F.D.I.C. v. Fidelity & Deposit Co. of Maryland

• Decision Date: 27 February 1995
• Docket Number: No. 93-3758,93-3758
• Citation: 45 F.3d 969
• Parties: 41 Fed. R. Evid. Serv. 979 FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff-Appellee, v. FIDELITY & DEPOSIT COMPANY OF MARYLAND, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 969

45 F.3d 969

41 Fed. R. Evid. Serv. 979

FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff-Appellee, v. FIDELITY & DEPOSIT COMPANY OF MARYLAND, Defendant-Appellant.

No. 93-3758.

United States Court of Appeals Fifth Circuit.

Feb. 27, 1995.

Rehearing Denied March 29, 1995.

Arthur R. Cooper, David S. Bell, Janice M. Church, Bell, Cooper & Hyman, Baton Rouge, LA, for appellant.

David A. Felt, Colleen B. Bombardier, Ann S. DuRoss, Washington, DC, Victor L. Roy, III, Susannah M. DeNicola, David O. Mooney, Roy, Kiesel, Aaron & Tucker, Baton Rouge, LA, for appellee.

Appeal from the United States District Court for the Middle District of Louisiana.

Before HIGGINBOTHAM, SMITH and PARKER, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Fidelity & Deposit Company of Maryland ("F & D") appeals a judgment entered pursuant to a jury verdict in favor of the Federal Deposit Insurance Corporation ("FDIC") 827 F.Supp. 385. We find no reversible error and affirm.

I.

A.

F & D was the fidelity bond insurer of the now defunct Capital Bank and Trust Co. ("Capital" or "Bank") in Baton Rouge. Capital went bankrupt in October 1987 as a result of the fraudulent acts of its chief lending officer, Allie Pogue.

In late 1986, Capital suspected that Pogue was making loans in exchange for bribes. Richard Easterly, its president, became suspicious of Pogue in August 1986. Easterly called upon Susan Rouprich, Capital's vice president and in-house attorney, and the Bank's internal audit department under Paula Laird, to investigate. The resulting report indicated that there were a number of undisclosed business relationships between Pogue and some of the loan customers.

Soon after the report, Easterly, purportedly contemplating the prompt notice-of-loss requirement in the Bank's fidelity bond, prepared and filed a notice-of-loss letter with F & D. In February 1987, Capital filed a proof of loss that detailed some of the loans that Pogue had approved to persons from whom he had received financial benefits.

B.

There are four main groups of loans at issue in this case that involved improprieties by Pogue.

Jimmy Scott loans

Jimmy Scott and his affiliates obtained millions of dollars in loans from Capital, including the disputed Carrol Herring loan. All of these loans were approved by Pogue and certainly resulted in a major loss to Capital. Jimmy Scott bribed Pogue into approving the loans by buying him a duplex and giving him gifts.

The Herring deal was a $375,000 loan that Pogue arranged from Capital to Carrol Herring. The loan proceeds were utilized in a series of transactions, through attorney J. Glenn Dupree, to buy property from Pogue and pay off Pogue's mortgage on the property. Pogue and Dupree were indicted and pled guilty to giving and taking a kickback on the Herring loan.

LAREEL loans

Pogue and one of his customers, Wayne Bunch, became partners in several business ventures, including Aspen Partnership, which owned a four-plex in Baton Rouge. The partnership owed a $136,101.61 mortgage on the property, with a balloon payment for the balance due at the end of September 1986. Because Bunch was in financial trouble, Pogue developed a scheme to rehabilitate their finances.

The Aspen Partnership sold the four-plex to Thomas Keene, who was the operative of Louisiana Real Estate Equity, Limited ("LAREEL"). Keene then syndicated the project to some investors. Keene paid off the Aspen Partnership loan with a personal check, using funds provided by LAREEL. Pogue greatly benefited from this sale.

Following this transaction, the LAREEL loans occurred. LAREEL agreed to "syndicate" other Bunch projects by offering the units to "investors" who put no money down, but signed notes to Capital for amounts far in excess of Bunch's liability on the units. LAREEL and Keene pocketed the excess cash in the loans. Pogue obtained the individual investor financing from Capital.

Pogue recommended to the executive committee of Capital that the series of loans be made to the LAREEL investors on the Bunch projects, but never disclosed that he had recently benefited from actions by LAREEL with respect to the four-plex. LAREEL and Keene greatly profited from the LAREEL loans.

Pogue knew that several of the "investors" were not credit-worthy. Even though several of the LAREEL loan applications were rejected by one loan officer, Pogue ignored the recommendation and ordered that the loans be made. Keene refused to testify at the trial, asserting his Fifth Amendment privilege when questioned about the loans.

Quadrant/Thompson loans

In July 1984, Pogue and Bunch sold a four-plex to the Quadrant Partnership, whose partners were Theodore Jones, an attorney, and Robert Killingsworth and Jimmy C. Thompson, two real estate promoters. All were loan customers of Capital. Quadrant assumed a $135,291 mortgage owed by Pogue and Bunch on the four-plex and was supposed to pay $20,000 in cash to Pogue, but only $6,666 in fact was paid. A note for the balance secured by a second mortgage on the four-plex was pledged for the $13,334 balance.

On the day the sale closed, Pogue approved a $12,000 loan by Capital to Quadrant for the stated purpose of a down payment on the purchase of a four-plex for syndication purposes. A letter from Quadrant to the attorney for the bank that held the first mortgage on the property stated that the acquisition of the property was done as an accommodation to Pogue. The "accommodation" eventually resulted in over $1,000,000 in loans to support syndications by Quadrant and its related entities, resulting in significant losses. Pogue never disclosed his personal dealings with Quadrant to Capital.

Robert Harger loans

In late September 1982, Pogue and Bunch sold a group of fourplexes for $725,000 to Oakbourne Apartments Partnership, Ltd., a company owned by one of Pogue's Capital loan customers, Robert Harger and Associates. Oakbourne assumed the $545,000 mortgage on the property, though Pogue and Bunch remained personally liable on the loan. According to the sales agreement, $180,804 was to be paid in cash, and the rest was to be paid by the assumption of the mortgage. In reality, only $15,804 was paid in cash, and Oakbourne issued a $165,000 note to Pogue and Bunch, secured by a second mortgage on the property.

Capital loaned the Harger company money, approved by Pogue, while these dealings were ongoing. Harger eventually ceased payments on the $545,000 debt, and the lender began to pressure Pogue and Bunch. Harger, however, continued to pay Pogue on the $165,000 note. The loans, which Pogue approved from Capital to Harger, allowed Harger more easily to pay Pogue the money it owed him and to shelter him from liability on the first mortgage.

Pogue resigned from Capital effective at the end of August 1986. He was hired as the president of Acadia State Bank ("Acadia") in Baton Rouge. Acadia also made loans to Harger after Pogue arrived. Proceeds were used to catch up on the $545,000 loan on which Pogue and Bunch were personally liable.

C.

Capital's chairman, Embree Easterly, and its president, Richard Easterly, testified that if they had known of Pogue's personal relationships with loan clients, they would not have allowed him to handle loan decisions for those persons or entities. Following Capital's filing of the proof of loss, F & D refused to pay the Bank's claim under the fidelity bond. As a result, Capital filed suit against F & D in April 1987. The bond expired on October 1, 1987; the Bank failed at the end of October 1987. The FDIC took receivership of the Bank and stepped into its shoes for purposes of the lawsuit.

The trial lasted for three weeks in November 1992. The jury was given 27 separate verdict forms corresponding to 27 separate loan transactions. Verdicts were returned in favor of the FDIC on 17 of the loan transactions, totaling $5.313 million. Because the limit on the bond is $4 million, the district court entered final judgment for $4 million plus interest.

II.

The fidelity bond in this case covers "[l]oss resulting directly from the dishonest or fraudulent acts of an employee committed alone or in collusion with others ... with the manifest intent to cause the Insured to sustain such loss." The bond applies "to loss discovered by the Insured during the bond period."

After the evidence had been presented at trial, the jury was presented with an interrogatory for each questionable loan. Each interrogatory contained four separate questions with respect to the particular loan:

1. Did Allie Ray Pogue commit a dishonest or fraudulent act in connection with this loan?

2. Did a loss result directly from Allie Ray Pogue committing a dishonest or fraudulent act with the manifest intent to cause Capital Bank a loss and to obtain a financial benefit for himself or others?

3. Did discovery, as defined in the Bond, occur on this loan prior to October 1, 1987?

4. What is the amount of the loss on this loan resulting directly from Allie Ray Pogue's dishonest or fraudulent acts?

The FDIC had to prove four distinct elements for each loan. First, each loss must have been discovered within the bond period. The relevant section of the bond reads:

This bond applies to loss discovered by the Insured during the bond period. Discovery occurs when the Insured becomes aware of facts which would cause a reasonable person to assume that a loss covered by the bond has been or will be incurred, even though the exact amount or details of loss may not then be known....

In interpreting these clauses, courts have held that "discovery of loss does not occur until the insured discovers facts showing that dishonest acts occurred and appreciates the significance of those facts; suspicion of loss is not enough." FDIC v. Aetna Casualty & Sur. Co., 903 F.2d 1073, 1079 (6th Cir.1990) (citing, inter alia, United States Fidelity & Guar. Co. v. Empire State Bank, 448 F.2d 360, 364-66 (8th Cir.1971)). See also ...