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F.D.I.C. v. NATIONAL UNION FIRE INS. CO. OF PITTS.

May 18, 2001

RE: FEDERAL DEPOSIT INSURANCE CORP.,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.



The opinion of the court was delivered by: Politan, District Judge.

THE ORIGINAL OF THIS AMENDED LETTER OPINION IS ON FILE WITH THE CLERK OF THE COURT

Dear Counsel:

This matter comes before the Court on a motion for summary judgment by Defendant, National Union Fire Insurance ("National Union" or "Defendant"). Oral argument was heard on March 16, 2001. For the reasons stated herein, Defendant's motion is GRANTED.

STATEMENT OF FACTS*fn1

In 1984, a large-scale construction project called Port Liberte' was launched on the Hudson River waterfront in Jersey City, New Jersey. The project contemplated use of 114 acres of land and the development of 2,250 residential units, one million square feet of commercial space, a town center, luxury hotel, marina, yacht club, restaurant, health club and individual boat slips for use by residents. It was to be built in five phases over the course of ten years. The project was owned and developed by Port Liberte' Partners.*fn2 City Federal Savings Bank ("City Federal" or "the bank"), a federally chartered savings bank, provided a large portion of the funding for the Port Liberte' project. City Federal's principal place of business was in the Township of Bedminster, Somerset County, New Jersey.

Between June 1984 and November 1985, City Federal loaned approximately 16.5 million dollars to Port Liberte' Partners for the purpose of purchasing the land and securing the necessary permits and approvals for its development. In February 1986, City Federal approved a revolving construction loan (the "revolver") in an initial amount of fifty million dollars, which was increased to ninety million in December 1986.*fn3 Between March 1988 and February 1989, City Federal made nine additional loans to Port Liberte' Partners. These additional lending decisions by City Federal were based primarily on a report issued in April of 1988 by George Ward, the senior MAI appraiser for City Appraisal Services, Inc., a wholly owned subsidiary of City Federal. Compl., ¶ 26.

In March 1989, National Union issued to City Federal a financial institution bond, Bond Number 362 61 69. Generally speaking, the bond is an insurance policy. Among other things, the bond provided City Federal with fidelity insurance and would indemnify City Federal or its subsidiaries for up to twenty million dollars of losses caused by certain fraudulent or dishonest acts of City Federal employees. The bond language is narrowly tailored, however, and it is this specific language which is the crux of the matter at bar. The terms of the bond will be discussed more thoroughly herein.

Plaintiff contends that the only reason the additional loans totaling $19,009,729 were made to the Port Liberte' project (on top of existing outstanding loans of approximately 150 million dollars) was because a bank officer, an executive vice president of City Federal, George E. Mikula, concealed critical information which, if disclosed, would have prevented the executive committee of City Federal's Board of Directors from authorizing the additional loan disbursements in 1988 and 1989. No part of the additional nineteen million plus was ever repaid or otherwise recovered by the bank.

Mikula was the primary City Federal officer responsible for the day-to-day administration and oversight of the bank loans to Port Liberte' Partners. It was his duty to keep the executive committee of the Board of Directors fully apprised of the status of the project. Mikula made presentations to the executive committee regarding the project and sought approval from the committee with respect to all loans to Port Liberte' Partners. Mikula was obligated to report to and advise the executive committee of all information of which he was aware that could impact the project or the loans for the project. At all times, however, the executive committee had the sole final responsibility and authority for all lending decisions.

In February 1989, the Office of Thrift Supervision ("OTS") began an examination of City Federal. The OTS found that the bank had substantial problems, one being the management of the Port Liberte' loan, and concluded that City Federal was on the verge of failure. By April 1989, after City Federal had granted extensions for loan repayment, all loans to Port Liberte' Partners were in default. The other banks participating in the loans refused to extend any more credit to Port Liberte' Partners.*fn4 "[B]y early 1989, all persons affiliated with the bank, including the Members of the Executive Committee and the Board, were well aware that the project . . . was in severe financial trouble." Pl. Rule 56.1 Statement, ¶ 33. Nevertheless, City Federal made five emergency advances, totaling $1,275,729, to Port Liberte' Partners from May to June of 1989. In addition, City Federal made three more loans to Port Liberte' Partners in July and August of 1989. These emergency advances and loans, totaling $19,009,729, were the subject of City Federal's claim under the National Union bond and are now the subject of the FDIC's Complaint here.

On December 7, 1989, City Federal was declared insolvent by the Director of the OTS and the Resolution Trust Corporation ("RTC") was appointed receiver for City Federal. On December 31, 1995, the FDIC succeeded the RTC as receiver for City Federal.*fn5

A formal proof of loss was filed by City Federal with National Union in February 1991. National Union denied City Federal's claim on April 27, 1994.*fn6 The FDIC filed this lawsuit against National Union on behalf of City Federal on May 31, 1996 claiming breach of contract and seeking declaratory relief in the amount of $19,009,729. The FDIC's Complaint alleges that Mikula was dishonest because he did not disclose to the bank's executive committee certain facts which would have impacted the bank's determination of whether to lend additional money to the Port Liberte' project.

The FDIC claims that Mikula intentionally concealed reports and appraisals in order to cause City Federal to sustain a loss and to obtain a financial benefit for himself or others. The parties agree, however, that Mikula has not benefitted financially from the loan transactions at issue. Plaintiff instead argues that Mikula obtained a financial benefit for a third party, namely Port Liberte' Partners and the subcontractors who performed work on the Port Liberte' project. See 3/16/01 Tr. at 17-19. This allegation is also set forth in the Complaint.

The following individuals may be referred to throughout this opinion. James McTernan was employed by City Federal from 1976 until June or July of 1989. McTernan was an executive vice president who reported directly to Rick Atherton.

Atherton was the bank president, CEO, and member of the Board of Directors. He was appointed as an executive committee member in June 1989. Alfred Hedden and John Kean were directors of City Federal and members of the executive committee at all relevant times. David Hermann was also an executive vice president of the bank.

DISCUSSION

A. Standard for Summary Judgment

The standard governing a summary judgment motion is set forth in Fed. R.Civ.P. 56(c), which provides, in pertinent part, that:

[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Fed.R.Civ.P. 56(c). A fact is material if it might affect the outcome of the suit under the governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

Procedurally, the movant has the initial burden of identifying evidence that it believes shows an absence of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). When the movant will bear the burden of proof at trial, the movant's burden can be discharged by showing that there is an absence of evidence to support the non-movant's case. Id. at 325, 106 S.Ct. 2548. If the movant establishes the absence of a genuine issue of material fact, the burden shifts to the non-movant to do more than "simply show that there is some metaphysical doubt as to material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Anderson, 477 U.S. at 256, 106 S.Ct. 2505 (finding that if the movant establishes that there is no genuine factual issue, "the plaintiff is not thereby relieved of his own burden of producing in turn evidence that would support a jury verdict.")

Evidence which is "merely colorable" is not sufficient to raise a factual issue when summary judgment would otherwise be proper. See Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505. "The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." Id. at 252, 106 S.Ct. 2505.

Indeed "Rule 56(c) mandates the entry of summary judgment against a party who fails to make a showing sufficient to establish the existence of an element essential to his case, and on which he will bear the burden of proof at trial." Churchill v. IBM, Inc., 759 F. Supp. 1089, 1094 (D.N.J. 1991) (citing Celotex 477 U.S. at 322, 106 S.Ct. 2548).*fn7

B. The National Union Bond

The financial institution bond at issue here provides coverage for:

Loss resulting directly from dishonest or fraudulent acts committed by an employee acting alone or in collusion with others. Such dishonest or fraudulent acts must be ...

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