533 F.2d 290
CALCASIEU-MARINE NATIONAL BANK OF LAKE CHARLES, Plaintiff-Appellee,
v.
AMERICAN EMPLOYERS' INSURANCE CO., Defendant-Appellant.
LOUISIANA BANK & TRUST CO., Plaintiff-Appellee Cross Appellant,
v.
The EMPLOYERS LIABILITY ASSURANCE CORP., Defendant-Appellant
Cross Appellee.
Nos. 74-3918, 75-1427.
United States Court of Appeals,
Fifth Circuit.
June 14, 1976.
Karl E. Boellert, John A. Jeansonne, Jr., Lake Charles, La., for Calcasieu-Marine Nat. Bank.
Marian Mayer Berkett, Charles F. Seemann, Jr., New Orleans, La., for American Emp. Ins. Co. and Emp. Liability Assur. Corp.
Nolan J. Edwards, Homer Ed Barousse, Jr., Edmond M. Reggie, O. W. Boswell, II, Reggie Harrington & Boswell, Crowley, La., for La. Bank & Trust.
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 opinion is 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 district court judgments for the plaintiffs. First, we hold that the losses sustained by Calcasieu and by Louisiana Bank fell within a bond provision that excluded coverage 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.
* FACTS
Both cases arise out of the transactions of the banks with two rice mills and with Jack R. Smith, the president of both mills. The Lake Rice Mill, Inc., (Lake) and the Rex Rice Co. (Rex) were in the business of purchasing "rough" rice from farmers, milling and cleaning 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 correspondent 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 honoring 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 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 Connell. These drafts were not accepted by Connell because the attached documentation was either incomplete or incorrect. Again, by the time the bank became aware of the dishonor, Rex had collapsed.
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 acceptance 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 faces. 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 collection, were returned NSF.
II
THE LOAN EXCLUSION
The bonds contained the following exclusionary provision:
THIS BOND DOES NOT COVER:
(d) any loss the result of the complete or partial nonpayment of or default upon any loan made by or obtained from the Insured, whether procured in good faith or through trick, artifice, fraud or false pretenses, . . . .
With respect to the Grace-Kennedy drafts and the Connell drafts, the bondsmen contend that the extensions 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 transactions were merely advances of credit pending the collection of various items in the normal course of business and that such advances, not commonly referred 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 considering 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 warehoused 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 collection. 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 itself from liability by reference 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 expected a return of its money in the same manner that it had received it in the previous transactions". The district courts in Calcasieu and Louisiana Bank relied on Paulding in finding that the instant transactions did not amount to loans. 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 availability 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 inapplicable, 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 that a loan was made by the Bank to the partnership". Id. It is 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 intent. The Paulding court had emphasized "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.
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 a check-kiting scheme. The district court rejected the bonding company's argument that the loan exclusion applied. It stated that "(t)he policy exclusion contemplates 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 making a profit on the interest". The court also relied on Paulding's observation that "there must be a meeting of minds". Id. at 75. Maryland Casualty had not yet been decided. The decision in National Bank of Commerce 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 unpersuasive. 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 jurisdictions 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 established 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 Insurance Co., La.App.1974, 302 So.2d 704, writ denied, 305 So.2d 540, 541; Latino v. Hardware Mutual Casualty Co., 5 Cir. 1969, 413 F.2d 1043.
The banks' position is arguably fortified by special rules applicable to insurance policies. It is commonly said, for example, that exclusions in insurance policies 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; Birmingham Fire Insurance Co. v. Adolph, 379 F.2d 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 policy 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 Insurance 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 insured 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.
Finally, the banks might rely on the principle of insurance law that words are to be construed in their plain, ordinary, and popular sense. See Muse v. Metropolitan 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. This rule is varied from only if a word is used as a "term of art", in which case its meaning in the area for which it is a term of art is applied. See LSA-C.C. Art. 1947; Reliance Insurance Co. v. Orleans 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 exclusion 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 to a 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 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 loans 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 expressed 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 all 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. This is so even when the result is an apparently harsh consequence to the insured. 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 implication).
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 exclusion. 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 latter agrees to return at a future time a sum equivalent to that which he borrows."In order to constitute a loan there must be a 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 parties, 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. Garcia, 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". Id. at 421.
Repeatedly, it has been observed that a loan may exist 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 implication). 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, supra ; 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 Co., Fla.App.1965, 177 So.2d 533, 534.
These cases support the proposition, with which we agree, that "whether or not (a) transaction constitutes 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 Commerce, 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 certainly 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 Insurance 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 which a note was signed. With respect to these latter transactions, Calcasieu originally sued the bonding company and the applicability of the loan exclusion clause was conceded; the only remaining question was whether the transaction fell within an exception to the exclusion. 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. Moreover, the bank's custom was to take a note along with the draft. The bank president, Ogeron, testified that the Federal Deposit Insurance Corporation recommended taking a note with the drafts. Blank notes bearing Jack Smith's signature as Rex president, but no indication of amount, were taken by the bank with the Connell drafts.
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 continued to bear the risk of loss. At any rate, that Louisiana 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 much 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 transaction, 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 interpreting an insurance contract, the intentions of the parties were paramount. It appears, however, that the parties intended the loan exclusion clause to apply to different things. The bondsmen's intentions were obviously 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" their goods in trade, money, to their respective customers, Lake and Rex, with the expectation that the purchase price, with interest, would be repaid in the future. The banks lost their money because the accounts became uncollectable. Under Louisiana law, the banker's 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 received funds on the security of construction contracts, misappropriated the payment of contract monies. We observed, "it is plain that the Insurer here did not purport 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.
(Emphasis added.)
All that remains is to distinguish the instant transaction from the check-kiting cases. The most important distinction is that, when the bank credits a check, it reasonably expects the check to be paid in the normal course of business. See Pioneer Valley Savings Bank v. Indemnity Insurance Co., N.D.Iowa 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 to the purchaser to honor or dishonor a draft. The difference between checks and drafts is well explained in E. Farnsworth, Commercial Paper 345 (1968):
. . . (a collecting bank) will treat the draft as a "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 immediately for a check at all states of the collection process and automatically become final without further action upon payment by the drawee bank. . . . Documentary drafts, on the other hand, are 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.
The banks here must have known that there was considerable 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 policies of credit insurance, did not take those risks and are not to be held accountable now, when the risks have turned bad.
III
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 Louisiana 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 faces and, hence, that the bank was, under Louisiana law, actually liable on them. The district court impliedly found that a loss occurred 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 to pay its own debts. We hold that the implicit finding of the district 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"; Louisiana Bank records "show that Louisiana Bank . . . failed to accept or to make timely protest or nonacceptance 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 payment 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 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 huge loss on stale rough rice drafts, would have paid off any drafts on which it was not liable.
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 payment of the stale rough rice drafts.
In conclusion, we reverse the judgment in both district courts. The bonds did not cover any losses incurred by the plaintiff banks.
REVERSED.