it please the court i'm john heintz of blank rome representing the liquidating agent for st paul croatian credit union i have reserved four minutes for rebuttal this morning i'd like to address three history is against the great weight and could have only been reached on a should have known basis if it that and three terminations under the terminations clause is prospect of only it doesn't end coverage for acts committed before one learns of the dishonesty of an employee so let me talk first about actual knowledge under the terminations clause and i provided to the court the provisions that are central to the day's argument in this case under the terminations cause actual knowledge is means knowledge of a specific act that would be justified charging an employee with dishonesty or fraud that requires more than suspicion and it requires an appreciation that the act is dishonest  character the corporate mistakenly thought that that rejected that argument because it thought that it focused on whether you appreciated a loss covered under the policy had occurred but that's not the focus of the terminations because it's knowledge of a disk on its act by the employee but it's just factually what it what it means to say relief i read here that the board discovered the loss before they were eleven twenty and indeed the board discovered the loss no later than two and the that letter shared secured loan is in a credit union members of the credit union deposit money and that's considered a share and if they then take out a loan secured by that deposit that's called a shared secured loan so if they make a loan against their own deposit or does against their own deposit but not it wouldn't be considered a share loan if you're using other members deposits which it shouldn't be it would still be secured but it shouldn't be considered a shared security long but part of the fraud here was to make it appear that in fact it was the case so that's what assured secured loan is and those are risk free loans because dollar for dollar those loans are intended to be backed up by the deposit on hand for the borrower so that that's that's the essence of a credit union is the core of the  the board have investigated further when it was reported over the substantial period of time that there were no u wall when the fellow who had run them in the manager for years said well let's can have a situation where they just know then they're always going to be some loans that are not paid but your honor that this i think gets to the core of the factual mistake against the great weight of the evidence that the court below made there are as a great distinction between delinquencies in general and delinquencies over sixty days and what was being reported as your oh in the financial reports to the board where the delinquencies over sixty days and in a sense for the board the auditor and the examiners annually investigated the finances of the company to showed that if you allow the sixty day period there it's reasonable to say they're never going to be any after sixty days well your honor there are two factors that could lead to that and one one is that it's good credit union practice and there's record testimony to that effect to cure loans as early as possible and shared secure loans are essentially secured by drawing against the deposit against the payment that was out so if if you are dominated by shared secured loans  you might not have any delinquencies over sixty days but the point is to come back to your question about whether the board should have investigated which is not the test here because the failure to discover something that might have been learned that would have indicated that refuse was dishonest to apply at this discovery a loss language and section  covered under this bond has been or will be incurred and and while it is the reasonable person standard here is that a factual issue or a question well i would suggest it's a mixed question and question of the district court addressed here your honor it says it's applying the actual knowledge test and and that's talking about the terminations yes which i need to understand to be talking about the discovery provisions deal with that those are two different provisions very different things to the did the district court at all resolve the issue that judge merit is addressing your honor the because the court yes i mean the answer and then explain i said there's not a clear answer from the courts is there whether  address that or not it what the court did is that because it the ruling it made under the terminations clause it didn't directly address the discovery of last standard it conflated th opposite because you lose under one you lose under the other well no because of the finding i made that the terminations came before february two thousand a conclusion that it with the loss was discovered before february of two thousand and ten what i'm saying is it didn't really discuss the basis for that having already found that the terminations cla was triggered by knowledge of reduces dishonesty and to come back to the actual knowledge test under the terminations clause the very fact that you miss writes a discovery of last clause w this hybrid reasonable standard and didn't use the same language in the terminations clause is fatal to its argument that the test is anything other than an actual knowledge cla and there is i would think that you would apply the language of the discovery of the loss clause become aware of facts which would cause a reasonable person to assume that  several i would think that stands as a standard to be used with regard to losses which was this is your honor there there are two things that are happening here that terminations clause focuses on whether you know an employee is this honest for it could be dishonesty and it entirely unrelated to the credit union and coverage going forward for that employee is is terminated it's gone you still have covered tracks he might have committed before you learned he was dishonest but you don't for acts committed after the discovery of loss doesn't focus is on whether the employee is dishonest it's the focus is on whether you know facts that would lead you to assume a loss had or would occur so it's focusing on the consequences of dishonest errors of dishonesty and and have no laws exactly and indeed there are cases it's the determination  twenty suing under the two thousand and ten bond but the cases make clear that if you renewed the policy year after year the coverage for the terminated employee for his predetermination decide the facts not not when it came down trial not when i'd not having been involved the underlying case i don't know when that issue if it came up was resolved but it was before trial so  i think it's important to keep clear of the difference between the determination clause which focuses on the actual knowledge of dishonesty and the court of the cases make clear that this is you don't have a duty to investigate a failure to discover facts that would have led you to determine that the employer was dishonest doesn't trigger the terminations clause they recognize that there is a presumption of honesty and in a context of a a small croatian church community where the manager was a member of the church of the credit union and his father was on the board it would take an awful lot to to conclude that he had betrayed his trust and it knowing that there were zero delinquencies over sixty days and concluding  that they were dishonest lee reported as such is a leap and in to balance and requires inferences that under the actual knowledge test could not be made particularly particularly because the accountant and the examiners on whom the board was entitle to rely we're not raising any problems about this indeed the examiner  positive thing an indication of good health and reflected the fact that these were shared secured loans that there was dishonesty going on right there laid the foundation for there was dishonesty going on right yes so the question is whether it was learned of that yes owner question is whether it was learned of yes that's pretty clear i mean there's not too much legal play in the meaning of lerner basically that's a factual issue is not yes so does that mean we apply clearly erroneous it is clearly to whether the relevant person learned of the dishonesty yes it's we have to say that th was clearly clearly erred in making the finding that there was learning is that what we have to do today i think you have to conclude that as part of reaching that conclusion it's that it it implicitly if not explicitly applied a should have known test in evaluating all but you have relied on this let on this this colloquy i guess it's  testimony it's in your brief at thirty two to thirty three but it just several of the briefs and you sort of parse it to say well delinquency is distinguishable from the reported delinquency correct that's how you tease that out to say that the district court came to the wrong factual determination this right i follow that it makes sense but the district court didn't read it that way well that's why we have district courts right that's my concern here ok like that's a a decision you know you're reading you're parsing this language and say here they use the word delinquency stopped and here use the word reported delinquencies stopped and i guess if if if i was reading it up with your guidance just on the sheer on the page in front of me it makes sense what you say but we have to defer to the district court with respect to factual issues that's what i'm curious ok your honor i i think that's a proper in order to reach the factual determination that the court below did it had to do apply a test that was softer than actual knowledge of the dishonest nature of the act good morning my name is joe neal and i represent to kill this insurance aside in this case the court is correct the standard is clearly erroneous and judge white was not clearly erroneous he was correct in his analysis of what the testimony said in response to a series of questions that witness said he was not just an ordinary witness he had been on the board for twenty six years he had been president of the board he said that all during his tenure there were delinquencies reported at the credit union and all of the sudden delinquency stopped and he was asked the question did the board have concerns about those alleged zero to link to it rates answered from time to time yes question all right and your concern was that you knew in fact all there was at least some delinquencies based on your own experience as a member of the board correct answer yes the district court applied to natural knowledge standards and the district courts finding in that regard was not clearly erroneous i think i'm looking at the same language and if you parse it carefully it doesn't lead to the conclusion that you arrive at  and the answer is yes so their theory as i understand it is sure there were delinquencies everybody knew there were delinquencies the delinquency stopped that looked a little unusual but we period i think the two response one that doesn't show on its way the district court took that as i understand it maybe there was more that the district court relied on district court took that to say that's enough to show dishonesty to terminate the liability of the or to terminate the coverage for all actions of this person who agreed that who asked of moment there was an agreement th delinquencies i'm not sure follow but it looks like it doesn't fall in my view it does and let me try to help the court understand that one it's not clearly erroneous and number two the distinction it's clearly erroneous of the court didn't understand a clear distinction portable delinquencies no your honor reports had delinquencies and they show a zero point zero zero rate and the testimony was that for not just a few months not just a year but for eight years what makes it distances he was telling the board you have nothing to worry about we have over two hundred million dollars in loans of various types including thirty million dollars in real estate loans and not a single loan is late a day it's not just thirty it's not just testimony in terms of the exhibits we gave the court examples exhibits eight ten and twelve are examples of the financial reports that weeps admitted into evidence we actually put into evidence as part of the record although i didn't make it part of the appendix  reportable the idea that they were proposing not sure it's right on looking for your guidance the idea that they're proposing is that the people know that when it says delinquencies it means zero delinquencies over sixty days because those are the ones that get to be those the ones that are reportable and and everyone knows or most people know all the shorter ones don't get reported and it's unusual not to have any reportable ones that's unusual but but nobody's really saying that there's none at all now your answer to that is this testimony which with respect doesn't seem to say that and these are these reports but if the whole idea is that the report doesn't have to have a dip it's been dealt with within the sixty days then that's consistent with that theory as well what is there what is the clearest part of the record that this view of things is incorrect i guess is what i'm there is part of the record is the financial statements which ragu prepared and that's  reports those monthly reports when i took him through every report or most of the reports and pointed that out to him counsel could have easily asked will you that they only cover reportable delinquencies now every day delinquencies counsel did not do that there is no evidence in the record that these documents say other thing what they do say namely zero point zero zero and and that's what is astounding about that the case that for eight years with all due respect i disagree and i'll tell you why because in may of two thousand and eight the board directors of this institution it's exhibit number fifty four received the report of the n c a away for the period ending december thirty one two thousand and seven that report appears as exhibit number ninety eight in the record that's part of the sealed exhibit that the government has submitted in that report there were at least three critical facts which you've already referred to in part the first fact that was point that the in seaway xander pointed out to the board of directors is that number one you had this shared secured loan program you have one hundred thirty one million dollars in allegedly so that member can't double dip can't take a loan out he's clipped say i've got a thousand dollars in my account i committed the credit you know want to take a thousand dollar loan got the money in my count no problem so i get the loan and if i come in the next day and try to take that thousand dollars out that is a problem unless of course it's been frozen so that i can't get the money that i put up as collateral in this instance in may of two thousand and eight the board was told that not a single dollar that the district court concluded that the word or the defendants actually knew about that well that they testified they received  the i put we put into evidence the board minutes which showed that they received the report there's testimony that they received the report there's testimony there are members of that fact there is no explanation as to why they didn't do anything about it report wasn't false the examiner was right nothing had been frozen but what that should have told them is how can we have confidence in what this guy saying about this wonderful program and that there's no risk because everything is here and when when they're told nothing is secured and they're talking about discovery terminations since i'm talking about discovery i switch because i thought i was trying to write and i was trying to answer the court's question the and the second thing they were told actually told several things but the i have let's say one hundred million dollars on deposit and i've loaned out one hundred twenty million dollars in search of cures wait a minute how can that be so they're told that not a single dollar secured number one and number two that we've loaned out more money than we have in shared secure deposits so those the bells and whistles should have started ringing as soon as they received that report and i wish the district judge you've gone the next step and and ruled as a matter of law that there was of the government i think they said they say seventy two million dollars was lost they couldn't prove five million dollars at trial but but the government says seventy two million dollars was lost they couldn't prove five million dollars i don't think they did prove five million dollars and i'll get to that  no reasonable juror could say that if you were told not a dollar was shared secured and you loaned out word you had no reasonable jury could say those aren't those aren't sufficient fact to lead you to believe that a loss could have been cover to use a simple analogy let's say the examiner had looked at the share loans but looked at real estate loans there was thirty one million dollars and said gentleman i'm sick i'm sorry to tell you this but we looked at every real estate folder and not one piece of property in which you loan money was actually subject to a lien not one piece of property now anybody would know wait a minute we loaned out thirty one million dollars and we haven't don't have a lien on the the property something is radically wrong that's exactly what the examiner was telling them and they didn't do anything about it and surprisingly the examiner did it about it i see my time's running down i just like to raise two other issues which i think are important for the court to consider goes the question of damages the lily report in which the government relies obviously no one from lily testified they wan say it's a business record it's not their business record they went to a third party they had this report complot it's a forensic report there's testimony in the record it's based on the special expertise of the lilly company so it's not admissible and shouldn't  admitted and it is their only evidence of damages it is indeed an expert report that is not miscible it's a business record because it didn't belong to them one last question what do you do with the argument that the terminations clause only terminates with respect to activities that subs happens subsequent to the learning we that that's what it says and i'm not disagreeing with that but if the court correctly and i'm not sure which of you asked the question that ensue on the two thousand and eight bond they did by the time they got around to selling isn't two thousand and ten and there is no coverage and we relied on the fourth circuit case on that point there is no case which stands for the proposition he's offered dishonesty before you entered into the two thousand and you look with respect and they do take to that end of it right right now is the individual that's causing all the loss right but i consider spect that but that's why the provision once you learned dishonesty if you see that the coverage if that happens before you sign the two thousand and ten bond you're saying that all the things that you discover after that during the discovery period during the period in which your coverage extends which is things that are discovered from two thousand and write a year later or whatever ok that all of that coverage is gone totally or gone totally with respect to things that happened after you learned of the dishonesty pathetically question i'm not asking what happened in this case i'm saying you enter into a bomb in two thousand and ten but in two thousand and nine you learn that the person as to which you bought the bomb lied about something is going you're saying there's no coverage for anything you discovered in two thousand and ten do even though what you discovered happened before you learned of the dishonesty exactly right that's the way the into the opposite of the it's mean have to look at the cases i suppose it seems like an anomalous rule not at all b because the principle of an infidelity insurance if you know of dishonesty no care is going to ensure in fact the case law says it if you know the dishonesty before you take out the posse there's no coverage for that particular individual not the other individuals are covered but at the other but this that individual is not covered there was a realty for then they didn't they didn't sue on the right don they did discover pardon me the losses discovered after two thousand before but that's enough to turn because that's that's the whole principle underlying this provision in this policy and the general put up the dead the general case law that if you know someone just doesn't know who they stole from the know someone is dishonest before you try to insure them there is no coverage for that individual otherwise the system collapses was if you knew it and you had disclosed it there wouldn't have been a bond you did great underwriter your honor that's exactly right thank you  your honor so first of all tell us which himself made the distinction between reportable and non reportable he was the one who in answer to a question made the distinction in order to make it clear and that cited in distinction or he could have just you know mumbled agreement using different words i mean you know well i i i think the court gave it a lot greater meaning then the testimony supports as mona before the order was his testimony before the cour to look in to know it well we're talking about two things now and under the terminations agreement and no actually the case is under both clauses say that there's no obligation on the board to investigate what it might have discovered a value well your honor there's there to exercise some supervision but let's put it in context there lay people with other jobs there are members of the credit union who are elected to this board who they rely on and are rightfully so the accountant they don't know anything about what they're supposed to be doing we're supposed to let them off the hook well no no there are two things that are controls here and it's actually critical an accountant and examiners from the n c u a that come every year and the report that council refers to f or the zero seven year raising these two issues about shared secured loans not being frozen and apparently and it was never stablish that they were not the best it comes from the government they're not supposed to do anything  could they found that these two things which they thought were technical problems not any suggestion of dishonesty anything that led to suspicion that some misconduct was going on and the following year the they what good are they well you know not a net it may have been negligent i can't that was not in the record but the following year the two problems that they raised in the report that counsel refers to are not raised in the report so it didn't appear to be a continuing problem to the examiners so why is a a lay person no matter how long he has served on the board supposed to read in to the evidence that single fact that there are zero reported and reportable delinquencies that reduces dishonest when there's accountant isn't telling him nap and the examiners aren't telling him that and every year there's a reporter there saying this is a good thing looks good to us for instance for us to protect you when you screw up when negligence and the cases make clear that negligence isn't there only a little time i have a question about your response to their response to your statement about the retroactivity of this termination strange it seems like if you know of the dishonesty as they describe it if you know of the dishonesty then you have a bond contract the bond contract just doesn't apply to people as you know of dishonesty even though when you discover the loss during the contract coverage period that loss occurred prior to the discovery of that that's the theory right that well it gets conflating so you've entered into a term already terminated obligation and that and that obligation deals with things that you discover about loss in the coming year or two years or whatever the dishonest before you entered into it you don't get recovery for that because you knew when you entered into the bond contract that you had a dishonest person but you seem to be saying you can enter into the contract knowing it's a dishonest person in order to wreak cover losses that you subsequently discovered during that year that occurred prior to your obtaining knowledge of his dishonesty in my thing it right yes and why would they think that the counter into that anomalous first of all that the language of the policy the bond says was arising from x occurring after the termination simple as that the case law fidelity casualty that's in the policy excerpt that we handed out it's the end of the third paragraph no coverage for a loss occurring from x occurring after the effective date of such terminations the cases that support the continuation and the theory of course is if you continue to employ a dishonest person whether it's because he was found cheating on his taxes or something related to his work at the bank you do so at your risk but you're still covered for something you did before you learned of it and fidelity casually versus central bank home savings versus colonial i know we've been asking the