TOM S. LEE, District Judge.
This cause is before the court on plaintiff BancInsure, Inc's motion for declaratory judgment (which is in substance a motion for summary judgment on BancInsure's complaint for declaratory judgment and will be treated as such), and on a motion for partial summary judgment filed by defendant Peoples Bank of the South f/k/a Peoples Bank of Franklin County (the Bank). These motions have been fully briefed and the court, having considered the memoranda of authorities, together with attachments submitted by the parties, concludes that the parties' respective motions should be granted in part and denied in part, as set forth herein.
At issue in this case, inter alia, is whether a Financial Institution Bond (Bond) issued by BancInsure to the Bank provides coverage for losses alleged to have been suffered by the Bank as a result of certain dishonest and/or fraudulent conduct of bank employee Alex Corban. In April 2009, during the period covered by the Bond,
The parties have filed competing summary judgment motions as to each of these issues, which the court addresses in turn.
The Bank asserts that coverage for its losses is provided by Insuring Agreements (A) and (B) under the Bond. In the court's opinion, since the Bank's losses are alleged to have been caused by an employee, exclusion (h) of the Bond excludes coverage under Insuring Agreement (B).
Insuring Agreement (B) covers the following:
Exclusion (h) excludes coverage for
BancInsure argues that since the loss at issue is alleged to have resulted from theft, and not from misplacement, mysterious unexplainable disappearance or destruction of or damage to property, then exclusion (h) bars any coverage under Insuring Agreement (B). The Bank, on the other hand, argues that the phrase "and resulting directly from misplacement, mysterious unexplainable disappearance or destruction of or damage to Property" in exclusion (h) only modifies "Insuring Agreement ... (R)" and that exclusion (h) therefore does not bar coverage under Insuring Agreement (B) for losses caused by theft. In the court's opinion, exclusion (h) unambiguously excludes coverage under Insuring Agreement (B) for loss caused by an employee unless the loss is caused by the "misplacement, mysterious unexplainable disappearance or destruction of or damage to Property."
Further, to the extent of any loss claimed by the Bank resulting from a loan, extension of credit or transaction involving the Bank as a lender, exclusion (e) forecloses coverage under Insuring Agreement (B). Exclusion (e) bars coverage for:
Insuring Agreement (A) of the Bond provides fidelity coverage, protecting the insured against losses resulting from certain dishonest and fraudulent acts of its officers and employees. By its terms, Insuring Agreement (A) provides indemnification for:
The Bank acknowledges that Insuring Agreement (A), as written, limits covered losses resulting from fraudulent or dishonest acts of employees to losses caused by the employee with the manifest intent to cause the Bank to sustain loss or to obtain improper financial benefit for the employee or another person or entity. Also, and more pertinently, in the case of "loan" losses, Insuring Agreement (A), as written, provides no coverage unless there is proof of collusion between the employee and one or more parties to the transaction and the employee received an improper financial benefit in connection with the transaction. However, the Bank argues that these additional requirements for coverage are unenforceable as a matter of law since the Bond is the statutory bond required by Mississippi Code Annotated § 81-5-15, and since the coverage limitations conflict with the coverage requirements of the statute.
Mississippi Code Annotated § 81-5-15 requires a fidelity bond for officers and employees of banks. The statute states:
The Bank asserts that since § 81-5-15 requires that a fidelity bond be issued for officers and employees of banks, then a fidelity bond issued for such coverage is considered a statutory bond under the law,
There are no Mississippi cases interpreting the subject statute and operative Bond language, and the parties vigorously dispute whether the Bond is a statutory bond. BancInsure notes that a simple comparison of the requirements of the statute and the terms of the Bond and circumstances of its acquisition, confirms the Bond was not intended to be a statutory bond. For example, whereas the statute requires that the bank employee "shall furnish a fidelity bond," the BancInsure Bond was procured by the Bank, and not by Corban; and while the statute requires that a bank employee agree, as principal, to protect the Bank from losses with the surety's obligation being secondary to that of the employee, the Bond neither names Bank employees as principals nor treats them as such. BancInsure also points out that there is otherwise no evidence to show that the Bank complied with the statutory provisions requiring approval by the State Comptroller and inspection by state authorities on examination of the Bank.
The Bank, however, notes that bonds obtained under comparable statutes have, in fact, been found to be statutory bonds. See, e.g., First Dakota Nat'l Bank v. St. Paul Fire & Marine Ins. Co., 2 F.3d 801 (8th Cir.1993); First American State Bank v. Continental Ins. Co., 897 F.2d 319 (8th Cir.1990); Kansas Bankers, 408 F.Supp.2d 751. Indeed, in Kansas Bankers, the court held the identical bond was a statutory bond notwithstanding that it was obtained by the bank, and not by the employee. In addition, the Bank has submitted an affidavit from Bank President Larry Hill, who states that the Bank purchased the Bond "in fulfillment of the statutory requirements of ... § 81-5-15...."
It is ultimately unnecessary to determine whether the subject Bond is a statutory bond required by § 81-5-15, since in the court's opinion, even assuming that is the case, the terms of the Bond may be enforced as written, as they are not inconsistent with the underlying purpose of § 81-5-15. This is precisely what the Eighth Circuit held in First Dakota, supra, when considering the validity of the proof requirements under Insuring Agreement (A) of a nearly identical Financial Institution Bond. In First Dakota, a South Dakota statute similar to Mississippi's § 81-5-15 required that bank officers and employees furnish fidelity bonds which "shall provide for indemnity to such bank on account of any losses sustained by it as a result of any dishonest, fraudulent, or criminal act or omission committed or omitted by them...." S.D. Codified Laws Ann. § 51-17-36 (1987). The district
Id.
Like the South Dakota statute (and the Mississippi statute), the Iowa statute under consideration in Kansas Bankers, supra, required that officers and employees of the bank enter into a bond "indemnifying the bank against losses resulting from any act or acts of fraud [or] dishonesty ... committed by such officer...." 408 F.Supp.2d at 754-55. Further, the court found there was "no material distinction to be made between the South Dakota and Iowa statutes with respect to the financial benefit issues." 408 F.Supp.2d at 756. Since the bond in Kansas Bankers had presumably been approved by the Iowa Insurance Commissioner for sale to financial institutions in the state, the court held that in accordance with the reasoning in First Dakota, it would give effect to the financial benefit limitation in the case of loan losses. Id.
The Bank readily acknowledges that the Mississippi Department of Banking and Consumer Finance reviewed the Bond during the bank examination process, and that it implicitly approved the Bond. However, it attempts to distinguish First Dakota and Kansas Bankers on the basis that the statutory language involved in those cases is not the same as that in the Mississippi statute. In the court's opinion, however, while there are obviously variations in the language of the three statutes, the import of the pertinent statutory language in all three statutes is effectively the same, requiring coverage of "any losses," in the case of the Mississippi and South Dakota statutes, and in the Iowa statute, of "losses resulting from any act or acts of fraud [or] dishonesty."
Based on the foregoing, the court concludes that in order to recover under Insuring Agreement (A) of the Bond, the Bank is required to show that its claimed losses resulted directly from Corban's dishonest or fraudulent acts; were committed by Corban with the manifest intent either to cause the Bank to sustain such loss, or to obtain an improper financial benefit for himself or for another; and in the case of any loss resulting directly or indirectly from "loans," that Corban was in collusion with one or more parties to the transactions and received an improper financial benefit in connection with the transactions.
BancInsure denied coverage for each of the Bank's claimed losses (with one exception)
After receiving a maturity notice from the Bank in connection with a $32,000 loan, Bank customer Joe Hargett contacted the Bank and stated he had never borrowed money from the Bank. Vice President Frank Foster researched the matter and discovered that Hargett's signature on the loan documents did not match his signature on a CD he had with the Bank, which was pledged as collateral for the loan by an apparently forged pledge document.
When contacted about the putative loan which he originated, Corban claimed that Hargett had borrowed the money to purchase a car for his son. Corban told Foster he would contact Hargett about the loan and report back. When Foster subsequently contacted Hargett, Hargett reported that Corban had called him and told him that he, Corban, would pay off the loan. Hargett signed an affidavit of forgery against Corban.
Although the proceeds of this putative "loan" to Hargett were disbursed to BrookLin Moulding, owned by Jamie Wallace, Corban's former employer, Wallace told the Bank he had no knowledge of Corban's actions. The Bank claims a loss of $33,521.79, including interest.
When confronted about other forged loan documents, Corban admitted he forged Steve Parker's signature on loan documents for a $38,050 loan and secured the loan with a CD owned by Parker. Parker confirmed that the signatures on the documents in connection with the putative loan were forgeries. Parker reported he knew of Corban's actions relative to this alleged loan, though he did not know that his CD had been pledged as collateral. He explained that he did not say anything about it on account of his friendship with Corban and was going to give Corban time to pay off the loan on his own (which did not occur). The proceeds were paid to James Wallace, who owned BrookLin Moulding, Corban's subsequent employer. The Bank claims a loss of $39,858.68, including interest.
A "loan" to Carl Mark Smith came to the Bank's attention in a review of past due loans. A review of the loan documents revealed an apparent irregularity in the signatures on the loan documents and a CD assignment by Smith. Upon being contacted, Smith reported he had no loans
The Bank's investigation ultimately revealed that Corban had used the funds from the Smith "loan" to pay off a loan for another Bank customer, Danny McKey. According to the Bank, McKey had originally taken out a $61,000 loan which was secured by certain real property. In 2003, McKey fell behind on the payments when his wife became ill. Corban told the Bank he had taken steps to foreclose on the property, but in fact, he did not foreclose on the property. Instead, he created two fictitious loan transactions (in the names of David Fields and Tom Monroe) to give the appearance of a foreclosure, purporting to sell the property to Fields and Monroe for $21,675 and $40,000, respectively. The funds disbursed on these two "loans" was used to pay off McKey's loan. The Smith loan, in turn, in the amount of $23,000, was made to pay off the "loan" to Fields.
When the Bank finally managed to unravel and decipher Corban's activities in connection with these various accounts, it contacted Danny McKey to determine whether his loan was a legitimate loan to begin with (the Bank was uncertain whether this was another fraudulent "loan" that had been concocted by Corban), and whether in fact, he still owned the property (which Corban had represented to the Bank had been foreclosed). McKey acknowledged that it was a legitimate loan and that he still owned the property, so the Bank, which still had a good deed of trust on McKey's property and thus could have foreclosed, reworked McKey's loan and applied the proceeds to the Smith, Lampton and McNeil accounts. As explained by Bank President Larry Hill, "We ended up making a $75,000 loan to Danny McKey; ... [W]e applied $20,000 against the charge-off loan of Will Lampton. We applied $20,000 against the charge-off loan of Joseph McNeil, and we, on our books, book a recovered to Carl Mark Smith, charge-off." McKey is currently paying the reworked loan.
After receiving notices from the Bank relating to a loan he supposedly had with the Bank for around $3,000, Tillmon Bishop contacted Corban multiple times and was told he was receiving these notices due to a posting error. Eventually, in investigating Corban's activities, the Bank located a check dated December 17, 2002 for $2,900 made payable to Bishop. Bishop signed an affidavit of forgery against Corban relating to this putative loan, and he denies that he ever signed loan documents for the supposed loan, that he endorsed the $2,900 check or that he received the proceeds of the check. The Bank believes that Corban must have forged Tillmon's signature, cashed the check and pocketed the money.
The Bond defines the term "loan" to mean "all extensions of credit by the Insured and all transactions creating a creditor relationship in favor of the insured and all transactions by which the insured assumes an existing creditor relationship." The parties agree that without an extension of credit, there is no loan under the Bond. However, they disagree as to whether there was an extension of credit. BancInsure declares that each of these disputed transactions involved an extension of credit, so that the Bank's claimed losses are "loan" losses. The Bank contends that credit was not actually extended to any of the individuals whose identities were fraudulently used by Corban and therefore, the losses from these fraudulent transactions were not "loan" losses. Having considered the parties' arguments, the court concludes that these transactions were not "loans" under the Bond as they were not actual loans but rather fictitious transactions contrived by Corban to conceal his theft.
In support of its position that the transactions at issue were "loans" under the Bond, BancInsure notes that courts have broadly interpreted the Bond's definition of "loan" to include not only transactions traditionally considered loans by banks, but also other transactions that involve extensions of credit. See, e.g., Humboldt Bank v. Gulf Ins. Co., 323 F.Supp.2d 1027, 1033 (N.D.Cal.2004) (finding that funds supplied to a servicing contractor for use in ATMs to be an "extension of credit"); Calcasieu-Marine Nat'l Bank of Lake Charles v. American Emp. Ins. Co., 533 F.2d 290, 298 (5th Cir.1976) (holding that loan loss exclusion applied to de facto loans); Resolution Trust Corp. v. Aetna Cas. & Sur. Co., 25 F.3d 570, 579 (7th Cir.1994) (finding that transactions "in the nature of a loan" were excluded); Affiliated Bank/Morton Grove v. Hartford Acc. & Indem. Co., No. 91-C-4446, 1992 WL 91761, at *5 (N.D.Ill. Apr. 23, 1992) (N.D.Ill. Apr. 22, 1992) (treating overdrafts as loans). Yet while it asserts the transactions at issue involved an extension of credit, it fails to explain how that is so.
In Calcasieu-Marine National Bank, cited by BancInsure, the Fifth Circuit held that in order to qualify as a "loan" under the loan loss exclusion at issue there, it was not necessary that the loan be a "formal loan" in which "the lender [sic] comes into the bank, negotiates with the loan department, signs a promissory note and receives from the bank money which must be repaid at interest"; instead, the term "loan" would include a "de facto" loan in which, regardless of form, a sum of money is delivered to another and the latter agrees to return at a future time an equivalent sum to that which he borrowed. 533 F.2d at 296. However, the court made clear that a loan, whether formal or de facto, will be found only where there is an agreement by which, in substance, one party transfers to the other a sum of money which that other agrees to repay, with or without interest. Id. (citations omitted). See also id. (Stating that "whether or not (a) transaction constitutes a loan, is to be determined from the surrounding facts in the particular case") 533 F.2d 290, 296 (5th Cir.1976) (citation omitted).
Here, it is undisputed that neither Hargett, Parker, Smith nor Bishop did not borrow the money from the Bank represented by the putative loans; they did not
In prior litigation between the same parties involving the same Bond, this court ruled that the Bank's claim for accrued interest was excluded as "potential income" under exclusion (s), which excludes coverage for:
Peoples Bank of the South v. BancInsure, Inc., Civ. Action No. 3:09CV217TSL-MTP (S.D.Miss. July 7, 2011). The court's ruling resolves the issue whether interest income is recoverable under the Bond: It is not.
BancInsure has filed a supplemental memorandum in support of its motion for declaratory judgment/summary judgment to address new information learned through discovery which it submits creates additional bases for its motion relating to certain of the transactions. Specifically, BancInsure argues as follows:
With respect to the Tillmon Bishop loan, BancInsure notes that in the deposition of Larry Hill, the Bank's Rule 30(b)(6) designee, Hill speculated that Corban forged Bishop's signature and pocketed the money from the $2,900 loan, but he admitted he had no knowledge of Corban being in collusion with anyone to create the loan transaction. Based on this testimony, BancInsure argues that since the Bank has no proof of collusion, then its denial of coverage of the Bishop loan must stand. However, as the court has concluded that the Bishop transaction was not a "loan," the Bank is not required to prove collusion to recover under the Bond.
BancInsure next states that while it originally sought declaratory judgment as to the Carl Mark Smith transaction on the basis that the claimed loss was a loan loss, it now argues that it is no longer relevant whether or not this was a "loan" under the Bond since the evidence establishes as a matter of law that the Bank did not suffer a loss with respect to this transaction.
The facts pertinent to the Smith transaction, set forth supra at 584, are that Danny McKey had an original legitimate loan of $61,500 which he failed to pay; that Corban created fictitious loans from other customers and used the proceeds to pay off McKey's loan; that he used other fictitious loans (including the fictitious Smith loan) to pay off those fictitious loans; and that ultimately, the Bank, upon discovering Corban's fraudulent activities, created a new, legitimate loan to McKey, which was used to pay off the outstanding fictitious loans generated by Corban. And McKey, who was originally legitimately indebted to the Bank (and who was apparently unaware his original loan had been paid off), remains legitimately indebted to the Bank, albeit on the basis of new loan documents. He is paying on a loan, which was a legitimate loan to begin with. While the Bank claims otherwise, it is clear to the court that Corban merely shifted money around on the Bank's books, with the result that there was only a bookkeeping or theoretical loss, which is not a loss covered under the terms of the Bond. See F.D.I.C. v. United Pacific Ins. Co., 20 F.3d 1070, 1080 (10th Cir.1994) (holding that "[b]ookkeeping or theoretical losses, not accompanied by actual withdrawals of cash or other such pecuniary loss is not recoverable.").
Finally, BancInsure argues that the Bank is precluded from recovering on loans to William Lampton, Jr. and William Lampton, Sr. on the basis that by entering a Workout Agreement with the Lamptons by which it agreed to forgive their loans, without notice to or agreement by BancInsure, the Bank violated the requirements of Section 7 of the Bond, which provides:
BancInsure submits that the Bank, in entering the Workout Agreement, has prejudiced its subrogation rights and is thus precluded from recovering the alleged losses relating to the Lampton loans.
Based on the foregoing, it is ordered that the parties' respective motions are granted in part and denied in part, as set forth herein.
Further, the court's conclusion that these were not "loans" is made without reference to the testimony of BancInsure's 39(b)(6) designee Van Butler, and is also made without regard to the opinions of the parties' experts, including BancInsure's expert (who agreed that there was "not a valid credit relationship" and "no extension of credit ... given to these individuals").
Lampton, Sr. obtained a $181,025 loan from the Bank secured by certain real property which was owned jointly by Bill Lampton and his wife Kay. The Bank later learned that Mrs. Lampton's signature on the loan documents had been forged. Corban cancelled the deed of trust, without authorization from the Bank; and when questioned about his actions, he informed the Bank that he had filed a new deed of trust with just Mr. Lampton's one-half interest in the property secured. Following Corban's resignation, the Bank discovered that no new deed of trust had been recorded and that there no collateral for the loan.
