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
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
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
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
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
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
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
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 ...