Court Opinion

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Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

2-4-2000

Resolution Trust Corp. v. Fidelity & Deposit Co. of
MD,et al. (Part I)
Precedential or Non-Precedential:

Docket 98-6368

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Recommended Citation
"Resolution Trust Corp. v. Fidelity & Deposit Co. of MD,et al. (Part I)" (2000). 2000 Decisions. Paper 18.
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Filed February 4, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-6368

RESOLUTION TRUST CORPORATION,
as Receiver for City Savings, F.S.B., in Receivership,

v.

FIDELITY AND DEPOSIT COMPANY OF MARYLAND;
WILLEM RIDDER; JOHN T. HURST; LYNDON C. MERKLE;
GREGORY DEVANY

Federal Deposit Insurance Corporation, as statutory
successor to Resolution Trust Corporation,

       Appellant

On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civ. No. 92-01003)
District Judge: Honorable William H. Walls

Argued December 15, 1999

BEFORE: MANSMANN, GREENBERG, and MCKEE,
Circuit Judges

(Filed: February 4, 2000)

       Anthony J. Sylvester
       Craig L. Steinfeld
       Riker, Danzig, Scherer, Hyland
        & Perretti
       One Speedwell Avenue
       Morristown, NJ 07962

       Barbara Sarshik
       Ann S. DuRoss
       Assistant General Counsel
       Colleen J. Boles
       Senior Counsel
       Daniel Glenn Lonergan (argued)
       Counsel
       Federal Deposit Insurance
       Corporation
       550 17th Street, N.W.
       Washington, DC 20429

        Attorneys for Appellant

       Gregory R. Haworth (argued)
       Lauren Debruicker
       Duane, Morris & Heckscher LLP
       One Riverfront Plaza
       Newark, NJ 07102

        Attorneys for Appellee

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

This appeal arises from a dispute concerning coverage
under a savings and loan blanket fidelity bond the appellee,
Fidelity and Deposit Company of Maryland ("F&D"), issued
to City Federal Savings Bank ("City Federal"), in 1987. In
particular, the Federal Deposit Insurance Corporation
("FDIC"), as statutory successor to the Resolution Trust
Company ("RTC"), appeals the district court's order of
summary judgment entered against it on January 29, 1998,

                                  2

on its action on the bond.1 It contends that the district
court erred in holding that no reasonable jury could
conclude, based on the evidence presented, that City
Federal "discovered" a covered loss within the bond period
as required by the bond's terms for there to be coverage. In
response, F&D asserts that the district court's ruling on the
discovery issue is correct, and that alternatively, it is
entitled to summary judgment because the loss City
Federal sustained is not covered by the bond. For the
reasons that follow, we will reverse the district court's order
of summary judgment, and remand the matter to the
district court for further proceedings consistent with this
opinion.

II. FACTS and PROCEEDINGS

A. Background

We draw the relevant facts from the district court's
opinion and the parties' submissions in the summary
judgment proceedings before the district court. 2 See
_________________________________________________________________
1. The RTC originally filed the complaint in the district court, but the
FDIC, as the RTC's statutory successor, has taken this appeal. See 12
U.S.C. S 1441a(m). As a matter of convenience we refer to the appellant
as the RTC.

2. In this appeal, the parties rely specifically on the "12G Statement of
Undisputed Facts" the RTC submitted in opposition to F&D's motion for
summary judgment, see app. at 125-175, as well as the "12G Statement
of Undisputed Facts" the RTC submitted in opposition to individual
defendant Lyndon Merkle's motion for summary judgment. See SA at 39-
105. Those statements, in turn, set forth the historical facts giving rise
to this dispute. Because neither party has contested the accuracy of the
historical facts set forth in the 12G statements, and in view of the
circumstance that all of the relevant deposition testimony is not in the
record before this court, we have relied on those factual statements and
other portions of the record in deciding this appeal. However, to the
extent that the parties' briefs indicate that there are disputed facts, we
will refer to the RTC's version because we must view the facts in the
light

most favorable to it, the non-movant before the district court.

We also note that the parties submitted separate appendices in this
appeal. We refer to the RTC's appendix as "App. at ___," and F&D's
appendix as "SA at ___."

                               3

Resolution Trust Co. v. Fidelity & Deposit Co., No. 92-1003,
slip op. (D.N.J. Jan. 27, 1998) (hereinafter "Op. at ___").
Because this appeal is intensely fact-driven, it is necessary
to set forth the factual background in some detail.

On March 22, 1987, F&D issued a "Savings and Loan
Blanket Bond" ("the bond"), Standard Form No. 22, naming
as insureds City Federal and its wholly-owned subsidiary
City Collateral and Financial Services, Inc. ("City
Collateral"). City Collateral was City Federal's mortgage
warehouse lending operation.3 Among other things, the
bond provided fidelity insurance, and stated that F&D
would indemnify City Federal or its subsidiaries up to $5
million against losses it might suffer because of certain
dishonest or fraudulent acts by its employees. The bond
expired on March 22, 1989.

During the effective period of the bond, Willem Ridder
("Ridder"), John Hurst ("Hurst"), Lyndon Merkle ("Merkle")
and Gregory DeVany ("DeVany") were City Federal and City
Collateral employees, serving City Collateral in the following
capacities: (1) Ridder was the president of City Collateral
and Hurst's supervisor; (2) Hurst was a vice president of
City Collateral, the director of financial services and
DeVany's supervisor; (3) Merkle was a senior financial
services officer and also a vice president of City Collateral;
and (4) DeVany was a financial services officer and an
assistant vice president of City Collateral. Unless we
otherwise note, we will refer to these persons collectively as
the "individual defendants."

In June 1987, Kevin Corcoran ("Corcoran"), a City
Collateral loan officer, presented City Federal's Executive
_________________________________________________________________

3. The district court described the nature of a mortgage warehouse
lending operation:

       First, a mortgage warehouse lender such as City Collateral advances
       money to a mortgage banker to fund mortgages on real property. In
       return, the lender is given the mortgage notes as security for the
       loan. Then, the mortgage banker sells the mortgage notes to the
       Federal Home Loan Mortgage Corporation or some other investor
       and tells the lender to forward the mortgage notes to that
investor.

       The lender sends the notes to the investor, and then the mortgage
       banker uses the proceeds of the sale to repay the lender.

                               4

Committee ("Executive Committee") and Officer's Loan
Committee ("Loan Committee") with a proposal for a lending
arrangement whereby City Collateral would extend a $30
million warehouse credit line to Northwest Mortgage
Company ("Northwest"). Northwest, a New Jersey company,
originated residential mortgage loans and sold them to
investors individually or in pools. At all times relevant to
this case, Harry Movroydis ("Movroydis") was the president
of Northwest. On June 16, 1987, City Federal and
Northwest executed a "Master Mortgage Loan Warehousing
Agreement" (the "master agreement") and related
documents setting forth the terms and conditions of the
lending arrangement.

In March 1988, Corcoran left employment at City
Collateral, but before his departure, he told Hurst about
certain problems he had experienced with the Northwest
credit line. On or about April 1, 1988, Hurst and DeVany
took over administration of the Northwest credit line. From
approximately April 1, 1988, to November 1988, Merkle
generated "exception reports" pertaining to the Northwest
credit line and delivered those reports to both Hurst and
DeVany. These reports provided the following information:
(1) total amount of collateral that had been shipped to
third-party investors for purchase but for which City
Federal remained unpaid for at least 30 days (referring to
these loans as "shipped loans"), and (2) total amount of
collateral that had not been shipped to third-party investors
for purchase and for which City Federal had not been
repaid by Northwest for at least 180 days from City
Collateral's funding of the loan (referring to these loans as
"warehoused loans"). Despite the fact that the exception
reports for the Northwest credit line indicated numerous
problems with the Northwest collateral, Hurst and DeVany
did not distribute the reports to City Federal officials during
the relevant time period.

In May 1988, Hurst wrote to Movroydis to inform him
that Northwest was in violation of the master agreement.
About the same time, DeVany and another City Collateral
employee found difficulties with Northwest's list of
commitments from third parties to buy notes and
mortgages. DeVany did not report the problems to City

                                5

Federal's Real Estate Finance Committee. Despite these
problems, Hurst recommended that the Loan Committee
extend the maturity date of the credit line from May 31,
1988, to June 30, 1988. Moreover, Hurst did not inform the
Loan Committee that the Northwest credit line was in
technical default as of that time.

In June 1988, Hurst wrote to Northwest about a
"workout plan" for the credit line to cure the violations of
the master agreement. In July 1988, City Collateral put the
credit line on its internal "watch list," which meant that the
Northwest account had been identified as a problem credit.
The individual defendants did not inform City Federal of
this fact. Moreover, between June and September 1988,
City Collateral continued to extend credit to Northwest
while it closely monitored the loan. As F&D points out in its
brief, the evidence demonstrates that there were
improvements with Northwest's credit line during the
summer of 1988. Northwest was able to reduce its
warehoused loans from $8,036,027 as of June 30, 1998, to
zero as of September 30, 1988. The shipped loans dropped
from $7,040,357 as of June 30, 1988, to $5,695,890 as of
September 30, 1988.

In or about May 1988, and coincidentally around the
same time period that the Northwest credit line's maturity
date was extended for the first time, Ridder, Hurst and
Merkle learned from James McTernan ("McTernan"), a City
Federal officer, that City Federal planned to sell City
Collateral. According to the RTC, upon learning of City
Federal's intent to sell City Collateral, Hurst, Ridder and
Merkle promptly initiated discussions with City Federal
about their potential compensation if the sale were
consummated. Apparently, Ridder, Hurst and Merkle
negotiated what the parties call "golden handcuff
agreements" or "closing agreements" with City Collateral
throughout the summer and into the fall of 1988. See SA at
48.

As part of the effort to sell City Collateral, Drexel
Burnham Lambert, Inc. prepared an offering memorandum
that described City Collateral's business and corporate
structure as well as its loan credits. Ridder, Hurst and
Merkle worked on the credit section of this document, in

                                6

particular providing information for the section of the
offering memorandum entitled "Workouts and Litigation."
Although the Northwest credit line was in a "workout"
status as of that time, they did not include it in this section
of the offering memorandum. City Federal distributed the
offering memorandum during the summer of 1988 to
potential purchasers.

In September 1988, DeVany (under Hurst's supervision)
prepared a written recommendation to extend and renew
the Northwest credit line to June 1989, and in late
September 1988, DeVany presented it to City Federal's loan
committees. The report, and DeVany's oral presentation,
omitted negative facts relating to the Northwest credit line,
including, inter alia, its "workout" status and Northwest's
technical default under the master agreement. The report
also underestimated Northwest's risk rating in view of the
various problems with the account. Indeed, F&D admits in
its brief that while there appears to be a factual dispute as
to what DeVany said at the committee presentation, giving
the RTC every reasonable inference, "the most that can be
said is that the Employees concealed the Northwest default
and the workout plan in progress in order to induce City
Federal to extend the loan." Br. at 7. Moreover, the record
indicates that in September 1988, Hurst represented to
City Federal that the Northwest credit line would be
included in any future City Collateral sale. Nevertheless,
Hurst told City Collateral employees in August and October
1988, that the Northwest credit line would not be included
in any City Collateral sale.

After the September 1988 presentation, City Federal's
committees accepted DeVany's recommendation to renew
and extend the Northwest credit line, but conditioned its
acceptance on Northwest's completion of certain conditions.
As it turned out, Northwest failed to satisfy the stated
conditions, and on or about December 5, 1988, DeVany
halted funding on the credit line. There is evidence
indicating that DeVany halted funding under Hurst's
direction, but that none of the individual defendants
informed anyone at City Federal of the situation as of that
time.

                               7

Meanwhile, sometime in the fall of 1988, the parent
corporation of HonFed Bank ("HonFed"), a federally insured
savings bank based in Hawaii, expressed interest in
purchasing City Collateral. The RTC states that"according
to the deposition testimony of Hurst, by late October to
early November, Hurst, Ridder and Merkle were confident
that HonFed was going to purchase City Collateral and that
HonFed planned to employ them after the sale." Br. at 9.
Coincidentally (or not), on October 21, 1988, City Collateral
signed closing agreements with Ridder, Hurst and Merkle,
providing each with substantial sums of money, i.e., the
"golden handcuff payments," if City Federal sold City
Collateral and each of them provided assistance with the
City Collateral sale. Under the agreements each was to
"render such additional assistance as may be necessary to
assist and expedite the sale, transfer or assignment of [City
Collateral]." The amount of compensation Ridder, Hurst
and Merkle received under the agreements depended upon
a number of factors, including, inter alia, City Federal's
gross profit from the sale and whether each obtained
employment with the purchaser after the sale. Also, they
could collect their payments only if the sale occurred before
March 31, 1989, and they were not terminated for cause
before the deal closed. The RTC also states that during the
same time period, presumably by late October or early
November 1988, Hurst, Ridder and Merkle were negotiating
their future employment contracts with HonFed. Br. at 9.

Sometime in November 1988, DeVany began to create a
"customer history" on the Northwest Loan that he kept in
City Federal's files. The history summarized activities
involving the credit line. On November 28, 1988, HonFed
signed a letter of intent to purchase City Collateral and
began its due diligence process. The letter of intent
obligated HonFed to purchase all of City Collateral's loans
except those that were "non-performing or otherwise
substandard." Moreover, the letter of intent expressed that
one of the conditions of the sale was that Hurst, Ridder and
Merkle would agree to join HonFed.

During its due diligence, HonFed reviewed the exception
reports from the Northwest credit line. Testimony from
Kathy Durham of HonFed indicates that HonFed rated the

                               8
Northwest credit line as a "watch" based on its history of
losses and stale loans. A few days prior to the closing,
HonFed notified City Federal that it was excluding the
Northwest credit line from the sale.

In December 1988, DeVany met with Movroydis to
discuss the situation with the credit line. At the meeting,
which appeared at first in the customer history as having
occurred on December 29, 1988, Movroydis admitted that
he wrongfully had diverted collateral securing the loans
obtained from City Collateral. Apparently, Movroydis was
involved in what the parties refer to as a "kiting scheme,"
whereby he diverted the funds Northwest owed to City
Collateral to cover marketing losses that Northwest had
sustained in April and October 1987. DeVany did not tell
anyone at City Federal of this admission at that time, but
DeVany testified that he told Hurst about it. Apparently,
the RTC learned in discovery that the meeting actually took
place on December 22, 1988, rather than December 29,
1988. DeVany testified at his deposition that he changed
the date of the meeting at Hurst's insistence, but Hurst
denied that he ever ordered DeVany to do so. As described
below, the closing date of the City Collateral sale was
December 29, 1988. DeVany also testified that he changed
the date of the customer history after the HonFed sale, but
insofar as we can tell, his testimony does not indicate when
Hurst asked him to change the date.

In the weeks prior to the closing, Ridder sent Gerry
Czarnecki ("Czarnecki"), the chairman of the board of
HonFed, a memorandum dated December 9, 1988, entitled
"HonFed/CityFed Negotiations." The district court described
the memorandum as containing "various recommendations
that appear to run counter to City Federal's interest." Op.
at 12-13. One of the items Ridder discussed in the
memorandum was the Northwest credit line; in particular,
he recommended that HonFed accept the Northwest credit
line under certain conditions, and suggested the following
course of action: "Your bargaining position [with City
Federal] should be that if the credit does not improve to an
`acceptable' or `pass' level (currently rated substandard by
HonFed) rated by HonFed credit exam by March 31, 1989,
that then all outstandings outstanding at that date are to

                                9

be repurchased by [City Federal.]" SA at 59. Importantly,
the memorandum confirmed that the Northwest credit line
was in technical default, and that Northwest "had excessive
stale loans in warehouse due to operating problems and
commitment glitches." Id. Ridder did not distribute the
memorandum to anyone at City Federal, nor was it found
in City Federal's files.
Notably, City Federal executive James McTernan testified
at his deposition that no one told him prior to the HonFed
closing about "operating problems" or "commitment
glitches" with the Northwest account. See SA 64-65.
Similarly, McTernan stated in a declaration that he was
certain that he was not aware of any problems with the
collateral securing the Northwest loan, and, in his
deposition, he testified that he did not know that there was
any technical default of the master agreement precluding
the renewal of the credit lines. McTernan also indicated in
his deposition that certain of the statements Ridder made
in the memorandum were contrary to City Federal's
interests, and therefore could have been grounds for
termination. See app. at 552; SA at 65-68. McTernan also
testified that he would have expected Ridder to circulate the
memorandum to his superiors at City Federal, given that it
contained recommendations that ran counter to City
Federal's interests. See SA at 68.

The district court noted that HonFed decided to exclude
the Northwest loan from its purchase of City Collateral's
assets only a "few days" before the closing. Thus, it is
reasonable to infer that the decision to exclude the loan
occurred after Movroydis's admission to DeVany, and after
Hurst became aware of it. See Op. at 13. The record
supports the conclusion that HonFed made its ultimate
decision after its receipt of the December 9, 1988,
memorandum. In late December, and prior to the HonFed
sale, McTernan asked Ridder how HonFed decided to leave
the Northwest credit line with City Federal. McTernan
testified that Ridder replied that HonFed had performed
due diligence and elected not to purchase the credit line.
He also indicated that Ridder did not mention the problems
with the Northwest account at that time.

                                10

At or about the same time as the closing on December
29, 1988, Ridder, Hurst, and Merkle entered into
employment contracts with HonFed providing for various
benefits including incentive compensation and automobile
expenses. Also, HonFed provided each individual with a
signing bonus: Ridder received $42,000, Hurst received
$26,250, and Merkle received $22,500. They also received
monthly salaries of $11,667, $8,750, and $7,500,
respectively. Ridder, Hurst and Merkle earned the
maximum payments under their "golden handcuff "
agreements: Ridder received approximately $279,000, Hurst
received approximately $206,000, and Merkle received
$150,000. See Op. at 14. Moreover, it appears that DeVany
received $1,000 from a bonus pool Ridder, Hurst and
Merkle established voluntarily. F&D's Br. at 9.
After the closing, City Federal created First Collateral
Financial Services ("First Collateral") to assume City
Collateral's former duties. In January 1989, Northwest
defaulted on its obligations on the credit line; it failed to
make payments due on January 1, 1989, and February 1,
1989. On February 15, 1989, DeVany, who continued to
administer the Northwest credit line after the sale, provided
City Federal with a status report that revealed problems
with the credit line. The district court indicated in its
opinion that DeVany's memorandum marked the first time
that anyone at City Federal had been advised of the
problems with the line. See Op. at 14. We note, however,
that evidence in the record indicates that City Federal
employees, including McTernan, knew generally in late
January 1989, that there were problems with the credit
line. In any event, the important point is that City Federal
officials were kept in the dark with respect to the nature
and severity of the situation until after the completion of
the HonFed sale. On February 24, 1989, Movroydis met
with City Federal executives and admitted that he
misappropriated City Collateral funds. This was thefirst
time that anyone at City Federal learned of the Movroydis
admission and the details of his kiting scheme, despite the
fact that DeVany and Hurst knew about the situation in
December 1988, prior to the HonFed closing.

City Federal's senior in-house counsel, Amy Stein, Esq.
("Stein"), learned of the Northwest situation on March 6,

                               11

1989. At that point, Stein and A. Eugene Hull, Esq. ("Hull"),
another in-house attorney at City Federal, commenced an
investigation into the Northwest matter because they were
concerned that employee misconduct may have caused the
Northwest loss, thus triggering coverage under the F&D
fidelity bond.

On March 20, 1989, after interviewing DeVany and
Merkle, Hull drafted a letter entitled "Notice of Possible
Loss," and sent it to F&D. The letter essentially tracked the
language of the discovery definition in the bond, but
provided no specific details concerning the factual basis for
City Federal's belief that a covered loss had occurred.

The following day, March 21, 1989, Hull sent a
supplemental letter to F&D. He estimated that City Federal
incurred a $7 million loss on the Northwest account, but he
again provided no specific information concerning the basis
for his belief that employee misconduct caused the loss.

On March 30, 1989, F&D sought additional facts from
Hull concerning the suspect transaction, the losses
sustained to date, the basis for City Federal's suspicion
that employee dishonesty was involved, and any other
information City Federal was willing to share. Unsatisfied
with Hull's response to that letter, F&D wrote to Hull again
on April 25, 1989. Specifically, F&D sought additional
information concerning the factual basis for City Federal's
suspicion that one or more of its employees was involved in
fraudulent or dishonest conduct causing the Northwest
loss. Hull did not respond to the correspondence, and F&D
sent another letter seeking the same information on August
9, 1989. Again City Federal's legal department did not reply
to F&D's correspondence.

Subsequently on December 7, 1989, the Director of the
Office of Thrift Supervision, Department of the Treasury,
declared City Federal insolvent and ordered it closed. The
order also appointed the RTC as receiver for City Federal.
Consequently, the RTC took possession of City Federal on
December 8, 1989, and succeeded to all its rights, titles,
assets, powers and interests, including City Federal's right,
if any, to indemnification under the F&D bond. About two
weeks later, the RTC filed its "Proof of Loss" with F&D. F&D
denied the claim for coverage, and this litigation followed.

                               12

B. Procedural History

The RTC, as City Federal's successor, filed its complaint
in the district court against F&D, Ridder, Hurst, DeVany
and Merkle on March 6, 1992, asserting various state law
claims. Count 1 of the complaint alleged that F&D
breached its contract with City Federal because it failed to
indemnify City Federal under the bond for the Northwest
loss. Count 2 sought a declaratory judgment of coverage
under the bond, and Count 3 alleged that F&D violated the
implied covenant of good faith and fair dealing by denying
coverage under the bond.4

F&D filed a motion for summary judgment, arguing that
it was entitled to judgment as a matter of law on two
separate grounds. First, it asserted that "Insuring
Agreement A," which we call the fidelity provision, did not
cover the losses caused by the alleged dishonest and
fraudulent conduct by the individual defendants. 5 It
claimed that no reasonable jury could find that the
individual defendants acted with the requisite "manifest
intent" both to cause a loss to City Federal and to obtain
the type of financial benefit for a third party or themselves
that would permit coverage under the bond. Second, F&D
_________________________________________________________________
4. Counts 4 through 20 alleged various state law claims against Hurst,
Merkle, Ridder and DeVany. On October 27, 1995, Merkle filed a motion
for partial summary judgment. The district court denied the motion by
opinion and order entered January 13, 1997. Merklefiled a motion for
reconsideration, which the district court granted by letter order entered
March 6, 1997. However, after considering the issues presented in the
motion for partial summary judgment for the second time, the court
denied the motion in its letter order. Merkle filed a motion for
reconsideration of that last order, which the district court denied by
letter order entered April 15, 1997. These rulings are not at issue in
this

appeal.

5. The bond consisted of separate "Insuring Agreements," each of which
protected against certain internal and external risks. All of the Insuring
Agreements are subject to a common set of general agreements,
definitions, conditions, limitations, and exclusions. The agreements, or
coverages, include: (A) Fidelity, (B) Audit Expense, (C) On Premises, (D)
In Transit, (E) Forgery or Alteration, (F) Securities, and (G) Counterfeit
Currency. In this appeal, the RTC claims coverage only under "Insuring
Agreement A."

                               13

maintained that under the general discovery definition
found in section 4 of the "General Agreements" portion of
the bond, no reasonable jury could conclude that City
Federal "discovered" the loss during the bond period, as
required for there to be coverage, even viewing the known
facts as of March 22, 1989, the date the bond expired, in
the light most favorable to the RTC. See Op. at 18.

The district court granted F&D's motion in its opinion
and order entered January 29, 1998, and dismissed the
RTC's claims against F&D with prejudice. First, the court
concluded that there were genuine issues of material fact
as to whether the individual defendants acted with the
manifest intent to cause City Federal a loss which, at the
same time, allowed them to obtain the type of financial gain
that would establish coverage under the bond. The court
held in the alternative, however, that summary judgment
was appropriate on the basis that City Federal failed to
discover the loss within the applicable bond period. See Op.
at 31-32. The district court subsequently filed an order
dismissing the action against F&D in its entirety, and after
the remaining parties settled the case, the RTCfiled a
timely notice of appeal of the summary judgment order.

III. JURISDICTION, STANDARD OF REVIEW and
       APPLICABLE LAW

The district court exercised subject matter jurisdiction
over this matter pursuant to   12 U.S.C. S 1441a(l)(1), which
grants original jurisdiction   to district courts over any action
to which the RTC is a party.   The FDIC was subject to
jurisdiction in the district   court by virtue of 12 U.S.C.
S 1819(b)(2)(A).

We exercise appellate jurisdiction over this appeal
pursuant to 28 U.S.C. S 1291, as the district court entered
a final order dated September 3, 1998, dismissing the
action. Because the RTC appeals from the district court's
order of summary judgment entered January 29, 1998, our
review is plenary. See Nelson v. Upsala College, 51 F.3d
383, 385 (3d Cir. 1995).

Preliminarily, we note that suits brought by the FDIC are
deemed by statute to arise under the laws of the United

                                 14

States. See 12 U.S.C. S 1819(b)(2)(A). Nevertheless, we treat
this appeal as governed by the substantive law of New
Jersey, inasmuch as both parties assume that New Jersey
law applies, neither party contends that another state's law
governs, and we see no basis for fashioning a federal rule
of decision to resolve the issues we address today. See
O'Melveny & Myers v. FDIC, 512 U.S. 79, 87-88, 114 S. Ct.
2048, 2055 (1994); FDIC v. Insurance Co. of N. Am., 105
F.3d 778, 779 n.1 (1st Cir. 1997); FDIC v. Oldenburg, 34
F.3d 1529, 1538 & n.10 (10th Cir. 1994); FDIC v. New
Hampshire Ins. Co., 953 F.2d 478, 481-82 (9th Cir. 1991).
In this regard, however, we note that many of the germane
cases are from the federal courts as, not surprisingly,
diversity jurisdiction frequently is present in litigation
involving fidelity bonds. The cases often state common law
principles which are not unique to any particular state.

IV. DISCUSSION

A. "Discovery" of the Loss

The RTC contends primarily that the district court erred
in concluding that City Federal failed to discover the basis
for its claim under the bond prior to the bond's expiration
on March 22, 1989, as required for there to be coverage. It
maintains that the issue of when the loss was "discovered"
under the bond is inherently factual and thus properly is
reserved for the trier of fact. It claims that the facts City
Federal knew as of the expiration of the bond period, when
considered in combination, were sufficient under the bond's
discovery standard so that the issue should have been
presented to a jury.

F&D contends in response that the district court's
disposition of the discovery issue was correct, as the court
recognized that the information that City Federal learned
prior to the expiration of the bond period was insufficient to
warrant a jury finding that it "discovered" the loss as of
that time. It argues that, at most, the facts and
circumstances City Federal knew gave rise to suspicions
about the individual defendants' misconduct, but that
"mere suspicion of employee dishonesty or wrongdoing

                               15

during the bond period does not constitute discovery." Br.
at 24. Citing cases in which the courts ruled in favor of the
insurer on the issue of discovery, F&D claims they support
its position because the insureds in those cases possessed
"far more knowledge of facts about the alleged dishonesty
than City Federal possessed" during the bond period. See
id. at 25-28.

The bond at issue is known in the industry as a
"Standard Form No. 22 bond." It is a "discovery bond,"
which by its terms requires that the insured discover the
loss during the bond period as a condition to coverage.
Thus, coverage expressly is limited by the following section,
which defines "discovery" as the term is used throughout
the various provisions in the bond:

       Section 4. This bond applies to loss discovered by the
       Insured during the bond period. Discovery occurs when
       the Insured becomes aware of facts which would cause
       a reasonable person to assume that a loss covered by
       the bond has been or will be incurred, even though the
       exact amount or details of loss may not then be known.

App. at 100. Moreover, section 5 of the General Agreements
section of the bond states that "[a]t the earliest practicable
moment, not to exceed 30 days after discovery of the loss,
the Insured shall give the underwriters notice thereof." Id.

During the summary judgment proceedings before the
district court, the RTC argued that a reasonable jury could
find that City Federal discovered the loss during the bond
period, given the information City Federal knew prior to the
expiration of the bond period, and the discovery standard
that applied. It relied on several pieces of information of
which members of City Federal's legal department were
aware as of March 20, 1989, the date City Federal sent its
Notice of Possible Loss letter to F&D. Thus, its position
essentially was that the facts City Federal knew showed
that it possessed more than "mere suspicions of
dishonesty." Specifically, it cited Stein's deposition
testimony which detailed the various pieces of information
City Federal's legal department discovered during the bond
period. Because the nature and extent of City Federal's
knowledge is central to resolving the discovery issue, we

                               16

will set forth in some detail the factual basis for the RTC's
argument.

First, Stein testified that she knew that the Northwest
loss essentially "dropped out of the sky" without City
Federal management receiving prior warning from any of
the individuals responsible for monitoring the loan. She
testified that it was "unprecedented" that a multi-million
dollar loss would just appear out of nowhere, without prior
warning signs being noticed by the employees working on
the account. Yet, to the best of her knowledge at that time,
none of the responsible employees revealed any warning
signs to City Federal personnel.

Second, Stein knew that HonFed specifically excluded the
Northwest credit line from its purchase of City Collateral's
assets. Stein testified that it was incredible and very
peculiar that HonFed would single out the Northwest loan
and exclude it from the sale, particularly while City Federal
employees responsible for the loan seemingly were unaware
of its troubled status. Her testimony in this regard was:

       MS. STEIN: I mean, I can't imagine how HonFed could
       come up to a conclusion like that [i.e., that the loan
       should be excluded], having no ownership of the loan,
       where we had bank employees or City Collateral
       employees who were responsible for this loan. It just
       didn't square up. I mean, why does a buyer kick out a
       loan from a purchase? It's just not, you know, karma.

        . . . .

        I just knew the HonFed deal was going down right
       around this time, and it seemed very peculiar to me
       that another financial institution kicks this loan out of
       its purchase.

       MR. KASLOW: Do you know if HonFed conducted any
       due diligence?

       MS. STEIN: Well, my point is this. If HonFed conducted
       due diligence and saw something that made it believe
       that this loan was not, you know, acceptable, where
       were our employees who were managing this loan and
       dealing with this borrower, why didn't they also

                               17
       discover that and why wasn't that brought to
       management's attention?

Third, Stein knew that DeVany learned of Movroydis's
fraudulent scheme in late December 1988, but failed to
report his admission to management at City Federal or City
Federal's legal department. She knew that DeVany met with
Movroydis at or around the same time as the HonFed
closing, and learned at that time that Movroydis converted
monies Northwest owed to City Collateral and used the
funds to cover marketing losses Northwest sustained in
1987. Stein testified that it was "bizarre" and contrary to
bank policy that DeVany concealed that information rather
than promptly notifying the legal department that one of its
borrowers perpetrated a fraud. She explained:

       A borrower walks in, sits down with an account officer
       [DeVany], confesses to a multimillion dollar fraud, and
       the account officer doesn't call the legal department for
       months, the legal department doesn't even find out
       about it through the account officer? That is, you
       know, clearly weird. That's just not the way things
       worked in the real world, it's just not the way it works.

App. at 352. Stein explained later in her deposition that
City Federal policy required its employees to notify the legal
department of matters that had "a legal consequence or a
legal issue" involved. In view of her belief that"certainly
fraud or theft by a borrower would fall into that category,"
Stein thought DeVany's concealment particularly telling.
App. at 349, 362.

Finally, Stein cited DeVany's demeanor as an additional
factor that led her to believe that he had engaged in
fraudulent or dishonest behavior causing the Northwest
loss. According to Stein, DeVany did not seem credible
during his interview with Hull, which occurred shortly
before the bond period expired and prior to City Federal's
Notice of Possible Loss letter dated March 20, 1989. The
RTC also cited Hull's assessment of both DeVany's and
Merkle's demeanor when he interviewed them. Hull testified
that he did not find either of them forthcoming with
information about the Northwest loss, which seemed
contrary to what one would expect given the circumstances.

                                18

After reviewing each piece of information, the district
court concluded that no reasonable jury could find that
discovery had occurred as of the bond's expiration date. It
explained that while the circumstances apparently gave rise
to concern or suspicions that employees concealed
information from City Federal, there was "no evidence in
the record to indicate that as of [March] 22, 1989, City
Federal was aware of any specific dishonest conduct by the
employees which proximately caused the Northwest loss."
See Op. at 32. Specifically, the court noted that Stein's
knowledge of the manner in which Northwest learned of the
loss and her awareness of the fact that HonFed decided to
exclude the account from the purchase did not provide a
basis for assuming that the employees responsible for the
administration of the credit lines caused the loss. Moreover,
the court discounted the significance of the fact that Stein
knew that DeVany was aware of Movroydis's scheme prior
to the HonFed closing but failed to alert City Federal
management or its legal department, stating:

       DeVany's failure to notify the legal department of the
       confession is not a definite basis for a careful and
       prudent person to charge him with fraud or
       dishonesty. At that time, his omission may have just as
       easily been classified as neglect. Further, this
       particular concealment was not the dishonest conduct
       that directly resulted in the Northwest loss: the culprits
       were the earlier ongoing misrepresentations of the
       condition of the credit line that proximately caused the
       claimed loss from the unpaid loans.

Op. at 33. The court also cited City Federal's failure to
respond promptly to F&D's requests for additional
information, and its admission in litigation with its
subsequent insurer that as of the expiration of the F&D
bond, City Federal had not determined "the specifics of any
employee dishonesty in connection with those problem
loans to Northwest." Op. at 33-34.

In reviewing the district court's grant of summary
judgment, we must determine whether there is a genuine
issue of material fact for trial on the issue of whether City
Federal discovered the loss during the bond period. See
FDIC v. Insurance Co. of N. Am., 928 F. Supp. 54, 58 (D.

                               19
Mass. 1996), aff'd on other grounds, 105 F.3d 778 (1st Cir.
1997). In this connection, we must view the facts in the
light most favorable to City Federal and determine if a
reasonable jury could conclude that a reasonable person
would have assumed, based on the information City Federal
knew as of March 22, 1989, that a covered loss had or
would be incurred. Stated differently, summary judgment
against the RTC on this issue of discovery was warranted
only if there was no material dispute that the information
City Federal knew provided an insufficient basis for a
reasonable person to assume that a loss covered by the
bond had or would be incurred. See In re ContiCommodity
Servs., Inc., Sec. Litig., 733 F. Supp. 1555, 1578 (N.D. Ill.
1990).6

For the reasons we explain below, we disagree with the
district court's conclusion that no reasonable jury could
find that City Federal "discovered" the Northwest loss
during the bond period. Given the standard of discovery set
forth in section 4 of the bond, we find that a reasonable
jury could conclude, based on the information that City
Federal knew as of the expiration of the bond period, that
it was aware of sufficient facts that would cause a
reasonable person to assume that a loss covered by the
bond had or would be incurred. Accordingly, we will reverse
the district court's summary judgment on this issue.

To explain our result, we first must set forth our
understanding of the concept of discovery under the
standard set forth in the bond. While we recognize that we
addressed the general idea of "discovery" of a loss under a
fidelity bond in Fidelity & Deposit Co. v. Hudson United
Bank, 653 F.2d 766 (3d Cir. 1981), this case presents an
issue of first impression in this circuit inasmuch as it
requires us to interpret the meaning of the discovery
standard found in the Standard Form No. 22 bond. 7 To
_________________________________________________________________

6. In re ContiCommodity Services, Inc., Securities Litigation was a multi-
district litigation case. See 733 F. Supp. 1555 (N.D. Ill. 1990). Other
aspects of the district court's opinion, which are not relevant here, were
affirmed sub nom in ContiCommodity Services, Inc. v. Ragan, 63 F.3d 438
(5th Cir. 1995), and reversed sub nom in Brown v. United States, 976
F.2d 1104 (7th Cir. 1992).

7. It appears that the RTC is willing to assume that the discovery
standard we relied upon in Hudson United provides the rule of law that

                               20

reiterate, discovery occurs under section 4 of the bond
"when the Insured becomes aware of facts which would
cause a reasonable person to assume that a loss covered by
the bond has or will be incurred, even though the exact
amount or details of the loss may have not then been
known." App. at 565. The date of "discovery" of the loss is
_________________________________________________________________

we should apply here in determining if discovery occurred within the
bond period. Nevertheless, we do not believe that it is self-evident that
its
assumption is correct. In Hudson United, we followed cases holding that
discovery under a fidelity bond occurs "when 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,
653 F.2d at 774. We also noted that in defining when a bank "discovers"
a loss for purposes of filing a notice of loss with its carrier, courts
have
held that "[a] bank is not under a duty to notify its insurance carrier
until it has knowledge of some specific fraudulent act." Id. (citing,
inter

alia, American Sur. Co. v. Pauly, 170 U.S. 133, 18 S. Ct. 552 (1898)). We
simply cannot assume that the general discovery principles we cited in
Hudson United automatically apply here, as our opinion there addressed
a different issue--namely, whether the insurer was entitled to rescind its
insurance contract based on the insured's failure to disclose a potential
loss prior to the commencement of the bond period. See id. And more
importantly, while we recognize that in Hudson United we found those
general discovery principles helpful in addressing the question of
rescission, section 4 of this bond explicitly provides the applicable
discovery definition at issue in this appeal. See also National Newark &
Essex Bank v. American Ins. Co., 385 A.2d 1216, 1224-25 (N.J. 1978)
(addressing concept of discovery under fidelity bond in absence of
controlling definition). Therefore, inasmuch as the parties contracted for
a specific discovery provision, our analysis must begin with the plain
language of the bond. But cf. First Sec. Savs. v. Kansas Bankers Sur. Co.,
849 F.2d 345, 349 (8th Cir. 1988) (construing same discovery definition
as in the present case and looking to "well-established rule" that insured
under a fidelity bond is not bound to give notice until he has acquired
knowledge of some specific or wrongful act) (citing, inter alia, Hudson
United); see also First Dakota Nat'l Bank v. St. Paul Fire & Marine Ins.
Co. 2 F.3d 801, 807 (8th Cir. 1993) (citing Kansas Bankers). Of course,
we recognize that we may look to prior case law in attempting to
ascertain the intended meaning of the parties' chosen language. See
generally 13 John A. Appleman & Jean Appleman, Insurance Law and
Practice S 7404 (2d ed. 1976). We simply point out here that we do not
share the parties' apparent view that the discovery rules we cited in
Hudson United are dispositive.

                               21

of practical significance because it not only determines
whether the loss is covered by the bond, but also triggers
the insured's obligation to give notice of the possible loss to
its carrier "at the earliest practical moment, not to exceed
30 days." Id.

We understand this discovery standard as comprised of
a subjective and objective component: the trier of fact must
identify what facts and information the insured actually
knew during the relevant time period, and it must
determine, based on those facts, the conclusions that a
reasonable person could draw from them. Our
understanding in this connection comports with prior case
law addressing the concept of "discovery" in the fidelity
bond context. See United States Fidelity & Guar. Co. v.
Empire State Bank, 448 F.2d 360, 365 (8th Cir. 1971) ("In
determining when discovery has taken place, the trier of
fact must find the pertinent underlying facts known to the
insured and must further determine the subjective
conclusions reasonably drawn therefrom by the insured.")
(applying Missouri law in absence of governing definition in
bond); see also Wachovia Bank & Trust Co. v.
Manufacturers Cas. Ins. Co., 171 F. Supp. 369, 375
(M.D.N.C. 1959) (adopting rule of law that mirrors discovery
standard of Standard Form No. 22 bond, and stating that
"The facts must be viewed as they would have been by a
reasonable person at the time discovery is asserted, and
not as they later appeared in the light of subsequently
acquired knowledge.").

We also agree with F&D's position that the discovery
definition requires that the insured possess more than
mere suspicions of employee dishonesty or fraud. See
Hudson United, 653 F.2d at 774 (citations omitted). Courts
long have recognized the principle that unsupported
suspicions of employee misconduct do not constitute
discovery in the fidelity bond context, see, e.g., National
Newark & Essex Bank v. American Ins. Co., 385 A.2d 1216,
1224 (N.J. 1978), and we believe that the language of the
bond incorporates that requirement by tying the concept of
discovery to "facts" within the insured's knowledge. Indeed,
the language "facts which would cause a reasonable person
to assume" defines the nature of information that the

                               22

insured must possess in order for it to be charged with
discovery, and we agree with those courts of appeals which
have stated that "discovery" of a loss under section 4 does
not occur until the insured "discovers facts showing that
dishonest acts occurred and appreciates the significance of
those facts." See, e.g., FDIC v. Fidelity & Deposit Co., 45
F.3d 969, 974 (5th Cir. 1995) (quoting FDIC v. Aetna Cas.
& Sur. Co., 903 F.2d 1073, 1079 (6th Cir. 1990)); see also
California Union Ins. Co. v. American Diversified Savs. Bank,
948 F.2d 556, 564 (9th Cir. 1991) (same); Aetna Cas., 903
F.2d at 1079 (citing Empire State Bank, 448 F.2d at 364-
66); cf. Royal Trust Bank, N.A. v. National Union Fire Ins.
Co., 788 F.2d 719, 721 n.2 (11th Cir. 1986) (stating that
same discovery definition does not require that the bank
have enough information to charge its employee with fraud
or dishonesty; "All that is required is that it have enough
information to assume that the employee has acted
fraudulently or dishonestly."). Moreover, we understand the
objective, "reasonable person" component as permitting the
trier of fact to analyze the full range of information the
insured knew so as to determine whether a reasonable
person would assume, based on all of the circumstances,
that a covered loss had or would be incurred. See Wachovia
Bank, 171 F. Supp. at 376-77.

Inevitably, a court must assess each case on its own
facts, keeping in mind the general principle that the
"discovery threshold is low." See California Union, 948 F.2d
at 563; see also Oldenburg, 34 F.3d at 1542 (quoting
California Union and stating that the " `discovery threshold
is low' "). Indeed, by adhering to that general principle, we
remain true to the plain language of the bond. All that it
requires is that the insured possess sufficient information
to lead to a reasonable assumption of a covered loss; it
states specifically that the insured need not know"the
exact amount or details" of the loss to be charged with
discovery under section 4.8
_________________________________________________________________

8. Parenthetically, we observe that our understanding as to the level of
knowledge that the bond requires for discovery to occur is informed by
the reality that, to some extent, the bond places an insured in a
difficult

predicament. Specifically, we point out that under section 5 of the bond,

                                23

With these basic precepts in mind, we may consider the
specific facts of this case. As we have indicated, our review
of the record leads us to conclude that a reasonable jury
could find that City Federal possessed sufficient knowledge
of facts that would cause a reasonable person to assume
that a covered loss had or would be incurred as of March
22, 1989. Put simply, we believe that there is more than
one reasonable conclusion that could be reached based on
the facts City Federal learned during the crucial days just
prior to the bond's expiration. First, City Federal knew for
a fact that DeVany was aware of the Movroydis scheme,
and committed a dishonest act by concealing the admission
from City Federal and perhaps more significantly, its legal
department.9 This is an important piece of information, and
_________________________________________________________________

if the insured waits for too long a period after it is deemed to have
"discovered" the loss, its insurer may deny coverage. Section 5 requires
the insured to give notice of the loss within 30 days after "discovery of
the loss." Indeed, we found cases addressing the concept of "discovery"
of a loss under a fidelity bond in the context of insurers' claims that,
as

a matter of law, discovery had occurred prior to the time the insured
claimed it had. See, e.g., Interstate Prod. Credit Ass'n v. Fireman's Fund
Ins. Co., 788 F. Supp. 1530, 1533-37 (D. Or. 1992). In these cases, the
insurers asserted that the insured waited too long after "discovery" of
the

loss, thus precluding coverage because of the duty to give timely notice.
Here, in essence, F&D's argument is the opposite: it claims that City
Federal gave its notice too early rather than too late.

9. The district court discounted the significance of this fact, stating
that
"DeVany's failure to notify the legal department of the confession is not
a definite basis for a careful and prudent person to charge him with
fraud or dishonesty. At that time, his omission may have just as easily
been classified as neglect." Op. at 33 (emphasis added). Regardless of the
district court's views on this point, the RTC was not required to
demonstrate that the concealment was a definite basis for a reasonable
person to charge him with fraudulent or dishonest conduct in
connection with the Northwest loss. Instead, the question at this
juncture is whether a reasonable jury could conclude on the basis of that
proof that City Federal possessed sufficient information to constitute
discovery. Moreover, to the extent the district court recognized that the
omission could be classified either as neglect or intentional concealment,
that statement indicates that reasonable minds could differ, thus making
summary judgment inappropriate. Finally, we also note that the court
determined that City Federal's discovery of DeVany's concealment was
not material because that concealment was not the dishonest conduct
that "directly resulted" in the loss. Op. at 33. But we do not interpret
the
discovery definition in the bond as requiring as much.

                               24

it indicates to us that a jury could conclude that City
Federal possessed more than mere unsupported suspicions
of dishonest conduct. Compare California Union, 948 F.2d
at 564-65 (affirming summary judgment for insurer on
discovery issue where the evidence arguably showed that
the insured knew of infractions of banking regulations, but
there was no testimony to indicate that the non-wrongdoing
employees knew of dishonest acts by other employees);
Aetna Cas., 903 F.2d at 1079 (reversing summary
judgment for FDIC and finding that discovery had not
occurred during the bond period where the insured had
suspected employee dishonesty was involved in a potential
loss, but the suspicions grew from general conditions of
bank and not from knowledge of any facts which indicated
that its employee committed any dishonest acts). Moreover,
City Federal was aware of the circumstance that, even after
the HonFed sale, DeVany did not inform City Federal or its
legal department of the Movroydis fraud; instead, City
Federal learned of it because of Movroydis' admission to its
management in February 1989.

Of course, a reasonable person would evaluate the
significance of these facts in the context in which they
occurred: on or about the same date that Movroydis
supposedly revealed his fraudulent scheme to DeVany, the
HonFed deal closed. And in evaluating the importance of
the timing of the Movroydis admission and DeVany's
concealment, a reasonable person could find it telling that
HonFed specifically excluded this account from the City
Collateral assets it purchased. Indeed, this circumstance
would appear exceptionally suspect in view of the fact that
the Northwest loan loss "dropped out of the sky" in the
sense that City Federal management possessed no
knowledge of any significant problems with this account, or
the existence of any loss, until after the closing date.
Finally, Stein testified that she and Hull perceived DeVany's
demeanor as "elusive" when they questioned him. While
their assessment of his behavior would be insufficient,
standing alone, to satisfy the discovery standard in the
bond because mere suspicions are not enough to constitute
"discovery," it certainly lends support to the conclusion that
a jury could find in favor of the RTC on the discovery issue
when it is considered in conjunction with the other factual

                               25

information in City Federal's possession during the relevant
time period.

It appears to us that the district court overlooked the
reasonable inferences that a jury could draw from the
totality of information that City Federal knew during the
relevant time period. Rather than considering the probative
force of the information in its totality, the district court
focused on each piece of information in isolation and
resolved a disputed factual issue in F&D's favor. We
recognize that finding the point at which discovery occurred
is difficult, given the inherently fact-driven nature of the
inquiry. It may be extremely difficult, then, to determine on
summary judgment when the insured discovered a loss
caused by employee dishonesty. Given the set of facts
before us, we disagree with the district court's ultimate
finding that the only reasonable conclusion to be drawn
was that City Federal possessed nothing more than
unconfirmed suspicions of employee misconduct relating to
the Northwest account. Compare United States Fidelity &
Guar. Co. v. Maxicare Health Plans, No. 96-2457, 1997 WL
466802, at *5 (E.D. La. Aug. 12, 1997) (finding as a matter
of law at motion for summary judgment that insured
discovered the loss within the meaning of the same bond
definition where the insured possessed a similar level of
knowledge as City Federal); see also Boomershine Pontiac-
GMC Truck, Inc. v. Globe Indem. Co., 466 S.E.2d 915, 917
(Ga. Ct. App. 1996) (reversing order of summary judgment
in favor of insurer in fidelity bond dispute on discovery
issue, stating that as long as there is room under the
evidence for a reasonable difference of opinion as to
whether insured discovered loss, summary judgment is
inappropriate).

In reaching our conclusion we have considered but
rejected F&D's arguments in support of the district court's
resolution of the discovery issue. First, F&D asserts that
City Federal's admissions in litigation against National
Union Fire Insurance Company, its insurer that followed
F&D, belie the RTC's contention that City Federal
possessed sufficient factual information during the bond
period for a jury to conclude that it had discovered the loss
prior to its expiration. Specifically, it argues that "[City

                               26

Federal] acknowledged the limits of its information in the
related National Union suit where it admitted that it knew
of no specifics of any employee dishonesty in connection
with the Loan prior to March 20, 1989, and further stated
that much of the information in the proof of loss was
learned after the Bond period had expired."10 Br. at 32-33.
Apparently, the district court ascribed significance to the
RTC's position in the National Union litigation, as it noted
that the RTC stipulated in the Final Pretrial Order in that
case that "prior to March 22, 1989, City Federal had not
determined the specifics of any employee dishonesty in
connection with those problem loans to [Northwest]." Op. at
34 (internal quotation marks omitted). It also noted that
City Federal stipulated that it learned much of the
information included in the proof of loss during the course
of the investigation that took place during the late
summer/early fall of 1989. See id.

F&D has not argued before us that the RTC's stipulations
in the National Union litigation are binding in this case
such that City Federal is precluded from asserting that it
discovered the loss within the F&D bond period. See
Hudson United, 653 F.2d at 777-78; see generally 9
Wigmore, Evidence S 2593 (Chadbourn rev. 1981)
(discussing effect of judicial admissions and explaining that
statement qualifying as a judicial admission generally is
binding in subsequent parts of same proceedings between
the same parties). Instead, we understand the thrust of its
argument to be that the RTC's position in the National
Union case undermines its assertion of discovery in this
case.
_________________________________________________________________

10. National Union Fire Insurance Co. ("National Union") issued a fidelity
bond to City Federal which took effect on March 22, 1989, after the F&D
bond expired. National Union filed a complaint in the United States
District Court for the District of New Jersey against the RTC, as receiver
for City Savings Bank, F.S.B. (City Federal's successor), seeking a
declaratory judgment that the bond was void because City Federal had
failed to disclose in its bond application that it had sustained the
Northwest loss. Notably, the RTC did not seek indemnification under the
National Union bond for the Northwest loan loss. See Compl., National
Union Fire Ins. Co. v. City Savings, F.S.B., No. 92-3408 (GEB). We
understand that the National Union litigation is no longer pending before
the district court.

                               27

In our view, the RTC has the better argument here, as it
recognizes the logical flaw in F&D's argument. Specifically,
the RTC's stipulation that City Federal learned"much of the
information included in the proof of loss," after March
1989, does not mean that sufficient information was not
available to City Federal prior to the expiration of the F&D
bond so as to constitute discovery as of that date. Similarly,
the circumstance that City Federal did not have specific
information about the nature and scope of the employee
dishonesty that caused the Northwest loss does not mean
that what it did know as of March 22, 1989, was
insufficient to warrant a reasonable assumption that a
covered loss had or would be incurred, which is all that the
discovery definition in the bond at issue here requires.
Therefore, the RTC's statements in the National Union
litigation are not incompatible with its position here and do
not persuade us that F&D was entitled to judgment as a
matter of law.

F&D also contends that the vague and conclusory nature
of City Federal's letters to F&D confirm that as of the
expiration of the bond period, City Federal possessed
nothing more than unsupported suspicions of employee
misconduct. It appears that the district court also ascribed
significance to the fact that F&D repeatedly sought more
specific factual information from City Federal, but City
Federal failed to respond to those requests. Apparently, the
argument here is that the tone of the letters and City
Federal's omissions provide objective evidence that it
possessed no specific information of employee wrongdoing.

Again, while these circumstances could be viewed as
supportive of F&D's position, they do not demonstrate
conclusively that F&D is entitled to judgment as a matter
of law on the issue of the date of City Federal's discovery
under the bond. In short, this argument does not overcome
the fact that reasonable minds could differ on the discovery
issue, given the nature of the RTC's proofs submitted at the
summary judgment proceedings.

Next, F&D points out that throughout Stein's deposition
testimony, she repeatedly used the word "suspicious" to
describe her assessment of the circumstances surrounding
the Northwest loan loss and the individual defendants'

                               28

involvement in that loss. See Br. at 28-29. It claims   that
Stein's word choice is indicative of the quantity and   quality
of information City Federal possessed at the relevant   time,
and that her testimony actually supports its position   that
no reasonable jury could conclude that City Federal
discovered the loss during the bond period.

We, however, do not share F&D's belief that Stein's
deposition testimony demonstrates conclusively that she
possessed only unsupported suspicions of employee
misconduct insufficient to constitute discovery under the
relevant standard. Indeed, review of the relevant deposition
testimony demonstrates that F&D's argument focuses too
narrowly on her use of the term "suspicious" without
examining the context of her statements and the overall
content of her testimony. We point out that while Stein
stated that she was suspicious of Ridder, Hurst, Merkle
and DeVany, she used the word "suspicious" in replying
specifically to F&D's attorney's question, which asked her if
she "suspected" that those employees engaged in
misconduct. See SA at 293. In these circumstances, we do
not find her responses particularly telling at all. In any
event, they certainly do not demonstrate that, as a matter
of law, City Federal did not discover the loss during the
bond period. Cf. Interstate Prod. Credit Ass'n v. Fireman's
Fund Ins. Co., 788 F. Supp. 1530, 1536-37 (D. Or. 1992)
(rejecting insurer's argument that testimony of member of
loan committee demonstrated that insured discovered loss
where employee stated only that he had a "feeling" that the
loans were questionable).

Moreover, other aspects of Stein's deposition testimony
confirm that, in her view, the information she knew as of
March 22, 1989, pointed to the conclusion that employee
misconduct was involved in the Northwest loan loss, and
thus that the loss was not the result of an employee's poor
business judgment or negligence. For example, Stein stated
specifically that with respect to DeVany's concealment of
the Movroydis admission, she "ruled out the concept that it
was negligence versus misconduct in regard to the
concealment. . . . I mean, there's no-no way to my way of
thinking that that was the result of negligence." App. at
374. Thus, we are not faced with a situation where the

                               29
evidence shows only that City Federal knew of the existence
of the loss, but had not yet reached the subjective
conclusion that employee dishonesty somehow was
involved. Compare Block v. Granite State Ins. Co., 963 F.2d
1127, 1130 (8th Cir. 1992) (affirming district court's grant
of summary judgment to insurer where "not one" bank
official testified to a contemporaneous belief that bank
employee misappropriated money during coverage period);
cf. Maxicare Health Plans, No. 96-2457, 1997 WL 466802,
at *5 (granting summary judgment to insurer where it
argued that insured discovered loss prior to commencement
of insurer's bond; court noted that insured's actions in
terminating contract suggested that it subjectively believed
it suffered a loss precipitated by employee dishonesty).

Finally, we note that F&D relies on cases in which the
courts ruled in favor of the insurer on the issue of
discovery, and contends that they are factually analogous
to this case and thus support the district court's finding in
its favor on that point. Br. at 26-27 (citing Block, 963 F.2d
at 1129-30; California Union, 948 F.2d at 564-65; Aetna
Cas., 903 F.2d at 1079). We need not tarry on this
argument, however, as we do not agree with F&D's
assessment that these cases are factually analogous. Put
simply, the cases F&D cites in support of its position do not
compel the conclusion it seeks because the outcome of
each case, as in the present case, turned on its unique
facts. Accordingly, a comparison of the quality and quantity
of information within the insureds' knowledge in those
cases ultimately does not persuade us that the district
court's disposition of the issue at the summary judgment
stage was appropriate.

As the foregoing discussion demonstrates, we disagree
with the district court's assessment of the legal significance
of the known facts as of March 22, 1989. We hold that the
district court erred in concluding that no reasonable jury
could find that City Federal "discovered" the loss during the
bond period, and accordingly, we hold that summary
judgment in F&D's favor was inappropriate.

B. Coverage under the Fidelity Provision

F&D argues in the alternative that if we find that the
district court erred in its analysis pertaining to the

                               30

discovery issue, we should uphold the district court's order
for summary judgment because the RTC cannot establish
at trial that the Northwest loss falls within the narrow
scope of coverage the bond provides. F&D's overarching
argument is that the fidelity provision of the Standard Form
No. 22 bond provides coverage in very limited instances,
and by its terms only insures against a specific type of risk.
From that initial premise, it claims that the loss City
Federal incurred on the Northwest loan does not fall within
the narrow parameters of coverage.

The RTC contends that the district court's disposition of
these issues is not before us because F&D did notfile a
cross-appeal from the January 29, 1998 order for summary
judgment. We disagree with the RTC's position that F&D
was required to cross-appeal in order to advance these
arguments for our consideration, as it is clear that we may
affirm the judgment on grounds alternative to those on
which the district court relied. See Rite Aid, Inc. v.
Houstoun, 171 F.3d 842, 853 (3d Cir. 1999) (dismissing
cross-appeals and stating "we point out that[appellees] are
not by their cross-appeals seeking additional relief. . . .
Rather, they advance the issue as an alternative ground to
affirm the summary judgment and injunction."); E.F.
Operating Corp. v. American Bldgs., 993 F.2d 1046, 1048
(3d Cir. 1993) ("It is also well established that an appellee
may, without taking a cross-appeal, support the judgment
as entered through any matter appearing in the record,
though his argument may attack the lower court's
reasoning or bring forth a matter overlooked or ignored by
the court."); Cospito v. Heckler, 742 F.2d 72, 78 n.8 (3d Cir.
1984). Accordingly, we will consider F&D's arguments as
alternative grounds to affirm the judgment.

The bond does not afford coverage under its fidelity
provision for all losses resulting directly from fraudulent
and dishonest employee conduct. The fidelity provision sets
forth a subclass or type of dishonest or fraudulent conduct
that may be covered under the bond. It promises to
indemnify the insured for:

       (A) Loss resulting directly from dishonest or frau dulent
       acts of an employee committed alone or in collusion
       with others.

                               31

       Dishonest or fraudulent acts as used in this Insuring
       Agreement shall mean only dishonest or fraudulent
       acts committed by such Employee with the manifest
       intent:

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

       (b) to obtain financial benefit for the Employee or for
       any other person or organization intended by the
       employee to receive such benefit, other than
       salaries, commissions, fees, bonuses, promotions,
       awards, profit sharing, pensions or other employee
       benefits earned in the normal course of
       employment.

App. at 562 (emphasis added). Broken down into its
components, this provision requires that the following
elements be present in order for a loss to constitute a
covered event: (1) the insured must incur a loss; (2) the loss
must have "result[ed] directly" from dishonest or fraudulent
acts of an employee or employees; (3) the employee must
have committed the acts with the "manifest intent" to cause
the insured to suffer the loss sustained (which we call
"subsection (a)'s requirement"); and (4) the employee must
have committed the acts with the "manifest intent" to
obtain a financial benefit for the employee or a third party,
and the financial benefit obtained must not be of the type
covered by the exclusionary clause (which we call
"subsection (b)'s requirement"). See Jeffrey M. Winn,
Fidelity Insurance and Financial Institutions in the Post-
FIRREA Era, 109 Banking L.J. 149, 151-52 (Mar.-Apr.
1992). If F&D can establish, as a matter of law, that at
least one of those requirements is not satisfied in this case,
it would not be required to indemnify City Federal because
the Northwest loss would not constitute a covered event. In
that circumstance, we would affirm the district court's
order for summary judgment on this alternative basis.

F&D concedes that the RTC established that City Federal
suffered a loss on the Northwest account, but contends
that the remaining elements necessary for coverage under
the fidelity provision are absent in this case. Specifically, its
arguments may be broken down into two broader
categories. First, F&D asserts that there is insufficient

                               32

evidence from which a jury could conclude that the
individual defendants acted with the "manifest intent" (1) to
obtain for themselves or a third party a type offinancial
benefit covered by the bond, and in turn (2) to cause City
Federal to sustain the Northwest loss. Second, F&D
maintains that there is insufficient evidence from which a
reasonable jury could conclude that the Northwest loss
"result[ed] directly" from the individual defendants'
dishonest and fraudulent actions that form the basis for
this lawsuit.

We will address these arguments in the following
manner. In subsection (1) below, we first must ascertain
the correct definition of the term "manifest intent" as it is
used in the fidelity provision. We then must decide whether
the RTC has presented sufficient evidence that the
employees acted with the "manifest intent" to obtain a
financial benefit for themselves or a third party that does
not fall within the category of benefits specifically excluded
by subsection (b), as that inquiry informs the remainder of
our analysis. We will conclude by examining whether there
is sufficient evidence from which a reasonable jury could
find that the employees acted with the manifest intent to
cause City Federal to sustain a loss on the Northwest credit
line. In subsection (2), we will address separately F&D's
causation argument, and consider whether there is
sufficient evidence from which a reasonable jury could
conclude that the Northwest loss "result[ed] directly" from
the individual defendants' dishonest and fraudulent acts.
As we will explain in greater detail below, we have
concluded, based on the bond's language and the proofs
the RTC presented at the summary judgment proceedings,
that there are genuine issues of material fact pertaining to
each element described above. Therefore, while we reach
our conclusion on different grounds than those on which
the district court relied, we agree with its ultimate
determination which we described above, that a jury could
find that the Northwest loss falls within the narrow
parameters of coverage.

                               33

1.     Whether the individual defendants committed dishonest
       and fraudulent acts with the manifest intent to cause
       City Federal to sustain the Northwest loss and to obtain
       a certain type of financial benefit for themselves or a
       third party

a. The meaning of "manifest intent"

In order to determine if the RTC has presented sufficient
evidence from which a reasonable jury could conclude that
the individual defendants acted with the "manifest intent"
to cause the Northwest loan loss and to obtain a certain
type of financial benefit for themselves or a third party, we
must begin by defining the term "manifest intent" in the
fidelity insurance context. Initially, we point out that it is
rather obvious that the term "manifest intent" refers to the
employee's state of mind in engaging in the allegedly
dishonest or fraudulent acts which the insured claims to
have caused it a loss covered by the fidelity bond.
Inasmuch as the Supreme Court of New Jersey has not
identified the meaning of the term under New Jersey law,
our task is to predict how that court would decide this issue.11
See McKenna v. Ortho Pharm. Corp., 622 F.2d 657, 661 (3d
Cir. 1980). And, as is evident from our discussion that
follows, the answer is not resolved easily, as it appears that
there has been considerable debate among various state
and federal courts concerning the proper formulation of the
standard. See Christopher Kirwan, Mischief or "Manifest
Intent"? Looking for Employee Dishonesty in the Unchartered
World of Fiduciary Misconduct, 30 Tort & Ins. L.J. 183, 186
(Fall 1994) ("In the eighteen years since its introduction the
_________________________________________________________________

11. We note that the New Jersey Supreme Court in National Newark
discussed the meaning of the phrase "dishonest or fraudulent acts" in
the context of a fidelity bond. It held that the phrase encompassed "any
acts which show a want of integrity or a breach of trust," and "conduct
which indicates a reckless, willful and wanton disregard for the interest
of the employer if it be an act manifestly unfair to the employer and
palpably subjects him to likelihood of loss." National Newark, 385 A.2d
at 1222 (internal quotation marks and citations omitted). However, as
F&D correctly notes in its brief, the bond at issue in National Newark did
not contain the manifest intent limitation which is the subject of the
parties' dispute in this case.

                                34

term `manifest intent' has become the major battlefield in
dishonesty coverage disputes.").

In virtually all of the cases we have found, courts have
interpreted the term "manifest" as meaning that the intent
of the employee must be "apparent or obvious." See, e.g.,
Oldenburg, 34 F.3d at 1539; FDIC v. St. Paul Fire & Marine
Ins. Co., 942 F.2d 1032, 1035 (6th Cir. 1991); North Jersey
Savs. & Loan Ass'n v. Fidelity & Deposit Co., 660 A.2d
1287, 1291 (N.J. Super. Ct. Law. Div. 1993); see also 11
Lee R. Russ and Thomas F. Segalla, Couch on Insurance 3d
S 161:3 (1998). The divergence of opinion, however, stems
from the issue of whether the "intent" aspect of the phrase
"manifest intent" requires an inquiry into the employee's
actual purpose in engaging in the conduct at issue. While
the fidelity provision covers only those dishonest or
fraudulent acts undertaken with the manifest intent both to
(1) cause the insured (who is also the employer) to sustain
a loss, and (2) obtain a certain type of financial benefit, the
question of the meaning of "intent" usually arises in the
context of determining whether the proofs show that the
former requirement has been satisfied. Indeed, in virtually
all of the cases interpreting the term "intent," the analysis
has focused on whether the evidence showed that the
employees possessed a "manifest intent" to cause the
insured's loss. Of course, this is not surprising, given the
fact that most cases turn on this element, as it presents
difficult proof problems for the insured.

Following this method of analysis, succinctly stated, the
initial question is whether the insured must establish that
the employee acted with the specific purpose or desire to
cause the insured to sustain the loss that it did. The
related issue then is the type of circumstantial evidence
relevant to the insured's burden of proof on this point.

In determining the appropriate construction of the
"manifest intent" state of mind requirement, a review of the
purpose and history behind its inclusion in bonds of this
type is instructive. The Surety Association introduced the
"manifest intent" language in its standard form bond in
1976 to ameliorate the effect of previous cases in which the
courts expanded the concept of employee dishonesty to the
point where the term included any act of the employee (or

                               35

any failure to act), regardless of motive. See Michael Keeley,
Employee Dishonesty Claims: Discerning the Employee's
Manifest Intent, 30 Tort & Ins. L.J. 915, 919 (Summer
1995); see also Winn, supra at 152 ("According to an
influential subcommittee report issued by the Surety
Association of America in January 1976, insurers added
the definition of dishonesty because [a] major factor in poor
results . . . has been a well-established pattern by the
courts to expand the concept of dishonesty to the point
where the term now seems to include any act . . .
regardless of motive, which results in an injury to the
employer.") (internal quotation marks omitted) (quoting
Surety Ass'n of Am. Sub-Committee, Revision of the
Dishonesty Insuring Agreement of Form 24, at 1 (1976)).
Thus, as one commentator explained: "Insuring Agreement
A [which contains the manifest intent requirement] was
revised to clarify the Surety Association's long-standing
intent, dating back to Standard Form No. 1 in 1916, to
limit loan losses to claims in which the culpable employee
acted with the intent or purpose to gain a benefit at the
expense of his employer--in other words, when the
employee intended to defraud the insured bank of money."
Keeley, supra at 919.

Against this background, we must examine the different
standards courts have adopted in defining the bond's
"manifest intent" requirement. To date, the Courts of
Appeals for the Sixth, Seventh and Tenth Circuits have
adopted the following standard of culpability: "Although the
concept of manifest intent does not necessarily require that
the employee actively wish for or desire a particular result,
it does require more than a mere probability. . . . Manifest
intent exists when a particular result is substantially
certain to follow from conduct." See Peoples Bank & Trust
Co. v. Aetna Cas. & Sur. Co., 113 F.3d 629, 635 (6th Cir.
1997) (applying Virginia law and quoting St. Paul Fire &
Marine, 942 F.2d at 1035) (internal quotation marks
omitted); Oldenburg, 34 F.3d at 1539 (citing FDIC v. United
Pac. Ins. Co., 20 F.3d 1070, 1078 (10th Cir. 1994))
(applying Utah law); United Pac., 20 F.3d at 1078
(interpreting "manifest intent" under general principles of
federal common law); Heller Int'l Corp. v. Sharp, 974 F.2d
850, 857-59 (7th Cir. 1992) (applying Illinois law and

                               36

quoting St. Paul Fire & Marine, 942 F.2d at 1035); St. Paul
Fire & Marine, 942 F.2d at 1035. But cf. First Fed. Savs. &
Loan Ass'n v. Transamerica Ins. Co., 935 F.2d 1164, 1167
(10th Cir. 1991) (affirming order of summary judgment for
insurer, explaining that employee did not possess a
manifest intent to injure the bank, his employer, where
evidence pointed to only one conclusion: that employee
arranged transactions that "hopefully" would be beneficial
to both the bank and borrowers). This standard, which
requires only that the loss was "substantially certain to
follow" from the employee's conduct, was articulated by the
Court of Appeals for the Sixth Circuit in St. Paul Fire &
Marine, see 942 F.2d at 1035, which in turn relied on
language from Hanson PLC v. National Union Fire Insurance
Co., 794 P.2d 66, 72 (Wash. Ct. App. 1990).

In stating that the "manifest intent" standard is satisfied
either by proof of the employee's desire to cause a loss or by
proof that the loss was "substantially certain" to result,
these cases embraced a different, and less culpable mental
state, than if the standard required that the evidence show
that it was the employee's specific purpose or desire to
cause the insured to sustain the loss and obtain afinancial
benefit at the insured's expense. Indeed, one commentator
described this "substantially certain to follow" standard as
requiring, in essence, a level of mental culpability
equivalent to the general intent concept embodied in the
area of criminal and tort law. See Keeley, supra at 937; see
also Affiliated Bank/Morton Grove v. Hartford Accident &
Indem. Co., No. 91-C-4446, 1992 WL 91761, at *4-5 (N.D.
Ill. Apr. 23, 1992) (stating that the definition of intent that
it adopted, i.e., that an employee acts with the manifest
intent when the evidence demonstrates either (1) that the
purpose was to achieve the particular result or (2) that the
person knows that the particular result is substantially
certain to follow from his or her conduct, is consistent with
concept of intent in tort law); see also United Pac., 20 F.3d
at 1078 (stating that jury instructions 36 and 37 provided
"general intent" standard that was a correct explication of
the meaning of "manifest intent"); Hanson PLC, 794 P.2d at
72. Moreover, the concept of general intent is synonymous
with the Model Penal Code's mental state "knowingly," as a
person acts knowingly under the Model Penal Code if he or

                               37
she is aware that " `a result is practically certain to follow
from his conduct, whatever his desire may be as to the
result.' " See Keeley, supra at 923-24.

Thus for example, in United Pacific, the Court of Appeals
for the Tenth Circuit upheld jury instructions stating, inter
alia: "the concept of manifest intent does not require that
the employee wish or desire for a particular result, but it
does require that the result be substantially certain to
happen' "; " `You may consider it reasonable to draw the
inference and find that a person intends the natural and
probable consequences of acts knowingly done or knowingly
omitted' "; and " `There was an intent to cause the bank to
sustain a loss if the natural result of [the employee's]
conduct would be to injure the Bank even though it may
not have been his motive.' " Id. at 1077-78 (citing Heller,
974 F.2d at 859; St. Paul Fire & Marine, 942 F.2d at 1035;
First Nat'l Bank v. Lustig, 961 F.2d 1162, 1166 (5th Cir.
1992)); see also Oldenburg, 34 F.3d at 1539 (citing United
Pac., 20 F.3d at 1078).

In contrast to the construction of "manifest intent"
adopted by the Courts of Appeals for the Sixth, Seventh
and Tenth Circuits, the Courts of Appeals for the Second,
Fourth and Fifth Circuits have applied the term"manifest
intent" differently, and we read those cases as requiring
that the insured establish that the employee acted with the
specific purpose or desire to both injure the insured and
obtain a benefit. See General Analytics Corp. v. CNA Ins.
Cos., 86 F.3d 51, 54 (4th Cir. 1996); Lustig , 961 F.2d at
1166-67; Glusband v. Fittin Cunningham & Lauzon, Inc.,
892 F.2d 208, 210-12 (2d Cir. 1989) (reversing judgment
for insured's receiver and entering judgment for insurer,
stating that there was insufficient evidence that the
employee acted with the manifest intent to cause a loss and
obtain a financial benefit; court explained that manifest
intent language limits coverage to losses caused by
embezzlement and embezzlement-like acts, and that the
evidence showed only that the employee intended to benefit
the company rather than cause it a loss); Leucadia, Inc. v.
Reliance Ins. Co., 864 F.2d 964, 972-74 (2d Cir. 1988)
(affirming judgment for insurer where the only reasonable
conclusion that could be drawn from the evidence

                               38

introduced at trial was that the employee's dishonest
actions were the result of attempts to save the employer
from sustaining a large loss).12 In this regard, the "manifest
_________________________________________________________________

12. Interestingly, the Court of Appeals for the Second Circuit has not
stated expressly that the term "manifest intent" covers only those acts
undertaken with the purpose or desire of causing the employer's loss
and obtaining a financial benefit, but a review of the facts and
circumstances in Glusband, see 892 F.2d at 208, and Leucadia, see 864
F.2d 964, indicate that the court applied the manifest intent standard by
focusing on the employee's subjective purpose in engaging in the
wrongful acts at issue. For example, in Leucadia, the employee engaged
in various dishonest and fraudulent acts that eventually contributed to
his employer's substantial losses on loans he originated. See 864 F.2d at
972-74. The nature of the employee's wrongful acts in Leucadia clearly
were such that a jury could have concluded that by engaging in that
course of conduct, he knew that a loss to his employer was substantially
certain to result. See id. Nevertheless, the court affirmed the jury's
judgment for the insurer, reasoning that the evidence did not
demonstrate that the employee's dishonest acts were undertaken with
the manifest intent to cause a loss or obtain afinancial benefit. And the
court in Glusband explained the holding in Leucadia by referencing the
employee's object in engaging in the course of conduct at issue, and
stating that "[b]ecause the employee misguidedly hoped to benefit his
employer and received no personal gain from the transaction, we held
that the requisite manifest intent had not been shown." 892 F.2d at 211.
By referencing the employee's "hopes" (albeit misguided) in engaging in
the misconduct, the court clearly was concerned with the employee's
subjective purpose rather than whether the loss was substantially likely
to result from the employee's actions. See Jane Landes Foster, et al.,
Does a Criminal Conviction Equal Dishonesty? Criminal Intent Versus
Manifest Intent, 24 Tort. & Ins. L.J. 785, 799-800 (Summer 1989)
(interpreting Leucadia as applying a subjective purpose test despite the
fact that the court did not use the word "purposeful" in its opinion).

Similarly, the Court of Appeals for the Fifth Circuit's opinion in Lustig
did not state explicitly that the term "intent" requires proof of purpose
or
desire to cause the a loss and obtain a financial benefit for the employee
or a third party. Nevertheless, insofar as the court's reasoning clearly
focuses on the employee's purpose or motive in engaging in the
dishonest or fraudulent acts at issue and the ways in which the bank
could prove that element, see 961 F.2d at 1165-67, its approach
demonstrates its adherence to a standard of culpability greater than that
suggested by the "substantially certain" or knowingly standard. Compare
id. with United Pac., 20 F.3d at 1077-78; see also Keeley, supra at 932-
33 (stating that Lustig appears to require an inquiry into the employer's
purpose).

                               39

intent" requirement thus may be analogized loosely to the
concept of "specific intent" in the criminal law context. See
Keeley, supra at 942 (advocating the adoption of a specific
intent standard for purposes of defining "manifest intent");
Judy L. Hlafesak, Comment, The Nature and Extent of
Subrogation Rights of Fidelity Insurers Against Officers and
Directors of Financial Institutions, 47 U. Pitt. L. Rev. 727,
731-32 (1986) (stating that "manifest intent" language of
1976 form rider required proof of the employee's specific
intent to cause a loss).

An instructive example of this approach is found in the
Court of Appeals for the Fourth Circuit's opinion in General
Analytics. See 86 F.3d at 54. There the insured, General
Analytics Corp. ("GA"), sought coverage under a fidelity
bond for losses it incurred as a result of an employee's
actions in altering incoming purchase orders sent by the
insured's customer, the Internal Revenue Service ("IRS"), for
computer products. Not realizing that the purchase orders
had been altered, GA personnel filled the IRS's requests by
ordering parts from a third-party supplier. When GA
delivered the parts to the IRS, it refused acceptance,
causing GA to sustain a large loss. The district court
granted summary judgment to GA against its insurer,
finding that the evidence showed beyond any factual
dispute that the employee acted with the manifest intent to
benefit a third party. See id. at 52-53.

The court of appeals reversed the district court's grant of
summary judgment to GA, finding that reasonable minds
could differ as to whether the loss was caused by employee
misconduct undertaken with the manifest intent to obtain
a financial benefit for a third party. Because the parties
disputed the district court's construction of the term
"manifest intent," the court of appeals analyzed its meaning
in the fidelity bond context. The court recognized that
"employee dishonesty policies" are "designed to provide
coverage for a specific type of loss characterized by
embezzlement, which involves the direct theft of money." Id.
at 53. The court then explained that:

        Because employee dishonesty policies like CNA
       Insurance's require proof that the employee have acted
       to accomplish a particular purpose, they require that

                               40

       the insured establish a specific intent, analogous to
       that required by the criminal law. Thus, if a dishonest
       act has the unintended effect of causing a loss to the
       employer or providing a benefit to the employee, the act
       is not covered by the policy. . . .

        As a state of mind, intent is often difficult to prove.
       And because it is abstract and private, intent is
       revealed only by its connection with words and
       conduct. . . . Thus, evidence of both words and
       conduct is probative of intent, . . . and, because
       context illuminates the meaning of words and conduct,
       evidence of the circumstances surrounding such words
       or conduct, including the motive of the speaker or
       actor, similarly is admissible.

Id. at 54 (citations omitted).

The court in General Analytics required proof of the
employee's specific intent or purpose to cause the insured
loss and to obtain a certain type of financial benefit for
herself or a third party, but in adopting that state of mind
requirement as the standard for "manifest intent," it
recognized that the employee's subjective intent may be
proven circumstantially by reference to evidence of the
employee's words, conduct, and the context in which his or
her actions took place. See also Lustig, 961 F.2d at 1166
("When an employee obtains fraudulent loans with reckless
disregard for a substantial risk of loss to the bank, a jury
may infer from his reckless conduct and surrounding
circumstances that he intended to cause the loss. . . . The
jury should be instructed that in answering the question of
intended loss, it should consider the range of evidentiary
circumstances, including the relationship between the
borrowers and the employee, the employee's knowledge of
the likelihood that the loans would not be repaid, and all
other surrounding circumstances bearing on the employee's
purpose.") (citations and quotation marks omitted)
(emphasis added).

Thus in General Analytics the court permitted
consideration of both the reckless nature of the employee's
conduct, and the likelihood that a loss would result from
the employee's conduct (i.e., the employee's knowledge of

                                 41

the substantial likelihood of the result), in determining
whether the employee acted with the "manifest intent" to
cause the insured to sustain a loss. But the court tied the
significance of those circumstances to a standard of
employee culpability that required proof that the employee
acted with the specific purpose to achieve the desired
result, i.e., a specific intent to cause the loss and obtain a
financial benefit for herself or a third party. See also
Susquehanna Bancshares, Inc. v. National Union Fire Ins.
Co., 659 A.2d 991, 998 (Pa. Super. Ct. 1995) ("[W]e hold
that the `manifest intent' of the employee should be
ascertained by deciding his true purpose in causing the
loss. In deciding what the purpose was, both direct and
circumstantial evidence should be considered, including the
employee's own testimony as to his purpose as well as any
evidence indicating the employee knew the loss was
substantially certain to be the result of his acts.").

A review of the different approaches reveals the obvious
distinction between the two lines of cases. As is evident
from our discussion, under either approach, evidence
tending to show that the employee acted "knowingly" would
support a jury finding that the employee intended the
consequences of his actions. Nevertheless, under the
rationale explicitly adopted in General Analytics, proof of an
employee's recklessness, or an employee's knowledge that a
result was substantially certain to occur from the conduct,
are objective indicia--manifestations--of the employee's
specific purpose or intent. But neither an employee's
recklessness or his knowledge that a result was
substantially certain to occur would satisfy the language of
the policy, absent that inference of specific intent. Cf.
Peoples Bank, 113 F.3d at 636 ("Like our sister circuits, we
recognize that reckless conduct might be evidence--a
manifestation--of intent. But recklessness itself, without an
inference of intent, would clearly not satisfy the language of
the policy, any more than recklessness alone would create
culpability for a crime requiring specific intent.") (citing
General Analytics, 86 F.3d at 54). In contrast, those courts
that have equated the term "intent" with the mental state
"knowingly" would find that the employee acted with the
manifest intent where the loss and the benefit were

                                42

substantially certain to follow, regardless of whether the
employee desired such results.

Interestingly in this case, regardless of the standard we
choose to adopt, we believe that the proofs are sufficient to
demonstrate a genuine issue of material fact concerning the
employees' "manifest intent." Nevertheless, in view of the
circumstance that we must remand this case to the district
court for trial, we believe that it is appropriate at this
juncture to state specifically which standard we adopt as
reflecting what we think the Supreme Court of New Jersey
would hold so as to give guidance to the district court.

We agree with the approach espoused by the Courts of
Appeals for the Second, Fourth and Fifth Circuits, and hold
that the term "manifest intent" as it is used in the fidelity
provision requires the insured to prove that the employee
engaged in dishonest or fraudulent acts with the specific
purpose, object or desire both to cause a loss and obtain a
financial benefit. Inasmuch as we equate the"substantially
certain to result" standard with the mental state
"knowingly," we are of the view that "purposefully" rather
than "knowingly" better captures the meaning of "intent" as
it used in the fidelity provision, given the history that
prompted its inclusion in the dishonesty definition and its
stated purpose. Indeed, we believe that our construction
strikes an appropriate balance because it comports with the
drafters' obvious intent to limit the types of employee
misconduct covered by this provision but ensures that
proof of the employee's recklessness and the substantial
likelihood of loss factor into the ultimate inquiry into the
employee's subjective state of mind. See Keeley, supra at
925 (noting that the Model Penal Code's definition of
specific intent supports equating "manifest intent" with
specific intent); Winn, supra at 152 ("We are ready and
willing to insure against dishonesty, i.e., against improper
acts of employees committed with an intent to deprive their
employer of funds or property. We cannot insure against
violations of instructions or poor business judgment."); see
also Jane Landes Foster, et al., Does a Criminal Conviction
Equal Dishonesty? Criminal Intent Versus Manifest Intent,
24 Tort. & Ins. L.J. 785, 800 (Summer 1989) ("Defining
manifest intent in terms of purpose is also more in keeping

                               43

with the intent of the fidelity industry. This clause
represented a specific response to a growing number of
decisions that judicially expanded the definition of
dishonesty by recognizing claims based on reckless
misconduct. Thus, it is clear that the drafters intended to
limit coverage by requiring proof of a more particularized
intent to harm.").

We emphasize, however, that by recognizing that the
term "manifest intent" requires proof of the employee's
purpose in engaging in the dishonest or fraudulent acts, we
are cognizant that the employee's actual subjective state of
mind virtually is impossible to prove absent resort to
circumstantial evidence--objective indicia of intent. The
Courts of Appeals for the Fourth and Fifth Circuits have
recognized this proof problem, and permitted the insured to
prove the employee's subjective purpose by introducing
objective evidence of the employee's intent. See Lustig, 961
F.2d at 1166; General Analytics, 86 F.3d at 54; see also
Susquehanna Bancshares, 659 A.2d at 998. And inasmuch
as proof of recklessness and/or the employee's knowledge
of the likelihood that a loss was to result both serve as
manifestations of the employee's specific purpose or design,
we hold that a jury may consider those factors, along with
any other objective indicia of intent, in ascertaining the
employee's state of mind in engaging in the wrongful
conduct. See Couch 3d, supra S 161:3 (stating that
"manifest intent" language meant an intent that was
"apparent or obvious," and indicating that in determining
the employee's intent or purpose, the court should consider
the employee's testimony as to what his or her purpose was
in engaging in the acts, and whether the employee was
substantially certain that a particular result would be
achieved, together with external indicia of subjective intent).
In reaching our conclusion, we recognize that our task
here is limited to deciding the meaning of the term
"manifest intent" as we believe it would have been decided
by the Supreme Court of New Jersey had the case arisen in
the New Jersey courts. See Robertson v. Allied Signal, Inc.,
914 F.2d 360, 378 (3d Cir. 1990). Thus, in addition to
relying on cases from other jurisdictions, we have
considered the well-established rules for contract

                               44

interpretation as they have developed under New Jersey
law. We note, in particular, that New Jersey adheres to the
principle of contra proferentum, which requires any
ambiguities in an insurance contract to be resolved in favor
of the insured. See Pittston Co. Ultramar Am. Ltd. v. Allianz
Ins. Co., 124 F.3d 508, 520 (3d Cir. 1997). Nevertheless,
"[w]hen the terms of an insurance contract are clear, . . . it
is the function of a court to enforce it as written and not
make a better contract for either of the parties." New Jersey
v. Signo Trading Int'l, Inc., 612 A.2d 932, 938 (N.J. 1992)
(citation and internal quotation marks omitted). Thus, we
must not torture the language of a contract to create
ambiguity where none exists in order to impose liability,
and we must construe the words of an insurance policy so
as to adhere to their ordinary meaning. See Longobardi v.
Chubb Ins. Co., 582 A.2d 1257, 1260 (N.J. 1990). Under
New Jersey law, ambiguity exists in an insurance contract
where "the phrasing of the policy is so confusing that the
average policyholder cannot make out the boundaries of
coverage." Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 795
(N.J. 1979).

We have not overlooked the possibility that one could
argue that given the divergence of opinion concerning the
correct standard for determining the employee's"manifest
intent," the term is ambiguous, thus requiring us to invoke
the principle of contra proferentum. See, e.g., Oritani Savs.
& Loan Ass'n v. Fidelity & Deposit Co., 821 F. Supp. 286,
290 (D.N.J. 1991) (rejecting that argument in the context of
determining appropriate construction of "manifest intent").
If that were the case, we would be compelled then tofind
that the term "intent" requires only that the loss be
"substantially certain to result," as it is a more lenient
standard of employee culpability. Here, however, we do not
believe that the Insuring Agreement is ambiguous because
we cannot conclude that the "phrasing of the policy is so
confusing that the average policyholder cannot make out
the boundaries of coverage." Weedo, 405 A.2d at 795.
Rather, we find that the principle that courts" `should not
write for the insured a better policy of insurance than the
one purchased' " applies squarely to the facts of this case.
Longobardi, 582 A.2d at 1260 (quoting Walker Rogge, Inc. v.
Chelsea Title & Guar. Co., 562 A.2d 208, 214 (N.J. 1989)).

                               45

Moreover, we further observe that in performing our task
of "predicting" how the New Jersey Supreme Court would
decide this issue, we have reviewed two cases from other
courts which applied the manifest intent requirement under
New Jersey law in a manner that supports our result. See
McKenna, 622 F.2d at 662. First, in Oritani, the district
court held that the term manifest intent requires the
employee to possess the "subjective intent" to cause the
employer loss. See 821 F. Supp. at 291. In reaching its
conclusion, the court found persuasive the insurer's
argument that the fidelity provision covers only those losses
that were caused by "deliberate" conduct motivated by a
"deliberate" intent. See id. at 288. The court granted the
insurer's motion for summary judgment because it was
undisputed that the employee was not a knowing
participant in the scheme that caused the loss. See id. at
291.

We find the court's requirement of a "subjective intent"
particularly noteworthy because the court could have
reached the same result by adopting the "knowingly"
standard given the facts of the case, but it chose instead to
state the standard as requiring an inquiry into the
employee's motive and subjective state of mind. Thus, the
court determined that proof of the employee's recklessness
or negligence would not suffice under the subjective
standard it adopted, so long as the circumstances
suggested only that the employee exercised poor business
judgment and acted with "a pure heart." See id.

Similarly in North Jersey, the New Jersey Superior Court,
Law Division, granted summary judgment to the insurer in
a fidelity bond dispute because the evidence submitted
pertaining to the question of manifest intent showed only
that the employee exercised poor judgment. See 660 A.2d
at 1292-93. The North Jersey court, citing, inter alia, the
Court of Appeals for the Second Circuit's opinion in
Leucadia, held that the evidence did not permit a
reasonable inference that the employee's "motive" or
"purpose" was to cause a loss to his employer. See id.

In light of the foregoing, we hold that the term"manifest
intent" requires the insured to demonstrate that it was the
offending employee's purpose or desire to obtain afinancial

                                46

benefit for himself or a third party, and to cause the
insured to sustain a loss. And given that a jury could infer
such an intent based on circumstantial evidence, an
insured may survive a motion for summary judgment by
proffering evidence suggesting that the employee acted
knowing that it was substantially certain that his or her
conduct would cause the insured to sustain a loss that
would inure to the employee's benefit, see Lustig, 961 F.2d
at 1166-67, and by offering any other proof tending to
establish the employee's intent. See also General Analytics,
86 F.3d at 54 (stating that an employee's words and
conduct are probative of intent, and that the context in
which the words and conduct occurred also is relevant).

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