Am. Cas. Co. of Reading, Pa. v. Baker, SA CV 90-125 AHS (RWRx).

• Decision Date: 04 February 1991
• Docket Number: No. SA CV 90-125 AHS (RWRx).,SA CV 90-125 AHS (RWRx).
• Court: U.S. District Court — Central District of California
• Parties: AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Plaintiff, v. Joe G. BAKER, et al., Defendants.

758 F. Supp. 1340

AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Plaintiff, v. Joe G. BAKER, et al., Defendants.

No. SA CV 90-125 AHS (RWRx).

United States District Court, C.D. California.

February 4, 1991.

Andre E. Jardini, Knapp, Peterson & Clarke, Universal City, Cal.

Richard A. Simpson, Joelle A. Moreno, Ross, Dixon & Masback, Washington, D.C.

Stephen Drummy, Kathleen Carothers Paone, Mark R. Beckington, Drummy, Garrett, King & Harrison, Costa Mesa, Cal., for Joe Sax, William E. Leonard, James C. Roberts, H. Cedric Roberts, Frank Purcell, Jr., Ernest W. Baker and Harold Harris, Jr.

Wayne King, Bill Thompson, Thompson, White, King & Watson, Valencia, Cal., for Bernard Baker.

Mark Weisman, Howard Kern, Weisman, Butler & Watson, Beverly Hills, Cal., for Franklin D. Hartridge.

Dennis Winston, Peter K. Rosen, Lynn Heather Mack, Rosen & Winston, Los Angeles, Cal., for Walker L. Huckaby, John E. Egdahl and Joe D. McCarthy.

Robert A. Peterson, Freidman, Peterson, Walling & Lau, Newport Beach, Cal., for James D. Stroffe.

David A. Sprowl, Paul B. George, McDermott, Will & Emery, Newport Beach, Cal., for Verne F. Potter.

Michael H. Bierman, Robin D. Wierner, Susan M. Walker, Michael J. Mailloux, Tuttle & Taylor, Los Angeles, Cal.

Jay Zybelman, Zybelman, Paluso, Alter, Graham & Sceper, San Diego, Cal., for Peter T. Fletcher.

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS FOR SUMMARY JUDGMENT

STOTLER, District Judge.

Procedural History

On August 17, 1990, plaintiff American Casualty Company of Reading, Pennsylvania ("American Casualty") filed its Motion for Summary Judgment on two claims in its action for declaratory relief, contending that insurance coverage does not exist for officers and directors against whom claims are pending in the underlying action entitled Federal Deposit Insurance Corporation, etc., et al. v. Joe G. Baker, et al., 739 F.Supp. 1401. The Court grants the Request for Judicial Notice and hereby takes notice of the underlying case. Certain proceedings in that case are reported in FDIC v. Baker, et al., 739 F.Supp. 1401 (C.D.Cal. 1990). Counterdefendant Continental Casualty Company ("Continental Casualty") filed a like motion as to policies referenced in the counterclaim brought by the Resolution Trust Corporation, Acting Through Its Managing Agent The Federal Deposit Insurance Corporation ("RTC/FDIC"), defendant-intervenor.

On September 17, 1990, opposition was filed by the RTC/FDIC, defendant Fletcher, and defendants Egdahl, Huckabay, and McCarthy. Various defendants joined in the opposition of other defendants. A consolidated reply was filed by the insurers on October 1, 1990. Sur-replies were received from the RTC/FDIC and defendant Egdahl on October 9, 1990, and certain defendants joined in these filings.

On August 17, 1990, the RTC/FDIC filed its Motion for Partial Summary Judgment, supported by the Declaration of E.T. Wilcher and a Request for Judicial Notice. The balance of the Request for Judicial Notice is granted, the Court hereby noticing Exhibits A through G attached to the Request. This motion was not opposed by the co-defendants and was joined in by several. American Casualty and Continental Casualty (also called the "CNA parties") filed opposition on September 18, 1990; RTC/FDIC replied on October 1, and the insurers filed sur-replies on October 9, 1990.

Oral argument was heard on October 29, at which time the Court called for additional briefing by the RTC/FDIC and the insurers. On November 5 and 14, 1990, respectively, the supplemental memoranda were filed.

By this order, the Court determines that insurance coverage is excluded by the "regulatory exclusion" provision of the policies in issue, but that insurance is not precluded under the "insured vs. insured" provision. The Court also schedules a Mandatory Status Conference for February 25, 1991, at 11 a.m. and directs the parties to comply with Local Rule 6.4.2.

Overview

The action initiated by American Casualty seeks a declaratory judgment pursuant to 28 U.S.C. §§ 2201 and 2202, concerning the rights and obligations of the parties under certain directors' and officers' liability insurance policies issued to Pacific Savings Bank ("Pacific"), in regard to various claims asserted against certain former directors and officers of Pacific in the underlying action described above. The counterclaims seek the same adjudication as to the other policies.

American Casualty issued the following policies to Pacific: Directors' and Officers' Liability Insurance Policy Including Savings & Loan Reimbursement No. ZED-000709551 (policy period 12/4/87-12/4/88, extended to 1/21/89) (the "1987-1988 Policy") and Directors' and Officers' Liability Insurance Policy Including Savings & Loan Reimbursement No. ZED-709551 (policy period 12/4/86-12/4/87) (the "1986-1987 Policy"). Copies of the policies ("Policies") (except documents submitted as part of the applications for the Policies) are annexed to the Complaint as Exhibits A and B, respectively. Subject to all applicable policy terms and conditions, the Policies provide certain insurance coverage for "Loss" sustained in connection with claims made against directors and officers of Pacific.

By virtue of the counterclaims, a total of five (5) policies are now in issue. In addition to those above, there are American Casualty Directors' and Officers' Liability Insurance Policy for Savings and Loan Associations Including S & L Reimbursement No. 709551 (policy period 12/4/85-12/4/86) (the "1985-1986 Policy"); MGIC Indemnity Corporation Directors' and Officers' Liability Policy For Savings and Loan Associations Including S & L Reimbursement No. DO-5455-6 (policy period 9/23/83-12/4/85), which was assumed by Continental Casualty (Endorsement No. 20); and MGIC Indemnity Corporation Directors' and Officers' Liability Policy for Savings and Loan Associations Including S & L Reimbursement No. DO-5455-6 (policy period 9/26/80-9/26/83). Copies of all five Policies were submitted as Exhibits A-E, respectively, annexed to the Declaration of Roger W. Novak.

American Casualty alleges that it has advised the insureds that there is no coverage for the claims on the following independent grounds: (1) Endorsement No. 7 to the 1987-1988 Policy (which is identical to Endorsement No. 6 of the 1986-1987 Policy) bars coverage for any claim brought by or on behalf of the Federal Deposit Insurance Corporation; (2) Endorsement No. 12 to the 1987-1988 Policy (which is identical to Endorsement No. 11 to the 1986-1987 Policy) bars coverage because FDIC seeks to enforce causes of action that belonged to Pacific; and (3) no claim was made and no adequate notice of potential claim was provided to American Casualty prior to the expiration of the 1987-1988 Policy. Continental Casualty asserts the same grounds as to the same exclusion provisions, to the extent they are found therein, in its policies.

Pursuant to the stipulation and Order, filed June 25, 1990, the instant motions are limited to interpretation and application of the Regulatory Exclusion and the Insured vs. Insured Exclusion. In the same stipulation, the parties agreed that no discovery was to be taken until the Court ruled on American Casualty's motion for summary judgment. Continental Casualty, although not a signatory to the stipulation, agreed to be bound by the Court's ruling on these issues. (Decl. of Susan Walker.) In this Order, the Court expressly does not decide additional issues raised by the parties concerning assumption of policies, waiver, or notice to defendant officers and directors of changes in the policy provisions. As to objections filed by the RTC/FDIC, the Court now sustains those objections directed to the Declaration of Mr. Dahlstrom for the reasons cited by RTC/FDIC and primarily because it is irrelevant to the issues addressed in this Order. The objections are overruled as to the Declaration of Mr. Novak for the purpose of these motions in order that the Court may consider the full text of the exclusionary provisions contained in the policies.

The insurance companies contend that there is no coverage under the Policies for the RTC/FDIC Action because the Regulatory Exclusion expressly provides that the Insurer:

shall not be liable to make any payment for Loss in connection with any claim made against the Directors or Officers based upon or attributable to: any action or proceeding brought by or on behalf of the Federal Deposit Insurance Corporation, the Federal Savings & Loan Insurance Corporation, any other depository insurance organization, the Comptroller of the Currency, the Federal Home Loan Bank Board, or any other national or state regulatory agency (all of said organization and agencies hereinafter referred to as "Agencies"), including any type of legal action which such Agencies have the legal right to bring as receiver, conservator, liquidator or otherwise; whether such action or proceeding is brought in the name of such Agencies or by or on behalf of such Agencies in the name of any other entity or solely in the name of any Third Party.

The Insured v. Insured Exclusion bars coverage for Loss:

which is based upon or attributable to any claim made against any Director or Officer by any other Director or Officer or by the Institution defined in Clause 1(a) of the policy, except for a shareholders derivative action brought by a shareholder of the Institution.

The RTC/FDIC and the other defendants who are named in the underlying action assert four grounds in support of coverage: (1) that the RTC/FDIC is not a regulatory agency; (2) that the "based upon or attributable to" language means that the exclusion only applies to suits instituted secondarily as the result of initial litigation brought by RTC/FDIC; (3) that enforcement of the regulatory exclusion violates public policy in that Congress' enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.L. No. 101-73 (Aug....