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September 23, 1971

ESSEX COUNTY STATE BANK, a Banking corporation, chartered by the State of New Jersey, Plaintiff,
FIREMAN'S FUND INSURANCE COMPANY, a corporation of the State of California, and Aetna Casualty and Surety Company, a corporation of the State of Connecticut, Defendants. AETNA CASUALTY AND SURETY COMPANY, a corporation of the State of Connecticut, and Fireman's Fund Insurance Company, Defendants-Third-Party Plaintiff, v. Kenneth B. WINTERS, Third-Party Defendant

Lacey, District Judge.

The opinion of the court was delivered by: LACEY

LACEY, District Judge:

 Plaintiff, Essex County State Bank (Bank), a New Jersey banking corporation, sues Fireman's Fund Insurance Company (Fireman's), a California corporation, and The Aetna Casualty and Surety Company (Aetna), a Connecticut corporation, on a "Bankers Blanket Bond." Originally brought in state court, this diversity action was removed to this Court. 28 U.S.C. § 1441; 28 U.S.C. § 1332. Trial herein was had without a jury on September 16 and 17, 1971. This Memorandum Opinion constitutes this Court's Findings of Fact and Conclusions of Law, pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.


 Mr. Kenneth B. Winters (Winters) became president and a director of the Bank on March 3, 1965. His duties, authority, and responsibility were broadly defined by letter to him of that date, over the signature of the Bank's Board Chairman, Mr. Murray R. Klepesch (Klepesch), drafted by the Bank's counsel, Mr. Arnold R. Kent (Kent), also a director and secretary of the Bank. The letter conferred upon Winters, unconditionally and without restriction, unsecured loan authority up to $25,000, subject only, as the evidence was later to demonstrate, to the requirement that such loans when made would be subsequently presented for Board review. *fn1"

 On September 19, 1966, Winters granted a $25,000 loan to Mr. Martin Pinnas (Pinnas), of which the Bank was subsequently only able to recover $10,000. The Bank's claim in this action is that Winters made this loan in direct violation of explicit Board instructions and it was therefore a "dishonest" act under defendants' fidelity bonds, both of which cover (Insuring Clause A): *fn2"

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.

 Defendants deny that the Pinnas loan was a "dishonest" act under their policies, argue that it was within Winters' authority, and interpose as well the affirmative defenses of plaintiff's failure to comply with bond requirements of notice and time limitations for instituting suit. *fn3" The defendant Fireman's also contends that "discovery of loss" occurred after the expiration of its bond which ran from 1964 to January 31, 1967, and that it is "discovery of loss" which is the critical event, rather than when the alleged "dishonest" act was committed. The defendant Aetna asserts the corollary proposition, that the "dishonest" act did not occur within the term of its bond which began February 1, 1967; and that the plaintiff, as of February 1, 1967, having had sufficient knowledge of the basic facts comprising the instant claim, that is, a loan in violation of Board instructions, was obliged under the bond to call to Aetna's attention the existence of these facts in its bond application. Moreover, Aetna contends, the Bank's omission in this respect served to cancel Aetna's bond.

 The defendants have each filed third-party indemnity claims against Winters. Winters has responded that he acted within his authority and denies any dishonest conduct or collusion with Pinnas.

 The controversy can thus be distilled to this principal question: Was the Pinnas loan knowingly made by Winters in direct violation of orders of the Board of Directors? The plaintiff states it was, and thus was a "dishonest" act. Defendants and Winters contend to the contrary. As a subsidiary question, plaintiff's counsel assumed at trial an added burden to justify his cross examination of Winters: That plaintiff had to show (and would prove) that Winters knew when he granted the Pinnas loan that he was acting contrary to the Bank's best interests.

 Kent testified for the Bank on the "dishonest" act issue. He stated that at a Board meeting prior to September 19, 1966, at a time he was unable to approximate, certain names were discussed as possible additions to the Board. The Board Chairman (Klepesch) proposed Pinnas. Certain unidentified directors were critical of Pinnas' financial stability, however, and his name was rejected, and in this context, according to Kent, the Board told Winters not to extend a loan to Pinnas. This injunction was not recorded in the minutes; however, Kent explained this away by indicating that the entire discussion took place during an informal session after a regular Board meeting. At the time of this meeting Pinnas had no relationship with the Bank, and the Bank's directors had no knowledge or reason leading them to believe Pinnas would ever apply to the Bank for a loan. *fn4"

 Winters confirmed that several months prior to September 19, 1966, a discussion occurred, at a Board meeting, of possible new directors, that Pinnas' name had been proposed, unfavorably received, and rejected; but he flatly denied receipt of orders from the Board not to extend credit to Pinnas. *fn5" Winters did not know Pinnas at this time. Subsequently he met him through Klepesch; and thereafter, and prior to September 19, 1966, Pinnas had brought certain accounts to the bank. The $25,000 loan in question was applied for by Pinnas on September 19, 1966, and granted by Winters after a credit investigation. Plaintiff faults this investigation but does not go so far as to contend that the issue of Board instructions aside, the loan transaction thereby became a "dishonest" act. The investigative materials were all incorporated in the accessible loan file; the majority of banks contacted commented favorably upon Pinnas; there is no suggestion that Winters concealed or falsified data, acted fraudulently, or personally profited from the loan; and in all respects his investigative product was available for Board review when he proceeded subsequently to notify the Board of the loan.

  When the Board, consistent with routine procedures, was on October 4, 1966, notified by Winters of the loan, it instructed him to recover it immediately. ($10,000 had been repaid by the time Winters left the Bank in March, 1967). The Bank advanced testimony that the directors at the meeting were upset because Winters had violated their instructions. *fn6" Winters denied any reference having been made by the Board at this meeting to previous instructions. Contrary to what would be reasonable to expect, given the alleged egregious violation of Board instructions, there is no recordation of this alleged violation of orders in the minutes of this meeting. Winters, it is noted, did nothing to conceal having made the loan: On the contrary, everything about it was presented to the Board in the ordinary course, and plaintiff's Pre-Trial Contentions in this regard (non-disclosure of the loan), were not only not proved, they were abandoned. The directors at the time had complete access to the loan file, but there is nothing to indicate that the Board was moved by the events of the meeting to call for its production or review. Similarly, there is no evidence that the Bank at this point in time was critical of the investigation conducted by Winters.

 Finally, auditors reviewed the Pinnas loan transaction in March, 1967, and there is no evidence they found any fault with Winters' investigative procedures or with the loan itself. The auditors were told there was a "claim pending," necessarily a reference to a civil suit against ...

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