United States Court of Appeals,
Fifth Circuit.
Nos. 93-3730, 93-3732.
RESOLUTION TRUST CORPORATION, in its Capacity as Receiver of Peoples Federal Savings and Loan Association, Plaintiff-Appellant Cross Appellee,
v.
Donald J. AYO, Donovan J. Barker, George H. Diedrick, Jr., Ambrose H. Landry, Succession of John F. Pugh, Sr., and Troy W. Thompson, Jr., Defendants.
Fidelity and Deposit Company of Maryland, Defendant-Appellee Cross Appellant.
RESOLUTION TRUST CORPORATION, Plaintiff-Appellant,
Louis A. MIRAMON, Jr., et al. Defendants,
Louis A. Miramon, Jr., et al., Defendants-Appellants,
Fidelity & Deposit Company of Maryland, Defendant-Appellee.
Sept. 9, 1994.
Appeals from the United States District Courts for the Eastern District of Louisiana.
Before REYNALDO G. GARZA, SMITH, and PARKER, Circuit Judges.
REYNALDO G. GARZA, Circuit Judge:
The above consolidated cases were brought by the RTC against former officers and directors
of banks who carried Director & Officer Liability Policies with Fidelity & Deposit Co. of Maryland
("F & D"). In both cases, the district judges found that no genuine issue of material fact existed, and
granted summary judgment in favor of F & D on the grounds that the insureds failed to comply with
the notice requirements of the F & D policy. The relevant portions of the policies for each case are
identical. The issues of law presented for appeal are also substantially the same for both cases. For
the following reasons, we affirm the district courts decisions.
FACTS
RTC V. MIRAMON
The individual defendants in this case are former directors and officers of the federally insured thrift South Savings and Loan Association ("South"). In 1982, F & D issued an insurance policy on
behalf of South Savings and its officers and directors providing coverage for director and officer
liability. This policy was effective between May 3, 1982 and May 31, 1985. In 1985, F & D issued
a second director and officer liability policy in favor of South Savings which became effective on May
31, 1985. South Savings' insurance coverage with F & D terminated on May 31, 1986.1
On August 7, 1992, the Resolution Trust Corporation ("RTC"), as receiver of South Savings,
instituted this litigation against the director defendants. The RTC alleged that the directors were
liable under theories of gross negligence and breach of fiduciary duty resulting from the directors'
alleged misdealing in eight different transactions.2 Additionally, RTC filed a third party action against
F & D under Louisiana' direct action statute, La.R.S. 22:655. In this action, the RTC contends F &
D is liable for the losses sustained as a result of the directors' alleged misconduct by virtue of the 1982
and 1985 insurance policies. The directors filed cross-claims against F & D in which they assert that,
under the director and officer liability policy, F & D has a duty to defend, including a duty to advance
defense costs, and a duty to provide liability coverage.
The district judge concluded that both the RTC and the di rectors failed to point to any
evidence which suggested that South Savings or the directors complied with the notice requirements
of the policy, or that they even at tempted to put F & D on notice for the claims and alleged
misconduct asserted in this case. "To the contrary, the undisputed evidence, including South Savings'
and the defendant directors' repeated denials that they had knowledge of any conduct that might lead
to the filing of a claim in renewal application forms, establishes that no notice was provided to F &
D as a matter of law." The judge noted that since the underlying facts in the case were undisputed,
and these facts were insufficient to satisfy the notice requirements of the policy, summary judgment
1 The district court's order points out that on May 31, 1986, South Savings obtained coverage from CNA Insurance Company, thereby precluding South Savings from exercising the option of the "Discovery Clause" for extending the coverage period provided for in clause 2 of the 1985 policy. 2 The eight transactions involve the purchase of South Savings' Mandeville branch site; the purchase and construction of South Savings' main office; the St. James Partnership loans; the Lake Hills Village and Madison Street/Golden Shores loans; the Westwood Estate loans; the Garret workout loans; the Atrium loan; and the Three S. Enterprises loan. was proper.
RTC V. AYO
This suit was brought by the RTC, as receiver for Peoples Federal Savings & Loan
Association, Thibodaux, Louisiana ("Peoples"), against certain directors and officers of Peoples and
against its directors and officers liability insurance carrier, F & D, pursuant to the Louisiana Direct
Action Statute, La.R.S. 22:655.
The RTC sought to recover losses in excess of $2.2 million sustained by Peoples as a result
of the alleged acts and omissions of the individual directors. The claims arose from a number of
different deficiencies relating to loan underwriting, collection, and management practices on
approximately fifty (50) loan transactions. RTC alleges that claims covered under the policies issued
to the directors were made against the directors by federal banking regulators during the policy period
and/or that F & D received actual or constructive notice of such claims or potential claims during the
policy period. The D & O policies at issue were in effect from June 25, 1983 through June 25, 1985,
and from June 25, 1985 through June 25, 1986.3 Similarly, the district court entered summary
judgment in favor of F & D.
The Insurance Policies
The F & D policies are entitled "Directors and Officers Liability Insurance Policy Including
Association Reimbursement." The policies in question are "claims made" policies, as opposed to the
customary "occurrence" policy. Under claims made policies, the mere fact that an "act, error, or
omission" occurs during the policy period is not sufficient to trigger insurance coverage. FDIC v.
Mijalis, 15 F.3d 1314, 1330 (5th Cir.1994). In order to trigger coverage, such policies usually
require that a claim be made against the insured during the policy period. The F & D policies also
provide coverage for potential claims provided F & D receives, within the policy period, notice of the
occurrence of a specified wrongful act. The controversy in the case before us stems primarily from
the notice provisions which dictate that for potential future claims to be treated as a "claim" made
3 The major difference between the two policies is that the second policy contained endorsements for an insured-versus-insured exclusion and a regulatory exclusion. Neither of these exclusions were involved in the district court's decision. during the policy year, the insured must notify F & D, within the policy period, of any occurrences
that may subsequently result in a claim. The policy provides in pertinent part:
6. NOTICE OF CLAIMS
(a) If during the policy period, or during the extended discovery period if the right is exercised by the Association or the Directors and Officers in accordance with Clause 2, the Association or the Directors and Officers shall:
(1) receive written or oral notice from any party that it is the intention of such party to hold the Directors and Officers, or any of them, responsible for a specified Wrongful Act; or
(2) become aware of any act, error or omission which may subsequently give rise to a claim being made against the Directors and Officers, or any of them, for a specified Wrongful Act;
and shall during such period give written notice thereof to the Company as soon as practicable and prior to the date of termination of the policy, then any claim which may subsequently be made against the Directors and Officers arising out of such Wrongful Act shall, for the purpose of this policy, be treated as a claim made during the Policy Year or the extended discovery period in which such notice was first given.
(b) The Association or the Directors and Officers shall, as a condition precedent to their rights under this policy, give to the Company notice in writing as soon as practicable of any claims made and shall give the Company such information and cooperation as it may reasonably require.
The notice requirements in claims made policies allow the insurer to "close its books" on a
policy at its expiration and therefore "attain a level of predictability unattainable under standard
occurrence policies." FDIC v. Mijalis, 15 F.3d 1314, 1330 (5th Cir.1994). Insurance companies may
limit their liability through clear and unambiguous notice provisions, and impose any reasonable
conditions they wish upon the insureds under the contract. Livingston Parish School Bd. v.
Fireman's Fund Am. Ins. Co., 282 So.2d 478, 481 (La.1973). See also, FDIC v. Barham, 995 F.2d
600, 604, n. 9 (5th Cir.1993). The purpose of the reporting requirement is to define the scope of
coverage by providing a certain date after which an insurer knows it is no longer liable under the
policy, and for this reason such reporting requirements are strictly construed.
Despite the enormous volume of briefs involved in this consolidated case, and the myriad of
parties involved, the crux of the both cases lies in two specific issues:
1. Did the insureds provide F & D with sufficient notice of "acts, errors, or omissions which may subsequently give rise to a claim such that the claims eventually made should be treated as claims made during the policy year?" 2. If not, is the failure of the insured to provide the requisite notice serve as a defense against the RTC's claim under Louisiana's Direct Action Statute?
STANDARD OF REVIEW
We review the district court's grant of summary judgment de novo. FDIC v. Selaiden
Builders, Inc., 973 F.2d 1249, 1253 (5th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1944, 123
L.Ed.2d 650 (1993). Summary judgment is appropriate if the movant demonstrates that there are no
genuine issues of material fact. FED.R.CIV.P. 56(c).
Further, the standard of review requires the court to read all evidence in the light most
favorable to the non-moving party and make all reasonable inferences in favor of the non-moving
party. Anderson v. Liberty Lobby, 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).
The judge is not to weigh the evidence on summary judgment, but accept the facts pled by the
non-movant as true, making a determination based on that evidence as to whether a genuine issue of
material fact exists. Id. at 249, 106 S.Ct. at 2510.
"Applying Louisiana rules of construction, we are mindful that "[a]n insurance policy is a
contract and, as with all other contracts, it constitutes the law between the parties.' " FDIC v.
Barham, 995 F.2d 600, 603 (5th Cir.1993). If the terms of the policy are ambiguous, they will be
construed in favor of the insured. Id. None of the recent decisions from this court construing
substantially identical policy provisions have held them to be ambiguous. Therefore, we have no
authority to alter the terms of the policies under the guise of contractual interpretation. Id.
Was There Notice of Potential Future Claims?
The parties contest the precise "type" of notice the policy requires the banks to give to F &
D regarding potential future claims before they are considered claims made within the policy's period
of coverage. F & D contends that the policy requires the bank to notify it of "specified Wrongful
Acts" of directors and officers having claim potential. RTC argues that the notice can be in the
broader form of "any act, error or omission" which may give rise to a claim for specified wrongful
acts. They contend that the district court erred in failing to find sufficient notice of the specific
wrongful acts that gave rise to the RTC's claims in the liability action, or at the very least, in failing
to find genuine issues of material fact to exist. Neither the RTC nor the directors contend the F & D received written notice within the
policy period of a third party's intention to hold the directors and officers responsible for a specified
wrongful act. However, the RTC and the directors argue that F & D received written notice, within
the policy period, of specific acts, errors, and omissions that could give rise to a claim. In support
of their position, the RTC and directors of South Savings point to F & D's receipt of regulatory
reports (immediately forwarded by the appellants) issued by the Federal Home Loan Bank Board in
1984, management reports prepared by an independent auditing agency in 1982, 1984, and 1985,
South Savings' 1983 and 1985 audited financial statements, South Savings' financial reports which
were provided to the Federal Home Loan & Bank Board, and copies of the complaints and other
materials associated with two lawsuits filed against South Savings and Director Englande.
The lower court in the RTC v. Miramon case found that such evidence reveals that F & D
possessed general information of South Savings' improper lending practices and financial difficulties
and that this information contributed, in part, to the eventual termination of the contractual
relationship between F & D and South Savings. The district court concluded, however, that this was
legally insufficient to prove that "South Savings or the officers and directors attempted to comply
with the literal terms of Section 6(a) by providing F & D with "written notice of any specific wrongful
acts they believed to have claim potential.' "
Likewise, the appellants contend that the notices forwarded in the RTC v. Ayo case also
constituted notice of specific instances of acts, errors, or omissions that may subsequently give rise
to a claim. However, the focus of appellant's brief in this case centers around the fact that the
insured, Peoples' Savings, received and was made aware of the acts, errors, or omissions that
occurred during the policy period. The brief's position relies heavily on the premise that the failure
of the insured to notify F & G as per the contract cannot be asserted as a bar to the third party action
under the Louisiana Direct Action Statute. As discussed in the second section of this memo, we do
not feel this position is supported by the law. Therefore, we will continue with appellant's argument
that F & D did in fact receive notice of potential future claims during the policy period.
RTC contends that Peoples' independent auditor provided the directors with a management letter, dated February 14, 1984, reviewing the operations of Peoples for the previous year. This letter
was later discovered by F & D.4 They claim that the letter discusses numerous deficiencies of
Peoples' operations and sets forth how those operations should be undertaken. RTC urges that this
letter apprised F & G that if Peoples failed to heed the auditor's detailed guidelines, such action would
constitute deficiencies on future loans. RTC also claims that F & D requested a copy of the results
of the 1986 Regulatory Examination, though it is not clear whether F & D actually was sent a copy.
This letter, the RTC alleges, is replete with details of specific wrongful acts which have become the
basis of the RTC's current claim.
RTC argues that the provision contained in 6(a) of the policy does not require that notice of
"specific wrongful acts" be given. Nor does it require that the insured transmit notice that a specific
act possessed significant claim potential. Instead, the section insures against liability arising from any
act or omission of which the insured is aware that may subsequently give rise to a claim. This
language, appellants contend, is considerably broader than the provision at issue in prior cases cited
by the district court and appellee. Moreover, the clause is, at worst, ambiguous and must be
construed in favor of the insured.
This issue was recently addressed by this court in FDIC v. Mijalis, 15 F.3d 1314 (5th
Cir.1994). In Mijalis, the language in the Loss Provision was substantially identical to the policy
before us, where the policy required written notice to the insurer of acts or occurrences amounting
to potential claims. Id. at 1329. The FDIC claimed that insurance coverage was triggered because
the insureds gave written notice to the carrier, International, in the form of letters, communications,
bank renewal applications which disclosed the existence of a cease and desist order, and other
financial information, each supposedly provided International with notice of "occurrences which may
subsequently give rise to a claim." Id. at 1334. This court held that the financial information
4 The management letter was found in the files of Sternfels Insurance, Inc., the local insurance agency who serviced the account with Peoples. Although it is arguable whether such a "discovery" would comply with the specific directive to "give written notice thereof to the Company as soon as practicable," this concern need not be addressed in view of the conclusion that the letter does not meet this court's threshold for providing objective notice of specific wrongful acts. conveyed to International by the Bank did not objectively rise t o the level of notice of specific
wrongful acts. Id. at 1336. Judge King states that "[t]he question is whether the information
supplied to [the insurer] by the insureds objectively gave "written notice of specified wrongful acts
[by the] officers and directors.' " Id. Subjective inferences drawn from general information provided
to the insurer are irrelevant to the notice inquiry. id. Since these factual determinations were made
following a jury trial, this court found it unnecessary to remand the case. Id. at 1337.
The exact policy provision before us was interpreted in McCullough v. Fidelity & Deposit
Co., 2 F.3d 110, 112 (5th Cir.1993). This court, applying Texas substantive law, agreed with F &
D that the policy language makes sense only if it is read to require notice of "specified wrongful acts,
errors, or omissions that may give rise to a claim." Id. The bank, during the policy renewal process,
revealed to F & D 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 F & D, 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. This court
emphasized that "the proper focus of the district court's inquiry is whether the insured had objectively
complied with such a notice provision, and not whether the insurer has subjectively drawn inferences
that potential claims exist from the materials submitted by the insured." McCullough, 2 F.3d at 113.
See Mijalis, 15 F.3d at 1336 (stating that subjective inferences drawn from general information
provided to the insurer are irrelevant to notice inquiry).
Even though the policies in McCullough defined "wrongful act" to include a breach of duty,
this court concluded that a cease and desist order was insufficient to constitute notice that the
insureds breached their duty to properly supervise the banks' lending operations. Id. at 113. This
Court then set forth the degree of specificity required in the notice, including such detail as the
particular subsidiary involved, the particular agents, officers, or directors involved, the relevant time
periods, the identity of potential claimants, and the specific unsound practices. Id. at 113.
We believe this precedent under Texas law is an accurate description of Louisiana law as
well, mandating the insured to "objectively' comply with this provision. McCullough, 2 F.3d at 113. The subjective inferences the insurer's representatives draw from the notice it receives are not
relevant.
Because all communications between F & D and the insureds have already been produced,
and these do not show that the insureds gave notice of a specified wrongful act that might give rise
to a claim according to the parameters mandated by McCullough, we find these correspondences
deficient to trigger policy coverage. This point is
AFFIRMED.
Can Lack of Notice Bar RTC's Direct Action Claim?
Appellants argue alternatively that even if the memorandum, letters, and communications
forwarded to F & D do not meet the requisite "notice of any act, error, or omission which may
subsequently give rise to a claim," such notice failure cannot be asserted as a defense to coverage in
this case unless F & D can demonstrate that it has been irreparably prejudiced. This action was
brought pursuant to Louisiana's Direct Action Statute, and this court had declared that Louisiana law
provides that an injured party asserting a direct action is not barred by the insured's non-prejudicial
failure to comply with the notice provision of a liability policy. Auster Oil & Gas, Inc. v. Stream, 891
F.2d 570, 578 (5th Cir.1990). The RTC claims it is a "third party" to the liability policies at issue,
as it not only represents the failed institution, but also any stockholder, member, account holder,
depositor, officer, or director of the bank. As such, RTC alleges that it is insulated from the lack of
notice defense.
This argument was touched on in Mijalis, but because the FDIC conceded to the court that
insurance coverage existed under the "potential claims" clauses only if the insurer was given notice
of those potential claims, this court did not address the district court's proclamation that the notice
provision was void as against the FDIC unless the insurer could demonstrate prejudice resulting from
the lack of notice. Mijalis, 15 F.3d at 1334-35, & n. 5. We now must confront this concern.
The RTC has asserted claims against the directors and officers of the banks in its corporate
capacity. The RTC represents the failed bank's shareholders, itself as a creditor, and all previous
creditors of the banks. This court has held that the policy terms do not control the scope and nature of the injured third party's rights. The third party's rights under the statute vest at the time of injury,
where the rights of the insured remain subject to conditions in the policy that arise subsequent to the
injury, such as the requirement of notice. Auster Oil & Gas, Inc. v. Stream, 891 F.2d 570, 578 (5th
Cir.1990). "An insurer may not raise the nonprejudicial failure of its insured to give notice of
accident or suit as a valid defense to claims of injured third parties." See Gulf Island, IV v. Blue
Streak Marine, Inc., 940 F.2d 948 (5th Cir.1991); Jackson v. Transportation Leasing Co., 893 F.2d
794 (5th Cir.1990); Chennault v. Dupree, 398 So.2d 169 (La.App. 3d Cir.1981).
It is important not to confuse the distinct "notice requirements" with which we are dealing
in the present case. Ours is the notice that turns potential future claims, which could be made outside
the policy's coverage, into actual claims made during the policy's term. This claim-triggering notice,
i.e., the notice provision in 6(a), serves a very different function than the prejudice-preventing notice
required under clause 6(b) that was central to the Auster opinion. The prejudice-preventing notice
clause is for the benefit of the insurance company, allowing it to timely intercede and protect its own
interest. On the other hand, the claim-triggering notice provision serves the insured by allowing
coverage for claims made outside the policy period, provided F & D was notified of the potential
claim. If the policy requirement for notice of specified wrongful acts is relaxed, then policy coverage
actually expands. This constitutes prejudice as a matter of law, since it circumvents the contract
mutually entered into by the parties and creates insurance protection where none existed before. The
court provides the following example:
[I]f notice that an insured attorney has a poor docket control system is accepted as coverage triggering notice of the attorney's wrongful act, the attorney's malpractice coverage would be triggered for any number of suits predicated on missed deadlines. See Hirsch v. Texas Lawyers Ins. Exchange, 808 S.W.2d 561, 565 (Tex.Ct.App.1991) (court reluctant to permit expansion of "claims made" coverage t hrough relaxation of coverage-triggering notice requirements).... [W]e are persuaded that the policy requires the insured to give the insurer notice of specified wrongful acts to trigger coverage.
McCullough, 2 F.3d at 112. The policy laid out in Auster was designed to protect injured third
parties from the harsh consequences that would result if, after filing a claim against the insured, the
insured fails to comply with the notice requirements—which are outside of the injured third party's
control. Auster, 891 F.2d at 578. Auster, which dealt with an occurrence policy, is not controlling for our set of circumstances, where it was within the injured third party's control to file a claim or not
once the act, error, or omission caused injury. The rights of the injured party under claims-made
policies, unlike the occurrence policy in Auster, do not vest at the time of the injury, but at the time
a claim is made.5 "Potential claims" are not covered by the D & O policies unless F & D had in fact
received objective notice of those potential claims. Notice to F & D is a sine qua non of any potential
claim known to the insured during the policy period. 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 Life Ins. Co., 601 So.2d 364 (La.Ct.App.1992). Therefore, both
the district courts are AFFIRMED.
SUBORDINATE ISSUES
Duty to Defend or Contemporaneously Advance Defense Costs
Appellants complain that the district court erred in failing to find F & D has a duty to advance
or pay for the defense costs. Under Louisiana law, it is established that an insurer's duty to defend
is determined by the allegations set forth in the pleadings. Jensen v. Snellings, 841 F.2d 600, 612
(5th Cir.1988). Only if the allegations preclude any possibility of coverage will the insurer be
relieved of its duty to defend the insured. Id. As the first two issues discussed demonstrate, this is
the case here. The claims made by the RTC fall outside the policy's period, and F & D should not be
called to foot the bill for ex-policyholders in their attempt to extend coverage.
The motion to certify the questions on appeal to the Louisiana Supreme Court is DENIED,
since application of existing law disposes of the issues.
5 Had a claim been made against either of the insureds during the applicable policy periods, then the rule articulated in Auster might apply.