Rock Island Bank v. Aetna Cas. and Sur. Co.
| Decision Date | 28 April 1983 |
| Docket Number | No. 82-1304,82-1304 |
| Citation | 706 F.2d 219 |
| Parties | The ROCK ISLAND BANK, Plaintiff-Appellee, v. The AETNA CASUALTY AND SURETY COMPANY, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Gary L. Griffin, McNeela & Griffin, Ltd., Chicago, Ill., for defendant-appellant.
Michael J. O'Rourke, Mayer, Brown & Platt, Chicago, Ill., for plaintiff-appellee.
Before POSNER, Circuit Judge, COFFEY, Circuit Judge, and CAMPBELL, Senior District Judge. *
This appeal challenges the district court's entry of summary judgment for the plaintiff-insured on a blanket bond issued by the defendant-insurance company. The appellant, Aetna Casualty and Surety Company (Aetna) claims that a material issue of fact exists as to whether the acts of William Kearney, a past president of the Rock Island Bank (Rock Island), were dishonest or fraudulent within the meaning of the bond. Kearney had issued letters of credit to Cortland J. Silver in amounts which greatly exceeded his loan authority without consulting the loan committee of the bank. Subsequently, Silver declared bankruptcy and one of the outstanding letters of credit resulted in a judgment against Rock Island for $371,181.71. Upon Rock Island's Motion for Summary Judgment, the district judge concluded that the losses incurred by Rock Island arising out of those letters of credit, i.e. the judgment and attorneys fees, were covered by the blanket bond. Based on that determination, the district court entered a judgment against Aetna for $532,914.21 and the defendant brought this appeal.
The decision in this case turns not on specific factual disputes as to the substance of the relevant transactions, but on the proper inferences to be drawn from those facts. The district court made extensive findings of fact with which we and the parties find no fault. Therefore, we will quote that portion of the Summary Judgment Order, subject to subsequent supplementation. (The District Judge's footnotes are included in brackets in the body of the quotation.)
1. During the period April 14, 1968 through April 9, 1970, The Rock Island Bank was insured under two Bankers' Blanket bonds issued by The Aetna Casualty and Surety Company. These bonds insured The Rock Island Bank, inter alia, against losses resulting from dishonest or fraudulent acts committed by any covered employee.
2. Throughout the aforesaid period, William J. Kearney was President of the Rock Island Bank and was an employee covered by the bonds.
3. During the period April 14, 1968 through April 9, 1970, Mr. Kearney issued seven letters committing The Rock Island Bank to assume loans made to, or to honor drafts drawn to the account of, Cortland J. Silver and/or one or more of his corporate enterprises, as follows:
Institution to Exercise
Date Which Issued Amount Date
4/4/68 National Bank of $300,000 after 4/5/71
North America
4/25/68 National Bank of $300,000 until 4/25/69
North America
9/12/68 O'Hare International $350,000 1/2/73 through
Bank 3/1/73
4/17/69 National Bank of $300,000 until 4/19/70
North America
6/5/69 Lorraine Realty $400,000 after 6/5/71
Corp. (subsequently
assigned to Bank of
North Carolina, N.A.)
1/15/70 America Bank & $350,000 until 2/1/72
Trust Co
4/9/70 National Bank of $300,000 after 4/5/71
North America
4. The aggregate amount of such commitments was at least $1,700,000 and may have totalled $2,000,000. *
5. The only direct monetary consideration received by The Rock Island Bank for the issuance of the letters of commitment was $1,500.00 received in June, 1968.
6. Mr. Kearney issued the letters of commitment without disclosure to, or the approval of, The Rock Island Bank's Board of Directors or its Loan Committee.
7. Prior to and during the time Mr. Kearney was issuing the letters of commitment, two resolutions of The Rock Island Bank's Board of Directors were in force and effect. One resolution, adopted on January 21, 1963, set certain limits on the lending authority of individual officers and also contained the following language:
"Irrespective of amount and anything herein to the contrary notwithstanding, all loans of an unusual nature, due to terms, borrower, type of collateral, or other exceptional feature, shall be made only with the approval of the Loan Committee."
The second, issued August 8, 1968 read in part as follows:
**
8. Prior to April 4, 1968, Mr. Kearney had never seen or issued a letter of credit.
9. The Kearney-issued letters of commitment were not reflected in the Bank's books of account, nor were they disclosed to bank examiners of the Illinois Commissioner of Banks and Trust Companies or the Federal Reserve Bank during those respective agencies' examinations of The Rock Island Bank of August 4, 1969 and January 19, 1970.
10. The Rock Island Bank was notified of the existence of the Kearney letters of commitment through an investigation of The Rock Island Bank conducted by the Federal Reserve Bank on May 26-27, 1970. Thereafter, it was determined that, as of July 3, 1970, the amount of outstanding Kearney-issued letters of commitment was $1,050,000.00.
11. Notice of possible claims under the bonds was made by the Bank to Aetna on July 3, 1970.
12. On March 14, 1976, The Rock Island was sued by the Bank of North Carolina, N.A. on the letter of commitment dated June 5, 1969 to Lorraine Realty Corp., described in paragraph 3 above. The Bank promptly tendered defense of the suit to Aetna. Aetna refused defense by letter of May 14, 1976.
12. [sic] The Bank filed a timely proof of loss with Aetna on March 31, 1976, covering the letter of commitment dated June 5, 1969. The defendant refused demand. On December 16, 1980, judgment was awarded in the Bank of North Carolina, N.A. v. The Rock Island Bank litigation in favor of the Bank of North Carolina and against The Rock Island Bank in the amount of $371,181.71, plus costs of suit.
12. [sic] In the course of the defense of the Bank of North Carolina litigation and in resisting various demands for payment by the holders of the other Kearney-issued letters of commitment, The Rock Island Bank expended $129,149.47 in attorneys' fees, the amount of which is not in dispute.
Some additional and apparently uncontested facts should also be noted. In 1968, when Silver was introduced to Kearney as a potential client for the bank, he was highly recommended as an active businessman with substantial interests and connections. Kearney checked Silver's credit background with two other banks, the First Wisconsin Bank and the First National Bank of St. Paul. First Wisconsin informed him that Silver had an open line of credit with them of $100,000. In a memorandum dated January 17, 1968 to the Rock Island loan committee, Kearney stated:
"The First National Bank has advanced to Mr. Silver three and one-half million dollars in construction funds which will be repaid from permanent financing committed to by the Massachusetts Mutual Insurance Company."
Kearney requested and received from Silver a personal financial statement, the accuracy of which has not been questioned, which indicated that his net worth was approximately $5,000,000. 1 Mr. Silver was a desirable client to the bank not only for his wealth and contacts but also because his expressed intentions to invest in the Rock Island area coincided with the bank's desire to increase loan demand through regional development. The loan committee authorized a loan of $200,000 to be made to Silver and encouraged Kearney to develop and maintain a relationship with him. During his relationship with the bank, Silver arranged for approximately $660,000 to be deposited in the bank by third parties. However, he never did invest in the Rock Island area and in 1975 he declared bankruptcy.
There is no evidence that Kearney ever received any personal compensation for his issuance of the letters or that he had any interest in the business ventures benefitted by them. While it is admitted that Kearney did not inform the loan committee of the letters of credit, there is no evidence of active concealment. Kearney's secretary typed the necessary documents and files on the transactions were kept in the bank and were not secreted in any way. Mr. B.T. Olson, cashier and officer of the bank, attested the June 5, 1969 letter of credit for $400,000 (which eventually resulted in the judgment against Rock Island) and Howard Peterson, executive vice president of Rock Island, attested the January 15, 1970 letter of credit for $350,000. Kearney testified that there were always two or three people in the bank aware of any of the transactions.
Based on the facts quoted above, the district court concluded that Kearney's conduct in issuing the letters of credit was dishonest or fraudulent within the meaning of the bond. The court determined that summary judgment was appropriate because:
In situations such as this, where there is no issue as to the acts committed by an employee covered by Bankers' Blanket bonds, it is proper for the Court to determine whether or not such acts constitute "dishonest or fraudulent act(s)" within the...
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