Case Name: MARYLAND CASUALTY CO. v. AMERICAN TRUST CO.
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1934-06-06
Citations: 71 F.2d 137
Docket Number: No. 7083
Parties: MARYLAND CASUALTY CO. v. AMERICAN TRUST CO.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 71
Pages: 137–140

Head Matter:
MARYLAND CASUALTY CO. v. AMERICAN TRUST CO.
No. 7083.
Circuit Court of Appeals, Fifth Circuit.
June 6, 1934.
SIBLEY, Circuit Judge, dissenting.
J. Newton Rayzor, of Houston, Tex., for appellant.
A. J. Lewis, of San Antonio, Tex., and Edgar Monteith, of Houston, Tex., for appellee.
Before BRYAN, SIBLEY, and HUTCHESON, Circuit Judges.
Rehearing denied June 29, 1934

Opinion:
HUTCHESON, Circuit Judge.
This suit, brought to recover losses on stock loans, is on a banker's blanket bond insuring appellee against "direct loss " "from any dishonest act of its employees," issued 'by appellant in February, 1929. The claim is that Ikard, appellee's president, secretly and covinously obtained funds of the bank to finance his stock market operations, carried on in other names, by having persons, known to him to be insolvent, execute notes, while keeping that fact and the fact of his interest concealed from the.bank.
The District Judge, who tried the case on a jury waiver, found the facts as plaintiff claimed them to be, and gave judgment accordingly. This appeal challenges the conclusion of the District Judge, that the things the president did were dishonest acts, and his further conclusion that the bank suffered direct losses from them.
It is not denied that the matters occurred substantially as plaintiff claims and as the District Judge found they did; in fact, the evidence is all one way. It shows that, desiring to conduct secret market operations with the bank's money, Ikard from time to time solicited and procured each of three persons without sufficient assets or credit to make their paper bankable to join with him in stock purchases, the notes to be made and the stock to be owned'ostensibly by the maker, but the transaction in each case to be the joint venture of the maker and Ikard. It shows that the facts of his connection with and interest in the loans, and the speculations they were made to carry on, were sedulously and effeetively concealed from the directors until long after the losses had occurred. There! was proof, too, that Ikard directed and controlled the disposition and sale of the collateral, and both the calling and paying of the loans. In particular instances, over the protest of the makers that they should sell the collateral and pay thé note, he refused to permit this to be done, holding out for a rise and the secret profit which he planned the ventures for.
Appellant's first claim is that this secret speculation with the bank's funds was not dishonest. There is no merit in this claim. It goes, we think, without saying that it is dishonest for the president of a bank to secretly obtain its funds for speculation, by putting forward others as worthy of credit, while concealing from the bank his interest in the transaction, and this whether or not it be considered that this was a borrowing by the president without the express consent of the directors within the prohibition of the statutes. Insurance against dishonest acts is insurance of fidelity; it is intended to, it does, guarantee openness and fair dealing on the part of the bank's officers. It is intended to, it does, underwrite that the bank's officers shall act with common honesty and an eye single to its interests. It guarantees that the bank shall at all times have the benefit of the unbiased, critical, and disinterested judgment! of the president in regard to the loans it makes. It specifically guarantees that the president of a bank will not engage in secret operations for speculative profit, with the bank's money, by making pretended loans to others, these others, only means to his prohibited ends. In the transaction in question, the bank not only did not have the benefit of Ikard's critical and disinterested judgment, it was deliberately deceived by his pretense and stealth. Under the plainest principles of ordinary common honesty and fair dealing, his conduct was dishonest. First National Bank of St. Petersburg v. Gussie Solomon (C. C. A.) 63 F.(2d) 900; United States F. & G. Co. v. Howard (C. C. A.) 67 F.(2d) 382; American Surety Co. v. Shaw (C. C. A.) 54 F.(2d) 550.
Upon its other point, that the losses were pot the direct result of Ikard's dishonesty, we think appellant stands no bettor. A certain kind of casuistry, a certain subtlety in "metaphysics, that fertile field of delusion propagated by language," may indeed discover a lack of direct causal connection between the dishonest obtaining- of the bank's money apd the loss which followed that obtaining, in the admitted fact that, had the loans been promptly enough liquidated by sale of the collateral, there would have been little, perhaps no, loss. The law, however, whore fiduciary obligations have been breached, is not so subtle; it sees with a clearer view. It holds that the dishonest and secret breach of trust by which money is gotten taints the transaction throughout its course. That unless and until by a full and timely disclosure its getting is puiged of the secret and dishonest stealth by which it was obtained, that stealih continues to be the responsible causa of loss of any of it. Had the directors been fully advised about the loan at any time before loss, particularly of Ikard's connection with it, and possessing that knowledge had honestly and deliberately elected to approve and make the loan their own, the original secrecy of its procuring would have been healed, and for losses thereafter occurring the- bond would not have been responsible. Until, however, the fatal humor which characterized the borrowings was purged out of them, it continued there, responsible in law and morals for losses the bank sustained on those loans, even if Ikard's only connection with them had been their original dishonest procurement.
But this is not all. The evidence shows, not only Ikard's original dishonest borrowing by a stealthy concealment of his interest, but bis continued unfaithful shepherding of the borrowings in his own interest. It shows that he, not only failed to manage them in the bank's interest by liquidating them voluntarily, but, intent on his secret profits, ho refused to save the bank by selling the collateral when the maker of the notes demanded that it be done. The law wo-uld stultify itself if, splitting infinitesimal hairs, it gave color to the claim appellant makes here. Bank insurance against direct loss through the dishonest acts of its officers extends to secret raidings of a bank president through loans from which the bank ultimately suffered loss. It is not a defense that, if it had known the fact of its president's secret interest early enough, the bank might have extricated itself. To hold otherwise would be to impose upon the bank, as the price for the protection it purchased, not only the premiums it paid, but constant sleepless vigilance to prevent loss to the insurer. United States F. & G. Co. v. Commercial Nat. Bank (C. C. A.) 63 F.(2d) 718; United States F. & G. Co. v. Bank of Thorsby (C. C. A.) 46 F.(2d) 950; Aetna Casualty & Surety Co. v. Austin (Tex. Civ. App.) 285 S. W. 951; Maryland Casualty Co. v. Farmers' State Bank & Trust Co. (Tex. Civ. App.) 258 S. W. 584; United States F. & G. Co. v. Howard, and American Surety Co. v. Shaw, supra. In law, the secrecy and stealth which attended the getting of the money in the first place tainted that getting until the money came back to the bank. In law, the losses from the loans are the direct results of that secrecy and stealth.
The judgment of the court was right. It is affirmed.
"Conclusions of Law. A. The obtaining by Ikard of the Trust Company's money under the circumstances hereinbefore set out, and such purchase therewith of such stock, was and is a 'dishonest act' within the meaning of such bond. And this is true whether considered from the standpoint of the Texas statutes relating to banks and banking (Title 16 supra) or otherwise. The placing of the stock as collateral to secure the notes did not clothe it with honesty. The subsequent action by Ikard with respect to such matters, particularly his concealment of his connection with them, also constituted a 'dishonest act' or acts within the moaning of such bond. The losses of the Trust Company were direct losses within the meaning of the bond." Tr. p. 152.