In a reported legal case, First National Bank of Sikeston v. Transamerica Insurance Company, 514 F2d 981 (1975), Tom Gibson was part owner of a business operated as Gibson Livestock Company in Marion, Kentucky. Tom Gibson owned the business with the president of First National Bank, one Donald Bohannon. In 1970 and 1971 Gibson Livestock was using First National as its bank and Bohannon as president had authorized Gibson Livestock’s deposits to have immediate credit without waiting for the checks to clear. This practice had been criticized by the Comptroller of Currency both because it violated banking law and also because it represented a conflict of interest for Bohannon as president of the bank and an owner in the cattle company. Bohannon subsequently arranged for a line of credit at Union Planters Bank guaranteed by a third party trust and the proceeds from the line of credit at Union Planters would be used to make sure that deposits at First National were covered. Bohannon then went to yet another bank (Providence Bank) and told them about the arrangement with Union Planters Bank and First National and requested Providence give immediate credit to Gibson Livestock checks since they would always be covered by the arrangement between First National and Union Planters.
Relying on the arrangement from Bohannon, Providence Bank began giving immediate credit for checks deposited from Gibson Livestock and checks issued by Gibson Livestock for cattle purchases. Providence then sent the checks to First National through the Federal Reserve System which, in 1971, took four to six days for the check to arrive at First National. Since Bohannon was still an officer of First National, each day he would determine the amount necessary to cover checks presented to First National and then transfer money from the Union Planters credit facility to cover the checks. As the Court later noted, the problem with this arrangement was that the Gibson Livestock credit line at Union Planters was being used to cover checks presented at First National which, but for the daily transfers in from Union Planters were insufficient funds. Ultimately the arrangement blew up and at the time Gibson Cattle was processing about Thirty Million Dollars a year through First National. Checks honored by Providence Bank cause the bank to loose approximately $340,000.00 and Providence Bank sued First National claiming that it relied on the promise of First National’s president, Bohannon, that the checks would always be covered.