Fed. Deposit Ins. Corp. v. Great Am. Ins. Co.

• Decision Date: 07 June 2010
• Docket Number: Docket No. 09-1052-cv.
• Citation: 607 F.3d 288
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Connecticut Bank of Commerce, Plaintiff-Counter-Defendant-Appellant,v.GREAT AMERICAN INSURANCE COMPANY, Defendant-Counterclaimant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

607 F.3d 288

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Connecticut Bank of Commerce, Plaintiff-Counter-Defendant-Appellant,v.GREAT AMERICAN INSURANCE COMPANY, Defendant-Counterclaimant-Appellee.

Docket No. 09-1052-cv.

United States Court of Appeals Second Circuit.

Argued: Nov. 16, 2009.

Decided: June 7, 2010.

COPYRIGHT MATERIAL OMITTED

Kyle M. Keegan, Christopher D. Kiesel, Roy, Kiesel, Keegan & DiNicola, PLC, Baton Rouge, LA; John B. Hughes, Assistant United States Attorney, for Nora R. Dannehy, Acting United States Attorney for the District of Connecticut; Lawrence H. Richmond, Jaclyn C. Taner, Federal Deposit Insurance Corporation, Arlington, VA, for Plaintiff-Counter-Defendant-Appellant.

F. Joseph Nealon (Jennifer E. Lattimore on the brief), Eckert Seamans Cherin & Mellott, LLC, Washington, DC; Margaret Little, Little & Little, Stratford, CT, for Defendant-Counterclaimant-Appellee.

Before POOLER and WESLEY, Circuit Judges, and KEENAN, District Judge. ^*

KEENAN, District Judge:

I. BACKGROUND

The following facts are not in dispute. In 1999, Connecticut Bank of Commerce (“CBC”), having assets of approximately $89 million, entered into a Purchase and Assumption Agreement (the “P & A Agreement”) to acquire MTB Bank (“MTB”), a New York bank with approximately $299 million in assets. CBC purchased substantially all of MTB's assets, including its factoring unit. This transaction required Federal Deposit Insurance Corporation (“FDIC”) approval, which MTB sought on August 4, 1999 and obtained on February 5, 2000. At the time MTB and CBC entered into the P & A Agreement, MTB had a 15-year insurance relationship with Lloyd's of London and was covered by a Lloyd's fidelity bond set to expire on June 30, 2000.

Several events which occurred prior to the closing of the P & A Agreement bear on the contract dispute at hand. First, in September of 1999, MTB management discovered that one or more of MTB's agents advanced $950,000 based on fraudulent invoices under a factoring agreement with a company called Harmony Designs, Inc. MTB submitted a claim for indemnity under the Lloyd's fidelity bond. However, MTB eventually settled with Harmony Designs for an amount which reduced its loss below the deductible of the Lloyd's bond; therefore MTB never recovered payment from Lloyd's for this claim. Additionally, in March 2000, the president and several other officers of MTB were indicted in an alleged conspiracy involving the importation of Argentinian minerals. MTB submitted a claim to Lloyd's for its losses relating to the conduct resulting in the indictments. On March 31, 2000, the P & A Agreement was finalized.

After the completion of the P & A Agreement, CBC was added to MTB's insurance policy with Lloyd's. As the bond expired on June 30, 2000, CBC began to seek renewal of the Lloyd's policy. However, Lloyd's was concerned about the two claims that MTB had made, and it refused to renew coverage unless CBC representatives went to Lloyds' headquarters in London for a meeting. No one from CBC went to London. Two weeks prior to the bond's expiration, CBC requested a 30-day extension of coverage, but Lloyd's declined to offer any extension beyond the June 30, 2000 expiration date.

CBC then sought the assistance of an insurance broker to procure fidelity insurance to replace the Lloyd's policy. CBC's Chief Financial Officer, Barbara Van Bergen (“Van Bergen”), filled out an application for insurance from Reliance Insurance Company (the “Reliance application”) on behalf of CBC. Van Bergen signed the Reliance application on June 19, 2000 and gave it to CBC's insurance broker, who, following common practice in the industry, submitted it to multiple insurers to receive quotes. On June 30, 2000, CBC's insurance broker submitted the Reliance application to Great American Insurance Company (“GAIC”).

The application contained the following questions:

List all losses sustained during the past three years, whether reimbursed or not;

[Does CBC have] any knowledge of or information concerning any occurrence or circumstance whatsoever which might materially affect this [insurance] proposal?;

Has any insurance of this nature been declined or cancelled during the past three years?

Van Bergen on behalf of CBC answered “None,” “No,” and “No,” to these three questions, respectively.

The Reliance application included the following affirmance above the signature line: “The Applicant represents that the information furnished in this application is complete, true and correct. Any misrepresentation, omission, concealment, or incorrect statement of a material fact, in this application or otherwise, shall be grounds for the rescission of any bond issued in reliance upon such information.”

In late June, GAIC issued a quote for fidelity insurance to CBC on the basis of information contained in the Reliance application. On July 19, 2000, GAIC issued a fidelity bond to CBC with coverage retroactive to June 30, 2000. After GAIC bound coverage, CBC additionally completed a GAIC insurance application. Just as she did in the Reliance application, Van Bergen stated in the GAIC application that CBC had not sustained any losses and no insurance had been declined or cancelled in the prior three years; however, the GAIC application did not contain a question regarding any knowledge or information which might materially affect the insurance proposal. The GAIC fidelity bond states that “[t]he Insured represents that the information furnished in the application for this bond is complete, true and correct. Such application constitutes part of this bond. Any misrepresentation, omission, concealment or any incorrect statement of a material fact, in the application or otherwise, shall be grounds for the rescission of this bond.” The fidelity bond further specified that GAIC issued coverage “in reliance upon all statements made and information furnished to the Underwriter by the Insured in applying for this bond.”

When the Reliance application was completed and submitted, CBC knew about both the Harmony Designs claim and the indictments of MTB's officers. CBC also knew that Lloyd's had declined to renew or extend coverage of its fidelity bond. The GAIC agent who reviewed CBC's application testified that GAIC would not have issued the fidelity bond had CBC disclosed this information.

CBC went into FDIC receivership on June 26, 2002. On January 18, 2006, the FDIC, standing in the shoes of CBC brought this suit claiming that GAIC breached its contractual duty by dishonoring claims for coverage under the fidelity bond for losses sustained by CBC related to a loan scheme that was used to fund the acquisition of MTB. The district court granted summary judgment to GAIC on the ground that it properly rescinded the fidelity bond due to omissions and misstatements made by CBC in its application for the fidelity bond.

II. DISCUSSION

A. Standard of Review

We review de novo the district court's grant of summary judgment. N.Y. State Rest. Ass'n v. N.Y. City Bd. of Health, 556 F.3d 114, 122 (2d Cir.2009). Summary judgment is appropriate where “the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). The moving party bears the initial burden of demonstrating “the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the moving party meets that burden, the opposing party must come forward with specific evidence demonstrating the existence of a genuine dispute of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In determining whether there is a genuine issue as to any material fact, “[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.” Id. at 255, 106 S.Ct. 2505. To defeat a summary judgment motion, the non-moving party “must do more than simply show that there is some metaphysical doubt as to the material facts,” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986), and “may not rely on conclusory allegations or unsubstantiated speculation,” Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir.1998). Where it is clear that no rational finder of fact “could find in favor of the nonmoving party because the evidence to support its case is so slight,” summary judgment should be granted. Gallo v. Prudential Residential Servs., Ltd. P'ship, 22 F.3d 1219, 1224 (2d Cir.1994).

B. Section 1823(e)

The FDIC argues that 12 U.S.C. § 1823(e), which protects the FDIC from defenses not apparent on the face of an asset it acquires as receiver of a failed bank, bars GAIC's misrepresentation defense. In pertinent part, Section 1823(e) reads as follows:

No agreement which tends to diminish or defeat the interest of the [FDIC] in any asset acquired by it ... as receiver of any insured depository institution, shall be valid against the [FDIC] unless such agreement-

(A) is in writing,

(B) was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution,

(C) was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the minutes of said board or committee, and

(D) has been, continuously, from the time of its execution, an official record of the depository institution.

The FDIC contends that the district court erred by limiting the statute's definition of “asset” to exclude fidelity bonds and thus the rescission clause of the bond should not apply. Two Courts of Appeals previously have decided this issue: the Sixth Circuit, which held similarly to the district court that fidelity bonds are not...