F.D.I.C. v. Fidelity & Deposit Co. of Maryland ( 1995 )

United States Court of Appeals,
Fifth Circuit.
No. 93-3758.
FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity,
Plaintiff-Appellee,
v.
FIDELITY & DEPOSIT COMPANY OF MARYLAND, Defendant-Appellant.
Feb. 27, 1995.
Appeal from the United States District Court for the Middle
District of Louisiana.
Before HIGGINBOTHAM, SMITH and PARKER, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Fidelity & Deposit Company of Maryland ("F & D") appeals a
judgment entered pursuant to a jury verdict in favor of the Federal
Deposit Insurance Corporation ("FDIC") 827 F. Supp. 385. We find no
reversible error and affirm.
I.
A.
F & D was the fidelity bond insurer of the now defunct Capital
Bank and Trust Co. ("Capital" or "Bank") in Baton Rouge. Capital
went bankrupt in October 1987 as a result of the fraudulent acts of
its chief lending officer, Allie Pogue.
In late 1986, Capital suspected that Pogue was making loans in
exchange for bribes. Richard Easterly, its president, became
suspicious of Pogue in August 1986. Easterly called upon Susan
Rouprich, Capital's vice president and in-house attorney, and the
Bank's internal audit department under Paula Laird, to investigate.
1
The resulting report indicated that there were a number of
undisclosed business relationships between Pogue and some of the
loan customers.
Soon after the report, Easterly, purportedly contemplating the
prompt notice-of-loss requirement in the Bank's fidelity bond,
prepared and filed a notice-of-loss letter with F & D. In February
1987, Capital filed a proof of loss that detailed some of the loans
that Pogue had approved to persons from whom he had received
financial benefits.
B.
There are four main groups of loans at issue in this case that
involved improprieties by Pogue.
Jimmy Scott loans
Jimmy Scott and his affiliates obtained millions of dollars in
loans from Capital, including the disputed Carrol Herring loan.
All of these loans were approved by Pogue and certainly resulted in
a major loss to Capital. Jimmy Scott bribed Pogue into approving
the loans by buying him a duplex and giving him gifts.
The Herring deal was a $375,000 loan that Pogue arranged from
Capital to Carrol Herring. The loan proceeds were utilized in a
series of transactions, through attorney J. Glenn Dupree, to buy
property from Pogue and pay off Pogue's mortgage on the property.
Pogue and Dupree were indicted and pled guilty to giving and taking
a kickback on the Herring loan.
LAREEL loans
Pogue and one of his customers, Wayne Bunch, became partners
2
in several business ventures, including Aspen Partnership, which
owned a four-plex in Baton Rouge. The partnership owed a
$136,101.61 mortgage on the property, with a balloon payment for
the balance due at the end of September 1986. Because Bunch was in
financial trouble, Pogue developed a scheme to rehabilitate their
finances.
The Aspen Partnership sold the four-plex to Thomas Keene, who
was the operative of Louisiana Real Estate Equity, Limited
("LAREEL"). Keene then syndicated the project to some investors.
Keene paid off the Aspen Partnership loan with a personal check,
using funds provided by LAREEL. Pogue greatly benefited from this
sale.
Following this transaction, the LAREEL loans occurred. LAREEL
agreed to "syndicate" other Bunch projects by offering the units to
"investors" who put no money down, but signed notes to Capital for
amounts far in excess of Bunch's liability on the units. LAREEL
and Keene pocketed the excess cash in the loans. Pogue obtained
the individual investor financing from Capital.
Pogue recommended to the executive committee of Capital that
the series of loans be made to the LAREEL investors on the Bunch
projects, but never disclosed that he had recently benefited from
actions by LAREEL with respect to the four-plex. LAREEL and Keene
greatly profited from the LAREEL loans.
Pogue knew that several of the "investors" were not
credit-worthy. Even though several of the LAREEL loan applications
were rejected by one loan officer, Pogue ignored the recommendation
3
and ordered that the loans be made. Keene refused to testify at
the trial, asserting his Fifth Amendment privilege when questioned
about the loans.
Quadrant/Thompson loans
In July 1984, Pogue and Bunch sold a four-plex to the Quadrant
Partnership, whose partners were Theodore Jones, an attorney, and
Robert Killingsworth and Jimmy C. Thompson, two real estate
promoters. All were loan customers of Capital. Quadrant assumed
a $135,291 mortgage owed by Pogue and Bunch on the four-plex and
was supposed to pay $20,000 in cash to Pogue, but only $6,666 in
fact was paid. A note for the balance secured by a second mortgage
on the four-plex was pledged for the $13,334 balance.
On the day the sale closed, Pogue approved a $12,000 loan by
Capital to Quadrant for the stated purpose of a down payment on the
purchase of a four-plex for syndication purposes. A letter from
Quadrant to the attorney for the bank that held the first mortgage
on the property stated that the acquisition of the property was
done as an accommodation to Pogue. The "accommodation" eventually
resulted in over $1,000,000 in loans to support syndications by
Quadrant and its related entities, resulting in significant losses.
Pogue never disclosed his personal dealings with Quadrant to
Capital.
Robert Harger loans
In late September 1982, Pogue and Bunch sold a group of
fourplexes for $725,000 to Oakbourne Apartments Partnership, Ltd.,
a company owned by one of Pogue's Capital loan customers, Robert
4
Harger and Associates. Oakbourne assumed the $545,000 mortgage on
the property, though Pogue and Bunch remained personally liable on
the loan. According to the sales agreement, $180,804 was to be
paid in cash, and the rest was to be paid by the assumption of the
mortgage. In reality, only $15,804 was paid in cash, and Oakbourne
issued a $165,000 note to Pogue and Bunch, secured by a second
mortgage on the property.
Capital loaned the Harger company money, approved by Pogue,
while these dealings were ongoing. Harger eventually ceased
payments on the $545,000 debt, and the lender began to pressure
Pogue and Bunch. Harger, however, continued to pay Pogue on the
$165,000 note. The loans, which Pogue approved from Capital to
Harger, allowed Harger more easily to pay Pogue the money it owed
him and to shelter him from liability on the first mortgage.
Pogue resigned from Capital effective at the end of August
1986. He was hired as the president of Acadia State Bank
("Acadia") in Baton Rouge. Acadia also made loans to Harger after
Pogue arrived. Proceeds were used to catch up on the $545,000 loan
on which Pogue and Bunch were personally liable.
C.
Capital's chairman, Embree Easterly, and its president,
Richard Easterly, testified that if they had known of Pogue's
personal relationships with loan clients, they would not have
allowed him to handle loan decisions for those persons or entities.
Following Capital's filing of the proof of loss, F & D refused to
pay the Bank's claim under the fidelity bond. As a result, Capital
5
filed suit against F & D in April 1987. The bond expired on
October 1, 1987; the Bank failed at the end of October 1987. The
FDIC took receivership of the Bank and stepped into its shoes for
purposes of the lawsuit.
The trial lasted for three weeks in November 1992. The jury
was given 27 separate verdict forms corresponding to 27 separate
loan transactions. Verdicts were returned in favor of the FDIC on
17 of the loan transactions, totaling $5.313 million. Because the
limit on the bond is $4 million, the district court entered final
judgment for $4 million plus interest.
II.
The fidelity bond in this case covers "[l]oss resulting
directly from the dishonest or fraudulent acts of an employee
committed alone or in collusion with others ... with the manifest
intent to cause the Insured to sustain such loss." The bond
applies "to loss discovered by the Insured during the bond period."
After the evidence had been presented at trial, the jury was
presented with an interrogatory for each questionable loan. Each
interrogatory contained four separate questions with respect to the
particular loan:
1. Did Allie Ray Pogue commit a dishonest or fraudulent act in
connection with this loan?
2. Did a loss result directly from Allie Ray Pogue committing a
dishonest or fraudulent act with the manifest intent to cause
Capital Bank a loss and to obtain a financial benefit for
himself or others?
3. Did discovery, as defined in the Bond, occur on this loan prior
to October 1, 1987?
4. What is the amount of the loss on this loan resulting directly
6
from Allie Ray Pogue's dishonest or fraudulent acts?
The FDIC had to prove four distinct elements for each loan.
First, each loss must have been discovered within the bond period.
The relevant section of the bond reads:
This bond applies to loss discovered by the Insured during the
bond period. Discovery occurs 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 loss may not then be
known....
In interpreting these clauses, courts have held that
"discovery of loss does not occur until the insured discovers facts
showing that dishonest acts occurred and appreciates the
significance of those facts; suspicion of loss is not enough."
FDIC v. Aetna Casualty & Sur. Co., 903 F.2d 1073, 1079 (6th
Cir.1990) (citing, inter alia, United States Fidelity & Guar. Co.
v. Empire State Bank, 448 F.2d 360, 364-66 (8th Cir.1971)). See
also California Union Ins. Co. v. American Diversified Sav. Bank,
948 F.2d 556, 564 (9th Cir.1991).
The FDIC had to prove dishonest or fraudulent acts on Pogue's
part and causation between the loss and the fraudulent or dishonest
acts. See First Nat'l Bank v. Lustig, 961 F.2d 1162 (5th
Cir.1992). The FDIC also had to show the amount of the loss
resulting from the fraud.
F & D challenges a number of the jury's findings for certain
loans. In order to obtain a reversal, F & D must show that no
reasonable juror could have found in favor of the FDIC even when
viewing all of the evidence in the light and with all reasonable
inferences most favorable to the FDIC. Boeing Co. v. Shipman, 411
7
F.2d 365, 374 (5th Cir.1969) (en banc).
A.
F & D asserts that the FDIC did not prove that the Bank
discovered the losses from the LAREEL and Herring loans within the
bond period. F & D claims that the proof of loss, which Capital
filed, did not pinpoint these particular loans as losses. The FDIC
counters that these losses were part of one huge "loss" that
resulted from all of Pogue's dishonest actions. The FDIC argues
that, even if the Herring and LAREEL transactions were
later-discovered, they were part of the same "loss" that was
discovered during the bond period.
Section Four of the bond plainly limits the coverage to "loss
discovered by the Insured during the bond period." Section Three
states that the total liability is limited to loss resulting from
"all acts or omissions by any person (whether Employee or not) or
all acts or omissions in which such person is implicated." Thus,
"loss" is a broad term that covers all losses from the acts of an
employee, but the "loss" must be discovered within the bond period.
As a result, we conclude that Capital's proof of loss need not
have pinpointed every single loan loss. We, however, decline to
adopt the FDIC's broad suggestion. We are unwilling to create a
situation in which, as long as the FDIC can find some acts or
omissions within the bond period committed by the same actor, it
has unlimited time to investigate and add later losses caused by
unrelated actions. We instead will look for loans that arose out
of the same pattern of conduct or scheme that was originally
8
discovered. See, e.g., Howard, Weil, Labouisse, Friedrichs v. Ins.
Co. of N. Am., 557 F.2d 1055, 1059-60 (5th Cir.1977) (dishonesty
found in "totality of actions," loss sustained was "a single loss
albeit the product of more than one act" though part of "a single
ongoing episode"). We also note that under the broad language from
Section Four of the contract, to uphold the finding on this issue,
we must decide only that a jury could have concluded that a
reasonable person, within the bond period, given the information
available, would have "assum[ed] that a loss covered by the bond
had been incurred or [would] be incurred, even though the exact
amount or details of loss" were not known then.
There was plainly enough evidence from which the jury properly
could have concluded that the LAREEL and Herring transactions were
discovered within the Bond period. The proof of loss implicated
parties who were involved in the transactions that constituted the
LAREEL and Herring loans. Scott, who received money from the
Herring loan, was a prominent part of the proof of loss; Keene,
who was involved in the LAREEL transaction, was also mentioned in
conjunction with Bunch.
Strictly speaking, the proof of loss did not mention every
single action by Pogue that had something to do with the LAREEL and
Herring transactions. Nevertheless, because the FDIC did present
evidence that at least some of the acts and omissions related to
the LAREEL and Herring transactions were discovered during the
period, we will not disturb the jury verdict.
B.
9
F & D argues that the FDIC presented no evidence that Pogue
was involved in approving the Morning Glory/LAREEL loans.1 F & D
claims that no record evidence shows that Keene and Pogue knew each
other at the time of the Morning Glory loan. Moreover, F & D
asserts that no one at the Bank testified that the Bank would not
have approved the Sable Chase and Bayou Fountain loans had it known
about the Aspen Partnership sale to Keene. Finally, F & D contends
that the FDIC never proved that Pogue intended to cause losses on
the LAREEL loans.
The evidence indicates that Pogue and Bunch, who was a Capital
loan client, were business partners in more than one venture in
early 1986 when the LAREEL loans began. Evidence indicates that
Pogue and Bunch sold a piece of property to the LAREEL operative,
Keene, in February 1986. Keene paid off Pogue's personal debt on
a loan to the Aspen Partnership, which was Pogue and Bunch's
venture.
The LAREEL loans for the Sable Chase and Bayou Fountain
projects were transactions in which LAREEL agreed to find
"investors" for Bunch projects. The investors, who put no money
down, received loans from Capital. Pogue allowed Capital to make
the loans with the knowledge that the "investors" were largely
uncreditworthy, that the income from the projects would not support
1
The LAREEL loans were subdivided into three parts related
to three developments: Morning Glory, Sable Chase, and Bayou
Fountain. There were actually 66 different loans made on the
three projects, but the parties agreed that they would be tried
as three transactions, because each of the 66 was identical with
respect to its respective project.
10
the large loan payments, and that the Bank probably would suffer a
loss as a result. Moreover, Keene and LAREEL made substantial
commission income from the loan activity.
Pogue used his position to pressure the loan officers working
under him into approving LAREEL loans that they had previously
rejected. Pogue concealed his relationships with lending clients,
such as Bunch, from Capital's president and chairman, and they
would not have allowed him to approve loans if they had known. The
FDIC showed that Pogue was a sophisticated loan officer. The jury
might have inferred that he would not have approved the LAREEL
loans to the risky investors had he not had a personal stake in the
outcome.
F & D is correct, however, that the FDIC failed to show any
connection between Pogue and Keene with respect to the Morning
Glory transaction. The sale of the four-plex that occurred between
the Aspen Partnership and Keene was initiated in January 1986 and
closed in February. The Capital loans for the Morning Glory
condominiums occurred in January 1986, before the four-plex
transaction. By contrast, the loans for the Sable Chase and Bayou
Fountain projects occurred after the four-plex sale.
Moreover, the FDIC produced a memorandum from Pogue to the
executive committee of the Bank recommending approval of the Sable
Chase and Bayou Fountain loans.2 The memorandum occurred in March
2
The FDIC's mini-closing statement claimed that Pogue's
memorandum recommended the Sable Chase, Morning Glory, and Bayou
Fountain deals to the executive committee, but this is not
supported by the document.
11
1986, after the four-plex deal and the Morning Glory loans. The
memorandum to the executive committee recommending the approval of
the Morning Glory loans was from Mark Byouk and not from Pogue.
Testimony plainly indicated that proceeds from the Sable Chase deal
went directly to Keene, but evidence does not indicate that Keene
received proceeds from the Morning Glory deal.
Finally, Karl Daggett testified that he was ordered by Pogue
to approve investors for the LAREEL projects after he had rejected
many of the applications. Daggett's testimony, however, also
indicated that he was instructed to approve the loans by Pogue
sometime after the disbursement of Morning Glory funds.
Accordingly, we modify the judgment with respect to the Morning
Glory loans but affirm with respect to the other two LAREEL
projects.
C.
With respect to the Scott, Harger, and Quadrant/Thompson
loans, F & D claims that the causation standard that we approved in
First Nat'l Bank v. Lustig, 961 F.2d 1162 (5th Cir.1992), was not
met. Lustig requires that the FDIC show that a loan would not have
been made "but for" the fraudulent conduct of the employee. Id. at
1167-68. Moreover, F & D claims that the FDIC never showed a
dishonest act with respect to these other loans; rather, they
assert that only a pattern of dishonesty was shown.
As with the LAREEL loans, the FDIC presented evidence of
dishonest acts with respect to all of the loan groups. Scott
admitted to bribing Pogue to influence him to make loans. This was
12
a charge to which Pogue had pled guilty. The FDIC introduced the
letter in which Quadrant indicated that it purchased a four-plex as
an accommodation to Pogue. Harger testified as to the purchase of
four-plexes from Pogue and Bunch that Pogue did not disclose.
As indicated above, the FDIC presented testimony from Bank
officers that the loans would not have been made if they had been
aware of Pogue's personal relationships with the various clients.
Moreover, as before, Pogue's high position and sophistication could
have given rise to inferences that he would not have made several
of the loans if he had been honest. The jury might also have given
weight to the testimony of Pogue's subordinates that he cajoled
them into favoring certain borrowers. There was plainly enough
evidence presented to meet the causation requirement.
A general pattern of dishonesty, rather than a dishonest act
for each loan, is sufficient in this circuit. See Fidelity &
Deposit Co. v. USAFORM Hail Pool, Inc., 523 F.2d 744, 757 (5th
Cir.1975), cert. denied, 425 U.S. 950, 96 S. Ct. 1725, 48 L. Ed. 2d
194 (1976). "There does not have to be a finding of fraud or
dishonesty with respect to every disbursement." Id. Thus, as to
each group of loans, the jury was entitled to find that Pogue was
motivated by separate instances of bribery to make multiple loans.
III.
F & D argues that the February 1987 proof of loss did not
adequately satisfy the requirements of section 5(b) of the bond.3
3
Section 5(b) reads: "Within 6 months after such discovery
the Insured shall furnish to the underwriter proof of loss duly
sworn to with full particulars."
13
The main substance of F & D's claim is the same as the earlier
argument that we rejected, i.e., that the proof of loss did not
contain specific losses that were later added by the FDIC.
Furthermore, the purely factual issues of the adequacy and timing
of the proof of loss were raised only after the trial. F & D
claims that the issue was raised in its FED.R.CIV.P. 50 motion and
that it is an essential element of the bond claim.
There was not a specific ruling on the adequacy and timing of
the proof of loss. F & D did not ask for an instruction to the
jury on this issue. In fact, it does not appear that F & D even
argued this theory at trial. As a result, we reject this
assertion.
IV.
F & D claims that the jury's answers were inconsistent and
that, when inconsistent answers are given to special
interrogatories, the court must grant a new trial. Specifically,
F & D questions the finding of liability on the first
Quadrant/Thompson loan and not the other one and inconsistent
answers on the Scott and Robert Harger loans.
Jury verdicts are supposed to be reconciled, if possible, to
validate a verdict when answers appear to conflict. White v.
Grinfas, 809 F.2d 1157, 1161 (5th Cir.1987). "The test of
consistency is whether the answers may fairly be said to represent
a logical and probable decision on the relevant issues as
submitted." Central Progressive Bank v. Fireman's Fund Ins. Co.,
658 F.2d 377, 382 (5th Cir. Unit A Oct. 1981) (citation and
14
internal quotation marks omitted). There is nothing necessarily
inconsistent about the verdicts in this case, as the FDIC had to
prove each one of four elements with respect to each loan. The
proof certainly overlapped, as has been explained, but not on every
loan.
The twenty-seven special interrogatories essentially were
separate jury verdicts. The apparent "inconsistency" in this case
was not the type of inconsistency that is present where a jury
returns conflicting answers on necessarily related jury questions.
See, e.g., Royal Netherlands S.S. Co. v. Strachan Shipping Co., 362
F.2d 691 (5th Cir.1966), cert. denied, 385 U.S. 1004, 87 S. Ct. 708,
17 L. Ed. 2d 543 (1967). As a result, a new trial would be improper.
V.
F & D argues that the court improperly instructed the jury
that it could draw an inference from an invocation of the Fifth
Amendment privilege against self-incrimination by a non-party. F
& D claims that the FDIC never established corroborating evidence
linking Pogue to the loan claims before allowing the jury to draw
inferences.
There were several witnesses who purportedly had had
relationships with Pogue and who invoked the Fifth Amendment at
trial. Much of F & D's argument with respect to the lack of
corroborating evidence relates to the argument that the FDIC failed
to prove a dishonest act as to each of the loans claimed. We have
rejected this argument, supra. Moreover, the court instructed the
jury not to find liability based solely upon an adverse inference
15
from a witness's invocation of the Fifth Amendment.
F & D's main argument is that the court improperly allowed
the invocation of the Fifth Amendment, by a non-party or non-agent
of a party, to be the basis of an inference against a party. In
general, the decision as to whether to admit a person's invocation
of the Fifth Amendment into evidence is committed to the discretion
of the district court. Farace v. Indep. Fire Ins. Co., 699 F.2d
204, 210 (5th Cir.1983). The admissibility of a non-party's
exercise of the Fifth Amendment against a party, however, is a
legal question that we must review de novo. Nevertheless, if such
evidence is not inadmissible as a matter of law, the district
court's specific determination of relevance and its evaluation of
a potential FED.R.EVID. 403 problem are reviewed for abuse of
discretion.
F & D argues that inferences from the invocation of the Fifth
Amendment are not allowed when a non-party asserts the privilege.
We find no support for such a proposition. The Fifth Amendment
"does not forbid adverse inferences against parties to civil
actions when they refuse to testify in response to probative
evidence offered against them." Baxter v. Palmigiano, 425 U.S.
308, 318, 96 S. Ct. 1551, 1558, 47 L. Ed. 2d 810 (1976). We
acknowledge that no party has refused to testify in this civil
action, but "[a] non-party's silence in a civil proceeding
implicates Fifth Amendment concerns to an even lesser degree." RAD
Servs., Inc. v. Aetna Casualty & Sur. Co., 808 F.2d 271, 275 (3d
Cir.1986) (citing Rosebud Sioux Tribe v. A & P Steel, Inc., 733
16
F.2d 509, 521 (8th Cir.), cert. denied, 469 U.S. 1072, 105 S. Ct.
565, 83 L. Ed. 2d 506 (1984)).
Because there is no constitutional bar to the admission of
this evidence, it is admissible if it is relevant and not otherwise
prohibited by the rules. FED.R.EVID. 402. Certainly, evidence of
this nature is generally relevant. In this case, a jury could
determine that a witness who colluded with Pogue took the Fifth
Amendment to avoid disclosing that collusion. District courts must
evaluate each witness separately when making a relevance
determination; F & D fails, however, to identify specific
instances in this case where a witness's invocation of the Fifth
Amendment was irrelevant.
Under FED.R.EVID. 403, evidence will be excluded if its
probative value is substantially outweighed by the danger of unfair
prejudice. F & D has not identified how specific invocations of
the Fifth Amendment prejudiced it in this case. Rather, it argues
that the admission of this type of evidence is, in effect,
prejudicial as a matter of law.
F & D argues that it is improper to allow a non-party's
invocation of the Fifth Amendment to be used against a party when
that non-party is neither an agent nor an employee, officer,
director or voting member of the party. The concern is that a
non-party who stands in no special relationship to the party at the
time of trial may purposefully invoke the privilege solely to
discredit the party. The classic example would be a disgruntled
former employee who invokes the privilege to hurt his former
17
employer.4
Other circuits have held that the fact that the witness no
longer serves the party in an "official capacity" does not present
a bar to requiring the witness to assert the privilege in front of
the jury. See Cerro Gordo Charity v. Fireman's Fund Am. Life Ins.
Co., 819 F.2d 1471, 1481 (8th Cir.1987); RAD Servs., Inc., 808
F.2d at 274-79; Brink's Inc. v. City of New York, 717 F.2d 700,
707-10 (2d Cir.1983). In each of those cases, the witness was a
former employee of a company that was a party to the litigation.
While the court in Cerro Gordo Charity, 819 F.2d at 1481,
found that the ex-employee still retained some loyalty to the
party, thereby negating any danger of invocation of the privilege
solely for the purpose of harming the employer, the RAD Servs.
court found that the "absence of an opportunity to cross-examine
the invoker and the lack of proof regarding his continued loyalty
to the employer ... cannot per se exclude from the jury the
witness's refusal to testify." RAD Servs., 808 F.2d at 276.
4
See ROBERT HEIDT, The Conjurer's Circle—The Fifth Amendment
Privilege in Civil Cases, 91 YALE L.J. 1062, 1119-20 n. 214
(1982):
The fact of present employment serves primarily to
reduce the chance that the employee will falsely claim
to have engaged in criminal conduct for which the
defendant employer is liable. Any factors suggesting
that a former employee retains some loyalty to his
former employer—such as the fact that the employer is
paying for his attorney—would serve the same purpose.
See also Note, Adverse Inferences Based on Non-Party
Invocations: The Real Magic Trick in Fifth Amendment Civil
Cases, 60 NOTRE DAME L.REV. 370, 386-87 (1985) (arguing that
adverse inferences should not be drawn against employer when
ex-employee invokes privilege).
18
Similarly, we refuse to adopt a rule that would categorically
bar a party from calling, as a witness, a non-party who had no
special relationship to the party, for the purpose of having that
witness exercise his Fifth Amendment right. As the Third Circuit
indicated:
First, a witness truly bent on incriminating [a party] would
likely offer damaging testimony directly, instead of hoping
for an adverse inference from a Fifth Amendment invocation.
Second, the trial judge could test the propriety of an
invocation to ensure against irrelevant claims of privilege.
Third, counsel may argue to the jury concerning the weight
which it should afford the invocation and any inferences
therefrom.
Id. Thus, district courts will have to evaluate these situations
on a case-by-case basis.
In this case, any danger that the jury might have found that
Pogue had committed dishonest acts merely from his association with
witnesses who invoked the Fifth Amendment, thereby unduly
prejudicing F & D, was avoided by the instruction that the jury was
not to find liability absent evidence corroborating the
relationships between the invoking witnesses and Pogue.
There is no question that the evidence is relevant. F & D
fails to make a competent argument as to why it was unfairly
prejudiced by the admission of the evidence. In fact, it is the
invoking party who is generally thought to be the one unfairly
prejudiced in these situations. See HEIDT, supra, at 1124. In this
case, accordingly, there was no abuse of discretion.
F & D also argues that the district court erred by not
cautioning the jury that the Fifth Amendment may be invoked by an
innocent party. F & D correctly asserts that model jury
19
instructions do contain such a provision. When challenging a jury
instruction, a party must demonstrate that the charge as a whole
creates "substantial and ineradicable doubt whether the jury has
been properly guided in its deliberations." FDIC v. Mijalis, 15
F.3d 1314, 1318 (5th Cir.1994) (citation and internal quotation
marks omitted). Moreover, we will not reverse if we believe,
"based upon the entire record, that the challenged instruction
could not have affected the outcome of the case." Id.
F & D has not met the Mijalis standard, given the jury
instruction as a whole and the quantum of evidence produced by the
FDIC. The charge given in this case is substantially similar to
the instruction that the Third Circuit approved in RAD Servs. and,
even if erroneous, was harmless error.5
5
The district court in RAD Servs. used the following:
During the trial you also heard evidence by past
or present employees of the plaintiff refusing to
answer certain questions on the grounds that it may
tend to incriminate them. A witness has a
constitutional right to decline to answer on the
grounds that it may tend to incriminate him. You may,
but you need not, infer by such refusal that the
answers would have been adverse to the plaintiff's
interests.
RAD Servs., 808 F.2d at 277.
In this case, the court instructed:
A witness has a constitutional right to decline to
answer on the grounds that it might tend to incriminate
him. When a witness takes the Fifth Amendment, you may
draw an inference for or against a party in this case.
However, before you may draw such an inference, you
must follow the following analysis:
First, you must find by a preponderance of the
evidence that Mr. Allie Pogue, who was an employee of
20
VI.
F & D contends that the district court erred by admitting
evidence that the first loan that Pogue made as president of Acadia
was to a Harger company and that the funds were used to catch up on
payments of the $545,000 loan on which Pogue and Bunch were
personally liable. The court admitted the evidence as res gestae
of the acts at issue in the case and, in the alternative, as
FED.R.EVID. 404(b) "other acts" evidence showing evidence of intent,
plan, knowledge, and absence of mistake.
the bank, committed a dishonest or fraudulent act
within the meaning of the bond. You must make this
finding for each of the loans you are considering.
If you satisfy step one, before you can draw an
inference, you must also find by a preponderance of the
evidence that the witness, who took the Fifth
Amendment, acted in collusion with Mr. Pogue to commit
a dishonest or fraudulent act within the meaning of the
bond.
If you find by a preponderance of the evidence
that the witness acted with Mr. Pogue in committing a
dishonest or fraudulent act within the meaning of the
bond, then you may draw, but you are not required to
draw, an inference which is either favorable or adverse
to either party because of the fact that the witness
took the Fifth Amendment and refused to answer one or
more questions.
If you find that the witness was not acting with
Mr. Pogue in connection with a transaction, then you
may not draw an inference. Even if you do find that
Mr. Pogue was acting dishonestly or fraudulently within
the meaning of the bond and you find that the witness
was acting with Mr. Pogue in connection with a
transaction, you cannot base your verdict solely on
that adverse inference. In other words, an adverse
inference may not be the sole basis upon which you
might impose liability. You have to have other
corroborating evidence, whether documents or witnesses'
testimony, upon which you might impose liability.
21
The rule 404(b) ruling was not an abuse of discretion, and the
evidence was properly admitted. Strictly speaking, the doctrine of
"res gestae " (as traditionally understood) and rule 404(b) cannot
be alternative justifications. The old doctrine of "res gestae "
has been supplanted by FED.R.EVID. 803. Before the Federal Rules of
Evidence were promulgated, res gestae was understood to encompass
four distinct hearsay exceptions: "(1) declarations of present
bodily condition; (2) declarations of present mental state and
emotion; (3) excited utterances; [and] (4) declarations of the
present sense impression." Wabisky v. D.C. Transit Sys., 309 F.2d
317, 318 (D.C.Cir.1962). FED.R.EVID. 803 now explicitly accounts
for these exceptions.
In a normal situation, prior bad acts would have to pass rule
404(b) muster and, if a hearsay problem was raised, would have to
meet any hearsay objections. In this case, the court did not use
the term "res gestae " to mean an exception to the hearsay rule.
F & D acknowledges, and there is no question, that the evidence at
issue was not of the type that would raise a hearsay problem.
Instead, the court used the term "res gestae " to represent its
feeling that the evidence at issue actually dealt with acts that
were directly at issue in the case.6 In other words, the district
court held that Pogue's Acadia activity was a continuation of his
Capital activity.
6
The Court's usage is more akin to the traditional
non-hearsay use of res gestae, which covered conversations that
accompanied a financial transaction and tended to define and
"elucidate the nature of the transaction." Bank of Metropolis v.
Kennedy, 84 U.S. (17 Wall.) 19, 24, 21 L. Ed. 554 (1873).
22
We need not evaluate the propriety of this holding, as we find
that the court did not abuse its discretion in admitting the
evidence under rule 404(b). Moreover, F & D fails to show that it
had a substantial right affected by the admission of the evidence.
See United States v. Jimenez Lopez, 873 F.2d 769, 771 (5th
Cir.1989).
VII.
F & D argues that this is a fraud case and, therefore, that
the actions must be proved by clear and convincing evidence. The
FDIC counters that, while Pogue's dishonesty may have risen to the
level of fraud, the action between the FDIC and F & D is for breach
of contract. The Eighth Circuit has characterized cases like this
one as breach of contract actions and not fraud. See First Am.
State Bank v. Continental Ins. Co., 897 F.2d 319, 323 (8th
Cir.1990). We agree with the FDIC on this issue. The suit is on
the fidelity bond contract, which the FDIC alleges that F & D has
breached. No proof of fraud is technically required, especially
against F & D.
VIII.
F & D argues that the court's award of pre- and post-judgment
interest was erroneous. The parties agreed that Louisiana law
would govern this issue.
F & D contends that the court erroneously awarded interest
from April 29, 1987, the date that Capital filed suit, when most of
the losses had not yet been demanded. F & D claims that the proof
of loss, on file at that time, did not contain the LAREEL and
23
Herring losses, as earlier noted.
The district court held that under Louisiana law, pre-judgment
interest begins to accrue from the date of judicial demand,
regardless of whether the damages are unliquidated, disputed, or
not ascertainable until judgment. See Cotton Bros. Baking Co. v.
Industrial Risk Insurers, 941 F.2d 380, 391-92 (5th Cir.1991),
cert. denied, --- U.S. ----, 112 S. Ct. 2276, 119 L. Ed. 2d 202
(1992).
F & D urges that there was no default on the contract with
respect to the LAREEL and Herring losses at the time of the
original judicial demand. This argument is related to the earlier
claim that these losses had not been specifically discovered and
mentioned in the original proof of loss. Because there was
evidence that this wrongdoing had been timely discovered by the
Bank, the court's award was correct.
IX.
In summary, our reasoning on the Morning Glory loan reduces
the original losses awarded by $1,203,674.24 from $5,313,004.17 to
$4,109,329.93. Because this amount is still above the $4 million
limit on the fidelity bond, the judgment of the district court is
AFFIRMED.
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