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FEDERAL DEPOSIT INS. CORP. v. ZABORAC

August 27, 1991

FEDERAL DEPOSIT INSURANCE CORPORATION, IN ITS CORPORATE CAPACITY, PLAINTIFF,
v.
MARGIE ZABORAC, CHESTER JACOBUS, GEORGE BAYLOR, HARRY TARTER, WAYNE GROVE, AND LINDA GROVE, AND AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, GARNISHEE, DEFENDANTS.



The opinion of the court was delivered by: Mihm, District Judge.

ORDER

Before the Court is a Motion by the Garnishee Defendant, American Casualty Company of Reading, Pennsylvania, for summary judgment (# 26) on the claim asserted against it. For the reasons set forth in this opinion, this Motion is granted.

BACKGROUND

Joe R. Gibson, the original Plaintiff in this action, commenced this action by filing a shareholder derivative complaint against the directors and officers of the bank, Wayne Grove, Linda Grove, Margie Zaborac, Chester Jacobus, George Baylor, and Harry Tarter — in the Circuit Court of the Ninth Judicial District, Fulton County, Illinois, on February 26, 1986. Gibson, now deceased, was a former director and officer of the bank. He resigned as the bank's president in 1978 and as chairman of the board on April 15, 1980. His complaint alleged that the officers and directors had negligently mismanaged the bank in connection with the lending function.

The director's and officer's liability insurance policy, which was issued by American Casualty Company of Reading, Pennsylvania (hereinafter American Casualty), covered the period from July 1, 1985 through July 1, 1986. The bank notified American Casualty of Gibson's claim during this period. On or about May 20, 1986, American Casualty denied coverage. See, Zaborac v. American Casualty Company, 663 F. Supp. 330 (C.D.Ill. 1987) (see, affidavit of Joe Anthony, FDIC Exhibit 2).

On or about January 9, 1987, the Commissioner of Banks and Trust Companies of the State of Illinois determined that the bank was insolvent and ordered it closed. The FDIC*fn1 was appointed as receiver of the bank and, in its corporate capacity, acquired the bank's negligence claims against its former directors and officers in a purchase and assumption transaction. On April 15, 1988, the FDIC was substituted for Gibson as the Plaintiff pursuant to Ill.Rev.Stat. ch. 110, ¶ 2-1008(a) (1987). After removing this action to federal court on May 11, 1988, the FDIC filed a complaint alleging, as did Gibson, that the directors and officers had negligently mismanaged the bank in its lending policies and practices. The jurisdiction over the removal and the complaint was based on 28 U.S.C. § 1345 and 12 U.S.C. § 1819. See also 12 U.S.C. § 1441a(l). The Groves did not answer the complaint, and the FDIC obtained a $1,194,822.27 default judgment against them on October 20, 1989.*fn2 The FDIC's negligence claim against the other individual Defendants is still pending in this action. Pursuant to Federal Rule of Civil Procedure 69, the FDIC served garnishment summonses and interrogatories on American Casualty to obtain insurance proceeds due to the Groves under the policy as a result of the judgment against them. American Casualty answered the FDIC's interrogatories to the garnishee on February 21, 1990, and asserted the regulatory exclusion (endorsement # 7) and the insured versus insured exclusion (endorsement # 8) as affirmative defenses. American Casualty also asserted endorsement # 13 of the policy as an affirmative defense, but that endorsement is not in issue on this motion.

I. REGULATORY EXCLUSION

American Casualty contends that the regulatory exclusion unambiguously precludes coverage for any claim against directors and officers based upon or attributable to any action by the FDIC in any capacity. In response, the FDIC maintains that the regulatory exclusion does not apply to the FDIC in this case based upon its own terms.

Endorsement # 7, the regulatory exclusion, entitled "Limitation of Coverage" provides:

  It is understood and agreed that the insurer shall
  not be liable to make any payment for loss in
  connection with any claim made against the
  directors or officers based upon or attributable
  to: any action or proceeding brought by or on
  behalf of the Federal Deposit Insurance
  Corporation, the Federal Savings and Loan Insurance
  Corporation, any other depository insurance
  organization, the Comptroller of the Currency, the
  Federal Home Loan Bank Board or any other national
  or state regulatory agency (all of said
  organizations and agencies hereinafter referred to
  as "agencies"), including any type of legal action
  which such agencies have the legal right to bring
  as receiver, conservator, liquidator, or otherwise;
  whether such action or proceeding is brought in the
  name of such agencies or by or on behalf of such
  agencies in the name of any other entity or solely
  in the name of any third party. All other
  provisions of the policy remain unchanged.

(See Exhibit 1 attached to Document # 31 at endorsement # 7) (emphasis added).

  A.  Was This Action or Proceeding Brought by the FDIC as
      Defined Under the Regulatory Exclusion?

The FDIC contends that the insurance policy uses two different phrases, making a claim and bringing an action, which are not defined in the policy and can encompass two different concepts. The FDIC notes that the regulatory exclusion states that the insurer is not liable for any loss:

  In connection with any claim made against the
  directors or officers based upon or attributable
  to: any action or proceeding brought by or on
  behalf of the Federal Deposit Insurance
  Corporation. . . .

The FDIC contends that this exclusion by its own terms does not apply here because this "action" was not "brought by or on behalf of" the FDIC. As acknowledged by both parties in the statement of undisputed facts, the FDIC notes that this action was brought in state court by Mr. Gibson as a shareholder derivative action against the Bank's directors and officers. Also, it notes that, after the FDIC took an assignment of the Bank's assets, it substituted as a Plaintiff in the derivative lawsuit and removed this action to federal court.

Under Illinois law, an action is commenced by filing a complaint with the court, and substitution of parties does not result in the bringing of a new action. See, Ill.Rev.Stat. ch. 110, ¶¶ 2-201 and 2-1008. Under federal law, an action is commenced by filing a complaint with the court, and removal does not result in the bring of a new action, even where a party chooses to replead in federal court as all injunctions, orders, and other proceedings occurring in the action prior to its removal remain in full force and effect until dissolved or modified by the district court. See, Rule 3 and Rule 81(c) of the Federal Rules of Civil Procedure and 28 U.S.C. § 1450. Further, where there is a transfer of interests in federal court, the action may be continued. Rule 25(c) of the Federal Rules of Civil Procedure.

Interpreting identical exclusionary language under similar circumstances, the district court in American Casualty Company v. FSLIC, 683 F. Supp. 1183 (S.D.Ohio 1988), held that American Casualty's regulatory exclusion did not preclude coverage for the FSLIC's claims against former directors and officers of a failed savings and loan institution. In that case, the failed savings and loan itself brought an action against its former directors and officers in state court. When the savings and loan was declared insolvent, the FSLIC took over the institution, substituted itself as the plaintiff in the lawsuit against the former directors and officers, and removed the action to federal court.

American Casualty, as it does in this case, argued that the FSLIC's substitution as a party plaintiff in conjunction with its removal of the director's and officer's action constituted the bringing of an action in the United States District Court. Id. at 1185. Chief Judge Rubin rejected American Casualty's argument in holding that the regulatory exclusion did not negate coverage because the action was brought by the failed institution and not by the FSLIC. The judge explained, stating that:

  To "bring" an action or suit refers to the
  initiation, not the maintenance, (footnote
  omitted) of legal proceedings. Black's Law
  Dictionary, [5th Ed.], 174 (1977). Moreover, a suit
  is "brought" at the time it is commenced. Id.;
  Goldenberg v. Murphy, 108 U.S. 162, 2 S.Ct. 388, 27
  L.Ed. 686 (1883). The phrase "on behalf of" is
  defined as "in the interest of: as a representative
  of." Webster's Ninth New Collegiate Dictionary, at
  141 (1983). Clearly, [the bank] did not bring the
  [directors and officers] action in the interest of
  or as a representative of FSLIC which had not yet
  been appointed as receiver. (Footnote omitted).
  Such a reading is absurd.

Id. Judge Rubin further rejected American Casualty's contention that maintaining a pre-existing suit is the same as bringing an original action:

  Plaintiffs suggest that "maintain" is a synonym
  for "brought." To "maintain" a suit, however,
  means to uphold, continue on foot and keep from
  collapse a suit already begun. Smallwood v.
  Gallardo, 275 U.S. 56, 61, 48 S.Ct. 23 [24], 72
  L.Ed. 152 (1927); see also, George Moore Ice Cream
  Company v. Rose, 289 U.S. 373, 53 S.Ct. 620, 77
  L.Ed. 1265 (1933).

Id. at n. 2. Finally, the judge rejected American Casualty's contention that its intent was to exclude coverage for all suits to which a government regulatory agency is a party in stating:

  Indeed, the intention of the parties must control
  in insurance contract, however, "this intent must
  be demonstrated from the written contractual
  matter expressed by the parties as contained in
  the policy of insurance." (Citations omitted).
  Furthermore, when words used in an insurance
  contract have a plain, ordinary and unambiguous
  meaning the court may not resort to construction
  of such contract. (Citation omitted). The language
  in the regulatory exclusion provision of the
  policy is clear and unambiguous. Claims arising
  from the [directors and officers] action are not
  excluded from coverage under the plain meaning of
  the regulatory exclusion.

Id. at 1185-1186.

This Court disagrees with the findings of the court in the American Casualty case. Id. This Court believes that the construction suggested by the FDIC and the court in the American Casualty case is technical and unreasonable. In the case of Gary v. American Casualty Company of Reading, Pennsylvania, 753 F. Supp. 1547, 1550-1551 (W.D.Okl. 1990), in interpreting an identical regulatory exclusion under similar facts, the court stated:

  Although the language "based upon or attributable
  to" is awkward when used in conjunction with the
  language "any action or proceeding brought by or
  on behalf of the Federal Deposit Insurance
  Corporation" the court finds the FDIC's
  construction of this exclusion to be strained and
  unreasonable. (Footnote omitted). Reading the
  endorsement as a whole, without placing undue
  emphasis on the words "based upon or attributable
  to," it is clear that the insured's intent was to
  exclude coverage for any loss resulting from any
  action brought by or on behalf of the FDIC in any
  capacity against a bank director or officer.
  (Footnote omitted). Accord, Continental Casualty
  Company v. Allen, 710 F. Supp. 1088, 1097 (N.D.Tex.
  1987) (holding that the language in an identical
  endorsement in an MGIC-issued 1983 D and O
  liability policy "is not ambiguous").

  See also, McCuen v. International Insurance
  Company, No. 87-54-D, slip op. (S.D. Iowa, Sept.
  29, 1988). Contra, American Casualty Company of
  Reading, Pennsylvania v. Federal Deposit Insurance
  Corporation, 677 F. Supp. 600, 603-604 (N.D.Iowa
  [1987]) (holding that the identical exclusion
  endorsement is ambiguous, susceptible to the
  interpretation urged by both the FDIC and ACCO
  therein, also urged herein).

(See Exhibit attached to document # 32, Motion of American Casualty for leave to file a reply in support of its Motion for Summary Judgment) (emphasis added).*fn3

This Court adopts the holding and reasoning of the Gary court on the regulatory exclusion and holds that this exclusion unambiguously excludes coverage when read as a whole. See also, FDIC v. Bowen, Nos. 88 CV 16746 and 89 CV 12616, slip op. at 5 (July 18, 1991, Colo.Ct. of App). This Court would note that the latter part of the regulatory exclusion states that it includes any type of legal actions which the FDIC had a right to bring whether it was brought in the name of the agency, on behalf of the agency in the name of another entity, or on behalf of a third party. (See earlier quotation of the regulatory exclusion). Clearly, this exclusion was intended to bar any action brought or maintained by the FDIC or other regulatory agency. ...


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