Federal Deposit Ins. Corp. v. St. Paul Fire and Marine Ins. Co.

• Decision Date: 26 August 1991
• Docket Number: No. 90-5942,90-5942
• Citation: 942 F.2d 1032
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1032

942 F.2d 1032

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant-Appellee.

No. 90-5942.

United States Court of Appeals Sixth Circuit.

Argued May 10, 1991.

Decided Aug. 26, 1991.

William R. O'Bryan, Jr., Mary Thomson LeMense, Trabue, Sturdivant & DeWitt, Nashville, Tenn., and Eugene J. Comey (argued and briefed), Tuttle & Taylor, Washington, D.C., for plaintiff-appellant.

Roger A. Milam (argued and briefed) and Thomas T. Pennington, Denney, Lackey & Chernau, Nashville, Tenn., for defendant-appellee.

Before KEITH and BOGGS, Circuit Judges, and RUBIN, District Judge. ^*

BOGGS, Circuit Judge.

The Federal Deposit Insurance Corporation ("FDIC"), as the successor in interest to Farmers Bank and Trust ("FBT"), a failed federal savings bank, filed this lawsuit against St. Paul Fire and Marine Insurance Company, asserting four claims under a bankers blanket bond issued to FBT by St. Paul. After a bench trial, the district court, in an extensive and thorough opinion, made findings of fact and conclusions of law. FDIC v. St. Paul Fire and Marine Ins. Co., 738 F.Supp. 1146 (M.D.Tenn.1990).

The FDIC asserts its claim under a "dishonesty clause" and a "forgery clause" in the fidelity bond. The dishonesty clause issues involve Gary Ramsey, the former president and CEO of FBT. The FDIC made a number of claims under the dishonesty clause, relating to various payments approved by Ramsey and loans that he approved without following proper procedures. The district court found in favor of the FDIC on some claims, relating to various fraudulent payments, and St. Paul has not appealed. However, the court found against the FDIC on the largest claim--resulting from the bad loans approved by Ramsey. The FDIC now appeals this judgment, and we affirm the district court.

The FDIC also alleged that a guarantee on a promissory note signed by Sonya Butcher was forged, and that this forgery resulted in a loss covered by the applicable clause of the blanket bond. The district court also found in favor of St. Paul on this claim. Because we believe that the district court erred by ignoring the terms of a stipulation entered into by the parties, we reverse and remand for reconsideration.

I

THE DISHONESTY CLAUSE

A

Farmbanc, a stock holding company created for the specific purpose of holding FBT stock, was the sole owner of FBT. Gary Ramsey was one of several Farmbanc shareholders. Ramsey also served on the FBT Board of Directors and as the President and CEO of FBT. In 1980, when Ramsey was elected President and CEO of the bank, he earned $50,000 a year. Ramsey seems to have had a somewhat casual attitude regarding the separation between his personal financial affairs and those of FBT.

The claim that the FDIC won below, which we mention only by way of background, had to do with payments to Consolidated Financial Service, a consulting firm that gave advice to the bank regarding insurance and marketing services. Jake Cantrell and Russell McGee, two shareholders in Farmbanc, managed Consolidated Financial. Consolidated Financial was owned by a holding company known as Rhea Bancshares, and every dollar made by Consolidated Financial was passed through to Rhea Bancshares. In November 1982, Ramsey became a shareholder in Rhea Bancshares, giving him a direct financial interest in Consolidated Financial. Ignoring the normal procedures for dealing with potential conflicts of interest, Ramsey hired Consolidated Financial to provide consulting services for FBT. FBT policy, if followed, would have required Ramsey to reveal his financial stake in the transaction to the board of directors and to recuse himself from involvement in the decision to hire the company. Instead, Ramsey made the decision unilaterally, and he kept the board in the dark. Nonetheless, the district court found in favor of St. Paul on the claim for the payments made to Consolidated Financial because it concluded that Consolidated Financial provided some financial and marketing services, and the FDIC did not demonstrate that the services were not worth what was paid for them. St. Paul, 738 F.Supp. at 1159. The FDIC has not appealed this aspect of the district court's judgment.

There were, however, two payments, totalling $54,000, that were made directly to Jake Cantrell, who used the money to service his personal debts. Ramsey claimed that he authorized these payments because he was in debt to Cantrell "both personally and financially." The court found in favor the FDIC on this claim. In addition, Ramsey authorized the payment of about $170,000 in "executive committee fees" to himself and to Cantrell. He and Cantrell used this money to service the debts that they had incurred in acquiring Farmbanc. At trial, the FDIC demonstrated that these payments were, indeed, fraudulent. The district court characterized these payments to Cantrell and Ramsey as "pure embezzlement." Id. at 1161. Accordingly, the court entered judgment for the FDIC for $224,000. We reiterate, however, that although St. Paul contested the claims at trial, it has chosen not to appeal that judgment.

By far the more significant losses, however, came not from actual embezzlement but from the approval of bad loans. The FDIC lost on these claims, and it now appeals. Ramsey approved a number of loans, again without going through the proper procedures, that resulted in losses. These loans, often to his friends or to entities in which he had a financial stake, were, at least according to the FDIC, substantially more risky than the FBT would have approved, had normal procedures been followed.

First, Ramsey approved loans to several individuals to purchase Rhea Bancshares stock. He did so without making normal credit checks and without going through the normal mechanisms for approving loans. Since he himself had a financial interest in Rhea Bancshares, he directly violated the FBT policy forbidding bank officers from processing loans in which they have a financial interest. Second, Ramsey loaned money to investors in the Century Motor Company. As with Rhea Bancshares, Ramsey had a direct financial interest in that company. This money, although loaned to various individuals, was used to reduce the indebtedness of Century Motors. Third, Ramsey approved loans to Donald Wilson, another friend of his, to finance a condominium project in Smyrna, Tennessee, the site of the new General Motors Saturn plant. Again, Ramsey had a financial interest in the project.

These loans did not pan out. In toto, these loans resulted in a cumulative loss of about $1.4 million. With prejudgment interest, the total claim by the FDIC is over $2.2 million.

B

FBT failed, and was taken over by the FDIC. In its corporate capacity, the FDIC purchased certain rights, including the rights under a bankers blanket bond, for which St. Paul was the underwriter. That bond contains a "dishonesty clause." St. Paul agreed to insure against:

(A) Loss resulting directly from dishonest or fraudulent acts of an Employee committed alone or in collusion with others.

Dishonest or fraudulent acts as used in this Insuring Clause shall mean only dishonest or fraudulent acts committed by such Employee with the manifest intent

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

(b) to obtain financial benefit for the Employee or for any other person or organization intended by the Employee to receive such benefit, other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment.

It is this clause that the FDIC invokes in order to claim that St. Paul should have to pay back the loans. The district court ruled in favor of St. Paul.

C

The clause at issue here allows recovery where three conditions are satisfied. First, the employee's actions must be "dishonest or fraudulent." Second, the employee must receive compensation not normally received in the ordinary course of business as a part of his or her job. And, third, the employee must act with the "manifest intent" to cause the injury to the insured. In ruling against the FDIC, the district court concluded both that Ramsey had acted dishonestly and that he had done so to obtain benefits other than those to which he would normally be entitled to during the course of business. See St. Paul, 738 F.Supp. at 1156-57. Thus, the court held that the first two elements had been satisfied. The court held, however, that the third element was not satisfied. Ramsey did not act with the "manifest intent" to cause the loss. Id. at 1158. The court noted that Ramsey had a significant financial stake in the bank. Ibid. Indeed, the failure of FBT would have caused (and did end up causing) Ramsey's financial ruin. The court then reasoned that, "Ramsey could have only intended to cause the bank to sustain a loss on the loans if he also intended to wipe out a vast portion of his assets in the process, including his ownership interest in FBT. The evidence does not indicate that Ramsey has such a financially suicidal intent." Id. at 1159.

The question presented is, therefore, whether Ramsey acted with the "manifest intent" to cause the loss to FBT. We differ somewhat with the district court regarding how it reached its conclusions, but its findings on the "manifest intent" issue are essentially correct. The FDIC maintains that the district court erred in interpreting our decision in Municipal Securities v. Insurance Company of North America, 829 F.2d 7 (6th Cir.1987), to require a sole focus on "subjective intent." St. Paul, 738 F.Supp. at 1158. The FDIC invokes the principle that one is presumed to intend the natural and probable consequences of one's actions. See, e.g., United States v. Cooper, 577 F.2d 1079, 1082-83 (6th Cir.), cert. denied, 439 U.S. 868, 99 S.Ct. 196, 58 L.Ed.2d 179 (1978). This sensible-sounding principle has been undermined in recent years, at...