Opinion ID: 681620
Heading Depth: 1
Heading Rank: 2

Heading: Applicability of the Regulatory Exclusion Endorsement

Text: 14 In granting the plaintiff's motion for summary judgment, the district court determined that the Crisman suit was brought on behalf of the FDIC and that, consequently, the regulatory exclusion contained in the 1987 D & O insurance policy barred coverage of the directors. The individual defendants allege that the suit was not, in fact, brought on behalf of a regulatory agency and that the exclusion should not apply in this instance. Furthermore, the individual defendants suggest that the regulatory exclusion itself is contrary to public policy and should not be enforced.
15 Defendants Rosenberg, Hepinstall, and Rudert initially point out that the FDIC itself did not bring suit against them for improper banking practices and argue that the regulatory exclusion endorsement is inapplicable to them. While it is true that the FDIC's complaint in these proceedings named only Gerald Martin and Richard Graves as defendants, it is also true that the shareholders' derivative suit brought by Crisman against Rosenberg, Hepinstall, and Rudert was explicitly brought on behalf of the FDIC. The individual defendants submit, nevertheless, that the mere wording of a plaintiff's complaint cannot transform an action into one barring insurance coverage pursuant to a regulatory exclusion. Moreover, the individual defendants argue that the FDIC was given the opportunity, under Michigan law, to bring the suit that Crisman requested and chose not to do so. 16 The facts surrounding American Casualty's claim that the Crisman suit was brought on behalf of the FDIC are not in dispute in this matter. Thus, the trial court properly reviewed this issue under the summary judgment principles of Fed.R.Civ.P. 56. This court reviews the grant of a motion for summary judgment de novo. Jones v. Tennessee Valley Auth., 948 F.2d 258, 261 (6th Cir.1991). Summary judgment is proper when there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law. However, the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. Anderson v. Liberty Lobby, 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). 17 Applicable law supports the district court's conclusion that the regulatory exclusion of the 1987 policy does bar coverage of the individual defendants under the facts of this case. Despite the individual defendants' attempt to recharacterize Crisman's complaint, Crisman did attempt to bring a shareholder's derivative action against the officers and directors of the bank on behalf of ... the Federal Deposit Insurance Corporation. Moreover, under established principles of corporate law, a shareholder's derivative action cannot be brought except on behalf of the corporation itself, or on behalf of another entity, such as the FDIC, that has succeeded to the corporation's derivative rights. Gaff v. FDIC, 814 F.2d 311, 315 (6th Cir.), vacated in part on other grounds on reh'g, 828 F.2d 1145 (6th Cir.1987), modified in other respects, 933 F.2d 400 (6th Cir.1991). 18 Furthermore, the fact that the FDIC did not itself bring an action against Rosenberg, Hepinstall, and Rudert does not necessarily foreclose application of the terms of the regulatory exclusion. Pursuant to the unambiguous terms of the exclusion itself, the policy provision included any type of legal action which such Agencies have the legal right to bring as receiver, conservator, liquidator or otherwise. Because the FDIC, as the receiver of First State Bank, had the legal right to bring an action against the individual defendants for their actions allegedly resulting in the diminution in the value of the bank's stock, the action by Crisman fell under the provisions of the regulatory exclusion on this basis as well. 19 In an effort to secure coverage under the bank's D & O policy, the individual defendants claim that the decision in this matter should follow the reasoning of the district court in American Casualty Co. v. FSLIC, 683 F.Supp. 1183 (S.D.Ohio 1988), and they advance the same arguments made by the FDIC in FDIC v. Zaborac, 773 F.Supp. 137 (C.D.Ill.1991), aff'd in FDIC v. American Casualty Co., 998 F.2d 404 (7th Cir.1993). As noted by the district court in this case, however, both of those cases involved substantively different situations. In those cases, the courts wrestled with the issue of whether the action under consideration was brought by the federal regulatory agency. Furthermore, in each case, the original complaint was filed prior to the receivership of the FDIC or the FSLIC. Consequently, even though the court in Zaborac ultimately held that the regulatory exclusion was applicable to the situation presented to it, 773 F.Supp. at 140-41, both American Casualty Co. v. FSLIC and FDIC v. Zaborac are readily distinguishable from this case. 20 The individual defendants also argue that a decision upholding a denial of coverage in this case would necessarily prevent coverage of directors and officers under regulatory exclusions in all shareholder derivative actions. Such an assertion is, however, far too broad. Only those shareholder derivative actions brought in situations in which a regulatory agency has succeeded to a corporation's cause of action are affected by the regulatory exclusion. In situations in which a bank has not failed, for instance, a shareholder's derivative action would be brought on behalf of the corporation itself, and a regulatory agency would not have the legal right to bring such an action. Thus, the shareholder's suit would not trigger the provisions of a regulatory exclusion. See e.g., American Casualty Co. v. FSLIC and FDIC v. Zaborac, supra. 21 Finally, if Crisman had not brought his shareholder's derivative suit on behalf of the FDIC, he could not have brought the action at all. The corporation allegedly injured by the actions of the individual defendants no longer possessed the legal right to bring such an action; all such rights had been effectively transferred to the FDIC as receiver for the failed bank. In fact, even the individual defendants recognize in their brief that 12 U.S.C. Sec. 1821(d)(2)(a)(i) (1989) provides: 22 The [FDIC] shall, as conservator or receiver, and by operation of law, succeed to ... all rights, title, powers, and privileges of the insured depository institution, and of any stockholder, member, accountholder, depositor, officer, or director of such institution with respect to the institution and the assets of the institution.... 23 Thus, from a purely practical standpoint, any shareholder's derivative action brought by Crisman must have been brought on behalf of the successor to the corporation's legal right to bring such an action--the FDIC.
24 Defendants Rosenberg, Hepinstall, and Rudert also submit that a regulatory exclusion like the one involved in this case contravenes public policy because such a provision misrepresents to a large segment of society the effectiveness of purchased liability insurance and because the exclusion serves to minimize the funds available to compensate depositors and investors. 25 A question of contract interpretation, including whether a regulatory exclusion violates public policy, is a question of law which this court reviews de novo. FDIC v. Aetna Casualty & Surety Co., 903 F.2d 1073, 1077 (6th Cir.1990). Generally, competent persons shall have the utmost liberty of contracting and ... their agreements voluntarily and fairly made shall be held valid and enforced in the courts. Twin City Pipe Line v. Harding Glass Co., 283 U.S. 353, 356, 51 S.Ct. 476, 477, 75 L.Ed. 1112 (1931); Fidelity & Deposit Co. v. Conner, 973 F.2d 1236, 1241 (5th Cir.1992). Thus, a court's refusal to enforce a contract on public policy grounds is limited to situations in which the contract violates some explicit public policy. United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 43, 108 S.Ct. 364, 373, 98 L.Ed.2d 286 (1987). Moreover, that public policy must be well defined and dominant, and is to be ascertained 'by reference to the laws and legal precedents and not from general considerations of supposed public interests.'  Id., quoting W.R. Grace and Co. v. International Union of United Rubber, Cork, Linoleum and Plastic Workers, 461 U.S. 757, 766, 103 S.Ct. 2177, 2183, 76 L.Ed.2d 298 (1983); Muschany v. United States, 324 U.S. 49, 66, 65 S.Ct. 442, 451, 89 L.Ed. 744 (1945). 26 Although a question of first impression in this circuit, the issue of whether a regulatory exclusion violates public policy has been addressed recently in several other circuits. In each instance, the appeals courts have concluded that the regulatory exclusion does not violate any public policy explicitly defined in applicable statutes. See, e.g., FDIC v. American Casualty Co., 995 F.2d 471, 473-74 (4th Cir.1993); Fidelity & Deposit Co. v. Conner, 973 F.2d 1236, 1243-44 (5th Cir.1992); St. Paul Fire and Marine Ins. Co. v. FDIC, 968 F.2d 695, 702-03 (8th Cir.1992); FDIC v. American Casualty Co., 975 F.2d 677, 682 (10th Cir.1992). The decisions in these cases have examined the provisions and legislative history of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 12 U.S.C. Secs. 1811-1833, and have concluded that FIRREA does not establish an explicit public policy that would invalidate the regulatory exclusion. St. Paul Fire and Marine Ins. Co. v. FDIC, 968 F.2d at 702. 27 In fact, the legislative history of FIRREA indicates that the FDIC initially suggested statutory language that would have allowed that agency to avoid any regulatory exclusion in a D & O liability policy. Congress rejected that proposal, however, and explicitly provided in the legislation: 28 The conservator or receiver may enforce any contract, other than a director's or officer's liability insurance contract or a depository institution bond, entered into by the depository institution notwithstanding any provision of the contract providing for termination, default, acceleration, or exercise of rights upon, or solely by reason of, solvency or the appointment of a conservator or receiver. 29 12 U.S.C. Sec. 1821(e)(12)(A) (emphasis added). Thus, as noted by the Fifth Circuit in Fidelity & Deposit Co. v. Conner, 973 F.2d at 1243, FIRREA cannot be relied upon to create or define a public policy against enforcement of a regulatory exclusion. 30 Other circuits have also addressed the specific challenges to the regulatory exclusion raised by the individual defendants in this case. In St. Paul Fire and Marine Ins. Co. v. FDIC, 968 F.2d at 702-03, for example, the Eighth Circuit rejected arguments that the regulatory exclusion frustrates the 'reasonable expectations' of the insured about the scope of coverage and that it is in effect a 'hidden major exclusion' which must be strictly construed against the insurer and in favor of coverage. In upholding the validity of the regulatory exclusion against such a contention, the court concluded: 31 In the present case, the regulatory exclusion was not hidden in the policy. As discussed above, the terms of the regulatory exclusion were plain and unambiguous. Moreover, as noted by the district court, this is not a case which involves disparity in bargaining power; the insured parties were a bank and its senior management, one of whom was a licensed insurance agent. 32 Id. Similarly, in the present case, the regulatory exclusion was not hidden in the policy, but was prominently displayed on a separate page of the quotation as a Limitation Of Coverage. Also, the insureds were officers and directors of a bank, and one of the named defendants, Donald Rudert, was even a co-owner of the insurance agency that secured the D & O policy for First State Bank. 33 The individual defendants' second argument that the regulatory exclusion violates public policy--the assertion that enforcement of the exclusion would diminish the funds available to investors and depositors--has also been rejected by another circuit court. In addressing a similar contention, the Tenth Circuit determined simply that Congress did not choose to provide a clear statement of policy regarding the validity of regulatory exclusions. FDIC v. American Casualty Co., 975 F.2d at 682. In fact, the court noted that relevant legislative history explicitly states that the intent of Congress is to remain neutral on these matters. Id., quoting 135 Cong.Rec. S10182, S10198 (101st Cong., 1st Sess. August 4, 1989). 34 Because no well-defined and dominant public policy against enforcement of regulatory exclusions has been articulated by Congress in FIRREA or in other relevant legislation, we decline to formulate such a policy by judicial edict. Furthermore, we note that by including a regulatory exclusion in its D & O policy, American Casualty is simply offering lesser insurance coverage, presumably at a lower price. Had the director defendants insisted upon insurance coverage without the regulatory exclusion, they surely would have expected to pay more for such coverage. Recognition of a public policy against D & O liability insurance containing a regulatory exclusion would, in effect, either require a particular, high-quality form of D & O insurance, or else require insurers to furnish a level of insurance coverage for which they will not be paid. Neither result is supportable public policy. 35