Bancinsure, Inc. v. Peoples Bank of the South
Filing
133
Memorandum Opinion and Order granting in part, denying in part 16 MOTION for Partial Summary Judgment, granting in part, denying in part 8 MOTION for Declaratory Judgment. Signed by District Judge Tom S. Lee on 3/30/12 (LWE)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF MISSISSIPPI
JACKSON DIVISION
BANKINSURE, INC.
PLAINTIFF
VS.
CIVIL ACTION NO. 3:11CV78TSL-MTP
PEOPLES BANK OF THE SOUTH
F/K/A PEOPLES BANK OF FRANKLIN COUNTY
DEFENDANT
MEMORANDUM OPINION AND ORDER
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,1 the Bank became aware that Corban, an executive vicepresident, had conducted multiple fraudulent transactions whereby
he forged signatures, made unauthorized withdrawals, and released
collateral without authority to do so.2
The Bank made a claim
under the Bond for losses allegedly resulting from Corban’s
dishonest and fraudulent conduct.
BancInsure denied the claim,
and filed the present action seeking a declaratory judgment on six
specific issues:
1. Whether exclusion (e) excludes coverage under
Insuring Agreement (B);
2. Whether exclusion (h) excludes coverage under
Insuring Agreement (B);
3. Whether the Bond is a statutory bond under Mississippi
Code Annotated § 81-5-15;
4. Whether the financial benefit requirement under
Insuring Agreement (A) of the Bond will be enforced as
written;
5. Whether the loans in question are considered “loans”
under the Bond;
6. Whether interest income is recoverable under the
Bond.
1
The Bank obtained the Bond from BancInsure on June 1,
2005, and coverage remained in effect until June 1, 2011.
2
On August 20, 2010, Corban pled guilty to violations of
18 U.S.C. § 656, which covers theft, embezzlement or willful
misapplication of bank funds by a bank officer or employee.
2
The parties have filed competing summary judgment motions as to
each of these issues, which the court addresses in turn.3
Issues 1 & 2:
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:
(B)(1) Loss of Property resulting directly from
(a) robbery, burglary, misplacement, mysterious
unexplainable disappearance and damage or destruction of
the Property or
(b) theft, false pretenses, or common-law or statutory
larceny, committed by a person present in an office or
on the premises of the Insured,
while the Property is lodged or deposited within offices
or premises located anywhere.
Exclusion (h) excludes coverage for
loss caused by an employee, except when covered under
Insuring Agreement (A) or when covered under Insuring
Agreement (B), (C) or (R) and resulting directly from
misplacement, mysterious unexplainable disappearance or
destruction of or damage to Property.
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
3
The Bank filed a counterclaim for bad faith breach of
contract, which is the subject of a separate motion by BancInsure
for partial summary judgment. The briefing on that motion is
incomplete at this time.
3
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:
loss resulting directly or indirectly from the complete
or partial non-payment of, or default upon, any Loan or
transaction involving the Insured as a lender or
borrower, or extension of credit ... whether such Loan,
transaction or extension was procured in good faith or
through trick, artifice, fraud or false pretenses,
except when covered under Insuring Agreement (A), (D),
(E), (P) or (Q).4
Thus, whether there is coverage for the Bank’s losses from
Corban’s misdeeds hinges on Insuring Agreement (A).
4
The Bank does not assert that there is coverage under
Insuring Agreements (D), (E), (P) or (Q).
4
Issues 3 & 4:
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:
(A) Loss resulting directly from dishonest or fraudulent
acts committed by an Employee acting alone or in
collusion with others.
Such dishonest or fraudulent acts must be committed by
the Employee with the manifest intent:
(a) to cause the Insured to sustain such loss, or
(b) to obtain improper financial benefit for the
Employee or another person or entity.
However, if some or all of the Insured's loss results
directly or indirectly from Loans, that portion of the
loss is not covered unless the Employee was in collusion
with one or more parties to the transactions and has
received, in connection with these transactions, an
improper financial benefit.
As used throughout this Insuring Agreement, financial
benefit does not include any employee benefits earned in
the normal course of employment, including salaries,
commissions, fees, bonuses, promotions, awards, profit
sharing or pensions.
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
5
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:
Every active officer and employee of any bank or trust
company in this state shall furnish a fidelity bond to
the bank by which he is employed for the faithful
performance of his duties, executed by some surety
company authorized to do business in the State of
Mississippi, as surety. The conditions of such bond,
whether the instrument so describes the conditions or
not, shall be that the principal shall protect the
obligee against any loss or liability that the obligee
may suffer or incur by reason of the acts of dishonesty
of the principal or by reason of the violation of any of
the provisions of the banking laws of Mississippi. The
amount of such bond shall be fixed by the board of
directors, subject, however, to approval of the state
comptroller and the same shall be inspected upon the
examination of the bank or trust company.
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, see Kansas Bankers Sur. Co. v. Farmers State
6
Bank, 408 F. Supp. 2d 751, 754-55 (S.D. Iowa 2005) (“if a bond is
of a type required by statute the general rule is that “[i]t is
presumed that the intention of the parties was to execute such a
bond as the law required.”); and it argues that since the statute
requires that such fidelity bond provide coverage for “any loss or
liability” suffered as a result of the employee’s acts of
dishonesty, “regardless of whether the instrument so describes the
conditions or not,” then the requirement in the BancInsure Bond
that the Bank must prove that a dishonest or fraudulent employee
acted with manifest intent to cause a loss or obtain an improper
financial benefit, and in the case of a loan loss to also prove
collusion and receipt of an improper financial benefit, conflict
with the requirements of the statute and must be stricken as
surplusage, see American Cas. Co. of Reading, Penn. v. Irvin, 426
F.2d 647, 650 (5th Cir. 1970) (“if a statutory bond contains
provisions which do not comply with the requirements of the law,
they may be eliminated as surplusage and denied legal effect”); .
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.
example, whereas the statute requires that the bank employee
7
For
“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 741.
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
8
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....”
Codified Laws Ann. § 51–17–36 (1987).
S.D.
The district court held
that the Financial Institution Bond issued by the defendant to the
plaintiff bank was a statutory bond.
Notwithstanding this, the
Eighth Circuit concluded that “the fidelity bond’s additional
requirements of manifest intent and of the $2,500 benefit [were]
legally enforceable under South Dakota law.”
2 F.3d at 808.
court reasoned,
First, the South Dakota Director of Banking and Finance
approved St. Paul's fidelity bond as written. See St.
Paul's app. at 82 (bond approval). Second, these two
additional requirements under the fidelity bond are not
inconsistent with the underlying purpose of § 51–17–36.
Consequently, we conclude that the district court
correctly required First Dakota to prove that a
dishonest or fraudulent employee acted with manifest
intent to cause a loss and to obtain at least a $2,500
benefit when the loss results from a loan.
Id.
9
The
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.”
Supp. 2d at 756.
408 F.
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.5
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
5
The court in Kansas Bankers did find the collusion
requirement to be inconsistent with the Iowa statute, because the
statute expressly the statute expressly provided for
indemnification of losses for unlawful acts committed by the
employee directly or through collusion. Kansas Bankers Sur. Co.
v. Farmers State Bank, 408 F. Supp. 2d 751, 756 n.1 (S.D. Iowa
2005). The Mississippi statute says nothing about collusion.
10
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.
Issue 5:
BancInsure denied coverage for each of the Bank’s claimed
losses (with one exception) on the basis that the losses were the
result of loans, and the Bank had not shown that Corban was either
in collusion with one or more parties to the transactions or that
he had received an improper financial benefit.
BancInsure filed
its motion for declaratory judgment/summary judgment seeking a
11
ruling by the court that all of the losses claimed by the Bank,
involving eight different Bank customers, are loan losses, which
are recoverable, if at all, only if the Bank proves that Corban
acted in collusion with one or more parties to the transactions
and that he received an improper financial benefit in connection
with the transaction.
In response, and in its motion for partial
summary judgment, the Bank advises it does not dispute that the
losses relating to four of the customers, James Wallace, William
Lampton, Sr., William Lampton, Jr. and Chuck Magee, involve loans;
but it argues that the transactions involving the other four
customers – Joe Hargett, Steve Parker, Carl Mark Smith and Tillmon
Bishop – were not “loans” under the terms of the Bond.
While the
parties do not agree on the proper characterization of these
latter transactions, for purposes of the present motions, they do
not dispute the basic circumstances of the following transactions:
Joe Hargett:
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.
12
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.
Steve Parker:
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
13
subsequent employer.
The Bank claims a loss of $39,858.68,
including interest.
14
Carl Mark Smith:
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 with the Bank; and upon reviewing the
loan documents, Smith confirmed that the signature on the
documents was a forgery.
Smith signed a forgery affidavit against
Corban.
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
15
loan.
The Smith loan, in turn, in the amount of $23,000, was made
to pay off the “loan” to Fields.6
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
6
BancInsure originally moved for summary judgment on the
Bank’s claim for recovery of its alleged losses resulting from
Corban’s actions in connection with a putative “loan” to Carl Mark
Smith on the basis that this constituted a “loan” under the terms
of the Bond. Following discovery, BancInsure filed an amended
and/or supplemental memorandum in support of its motion for
summary judgment, arguing that in light of what it learned in
discovery relating to the Smith transaction, it is no longer
relevant whether the Smith “loan” was or was not a “loan” under
the Bond, since the undisputed facts establish that the Bank did
not sustain a loss in connection with the putative Smith “loan”
transaction. The court addresses this new argument, infra p. 2022.
16
books, book a recovered to Carl Mark Smith, charge-off.”
McKey is
currently paying the reworked loan.
Tillmon Bishop:
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.7
The Bank claims a loss of $3,920.05,
including interest.
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
7
Upon investigation, the Bank
had forged Bishop’s mother’s signature
security for a $28,000 loan to Bishop,
Bishop or his mother’s knowledge. The
in connection with this transaction.
17
also discovered that Corban
on a CD that was pledged as
and had done so without
Bank does not claim a loss
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);
18
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.
(citations omitted).
Id.
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).
19
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 receive the funds and they did
not agree to repay the putative debt.
On the contrary, they were
unaware of any of these transactions until after the fact.
While
fraudulent loan documents generated by Corban gave the appearance
that credit had been extended to these individuals, this was a
false impression.
Credit was not extended to any of the
individuals whose identities were fraudulently used by Corban to
facilitate his scheme, nor was credit extended to any other
individual or entity who may have received putative “loan”
proceeds from Corban, since there was never any agreement by
anyone to repay the proceeds of the faked “loans”.8
For these
reasons, the court concludes that the Hargett, Smith, Bishop and
Parker losses were not “loan” losses under the terms of the Bond.
Issue 6:
In prior litigation between the same parties involving the
same Bond, this court ruled that the Bank’s claim for accrued
8
The court notes that it finds no significance in the
fact that in its communications with BancInsure, the Bank referred
to the transactions as “loans.”
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”).
20
interest was excluded as “potential income” under exclusion (s),
which excludes coverage for:
potential income, including but not limited to interest
and dividends, not realized by the Insured (including
for purposes of this exclusion portions of outstanding
promissory notes payable to the Insured which represent
payments of interest, fees and penalties in connection
with prior promissory notes payable to the Insured).
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’s Supplemental Memorandum
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.
21
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.
Based on the undisputed facts relating to this transaction, the
court finds merit in BancInsure’s position.
The facts pertinent to the Smith transaction, set forth supra
at 13-14, 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.
22
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:
(b) In the event of payment under this Bond, the Company
shall be subrogated to all of the Insured’s rights of
recovery thereunder against any person or entity to the
extent of such payment ...
(e) ... The insured shall do nothing after discovery of
loss to prejudice such rights or cause of action.
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.9
It contends, alternatively, that the Bank is not
9
The facts relating to the Lampton loans are as follows:
In December 2003, Corban originated a line of credit for
23
entitled to recover under the Bond for either of the Lampton loans
because there is no proof that Corban acted in collusion with any
party to the transaction or that he received an improper financial
benefit in connection with the transaction.
As to the latter
position, the Bank has pointed to evidence of collusion and
improper financial benefit.
As to the Workout Agreement, the
court is unable to conclude on the present record that the Bank’s
claim is necessarily foreclosed and considers that a fuller
development of the facts will facilitate a decision on this issue.
Therefore, the court at this time will deny BancInsure’s motion
for a ruling that the fact of the Workout Agreement precludes the
Bank’s claim.
Lampton, Jr., secured by certain real property. After he sold the
real property in 2006, Lampton, Jr. paid $54,743.43 on the line of
credit, leaving a balance of $20,025.82. He then drew additional
funds from the line of credit, increasing the balance to
$55,425.82. Corban then originated a loan to Lampton, Jr. of
$55,425.82, to pay off the line of credit. The loan was secured
by a deed of trust on the real property which Lampton, Jr. had
sold in 2006. The Bank discovered there was no collateral for the
loan in January 2010, when the closing attorney on Lampton, Jr.’s
sale of the property contacted the Bank requesting cancellation of
the deed of trust. The Bank claimed it suffered a loss of
$49,421.14 in connection with the Lampton, Jr. Loan.
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.
24
Conclusion
Based on the foregoing, it is ordered that the parties’
respective motions are granted in part and denied in part, as set
forth herein.
SO ORDERED this 30th day of March, 2012.
/s/ Tom S. Lee
UNITED STATES DISTRICT JUDGE
25
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