North Jersey Sav. and Loan Ass'n v. Fidelity and Deposit Co. of Maryland

• Decision Date: 26 July 1993
• Parties: NORTH JERSEY SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant.
• Court: New Jersey Superior Court

Page 56

283 N.J.Super. 56

660 A.2d 1287

NORTH JERSEY SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant.

Superior Court of New Jersey, Law Division.

Decided July 26, 1993.

Daniel Kinburn, Wayne, for plaintiff (Williams, Caliri, Miller & Otley, attorneys)

Ian A.L. Strogatz and David I. Bookspan, Philadelphia, PA (Wolf, Block, Schorr and Solis-Cohen, attorneys), and Robert P. Zoller, Trenton (Hannoch Weisman, attorneys) for defendant.

ALTERMAN, J.S.C.

This is a motion for partial summary judgment.

The motion addresses Counts I and II of the complaint, alleging fraud and dishonesty of Landbank Equity Corporation, and of North Jersey Savings & Loan's Vice President, respectively. Other counts of the complaint have been severed and stayed.

On June 7, 1984, Fidelity & Deposit Company of Maryland (F & D) issued a Savings & Loan Blanket Bond to North Jersey Savings & Loan Association (North Jersey). This dispute addresses the applicability of the bond's provisions to losses sustained by North Jersey in its transaction with Landbank Equity Corporation (Landbank).

In the early 1980's, North Jersey determined to abandon its conservative lending philosophy and embark upon a new more aggressive investment strategy. To implement its new approach, North Jersey hired Neil Grote as its senior loan officer, and charged him with the responsibility of establishing a commercial real estate loan program.

In December 1984, through the brokerage of Premier Financial Group, North Jersey received an offer from Landbank to purchase $10,000,000 of first and second mortgage loans. According to the offer, Landbank promised to pay North Jersey a commitment fee of 1.5 percent, to pay a fixed-rate income stream of 13.75 percent, and to provide mortgages originated by Landbank which themselves were guaranteed against default by private mortgage insurance. Landbank also guaranteed to continue principal and interest payments for any loans if they became delinquent, until such time as the loan became current or was paid in full.

On December 19, 1984, Grote reviewed the offer with North Jersey's Board of Directors and the Board approved the transaction. As reflected in the Board's minutes, each second mortgage On January 14, 1985, Landbank and North Jersey entered into a "Sales and Servicing Agreement." Two days later, Grote, acting for North Jersey without express consent of the Board of Directors, modified the commitment letter to state that North Jersey would receive both first and second mortgages and that each "first and second mortgage will have a mortgage PMI insurance policy covering 100 percent of the mortgage proceeds underwritten by the Insurance Exchange of the Americas, Inc."

"will have a second mortgage PMI [private mortgage insurance] policy covering 100 percent of the mortgage proceeds. The insurance company will have a Best Rating[660 A.2d 1290] of AA and North Jersey Savings has the option to approve or disapprove any mortgage insurance company." On that date, North Jersey sent Landbank its commitment letter containing the aforementioned terms.

Responsibility for implementing, funding and monitoring the purchase was given to North Jersey's Assistant Vice President, Frank Rotella. He formulated underwriting guidelines for the mortgages and delegated responsibility for funding and loan-file processing to his subordinates.

Before North Jersey actually purchased any mortgages from Landbank, Balboa Insurance Company (Balboa), one of Landbank's private mortgage insurers, notified North Jersey that irregularities existed in Landbank-originated mortgages. The Balboa letter and other letters accompanying it, indicated inappropriate loan-to-value ratios of Landbank-originated mortgages, the possibility of violations of the Federal Truth In Lending Act, and possible violations of Virginia state law. Upon learning of those warnings, Grote instructed Rotella to suspend implementation of the Landbank transaction until Rotella confirmed that the mortgages to be purchased by North Jersey were fully covered by private mortgage insurance. Grote refused to authorize Rotella to proceed with the Landbank transaction until he received written confirmation from the Insurance Exchange of the Americas, Inc. that each mortgage to be included in North Jersey's mortgage package was fully covered by the Insurance Exchange's private Performance by Landbank during the first few months of the transaction was satisfactory. But by August 1985, Landbank was two months in arrears in its payments and North Jersey reported the default to its attorney and to the Insurance Exchange of the Americas. Landbank was unable to cure its default, and in September North Jersey took its mortgage from Landbank and turned the mortgage files over to Johnson Mortgage Company for servicing. It also notified F & D of a "possible loss under the Bond" and expressed its belief that "monies collected from mortgages had been misappropriated by Landbank for other uses."

mortgage insurance. Grote also obtained the advice of Stanley Briggs, an insurance agent relied upon by North Jersey's employees, that the Insurance Exchange of the Americas was a coalition of insurance companies all with Best AA ratings. Then, satisfied with this insurance protection, Grote permitted North Jersey to proceed with the purchase of the Landbank mortgages.

In that same month, Landbank filed in bankruptcy. Shortly thereafter, a number of class action suits were filed by Landbank's mortgage borrowers against Landbank and its investors, claiming that Landbank-originated mortgages were unenforceable because of Landbank's violations of various federal and state laws. Resultingly, extensive civil and criminal litigation took place in several jurisdictions, culminating, in part, with the imprisonment of Landbank's officers and attorney. North Jersey's denunciation of Landbank as "a criminal racketeering enterprise" is more than mere hyperbole.

North Jersey asserts that F & D is required to reimburse it for losses it sustained in the Landbank transactions under several provisions relating to employee fidelity, to loss caused by servicing contractors, and to loss resulting from fraudulent mortgages.

I. FIDELITY COVERAGE

North Jersey contends that Grote was a dishonest employee and that his improbity is evidenced in several ways.

First, he altered the agreement between North Jersey and Landbank without the Board's permission. The Board resolution required a private mortgage insurance company which was Best AA rated. Grote deleted that requirement from the commitment letter and agreed with Landbank that private mortgage insurance would be provided by Insurance Exchange of the Americas. Additionally, although the Board required that Landbank name North Jersey as an insured in its fidelity policy, Grote deleted that requirement from the commitment letter and merely required Landbank to request an endorsement to this effect.

Second, Grote knew, but failed to disclose to the Board and to his immediate supervisor, that Premier Financial Group was the broker for the Landbank transaction. North Jersey had received information from federal regulators to be cautious of transactions brokered by Premier Financial.

Third, when Grote received the correspondence from Balboa indicating that North Jersey's loans may not be insured by Balboa, or might not be insurable, he took no action except to verify that Insurance Exchange of Americas, rather than Balboa, insured North Jersey's loans.

Fourth, Grote failed to underwrite the Landbank loans.

In response to these contentions, F & D argues that Grote believed he was authorized to accept changes in the commitment letter and believed the changes were proper. The commitment letter was changed from "the [PMI] Insurance Company, must have a Best AA rating, and North Jersey S & L Association has the option to approve or disapprove any mortgage insurance company" to "each first and second mortgage will have a mortgage PMI insurance policy covering 100 percent of the mortgage proceeds underwritten by the Insurance Exchange of the Americas."

Federal regulators, F & D contends, did not instruct North Jersey to refrain from doing business with Premier Financial; they merely advised North Jersey about bad commercial loans For the purpose of this motion, plaintiff's factual allegations are accepted as true.

Premier Financial had brokered. The federal regulators had advised North Jersey that Premier Financial was a reliable broker of first and second residential mortgages, the kind of mortgages North Jersey was purchasing from Landbank. When Grote received the Balboa correspondence, he suspended implementation of the transaction until an arrangement had been made to provide insurance coverage for the mortgages North Jersey was about to purchase. Furthermore, Rotella, not Grote, had the obligation to underwrite the loans and they were in fact underwritten.

F & D's bond provides for indemnification for:

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

(B) Dishonest or fraudulent acts as used in this insuring agreement 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, profitsharing, pensions, or other employee benefits earned in the normal course of employment.

This clause permits recovery where three conditions are satisfied: the employee's action must be dishonest or fraudulent; the employee must act with a "manifest intent" to cause the injury to his employer; and the employee must receive compensation not normally received in the ordinary course...