Petition — Louisiana Bank & Trust Co. v. Employers Liability Assurance Corp.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1976

No. 76-311

LOUISIANA BANK & TRUST COMPANY

OF CROWLEY, LOUISIANA,

Petitioner,

versus

THE EMPLOYERS LIABILITY ASSURANCE CORP.,

LTD..,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

EDMUND M. REGGIE

REGGIE HARRINGTON AND

BOSWELL

P.O. DRAWER D

Crowley, Louisiana 70526

Counsel for Petitioner

SCOHIELDS QUALITY PRINTERS P O BOX 53096 N O [tA 70153 604 822 1611

|

TABLE OF CONTENTS

Page

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Savas xn ccc enc ckseddnrtelennnecwes 2

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STATEMENT OF THE CASE .................008- 6

REASONS FOR GRANTING THE WRIT ......... 9

1. The Decision Below Is In Conflict With

Decisions Of The Courts Of Appeals

For The Seventh And Eighth Circuits

Interpreting The “Loan Exclusion” Of

Bankers Blanket Bond Form 24 ............ 9

2. The Decision Below That No Loss Has

Been Shown On The NSF Checks Is

Not Supported By The Court Of

Appeals’ Findings Of Fact And Is An

Incorrect Interpretation Of Louisiana

Revised Statutes 7:136-37 ................. 14

EE Bi co iveen ee cedecceaeedsadidaledh bons 18

PE hse cacbhseskaccns cheese eueeneeaene 19

APPENDICES

A — Unreported Opinion of the United

States District Court for the Western

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B — Opinion of the United States Court of

Appeals, Fifth Circuit, dated June 14,

ch wuss ceeenesuskndeeh eens budes saaaey 9a

C — Order Denying Petition for Rehearing,

I aaa eens 33a

D — Judgment, dated July 20,1976 ............ 34a

il

TABLE OF AUTHORITIES

Page

Cases:

Bank of the Republic v. Baxter, 31 Vt. 101

EE 600456444400 54 ONASE4OeaO ESE ds kde dah tes 11

Bellevue State Bank v. Coffin, 22 Idaho 210,

Se EE 65 ok 5s 6 6 oco's ok osedsaeknu cus heuaus 11

Bon Homme County Bank v. Dakota National

Bank, 50 S.D. 191, 208 N.W. 825 (1926) .......... 11

First National Bank of Decateur v. The In-

surance Company of North America, 424

ae ME hob ccdnecsccccstncadeca 2,11

Hartford Accident & Indemnity Company v.

Federal Deposit Insurance Corp., 204 F.2d

ES EES 5 Gi Sdodcacddccccuceeceva 2-3,11

National Bank of Commerce in New Orleans

v. Fidelity and Casualty Company of New

York, 312 F. Supp. 71 (E.D.La. 1970), aff'd

437 F.2d 96 (5th Cir. 1971), cert. den. 403 U.S.

rr ee 3

National Bank of Paulding v. Fidelity and

Casualty Company, 131 F.Supp. 121 (S.D.

EE ovo Cusdeeudducluchins duce es aeu seeeas 12

Pioneer Valley Savings Bank v. The Indemni-

ty Insurance Company of North America,

225 F.Supp. 404, aff'd 343 F.2d 634 (8th Cir.

DAN Kah uea keh adbdde nba wosehecesensebcase-oe 2,11,12

Schramm v. Bank of California National

Association, 143 Or. 546, 20 P.2d 1093(1933) ..... 11

iil

TABLE OF AUTHORITIES (Continued)

Page

United States for the Use of First Continental

National Bank & Trust Company v.

Western Contracting Corporation, 341 F.2d

383 (8th Cir. 1965) ......... cece cece ee eee ees 2.11

Statutes:

Louisiana Revised Statute 7:126 ...............4.. 3-4

Louisiana Revised Statute 7:136 ............. 3,4,9.14

Louisiana Revised Statute 7:137 ............. 3,4.9.14

Louisiana Revised Statute 9:3902 ...............55: 5

Louisiana Revised Statute 22:658 ................ 5-6

OD UDG. BEBE) 2. cc ccvcvccccccescccccecesscncscces 2

CE Ne ep eeebe Ue Weaeeuuseecepsentes 2

Ee errr rer rer Tr Tt tre te 6

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1976

No.

LOUISIANA BANK & TRUST COMPANY

OF CROWLEY, LOUISIANA,

Petitioner,

versus

THE EMPLOYERS LIABILITY ASSURANCE CORP.,

LTD.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

The petitioner, LOUISIANA BANK AND TRUST

COMPANY of Crowley, Louisiana, prays that a writ of

certiorari issue to review the judgment of the United

States Court of Appeals for the Fifth Circuit.

OPINIONS BELOW

The unreported opinion of the United States District

Court for the Western District of Louisiana (Lafayette

Division) in Civil Action Number 15539, appears at

Appendix A, infra, page 1a. The opinion of the United

States Court of Appeals, Fifth Circuit, is reported as

2

case Number 75-1427 in a slip opinion dated June 14,

1976, together with the Court of Appeals decision in

Calcasieu-Marine National Bank of Lake Charles v.

American Employers’ Insurance Co., Number 74-3918,

and appears at Appendix B, infra, page 9a. The denial

of rehearing by the United States Court of Appeals,

Fifth Circuit, appears at Appendix C, infra, page 33a.

JURISDICTION

The decision of the United States Court of Appeals

for the Fifth Circuit was announced on June 14, 1976. A

petition for rehearing was filed on June 24, 1976.

Rehearing was denied on July 12, 1976, as appears

from Appendix C. infra, page 33a. The judgment of the

Court was entered on July 20, 1976, and appears at

Appendix D infra, page 34a. This petition for cer-

tiorari is timely filed within the delays provided by 28

U.S.C. §2101. The jurisdiction of this Court is invoked

under 28 U.S.C. §1254(1).

QUESTIONS PRESENTED

1. Whether the holding of the court of Appeals is in

conflict with the decisions of the Courts of Appeals for

the Seventh and Eighth Circuits in First National

Bank of Decateur v. The Insurance Company of North

America, 424 F.2d 312 (7th Cir. 1970); Pioneer Valley

Savings Bank v. The Indemnity Insurance Company

of North America, 225 F.Supp. 404, aff'd 343 F.2d 634

(8th Cir. 1965): United States for the Use of First Con-

tinental National Bank & Trust Company v. Western

Contracting Corporation, 341 F.2d 383 (8th Cir. 1955);

and Hartford Accident & Indemnity Company v.

3

Federal Deposit Insurance Corp., 204 F.2d 933 (8th Cir.

1953), and with the decision in National Bank of Com-

merce in New Orleans v. Fidelity and Casualty Com-

pany of New York, 312 F.Supp. 71 (E.D.La. 1970), aff'd

437 F.2d 96 (5th Cir. 1971), cert. den. 403 U.S. 906, 91

S. Ct. 2209 (1971), which allow recovery under Bankers

Blanket Bond Form 24 for losses incurred in trans-

actions similar to those held by the Court of Appeals

in this case to be excluded from coverage by the “loan

exclusion” of that Bond. In this case, the Court of

Appeals effectively defined a loan as any money “‘ad-

vanced to a customer of the Bank”. Slip opinion at

4059; Appendix B, infra, page 23a. Other Courts of

Appeals have held, however, that not all advances of

money to the Bank’s customers are “loans” within the

meaning of the “loan exclusion” of the Bond.

2. Whether the holding of the Court of Appeals that

the Bank suffered no loss from the deposit of two

checks returned for insufficient funds (““NSF checks’)

is supported by the Court of Appeals’ findings of fact,

and is based upon a correct interpretation of Loui-

siana Revised Statutes 7:136-37.

3. Whether penalties and attorney's fees are due the

Bank under the provisions of Louisiana Revised

Statutes 9:3902 and/or Louisiana Revised Statutes

22:658. (This question was not reached by the Court of

Appeals and will be reached only if the decision of the

Court of Appeals denying recovery is reversed; it is

presented here to preserve the right of the Bank to

assert it.)

STATE STATUTES

LOUISIANA REVISED STATUTES 7:126

(repealed by Act 92 of 1974):

4 5

§ 126. Bill of exchange defined

LOUISIANA REVISED STATUTES 9:3902:

_ A bill of exchange is an unconditional order § 3902. Failure of surety to pay; recovery of at-

in writing addressed by one person to another, torney’s fees

signed by the person giving it, requiring the

person to whom it is addressed to pay on de-

mand or at a fixed or determinable future time

a Sum certain in money to order or to bearer.

If the surety on a bond fails to pay his obliga-

tion and it becomes necessary for the creditor

to sue thereon, the latter shall be entitled to ten

per cent attorney’s fees on the amount

LOUISIANA REVISED STATUTES 7:136 recovered, provided he has employed an at-

(repealed by Act 92 of 1974): torney for the purpose, has made written

amicable demand on the principal and surety

and thirty days have elapsed from their

receipt thereof without payment being made,

and the full amount claimed in the demand is

§ 136. Time allowed for acceptance

The drawee is allowed twenty-four hours

after presentment in which to decide whether recovered.

or not he will accept the bill; but the accep- This Section shall not affect the right to

sy if given dates as of the day of presenta- recover interest and costs as otherwise

ion.

provided by law.

LOUISIANA REVISED STATUTES 7:137 LOUISIANA REVISED STATUTES 22:658:

(repealed by Act 92 of 1974):

§ 137. Acceptance by destruction or failure to

return bill

Where a Grawee to whom a bill is delivered

for acceptance destroys the same, or refuses

within twenty-four hours after such delivery,

or within such other period as the holder may

allow, to return the bill accepted or non-

accepted to the holder, he will be deemed to

have accepted the same.

§ 658. Payment of claims, policies other than

life and health and accident; penaities

All insurers issuing any type of contract

other than those specified in R.S. 22:656 and

22:657 shall pay the amount of any claim due

any insured including any employee under

Chapter 10 of Title 23 of the Revised Statutes of

1950 within sixty days after receipt of satis-

factory proofs of loss from the insured,

employee or any party in interest. Failure to

make such payment within sixty days after

receipt of such proofs and demand therefor,

when such failure is found to be arbitrary,

6

capricious, or without probable cause, shall

subject the insurer to a penalty, in addition to

the amount of the loss, of 12% damages on the

total amount of the loss, payable to the in-

sured, or to any of said employees, together

with all reasonable attorney's fees for the

prosecution and collection of such loss, or in

the event a partial payment or tender has been

made, 12% of the difference between the

amount paid or tendered and the amount found

to be due and all reasonable attorney’s fees for

the prosecution and collection of such amount.

Provided, that all losses on policies covering

automobiles, trucks, motor propelled vehicles

and other property against fire and theft, the

amount of the penalty in each of the above

cases shall be 25% and all reasonable at-

torney’'s fees.

STATEMENT OF THE CASE

This is a suit by Louisiana Bank on the Banker’s

Blanket Bond issued it by The Employers Liability

Assurance Corporation, which insured the Bank

against losses sustained through common-law or

statutory larceny, theft, or false pretenses. This is a

diversity action. 28 U.S.C. §1332.

The Bank sought recovery for its losses in two

separate transactions, both of which involved deal-

ings with Lake Rice Mill, Inc., and Rex Rice Company

and with the President of both companies, Jack R.

Smith.

Connell Drafts

In one of the transactions, the Bank’s loss resulted

from the non-payment of seven drafts drawn on Con-

nell Rice & Sugar Co., Inc., of Westfield New Jersey.

7

The drafts, each of which was in the amount of Twenty-

two Thousand Eight Hundred Sixty-six and 28/100

Dollars ($22,866.28), were drawn by Rex Rice Com-

pany, Inc., and were deposited to the account of Rex

Rice Company in Louisiana Bank. Credit was allowed

Rex Rice Company for the amount of the deposit im-

mediately, and the funds thereby obtained were

withdrawn and disbursed by Rex Rice Company.

Louisiana Bank had engaged in similar trans-

actions involving Connell drafts with Rex Rice overa

period of years. Hundreds of such drafts were

deposited by Rex Rice Company to its account in

Louisiana Bank. In each such case, Rex Rice Company

obtained immediate credit for the amount of the draft,

and was allowed to draw upon such funds, prior to

payment of the draft by Connell Rice & Sugar Co., Inc.

None of these transactions were entered on the loan

liability ledger of Rex Rice Company Inc., at

Louisiana Bank, or on the general loan journal of

Louisiana Bank. The Court of Appeals found that

“Blank notes bearing Jack Smith’s signature as Rex

President, but no indication of amount, were taken by

the Bank with the Connell drafts.’’ Slip Opinion at

4060; Appendix B, infra, page 24a.

The drafts were forwarded for collection through a

correspondent bank, which credited Louisiana Bank's

account for the amount of the drafts, and charged

Louisiana Bank interest on that amount until payment

of the draft was received from Connell. Louisiana

Bank charged Rex Rice Company’s account for the

same sum charged by the correspondent, and made no

direct profit on the transaction.

The drafts drawn by Rex Rice Company on Connell

Rice & Sugar Co., Inc. over the years, and deposited to

Rex Rice Company’s account in Louisiana Bank, were

the means by which Rex Rice Company obtained pay-

ment for shipments of rice to Connell Rice & Sugar

Co., Inc. Certain documentation of such shipments

was necessary, and was attached to the drafts when

forwarded for payment.

At the time of the deposit of the seven drafts from

which the loss in this matter resulted, Jack R. Smith

represented to Louisiana Bank, as he had many times

before, that shipments of rice had been made by Rex

Rice Company to Connell Rice & Sugar Co.., Inc., and

that the drafts were the means of obtaining payment

due Rex Rice Company for those shipments. At the

time of the initial deposit of the seven drafts, Smith

represented that certain documentation of the

shipments was missing and would be supplied later.

Smith subsequently furnished fictitious documenta-

tion, and the drafts were forwarded to Connell Rice &

Sugar Co., Inc., which refused to pay. The evidence in-

dicates that there were no shipments by Rex Rice

Company to Connell Rice & Sugar Co., Inc. for which

payment was due. The District Court found that Jack

R. Smith “knowingly misrepresented material facts

and supplied fictitious documentation to obtain credit

for the drafts.” See Appendix A page 6a, infra.

The Court of Appeals reversed the judgment of the

District Court granting the Bank recovery for the

losses sustained in the Connell draft transaction sole-

ly on the ground that the draft transaction was a

“loan” and was, therefore not covered by the Banker’s

Blanket Bond.

9

NSF Checks

The Bank also seeks to recover for losses sustained

as a consequence of the deposit of two checks returned

for insufficient funds (“NSF Checks”) totaling One

Hundred Ten Thousand Five Hundred Nine and 80/ 100

Dollars ($110,599.80) drawn on Lake Rice Mill’s ac-

count and deposited to Rex Rice Company’s account

with Louisiana Bank. Immediately after the deposit of

those checks, Jack R. Smith issued a Rex Rice Com-

pany check to Louisiana Bank for One Hundred Four

Thousand Five Hundred Sixty-six and 84/100 Dollars

($104,566.84), and the Bank used those funds to pay a

number of “rough rice drafts” drawn on Rex Rice

Company “through” Louisiana Bank, which had been

held by Louisiana Bank for over twenty-four hours

without acceptance or dishonor.

The Court of Appeals reversed the District Court

and denied recovery for the NSF Checks on the ground

that Louisiana Bank was liable on the “rough rice

drafts” drawn on Rex Rice Company that it had held

for more than twenty-four hours, citing Louisiana

Revised Statutes 7:136-37 (repealed, effective Jan-

uary 1, 1975, by act 92 of 1974), and that it suffered no

damage because those drafts were paid with the funds

obtained by the deposit of the NSF Checks.

REASONS FOR GRANTING THE WRIT

1.

The Decision Below Is In Conflict With

Decisions Of The Courts Of Appeals For The

10

Seventh And Eighth Circuits Interpreting The

“Loan Exclusion” Of Bankers Blanket Bond

Form 24.

Insuring clause (B) of the Bankers Blanket Bond in-

sures against on premises losses caused by, among

other things, “common-law or statutory larceny, theft,

[or] false pretenses. . .”. The Bond excludes coverag®.

however, for

“(d) Any loss the result of the complete or par-

tial non-payment of or default upon any loan

made by or obtained from the Insured, whether

procured in good faith or through trick, ar-

tifice, fraud or false pretenses, except when

covered by Insuring Clause (A), (D) or (E).”’

The Court of Appeals held that the transactions

between Louisiana Bank and Rex Rice Company in-

volving drafts drawn on Connell Rice & Sugar Co.,

Inc., were “loans” within the meaning of that term as

used in the exclusionary clause of the Bond quoted

above.

In supporting its holding, the Court of Appeals cited

a portion of the many cases decided both by the Courts

of the State of Louisiana and those of other jurisdic-

tions nolding that words in insurance policies are to

be construed in their ordinary and popular sense; that

exclusions in insurance policies must be clearly ex-

pressed; and that ambiguities in policies are to be

resolved in favor of the insured.

In reaching its decision that the transactions

between Louisiana Bank and Rex Rice Company were

11

“loans” within the meaning of the Bankers Blanket

Bond, however, the Court of Appeals turned not to the

decisions of other Courts interpreting the meaning of

the loan exclusion of the Bankers Blanket Bond, but

instead to cases deciding other issues, observing that

“The manner in which credit was advanced by the

Banks is strikingly similar to the transactions called

‘loans’ in Bellevue State Bank, Bon Homme County

Bank, Bank of the Republic, and Schramm.” Slip

Opinion at 4059; Appendix B, infra, page 23a. T'he

cases thus cited were Bellevue State Bank v. Coffin, 22

Idaho 210, 125 P. 816 (1912); Bon Homme County Bank

v. Dakota National Bank, 50 S.D. 191, 208 N.W. 825

(1926); Bank of the Republic v. Baxter, 31 Vt. 101 (1858):

and Schramm v. Bank of California National Associa-

tion, 143 Or. 546, 20 P.2d 1093 (1933).

We respectfully submit that cases decided by other

United States Courts of Appeals directly involving the

application of the “loan exclusion” of the Bankers

Blanket Bond are more relevant than the decisions

relied upon by the Court of Appeals in this case. Those

cases are First National Bank of Decateur v. The In-

surance Company of North America, 424 F.2d 312 (7th

Cir. 1970); Pioneer Valley Savings Bank v. The Indem-

nity Insurance Company of North America, 225

F.Supp. 404, aff'd 343 F.2d 634 (8th Cir. 1965); United

States for the Use of First Continental National Bank

& Trust Company v. Western Contracting Corpora-

tion, 341 F.2d 383 (8th Cir. 1965); and Hartford Accident

& Indemnity Company v. Federal Deposit Insurance

Corp., 204 F.2d 933 (8th Cir. 1953). Each of these cases

deals with a “check-kiting” scheme — that is, a situa-

tion in which worthless checks were deposited to an

account, immediate credit was given for those checks,

12

and the funds thus made available were withdrawn

before the worthless checks were returned unpaid. In

each of these “check-kiting” cases, the insurer raised

the defense of the “loan exclusion” of the Bankers

Blanket Bond. The insurers argued that the Banks had

made “loans” to their customers by permitting them to

draw against uncollected items of deposit. In each of

the cases cited, the contention of the insurers was re-

jected, the Courts holding that the mere advance of

funds to a customer in such a situation, even though

such an advance gave rise to an obligation of repay-

ment, was nota‘‘loan” within the meaning of that term

as used in the Bond. Those cases distinguish between

“check transactions” and “loan transactions” (see

e.g., Pioneer Valley Savings Bank, 343 F.2d at 653) and

hold that such advances of credit are not within the

meaning of the term “loan” in ordinary speech or in

the Bankers Blanket Bond.

The only case known to counsel involving the

applicability of the “loan exclusion” of the Bankers

Blanket Bond to losses arising from the granting of

immediate credit for drafts drawn upon a third person

and subsequently not paid is National Bank of

Paulding v. Fidelity and Casualty Company, 131

F.Supp. 121 (S.D. Ohio 1954). In the National Bank of

Paulding case, the arguments of the insurer that the

loan exclusion applied were rejected and recovery

was allowed.

The opinion of the Court of Appeals in this case im-

plies that every advance of funds by a bank to a cus-

tomer is a“loan” within the meaning of the loan exclu-

sion of the Bankers Blanket Bond. This holding is in

conflict with the cases allowing recovery in in-

=

13

stances of check-kiting, because each such case in-

volved an advance of funds to a customer of the bank.

If there were no such “advance” of funds, no damage

would be sustained by a bank in a check-kiting

scheme, since the customer would not be allowed to

draw against the deposit until the check had cleared

and had been collected. Footnote 3 of the Court of

Appeals’ opinion in this case implies that because the

analogy between check-kiting and depositing drafts is

“not exact,” check-kiting schemes are less like loans

than the deposit of drafts in this case. But in check-

kiting schemes the bank usually relies solely upon the

credit of its customer, that is, it advances him funds

upon the expectation that he has available or will

make available sufficient funds to “cover” what is

usually his check, and will thus cause the check to be

paid. In the present case, however, Louisiana Bank re-

lied on something more than its estimate of the worth

of its customer's credit: it relied upon (mis-) repre-

sentations that shipments of rice had been made to

Connell Rice & Sugar Co., Inc., for which Connell was

liable to pay, and for which Connell would pay, as it

had so many times before, upon presentation of the

drafts.

We respectfully submit that the check-kiting cases

cited above are closely analogous to the present case,

and that their interpretation of the “loan exclusion” of

the Bankers Blanket Bond limiting the scope of that

exclusion to formal loans should be applied to the

facts of this case, and that the decision of the Court of

Appeals should be reversed on that point.

14

The Decision Below That No Loss Has Been

Shown On The NSF Checks Is Not Supported

By The Court Of Appeals’ Findings Of Fact

And Is An Incorrect Interpretation Of Loui-

siana Revised Statutes 7:136-37.

The Court of Appeals described the NSF Check

transaction as follows:

Louisiana Bank also claims to have lost

money by honoring two checks, deposited

with it by Jack Smith for the Rex account, that

were returned for insufficient funds (NSF) and

for which no collection was ever made.

Louisiana Bank was, at the time Smith

deposited the checks, holding numerous

“rough rice drafts” drawn on Rex’s account for

the benefit of farmers who had sold rice to Rex.

These drafts, having been held by the bank for

more than twenty-four hours without accep-

tance or dishonor, were considered “stale”.

Under Louisiana law at that time, Louisiana

Bank would have been liable itself on these

drafts if they had been regular on their face.

The bank, anxious about the stale drafts, asked

Jack Smith to pay for some of them. Smith

drew two checks, totalling $110,509.80, on

Lake's account with Calcasieu and deposited

these into the Rex account with Louisiana

Bank. He then wrote a Rex check to Louisiana

Bank for $104,566.84, and the bank paid off a

Similar amount in stale rough rice drafts with

its own cashier's check. The Lake checks, sent

15

through normal banking lines for collection,

were returned NSF.

Slip opinion at 4054; Appendix B, infra, page 12a.

The Court of Appeals then held:

Although there is no direct evidence that the

drafts paid by Louisiana Bank with the

proceeds of the NSF checks were regular on

their faces, there is overwhelming indirect

evidence to that effect. There is no suggestion

in the record of any irregularity of such drafts.

There is no suggestion that the exemplary

draft, Defendant's Exhibit 19, is irregular.

There is no reason to believe that Louisiana

Bank, when faced with such a iuge loss on

stale rough rice drafts, would have paid off

any drafts on which it was not liable.

Slip opinion at 4063-64; Appendix B, infra, page 31a.

The Court of Appeals’ opinion holds that Louisiana

Bank suffered no loss through the negotiation of the

NSF checks involved in this litigation because the

funds disbursed after deposit of those checks went to

pay drafts drawn on Rex Rice Company that had been

held by Louisiana Bank for more than twenty-four

hours. The Court refers to the “breadth of the pretrial

stipulation” and holds that it was “imperative for

Louisiana Bank ... to show that it was not liable on

such drafts.” Slip opinion at 4064; Appendix B, infra,

page 32a. We respectfully submit that the reading

given the stipulations by the Court exceeds their ac-

tual scope. The stipulations relied on are numbers 23,

26, 36 and 37 of the Pretrial Order:

16

“23. On March 17, 1969 the total amount of

stale rough rice drafts on Rex Rice Company

held by Louisiana Bank (i.e. drafts which had

been held for longer than 24 hours without

return or pa;7ment) exceeded $104,000.00.

* * *

“26. On the same date, Louisiana Bank &

Trust Company paid $100,518.89 of Rex’s

outstanding stale drafts and shortly thereafter

paid an additional $4,037.94 of stale Rex drafts

which had been outstanding March 17.

” * +

“36. The Louisiana Bank & Trust Company

concedes that its records show that Louisiana

Bank & Trust Company failed to accept or to

make timely protest or non-acceptance of con-

siderably more than $110,000.00 worth of Rex's

rough rice drafts, which for the sake of brevity

shall be referred to as “stale drafts”, and this

made Louisiana Bank & Trust Company liable

to the payees for the payment of said drafts.

“37. Louisiana Bank & Trust Company did,

in fact, accept or concede liability for at least

$512,972.37 of similar stale drafts still remain-

ing unpaid after March 17, 1969.”

The term “stale drafts” is defined in both stipulations

23 and 26. The definitions are not the same. In 23, it is

“drafts which had been held for longer than 24 hours

17

without return or payment” — a simple statement of

fact. In 36, it is drafts “that Louisiana Bank & Trust

Company failed to accept or to make timely protest or

non-acceptance of” — a conclusion of law. The

presumption must be that each definition is limited in

its scope to the stipulation in which it occurs.

The stipulations say that Louisiana Bank and Trust

Company conceded liability on other drafts of Rex rice

(that is, drafts not paid with the proceeds of the deposit

on March 17, 1969), and the Court holds that this placed

a burden upon Louisiana Bank and Trust Company to

show that the drafts paid on March 17, 1969, were

different than those on which Louisiana Bank and

Trust later conceded liability. The drafts paid on

March 17, 1969, are not in evidence. We can offer

speculation that the drafts might or might not have

been subject to the twenty-four hour rule of the

Louisiana Revised Statutes, or that payment might or

might not have been demanded from Louisiana Bank

and Trust Company by persons holding those drafts,

but the important point is that the actions of Rex rice,

through its President, Jack Smith, in accepting the

drafts on March 17, 1969, and ordering their payment,

eliminated any possibility of a determination of

Louisiana Bank's liability on those drafts, other than

in the present litigation. We respectfully submit that

the Court's opinion shifts the burden of proof in-

correctly to Louisiana Bank and Trust Company in

this matter. The stipulations, as outlined above, are

not equivalent to a stipulation of Louisiana Bank's

liability on the drafts paid on March 17, 1969, and, we

respectfully submit, as a consequence, the fact of

Louisiana Bank’s liability on those drafts remained a

matter of defense.

18

One final comment is necessary on this matter. The

Court observes (slip opinion page 4063) that “there is

no reason to believe that Louisiana Bank, when faced

with such a huge loss on sale of Rex Rice drafts, would

have paid off any drafts on which it was not liable.” We

respectfully submit that this assertion by the Court

does not take into account the fact that the drafts paid

on March 17, 1969, were not paid by Louisiana Bank,

but were, instead, paid by Rex Rice Company with

funds deposited into Rex’s account on that date.

Through the use of the NSF checks, Rex obtained pay-

ment of the drafts. The Court of Appeals, we respect-

fully submit, is in error to read the payment of the

drafts on that date as a concession of liability by Loui-

siana Bank and Trust Company. At that time, Rex Rice

Company was, from Louisiana Bank’s point of view,

still in control of its affairs, and was still ordering the

bank to pay or not to pay such drafts.

CONCLUSION

For these reasons, a writ of certiorari should issue to

review the judgment of the United States Court of

Appeals for the Fifth Circuit.

By its attorneys,

REGGIE HARRINGTON AND

BOSWELL

EDMUND M. REGGIE

P.O. Drawer D

Crowley, Louisiana 70526

318-783-1577

19

CERTIFICATE

I certify that I have served the foregoing Petition for

Certiorari on Mrs. Marian Mayer Berkett and Mr.

Charles F. Seeman, Jr., of Deutsch, Kerrigan and

Stiles, 4700 One Shell Square, New Orleans.

Louisiana, counsel for The Employers Liability

Assurance Corp. Ltd. by U.S. Mail, postage prepaid,

this ___ day of August, 1976.

EDMUND M. REGGIE

la

APPENDIX A

United States District Court Civil Action

Western District of Louisiana Number 15539

Lafayette Division

LOUISIANA BANK AND TRUST COMPANY

versus

THE EMPLOYERS LIABILITY ASSURANCE COR?P..,

LTD.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Findings of Fact

The above entitled cause came on regularly for trial

and the Court having duly considered the evidence and

being fully advised in the premises now finds the

following:

At all times material to this law suit, Louisiana

Bank and Trust Company had in effect a

Banker's Blanket Bond in the amount of $200,000.00 is-

sued by the defendant, The Employers Liability

Assurance Corp., Ltd., on Banker’s Blanket Bond

Form 24. Under Paragraph B of that bond,' the defen-

dant agreed to compensate the plaintiff for:

1 This Section of the “Banker's Blanket Bond” is in reality an in-

surance provision against losses incurred by the bank by virtue of

the criminal activities of third persons, including depositors.

“Any loss of Property through robbery,

burglary, common-law or statutory larceny,

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...”

II.

On March 17, 1969, Jack Smith, who was the presi-

dent of both Rex Rice Company, Inc., and Lake Rice

Mill, Inc., deposited two checks (Exhibits P-3 and P-4)

signed by him as president of Lake and drawn on the

Lake account in Calcasieu-Marine National Bank.

Lake Arthur, Louisiana, to the Rex account in

Louisiana Bank and Trust Company. One of those

checks was‘in the amount of $55,509.80 and the other

was in the amount of $55,000.00. Both of the checks

were subsequently returned by the banks upon which

they were drawn because there were insufficient funds

to pay them. Neither check has ever been paid.

ITI.

After the checks were deposited to the account of

Rex Rice Company, Inc., Louisiana Bank and Trust

Company granted Rex Rice immediate credit and dis-

bursed the funds obtained by the deposit of the two

enumerated therein. One Louisiana case, Victory Electric Works,

Inc. v. Maryland Casualty Co., 230 So. 2d 287 (La. App. 1970), has

held in dicta that paragraph B of the bond falls under LSA-R.S.

22:6(8) and renders the underwriter surety of the person

perpetrating the fraud, robbery, etc. The issue has not been ad-

judicated by the Louisiana Supreme Court, and it is not necessary

for our decision here.

3a

checks at the direction of Jack Smith, thereby in-

curring a loss of $110,509.80.

IV.

On March 17, 1969, the account of Lake Rice Mill,

Inc., upon which the checks totaling $110,509.80 were

drawn had a balance of $1,758.30.

V.

On March 19, 1969, Jack Smith deposited a check

(Exhibit P-7) signed by him as president of Rex and

drawn on the account of Rex Rice Company, Inc., St.

Landry Bank and Trust Company, Eunice, Louisiana,

to the account of Rex in Louisiana Bank and Trust

Company. That check was in the amount of $2,000.00,

and was not paid by the bank upon which it was drawn

because there were insufficient funds in the account to

cover it.

VI.

The check for $2,000.00 has never been paid, and the

immediate grant of credit made by Louisiana Bank

and Trust Company after receipt of the deposit of that

check caused it to incur a loss of $2,000.00.

VIL.

Because of the vast discrepancy between the

amounts actually on deposit and the face amounts of

the checks, and, because of Jack Smith's status as

president of both corporations involved in this matter,

da

the court finds that Smith knew that the funds on hand

were insufficient to satisfy the checks.

VIII.

During the period from 1961 until 1969, Rex Rice

Company, Inc. made approximately 720 shipments of

rice to Connell Rice & Sugar Company, Inc., Westfield,

New Jersey. Payments for these shipments were

effected by sight drafts drawn on Connell by Rex, and

forwarded with documentation of the shipment for

which payment was sought.

IX.

During that period, it was customary for Rex to

deposit such drafts to its account in Louisiana Bank

and Trust Company and to receive credit for them

while they were in process of collection.

X.

Late in February or early in March of 1969, seven

drafts drawn by Rex on Connell, each in the amount of

$22,866.28 (Exhibits P-9/P-15) were deposited by Jack

Smith to the account of Rex Rice in Louisiana Bank,

and credited immediately to that account.

XI.

At the time the deposits were made, Jack Smith

represented to the bank that certain documentation of

rice shipments necessary to effect payment of the

drafts was not then attached to them but that the ad-

ditional documents would be supplied by him.

amma ia aia el ame, Cue

5a

XII.

Subsequently, Smith supplied what he represented

to be the required documentation for payment and the

drafts were forwarded to Connell Rice & Sugar Com-

pany, Inc. for payment.

XIII.

Connell Rice & Sugar subsequently refused to pay

the drafts, and Louisiana Bank and Trust Company

suffered a loss of $160,063.96 as a result of having

allowed Rex Rice Company to withdraw and disburse

the funds obtained by the deposit of those drafts.

XIV.

The documents supplied by Jack Smith to the bank

were, contrary to his representations, insufficient to

obtain payment of the drafts, and did not document

shipments of rice actually made to Connell by Rex.

XV.

Some of the documentation consisted of copies of

documents representing shipments that had been paid

for under other drafts drawn on Connell by Rex and

paid by Connell before the drafts at issue in this suit

were received by Connell.

XVI.

Because of the ficticious nature of the documenta-

tion presented to Louisiana Bank by Jack Smith, and

6a

because of Smith’s position as president and chief ex-

ecutive officer of Rex, and his consequent knowledge

of the affairs of Rex and of what was required in its

dealings with Connell, the court finds that Smith

knowingly misrepresented material facts and sup-

plied ficticious documentation to obtain credit for the

drafts.

XVII.

The Connell draft transactions appeared in the rec-

ords of Louisiana Bank as deposits to the account of

Rex Rice Company, Inc.

XVIII.

No entry was made on the loan liability ledger of

Rex Rice Company, Inc., or on the general loan journal

of Louisiana Bank, in connection with the Connell

draft transactions.

XIX.

Before suit was filed in this matter, the defendant

made a payment of $7,942.96 to the plaintiff, which was

accepted and retained by the plaintiff.

Conclusions of Law

From the foregoing facts, the Court concludes:

I.

By presenting the three NSF checks to Louisiana

Bank and Trust Company, Jack Smith represented (in

7a

his double capacity as president of both Rex and Lake)

that sufficient funds were on hand in the accounts

upon which the checks were drawn to pay those

checks. In light of the vast discrepancy between the

amounts actually on deposit in those accounts, and the

face amounts of the checks, and, considering Jack

Smith’s status as president of both corporations in-

volved in this matter, the conclusion is inescapable

that Smith knew that the funds on hand were in-

sufficient to satisfy the checks. His representation to

the bank was, therefore, knowingly false, and con-

stituted “false pretenses” within the meaning of that

phrase as used in Paragraph B of the Banker's Blanket

Bond Form 24. It is beyond dispute under Louisiana

law that losses resulting from the knowing issuance

of worthless checks are covered by Paragraph B of the

Banker's Blanket Bond Form 24. See National Bank of

Commerce in New Orleans v. Fidelity Casualty Com-

pany of New York, 312 F. Supp 71(E.D. La. 1970), aff'd

437 F. 2d 96 (5th Cir. 1971), cert. den. 403 U.S. 906, 91

S. Ct. 2209 (1971).

Il.

The misrepresentations made to Louisiana Bank by

Jack Smith with reference to the Connell drafts, and

the ficticious documentation supplied by Smith to the

bank, constituted “false pretenses” within the mean-

ing of that term as used in Paragraph B of the Banker's

Blanket Bond Form 24. The transactions between Rex

and Louisiana Bank involving the Connell drafts were

not “loans” within the meaning of that term as used in

the Banker’s Blanket Bond. There was no meeting of

the minds of the parties in a loan transaction. Smith

8a

represented that the sight drafts were a means of ob-

taining payment of valid obligations of Connell. Loui-

siana Bank expected those obligations to be paidina

normal course of events as they had been in the past.

The facts in this case are very similar to those set forth

in National Bank of Paulding v. Fidelity and Casualty

Company, 131 F. Supp. 121 (S.D. Ohio 1954). In that

case, ficticious documentation was also presented

with sight drafts for the purpose of obtaining imme-

diate credit for those drafts. Such practices were held

to be within the coverage afforded by Paragraph B of

the Banker's Blanket Bond Form 24. It is clear in this

case, as it was in National Bank of Paulding, that the

minds of the parties had not met in a loan transaction,

and that the loan exclusion of the Banker’s Blanket

Bond does not apply to the situation at hand.2

IIl.

Louisiana Bank and Trust Company has proven

damages of $272,573.76, representing the total amount

obtained from the plaintiff bank in the NSF check and

Conneli draft transactions. The bond sued upon is,

however, limited in amount to $200,000.00. In addition,

defendants have made a payment to plaintiff of $7.-

942.96 before suit in this matter, and are entitled to

credit for that payment.

2 Calcasieu Marine National Bank v. American Employers In-

surance Co., No. 15.534, Western District of Louisiana, decided

September 19. 1974 by Judge Scott, not yet reported, deals with

similar transactions between Smith, Rex Rice Mill and Lake Rice

Mill, and the Calcasieu Marine Bank. We agree with Judge Scott

that the losses sustained were covered by Paragraph B as thefts

under the Louisiana Criminal Code.

IV.

The plaintiff is entitled to judgment in the amountof

$192,057.04, and for its costs and disbursements herein

expended.

Let judgment be rendered accordingly.

Dated this 15th day of January, 1975.

/s/ R. J. PUTNAM

UNITED STATES DISTRICT

JUDGE

APPENDIX B

CALCASIEU-MARINE NATIONAL

BANK OF LAKE CHARLES,

Plaintiff-Appellee,

V.

AMERICAN EMPLOYERS’ INSURA CE CO.,

Defendant-Appellant.

LOUISIANA BANK & TRUST CO.,

Plaintiff-Appellee Cross Appellant,

Vv.

The EMPLOYERS LIABILITY ASSURANCE CORP..,

Defendant-Appellant Cross Appellee.

Nos. 74-3918, 75-1427.

United States Court of Appeals,

Fifth Circuit.

10a

June 14, 1976.

Appeals from the United States District Court for

the Western District of Louisiana.

Before WISDOM, COLEMAN and GEE, Circuit

Judges.

WISDOM. Circuit Judge:

Before us are two diversity cases in which the

critical legal question is substantially the same.

American Employers’ Insurance Company appeals

from a judgment, on a bankers blanket bond, in favor

of the Calcasieu-Marine National Bank (Calcasieu).

The Employers’ Liability Assurance Corporation,

Ltd.. appeals from a judgment, on a similar bond, in

favor of the Louisiana Bank and Trust Company of

Crowley. Louisiana (Louisiana Bank). In view of this

Court's disposition of the two appeals, only one opin-

ion 1s necessary.

Each bank claimed that losses incurred by it, with

respect to various transactions culminating in the

bankruptcy of a bank customer, were covered by the

respective bonds. The defendants denied liability on

numerous grounds. We reverse the distric. court

judgments for the plaintiffs. First. we hold that the

losses sustained by Calcasieu and by Louisiana Bank

fel! within a bond provision that excluded covera,ze

for losses due to bank loans. Second, we hold that the

remainder of the alleged loss suffered by Louisiana

Bank was not a loss at all.

ila

I

FACTS

Both cases arise out of the transactions of the banks

with two rice mills and with Jack R. Smith, the presi-

dent of both mills. The Lake Rice Mill, Inc., (Lake) and

the Rex Rice Co. (Rex) were in the business of pur-

chasing “rough” rice from farmers, milling and clean-

ing the rice, packaging the rice in varying quantities,

and selling the rice to food companies.

The Calcasieu/Lake transaction began when Lake

deposited with Calcasieu a draft on the Grace-

Kennedy Company (Grace-Kennedy), a Canadian

purchaser of rice, for $63,300. Calcasieu, according to

its custom, immediately credited Lake for the amount

of the draft and forwarded the draft to its correspon-

dent bank in New York for collection. This draft was

not honored by Grace-Kennedy for a number of

reasons: some of the rice had been damaged and some,

apparently, had never been shipped. Instead of honor-

ing the draft, Grace-Kennedy drew a check in the

amount of $40,594.40, the adjusted purchase price, to

the order of Rex and sent this check to Rex. The check

was deposited in Rex's account at Louisiana Bank on

February 10, 1969.

Meanwhile, however, another draft on Grace-

Kennedy was prepared by Lake and was supported by

a Rex invoice.' This draft also reflected the adjusted

1 Because Jack Smith operated both rice mills, it was not con-

sidered unusual for a draft to be deposited for Lake's account, but

supported by a Rex invoice. Jack Smith's dual role explains why

Grace-Kennedy sent its check to Rex rather than to Lake.

12a

purchase price of $40,594.40 and, on February 6, 1969,

was deposited, as the first draft had been, with

Calcasieu for collection. Because money due on the

Same transaction had already been advanced,

Calcasieu adjusted Lake's bank balance to reflect the

lower purchase price; it continued to credit Lake with

$40,594.40, minus a “service charge” that amounted to

interest on its previous advance. Of course, when

Grace-Kennedy was presented with the second draft, it

did not pay that draft because it had already paid Rex

for the same rice directly by check. Calcasieu was

notified of the dishonor of the second draft after one

and one-half months had elapsed and both rice mills

had been closed. Calcasieu’s claim arises from the loss

on this second draft.

The events which led to Louisiana Bank’s claim

against its bondsman occurred closer to the demise of

the two mills. Louisiana Bank had given Rex credit on

seven drafts drawn by Rex on Connell Rice and Sugar

Co. (Connell) to cover the purchase of rice sold to Con-

nell. These drafts were not accepted by Connell

because the attached documentation was either in-

complete or incorrect. Again, by the time the bank

became aware of the dishonor, Rex had collapsed.

Louisiana Bank also claims to have lost muney by

honoring two checks, deposited with it by Jack Smith

for the Rex account. that were returned for insufficient

funds (NSF) and for which no collection was ever

made. Louisiana Bank was, at the time Smith deposit-

ed the checks, holding numerous “rough rice drafts”

drawn on Rex's account for the benefit of farmers who

had sold rice to Rex. These drafts, having been held by

13a

the bank for more than twenty-four hours without

acceptance or dishonor, were considered “stale”. Un-

der Louisiana law at that time, Louisiana Bank would

have been liable itself on these drafts if they had been

regular on their face.2 The bank, anxious about the

stale drafts, asked Jack Smith to pay for some of them.

Smith drew two checks, totalling $110,509.80. on

Lake's account with Calcasieu and deposited these

into the Rex account with Louisiana Bank. He then

wrote a Rex check to Louisiana Bank for $104,566.84.

and the bank paid off a similar amount in stale rough

rice drafts with its own cashier's check. The Lake

checks, sent through normal banking lines for collec-

tion, were returned NSF.

Il

THE LOAN EXCLUSION

The bonds contained the following exclusionary

provision.

THIS BOND DOES NOT COVER:

(d) any loss the result of the complete or par-

tial nonpayment of or default upon any

loan made by or obtained from the In-

sured, whether procured in good faith or

through trick, artifice, fraud or false

pretenses,....

2 La.R.S. 7:136-37, repealed, eff. Jan. 1, 1975 by Act 92 of 1974.

14a

With respect to the Grace-Kennedy drafts and the

Connell drafts, the bondsmen contend that the exten-

sions of credit to the rice mill accounts, pending

collection of those drafts, constituted a “loan” for the

purposes of the bond exclusion. The banks argue that

there was no loan; rather, they argue that the transac-

tions were merely advances of credit pending the

collection of various items in the normal course of

business and that such advances, not commonly re-

ferred to in banking terms as loans, cannot be deemed

included in the bond exclusion.

This is, as far as we can determine, a question of first

impression in the federal courts of appeals. The

analysis begins with a review of prior cases consider-

ing related problems.

The closest case on the facts is National Bank of

Paulding v. Fidelity and Casualty Co., S.D.Ohio 1954,

131 F.Supp. 121. Stoller, who bought, sold, and ware-

housed seeds and grain, was in the practice of drawing

sight drafts on his purchasers. His bank would, upon

receipt of the draft, an invoice to the customer, and a

bill of lading, credit Stoller’s account with the amount

of the draft and forward the papers for co'lection.

While the draft was being collected, the bank would

charge Stoller’s account with interest. The bank lost

money when it advanced credit on drafts supported by

fictitious accompanying documents. The defendant

bondsman tried to relieve itseif from liability by ref-

erence to the same bond exclusion as is involved here.

The district court held that the transaction was not a

loan. A loan was described as “a contract [for which]

there must be a meeting of the minds”. There was no

meeting of the minds because “‘[t]he plaintiff bank ex-

Dn, Cie ele a s - ttl. Atal in

15a

pected a return of its money in the same manner that it

had received it in the previous transactions”. The dis-

trict courts in Calcasieu and Louisiana Bank relied on

Paulding in finding that the instant transactions did

not amount to a loan. See, e. g., 388 F.Supp. at 468.

The bonding companies argue that Maryland

Casualty Co. v. State Bank and Trust Co., 5 Cir. 1970,

425 F.2d 979, has modified, in this circuit, the availa-

bility of the Paulding-based argument. In Maryland

Casualty, Behring negotiated a loan with the bank; the

loan was secured by valueless warehouse receipts.

The district court held the loan exclusion clause in-

applicable, because “Behring knew ... not only that

the warehouse receipts were valueless but also that he

never intended to repay the money. He wanted to steal

the money, not to obtain a loan, and he simply used the

mechanics of the loan procedure to effect the theft”.

425 F.2d at 981. We reversed, observing nothing of ‘the

slightest persuasiveness that the exclusionary clause

of the bond can be nullified by the subjective

fraudulent intent of the borrower, notwithstanding

that the objective indicia all point one way — thata

loan was made by the Bank tothe partnership’. Id. Itis

possible to read the two district court opinions here as

having fallen into the same mistake as the district

court in Maryland Casualty; that is, the district courts

may have relied upon that part of Paulding in which

the court focused on Stoller’s obviously fraudulent in-

tent. The Paulding court had emphasized that “the

elements of the transactions which constitute. . . false

pretenses .... There were no elements of loans in

these transactions”. This observation was quoted in

Calcasieu, and the Louisiana Bank court approved of

Calcasieu's reading of Paulding.

16a

Finally, we note National Bank of Commerce in New

Orleans v. Fidelity and Casualty Co., E.D.La.1970. 312

F.Supp. 71. There, the bank was victimized by acheck-

kiting scheme. The district court rejected the bond-

ing company’s argument that the loan exclusion ap-

plied. It stated that “{t]he policy exclusion con-

templates a lending transaction knowingly entered

into by the bank in reliance on the customer's express

agreement to repay, most often for the purpose of mak-

ing a profit on the interest”. The court also relied on

Paulding’s observation that “there must bea meeting

of minds”. Id. at 75. Maryland Casualty had not yet

been decided. The decision in National Bank of Com-

3 A check-kiting scheme, of course. is a process whereby a per-

son with a checking account in two banks can create an illusion of

money in his accounts. A check drawn on the first bank is

deposited with the second bank. Before the check reaches the first

bank for payment, a check drawn on the second bank is deposited

in the first bank. If the bank is willing to give credit in the interim.

and many banks are if the person isa regular customer. the person

can use the bank's money without first providing collateral and

without paying interest. The scheme can go on as long as the per-

son keeps on depositing checks in both banks and as long as the

banks believe that there is money behind the checks.

The analogy between check-kiting and depositing drafts on rice

not yet delivered is not exact. In the check-kiting scheme, the

depositor usually attempts to keep the kite flying by depositing

worthless checks in both banks. In the draft situation. the scheme

can continue only so long as the purchaser receives ¢ vidence of

delivery of the commodity before he must accept or d : honor the

draft. The depositor can use the bank's money for a lim:ted period

of time: he cannot convince the purchaser to accept th: draft by

depositing with it a draft drawn on the bank.

4 See also Pioneer Valley Savs. Bank v. Indemnity Ins. Co.,

N.D.lowa 1964, 225 F.Supp. 404, 410-12, aff'd, 8 Cir. 1965. 343 F 2d

634, 652; United States v. Western Contracting Corp.. 8 Cir. 1965, 241

F.2d 383, 390; Fidelity & Cas. Co. v. Bank of Altenberg, 8 Cir. 19 54.

216 F 2d 294, 304; Hartford Accident & Indem. Co. v FDIC, 8 Cir.

1953, 204 F.2d 933, 937. These cases. like Nationa! Bank of Com-

merce, hold that the loan exclusion clause does not apply to losses

caused by check-kiting schemes. Not every court that has faced the

question, however, has held that the loan exclusion does not ap-

ply to a loss resulting from acheck-kite. See Citizens Nat’! Bank v.

Travelers Indem. Co., M.D.Fla.1967, 296 F.Supp. 300.

<twad) «

17a

merce was affirmed, per curiam, by this Court. 437

F.2d 96. The banks here rely heavily on an analogy

between check-kiting cases and the instant cases.

Although the analogy is strong, we find it unper-

suasive. Before delineating our reasons, however, we

refer to general principles of insurance law.

First, we observe that this is a diversity action;

Louisiana law applies. Birmingham Fire Insurance

Co. v. Adolph, 5 Cir. 1967, 379 F.2d 948, 951.° Although

we rely on Louisiana cases, cases from other jurisdic-

tions will be relevant because “[t]he law of insurance

is the same in Louisiana as in other states’. Brown v.

Life and Casualty Insurance Co., La.App.1933, 146 So.

332, 334; Jernigan v. Allstate Insurance Co., 5 Cir. 1959,

269 F.2d 353, 355.

An insurance policy is a contract, and the rules es-

tablished for the interpretation of agreements are

applicable to such policies. See Theye Y Ajuria v. Pan

American Life Insurance Co., 1964, 245 La. 755, 161

So.2d 70, cert. denied, 377 U.S. 997, 84 S.Ct. 1922, 12

L.Ed.2d 1046; Wiley v. Louisiana and Southern Life In-

surance Co., La.App.1974, 302 So.2d 704, writ denied,

305 So.2d 540, 541; Latino v. Hardware Mutual Casual-

ty Co., 5 Cir. 1969, 413 F.2d 1043.

The banks’ position is arguably fortified by special

rules applicable to insurance policies. It iscommonly

n Co. v. Stentor Electric Mfg. Co., 1941, 313 U.S. 487,

a1 Sct 1000. 8 L.Ed. 1477, a federal court must, of course, “yt

the conflicts rules of the state in which the court sits. LSA-R. cc.

Art. 10 provides that the law of the place where the ee

policy is delivered must govern. Harmon v. Lumbermens ~ ye

Ins. Co., La. App. 1964, 164 So.2d 397; David v. Insurance ~ o

North America, E.D.La.i967, 268 F.Supp. 496, 499. Similarly, =

siana law applies if the bond is construed as a surety agreement, —

Lachman v. Block, 1894, 47 La.Ann. 505, 17 So. 153.

18a

said, for example, that exclusions in insurance pol-

icies must be clearly expressed. See Snell v. Stein,

1972, 261 La. 358, 259 So.2d 876, 878-79; Kendrick v.

Mason, 1958, 234 La. 271, 99 So.2d 108, 116; Birming-

ham Fire Insurance Co. v. Adulph, supra, at 952. The

insurer has the burden of proving an exclusion. See

Standard Life Insurance Co. v. Hughes, 5 Cir. 1957, 240

F.2d 859, 861-62; Sparkman v. Highway Insurance Co.,

E.D.La.1967, 266 F.Supp. 197, 203. Another general

principle of insurance law is that ambiguities in a pol-

icy are to be resolved in favor of the insured. See, e. g..,

Albritton v. Fireman's Fund Insurance Co., 1954, 224

La. 522, 70 So.2d 111, 113; Thompson v. Phenix In-

surance Co., 1890, 136 U.S. 287, 297, 10 S.Ct. 1019, 34

L.Ed. 408; Godfrey v. United States Casualty Co.,

W.D.La. 1959, 167 F.Supp. 783, 790. This principle has

been stated at times to require a finding for the in-

sured where the insured’s interpretation of the policy

is “reasonable’, notwithstanding other reasonable

interpretations favoring the insurer. See Zoller v.

State Board of Education, La.App.1973, 278 So.2d 868,

870.°

6 One commonly expressed rationale for this rule is that it would

be unjust to construe an ambiguous provision in favor of the party

that drafted it. See, e. g.. First National Bank v. Hartford Fire In-

surance Co., 1878, 95 U.S. 673, 678, 24 L.Ed. 563, 565. Th : rationale

may not be applicable here, in view of the fact that the bankers’

blanket bond being construed was drafted by a joint ef‘ rt of the

American Bankers’ Association and the Americar. Surety

Association. All parties are, apparently, members of these respec-

tive associations, and it would appear, therefore, that each party

was equally responsible for the policy language. This is an addi-

tional factor supporting the result we reach in this appeal. : ee

Con:munity Federal Savs. & Loan Ass'n v. General Cas. Co., 8 Cir.

1960, 274 F.2d 620, 625. which held that the bond could not be con-

strued to allow coverage for losses resulting from a loan procured

by fraud. Community Federal was substantially relied upon in

Maryland Cas. Co. v. State Bank & Trust Co., 5 Cir. 1970, 425 F.2d

979, 981-82.

ee .

19a

Finally, the banks might rely on the principle of in-

surance law that words are to be construed in their

plain, ordinary, and popular sense. See Muse v. Metro-

politan Life Insurance Co., 1939, 193 La. 605, 192 So. 72,

75; Floyd v. Pilot Life Insurance Co., La.App.1961, 135

So.2d 546, 548; Bergholm v. Peoria Life Insurance Co.,

1932, 284 U.S. 489, 492, 52 S.Ct. 230, 76 L.Ed. 416; LSA-

R.C.C. Art. 1946.7 This rule is varied from only if a

word is used as a “term of art’, in which case its mean-

ing in the area for which it is a term of art is applied.

See LSA-C.C. Art. 1947°; Reliance Insurance Co. v. Or-

leans Parish School Board, 5 Cir. 1963, 322 F.2d 803,

806, cert. denied, 377 U.S. 916, 84 S.Ct. 1180, 12 L.Ed.2d

186.

In support of the nonapplicability of the loan exclu-

sion clause, it would be argued first that the word

“loan”, as used in the clause, is ambiguous. The banks

would obviously contend that the exclusion refers toa

situation in which the lender 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. We refer to such a

transaction as a formal loan. The bonding companies,

on the other hand, would argue that “loan”, as used in

the policy, refers to a transaction in which the bank

lends money to a borrower; such a loan may take many

7 This article provides:

The words of acontract are to be understood, like those of

a law, in the common and usual signification, without

attending so much to grammatical rules, as to general and

popular use.

8 This article provides:

Terms of art or technical phrases are to be interpreted

according to their received meaning with those who

profess the art or profession to which they belong.

forms, only one of which is a formal loan. We refer to

this type of transaction as a de facto loan. The banks

would then argue that, since the policy does not

specify formal loane or de facto loans, the word “loan”

is ambiguous and the ambiguity must be construed in

the banks’ favor. Supporting this position, the banks

would argue that the insurer has not clearly ex-

pressed its intention to deny coverage to de facto

loans, that the insurer has not overcome its burden of

proving the exclusion, that the word “loan” means, in

the ordinary and popular sense, a formal loan, and

that, if the word is to be interpreted as a term of art, it

still refers only to a formal loan.

The bonding companies would rejoin that the

special rules favoring the insured are only applicable

when there is an ambiguity. They would argue that the

word “loan” is not ambiguous but is intentionally

broad, that the contract refers to “any loan’, and that

the exclusion covers ali circumstances in which there

has been a de facto loan.

The special rules of interpretation do indeed apply

only when there is an ambiguity; courts ought not to

strain to find such ambiguities, if, in so doing, they

defeat probable intentions of the parties. See

Monteleone v. American Empire Insurance Co, 1960,

239 La. 773, 120 So.2d 70, 72.9 This is so even when the

result is an apparently harsh consequence to the in-

9 See also Hemel v. State Farm Mut. Auto. Ins. Co., 1947, 211 La.

95. 29 So.2d 483. 485: Jennings v. Louisiana & Southern Life Ins.

Co., La. App. 1973. 280 So.2d 297 300; Clerk v. Connecticut Fire Ins.

Co., La. App. 1967. 203 So.2d 866, 868, writ ref., 251 La. 733, 206 So.2d

90: Bowab v. St. Paul Fire and Marine Ins. Co., La.App.1963, 152

So.2d 66, 68. app. denied, 244 La. 664, 153 So.2d 881: Green v.

National Bellas Hess Life Ins. Co., La.App. 1960, 124 So.2d 397, 398.

ee A te ae ee ee ww

a0 Ge ree ne

2ia

sured. See State Bank of Poplar Bluff v. Maryland

Casualty Co., 8 Cir. 1961, 289 F.2d 544, 547; American

Casualty Co. v. Myrick, 5 Cir. 1962, 304 F.2d 179 (by im-

plication).

General principles do not always decide particular

cases. With that in mind, we attempt to understand the

meaning of the term “loan” as used in the policy exclu-

sion. First, we illustrate some of the many situations

in which there exists a de facto loan and show that the

instant transactions fall into that category.

The classic definition of a loan is given in In re

Grand Union Co., 2 Cir. 1914, 219 F. 353, 356.

A loan of money is a contract by which one

delivers a sum of money to another and the lat-

ter agrees to return at a future time a sum

equivalent to that which he borrows.

‘In order to constitute a loan there must bea

contract whereby, in substance one party

transfers to the other a sum of money which

that other agrees to repay absolutely, together

with such additional sums as may be agreed

upon for its use. If such be the intent of the par-

ties, the transaction will be considered a loan

without regard to its form.” (Emphasis added. )

This language is used as the definition of a loan in The

Michie Co., 6 Banks and Banking, ch. 11, § 1 (1952). G.

Munn, Encyclopedia of Banking and Finance (F. Gar-

cia, 6th ed. 1962) defines a loan as “The letting out or

renting of sums of money by a lender to a borrower, to

be repaid with or without interest”. Jd. at 421.

Repeatedly, it has been observed that a loan may ex-

ist regardless of the form of a transaction. C. Sollman,

Banks and Banking § 4823 (1936); Williams Deacon

and Co. v. Jones, 1884, 77 Ala. 294, 305-06 (by implica-

tion). Loans have been found to exist in transactions

that were arguably purchases, see In re Grand Union,

supra; Bon Homme County Bank v. Dakota National

Bank, 1926, 50 S.D. 191, 208 N.W. 825. 826, and in

transactions that were arguably transfers in trust. see

Bellevue State Bank v. Coffin, 1912, 22 Idaho 210, 125 P.

816, 818. Loans have been found, for the purpose of

usury laws, when a bank advances money and the

transaction is “in substance” a loan. See Hudson v.

Repton State Bank, 1917, 16 Ala.App. 101, 75 So. 695,

696. Loans, in substance, have been found when the

issue is relevant to whether a corporation's actions

have been ultra vires, see Watson v. Jackson, Tex.

Civ.App. 1924, 264 S.W. 603, 610, error dismissed, 268

U.S. 681, 45 S.Ct. 637, 69 L.Ed. 1154; Schramm v. Bank of

California National Association, 1933, 143 Or. 546, 20

P.2d 1093, 1096, and when the issue is relevant to the

duty of fair dealing of one who receives money, see

Bank of the Republic v. Baxter, 1858, 31 Vt. 101, 107.

Overdrafts from demand deposit accounts have been

thought to constitute loans. See Schramm, s'1pra; G.

Munn, supra, at 563; cf. Bromberg v. Bank of American

National Trust and Savings Association, 1943, 58

Cal.App.2d 1, 135 P.2d 689, 692: Prowinsky v. Second

National Bank, 1920, 49 U.S.App. D.C. 363, 265 F. 1003;

Florida-Patsand Corp. v. Central Bank and Trust C >.,

Fla.App.1965, 177 So.2d 533, 534.

These cases support the proposition, with which we

agree, that “whether or not [a] transaction constitutes

ee ee ee

23a

a loan, is to be determined from the surrounding facts

in the particular case’. The Michie Co., 6 Banks and

Banking, ch. 11, §4, at 225; Stolze v. Bank of

Minnesota, 1897, 67 Minn. 172, 69 N.W. 813, 814. We

return now to the facts of the case before us.

In both cases, money was advanced to a customer of

the bank. The manner in which credit was advanced by

the banks is strikingly similar to the transactions

called “loans” in Bellevue State Bank, Bon Homme

County Bank, Bank of the Republic, and Schramm.

Moreover, interest was to be charged in both cases.

That the presence or absence of interest is significant

was noted by Judge Rubin in National Bank of Com-

merce, 312 F.Supp. at 75, and, of course, appeals to

common sense. !°

In the Calcasieu transaction, the only piece of

evidence that suggests there was not a loan is the

absence of a promissory note. While a note would cer-

tainly be evidence of a loan, it is not a prerequisite for

the transaction to be a loan. See, e. g., Merchants’

National Bank v. First National Bank, 8 Cir. 1916, 238

F. 502, 507; Zurich General Accident and Liability In-

10 In Birmingham Fire Ins. Co. v. Adolph, supra, we were called

upon to determine the meaning of the word “employees” for the

purposes of an insurance policy exclusion that denied coverage to

an employee injured by another employee of the insured partner-

ship. We held that a partner was not an employee within the mean-

ing of the policy exclusion. In so holding, we observed that a rele-

vant consideration would be “whether the partner received wages

or other specific compensw*tion in addition to his partnership

share of profits”. 379 F.2d at 951. One factor supporting our deci-

sion was the fact the the $250 per month drawn by the partner in-

volved in the accident depended upon the existence of profits to

pay that amount. This made the partner look more like an owner

and less like an employee. Birmingham Fire supports the notion

that common sense is an appropriate method by which to judge

whether a transaction falls within an insurance policy exclusion.

24a

surance Co. v. Safe-T-Kros Drug Co., 1930,91 Ind.App.

130, 170 N.E. 351, 353; In re Nellis’ Will, Sur.Ct.1926, 126

Misc. 638, 214 N.Y.S. 378, 379. There is no distinction of

substance between the Grace-Kennedy transaction

and many previous transactions at the bank in whicha

note was signed.'! With respect to these latter transac-

tions, Calcasieu originally sued the bonding company

and the applicability of the loan exclusion clause was

conceded; the only remaining questio: was whether

the transaction fell within an exception to the exclu-

sion. The record does not explain why the Grace-

Kennedy draft was not taken with a note as other

drafts were. Whatever the reason, however, the

absence of a note was clearly not intended to change

the substance of the underlying transaction.

With respect to Louisiana Bank, the transaction

looks even more like a loan. Credit was advanced on

documents which were not even completed More-

over, the bank’s custom was to take a note along with

the draft. The bank president, Ogeron, testified that the

Federal Deposit Insurance Corporation recommend-

ed taking a note with the drafts.'* Blank notes bearing

Jack Smith's signature as Rex president, but no in-

dication of amount, were taken by the bank with the

Connell drafts.

11 We note that Jack Smith, in his deposition, testified that when

he'd present a draft to the bank, he'd “sign a note’, secured by the

invoice. The sight drafts were used as a method of financing in con-

junction with promissory notes. Smith believed that the Grace-

Kennedy draft would have had to have been presented witli: a

promissory note.

12 The purpose of taking notes was probably to protect the bank

from certain kinds of loss. Without a note, it might appear that the

bank had purchased the sight drafts and the accompanying

documents and fuily accepted the risk of dishonor.

OP 4 Se 8 Rint ee te. ae ~ ee DAS

25a

Louisiana Bank points out that, although it charged

a fee referred to as ‘interest’, that fee was charged to

the bank by the American Bank of Baton Rouge

(American), and Louisiana Bank was only passing

along that charge. American was involved in the

transaction, according to Ogeron’s testimony,

because the Louisiana Bank did not have sufficient

loan capacity to advance the appropriate credit to Rex.

Because of Louisiana Bank’s arrangement with

American, however, Louisiana Bank obviously con-

tinued to bear the risk of loss. At any rate, that Loui-

siana Bank made no direct profit from the “service

charge” it assessed Rex is not important. Banks often

borrow money at one rate and lend it at a higher rate.

They profit on such transactions but clearly not as

.nuch as the rate at which they loan might suggest.

Here, the rate of borrowing and the rate of lending is

the same. No immediate profit is obvious. The

materiality of this is negligible. If it is necessary to

find that Louisiana Bank profited from its transac-

tion, the ‘profit’ was derived from its nurturing of

Rex's business. Here, Louisiana Bank nurtured Rex's

business too long and too hard.

We have shown that the transactions were de facto

loans. The final question, then, is whether the policy

can be construed to exclude coverage only with

respect to formal loans.

In Travelers Insurance Co. v. Brown, 5 Cir. 1964, 338

F.2d 229, 237, we observed that, for the purposes of in-

terpreting an insurance contract, the intentions of the

parties were paramount. It appears, however, that the

parties intended the loan exclusion cleuse to apply to

different things. The bondsmen’s intentions were ob-

viously reasonable. The question, then, is whether the

banks’ expectations of coverage at the time of the

agreement were objectively reasonable. See R.

Keeton, Insurance Law 351 (1971). We hold that, if the

banks expected coverage in this type of transaction,

such expectations were not objectively reasonable.

First, we repeat that the term “any loan” is broad and

is not restricted by any narrowing modifier. The banks

should have been aware of the breadth of this term.'?

More importantly, however, the banks are asking, in

this instance, for credit insurance: insurance provided

against losses from bad debts arising from the sale of

goods on credit, coverage for uncollectable accounts.

G. Munn, supra, at 170. The banks “sold” its goods in

trade, money, to its respective customers, Lake and

Rex, with the expectation that the purchase price, with

interest, would be repaid in the future.'4 The banks lost

13. We reject the argument that there cannot be a loan unless the

bank intends to make a “loan”. The policy excludes coverage for

“any loan made by or obtained from the Insured’. (Emphasis adda-

ed.) The words “or obtained from” are especially significant, for

they demonstrate that the exclusion applies to situations in which

the intent of the lender is notclear. The contract, of course, must be

construed, if possible, so as to give effect to all of its stipulations.

See LSA-C.C. Art. 1955; Noel Estate, Inc. v. Kansas City S. & G. Ry..,

1937, 187 La. 717, 175 So. 468, 470; Solomon v. Hickman,

La.App.1969, 219 So.2d 330, 333. We also reject the statement in

National Bank of Commerce, 312 F.Supp. at 75, that “loan” in the

exclusion clause refers to a transaction in which the bor “ower has

made an express agreement to repay. As we demonstrate in text.

that construction unreasonably narrows a broad provision.

14 The banks had, perhaps, no more reason to fear nonpayment

with respect to the drafts on which they lost money than they had

with respect to the many previous drafts that were honored by the

purchasers. Under the Paulding reasoning, this alone would take

the transaction out of the “loan” category. This reasoning, of

course, begs the question. All of the previous transactions could

have been, and in fact were, loans themselves. It cannot be thought

unusual for a bank customer to make and repay regularly many

loans while its business flourishes, but to default on subsequent

loans when its business founders.

etn

me ee

< enw

i tte te es Pe om

27a

their money because the accounts became uncollec-

table. Under Louisiana law, the bankers’ blanket bond

does not provide credit insurance. See Allen State

Bank v. Traveler's Indemnity Co., La.App.1972, 270

So.2d 270, 273. See also First National Bank v. Aetna

Casualty and Surety Co., 6 Cir. 1962, 309 F.2d 702, 705,

cert. denied, 372 U.S. 953, 83 S.Ct. 951, 9 L.Ed.2d 977. As

the Louisiana court said in Allen State Bank, ‘the

bond is not a policy of credit insurance and does not

protect the bank when it simply makes a bad business

deal”.

To the same effect are East Gadsden Bank v. United

States Fidelity and Guaranty Co., 5 Cir. 1969, 415 F.2d

357, 359-60 and First National Bank and Trust Co. v.

Continental Insurance Co., 10 Cir. 1975, 510 F.2d 7, 12-

13. In East Gadsden Bank, we affirmed a decision of a

district court holding that the loan exclusion clause

applied to a transaction in which the borrower, who re-

ceived funds on the security of construction contracts,

misappropriated the payment of contract monies. We

observed, “it is plain that the Insurer here did not pur-

port to provide a policy of credit insurance”. In First

National Bank, the Tenth Circuit held that the

purchase of commercial paper by a bank constituted a

loan to the automobile dealership from which the

paper was purchased. The court observed

The important aspect of this case is the fact

that for some ten years First National had

been financing the .. . dealership by making

countless loans, in one form or another. And

when the. . . dealership folded, First National

was left with unpaid loans. Such loss was an

excluded risk.

28a

(Emphasis added.)'5

All that remains is to distinguish the instant trans-

action from the check-kiting cases.'* The most impor-

tant distinction is that, when the bank credits a check,

it reasonably expects the check to be paid in the nor-

mal course of business. See Pioneer Valley Savings

15 Two other cases have held that the loan exclusion clause

applies to the advance of money on the assignment of -eceivables

evidenced by false invoices. Exchange Nat'l] Bank v. Insurance Co.

of North America, 2 Cir. 1965, 341 F.2d 673; Capitol Bank v. Fidelity

& Cas. Co., 7 Cir. 1969, 414 F.2d 986. These cases suggest that

coverage depends, in part, upon the ease with which the bank could

verify the lack of the accounts. This would not, of course, explain

the result in the check-kiting cases, in which even a cursory

attempt at verification would uncover the fraudulent scheme.

There is no inconsistency, however, because the cases mentioned

above were discussing the applicability of Clause E, which

provides some exceptions to the loan exclusion in cases of

counterfeiting and forgery. To the extent, however, that the cases

deem the loan exclusion applicable in the first instance, they sup-

port the position reached in this appeal. To be sure, notes evi-

dencing the loan were signed in these cases. But as we make clear

in text, the absence of notes does not preclude us from observing

the true nature of the transactions.

16 We also distinguish Shoals Nat'l] Bank v. Home Indem. Co.,

N.D.Ala.1974, 384 F.Supp. 49, aff'd without opinion, 515 F.2d 1182.

There, the district court held that a broader loan exclusion — deny-

ing coverage for losses due to “any loan or transaction in the

nature of, or amounting to, a loan” — did not apply toa loss result-

ing from the advance of money on negotiable sight drafts and

checks supported by false invoices. The court relied on Paulding,

National Bank of Commerce, In re Grand Union, supra. and on the

rule that ambiguities are to be construed against the insurer, see

First Nat'l Bank v. Insurance Co. of North America, 7 Cir 1970,424

F.2d 312, 317 (rule applies notwithstanding fact that bond was the

result of joint effort of the American Bankers Association and the

Surety Association of America). Shoals is distinguished on two

grounds: first, the court believed that the loss occurred because the

bank's bookkeeping department mistakenly believed that he

depositor has money in its account; second, the bond would not

have excluded coverage for a loan anyway, because of an excep-

tion for transactions within the offices of the insured. See 384

F.Supp. at 53, 55. Even in the absence of these distinguishing char-

acteristics. Shoals would be unpersuasive authority. Our affir-

mance without opinion is insignificant.

OS hel Ee Oe eid ae i

29a

Bank v. Indemnity Insurance Co., N.D. lowa 1964. 225

F.Supp. 404, 411, aff'd, 8 Cir. 1965, 343 F.2d 634. Such an

expectation may be reasonable even if the bank knows

that there are no funds in the drawee bank to cover the

check, because of the depositor’s credit at the drawee

bank or because of the practice of many banks to honor

overdrafts. See id. But, with respect to the drafts

deposited with the two banks here, there could have

been no reasonable expectations. Although many

previous drafts had been paid in the normal course of

business, it was always up tothe purchaser to honor or

dishonor a draft. The difference between checks and

drafts is well explained in E. Farnsworth, Commer-

cial Paper 345 (1968):

...[acollecting bank] will treat the draft asa

“collection” item rather than a “cash” item.

Checks, the most common items handled by

the banks, are dealt with in bulk as “cash”

items on the assumption that they will be

honored in the overwhelming majority of

cases; provisional credits are entered imme-

diately foracheckx at all states of the collection

process and automatically become fina]

without further action upon payment by the

drawee bank ... documentary drafts, on the

other hand, arc handled as “collection” items

and dealt with individually, rather than in the

bulk, and since no assumption is made that

they will be honored, no credits, not even

provisional credits, are given until the item

has been paid by the buyer.'”

17 Quoting Farnsworth, Documentary Drafts Under the Uniform

Commercial Code, 22 Bus. Law. 479, 482 (1967). Although Art. 4 of

the U.C.C. was not in force in Louisiana at the time of the transac-

tions with which we are concerned, Farnsworth’'s observations are

30a

The banks here must have known that there was con-

siderable risk in crediting the drafts before acceptance

by the purchaser. The banks took such risks in the

hope of making a profit on the interest or in obtaining

other business advantages. The insurers, who did not

issue a policy of credit insurance, did not take those

risks and are not to be held accountable now, when the

risks have turned bad.'*®

Ill

NSF CHECKS

The remaining issue is whether the Louisiana Bank

suffered a loss when it paid off stale rough rice drafts

after receiving NSF checks drawn on Lake's

Calcasieu account and deposited in Rex’s Louisiana

Bank account. This issue turns, according to Loui-

siana Bank, on whether the bank was actually liable

on the stale drafts. The bank suggests, in its reply brief

and in its oral argument, that there is no evidence that

the drafts were regular on their fact and, hence, that

the bank was, under Louisiana law, actually liable on

them. The district court impliedly found that a loss oc-

curred from the deposit of the NSF checks. No mention

is made, however, of the defendant's contention that

the bank lost no money because it used funds tu pay its

not legal observations but practical observations. In any event,

there does not appear to be any relevant difference between the old

Negotiable Instruments Law and the U.C.C.

18 We are confident that our construction of the bonds has not

“trapped” the banks in the sense of their being victimized by arul

ing that they could not have expected. See Williams v. Union Cen-

tral Life Ins. Co.. 1934, 291 U.S. 170, 180, 54 S.Ct. 348, 78 L.Ed. 711;

Hemel v. State Farm Mut. Auto. Ins. Co., 1947. 211 La. 95, 29 So.2d

483. 486.

Sila

own debts. We hold that the implicit finding of the dis-

trict court has no evidentiary support in the record.

The answer of the defendant to Louisiana Bank’s

complaint alleges that ‘no loss has been suffered by

complainant by reason of the issuance of the checks

described in the complaint”. The pretrial stipulations

bear out this allegation. The bank stipulated that:

“drafts exemplified by Defendant's Exhibit 19 were

drawn on Rex Rice account at Louisiana Bank.. .”; on

March 17, 1969 “Louisiana Bank... . paid $100,518.89 of

Rex's outstanding stale drafts and shortly thereafter

paid an additional $4,037.94 of stale Rex drafts’; Loui-

Siana Bank records “show that Louisiana Bank ...

failed to accept or to make timely protest or non-

acceptance of considerably more than $110,000.00

worth of Rex's rough rice drafts ... and this made

Louisiana Bank ... liable to the payees on the pay-

ment of said drafts”; and “Louisiana Bank ... did, in

fact, accept or concede liability for at least $512,972.37

of similar stale drafts still remaining unpaid after

March 17, 1969". Although there is no direct evidence

that the drafts paid by Louisiana Bank with the pro-

ceeds of the NSF checks were regular on their faces,

there is overwhelming indirect evidence to that effect.

There is no suggestion in the record of any irregulari-

ty of such drafts. There is no suggestion that the ex-

emplary draft, Defendant's Exhibit 19, is irregular.

There is no reason to believe that Louisiana Bank,

when faced with such a huge loss on stale rough rice

drafts, would have paid off any drafts on which it was

not liable.'9

19 By way of suggesting that it might not have been liable on the

drafts paid on March 17, 1969, Louisiana Bank cites Bollich v. Loui-

siana Bank & Trust Co., 1972, La.App., 271 So.2d 274. There Loui-

32a

The bank’s attempt to prove a loss on the theory that

it was not actually liable on the drafts that were paid is

an attempt to accomplish what it failed to do, or could

not do, at trial. Especially in view of the breadth of the

pretrial stipulations, it was imperative for Louisiana

Bank to produce the drafts it actually paid and to show

that it was not liable on such drafts. We therefore hold

that Louisiana Bank suffered no loss through its pay-

ment of the stale rough rice drafts.

In conclusion, we reverse the judgment in both dis-

trict courts. The bonds did not cover any losses in-

curred by the plaintiff banks.

REVERSED.

siana Bank was relieved of liability on a draft presented twice, on

March 17 and March 19. Each time the draft was returned without

payment within the 24-hour period. Even if this case supported.

which it does not, the bank's contention that it might not have been

liable on the drafts paid on March 17, the case does not appear to

have been presented as evidence in the trial court.

33a

APPENDIX C

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 75-1427

LOUISIANA BANK & TRUST CO..,

Plaintiff-Appellee,

Cross Appellant,

versus

THE EMPLOYERS LIABILITY ASSURANCE CORP...

Defendant-Appellant

! Cross Appellee.

Appeals from the United States District Court forthe

Western District of Louisiana

ON PETITION FOR REHEARING

(JULY 12, 1976)

Before COLEMAN and GEE, Cir< sit Judges’.

PER CURIAM:

IT IS ORDERED that the petition for rehearing filed

in the above entitled and numbered cause be and the

same is hereby DENIED.

* Judge Wisdom was a member of the original pane! but because

of illness did not participate in this decision.

34a

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 74-3918

D. C. Docket No. CA-15534

CALCASIEU-MARINE NATIONAL

BANK OF LAKE CHARLES,

Plaintiff-Appellee,

versus

AMERICAN EMPLOYERS’ INSURANCE CoO.,

Defendant-Appellant.

Appea! from the United States District Court for the

Western District of Louisiana

Before WISDOM, COLEMAN and GEE, Circuit

Judges.

JUDGMENT

This cause came on to be heard on the transcript of

the record from the United States District Court for the

Western District of Louisiana, and was argued by

counsel;

35a

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the judgment

of the said District Court in this cause be, and the same

is hereby, reversed;

It is further ordered that plaintiff-appellee pay to

defendant-appellant, the costs on appeal to be taxed by

the Clerk of this Court.

June 14, 1976

Issued as Mandate: JUL. 20, 1976