F.D.I.C. v. Verex Assur., Inc.

• Decision Date: 01 October 1993
• Docket Number: No. 92-4591,92-4591
• Citation: 3 F.3d 391
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Sunrise Savings and Loan Association, a Federal Savings and Loan Association, Plaintiff-Appellant, v. VEREX ASSURANCE, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 391

3 F.3d 391

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for

Sunrise Savings and Loan Association, a Federal

Savings and Loan Association, Plaintiff-Appellant, v. VEREX ASSURANCE, INC., Defendant-Appellee.

No. 92-4591.

United States Court of Appeals, Eleventh Circuit.

Oct. 1, 1993.

Craig P. Kalil, Alan L. Briggs, Squire Sanders & Dempsey, Miami, FL, for plaintiff-appellant.

Gerald B. Wald, Marianne A. Vos, Murai Wald, Biondo & Moreno, P.A., Miami, FL, for defendant-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before EDMONDSON and CARNES, Circuit Judges, and HILL, Senior Circuit Judge.

HILL, Senior Circuit Judge:

Appellant Federal Deposit Insurance Corporation ("FDIC") brings this appeal from the district court order granting summary judgment to Appellee Verex Assurance, Inc. ("Verex"). 795 F.Supp. 404. FDIC sought to recover sums allegedly due and owing under two certificates of insurance issued pursuant to a standard mortgage guaranty insurance policy. The district court held Verex was entitled to rescind the two certificates of insurance due to material misrepresentations contained in the application packages for the certificates. FDIC contends this judgment is erroneous.

FDIC presents three issues in this appeal. First, whether misrepresentations contained in the borrowers' loan documents could be imputed to the financial institution that included these documents in its applications for insurance submitted to Verex. Second, whether the borrowers' misrepresentations could be imputed to FDIC. Finally, FDIC contends that Florida Statutes section 627.409 did not govern mortgage guaranty insurance contracts at the time these insurance certificates were issued, and therefore the certificates are not voidable by virtue of the misrepresentations. We decide the first two issues, affirming the district court, and certify the third to the Supreme Court of Florida, with a memorandum, attached hereto as Appendix A.

I. Background

This case involves two certificates of insurance issued under a master mortgage guaranty insurance policy by Verex in favor of Sunrise Savings & Loan ("Sunrise"). FDIC is the successor-in-interest to the Federal Savings & Loan Insurance Corporation, which was the receiver for Sunrise. Verex is an insurer of mortgage loans on residential real property, insuring lenders against loss when borrowers default on their mortgage loans.

Prior to 1983, Verex issued its standard Master Policy of Insurance ("Policy") to Sunrise. Under the terms of this Policy, Sunrise submitted applications to Verex for residential mortgage guaranty insurance with respect to each loan for which it desired coverage under the Policy. Each application package for insurance consisted of the purchase contract for the property, the borrower's residential loan application, credit reports, Sunrise's verification of the borrower's deposits and employment, an appraisal, and various closing documents. The two certificates of insurance involved in this case provided that Verex would pay 20% of any losses suffered by Sunrise on the residential mortgage loans if the borrowers defaulted.

On April 29, 1983, Sunrise sent a standard application package to Verex for mortgage guaranty insurance on a $450,000 mortgage loan that Sunrise had made to Frank and Patti Ferrero ("Ferreros"). On May 5, 1983, Verex issued an insurance commitment in connection with this loan; the commitment became a certificate of insurance after the loan was closed and the premium paid. Unknown to Sunrise and Verex, the Ferreros misrepresented the amount of their down payment and paid considerably less out of pocket than the figure stated on their loan application. Sunrise and Verex relied upon this misrepresentation.

Sunrise also made a $45,100.00 mortgage loan to Juan and Lisa Bonilla ("Bonillas") around the same time. Like the Ferreros, the Bonillas misrepresented to Sunrise the amount of their down payment, and Sunrise unwittingly submitted this misrepresentation to Verex through the certificate of insurance application package. On July 21, 1983, Verex issued an insurance commitment to Sunrise in connection with this mortgage loan and this commitment later ripened into a certificate of insurance.

Both the Ferreros and the Bonillas subsequently defaulted on the mortgage loans. Sunrise sought reimbursement from Verex on the mortgage guaranty insurance certificates under the Policy. Verex refused to pay on the certificates, alleging that the material misrepresentations in the certificate applications precluded recovery under the Policy.

The district court entered summary judgment in favor of Verex. It held that the certificates of insurance were void because of the material misrepresentations contained within the application packages submitted to Verex by Sunrise. In reaching this decision, the district court concluded that section 627.409 ¹ of the Florida Statutes (1991) undisputedly provides that when a borrower misrepresents a material fact in a loan application, which misrepresentation is transmitted as part of an application for insurance, the risk of loss from the loan is placed on the bank rather than the bank's insurer. After noting that the question of whether Sec. 627.409 applied to mortgage guaranty insurance policies prior to October 1, 1983 was unsettled, the district judge concluded that Sec. 627.409 did apply to these two certificates of insurance. FDIC challenges the district court's application of Sec. 627.409 in this appeal.

II. Discussion

FDIC presents three arguments on this appeal. First, FDIC contends that the district court erred in determining that the misrepresentations made by the borrowers could be imputed to Sunrise. Second, FDIC asserts that imputation of the borrowers' misrepresentations to FDIC contravenes federal common law. Finally, FDIC claims that Sec. 627.409 did not apply to mortgage guaranty insurance prior to October 1, 1983, and thus did not operate to invalidate the two certificates of insurance at issue in this case. We consider each of these arguments in turn.

A. Imputation to Sunrise

FDIC argues that while the loan documents provided by the borrowers contained material misrepresentations, the applications for certificates of insurance submitted by Sunrise to Verex made no misrepresentations. The lack of a material misrepresentation by Sunrise is important because in order to avoid the insurance certificates under section 627.409, Verex must show that Sunrise made a material misrepresentation in its application for insurance. FDIC acknowledges Sunrise submitted a package including the borrowers' loan documents with its applications for insurance, but points out that the Master Policy had no language requiring Sunrise to adopt the representations of the borrowers. This lack of adoption contrasts with a 1985 revision to the Policy that expressly states that a lender applying for mortgage guaranty insurance adopts the representations of the borrower contained in the application package, according to FDIC.

Another argument presented by FDIC is based on the case of St. Paul Fire & Marine Ins. Co. v. Mayor's Jewelers of Ft. Lauderdale, Inc., 465 F.2d 317 (5th Cir.1972). ² In St. Paul the insured requested additional coverage under his property insurance policy. The insurance company agreed to extend the coverage on the condition that the insured could verify that he had a specific type of burglar alarm. After telling the insurer that he did not know what type of alarm was installed, the insured called his security company which informed him that he had the requisite type of alarm. The insured then called the insurance company and reported what the security company had told him. This information later turned out to be false. St. Paul, 465 F.2d at 320-21. The court held that the insured had made no misrepresentations because he merely faithfully reported what the security company had told him. FDIC insists that this case is on point with St. Paul because Sunrise simply reported information supplied by the borrowers in its loan applications. Therefore, FDIC argues Sunrise made no misrepresentations and cannot be charged with those made by the borrowers.

We are not persuaded by FDIC's arguments that the misrepresentations made by the borrowers should not be imputed to Sunrise. The Master Policy in effect at the time of issuance of these certificates stated that Verex issued the certificates "in reliance upon the statements made in the Application submitted by the insured." The Policy required Sunrise to supply "an Application in connection with each loan for which coverage under the policy is desired, on forms furnished and with requirements prescribed by" Verex. The parties agree that Sunrise was required to furnish the borrowers' loan documents as part of the "requirements prescribed by" Verex. Thus, under the language of the Policy, the applications Verex required Sunrise to submit included all statements made in the borrowers' loan documents. The Policy indicates that the insurance certificates were issued in reliance upon the statements made in the applications; therefore, Sunrise is properly charged with the consequences of any misrepresentations in the applications. See TCF Mortgage Corp. v. Verex Assurance, Inc., 709 F.Supp. 164, 166 (D.Minn.1989) (construing an identical policy, the court held that because loan documents were submitted by the insured as required by Verex in order to receive insurance, misrepresentations contained therein were made by the insured or at least on the insured's behalf). St. Paul is not controlling because Sunrise was not merely faithfully reporting information supplied by a third party, but rather was required to furnish certain statements, including the borrowers' loan papers, as a part of its application upon which Verex expressly relied under the terms of the Policy. We hold that the misrepresentations made...