Exhibit,Appendix: JOYCE JUELCH, ET AL VS. ASBESTOS DEFENDANTS (B/P)AS REFLECTED ON EXHIBITS et al

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McKenna Lone &
ALDRIDGE LLP
ATIDRNEYS AT LAW
BAN FRANCISCO

LISA L. OBERG (BAR NO. 120139)
DANIEL B. HOYE (BAR NO. 139683}

ALECIA E. COTTON (BAR NO. 252777)

MCKENNA LONG & ALDRIDGE LLP ELECTRONICALLY

101 California Street FILED

4ist Floor Superior Court of California,

San Francisco, CA 94111 County of San Francisco

Telephone: (415) 267-4000

Facsimile: (415) 267-4198 APR A 3 2010
BY: CHRISTLE ARRIOLA

Attorneys for Defendant Deputy Clerk

METALCLAD INSULATION CORPORATION

SUPERIOR CouRT OF THE STATE OF CALIFORNIA

COUNTY OF SAN FRANCISCO

JOYCE JUELCH and Case No, CGC-09-275212
NORMAN JUELCH, SR.,
COMPENDIUM OF OUT-OF-STATE
AUTHORITIES IN SUPPORT OF DEFENDANT’S
Motion In Limine REGARDING JURY

Plaintiffs, INSTRUCTION ON APPORTIONMENT OF
DAMAGES BETWEEN CIGARETTE SMOKING
v. AND ASBESTOS EXPOSURE [MHL 30}
ASBESTOS DEFENDANTS, (BP), et al., TRIAL DATE: APRIL 5, 2010
Depr.: 604

JUDGE: HonoraBLe Maria J. MILLER

Defendants.

Attached are true and correct copies of out-of-state authority cited in Defendant
METALCLAD INSULATION CORPORATION’s Motion Ji Limine No. 30, pursuant to
California Rules of Court 3.1110(f and 3.1113():

Cases

Fidelity Savings and Loan Association v. Aetna Life and Casuay Conporation

(1977) 440 F Supp. 862... _-Exhibit A
Pratectus Alpha Navigation Co., Ltd v.
(1985) 767 F.2d 1379..... ... Exhibit B

COMPENDIUM OF OUT-OF-STATE AUTHORITIES IN SUPPORT OF OEFENDANTS MOTION IN LIMINE REGARDING JURY INSTRUCTION ON
APPORTIONMENT GF DAMAGES BETWEEN CIGARETTE SMOKING AND ASBESTOS EXPOSURE. [MIL 30}

SF2741 8586.3‘|

28

McKenna Lona &
ALORBCE LLP
ATTORNEYS AT Law

Gideon v. Johns-Manvitle Sales Corp.
(1985) 761 F.2d 1129.

Dated: — April 5, 2010

Lisa L. OBERG
DANIEL B. HOYE
ALECIA E. COTTON

Attorneys for Defendant
METALCLAD INSULATION
CORPORATION

-2-

COMPENDIUM OF OUT-OF-STATE AUTHORITIES IN SUPPORT OF DEFENDANT'S MOTION IN LIMINE REGARDING JURY INSTRUCTION ON

SAN FRANCISCO

APPORTIONMENT OF DAMAGES BETWEEN CIGARETTE SMOKING AND ASBESTOS EXPOSURE [MIL 30}
‘SF:27418580.1Exhibit AWestlaw,

440 F.Supp. 862
{Cite as: 440 F.Supp. 862)

H
United States District Court, N. D. California.

FIDELITY SAVINGS AND LOAN ASSOCIA-
TION, a corporation, Plaintiff, .

v.
AETNA LIFE AND CASUALTY CORPORATION,
a corporation, Fireman's Fund Insurance Company, a
corporation, Republic Insurance Company, a corpora-
tion, et al., Defendants.
SECURITY SAVINGS AND LOAN ASSOCIA-
TION, a California Corporation, Plaintiff,

vv
FIDELITY AND DEPOSIT COMPANY OF
MARYLAND, a Maryland Corporation, Defendant.
Nos. C-51126, C-45642.

Aug. 31, 1977.

Depositor of certificates of deposit and depositor of
certificates of deposit and a commercial checking
account brought action against their respective insur-
ers to recover under standard savings and loan asso-
ciation blanket bond providing insured wonld be in-
demnified for any loss of property occurring through
any other form of fraud or dishonesty. The District
Court, Peckham, Chief Judge, held that: (1) depositor
of certificates of deposit established that bank's
fraudulent misrepresentation resulted in loss, thus
entitling it to recover under standard blanket bond,
and {2} where logical and equitable apportionment
between dishonesty and other factors leading to fail-
ure of bank could be made in accordance with for-
raula proposed, depositors could recover under their
dishonest loan theory of liability im accordance with
the formula,

‘Order entered.

West Headnotes
IH Fraud 184 3
184 Fraud

184] Deception Constituting Fraud, and Liability
Therefor
184k2 Elements of Actual Fraud

Page I

184k3 k. In General. Most Cited Cases
Under California law, a cause of action based upon
fraudulent smisrepresentation requires a showing of
misrepresentation, scienter, intent to induce reliance,
actual reliance, justifiable reliance, and resulting
damages, .

2] Insurance 217 ©2412

217 Insurance
217XVUN Coverage-Fidelity and Guaranty tn-
surance
217k2412 k. Evidence. Most Cited Cases
(ormerly 217k437.1(3.1), 217k437.1G))

In action brought by depositor of certificates of de-
posit against insurer to recover under standard sav-
ings and loan association blanket bond providing
insured would be indemnified for any loss: of prop-
erty occurring through any other form of fraud, evi-
dence, incinding a showing that board chairman of
depositor was sufficiently concerned about bank's
previous default on $250,000 certificate of deposit to
request 2 meeting with bank president to receive as-
surances and that he agreed to renewal of the
$700,000 certificate only after receiving such assur-
ances coupled with prontise of immediate payment of
overdue certificate, in absence of evidence that board
chairman had ever been misled by president in their
previous dealings, was sufficient to support finding
that board chairman actually relied upon misrepre-
sentations of bank president, despite previous trans-
actions between board chairman and bank president
which resulted in inflation of assets of bank.

[3] Fraud 184 €22(1)

(184 Fraud
1841 Deception Constituting Fraud, and Liability
OF

184k19 Reliance on Representations and In-
ducement to Act
84k22 Duty to Investigate
184k22(1) k. In General. Most Cited

Cases

Under California law, where falsity of defendant's
representations should unquestionably have been
discovered by the plaintiff, justifiable reliance is ab-

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.440 F.Supp. 862
(Cite as: 440 F.Supp. 862)

sent and recovery for fraud barred.
[4] Fraud 184 C21

(184 Fraud
184] Deception Constituting Fraud, and Liability
Therefor
184k19 Reliance on Representations and In-
ducement to Act
18421 k. Persons Who May Rely on Rep-
tesentations, Most Cited Cases

Insurance 217 €72406(3)

217 Insurance

217XVUI Coverage--Fidelity and Guaranty In-
surance

217k2404 Risks Covered and Exclusions
217k2406 Employee Fraud or Dishonesty
217k2406(3) k. Nature of Acts Cov-

ered; Intent. Mc is
Although board chairman of depositor of certificates
of deposit had previously engaged in possible im-
proper transactions with bank president in which
board chairman allegedly assisted bank president to
inflate the assets of bank on “call dates,” dates upon
which all banks must report their balance sheet to the
Comptoller of the Currency, where, from all appear-
ances, transactions were performed simply as “win-
dow dressing” to exaggerate what was, so far as
board chairman knew, an adequate financial perform-
ance, and where various transactions did not raise
implication of dishonesty so pervasive as to make
board chairman's reliance on bank president unjusti-
fied in all of their contacts, board chairman's reliance
‘on bank president's specific representations regarding
financial health of bank, as well as his explanation of
bank's previous default on depositor’s $250,000 cer-
tificate of deposit, was justified for purposes of estab-
lishing fraud under insurance policy.

{31 Insurance 217 ©2405

207 Insurance
21L7XVIN Coverage--Fidelity and Guaranty In~
surance
217k2404 Risks Covered and Exclusions
21742405 k, In General. Most Cited Cases
{Formerly 217k430Q))
Where board chairman of depositor of certificates of

Page 2

deposit justifiably relied upon bank president's repre-
sentations of bank's financial stability so as to renew
depositor's certificate of deposit, fraud was estab-
lished so as to permit depositor to recover under
standard savings and Joan association blanket bond
providing insured would be indemnified for any loss
of property occurring through any form of fraud,

[6] Insurance 217 ©2405

217 Insurance

2LIXVEI Coverage-Fidelity and Guaranty In-
surance

217k2404 Risks Covered and Exclusions
217K2405 k. In General. Most Cited Cases

(Formerly 217k430(2))
Where Comptroller of Currency was closely monitor-
ing condition of bank and bank was able to meet its
obligations as they fell due, it was not “dishonest?
within meaning of standard savings and loan associa-
tion blanket bond for bank to continue to accept de-
posits and, thus, depositor who suffered loss due to
closing of bank could not recover under bond,

[2] Banks and Banking 52 €=54(2)

32 Banks and Banking
52H Banking Corporations and Associations
S21I(D) Officers and Agents

52k53 Rights and Liabilities as to Bank and

Stockholders
52kS54 Nature and Extent
52k54(2) k. Misappropriation of

Funds. Most Cited Cases
Pocketing of loan fees by president of bank was ille-
gal misapplication of bank funds, 18 U.S.C.A, § 646.

18} Insurance 217 ©2405

217 Insurance

21TXVIIL Coverage—Fidelity and Guaranty In-
surance

217K2404 Risks Covered and Exclusions
2172405 k. In General. Most Cited Cases

(Formerly 217k430(2))
Where a loan fee was taken by president of bank and
credit was extended beyond what would be justified
by reasonable banking standards, loan fee loan was
extended “dishonestly” within meaning of standard
savings and loan association blanket bond providing

© 2010 Thomson Reuters. No Claim to Orig, US Gov. Works,440 F Supp. 962
(Cite as: 449 F.Supp. 862)

insured would be indemnified for any loss of prop-
erty occurring through any other form of fraud or
dishonesty.

19} Insurance 217 C2405

217 Insurance

21TXVIN Coverage—Fidelity and Guaranty In-
surance:

217K2404 Risks Covered and Exclusions
21242405 k, In General. Most Cited Cases

(Formerly 217&430(2))
Loans made to borrowers by bank prior to their pay-
ment of a loan fee were not “dishonest” within mean-
ing of standard savings and loan association blanket
bond providing insured would be indemnified for any
loss of property occurring through any other form of
fraud or dishonesty.

118] Insurance 217 C2405

217 Insurance

217XVIIl Coverage-Fidelity and Guaranty In-
surance

217k2404 Risks Covered and Exclusions
21742405 k, In General. Most Cited Cases

(Formerly 217k430(2))
Loans made by bank president subsequent to pay-
ment of loan fee would be characterized as “dishon-
est” under standard savings and loan association
blanket bond providing insured would be indemnified
for any loss of property occurring through any other
form of fraud or dishonesty.

111] Insurance 217 ©2405

217 Insurance

217XVITI Coverage—Fidelity and Guaranty In-
‘surance

2172404 Risks Covered and Exclusions
21742405 k. In General. Most Cited Cases

(Formerly 217k430(2))
Although loans exceeding in amount the bank's lend-
ing limit for individual borrowers are in violation of
banking regulations, in absence of a loan fee or other
evidence of dishonest purpose, those loans would not
be characterized.as “dishonest” under standard blan-
ket bond providing insured would be indemnified for
any loss of property occurring through any other
form of fraud or dishonesty.

Page 3

[12] Insurance 217 2405

217 Insurance

2ITXVIN Coverage--Fidelity and Guaranty In-
surance

217k2404 Risks Covered and Exclusions
217K2405 k. In General. Most Cited Cases

(Formerly 217k430(2))
Where loans were made to borrowers for purpose of
purchasing bank stock and where borrowers were
ancreditworthy, loan was “dishonest” within meaning
of standard savings and loan association blanket bond
providing insured would be indemnified for any loss
of property occurring through any other form of fraud
or dishonesty.

[13] Insurance 217 ©2407

247 Insurance

217TXVHI Coverage--Fidelity and Guaranty In-

surance: .
2172407 k. Amounts Payable. Most Cited

Cases

(Formerly 217k512(1)}
Standard savings and loan association blanket bond
providing insured would be indenmified for any Joss
of property occurring through any other form of fraud
or dishonesty did not contemplate that, whenever
dishonesty is one of several factors responsible for
failure of a bank wherein insured has deposited
funds, the insurer would necessarily be liable for the
entire loss; rather, where there is no basis for con-
cluding that dishonesty alone was sufficient to cause
bank to fail, blanket bond contemplated an appor-
tionment of damages between dishonesty and other
factors. -

[14] Insurance 217 ©2411

217 Insurance

21TXVUL Coverage--Fidelity and Guaranty In-
surance

217k2409 Other Insurance
2172411 k. Proration or Allocation. Most

Cited Cases

(Formerly 217k430(2))
Where logical and equitable apportionment between
dishonesty and other factors which caused bank to
fail could be made by computing total unpaid bal-

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.440 F Supp. 862
(Cite as: 440 F.Supp. 862)

ances of dishonest loans as of present date and com-
paring that figure to total unpaid balance of all loans
whereby a percentage figure would be derived which
would then be applied against depositors’ individual
losses to calculate the proportion of their respective
losses attributable to dishonesty, depositors would
recover under their dishonest loan theory of liability
under standard blanket bond providing insured would
be indemnified for any loss of property occurring
through any other form of fraud or dishonesty.

*864 John H. Finger, Hoberg, Finger & Brown, San
Francisco, Cal., for plaintiff Security Sav. and Loan
Ass'n.

Jon H, Kouba, Trump, Kouba & Dickson, San Fran-
cisco, Cal., for plaintiff Fidelity Say, and Loan Ass'n.

Scott Conley, Douglas M. Moore, Jr., Sedgwick, De-
tert, Moran & Arnold, San Francisco, Cal., for defen-
dants Fidelity and Deposit Co. of Maryland, Aetna
Life and Cas. Co., and Fireman's Fund Ins. Co.

MEMORANDUM AND ORDER
PECKHAM, Chief Judge.

These consolidated cases arise generally from the
failure of the San Francisco National Bank (hereafter
“SFNB”). That bank was closed by the Comptroller
of the Currency on January 22, 1965, after a period of
its economic distress. On the date of closure, plaintiff
Security Savings and Loan Association (hereafter
“Security”) had on deposit with the bank certificates
of deposit totaling $600,000. The predecessors in
interest to plaintiff Fidelity Savings and *865 Loan
Association (hereafter “Fidelity”} had on deposit
$1,204,669.40, in the form of certificates of deposit
and a commercial checking account. Neither plaintiff
recovered its deposits in full 2

ENL, Fidelity’s predecessors in interest in-
chide Transbay Savings, which had on de-
posit $1,000,000 in the form of a certificate
of deposit dated May 7, 1964 and $4,669.40
in a commercial checking account, a3 well
as Beneficial Savings, which had on deposit
$200,000 in the form of two certificates of
deposit each in the sum of $100,000 dated
July 22, 1964 and October 21, 1964.

Page 4

FN2. The Federal Deposit Insurance Corpo-
ration (“FDIC”) paid each party the insur-
ance proceeds due depositors in federalty in-
sured banks and, as receiver of the SFNB,
the FDIC paid depositors a liquidating divi-
dend of over 52% of the deposits, leaving
umrecovered the total sum of $488,345.64
for Fidelity, and $243,434.05 for Security.

At the time of the bank's failure, both Security and
Fidelity were insured by the respective defendants
ander a standard savings and loan association blanket
bond, Form No. 22, as required by 12 CFR. §
563.19. Clause (E) of these bonds provided that the
insured would be indemnified for, “(a)ny loss of
Property (occurring) through any other form of fraud
or dishonesty by any person or persons whether em-
Ployees or not.” Contending that the loss of their de-
posits resulted from various fraudulent or dishonest
acts of the SFNB, plaintiffs brought this action to
recover their losses pursuant to the blanket bond.

EN3, The instant actions were initially con-
solidated with numerous other suits brought
in the wake of SFNB's failure by savings
and loan associations seeking recovery on
their respective blanket bonds. The other ac-
tions were settled prior to trial.

A brief history will help place the issues raised by the
parties into context. The San Francisco National
Bank began operations approximately June 1, 1962.
Management of the bank was largely vested in Don-
ald C. Silverthorne, its president and board chairman.
Almost from the bank's inception, Silverthome en-
gaged in the practice of extending credit of the bank
in exchange for the payment of “oan -fees.” Such
fees, over and above normal interest charges, were
personally pocketed by Silverthome. In some cases
they were split between Silverthome and Mr. Wil-
liam S. Bennett, whose personal guarantee was fre-
quently the basis for extension of credit. Over 60
borrowers paid loan fees kept by Silver- thome.

Most of the borrowers receiving credit in exchange
for loan fees were not creditworthy. Combined with a
large number of additional uncollectable loans, not
involving loan fees, the assets of the bank were seri-
ously weakened.

These conditions were discovered by the Comptroller

©2010 Thomson Reuters. No Claim to Orig. US Gov. Works.440 F.Supp. 862
{Cite as: 440 F.Supp. 862)

of the Currency during the course of a routine exami-
nation of the bank conducted in May and June, 1964,
The Comptroller ordered weekly visitations to the
SFNB by federal bank examiners, as a means of
monitoring efforts to strengthen the bank’s financial
position. The bank was able to meet its obligations as
they fell due during the remainder of 1964 only
through heavy borrowing from the Federal Reserve
Bank. The SFNB did not have sufficient resources,
however, to meet the demands created by a heavy
concentration of certificates of deposit maturing in
January, 1965. On January 22, 1965, the bank was
finally closed by the Comptroller of the Currency.

In a series of pretrial rulings, this court concluded
that it had Jurisdiction over the subject matter of the
instant controversy, that the applicable blanket
bonds were sufficiently broad to encompass loss of
savings and loan association funds deposited in bank-
ing institudons if such loss was caused by fraud or
dishonesty," that certain claims had been waived by
the parties, * and, Gnally, that various pattems of
conduct might constitute “fraud” or “dishonesty”
under the terms of the bond 2

FN4. See Order of May 15, 1969.

ENS. See Orders of November 21, 1972,
November 24, 1974 and January 10, 1975.

ENS. See Order of January 16, 1975.

EN7. See Memorandum of October 22,
1974, and Order of January 10, 1975.

*866 At trial, plaintiffs advanced three theories of
recovery, The first, applicable only to the Security
canse of action, is that Silverthome fraudulently in-
duced Security to renew a maturing certificate of
deposit by making false representations as to SFNB's
financial soundness. Plaintiffs’ second theory, appli-
cable to both Security and Fidelity, is that SFNB's
acceptance of their respective deposits was dishonest,
inasmuch as the bank was, at the time of acceptance,
insolvent within the knowledge of its managing offi-
cers. Finally, both plaintiffs contend that the making
of dishonest loans by the SFNB caused the bank to
fail, and thus that “dishonesty” is responsible for their
losses. We address these theories in turn.

Page 5

(A) Security's Fraudulent Misrepresentation Claim

The facts. upon which Security premises its claim of
fraudulent misrepresentation may be summarized as
follows. During the fall of 1964, Security had on de-
posit with the SFNB several certificates of deposit.
One was in the amount of $250,000, with a maturity
date of September 6, 1964. Another was a $700,000
certificate of deposit, maturing on October 20, 1964.
The bank failed to pay the former certificate as it fell
due. Concemed about that default, as well as pay-
ment of the $700,000 certificate about to mature,
John J. Peters, board chairman of Security, arranged a
meeting with Silverthorne to discuss these matters.
Peters, accompanied by Lowell H. Duggan, a board
member of Security, met with Silverthorne prior to
October 20, 1964.

At that meeting, according to the uncontradicted tes-
timony of Peters and Duggan, Silverthome made
express representations of SFNB's financial sound-
ness. He stated that the bank's earnings were strong,
that there were no particular problems with the loan
portfolio, and that he expected to be able to meet
withdrawal demands adequately. Silverthorne blamed
the previous default on a temporary liquidity shortage
induced by banking regulatory changes limiting the
amount of certificates of deposit permissibly held in
banks by savings and loan associations, thereby caus-
ing nonrenewal of many certificates of deposit. Peters
and Duggan were aware of these regulatory changes.
At no time did Silverthorne reveal that SFNB was
financially unstable, that tie bank was being closely
monitored by the Comptroller of the Currency, that
many assets of the bank were of questionable value,
or that there was a possibility of financial failure.

Silverthorne promised immediate payment on the
overdue certificate of deposit, but requested that
payment on the $700,000 certificate be spread out
over a period of months to help alleviate the liquidity
crunch. Peters agreed to this arrangement. The
$700,000 certificate was thereafter surrendered, and
seven separate certificates in the amount of $100,000
each were issued in its stead. The first such certificate
matured in November, 1964, while the others were to
mature in subsequent months. As promised, the over-
due $250,000 certificate was paid, as was the first
maturing $100,000 certificate. No further payments
were received by Security,

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.440 F.Supp. 862
(Cite as; 440 F.Supp. 862)

Security contends that the renewal of its $700,000
certificate of deposit was fraudulently induced by
Silverthorne, and thus that their loss resulted from a
peril insured against by the blanket bond. Both par-
ties have looked to California law to define the ele~
menis of fraudulent misrepresentation.

11 A cause of action based upon fraudulent misrep-
resentation requires a showing of six distinct ele~
ments: (1) misrepresentation; (2) scienter; (3) intent
to induce reliance; (4) actual reliance; (5) justifiable
reliance, and (6) resulting damages. See Witkin,
Summary of California Law. Torts § 446, at 2711.
Defendant "does not seriously contest the fact that
Silverthorne misrepresented to Peters and Duggan the
financial condition of SFNB, that Silverthorne knew
these representations to be *867 false, nor that the
representations were intended to induce Security to
renew its certificate of deposit. Rather, defendant's
contention is that the elements of actual and justifi-
able reliance are absent.

ENS. With respect to the section of this
opinion concerned with Security's fraud
* cause of action, “defendant” refers to defen-
dant Fidelity and Deposit Company of
Maryland, while “plaintiff” refers to Secu-
tity Savings and Loan Association.

Defendant's reliance argument is premised upon the
contention that Silverthome and Peters participated
together in a series of questionable financial transac-
tions between their respective institutions, and thus
that Peters had knowledge of the irresponsible and
unethical manner in which Silverthorne managed the
SFNB. Either Peters suspected that the bank must be
financially unsound and did not rely upon Silver-
thorne’s representations, defendant contends, or Pe-
ters at the least knew enough that such reliance was
unjustifiable without an independent investigation.

A brief summary of defendant's charges of unethical
conduct by Peters and Silverthome is necessary to
bring the issues presented into clear focus. In sub-
stance, defendant alleges that: (1) Peters cooperated
with Silverthorne to inflate the assets of SFNB by
making a $5,000,000 deposit of Security funds for a
short period coinciding with a date upon which
SENB (in conjunction with all other banks) had to
disclose its balance sheet to the Comptroller of the
Currency; (2) in an unrelated transaction, Peters ar-

Page 6

ranged to inflate the- assets of both Security and
SFNB through a complex transaction involving the
deliberate floating of two checks in such a manner as
to have the same $4,000,000 appear simultaneously
as assets in both institutions over the year end; and
(3) Peters arranged a $250,000 deposit of Security
funds in SFNB on the same day that he received a
personal loan from SFNB in the amount of $300,000.
The proceeds of the Peters loan were in turn loaned
to Mr. Harry Stockman, later a SFNB director, who
had already borrowed to SFNB's legal lending limit.
The Stockman loan was repaid by Stockman's bor-
rowing of funds from the SFNB, after Security‘s sis-
ter corporation, Sequoia Mortgage Company, reduced
Stockman's liability to the SFNB by purchasing one
of Stockman's loans from SFNB.

Based upon these transactions, defendant urges the
court to draw the inference that Peters placed no ac-
tual or justifiable reliance upon the misrepresenta-
tions made by Silverthome. Actual reliance is absent,
defendant contends, because “(g)iven his personal
knowledge of Silverthorne, Peters did not rely on his
‘statements, but rather on his belief that if the bank got
into trouble the Federal Reserve would step in and
save the bank.” Defendant Fidelity and Deposit
Company's Post Trial Brief, p. 14. Even assuming
that Peters in fact relied upon Silverthorne, defendant
contends, such reliance was not justified without in-
dependent inquiry or investigations as to the tue
condition of the bank.

[2] We believe that the evidence clearly supports the
finding that Peters actually relied upon the misrepre-
sentations of Silverthorne. We so conclude for sev-
eral reasons.

First, there is significant circumstantial evidence sug-
gesting such reliance. Peters was sufficiently con-
cerned about the previous default on the $250,000
certificate of deposit to request a meeting with Silver-
thorne to receive assurances. He agreed to the re-
newal of the $700,000 certificate only after receiving
such assurances coupled with the promise of immedi-
ate payment of the overdue certificate. There is no
evidence that Peters had ever been misled by Silver-
thorne in their previous dealings, and thus little basis
upon which to infer that Peters would have disbe-
lieved him on this occasion. Nor is there any evi-
dence that Peters had actual knowledge of SFNB's
weak financial condition. Silverthome's explanation

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.440 F.Supp, 362
(Cite as: 440 F.Supp. 862)

of the prior default was relatively credible, inasmuch
8 it related to changes in banking regulations regard-
ing savings and Joan association deposits in banking
institutions, a regulation of which Peters was aware.
Finally, Peters did subsequently refuse a request by
SFNB officials to renew an unrelated $300,000 cer-
tificate of deposit maturing on December 30, 1964.
At the time of this request, Silverthorne had been
temoved as president of the bank, and the possibility
of serious trouble *868 in the bank was finally evi-
dent. In short, it seems highly unlikely that Peters
would have renewed the $700,000 certificate of de-
posit had Silverthorne honestly answered Peters’ in-
quiries regarding the condition of the bank and the
reasons for the prior default.

Second, the transactions questioned by defendant
have only tangential relevance to the actual reliance
issue. None forms an adequate basis for inferring that
Peters actually knew or suspected that the bank was
in financially weakened condition as the result of the
extension of unjustified credit. Nor is there evidence
that Silverthome had previously misled or deceived
Peters in any way. In that light, the fact of an estab-
lished working relationship between Peters and
Silverthorne, regardless of the ethics of the transac-
tions involved, tends to strengthen rather than
weaken the inference of actual reliance. Accordingly,
we conclude that Peters actually relied on Silver-
thorne's misrepresentations, and turn to defendant's
primary argument, that Peters' reliance was unjusti-
fied,

‘The Califomia rule of justifiable reliance was elabo-
tated by Justice Traynor in Seeger v. Odell, 18 Cal.2d
409, 115 P.2d 977 (4941):

‘it must appear, however, not only that the plaintiff
acted in reliance on the misrepresentation but that he
was justified in his reliance . . . Negligence on the
part of the person in failing to discover the falsity of a
Statement is no defense when the misrepresentation
was intentional rather than negligent .. . The fact that
an investigation would have revealed the falsity of
the misrepresentation will not alone bar his recovery .
.. Nor is the plaintiff held to the standard of precau-
tion or of minimum knowledge of a hypothetical rea-
sonable man .. . If the conduct of the plaintiff in the
light of his own intelligence and information was
manifestly unreasonable, however, he will be denied
@ recovery, (Citations omitted.) “He may not put faith

Page 7

it representations which are preposterous, or which
are shown by facts within his observation to be so
patently false that he must have closed his eyes to
avoid discovery of the truth . . .” (citations omitted).

18 Cal.2d at 414-15, 115 P.2d at 980-981. Seeger's
liberal rule of justifiable reliance has been given fre-
quent application by the California courts. See e. g,,

Anderson v. Thacher, 76 Cal.App.2d 50, 172 P.2d
_ 533.0246);

lowes, 82 Cal.App.2:

O19:Mever vy, Ford M: 7:
Cal.App.2d 90,79 Cal Rptr. 816 (1969); Hartong v.
M42, 72

(1968); Kahn v. Lischner, 128 Cal.App.2d 480,275
P.2d S39 (1954); Hefferan v. Freebaim, 34 Cal2d
715,214 P.2d 386 (1950).

{3] Hefferan v. Freebaim, supra, is relatively typical.
There, plaintiff sued te rescind a contract purchasing
defendant's business, on the ground that recent earn-
ings of the business had been misrepresented, Apply-
ing Seeger, Justice Traynor affirmed the lower court's
finding of justifiable reliance despite plaintiff's ex-
amination of defendant's profit and loss statement
indicating substantially lower profits than those pre-
viously represented by the defendant, Defendant had
explained the discrepancy by the fact that certain
trade rebates were not shown on the statement. Plain-
tiffs' reliance on defendant's explanation, and failure
to further investigate, were not viewed by the court as
sufficiently unreasonable to bar recovery. See also
Blackman v. Howes, supra; Meyer v. Ford Motor
Company, supra ; and Hartong v. Partake, supra, In
contrast, where the falsity of the defendant's repre-
sentations should unquestionably have been discov-
ered by the plaintiff, justifiable reliance is absent, and
recovery for fraud barred. See ¢. g., Carpenter v.
Hamilton, 18 Cal App.2d 59, 62 P.2d 1397 (1936);
Cameron y, Cameron, 88 Cal.App.2d $85, 199 P2d
445 (1948); Carter_v. Seaboard Finance Co. 33
Cal.2d 564, 203 P.2d 758 (1949),

4] Defendant contends that, in view of Peters’
knowledge regarding the management of SFNB by
Silverthorme, Peters was unjustified in accepting
Silverthorne's representations*869 without an inde-
pendent investigation to determine the facts. We dis-
agree, and conclude for the reasons stated below that
Peters’ reliance was justified under the applicable
standard, despite possible impropriety in the prior
conduct of the parties.

© 2010 Thomson Reuters, No Claim to Orig. US Gov. Works.440 F.Supp. 862
(Cite as: 440 ¥.Supp. 862)

At the onset we observe that the dispositive issue
presented in this litigation is not whether the previous
transactions between Peters and Silverthome were
laudable. Rather, the issue is whether, on the particu-
lar occasion in question, Peters was deceived by
Silverthome into renewing the $700,000 certificate of
deposit. In examining the transactions questioned by
defendant, therefore, inquiry must be focused upon
whether they support the conclusion that Peters was
sufficiently aware of the condition of SFNB, or of
Silverthome's proclivity for misrepresentation, that
reliance was unjustified.

‘The first two transactions raised by the defendant are
instances in which Peters allegedly assisted Silver-
thorne. to inflate the assets of SFNB on “call dates,”
dates upon which all banks must report their balance
sheet to the Comptroller of the Currency.2% On the
first occasion, over the June 30, 1963, call date, Secu-
tity made a short-term deposit in the amount of
$5,000,000 in SFNB. Apparently, however, the prac-
tice of banks soliciting short-term deposits to boost
their call date assets was not particularly uncommon
at the time in question, sec testimony of Mr. Suther-
land, Tr. 2393-94, and the transaction may have had a
valid economic purpose from Security's perspective
in allowing it to receive interest on short-term funds,
On the other hand, the amount involved was substan-
tial, and Silverthorne apparently violated banking
regulations in allowing early withdrawal of the cer-
tificate.

EN. There are four “call dates” cach year.
Two dates are “floating” dates, not an-
nounced in advance by the Comptroller,
while the others fall on June 30 and Decem-
ber 31 of each year.

The second call date transaction, over the 1963 year
end, involves more serious charges. Here defendant
alleges that Security participated in the inflation of
SFNB assets not by making a direct deposit into
SFNB, but rather by withholding collection of a
check drawn on SFNB in such a manner that the
same $4,000,000 would appear on the books of both
institutions simultaneously. 5% Despite Security's
vigorous denial that it participated in an intentional
float of the funds, the circumstances are highly suspi-
cious.

Page 8

ENIQ. The transaction was initiated when
Security sought to increase its own deposits
by 35,000,000 over the year end. Security's
purpose was to take advantage of a proposed
change in regulations relating to savings and
loan associations thought to be premised
upon the volume of an association's deposits
at the time in question. Security arranged
for Mr. Stockman to borrow $5,000,000
from United California Bank on December
30, 1963 and to deposit these funds into Se-
curity. Before so doing, however, Stockanan
deposited $4,000,000 of the funds into
SFNB in the form of a certificate of de-
posit. He then wrote a $4,000,000 check on
his personal checking account with SFNB
and deposited the check into Security.
(Stockman did not have sufficient funds in
his checking account to cover the check at
the time of deposit.) Security did not deposit
the Stockman check into its own account
with United California Bank until January 2,
1964. Consequently, the funds appeared as
deposits with Security over the year end, and
as a certificate of deposit in SFNB. The
withdrawal of funds from SFNB represented
by the Stockman check was not recorded
over the year end because of the float.

FN1L. On the one hand, the transaction was
undertaken by Security for its own purposes,
unrelated to the SFNB, all participants de~
nied that Security had purposely withheld
the SFNB check from collection in order to
create a float, and a float could have been
created without overt manipulation of the
parties if the transaction had been performed
on December 31, 1963 (so that even if put
through for collection in the normal course
of business it would not have cleared until
January 2). On the other hand, Security had
helped inflate the assets of SFNB over the
previous fixed call date, and it seems almost
inconceivable that Security would inadver-
tently delay collection of a check in such a
substantial amount.

Even assuming that the call date transactions oc-
curred as charged by the defendant, however, we find
the evidence insufficient to deny recovery by Secu-
tity. While in no sense condoning the conduct al-

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.440 F Supp. 862
{Cite as: 440 F.Supp. 862)

leged, we *870 conclude that these transactions are
simply too far attenuated from the substance of
Silverthorne's misrepresentations at issue in the in-
stant case to negate justifiable reliance.

First, we note that the transactions alleged do not
Support the inference that Peters knew or should have
known that SFNB was in serious financial trouble.
There is no suggestion in the record that cither of the
tall date transactions were done for the purpose of
concealing an otherwise questionable or weak finan-
cial condition, From all appearances, the transactions
were performed simply as “window dressing” to ex-
aggerate what was, so far as Peters knew, an adequate
financial performance.™2 Thus, Peters cannot realis-
tically be viewed as possessing substantive knowl-
edge contradicting Silverthorne's representations.

EN12. What made SFNB's financial condi-
tion perilous was not its assets as reported
on call date balance sheets, but rather the
fact that many of the assets reported there
were worthless. There is no evidence that
Peters knew or should have known of these
conditions.

Second, while the various transactions detailed above
suggest Silverthome's capacity for misrepresentation,
we do not feel that the implication of dishonesty
thereby arising was so pervasive as to make Peters!
reliance on him unjustified in all other contexts.’
On balance, we conclude that Peters’ reliance on
Silverthome's specific representations regarding the
financial health of SFNB, as well as his explanation
of the bank's previous default on Security's $250,000
certificate of deposit, was justified.

EN13, The third transaction questioned by
defendants, in which Peters allegedly used
Security funds as a compensating balance
for a personal loan from SFNB, while sug-
gesting a conflict of interest in Peters’ man-
agement of Security's affairs, adds litle in-
formation about SFNB relevant to this litiga-
tion.

[5] Accordingly, we find for plaintiff Security on its
fraud cause of action.

(®) Plaintiffs! “Insolvency” Claim

Page 9

{6] Plaintiffs' second theory of lability, applicable to
both Security and Fidelity, is that SFNB's acceptance
of their respective deposits while insolvent to the
knowledge of Silverthome, its president, was “dis-
honest” within the meaning of the blanket bond. The
parties dispute both the applicable definition of insol-
vency and, assuming that plaintifis' definition is
adopted, whether SFNB was insolvent within the
knowledge of Silverthome at the time of the deposits
in question.

The parties have sought authoritative guidance as to
the meaning of the term “insolvent” by looking to
cases defining that term as utilized by the National
Banking Act, 12 U.S.C. § 21 et seq. Plaintiffs con-
tend that 8 national bank is insolvent whenever it has
an excess of liabilities over assets, while defendant
argues that “insolvency” under the National Banking
Act requires that the bank be unable to pay its debts
as they mature in the ordinary course of business.

We find it unnecessary to determine what “insol-
vency” means for National Banking Act purposes, for
we do not view the meaning of the term as utilized
there dispositive of the instant claim. Under the Na-
tional Banking Act, the Comptroller of the Currency,
acting in the public interest, is delegated certain
broad powers upon the insolvency of a national bank.
‘That the policy considerations inherent in determin-
ing the circumstances under which Congress intended
that delegation of authority to become effective might
be wholly distinct from those applicable to plaintiffs’
present claim is readily apparent. Here the task is to
determine when the bank's financial condition is such
that fisther acceptance of deposits is dishonest. The
cases have utilized a specialized definition of insol-
vency to make this determination.

The line of cases primarily relied upon by plaintiff
for the proposition that a bank's seceptance of depos-
its while insolvent is dishonest is St. jouis and SF,
Co. y. Johnst 33
33 L.Ed, 683 (1890), and its progeny. AS the
Supreme Court upheld a state *871 court's finding of
fraud in the acceptance of certain deposits, stating
that,

This bank was hopelessly insolvent when the deposit
was made, made so by the operations of a firm of
which the president of the bank was a member. The

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.440 F.Supp. 862
(Cite as: 449 F.Supp. 862)

knowledge of the president was the knowledge of the
bank. (Citations omitted.) In the latter case it was
held that the acceptance of a deposit by a bank irre-
trievably insolvent, constituted such a fraud as enti-
tled the depositor to reclaim his drafts or their pro-
ceeds. And the anonymous case, 67 N.Y. 598, was
approved, where a draft was purchased from the de-
fendants, who were bankers, when they were hope-
lessly insolvent, to their knowledge, and the court
held the defendants guilty of fraud in contracting the
debt, and said their conduct was not like that of a
trader “who has become embarrassed and insolvent,
and yet has reasonable hopes that by continuing in
business he may retrieve his fortunes, In such a case
he may buy goods on credit, making no false repre-
sentations, without the necessary imputation of dis-
honesty.” (Citations omitted.) But it is believed that
no case can be found in the books holding that a
trader who was hopelessly insolvent, knew that he
could not pay his debts and that he raust fail in busi-
ness and thus disappoint his creditors, could honestly
take advantage of a credit duced by his apparent
prosperity and thus obtain property which he had
every reason to believe he could never pay for. In
such @ case he does an act, the necessary result of
which will be to defeat and defraud another and the
intention to cheat will be inferred.

Granted that the mere omission to disclose the insol-
vency if there had been ground for the supposition
that the bank might continue in business, would not
be sufficient, there is nothing for such belief to rest
on here.

133 US. at 576-77, 10 S.Ct, at 393,

St. Louis was followed by a number of state and fed-
eral cases holding similarly. The leading Ninth Cir-
cuit case on point appears to be Fidelit it

m0) of Mary Kelso State 87
828 (9th Cir. 1923). That court found no fraud, ob-
serving that,

The court below, on the testimony heard in open
court, found that, while the bank was in fact insolvent
when it received the deposits in question, in that ir
did not possess sufficient solvent and marketable
assets to meet its obligations, it was still a going con-
sem and continued to receive deposits, pay checks,
and to do general banking business for three days
thereafter, until forced to close by order of the bank-

Page 16

ing department. And said the (district) court: “So far
as I can ascertain from the evidence, the officers of
the bank did not know or believe at that time that the
bank was hopelessly and irretrievably insolvent, but
thought it would be able to continue in business.”’. . .
This conclusion is amply sustained by the evidence,

287 F. 830. A state of “hopeless and irretrievable
insolvency” has been almost uniformly required by
the courts as prerequisite to finding fraud in a bank's
acceptance of deposits. See e. g., Poole v, Elliott, 76
E.2d 772 (4th Cir. 1935); Smith v. Zemurray, 69 F.2d -
3.Gth Cir. 1934); [linois Central R. Co, v. Rawlings,
66 F.2d 146 (Sth Cir. 1933); Byrd v. Ross, 58 F.2d

372.(S.D.Fla.1932).

Even apart from the rationales upon which the fore-
going cases are premised, the imposition of a de-
manding standard of insolvency is particularly apt in
the instant case. It may be, as plaintiffs contend, that
the SFNB was insolvent, in the sense of having an -
excess of liabilities over assets, for a period before it
was closed by the Comptroller of the Currency. But
this proves too much; for the Comptroller was during
this period montitoring the bank's condition, and mak-
ing visitations on a weekly and later daily basis to
determine whether to exercise his authority pursuant
to 12 U.S.C. § 192. Acting as representative of the
public interest, the Comptroller determined that the
SFNB should remain *872 open while various efforts
were made to salvage it and reduce loss to depositors.
To characterize as dishonest the acceptance of depos-
its during this period would not only unduly strain the
concept of “dishonesty,” but also quite possibly inter-
fere with the discretion accorded the Comproller
under 12 U.S.C, § 192 Nl

EN14. Indeed, plaintiffs’ own expert con-
ceded that the Comptroller was aware of the
bank's precarious financial condition, a fact
confirmed by the bank examination reports
in evidence before this court, and was
probably correct in his determination to keep
the bank open as long as possible while ex-
amining possibilities for salvaging it. See Tr.
2626-2631.

A similar rationale was relied upon in part by the
Supreme Court in striking down state laws imposing
criminal lability upon national bank officers accept-
ing deposits to insolvent banks. After concluding that

© 2010 Thomson Reuters. No Claim to Orig. US Gov, Works.440 F.Supp. 862
{Cite as: 440 F.Supp. 862)

the states had no power to define the duties of a na-
tional bank officer because, “. .. Congress has pro-
vided a symmetrical and complete scheme for the
banks to be organized under the provisions of (the
National Banking Act),” the court in Easton v. lowa,
188 U,S. 220, 23 S.Ct. 288, 47 LLEd 452 (1903)
noted that,

The provision of the state statute is express that it is
the duty of the officers of the bank, when they know
it is insolvent, to at once suspend its active opera-
tions; for it is obvious, that to refuse to accept depos-
its would be equivalent to a cessation of business.
Whether a bank is or is not actually insolvent may be,
often, a hard question to answer. There may be good
reason to believe that, though temporarily embar-
rassed, the bank's affairs may take a fortunate turn.
Some of the assets that cannot at once be converted
into money may be of a character to justify the ex-
pectation that, if actual and open insolvency be
avoided, they may be ultimately collectable, and thus
the ruin of the bank and its creditors be prevented.
{Citation omitted} But under the state statute, no
such conservative action can be followed by the offi-
cers of the bank except at the risk of the penalties of
fine and imprisonment. In such a case the provisions
of the Federal statute would permit the comptroller to
withhold closing the bank to give an opportunity to
escape final insolvency. It would seem that such an
exercise of discretion on the part of the Comptroller
would, in many cases be better for all concerned than
the unyielding course of action prescribed by state
law. However, it is not our province to vindicate the
policy of the Federal statute, but to declare that it
cannot be overridden by the policy of the State.

‘We hold that where, as here, the Comptroller of the
Currency was closely monitoring the condition of the
bank, and the bank was able to meet its obligations as
they fell due, it was not dishonest for the bank to con-
tinue to accept deposits. Accordingly, plaintiffs’ sec-
ond theory of liability must fail.

(C) Plaintiffs’ Dishonest Loans Theory

Plaintiffs' third theory of recovery is that the making
of dishonest loans caused the SFNB to fail, resulting
in their respective losses. The issues raised by this
claim are essentially twofold: (1) what loans made by
the bank may be fairly characterized as “dishonest”;
and (2) what is the casual relationship between the

Page If

making of such dishonest loans and the losses suf-
fered by plaintifis.

Plaintiffs’ case consisted of establishing that 61 ber-
rowers of the SFNB had paid unlawful loan fees. The
balance due from these borrowers at the time of the
bank's closing was approximately $13,000,000, about
one-third of all loans outstanding at the time of clo-
sure. Contending that the entirety of this sum, as well
as certain other loans, must be characterized as “dis-
honest,” plaintiffs contend that the losses resulting
from these dishonest loans caused the bank to fail,
and resulted in the nonpayment of their deposits.
Thus, plaintiffs contend that their loss is attributable
to “dishonesty.”

Defendants proffer an entirely distinct analysis of
plaintiffs’ losses, First, defendants contend that plain-
tiffs have grossly overstated the amount of loans
which may *873 be fairly characterized as “‘dishon-
est.” Rather than accepting as dishonest all loans
made to borrowers who at any time paid a loan fee,
defendants argue that only specific loans upon which
loan fees were paid ought to be characterized as dis-
honest. At most, they contend, Ioan fee loans and
subsequent loans to the same borrower ought to be
counted.

Second, defendants contend that a very substantial
proportion of the bank's losses derive from the non-
payment of honest, albeit negligent, loans. Thus, they
argue that “dishonesty,” the peril insured against, is
only one of several sources of loss to the plaintiff. To
this end, defendants introduced evidence conceming
187 so-called “honest” borrowers of the bank. The
balance due from these borrowers at closing totaled
‘over $8,000,000, of which $5,000,000 was never
recovered,

Finally, defendants take issue with plaintiffs theory
that the closing of the bank “caused” plaintiffs’
losses. Defendants contend that the plaintiffs’ losses
were caused not by the closing of the bank-which had
no effect on the assets available to pay depositors-but
rather from the nonpayment of individual loans. A
bank with sound assets would be able to fully com-
pensate its depositors notwithstanding the fact that an
accounting had been triggered; what actually causes
loss, defendants argue, is the inability of the bank to
collect its outstanding loans. Since some uncollect-
able loans were honest, while others were dishonest,

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.440 F.Supp. 862
(Cite as: 440 F.Supp. 862)

defendants contend that only that proportion of loss
arising from the nonpayment of dishonest loans may
be properly attributable to dishonesty. Thus, defen-
dants argue that dishonesty caused no loss resulting
from the nonpayment of bad but honest loans.

We tum first