F.D.I.C. v. Mijalis

• Decision Date: 10 March 1994
• Docket Number: No. 92-5123,92-5123
• Citation: 15 F.3d 1314
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, in its Corporate Capacity, Plaintiff-Appellee, Cross-Appellant, v. Gus S. MIJALIS, et al., Defendants, and Gus S. Mijalis, et al., Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1314

15 F.3d 1314

FEDERAL DEPOSIT INSURANCE CORPORATION, in its Corporate

Capacity, Plaintiff-Appellee, Cross-Appellant, v. Gus S. MIJALIS, et al., Defendants, and Gus S. Mijalis, et al., Defendants-Appellants, Cross-Appellees.

No. 92-5123.

United States Court of Appeals, Fifth Circuit.

March 10, 1994.

Order Denying Rehearing May 2, 1994.

Phillip W. Preis, Catherine S. St. Pierre, Preis & Crawford, Baton Rouge, LA, Louis G. Coris, S. Dwight Stephens, New York City, for Intern. Ins. Co.

Joe C. LeSage, Jr., John R. D'Anna, Shreveport, LA, for Gus S. Mijalis, et al., and John G. Cosse.

Paul M. Cooke, Shreveport, LA, for John B. Franklin and J. Harper Cox.

Sarah S. Vance, Barry W. Ashe, Richard Gill, Karen H. Freese, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, LA, for F.D.I.C.

Peter G. Thompson, William E. O'Brian, Jr., Susan M. Camp Stocks, Ross, Dixon & Masback, Washington DC, amicus curiae for American Cas. Co. of Reading, PA, in support of appellant Intern. Ins. Co.

Appeals from the United States District Court for the Western District of Louisiana.

Before REYNALDO G. GARZA, KING and DeMOSS, Circuit Judges.

KING, Circuit Judge:

After a jury trial, the United States District Court for the Western District of Louisiana entered judgment in favor of the plaintiff, the Federal Deposit Insurance Corporation (FDIC), and against Gus S. Mijalis, Alex S. Mijalis, John G. Cosse, John B. Franklin, and J. Harper Cox, Jr. (the individual defendants), and their directors' and officers' liability insurer, International Insurance Company. We now consider the defendants' appeals and the FDIC's cross-appeal.

I. BACKGROUND

A. FACTS

The stipulations contained in the pretrial order and the evidence introduced at trial, viewed in the light most favorable to the jury verdict, tended to show the following chain of events.

The Bank of Commerce (the Bank) was chartered as a Louisiana state bank and opened for business in January 1975. Gus Mijalis served as vice-chairman of the Bank's board of directors from the Bank's opening until May 1980, when he was elected chairman International Insurance Company (International) issued two director and officer liability policies (D & O policies) to the Bank. International issued the first D & O policy (the 1983 policy) to the Bank on February 25, 1981, and it was to run until February 21, 1984; the policy was later amended to expire on January 1, 1984. Originally the 1983 policy's limit of liability was $5 million for each policy year, but in September 1982 International agreed to double the limit to $10 million per policy year. Bank president Cox represented to International that he was aware of no facts that would give rise to any claim in excess of $5 million at the time. In December 1983, the Bank applied for a new D & O policy from International, and International issued a new policy for the period January 1, 1984, to January 1, 1985 (the 1984 policy). This policy reduced coverage to $5 million, and it excluded from coverage several liabilities that were not excluded under the 1983 policy. International declined to renew the 1984 policy after it expired.

of the board. Gus Mijalis's brother, Alex Mijalis, and his cousin, John Cosse, also served as directors of the Bank from at least 1981 to 1985. Together, these three men owned a controlling bloc of Bank stock, eventually growing to over 65% of outstanding shares by November 1982. J. Harper Cox, Jr., was Bank president from 1976 to 1986, except for a hiatus from June 1981 to July 1982, during which he served as president of AMI, Inc. John Franklin served as a vice-president and loan officer of the Bank from April 1982 to October 1985.

The Bank experienced severe financial difficulties during the 1980s. As a federally insured financial institution, the Bank was subject to federal regulation, and a federal examination report noted that the Bank had a negative liquidity as of January 1981. That year the FDIC designated the Bank as a "problem bank," a distinction it shared with only one other bank in its entire 115-bank district. In March 1981, the FDIC entered into a memorandum of understanding with the Bank, establishing performance benchmarks for the Bank intended to improve its liquidity difficulties and its generally unsound financial condition. Matters did not improve, however, and the Bank received a poor rating on its December 1982 examination by the FDIC. In June 1983, the FDIC issued a notice of charges and a proposed cease and desist order, and the FDIC entered the order against the Bank in October 1983.

The Bank's financial condition did not improve, and the FDIC gave the Bank another poor rating in its December 1983 examination. Indeed, between the entry of the memorandum of understanding in March 1981 and June 1984, federal and state regulators advised the Bank on sixteen separate occasions that corrective measures were needed to improve the Bank's financial health. By January 1985, the FDIC downgraded the Bank's financial condition to the poorest rating possible. That year the FDIC issued a more stringent cease and desist order against the Bank, and the FDIC also entered an order prohibiting Gus Mijalis from ever acting as a director or officer of a federally-insured bank.

Finally, on June 13, 1986, the Commissioner of the Louisiana Office of Financial Institutions declared the Bank insolvent and appointed the FDIC as receiver. The FDIC as receiver transferred all of the Bank's claims thereby received to the FDIC in its corporate capacity.

B. PROCEDURAL HISTORY

The FDIC brought suit in June 1989 in federal district court against numerous Bank directors and officers and against their liability insurers, International and Southern Underwriters, Inc., and the Bank's insurance broker, Morris, Temple & Trent, Inc. Federal subject-matter jurisdiction was predicated on 28 U.S.C. Sec. 1331 (federal question jurisdiction) and 28 U.S.C. Sec. 1345 (actions brought by the United States or its agencies). The insurance companies were joined under Louisiana's direct action statute. LA.REV.STAT.ANN. Sec. 22:655 (West Supp.1993). Southern Underwriters and Morris, Temple & Trent settled with the FDIC several months prior to trial, and most of the officers and directors of the Bank settled with the FDIC on the eve of trial, leaving as defendants Gus and Alex Mijalis, John Cosse, J Jury trial commenced on November 5, 1991. On December 12, 1991, the jury returned a verdict in favor of the FDIC for the entire amount of damages sought, some $28.5 million. The jury further found that some $17.5 million of the total damages suffered by the Bank were attributable to occurrences during the effective period of the 1983 policy. The district court reserved most of the insurance coverage issues for its own decision, and on June 30, 1992, the court ruled that losses suffered by the Bank traceable to acts or omissions occurring during the years 1981-83 were covered by the 1983 policy. The court also held that an exclusion in the 1984 policy precluded any coverage of losses stemming from occurrences during that policy's lifetime. 800 F.Supp. 397. On September 1, 1992, the district court entered judgment in favor of the FDIC in the following amounts (excluding prejudgment and postjudgment interest): (1) $20,977,918 against Gus and Alex Mijalis, Cosse, Cox, and Franklin in solido, (2) $5,302,025 against Gus and Alex Mijalis, Cosse, and Cox in solido, and (3) $2,180,931 against Gus and Alex Mijalis and Cosse in solido. The court also adjudged International liable for $17,504,946 of the preceding amounts, plus prejudgment and postjudgment interest.

Harper Cox, John Franklin, and International. The FDIC's claims against the defendant directors and officers included breach of fiduciary duty, breach of contract, and negligence, and its claims were based largely on the approval and funding of imprudent loans that ultimately caused substantial losses to the Bank and the FDIC.

The defendants' motions for new trial and for judgment as a matter of law were denied. Appeal to this court followed. ¹

C. ISSUES

The issues presented for our consideration may be divided into two general categories. The first category includes the individual defendants' challenges to the merits of the verdict and judgment holding them liable for $28.5 million. Five of the issues raised by the individual defendants in this connection concern the district court's jury instructions, and the sixth issue challenges the district court's refusal to allow the defendants to introduce evidence to show that the FDIC was the proximate cause of all or part of the damages claimed. The FDIC argues in support of the verdict and judgment against the individual directors.

The second category of issues concerns the district court's rulings with respect to insurance coverage. International makes several arguments that the district court erred in holding International liable for $17.5 million of the total judgment. The individual defendants and the FDIC defend this portion of the judgment, and they additionally argue that the district court erred in holding that the 1984 policy provided no coverage for losses during its lifetime.

II. STANDARDS OF REVIEW

In Bender v. Brumley, 1 F.3d 271, 276-77 (5th Cir.1993), we set forth a two-part test for challenges to jury instructions. First, the challenger must demonstrate that the charge as a whole creates "substantial and ineradicable doubt whether the jury has been properly guided in its deliberations." Id. at 276 (citations omitted). Second, even if the jury instructions were erroneous, we will not reverse if we determine, based upon the entire record, that the challenged instruction could not have affected the outcome of the case. Id. at 276-77. If a party wishes to complain on appeal of the district court's refusal to give a proffered instruction, that party must show as a threshold matter that the proposed instruction...