Metropolitan Casualty Insurance Company v. First State Bank of Temple

Texas Court of Civil Appeals · 1932 · Corporations

54 S.W.2d 358 (1932)

Updated August 22, 2026

Corporationsboard of directorsbank dividendsemployee dishonesty insurancemisapplication of fundsmismanagementofficial corporate actillegal dividend

Facts

The appellee bank was insured against loss through dishonesty of any employee, including wrongful abstraction, misapplication, or misappropriation, and the term employee included active officers. After the bank was reorganized, several directors who were also stockholders paid $22,000 to satisfy stock assessments arising from the old bank's insolvency, and shortly thereafter the board purported to declare a dividend that was recorded in the minutes and approved as official corporate action. The bank alleged that the president, vice president, and cashier, acting together or with other directors, used that dividend device to repay themselves and others from bank funds. The trial court found the directors had agreed in advance to use the dividend as a guise to take back the $22,000 for their own benefit.

Issue

Whether a loss resulting from payment of an allegedly illegal dividend declared by the board of directors constitutes a covered misappropriation or misapplication of bank funds by employees under the bank's employee dishonesty policy, when the officers merely carried out the board's official action.

Rule

When a board of directors, acting in its official capacity at a regular meeting, adopts and records a resolution declaring a dividend, that action becomes the official act of the corporation itself. Even if the dividend is illegal or unauthorized, resulting loss is treated as mismanagement or illegal action by the board, not as dishonesty or misapplication by employees acting as employees, where the employees only execute the board's instructions.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Waco, Lone Prairie Bank carried a fidelity policy covering losses caused by dishonest acts of employees, including active officers. At a regular board meeting, the directors voted to declare a cash distribution that state banking rules did not permit, recorded the resolution in the minutes, and instructed the cashier to issue checks; the cashier did exactly that.

If the bank later seeks coverage under the policy for the amount paid out, what is the strongest argument against coverage?

Explanation. Under the majority rule, when the board acting in its official capacity adopts and records a resolution on a matter entrusted to the board, the action becomes the corporation's own act, even if unauthorized or illegal. Employees who merely carry out that official action are not, as employees, committing the covered dishonesty. The policy covers employee dishonesty, not losses from board mismanagement. (Derived from Metropolitan Casualty Insurance Company v. First State Bank of Temple (1932).)