First Dakota Nat. Bank v. St. Paul Fire & Marine Ins. Co.

• Decision Date: 14 July 1993
• Docket Number: 91-3034,Nos. 91-3020,s. 91-3020
• Citation: 2 F.3d 801
• Parties: FIRST DAKOTA NATIONAL BANK, formerly doing business as American State Bank, a national bank, Appellant/Cross-Appellee, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 801

2 F.3d 801

FIRST DAKOTA NATIONAL BANK, formerly doing business as

American State Bank, a national bank, Appellant/Cross-Appellee, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, Appellee/Cross-Appellant.

Nos. 91-3020, 91-3034.

United States Court of Appeals,

Eighth Circuit.

Submitted May 14, 1992.

Decided July 14, 1993.

Stephen M. Johnson, Yankton, S.D., argued and on brief (Celia Miner and Michael F. Marlow, on the brief) for appellant/cross-appellee.

Roderick Dean Blanchard, Minneapolis, MN, argued and on brief (Carl D. Knudson and Thomas H. Crouch, and Paul T. Barnett, Sioux Falls, SD, on the brief) for appellee/cross-appellant.

Before FAGG, Circuit Judge, HENLEY, Senior Circuit Judge, and HANSEN, Circuit Judge.

HANSEN, Circuit Judge.

This is a banker's bond case. First Dakota National Bank (First Dakota), after buying the failed American State Bank (American Bank), sued St. Paul Fire & Marine Insurance Company (St. Paul) for losses allegedly caused by dishonest former employees of American Bank and sought recovery under two fidelity bonds issued to American Bank by St. Paul. The case went to trial and the jury found in favor of First Dakota on 12 of its 14 claims against St. Paul. The district court granted St. Paul's posttrial motion for judgment as a matter of law on four of the 12 claims that the jury had found in favor of First Dakota. Both parties appeal. We affirm in part, reverse in part, and remand.

I. Facts

American Bank, a small, state-chartered bank operating in Yankton, South Dakota, was owned by American Banshares, Inc., a closely held bank holding company. In 1984, William Deam became President and Chief Executive Officer (CEO) of American Bank. Unbeknownst to the bank's stockholders, depositors, or bank regulators, Deam was involved in a fraudulent scheme to divert bank funds to his own personal use. During the scheme, Deam's ownership in the holding company increased from 8.3% to 45% between 1983 and 1986. Three other American Bank officials were involved in the scheme during this period of time: Executive Vice-President Karen Kay Langley; Vice-President James Sletten; and Trust Officer Steve Capitanio. ¹ Deam, Langley, and Sletten each pled guilty to federal criminal violations.

The fraudulent scheme was extensive and consisted of transactions between and among 28 different corporations or entities.

In August 1986, the Federal Deposit Insurance Corporation (FDIC) began investigating American Bank. On March 3, 1987, upon completion of their investigation, the FDIC examiners met with American Bank's Board of Directors. The FDIC examiners informed the board that several bank officers were engaging in self-serving conduct that weakened the bank's asset portfolio. The examiners also cited numerous apparent violations of federal banking laws and regulations.

Based on its examination findings, the FDIC issued a temporary cease and desist order against William Deam on April 14, 1987. Two months later, the FDIC released the results of the American Bank examination to the public. Shortly thereafter, William Deam resigned as President and CEO of American Bank. John Lillibridge, Chairman of the Board of First Fidelity Bank in Burke, South Dakota, became interim president of American Bank in September 1987.

Unaware at the outset of the extent of Deam's scheme, Lillibridge quickly learned. In early September 1987, when a depositor at American Bank demanded to see his $600,000 certificate of deposit which the American Bank was holding in escrow, Lillibridge discovered that Deam had cashed it in. Lillibridge immediately contacted Lawrence Piersol, an attorney hired by American Bank. After an investigation, Piersol notified St. Paul on September 10, 1987, for a claim on this loss. St. Paul concedes this fact. See St. Paul's brief at 42.

After further investigation into Deam's past activities, American Bank then filed formal proofs of loss on December 29, 1987. On February 19, 1988, in accordance with the terms of the fidelity bonds, St. Paul notified American Bank that the bonds' coverage would terminate on April 19, 1988. American Bank subsequently filed a revised proof of loss with St. Paul on August 1, 1988.

In 1988, First Dakota contacted the FDIC and expressed an interest in merging with or, in effect, purchasing American Bank. Trial transcript (Tr.) at 189. Because American Bank's liabilities were greater than its assets, First Dakota requested a substantial amount of money from the FDIC to finalize the merger. Id. The FDIC agreed and contributed $4,275,000 to First Dakota. Id. As an additional condition of the merger, First Dakota was obligated to seek reimbursement for losses allegedly caused by Deam and other American Bank officers. Tr. at 190. The agreement specified that the FDIC would receive 70% of the recovered losses and First Dakota would receive the remaining 30%. Tr. at 191. The purpose of this repayment schedule was to reimburse the FDIC for the money it paid to First Dakota to finalize the merger. Id.

First Dakota filed this civil complaint against St. Paul on March 22, 1989, and the trial commenced on May 7, 1991. First Dakota sought recovery from St. Paul for losses sustained by American Bank on 14 separate transactions. ² On May 30, 1991, the jury found in favor of First Dakota on 12 of the 14 claims and in favor of St. Paul on the two remaining claims, namely the Business Expense claim and the Emmick claim. The district court, however, after the verdicts, granted judgment as a matter of law to St. Paul on four claims (the Northern Extrusions claim, the Unauthorized Dividend claim, the First Bancwest Devco, Inc. claim, and the Steve Capitanio claim). See First Dakota Nat'l Bank f/d/b/a American State Bank, a national bank v. St. Paul Fire & Marine Ins. Co., No. CIV 89-4047 (D.S.D. filed Aug. 9, 1991) (amended order on motions). On August 20, 1991, the district court awarded judgment in favor of First Dakota for a total of $4,392,182.26. ³ See id. No. CIV 89-4047 (D.S.D. filed Aug. 20, 1991) (second amended judgment in a civil case). Both parties appeal and raise a salmagundi of issues.

II. Discussion

A. Statute of Limitations

St. Paul issued two bonds to American Bank insuring against losses resulting directly from dishonest or fraudulent acts committed by an American Bank employee acting alone or in collusion with others. In order to recover under the specific terms of the bond, the insured was required to notify St. Paul of a loss "at the earliest practicable moment not to exceed 30 days after the discovery of a loss." See St. Paul's app. at 30 (financial institution bond (bond)). Within six months after the discovery, the insured was required to furnish St. Paul with a proof of loss. Id. Finally, the insured was required to initiate legal proceedings, if necessary, within 24 months after discovery of a loss. Id. "Discovery" is defined as the time "when the insured first becomes aware of facts which would cause a reasonable person to assume that a loss of a type covered by this bond has been or will be incurred, regardless of when the act or acts causing or contributing to such loss occurred, even though the exact amount or details of loss may not then be known." See id. at 29.

The jury, by way of special interrogatories, found that the insured complied with the bond's specific notification and discovery provisions. Specifically, the jury found that the insured notified St. Paul "as soon as practicable" and also that this notification was within 30 days after discovering the loss. See First Dakota Nat'l Bank f/d/b/a American State Bank, a national bank v. St. Paul Fire & Marine Ins. Co., No. CIV 89-4047 (D.S.D. filed May 30, 1991) (jury verdict). The jury was not required by the interrogatories to specify the exact date upon which American Bank should have reasonably assumed that an insured loss had been incurred; in other words, the exact date when a loss was discovered.

St. Paul argues that First Dakota failed to file this lawsuit within 24 months after discovering a loss and, therefore, is barred from any recovery. Notwithstanding the fact that the jury specifically found that American Bank timely notified St. Paul "as soon as practicable" and also within 30 days after discovering an insured loss, St. Paul contends that on either January 17, 1986, or on March 3, 1987, American Bank discovered facts sufficient as a matter of law to conclude that an insured loss had occurred. Because the discovery of a covered loss allegedly occurred more than 24 months before First Dakota actually filed its complaint on March 22, 1989, St. Paul contends that First Dakota's lawsuit is entirely barred by the bond's two-year statute of limitations provision.

The January 17, 1986, date relied on by St. Paul is when the American Bank board met and discussed the results of a 1985 South Dakota State Examination Report (state report). In the state report, the board learned that American Bank had paid more than the net book value of the identifiable assets and liabilities of three leasing companies and a security title company when the Bank acquired them. All of the businesses had been part of Deam's holdings. Also, the board learned then that the state examiners "criticized" this transaction principally because American Bank had included the purchased business's goodwill as an asset on its financial sheets. St. Paul claims that these facts were sufficient to cause a reasonable person to assume that a covered loss had been incurred. Under St. Paul's argument, therefore, First Dakota had until January 17, 1988, which is 24 months after American Bank allegedly should have discovered the loss, to bring its lawsuit.

After reviewing the voluminous trial transcript, we hold that there was not sufficient evidence to conclude as a matter of law that discovery occurred on January 17, 1986. On that date and based on the state report, American Bank did not become aware of facts...