F.D.I.C. v. Mijalis

• Court: Court of Appeals for the Fifth Circuit
• Decided: March 10, 1994
• Docket: 92-05123
• Status: Published

Opinion

United States Court of Appeals,

Fifth Circuit.

No. 92-5123.

FEDERAL DEPOSIT INSURANCE CORPORATION, in its Corporate Capacity, Plaintiff-Appellee, Cross-Appellant,

v.

Gus S. MIJALIS, et al., Defendants,

and

Gus S. Mijalis, et al., Defendants-Appellants, Cross-Appellees.

March 10, 1994.

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

Before REYNALDO G. GARZA, KING and DeMOSS, Circuit Judges.

KING, Circuit Judge:

After a jury trial, the United States District Court for the

Western District of Louisiana entered judgment in favor of the

plaintiff, the Federal Deposit Insurance Corporation (FDIC), and

against Gus S. Mijalis, Alex S. Mijalis, John G. Cosse, John B.

Franklin, and J. Harper Cox, Jr. (the individual defendants), and

their directors' and officers' liability insurer, International

Insurance Company. We now consider the defendants' appeals and the

FDIC's cross-appeal.

I. BACKGROUND

A. FACTS

The stipulations contained in the pretrial order and the

evidence introduced at trial, viewed in the light most favorable to

the jury verdict, tended to show the following chain of events.

1 The Bank of Commerce (the Bank) was chartered as a Louisiana

state bank and opened for business in January 1975. Gus Mijalis

served as vice-chairman of the Bank's board of directors from the

Bank's opening until May 1980, when he was elected chairman of the

board. Gus Mijalis's brother, Alex Mijalis, and his cousin, John

Cosse, also served as directors of the Bank from at least 1981 to

1985. Together, these three men owned a controlling bloc of Bank

stock, eventually growing to over 657 of outstanding shares by

November 1982. J. Harper Cox, Jr., was Bank president from 1976 to

1986, except for a hiatus from June 1981 to July 1982, during which

he served as president of AMI, Inc. John Franklin served as a

vice-president and loan officer of the Bank from April 1982 to

October 1985.

International Insurance Company (International) issued two

director and officer liability policies (D & O policies) to the

Bank. International issued the first D & O policy (the 1983

policy) to the Bank on February 25, 1981, and it was to run until

February 21, 1984; the policy was later amended to expire on

January 1, 1984. Originally the 1983 policy's limit of liability

was $5 million for each policy year, but in September 1982

International agreed to double the limit to $10 million per policy

year. Bank president Cox represented to International that he was

aware of no facts that would give rise to any claim in excess of $5

million at the time. In December 1983, the Bank applied for a new

D & O policy from International, and International issued a new

policy for the period January 1, 1984, to January 1, 1985 (the 1984

2 policy). This policy reduced coverage to $5 million, and it

excluded from coverage several liabilities that were not excluded

under the 1983 policy. International declined to renew the 1984

policy after it expired.

The Bank experienced severe financial difficulties during the

1980s. As a federally insured financial institution, the Bank was

subject to federal regulation, and a federal examination report

noted that the Bank had a negative liquidity as of January 1981.

That year the FDIC designated the Bank as a "problem bank," a

distinction it shared with only one other bank in its entire 115-

bank district. In March 1981, the FDIC entered into a memorandum

of understanding with the Bank, establishing performance benchmarks

for the Bank intended to improve its liquidity difficulties and its

generally unsound financial condition. Matters did not improve,

however, and the Bank received a poor rating on its December 1982

examination by the FDIC. In June 1983, the FDIC issued a notice of

charges and a proposed cease and desist order, and the FDIC entered

the order against the Bank in October 1983.

The Bank's financial condition did not improve, and the FDIC

gave the Bank another poor rating in its December 1983 examination.

Indeed, between the entry of the memorandum of understanding in

March 1981 and June 1984, federal and state regulators advised the

Bank on sixteen separate occasions that corrective measures were

needed to improve the Bank's financial health. By January 1985,

the FDIC downgraded the Bank's financial condition to the poorest

rating possible. That year the FDIC issued a more stringent cease

3 and desist order against the Bank, and the FDIC also entered an

order prohibiting Gus Mijalis from ever acting as a director or

officer of a federally-insured bank.

Finally, on June 13, 1986, the Commissioner of the Louisiana

Office of Financial Institutions declared the Bank insolvent and

appointed the FDIC as receiver. The FDIC as receiver transferred

all of the Bank's claims thereby received to the FDIC in its

corporate capacity.

B. PROCEDURAL HISTORY

The FDIC brought suit in June 1989 in federal district court

against numerous Bank directors and officers and against their

liability insurers, International and Southern Underwriters, Inc.,

and the Bank's insurance broker, Morris, Temple & Trent, Inc.

Federal subject-matter jurisdiction was predicated on 28 U.S.C. §

1331 (federal question jurisdiction) and 28 U.S.C. § 1345 (actions

brought by the United States or its agencies). The insurance

companies were joined under Louisiana's direct action statute.

LA.REV.STAT.ANN. § 22:655 (West Supp.1993). Southern Underwriters

and Morris, Temple & Trent settled with the FDIC several months

prior to trial, and most of the officers and directors of the Bank

settled with the FDIC on the eve of trial, leaving as defendants

Gus and Alex Mijalis, John Cosse, J. Harper Cox, John Franklin, and

International. The FDIC's claims against the defendant directors

and officers included breach of fiduciary duty, breach of contract,

and negligence, and its claims were based largely on the approval

and funding of imprudent loans that ultimately caused substantial

4 losses to the Bank and the FDIC.

Jury trial commenced on November 5, 1991. On December 12,

1991, the jury returned a verdict in favor of the FDIC for the

entire amount of damages sought, some $28.5 million. The jury

further found that some $17.5 million of the total damages suffered

by the Bank were attributable to occurrences during the effective

period of the 1983 policy. The district court reserved most of the

insurance coverage issues for its own decision, and on June 30,

1992, the court ruled that losses suffered by the Bank traceable to

acts or omissions occurring during the years 1981-83 were covered

by the 1983 policy. The court also held that an exclusion in the

1984 policy precluded any coverage of losses stemming from

occurrences during that policy's lifetime. 800 F.Supp. 397. On

September 1, 1992, the district court entered judgment in favor of

the FDIC in the following amounts (excluding prejudgment and

postjudgment interest): (1) $20,977,918 against Gus and Alex

Mijalis, Cosse, Cox, and Franklin in solido, (2) $5,302,025 against

Gus and Alex Mijalis, Cosse, and Cox in solido, and (3) $2,180,931

against Gus and Alex Mijalis and Cosse in solido. The court also

adjudged International liable for $17,504,946 of the preceding

amounts, plus prejudgment and postjudgment interest.

The defendants' motions for new trial and for judgment as a

matter of law were denied. Appeal to this court followed.1

1 We granted leave to American Casualty Company of Reading, Pa. (American Casualty), to file an amicus brief in support of International's position with respect to the insurance coverage issues presented in this case.

5 C. ISSUES

The issues presented for our consideration may be divided into

two general categories. The first category includes the individual

defendants' challenges to the merits of the verdict and judgment

holding them liable for $28.5 million. Five of the issues raised

by the individual defendants in this connection concern the

district court's jury instructions, and the sixth issue challenges

the district court's refusal to allow the defendants to introduce

evidence to show that the FDIC was the proximate cause of all or

part of the damages claimed. The FDIC argues in support of the

verdict and judgment against the individual directors.

The second category of issues concerns the district court's

rulings with respect to insurance coverage. International makes

several arguments that the district court erred in holding

International liable for $17.5 million of the total judgment. The

individual defendants and the FDIC defend this portion of the

judgment, and they additionally argue that the district court erred

in holding that the 1984 policy provided no coverage for losses

during its lifetime.

II. STANDARDS OF REVIEW

In Bender v. Brumley, 1 F.3d 271, 276-77 (5th Cir.1993), we

set forth a two-part test for challenges to jury instructions.

First, the challenger must demonstrate that the charge as a whole

creates "substantial and ineradicable doubt whether the jury has

been properly guided in its deliberations." Id. at 276 (citations

omitted). Second, even if the jury instructions were erroneous, we

6 will not reverse if we determine, based upon the entire record,

that the challenged instruction could not have affected the outcome

of the case. Id. at 276-77. If a party wishes to complain on

appeal of the district court's refusal to give a proffered

instruction, that party must show as a threshold matter that the

proposed instruction correctly stated the law. Treadaway v.

Societe Anonyme Louis-Dreyfus, 894 F.2d 161, 167 (5th Cir.1990).

In sum, "[g]reat latitude is shown the trial court regarding jury

instructions." FDIC v. Wheat, 970 F.2d 124, 130 (5th Cir.1992).

The individual defendants also complain of the district

court's exclusion of certain evidence. We will not reverse a

district court's evidentiary rulings unless they are erroneous and

substantial prejudice results. The burden of proving substantial

prejudice lies with the party asserting error. Smith v. Wal-Mart

Stores (No. 471), 891 F.2d 1177, 1180 (5th Cir.1990).

With respect to the insurance coverage issues, we note that

we review a district court's interpretation of an insurance policy

de novo. Harbor Ins. Co. v. Urban Constr. Co., 990 F.2d 195, 199

(5th Cir.1993). Of course, any factual findings made by the

district court are reviewed under the clearly erroneous standard.

Prudhomme v. Tenneco Oil Co., 955 F.2d 390, 392 (5th Cir.), cert.

denied, --- U.S. ----, 113 S.Ct. 84, 121 L.Ed.2d 48 (1992).

III. MERITS ISSUES

We turn our attention first to the issues raised by the

individual defendants challenging the judgment entered against them

by the district court. Most of their challenges concern the

7 district court's instructions to the jury. The individual

defendants also argue that the district court erred by refusing to

allow the defendants to introduce evidence in order to prove that

they did not cause all or part of the losses that accrued after the

Bank was closed.

A. JURY INSTRUCTIONS

1. Definition of "Gross Negligence"

The district court concluded that the appropriate legal

standard of care in this case was gross negligence, and the parties

have not challenged this conclusion as erroneous on this appeal.

As the court below observed, federal law provides for personal

liability on the part of directors and officers of insured

depository institutions for "gross negligence, including any

similar conduct or conduct that demonstrates a greater disregard of

a duty of care (than gross negligence) including intentional

tortious conduct, as such terms are defined and determined under

applicable State law." 12 U.S.C. § 1821(k). The defendants,

however, argue that the jury instructions given by the district

court misstated the definition of gross negligence under Louisiana

law, leading to a misunderstanding of the law by the jury and clear

prejudice to the defendants' rights. The FDIC responds that the

definition given by the district court was correct. We accord

substantial deference to the district court's decisions with

respect to jury instructions. See Bender, 1 F.3d at 276-77.

The individual defendants specifically complain of jury

instruction no. 19, which reads as follows:

8 Simple negligence alone is insufficient for a finding of personal liability of the director and officer defendants. Gross negligence is required.

Simple negligence is the failure to act as a reasonably prudent person would act under the circumstances. Gross negligence lies somewhere between simple negligence and willful misconduct or fraud with intent to deceive.

The individual defendants contend that this instruction falls far

short of defining the degree of culpability encompassed by the

gross negligence standard.

The district court refused to give the defendants' proposed

jury instruction, over the defendants' written objections. The

proposed jury instruction reads as follows:

The first requirement is that the defendants were grossly negligent in funding each of the sixteen (16) loans particularly alleged.

In order to find that a director is liable, you must determine that he has acted with gross negligence. Simple negligence alone is insufficient for a finding of personal liability of an officer or director of a bank. Gross negligence is the want of even slight care and diligence. It is the want of the diligence of even careless men are accustomed [sic]. Gross negligence is the entire absence of care, and it consists of other disregard of the dictates of prudence amounting to complete neglect of the rights of others. Gross negligence is the entire want of care which would raise the belief that the act or omission complained of was the result of conscious indifference to the right or welfare of the bank. The plaintiffs [sic] must show that the defendants were consciously, that is, knowingly, indifferent to the obligations that they owed the bank. In other words, the plaintiff must show that the defendants knew about the peril of the decisions that they were making, that their acts or omissions demonstrated that they did not care. Errors of judgment in the business world do not necessarily indicate gross misconduct by the management compensable in damages.

We focus first on the threshold issue of whether this prolix

proposed instruction accurately stated Louisiana law, which all

parties agree we must look to as the source of the appropriate

9 definition of gross negligence. The FDIC cites our decisions in

Louisiana World Exposition v. Federal Ins. Co., 858 F.2d 233 (5th

Cir.1988), reh'g denied, 864 F.2d 1147 (5th Cir.1989) [hereinafter

LWE ], in opposition to the defendants' definition and in support

of the district court's definition. In LWE we considered a host of

issues arising out of the bankruptcy of Louisiana World Exposition,

Inc., a Louisiana nonprofit corporation. Id. at 235. We

concluded, inter alia, that the nonprofit corporation could

maintain an action against its officers and directors under

Louisiana law for gross negligence, mismanagement, and breach of

fiduciary duty. Id. at 239. In the course of denying the

appellees' petition for rehearing, we further held that Louisiana

does not recognize a cause of action against principals of a

nonprofit corporation for simple negligence. Louisiana World

Exposition v. Federal Ins. Co., 864 F.2d 1147, 1152 (5th Cir.1989).

We note that the Louisiana legislature has, since the trial in the

instant case, passed a statute limiting personal liability of bank

directors and officers to their bank to cases of gross negligence.

LA.REV.STAT.ANN. § 6:291(B) (West Supp.1993) (effective July 2,

1992).

Our opinions in LWE, however, stop short of giving an actual

definition of the gross negligence standard of care. This is

hardly surprising because there is a paucity of Louisiana authority

on the subject of gross negligence; indeed, it has been observed

that gradations of non-intentional fault were almost unknown to

Louisiana jurisprudence until very recently. See Edwin H. Byrd,

10 III, Comment, Reflections on Willful, Wanton, Reckless, and Gross

Negligence, 48 LA.L.REV. 1383, 1385 & n. 9 (1988) ("Plaintiffs have

frequently alleged "gross negligence' in their complaints even

though the exclusive delictual remedy under Louisiana law has,

until recently, been based upon ordinary negligence."). The

closest we came in LWE to offering a definition came in our denial

of rehearing when we simply described the standard as lying

"somewhere between simple negligence and willful misconduct or

fraud with intent to deceive." LWE, 864 F.2d at 1150. The

district court relied on this description in formulating the

definition of gross negligence that it gave the jury in the instant

case.

The individual defendants first direct our attention to the

statutory definition of gross negligence that now applies to bank

directors and officers under LA.REV.STAT.ANN. § 6:291(B). According

to the statutory definition, gross negligence is "a reckless

disregard of, or a carelessness amounting to indifference to, the

best interests of the corporation or the shareholders thereof, and

involves a substantial deviation below the standard of care

expected to be maintained by a reasonably careful person under like

circumstances." LA.REV.STAT.ANN. § 6:2(8) (West Supp.1993)

(effective July 2, 1992). As noted, this statutory definition did

not become effective until after the conclusion of the trial in

this matter. Certainly it was not erroneous for the district court

to fail to use a definition not yet adopted by the state of

Louisiana as law. In any event, this definition was not a part of

11 the instruction tendered to the district court by the defendants.

The defendants also cite the case of State v. Vinzant, 200 La.

301, 7 So.2d 917, 922 (1942), for the following proposition: "

"Gross negligence is the want of even slight care and diligence.'

It is the "want of that diligence which even careless men are

accustomed to exercise.' " The FDIC counters that Vinzant involved

the interpretation of Louisiana's involuntary vehicular homicide

statute, which prohibited the operation of a motor vehicle in a

grossly negligent or grossly reckless manner, id., 7 So.2d at 920,

and it insists that this standard was inapposite to corporate

directors and officers, whose conduct has always been governed by

other Louisiana statutes. We note that a Louisiana intermediate

appellate court has favorably cited the Vinzant standard in the

civil context (in a medical malpractice case), although this case

was admittedly decided after the trial in the instant case.

Ambrose v. New Orleans Police Dep't Ambulance Serv., 627 So.2d 233,

243 (La.Ct.App.1993). Assuming that the defendants had tendered

the Vinzant definition alone as a jury instruction, the district

court might have erred had it rejected the instruction as

inapplicable to the corporate director context.

As it happens, however, the defendants did not tender an

instruction based on Vinzant or other Louisiana law alone.

Instead, the proposed instruction cobbles together numerous legal

standards from a variety of sources. The defendants incorporated

into the instruction not only the Vinzant definition, but also a

12 definition from an admiralty case from federal district court2 and

a case from this court interpreting Texas law.3 We find no support

for the defendant's assertion that Louisiana's gross negligence law

was the same as that of Texas, even prior to the statutory

definition recently enacted by the Louisiana legislature. Whatever

the flaw may have been in using as a jury instruction a description

of gross negligence when a definition was in order, the defendants

are effectively estopped from complaining because the definition

they tendered was itself infirmed. We cannot say that the district

court abused its substantial discretion in rejecting it.

2. Comparative Negligence

The individual defendants next contend that the district

court committed reversible error by denying their request for an

instruction on the law of comparative negligence. The FDIC makes

several responses to this argument, including that (1) the

defendants did not offer sufficient evidence that other parties

were partially responsible for the Bank's losses to warrant a

comparative negligence instruction, (2) federal law controls and

would permit the individual defendants only a pro tanto reduction

in liability even if they had proved that other parties were

partially liable for the losses, and (3) even if Louisiana law does

2 Hendry Corp. v. Aircraft Rescue Vessels, 113 F.Supp. 198, 201 (E.D.La.1953). It may be noted that the Hendry court in turn relied on our opinion in Hollander v. Davis, 120 F.2d 131 (5th Cir.1941), a diversity case controlled by Florida law. 3 City Nat'l Bank v. United States, 907 F.2d 536, 541 (5th Cir.1990) (citing Burk Royalty Co. v. Walls, 616 S.W.2d 911, 920, 922 (Tex.1981)).

13 apply, it would not permit application of comparative negligence

principles in this case.

The individual defendants' argument is based on the following

facts. On November 4, 1991, the district court was apprised of the

fact that the FDIC had reached a settlement with seven persons who

apparently had served on the Bank's board of directors between 1981

and 1985. Those settling defendants were apparently dismissed from

the case, as the final judgment does not refer to them. The

individual defendants tendered the following proposed jury

instruction to the district court near the end of trial:

The gross damages should be reduced by any loss attributable to any factor other than the gross negligence of the directors. Further, the loss should be reduced by any loss attributable to any of the alleged acts of gross negligence of any defendants who approved these loans but served on either of the loan committees and the board of directors.

During this tenure, other individuals served on the board of directors of the bank and the loan committees. If you determine that these individuals were involved in the same acts and omissions, then you will be required to determine what percent of any of the losses involved in this lawsuit should be allocated to these defendants.

The district court rejected this proposed instruction and did not

give the jury an interrogatory to permit it to assign a percentage

of fault to parties other than the individual defendants. The

court noted that there was no evidence before the jury regarding

any of the parties that settled before trial.

The facts of this case are strikingly similar to those

presented in FDIC v. Mmahat, 907 F.2d 546 (5th Cir.1990), cert.

denied, 499 U.S. 936, 111 S.Ct. 1387, 113 L.Ed.2d 444 (1991).

Mmahat involved a legal malpractice action by the FDIC against John

14 Mmahat, general counsel for a federally-chartered savings and loan

that went into receivership. Id. at 549. The FDIC sued Mmahat for

advising the savings and loan to make loans in violation of

regulations promulgated by the Federal Home Loan Bank Board. Id.

As in the instant case, several officers and directors settled with

the FDIC before trial, but no jury interrogatory regarding their

proportionate fault was given. Id. at 550. Mmahat argued that the

Louisiana proportionate reduction rule should have applied to

reduce his liability by the percentage of fault attributed to

settling parties. Id. The FDIC argued, as it does in the instant

case, that we should apply a uniform federal common law rule to

determine the effect of the partial settlement, and it further

argued that we should adopt the pro tanto rule, which limits

nonsettling defendants to receiving a dollar-for-dollar credit for

any amount paid by settling defendants. Id. The Mmahat court

refused to decide the issue because there was no evidence of the

settling defendants' fault on which to predicate a comparative

negligence instruction, even assuming that use of the proportionate

reduction rule would have been appropriate. Id.

The legal effect of a partial settlement in FDIC litigation of

this type has not been definitively resolved in any of the federal

courts of appeals. The Tenth Circuit has recognized that the

establishment of a special pro tanto rule for the FDIC would

present "some very difficult legal questions." FDIC v. Geldermann,

Inc., 975 F.2d 695, 699-700 (10th Cir.1992) (expressing no opinion

on the appropriate legal standard for calculating the setoff for a

15 related settlement). The district courts have debated the merits

of the proportionate reduction and the pro tanto rules in the

context of FDIC litigation, with mixed results. Compare FDIC v.

Deloitte & Touche, 834 F.Supp. 1155 (E.D.Ark.1993) (applying the

proportionate reduction rule) and Resolution Trust Corp. v.

Gallagher, 815 F.Supp. 1107 (N.D.Ill.1993) (same) with Resolution

Trust Corp. v. Platt, No. 92-CV-277-WDS (S.D.Ill. Aug. 24, 1993)

(unpublished opinion) (applying the pro tanto rule) and FSLIC v.

McGinnis, Juban, Bevan, Mullins & Patterson, P.C., 808 F.Supp. 1263

(E.D.La.1992) (same).

We need not resolve these difficult issues because, as in

Mmahat, the individual defendants in the instant case would have

had the burden at trial of proving the settlors' share of fault

even under the proportionate reduction rule. Mmahat, 907 F.2d at

550. Just as in Mmahat, the court below found that there was

insufficient evidence in the record to permit a finding of

proportionate fault. It is well-established that a district court

should not instruct the jury on a proposition of law if there is no

competent evidence to which it may be applied. See Concise Oil &

Gas Partnership v. Louisiana Intrastate Gas Corp., 986 F.2d 1463,

1474 (5th Cir.1993); DMI, Inc. v. Deere & Co., 802 F.2d 421, 429

(Fed.Cir.1986). We agree with the FDIC that the individual

defendants did no more than introduce evidence to show that some of

the settling defendants sat on the Bank's board of directors and/or

loan committee at times when bad loans were made and elicit from an

FDIC expert witness the opinion that the Bank's board, generally

16 speaking, had been grossly negligent in its loan supervision. No

evidentiary basis existed upon which the jury could have rationally

apportioned liability among the settling and non-settling

defendants. See generally STEPHEN M. FLANAGAN & CHARLES R.P. KEATING,

FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 1087.1 (1986). We

therefore need not decide the proportionate reduction/pro tanto

issue.

Of course, the FDIC is not entitled to keep any double

recovery that might be occasioned by the partial settlement and the

judgment. As in Mmahat, if the money paid by the settling

defendants is attributable to any or all of the same loans for

which the nonsettling defendants were held liable, then the

nonsettling defendants should get a dollar-for-dollar credit for

the appropriate amount. See Mmahat, 907 F.2d at 550. We therefore

remand this issue to the district court to determine what portion

of the amount paid by the settlors is attributable to the bad loans

sued upon by the FDIC.

3. Mitigation of Damages

The defendants in this case tendered to the district court,

and the court refused to give, the following proposed instruction

regarding the FDIC's duty to mitigate damages:

A party claiming damages has a duty to mitigate or minimize its damages as the result of an alleged wrongful act on the part of another party by using reasonable diligence and reasonable means under the circumstances in order to prevent the aggravation of such damages and further loss to itself. If you find that the FDIC failed to take reasonable measures to seek out or take advantage of business opportunities to minimize its losses you should reduce the amount of damages you find appropriate by the amount of damages the FDIC could have saved under the circumstances.

17 This proposed instruction was based on one given by the district

court in Mmahat. The Mmahat defendant complained of this

instruction on appeal, and we deferred to the district court's

broad discretion to formulate a charge. Mmahat, 907 F.2d at 552.

The individual defendants also cite FDIC v. Wheat in support

of their proposed jury instruction regarding the FDIC's duty to

mitigate damages. Wheat was a case in which the FDIC sued the

former director of an insolvent bank for negligence, breach of

fiduciary duty, and breach of contract. Wheat, 970 F.2d at 126.

Following a jury verdict in favor of the FDIC, the defendant

director appealed to our court, contending inter alia that the

district court had erred in failing to submit a jury instruction

regarding the FDIC's duty to mitigate damages. Id. at 132. We

noted that the FDIC had in fact mitigated to the full extent

"legally possible," and so held that no jury instruction was

required. Id. The defendants in the instant case argue that Wheat

and Mmahat stand for the proposition that the FDIC has a duty to

mitigate its damages like any other plaintiff.

The FDIC responds with a litany of cases holding that the FDIC

is not subject to the state law defense of mitigation of damages.

It appears that the Seventh Circuit is the only court of appeals to

have considered the issue, and that court held that the FDIC is not

subject to the mitigation of damages defense when it sues former

directors and officers in its corporate capacity to recover losses

sustained by an insolvent bank. FDIC v. Bierman, 2 F.3d 1424,

1438-41 (7th Cir.1993) (relying on the discretionary function

18 exception to the Federal Tort Claims Act and the lack of a duty to

the wrongdoers). The great majority of the district courts are in

accord with the conclusion reached by the Bierman court. See

Resolution Trust Corp. v. Fleischer, 835 F.Supp. 1318, 1321 n. 5

(D.Kan.1993) (collecting cases). District courts within our

circuit have come to different results. Compare Resolution Trust

Corp. v. Evans, 1993 WL 354796, at *4 (E.D.La. Sept. 3, 1993)

(unpublished opinion) (refusing to strike defendants' affirmative

defense of failure to mitigate damages) with FSLIC v. Shelton, 789

F.Supp. 1367, 1370 (M.D.La.1992) (holding that the FDIC owes no

duty to mitigate damages to insolvent institutions or to their

culpable directors).

We agree with the FDIC that our decisions in Mmahat and Wheat

do not preclude us from consideration of this issue. Neither the

Mmahat court nor the Wheat court appears to have addressed the

FDIC's argument that the mitigation of damages defense is

inapplicable to the FDIC in suits against officers and directors of

failed financial institutions. In Mmahat, only the defendant

raised any question about the jury instructions, and we simply

passed on the form of the instruction without considering whether

it should have been given at all. Mmahat, 907 F.2d at 552. It

also appears that this issue was not raised by the FDIC in Wheat;

our decision was limited to the conclusion that the FDIC did

mitigate "to the full extent legally possible." Wheat, 970 F.2d at

132.

Several rationales support the FDIC's position on this issue.

19 Many courts have held that public policy prohibits defendant

directors and officers from asserting the mitigation of damages

defense against the FDIC, reasoning that the risk of errors in

judgment by FDIC personnel should be borne by the directors and

officers who were wrongdoers in the first instance rather than by

the national insurance fund. Fleischer, 835 F.Supp. at 1322;

FSLIC v. Burdette, 718 F.Supp. 649, 663 (E.D.Tenn.1989). Courts

have also invalidated the mitigation of damages defense as against

the FDIC because the conduct of the FDIC "should not be subjected

to judicial second guessing," and because the FDIC owes no duty to

failed financial institutions or to their former directors and

officers. Fleischer, 835 F.Supp. at 1322. Still another approach

has been to view the FDIC's conduct in managing failed banks as

insulated from affirmative defenses such as mitigation of damages

by the discretionary function exception to the Federal Tort Claims

Act (FTCA). Id. at 1324.

In Bierman, the Seventh Circuit relied upon both the policy

considerations that favor liberating the FDIC from the duty to

mitigate damages and the discretionary function to the FTCA

rationale. Taking note of the Supreme Court's recent decision in

United States v. Gaubert, 499 U.S. 315, 326, 111 S.Ct. 1267, 1275,

113 L.Ed.2d 335 (1991) (holding that actions taken by the Federal

Home Loan Bank Board in supervising a savings and loan at the

day-to-day operational level could come within the discretionary

function exception to the FTCA), the Bierman court concluded that

exempting the FDIC from the affirmative defenses of contributory

20 negligence and mitigation of damages "is consonant with the purpose

of the discretionary function exception to the FTCA." Id. at 1441.

In sum, "the discretionary exception to the FTCA and the lack of a

duty to the wrongdoers ... prevent the assertion of affirmative

defenses against the FDIC." Id.

After careful consideration, we agree with the Seventh

Circuit's cogent analysis of the issue in Bierman. See id. at

1438-41. For the reasons stated in that case, we hold that the

FDIC is not subject to the affirmative defense of failure to

mitigate damages when it sues former directors and officers in its

corporate capacity to recover losses sustained by an insolvent

financial institution and covered by the national insurance fund.

The district court did not err in refusing to instruct the jury

regarding the FDIC's duty to mitigate damages.

4. Liability for Loans Funded Before 1981 But Renewed During or After 1981

The district court refused to give the jury the following

instruction proposed by the defendants:

This lawsuit involves only events or omissions that occurred between January 1, 1981, and December 31, 1984. Therefore, you must not consider any event or omission which caused the loss, such as the approval or the funding of a loan or the renewal of a loan, which occurred before January 1, 1981, or after December 31, 1984, in determining damages. For example, if a loan is funded in 1979, but renewed in 1982, you will be asked to determine what amount of loss, if any, was caused by the original approval of the loan at the time in 1979 and what amount of the loss, if any, was caused by the renewal of the loan in 1982 or the placing of a loan in another person's name. The defendants would be responsible for only those losses caused by the renewal of the loan in 1982. The defendants would not be responsible for any loss caused by the funding of a loan prior to 1981.

In determining whether there is a loss on the renewal of

21 a loan between January 1, 1981, and December 31, 1984, you will be asked to determine whether the bank increased its loss by not foreclosing on the property and filing suit against the borrower at the time of the renewal between January 1, 1981, and December 31, 1984. The defendants contend that these workout loans did not increase the loss of the bank. The defendants believe that the loss had already occurred on these loans prior to 1981, and any event which occurred after 1981 did not increase the loss. The plaintiff contends that the loss could have been reduced or eliminated if the bank had not renewed certain loans between January 1, 1981, and December 31, 1984.

If you determine that the defendants were grossly negligent by not filing suit and foreclosing on the property, then you must determine how much of the loss, if any, is allocated to the delay in collecting on the note for any loan funded prior to 1981. The damages, if any, would be limited solely to the delay in collecting on the note between January 1, 1981, and December 31, 1984, and any new extensions of funds after January 1, 1981, but before December 31, 1984.

Some of the allegedly imprudent loans on which the FDIC sued the

defendants were actually funded by the Bank before January 1, 1981,

but later renewed or transferred to new borrowers. The individual

defendants argue that the FDIC's complaint, however, complains only

of acts and omissions between January 1, 1981, and June 13, 1986,

and that they were entitled to the above-quoted jury instruction to

prevent jury confusion.

The FDIC makes several responses to this argument. For one,

it argues that the defendants may not rely on the dates as stated

in the FDIC's complaint because the complaint was superseded by the

pretrial order, in which the FDIC's contentions encompassed conduct

prior to 1981. See Ash v. Wallenmeyer, 879 F.2d 272, 274 (7th

Cir.1989) ("The information [obtained in the discovery process] is

to be reflected in the pretrial order, which supersedes the

complaint."). The FDIC further contends that the jury clearly

22 found that all of the grossly negligent conduct for which it

awarded damages occurred during the years 1981 through 1984, so the

defendants' focus on conduct occurring before 1981 is irrelevant.

The FDIC also cites FDIC v. Robertson, 1989 WL 94833, at *5-6

(D.Kan.1989) (unpublished opinion), for the proposition that bank

directors may be held liable for imprudent extensions and renewals

of loans, as well as for imprudent loans themselves. The

defendants do not deny this as an abstract proposition of law, but

they argue that the jury in the instant case was given insufficient

guidance in its instructions to be able to separate damages caused

by imprudent loans made before 1981 from damages caused by

imprudent renewals granted after January 1, 1981.

We agree with the FDIC's argument that the jury

interrogatories were sufficiently clear so that the defendants were

not entitled to the proposed instruction. The jury interrogatories

asked the jury to assign a damages amount to each problem loan or

set of loans. Additionally, the jury was required to make factual

findings as to when the grossly negligent acts and omissions that

caused the damages occurred. The interrogatories required the jury

to find what portion of the damages attributable to each loan or

set of loans was traceable to grossly negligent acts and omissions

occurring before 1981, between 1981 and 1983, during 1984, and

after 1984. The jury found in every case that no damages were

traceable to acts or omissions occurring before 1981. We hold that

these interrogatories afforded sufficient guidance to the jury in

separating the funding of loans and the renewal of loans or the

23 transfer of loans to new borrowers. Because the interrogatories

gave the jury sufficient guidance, it was not reversible error for

the district court to refuse to give the proposed instruction.

Treadaway, 894 F.2d at 168.

We do not agree with the defendants' contention that our

holding will make bank directors automatically responsible for 1007

of the amount of any past credit transaction simply because they

opt to renew, extend or restructure a problem loan. The law simply

requires them to act with greater care than gross negligence when

they do renew problem loans, and these jury instructions

sufficiently allowed the jury to make the relevant factual

findings. The district court did not abuse its discretion in

refusing to instruct the jury as desired by the defendants on this

5. Calculation of Interest

Accrued interest accounts for some $12 million of the total

amount of damages awarded. The district court instructed the jury

that "the damages recoverable by the FDIC on account of an

imprudent loan would be the uncollected amount of the principal ...

plus accrued interest owing on or attributable to such loan at the

rate of interest that the borrower agreed to pay" (emphasis added).

The defendants argue that the district court erred in using

contractual interest rates rather than the government's actual cost

of funds. They cite testimony from the FDIC's damage expert at

trial in support of the proposition that the damage figure for

interest would be reduced by $3.5 million if the government's cost

24 of funds were used. The FDIC responds that the court correctly

instructed the jury with respect to the calculation of interest.

The parties do not adequately explain to this court how the

interest on the problem loans was factored into the verdict and

judgment in this case, so we have reviewed the pertinent parts of

the record ourselves. Each jury interrogatory asked the jury to

consider a single problem loan and to assign to that loan an

"amount of loss caused as a result of [the individual defendants']

gross negligence." The total amount of loss found by the jury, as

we have already noted, was roughly $28.5 million. This figure,

according to the FDIC's damages expert at trial, consisted of $17

million of outstanding principal when the Bank closed in June 1986,

$2 million of outstanding interest as of June 1986, plus interest

at the contractual rate computed over the next five and a half

years—that is, up to the time of trial, which ended in December

1991. The district court entered judgment in September 1992 for a

total of $28,460,874 against the individual defendants, plus an

additional $2,413,512.75 as prejudgment interest. Thus, the court

awarded the FDIC roughly 11.37 prejudgment interest for the period

from December 1991 to September 1992 on the damages found by the

jury.

The Financial Institutions Reform, Recovery, and Enforcement

Act of 1989 (FIRREA) provides that the FDIC shall be able to

recover "appropriate interest" as damages against liable directors

and officers of insured depository institutions. 12 U.S.C. §

1821(l ). Unfortunately, case law addressing the appropriate rate

25 of interest to be awarded is, to say the least, sparse.

For support, the defendants cite FDIC v. Gordinier, 783

F.Supp. 1181 (D.Minn.1992), rev'd on other grounds sub nom. FDIC v.

St. Paul Fire and Marine Ins. Co., 993 F.2d 155 (8th Cir.1993).

The court in Gordinier, without discussion, awarded prejudgment

interest at the note rate until the insolvent bank was closed and

"thereafter (if lower than the note rate) at 87 per annum for 1987

and 1988 and at 77 per annum for 1989 and thereafter." Id. at

1188. The source of the 77 and 87 rates is not clear, but the

court plainly decided that these rates should be a ceiling for

post-closure interest.

In opposition the FDIC relies on FDIC v. Burrell, 779 F.Supp.

998 (S.D.Iowa 1991). In that case, the defendant directors and

officers argued that the FDIC's claims against them were

unliquidated until the date the jury returned its verdict (and that

interest thus did not begin to run until that date under Iowa law).

Id. at 1001. The court held that "submission of the claim plus the

contract rate of interest did not make the amount claimed

unliquidated." Id. at 1002. The FDIC also cites FDIC v. Stanley,

770 F.Supp. 1281, 1315 (N.D.Ind.1991), aff'd sub nom. FDIC v.

Bierman, 2 F.3d 1424 (7th Cir.1993), in which the district court

awarded principal and interest (apparently at the contractual rate)

on loan losses up through the date of trial.

None of the cases cited by the parties articulates a legal

principle to explain the result reached, much less the source of

the underlying principle. More to the point, the defendants have

26 not directed our attention to any point in the proceedings below

when their argument was made to the district court, and we have

found none. The defendants advert only to a colloquy between

International's counsel and the district court during which counsel

argued that it was improper to ask the jury to calculate damages on

each loan as a lump sum of principal and interest; counsel argued

that the correct approach would be to ask the jury first what

portion of the principal the defendants were responsible for, and

then add the interest to that amount. This does not amount to an

argument to the district court that the government's cost of funds

should have been used as the interest rate instead of the contract

rate, nor do the defendants direct our attention to any place in

the record at which such an argument was made. Indeed, our review

of the defendants' proposed changes to the jury instructions shows

that no complaint was made about the jury instruction regarding

interest, nor was a proposed instruction stating the defendants'

view of the law proffered. As we have held, if a litigant desires

to preserve an argument for appeal, the litigant must press and not

merely intimate the argument during the proceedings before the

district court. If an argument is not raised to such a degree that

the district court has an opportunity to rule on it, we will not

address it on appeal. Butler Aviation Int'l, Inc. v. Whyte (In re

Fairchild Aircraft Corp.), 6 F.3d 1119, 1128 (5th Cir.1993).

B. EVIDENCE OF POST-CLOSING DAMAGES

The district court ruled that no evidence would be permitted

concerning the activities of the FDIC in its efforts to manage and

27 collect on loans that were owed to the Bank at the time it was

closed. The defendants point out that the FDIC's damage model

computed damages from each problem loan as the sum of the

outstanding principal and accrued interest on November 4, 1991 (the

day before trial), less any proceeds from the sale of collateral or

the value of unliquidated collateral on that same date. The

individual defendants now complain that they should have been

allowed to introduce evidence that the FDIC's conduct was the

proximate cause of some of the losses claimed by the FDIC. As an

example, the defendants refer us to the trial testimony of Jerry

Fowler, to whom one of the problem loans was made. The district

court ruled before Fowler began to testify that the defendants

could not ask Fowler whether he could have repaid the loan, or even

whether the FDIC had ever contacted him about repaying the loan.

The defendants contend that they should have been allowed to

introduce evidence of this type in order to show that their gross

negligence was not the proximate cause of the damages, particularly

in light of the district court's jury instruction no. 33:

The directors and officers claim that even if they breached their duties in making or allowing the loans in this case to be made, some of the damages sustained by the bank were caused not by their breaches of duty but by certain intervening causes. The law provides that a defendant is relieved of liability for damages caused by intervening events, but only if those events were so unforeseeable as to break the chain of causation set in motion by the alleged acts or omissions of gross negligence which occurred.

The FDIC argues that the defendants' argument regarding

evidence of events occurring after closure of the Bank is simply an

end-run around the rule that the FDIC has no duty to mitigate

28 damages. The FDIC draws support from cases such as Resolution

Trust Corp. v. Youngblood, 807 F.Supp. 765, 774 (N.D.Ga.1992), in

which the court struck the defendants' affirmative defenses of

comparative negligence and mitigation of damages. The Youngblood

court recognized that the defendants were entitled to challenge the

RTC's proof of the element of proximate cause, but it insisted that

"under the "no-duty' rule, the RTC's conduct is not on trial,

whether under the label of proximate cause or affirmative defense."

Id. at 773; see also FDIC v. Isham, 782 F.Supp. 524, 532

(D.Colo.1992) ("The defense of lack of causation is stricken to the

extent that defendants seek to put FDIC's conduct at issue.

However, defendants are free to contest that their negligence, if

any, did not proximately cause the damages FDIC claims."). In the

FDIC's view, the defendants were free to contend that their gross

negligence was not the proximate cause of the damages claimed, and

they did in fact introduce evidence to show that changes in the tax

laws, declines in collateral values, and the general deterioration

of the economy were intervening causes of the damages. The

defendants could also (and, the FDIC claims, did) challenge the

FDIC's evidence regarding the salvage value of unliquidated

collateral and thereby attack the damages figure recommended by the

FDIC. The jury, however, found to the contrary.

The FDIC's argument is persuasive. Because the FDIC is not

subject to the affirmative defense of mitigation of damages, the

defendants were also not entitled to attack the causation element

of the FDIC's case by showing that the FDIC's acts and omissions

29 caused the damages it sought to recover from the defendants. All

other avenues of proving that their gross negligence did not

proximately cause the losses remained open to them. The district

court did not abuse its discretion in excluding the evidence.

C. CONCLUSION

The judgment against the individual defendants is AFFIRMED,

and we REMAND only for determination of the appropriate credit for

amounts received by the FDIC in settlements with other parties.

IV. INSURANCE COVERAGE ISSUES

The court below awarded the FDIC $17,504,946, plus prejudgment

and postjudgment interest, to be paid by the individual defendants'

D & O insurer, International, based on the coverage provided under

the 1983 policy. International contends that the district court

erred in ruling that insurance coverage existed under that policy

for the damages stemming from claims during 1981-1983. The FDIC

and the individual defendants defend this ruling by the district

court, but they also contend that the district court erred in

holding that the damages stemming from occurrences in 1984 were not

covered by the 1984 policy.

The parties make numerous arguments regarding the existence

and extent of the insurance coverage. International contends,

inter alia, (1) that coverage does not exist because no "claim" was

made against the individual defendants during the policy periods,

(2) that even if a claim had been made against the individual

defendants during a policy period, the failure to give notice of

any claim to International until 1989 defeats coverage, and (3)

30 that the individual defendants did not give International notice of

any potential claims as required by the insurance policies in order

to invoke coverage. The FDIC, joined by the individual defendants,

argues, inter alia, (1) that the district court correctly held that

claims were made against the individual defendants during the

policy periods, (2) that the district court correctly held that the

D & O policies did not require the individual defendants to give

International notice of claims in order to invoke coverage, (3)

that, in the alternative, the individual defendants gave

International notice of potential claims as required by the

policies in order to invoke coverage, and (4) that the district

court erred in holding that coverage under the 1984 policy was

barred under the classified loan exclusion clause contained in that

policy.

A. ADDITIONAL BACKGROUND

1. Facts and Procedural History

The 1983 D & O policy issued by International contains the

following relevant provisions:

1. INSURING CLAUSE

If during the policy period any claim or claims are made against the Insureds (as hereinafter defined) or any of them for a Wrongful Act (as hereinafter defined) while acting in their individual or collective capacities as Directors or Officers, the Insurer will pay on behalf of the Insureds or any of them, their Executors, Administrators, Assigns 957 of all Loss (as hereinafter defined), which the Insureds or any of them shall become legally obligated to pay....

. . . . .

4. DEFINITIONS

Definitions of terms used herein:

31 (a) The term "Insureds" shall mean all persons who were, now are or shall be duly elected Directors or Officers of the [Bank]....

(b) The term "Wrongful Act" shall mean any actual or alleged error or misstatement or misleading statement or act or omission or neglect or breach of duty by the Insureds while acting in their individual or collective capacities, or any matter not excluded by the terms and conditions of this policy claimed against them solely by reason of their being Directors or Officers of the [Bank].

(c) The term "Loss" shall mean any amount which the Insureds are legally obligated to pay for a claim or claims made against them for Wrongful Acts, and shall include but not be limited to damages, judgments, settlements and costs, cost of investigation (excluding salaries of officers or employees of the [Bank] ) and defense of legal actions, claims or proceedings and appeals therefrom, cost of attachment or similar bonds; providing always, however, such subject of loss shall not include fines or penalties imposed by law, or matters which may be deemed uninsurable under the law pursuant to which this policy shall be construed.

9. LOSS PROVISIONS

If during the policy period or extended discovery period:

(a) The [Bank] or the Insureds shall receive written or oral notice from any party that it is the intention of such party to hold the Insureds responsible for the results of any specified Wrongful Act done or alleged to have been done by the Insureds while acting in the capacity aforementioned; or

(b) The [Bank] or the Insureds shall become aware of any occurrence which may subsequently give rise to a claim being made against the Insureds in respect of any such alleged Wrongful Act;

and shall in either case during such period give written notice as soon as practicable to the Insurer of the receipt of such written or oral notice under Clause 9(a) or of such occurrence under Clause 9(b), then any claim which may subsequently be made against the Insureds arising out of such alleged Wrongful Act shall, for the purposes of this policy,

32 be treated as a claim made during the policy year in which such notice was given or if given during the extended discovery period as a claim made during such extended discovery period.

The [Bank] or the Insureds shall, as a condition precedent to the Insureds' right to be indemnified under this policy, give to the Insurer notice in writing as soon as practicable of any claim made and shall give the Insurer such information and cooperation as they may reasonably require and as shall be in the Insureds' power.

13. DISCOVERY CLAUSE

If the Insurer shall cancel or refuse to renew this policy, the Insureds shall have the right, upon payment of an additional premium calculated at 107 of the three-year premium hereunder, to an extension of the cover granted by this policy in respect of any claim or claims which may be made against the Insureds during the period of ninety (90) days after the effective date of such cancellation or, in the event of such refusal to renew, the date upon which the policy period ends, but only in respect of any Wrongful Act committed before such date. Such right hereunder must, however, be exercised by the Insureds by notice in writing to the Insurer not later than ten (10) days after the date referred to in the preceding sentence. If such notice is not given, the Insureds shall not at a later date be able to exercise such right.

The 1984 policy contains clauses identical to those quoted above.

The policies also contain certain exclusionary clauses. The

1983 policy was amended effective September 22, 1982, to increase

the policy limit to $10 million and to add the following clause

(referred to herein as the "classified loan exclusion"):

Also, it is hereby understood and agreed the insurer shall not be liable to make any payment for loss in connection with any claim made against the insureds/directors or officers for or arising out of the granting of any loan which shall be deemed classified by any regulatory body or authority.

Less then two months later, on November 16, 1982, International

issued a new endorsement to the 1983 policy whereby the

33 exclusionary clause quoted above was deleted in its entirety. This

clause reappeared in the 1984 policy and remained a part of that

policy from its inception on January 1, 1984. Another exclusionary

clause (referred to herein as the "regulatory exclusion") also

appears in the 1984 policy, and it provides as follows:

In consideration of the premium charged, it is further understood and agreed that the insurer shall not incur any obligation under the terms and conditions of this policy for, or on account of, any claim:

1. arising out of, based upon or related to:

A. the insolvency of the [Bank]; or

B. financial impairment of the [Bank]; or

C. any action, ruling or intervention of any federal, state or local governmental agency or office;

2. made by, or on behalf of, any federal, state or local governmental agency or office.

The insurance coverage issues were dealt with in the course of

the litigation as follows. International filed a motion for

summary judgment, arguing that no coverage was available under

either the 1983 or the 1984 policy. The district court denied the

motion before trial. After trial, the parties filed voluminous

briefs with the district court addressing the coverage issues, and

on June 30, 1992, the district court held that International was

liable on the 1983 policy for the damages caused by the individual

defendants' grossly negligent acts during the years 1981 through

1983. The court further held, however, that the classified loan

exclusion in the 1984 policy protected International from any

liability under that policy. This memorandum ruling is reported as

34 FDIC v. Mijalis, 800 F.Supp. 397 (W.D.La.1992).

2. Claims Made Insurance

Before beginning our analysis, we note that the policies

involved in this litigation are "claims made" rather than

"occurrence" policies. Under claims made policies, the mere fact

that an insured loss-causing event occurs during the policy period

is not sufficient to trigger insurance coverage of the loss. Such

policies also typically require the insured to give prompt notice

to the insurer of any claims asserted against the insured, as well

as of any occurrences that have caused or will potentially cause an

insured loss. As amicus points out, these policies are commonly

used as professional liability insurance because malpractice by a

professional such as a doctor or an architect may not lead to the

assertion of a claim until years after expiration of the actual

insurance policy. The notice requirements in claims made policies

allow the insurer to "close its books" on a policy at its

expiration and thus to "attain a level of predictability

unattainable under standard occurrence policies." Burns v.

International Ins. Co., 709 F.Supp. 187, 191 (N.D.Cal.1989), aff'd,

929 F.2d 1422 (9th Cir.1991). By increasing predictability and

reducing their potential exposure, insurers may be able to reduce

the policy cost to the insured, or so the theory goes. FDIC v. St.

Paul Fire and Marine Ins. Co., 993 F.2d 155, 158 (8th Cir.1993).

Thus, notice provisions are integral parts of claims made policies.

B. OF "CLAIMS," "OCCURRENCES," AND "NOTICE"

The FDIC and International engage in a spirited battle over

35 the existence and scope of insurance coverage for the liabilities

of the individual defendants. Before addressing the merits of

their arguments, we must trace the steps of the district court's

analysis of the policies. The district court concluded that

insurance coverage would be triggered under the 1983 and 1984

policies if either of two events occurred during the policy

periods: (1) a claim was made against an insured, or (2) notice of

a specified wrongful act or occurrence was given to the Bank or to

an insured. Mijalis, 800 F.Supp. at 400. The court also addressed

the proper application of the policies' notice provisions. In a

memorandum ruling before trial, the district court held that no

notice to International was required under the policy in the event

that actual "claims" were made against the insureds. In the

post-trial memorandum ruling cited above, the court interpreted

clause 9 of the policies to require written notice to International

of acts or occurrences amounting to potential claims; the court

further held, however, that this notice provision was unenforceable

against the FDIC under the Louisiana direct action statute because

International had not shown prejudice from the lack of notice. Id.

The district court concluded that coverage existed because "claims"

had been made against the individual defendants during the policy

periods. See id. at 400-02.4 We consider first International's

arguments that no claims were made against the individual

4 The district court did not decide whether the second method of establishing coverage—notice to the Bank or an insured of a specified wrongful act or occurrence—was also satisfied in this case.

36 defendants during the policy periods.

1. Claims

The first issue is whether the district court erred in

determining that claims had been made against the Bank during the

years 1981 through 1984, thus triggering insurance coverage under

the "insuring clauses." The policies, the court noted, did not

define the term "claim." Id. at 400. The court first held that

the word "claim," as used in the D & O policies, means "a demand on

the insured by a third party for the performance of some act which

the third party has a legal right to require." Id. (citing FDIC v.

Lensing, No. 89-0013 (W.D.La. March 20, 1990) (magistrate's

recommendation and report)). The district court held that the

regulatory directives and demands made on the Bank's directors and

officers by the FDIC during the policy periods satisfied the

policies' requirements that claims be made on the insureds during

the policy periods. Id. at 401-02. International contends that

the district court erred, and it cites several cases from around

the country as contrary authority.

"Claims made" insurance policies of the type involved in this

case are not new to this court's experience, and we have held that

the determination of whether a given demand is a "claim" within the

meaning of a claims made policy requires a fact-specific analysis

to be conducted on a case-by-case basis. MGIC Indem. Corp. v.

Central Bank, 838 F.2d 1382, 1388 (5th Cir.1988). Of course, a

claim is clearly made when an outside party files suit on a demand

based on an act or omission of an officer or director. Id. Other

37 communications to the insured may or may not rise to the level of

claims depending on their content. We have noted the view that the

expectations of the insured upon receiving or responding to a

communication or inquiry cannot be determinative of whether a claim

has been made because of the uncertainty such a rule would create.

Jensen v. Snellings, 841 F.2d 600, 616 (5th Cir.1988) (citing Hoyt

v. St. Paul Fire & Marine Ins. Co., 607 F.2d 864, 866 (9th

Cir.1979)).

The FDIC vigorously argues that its communications to the

individual defendants during the policy periods were claims within

the meaning of that term as used in the insurance policies.

Relying on the definition used by the district court, the FDIC

contends that the cease and desist order, the notice of charges,

and the other demands for corrective action it made on the Bank

during the policy periods constituted demands for the performance

of acts that the FDIC had the right to require of the Bank and its

directors.

International relies on our recent decision in FDIC v. Barham,

995 F.2d 600, 604 (5th Cir.1993), for the proposition that the term

"claim" as used in these D & O policies encompasses only "a demand

which necessarily results in a loss—i.e., a legal obligation to

pay—on behalf of the directors." Barham involved a third-party

claim by the directors of a failed bank against their D & O insurer

after they had been sued by the FDIC for authorizing imprudent

loans. Id. at 601. The insurer sought refuge in the D & O

policy's reporting and notice clause, contending that the directors

38 had not reported claims and wrongful acts to the insurer as

required. Id. at 603. In response, the directors argued that the

insurer had been given constructive notice of a claim because its

agent had discovered a "letter of agreement" between the bank and

the Office of the Comptroller of the Currency (OCC) during an

insurance risk survey. Id. at 604. The bank agreed in the letter

of agreement to adopt and implement policies and procedures to

prevent future legal and regulatory infractions. Id. The district

court granted summary judgment in favor of the insurer, holding

that no "claim" had been made on the directors, and we affirmed.

Id. at 601.

The Barham court rejected the argument that the letter of

agreement between the OCC and the insolvent bank constituted a

claim within the meaning of the D & O policy. Id. ("[A] demand

for regulatory compliance does not rise to the level of a claim, as

that term is used in the policy."). As in the instant case, the

term "claim" was not defined in the D & O policy, id. at 604 n. 10;

the court relied instead on the language of the policy's insuring

clause, which provided:

The [insurance] Company shall pay on behalf of each of the Insured Persons all Loss, for which such Insured Person is not indemnified by the Insured Organization, and which such Insured Person becomes legally obligated to pay on account of any claims(s) [sic] made against him, individually or otherwise, during or after the Policy Period for a Wrongful Act[.]

Id. at 602. The insured directors argued in Barham that the letter

of agreement between the OCC and the ultimately insolvent bank

constituted a claim that had been reported to the insurer. Id. at

39 604. The court disagreed: "[b]ecause the 1982 letter [of

agreement] makes no reference to a loss which [the bank] may

sustain as a result of its failure to comply with certain banking

regulations, we conclude that no claim was reported to [the

insurer] during the policy period." Id. at 605.

The FDIC attempts to distinguish Barham by arguing that the

Barham court's conclusion that the term "claim" was unambiguous,

id. at 604, should not apply to the instant D & O policies. Thus,

argues the FDIC, familiar rules of contract interpretation dictate

that we should interpret the policies in favor of coverage. Id. at

603; Bingham v. St. Paul Ins. Co., 503 So.2d 1043, 1045

(La.Ct.App.1987). International responds that there is no material

difference between the policy at issue in Barham and those it

issued to the Bank in this case, and that we must therefore use the

same definition of claim as that used by the Barham court.

We conclude that the instant policy language, although

different from that used in the policy in Barham, is no more

ambiguous than the language we construed in Barham. The term

"claim" is intimately connected with the term "loss" in the

insuring clause, and it appears as part of the definition of "loss"

as well. The policy provides that International will pay 957 of

"losses" suffered by the insureds, and that those losses are, quite

simply, amounts that the insureds become "legally obligated to pay

for a claim or claims made against them." It is clear that the

policy envisions "claims" as being closely related to legal

obligations to pay money, and that the Barham definition of claim

40 should apply to the instant case. See Resolution Trust Corp. v.

Miramon, 1993 WL 292833, at *5 (E.D.La. July 27, 1993) (unpublished

opinion) (applying the Barham definition of "claim" in the

interpretation of a D & O policy very similar to those issued by

International in the instant case).

The FDIC next seeks to distinguish Barham by arguing that the

communications and demands it made of the Bank during the policy

periods were materially different from the letter of agreement

involved in that case. The FDIC specifically relies on numerous

letters it sent to the Bank's board of directors advising the board

of the FDIC's concern and insisting that the Bank cease its unsafe

lending practices. International responds that the regulatory

demands made by the FDIC during the policy periods were not

substantially different from the one considered in Barham. Under

Barham, the appropriate inquiry is whether these communications

referred to demands that would necessarily result in losses to the

directors as a result of their failure to comply with the relevant

banking regulations. See Barham, 995 F.2d at 604; see also MGIC

Indem. Corp. v. Home State Sav. Ass'n, 797 F.2d 285, 288 (6th

Cir.1986) (interpreting a claims made policy to be "speaking not of

a claim that wrongdoing occurred, but a claim for some discrete

amount of money owed to the claimant on account of the alleged

wrongdoing"); FDIC v. Continental Casualty Co., 796 F.Supp. 1344,

1351-52 (D.Or.1991) (holding that a cease and desist order was not

a "claim" because "it fell short of holding the directors and

officers personally liable for the misconduct or seeking money

41 damages from them"); cf. California Union Ins. Co. v. American

Diversified Sav. Bank, 914 F.2d 1271, 1276 (9th Cir.1990) (stating

that notices from regulatory agencies do not assert claims unless

they threaten formal proceedings as a consequence of failure to

comply or propose to hold directors personally liable for the

noticed deficiencies), cert. denied, 498 U.S. 1088, 111 S.Ct. 966,

112 L.Ed.2d 1052 (1991).

The FDIC claims that some of its communications to the Bank's

board specifically advised the directors and officers of the Bank

of their potential liability. For instance, an FDIC examination

report dated December 3, 1982, advised the Bank's board that

"unsafe and unsound conditions may exist" that, unless addressed,

could impair the Bank's future viability, threaten the interests of

the Bank's depositors, and "pose a potential for disbursement of

funds by the insuring agency." A March 31, 1983, letter to the

Bank's board warned the board members that civil money penalties

would be considered if prompt good faith efforts were not made to

correct the Bank's violations of federal banking regulations. The

FDIC also cites its June 1983 notice of charges and administrative

hearing and the subsequent cease and desist order as conveying to

the Bank's directors the potential for liability.

Most of the documents relied upon by the FDIC can be easily

dismissed as falling outside the Barham definition of "claim."

They are the same sort of general demands for regulatory compliance

as the one before the Barham court. None of these documents

clearly refers to an insured loss that the Bank would or might

42 sustain if it did not abide by the FDIC's mandates. Even specific

formal demands for corrective action do not rise to the level of

"claims" unless coupled with indications that demands for payment

will be made. See Barham, 995 F.2d at 604.

There is, however, one arguable exception to this analysis:

the FDIC did warn the members of the Bank's board of directors by

letter dated March 31, 1983, that it was considering recommending

civil money penalties under Federal Reserve Regulation O, 12 C.F.R.

§ 215(b), (d) (regulating insider lending). The letter referred to

the December 1982 examination report to the Bank in which the

examiner noted,

The bank is in apparent violation of the provisions of Federal Reserve Regulation O, as made applicable by the Federal Deposit Insurance Act.... Management should formulate policy which will ensure that the bank is operating within the framework of all applicable laws and regulations. It should also be noted that the Corporation has the power to impose civil money penalties for such violations of $1,000 per day.

The March 31, 1983, follow-up letter advised the Bank's directors

that

[t]he violation [of Regulation O] are of serious concern and would ordinarily warrant recommendation of civil money penalties. Based on the information presently available, however, further consideration of civil money penalties for the violations will be held in abeyance provided the bank, in good faith, initiates prompt efforts to correct the violations.... Please advise when the violations have been corrected and the method used to effect correction.... Should you not act in good faith, recommendation of civil money penalties will be reconsidered.

We proceed to analyze this communication in light of Barham.

In a broad sense, certainly, a threat to recommend civil money

penalties would appear to come within the definition of claim we

settled upon in Barham. By warning the board that such penalties

43 would be recommended if the Bank's regulatory violations were not

corrected, the letter arguably makes "a demand which necessarily

results in a loss—i.e., a legal obligation to pay—on behalf of the

directors." Id. at 604. Under the provisions of the Federal

Deposit Insurance Act then in effect, 12 U.S.C. § 1828(j)(3)(A)

(1982), either the Bank or its principals who participated in

violations of Regulation O could be assessed civil money penalties

of up to $1,000 per day. Of course, it could be argued that the

March 31, 1983, letter is not a demand for payment by the Bank or

the directors and does not even promise that such a demand will be

made in the future; by its terms, the letter is arguably nothing

more than a "demand for regulatory compliance"—albeit one backed

with threatened consequences.

We need not decide, however, whether the March 31, 1983,

letter satisfied the narrow definition of claim we settled upon in

Barham because the insurance policies at issue exclude from

definition of "Loss" any "fines or penalties imposed by law."

Thus, the threatened "civil money penalties" are clearly excluded

from coverage under the policies. See Vallier v. Oilfield Constr.

Co., 483 So.2d 212, 215-16 (La.Ct.App.), cert. denied, 486 So.2d

734 (La.1986) (holding that an exclusion of "fines or penalties

imposed on the insured ... for failure to comply with the

requirements of any workmen's compensation law" excluded coverage

of civil penalties and attorney's fees provided for under Louisiana

statute). It would be incongruous to hold that the threat of an

uninsured loss could nevertheless constitute a claim within the

44 meaning of that term as used in an insurance policy. In our

opinion in Central Bank, we held that a claim is indisputably made,

at the latest, at the time a party files suit on a demand based on

an act of a bank's directors or officers, which demand the bank has

denied. Central Bank, 838 F.2d at 1388. Significantly, we

continued,

This is so regardless of whether the party making the claim names the director or officer as a party, as long as it is clear to the bank that the claim is based upon an action by a director or officer that falls within the terms of the insurance contract.

Id. (emphasis added). Because the civil money penalties that the

FDIC threatened the Bank's board of directors with were not insured

losses under the 1983 policy, the March 31, 1983, letter in which

the FDIC threatened to recommend those penalties could not have

been a claim within the meaning of the policy.

We conclude that Barham is controlling and that no claims were

made on the Bank or its directors during the policy periods as was

required under the 1983 and 1984 policies. Because no claims were

made, we need not consider whether the district court correctly

interpreted the policies not to require the insured to give notice

to International of claims made as a condition precedent to

coverage.

2. Occurrences

The FDIC next argues in the alternative, as it has in

numerous recent cases around the country, that insurance coverage

was triggered under clause 9(b) of the policies because the

insureds gave written notice to International during the policy

45 periods of occurrences that might have given rise to claims being

made against the insureds. Specifically, the FDIC argues that the

Bank's renewal application submitted before the expiration of the

1983 policy disclosed the existence of the cease and desist order,

which the FDIC views as "an occurrence that subsequently gave rise

to the claims asserted" against the directors. The FDIC also

directs our attention to financial information provided to

International by the Bank during the 1984 policy period, such as a

listing of the Bank's classified loans. According to the FDIC,

these notices to International constituted notice of occurrences

"which may subsequently give rise to a claim being made against the

Insureds" within the meaning of clause 9(b) of the insurance

policies.

We must digress before discussing the merits of the FDIC's

arguments to deal with a point raised by amicus. International's

policies provide coverage of losses for wrongful acts or

occurrences that occur during policy periods and may give rise to

future claims (but do not give rise to actual claims during a

policy period) only if written notice of the occurrences is given

as soon as practicable. Although the district court appears not to

have relied on this "potential claims" coverage clause, it stated

gratuitously that the portion of the clause requiring notice of the

occurrences to International could not be enforced against the

FDIC, as a third party suing under the Louisiana direct action

statute, absent a showing of prejudice. As amicus points out, this

ruling would alter the nature of claims made insurance coverage by

46 creating coverage in instances when an insured knows of a potential

claim during the policy period and does not disclose this awareness

to his claims made insurer, at least in the direct-action setting.

The FDIC, for its part, appears to contend that amicus is

misreading the district court's opinion; in its original brief the

FDIC insists that the court's ruling "on notice does not extend to

the notice required for occurrences which may subsequently give

rise to claims." True to its word, the FDIC contends throughout

its numerous briefs that International did in fact receive notice

during the policy periods from the insureds of occurrences that

could potentially give rise to claims, apparently conceding that

mere "potential claims" could not be covered by the D & O policies

unless International had in fact received notice of those potential

claims.5 We will take the FDIC at its word and assume that notice

to International is a sine qua non of coverage of any potential

claims known to the individual defendants during the policy

periods. Although the Louisiana Supreme Court appears not to have

addressed the issue, Louisiana's intermediate courts of appeals

seem to agree with this position. See Bank of Louisiana v. Mmahat,

Duffy, Opotowsky & Walker, 608 So.2d 218 (La.Ct.App.1992), cert.

denied, 613 So.2d 994 (La.1993); Bank of the South v. New England

5 The FDIC does not always take this position. In FDIC v. Caplan, 838 F.Supp. 1125, 1129 (W.D.La.1993), the FDIC pressed the argument that, as a third party suing under the Louisiana direct action statute, it could avoid the operation of notice provisions in a claims made D & O policy. The court held that the failure of the insureds to comply with the notice provisions precluded the FDIC's right of action against the insurer. Id. at 1131.

47 Life Ins. Co., 601 So.2d 364 (La.Ct.App.1992).

Returning to the merits of this issue, we note that

International responds, backed with an impressive list of cases,

that the documents relied upon by the FDIC are not legally

sufficient to constitute notices of potential claims and that

non-specific communications merely disclosing that events have

occurred do not satisfy the requirement of notice of potential

claims. International relies not only on our recent opinion in

Barham but also on our even more recent opinion in McCullough v.

Fidelity & Deposit Co., 2 F.3d 110 (5th Cir.1993). International

also directs our attention to the cases relied upon in Barham and

McCullough, such as a pair of cases from the Eighth Circuit,

American Casualty Co. v. FDIC, 944 F.2d 455 (8th Cir.1991), and

FDIC v. St. Paul Fire and Marine Ins. Co., 993 F.2d 155 (8th

Cir.1993), as well as one from the Ninth Circuit, California Union

Ins. Co. v. American Diversified Sav. Bank, 914 F.2d 1271 (9th

Cir.1990), cert. denied, 498 U.S. 1088, 111 S.Ct. 966, 112 L.Ed.2d

1052 (1991). These courts have construed insurance policies such

as those at bar to require very specific notices from the insured

to the insurer to trigger "notice of potential claims" coverage.

We addressed this identical issue in the Barham case,

construing a clause requiring written notice of potential claims as

requiring directors "to give written notice of the specific acts

they considered to have claim potential." Barham, 995 F.2d at 605;

see also id. at 604 n. 9 ("Because notice of a claim or potential

claim defines coverage under a claims-made policy, ... the notice

48 provisions of such a policy should be strictly construed."). The

FDIC distinguishes Barham, arguing that the notice provision

involved in that case required more specific notice than the

instant policy. The policy in Barham specified that notice of

potential claims would be satisfied by written notice "of the

material facts or circumstances relating to such Wrongful Act as

facts or circumstances having the potential of giving rise to a

claim being made against" the insureds. Id. at 602 (emphasis

added). The FDIC argues that the language in clause 9(b) of the

International policies is slightly more general than this language,

and thus requires less specificity in the notice of potential

claims to trigger coverage.

McCullough also presented this issue, and that case involved

a notice clause requiring the insured to give notice of "any act,

error, or omission which may subsequently give rise to a claim

being made against the Directors and Officers ... for a specified

Wrongful Act." McCullough, 2 F.3d at 112. The bank in McCullough,

in conjunction with the policy renewal process, informed its D & O

insurer that the OCC had issued a cease and desist order to one of

its subsidiaries and that the bank was generally experiencing

increased loan losses and delinquencies. Id. at 111. We affirmed

summary judgment in favor of the insurer, holding that "[n]otice of

an institution's worsening financial condition is not notice of an

officer's or director's act, error, or omission." Id. at 113. We

went on to hold that the proper focus of the district court's

inquiry is whether the insured has objectively complied with such

49 a notice provision, and not whether the insurer has subjectively

drawn inferences that potential claims exist from the materials

submitted by the insured. Id. (emphasis added).

We relied on the Eighth Circuit's opinion in American Casualty

Co. v. FDIC, 944 F.2d 455 (8th Cir.1991), in both Barham and

McCullough. In American Casualty, a factually similar case, the

directors argued that coverage under one policy was triggered

because they gave their insurer adequate notice of potential claims

during the application process for the succeeding policy. Id. at

460. The weaknesses of the bank's loan portfolio were fully

revealed during the application process, and the insurer was

informed that the bank expected to lose over $400,000 during the

current year, that almost 2007 of the bank's capital was classified

as problem assets, and that the OCC had issued a cease and desist

order against the bank. Id. The Eighth Circuit concluded that

this was not sufficient notice to the insurer and that no coverage

existed. The court cited several facts as significant to its

decision, such as the generality of the information provided to the

insurer, the fact that it was mostly orally communicated, and the

repeated representations of the chairman of the board of directors

to the insurer that the bank was not in danger. Id.

St. Paul Fire and Marine is to similar effect. On essentially

the same facts as American Casualty and as the instant case, the

court held that the notice given in a renewal application was

insufficient to give the insurer notice of potential claims. St.

Paul Fire and Marine, 993 F.2d at 158-60. The court specifically

50 noted that the renewal application indicated no "occurrences" under

the terms of the D & O policy, and that the bank actually responded

negatively to specific questions about occurrences in the renewal

application. Id. at 159. The bank also informed the insurer in

the renewal application about certain problem conditions, including

"extensions of credit which exceed the legal lending limit" and

"significant violations of laws and regulations," but at the same

time denied knowledge of any pending suits, claims, or occurrences

that might give rise to a claim. Id. at 156-57. The court held

that this information taken in toto was insufficiently specific and

did not alert the insurer that any claim could have been asserted.

Id. at 159. The court in California Union also rejected a claim

that generalized information provided an insurer with "constructive

notice" of potential claims. California Union, 914 F.2d at 1277-

78; see also American Casualty Co. v. Continisio, 819 F.Supp. 385,

398 (D.N.J.1993) (construing a notice provision "as imposing a duty

on the insured to give some kind of formal, written notification of

occurrences in order to evoke coverage"); Continental Casualty,

796 F.Supp. at 1353 ("[T]here is a substantial difference between

an insurer being on notice that an insured is a poor risk for

future insurance, and its having received the specific notice

required under [the terms of the D & O policy].").

Although subtle differences do distinguish International's

insurance policies from those involved in the above-mentioned

cases, we cannot conclude that the notice of potential claims

clause is materially different from those involved in Barham and

51 McCullough. International's policies required the individual

defendants to give International written notice as soon as

practicable "of any occurrence which may subsequently give rise to

a claim being made against the Insureds in respect of any ...

Wrongful Act" done or alleged to have been done by the insureds

while acting as directors or officers of the Bank. This is

sufficiently similar to the language we interpreted in McCullough

to warrant application of the full force of its holdings to the

instant facts. The question is whether the information supplied to

International by the insureds objectively gave "written notice of

specified wrongful acts [by the] officers and directors."

McCullough, 2 F.3d at 113. Subjective inferences drawn from

general information by the insurer's representatives are irrelevant

to the question of adequate notice. Id.

The FDIC argues at length that testimony at trial revealed

that International was aware of potential claims against the Bank's

directors through the financial information submitted by the Bank

during the renewal process. Under McCullough, however, this

evidence of International's subjective knowledge is not relevant.

Id. The FDIC also relies on International's actions at the time of

renewal as demonstrating International's anticipation that claims

would be made against the Bank's directors by the FDIC. The

"renewed" policy for 1984 halved the Bank's coverage, almost

tripled the previous premium, and included new exclusionary

clauses. Again, this does not prove that the financial information

conveyed to International by the Bank objectively rose to the level

52 of notice of specific wrongful acts. It reflects only that

International made a "reasonable business decision," American

Casualty, 944 F.2d at 459, when confronted with the Bank's

financial weakness. The FDIC's argument that the classified loan

list provided to International during the 1984 policy period

constituted notice of potential claims must fail for the same

reasons. The American Casualty court held that informing the

insurer of the classification of bank assets totalling almost 2007

of capital did not constitute sufficient notice of occurrences that

might give rise to claims. Id. at 460. International also points

out that the directors of the Bank represented to International on

more than one occasion that they knew of the existence of no claims

or potential claims against them, a factor which several of the

opinions cited above treat as significant.

The FDIC urges that we should remand to the district court for

a factual determination in the first instance of whether sufficient

notice of potential claims was given to International. Our review

of the record indicates that remand is unnecessary. We conclude

that International was not given notice during the policy periods

of occurrences that might give rise to future claims, and that

insurance coverage was therefore not triggered under the "loss

provisions" clause of the International policies.

C. REMAINING ISSUES

Having held that International is not liable on its 1983 and

1984 policies, we find that we need not reach the remaining issues

raised by the parties. The individual defendants contend that the

53 district court, for various reasons, should have reformed the 1984

policy to invalidate all of its terms that are inconsistent with

those of the 1983 policy. As we have seen, however, the 1984

policy provides no insurance coverage for the same reasons that the

1983 policy provides none, none of which implicate the exclusionary

clauses added to the 1984 policy. For the same reason we need not

consider the FDIC's argument that the district court erred in

holding that the classified loan exclusion in the 1984 policy

barred coverage of losses suffered or caused during 1984. Plainly

we need not reach International's and amicus's additional arguments

for reversal. Because the FDIC concedes that insurance coverage

existed under the "potential claims" clauses only if International

was given notice of those potential claims, we do not decide

whether the court below erred in stating that this notice provision

was void as against the FDIC unless International could show

prejudice resulting from the lack of notice.

V. CONCLUSION

For the foregoing reasons, we AFFIRM the judgment below

against Gus S. Mijalis, Alex S. Mijalis, John G. Cosse, John B.

Franklin, and J. Harper Cox, Jr., and we REMAND only for

determination of the appropriate credit for amounts received by the

FDIC in settlements with other parties. We REVERSE the judgment

against International Insurance Company and RENDER judgment in its

favor. Costs shall be borne by the FDIC and by Gus S. Mijalis,

Alex S. Mijalis, John G. Cosse, John B. Franklin, and J. Harper

Cox, Jr.

54 55