Federal Deposit Insurance v. Verex Assurance, Inc.
Docket: No. 92-4591
Court: Court of Appeals for the Eleventh Circuit; October 1, 1993; Federal Appellate Court
Appellant Federal Deposit Insurance Corporation (FDIC) appeals a district court ruling that granted summary judgment to Appellee Verex Assurance, Inc. (Verex). FDIC sought to recover amounts under two certificates of insurance associated with a mortgage guaranty insurance policy, arguing that Verex improperly rescinded the certificates due to alleged material misrepresentations in the application packages. The district court found that Verex was justified in rescinding the certificates based on these misrepresentations.
FDIC raises three key issues on appeal:
1. Whether misrepresentations in borrowers’ loan documents can be attributed to the financial institution that submitted these documents to Verex.
2. Whether the borrowers' misrepresentations can be attributed to FDIC.
3. Whether Florida Statutes section 627.409, which governs misrepresentations in insurance contracts, applied to mortgage guaranty insurance at the time the certificates were issued, potentially voiding them.
The court affirms the first two issues in favor of Verex and certifies the third issue to the Supreme Court of Florida for clarification. The case involves two specific certificates of insurance issued under a master policy by Verex for loans to Frank and Patti Ferrero and Juan and Lisa Bonilla. Both sets of borrowers misrepresented their down payments, which led to the denial of claims by Sunrise Savings Loan (FDIC's predecessor) after the borrowers defaulted. Verex refused to pay, citing the material misrepresentations as grounds for voiding the certificates, which the district court upheld.
The district court determined that Florida Statutes section 627.409 (1991) stipulates that when a borrower misrepresents a material fact in a loan application, the associated risk of loss is borne by the bank, not its insurer. The court found that section 627.409 applies to the insurance certificates in question, despite uncertainty about its applicability to mortgage guaranty insurance policies before October 1, 1983. The FDIC is appealing this decision and has presented three main arguments:
1. The FDIC claims the district court incorrectly imputed the borrowers' misrepresentations to Sunrise.
2. The FDIC argues that such imputation violates federal common law.
3. The FDIC asserts that section 627.409 should not apply to mortgage guaranty insurance prior to October 1, 1983, thus not invalidating the certificates.
Regarding the first argument, the FDIC contends that the loan documents contained misrepresentations, but the insurance applications from Sunrise to Verex did not. They argue that without a material misrepresentation by Sunrise, the insurance certificates cannot be voided under section 627.409. The FDIC points out that the Master Policy lacked language requiring Sunrise to adopt the borrowers' representations, contrasting it with a later policy revision that included such a requirement. They also reference the case St. Paul Fire & Marine Ins. Co. v. Mayor’s Jewelers, asserting that Sunrise merely relayed borrower information without misrepresentation.
The court rejected the FDIC's arguments, stating that the Master Policy explicitly indicated reliance on the statements made in the application submitted by the insured. Consequently, it was deemed necessary for Sunrise to include the borrowers’ loan documents in the application, thereby making the borrowers' misrepresentations attributable to Sunrise.
The Policy stipulates that insurance certificates were issued based on the statements in the applications, making Sunrise accountable for any misrepresentations. Citing TCF Mortgage Corp. v. Verex Assurance, Inc., the court affirmed that misrepresentations in loan documents submitted by the insured are attributed to the insured. Unlike St. Paul, where information was reported from a third party, Sunrise was required to provide specific statements, including borrowers’ loan papers, which Verex relied upon. Consequently, borrowers' misrepresentations are imputed to Sunrise.
The FDIC contends that even if Sunrise is liable for misrepresentations, these cannot be imputed to the FDIC under federal common law, referencing the D’Oench, Duhme doctrine which protects the FDIC from such imputation when liquidating a failed institution's assets. Citing cases like FDIC v. O’Melveny & Meyers, the FDIC maintains it has greater rights to the institution’s assets than a mere successor. However, the FDIC's reliance on D’Oench, Duhme is undermined by its failure to raise the issue in the district court, as appellate courts typically do not entertain issues not presented at that level. The FDIC attempts to invoke exceptions to this rule based on the Daikin case, arguing the importance of the legal issue and its national relevance. Nonetheless, the court concludes that the issue of loss allocation between two innocent parties was already apparent and should have been addressed by the FDIC earlier in the proceedings.
The case hinges on determining liability following alleged misrepresentations by third-party borrowers, with parties arguing that such misrepresentations should not affect Sunrise. The FDIC had opportunities to address this issue but did not, and no significant justice interests are at stake that would warrant reconsideration of FDIC's late argument based on D’Oench, Duhme.
The core unresolved issue is whether Fla.Stat. 627.409 applies to the insurance certificates in question. This statute shields insurers from material misrepresentations in insurance applications, even if made innocently by the insured. If applicable, Verex could rescind certificates issued based on misrepresentations attributed to Sunrise. The applicability of Fla.Stat. 627.409 to mortgage guaranty insurance is unclear under Florida law, prompting the Court of Appeals to certify this issue to the Supreme Court of Florida for clarification.
The district court had acknowledged this uncertainty while ruling on the matter, noting the historical context wherein mortgage guaranty insurers were previously protected under section 627.409, despite the absence of a direct counterpart in Chapter 635 of Florida Statutes, which governs mortgage guaranty insurance. The certification underscores the necessity for the highest court in Florida to resolve the applicability of the statute, especially following changes to the statutory framework that may affect its interpretation.
Provisions of the Florida Insurance Code relevant to mortgage guaranty insurers include chapters 624, 625, 626 (parts I, II, VIII, and X), 627.915, 628, and 631, as specified in section 635.091. Importantly, section 627.409 is not listed among those incorporated into Chapter 635. In the case Home Guaranty Ins. Corp. v. Numerica Financial Services, Inc., the court determined that section 627.409 does not apply to mortgage guaranty insurance contracts executed after October 1, 1983, due to its non-incorporation in section 635.091. The parties agree that had the insurance certificates been issued post-October 1, 1983, the outcome would favor Numerica, making Verex liable for losses from material misrepresentations. However, since the certificates were issued prior to this date, the applicability of section 627.409 to mortgage guaranty insurance before October 1, 1983, remains unresolved. The district court faced the question of whether section 635.091 was enacted to clarify that section 627.409 does not apply or to implicitly repeal its application. Lacking authority to certify questions of state law, the district court ruled that section 627.409 did apply prior to section 635.091's enactment, a decision with which the court agrees but believes should be certified to the Florida Supreme Court for resolution. The FDIC argues that the legislative intent at the time of section 635.091's enactment was merely to clarify that section 627.409 never applied to mortgage guaranty insurance, supported by the omission of Chapter 635 from the definition of the Florida Insurance Code in 1983. The FDIC asserts that since Chapter 635's introduction in 1959, mortgage guaranty insurance has been governed uniquely by it, with incorporation of other provisions occurring through sections 635.051 and 635.081. The FDIC contends that section 635.091 was intended to outline the applicable provisions of the insurance code for mortgage guaranty insurers.
FDIC argues that section 635.091 was enacted as a technical amendment aimed at clarifying existing law regarding mortgage guaranty insurance, rather than making substantive changes. This position is supported by legislative history, including the House and Senate analyses from December 1982, which indicate that the amendment was intended to clarify that certain provisions of the Insurance Code apply to mortgage guaranty insurers. Specifically, FDIC cites Section 13 of the House Analysis, which suggests that the enactment did not repeal any existing provisions but served to clarify existing law. The Senate Analysis reinforces this, recommending technical corrections to improve the organization of the statute.
Conversely, Verex contends that the district court correctly held that prior to section 635.091's enactment, section 627.409 applied to mortgage guaranty insurance, bolstered by statutory definitions and provisions indicating that mortgage guaranty insurance is categorized as casualty and surety insurance. Verex points out that section 627.4015, which outlines the scope of Chapter 627, does not exclude mortgage guaranty insurance, implying its coverage under section 627.409. Additionally, Verex highlights that section 627.4145, which mandates readability tests for insurance policies, was amended in 1985 to exempt mortgage guaranty insurance, suggesting that if it were solely governed by Chapter 635, this amendment would be unnecessary. Verex also references section 627.4133 concerning notice of cancellation, asserting that its amendment to exempt mortgage guaranty insurance indicates that section 635.091 does not encompass it, as section 635.091 does not list section 627.4133.
In 1990, the Florida legislature amended section 627.4133 to exempt mortgage guaranty insurance, leading Verex to argue that this statute applied to such insurance prior to the amendment. Verex contends that amendments to sections 627.4145 and 627.4133 render the FDIC's interpretation of section 635.091 incorrect, as this section could not have been intended solely to clarify existing provisions of the Insurance Code related to mortgage guaranty insurance. Verex cites legislative history indicating that Chapter 635 was intended to impose additional limitations on mortgage guaranty insurance rather than serving as the exclusive governing framework.
Verex asserts that section 635.011 defines mortgage guaranty insurance as a type of casualty and surety insurance, thereby subjecting it to broader Insurance Code requirements. The legislative analyses referenced support Verex's claim that mortgage guaranty insurance must comply with both Chapter 635 and relevant Insurance Code provisions. Consequently, Verex argues that the enactment of section 635.091 in 1983 impliedly repealed section 627.409's application to mortgage guaranty insurance, contrary to FDIC's position that the latter is solely governed by Chapter 635.
To resolve this legal ambiguity, the matter is certified to the Supreme Court of Florida, specifically questioning whether Fla. Stat. 627.409 applied to mortgage guaranty insurance contracts prior to the enactment of Fla. Stat. 635.091 on October 1, 1983. The phrasing of the question allows the Supreme Court to explore the broader issues at hand, with the full record and party briefs to be provided for its consideration. Section 627.409 outlines the treatment of statements in insurance applications, emphasizing their status as representations rather than warranties, with specific conditions under which misrepresentations would affect recovery under the policy.
In Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981), the Eleventh Circuit established that Fifth Circuit decisions prior to October 1, 1981, are binding precedent for federal courts in the Eleventh Circuit. Florida Statute 635.051 (1981) mandates that mortgage guaranty insurance agents must be licensed with qualifications mirroring those of general lines agents, with specific exceptions: no prior specialized education is required if the insurer guarantees training; the license is limited to mortgage guaranty insurance; and an examination may be required at the department's discretion. General lines agents can represent mortgage guaranty insurers without additional exams. The department is responsible for collecting the same license taxes and fees applicable to general lines agents and must deposit these funds according to existing laws. Florida Statute 635.081 (1981) grants the department authority for administration and enforcement of the act, similar to its powers over casualty or surety insurers. Florida Statute 627.401 (1983) outlines exclusions from this part of the insurance code, including reinsurance, out-of-state policies, wet marine and transportation insurance, title insurance, and credit life or disability insurance, with specified exceptions.
