First United Financial Corp. v. U.S. Fidelity & Guar. Co.

• Citation: 96 F.3d 135
• Decision Date: 27 September 1996
• Docket Number: No. 95-60554,95-60554
• Parties: FIRST UNITED FINANCIAL CORPORATION, Plaintiff-Appellant, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 135

96 F.3d 135

FIRST UNITED FINANCIAL CORPORATION, Plaintiff-Appellant, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Defendant-Appellee.

No. 95-60554.

United States Court of Appeals,

Fifth Circuit.

Sept. 27, 1996.

Kent Edmund Hanson, Denver, CO, Maurice M. Dantin, Columbia, MS, for First United Financial Corp., plaintiff-appellant.

Ronald Alton Yarbrough, Ott & Purdy, Jackson, MS, for United States Fidelity & Guaranty Co., defendant-appellee.

Appeal from the United States District Court for the Southern District of Mississippi.

Before REAVLEY, KING and EMILIO M. GARZA, Circuit Judges.

PER CURIAM:

The judgment of the district court is affirmed for the following reasons:

1. No issue of coverage is raised by First United in the summary judgment record. It contends that Paul Broadhead and expert witnesses, by their depositions, testify that employees of First United Bank dishonestly caused it to buy loan participations that led to losses. We agree with the district court that this testimony fails to prove dishonesty. Broadhead only concludes, "on reflection," that O'Dom and his officers were part of a dishonest plot when O'Dom said these were good loans. He refers to a banking relationship by which First United Bank took many loans, most of which were profitable to the Bank, and all of which were taken with the right to return to the selling bank until reimbursement was stopped by the FDIC in 1984, long after the assailed transactions in which O'Dom participated.

The expert testimony was, likewise, properly rejected by the court. Their opinion of dishonesty goes beyond the scope of expertise. They looked at boxes of documents and the relationships between O'Dom and the notorious Herman Beebe and concluded that O'Dom was dishonest. Their conclusion will not substitute for evidence of dishonesty. By their knowledge of banking practices they may only assist and not replace the fact finder.

2. U.S.F. & G. cannot be faulted for its response to the claim against First United Bank by attorney Turley in 1986 and 1987. The proof of loss filed by the Bank on June 29, 1987 must be taken in context with the discussions between the parties. The Bank claimed no losses caused by its employees but only called for protection against liability claimed against it on behalf of the lawyer for its stockholders. When that claim was abandoned, the surety properly ceased its activity.

3. We would reach the same result if this appeal were from a judgment as a matter of law after trial but upon this same evidence. The admissibility of expert testimony is governed by the same rules, whether at trial or on summary judgment. And we review the decision of the trial court by the same abuse of discretion standard. Christophersen v. Allied-Signal Corp., 939 F.2d 1106, 1109, cert. denied, 503 U.S. 912, 112 S.Ct. 1280, 117 L.Ed.2d 506 (1992). For this reason, the concurring opinion is both unnecessary and unhelpful. The writer of that opinion tries to justify his product by saying that admissibility of the expert opinion is not the issue here. The district court ruled that there was no evidence of dishonesty. Counsel for appellee has taken that position in the district court and in this court. Judges need not initiate nice questions for legal exercise.

AFFIRMED.

EMILIO M. GARZA, Circuit Judge, specially concurring:

I concur in the judgment of the court. I write separately, however, to address an issue raised by the parties which this circuit has yet to decide: the tension between FED.R.CIV.P. 56(e)'s requirement that summary judgment evidence "set forth specific facts showing that there is a genuine issue for trial" and FED.R.EVID. 703's provision that "the facts or data [underlying expert opinions] need not be admissible in evidence." This issue is squarely presented by the parties through their use of experts on the issue of dishonesty.

I

First United is a bank holding company, headquartered in eastern Mississippi, with several branches in communities throughout eastern and central Mississippi. First United purchased insurance coverage from USF & G in the form of a "bankers blanket bond," also commonly referred to as a "fidelity bond." The bond provided coverage for losses resulting from the dishonest or fraudulent acts of First United's employees. The bond included both first-party coverage, for losses directly sustained by First United, and third-party coverage, for losses sustained as the result of suits by third parties. During the bond's coverage period, First United received two letters from an attorney threatening a derivative suit on behalf of First United's shareholders. These letters alleged that former directors and officers of First United had negligently and fraudulently caused First United to make millions of dollars in "bad loans." Pursuant to the terms of the bond for third-party coverage, First United notified USF & G of the letters and the possibility of suit. After numerous extensions, First United also filed a "proof of loss" form with USF & G, which disclosed First United's knowledge of the allegations made against its former directors and officers. The "proof of loss" form does not specify whether it was filed pursuant to the third-party coverage or the first-party coverage provisions of the bond. The threatened lawsuit was never filed, and First United eventually notified USF & G that the claims had been abandoned.

Three years later, First United's attorneys sent USF & G a "settlement demand" letter, alleging that the "proof of loss" form filed with USF & G constituted a claim for payment under the first-party coverage provisions of the bond, and that USF & G had breached its duty of good faith to First United by failing to fully investigate that claim. The letter set forth the following facts: Richard O'Dom once owned 100% of the stock of First United. Harry Sivley was the Chief Executive Officer of First United Bank, one of the branch banks in the First United system. O'Dom was also a boardmember of Bossier Bank and Trust Company ("Bossier Bank"), located in Bossier City, Louisiana. During the time that O'Dom controlled First United, First United purchased over ninety "loan participations," which are portions of existing loans, from Bossier Bank. Many of these loan participations were still active when O'Dom sold First United to Paul Broadhead, a boardmember of First United Bank. Sivley continued to serve as CEO of First United Bank after the sale of First United to Broadhead. First United and its branch banks sustained significant losses on twelve of the loan participations purchased from Bossier Bank.

First United filed suit against USF & G in district court, seeking recovery in contract and in tort. In its breach of contract claim, First United alleged that the losses on the twelve above-mentioned loan participations were covered under the bond because they were caused by the dishonest conduct of O'Dom and Sivley. In its bad faith tort claim, First United alleged that USF & G violated its duties of good faith and fair dealing in handling First United's coverage claim under the bond. First United and USF & G filed cross-motions for summary judgment on both claims. The district court granted USF & G's motion for summary judgment on the coverage issue, holding that First United had not presented any evidence of fraudulent or dishonest conduct. The district court then denied the summary judgment motions pertaining to the bad faith tort claim as moot, and entered judgment for USF & G.

II

First United argues that the district court erred by granting USF & G's motion for summary judgment on the coverage issue. We review a grant of summary judgment de novo, applying the same standards as the district court. Harbor Ins. Co. v. Urban Constr. Co., 990 F.2d 195, 199 (5th Cir.1993). Summary judgment is appropriate in cases in which there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c). In order to establish coverage under a fidelity bond, an insured must prove (1) that its employees engaged in fraudulent or dishonest acts, ¹ and (2) that such acts caused the loss of which the insured complains. Federal Deposit Ins. Corp. v. Fidelity & Deposit Co. of Maryland, 45 F.3d 969, 974 (5th Cir.1995).

As evidence that O'Dom and Sivley acted dishonestly in connection with the purchase of the challenged loan participations, First United relies primarily on the deposition testimony of two financial experts, Charles Cooper and Arthur Leiser. After reviewing the bank files and records pertaining to the challenged loan participations, Cooper and Leiser both concluded that O'Dom and Sivley acted dishonestly at the time that the loan participations were purchased. In determining whether the depositions of Cooper and Leiser create an issue of material fact as to the dishonesty of O'Dom and Sivley, we are faced with an issue requiring consideration of the interplay between an evidentiary rule pertaining to expert witnesses and the procedural rule pertaining to summary judgment. ²

I note at the outset that a district court may inquire into the reliability and foundation of an expert opinion in order to determine the admissibility of that opinion. Rule 703 of the Federal Rules of Evidence states that an expert's opinion should be admissible so long as the sources underlying that opinion are of a type reasonably relied on by experts in the field. ³ We have analyzed and applied this Rule 703 standard on several occasions. In Viterbo v. Dow Chemical Co., 826 F.2d 420 (5th Cir.1987), the plaintiff sought damages for a medical condition allegedly caused by the defendant's pesticide product. Id. at 421. The district court ruled that the testimony of the plaintiff's only expert was inadmissible under Rule 703, and granted summary judgment for the defendant. Id. We affirmed, holding that the expert's opinion, which was based largely on the plaintiff's...