Court Opinion

ID: 2964573
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:27:40.040211+00
Date Added: 2024-06-11T11:42:57.766520
License: Public Domain

USCA1 Opinion

	

                            United States Court of Appeals
                            
                                For the First Circuit
                                 ___________________

          Nos. 96-1556
               96-1557 

                        FEDERAL DEPOSIT INSURANCE CORPORATION 
                        as RECEIVER FOR THE BANK FOR SAVINGS,

                                Plaintiff, Appellant,

                                          v.

                         INSURANCE COMPANY OF NORTH AMERICA,

                Defendant, Appellee/Third-Party Plaintiff, Appellant,

                                          v.

                       PAUL J. BONAIUTO and DOLORES DiCOLOGERO,

                          Third-Party Defendants, Appellees.
                                  _________________

                    APPEALS FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                     [Hon. Robert E. Keeton, U.S. District Judge]
                                             ___________________
                                 ____________________

                                        Before

                                Selya, Circuit Judge,
                                       _____________
                                 Cyr, Circuit Judge,
                                      _____________
                              and Lynch, Circuit Judge.
                                         _____________
                                 ____________________

               Eugene  J. Comey, with whom  Robert D. Luskin,  Comey Boyd &
               ________________             ________________   ____________
          Luskin, Ann S. DuRoss, Assistant General Counsel, Federal Deposit
          ______  _____________
          Insurance Corporation,  Thomas  L. Hindes,  Counsel,  E.  Whitney
                                  _________________             ___________
          Drake, Special Counsel, and  Leslie Ann Conover, Senior Attorney,
          _____                        __________________
          were on brief for FDIC.
               Gerald  W. Motejunas,  with  whom  Marie Cheung-Truslow  and
               ____________________               ____________________
          Lecomte,  Emanuelson,  Motejunas  &   Doyle  were  on  brief  for
          ___________________________________________
          Insurance Company of North America.
                                  __________________
                                   February 3, 1997
                                 ___________________

                      LYNCH, Circuit Judge.   In  1977 the  Massachusetts
                      LYNCH, Circuit Judge.
                             _____________

            legislature  enacted  a statute,  Mass.  Gen.  Laws ch.  175,

              112, which  provided that,  for certain types  of liability

            insurance,  the Commonwealth would adopt a "notice prejudice"

            rule.  This new statutory  rule departed from the traditional

            common law rule which had strictly enforced notice provisions

            in  insurance policies, allowing forfeiture of coverage where

            notice  to  an insurer  of a  claim  was late.    The Supreme

            Judicial  Court of  Massachusetts  subsequently extended,  by

            common law, and  then limited  the extension  of, the  notice

            prejudice rule  for liability  insurance policies.   At issue

            here  is whether  the notice  due under  a fidelity  bond was

            late.   If  so, does  the state  common law  notice prejudice

            rule,  under which an insurer must show prejudice in order to

            be excused from coverage by the insured's late notice, extend

            to the Financial Institution Bond at issue. 

                      The  import here is  whether a suit  by the Federal

            Deposit Insurance Corporation  ("FDIC"), as receiver  for the

            failed  Bank  for Savings,  may  proceed  against the  Bank's

            insurer, the Insurance Company  of North America ("INA"), for

            coverage of losses due to certain dishonest acts committed by

            a Bank officer  and by a  lawyer retained by  the Bank.   The

            loss to the Bank from these activities is asserted  to be $10

            million.    The  FDIC,  as  receiver  for  the   Bank,  seeks

                                         -2-
                                          2

            reimbursement for these losses to the  full amount covered by

            the Financial Institution Bond issued by INA, $4 million.  

                                          I.

                      The Bank  gave INA  notice of potential  loss under

            the Bond on January 16, 1990.   The insurer declined to  pay,

            and the Bank brought suit.  The district  court, interpreting

            the Bond provisions  on a motion  for summary judgment,  held

            that the Bank's notice was late because it had not been filed

            within  30 days  of  discovery of  loss  as required  by  the

            policy.   FDIC v. Insurance Co.  of N. Am., 928  F. Supp. 54,
                      ____    ________________________

            62-63  (D. Mass. 1996).   The court  granted summary judgment

            for  the defendant.   Id.   The  Bank appeals,  disputing the
                                  ___

            district  court's  analysis  of  the date  of  discovery  and

            claiming  that  its notice  was  timely.   The  Bank  further

            asserts that, even if its notice was late, the district court

            erred  in failing to apply  the notice prejudice  rule to the

            Bond.1

                      Our  review of  a grant  of summary judgment  is de
                                                                       __

            novo.  Wood v. Clemons, 89 F.3d 922, 927 (1st Cir. 1996).  We
            ____   ____    _______

            hold that the  district court was plainly correct  in holding

            that the notice was  late, but we do so  on different grounds

                                
            ____________________

            1.  The parties have  agreed that Massachusetts law  applies.
            The FDIC here sues  as the receiver of a  Massachusetts bank,
            and  we  discern no  conflict between  state law  and federal
            statutory   provisions   or  significant   federal  policies.
            O'Melveny  & Myers  v. FDIC,  114 S.  Ct. 2048,  2055 (1994);
            __________________     ____
            Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68 (1966).
            ______    _______________________

                                         -3-
                                          3

            than  the district  court.   We  also  hold that  the  notice

            prejudice rule does not apply in this instance.2

                                         II.

                      The facts of the employee misconduct underlying the

            Bank's  losses  are taken  from  the  Bank's Bond  claim  and

            accepted  as true for present  purposes.  From  1987 to 1989,

            Dolores DiCologero,  an Assistant Vice President  of the Bank

            and  the  manager  of   the  mortgage  department,  and  Paul

            Bonaiuto,  an  attorney retained  to  represent  the Bank  in

            mortgage closings, conspired  with a condominium  development

            group,  the Rostoff Group, to make hundreds of mortgage loans

            using inflated appraisals and purchase prices in violation of

            Bank regulations and the law.  

                      The   Bank  made  loans   on  condominium  projects

            developed by the Rostoff Group until February 1989.  Although

            internal  regulations forbade the  Bank from participating in

            more than one-third of the units in a particular development,

            the  Bank   exceeded  these   limits  as  to   Rostoff  Group

            properties.  In addition, despite regulations prohibiting the

            financing  of  more  than 80%  of  the  purchase  price of  a

            property,  the Bank  made loans  to purchasers  for the  full

                                
            ____________________

            2.  INA originally brought a third-party claim in this action
            against the  dishonest Bank employees who  caused the claimed
            losses.   The district  court dismissed  INA's claim  as moot
            because it held that,  under the Bond, INA had  no liability.
            INA appeals  that  dismissal.    As we  affirm  the  district
            court's  finding that INA  has no liability,  INA's appeal on
            this issue is moot.

                                         -4-
                                          4

            value of condominiums in  Rostoff Group properties.  Bonaiuto

            prepared closing documents overstating the purchase  price of

            the condominiums  and falsely indicating  that the purchasers

            had equity in the property.  The loan documentation reflected

            nonexistent down payments.  In fact, the "down payments" took

            the  form of  discounts  on the  purchase price.   DiCologero

            expedited approval of the mortgages without any investigation

            of the creditworthiness of the applicants, many  of whom were

            not  creditworthy for  the loans  given.  The  aggregate face

            value of the  loans was approximately  $30 million, and  many

            culminated in default. 

                      Other DiCologero family  members also  participated

            in the scheme, to their profit.  The overstated values of the

            condominiums   were  supported  by   appraisals  prepared  by

            DiCologero's  son.  He earned more than $33,000 for his work;

            DiCologero's daughter received $4,550 from the  Rostoff Group

            for secretarial work.  DiCologero's husband received  $12,000

            in referral  fees for  directing potential purchasers  to the

            Rostoff  Group and  purchased a  condominium  himself without

            paying a deposit, although the Bank records falsely reflected

            that he had  done so.  Other aspects of  this tale of avarice

            and corruption need not  be detailed.  The Bank  was declared

            insolvent  on March  20,  1992, and  the  FDIC was  appointed

            receiver.   The FDIC asserts  that these events  helped bring

            down the Bank.

                                         -5-
                                          5

                      In  March 1989,  the  Bank received  a letter  from

            counsel for Erna  Hooton, a former bookkeeper of  the Rostoff

            Group and a mortgagee on six Rostoff Group units.  Ms. Hooton

            had  defaulted   on  the  loans,  and  the   Bank  had  begun

            foreclosure proceedings.   The letter said that  the Bank had

            misrepresented in the loan documents that Ms. Hooton had made

            down payments on the  properties.  The letter also  said that

            Ms. Hooton's financial position should  have led the Bank  to

            refuse  financing.   The  letter  claimed  that Bonaiuto,  as

            closing counsel on the  Hooton loans, was aware of  the false

            documentation.     The   Bank  investigated   these  charges;

            representatives  of  the  Bank  met with  Steven  Rostoff,  a

            principal of the Rostoff  Group, on March 21, 1989.   Rostoff

            said  that the  down payment  for some  loans, including  Ms.

            Hooton's, had taken the form of a discounted  purchase price.

            He denied that anyone  associated with the Bank was  aware of

            this.      DiCologero   also   denied   knowledge   of    any

            irregularities.  The Bank  responded to the Hooton letter  by

            denying the allegations.   Because Ms. Hooton did  not pursue

            the matter, neither did the Bank.

                      Then, in August 1989, Herbert and Deanna Bello, two

            defaulting  borrowers on  six Rostoff  Group units,  sued the

            Bank for damages and  asserted counterclaims in a foreclosure

            action brought  by the Bank.  The Bellos asserted, as had Ms.

            Hooton,  that Bonaiuto was aware  that they had  not made the

                                         -6-
                                          6

            down payments reflected in the closing  documents.  They also

            alleged  that when  they told  Steven  Rostoff that  they had

            previously been  unable to obtain financing,  he replied that

            they would "not have to worry about financing" because he had

            made  a "deal"  with the  Bank.   The Bank, the  Bellos said,

            never asked for financial information from them.   The Bellos

            further alleged that, at one closing, they had pointed out to

            Bonaiuto  that  the  closing  documents  stated  an  inflated

            purchase  price  and  an  inflated down  payment.    Bonaiuto

            referred  them to Rostoff, who  said this was  "what the Bank

            wanted."  In the foreclosure action, the Bellos' counterclaim

            specifically  alleged  that   the  Bank  knowingly  permitted

            Rostoff's misrepresentations.

                      Another  couple  who  had  purchased  Rostoff Group

            properties,  Edward  and  Dorothy  Giamette,  filed  suit  on

            September  22,   1989  against  the  Bank   and  the  Rostoff

            principals.   Again the complaint alleged  that down payments

            were falsely  represented  on  the  closing  documents,  that

            Steven Rostoff told  the plaintiffs  that the  Bank knew  the

            figures were false,  that the appraisals, which were  done by

            DiCologero's son, were for more than the fair market value of

            the properties,  and that this scheme had  been repeated with

            at least eight  other purchasers  who had bought  a total  of

            forty-five condominiums.  Earlier, on September 11, 1989, Mr.

            Giamette had  made similar  allegations in a  counterclaim in

                                         -7-
                                          7

            the Bank's foreclosure action against him.  None   of   these

            claims,  however, prompted the Bank to notify INA of possible

            losses due to alleged employee  misconduct.   What eventually

            did  lead  the Bank  to  submit  a   notice  of  claim was  a

            conversation in  October 1989  between DiCologero and  a Vice

            President of  the Bank during which  DiCologero remarked that

            her  husband had  purchased  a condominium  from the  Rostoff

            Group without  making  a down  payment.   The Vice  President

            reported DiCologero's remark to the Bank's President, who met

            with the Bank's Audit Committee on November 6, 1989.  Outside

            legal counsel from Gaston & Snow were present at the meeting.

            The Committee  discussed "the possibility of  100% loans, the

            unknown extent of these loans, employee involvement and legal

            ramifications."    Gaston  &  Snow was  asked  to  prepare  a

            preliminary  analysis  which was  submitted  on  November 15,

            1989.  Gaston &  Snow then investigated and reported  back to

            the Bank on December 18, 1989.  The report recommended, among

            other  measures, that  the Bank  refer the matter  to federal

            authorities, notify INA, and dismiss DiCologero.  On December

            27, 1989, the Bank filed a Report of  Apparent Crime with the

            FDIC, advising that it had learned of suspected violations of

            federal law on December 18, 1989.  The Bank also notified the

            FBI and  the U.S.  Attorney's Office.   DiCologero, Bonaiuto,

            and  the development  group were  later convicted  on federal

                                         -8-
                                          8

            bank fraud and conspiracy charges.  United States v. Rostoff,
                                                _____________    _______

            53 F.3d 398 (1st Cir. 1995).

                      On  January 16, 1990, the Bank gave INA notice of a

            potential loss  arising from  employee misconduct.   The Bank

            enclosed copies of the complaints in the Giamettes' state and

            federal lawsuits with its letter of notice.

                                         III.

                      As is  customary in the banking  industry, the Bank

            had obtained a Financial  Institution Bond, Standard Form No.

            24, from INA.  The Bond period originally ran from January 1,

            1988 to April 1, 1989, and was later extended by agreement to

            April 1, 1990.   Insured losses include  those resulting from

            employee  dishonesty and  fraud.3   For present  purposes, we

            assume that the actions of DiCologero and Bonaiuto caused the

            Bank to sustain losses  of the type covered by  the "INSURING

            AGREEMENTS FIDELITY" section of the Bond.4  

                                
            ____________________

            3.  Other types of losses covered under other portions of the
            Bond are not pertinent here.

            4.  That provision reads:

                                 INSURING AGREEMENTS
                                       FIDELITY

                      Loss resulting directly from dishonest or
                      fraudulent acts committed by  an Employee
                      acting alone or in collusion with others.
                      Such dishonest or fraudulent acts must be
                      committed  by  the   Employee  with   the
                      manifest intent:

                      (a)  to cause the Insured to sustain
                           such loss, and

                                         -9-
                                          9

                      The  obligation  of the  insurer  to  indemnify the

            insured for covered losses is explicitly made:

                      subject  to  the  Declarations,  Insuring
                      Agreements,      General      Agreements,
                      Conditions  and   Limitations  and  other
                      terms [of the Bond].

                      The  "CONDITIONS  AND LIMITATIONS"  section  of the

            Bond contains,  among other clauses,  the "DISCOVERY" clause.

            Under that  clause, the Bond  applies to "loss  discovered by

            the Insured during the Bond Period."  The clause then defines

            "Discovery" in two ways:

                      Discovery occurs when  the Insured  first
                      becomes aware of facts which  would cause
                      a reasonable person to assume that a loss
                      of the type covered by this bond has been
                      or  will be incurred,  regardless of when
                      the act or  acts causing or  contributing
                      to  such loss  occurred, even  though the
                      exact amount  or details of the  loss may
                      not then be known.

                                
            ____________________

                      (b)  to obtain financial benefit  for the
                           Employee   or   another  person   or
                           entity.

                      However, if some or all of the  Insured's
                      loss results directly or  indirectly from
                      Loans,  that portion  of the loss  is not
                      covered  unless  the   Employee  was   in
                      collusion with one or more parties to the
                      transactions   and   has   received,   in
                      connection therewith, a financial benefit
                      with a value of at least $2,500.

                      As   used    throughout   this   Insuring
                      Agreement,  financial  benefit  does  not
                      include any employee  benefits earned  in
                      the   normal    course   of   employment,
                      including:   salaries, commissions, fees,
                      bonuses,   promotions,   awards,   profit
                      sharing or pensions.  

                                         -10-
                                          10

                      Discovery  also  occurs when  the Insured
                      receives notice of an actual or potential
                      claim in  which  it is  alleged that  the
                      Insured is liable to  a third party under
                      circumstances   which,  if   true,  would
                      constitute a loss under this bond.

                      The  "CONDITIONS AND  LIMITATIONS"  section of  the

            Bond also contains pertinent notice provisions which state in

            relevant part:

                           NOTICE/PROOF - LEGAL PROCEEDINGS
                                 AGAINST UNDERWRITER

                      a)  At  the earliest  practicable moment,
                      not to exceed 30 days, after discovery of
                      loss,   the   Insured   shall  give   the
                      Underwriter notice thereof.

                      Construing   the   Bond's   first   definition   of

            discovery, the district court found that, at the latest,  the

            Bank had discovered the loss by November 15, 1989.  The court

            thus  determined that the Bank was required to give notice to

            INA no later  than December 15, 1989 and that the January 16,

            1990  notice  was therefore  untimely.    The district  court

            concluded that, "[i]f notice to INA was untimely, the Bank is

            precluded from recovery, regardless  of whether INA can prove

            any actual prejudice as a result of the delay.  J.I. Corp. v.
                                                            __________

            Federal  Ins.  Co.,  920  F.2d   118,  120  (1st  Cir.  1990)
            __________________

            (interpreting  Johnson  Controls  v.  Bowes, 409  N.E.2d  185
                           _________________      _____

            (Mass. 1980))."  Insurance Co. of N. Am., 928 F. Supp. at 59.
                             _______________________

            The  district court  then  granted INA's  motion for  summary

            judgment.

                                         -11-
                                          11

                      We agree  that discovery was earlier  than the Bank

            posits.   Although the  district court relied  on the  Bond's

            first definition of discovery to reach this conclusion, it is

            most clearly  reached under the second definition.   See Levy
                                                                 ___ ____

            v. FDIC, 7 F.3d 1054, 1056 (1st Cir. 1993).  Under the second
               ____

            definition,  discovery  occurs  "when  the  Insured  receives

            notice of an actual or potential claim in which it is alleged

            that   the  Insured  is   liable  to  a   third  party  under

            circumstances which,  if true, would constitute  a loss under

            this bond."   The lawsuits and  counterclaims brought by  the

            Bellos and the  Giamettes plainly constituted  actual claims.

            The complaints alleged knowing acts of dishonesty or fraud by

            Bank employees.5  Any harm caused by these alleged acts would

            qualify as loss under the Bond.6

                                
            ____________________

            5.  We reject  the Bank's  argument that the  complaints only
            alleged  that  the  Bank  itself  defrauded  the  Bellos  and
            Giamettes and  thus could  not constitute discovery  of loss.
            The complaints and counterclaims all specifically allege that
            DiCologero  and/or   Bonaiuto  acted   in  a   dishonest  and
            fraudulent manner  under circumstances which,  if true, would
            have created a loss under the Bond.   Moreover, when the Bank
            finally provided  INA with  notice, it cited  the allegations
            contained in the  Giamette complaints  as the  source of  its
            discovery of loss.

            6.  Though it is largely irrelevant for our purposes, we will
            assume  that the  other  elements of  "loss"  are present  --
            namely that, with regard to the portion of the loss resulting
            from loans, the employee(s), DiCologero and/or Bonaiuto, were
            in collusion with one or more parties to the transactions and
            received  a financial benefit with a value of at least $2,500
            from  principals  involved in  the  transactions.   The  Bank
            conceded in its notice letter to INA that, with regard to the
            loans alleged  in the  Giamette complaints, it  appeared that
            DiCologero's family members received financial benefits of at

                                         -12-
                                          12

                      The Bank weakly  argues that these complaints  "did

            not  rise  to   the  level  of  allegations  of   deceit  and

            misrepresentation on  the part  of Bank employees  seeking to

            obtain  improper financial  benefits but rather  were nothing

            more than the litigation  tactics of defaulting borrowers who

            were  confronting foreclosure  proceedings."   That  argument

            misses  the point.  The  Bond requires notice  to the insurer

            upon  a claim of employee  dishonesty and does  not allow the

            insured  to wait until the claim is proved.  Further, General

            Agreement F of  the Bond independently  required the Bank  to

            provide INA -- within  thirty days -- with all  pleadings and

            pertinent papers in any legal proceeding brought to determine

            the insured's liability for any loss. 

                      The Bank  also asserts  that third-party  claims do

            not  trigger  discovery   under  the  second  definition   of

            discovery unless those claims are reasonable.  Whether or not

            Massachusetts adopts  such  a reasonableness  standard,7  the

            claims here met any such requirement and triggered the notice

                                
            ____________________

            least $2,500. 

            7.  But cf. Clore & Keeley, "Discovery of Loss," in Financial
                ___ ___                                      __ _________
            Institution Bonds  89, 113 (Duncan  L. Clore ed.,  1995) ("As
            _________________
            long as a third party's claim would constitute a covered loss
            under the bond if proven  to be true, it matters  not whether
            the  allegations  are  perceived   as  true.    Instead,  the
            allegations  can be completely false.  The point is, once the
            allegations are made, the insurer has the right to know about
            them  and  to  conduct  whatever investigation  it  may  deem
            appropriate.").

                                         -13-
                                          13

            requirement by, at the  latest, mid-September 1989.   By that

            time,  the Bank had been  informed that at  least ten persons

            claimed to  have purchased more than  fifty condominiums from

            the  Rostoff Group without any  down payment or  with a lower

            down payment  than the  Bank's loan documentation  reflected.

            The Bank was  charged with  knowing that the  figures in  the

            loan  documentation  were false.    The  Bank's attorney  was

            alleged to be complicit  in the falsehoods.   The son of  the

            Bank's mortgage department manager purportedly had  been paid

            for false appraisals.   A principal of the Rostoff  Group had

            confirmed  that this had happened.  The similarity of all the

            allegations is telling.  If a "smell test" was  in order, the

            smell  was rank indeed.  Accordingly, the notice given by the

            Bank on January 16, 1990 was untimely.

                                         IV.

                      More  difficult  is  the  question  of whether  the

            Massachusetts  courts  would  apply  the  common  law "notice

            prejudice" rule to Financial  Institution Bonds of this sort.

            This is  a question of law.   See J.I. Corp.  v. Federal Ins.
                                          ___ __________     ____________

            Co., 920 F.2d 118, 119 (1st Cir. 1990).
            ___

                                          A.

                      The  two  primary cases  from the  Supreme Judicial

            Court on the notice prejudice rule are Johnson Controls, Inc.
                                                   ______________________

            v. Bowes, 409 N.E.2d  185 (1980), which creates a  common law
               _____

            notice prejudice  rule for  liability policies, and  Chas. T.
                                                                 ________

                                         -14-
                                          14

            Main, Inc. v.  Fireman's Fund  Insurance Co.,  551 N.E.2d  28
            __________     _____________________________

            (Mass. 1990),  which  limits  the  rule  in  the  context  of

            liability  policies.     The  Massachusetts   law  of  notice

            prejudice  has been  previously visited  by the  decisions of

            this  court  in  J.I.   Corp.,  supra;  National  Union  Fire
                             ____________   _____   _____________________

            Insurance Co. v. Talcott,  931 F.2d 166 (1st Cir.  1991); and
            _____________    _______

            Liberty  Mutual Insurance Company v.  Gibbs, 773 F.2d 15 (1st
            _________________________________     _____

            Cir. 1985).  For various reasons, in all three of these cases

            this court declined to apply the notice prejudice rule.

                      The  Bank urges us to analyze the issue in terms of

            whether the  admittedly  different  policy  language  in  the

            Financial  Institution Bond  is  closer  to  an  "occurrence"

            liability policy  or a  "claims made and  reported" liability

            insurance  policy.   There  is,  however,  a logically  prior

            question  and  one  which it  is  prudent  to  ask under  our

            obligation  to apply  state substantive  law (in  the absence

            here of any conflict  with or a threat to  federal policies).

            See Atherton v. FDIC, No. 95-928, 1997 WL 9781 (U.S. Jan. 14,
            ___ ________    ____

            1997); Erie R.R.  Co. v.  Tompkins, 304 U.S.  64 (1938);  see
                   ______________     ________                        ___

            also  infra n.1.   We must apply the  law of Massachusetts as
            ____  _____

            given  by its  state legislature  and state  court decisions.

            And in that lies the difficulty of the Bank's position.

                      The  Supreme Judicial Court  has never  applied the

            notice prejudice rule to a Financial Institution Bond.   Such

            fidelity  bonds, as  discussed later,  are different  in kind

                                         -15-
                                          15

            from liability insurance policies.  In  creating a common law

            notice prejudice rule,  the Johnson Controls court did  so in
                                        ________________

            the context of liability  policies.  The statutory progenitor

            to Johnson Controls concerned automobile liability policies.8
               ________________

            The refinement and limitation of the notice prejudice rule in

            Chas.  T. Main was also in the context of liability policies.
            ______________

            And the usual posture in which the court has applied the rule

            has been in liability policies.  See, e.g., Darcy v. Hartford
                                             ___  ____  _____    ________

            Ins. Co.,  554  N.E.2d 28  (Mass. 1990).   No  court has  yet
            ________

            extended the Massachusetts notice prejudice rule to  fidelity

            policies such as this Bond.   See, e.g., J.I. Corp., 920 F.2d
                                          ___  ____  __________

            at 118; Boston Mut. Life Ins. Co. v. Fireman's Fund Ins. Co.,
                    _________________________    _______________________

            613 F. Supp. 1090 (D. Mass. 1985).

                      When guidance is sought from  Massachusetts caselaw

            concerning  fidelity  policies, that  law, admittedly  not of

            recent  vintage,  does not  require  our  application of  the

            notice  prejudice   rule  here.     The  background   law  of

            Massachusetts, which  we believe is not  overruled by Johnson
                                                                  _______

            Controls,  was   that  conditions  and  limitations  in  such
            ________

                                
            ____________________

            8.  In Goodman  v. American Casualty Co., 643 N.E.2d 432, 434
                   _______     _____________________
            (Mass. 1994),  the court  applied the usual  notice prejudice
            rule for automobile liability coverage to  uninsured motorist
            coverage, finding no meaningful  distinction between the two.
            Accord MacInnis v. Aetna  Life and Cas. Co., 526  N.E.2d 1255
            ______ ________    ________________________
            (Mass. 1988).

                                         -16-
                                          16

            policies are construed as  written.9  In Gilmour  v. Standard
                                                     _______     ________

            Surety and Casualty Co., 197 N.E. 673 (Mass. 1935), the court
            _______________________

            was  concerned  with a  bond for  acts  of dishonesty.   "The

            contract   of  suretyship  made  by  the  defendant  provided

            indemnity to the plaintiffs in  the event they sustained loss

            through dishonest conduct on the part of the agency."  Id. at
                                                                   ___

            673.  The  bond had the  following condition and  limitation:

            "That  loss  be  discovered  during the  continuance  of  the

            suretyship or  within six  (6) months after  its termination,

            and  notice delivered to the Surety at its Home Office within

            ten (10)  days after such discovery."  Id. at 673.  The court
                                                   ___

            held that "[t]he giving  of such notice was made  a condition

            precedent  to recovery on the bond."   Id. at 675.  The court
                                                   ___

            noted that it  was concerned  not with "the  question of  the

            circumstances  under which  at  common law  an obligation  is

            imposed on the  obligee in a fidelity bond to give the surety

            notice,"  but rather with the  question of the  timing of the

            notice given.   Id.  at 674.   The question  was whether  the
                            ___

                                
            ____________________

            9.  The  requirement of timely notice is  a condition of this
            Bond and so  is a  condition of coverage  under the  parties'
            agreement.  In  a bond of  this type,  the Insured agrees  to
            comply with the bond's "CONDITIONS AND LIMITATIONS" governing
            the procedure for presenting  and proving the Insured's claim
            in exchange  for the  indemnity promised by  the Underwriter.
            Woods, "Conditions Precedent to Recovery: Presentation of the
            Insured's  Claim," in  Financial Institution  Bonds  285, 285
                               __  ____________________________
            (Duncan  L.  Clore  ed.,  1995).   "A  condition,  unlike  an
            agreement  or   a  covenant,   makes  the   Bond's  indemnity
            contingent upon the Insured's performance of the  condition."
            ____________________________________________________________
            Id. (emphasis added).
            ___

                                         -17-
                                          17

            plaintiffs had complied  with the  ten day  notice period  in

            order to  be able to  recover on  the bond.   The notice  was

            apparently given  during the bond  year, but the  court still

            considered the dispositive question  to be whether the notice

            was given within the ten day period.  Id. at 674.  (The court
                                                  ___

            concluded that it  had).  No case  has said that Gilmour  has
                                                             _______

            been overruled. 

                      In Liberty Mutual Insurance  Co. v. Gibbs, 773 F.2d
                         _____________________________    _____

            15 (1st  Cir. 1985), this  court held that,  Johnson Controls
                                                         ________________

            notwithstanding,  the contract  of  insurance there  must  be

            enforced according to its terms and that the notice prejudice

            rule did not apply.  At issue was a  contract of reinsurance.

            The contract's notice clause required notice to be given  "as

            soon as possible."   Id. at 18.  Our  court thought important
                                 ___

            three  things.   First,  the parties  involved  were not  lay

            policyholders who required protection.  Id.  Second, the case
                                                    ___

            involved  two  insurance  companies, experienced  businesses,

            that  had bargained  at  arm's  length.    Id.    Third,  the
                                                       ___

            Massachusetts   insurance   statute,  as   is   true  here,10

            distinguished  between the  contracts at  issue (reinsurance)

            and liability policies.  Id. 
                                     ___

                      In Cheschi v. Boston Edison Co., 654 N.E.2d 48,  53
                         _______    _________________

            (Mass.  App. Ct.  1995), Chief  Judge Warner  of the  Appeals

                                
            ____________________

            10.  See  Mass.  Gen. Laws  ch.  175,    107  (distinguishing
                 ___
            between surety bonds and insurance contracts).

                                         -18-
                                          18

            Court  of  Massachusetts rejected  application of  the notice

            prejudice  rule  to  an  indemnity  contract,  distinguishing

            Johnson Controls.   The court adopted and  expanded upon this
            ________________

            court's reasoning in Liberty Mutual, doubting that the notice
                                 ______________

            prejudice rule would  apply to types of  insurance other than

            liability insurance when the insureds were not laypersons and

            when  the  parties to  the  contract  were two  sophisticated

            business concerns.  654 N.E.2d at 53.  The court held that it

            would  apply traditional contract  principles to the language

            of  the  indemnity clause,  saying:    "Rules addressing  the

            special  circumstances of  certain insurance  policies should

            not  be  applied in  these  circumstances."   Id.  at  53-54.
                                                          ___

            Because it found language in the policy equivalent to  making

            prompt  notice a condition, the  court held that  the lack of

            prompt  notice  relieved the  insurer  of  its obligation  to

            reimburse the insured.  Id. at 54.
                                    ___

                      Guided    by    these   principles,    we   analyze

            Massachusetts  law.     Cheschi  cautions  against  automatic
                                    _______

            application of  notice prejudice rules designed  for one type

            of insurance to other insuring arrangements.11  654 N.E.2d at

            53-54.    The Bond  here  is  a Financial  Institution  Bond,

                                
            ____________________

            11.  In  J.I. Corp., this court, based on the analysis of the
                     __________
            language in a  fidelity policy, declined to  apply the notice
            prejudice rule to  that policy.   While dicta  in J.I.  Corp.
                                                    _____     ___________
            suggests that  the operative distinction  is not the  type of
            insuring arrangement involved, 920 F.2d at 120, the panel did
            not have the benefit of Cheschi. 
                                    _______

                                         -19-
                                          19

            Standard Form No.  24, as revised  in 1986.   It is the  most

            recent  form in  a long  line  of Financial  Institution Bond

            forms  utilized  by  members  of the  Surety  Association  of

            America.   See generally Knoll & Bolduan, "A Brief History of
                       ___ _________

            the Financial  Institution  Bond," in  Financial  Institution
                                               __  ______________________

            Bonds (1995), supra, at 1.  Such bonds are basically fidelity
            _____         _____

            bonds,  written  specifically  for   financial  institutions,

            including  commercial  and savings  banks,  savings  and loan

            associations, credit unions, stockbrokers, finance companies,

            and insurance companies.   I Fitzgerald et al., Principles of
                                                            _____________

            Suretyship 67 (1st ed. 1991). 
            __________

                      Fidelity bonds are a  sort of "honesty  insurance,"

            insuring against employee dishonesty.  See Weldy, "History of
                                                   ___

            the Bankers  Blanket Bond and the  Financial Institution Bond

            with  Comments  on   the  Drafting  Process,"  in   Financial
                                                           __   _________

            Institution Bonds 1, 1 (1989);  Knoll & Bolduan, supra, at 1.
            _________________                                _____

            The  capacity of one  who ensures  the fidelity  of another's

            employee has  been described as part insurer and part surety,

            with liability  in either capacity being  primary and direct.

            1 Russ & Segalla, Couch on Insurance 3d   1:16 (1995).  Early
                              _____________________

            Massachusetts  cases  about  the Blanket  Bankers  Bond,  the

            predecessor  to the  Financial Insurance  Bond, use  both the

            language of surety and the language of insurance.  See, e.g.,
                                                               ___  ____

            Fitchburg Sav. Bank v. Massachusetts Bonding & Ins.  Co., 174
            ___________________    _________________________________

            N.E. 324, 328 (Mass. 1931).

                                         -20-
                                          20

                      It  is  said that  "[i]n  most cases  and  for most

            purposes, .  . . [fidelity bonds] are recognized to be a form

            of  insurance that  are subject  to the  rules applicable  to

            insurance  contracts generally."   1  Couch on  Insurance 3d,
                                                  ______________________

            supra,   1:16 (citing law from various states).  Nonetheless,
            _____

            scholars  have noted  that, while  fidelity bonds  have, over

            time, become more like insurance contracts,12 a fidelity bond

            is still not liability insurance:

                      Although often referred to  as insurance,
                      it is not liability insurance, but rather
                      a  two-party indemnity  agreement through
                      which the insurer reimburses  the insured
                      for    losses   actually    suffered   in
                      accordance with the contract provisions. 

            Weldy, supra, at 2; see also Knoll & Bolduan, supra, at 5.
                   _____        ___ ____                  _____

                      It  is significant  that  the Bond  possesses  some

            characteristics of surety arrangements which distinguish them

            from  liability policies.  "The nature of the risk assumed by

            the party in  the role  of 'insurer' is  a major  distinction

            between  insurance  and  the  arrangements  of  guaranty  and

            surety. . . . [T]he risk can be characterized in terms of the

                                
            ____________________

            12.  The transformation  from treatment  as a surety  bond to
            treatment  as  an  insurance   contract  was  prompted  by  a
            broadening  in  the  scope  of coverage  of  fidelity  bonds.
            "[F]idelity coverage  came to encompass not  only traditional
            employee dishonesty, but other related risks, and became more
            like a  contract of insurance, using  the terms 'underwriter'
            and 'insured'  instead of 'surety'  and 'obligee.'"   Knoll &
            Bolduan,  supra, at  5.   Here, the  only insuring  clause at
                      _____
            issue is the one  covering "traditional employee dishonesty."
            But it is also  true that INA is described in  the Bond as an
            "underwriter" providing insurance.

                                         -21-
                                          21

            degree  to which the contingency is within the control of one

            of  the parties.  In  the classic instance  of insurance, the

            risk is controlled only by chance or nature.  In guaranty and

            surety arrangements, the risk tends to be wholly or partially

            in  the  control  of  one of  the  three  parties  [promisor,

            creditor, or debtor]."   1  Couch on Insurance  3d, supra,   
                                        ______________________  _____

            1:18.   There  is also  a  difference in  the liability  of a

            classic insurer  and that  of surety/guarantor.   An insurer,

            upon  the  occurrence  of  the  contingency,  must  bear  the

            ultimate loss, while  a surety  is entitled  to indemnity  in

            case the surety is compelled to perform.  

                      It  is also  significant,  as was  true in  Liberty
                                                                  _______

            Mutual, 773  F.2d at  18, that the  Massachusetts legislature
            ______

            has  made  distinctions  in  this area.    The  Massachusetts

            legislature has decided  that, for most regulatory  purposes,

            surety bonds  are not  insurance contracts.   See Mass.  Gen.
                                                          ___

            Laws ch. 175,   107.  In Williams v. Ashland Engineering Co.,
                                     ________    _______________________

            45 F.3d  588, 592  (1st Cir.), cert.  denied, 116  S. Ct.  51
                                           _____  ______

            (1995), this court found that "surety bonds are not insurance

            contracts,  and are  thus not  subject to  the Commonwealth's

            insurance laws."   See  also General  Elec. Co.  v. Lexington
                               ___  ____ __________________     _________

            Contracting Corp., 292  N.E.2d 874, 876  (Mass. 1973).   That
            _________________

            expression  of   public   policy  undercuts   any   automatic

            application of the insurance  notice prejudice rule to surety

                                         -22-
                                          22

            bonds, and thus to Financial Institution  Bonds to the extent

            that they partake of the characteristics of surety bonds. 

                      These distinctions confirm our reluctance to extend

            the state  notice prejudice  rule for liability  insurance to

            Financial  Institution  Bonds.   The  material  technical and

            substantive differences between  a Financial Institution Bond

            and liability insurance make it difficult to apply easily the

            common  law notice prejudice rule, developed as it was in the

            liability  insurance  context,  to the  insuring  arrangement

            here.

                      In   Cheschi,  as  in  Liberty  Mutual,  the  court
                           _______           _______________

            considered  the fact  that  the  insuring  arrangements  (not

            liability  policies) did  not  involve  layperson  consumers.

            Rather, they involved sophisticated businesses.  Accordingly,

            there  was little  reason to  depart from  the usual  rule of

            holding  the parties to their  bargain.  In Johnson Controls,
                                                        ________________

            the  Supreme Judicial Court  had stated  that one  reason for

            applying  the notice prejudice rule in that case was that the

            insurance policy was:

                      not  a  negotiated agreement;  rather its
                      conditions are by  and large dictated  by
                      the  insurance  company  to the  insured.
                      The  only  aspect  of  the  contract over
                      which  the insured  can 'bargain'  is the
                      monetary amount of the coverage.

            409  N.E.2d at 187 (quoting Brakeman v. Potomac Ins. Co., 371
                                        ________    ________________

            A.2d 193, 196 (Pa. 1977)).

                                         -23-
                                          23

                      Here, in  contrast, the Bond is  an agreement whose

            basic  terms are negotiated between two industries.  Over the

            years, the  banking industry and the  fidelity bond companies

            have negotiated  various  standard  forms  of  the  Financial

            Institution  Bonds.   See generally  Knoll &  Bolduan, supra;
                                  ___ _________                    _____

            Weldy, supra.   As one  commentator has noted,  "the fidelity
                   _____

            bond   is   an  arms-length,   negotiated   contract  between

            sophisticated business entities, the standard  form for which

            was drafted by the joint efforts of the Surety Association of

            America and the American  Bankers Association."  Koch, supra,
                                                                   _____

            at vii.  For example, at  the request of the American Bankers

            Association, the  1986 Bond added coverage for Uncertificated

            Securities,  and   adopted  the  UCC  definitions   of  these

            financial instruments.   Knoll &  Bolduan, supra, at  25; see
                                                       _____          ___

            also Calcasieu-Marine Nat'l Bank v.  American Employers' Ins.
            ____ ___________________________     ________________________

            Co., 533 F.2d  290, 295  n.6 (5th Cir.)  (bankers bond  being
            ___

            construed was  drafted  as a  joint  effort by  the  American

            Bankers  Association and  the  American Surety  Association),

            cert. denied, 429 U.S. 922 (1976).
            _____ ______

                      The  Bank   brings  up   the  doctrine   of  contra
                                                                   ______

            proferentum arguing that  "[a]mbiguities are resolved against
            ___________

            the  insurer, who  drafted the  policy, and  in favor  of the

            insured."    GRE  Ins.  Group v.  Metropolitan  Boston  Hous.
                         ________________     ___________________________

            Partnership,  Inc., 61  F.3d 79,  81 (1st  Cir. 1995).   This
            __________________

            doctrine  provides  the  Bank  no refuge.    The  presumption

                                         -24-
                                          24

            against the insurer is not applied  where the policy language

            results from the bargaining between  sophisticated commercial

            parties of similar bargaining power.   Falmouth Nat'l Bank v.
                                                   ___________________

            Ticor  Title  Ins.  Co.,  920  F.2d  1058,  1062  (1st   Cir.
            _______________________

            1990)(applying Massachusetts law).13  

                      Thus, to  the extent  the notice prejudice  rule is

            supported  by   the  policy   of  protecting   consumers  who

            effectively  have  little  or  no bargaining  leverage,  that

            policy provides  no basis here to extend the notice prejudice

            rule.

                                          B.

                      Finally, the  Bank draws  support for its  position

            from  a Tenth  Circuit decision, FDIC  v. Oldenburg,  34 F.3d
                                             ____     _________

            1529  (10th Cir. 1994), cert.  denied, 116 S.  Ct. 171 (1995)
                                    _____  ______

            and district  court decisions from other  jurisdictions.  The

            court in Oldenburg  predicted that Utah  law would require  a
                     _________

            Financial Institution Bond company to show prejudice in order

            to avoid coverage where  the bank gave  late notice.  Id.  at
                                                                  ___

            1546.   The court held that the notice prejudice rule applied

            in light of: (1) the failure of the  policy to expressly make

            notice  within  a  specific  time a  condition  precedent  to

            recovery;  (2)  the  Utah  rule   that  provisions  excluding

                                
            ____________________

            13.  The Fifth  Circuit has also rejected  the application of
            the doctrine  of contra proferentum to  Financial Institution
                             ______ ___________
            Bonds.   Sharp v. FSLIC, 858 F.2d 1042, 1046 (5th Cir. 1988);
                     _____    _____
            Calcasieu-Marine Natl Bank, 533 F.2d at 295 n.6. 
            __________________________

                                         -25-
                                          25

            coverage are strictly construed  against the insurer; and (3)

            a  Utah  statute,  enacted   after  the  Bond  period,  which

            expressed a public  policy that the notice  prejudice rule be

            applied to all insurance policies.  Id. at 1545-46.  Whatever
                                                ___

            the  requirements of  Utah  or other  law, Massachusetts  law

            governs this issue, and  Massachusetts has, until the Supreme

            Judicial Court  or the  state legislature  decides otherwise,

            framed its public policy choices differently.

                      We  hold that  the notice  prejudice rule  does not

            apply. 

                      Affirmed.
                      _________

                                         -26-
                                          26