Opinion ID: 2539402
Heading Depth: 1
Heading Rank: 13

Heading: Issue 4: Steward's transactions can be characterized as loans by the bank.

Text: The bank argues that the Court of Appeals panel erred in holding that Steward's actions constituted bank loans as a matter of law. It contends that her transactions were not loans because an employee can only bind the bank if her actions are authorized. KBS responds that the honoring of check overdrafts constitutes loans. It also contends that Steward possessed apparent authority to honor the overdrafts and the bank is therefore bound. As a result, there is no coverage for the loan losses under the bond. We observe that Bond Exclusion 2(e) states there is no coverage for loss resulting from . . . any loan or transaction involving the Insured [bank] as a lender . . . 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 Agreements (A). . . . (Emphasis added.) Consequently, there is interplay with Insuring Agreement (A), i.e., possibly an exception to the loan exclusion in 2(e). Insuring Agreement (A) appears at p. 2 of the Crime Bond, which states in relevant part: FINANCIAL INSTITUTION CRIME BOND The underwriter [KBS], in consideration of an agreed premium, and in reliance upon all statements made and information furnished to the Underwriter by the Insured in applying for this bond, and subject to the Declarations, Insuring Agreements, General Agreements, Conditions and Limitations and other terms hereof, agrees to indemnify the Insured for: INSURING AGREEMENTS FIDELITY (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, and (b) to obtain 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 therewith, a financial benefit. (Emphasis added.) Clearly, the crime bond was not meant to cover the scenarios simply involving bad loans. Before we merely recite the trial court's specific holding, we note a disagreement between the parties on whether that court decided if the transactions constituted loans. The trial court found: Although it is true that as between a bank and its customers, the bank's knowing and deliberate coverage of overdrafts does constitute a loan. Such is not what happened here. . . . This was not the bank's decision to cover overdrafts; it was a single employee's criminal act. KBS interprets this ruling to mean the court determined that the transactions were loans. As a result, KBS argues that because the bank did not deny that the transactions were loans in its summary judgment response, the bank waived the argument by not cross-appealing that ruling. The bank responds that the trial court simply never characterized the transactions as loans. We need not resolve this dispute because we agree with the panel that the transactions were loans as a matter of law, as more fully explained below. The panel observed that the bond defines loan as [1] all extensions of credit and [2] all transactions creating a debtor-creditor relationship, and all transactions by which the Insured [bank] assumes an existing debtor or creditor relationship. (Emphasis added.) Similarly, the panel noted that K.S.A. 9-1104(a)(3), part of the Kansas Banking Code, provides that Loan is defined as (A) A bank's direct or indirect advance of funds to or on behalf of a borrower based on an obligation of the borrower to repay the funds; (B) a contractual commitment to advance funds; (C) an overdraft. These definitions are consistent with other authorities. See, e.g., 12 C.F.R. § 32.2(k)(1)(v) (2009) (loans or extensions of credit for purposes of 12 U.S.C. § 84 [2006,] and this part include . . . an overdraft, whether or not prearranged). Many jurisdictions consider that a bank's payment of a customer's overdraft constitutes a loan or an extension of credit. See Tony's Tortilla Factory v. First Bank, 857 S.W.2d 580, 584-85 (Tex.App.1993) (collecting many cases). Indeed, the common law-rule . . . is that the payment of an overdraft constitutes a loan by the bank to the drawer of the overdraft, a loan for which the drawer is liable. U.S. Trust Co. of New York v. McSweeney, 91 A.D.2d 7, 9, 457 N.Y.S.2d 276 (1982). The bank does not seem to seriously dispute this conclusion on appeal to this court. Rather, it appears to contend that the panel erred in its holding because the transactions could not have been loans since Steward was not authorized to honor the overdrafts.