First Nat. Bank of Louisville v. Lustig

• Decision Date: 18 May 1992
• Docket Number: No. 90-3820,90-3820
• Citation: 961 F.2d 1162
• Parties: FIRST NATIONAL BANK OF LOUISVILLE, Plaintiff-Appellee, Cross-Appellant, v. Loretta LUSTIG, et al., Defendants, and Aetna Casualty & Surety Co., and Federal Insurance Co., Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1162

961 F.2d 1162

FIRST NATIONAL BANK OF LOUISVILLE, Plaintiff-Appellee, Cross-Appellant, v. Loretta LUSTIG, et al., Defendants and Aetna Casualty & Surety Co., and Federal Insurance Co. Defendants-Appellants, Cross-Appellees.

No. 90-3820.

United States Court of Appeals Fifth Circuit.

May 18, 1992.

On Petition for Rehearing June 29, 1992.

Frederick R. Bott, Matt J. Farley, Ellis B. Murov, Allen F. Campbell, Deutsch, Kerrigan & Stiles, New Orleans, La., Larry L. Simms, Bradford R. Clark, John K. Bush, Joseph Avanzato, Gibson, Dunn & Crutcher, Washington, D.C., for defendants-appellants, cross-appellees.

William E. Brown, Phillip A. Wittmann, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, La., for defendants.

Patrick M. Ardis, Robert M. Johnson, Daniel K. Evans, Wolff Ardis, Memphis, Tenn., for First Nat. Bank of Louisville.

Appeals From the United States District Court for the Eastern District of Louisiana.

Before REAVLEY, HIGGINBOTHAM and DeMOSS, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Today we interpret a standard form Bankers Blanket Bond, in deciding an appeal from summary judgment granted to First National Bank of Louisville. The district court held that a Bond issued by Aetna Casualty and Surety Co. and Federal Insurance Co. covered the dishonest or fraudulent acts of FNBL employee Kevin DeWitt, without proof that he intended by his fraudulent acts to cause any loss to the bank. We conclude that the bond insures only those fraudulent acts intended to cause a loss and hold that there are genuine issues of material fact as to the Bond's coverage. We hold that there is a genuine issue of fact whether the employee on these facts intended to cause the bank a loss within the meaning of the bond. Finally, we conclude that the district court erred in instructing the jury that the definition of fraud in the insuring provision controls the definition of fraud in the termination provision. We reverse summary judgment, and remand for trial.

I.

The Sureties issued FNBL a standard form 1980 Bankers Blanket Bond to cover the fraudulent and dishonest acts of its employees for losses discovered from July 1, 1985 to July 1, 1986. In 1986, FNBL claimed coverage under Insuring Agreement (A) of the Bond for over $20 million in losses from eight failed loans caused by the dishonest acts of a young FNBL loan officer, Kevin DeWitt. Insuring Agreement (A) provides coverage under the bond for losses resulting directly from dishonest or fraudulent acts of an Employee committed alone or in collusion with others. Dishonest and fraudulent acts are defined for purposes of the insuring agreement as limited to only those acts "committed by such Employee with the manifest intent (a) to cause the Insured to sustain such loss by such Employee and (b) to obtain financial benefit for the Employee or 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."

DeWitt joined FNBL's management training program on his graduation from college in 1983. After his training, he was assigned to the Construction Loan Division where he prepared credit approval applications and administered the closing and payout of large commercial real estate loans. The eight loans at issue were construction loans presented by DeWitt for approval between 1984 and 1986, ranging from $1.9 million to $10.9 million. DeWitt misrepresented several facts about these loans, most often falsifying the credit records of borrowers and guarantors. There was also evidence that DeWitt misrepresented the identity of permanent lenders, the number of pre-sold project condominiums, exaggerated the size of borrower's contributions, and falsified various loan-related documents.

The Sureties presented evidence that FNBL learned that DeWitt had made misrepresentations and acted beyond the scope of his authority well before he made some of the failed loans. While DeWitt was in the training program his supervisors discovered that he was changing numbers in his credit analyses to make them balance, a technique referred to as "plugging." Whether plugging is considered a dishonest practice is disputed. Although DeWitt was mildly reprimanded, the head of the CLD was not informed of this incident. In June 1985, a loan reviewer discovered major deficiencies in one of DeWitt's loans. After meeting with DeWitt, the reviewer informed FNBL officials that DeWitt had distorted the credit history of a guarantor and did not make the loan to a borrower in the original write-up.

FNBL officials were also told that two of the failed loans had been closed "outside of approval," meaning that the established procedures for approval were not followed. In November 1985, DeWitt allegedly lied about whether the "Odyssey Two" loans had been approved by the Executive Loan Committee and was caught by an FNBL official. Despite these incidents, DeWitt was recommended for a bonus, promoted, and praised for his "extraordinary" results. The Sureties assert that FNBL's knowledge of these incidents triggered the Bond's termination clause, ending coverage for DeWitt's dishonesty.

In March 1986, DeWitt resigned his position at FNBL to accept an offer at a Baltimore bank. Nine days later he received a $40,000 "loan" from Loretta Lustig who was either individually or through a corporate entity the borrower or guarantor on a number of the failed loans. DeWitt claimed that the loan was intended to evidence Lustig's good faith in her promise to later employ DeWitt.

Soon after DeWitt's departure, serious problems with his loans began to emerge. On March 28, 1986, DeWitt returned to Louisville to meet with FNBL officials about their investigation of the credit information he had supplied for loans. DeWitt confessed to fabricating credit references. In a handwritten statement after the meeting DeWitt stated that he falsified the information to make good loans and get recognition at FNBL, not to get personal gain from customers.

On April 2, 1986, FNBL gave the Sureties notice of a possible claim under the bond. The real estate markets in the states where most of the properties were located went into severe recession and none of the projects earned enough to pay the loans from FNBL. The losses on the loans totaled more than $20 million.

In July 1988, FNBL added the Sureties to its complaint previously filed against DeWitt and other parties. The Sureties denied liability under the Bond. In January 1989, DeWitt pleaded guilty to violating 18 U.S.C. § 1005. The guilty plea was conditioned upon the district court's acceptance of a sentencing agreement. The district court rejected that agreement as being too lenient and DeWitt withdrew his guilty plea. The district court granted partial summary judgment for FNBL, finding that DeWitt's withdrawn guilty plea to a violation of 18 U.S.C. § 1005 in January 1989 satisfied the requirements for coverage under the fidelity bond. The district court also denied summary judgment to the Sureties and struck the Sureties' defense that the losses were caused by a declining "oil patch" economy rather than directly by DeWitt's conduct. The remaining issues were tried to a jury. The jury rejected the Sureties' defense of termination and lack of timely notice. After the verdict for FNBL, the district court entered judgment in the amount of $20 million, the policy limit.

While this case was pending on appeal, DeWitt pled guilty to an 18 U.S.C. § 1005 offense under a plea agreement which was accepted by the district court. FNBL has requested that this court take judicial notice of his second guilty plea and statements made by DeWitt during his plea hearing.

II.

To recover under Insuring Agreement (A) FNBL must prove a loss resulting directly from dishonest or fraudulent acts by a bank employee committed with the manifest intent to cause a loss to the bank and the manifest intent to benefit the employee or someone else. The district court granted summary judgment on all the coverage issues for FNBL, holding that "As a matter of law, DeWitt's withdrawn guilty plea in the Western District of Kentucky plainly satisfies the requirements for coverage under the fidelity bond." In response to the Sureties' motion for clarification, the district court again stated that all the coverage elements were found implicitly in the guilty plea adding simply that the elements are "further substantiated" by FNBL's documentary evidence, including DeWitt's confession, his default judgment in FNBL's civil action against him, and other documents.

We conclude that the district court's reliance upon DeWitt's withdrawn guilty plea as conclusive proof of coverage under Insuring Agreement (A) of the policy was error. The statute under which DeWitt was attempting to plead guilty, 18 U.S.C. § 1005, criminalizes a number of deceptive or fraudulent practices. Although a guilty plea under 18 U.S.C. § 1005 might prove some of the elements required for policy coverage, it does not necessarily do so. Section 1005 does criminalize false entries in bank records which are made "with intent to injure or defraud such bank." However, the same section also criminalizes false entries made "with intent ... to deceive any officer of such bank."

FNBL would have us rely upon the statements made by DeWitt at his second guilty plea hearing which occurred after the summary judgment was granted by the district court. We restrict our review on summary judgment to materials which were before the district court. Nissho-Iwai American Corp. v. Kline, 845 F.2d 1300, 1307 (5th Cir.1988). However, even if we were to consider DeWitt's second guilty plea, the fact of that plea alone would still not entitle FNBL to summary judgment in the face of countervailing evidence on the elements of policy coverage. A guilty plea to a...