Federal Sav. and Loan Ins. Corp. v. Heidrick

• Decision Date: 25 January 1991
• Docket Number: Civ. No. HM-86-77.
• Citation: 774 F. Supp. 352
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, et al. v. Gerard A. HEIDRICK, Jr., et al.
• Court: U.S. District Court — District of Maryland

774 F. Supp. 352

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, et al. v. Gerard A. HEIDRICK, Jr., et al.

Civ. No. HM-86-77.

United States District Court, D. Maryland.

January 25, 1991.

Paul E. Gutermann and James Flannery, Washington, D.C., for plaintiffs.

William H. Morstein, Ellicott City, Md., James E. Gray, Thomas V. Monahan, Jr., Baltimore, Md., John R. Gerstein, Robert

M. Pozin, Washington, D.C., and Henry L. Conway, Jr. and Thomas B. Conway, Baltimore, Md., for defendants.

MEMORANDUM

HERBERT F. MURRAY, Senior District Judge.

Presently pending before the Court are plaintiffs' and defendant American Casualty's cross-motions for summary judgment. At issue in these cross-motions is the interpretation of the "Directors' and Officers' Liability Insurance Policy for Savings and Loan Associations Including S & L Reimbursement" (hereafter "the policy") which was issued to the now insolvent Fidelity Federal Savings and Loan Association (hereafter "Fidelity"). For the reasons stated below, plaintiffs' motion is granted and defendant's motion is denied.

I. FACTS AND PROCEDURAL HISTORY

A. Facts

Plaintiffs in this action are the Federal Savings and Loan Insurance Corporation (hereafter "FSLIC"), Howard International, Inc. (hereafter "Howard"), and Development Funding/Highpointe, Inc. (hereafter "Highpointe"). FSLIC, an instrumentality of the United States, is suing in its corporate capacity and as the subrogee of the rights of the depositors of Fidelity. Fidelity was a mutual savings and loan association organized under the laws of the United States and chartered by the Federal Home Loan Bank Board (hereafter "FHLBB"). The accounts of Fidelity were insured by FSLIC. Howard and Highpointe were wholly-owned subsidiary service corporations of Fidelity.

Individual defendants in this action, Heidrick (deceased), Chrzanowski, Smith, Korwek and White, were officers and directors of Fidelity, Howard and/or Highpointe. Defendant American Casualty Company of Reading, Pennsylvania (hereafter "American Casualty"), one of the CNA Insurance Companies, is a corporation doing business as an insurer. American Casualty purchased the policy here in issue from MGIC Indemnity Corporation, which originally issued the policy to Fidelity. American Casualty thus became the successor in interest to MGIC Indemnity Corporation.

On January 7, 1983, FHLBB placed Fidelity under a conservatorship on the grounds that Fidelity was insolvent, had suffered substantial dissipation of its assets or earnings due to a violation of law or an unsafe or unsound practice, and was in an unsafe or unsound condition to transact business. On August 24, 1984, because of Fidelity's continued insolvency, and also to effect an assisted merger, FHLBB appointed FSLIC as sole receiver for Fidelity. The claims of Fidelity against its officers and directors were assigned to FSLIC in its corporate capacity. In addition, ownership of all the capital stock of plaintiffs Howard and Highpointe was transferred to FSLIC in its corporate capacity.

The instant dispute has come about as a result of attempts by Fidelity's sole receiver, FSLIC, and Fidelity's conservator, Richard S. Mattison, to make American Casualty liable under the policy for losses visited upon Fidelity by the five defendant officers and directors. The policy was issued for a three year term beginning December 23, 1981. The aggregate limit of liability each policy year was $3,000,000, and the policy premium was $11,418, covering all three years. On February 17, 1984, prior to the appointment of FSLIC as receiver but while the policy was still in effect, Fidelity's conservator, Richard S. Mattison, wrote a letter to MGIC Indemnity Corporation notifying MGIC that he was the conservator for Fidelity. In this letter, Mattison told MGIC the following:

As Conservator and on behalf of the Association i.e., Fidelity, I hereby am giving you written notice, pursuant to Section 6 of the policy, that I am aware of occurrences which may subsequently give rise to claims being made against the Directors and Officers of the Association as defined in Section 1(A) of the above mentioned policy, for one or more wrongful acts as defined in Section 1, Paragraph (E) of the policy. These wrongful acts include possible self-dealing by certain officers and directors in the construction of the Association's main office building, and violations of regulations, breaches of fiduciary duty, and negligent acts and omissions by Officers and Directors in the discharge of their duties to the Association relating to the construction of Fidelity's main office building and by authorizing, approving and administering various loans and projects of the Association.

As specific information is developed concerning losses occasioned by the Officers and Directors, additional details will be made available. Although a total dollar amount of claim is not ascertainable at present, the total claim is expected to be well in excess of $3,000,000.

If you have any questions or require further information to perfect any claims under the policy, please do not hesitate to contact me.

On May 11, 1984, Richard L. Furlong, Senior Claim Analyst for the CNA Insurance Companies, wrote Mr. Mattison and acknowledged receiving Mattison's letter of February 17. He advised Mr. Mattison of the following:

As of November 1, 1983, our company purchased the casualty insurance business of that corporation and thus the claim that you were submitting by your letter of February 17, 1984, will now be handled by this office by this writer, under file XX-XXXXXX.

Because this is a new claim and the issues are unclear at this time, we have submitted this matter to the law firm of Ross, Dixon & Masback at 2000 Pennsylvania Ave., Washington, D.C. 20036. We will ask Mr. Stewart Ross to assign this matter to a member of his firm and have them get in touch with you so that we might work together to try to determine the applicability of the coverages as they might relate to the claim that you are advising us of at this time.

On June 25, 1984, John R. Gerstein of Ross, Dixon & Masback wrote Mr. Mattison concerning the requirements for proper notice under the policy:

In order to serve as adequate notice under paragraph 6(a) of the policy, more detailed information concerning the alleged wrongful acts and pertinent circumstances is required, particularly with respect to the second potential claim regarding possible wrongful acts in connection with "various loans and projects of the Association" (Mattison's February 17, 1984 letter.) .... Please provide, among other things, additional information that will identify with more particularity the subject loans, and projects, and alleged wrongful acts.

Mr. Mattison subsequently referred the above letter to the firm of Squire, Sanders & Dempsey, which was representing Fidelity. On August 13, 1984, Glenn M. Young of Squire, Sanders wrote to inform Mr. Gerstein of the following:

We are in the process of gathering the "more detailed information concerning the alleged wrongful acts" that you request. We could immediately give you various items of information that are already in our file. However, I would prefer to give you a more organized and fuller presentation of this information. Unless you have some objection, I intend to provide you with this information during the week of August 27. Please feel free to telephone me, or James P. Murphy of this office, should you care to discuss this matter.

In fact, Mr. Young did not provide Mr. Gerstein with the memorandum detailing the wrongful acts until April 12, 1985. In his letter accompanying the memorandum, Mr. Young mentioned the fact that in the interim between his letter of August 13, 1984, and the April 12, 1985, memorandum, FSLIC had been appointed Fidelity's receiver. Mr. Young next addressed the reasons for the delay in providing the information:

Subsequent to the appointment of the receivership on August 27, 1984, I conferred with you by telephone and apprised you that these developments would necessitate some delay in providing you the information you requested. On August 28, 1985 sic: 1984, Mr. Mark F. Gasser, Special Representative for FSLIC as Receiver for Fidelity Federal, notified MGIC, by certified mail, of the appointment of the receivership and requested, under the policy, an extension of the period within which to discover and make claim for any loss sustained by the Fidelity Federal. Apparently, MGIC did not respond to that letter.

Counsel for American Casualty responded on May 28, 1985, by stating that coverage defenses possibly existed, including lack of adequate notice, and denied the claim. The parties reached an impasse, and the present action was filed by plaintiffs on January 7, 1986.

B. Procedural History

FSLIC, Howard and Highpointe brought this action against the five former directors and officers and against American Casualty, alleging negligence and breach of fiduciary duty by the officers and directors in connection with various loans and projects of Fidelity, and seeking a declaration of rights under the policy. On February 20, 1986, American Casualty moved to dismiss plaintiffs' complaint. On March 27, 1986, plaintiffs opposed the motion, and on April 8, 1986, American Casualty filed its reply. On May 27, 1988, a hearing on the motion to dismiss was held before Judge Niemeyer of the United States District Court for the District of Maryland. By order dated May 31, 1988, Judge Niemeyer directed that the District Court would treat the motion to dismiss as a motion for summary judgment.

Consequently, on July 18, 1988, plaintiffs filed a cross-motion for summary judgment against American Casualty. A hearing on the cross-motions for summary judgment was held before the present Court on September 23, 1988. Between the time of American Casualty's reply to plaintiffs' original opposition on April 23, 1986, and the date of the last filing in the case, January...