951 F2d 1258 Federal Deposit Insurance Corporation v. A Bryan L the American Casualty Company of Reading Pennsylvania

951 F.2d 1258

Farmers & Merchants National Bank, Hennessey,
Oklahoma, Plaintiff,
Bruce A. BRYAN, Robert Bryan, Defendants-Appellants,
David Bryan, Marjorie L. Bryan, Defendants.
Federal Deposit Insurance Corporation, as Receiver of
Farmers & Merchants National Bank, Hennessey,
Oklahoma, Plaintiff-Appellant,
Bruce A. BRYAN, Robert Bryan, David Bryan, Marjorie L.
Bryan, Defendants,
The American Casualty Company of Reading, Pennsylvania,

Nos. 90-6169, 90-6170.

United States Court of Appeals, Tenth Circuit.

Dec. 10, 1991.

NOTICE: Although citation of unpublished opinions remains unfavored, unpublished opinions may now be cited if the opinion has persuasive value on a material issue, and a copy is attached to the citing document or, if cited in oral argument, copies are furnished to the Court and all parties. See General Order of November 29, 1993, suspending 10th Cir. Rule 36.3 until December 31, 1995, or further order.

Before STEPHEN H. ANDERSON and BALDOCK, Circuit Judges, and SAM,* District Judge.



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The Federal Deposit Insurance Corporation, Robert Bryan, and Bruce Bryan (referred to collectively herein for convenience as "FDIC") appeal from a judgment entered after a four day jury trial. The jury returned a verdict for plaintiff, American Casualty Company of Reading, Pennsylvania (ACCO), and the court entered a declaratory judgment permitting ACCO to rescind a portion of an insurance contract. FDIC asserts that the district court erred as follows: (1) by improperly denying FDIC's motion for a directed verdict because ACCO had not introduced any evidence to establish the elements of a prima facie case for (A) rescission or (B) material misrepresentation; (2) by improperly instructing the jury as to (A) the requirements necessary to sustain an action for rescission, (B) the elements of rescission, and (C) the definition of misrepresentation; (3) by improperly striking, on timeliness grounds, an affirmative defense raised by FDIC; (4) by improperly allowing ACCO to amend its pleadings during trial, altering their position as stated in the final pretrial order entered in the case; (5) by improperly admitting testimony of a crucial witness for ACCO, Joseph Carpenter, in violation of Fed.R.Evid. 406 and 701; and (6) by improperly denying a motion for a mistrial on the grounds of jury confusion. We find that the contentions contained in parts 1(A) and 2(A) require a remand. The remaining contentions are without merit and we affirm the district court on those issues.


The relevant facts are as follows. Farmer's and Merchant's Bank (F & M) of Hennessey, Oklahoma obtained from ACCO a directors' and officers' (D & O) liability insurance policy that went into effect in December 1983.1 The policy covered F & M, its holding company (F & M Bancshares, Inc.), and the directors and officers of each enterprise. In June 1985, F & M brought a suit against Bruce, Robert, Marjorie, and David Bryan, all officers or directors of F & M during the policy period, for mismanagement and breach of duties. F & M failed in late 1985, and the rights to the suit passed to FDIC as receiver of the bank. FDIC was substituted for F & M as plaintiff in the action. In 1988, a jury found Bruce and Robert Bryan liable to FDIC for approximately $3.3 million on these claims.2


Two weeks later, ACCO filed an action for a declaratory judgment against the holding company and FDIC, in its capacity as receiver for F & M. ACCO sought a declaration that it was entitled to rescind the 1983 insurance policy, or in the alternative, rescind the coverage as to David, Marjorie, Robert, and Bruce Bryan, on the grounds that ACCO had relied on misrepresentations Robert and Bruce Bryan had made in the insurance application.3 FDIC counterclaimed for a declaration that the policy covered the judgment entered against the Bryans and that FDIC's claim to the proceeds had priority over any claims by the individual directors and officers for reimbursement of the defense costs incurred in the breach of duties suit.


FDIC then sought to garnish the insurance proceeds which it claimed ACCO owed F & M for the actions of the Bryans, officers and directors of F & M. In January 1989, the rescission suit and the garnishment proceeding were consolidated. In March 1990, ACCO's declaratory judgment action to rescind the policy was tried before a jury. ACCO prevailed in its attempt to rescind the policy to the extent it provided coverage for Bruce and Robert Bryan, the two officers or directors who made or had knowledge of the misrepresentations alleged in this suit. This appeal followed.



FDIC contends that the trial court erred in not granting FDIC's motion for a directed verdict. FDIC asserts that ACCO presented no evidence to support a finding either that (1) ACCO complied with the requirements for rescission under Okla.Stat. tit. 15, § 235 (1981) or (2) that the alleged misrepresentations were material under Oklahoma law.4


We review the trial court's decision on a directed verdict under the same standard the trial court should use in the first instance. Wilson v. Al McCord, Inc., 858 F.2d 1469, 1474 (10th Cir.1988). Viewing the evidence in a light most favorable to the nonmoving party, "a directed verdict is justified only if the proof is all one way or so overwhelmingly preponderant in favor of the movant as to permit no other rational conclusion." J.I. Case Credit Corp. v. Crites, 851 F.2d 309, 311 (10th Cir.1988); or when all the inferences to be drawn from the evidence are so in favor of the moving party that reasonable persons could not differ in their conclusions. Federal Deposit Ins. Corp. v. Palermo, 815 F.2d 1329, 1335 (10th Cir.1987). Otherwise, the issue should be submitted to the jury. Grasmick v. Otis Elevator Co., 817 F.2d 88, 90 (10th Cir.1987).

A. Rescission


FDIC asserts two grounds to support its contention that it was entitled to a directed verdict on the issue of rescission: (1) ACCO failed to restore everything of value it received under the insurance contract as required by Okla.Stat. tit. 15, § 235(2) (1981) and (2) ACCO did not rescind promptly as required by § 235(1). We agree with the first contention and remand for a new trial limited to consideration of the rescission issues discussed below.

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Endorsement number two to the D & O policy that F & M purchased from ACCO provided that "[the bank] ... shall act on behalf of all Directors or Officers ... with respect to ... the payment of premiums and the receiving of any return premiums that may be due under this policy." R.Vol. II, Tab 359. Endorsement number 3 stated that "[t]he term 'Directors and Officers' shall mean all persons who were, now are, or shall be Directors and/or Officers of the (Bank/Association/Company)." Id. At the time the policy was issued, F & M had twelve officers or directors. R.Vol. IX at 16. From the policy language quoted above, it is evident that the bank sought to provide insurance for all of these individuals. In seeking rescission only against two of the insureds, Robert and Bruce Bryan, ACCO attempted to alter the policy's coverage.


Okla.Stat. tit. 15, § 235 (1981) requires that the party seeking rescission must restore "to the other party" everything of value the rescinding party received "from him" under the contract.5 See Ware v. City of Tulsa, Okla., 312 P.2d 946, 950 (Okla.1957). The restoration of value received under the contract is a condition precedent to obtaining rescission under § 235. Breland's Inc. of Tulsa v. Northside Village Shopping Ctr., 506 P.2d 908, 912 (Okla.1972); Great Am. Reserve Ins. Co. of Dallas v. Strain, 377 P.2d 583 (Okla.1963). This principle also applies to contracts for insurance. St. Paul Fire & Marine Ins. Co. v. Peck, 40 Okla. 396, 139 P. 117 (1914) (return of pro rata unearned premium condition precedent to declaring insurance policy void); Taylor v. Insurance Co. of North Am., 25 Okla. 92, 105 P. 354 (1909).6 The underlying objective is to prevent unjust enrichment by the party seeking to rescind. See Holden v. Du Bois, 665 P.2d 1175 (Okla.1983); Restatement (First) of Restitution, § 65 cmt. e. The party attempting to rescind has the burden of proof to show that it restored everything of value to the other party. New York Life Ins. Co. v. Kaplan, 195 Okla. 638, 639; 163 P.2d 1009, 1011 (1945).


The issue we address is the construction of the phrase "to the other party" in § 235(2). ACCO argued below that the meaning of "the other party" in this case was limited to Robert and Bruce Bryan, the individuals ACCO wanted to exclude from coverage, and that since the Bryans had not paid any of the premium, there was nothing for ACCO to restore. The district court agreed with this theory stating "it looks to me like the law is that you have an obligation to restore to the person you're contesting against whatever they paid, whatever insured you're contesting against as opposed to, in this case, the person that bought the policy." R.Vol. IX at 11. From this interpretation of § 235(2), it followed that ACCO had satisfied the condition precedent to obtaining rescission. Since it is uncontested that the Bryans had not furnished any of the premiums for insurance coverage, Id. at 16-18, ACCO had nothing of value to restore to the Bryans.


The district court's reading of "the other party" is too restrictive. Rescission goes to the contract, and is not valid unless accompanied by a restoration of value to the maker. If the maker waives the restoration of value, or there is nothing to restore, those third parties affected by the contract, such as Robert and Bruce Bryan here, may not complain. But, if the contracting party successfully contests rescission on the grounds that the rescinding party failed to restore value or the contracting party does not affirmatively waive the restoration of value, then individuals covered by the contract can benefit from the failure to rescind properly. Here, both the bank, the party which furnished consideration for the insurance contract and whose contract is being altered by the rescission, and the affected individual officers and directors covered under the policy are joined in this suit in opposing rescission.7 Under these circumstances, we hold that the bank is an entity covered by § 235(2), and that ACCO was required as a condition precedent to obtaining rescission against the two officers and directors covered under the policy to restore to the bank any part of the premium affected by the rescission. See Restatement (First) of Restitution, § 65 cmt. e.


By its own terms, the policy contemplated that the bank might receive any return premiums due under the policy. But, it is still an open question whether the premium F & M paid would have been any different if the D & O policy covered most, but not all, of F & M's officers and directors, and Robert and Bruce Bryan in particular. No inquiry was conducted on this critical issue.


FDIC also contends that ACCO failed to comply with the § 235(1) requirement of prompt rescission. Given our analysis above, we do not have sufficient information to resolve this issue. If ACCO did not have any value to restore to the bank, then the trial court properly resolved this issue. There was sufficient evidence in the record to support an inference that ACCO otherwise acted promptly in rescinding. R.Vol. VIII at 207-10.


If, instead, ACCO did not tender the value furnished by F & M, the district court needs to reconsider this issue on remand as well as any other issues implicated by the development of a full factual record on the issue of rescission.


Because the outcome of a new trial limited to the rescission issues just discussed is uncertain, we proceed to address the remainder of FDIC's contentions on appeal.

B. Materiality


ACCO alleged that six of forty-three questions contained on the D & O insurance application were answered falsely and that the answers to these questions were material to ACCO's decision to issue the insurance policy.8 FDIC responds that the test of materiality in assessing an alleged misrepresentation in an insurance application is "whether insurance companies generally would have rejected the application." Appellant's Reply Br. at 19 (quoting Massachusetts Mutual Life Ins. Co. v. Allen, 416 P.2d 935, 941 (Okla.1965)). Since ACCO introduced no evidence as to how other insurance companies would have treated the alleged misrepresentations, FDIC asserts that it was entitled to a directed verdict on the issue.


FDIC's definition of materiality addresses only one of several grounds for rescission under Oklahoma law. Okla.Stat. tit. 36, § 3609 (1981), allows an insurance company to obtain rescission if it satisfies any of the statute's three subdivisions.9 Dennis v. William Penn Life Assurance Co. of America, 714 F.Supp. 1580, 1582 (W.D.Okla.1989). The language FDIC cites in Allen pertaining to an insurance company's rejection of an application seems limited to a § 3609(3) situation since Allen itself endorsed a broader definition of materiality. The court stated that a misrepresentation could be material if it "would reasonably affect the insurer's judgment as to the matter of the risk and the amount of the premium." 416 P.2d at 940 (quoting 29 Am.Jur., Insurance, § 701). This definition of materiality encompasses the language of § 3609(2) which allows an insurance company to rescind if a misrepresentation is "[m]aterial either to the acceptance of the risk, or to the hazard assumed by the insurer." This reading of Oklahoma law conforms with the district court's pronouncement in Firstier Mortgage Co. v. Investors Mortgage Ins. Co., 708 F.Supp. 1224, 1231 (W.D.Okla.1989); aff'd, 930 F.2d 1508 (10th Cir.1991), that "[a]ll that Okla.Stat. tit. 36, § 3609 requires is that the misrepresentation be material to the acceptance of the risk." See also Coppin v. Shelter Mut. Ins. Co., 742 P.2d 594, 597 (Okla.Ct.App.1987) (misrepresentation material if it causes insurance company to accept risk; but court adds requirement of intent that is present neither under the plain language of § 3609 nor under cases from the Oklahoma Supreme Court) ( See contra Allen, 416 P.2d at 940; Vaughn v. American Nat'l Ins. Co., 543 P.2d 1404 (Okla.1975) (no intent requirement)).


FDIC also contends that expert testimony is required to establish what is material to "a reasonable insurance company, in determining its course of action" under Long v. Insurance Company of North America, 670 F.2d 930, 934 (10th Cir.1982) (citing Restatement (Second) of Torts ). There is no law to support this contention. The trier of fact can establish whether a challenged conduct is reasonable. The Restatement of Torts provides that:


[i]f no obligatory conduct has been established by a legislative enactment and there is no ruling of an appellate court upon substantially identical situations and the trial court has not withdrawn the case from the jury, the jury must itself define the standard of the reasonable man with such particularity as is necessary to make it applicable to the facts of the case before it.


Restatement (Second) of Torts, § 285(d) cmt. g. FDIC was not entitled to a directed verdict on the issue of materiality because of an absence of expert testimony by ACCO about the practices of other insurers.10


The trial court did not err in denying FDIC's motion for a directed verdict on the issue of materiality.



FDIC argues next that three of the jury instructions given in the case constituted prejudicial error. The three instructions at issue are: (1) "Prompt Rescission--Explained"; (2) "Claim for Rescission--Essential Elements"; and (3) "Misrepresentation--Defined". Only the first allegation of error has merit. In examining a challenge to jury instructions, "we review the record as a whole to determine whether the instructions 'state the law which governs and provides the jury with an ample understanding of the issues and standards applicable.' " United States v. Zimmerman, 943 F.2d 1204, 1213 (10th Cir.1991) (citations omitted). We consider not whether the charge was faultless but whether the jury had an understanding of the issues and its duty to determine those issues. Id. (citation omitted). An error in jury instructions mandates reversal of a judgment only if prejudicial based on a review of the record as a whole. Big Horn Coal Co. v. Commonwealth Edison Co., 852 F.2d 1259, 1271 n. 19 (citation omitted). Only in those cases where the reviewing court has a substantial doubt whether the jury was fairly guided in its deliberations should the judgment be disturbed. Lutz v. Weld County School Dist. No. 6, 784 F.2d 340, 341 (10th Cir.1986) (citations omitted).


A. "Prompt Rescission--Explained"


FDIC argues that this instruction was erroneous because it did not require the insurance company to prove that it restored or offered to restore the premium paid for the policy being rescinded under 15 Okla.Stat. tit. 15, § 235. For the reasons explained above in Part I-A of this opinion, we agree.


B. "Claim for Rescission--Essential Elements"


FDIC asserts that the court should have instructed the jury that reliance was an essential element under Okla.Stat. tit. 36, § 3609(2) and (3) (1981). We are satisfied that this instruction tracked the statutory language in § 3609 and was proper. See Vaughn v. American Nat'l Ins. Co., 543 P.2d 1404, 1406 (Okla.1975); Massachusetts Mutual Life Ins. Co. v. Allen, 416 P.2d 935, 937 (court syllabus) (Okla.1965).


C. "Misrepresentation--Defined"


FDIC contends that while the district court's definition was correct, it did not provide exceptions to the general definition of misrepresentation. FDIC cites Oklahoma authority for the propositions that (1) an insured's answer on an application form is not a misrepresentation if substantially true under a reasonable interpretation of the question, Appellant's Br. at 42; and (2) an insurance applicant can rely on an insurance agent's interpretations of questions on the application form with any resulting misrepresentations chargeable to the insurer. Id. at 43.


Our review of the record leads us to conclude that the instruction given by the district court provided the jury with an ample understanding of the issue of misrepresentation and the standards applicable.



ACCO filed an amended complaint on September 15, 1989, R.Vol. II, Tab 386, and FDIC filed its answer on October 16, 1989. R.Vol. XII, Tab 201. In that answer, FDIC raised for the first time its second affirmative defense.11 That defense, sounding in Okla.Stat. tit. 36, § 3610 (1981), stated that ACCO had to use an application form approved by and filed with the Oklahoma Insurance Commission.


FDIC subsequently filed a motion for leave to file a supplemental motion for summary judgment based on this defense. R.Vol. XII, Tab 210. That motion was initially granted, R.Vol. XII, Tab 214, but ten days later the district court reversed itself, and denied the motion because the time for filing dispositive motions had passed and FDIC had shown no just cause for the delay in filing. R.Vol. XII, Tab 222. In a hearing on ACCO's motion to strike and another motion not relevant here, the court stated:


[A]fter discovery is completed and after the deadline for dispositive motions [has passed], to raise three new, completely new issues, I think, it's just too late. And I'm going to sustain the motion to strike the ... defenses as inappropriately brought after the deadlines in the case. I think the parties have the right to have cases brought to trial, and I think it's time to bring this one to trial.


R.Vol. XV at 15.


FDIC asserts that absent any prejudice to ACCO, the district court should have allowed FDIC to file its amended answer under Fed.R.Civ.P. 15(a),12 and that it was error for the trial court to deprive FDIC of a possibly meritorious defense.


Without ACCO's consent, FDIC could only amend its answer by leave of the court. While such leave "shall be freely given when justice so requires" Fed.R.Civ.P. 15(a), the decision "is within the discretion of the trial court." Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330 (1971), accord First City Bank, N.A. v. Air Capitol Aircraft Sales, Inc., 820 F.2d 1127 (10th Cir.1987). We review a district court's grant or denial of a motion to amend under an abuse of discretion standard. Federal Ins. Co. v. Gates Learjet Corp., 823 F.2d 383, 387 (10th Cir.1987).


The district court must give some reason for its refusal to allow a party to amend its pleadings. Triplett v. Leflore County, Okla., 712 F.2d 444, 446-47 (10th Cir.1983). However, prejudice to the opposing party is not required as FDIC asserts. Id. We stated in First City Bank, N.A. that "a district court acts within the bounds of its discretion when it denies leave to amend for 'untimeliness' or 'undue delay'. Prejudice to the opposing party need not be shown also." 820 F.2d at 1133, accord Las Vegas Ice and Cold Storage Co. v. Far West Bank, 893 F.2d 1182, 1185 (10th Cir.1990).


The district court did not abuse its discretion in granting ACCO's motion to strike FDIC's new affirmative defense because it was untimely. This is especially so in light of FDIC's concession to the district court that "we don't deny that theoretically that fact [underlying the defense] was discoverable at an earlier time." R.Vol. XV at 9.



FDIC next alleges that the trial court erred in granting ACCO's motion during the trial to amend its pleadings to conform to the evidence presented in the case. R.Vol. IX at 6. The effect of the amendment was to narrow ACCO's claim for rescission to Robert and Bruce Bryan alone. The final pretrial order indicated that ACCO sought rescission of the entire policy or, in the alternative, rescission as to Bruce, Robert, David, and Marjorie Bryan as the officers and directors of F & M. R.Vol. XIII, Tab 245. FDIC contends that ACCO failed to show that modification of the pretrial order was necessary "to prevent manifest injustice" under Fed.R.Civ.P. 16(e), and that FDIC was prejudiced by the grant of the motion to amend the pleadings because a new factual issue was introduced into the case on which FDIC had not conducted discovery.


We review grants or denials of motions to amend pretrial orders under an abuse of discretion standard. R.L. Clark Drilling Contractors, Inc. v. Schramm, Inc., 835 F.2d 1306, 1308 (10th Cir.1987). The terms of a pretrial order are not absolute, and amendments to the pleadings may be permitted under the liberal terms of Fed.R.Civ.P. 15(b). Southwestern Stationery & Bank Supply, Inc. v. Harris Corp., 624 F.2d 168, 171 (10th Cir.1980). Rule 15(b) permits a court to amend pleadings over an objection at trial if the objecting party fails to satisfy the court that the admission of evidence pertaining to an issue not within the pretrial order "would prejudice the party in maintaining the party's ... defense upon the merits." Fed.R.Civ.P. 15(b).


Here, the trial court inquired as to the possible prejudice FDIC would suffer if the pleadings were amended to conform to the proof at trial. R.Vol. IX at 8. FDIC responded that allowing the amendment would introduce for the first time in the case the issue of whether ACCO restored the consideration given for the policy prior to rescission under Okla.Stat. tit. 15, § 235 (1981), an issue which FDIC had not explored during discovery. Id. at 8-10. The court responded that "I could be wrong. I just don't see that you're prejudiced at all in that there's no question they didn't pay the Bryan's anything.... I just don't see how discovery is going to change the fact they didn't pay them anything." Id. at 10-11.


Where there is no showing of prejudice, the only remedy for the objecting party is to request a continuance to enable the party to meet the new evidence. Fed.R.Civ.P. 15(b); Hardin v. Manitowoc-Forsythe Corp., 691 F.2d 449, 457 (10th Cir.1982). FDIC failed below to request a continuance to meet the allegedly new evidence.


It is inconceivable that FDIC was prejudiced by this amendment. ACCO filed an action for a declaratory judgment to allow ACCO to rescind the policy either in its entirety, or in the alternative, as to some of the officers and directors of F & M. From the very outset of this litigation, central elements of the case involved the requirements for rescinding a contract under Okla.Stat. tit. 15, § 235 (1981). Whether ACCO had restored value "to the other party" under § 235(2), discussed in Part I-A of this opinion, was always an issue the parties needed to address. FDIC could not have suffered any prejudice from the alleged introduction "for the first time" of an essential element of the case.


Furthermore, FDIC's actions in the case belie its claim of prejudice. One day prior to FDIC's assertion of prejudice from the introduction of a new issue, counsel for FDIC had inquired on cross-examination whether the insurance company had at any time offered to return to the Bryans' or F & M Bancshares "any part of the premiums that had been paid for the [insurance] coverage." R.Vol. VIII at 216. This question suggests that at some time prior to FDIC's claim of prejudice, counsel for FDIC had determined that the issue of whether ACCO had returned some portion of the premium paid by F & M for D & O insurance was relevant to FDIC's case. It is difficult to understand how FDIC could be prejudiced by an issue it independently determined was relevant13 and is an element of the prompt rescission requirement under Okla.Stat. tit. 15, § 235 (1981), discussed above in Part I-A.


The district court did not abuse its discretion when it granted ACCO's Fed.R.Civ.P. 15(b) motion to conform its pleadings to the evidence presented in the case.



In its briefs and arguments to this court, FDIC's most passionate ground for appeal is that ACCO ambushed FDIC by relying at trial on information that ACCO refused, without any valid reason, to provide in discovery. The disagreement concerns the trial testimony of Joseph Carpenter, the employee who had underwriting responsibility for the D & O policy at issue in the trial.


FDIC asserts on appeal that Carpenter based his testimony solely on his habits and practices of making underwriting determinations for the insurance company since Carpenter had no personal knowledge of being involved in the underwriting of F & M's D & O policy.14 FDIC contends that ACCO withheld on discovery information relevant to cross-examining Carpenter on his actual underwriting habits and practices of D & O policies. ACCO responds that FDIC agreed to the scope of discovery in the case and even proposed limiting the scope of discovery. ACCO produced 26 files of documents containing underwriting files for approximately 35 failed Oklahoma banks and D & O files for approximately 50 failed Oklahoma banks, none of which was used to cross-examine Mr. Carpenter. Appellee's Br. at 30-32.


The record shows that ACCO was not forthcoming in its responses to discovery.15 The record also reveals that FDIC consented to discovery compromises that limited the scope of the discovery in the case. Both parties signed a letter agreement on May 4, 1989 concerning discovery. The letter recited that:


the parties agreed ... that FDIC's prior request for production of documents by American Casualty Company shall be deemed amended so as to request only director and officer liability policy applications, and underwriting files, for new policies requested or issued by MGIC to Oklahoma instructions during the period January 1, 1983 through March 1, 1984.


R.Vol. X, Ex. 7(a) at 2. Approximately eleven weeks later, Magistrate Judge Howland ruled in his Order Regarding Discovery Motions "[p]ursuant to stipulation between American Casualty and FDIC ... American Casualty shall forthwith produce to FDIC.... such production shall satisfy all of FDIC's prior requests for production of D & O underwriting files by American Casualty." R.Vol. XI, Tab 159 at 3 (emphasis added).


Even if ACCO's pretrial behavior served to insulate Carpenter from effective cross-examination by FDIC, the trial court gave FDIC an opportunity to cure any prejudice FDIC had suffered. FDIC opted to pass up the opportunity. At oral argument, both parties discussed a conference held in the district judge's chambers following FDIC's objection to Carpenter's testimony on the grounds of inadequate discovery. Neither the existence of this conference nor its contents is reflected in the record on appeal. Counsel for FDIC stated that Judge Russell proposed recessing the trial for two hours to allow Counsel to redepose Carpenter. Counsel declined the offer because it would "interrupt the trial" and he would have been "doing [the deposition] blind" absent the unproduced underwriting files.


Nothing prevented counsel for FDIC from redeposing Carpenter and moving for a continuance if the deposition had proved productive. This court will not reverse the district court on the basis of appellant's speculation as to how Carpenter might have answered questions never posed to him when appellant had a fair opportunity to ask those questions below.



FDIC contends that the trial court should have declared a mistrial since the jury was confused both in understanding and applying the instructions given regarding materiality. The jury originally returned a general verdict inconsistent with the answers given in response to special interrogatories. R.Vol. IX at 20, 25-29 (last afternoon session). FDIC suggests that the trial court's subsequent actions in asking the jurors to submit a written question to the court, "chill[ed] further inquiry and discussion by the jury and suggest[ed] that the jury should repress its questions and confusion and render a consistent verdict." Appellant's Br. at 47. We review a district court's denial of a motion for mistrial under an abuse of discretion standard. United States v. Paveto, 881 F.2d 844, 859 (10th Cir.1989); Malandris v. Merrill Lynch, Pierce, Fenner & Smith, 703 F.2d 1152, 1178 (10th Cir.1981).


When faced with inconsistent verdicts, it is not an interference with the jury's function for the court to explain that either the verdict or the answer to the interrogatory will have to change to eliminate confusion. Jarvis v. Commercial Union Assurance Cos., 823 F.2d 392, 396 (10th Cir.1987). That is precisely what the trial court did in this instance stating "I would ask that you reconsider your interrogatories and the verdict." R.Vol. IX at 29 (last afternoon session). The record reflects that the jury considered the matter for over one hour before returning with a consistent verdict in favor of ACCO. Id. at 32. Under these facts, it was not an abuse of discretion for the trial court to deny FDIC's motion for a mistrial based on juror confusion.



For the reasons stated above, we AFFIRM the district court on all issues except the issue relating to whether ACCO satisfied the requirements set forth in Okla.Stat. tit. 15, § 235 (1981), as conditions precedent to seeking rescission of the D & O policy. As to that issue, and any related and relevant questions which the district court may deem to be appropriate (excluding any issue decided herein), we REMAND this case for a new trial consistent with this opinion.


The Honorable David Sam, United States District Judge for the District of Utah, sitting by designation


This order and judgment has no precedential value and shall not be cited, or used by any court within the Tenth Circuit, except for purposes of establishing the doctrines of the law of the case, res judicata, or collateral estoppel. 10th Cir.R. 36.3


FDIC, as receiver of F & M, and ACCO, as the insurer, are the relevant parties in this case. The history of this D & O policy is as follows. F & M's holding company, F & M Bank Shares, Inc., is the named insured under the policy. That entity later merged into F & M Bancshares, Inc. F & M Bancshares has assigned all of its rights and claims under the policy to FDIC. Appellant's Br. at 5. MGIC Indemnity Corporation (MGIC) actually issued the policy. CNA (Continental Casualty Company), ACCO's parent company, assumed this MGIC D & O policy via an "Assumption Endorsement" retroactive to the day the policy first took effect


See Federal Deposit Ins. Co. v. Bryan, CIV-85-1627-R (W.D.Okla.1988); aff'd sub nom. Farmers & Merchants Nat'l Bank v. Bryan, 902 F.2d 1520 (10th Cir.1990)


ACCO amended this claim at trial to seek to rescind coverage only against Robert and Bruce Bryan discussed further in Part IV of the court's opinion


FDIC properly raised the rescission issue both at trial and on appeal. See R.Vol. IX 3-14; Appellant's Br. at 36-37, 44-45. Although FDIC does not emphasize this important point on appeal, we are satisfied that the issue is properly presented to us for consideration


"Rescission ... can be accomplished only by the use, on the part of the party rescinding, of reasonable diligence to comply with the following rules:


He must restore to the other party everything of value which he has received from him under the contract."

Okla.Stat. tit. 15, § 235 (1981).


Oklahoma law on these issues is in accord with that of other states. See 43 Am.Jur.2d, Insurance, §§ 399, 402; 13 Am.Jur.2d, Cancellation of Instruments, § 37; 17A Am.Jur.2d, Contracts, § 590; Restatement (First) of Restitution, § 65


As discussed at n. 1 supra, F & M's holding company purchased the insurance policy at issue, and later assigned its rights to F & M. Accordingly, for purposes of this case, whether the party purchasing the D & O policy was F & M or the holding company does not affect the reasoning or result of this analysis, and references to the bank included both the bank and the holding company


The questions at issue are:


f. Are there negotiations now pending for the sale of stock in this Holding Company in excess of 10% of the total stock outstanding? ____ Yes ____ No. If yes, provide details:

Question 3.f. was marked "no."


Does any Director or Officer have knowledge or information of any act, error or omission which might give rise to a claim under the proposed policy? ____ Yes ____ No. If yes, provide details:

Question 12 was marked "no."


Loans past due 60 days or more for Holding Company and each subsidiary. Provide the number of loans and principal dollar amount outstanding at December 31st of the last two years and at most recent month end

No loans were listed.


During the last two years, have any Directors or Officers been alerted to any of the following conditions:

(a) Concentration of credits which warrant reduction or correction ____ Yes ____ No.

Question 15(a) was marked "no."

(b) Extensions of credit which exceed the legal lending limit ____ Yes ____ No.

Question 15(b) was marked "yes" and supplemented with the following details as requested if the answer was "yes." "Two occurrences; Individual farmer whose line of credit when combined with interest of partnership were over the Legal Loan Limit. They are now back in compliance."

(c) Assets subject to criticism as substandard, doubtful or loss, the total of which exceeds 25% of capital ____ Yes ____ No.

Question 15(c) was marked "no."

(d) Problems involving extensions of credit to Directors, Officers or Corporations controlled by Directors or Officers ____ Yes ____ No.

The answer was marked "no."

(e) Significant violations of laws and regulations ____ Yes ____ No.

The answer was marked "no."

R.Vol. II Tab 359.


§ 3609. Representations in applications-Recovery under Policy-Mortgage guaranty policies

A. All statements and descriptions in any application for an insurance policy or in negotiations therefor, by or in behalf of the insured, shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under the policy unless:


Fraudulent; or


Material either to the acceptance of the risk, or to the hazard assumed by the insurer; or


The insurer in good faith would either not have issued the policy, or would not have issued a policy in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as requires either by the application for the policy or otherwise


The issue of materiality was properly submitted to the jury. Oklahoma law provides that an issue is for the jury where there is conflicting evidence about the falsity of an insured's statements on an insurance application. City Nat'l Bank, N.A. v. Jackson Nat'l Life Ins., 804 P.2d 463, 466 (Okla.App.1990); Brunson v. Mid-Western Life Ins. Co., 547 P.2d 970 (Okla.1976)

There was conflicting evidence presented to the jury on this issue. ACCO introduced evidence tending to show that the application had been submitted with misrepresentations material to the risk the insurance company would underwrite. See R.Vol. VI at 79; Vol. VII at 92, 101-04, 107, 172-76; Vol. VIII at 45-52, 159-61. FDIC introduced evidence tending to show that no misrepresentations were made or that any alleged misrepresentations were not material to the insurance company. See R.Vol. VI at 141-44, 152, 167; Vol. VII at 38, 65, 75, 110, 180, 184-85; Vol. VIII at 123, 154, 164-65.


FDIC also raised two other new affirmative defenses in its answer. FDIC does not appeal on the basis of the striking of either of these two defenses


At the hearing, FDIC contended that it did not need the district court's permission to amend its answer since ACCO had filed a timely amended complaint. R.Vol. XV at 13. FDIC does not pursue this contention on appeal


FDIC's claim of surprise is also undercut by the statements of counsel for the Bryan's whose interest in the case was nearly identical to that of FDIC. Counsel said in opening arguments, "this is a little bit of a different type of insurance policy. It is taken out by a bank, or in this instance, by a bank holding company. And the bank paid the premiums. And it was for the purpose of protecting the Officers and Directors of the bank." R.Vol. VI at 32. (emphasis added)


FDIC does not seriously contend on appeal that Carpenter was incompetent to testify as to his habits and practices as an employee engaged in underwriting under Fed.R.Evid. 406. While Carpenter's trial testimony may have run afoul of the requirements of Rule 406, FDIC specifically states on appeal that "[w]hether Carpenter was ... technically qualified to give lay opinion testimony, under [Fed.R.Evid.] Rule 406 or Rule 701 ... is not the issue here. The issue to be decided on appeal is whether ACCO should have been precluded from ambushing the [FDIC] by proving its case exclusively through opinions of Carpenter which were founded upon and drawn from evidence ... that ACCO refused to produce." Appellant's Reply Br. at 1. "[T]he real question in this case is whether ACCO'S conduct prior to trial should have precluded it from using Carpenter's opinion testimony at trial, even assuming that Carpenter was technically 'qualified' to give such testimony under the Federal Rules of Evidence." Id. at 9. Furthermore, FDIC conceded at oral argument that the discovery produced in the case would satisfy Rule 406 for the state of Oklahoma


Counsel for ACCO was sanctioned by Magistrate Judge Howland in July 1989, R.Vol. XI, Tab 159 at 2-3, and the trial judge indicated that he would have imposed sanctions on ACCO's counsel for counsel's instruction not to answer a series of hypothetical questions asked in Carpenter's deposition. R.Vol. VIII at 40