United States Court of Appeals,
Fifth Circuit.
No. 93-3815.
FEDERAL DEPOSIT INSURANCE CORPORATION, as Manager of the Federal
Savings & Loan Insurance Corporation Resolution Fund, Plaintiff-
Appellant,
v.
Peter E. DUFFY and New England Insurance Company, Defendants-
Appellees.
NEW ENGLAND INSURANCE COMPANY, Plaintiff-Appellee,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, as Manager of the Federal
Savings & Loan Insurance Corporation Resolution Fund, Intervenor-
Defendant-Appellant.
March 9, 1995.
Appeals from the United States District Court for the Eastern
District of Louisiana.
Before SMITH and EMILIO M. GARZA, Circuit Judges, and STAGG,1
District Judge.
TOM STAGG, District Judge:
The Federal Deposit Insurance Corporation ("FDIC") appeals
from the district court's grant of summary judgment in favor of
appellee, New England Insurance Company ("New England"). For the
reasons set forth below, we affirm the judgment of the district
court.
FACTS
I. PROCEDURAL HISTORY.
This case has a convoluted procedural history and has been
1
District Judge of the Western District of Louisiana,
sitting by designation.
1
ruled on by a panel of this court twice before on other aspects of
the litigation. The decision now on appeal involves three rulings
issued in two prior trials. The first ruling was in an action
commenced on November 21, 1986 by the Federal Savings and Loan
Insurance Corporation ("FSLIC") against John Mmahat, the law firm
of Mmahat & Duffy, and New England Insurance Company. The firm of
Mmahat & Duffy was composed of five partners—John Mmahat, Peter
Duffy, Marvin Opotowsky, Vallerie Oxner, and Annabelle Walker, and
two associates—Noel Vargas and N. Eleanor Graham. New England
issued a professional liability policy to Mmahat & Duffy for the
period during which the alleged wrongdoing occurred.
The FSLIC's suit alleged that John Mmahat and his law firm
committed legal malpractice and breached fiduciary duties by
advising Gulf Federal Savings and Loan ("Gulf Federal") to make
loans in violation of federal regulations. There was evidence that
Mmahat advised Gulf Federal to disregard federal law concerning
limitations on loans to one borrower regulations, even after
warnings by the Federal Home Loan Bank Board. The evidence at
trial indicated that Mmahat encouraged these loans to generate fees
for his firm. The jury found that Mmahat and Mmahat & Duffy had
committed malpractice and breached fiduciary duties owed to Gulf
Federal. Damages of $35 million were awarded.
The question of insurance coverage was reserved for the court,
and the district court ruled on December 28, 1988 that the policy
of insurance issued to Mmahat & Duffy by New England did not
provide coverage for the $35 million judgment. That ruling was
2
based on an exclusion in the policy for any claim "that results in
a final adjudication that any Insured has committed a dishonest,
fraudulent or malicious act, error, omission or personal injury
with deliberate purpose and intent." This court affirmed the
district court's ruling in FDIC v. Mmahat, 907 F.2d 546 (5th
Cir.1990).
The second ruling occurred several months later in an action
in which the FDIC, as successor to the FSLIC, brought suit against
Peter Duffy and New England, seeking to recover from Duffy his
virile share of the $35 million judgment. The district court
dismissed the suit sua sponte based on a finding of res judicata.
The FDIC appealed that ruling, and a panel of this court reversed
and remanded in FDIC v. Mmahat, 960 F.2d 1325 (5th Cir.1992). This
court reasoned that in the subsequent suit against Duffy, the FDIC
merely sought to collect an existing judgment in its favor.
Mmahat, 960 F.2d at 1329. Accordingly, the suit did not require
readjudication of the malpractice claim and thus was not barred by
res judicata.
Following the remand, New England filed a motion for summary
judgment, which was granted by the district court. That third
ruling is now on appeal before this court.
II. THE DISTRICT COURT'S RULING AND THE INSURANCE POLICY.
The district court granted summary judgment based on four
grounds: 1) the New England policy is void ab initio because of
material misrepresentations of the risk; 2) the policy does not
provide coverage for the judgment based on a "prior acts"
3
exclusion; 3) the FDIC has no standing to raise waiver as a
defense in this case; and 4) there was no waiver by New England.
A. THE DISTRICT COURT'S CONCLUSION THAT THE POLICY IS VOID AB
INITIO
The application for insurance answered by Mmahat & Duffy
contained the following question:
Is the proposed insured aware of any prior incident, act,
error or omission which there is reason to suppose might fall
within the scope of the proposed insurance?
Section III(E) of policy. Preceding the signature line of the
application is the following paragraph:
The applicant declares that to the best of his knowledge of
all persons to be insured the statements set forth herein and
in any attachments made hereto are true and no material facts
have been suppressed or misstated.
The application defines "applicant" as "all Lawyers associated with
the firm." New England successfully argued to the district court
that the finding of legal malpractice and breach of fiduciary duty
against Mmahat conclusively established that he was aware of "prior
acts" which might fall within the scope of the New England policy.
Therefore, a material misrepresentation was made when Mmahat &
Duffy answered "no" to Section III(E).
B. THE DISTRICT COURT'S FINDING THAT THE JUDGMENT WAS EXCLUDED FROM
COVERAGE UNDER THE POLICY
Alternatively, the district court found that coverage was
excluded by Section I, subparagraph I(A)(2)(b)(ii) of the policy.
This section was entitled "INSURING CLAUSES" and stated that the
policy provided coverage for prior acts only if, prior to the
commencement date of the policy, "the firm's management committee
or governing body, howsoever designated, or any member thereof
4
designated in the application, had no reasonable basis to believe
that any Insured had breached a professional duty." The district
court concluded that Mmahat was on the management committee of the
firm and was a partner designated in the application for coverage.
Accordingly, his knowledge that he had breached a professional duty
caused the judgment to be excluded from coverage.2
C. THE DISTRICT COURT'S RULINGS ON WAIVER
The district court rejected the FDIC's argument that New
England had waived its right to assert the defenses of material
misrepresentation and non-coverage against Duffy. This conclusion
was based on the district court's finding that Louisiana law holds
that a third party not in privity to a contract lacks standing to
argue that one of the parties to the contract waived its rights
under the contract. Alternatively, the lower court found that New
England's actions in this case did not constitute waiver.3
ANALYSIS
I. DOES THE FDIC HAVE STANDING TO RAISE THE ISSUE OF WAIVER?
We review the district court's award of summary judgment de
novo. MacDonald v. Monsanto Co., 27 F.3d 1021, 1023 (5th
Cir.1994); FDIC v. Myers, 955 F.2d 348, 349 (5th Cir.1992).
The FDIC argued to the district court that New England had
waived its defenses of material misrepresentation and exclusion
2
The policy defined "insured" as Mmahat & Duffy and any
employee, partner, officer, or director of the firm.
3
As will be discussed later, we do not reach the issue of
waiver and, accordingly, express no opinion with respect to the
correctness of the district court's ruling on the issue.
5
from coverage. The district court reasoned that because the FDIC
was not party to the insurance contract, it had no standing to
raise the issue of waiver. In so finding, the court relied on the
Louisiana Direct Action Statute and several cases. The court
concluded that in limited cases of post-claim breaches of an
insurance policy, an injured third party has standing to sue. The
district court reasoned that because New England's defenses of
material misrepresentation and exclusion under the policy rely on
acts that occurred before the policy was entered into, there was no
standing.
The district court analogized the situation to cases involving
whether causes of action were available to third parties rather
than whether a third party could argue that the insurer waived a
defense to the policy. New Zealand Ins. Co. v. Holloway, 123
F.Supp. 642 (W.D.La.1954) merely found that material
misrepresentations void the policy ab initio, even with respect to
innocent third parties who have been injured. Randall v. Lloyd's
Underwriter's, 602 So.2d 790 (La.App. 4th Cir.1992) concluded that
a third party not in privity to the insurance policy could not
maintain an action in contract against the insurance company.
Harrelson v. La. Pacific Corp., 434 So.2d 479 (La.App. 2d Cir.1983)
similarly held that absent privity, an insurance company can not
take advantage of a plaintiff's waiver of his rights against a
separate insurance company. Finally, Guillory v. Gulf South
Beverages, Inc., 506 So.2d 181 (La.App. 5th Cir.1987) found that a
third party could not obtain penalties and attorneys' fees from an
6
insurance company for arbitrary refusal to pay a claim. The court
reasoned that the authority for an award of attorney's fees was a
statutory provision that provided that the insured could obtain the
fees.
Contrary to the foregoing situations, the Louisiana Direct
Action Statute creates a right of action in favor of an injured
third party against the insurer of the wrongdoer. La.R.S. 22:655
("The injured person ... shall have a right of direct action
against the insurer...."); Shockley v. Sallows, 615 F.2d 233, 238
(5th Cir.), cert. denied, 449 U.S. 838, 101 S.Ct. 113, 66 L.Ed.2d
44 (1980). The Shockley court stated that:
Defendant insists that there was no "privity" between the
insurer and the plaintiff. When "privity" was a talismanic
word, courts recognized that an enforceable right in a third
party beneficiary might be created by statute. That is
precisely what the Louisiana Legislature did. The statute, by
its terms, is a part of the policy and creates a contractual
relationship which inures to the benefit of any and every
person who might be negligently injured by the insured as
completely as if such injured person had been specifically
named in the policy.
Shockley, 615 F.2d at 238, citing Dixon v. Shockley, 356 So.2d 96
(La.App. 1st Cir.1978).
We conclude that the district court erred in finding that the
FDIC did not have standing to raise the issues of waiver and
misrepresentation. Accordingly, the judgment of the district court
is reversed with respect to this issue.
II. WAS THERE A KNOWING WAIVER BY NEW ENGLAND?
Because the district court addressed the issue of whether New
England had waived its rights under the policy, we address this
issue. The FDIC argues that the handling of other claims by New
7
England operated as a waiver of its defenses to the policy.
Waiver is the "intentional relinquishment of a known right,
power, or privilege." Steptore v. Masco Constr. Co., 643 So.2d
1213, 1216 (La.1994); See also Tate v. Charles Aquillard Ins. &
Real Estate, Inc., 508 So.2d 1371, 1373 (La.1987). Reliable proof
of waiver is necessary, and the burden is on the party claiming
waiver to establish its existence. Tate, 508 So.2d at 1375. The
district court concluded that the only acts by New England which
would be relevant to waiver in this case were New England's
handling of the Duffy claim. Both Duffy and Opotowsky testified in
deposition that New England did not communicate to them that it was
waiving any defenses. Moreover, New England did not provide a
defense to Duffy. The district court also noted that in the
previous Mmahat case, New England issued a letter that indicated
that it was reserving its rights.
The FDIC argues that New England has been a party to this
litigation since 1986, and that Mmahat was adjudged to have been
dishonest in 1988. However, New England did not raise the defense
that the policy was void until 1992, and it did not send a letter
reserving its rights to assert that defense until 1993. The FDIC
points to New England's statement in the second Mmahat trial that
it was "putting an end to the litigation without reservation of any
claims against any of its insureds, except as regards the appeal of
the Phase I judgment." The FDIC also notes that New England has
continued to pay claims under the policy, which is inconsistent
with its position that the policy is void ab initio.
8
We agree with the district court that New England did not
waive its defenses under the policy. Conduct in paying one claim
under a policy does not prevent the insurer from raising defenses
to the policy. Monju v. Continental Cas. Co., 487 So.2d 729, 732
(La.App. 5th Cir.1986). La.R.S. 22:651 specifically provides that
the following acts by an insurer do not constitute a waiver under
any provision of a policy:
(1) Acknowledgment of the receipt of notice of loss or
claim under the policy.
(2) Furnishing forms for reporting a loss or claim, for
giving information relative thereto, or for making proof of
loss, or receiving or acknowledging receipt of any such forms
or proofs completed or incompleted.
(3) Investigating any loss or claim under any policy or
engaging in negotiations looking toward a possible settlement
of any such loss or claim.
La.R.S. 22:651. In 1986 New England sent a letter reserving its
rights under the policy. The FDIC seeks to make the distinction
that the letter never stated that New England reserved its rights
to void the policy, but we conclude that no such technical language
is required. The insureds and the FDIC were aware that although
New England was providing a defense for its insureds, it denied
liability. The judgment of the district court is affirmed on this
issue.
III. IS THE POLICY VOID AB INITIO ?
Under Louisiana law, an insurance policy is null from its
inception if a material "oral or written misrepresentation or
warranty [is] made in the negotiation of an insurance contract, by
the insured in his behalf ... [if] the misrepresentation or
9
warranty is made with the intent to deceive" or if it would have
affected the insurer's decision to proceed with the contract or
with the rate. Mazur v. Gaudet, 826 F.Supp. 188, 193
(E.D.La.1992), citing Estate of Borer v. Louisiana Health Service
& Indemnity Co., 398 So.2d 1124, 1125 (La.1981); see also
La.Rev.Stat. 22:619.4 The district court concluded that the
insured's negative answer to Section III(E) of the insurance
application regarding prior acts was a material misrepresentation
made with the intent to deceive. FDIC v. Duffy, 835 F.Supp. 307,
314 (E.D.La.1993). Specifically, the court noted that the jury
verdict finding that Mmahat had committed malpractice and breached
his fiduciary duty was binding upon the FDIC, and thus the FDIC was
judicially estopped from arguing otherwise. Id.
In essence, the district court ruled that the jury verdict
that Mmahat committed intentional acts to gain monetary advantage
for his law firm negated the necessity of a factual inquiry on the
issue of whether Mmahat intended to deceive.5 The district court
4
La.R.S. 22:619(A) provides that: "Except as provided in
Subsection B of this Section and R.S. 22:692, and R.S. 22:692.1,
no oral or written misrepresentation or warranty made in the
negotiation of an insurance contract, by the insured or in his
behalf, shall be deemed material or defeat or void the contract
or prevent it attaching, unless the misrepresentation or warranty
is made with the intent to deceive." (emphasis added).
5
The district court also noted that Mmahat himself never
signed the application. The applicant for the insurance was the
law firm of Mmahat & Duffy, and Marvin Opotowsky signed the
application as a partner of the firm. Section III(E), the
question at issue, is phrased with respect to whether the
"insured" is aware of any prior incident. The applicant, by
signing the form, declares "that to the best of his knowledge of
all persons to be insured the statements set forth herein and in
any attachments made hereto are true and no material facts have
10
stated that:
The Court ... has no hesitancy under the undisputed facts in
concluding that the misrepresentation regarding prior acts in
the application for coverage by and on behalf of the partners
of M & D was material to the risk, was false, and was made
with intent to deceive for the purpose of securing insurance
coverage. The Court is further of the opinion that based upon
the undisputed facts, no reasonable trier of fact could
conclude otherwise.
....
The findings of intentional dishonest acts in the final
judgment of the Mmahat case are binding upon the FDIC, so as
to preclude it from relitigating issues resolved by that
judgment. The doctrine of judicial estoppel precludes a party
in a legal proceeding from asserting a position contrary to a
position taken by the party in a prior proceeding.
....
It would be most unusual if not unprecedented for a court to
find that a person did not have actual knowledge of his own
intentional dishonest acts. The law of this case is that
Mmahat, an insured under the New England policy, prior to the
application for professional liability coverage in November of
1985 committed intentional dishonest acts from which both he
and M & D benefitted. This Court's prior findings of fact in
Mmahat case lead to but one reasonable conclusion, that John
Mmahat had knowledge of these prior "dishonest" acts, and
thus, it was falsely represented in the application that the
applicant (i.e., which by definition included all Lawyers
associated with the firm) were not aware of any prior incident
which there is a reason to suppose might fall within the scope
of the proposed insurance (i.e., professional liability
been suppressed or misstated." The "applicant" is defined to
include each lawyer associated with the firm. Opotowsky
acknowledged that he understood that his signature was made on
behalf of the entire firm. FDIC v. Duffy, 835 F.Supp. at 311, n.
9.
The district court cited Mazur v. Gaudet, 826 F.Supp.
188 (E.D.La.1992) for the conclusion that the insurance
policy issued by New England should not be applied
separately to each insured. Because there was no
severability clause in the contract, the policy was void as
to all insureds as opposed to those involved in wrongdoing.
We adopt the district court's reasoning on the severability
issue. FDIC v. Duffy, 835 F.Supp. at 315-16.
11
coverage).
FDIC v. Duffy, 835 F.Supp. at 314-15. The district court concluded
that a finding that Mmahat was intentionally dishonest in his
dealings with Gulf Federal was sufficient to establish as a matter
of law that he intended to deceive New England by answering the
"prior acts" question in the negative.
The FDIC argues that this ruling was erroneous, as the issue
of whether an insured acted with the intent to deceive necessarily
involves a factual inquiry. The FDIC argues that the proper
question is whether Mmahat intended to deceive by answering Section
III(E) in the negative.
The FDIC is correct that the jury did not find that Mmahat
intended to deceive by filling out the application. But, as noted
by the district court and a previous panel of the Fifth Circuit,
the FDIC was not content to rest on a pure legal malpractice
theory, instead choosing to pursue its theory of breach of
fiduciary duty.6 In so doing, it placed before the jury the
question of whether Mmahat intentionally committed a dishonest act.
Under Louisiana law, a cause of action for breach of
6
An earlier panel of this court noted that:
But, as the district court correctly pointed out, FDIC
"was not content to rest its case on whether Mmahat and
his firm were guilty of malpractice solely because of
improper advice.... Rather, [FDIC] included in its
argument and evidentiary presentation to the jury the
claim that Mmahat and his firm breached their fiduciary
duties as lawyers because of actions taken to generate
fees." We will not let FDIC undo what it has wrought.
Mmahat, 907 F.2d at 553.
12
fiduciary duty "requires proof of fraud, breach of trust, or an
action outside the limits of the fiduciary's authority." Gerdes v.
Estate of Cush, 953 F.2d 201, 205 (5th Cir.1992).
The dominant characteristic of a fiduciary relationship is the
confidence reposed by one in the other and [a person]
occupying such a relationship can not further his own
interests and enjoy the fruits of an advantage taken of such
a relationship. He must make a full disclosure of all
material facts surrounding the transaction that might affect
the decision of his principals.
Plaquemines Parish Comm'n Council v. Delta Development Co., Inc.,
502 So.2d 1034, 1040 (La.1987). In this case, the jury found that
Mmahat's failure to disclose that he was acting for the benefit of
his law firm amounted to a breach of fiduciary duty. The
definition of breach of fiduciary duty in Louisiana requires that
the act constituting the breach be intentional. As noted by the
district court, a person is necessarily aware of his intentional
acts. Accordingly, we conclude that the jury verdict declaring
that Mmahat breached his fiduciary duty is dispositive on the issue
of intent to deceive.7
CONCLUSION.
After concluding that the New England policy was void ab
initio because of material misrepresentations of the risk, the
district court went on to find that a separate exclusion in the
policy precluded coverage for the acts of Mmahat in this instance.
7
We also note that this court has already affirmed the
district court's finding that the verdict against Mmahat was
excluded from coverage based on the exclusion in the policy for
any claim "that results in a final adjudication that any Insured
has committed a dishonest, fraudulent or malicious act, error,
omission or personal injury with deliberate purpose and intent."
Mmahat, 907 F.2d at 553.
13
The district court then found that the FDIC did not have standing
to raise the issue of waiver, but that, in any event, there was no
waiver by New England. Because the first rationale for the
district court's ruling is dispositive of this case, we need not
address appellant's remaining arguments. The ruling of the
district court is AFFIRMED.
14