Resolution Trust Corp. v. Fidelity & Deposit Co

• Decision Date: 04 February 2000
• Docket Number: No. 98-6368,98-6368
• Parties: (3rd Cir. 2000) RESOLUTION TRUST CORPORATION, as Receiver for City Savings, F.S.B., in Receivership, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND; WILLEM RIDDER; JOHN T. HURST; LYNDON C. MERKLE; GREGORY DEVANY Federal Deposit Insurance Corporation, as statutory successor to Resolution Trust Corporation, Appellant
• Court: U.S. Court of Appeals — Third Circuit

Page 615

205 F.3d 615 (3rd Cir. 2000)

RESOLUTION TRUST CORPORATION, as Receiver for City Savings, F.S.B., in Receivership, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND; WILLEM RIDDER; JOHN T. HURST; LYNDON C. MERKLE; GREGORY DEVANY

Federal Deposit Insurance Corporation, as statutory successor to Resolution Trust Corporation, Appellant

No. 98-6368

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued December 15, 1999

Decided February 4, 2000

On Appeal from the United States District Court for the District of New Jersey (D.C. Civ. No. 92-01003) District Judge: Honorable William H. Walls [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Attorneys for Appellant: Anthony J. Sylvester Craig L. Steinfeld Riker, Danzig, Scherer, Hyland & Perretti One Speedwell Avenue Morristown, NJ 07962, Barbara Sarshik Ann S. DuRoss Assistant General Counsel Colleen J. Boles Senior Counsel Daniel Glenn Lonergan (argued) Counsel Federal Deposit Insurance Corporation 550 17th Street, N.W. Washington, DC 20429

Attorneys for Appellee: Gregory R. Haworth (argued) Lauren Debruicker Duane, Morris & Heckscher LLP One Riverfront Plaza Newark, NJ 07102

BEFORE: MANSMANN, GREENBERG, and MCKEE, Circuit Judges

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

This appeal arises from a dispute concerning coverage under a savings and loan blanket fidelity bond the appellee, Fidelity and Deposit Company of Maryland ("F&D"), issued to City Federal Savings Bank ("City Federal"), in 1987. In particular, the Federal Deposit Insurance Corporation ("FDIC"), as statutory successor to the Resolution Trust Company ("RTC") appeals the district court's order of summary judgment entered against it on January 29, 1998, on its action on the bond.¹ It contends that the district court erred in holding that no reasonable jury could conclude, based on the evidence presented, that City Federal "discovered" a covered loss within the bond period as required by the bond's terms for there to be coverage. In response, F&D asserts that the district court's ruling on the discovery issue is correct, and that alternatively, it is entitled to summary judgment because the loss City Federal sustained is not covered by the bond. For the reasons that follow, we will reverse the district court's order of summary judgment, and remand the matter to the district court for further proceedings consistent with this opinion.

II. FACTS and PROCEEDINGS

A. Background

We draw the relevant facts from the district court's opinion and the parties' submissions in the summary judgment proceedings before the district court. ² See Resolution Trust Co. v. Fidelity & Deposit Co., No. 92-1003, slip op. (D.N.J. Jan. 27, 1998) (hereinafter "Op. at ___"). Because this appeal is intensely fact-driven, it is necessary to set forth the factual background in some detail.

On March 22, 1987, F&D issued a "Savings and Loan Blanket Bond" ("the bond"), Standard Form No. 22, naming as insureds City Federal and its wholly-owned subsidiary City Collateral and Financial Services, Inc. ("City Collateral"). City Collateral was City Federal's mortgage warehouse lending operation.³ Among other things, the bond provided fidelity insurance, and stated that F&D would indemnify City Federal or its subsidiaries up to $5 million against losses it might suffer because of certain dishonest or fraudulent acts by its employees. The bond expired on March 22, 1989.

During the effective period of the bond, Willem Ridder ("Ridder"), John Hurst ("Hurst"), Lyndon Merkle ("Merkle") and Gregory DeVany ("DeVany") were City Federal and City Collateral employees, serving City Collateral in the following capacities: (1) Ridder was the president of City Collateral and Hurst's supervisor; (2) Hurst was a vice president of City Collateral, the director of financial services and DeVany's supervisor; (3) Merkle was a senior financial services officer and also a vice president of City Collateral; and (4) DeVany was a financial services officer and an assistant vice president of City Collateral. Unless we otherwise note, we will refer to these persons collectively as the "individual defendants."

In June 1987, Kevin Corcoran ("Corcoran"), a City Collateral loan officer, presented City Federal's Executive Committee ("Executive Committee") and Officer's Loan Committee ("Loan Committee") with a proposal for a lending arrangement whereby City Collateral would extend a $30 million warehouse credit line to Northwest Mortgage Company ("Northwest"). Northwest, a New Jersey company, originated residential mortgage loans and sold them to investors individually or in pools. At all times relevant to this case, Harry Movroydis ("Movroydis") was the president of Northwest. On June 16, 1987, City Federal and Northwest executed a "Master Mortgage Loan Warehousing Agreement" (the "master agreement") and related documents setting forth the terms and conditions of the lending arrangement.

In March 1988, Corcoran left employment at City Collateral, but before his departure, he told Hurst about certain problems he had experienced with the Northwest credit line. On or about April 1, 1988, Hurst and DeVany took over administration of the Northwest credit line. From approximately April 1, 1988, to November 1988, Merkle generated "exception reports" pertaining to the Northwest credit line and delivered those reports to both Hurst and DeVany. These reports provided the following information: (1) total amount of collateral that had been shipped to third-party investors for purchase but for which City Federal remained unpaid for at least 30 days (referring to these loans as "shipped loans"), and (2) total amount of collateral that had not been shipped to third-party investors for purchase and for which City Federal had not been repaid by Northwest for at least 180 days from City Collateral's funding of the loan (referring to these loans as "warehoused loans"). Despite the fact that the exception reports for the Northwest credit line indicated numerous problems with the Northwest collateral, Hurst and DeVany did not distribute the reports to City Federal officials during the relevant time period.

In May 1988, Hurst wrote to Movroydis to inform him that Northwest was in violation of the master agreement. About the same time, DeVany and another City Collateral employee found difficulties with Northwest's list of commitments from third parties to buy notes and mortgages. DeVany did not report the problems to City Federal's Real Estate Finance Committee. Despite these problems, Hurst recommended that the Loan Committee extend the maturity date of the credit line from May 31, 1988, to June 30, 1988. Moreover, Hurst did not inform the Loan Committee that the Northwest credit line was in technical default as of that time.

In June 1988, Hurst wrote to Northwest about a "workout plan" for the credit line to cure the violations of the master agreement. In July 1988, City Collateral put the credit line on its internal "watch list," which meant that the Northwest account had been identified as a problem credit. The individual defendants did not inform City Federal of this fact. Moreover, between June and September 1988, City Collateral continued to extend credit to Northwest while it closely monitored the loan. As F&D points out in its brief, the evidence demonstrates that there were improvements with Northwest's credit line during the summer of 1988. Northwest was able to reduce its warehoused loans from $8,036,027 as of June 30, 1998, to zero as of September 30, 1988. The shipped loans dropped from $7,040,357 as of June 30, 1988, to $5,695,890 as of September 30, 1988.

In or about May 1988, and coincidentally around the same time period that the Northwest credit line's maturity date was extended for the first time, Ridder, Hurst and Merkle learned from James McTernan ("McTernan"), a City Federal officer, that City Federal planned to sell City Collateral. According to the RTC, upon learning of City Federal's intent to sell City Collateral, Hurst, Ridder and Merkle promptly initiated discussions with City Federal about their potential compensation if the sale were consummated. Apparently, Ridder, Hurst and Merkle negotiated what the parties call "golden handcuff agreements" or "closing agreements" with City Collateral throughout the summer and into the fall of 1988. See SA at 48.

As part of the effort to sell City Collateral, Drexel Burnham Lambert, Inc. prepared an offering memorandum that described City Collateral's business and corporate structure as well as its loan credits. Ridder, Hurst and Merkle worked on the credit section of this document, in particular providing information for the section of the offering memorandum entitled "Workouts and Litigation." Although the Northwest credit line was in a "workout" status as of that time, they did not include it in this section of the offering memorandum. City Federal distributed the offering memorandum during the summer of 1988 to potential purchasers.

In September 1988, DeVany (under Hurst's supervision) prepared a written recommendation to extend and renew the Northwest credit line to June 1989, and in late September 1988, DeVany presented it to City Federal's loan committees. The report, and DeVany's oral presentation, omitted negative facts relating to the Northwest credit line, including, inter alia, its "workout" status and Northwest's technical default under the master agreement. The report also underestimated Northwest's risk rating in view of the various problems with the account. Indeed, F&D admits in its brief that while there appears to be a factual dispute as to what DeVany said at the committee presentation, giving the RTC every reasonable inference, "the most that can be said is that the Employees concealed the Northwest default and the workout plan in progress in order to induce City Federal to extend the loan." Br. at 7. Moreover, the...