FDIC v. Insurance Co. of North America, Civil Action No. 94-11078-REK.

• Decision Date: 15 March 1996
• Docket Number: Civil Action No. 94-11078-REK.
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of The Bank for Savings, Plaintiff, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant. INSURANCE COMPANY OF NORTH AMERICA, Third Party Plaintiff, v. Paul J. BONAIUTO and Delores DiCologero, Third Party Defendants.
• Court: U.S. District Court — District of Massachusetts

928 F. Supp. 54

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of The Bank for Savings, Plaintiff, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant.

INSURANCE COMPANY OF NORTH AMERICA, Third Party Plaintiff, v. Paul J. BONAIUTO and Delores DiCologero, Third Party Defendants.

Civil Action No. 94-11078-REK.

United States District Court, D. Massachusetts.

March 15, 1996.

Ben L. Fernandez, David R. Jimenez, Fitzhugh & Associates, Boston, MA, Evan S. Widlitz, Kathleen M. Balderston, Sharon P. Carlstedt, Reid & Priest, New York City, Leila R. Kern, Kern, Hagerty, Roach & Carpenter, Boston, MA, for Plaintiff.

Francis J. Gallagher, Gerald W. Motejumas, Lecomte, Emanuelson & Tick, Boston, MA, for Defendant.

Opinion

KEETON, District Judge.

This action was brought by the Federal Deposit Insurance Corporation ("FDIC") as Receiver of The Bank for Savings ("Bank") against Insurance Company of North America ("INA"). FDIC seeks to recover on a Financial Institution Bond ("Bond") for losses suffered by the Bank and allegedly insured under the Bond. Before the court at this time is the Defendant's Motion for Summary Judgment (Docket No. 19, filed August 15, 1995). Because I conclude that the undisputed evidence on the record shows that the Bank's notice to INA was not timely, FDIC is barred from seeking payment on the Bond. The motion for summary judgment will be allowed.

I

The events that gave rise to a possible claim under the Bond occurred before the Bank was declared insolvent and the FDIC was appointed receiver. The FDIC has alleged, however, that the events at issue in this litigation helped to bring about the financial demise of the bank. On March 20, 1992, the Massachusetts Commissioner of Banks declared the Bank an insolvent institution and appointed the FDIC as receiver.

Before the FDIC was appointed receiver, while the Bank was still solvent, the Bank obtained, as required by law, a Standard Form No. 24 Financial Institution Bond from INA. The Bond covered claims made from January 1, 1988 to April 1, 1989. It was later extended by agreement of the parties to September 1, 1990. The Bond describes in great detail which losses are insured under its provisions. Insured losses include those associated with such risks as employee fraud, robbery, forgery and securities violations.

The section at issue in the present case is entitled "Fidelity." This section states that the following losses are insured under the Bond:

(A) Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others. Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:

(a) to cause the Insured to sustain such loss, and

(b) to obtain financial benefit for the Employee or another person or entity. However, if some or all of the Insured's loss results directly or indirectly from Loans, that portion of the loss is not covered unless the Employee was in collusion with one or more parties to the transactions and has received, in connection therewith, a financial benefit with a value of at least $2,500.

The FDIC alleges that the actions of two employees of the Bank, Delores DiCologero ("DiCologero") and Paul Bonaiuto ("Bonaiuto"), caused the Bank to sustain losses insured under the "Fidelity" section of the Bond.

At the times relevant to this litigation, DiCologero was an Assistant Vice President of the Bank and the manager of the Bank's mortgage department. Bonaiuto was an attorney employed by the Bank to represent it in closing mortgage loans.

The FDIC alleges that from 1985 to 1989, DiCologero and Bonaiuto conspired with a group of real estate developers (the "Rostoff Group") to cause the Bank to make certain loans in violation of the Bank's internal lending policies and banking regulations. It is alleged that the conspiracy among DiCologero, Bonaiuto, and the Rostoff Group caused the Bank to make over 500 such wrongful mortgage loans to individuals who then used the proceeds to purchase condominiums from the Rostoff Group. The aggregate face value of the loans in question is in excess of $30 million. Many of these loans ended up in default.

The primary and recurring violation of banking regulations and policies allegedly involved in the scheme was that the Bank made loans for the full value of condominiums being purchased. The conspirators were able to cause the Bank to do this by over-stating the purchase price of the condominiums in official loan documentation — indicating that the purchaser had equity in the value of the property. In fact, the purchasers usually did not have any equity in the properties, and the loans were therefore for 100% of the value of the property.

The conspirators allegedly circumvented sound banking policies by having the loan documentation reflect that a down payment had been made, when, in fact, no such down payment had actually been made. After investigation, it was learned that this "down payment" usually took the form of a "discount" in the purchase price. Thus, the purchase price listed in the loan documents was 10%-20% greater than the actual purchase price of the property, and when the Bank then loaned the purchaser up to 80% of the over-stated purchase price, it effectively loaned an amount equal to 100% of the value of the property. Regulations prohibit financing greater than 80% of the value of a property in the normal course of business.

The conspiracy also involved other violations of sound banking practices. The Bank was often the lender for over one-third of the condominium units in a given development, even though internal regulations clearly prohibited participation in excess of 33% of a particular development. Moreover, DiCologero allegedly approved many of the mortgages in an expedited fashion, without any investigation of the creditworthiness of the applicants. Many mortgages were approved for the same individuals, so that certain individuals purchased multiple Rostoff condominiums. Often, the applications were incomplete and the applicants clearly did not have the resources to incur such debt.

Bonaiuto allegedly prepared many of the fraudulent closing documents, knowing that the documents were incomplete and inaccurate.

The alleged over-stated value of the condominiums reported in the loan documentation was often supported by an appraisal done by Marc DiCologero, son of Delores DiCologero. Marc DiCologero allegedly received in excess of $33,000 from the Rostoff Group in return for his work. Also, Doris DiCologero, daughter of Delores DiCologero, allegedly received in excess of $4,500 from the Rostoff Group in return for typing up loan applications.

Michael DiCologero, Delores' husband, also allegedly profited from the Rostoff Group. He allegedly received $12,000 in referral fees for his efforts, along with those of his wife Delores, in directing potential condominium purchasers to the Rostoff Group. Michael DiCologero also purchased a condominium, himself, from the Rostoff Group without paying any deposit. The loan documentation supplied to the Bank for Michael DiCologero's purchase indicated that he had paid a deposit of $7,700.

Bonaiuto also allegedly received compensation from the Rostoff Group. He purchased two condominiums from the Rostoff Group for himself and his wife, and he borrowed money from the Bank for each purchase. Notwithstanding the fact that he and his wife were listed as the borrowers on the mortgage loans, Bonaiuto acted as counsel for the Bank in the loan closings. The loan documentation for these two purchases indicated that Bonaiuto had made down payments, paid closing costs, and had taken second mortgages from the Rostoff Group to cover some of the costs of purchase. These costs allegedly paid by Bonaiuto were in excess of $27,000. In fact, the down payments and closing costs were never made, or were refunded by the Rostoff Group. Moreover, the Rostoff Group never sought to enforce its second mortgage on Bonaiuto's condominiums.

On January 1, 1992, a federal grand jury in Massachusetts indicted DiCologero, Bonaiuto, and the members of the Rostoff Group on 87 counts including conspiracy, bank fraud, and false statements. On September 9, 1992, the defendants were found guilty of some but not all of the charges. DiCologero was convicted on three of the eighty-seven counts; Bonaiuto was convicted on eleven of the eighty-seven counts.

The FDIC alleges that the Bank suffered losses in excess of $10 million when the borrowers defaulted on the fraudulently obtained mortgages, and it claims that the fraudulent actions of DiCologero and Bonaiuto directly caused the Bank to suffer harm. FDIC seeks reimbursement for those losses — up to the full amount of the Bond, $4 million.

II

The current motion for summary judgment involves only issues to which Phase I of discovery was relevant. The only issues now before the court involve the timeliness of various steps taken by FDIC and the Bank, its predecessor in interest, to perfect the Bank's claim under the Bond. The first such issue, and the issue upon which I conclude summary judgment is warranted, is whether the Bank's Notice of Potential Loss, sent to INA on January 16, 1990, was timely.

Various provisions in the Bond required the Bank to inform INA if the Bank became aware of a potential claim under the Bond. The specific provisions state:

Section 3.

This bond applies to loss discovered by the Insured during the Bond Period. Discovery occurs when the Insured first becomes aware of facts which would cause a reasonable person to assume that a loss of a type covered by this bond has been or will be incurred, regardless of when the acts causing or contributing to such loss occurred, even though the exact amount or details of loss may not then be known.

Discovery also occurs when the Insured receives notice of an actual or potential claim in which it is alleged that the Insured is liable to a third party under

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