MGIC Indem. Corp. v. Central Bank of Monroe, La.

• Court: U.S. Court of Appeals — Fifth Circuit
• Writing for the Court: Before CLARK, Chief Judge, JOLLY and JONES; E. GRADY JOLLY
• Citation: MGIC Indem. Corp. v. Central Bank of Monroe, La., 838 F.2d 1382 (5th Cir. 1988)
• Decision Date: 07 March 1988
• Docket Number: No. 87-4007,87-4007
• Parties: MGIC INDEMNITY CORP., and Continental Casualty Co., Plaintiffs-Appellees, v. CENTRAL BANK OF MONROE, LA., Defendant-Appellant.

Page 1382

838 F.2d 1382

MGIC INDEMNITY CORP., and Continental Casualty Co. Plaintiffs-Appellees, v. CENTRAL BANK OF MONROE, LA., Defendant-Appellant.

No. 87-4007.

United States Court of Appeals Fifth Circuit.

March 7, 1988.

Thomas J. Walsh, Jr., Glen G. Reid, Jr., Wildman, Harrold, Allen, Dixon & McDonnell, Memphis, Tenn., for defendant-appellant.

William G. Kelly, Jr., Davenport, Files & Kelly, Monroe, La., Christy D. Jones, Lawrence J. Franck, Butler, Show, O'Mara, Stevens & Cannada, Jackson, Miss., for plaintiffs-appellees.

Appeal from the United States District Court for the Western District of Louisiana.

Before CLARK, Chief Judge, JOLLY and JONES, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

Central Bank of Monroe ("Central") appeals a jury verdict in favor of MGIC Indemnity Corp. ("MGIC"), the issuer of its directors and officers liability insurance policy ("D & O policy") and against Central's claim under that policy. After careful examination of the record, we conclude that the arguments at trial and on appeal are based on erroneous theories, but that the district court should have granted a directed verdict for MGIC based upon the undisputed facts. We therefore affirm.

I

United Machinery Services, a small family-owned business, was a customer of Central Bank. United made and sold pump jacks, which are mechanical devices used in oil and gas wells.

Among the pump jack's component parts is a gear box. United arranged to purchase gear boxes over a long-term period from Philadelphia Gear Corporation. Philadelphia Gear required that United have its bank issue a letter-of-credit in favor of Philadelphia Gear. United asked Central Bank to provide such a document, and Central agreed. In February 1981, Central sent a letter-of-credit to Philadelphia Gear in the amount of $75,000, the approximate cost of a single truckload of gearboxes. Bank officer Henry Hinkle signed the letter-of-credit and handled the transaction. Philadelphia Gear sent a telex to Hinkle, advising of certain changes it required. It wanted to change the date from August 12, 1981, to April 31, 1982, to correspond to delivery dates. In addition, Philadelphia Gear asked that the following language be added:

The letter-of-credit will automatically and instantaneously be amended to $75,000 after each drawing.

Apparently without realizing the effect of this language, Hinkle amended the letter-of-credit as asked, and sent it to Philadelphia Gear in late February. Shortly thereafter, Hinkle left the bank and went to work for United. No issue has been raised as to Hinkle's honesty in this transaction.

Sometime later, both Hinkle and people at Philadelphia Gear became concerned that the amendment to the letter-of-credit could be construed as granting an unlimited amount of credit. Other possible constructions of this amendment would have allowed credit to the extent of $18 million, which exceeded Central Bank's lending limit. In addition, United had a net worth of less than $400,000 and was not a proper candidate for such a large credit risk.

The bank renegotiated the letter-of-credit with Philadelphia Gear, and finally agreed to a credit cap of $4.5 million, which matched United's outstanding orders with Philadelphia Gear. At this point, Philadelphia Gear had shipped only one gear box to United. Because of the oil boom in early 1981, Philadelphia Gear apparently had more orders for gear boxes than it could fill.

Late in 1981, because of the then failing oil market, United was no longer able to sell pump jacks, and was unable to pay Philadelphia Gear for the gear boxes which it continued to ship. Philadelphia Gear therefore submitted drafts on its letter-of-credit. Central Bank refused to pay the drafts. In February 1982, Philadelphia Gear sued Central Bank for payment in district court. Philadelphia Gear won a judgment, which was overturned on appeal, and finally the two parties settled the claim.

During all this, Central Bank held a D & O policy from MGIC, which provided, among other things, that MGIC "will pay ... on behalf of the Directors and Officers ... all loss which [they] shall become legally obligated to pay as a result of a 'wrongful act,' defined as an error, misstatement, act or omission, or neglect or breach of duty." This policy contained provisions requiring Central Bank to notify MGIC of claims or possible claims against Central's directors and officers. Two provisions are quoted by the parties as relating to Central's duties to inform MGIC of actual and possible claims:

6(a) If during the policy period the Bank or the Directors or Officers shall: (i) receive written or oral notice from any party that it is the intention of such party to hold the Directors and Officers, or any of them, responsible for a Wrongful Act; or (ii) become aware of any occurrence which may subsequently give rise to a claim being made against the Directors and Officers, or any of them for a Wrongful Act; and shall, during such period, give written notice thereof to the Insurer as soon as practicable and prior to the date of termination of the policy, then any claim which may subsequently be made against the Directors or Officers arising out of such Wrongful Act shall, for the purpose of this policy, be treated as a claim made during the policy year in which such notice was given.

6(b) The Bank or the Directors or Officers shall, as a condition precedent to their rights under this policy, give to the Insurer notice in writing as soon as practicable of any claims made and shall give the Insurer such information and cooperation as it may reasonably require.

Another portion of the policy provides:

6(d) The Bank and the Directors or Officers shall give the Insurer the right to associate itself in the defense and settlement of any claim that appears reasonably likely to involve the Insurer.

On June 25, 1982, while Central Bank's appeal of Philadelphia Gear's judgment was pending, and before the bank had made any claim against Hinkle, Central sent a notice letter to MGIC, advising that Central had "become aware of a series of occurrences ... which may in the future result in a claim being made under the aforesaid policy because of certain errors and omissions of one Henry Hinkle." Central then invited MGIC to participate in settlement negotiations with Philadelphia Gear, which eventually led to the settlement noted above.

MGIC then filed this suit for declaratory judgment as to its liability for Central's loss.

II

MGIC obtained a jury verdict that it was not liable for Central's losses. This verdict was based on MGIC's "Notice and Prejudice" claim. In response to special interrogatories, the jury found that Hinkle had committed a wrongful act which caused the loss for which he would be liable to Central, but that MGIC had not been given proper notice and was prejudiced thereby. MGIC had contended that Central should have notified them as soon as it realized Hinkle had erroneously approved the possibly unlimited letter-of-credit, before it renegotiated the $4.5 million cap with Philadelphia Gear. MGIC said it would have advised Central that the unlimited letter-of-credit was not valid and would have suggested more prudent alternate solutions than the one Central took. The jury apparently accepted this argument and upon its verdict judgment was entered accordingly for MGIC. Central filed a motion for a new trial, raising issues concerning notice and prejudice. The motion was denied. Central then filed its notice of appeal in this court.

On appeal, Central argues that: (1) the trial court erred in reading policy section 6(b) to the jury because only 6(a) was relevant, and 6(b) implied that notice was a "condition precedent" to recovery; (2) that the trial court erred by failing to tell the jury that MGIC had the burden of proof on the issue of prejudice; (3) that the trial court erred by instructing the jury that all three parties must consent to a modification of a letter-of-credit for the modification to become valid; (4) that there was insufficient evidence to show that MGIC had been prejudiced by Central's failure to give notice; and (5) that the trial court erred in allowing an expert witness to testify regarding the "customs and practices of the banking industry" because his testimony allowed him, rather than the court, to instruct the jury on the law of letters-of-credit.

III

A.

The way we see this case is that it was argued by both sides on erroneous theories, and much of the debate, upon close examination, turns out to be irrelevant. ¹ First, policy provision 6(a) is not applicable at all. A careful reading of that provision shows that it was meant to allow the insured to extend the period of coverage under this policy beyond the policy period by timely reporting any occurrences that might give rise to a future claim after the term ended. If Central reported possible future claims in compliance with this provision, then if such a claim was made after the end of the policy term, it would still be covered. This provision is included in the policy to mitigate the possible harshness of a "claims made" policy, which, it is conceded, is the type of policy here. Provision 6(a) does not require notice from the insured at all. It simply warns Central that, in order to extend the policy term for likely future claims, it must report these potential claims during the policy term. Therefore, since there is no contention that the subject claim was made outside the policy period, this provision has nothing to do with the dispute before us, and neither the district court nor the jury should have given it consideration.

This error is harmless, however, since it is clear that Central did not comply with the requirements of provision 6(b), which requirements were a condition precedent to recovery under the policy. For clarity's sake, we will repeat the wording of this provision here:

6(b) The Bank or the Directors or Officers shall, as a...