to be suspicious; he was alarmed further because several drafts for cattle payment which The Providence bank, acting on Bohannon's assurance that all checks which Gibson Livestock drew on First National would be paid, gave immediate credit on those checks which the livestock company had deposited. As the unpaid checks were returned, available funds of Gibson Livestock in the bank were applied toward payment. However, Providence State Bank lost $340,138.14 because it had honored Gibson checks drawn on the uncollected funds represented by the final checks which First National eventually returned unpaid. Providence State Bank sued First National for this amount in the Eastern District of Missouri. The court found that First National had failed to give timely notice of dishonor of all the checks and failed to make timely return of some of the checks under the UCC and Federal Reserve requirements. ⁵ Therefore, First National was held liable to Providence State Bank for amounts paid out before they received notice of dishonor on May 3, 1971. After credit was given for certain security which Providence State Bank took from Gibson Livestock, a judgment was entered for the Providence State Bank in the amount of $100,174.22.

                he had deposited in Union Planters had been returned unpaid in April.  4  Bohannon decided that the balance in the Union Planters account might not represent collectible funds.  On Thursday, April 29, 1971, he decided not to transfer any more funds from Union Planters to First National, since this might result in a loss to Montgomery Trust under their guarantee to Union Planters, and ipso facto, liability of Gibson and Bohannon for Montgomery's loss.  On the afternoon of the 29th, Bohannon told First National's cashier that Gibson Livestock did not have sufficient funds to cover the checks which Providence State Bank had sent to First National for collection.  On the 29th and 30th of April, and on Monday, May 3, he instructed First National to return checks to Providence State Bank.  Twenty-three checks amounting to $827,374.36 were sent back.  Gibson Livestock's account in Union Planters had a balance on May 3, 1971, of $497,939.70, but as Bohannon had suspected, only $179,391.27 was collectible.  This money was paid to various Gibson Livestock creditors, including Montgomery Trust, which received $40,000.00
                

Transamerica repeatedly refused to defend First National in the Providence State Bank suit and refused to pay the judgment, whereupon First National brought this suit against Transamerica on the blanket bond. Transamerica made Bohannon a third party defendant requesting judgment for any amount for which it might be found liable. After trial in the district court, judgment was entered against Transamerica for the amount of the judgment, costs and attorney's fees in the Providence State Bank case: $120,359.04, plus interest from the date of judgment. Punitive damages and attorney's fees in the instant case were denied. Judgment was also issued for Transamerica against Bohannon for the amount that...