Fed. Deposit Ins. Corp. v. Cincinnati Ins. Cos.

• Citation: 981 F.Supp.2d 1324
• Decision Date: 17 September 2013
• Docket Number: Civil Action No. 3:11–cv–145–TCB.
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for Neighborhood Community Bank, Plaintiff, v. The CINCINNATI INSURANCE COMPANIES, INC., Defendant.
• Court: U.S. District Court — Northern District of Georgia

981 F.Supp.2d 1324

FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for Neighborhood Community Bank, Plaintiff,
v.
The CINCINNATI INSURANCE COMPANIES, INC., Defendant.

Civil Action No. 3:11–cv–145–TCB.

United States District Court,
N.D. Georgia,
Newnan Division.

Sept. 17, 2013.

[981 F.Supp.2d 1325]

Ashley Elizabeth Wilson, George P. Shingler, Joyce Gist Lewis, Shingler Lewis LLC, Atlanta, GA, for Plaintiff.

[981 F.Supp.2d 1326]

Fred C. Statum, III, Justin D. Wear, Sam H. Poteet, Jr., Manier & Herod, P.C., Nashville, TN, William Randal Bryant, Bovis, Kyle, Burch & Medlin, LLC, Atlanta, GA, for Defendant.

ORDER
TIMOTHY C. BATTEN, SR., District Judge.

This case is before the Court on the parties' cross-motions for summary judgment. For the reasons below, the Court GRANTS Defendant's motion [60] and DENIES Plaintiff's motion [51].

I. BackgroundA. Factual Summary

Jeffrey Grant wanted to purchase and develop 2.6 million dollars' worth of real property from several sellers in Henry County, Georgia. But he did not want to put any of his own money into the project. He wanted a bank to lend him the entire $2.6 million and more money later for development. But no bank was likely to lend him one hundred percent of the purchase price. Indeed, Neighborhood Community Bank (“NCB”), represented as Plaintiff here by the FDIC, would only make the loan to Grant if he deposited $625,000 of his own money as collateral.

So Grant devised a scheme to get the loan and buy the property without putting up any of his own money. He entered into several legitimate sales contracts to buy parcels of property from multiple owners for a total purchase price of $2.6 million. But he also fabricated a single sales contract and forged one owner's signature. The forged sales contract stated that Grant was purchasing just one parcel from one owner for $3.36 million. He applied for a loan from NCB and presented the forged sales contract. Relying on the contract, NCB initially loaned Grant $3.4 million. He then purchased the parcels via the legitimate sales contracts for $2.6 million. He used the extra $800,000 of NCB's money to deposit the $625,000 NCB demanded as collateral. Grant got a loan, purchased the property, and deposited the required collateral without spending any of his own money.

Eventually the loan went bad. NCB, and later the FDIC as receiver, wanted its money back. Grant was judgment-proof. The FDIC recovered some of the loss in a legal malpractice settlement with NCB's closing attorney. It then sought further recovery from NCB's insurer under the forgery provision of a bank insurance bond. The insurer refused to pay, arguing the bond does not cover the loss. This action for breach of contract ensued.

B. Statement of Facts1. Loan Application and Approval

NCB was a state-chartered bank in Newnan, Georgia. On June 26, 2009, the FDIC was appointed as its receiver. The Cincinnati Insurance Companies and NCB entered into an insurance contract effective January 1, 2008. The insurance contract, known as a depository institutions blanket bond or, more commonly, a financial institution bond, insures against certain bank losses. The bond's relevant provisions are as follows:

• Insuring Agreement E covers loss by reason of forgery;

• Condition B limits coverage to losses discovered after the effective date of the bond; and

• Exclusion H excludes from coverage losses caused by an employee.

Each provision is discussed in detail below.

Jeffrey Grant owned and controlled a business entity called Orchard Road, LLC. In January 2006, Grant, on behalf of Orchard

[981 F.Supp.2d 1327]

Road, applied for an acquisition and development loan from NCB. Michael Scott was the NCB loan officer responsible for the Orchard Road loan. The bank's directors loan committee had authority to approve the loan. Scott was not on this committee.

Grant gave Scott a signed sales contract describing the property purchase underlying his loan application. The sales contract was dated November 20, 2005, but contemplated a closing date of March 1, 2005, eight months earlier. The contract stated it was for the purchase of 76.6 acres, more or less, from Saralyn Heny for $3.36 million, and that the purchaser was Southern Lumber, Inc., a separate Grant-owned entity. The contract referred to an Exhibit A that purportedly described the property, but the contract contained no exhibits. NCB had the property appraised. The appraisal stated the property was 72.45 acres, approximately four acres fewer than stated in the sales contract.

Scott prepared a loan approval form for the directors loan committee. He included in the form information from the sales contract including the $3.36 million purchase price. The form stated the size of the property was 72.42 acres. The form stated the loan would include two forms of security: a deed to secure debt on the parcel purchased with the loan proceeds and a requirement that Grant deposit $625,960 with NCB as collateral. On February 1, 2006, the DLC approved the Orchard Road loan based on information from the sales contract in the loan approval form.

2. Loan Closing

The loan closed on February 27, 2006. NCB retained Mark Brittain as its closing attorney. At or before closing, NCB received a HUD settlement statement drafted and signed by Brittain. HUD settlement statements explain the details of loans made for the purchase of real estate. They memorialize who paid what to whom. They state how much money the lender loaned to the borrower, how much the borrower gave back as collateral, and how much the borrower paid to the seller for the underlying property.

The settlement statement drafted and signed by Brittain reflected a loan disbursement of $3.36 million from NCB to Grant. It stated that Grant gave NCB $625,960 of his own money as a collateral deposit, and that Grant paid $3.36 million for the property. The settlement statement contained blank boxes to be completed with the name, address and signature of the seller. Those boxes were left blank.

Most of the settlement statement's representations were false. Although he did obtain $3.36 million from NCB, Grant did not use $3.36 million to purchase the property; he used only $2.64 million. The difference of approximately $730,000 was disbursed to Southern Lumber, another Grant company that does not appear on the settlement statement. Grant used part of the $730,000 to make the required $625,960 collateral deposit with NCB.

NCB closed the loan despite several irregularities in the sales contract and the attendant documents, including: the sales contract was dated November 20, 2005, but stated the sale would close on or before March 1, 2005, more than eight months earlier; the sales contract referred to an Exhibit A describing the property but in fact contained no exhibits; the settlement statement was blank in several places, including the seller's name, address and signature; the sales contract contained an acreage figure of “76.6 acres, more or less,” which differed from other loan documents, including the appraisal and the loan approval form, which each recited 72 acres,

[981 F.Supp.2d 1328]

and the settlement statement, which recited 73 acres; the sales contract identified the buyer as Southern Lumber, Inc., another Grant-owned entity, rather than Orchard Road, LLC; and the sales contract misspelled the seller's name as Saralyn “Heny” rather than Saralyn Henry.

3. After Closing

In April 2006, two months after the February closing, Brittain, NCB's closing attorney, sent to NCB a letter containing documents related to the Orchard Road loan. The documents included a copy of a deed to secure debt on the acquired property in NCB's favor. The deed to secure debt stated that it secured five separate land parcels, and not a single parcel as contemplated by the sales contract. The deed to secure debt reflected that surveys of the five tracts were prepared for an entity known as Mandalay Properties.

4. Default, Discovery and Denial

Two years after closing, the Orchard Road loan defaulted. NCB retained an attorney, Michael White, to pursue collection litigation against Grant. White met with Mark Brittain on September 25, 2008 to discuss the details of the Orchard Road closing.

The FDIC claims NCB discovered the loss on the Orchard Road loan at that September 25 meeting, eight months after the bond's effective date. It claims NCB learned at that meeting that Grant did not purchase one tract of land from one seller as contemplated by the sales contract and the loan terms. It claims NCB learned that Grant, through another entity known as Mandalay Properties, purchased multiple tracts of land from multiple sellers.

NCB initially suspected that Scott, the loan officer, was responsible for the loss. Scott attended the closing on behalf of NCB. At the September 25 interview, Brittain accused Scott, claiming Scott approved the anomalous settlement statements and the disbursement of funds in conflict with the loan approval form. On October 21, 2008, based on its belief that Scott was responsible, NCB notified Cincinnati of a loss under the bond's employee fraud or dishonesty provision. The FDIC later determined that Scott had not approved the anomalous settlement statements or the disbursements and that Brittain had falsely accused Scott.

On August 13, 2009, the FDIC supplemented NCB's earlier notice to Cincinnati, this time explaining the loss was caused by Grant's forgery rather than Scott's dishonesty, and claiming coverage under the bond's forgery provision, Insuring Agreement E. On December 24, the FDIC submitted a sworn proof of loss to Cincinnati including an affidavit from Saralyn Henry, the seller identified on the forged sales contract. Henry stated she did not sign the $3.36 million sales contract, and that she owned only 63.74 acres, which she sold to Grant via one of the legitimate sales contracts for $2.23 million.

On March 25, 2011, Cincinnati denied the FDIC's claim for coverage under the insurance bond.

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