Federal Deposit Insurance v. Aetna Casualty & Surety Co.

426 F.2d 729

• Court: Court of Appeals for the Fifth Circuit
• Decided: April 13, 1970
• Docket: No. 27254
• Status: Published

Opinions

LEWIS R. MORGAN, Circuit Judge.

This is an appeal from a judgment for the plaintiff, Federal Deposit Insurance Corporation (hereinafter, the FDIC), rendered by the District Court for the Northern District of Texas, sitting without a jury, in an action seeking indemnity under two banker’s blánket employee fidelity bonds and an excess bank employee dishonesty bond (hereinafter, the bonds) which were executed and delivered by the defendant insurance companies to the First National Bank of Marlin, Texas (hereinafter, the Bank) for a loss sustained from the purchase by the Bank of 101 real estate notes (hereinafter, the notes) in violation of the National Banking Act, 12 U.S.C. § 21 et seq., alleged to have been caused by the dishonest and fraudulent acts of persons whose acts were covered under the bonds.

On February 7, 1962, The Travelers Indemnity Company executed and delivered to the Bank its Banker’s Blanket Bond, Standard Form 24, for $40,000. On December 28, 1961, United States Fidelity and Guaranty Company executed and delivered to the Bank its Banker’s Blanket Bond, Standard Form No. 2, for $80,000, subject to a deductible of $40,-000. On May 10, 1963, The Aetna Casualty and Surety Company executed and delivered to the Bank its Excess Bank Employee Dishonesty Blanket Bond, Standard Form No. 28, for $1,000,000, subject to a deductible of $120,000. All three of the bonds continued in force until the Bank was closed on March 10, 1964. In all three bonds, the insurance companies agreed to indemnify the Bank against any loss sustained through the dishonest or fraudulent acts of any employee, as that- term is defined in the bonds.¹

Each of the bonds provides under the heading “Exclusions”:

Section 1. This bond does not cover * * * (c) Any loss resulting from any act or acts of any director of the Insured other than one employed as a salaried, pensioned or elected official or an Employee of the Insured, except when performing acts coming within the scope of the usual duties of an Employee, or while acting as a member of any committee duly elected or appointed by resolution of the board of directors of the Insured to perform specific, as distinguished from general, directorial acts on behalf of the Insured. (Emphasis supplied.)

The events leading up to the purchase of the bonds began with the acquisition of a controlling interest in the Bank by Joseph B. Morris and Bernard S. Garrett, through their agent Matthew D. Steiner, on July 18, 1963. The Continental Bank and Trust Company of Houston, Texas, agreed to finance the purchase of the stock on the condition that Morris and Garrett would not be stockholders of record. Consequently, the stock was purchased in the names of Steiner; his wife, Mary Jo Steiner; Vince Sanfilippo; and the Republic National Finance Company, which was organized by Morris and Garrett as their alter ego and instrumentality and had Steiner as its president and chairman of its board of directors. Steiner, his wife, Sanfilippo and Republic National all made declarations of trust, wherein they agreed to hold the shares of the Bank’s stock registered in their names in trust for the benefit of Morris and Garrett. On July 17, 1963, Morris and Garrett instructed Steiner to go to Marlin, Texas, in order to consummate the purchase of the Bank’s stock and to call a meeting of the Bank’s board of directors and have himself, his wife and Sanfilippo elected as directors in order to control the Bank. This was done by Steiner on July 19th.

On September 6, 1963, Morris and Garrett agreed through their agents, Goree Mock and Brown Walker, doing business as Liberty Realty Company, to purchase certain notes and mortgages with unpaid balances totalling $1,001,382 from the First American Life Insurance Company, Houston, Texas, and further agreed to deposit the approximate amount of $1,000,000 with the San Jacinto Title Company to be disbursed by First American and in accordance with separate disbursing instructions from Liberty Realty.

On September 11, 1963, the Bank’s board of directors passed upon Steiner’s motion, a resolution authorizing the Bank to accept a deposit of $500,000 from the Guaranty Depository of California and $500,000 from the Mainland Bank and Trust Company of Texas City, Texas, which was controlled by Morris and Garrett and had Steiner as its president and chairman of its board of directors, and to invest a like amount in Houston real estate notes.² Steiner made this motion pursuant to instructions given him by Morris and Garrett. At the time of the September 11th meeting, Steiner told J. J. Gallaher, Jr., the Bank’s president, that he had applied for a charter for a savings and loan association and that when the charter had been granted he would transfer the notes and mortgages to the savings and loan association, so that they would remain in the Bank only a short time. In reply, Gallaher informed Steiner that the Bank was a national bank and that under the National Banking Act, supra, it could not take any one loan in excess of $20,-000 with a maturity date in excess of twenty years.

On September 18, 1963, Steiner conferred with Norman R. Dunn, Deputy Comptroller of the Currency of the United States, in Dallas, Texas, and informed him that he was acting as a front for Morris and Garrett in that they were the beneficial owners of the stock registered in the names of Steiner, his wife, Sanfilippo, Roger Harrold and Republic National. This information, however, was never made available to the minority members of the board of directors or to the Bank’s officers. Dunn, in turn, instructed Steiner that no assets were to be purchased by the Bank which were out of the Marlin trade area, and the Bank was not to be involved in any transaction with Morris or Garrett or their business interests. These instructions were, likewise, never conveyed to the minority members of the board or to the Bank’s officers.'

On October 3, 1963, the Bank’s board of directors passed a resolution authorizing The Riverside National Bank of Houston to purchase first lien real estate notes for the Bank’s account subject to the approval of Steiner.³ Two letters, one on October 2nd and one on October 3rd, were written to The Riverside National Bank by Gallaher, as president of the Bank, and both these letters stated that the purchase of the notes was to be subject to the approval of S.teiner.⁴ Although The Riverside National Bank did not purchase the notes mentioned in the October 3rd resolution nor service the notes that were eventually purchased by the Bank, the uncontradicted testimony indicates that the notes Steiner was authorized to approve by the October 3rd resolution and the notes that were eventually purchased were identical. Pursuant to this authority and upon instruction from Morris and Garrett, Steiner went to the San Jacinto Title Company on October 5, 1963, and examined the notes for delinquency. Steiner testified that he merely checked notations that had been made on the outside of the packets containing the individual notes and mortgages, and at no time scrutinized the notes to ascertain whether they conformed to the requirements established for the National Banking Act, supra, as they applied to the Bank.

On October 7, 1963, Morris and Garrett sent Sanfilippo to the Bank to pick up a cashier’s check for $970,000 with which to purchase the notes. While Sanfilippo was at the Bank, Steiner, who was in Houston, had a telephone conversation with Gallaher, the Bank’s president, during which Steiner told Gallaher that an attorney in Houston had checked the titles to the mortgaged property for the Bank, while, in fact, no attorney had done so, and instructed him to issue the check. Sanfilippo returned to Houston and delivered the check to Morris and Garrett, but it is unclear who delivered the check to the San Jacinto Title Company.

Steiner was not involved in any of the negotiations leading to the purchase of the notes, and he was present at the closing of the transaction at the offices of the San Jacinto Title Company on October 8, 1963, only for about the last ten minutes. At this time Steiner signed a document which on its face purports to be a “Purchaser-Borrower Statement” and which is referred to in the testimony as the closing statement. Although Steiner’s signature does not indicate in what capacity he signed, he was the only representative of the Bank present at the closing. On October 9, 1963, Steiner personally delivered the notes and mortgages to the Bank, along with checks drawn by San Jacinto for $22,319.26 and $1,878.60 after closing the deal, the first representing the Bank’s discount on the notes, the second the difference between the purchase price and the $970,000.

Out of the $968,121.40 paid to San Jacinto, $189,186.04 was paid to Valley National Mortgage Company, a Morris-Garrett front, as the “net discount realized” in the purchase, and this money ultimately ended up in the hands of Morris and Garrett. Steiner testified that he observed that the closing statement reflected that Valley National was to receive this amount out of the transaction and that he knew Valley National to be a front for Morris and Garrett. He further testified that he was told by Morris and Garrett that the money was to be used to set up reserves to insure the currency of the notes, to move the notes when the federal savings and loan association charter was obtained, and to pay money brokers’ commissions for the deposits that had been procured for the Bank. Steiner also testified that he felt the purchase of the notes violated the instructions given him by the Deputy Comptroller of the Currency. Steiner never informed the minority directors or the Bank’s officers of the payment to Valley National.

When the notes were delivered to the Bank on October 9, 1963, by Steiner, a Mr. Donohoo, a director, vice president and cashier of the Bank, looked at several of the notes and informed Steiner and Gallaher that they did not conform to the requirements of the National Banking Act, and if all the notes were of a similar quality they would have to be returned. Also, on October 9th, a meeting of the Board of Directors was held, at which the purchase of the notes was approved.⁵ On or about October 18 or 20, 1963, President Gallaher completed an examination of the notes in detail and found that three exceeded the Bank’s $20,000 limit and that sixty-four were for periods of time exceeding the Bank’s twenty-year limit. Gallaher immediately informed Steiner that the notes were nonconforming and that Steiner would have to get the notes out of the Bank, and that if they were discovered by the bank examiners, the Bank would be closed. Steiner promised to get the notes out of the Bank and the evidence indicates that, while he made diligent efforts to place the notes elsewhere, he failed to do so.

In February, 1964, Deputy Comptroller of the Currency Dunn became aware of the nonconforming quality of the notes and gave the Bank a short time in which to dispose of them. At a Board of Directors’ meeting held on February 24, 1964, the resignations of Steiner, his wife and Sanfilippo were demanded and received. On March 30, 1964, the Bank was declared insolvent by the Comptroller of the Currency, pursuant to 12 U.S.C. § 191, and the FDIC was appointed receiver pursuant to 12 U.S.C. § 1821.

The Bank ultimately suffered a net loss upon the disposal of the notes of $408,362.97.⁶

The FDIC gave the insurance companies notice of loss by letter on March 18, 1964, and filed a proof of loss by letters dated August 5, 1964, after the insurance companies had extended the time in which proof of loss could be made. The insurance companies denied liability on August 12 and 14, 1964. The Bank gave no notice nor filed a proof of loss prior to its closing on March 10,1964.

In its Finding of Fact and Conclusions of Law, the District Court found, inter alia: (1) that Steiner was given access to the original notes and mortgages in the offices of the San Jacinto Title Company prior to their purchase and that after a brief examination he knew that they violated the instructions given to him by the Deputy Comptroller of the Currency; (2) that Steiner told Gallaher that the notes had been checked by an attorney for the Bank when he instructed Gallaher to issue the $970,000 check to Sanfilippo knowing that the notes had never been checked by an attorney for the Bank; (3) that at the time he signed the purchaser’s statement, Steiner knew that Valley National Mortgage Company was a Morris-Garrett front and that no members of the Board of Directors had knowledge of the payment of $189,186.-04 to Valley National out of the note transaction except Steiner and Sanfilippo ; (4) that Steiner’s acts in connection with the purchase of the notes were acts coming within the scope of the usual duties of an employee of the Bank; and (5) that Steiner’s acts in connection with the purchase of the notes were dishonest and fraudulent. The District Court held as a matter of law: (1) that a loss resulting from the dishonest and fraudulent acts of a director, which acts come within the scope of the usual duties of an employee, are covered by the bonds issued by the insurance companies; (2) that the purchase of the nonconforming notes was not authorized by the Bank’s board of directors nor did it ratify the dishonest and fraudulent acts of Steiner; and (3) that notice of loss and proof of loss was filed by the FDIC with each of the insurance companies within the time limits set by the bonds, and that no director or officer of the Bank not in collusion with Steiner knew of the wrongdoing until March 10, 1964.

The initial question presented by this appeal is whether Steiner’s actions in connection with the purchase of the notes by the Bank come within the coverage provisions of the bonds. This question, in turn, must be reduced to three even more specific questions: (1) whether the dishonest and fraudulent acts of a director committed while performing acts which come within the scope of the usual duties of an employee are covered by the bonds; and, if so, (2) whether the District Court was correct in finding that Steiner’s acts in connection with the purchase of the notes were dishonest and fraudulent, and (3) that his acts came within the scope of the usual duties of an employee of the Bank.

All three bonds cover any loss realized through the dishonest and fraudulent acts of any Employee, as that term is defined in the bonds. It is conceded, however, that Steiner was not an officer, clerk or employee of the Bank at any time between July 18, 1963, and March 10, 1964, and that he did not take part in the day-to-day operations of the Bank. Instead, the FDIC claims coverage under an exception in an exclusion clause dealing with the acts of directors, which provides:

This bond does not cover * * * any loss resulting from any act or acts of any director of the Insured other than one employed as a salaried, pensioned or elected official or an Employee of the Insured, except when performing acts coming within the scope of the usual duties of an Employee, or while acting as a member of any committee duly elected or appointed by resolution of the board of directors of the Insured to perform specific, as distinguished from general, directorial acts on behalf of the Insured. (Emphasis supplied).

In its Conclusions of Law, the District Court held that “Loss from the dishonest and fraudulent acts of a director, which acts come within the scope of the usual duties of an employee, are covered by the bonds issued by the defendants herein”. On the other hand, the appellants argue that the proper construction of the provision would limit coverage to the acts of a director who has at the same time an officer or employee of the Bank and, more precisely, to only those acts which “come within the scope of the usual duties of an Employee” and are authorized by the Board of Directors or by the proper officer. We cannot agree with the appellants’ interpretation.

In construing fidelity bonds, courts follow the liberal rules applicable to insurance contracts. However, the bond cannot be extended by implication, or enlarged by construction beyond the actual terms of the agreement entered into by the parties. Great American Insurance Co. v. Langdeau, 379 S.W.2d 62, 65 (Tex.1964). Likewise, a contract of insurance as any other contract must be read as a whole and, where possible, effect given to the entire contract, American Casualty Co. of Reading, Pa. v. Myrick, 5 Cir. 1962, 304 F.2d 179, 184, and the language used in insurance policies is given its usual and popular meaning unless it is ambiguous or is shown that the parties intended it to have a special meaning. Northwestern National Life Insurance Co. v. Black, 383 S.W.2d 806 (Tex.Civ.App.1964). Furthermore, the purpose of an exception is to take something out of the contract which otherwise would have been included in it. American Casualty Co. of Reading, Pa. v. Myrick, supra.

Reading the controverted provision in the light of these rules of construction, it is apparent a general rule is established by the exclusion clause in question that the bond does not cover the loss resulting from the act of a director of the Insured unless he is “employed as a salaried, pensioned or elected official or Employee of the Insured”. The remainder of the clause, however, establishes an exception to this general rule so that if a director is “performing acts coming within the scope of the usual duties of an Employee, or while acting as a member of any committee duly elected or appointed by resolution of the board of directors of the Insured to perform specific, as distinguished from general, directorial acts on behalf of the Insured”, those acts are within the coverage of the bonds. The District Court is correct in its construction of the provision.⁷

The District Court found as a matter of fact: (1) that, after a brief examination of the notes at the offices of San Jacinto Title Company prior to closing the deal, Steiner knew that they violated the instructions given him by the Deputy Comptroller of the Currency; (2) that Steiner told the Bank’s president that the notes had been checked by an attorney for the Bank, knowing this to be untrue, in arranging for the issuance of the check to purchase the notes; and (3) that at the time he signed the purchaser’s statement he knew Valley National Mortgage Company was to receive $189,186.04 and that Valley National was a front for Morris and Garrett. These findings are amply supported by the record. The Court further found that these acts were dishonest and fraudulent and were acts coming within the scope of the usual duties of an employee of the Bank.

In Great American Insurance Co. v. Langdeau, supra, the Texas Supreme Court has recently held that:

“To constitute fraudulent and dishonest conduct, the employee must have some degree of intent to perform the wrongful action. There must be the physical act plus the mental state for there to be fraud. (Citing cases.) The intent need not be of the degree required for criminal conduct. (Citing cases.) On the other hand mere negligence, carelessness or incompetence is insufficient. (Citing cases.) If the employee has knowledge of and aids in concealing another person’s wrongful conduct, it has been held that he, himself, is guilty of that same wrongful conduct. (Citing cases.)” 379 S.W.2d at 65.

Likewise, the words “dishonest” and “fraudulent” used in reference to conduct covered by the bond are to be given a broad meaning, Irvin Jacobs & Co. v. Fidelity & Deposit Co. of Maryland, 7 Cir. 1953, 202 F.2d 794, and both misrepresentation of facts and deliberate deception by pretense and stealth constitute dishonest and fraudulent conduct. National Surety Corp. v. Rauscher, Pierce & Co., 5 Cir. 1966, 369 F.2d 572, cert. den. 386 U.S. 1018, 87 S.Ct. 1375, 18 L.Ed.2d 456, and Maryland Casualty Co. v. American Trust Co., 5 Cir. 1934, 71 F.2d 137, cert. den. 293 U.S. 582, 55 S.Ct. 95, 79 L.Ed. 678. Moreover, it is not necessary that the person covered by the fidelity bond personally profit by his acts. Irvin Jacobs & Co. v. Fidelity & Deposit Co. of Maryland, supra, 202 F.2d at 798.

In light of these principles, there can be no doubt that the District Court was correct in finding Steiner’s conduct in connection with the purchase of the notes “dishonest and fraudulent”. Steiner was first and always the agent of Morris and Garrett. His conduct only illustrates his disregard for the responsibilities he had to the Bank and his preoccupation with furthering the designs of Morris and Garrett. He acted for the interests of Morris and Garrett while he led the Bank to believe that he acted in its interest, and when these two sets of interests conflicted, he did not hesitate to keep information from the Bank which it had a right to know or to follow blindly the instructions of Morris and Garrett when, in the Bank’s interest, he should have refused to do so.

Likewise, the District Court was correct in holding that Steiner’s acts in connection with the purchase of the notes were “acts coming within the scope of the usual duties of an Employee”. While it is true that a director exercises his office only through the collective action of the Board of which he is a member and that a director has no individual power of action ,^as does an officer who is usually elected or appointed to perform specific duties as agent of the corporation by the Board of Directors, Georgia Casualty and Surety Co. v. Seaboard Surety Co., N.D.Ga.1962, 210 F.Supp. 644, 651, aff’d without opinion 5 Cir. 1964, 327 F.2d 666, there is nothing to prevent a board of directors from authorizing one of its members to act in an officer-like capacity for the corporation in a particular transaction. This is precisely what took place here. On October 3, 1963, the Board authorized the purchase of the notes in question “subject to the approval of Mr. Matt Steiner, Chairman of the Board of The First National Bank, Marlin, Texas,” and it is uncontroverted that Steiner was the only person present to represent the Bank in the subsequent purchase transaction. The Board of Directors made it even more clear that Steiner was acting in an officer-like capacity for the Bank in the note transaction by its approval of his handling of the matter (insofar as the facts were known to the innocent members of the Board) in its resolution of October 9, 1963. Steiner was in no way a usurper of authority, as was the case in the Georgia Casualty and Surety case. Steiner’s actions in connection with the purchase of the notes, with the exception of his participation in the actions of the Board of Directors which authorized the purchase, were acts coming within the scope of the usual duties of an officer of the Bank, a position included within the definition of “Employee” in the bonds. Steiner’s actions in connection with the purchase of the notes were, therefore, within the coverage provided by the bonds. Furthermore, these actions resulted in the Bank’s purchase of the nonconforming notes, the possession of which caused the Bank to be closed and resulted in the loss for which recovery is being sought here.

The second question presented by this appeal is whether the notice requirements of the bonds were met. Each of the bonds provide:

At the earliest practicable moment after discovery of any loss hereunder the Insured shall give the Underwriter written notice thereof and shall also within six months after such discovery furnish to the Underwriter affirmative proof of loss with full particulars.

The District Court held as a matter of law that “Notice was given by Plaintiff to each Defendant and the Proofs of Loss were filed by Plaintiff with each Defendant within the time limits set out in the Defendants’ bonds, in that neither the Bank nor any director or officer not in collusion with the person in default had knowledge of the fact that Joseph Morris and Bernard Garrett received $189,186.04 from the transaction involved herein and the Bank did not know that Steiner had knowledge of this fact until on or about March 10, 1964”. The appellants argue that notice was not given at the earliest practicable moment in that the Bank discovered the loss on October 9, 1963, when the Bank’s cashier examined three of the notes and found that they did not conform with the requirements of the National Banking Act, supra, and that notice was not given until March 18, 1964. The appellants, however, are laboring under a misapprehension. The purchase of nonconforming notes, in and of itself, did not constitute the fraudulent and dishonest conduct upon which liability under the bonds is predicated. Rather, the fraud and dishonesty arose out of the fact that Steiner participated in the purchase of these notes knowing that their purchase would violate the instructions given him by the Deputy Comptroller of the Currency; misrepresented to the president of the Bank that an attorney for the Bank had passed on the bonds in procuring the issuance of the check for their purchase; and finally, and most importantly, that Steiner participated in the transaction knowing that Morris and Garrett were to receive $189,186.04 out of the purchase price of the notes and then failed to relay this information to the Bank. The word “loss” as used in the notice requirements of the bonds means the date the fraud was discovered by the Bank — not the date the Bank was called upon to make good the loss. Mount Vernon Bank & Trust Co. v. Aetna Casualty and Sur. Co., E.D.Va.1963, 224 F.Supp. 666 (construing an identical notice requirement). Thus, the “loss” here was not discovered when the nonconforming nature of the notes was discovered, but when Steiner’s fraudulent conduct came to light after the Bank was closed and placed in receivership.

The fact that the nonconforming nature of the notes was discovered by the Bank in October of 1963, however, does raise the question whether the Bank was then placed on notice that the note transaction might involve something more than merely the purchase of nonconforming notes and was obligated to inquire further into the transaction and give notice of its suspicions to the insurance companies. The well-established rule is that the Insured under a blanket employee’s fidelity bond is not bound to give notice “until he [has] acquired knowledge of some specific fraudulent or dishonest act which might involve the [Insurer] in liability for the misconduct”. Notice is not required when the obligee merely suspects or has reason to suspect the wrongdoing. American Surety Co. v. Pauly, 170 U.S. 133, 144, 18 S.Ct. 552, 42 L.Ed. 977 (1898). Accord, United States Fidelity & Guaranty Co. v. Walker, 5 Cir. 1918, 248 F. 42. See 129 A.L.R. 1411 and 23 A.L.R.2d 1065. In other words, the Bank was not required to give notice to the insurance companies at the time the nonconforming nature of the notes was discovered even if it did have reasons to suspect wrongdoing. The District Court was, therefore, correct in holding that notice had been given within the time limits established by the bonds.

The appellants further contend that the loss is not within the coverage of the bonds because the purchase of the nonconforming notes was an act of the Bank, in that knowledge of the nonconforming nature of the notes is imputed to the Bank through the knowledge of its officers and directors and the information contained in its records and, in spite of this knowledge, the Bank ratified, approved and adopted as its own the purchase of the nonconforming notes, and that there is no coverage for the wrongful or dishonest act of the Bank under the bonds. This contention lacks merit for several reasons. First, the fraud consisted of Steiner’s actions in connection with the purchase of the notes, not the purchase of the nonconforming notes as such. Secondly, the knowledge of Steiner and the directors associated with him cannot be imputed to the Bank since they were acting adversely to its interests. First Texas Joint Stock Land Bank v. Chapman, 48 S.W.2d 651 (Tex.Civ.App., 1932). Thirdly, the Board of Directors of the Bank lacked the power to authorize the dishonest and fraudulent acts of Steiner. Minor v. Mechanics’ Bank of Alexandria, 26 U.S. (1 Pet.) 46, 7 L.Ed. 47 (1828).

The judgment of the District Court is affirmed.

Affirmed.

1 . The Travelers bond provides:

(A) Any loss through any dishonest, fraudulent or criminal act of any of the Employees, committed anywhere and whether committed alone or in collusion with others, including loss of Property through any such act of any of the Employees.

The U.S.F. & Cl. bond provides:

(A) Through any dishonest act of any of the Employees committed anywhere and whether committed alone or in collusion with others.

The Aetna bond provides:

* * * through any dishonest, fraudulent or criminal act committed anywhere by any of the Employees, acting alone or in collusion with others * * »

Each of the bonds define the term “Employee” in essentially the same language:

Wherever used in this bond, Employee and Employees shall be deemed to mean, respectively, one or more of the Insured’s officers, clerks and other employees while employed in, at or by any of the Insured’s offices while covered under this bond, and attorneys retained by the Insured to perform legal services for the Insured and the employees of such attorneys while such attorneys or the employees of such attorneys are performing such services for the Insured, and Guest Students pursuing their studies or duties in any of said offices.

2 . The Minutes of the Directors’ Meeting of September 11, 1963, read in part:

On motion of Matt Steiner seconded by Roger Harrold and carried, the Bank was instructed to accept $500,000.00 in Certificate of Deposits from The Guaranty Depository to pay 4% Interest for one year. The Mainland Bank & Trust Company of Texas City will deposit $500,000 without Interest for the same length of time. This money will be invested in Houston Real Estate Notes at 6 to 8% interest. None of the notes will be over our limit of $20,000.-00 and will be bought at a discount of $5,000.00. The amount of the notes will be around $1,000,000.00. The R/E notes are subject to approval of our Attorneys. The Bank has entered into contract with Valley National Corp. of Houston to collect and service the notes for 1%.

3 . The Minutes of the Board meeting of October 3, 1963, read, in part, as follows:

That the Riverside National Bank of Houston is to purchase for the account of this bank first lien Real Estate notes subject to the approval of Mr. Matt Steiner, Chairman of the Board of The First National Bank, Marlin; Texas.

The Riverside National Bank of Houston, Texas, is to service the notes for 1% service charge.

4 . The letter of October 2nd stated: “We are willing to purchase $1,000,000 in Real Estate 1st Lien Notes from you. We will allow you 1% for servicing these notes. Our Chairman of the Board, Mr. Matt Steiner, will handle the transaction.” The letter of October 3rd refers to a telephone conversation and states: ‘This is your authority to purchase for our account the above mentioned notes subject to the approval of our Chairman of the Board, Mr. Matt Steiner, who will approve notes for this Bank.” The letter also mentioned servicing the notes and the October 3rd resolution.

5 . The Minutes of the October 9th Board of Directors’ Meeting read, in part, as follows :

Minutes of Meeting September 11th and October 3rd were read and approved.

Referring to Minutes of September lltli and October 3rd wherein we recorded in the minutes two different Banks were to service Real Estate Notes for 1% that we were purchasing, Chairman of the Board Mr. Matt Steiner made a deal with the Medical Center National Bank to do this service for one-half of one percent.

We sent Mr. Steiner a check for $970,000 to purchase Real Estate Notes in Houston, Texas. He purchased $968,121.40 worth of notes and returned the check for the difference of $1,878.60.

We, also, got a discount of $30,000 less accrued interest of $7,680.74 leaving a balance of $22,319.26 for which amount we received a check.

6 . On June 25, 1964, the PDIO, as receiver, sold the entire package of 101 notes and mortgages for the sum of $503,700.00, realizing sale expenses of $8,300. The Bank had collected up to this time the aggregate sum of $42,039.17 on account of principal and interest due and payable on the notes and mortgages.

The District Court approved the sale and the amount so realized as the highest offer that could be obtained for the notes, and mortgages.

7 . It is interesting to note, although it is in no way binding on this Court, that the apparent expectation in the industry concerning the Exclusion Clause is compatible with the construction reached here. In a discussion of bankers blanket bonds in Insurance and Protective Committee of The American Bankers Association, Digest of Bank Insurance, p. 5b, it is reported :

Losses caused by directors who are not salaried, pensioned or elected officials or employees are excluded from coverage under all three forms. On June 11, 1951, however, Forms 2 and 24 were amended so a-s not to exclude losses resulting from acts of directors while they are performing the duties of employees or are acting as members of a committee appointed by the board of directors to perform specific acts. Previously a rider was available to effect this amendment. (Emphasis added.)