205 F.3d 66 (2nd Cir. 2000), 99-7357, Fed. Deposit Ins. v Nat'l Union Fire Ins.

Docket Nº:Docket No. 99-7357
Citation:205 F.3d 66
Party Name:Federal Deposit Insurance Corporation, as Receiver of Union Savings Bank, Plaintiff-Appellee, v. National Union Fire Insurance Company of Pittsburgh, PA., doing business as National Union Fire Insurance Company, Defendant-Appellant.
Case Date:March 02, 2000
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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205 F.3d 66 (2nd Cir. 2000)

Federal Deposit Insurance Corporation, as Receiver of Union Savings Bank, Plaintiff-Appellee,


National Union Fire Insurance Company of Pittsburgh, PA., doing business as National Union Fire Insurance Company, Defendant-Appellant.

Docket No. 99-7357

United States Court of Appeals, Second Circuit

March 2, 2000

Argued: October 25, 1999

Appeal from summary judgment entered by the United States District Court for the Southern District of New York (Loretta A. Preska, Judge) against National Union Fire Insurance Company of Pittsburgh, PA. The district court held that the Federal Deposit Insurance Corporation established that a fidelity bond issued by the insurer indemnified Union Savings Bank for its loss as a matter of law.

The district court's judgment is affirmed.

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[Copyrighted Material Omitted]

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Ronald H. Alenstein, New York, NY (Victor F. Mustelier, Stephen F. Willig, D'Amato & Lynch, of counsel), for Defendant-Appellant.

Alan T. Gallanty, New York, NY (Twomey, Hoppe & Gallanty, LLP; Ann S. DuRoss, Assistant General Counsel, Robert D. McGillicuddy, Supervisory Counsel, Roberta H. Clark, Counsel, Federal Deposit Insurance Corporation, Washington, DC, of counsel), for Plaintiff-Appellee.

Before: POOLER, FEINBERG and OAKES, Circuit Judges.

OAKES, Senior Circuit Judge,

The Federal Deposit Insurance Corporation (the "FDIC"), as receiver for Union Savings Bank (the "Bank"), filed this action against National Union Fire Insurance Company of Pittsburgh, PA ("National Union"), seeking recovery under a fidelity bond indemnifying the Bank for damages caused by dishonest and fraudulent acts by employees. The United States District Court for the Southern District of New York (Loretta A. Preska, Judge) granted summary judgment to the FDIC and awarded the liability permitted under the bond, plus interest. This appeal by National Union followed. Because we agree with the district court that the FDIC has established as a matter of law that the fidelity bond indemnifies the Bank for its loss, we affirm the judgment of the district court.


T. John Folks, III, was a Trustee of the Bank from 1974 to 1992. Folks served on the Bank's Mortgage and Real Estate Committee, responsible for guiding and protecting the Bank in real estate ventures, from at least 1982 to 1992.

In 1985, the Bank entered into a limited partnership agreement with Micrad Corporation, an entity owned by Seymour Diesenhouse, and formed Hampton Vistas Associates ("Hampton Vistas").1 Unbeknownst to the Bank, Folks was a partner with Diesenhouse in two separate real estate ventures. Diesenhouse was hired to serve as the construction manager for the Hampton Vistas project.

The purpose of the Hampton Vistas partnership was to develop condominium units at the Rock Hill Golf and Country Club in Brookhaven, New York. The Bank agreed to loan $5 million to Hampton Vistas and had a right of first refusal as to any further construction loans for the project.

In late 1987, three of Diesenhouse's employees, on separate occasions, told Folks that Diesenhouse was engaging in improper and illegal activities in his real estate projects. John DiPietro, an employee of the Hampton Vistas project, and Michael DeChiaro, the construction supervisor and

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project manager of Hampton Vistas, testified under oath that they informed Folks that Diesenhouse was stealing from the project. The activities Diesenhouse was involved in included stealing, taking kickbacks from contractors, overbilling, forging checks, fabricating IRS 1099 forms, and using the Bank's funds to pay personal expenses. Robert Levitas, a business partner of Folks, also testified under oath that he was told by DeChiaro on more than one occasion of allegations of improprieties by Diesenhouse, and that he discussed these allegations with Folks.

Diesenhouse eventually pleaded guilty in 1994 to criminal charges of conspiracy to commit bank fraud, and admitted to soliciting bribes and demanding kickbacks from subcontractors on the Hampton Vistas project after 1991. In his plea, Diesenhouse admitted to directing subcontractors to submit inflated invoices for payment to the Hampton Vistas project which, in turn, were submitted by Diesenhouse to the Bank in order for the subcontractors to kick back monies to Diesenhouse.

Neil Scuderi and Robert Sullivan, employees on the Hampton Vistas project, testified that they knew that DeChiaro and DiPietro planned to tell Folks about Diesenhouse, and that the conversation with Folks indeed had taken place. In addition, Diesenhouse testified that in or about November 1987 he met and discussed with Folks the allegations made against him, and Folks told him on that occasion that he had been informed. Folks, when asked in his deposition whether he was told of Diesenhouse's wrongdoing, did not deny that he was told but merely testified that he could not "recall" or "recollect" discussing these allegations.

Three witnesses also testified that when Folks learned of Diesenhouse's wrongdoing, Folks took actions to protect his own interest in the projects that he shared with Diesenhouse. Specifically, Folks took control of checking accounts away from Diesenhouse, set up an accountant and bookkeeper on one of the other shared partnerships, and put other people in control of those projects. Folks did not, however, take the checkbooks for Hampton Vistas -- the Bank's project -- away from Diesenhouse nor did he inform the Bank of Diesenhouse's wrongdoing.

Beginning on December 22, 1987, the Bank loaned and advanced an additional $8 million to the Hampton Vistas project. The additional notes which originated in 1987 through 1990 were approved by the Bank's Mortgage and Real Estate Committee, of which Folks was a member. Three of the Bank's trustees submitted affidavits swearing that had Folks disclosed to the Bank the allegations regarding Diesenhouse, a full investigation would have been pursued, Diesenhouse would have been removed, and all further funding to Hampton Vistas would have ceased to the extent permissible. Folks testified that he would also have recommended immediately ceasing any further funding to the project if he had been told of the same allegations.

Ultimately, the Hampton Vistas project failed after four years of delays in construction and sales due, the FDIC asserts, to the negligence of the Bank's counsel in its zoning and title work. Specifically, Hampton Vistas did not acquire zoning approval to build housing units on the property until April of 1988. Even then, the project was scaled down significantly from 266 condominiums to final approval for a 136 townhouse project. Between 1985 and 1991, the partnership constructed and sold only 65 of the initially-planned 280 units, 26 of which were partially constructed units sold by auction. The remaining units were not built.

In June of 1991, the Bank consented to an order by the FDIC to cease and desist from unsafe and unsound business practices. In the spring of 1992, the Bank discovered Folks's undisclosed relationship with Diesenhouse, and he was asked to resign as a trustee. The Bank was closed by the New York Superintendent of Banks

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in 1992, and the FDIC was appointed receiver.

Of the approximate $8 million in funds advanced after December 1987, amounts in excess of the bond's limit, $3 million, were never repaid to the Bank. The FDIC sought to recover the Bank's losses under a fidelity bond issued by National Union. The FDIC filed its proof of loss with National Union on November 12, 1992, for the full amount of the bond's coverage.

National Union refused to provide coverage and this litigation followed. After extensive discovery, the FDIC filed a motion for summary judgment. The district court granted the FDIC's motion for summary judgment, finding that the FDIC established as a matter of law that the fidelity bond indemnified the bank for its loss.


I. Summary Judgment Principles.

Summary judgment may be granted only if there is no genuine issue of material fact to be tried and the moving party is therefore entitled to...

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