F.D.I.C. v. Oldenburg

• Decision Date: 08 September 1994
• Docket Number: 91-4095 and 91-4137,Nos. 91-4093,s. 91-4093
• Citation: 34 F.3d 1529
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as Manager of the FSLIC Resolution Fund, statutory successor to FSLIC in its corporate capacity, Plaintiff-Appellee, v. J. William OLDENBURG, Investment Mortgage International, Inc., Empire State West, Landfund, Ltd., James W. Rossetti, Martin L. Mandel, Charles H. Burgardt, Defendants, and MGIC Indemnity Corporation, American Casualty Insurance Company of Reading, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1529

34 F.3d 1529

FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as Manager of the FSLIC Resolution Fund, statutory successor to FSLIC in its corporate capacity, Plaintiff-Appellee, v. J. William OLDENBURG, Investment Mortgage International Inc., Empire State West, Landfund, Ltd., James W Rossetti, Martin L. Mandel, Charles H Burgardt, Defendants and MGIC Indemnity Corporation, American Casualty Insurance Company of Reading, Defendants-Appellants.

Nos. 91-4093, 91-4095 and 91-4137.

United States Court of Appeals, Tenth Circuit.

Sept. 8, 1994.

Rehearing Denied Dec. 2, 1994.

Louis C. Roberts (Leonard S. Surdyk, with him on the briefs), Peterson & Ross, Chicago, IL, for MGIC Indem. Corp. and American Cas. Co. of Reading, Pennsylvania, defendants-appellants.

David W. Alexander (John R. Gall and Philomena M. Dane, Squire, Sanders & Dempsey, Columbus, OH, and Herschel J. Saperstein, Watkiss & Saperstein, Salt Lake City, UT, with him on the briefs), Squire, Sanders & Dempsey, Columbus, OH, for F.D.I.C., plaintiff-appellee.

Before SEYMOUR, Chief Judge, RONEY, ^* and LOGAN, Circuit Judges.

SEYMOUR, Chief Judge.

The Federal Deposit Insurance Corporation (FDIC), acting in its corporate capacity, ¹ sued certain former officers and directors of the State Savings & Loan Association of Salt Lake City, Utah (State Savings) for fraud and negligence. It also sued to recover under two separate savings and loan blanket bonds issued to State Savings. This appeal involves only the two blanket bonds. The district court issued a series of pretrial rulings and then held a bench trial, after which it made extensive findings of fact and entered judgment for the FDIC on both fidelity bonds. The fidelity insurers appeal several of the court's rulings, and the FDIC cross appeals the court's denial of prejudgment interest. We affirm in part, reverse in part, and remand for further proceedings.

I. BACKGROUND

A. Factual Summary

The claims surrounding this appeal involve a piece of real estate located in Richmond, California, known as Park Glen Estates (Park Glen). Defendant J. William Oldenburg was the owner, president, and chairman of the board of both Investment Mortgage International, Inc. (IMI) and Empire State West (Empire). IMI provided real estate In October 1983, Oldenburg became the owner of State Savings after he purchased 99.9% of State Savings stock for $10.5 million in cash. On January 30, 1984, senior employees of IMI called James Rossetti, the President of State Savings, ² and told him that Oldenburg or IMI wanted to borrow $10 million from State Savings. State Savings' General Counsel, Charles Burgardt, was with Rossetti when he received this call, and they both agreed to advise Oldenburg that it would be improper and a violation of federal banking regulations to make such a loan. ³ Nevertheless, Rossetti, Burgardt, and several other individuals met to discuss ways in which Oldenburg's request for $10 million could be satisfied. They agreed that the only way to get $10 million to Oldenburg or IMI would be for federal regulators to approve the sale by Oldenburg of something worth $10 million to State Savings.

financing services, and Empire was primarily engaged in the business of owning and developing Park Glen. Although IMI was in good financial condition until July 1983, it began to rapidly deteriorate soon thereafter as its expenses far exceeded its earnings. According to the district court's findings, IMI's financial problems were due in part to an expensive relocation of corporate offices and other extravagant expenditures by Oldenburg and IMI. Aplt. App., vol. I at 183. By the end of January 1984, IMI was in serious financial trouble.

The next day, Rossetti, Oldenburg, Thomas Kambe, who was the president of Empire, and others had a meeting at the corporate offices of IMI where Kambe was advised that Park Glen was going to be sold by Empire to State Savings for $50 million. No one at this meeting brought up or discussed an appraisal of the Park Glen property, or discussed the fact that Park Glen was currently subject to $16.5 million in encumbrances. As of March 1984, the fair market value of Park Glen as raw land was about $4.1 million. ⁴

Prior to approval of the Park Glen transaction by State Savings' board of directors and only one day after Oldenburg requested the $10 million loan, Rossetti had $10 million transferred from State Savings to IMI even though he was well aware of the need for federal approval of the transaction. Because IMI was on the verge of financial collapse, this cash infusion was essential for IMI to continue its operations. IMI used the money as capital or to pay its bills.

In late February, a supervisory agent of the Federal Home Loan Bank of Seattle (FHLB), John Morris, became concerned about affiliated transactions between State Savings and other Oldenburg companies. He advised Rossetti, Burgardt, and senior management of IMI that no dealings were to take place between State Savings and any Oldenburg companies until the FHLB had more information. Despite this verbal order, Rossetti, Burgardt, and others proceeded with the Park Glen purchase without seeking federal approval.

State Savings held its Board of Directors ⁵ regular meeting on March 23, 1984. Bryan Wilkinson, the only outside director of State Savings, had been given no prior notice of the Park Glen purchase. He was asked to ratify the purchase of Park Glen after being told that the board had decided to purchase the property at a "special board meeting" on January 31. The district court found that Oldenburg, Rossetti, Burgardt, and Martin Mandel, who was a director of State Savings and also corporate counsel for IMI, either failed to disclose or deliberately misrepresented pertinent facts necessary for Wilkinson to make an informed decision on Park Glen. These facts included that 1) Park Glen was owned by Empire, which was in turn owned Burgardt closed the Park Glen sale on March 30 for a purchase price of $55.7 million. ⁶ Kambe executed the agreement as president of Empire but did not know why the price had increased $5.7 million from the $50 million price agreed on at the January 31 meeting. The final purchase agreement did not include any provision requiring approval of the transaction by federal or Utah regulators, or a provision providing for a refund if the deal was not approved by regulators. State Savings transferred $11.5 million to the escrow agent for the transaction, plus an additional $5 million which it borrowed from another savings and loan. ⁷ The escrow agent paid a total of approximately $15.6 million to Bank of the West and Gibraltar Savings and Loan Association for loans on which Oldenburg had previously given personal guarantees. Another payment of $562,664.95 was given directly to IMI at closing without explanation.

by Oldenburg, and that Empire had purchased Park Glen for $3.5 million, 2) IMI was very short of cash, 3) Oldenburg and IMI had tried to borrow $10 million directly from State Savings, 4) Rossetti had refused the loan request because he believed it was unlawful, 5) the Park Glen deal was conceived as a vehicle to circumvent prohibitions on a direct loan to Oldenburg, 6) State Savings had already transferred $10 Million to IMI, 7) the FHLB had already specifically prohibited State Savings from engaging in any transactions with Oldenburg companies, 8) the January 31 meeting represented in the back-dated minutes was not a legitimate board meeting, and 9) federal disclosure of the transaction had not been made. Aplt. App., vol. I, at 192-93. Wilkinson voted to proceed with the transaction.

Oldenburg, Rossetti, Burgardt, Mandel, and others continued to deliberately deceive federal regulators by concealing the Park Glen transaction. Federal regulators' initial requests for information about a possible affiliated transaction went unsatisfied. When they finally learned of the Park Glen transfer, Rossetti, Burgardt, Mandel, and Oldenburg gave them information they knew was false. As the full scope of the Park Glen transaction came to light, the FDIC and Utah state regulators issued cease and desist orders to State Savings in June 1984. State Savings eventually became insolvent and the FSLIC became its receiver in April 1985. FSLIC sold the Park Glen property for $4.5 million in 1988.

During the period from February 6, 1981 through February 5, 1984, State Savings was insured under the terms of a savings and loan blanket bond issued by defendant MGIC Indemnity Corporation (MGIC). From February 6, 1984 to October 15, 1984, State Savings was insured under a blanket bond issued by defendant American Casualty (American). American acquired portions of the MGIC insurance business in the latter part of 1983, including its fidelity bond obligations. Any liability accruing under either bond is thus the obligation of American. Consequently, only American was named in the judgment below, and American and MGIC will be referred to collectively in this opinion as "American."

B. Proceedings Below

This appeal arises from the FDIC's action against American to recover under the provisions of the two blanket bonds for the losses State Savings suffered as a result of the Park Glen transaction. The district court entered judgment in favor of the FDIC and against American in the amount of $3 million under each bond, for a total of $6 million. The court denied prejudgment interest on all claims. On appeal, American contends the district court erred by concluding that (1) both Rossetti and Burgardt acted with manifest intent to cause State Savings to sustain a loss, (2) discovery of loss occurred under both bonds, (3) late notice of loss under the

bonds did not defeat coverage or prejudice American, (4) the automatic termination provisions did not apply to terminate coverage under the bonds, (5) the doctrine articulated in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (19...