(CN) — The 10th Circuit on Tuesday denied an FDIC appeal to recover on a crime bond held by the defunct New Frontier Bank of Greeley, Colo., in a cow-leasing scheme that led to the nation’s largest bank failure of 2009.
New Frontier Bank went into receivership in 2009 after it was found that its vice president and chief lending officer, Gregory Bell, had orchestrated multimillion-dollar loans for years, funneled through Johnson Dairy, then recruited people to take out more loans to buy cattle from the dairy and lease them back to the same company.
Bell was convicted of bank fraud, sentenced to 2½ years in federal prison and ordered to pay restitution.
The dairy went bankrupt in 2009, and then sued New Frontier Bank. The Colorado State Bank Commissioner closed the bank in April 2009 and appointed the Federal Deposit Insurance Corporation as receiver for the bank.
In 2013 the FDIC sued Kansas Bankers Surety Company, which held a financial institution crime bond for New Frontier Bank, seeking to recoup the losses from Bell’s fraud. The FDIC claimed that Bell pumped more than $37 million into the failing dairy while loaning $15 million to friends to buy cows from the dairy and lease them back for huge profits.
The insurer denied the claim, citing a bond condition which stated that the bond would terminate entirely upon the bank’s going into receivership, and claims could not be made unless a proof of loss with documentation was submitted to Kansas Bankers Surety before the cancellation.
A federal judge in Denver rejected the FDIC as well, agreeing with the insurer’s claim that a full proof of loss had not been submitted and accepted before the FDIC took over the bank, so the bond was terminated and no more claims could be made against it.
On Tuesday the 10th Circuit affirmed. Writing for a three-person panel, U.S. Circuit Judge Paul J. Kelly Jr. said that the FDIC’s claim of “non-standard language” in the bond’s contract is not valid, nor is the FDIC’s claim that Colorado law required it only to be in “‘substantial compliance’ with proof-of-loss requirements” to make a claim on the bond.
The FDIC had argued that as receiver for the bank “it ‘succeed[s] to — all rights, titles, powers, and privileges of the insured depository institution … with respect to the institution and all the assets of the institution,'” and so was entitled to pursue coverage under the bond as if the bank had not failed.(Punctuation as in ruling.)
But Kelly found that both federal and Colorado law “expressly permit provisions like Condition 14 [the termination clause] to limit the otherwise broad powers of receivers like the FDIC.” Also, the bond’s coverage had not fully vested before the FDIC took over, so neither the bank nor the FDIC ever had the right to enforce the bond in the first place.
Joining Kelly on the unanimous panel were U.S. Circuit Judges Monroe McKay and Carolyn McHugh.