F.D.I.C. v. Insurance Co. of North America

• Citation: 105 F.3d 778
• Decision Date: 04 November 1996
• Docket Number: 96-1557,Nos. 96-1556,s. 96-1556
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver for the Bank For Savings, Plaintiff, Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant, Appellee/Third-Party Plaintiff, Appellant, v. Paul J. BONAIUTO and Dolores DiCologero, Third-Party Defendants, Appellees. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 778

105 F.3d 778

FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver for the

Bank For Savings, Plaintiff, Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant, Appellee/Third-Party Plaintiff, Appellant, v. Paul J. BONAIUTO and Dolores DiCologero, Third-Party

Defendants, Appellees.

Nos. 96-1556, 96-1557.

United States Court of Appeals, First Circuit.

Heard Nov. 4, 1996.

Decided Feb. 3, 1997.

Eugene J. Comey, with whom Robert D. Luskin, Comey Boyd & Luskin, Ann S. DuRoss, Assistant General Counsel, F.D.I.C., Thomas L. Hindes, Counsel, E. Whitney Drake, Special Counsel, and Leslie Ann Conover, Senior Attorney, were on brief, Washington, D.C., for FDIC.

Gerald W. Motejunas, with whom Marie Cheung-Truslow and Lecomte, Emanuelson, Motejunas & Doyle were on brief, Quincy, MA, for Insurance Company of North America.

Before SELYA, Circuit Judge, CYR, Circuit Judge, and LYNCH, Circuit Judge.

LYNCH, Circuit Judge.

In 1977 the Massachusetts legislature enacted a statute, Mass.Gen.Laws ch. 175, § 112, which provided that, for certain types of liability insurance, the Commonwealth would adopt a "notice prejudice" rule. This new statutory rule departed from the traditional common law rule which had strictly enforced notice provisions in insurance policies, allowing forfeiture of coverage where notice to an insurer of a claim was late. The Supreme Judicial Court of Massachusetts subsequently extended, by common law, and then limited the extension of, the notice prejudice rule for liability insurance policies. At issue here is whether the notice due under a fidelity bond was late. If so, does the state common law notice prejudice rule, under which an insurer must show prejudice in order to be excused from coverage by the insured's late notice, extend to the Financial Institution Bond at issue.

The import here is whether a suit by the Federal Deposit Insurance Corporation ("FDIC"), as receiver for the failed Bank for Savings, may proceed against the Bank's insurer, the Insurance Company of North America ("INA"), for coverage of losses due to certain dishonest acts committed by a Bank officer and by a lawyer retained by the Bank. The loss to the Bank from these activities is asserted to be $10 million. The FDIC, as receiver for the Bank, seeks reimbursement for these losses to the full amount covered by the Financial Institution Bond issued by INA, $4 million.

I.

The Bank gave INA notice of potential loss under the Bond on January 16, 1990. The insurer declined to pay, and the Bank brought suit. The district court, interpreting the Bond provisions on a motion for summary judgment, held that the Bank's notice was late because it had not been filed within 30 days of discovery of loss as required by the policy. FDIC v. Insurance Co. of N. Am., 928 F.Supp. 54, 62-63 (D.Mass.1996). The court granted summary judgment for the defendant. Id. The Bank appeals, disputing the district court's analysis of the date of discovery and claiming that its notice was timely. The Bank further asserts that, even if its notice was late, the district court erred in failing to apply the notice prejudice rule to the Bond. ¹

Our review of a grant of summary judgment is de novo. Wood v. Clemons, 89 F.3d 922, 927 (1st Cir.1996). We hold that the district court was plainly correct in holding that the notice was late, but we do so on different grounds than the district court. We also hold that the notice prejudice rule does not apply in this instance. ²

II.

The facts of the employee misconduct underlying the Bank's losses are taken from the Bank's Bond claim and accepted as true for present purposes. From 1987 to 1989, Dolores The Bank made loans on condominium projects developed by the Rostoff Group until February 1989. Although internal regulations forbade the Bank from participating in more than one-third of the units in a particular development, the Bank exceeded these limits as to Rostoff Group properties. In addition, despite regulations prohibiting the financing of more than 80% of the purchase price of a property, the Bank made loans to purchasers for the full value of condominiums in Rostoff Group properties. Bonaiuto prepared closing documents overstating the purchase price of the condominiums and falsely indicating that the purchasers had equity in the property. The loan documentation reflected nonexistent down payments. In fact, the "down payments" took the form of discounts on the purchase price. DiCologero expedited approval of the mortgages without any investigation of the creditworthiness of the applicants, many of whom were not creditworthy for the loans given. The aggregate face value of the loans was approximately $30 million, and many culminated in default.

DiCologero, an Assistant Vice President of the Bank and the manager of the mortgage department, and Paul Bonaiuto, an attorney retained to represent the Bank in mortgage closings, conspired with a condominium development group, the Rostoff Group, to make hundreds of mortgage loans using inflated appraisals and purchase prices in violation of Bank regulations and the law.

Other DiCologero family members also participated in the scheme, to their profit. The overstated values of the condominiums were supported by appraisals prepared by DiCologero's son. He earned more than $33,000 for his work; DiCologero's daughter received $4,550 from the Rostoff Group for secretarial work. DiCologero's husband received $12,000 in referral fees for directing potential purchasers to the Rostoff Group and purchased a condominium himself without paying a deposit, although the Bank records falsely reflected that he had done so. Other aspects of this tale of avarice and corruption need not be detailed. The Bank was declared insolvent on March 20, 1992, and the FDIC was appointed receiver. The FDIC asserts that these events helped bring down the Bank.

In March 1989, the Bank received a letter from counsel for Erna Hooton, a former bookkeeper of the Rostoff Group and a mortgagee on six Rostoff Group units. Ms. Hooton had defaulted on the loans, and the Bank had begun foreclosure proceedings. The letter said that the Bank had misrepresented in the loan documents that Ms. Hooton had made down payments on the properties. The letter also said that Ms. Hooton's financial position should have led the Bank to refuse financing. The letter claimed that Bonaiuto, as closing counsel on the Hooton loans, was aware of the false documentation. The Bank investigated these charges; representatives of the Bank met with Steven Rostoff, a principal of the Rostoff Group, on March 21, 1989. Rostoff said that the down payment for some loans, including Ms. Hooton's, had taken the form of a discounted purchase price. He denied that anyone associated with the Bank was aware of this. DiCologero also denied knowledge of any irregularities. The Bank responded to the Hooton letter by denying the allegations. Because Ms. Hooton did not pursue the matter, neither did the Bank.

Then, in August 1989, Herbert and Deanna Bello, two defaulting borrowers on six Rostoff Group units, sued the Bank for damages and asserted counterclaims in a foreclosure action brought by the Bank. The Bellos asserted, as had Ms. Hooton, that Bonaiuto was aware that they had not made the down payments reflected in the closing documents. They also alleged that when they told Steven Rostoff that they had previously been unable to obtain financing, he replied that they would "not have to worry about financing" because he had made a "deal" with the Bank. The Bank, the Bellos said, never asked for financial information from them. The Bellos further alleged that, at one closing, they had pointed out to Bonaiuto that the closing documents stated an inflated purchase price and an inflated down payment. Bonaiuto referred them to Rostoff, who said this was "what the Bank wanted." In the foreclosure action, the Bellos' counterclaim specifically Another couple who had purchased Rostoff Group properties, Edward and Dorothy Giamette, filed suit on September 22, 1989 against the Bank and the Rostoff principals. Again the complaint alleged that down payments were falsely represented on the closing documents, that Steven Rostoff told the plaintiffs that the Bank knew the figures were false, that the appraisals, which were done by DiCologero's son, were for more than the fair market value of the properties, and that this scheme had been repeated with at least eight other purchasers who had bought a total of forty-five condominiums. Earlier, on September 11, 1989, Mr. Giamette had made similar allegations in a counterclaim in the Bank's foreclosure action against him. None of these claims, however, prompted the Bank to notify INA of possible losses due to alleged employee misconduct. What eventually did lead the Bank to submit a notice of claim was a conversation in October 1989 between DiCologero and a Vice President of the Bank during which DiCologero remarked that her husband had purchased a condominium from the Rostoff Group without making a down payment. The Vice President reported DiCologero's remark to the Bank's President, who met with the Bank's Audit Committee on November 6, 1989. Outside legal counsel from Gaston & Snow were present at the meeting. The Committee discussed "the possibility of 100% loans, the unknown extent of these loans, employee involvement and legal ramifications." Gaston & Snow was asked to prepare a preliminary analysis which was submitted on November 15, 1989. Gaston & Snow then investigated and reported back to the Bank on December 18, 1989. The report recommended, among other measures, that the Bank refer the matter to federal authorities, notify INA, and dismiss DiCologero. On December 27, 1989, the Bank filed a Report of Apparent Crime with the FDIC, advising that it had learned of suspected violations of federal law on December 18, 1989. The Bank also notified the FBI and the U.S. Attorney's Office. DiCologero,...