Renasant Bank v. St. Paul Mercury Insurance Co. , 882 F.3d 203 ( 2018 )

Case: 17-60168 Document: 00514338752 Page: 1 Date Filed: 02/06/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 17-60168
Fifth Circuit
FILED
February 6, 2018
RENASANT BANK, Lyle W. Cayce
Clerk
Plaintiff - Appellant
v.
ST. PAUL MERCURY INSURANCE COMPANY,
Defendant - Appellee
Appeal from the United States District Court
for the Northern District of Mississippi
Before DAVIS, HAYNES, and COSTA, Circuit Judges.
HAYNES, Circuit Judge:
A Mississippi statute, Miss. Code Ann. § 81-5-15, requires bank
employees to post fidelity bonds that protect against “acts of dishonesty.”
Renasant Bank did not require its employees to post such bonds. Instead, like
most banks today, it purchased a Financial Institution Bond, which covers
losses caused by employees only when certain criteria are met (“the Bond”). At
issue in this case, inter alia, is whether the Bond’s criteria improperly limit
coverage in light of § 81-5-15’s allegedly broad mandate.
Assuming arguendo that the Bond is governed by § 81-5-15, we conclude
that the Bond’s terms are enforceable as written because they are consistent
with the statute. We also agree with the district court’s conclusion that
Case: 17-60168 Document: 00514338752 Page: 2 Date Filed: 02/06/2018
No. 17-60168
Renasant Bank failed to produce evidence necessary to its breach-of-contract
claim and, therefore, that St. Paul Insurance Mercury Insurance Co. (“St. Paul
Insurance”) is entitled to summary judgment. Accordingly, we AFFIRM.
I. Factual and Procedural Background
In September 2008, Renasant Bank obtained a Financial Institution
Bond from St. Paul Insurance. Relevant to this appeal, the Bond covers “[l]oss
resulting directly from . . . [d]ishonest or fraudulent acts committed by an
Employee.” When losses result directly or indirectly from loans, however, the
Bond limits coverage to situations where the employee extending the loan:
(i) acted with the intent to cause the Insured to
sustain such a loss;
(ii) was in collusion with one or more parties to the
transaction; and
(iii) has received, in connection therewith, an
improper financial benefit.
Alternatively, if the employee did not receive “an improper financial
benefit,” the Bond covers losses resulting from loans if:
(i) other persons with whom the Employee was
dishonestly or fraudulently acting in collusion
received proceeds from the Loan . . . ; and
(ii) the Insured establishes that the Employee
intended to share or participate in the proceeds
of the Loan . . . .
A “financial benefit,” the Bond explains, “does not include any employee
benefits earned in the normal course of employment, including: salaries,
commissions, fees, bonuses, promotions, awards, profit sharing or pensions.”
In July 2009, Renasant Bank notified St. Paul Insurance of potential
losses resulting from allegedly dishonest or fraudulent lending activities of a
former employee (“the Employee”). Renasant Bank apparently learned of
these activities upon reviewing certain outstanding loans in late 2007, as the
2
Case: 17-60168 Document: 00514338752 Page: 3 Date Filed: 02/06/2018
No. 17-60168
real estate market deteriorated. According to Renasant Bank, in 2006, the
Employee approved two multi-million dollar real estate development loans
(“the Loans”) that she knew were secured by less collateral (i.e., land acreage)
than she initially represented to the bank in obtaining the bank’s authorization
for the Loans. Renasant Bank also claims the Employee knowingly allowed
improper loan disbursements to the developers of the land, who provided
inadequate documentation verifying the legitimacy of those disbursements.
Renasant Bank submitted a formal claim to St. Paul Insurance for
approximately $7.77 million in alleged losses, consisting of the combined
outstanding payoff amounts and accrued interest and penalties, which St. Paul
Insurance denied. Thereafter, Renasant Bank sued St. Paul Insurance for
breach of contract based on the denial of its claim. In its complaint, Renasant
Bank claimed that the Employee colluded with one or more of the developers
by extending credit for projects which promised the developers substantial
front-end profits in exchange for improper financial benefits, such as gifts,
entertainment, and travel. But in response to St. Paul Insurance’s motion for
summary judgment, Renasant Bank did not claim that the Employee received
any financial benefits other than the allegedly improper financial benefit in
the form of commissions on the Loans.
The district court concluded that the Bond was enforceable as written
and that Renasant Bank failed to show that the Employee received “an
improper financial benefit,” as required and defined by the Bond. The district
court thus concluded that the Bond did not cover Renasant Bank’s alleged
losses as a matter of law, and St. Paul Insurance was entitled to summary
judgment. Renasant Bank now appeals the district court’s decision.
II. Standard of Review
“We review an order granting summary judgment de novo, applying the
same standards as the district court.” Cooley v. Hous. Auth. of Slidell, 747 F.3d
3
 Case: 17-60168 Document: 00514338752 Page: 4 Date Filed: 02/06/2018
No. 17-60168
295, 297 (5th Cir. 2014). “The court shall grant summary judgment if the
movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a).
Additionally, “[w]e review the district court’s interpretation of the bond
contract de novo.” First Nat’l Bank of Louisville v. Lustig, 96 F.3d 1554, 1569
(5th Cir. 1996).
III. Discussion
A. Validity of the Bond
The parties first dispute whether the Bond’s criteria for covering loan
losses are legally enforceable. Renasant Bank argues that the Bond is a
“statutory bond,” meaning a bond required by statute, specifically, Miss. Code
Ann. § 81-5-15. It further argues that the Bond’s criteria improperly provide
less coverage for employee dishonesty than § 81-5-15 allows, and therefore that
those criteria are unenforceable. 1 St. Paul Insurance responds that the Bond
is fully enforceable because its terms are consistent with § 81-5-15 or,
alternatively, because the Bond is not the type of bond contemplated by § 81-
5-15, which actually references a bond procured by the employee herself rather
than by the bank. We note that Renasant Bank is in the awkward position of
asking this court to treat the Bond as one governed by § 81-5-15 based on
modern business practice, while simultaneously asking us to ignore modern
practice in determining what § 81-5-15 requires. Nonetheless, we conclude
that it is unnecessary to decide whether the Bond is a statutory bond required
by § 81-5-15 because, assuming arguendo that it is a statutory bond, the terms
of the Bond are consistent with the statute.
1 Miss. Code Ann. § 81-5-15 requires bank employees to post fidelity bonds that protect
against losses resulting from both their own “acts of dishonesty” and their “violation of any
of the provisions of the banking laws of Mississippi.” Renasant Bank has not alleged that St.
Paul Insurance refuses to cover losses caused by employee violations of state banking laws.
Therefore, we do not address this aspect of the statute.
4
Case: 17-60168 Document: 00514338752 Page: 5 Date Filed: 02/06/2018
No. 17-60168
When analyzing a statutory bond, we review it “in the light of the statute
creating the duty to give security.” Am. Cas. Co. v. Irvin, 426 F.2d 647, 650
(5th Cir. 1970). “[T]he provisions of the statute and regulations will be read
into the bond.” Id. “[I]f a statutory bond contains provisions which do not
comply with the requirements of law, they may be eliminated as surplusage
and denied legal effect.” Id. That is to say, terms that conflict with the relevant
statute must be “read out” of a statutory bond.
Section 81-5-15 of the Mississippi Code reads, in relevant part, as
follows:
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.
Every banking corporation shall provide adequate
insurance protection and indemnity against robbery
and burglary and other similar insurable losses.
There are no Mississippi court cases interpreting § 81-5-15. But the
Mississippi Supreme Court has taken a similar approach to other types of
statutory bonds as we have, asking whether a statutory bond’s terms conflict
with the statute before declaring them unenforceable. See State v. Moody, 198
So. 2d 586, 588–89 (Miss. 1967); Adams v. Williams, 52 So. 865, 868–69 (Miss.
5
Case: 17-60168 Document: 00514338752 Page: 6 Date Filed: 02/06/2018
No. 17-60168
1910); see also Commercial Bank of Magee v. Evans, 112 So. 482, 483 (Miss.
1927) (stating that the court will “write into” a statutory bond any missing
conditions required by the governing statute).
Section 81-5-15 of the Mississippi Code requires that fidelity bonds
obtained pursuant to the statute “shall protect . . . against any loss . . .
incur[red] by reason of the acts of dishonesty” of covered bank employees.
Renasant Bank argues that the Bond violates the plain meaning of § 81-5-15.
We disagree.
First, the statute requires “fidelity bond[s]” as protection against
employee dishonesty. Consistent with this policy, the Bond’s criteria for
covering loan losses define “dishonesty” in a way that preserves “the distinction
between fidelity insurers (who cover embezzlement and embezzlement-type
acts) and credit insurers.” 10-112 New Appleman on Insurance Law Library
Edition § 112.07[1] (2017) (discussing the similar criteria of the industry’s
standard insurance policy form, Financial Institution Bond Standard Form No.
24); see also Calcasieu-Marine Nat’l Bank of Lake Charles v. Am. Emp’rs Ins.
Co., 533 F.2d 290, 299 (5th Cir. 1976) (stating that a banker’s blanket bond
under Louisiana law “is not a policy of credit insurance and does not protect
the bank when it simply makes a bad business deal”); Fed. Deposit Ins. Corp.
v. St. Paul Fire & Marine Ins. Co., 942 F.2d 1032, 1036–37 (6th Cir. 1991)
(concluding that a similar bank bond covered losses caused by an employee’s
intent to defraud her employer, not losses caused by overreaching or “reckless
and imprudent” business judgment); Glusband v. Fittin Cunningham &
Lauzon, Inc., 892 F.2d 208, 210–12 (2d Cir. 1989) (limiting similar bond
provisions’ coverage to embezzlement or “embezzlement-like” acts).
More specifically, requiring intent to cause the bank a loss distinguishes
the employee who “may use fraudulent documents for loans, believing that
they would be successfully paid,” from the truly unfaithful employee who
6
Case: 17-60168 Document: 00514338752 Page: 7 Date Filed: 02/06/2018
No. 17-60168
intends to cheat the bank. See Lustig, 961 F.2d at 1166. Collusion with others
is a function of lending with such dishonest intentions and thus is a reasonable
construction of the statute’s requirement to cover dishonesty. See 10-112 New
Appleman on Insurance § 112.07[1] (stating that collusion is “a hallmark of
embezzlement or embezzlement-type activity”). Similarly, requiring receipt of
a financial benefit outside the employee’s normal compensation scheme, or an
intent to share in loan proceeds, excludes from coverage situations where
employees act imprudently to boost their employer’s profits, reflecting bad
business judgment rather than a disposition to steal from the bank. See id.
(“[B]ank employees (and people in general) typically do not steal for others
without any quid pro quo.”). The only circuit court to also consider this issue
in analyzing a very similar state statutory requirement likewise concluded
that such bond provisions were consistent with the statute. See First Dakota
Nat’l Bank v. Saint Paul Fire & Marine Ins. Co., 2 F.3d 801, 808 (8th Cir. 1993).
Second, as our sister circuit also indicated, approval by state banking
regulators supports a conclusion that a bond is legally enforceable under state
law. See id. Here, § 81-5-15 states that the amounts of bonds obtained
pursuant to the statute are “subject . . . to approval of the state comptroller
and the same shall be inspected upon the examination of the bank.” Given the
absence of evidence that the state has found bonds similar to the Bond to
violate the statute, 2 we conclude that this factor supports St. Paul’s argument.
Third, a contrary interpretation is less compatible with the reason for
the statute in the first place, which is generally, as both parties agree, to
protect the state’s banking system. Cf. Moore v. Bank of Indianola Liquidating
2The Bond’s disputed criteria closely resemble that contained in the standard
industry policy, Standard Form No. 24, which banks throughout the nation widely use. See
10-112 New Appleman on Insurance § 112.01.
7
Case: 17-60168 Document: 00514338752 Page: 8 Date Filed: 02/06/2018
No. 17-60168
Corp., 184 So. 305, 307 (Miss. 1938) (stating that the state’s banking laws were
established “for the benefit of the depositors, creditors, and stockholders of the
banks”). 3 If we were to read Mississippi law as requiring coverage for all
employee losses, we would read out the limitation that the Bond cover
“dishonesty.” Ignoring this limitation greatly magnifies the risk to the
insurance company and the perverse incentives for banks to act in a risky
fashion knowing all losses would be covered. Cf. Glusband, 892 F.2d at 212
(observing that an expansive understanding of employee dishonesty coverage
in the securities trading context would encourage greater moral hazard than
one limited to covering embezzlement); RICHARD S. CARNELL, JONATHAN R.
MACEY & GEOFFREY P. MILLER, THE LAW OF FINANCIAL INSTITUTIONS 281–82
(5th ed. 2013) (explaining how insurance encourages moral hazard, which is
“one of the most crucial economic concepts in banking policy”). This is why
“[p]rivate insurance markets have developed various mechanisms to reduce
moral hazard,” such as excluding from coverage acts of self-injury. CARNELL,
MACEY & MILLER, supra, at 282. Indeed, the risk of loan-related losses would
otherwise be too high to profitably insure against; insurers would leave the
market or raise premiums substantially. See 10-111 New Appleman on
Insurance Law Library Edition § 111.01[7][a][i] (2017); 10-112 New Appleman
on Insurance § 112.02; 11-138 New Appleman on Insurance Law Library
Edition § 138.01[2] (2017) (“Surety bonds, unlike traditional insurance
products, are written with an expectation of zero loss. Accordingly, a surety
3 Miss. Code Ann. § 81-5-15 was enacted in 1934, a year after the nation’s banking
system collapsed after a wave of preceding panics. See RICHARD S. CARNELL, JONATHAN R.
MACEY & GEOFFREY P. MILLER, THE LAW OF FINANCIAL INSTITUTIONS 18–20 (5th ed. 2013).
Although the statute’s recorded history is lacking, the timing of its enactment and general
mandate indicate a policy of protecting the state’s banking system.
8
Case: 17-60168 Document: 00514338752 Page: 9 Date Filed: 02/06/2018
No. 17-60168
bond will only be provided to a person or entity that has demonstrated the
ability to perform the bonded obligations.”).
Reviewing the Bond in light of the statute and the above considerations,
we conclude that the district court properly gave full effect to the Bond’s
criteria for covering loan-related losses.
B. Summary Judgment
The district court determined that Renasant Bank’s breach-of-contract
claim failed as a matter of law because the bank did not produce any evidence
that the Employee received an improper financial benefit, as the Bond
requires. Renasant Bank does not appeal the district court’s conclusion that it
failed to provide evidence of the Employee receiving improper gifts,
entertainment and travel, as originally alleged in its complaint. We therefore
turn to Renasant Bank’s argument that the Employee’s commissions on the
Loans are an “improper financial benefit.”
Financial Institution Bonds are a form of insurance contracts between
the insurer and insured, and are thus subject to the general rules of contract
interpretation. See Calcasieu-Marine Nat’l Bank, 533 F.2d at 295 (construing
bankers blanket bond as an insurance contract); ACS Constr. Co. of Miss. v.
CGU, 332 F.3d 885, 888 (5th Cir. 2003) (“Under Mississippi law, an insurance
policy is a contract subject to the general rules of contract interpretation.”)
(citing Clark v. State Farm Mut. Auto. Ins. Co., 725 So. 2d 779, 781 (Miss.
1998)); see also Irvin, 426 F.2d at 650 (“[T]he liability of a surety on a bond
which is plain and unambiguous is governed, like any other contract, by the
intention of the parties as expressed in the instrument.”); 10-111 New
Appleman on Insurance Law § 111.01[2]–[3]. We must consider the insurance
contract “as a whole, with all relevant clauses together.” U.S. Fid. & Guar. Co.
v. Martin, 998 So. 2d 956, 963 (Miss. 2008). “No rule of construction requires
or permits [Mississippi courts] to make a contract differing from that made by
9
Case: 17-60168 Document: 00514338752 Page: 10 Date Filed: 02/06/2018
No. 17-60168
the parties themselves, or to enlarge an insurance company’s obligations where
the provisions of its policy are clear.” Leonard v. Nationwide Mut. Ins. Co., 499
F.3d 419, 429 (5th Cir. 2007) (alterations in original) (quoting State Auto. Mut.
Ins. Co. of Columbus v. Glover, 176 So. 2d 256, 258 (Miss. 1965)).
Under the Bond, “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.”
Renasant Bank argues this language excludes only commissions that are
“earned in the normal course.” Because the Employee here allegedly obtained
commissions through dishonest and fraudulent acts, Renasant Bank says
those commissions were not “earned in the normal course,” and therefore, they
count as an improper financial benefit that triggers coverage under the Bond.
We disagree with Renasant Bank’s strained reading. The phrase
“earned in the normal course” plainly modifies the phrase “employee benefits.”
The two phrases go together and identify a general category (i.e., “employee
benefits earned in the normal course”). Then, “including:” signals that what
follows are specific examples of “employee benefits earned in the normal
course.” Therefore, commissions are a specific example of “employee benefits
earned in the normal course.” 4 As this court has explained in another case
involving a very similar provision: “The language excluding salaries [and
commissions, fees, bonuses, etc.] presumes that there are acts of employee
dishonesty that result in increased employee benefits that the insured and
insurer agreed to exclude from coverage.” Performance Autoplex II. Ltd. v.
Mid-Continent Cas. Co., 322 F.3d 847, 858 (5th Cir. 2003) (per curiam); see also
4 Renasant Bank argues that this reading renders “earned in the normal course of
employment” superfluous. We disagree. The phrase gives specificity to the meaning of
“employee benefits,” distinguishing benefits or anything of value received by employees that
are part of the bank’s usual compensation scheme from those that are not.
10
Case: 17-60168 Document: 00514338752 Page: 11 Date Filed: 02/06/2018
No. 17-60168
Watson Quality Ford, Inc. v. Great River Ins. Co., 909 So. 2d 1196, 1200 (Miss.
Ct. App. 2005).
We therefore agree with the district court that the Bond does not count
commissions as the type of financial benefit that triggers coverage. This
interpretation is the most natural way to read the Bond and is consistent with
what other circuit courts have concluded in construing such language. See R
& J Enterprizes v. Gen. Cas. Co. of Wis., 627 F.3d 723, 726–28 (8th Cir. 2010);
Resolution Tr. Corp. v. Fid. & Deposit Co. of Md., 205 F.3d 615, 645–48 (3d Cir.
2000); Mun. Secur., Inc. v. Ins. Co. of N. Am., 829 F.2d 7, 9–10 (6th Cir. 1987)
(per curiam); James B. Lansing Sound, Inc. v. Nat’l Union Fire Ins. Co., 801
F.2d 1560, 1567 (9th Cir. 1986); see also 10-112 New Appleman on Insurance
§ 112.06[3] (summarizing the majority rule on the issue).
Renasant Bank next argues that the “financial benefit” issue does not
dispose of its claim, because the Bond has an alternative coverage provision.
Under this provision, where an employee does not receive an improper
financial benefit, the Bond may still cover loan-related losses if the employee
colluded with others who received loan proceeds and the employee “intended
to share or participate in” those proceeds. The district court did not rule on
this alternative ground, but “[w]e may affirm on any grounds supported by the
record, even if those grounds were not relied upon by the lower courts.” In re
Plunk, 481 F.3d 302, 305 (5th Cir. 2007).
As a threshold matter, Renasant Bank is incorrect that St. Paul
Insurance never moved for summary judgment on this issue. St. Paul
Insurance’s filings in support of summary judgment expressly asserted, and
presented affirmative evidence indicating, that Renasant Bank was unable to
show “improper financial benefit or an established intent to share in the loan
proceeds.”
11
Case: 17-60168 Document: 00514338752 Page: 12 Date Filed: 02/06/2018
No. 17-60168
The Employee denied any such intent, and Renasant Bank failed to
proffer any competent summary judgment evidence that would support a
finding that the Employee intended to share in the Loans’ proceeds. Indeed,
Renasant Bank admitted that it had no non-speculative evidence that the
Employee intended to share in the Loans’ proceeds. When asked in a
deposition whether there was any such proof “beyond speculation and a
theory,” the bank’s representative replied, “Nothing in our hands today.”
Renasant Bank also acknowledged that, despite issuing a number of third-
party subpoenas, it had no documents showing that the Employee had the
requisite intent. On this record, Renasant Bank has not provided sufficient
evidence to raise a genuine issue of material fact regarding the Employee’s
intent to share or participate in the Loans’ proceeds.
IV.
For the forgoing reasons, we AFFIRM summary judgment in favor of St.
Paul Insurance.
12