sent seven letters alerting the insurers that some individuals (not the FDIC) had potential claims against First Federal D&O's. See supra page 22.
This issue has been mooted by our previous decision in FDIC v. Continisio, Nos. 91-5107, 92-1720 (D.N.J. Sept. 11, 1992), in which we held that the Regulatory Exclusion in the 1984 Policy, if operative, specifically excludes coverage for suits by the FDIC, and by our decision today, explained below, that the exclusion is valid.
B. Is The Regulatory Exclusion Void as Conflicting With A Federal Statute, 12 U.S.C. § 1729(f)(2)(A)(i). Which Permits the FSLIC to Purchase an Association's Assets?
The FDIC argues that this court should not enforce the Regulatory Exclusion because the provision contravenes a federal statute. Specifically, the FDIC argues that the former FSLIC (the FDIC's predecessor-in-interest) purchased the assets of First Federal Pursuant to a portion of the Fair Housing Act, 12 U.S.C. § 1729(f)(2)(A)(i) (1988) (repealed), which authorized the FSLIC to "purchase any . . . assets" of a troubled thrift in order to facilitate a supervisory merger with a healthy thrift. The FDIC asserts that, pursuant to this statute, the FSLIC purchased (1) the claims First Federal once had against its Directors and Officers which are now being asserted in the underlying action; and (2) the claims First Federal would have had against the insurers for coverage under the D&O policies. The FDIC claims that enforcement of the regulatory exclusion contravenes the FSLIC's statutory right to purchase any assets of a failed thrift.
While the FDIC is correct that private contractual arrangements that contravene federal statutes are not to be given effect, the FDIC's argument fails because the Regulatory Exclusion does not contravene 12 U.S.C. § 1729(f). Section 1729(f) gave the FSLIC the authority to purchase any assets of a failing thrift, including its claims under its Directors and Officers insurance policies. However, as the insurers correctly point out, as of 1984, First Federal owned a Directors and Officers insurance policy that contained a regulatory exclusion. The FSLIC purchased exactly the rights that First Federal had under that policy. Therefore, the regulatory exclusion does not contravene the statute authorizing the agency to purchase all the thrift's assets.
The cases cited by the FDIC do not impel a different conclusion. The FDIC cites FDIC v. Bank of Boulder, 911 F.2d 1466 (10th Cir. 1990), cert. denied, 113 L. Ed. 2d 213, 111 S. Ct. 1103 (1991), where the court held that a non-assignability provision in a letter of credit was unenforceable in the face of a federal statute, 12 U.S.C. § 1823(d) (1988), which granted the FDIC in its corporate capacity the right to purchase any assets from the FDIC as receiver of the failed bank. They also cite NCNB Texas Nat'l Bank v. Cowden, 895 F.2d 1488 (5th Cir. 1990), where the court held the FDIC could transfer fiduciary appointments in trust agreements to a federally created bridge bank despite provisions in the trust agreements prohibiting such transfer, because a statutory grant of authority to the FDIC to transfer any assets of an insolvent institution to a federally created bridge bank overrode provisions to the contrary in the trust agreements. These cases are distinguishable from the present case, however, because they deal with an explicit conflict between a federal statute and the provisions of a contract. In Bank of Boulder, a statute that granted the FDIC the right to purchase all assets, including letters of credit, conflicted with a provision in a letter of credit that forbade sale. In NCNB, the conflict was between a federal statute empowering the FDIC to transfer assets and a trust provision that forbade transfer. Here, there is no such explicit conflict. The Regulatory Exclusion does not forbid the FSLIC or the FDIC from purchasing any assets from the failed bank: rather, it merely limits the asset itself, irrespective of who owns the policies or the rights under them. Therefore, there is no conflict and the FDIC's statutory argument fails.
This conclusion is consistent with a number of cases where the courts rejected a similar argument made by the FDIC based on a different statute. In a number of recent cases dealing with the same insurance company and similar policies, the FDIC has argued that the Regulatory Exclusion contravened federal public policy because it interfered with the FDIC's statutory function to recover failed institutions' assets that were depleted by director and officer mismanagement. Almost without exception, the public policy argument was rejected by federal courts. This is because Congress, when enacting FIRREA, chose not to require banks to purchase Directors' & Officers' liability insurance and chose not to invalidate regulatory exclusions of the type at issue here. Therefore, Congress has not articulated the kind of clear and consistent public policy required to invalidate such an exclusion. See, e.g., FDIC v. American Casualty Co., 975 F.2d 677 (10th Cir. 1992); Fidelity & Deposit Co. v. Conner, 973 F.2d 1236 (5th Cir. 1992); St. Paul Fire & Marine Ins. Co. v. FDIC, 968 F.2d 695 (8th Cir. 1992); American Casualty Co. v. Kirchner, 1992 WL 300843 (W.D. Wis. May 22, 1992); FDIC v. Continental Casualty Co., 796 F. Supp. 1344 (D. Or. 1991).
IV. DIRECTORS' SUMMARY JUDGMENT MOTIONS
A. Berenato Group's Arguments as to Estoppel and Actual Knowledge
Former directors Berenato, Small, Rodio, and Machise (the "Berenato Group") make two additional arguments as to why the 1981 Policy should cover the underlying FDIC suit. They argue (1) the insurers should be estopped from asserting the regulatory exclusion because of misrepresentation; and (2) the insurers' actual knowledge of bad loans made by First Federal, coupled with the absence of prejudice suffered by the insurers should satisfy the notice requirement of the 1981 Policy.
1. Should the insurers be estopped from denying coverage when they failed to inform the bank about the discovery option and inserted the regulatory exclusion after the 1981 policy had expired.
Under New Jersey law, an insurer may be equitably estopped from asserting defenses to a policy claim when (1) an insurer or its agent misrepresents the coverage of an insurance contract, and (2) the insured justifiably relies upon the misrepresentations to its detriment. Harr v. Allstate Ins. Co., 54 N.J. 287, 255 A.2d 208, 218 (N.J. 1969). The Berenato Group argues that "CNA made misrepresentations in the form of affirmative statements that First Federal's renewal would be on the same terms and conditions of the 1981 Policy and in the form of omissions as to the terms of the actual renewal," and therefore the rule of estoppel should apply.
The Berenato Group's estoppel argument fails because the directors cannot show either that the insurers made affirmative misrepresentations or that the bank reasonably relied upon such representations. The Berenato Group points to the following statements by the insurers' agent
as evidence of misrepresentation:
1. In September, 1983 (eight months before the renewal process), First Federal's president received notice from MGIC that MGIC was to be taken over by CNA, and that "the protection [we] previously enjoyed through Indemnity [MGIC] will be continued in the form of CNA."