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FDIC v. MOSKOWITZ

December 2, 1996

FEDERAL DEPOSIT INSURANCE CORPORATION, as successor to Resolution Trust Corporation, Receiver of United Savings Bank, F.S.B., Plaintiff,
v.
DONALD J. MOSKOWITZ, et al., Defendants.



The opinion of the court was delivered by: WOLIN

 WOLIN, District Judge

 This matter comes before the Court on the motion of Fidelity & Deposit Company of Maryland ("F&D"). Pursuant to Federal Rule of Civil Procedure 56, F&D moves for summary judgment on the claims brought against it by the Resolution Trust Corporation (the "RTC"), in its capacity as Receiver of United Savings Bank, F.S.B. ("United"). The Federal Deposit Insurance Corporation (the "FDIC") succeeded to the RTC and opposes this motion. The Court decides this motion on the parties' written submissions pursuant to Federal Rule of Civil Procedure 78. For the reasons expressed herein, F&D's motion for summary judgment will be granted.

 BACKGROUND

 History teaches that war comprises many battles; complex civil litigation is no different. In this case, when in May 1990 the Office of Thrift Supervision declared United insolvent and appointed the RTC as United's receiver, *fn1" war became inevitable. Indeed, the RTC first attacked on May 14, 1993, when after three years of investigating the cause of United's demise, the RTC filed a complaint against thirty-five defendants including certain of United's former officers, directors, appraisers, accountants, lawyers, borrowers and, most importantly here, United's fidelity bond carrier, F&D. Since 1993, the three dozen parties have waged a myriad of battles with varying results; some parties settled, others had defaults entered against them, and still others remain engaged with the FDIC.

 On the eve of trial, several of the nine remaining defendants have initiated final charges against the FDIC in the form of motions for summary judgment. F&D is one such defendant.

 As against F&D, the FDIC claims that United's losses resulted from the fraud and dishonesty of its employees and that those losses are covered by the Financial Institution Bond issued by F&D to United on May 18, 1989 (the "1989 Bond"). *fn2" Pursuant to the 1989 Bond, F&D agreed to indemnify United for losses resulting directly from dishonest or fraudulent acts committed by an employee so long as such acts were committed with the manifest intent (a) to cause United to sustain such losses and (b) to obtain financial benefit for the employee or other person or entity. Lombardi Aff. Ex. 1 at 2. The 1989 Bond provided coverage for losses discovered during the period of time between February 17, 1989 and February 17, 1990. *fn3"

 It is undisputed that United employees committed fraudulent acts which, to some extent, contributed to United's losses. *fn4" In fact, United's President, Donald Moskowitz ("Moskowitz"), and United's Controller were found guilty of criminal activity and were sentenced accordingly.

 F&D, however, refused recovery on the 1989 Bond. Thus, as part of its initial complaint in May 1993, the RTC sued F&D for breach of contract. F&D filed a counterclaim seeking rescission of the 1989 Bond on the grounds that, inter alia, United fraudulently induced F&D to issue the 1989 Bond by misrepresenting material information in the 1989 Bond application. On this same basis, F&D argues that it is entitled to summary judgment. In addition, F&D contends that summary judgment is appropriate because a reasonable finder of fact could not conclude that United discovered the losses during the 1989 Bond period. As discussed more fully below, the Court agrees with the former argument and disagrees with the latter.

 1. Facts Relevant to F&D's Misrepresentation Claim

 On or about December 20, 1988, United submitted a bond application to F&D. The application was submitted to F&D through Norman Koch ("Koch") who, at that time, was a member of United's Board of Directors and also United's insurance broker. McGuire Certif. Ex. 1 at 185-1 to 23, 171-5, 226-15 to 227-7. The 1989 Bond application contained the following question 13:

 
13. Date of last examination by State authorities?
 
Date of last examination by Federal authorities?
 
Was there any criticism of your operations in either the last State or Federal examination?
 
If "Yes", explain.

 In response to the first two parts of question 13, United averred that the dates of the last examination by both state and federal regulators was "9/19/88 to 10/27/88." United answered the third part of question 13 in the negative. Lombardi Aff. Ex. 5 at 4.

 The 1989 Bond application also contained the following statement above the signature line:

 
The Insured represents that the information furnished in this application is complete, true and correct. Any misrepresentation, omission, concealment or incorrect statement of a material fact, in this application or otherwise, shall be grounds for rescission of any bond issued in reliance upon such information.

 Id.

 The 1989 Bond contains the following language:

 
D. The insured represents that the information furnished in the application for this bond is complete, true and correct. Such application constitutes part of this bond.
 
Any misrepresentation, omission, concealment or any incorrect statement of a material fact in the application or otherwise shall be grounds for rescission of this bond.

 Lombardi Aff. Ex. 1 at 67000105 (Bates No.).

 F&D contends that United falsely represented that there had been no criticisms by the regulators. In support of its position, F&D submits the joint report produced by the state and federal regulators after their examination of United in September and October of 1988 (the "1988 Report"), the examination to which United referred in its response to question 13. McGuire Certif. Ex. 8. A "Report Summary" begins on page one of the 1988 Report. The summary states, in relevant part:

 
On September 19, 1988, a joint regular examination of [United] commenced, with federal and state of New Jersey examiners participating. Minimum scope programs were followed in the major areas of review: commercial real estate lending, financial analysis, and regulatory compliance. However, due to unsatisfactory findings in the area of investments, particularly internal control/accounting procedures for investment activity, expanded review was conducted focusing on internal controls in this area.
 
. . . Matters of policies and procedures, management expertise, recordkeeping, asset quality and reports to the board of directors have become a matter of examination concern. The following matters are brought to the attention of the directors for their review and consideration. . . .
 
1. Management
 
. . . Documented director oversight, particularly in the areas of investments and loan analysis/review, appears lacking and is ...

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