St. Paul Mercury Insurance Company v. Federal Deposit Insurance Corporation , 774 F.3d 702 ( 2014 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 13-14228
________________________
D. C. Docket No. 2:12-cv-00225-RWS
ST. PAUL MERCURY INSURANCE COMPANY,
Plaintiff-Appellee,
versus
FEDERAL DEPOSIT INSURANCE
CORPORATION, as receiver for Community
Bank & Trust of Cornelia, Georgia,
CHARLES M. MILLER; TRENT D. FRICKS,
Defendants-Appellants.
________________________
Appeals from the United States District Court
for the Northern District of Georgia
_________________________
(December 17, 2014)
Before WILSON and ROSENBAUM, Circuit Judges, and SCHLESINGER,*
District Judge.
*
Honorable Harvey E. Schlesinger, United States District Judge for the Middle District
of Florida, sitting by designation.
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SCHLESINGER, District Judge:
This appeal arises from a declaratory judgment action initiated by St. Paul
Mercury Insurance Company, a subsidiary of The Travelers Companies, Inc. (“St.
Paul”). St. Paul filed this action in response to a separate federal lawsuit brought
by the Federal Deposit Insurance Corporation (“FDIC”), as receiver (“FDIC-R”)
for Community Bank & Trust (“Bank”), against Charles M. Miller and Trent D.
Fricks, former Bank officers (“Officer defendants”). In that separate action, the
FDIC-R sought recovery from the Officer defendants’ for alleged gross negligence
and breaches of fiduciary duty related to the Bank’s Home Funding Loan Program
(“FDIC-R action”). St. Paul disputes coverage for the separate FDIC-R action, and
brought this lawsuit seeking a determination of coverage and its duty to advance
defense costs to the Officer defendants in the separate FDIC-R action.
I.
On January 29, 2010, the Georgia Department of Banking and Finance
closed the Bank and appointed the FDIC as receiver. Upon appointment, the
FDIC-R assumed the obligation to determine and pay creditors’ claims from
receivership assets. The FDIC in its corporate capacity became one of the
receivership’s primary creditors—after paying insured deposits from its Deposit
Insurance Fund, the FDIC acquires a subrogated claim for those deposits. As part
of its effort to secure assets to pay creditors, including the FDIC’s Deposit
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Insurance Fund, the FDIC-R brought its action against the Officer defendants. In
that action, the FDIC-R alleged that the Officer defendants’ tortious conduct
caused over $15 million in damages by, in the case of Fricks, approving loans in
violation of the Bank’s loan policy and prudent lending practices, and, in the case
of Miller, failing to adequately supervise Fricks and implement corrective
measures.
The Policy, drafted by St. Paul, provided liability coverage to Directors and
Officers of the Bank for:
Loss for which the Insured Persons are not indemnified by the
Company and which the Insured Persons become legally obligated to
pay on account of any Claim first made against them, individually or
otherwise . . . for a Management Practices Act.
The Policy contains five separate insuring agreements applicable to: (1)
management liability; (2) employment practices liability; (3) fiduciary liability; (4)
trust liability; and (5) bankers professional liability, including lender liability and
professional services liability.
FDIC-R seeks coverage under the management liability insuring agreement,
particularly the “Directors and Officers Individual Coverage” (“Officer
Coverage”). The Officer Coverage provides, in relevant part: “The Insurer shall
pay on behalf of the Insured Persons Loss for which the Insured Persons . . .
become legally obligated to pay on account of any Claim first made against them .
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. . for a Management Practices Act . . . .”
The Policy’s definition of a “Claim” includes a “civil proceeding against any
Insured.” A “Claim” also includes a “formal administrative or regulatory
proceeding . . . commenced by . . . a notice of filed charges, a formal investigative
order or a similar legal document.”
The Policy defines “Insured” to include “Insured Persons,” which
encompasses “Directors or Officers.” A “Director or Officer” is defined as “any
natural person who was, now is or shall be a duly elected or appointed director,
officer, member of the board of managers, or management committee member of
any Company . . . .” “Company” is defined to include Community Bankshares,
Inc., and its subsidiaries, including CB&T.
The Policy also contains an “insured-versus-insured” exclusion, applicable
to all insuring agreements, including the Officer Coverage. This exclusion
provides:
The Insurer shall not be liable for Loss [including Defense Costs] on
account of any Claim made against any Insured:
***
4. brought or maintained by or on behalf of any Insured or
Company [including CB&T] in any capacity, except:
(a) a Claim that is a derivative action brought or maintained
on behalf of the Company by one or more persons who
are not Directors or Officers and who bring and maintain
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such Claim without the solicitation, assistance or active
participation of any Director or Officer;
(b) a Claim brought or maintained by a natural person who
was a Director or Officer, but who has not served as a
Director or Officer for at least six-years preceding the
date the Claim is first made, and who brings and
maintains the Claim without the solicitation, assistance or
active participation of any Director or Officer who is
serving as a Director or Officer or was serving as a
Director or Officer within such six-year period;
(c) a Claim brought or maintained by or on behalf of any
Insured Person for an Employment Practices Act;
(d) a Claim brought or maintained by any Insured Person for
contribution or indemnity, if the Claim results from
another Claim covered under this Policy;
(e) only with respect to any Fiduciary Liability Insuring
Agreement made part of this Policy, a Claim brought or
maintained by or on behalf of any Employee of the
Company for any Fiduciary Act;
(f) a Claim brought by an Insured Person solely in his or her
capacity as a customer of the Company for a Trust Act or
a Professional Services Act, provided that such Claim is
instigated totally independent of, and totally without the
solicitation, assistance, active participation, or
intervention of, any other Insured; or
(g) a Claim brought or maintained in a jurisdiction outside of
the United States of America, Canada or Australia by an
Insured Person of a Company incorporated or chartered
in a jurisdiction outside of the United States of America,
Canada or Australia.
Finally, the Policy’s Officer coverage extends only to a “Loss” as defined in
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the Policy. The Policy defines “Loss” in pertinent part as: “[T]he amount which
the Insureds become legally obligated to pay on account of each Claim . . . for
Wrongful Acts for which coverage applies, including Damages, judgments,
settlements and Defense Costs . . . .”
The Policy then carves out certain items from the definition of covered Loss.
Of importance here, this includes the unrepaid loan carve-out in subsection (c) of
the definition of Loss, which provides that an “amount” that constitutes “any
unrepaid, unrecoverable or outstanding loan, lease or extension of credit to any
Affiliated Person or Borrower” is not included as a covered Loss.
The definition of “Affiliated Person” used in the unrepaid loan carve-out
expressly includes any “Director, Officer or Employee” of the Bank. On the other
hand, the term “Borrower” used in the carve-out is defined to mean “any individual
or entity that is not an Affiliated Person and to which the Company extends, agrees
to extend, or refuses to extend, a loan, lease or extension of credit.”
II.
On September 21, 2012, St. Paul filed suit in the United States District Court
for the Northern District of Georgia seeking a declaration that the Policy bars
coverage for the FDIC-R action. On December 26, 2012, St. Paul requested
summary judgment. Following additional briefing on whether the applicable
Policy provisions were ambiguous, the district court determined: that the unrepaid
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loan carve-out provision was ambiguous in this context; that the insured v. insured
exclusion was “not ambiguous, that any ambiguity in the policy c[ould] be
resolved without resort to parol evidence;” that no further discovery was necessary;
and that St. Paul “ha[d] no duty under the policy to pay to defend or to indemnify”
the Officer defendants.
III.
This Court reviews de novo the district court’s decision to grant summary
judgment. Beach Cmty. Bank v. St. Paul Mercury Ins. Co., 635 F.3d 1190, 1194
(11th Cir. 2011). A court may grant a motion for summary judgment only where
the moving party has demonstrated the absence of any genuine issue of material
fact and entitlement to judgment as a matter of law. Fed. R. Civ. P. 56(a); Beach
Cmty. Bank, 635 F.3d at 1194.
IV.
This case presents us with the following issues. First, whether claims
brought by the FDIC-R as receiver for a closed bank against former directors and
officers of the bank are covered under the Policy that excludes from coverage
actions brought “by or on behalf of” any “Insured” or the “Company.” Second,
whether the district court erred in concluding that the Policy unambiguously
precluded coverage and refusing to consider extrinsic evidence or allow further
discovery. Third, and finally, whether the unrepaid loan carve-out provision
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precludes coverage for damages that are unrepaid loans.
A.
The FDIC-R maintains that the plain language of the insured v. insured
exclusion precludes coverage only for actions brought “by or on behalf of any
Insured or Company in any capacity.” Neither the exclusion nor the defined terms
make any reference to the FDIC, regulators, or any liquidating entity; therefore, the
FDIC-R insists the district court erred in concluding the insured v. insured
exclusion applied. Not surprisingly, St. Paul disagrees and insists the district court
correctly interpreted the insured v. insured exclusion.
The disagreement between the parties has its genesis in O’Melveny & Myers
v. FDIC, 512 U.S. 79 (1994). In O’Melveny, the Supreme Court considered a suit
where the FDIC brought an action against a law firm for “professional negligence
and breach of fiduciary duty.” Id. at 82. The FDIC argued that despite the cause
of action originating under California law, federal law governed the rights of the
FDIC because it was an appointed receiver of a failed financial institution under a
federal statute. Id. at 83. The Supreme Court granted certiorari to examine two
issues: (1) whether federal common law, not state law, “determines whether the
knowledge of corporate officers acting against the corporation’s interest will be
imputed to the corporation;” and (2) even if state law answers the first question,
whether “federal common law determines the more narrow question whether
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knowledge by officers so acting will be imputed to the FDIC when it sues as
receiver of the corporation.” Id.The O’Melveny Court disposed with the first issue by explaining that
“‘[t]here is not federal general common law,’” id. (quoting Erie R. Co. v.
Tompkins, 304 U.S. 64, 78 (1938)), and that state law, not federal, “govern[ed] the
imputation of knowledge to corporate victims of alleged negligence . . . .” Id. at
84–85. For the second, more complex issue the FDIC maintained that even though
the claim arose under state law, federal law governs the FDIC’s rights because it
was appointed as a receiver of the failed savings and loan pursuant to a federal
statute—the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (“FIRREA”), Pub. L. No. 101–73, 103 Stat. 183 (codified in scattered
sections of 12 U.S.C.). Id. at 85. The Court was not persuaded by this argument
and instead explained that where Congress promulgated a “comprehensive and
detailed” statute, the court must presume that matters unaddressed in the federal
statute are “left subject to the disposition provided by state law.” Id.
In reaching this conclusion, the O’Melveny Court stated,
Section 1821(d)(2)(A)(i), which is part of a title captioned “Powers
and duties of [the FDIC] as . . . receiver,” states that “the [FDIC] shall,
. . . by operation of law, succeed to—all rights, titles, powers, and
privileges of the insured depository institution . . . . ” 12 U.S.C. §
1821(d)(2)(A)(i) (1988 ed., Supp. IV). This language appears to
indicate that the FDIC as receiver “steps into the shoes” of the failed
S & L, obtaining the rights “of the insured depository institution” that
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existed prior to receivership. Thereafter, in litigation by the FDIC
asserting the claims of the S & L—in this case California tort claims
potentially defeasible by a showing that the S & L’s officers had
knowledge—any defense good against the original party is good
against the receiver.
Id. at 86 (emphasis added) (internal quotation marks and citations removed).
The parties disagree on the import of the stepping into the shoes language.
According to the FDIC-R, O’Melveny does not stand for the proposition that the
FDIC-R’s role as successor to the failed Bank renders it equivalent to the Bank for
all purposes. It is FDIC-R’s position that although the Supreme Court determined
that state law applied, because the FDIC “steps into the shoes” of a failed bank, the
legal significance of this statement is limited because as the Bank’s receiver,
FDIC-R steps into a number of pairs of different shoes—as it were the wingtips of
the Bank, the pumps of any stockholder, the loafers of any accountholder, and the
tennis shoes of any Bank depositor—because the FDIC sues to recoup not only its
own losses, but also the losses of depositors and other creditors. In light of this
unique role, FDIC-R asserts a majority of courts have concluded that it is not the
equivalent of the insured bank for purposes of insured v. insured exclusions. See,
e.g., Am. Cas. Co. v. Sentry Fed. Sav. Bank, 867 F. Supp. 50, 59 (D. Mass. 1994);
Am. Cas. Co. v. FDIC, 791 F. Supp. 276, 277–78 (W.D. Okla. 1992); FDIC v. Am.
Cas. Co. of Reading, Pa., 814 F. Supp. 1021, 1026–27 (D. Wyo. 1991).
By contrast, St. Paul interprets the O’Melveny language to mean that when
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the FDIC, as receiver, asserts state law claims that originally belonged to a failed
bank, the FDIC “steps into the shoes” of the bank and is subject to all defenses that
could have been asserted against the bank. That construction, according to St.
Paul, captures precisely the circumstances of this case. St. Paul, in support, points
to courts that have recognized that, in asserting the failed bank’s claims, the FDIC,
or other government entity, stands in the shoes of the bank and therefore the claims
were, in effect, brought “by” the insured bank. See, e.g., Gary v. Am. Cas. Co. of
Reading, Pa., 753 F. Supp. 1547, 1554–56 (W.D. Okla. 1990); Mt. Hawley Ins. Co.
v. Fed. Sav. & Loan Corp., 695 F. Supp. 469, 481–82 (C.D. Cal. 1987).
We need not resolve the disagreement between the parties concerning
whether O’Melveny’s “steps into the shoes” language may be construed to render
the insured v. insured exclusion applicable here if the Policy was ambiguous,
regardless of its intended meaning.
B.
The FDIC-R urges that under Georgia law an insurance policy provision is
ambiguous when it is susceptible to two or more reasonable interpretations. In
such circumstances, the FDIC-R argues that the Georgia rules of contract
construction provide that the court must adopt the interpretation that favors
coverage—regardless of whether that may be the logical choice. The FDIC-R’s
position, in other words, is that the language of the insured v. insured exclusion is,
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at the very least, reasonably susceptible to an interpretation that would provide
coverage for the FDIC-R action. St. Paul, on the other hand, maintains the district
court correctly determined that no ambiguity existed and that coverage was
excluded.
The district court addressed this argument and concluded that not applying
the insured v. insured exclusion would have the effect of reading the phrase, “on
behalf of,” out of the Policy in contravention of the rule that requires this Court to
construe a contract “in whole and in every part.” O.C.G.A. § 13-2-2(4). It was the
district court’s opinion that, aside from a derivative action, the only party that
could bring an action on a federally insured bank’s behalf is the
FDIC—demonstrating that the exclusion speaks specifically to this circumstance.
Because the parties do not dispute that Georgia law governs the construction
of the Policy, it is necessary to allow Georgia law to guide our inquiry. Previously,
we succinctly outlined Georgia’s rules of construction for insurance policies:
Georgia law directs courts interpreting insurance policies to ascertain
the intention of the parties by examining the contract as a whole. A
court must first consider the ordinary and legal meaning of the words
employed in the insurance contract. An insurance policy should be
read as a layman would read it. Parties to the contract of insurance are
bound by its plain and unambiguous terms. If the terms of the
contract are plain and unambiguous, the contract must be enforced as
written.
An ambiguity exists, however, when the plain words of a contract are
fairly susceptible of more than one meaning. Georgia law teaches that
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an ambiguity is duplicity, indistinctness, an uncertainty of meaning or
expression. When a term in a contract is ambiguous, Georgia courts
apply the rules of contract construction to resolve the ambiguity.
Pursuant to Georgia’s rules of contract construction, the construction
which will uphold a contract in whole and in every part is to be
preferred, and the whole contract should be looked to in arriving at the
construction of any part. Further, ambiguities are construed against
the drafter of the contract (i.e., the insurer), and in favor of the insured
. . . . If the ambiguity remains after the court applies the rules of
construction, the issue of what the ambiguous language means and
what the parties intended must be resolved by the finder of fact.
Duckworth v. Allianz Life Ins. Co. of N. Am., 706 F.3d 1338, 1342 (11th Cir. 2013)
(citing Alea London Ltd. v. Am. Home Servs., Inc., 638 F.3d 768, 773–74 (11th Cir.
2011) (internal citations, alterations, and quotation marks omitted)).
“[E]xceptions, limitations, and exclusions to insurance agreements require a
narrow construction on the theory that the insurer, having affirmatively expressed
coverage through broad premises assumes a duty to define any limitations on that
coverage in clear and explicit terms.” U.S. Fid. & Guar. Co. v. Park’N Go of Ga.,
Inc., 66 F.3d 273, 278 (11th Cir.1995) (internal quotation marks omitted). “Any
exclusion sought to be invoked by the insurer is to be liberally construed against
the insurer unless it is clear and unequivocal.” Id.Further, a court must not interpret a policy to allow an insurer to provide
largely illusory coverage. In other words, “Georgia public policy disfavors
insurance provisions that permit the insurer, at the expense of the insured, to avoid
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the risk for which the insurer has been paid and for which the insured reasonably
expects it is covered.” Barrett v. Nat’l Union Fire Ins. Co. of Pittsburgh, 696
S.E.2d 326, 330 (Ga. Ct. App. 2010) (internal alterations and quotation marks
omitted).
There is a low threshold for establishing ambiguity in an insurance policy.
“Ambiguity in an insurance contract is duplicity, indistinctiveness, uncertainty of
meaning of expression, and words or phrases which cause uncertainty of meaning
and may be fairly construed in more than one way.” Ga. Farm Bureau Mut. Ins.
Co. v. Meyers, 548 S.E.2d 67, 69 (Ga. Ct. App. 2001). As recognized by Georgia
courts, “if a provision of an insurance contract is susceptible of two or more
constructions, even when the multiple constructions are all logical and reasonable,
it is ambiguous . . . .” Hurst v. Grange Mut. Cas. Co., 470 S.E.2d 659, 663 (Ga.
1996) (citing Lakeshore Marine, Inc. v. Hartford Acc. & Indem. Co., 296 S.E.2d
418 (Ga. Ct. App. 1982)).
What is more, “Georgia courts have long acknowledged that insurance
policies are prepared and proposed by insurers. Thus, if an insurance contract is
capable of being construed two ways, it will be construed against the insurance
company and in favor of the insured.” Bituminous Cas. Corp. v. Advanced
Adhesive Tech., Inc., 73 F.3d 335, 337 (11th Cir. 1996) (quoting Claussen v. Aetna
Cas. & Sur. Co., 380 S.E.2d 686, 687–88 (Ga. 1989)). In other words, “[t]he
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number of reasonable and logical interpretations makes the clause ambiguous, and
the statutory rules of construction require that we construe the ambiguous clause
against the insurer.” Hurst, 470 S.E.2d at 663 (internal citation omitted). Finally,
an important indication of ambiguity in a policy is whether nearly identical or
similar language has been construed differently by other courts. Boston Ins. Co. v.
Gable, 352 F.2d 368, 370 (5th Cir. 1965) (applying Georgia law).1
The FDIC-R asserts a number of arguments in support of its contention that
the insured v. insured exclusion is unambiguous and should not apply. However, it
seems to us that the most compelling argument is that courts who have addressed
similarly worded insured v. insured exclusions have reached different results.2
One such case illustrates the point, Progressive Casualty Ins. Co. v. FDIC,
926 F. Supp. 2d 1337 (N.D. Ga. 2013)—a strikingly similar case. Progressive
1
In Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981) (en banc), this Court
adopted as binding precedent all of the decisions of the former Fifth Circuit handed down prior
to the close of business on September 30, 1981.
2
St. Paul cites other cases that conclude the insured v. insured exclusion applies, and
maintains that these are the “better-reasoned” opinions. See, e.g., Gary v. Am. Cas. Co. of
Reading, Pa., 753 F. Supp. 1547, 1554–56 (W.D. Okla. 1990); Mt. Hawley Ins. Co. v. Fed. Sav.
& Loan Corp., 695 F. Supp. 469, 481–82 (C.D. Cal. 1987). Nevertheless, the fact remains that
there are two schools of thought on how to interpret insured v. insured exclusions, and that
seems to make FDIC-R’s point. Compare St. Paul Mercury Ins. Co. v. Hahn, No. SACV
13-0424 AG RNBX, 2014 WL 5369400, at *3 (C.D. Cal. Oct. 8, 2014) (holding insured versus
insured exclusion is ambiguous as to the FDIC); W. Holding Co., Inc. v. Chartis Ins. Co.-Puerto
Rico, 904 F. Supp. 2d 169, 182–84 (D.P.R. 2012) (same); Am. Cas. Co. v. Baker, 758 F. Supp.
1340 (C.D. Cal. 1991) (same); and Fid. & Deposit Co. of Md. v. Zandstra, 756 F. Supp. 429,
433–34 (N.D. Cal. 1990) (same), with St. Paul Mercury Ins. Co. v. Miller, 968 F. Supp. 2d 1236,
1243–44 (N.D. Ga. 2013) (holding exclusion applies); and Fid. & Deposit Co. of Md. v. Conner,
973 F.2d 1236, 1244–45 (5th Cir. 1992) (same).
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Casualty Insurance Company initiated a declaratory judgment action “seeking a
declaration that the directors and officers/company liability policy” it had issued
did not “afford coverage” to former directors and officers of the bank in a lawsuit
filed by the FDIC as a receiver. Id. at 1338. Progressive eventually moved for
summary judgment claiming, among other things, that coverage was “barred by the
‘insured verses insured exclusion’ in the policy.” Id. at 1339. The insured versus
insured exclusion specifically provided, “The Insurer shall not be liable to make
any payment for Loss in connection with any Claim by, on behalf of, or at the
behest of the Company, any affiliate of the Company or any Insured Person in any
capacity . . . .” Id. at 1339.
Progressive insisted because the policy language excluded any claim “by” or
“on behalf of,” that this applied to the FDIC-R and barred coverage since the
FDIC-R stepped into the shoes of the bank. Id. at 1339–40. Interestingly, the
Progressive Court found ambiguity and concluded,
However, it is unclear whether the FDIC-R’s claims are “by” or “on
behalf of” the failed bank. Furthermore, it is unclear what exactly is
encompassed by the phrase “steps into the shoes.” These ambiguities
arise, in part, because the FDIC-R differs from other receivers or
conservators that might step into the shoes of a failed or insolvent
bank. The FDIC-R is tasked, under the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, with bringing claims to
recover losses suffered by the federal Deposit Insurance Fund and a
bank’s depositors, creditors, and shareholders. The FDIC-R has
multiple roles. Therefore, the FDIC-R has shown that some
ambiguity exists in the insured versus insured exclusion.
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Id. at 1340 (internal citations omitted).
The fact that the district court in this case and the Progressive Court reached
opposite conclusions about the effect of a nearly identically worded insured v.
insured exclusion appears to us to plainly support a finding of ambiguity under
Georgia law. In Georgia, “‘[i]f the courts cannot with any degree of assurance, or
unanimity, interpret exclusion provisions of this kind, that fact alone weighs
heavily against the insurer because the fine print of the policy, where ambiguous, is
construed in favor of the assured.’” First Ga. Ins. Co. v. Goodrum, 370 S.E.2d 162,
164 (Ga. Ct. App. 1988) (quoting Travelers Ins. Co. v. State Farm Mut. Auto. Ins.
Co., 175 F. Supp. 673, 676 (E.D. La. 1959)). Consequently, we conclude that the
insured v. insured exclusion is ambiguous.
Since we conclude that the insured v. insured exclusion is ambiguous, it may
be necessary to consider extrinsic evidence to determine the parties’ intent. See
Duckworth, 706 F.3d at 1342 (explaining that if ambiguity remains after the
application of the rules of construction, the language of the insurance policy
remains ambiguous and the intention of the parties must be consulted to determine
what the parties intended).
C.
Alternatively, St. Paul contends that the unrepaid loan carve-out precludes
coverage for damages that are unrepaid loans. The district court concluded that the
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definition of loss which carved out unrepaid loans was ambiguous, and we see no
reason to disturb that finding.
V.
Based on the foregoing and our review of the record and the parties’ briefs,
we conclude the insured v. insured exclusion is ambiguous, and that extrinsic
evidence may be necessary to determine the parties’ intent. Accordingly, this case
is remanded to the district court for further consideration in accordance with this
opinion.
REVERSED.
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