(dissenting).
I dissent on the issue of notice to the sureties.
I agree with my colleagues that the inquiry as to timeliness is one of fixing the point in time at which the bank ei*740ther discovered there had been fraud or received information sufficient to require it to investigate further. I agree that a mere suspicion of wrongdoing is not enough.
The wrongful acts sued on as breaches of the bond were alleged to be “certain dishonest, fraudulent and/or criminal acts” committed by Steiner, Morris, Garrett, and Gallaher. The complaint set out with considerable specificity the various acts done by each of these four in connection with the acquisition of the notes which caused this bank to close. A detailed history of the relevant acts and occurrences is set out in a stipulation of the parties which is some 150 pages long and contains numerous documents. The District Court, as its first finding, found as facts all facts stipulated (except any inconsistent with express findings.) The court found that the acts of Gallaher, the president of the bank, in connection with purchase of the notes and mortgages, were negligent but not dishonest, fraudulent or criminal. It entered the following findings concerning Steiner's acts:
Findings of Fact:
* * -X-
12. Steiner’s acts in connection with the purchase of the 101 promissory notes and mortgages involved herein were dishonest and fraudulent.
* * *
14. The purchase by the Bank of the notes and mortgages involved herein resulted in the Bank’s insolvency and its liquidation.
15. The dishonest and fraudulent acts of Steiner caused loss to the Bank of $408,362.97.
* * *
19. No members of the Bank’s Board of Directors, other than Steiner and Vince Sanfilippo, had knowledge of the dishonest and fraudulent acts of Steiner in connection with the purchase of the notes and mortgages in question, until on or about March 10, 1964, the day the Bank closed.
Conclusions of Law:
1. The dishonest and fraudulent acts of Steiner which resulted in loss to the Bank are covered by the bonds issued by Defendants herein.
* * *
6. The Bank did not have notice of the dishonest and fraudulent acts of Steiner in connection with the transaction involved herein until on or about March 10, 1964.
The court also entered findings that Steiner knew the purchase violated the instructions given him by the Deputy Comptroller, knew that the notes and mortgages had not been checked by an attorney, and knew of the commission to Morris and Garrett.
The majority opinion treats the case as limited to the three selected acts of Steiner just above described. Affirmance is predicated on lack of knowledge or notice by the bank of those acts. The pervasive scheme carried out by Steiner, and the broad spectrum of other acts done by him in connection with the scheme, are treated as though of no consequence. The majority approach is the only way to sustain on appeal Conclusion of Law 6, which states there was no notice of “the dishonest and fraudulent acts of Steiner” until March, 1964.
The short answer to the majority analysis is that it simply is not what Findings of Fact 12, 14, 15 and 19, and Conclusion of Law 1 and 6, say. Repeatedly the District Court employed the phrases, “Steiner’s dishonest and fraudulent acts,” and “Steiner’s dishonest and fraudulent acts in connection with the purchase of the notes and mortgages,” without indication that they were limited to only three of the many things Steiner did.
However, even if one accepts the narrowing of findings by construction at the appellate level, then the District Court erred as a matter of law in failing to address itself correctly to the notice issue. The question of whether the bank had knowledge sufficient to quicken the necessity of notice to the sureties, *741and when it acquired that knowledge, could not be considered in terms of only three selected acts of Steiner. The District Court made no finding that the acts of Steiner other than the three selected acts were not fraudulent, dishonest or sufficient to put the bank on notice. In my opinion, the other acts of Steiner were fraudulent and dishonest as a matter of law and were so fully revealed in the fall of 1963 as to require the bank to notify the sureties of what its officers and directors knew. I would reverse the case. But, as a minimum, it should be remanded to the District Court for it to consider the issue of notice to the sureties in context of all that Steiner did and to enter appropriate findings thereon.
I turn to the facts of what Steiner did and who knew about it.
The bank was a small bank in a small town. Marlin, Texas has a population of approximately 6,900. The bank had capital of $100,000 and surplus of $100,000. The 1962 Polk’s Bank Directory shows it had deposits of $2,539,000 and loans of $1,110,000. At that time there were three banks in Marlin.
Sale of controlling interest to new owners was made known to the directors on July 18, 1963. Immediately Steiner, his wife, and his associate Sanfilippo, were elected directors and Steiner Chairman of the Board.
On its face, Steiner’s scheme was a rank impropriety from the beginning. The opening act was the directors’ meeting of September 11. Steiner, a stranger to the bank and a spokesman for new interests in control approximately 20 days, brought to the board his three-pronged proposal.
—The bank would accept one-year deposits of $500,000 from Guaranty Depository (a California bank) and $500,000 from Mainland Bank of Texas City, Texas.1
—These funds were to be invested in notes secured by real estate mortgages.
—Steiner represented to President Gallaher that he “had an application for a savings and loan company to be in Houston.” The bank would hold the loans only a short time after which “they would be transferred to the savings and loan in Houston.”
Thus before the scheme was effectually launched it was revealed that it embraced self-dealing of stranger Steiner in his capacities as new Chairman and as spokesman for a nonexistent savings and loan association. The bank was to be a “warehouse” for the loans.
Both before and at the September 11 meeting Gallaher warned Steiner that under the National Banking Act the bank could take no loan in excess of $20,000 or over 20 years duration and that it preferred not to go over 15 years. 12 U.S.C. § 84 limits the obligation of a borrower owed to a national bank to 10 per cent of capital stock and 10 per cent of surplus. Thus this bank had a $20,-000 loan limit. A loan in excess of the statutory limit is an illegal loan. Anderson v. Akers, 11 F.Supp. 9, 12 (W.D. Ky.1935); Federal Deposit Ins. Corp. v. Mapp’s Executor, 184 Va. 970, 37 S.E.2d 23 (1946). 12 U.S.C. § 93 is the penalty section. If the directors knowingly violate or permit violation of § 84 the charter of the bank is forfeited arid, after suit in federal court establishing the violation, the bank may be dissolved. Every director who participates or assents is liable in damages to the bank, its stockholders and others. The testimony referred to a 20-year limit for loans on improved real estate. This limit (now 25 years, by a subsequent amendment) is governed by 12 U.S.C. § 371. The important thing is that 20 years was a limitation imposed by law and not merely bankers’ policy or a bank examiners’ nicety.2
*742At the same time Gallaher told Steiner that the loans must be examined and approved by the bank’s attorneys, a firm in Marlin.
At the September 11 meeting a resolution was adopted, on Steiner’s motion, instructing the bank to accept the deposits and invest the money in approximately $1,000,000 of real estate notes, none over the $20,000 limit.3 The resolution provided: “The R/E notes are subject to approval of our Attorneys.”
It took no crystal ball for all the directors to see on September 11 the course of action on which the bank was embarking. If in 12 months the deposits were withdrawn and the bank still held the notes it would have to sell them or be exposed to a high risk of closing its doors. The bank was committed to a lack of liquidity which could become critical in 12 months, subjecting it to the vagaries of market conditions at that time governing salability of nonliquid investments.
There were two hedges against this freezing of a million dollars of assets. One was Steiner’s oral promise that the loans wouldn’t be around long and would be transferred to a nonexistent savings and loan association. No one knew if the association would ever come into existence, or if it did that Steiner’s representation would be binding on it, or if it would possess a million dollars to buy the loans. There were none of the usual protective accompaniments of a “warehouse” transaction — no firm, written and enforceable commitments from a financially stable institution to purchase or “take out” the warehoused loans under agreed terms, at an agreed price and within a fixed period.
The second hedge was that if Steiner’s promise was illusory, the investments could be disposed of on the mortgage market at, hopefully, no loss. This possibility was, at best, no better than the legality and quality of the loans to be purchased.
Judge Hutcheson, speaking for this Circuit, has described the coverage afforded against acts of bank officers by a fidelity bond for “dishonest acts.”
Insurance against dishonest acts is insurance of fidelity; it is intended to, it does, guarantee openness and fair dealing on the part of the bank's officers. It is intended to, it does, underwrite that the bank’s officers shall act with common honesty and an eye single to its interests. It guarantees that the bank shall at all times have the benefit of the unbiased, critical, and disinterested judgment of the president in regard to the loans it makes. It specifically guarantees that the president of a bank will not engage in secret operations for speculative profit, with the bank’s money, by making pretended loans to others, these others, only means to his prohibited ends. In the transaction in question, the bank not only did not have the benefit of Ikard’s critical and disinterested judgment, it was deliberately deceived by his pretense and stealth. Under the plainest principles of ordinary common honesty and fair dealing, his conduct was dishonest.
Maryland Casualty v. American Trust, 71 F.2d 137, 138 (5th Cir.) cert. den. 293 U.S. 582, 55 S.Ct. 95, 79 L.Ed. 678 (1934). On the face of the matter, Steiner was not acting “with common honesty and an eye single to its [the bank’s] interests.” I would hold that on September 11 there was sufficient knowledge or notice to “justify a careful and prudent man in charging another with fraud or dishonesty.” Hidden Splendor Mining Co. v. General Ins. Co. of America, 370 F.2d 515 (10th Cir. 1966). And September 11 is only the beginning.
Later in September the bank received the deposits from Mainland and Guaranty and issued to each a one-year certificate of deposit. This was not all the “hot” money that the bank was getting. Between September 12 and 16 it re*743ceived other deposits, made under one-year certificates of deposit, from 21 savings and loan associations in eight states, totaling $480,000.
One of the bank’s hedges against risk of catastrophe was Steiner’s promise. On October 3 the bank delegated to him control of the other hedge, the validity and quality of the loans. By resolution the directors authorized that the loans be purchased for the account of the bank by Riverside National Bank of Houston “subject to the approval of Mr. Matt Steiner, Chairman of the Board.” Making loans and investments was the president’s duty. Nevertheless the board turned over this million dollar loan transaction to the inexperienced stranger who had brought the deal to the bank.
On October 7, when Gallaher signed a draft to pay for the loans he questioned Steiner about whether the loans would be confirming assets [i. e., in conformity with banking laws and regulations.] He reminded Steiner of the necessity of their being passed on by the bank’s attorney. Steiner told him they would be passed on by an attorney in Houston. This violated the resolution of September 11 and the instructions which Gallaher had given Steiner on that date.
On October 9 when S.teiner delivered the notes to the bank, and prior to the meeting of that date, Donahoo, a director, vice president and cashier, looked at several of the notes at random and told Steiner and Gallaher that they did not conform to requirements of the National Banking Act, and if all the notes were of this quality “that they may as well take them back,” because they “were not worthy to bring in the bank.” Gallaher did not look at the loans at that time. However, he did discuss with Steiner whether they had been approved by a Houston attorney, and Steiner told him they had been. The minutes of the October 9 meeting4 referred to the purchase of the loans. Gallaher says it was discussed but that nobody had any questions about it. Gallaher considered that by approving the minutes of the two previous meetings, September 11 and October 3, the directors were approving the transaction.
Thus, before beginning of the meeting at which Steiner’s acquisition of the loans was approved, President Gallaher and Vice-president and Cashier Donahoo knew that some of the loans violated the law. Also, on October 9, Gallaher knew his instructions and the board’s instructions concerning approval by the bank’s attorney had not been followed. And he learned that same day that Steiner had not purchased the loans through the Riverside National Bank, as authorized on October 3, but elsewhere.
Over the next ten days to two weeks —still in October — Vice-president and Cashier Donahoo went through the notes. He saw that they “represented an extremely bad deal for the bank.” He found that of the 101 loans purchased probably 13 “might qualify” under the National Banking Act. Sixty-four5 violated the Act by having more than 20 years to run. Three violated the Act by exceeding the $20,000 loan limit. Twenty or 21 more were nonconforming for reasons not specifically spelled out. Gallaher states that some of the loans exceeded the allowable 70 per cent of appraised value of the property, a violation of § 371.6
One of the three loans violating the $20,000 limit was for $108,303.43, some $88,000 over the maximum allowed by the Act and the amount authorized on September 11. The other two were $28,238.31 and $21,574.54. These excess loans totaled $158,116.28.
*744The 65 loans violating the 20-year limit totaled $690,428.23.
The excess and over-length loans together totaled $848,544.51.
This is not all that Donahoo (and, as appears below, Gallaher) knew. Forty-nine of the 101 notes were overdue when purchased. Thirty-nine were two or more months overdue. The overdue notes totaled $440,698.40. It is to be noted that Steiner testified he did not check the notes for compliance with the national banking laws before closing the purchase, but that he did check them for delinquency.
The bank did not know when it purchased the loans, but found out at a later unspecified time, that all were on Negro property. Vice-president Donahoo told all the directors about the notes. Mrs. Ingram, the only officer not a director, became aware of the situation. Donahoo refused to enter the notes on the bank’s books as assets. The bank knew it had nearly a million dollars of junk loans 7 on its hands. One of the Steiner-controlled hedges was gone. It sought to avail itself of the other. Donahoo talked to Steiner :
Q. What did you say to Mr. Steiner?
A. I told him that this bank could not hold those notes, that it would apparently be the downfall of the bank, and he advised me that they were only going to be in there from fifteen to forty-five days, sort of on a warehousing deal, that they were specifically designed to go to a Federally-chartered savings and loan association in California. I urged him at that time to get those notes out of the bank.
It is noteworthy that Steiner’s representation to Donahoo was different from his previous representation to Gallaher about what was intended to be done with the notes.
Gallaher went through the notes too and saw they were nonconforming. He “immediately could tell that something was wrong.” Promptly he did the following :
T got ahold of Mr. Steiner and told him he had to get them out; the bank examiners, when they came by to examine us, that they’d close us up because we had, as far as banking paper, the notes were not worth what they were supposed to be.
Gallaher began calling Steiner several times a week on the phone about getting the loans out of the bank. Each time Steiner assured him he was “working on a deal” and the notes would be out of the bank in a few days. After examining the loans himself, Gallaher set about at once to try to get a closing statement reflecting the purchase of the loans.8
By around October 20 the above events had occurred, and were known to some or all the officers and some or all directors (excluding consideration of Steiner, his wife and Sanfilippo). The bank was reduced to reliance on Steiner’s oral promise, which proved to be worthless.
One need not consider whether in isolation the illegality and poor quality of the loans, or the approval of the loans by Steiner, or the violation by Steiner of the authorizations given him by the board and of the warnings given him by Steiner, or the failure to have the loans examined by the bank’s attorneys,9 is a determinative factor in appraising Stei*745ner’s conduct. None of these exist in isolation. All are in the context of incidents of Steiner’s self-dealing scheme on which the bank never should have embarked.
The obligation of a surety is not limited to losses from criminal acts such as larceny or embezzlement, but the words “personal dishonesty” have a broader meaning and may include “any acts which evinced a want of integrity and a personal breach of trust.” * * * “Any illegal or unauthorized taking or withdrawal of the funds of the bank, intentionally perpetuated by the employee, whether for the benefit of himself or of another, was a wrongful conversion or abstraction and an act of personal dishonesty which constituted a breach of the bond.” United States Fidelity & Guaranty Co. v. Bank of Thorsby, 46 F.2d 950 (5th Cir. 1931), involving a cashier, who was prohibited by resolution from making loans, and, who in violation of state law, made an unsecured loan indirectly by permitting a financially irresponsible depositor to overdraw. Accord, London & Lancashire I. Co. v. People’s Nat. Bank & Trust Co., 59 F.2d 149, 152 (7th Cir. 1932). See also Aetna Casualty & Surety Co. v. Austin, 285 S.W. 951 (Tex.Civ.App.1926) (surety held liable where director, indebted to his bank in the maximum amount allowed by law, procured another to obtain a loan from the bank and p.ut the funds at the director’s disposal); Fidelity & Deposit Co. v. Merchants’ & Marine Bank, 169 Miss. 755, 151 So. 373 (1933) (surety held liable for president’s making loan to partnership of which he was a member on note not signed by him); Guaranty Trust v. United States Fidelity & Guaranty Co., 79 N.H. 480, 112 A.247 (1920) (surety liable for bank treasurer’s paying out money on worthless notes signed by himself and relatives); National Surety Corp. v. State, 90 Ind. App. 524, 161 N.E. 832 (1928) (surety liable where cashier made loans to president exceeding a limitation established by the bank by resolution and violating a requirement that three directors approve any loan to an officer or director).
In my opinion the finding of the District Court that Gallaher was guilty of only negligence is plainly erroneous. But, pretermitting that, Gallaher’s knowledge of Steiner’s acts was knowledge of the bank. All the officers and directors sat silent for months, without a word to sureties or supervisory authorities, who were entitled to try to salvage the situation. Donahoo knew so much that as an experienced banker he declined to enter the loans on the bank’s books as assets. The loans were assets, even if poor ones. There had to be an asset entry to balance the million dollar deposit entry. I find no explanation in the record of how the bank, from October to late March, could purport to make true financial statements. Nor do I find any logical consistency in a result that knowledge of facts which impelled an experienced banker to decline to enter the notes on the bank’s books was not knowledge necessitating that the sureties be alerted.
If a surety denied liability on the ground that a total spectrum of acts such as those done by Steiner in this case were not fraudulent and dishonest, it would be almost laughed out of court. The quality of the acts is no different because they appear in the context of failure of the bank to give notice to sureties, with the consequence that the bank has cut itself off from recovery. What is dishonest and fraudulent does not depend on whether the surety or the bank is the ox being gored.
I respectfully dissent.
. The deposits were procured by deposit brokers for a fee. Whether the board knew this is not shown.
. Sections 84 and 371 forbid the existence of a loan not meeting the statutory standards. Whether the loan is “made” or “purchased” from a transferor is immaterial.
. Gallaher’s warning embraced both the $20,000 and the 20-year limits. The resolution referred to only the $20,000 limit.
. See footnote 5, majority opinion, for extract.
. Actually, the schedule of the loans shows sixty-five.
. The District Court found that 84 of the notes and mortgages were nonconforming assets and only 17 were legal investments. The difference between 84 as found by the District Court and the numbers testified to by the bank officers is not material.
. When the F.D.I.C.. sold the loans in June, 1964 they brought about 50 cents on the dollar.
. This fact makes very dubious the holding that the bank had no knowledge or notice puting it on inquiry concerning the commission to Morris and Garrett. Gallaher already knew what the bank had paid for the notes. What the closing statement might reveal that he did not already know was where the money went. The best evidence that there was knowledge sufficient to trigger inquiry into the facts of the closing of the sale was that Gallaher did inquire.
. This failure turned out to be very important, since it developed that the examination said by Steiner to have been made by a lawyer iñ Houston never took place.