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FSLIC v. TRANSAMERICA INS. CO.

January 25, 1989

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, in its corporate capacity, Plaintiff,
v.
TRANSAMERICA INSURANCE COMPANY, a California insurance corporation, Defendant and Third-Party Plaintiff, v. JOHN F. ROSCH, et al.


James F. Holderman, United States District Judge.


The opinion of the court was delivered by: HOLDERMAN

JAMES F. HOLDERMAN, UNITED STATES DISTRICT JUDGE

 Plaintiff Federal Savings and Loan Insurance Corporation ("FSLIC") is a corporate instrumentality and an agency of the United States, operating under the direction of the Federal Home Loan Bank Board ("FHLBB"). FSLIC filed its one-count complaint against defendant Transamerica Insurance Company ("Transamerica") on August 7, 1987. The complaint alleges that Transamerica wrongfully denied FSLIC's claim under a Transamerica savings and loan blanket bond issued to Glen Ellyn Savings and Loan Association ("Glen Ellyn") in June of 1982. *fn1"

 Transamerica filed its amended answer and affirmative defenses to the complaint on September 21, 1987. FSLIC and Transamerica have filed cross-motions for summary judgment with regard to the first and third affirmative defenses raised by Transamerica. Additionally, Transamerica seeks summary judgment on the grounds raised in its second, fifth, seventh and eighth affirmative defenses.

 A district court should grant summary judgment only if the pleadings, depositions, answers to interrogatories, admissions and affidavits "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). For the reasons set forth below, FSLIC's motion for summary judgment is denied. Transamerica's motion for summary judgment is granted with respect to its eighth affirmative defense. In all other respects, Transamerica's motion for summary judgment is denied.

 BACKGROUND FACTS

 A. Rosch's Activities at Glen Ellyn.

 In December of 1974, John F. Rosch ("Rosch") became President and Managing Officer, as well as a director and shareholder of Glen Ellyn. (Transamerica's Statement of Material Fact, para. 4.) In 1976, Glen Ellyn consented to the entry of an order by FSLIC to cease and desist at least 21 practices which FSLIC had determined to be in violation of federal and Illinois laws and regulations. FSLIC charged that these violations constituted unsafe and unsound banking practices. (Stipulation and Consent to Entry of Order to Cease and Desist, Exhibit 3 to FSLIC's Statement of Material Fact, p. 9 et seq.)

 Despite the 1976 cease and desist order, Glen Ellyn continued to violate federal and state savings and loan regulations. (FHLBB Report of Special Limited Joint Examination, Exhibit 5 to FSLIC's Statement of Material Fact.) An FHLBB investigation of Glen Ellyn revealed that between 1981 and mid-1984 the savings and loan association lost a total of $ 1.2 million. Id. FSLIC and Transamerica apparently agree that Glen Ellyn's financial troubles were due in large part to malfeasance on the part of Glen Ellyn's president, Rosch, and James E. Reagin, a Texas real estate developer. (Id. at p. 1.) ("The comments and conclusions presented in this report reflect the activities of President and Managing Officer John F. Rosch, who conducted the affairs of the association in an unsafe and unsound manner. These activities resulted in the insolvency of the institution.").

 At a meeting of its board of directors on June 19, 1984, Rosch made an oral tender offer to the other members of the board of directors to acquire 100% of the shares presently issued and outstanding of Glen Ellyn. At the time of the offer, Rosch owned approximately 16% of Glen Ellyn's outstanding shares. On July 3, 1984, four of Glen Ellyn's directors resigned. As of July 3, 1984, Rosch held himself out as the sole owner of all of the outstanding common stock of Glen Ellyn and purported to nominate and select five new members of the board of directors of Glen Ellyn. (Exhibit 19 to FSLIC's Statement of Material Fact.) A report by the FHLBB noted that most of the new directors were Rosch's "subordinates" at Glen Ellyn. (Exhibit 20 to FSLIC's Statement of Material Fact.) Two days later, Rosch and two of the members of the board of directors passed a resolution that directed Glen Ellyn's legal counsel to draw up an amendment to the by-laws that would reduce the number of members of the board of directors from seven to three. (Action by Sole Shareholder and Board of Directors, Exhibit 19 to FSLIC's Statement of Material Fact, p. 2.) It is unclear in the record whether this resolution was ever implemented.

 B. FSLIC Change in Control Requirements.

 Legislation enacted by Congress in 1978 requires that a person seeking to acquire control of any federally-insured savings and loan through, inter alia, a purchase of its voting stock must provide FSLIC with 60 days' prior written notification of the proposed acquisition. 12 U.S.C. § 1730(q)(1)(the "Change in Control Act"). The proposed acquiror is obligated to provide detailed information regarding the proposed acquisition and its effect on the insured institution. 12 U.S.C. § 1730(q)(6). Within the 60-day period, FSLIC may disapprove the proposed change in control or extend the period for disapproval in order to (a) secure additional information about the "competence, experience, integrity, and financial ability" of the proposed acquiror or (b) determine the accuracy and completeness of the information provided to FSLIC by the proposed acquiror. 12 U.S.C. § 1730(a)(2)(B).

 On May 1, 1984, i.e. before he made a tender offer for 100% of the outstanding shares of Glen Ellyn, Rosch filed with FSLIC a notice of his intent to acquire an additional 9% of Glen Ellyn's stock, thereby increasing his percentage of the outstanding shares to 25.4%. *fn2" The FHLBB notified Rosch that it would require additional information before the application would be considered complete. (Exhibit 21 to FSLIC's Statement of Material Fact and paras. 8-12 thereof.) Approximately two months later, Rosch purchased the remaining outstanding shares of Glen Ellyn. (FHLBB Memorandum dated February 4, 1985, Exhibit 20 to FSLIC's Statement of Material Fact, p. 7.) Rosch apparently never filed any notice of intent to acquire control with respect to the additional 74.6% of Glen Ellyn's shares that he purchased on July 3, 1984. *fn3"

 When FSLIC discovered Rosch's attempt to acquire the remaining outstanding shares of Glen Ellyn, it sought injunctive relief in this court. A consent order was entered on September 7, 1984 requiring Rosch to, inter alia, place 76% of his stock in escrow and to reconstitute the board of directors with a majority of independent directors until the FSLIC had acted upon his notice of intent to acquire control. These directors were subject to the prior written approval of the FHLBB. (Consent Order, Exhibit 22 to FSLIC's Statement of Material Fact.) Despite the terms of the consent order, Rosch sold 90% of his stock on December 28, 1984 to four of Reagin's nominees. (FHLBB Report dated as of April 27, 1985, Exhibit 5 to FSLIC's Statement of Material Fact.)

 C. Glen Ellyn Insolvency and FSLIC Receivership.

 D. The Savings and Loan Blanket Bond.

 On June 24, 1982, Transamerica issued a savings and loan blanket bond on Standard Form No. 22 (the "bond") to Glen Ellyn, insuring the institution against any loss incurred "directly from one or more dishonest or fraudulent acts of an Employee, committed anywhere and whether committed alone or in collusion with others . . . ." (Rider SR 6041, Exhibit 12 to FSLIC's Statement of Material Fact, p. 18.) Dishonest or fraudulent acts were defined in the bond as acts committed with the manifest intent to (a) cause loss and (b) obtain financial benefit for the employee. The bond insured against loss sustained by Glen Ellyn "at any time but discovered during the Bond Period . . . ." (Exhibit 12 to FSLIC's Statement of Material Fact, p. 2.) Under the terms of the bond, discovery occurred "when the Insured becomes aware of facts which would cause a reasonable person to assume that a loss covered by the bond has been or will be incurred even though the exact amount or details of the loss may not be then known." (Rider SR 6091, Exhibit 12 to FSLIC's Statement of Material Fact, p. 12.)

 Two termination provisions of the bond are the primary focus of these summary judgment motions. First, a rider to the bond provided for partial termination of coverage if the insured failed to notify Transamerica within 30 days of any change in control of Glen Ellyn due to a transfer of its outstanding voting stock or voting rights. "Control" was defined in the rider to mean:

 
the power to determine the management or policy of the Insured by virtue of voting stock or voting rights ownership. A change in ownership of voting stock or voting rights which results in direct or indirect ownership by a stockholder or an affiliated group of stockholders of ten per cent (10%) or more of the outstanding voting stock or voting rights of the Insured shall be presumed to result in a change in control for the purpose of the required notice.

 (Rider SR 6042, Exhibit 12 to FSLIC's Statement of Material Fact, p. 8.) Failure to provide the requisite notice would result in termination of coverage for any loss in which the transferee of the voting power was implicated, effective upon the date of the stock transfer. (Id.) Transamerica's first affirmative defense is based upon this change in control rider.

 The other termination clause at issue is section 11(c) of the bond, which provided that that bond would be terminated as an entirety "immediately upon the taking over of the Insured by a receiver or other liquidator or by State or Federal officials . . . ." Transamerica's third affirmative defense is founded upon this term of the bond.

 E. Transamerica's Cancellation of Coverage.


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