it was operating pursuant to two FHLBB Supervisory Directives which embodied certain criticisms of the regulators. One Supervisory Directive restricting trading was issued to United by the FHLBB during the 1988 examination. Hall Aff. Ex. C at 11000218 (Bates No.). Additionally, it is undisputed that United was aware that it had been subject to the other Supervisory Directive since September 1987 and that the directive limited United's lending ability. The Board was made aware of this directive in September 1987; to wit, Koch admitted that he was aware in September 1987 of the FHLBB directive prohibiting commercial loans and that he regarded the directive as a serious criticism of United's operations. McGuire Certif. Ex. 1 at 84-4 to 14. Based on the record, the Court concludes that United was aware of existing criticisms at the time it completed and filed the 1989 Bond application.
The Court notes, however, that even if United did not have knowledge of the 1988 Report until April 1989, the facts still indicate that United knowingly misrepresented application information to F&D. It is undisputed that F&D did not issue the 1989 Bond until May 18, 1989. "It is well settled that, where an application for insurance has been submitted to an insurer and, before the policy is issued, a change of conditions material to the risk occurs or is discovered by the applicant, he is under an obligation to inform the insurer promptly. The knowing suppression or failure to make timely disclosure of such information constitutes a material misrepresentation." Weir v. City Title Ins. Co., 125 N.J. Super. 23, 29, 308 A.2d 357 (App. Div. 1973). The facts demonstrate that during the period after United filed the application and before F&D issued the Bond, United indisputably became aware of the 1988 Report. At the very least, United became aware of the regulators' criticisms while the 1989 Bond application was pending, and the criticisms would have caused United's initial response to be untrue. United was therefore under a duty to disclose the regulators' criticisms so as to correct the information previously provided in the application.
The failure to supplement incorrect information in the application constitutes a misrepresentation, id., and would support rescission of the 1989 Bond. See Hudson United Bank, 653 F.2d at 773.
Finally, in order to award the equitable relief of rescission on the basis of a misrepresentation in the application for insurance, New Jersey law provides that the misrepresentation must be material. N.J.S.A. 17B:24-3(d); Massachusetts Mut. Life Ins. Co. v. Manzo, 122 N.J. 104, 115, 584 A.2d 190 (1991). The New Jersey Supreme Court has held that "[a] misrepresentation is material if it 'naturally and reasonably influence[s] the judgement of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium.'" Ledley, 138 N.J. at 638, 651 A.2d at 97 (citing Manzo, 122 N.J. at 122, 584 A.2d 190).
United falsely answered "no" in response to question 13 of the 1989 Bond application. Lombardi, an underwriter for F&D during the time relevant here, testified that "had F&D known of the 1987 FHLBB directive or of the numerous criticisms of the regulators in the [1988 Report], F&D definitely would not have issued United's bond for 1989." Lombardi Aff. P 15. Lombardi further stated: "One question on [the application] was a key question about any criticisms by any regulators. If that were answered yes, we would go back to determine what those criticisms were." McGuire Certif. Ex. 7 at 12-25 to 13-3. In essence, Lombardi testified to the materiality of question 13 and F&D's reliance thereon. Lombardi's testimony is supported by the fact that the application had a total of sixteen questions, many of which merely sought biographical information about United or the type of coverage desired. The number and substance of the questions in the application supports a finding of materiality.
Also, simple logic contributes to the conclusion that the question is material. Evidence that bank regulators had criticized a bank's operations would be relevant to the determination of whether to issue fidelity insurance to the bank; an affirmative response to question 13 would have triggered an investigation by F&D as to why such criticisms had been leveled at United. See McGuire Certif. Ex. 7 at 12-25 to 13-3; Ledley, 138 N.J. at 639, 651 A.2d at 97. Finally, the Court notes that the FDIC offers no specific facts in rebuttal to F&D's proposition that question 13 is material. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). On the basis of the foregoing, the Court concludes that question 13 is material; United's false response to question 13 reasonably influenced the judgment of the underwriter in making the contract. See Manzo, 122 N.J. at 115, 584 A.2d 190.
The Court recognizes that rescission is a drastic remedy. The facts, however, demonstrate that United knowingly and falsely denied that the regulators had not criticized operations. Even viewing the facts in a light most favorable to the FDIC, the Court is convinced that United concealed information that would have materially affected F&D's decision as to whether to issue the 1989 Bond. F&D may therefore rescind the policy because of United's equitable fraud. Hudson United Bank, 653 F.2d at 773; Ledley, 138 N.J. at 638-39, 651 A.2d at 97.
The Third Circuit has stated that "discovery" does not occur until "a bank has sufficient knowledge of specific dishonest acts to justify a careful and prudent person in charging another with dishonesty or fraud." Hudson United Bank, 653 F.2d at 775. Suspicion is not sufficient discovery. Under the 1989 Bond, discovery occurs when the insured becomes aware of facts that would cause a reasonable person to assume that a loss covered by the bond has been or will be incurred. Lombardi Aff. Ex. 1 at 67000107-08 (Bates No.).
More than two years ago, F&D moved to dismiss on the basis that discovery by United did not occur during the bond period. In opposition, the RTC filed the affidavit of Marotta and the minutes from the Board meeting at which Moskowitz informed the Board of the allegations and subpoenas. The Court denied F&D's motion stating:
What Marotta and the Board knew (and when each knew it) are genuine issues of material fact. By submitting the Marotta affidavit and the Board's minutes, the RTC has raised questions concerning the underlying facts each had that cannot be resolved via summary judgment.