470 U.S. 632 (1985)
BENNETT, SECRETARY OF EDUCATION
v.
NEW JERSEY
No. 83-2064.
Supreme Court of United States.
Argued January 8, 1985
Decided March 19, 1985
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
*633 Michael W. McConnell argued the cause for petitioner. With him on the briefs were Solicitor General Lee and Deputy Solicitor General Geller.
Mary Ann Burgess, Assistant Attorney General of New Jersey, argued the cause for respondent. With her on the brief were Irwin I. Kimmelman, Attorney General, Michael R. Cole, First Assistant Attorney General, and Regina A. Murray and Michael J. Haas, Deputy Attorneys General.[*]
JUSTICE O'CONNOR delivered the opinion of the Court.
The issue presented is whether substantive provisions of the 1978 Amendments to Title I of the Elementary and Secondary *634 Education Act apply retroactively for determining if Title I funds were misused during the years 1970-1972. This case was previously before the Court, and we then held that the Federal Government may recover misused funds from States that provided assurances that federal grants would be spent only on eligible programs. Bell v. New Jersey, 461 U. S. 773 (1983). We expressly declined, however, to address the retroactive effect of substantive provisions of the 1978 Amendments. Id., at 781, n. 6, 782, and n. 7. On remand from our decision, the Court of Appeals for the Third Circuit held that the standards of the 1978 Amendments should apply to determine if funds were improperly expended in previous years. State of New Jersey, Dept. of Ed. v. Hufstedler, 724 F. 2d 34 (1983). We granted certiorari, 469 U. S. 815 (1984), and we now reverse.

I
Title I of the Elementary and Secondary Education Act of 1965, Pub. L. 89-10, 79 Stat. 27, as amended, 20 U. S. C. § 241a et seq. (1976 ed.), provided federal grants-in-aid to support compensatory education for disadvantaged children in low-income areas.[1] Based on the theory that poverty and low scholastic achievement are closely related, Title I allocated funds to local school districts based on their numbers of impoverished children and the State's average per-pupil expenditures. H. R. Rep. No. 95-1137, pp. 4, 8 (1978); S. Rep. No. 95-856, p. 5 (1978); see 20 U. S. C. §§ 241a, 241c(a)(2) (1976 ed.); S. Rep. No. 146, 89th Cong., 1st Sess., 5-6 (1965). Within particular school districts, Title I funds were in turn directed to schools that had high concentrations *635 of children from low-income families. § 241e(a)(1)(A). Once Title I funds reached the level of targeted schools, however, all children in those schools who needed compensatory education services were eligible for the program regardless of family income. H. R. Rep. No. 95-1137, at 4; 45 CFR § 116a.21(e) (1977); 45 CFR § 116.17(f) (1972). Respecting the deeply rooted tradition of state and local control over education, Congress left to local officials the development of particular programs to meet the needs of educationally disadvantaged children. Federal restrictions on the use of funds at the local level sought only to assure that Title I moneys were properly used "to provide specific types of children in specific areas with special services above and beyond those normally provided as part of the district's regular educational program." H. R. Rep. No. 95-1137, at 4.
The goal of providing assistance for compensatory programs for certain disadvantaged children while respecting the tradition of state and local control over education was implemented by statutory provisions that governed the distribution of Title I funds. Local school districts determined the content of particular programs, and the appropriate state education agency approved the applications for Title I assistance submitted by local education agencies. 20 U. S. C. § 241e(a) (1976 ed.). After determining that the applications complied with the requirements of federal law, the state education agencies distributed Title I funds to the school districts. §§ 241e(a), 241g. The state education agencies in turn received grants from the Department of Education upon providing assurances to the Secretary that the local educational agencies would spend the funds only on programs which satisfied the requirements of Title I.[2]Bell v. New *636 Jersey, supra, at 776; 20 U. S. C. § 241f(a)(1) (1976 ed.). As noted supra, we previously held that if Title I funds were expended in violation of the provided assurances, the Federal Government may recover the misused funds from the States.
This case arises from a determination by the Department of Education that respondent New Jersey must repay $1,031,304 in Title I funds that were improperly spent during the years 1970-1972 in Newark, N. J. 461 U. S., at 777. There is no contention that the Newark School District received an incorrect allocation of Title I funds or that funds were not used for compensatory education programs. Instead, the Secretary's demand for repayment rests on the finding that Title I funds were not directed to the proper schools within the Newark School District. Regulations in effect when the moneys were expended provided that school attendance areas within a school district could receive Title I funds if either the percentage or number of children from low-income families residing in the area was at least as high as the districtwide average. 45 CFR § 116.17(d) (1972). Alternatively, the entire school district could be designated as eligible for Title I services, but only if there were no wide variances in the concentrations of children from low-income families among school attendance areas in the district. Ibid. A federal audit completed in 1975 determined that the New Jersey Department of Education had incorrectly approved grant applications allowing 13 Newark schools to receive Title I funds in violation of these requirements. App. 9-51.
The auditors found that during the 1971-1972 school year, the percentage of children from low-income families for the 13 schools ranged from 13% to 33.5%, while the districtwide average for Newark was 33.9%. Id., at 23-24. Consequently, for that school year the auditors disallowed Title I expenditures totaling $1,029,630. The auditors also found that funds were misused during the 1970-1971 school year, *637 but because of the statute of limitations, only $1,674 remains at issue for that year. App. to Pet. for Cert. 36a-37a. In June 1976, the Department issued a final determination letter to New Jersey demanding repayment of the misused funds. App. 52-58. New Jersey sought further administrative review, and hearings were held before the Education Appeal Board (Board). In those proceedings, New Jersey argued that the Department was not authorized to compel repayment, that the auditors had miscalculated the percentages of children from low-income families, and that the entire Newark School District qualified as a Title I project area under the regulations. App. to Pet. for Cert. 35a-58a. The Board rejected each of these arguments, id., at 37a-58a, and ordered repayment. The Secretary declined to review the Board's order, which thereby became final. Id., at 59a.
New Jersey then sought judicial review, and the Court of Appeals for the Third Circuit held that the Department did not have authority to issue the order demanding repayment. State of New Jersey, Dept. of Ed. v. Hufstedler, 662 F. 2d 208 (1981). Accordingly, the Court of Appeals did not address arguments made by New Jersey challenging the Department's determination that funds were misused. Id., at 209. After remand from our decision in Bell v. New Jersey, the State argued for the first time that the 1978 Amendments to Title I, Pub. L. 95-561, 92 Stat. 2143, 20 U. S. C. § 2701 et seq., should determine whether the funds were misused during the years 1970-1972. 724 F. 2d, at 36, n. 1. The Court of Appeals agreed and remanded the case to the Secretary to determine whether the disputed expenditures conformed to the 1978 standards. Id., at 37. We hold that the substantive standards of the 1978 Amendments do not affect obligations under previously made grants, and we reverse. Our holding does not address whether the Secretary correctly determined that Title I funds were misused under the law in effect during the years 1970-1972, and New Jersey may renew its contentions in this regard on remand.

*638 II
The Court of Appeals based its holding on a presumption that statutory amendments apply retroactively to pending cases. Relying on language from Bradley v. Richmond School Board, 416 U. S. 696 (1974), the Court of Appeals observed that "[a] federal court or administrative agency must `apply the law in effect at the time it renders its decision, unless doing so would result in manifest injustice or there is statutory direction or legislative history to the contrary.' " 724 F. 2d, at 36, quoting 416 U. S., at 711. We conclude, however, that reliance on such a presumption in this context is inappropriate. Both the nature of the obligations that arose under the Title I program and Bradley itself suggest that changes in substantive requirements for federal grants should not be presumed to operate retroactively. Moreover, practical considerations related to the administration of federal grant programs imply that obligations generally should be determined by reference to the law in effect when the grants were made.[3]
As we explained in our first decision in this case, "the pre-1978 version [of Title I] contemplated that States misusing federal funds would incur a debt to the Federal Government for the amount misused." 461 U. S., at 782. Although our conclusion was based on the statutory provisions, id., at 782-790, we also acknowledged that Title I, like many other federal grant programs, was "much in the nature of a contract." Pennhurst State School and Hospital v. Halderman, 451 U. S. 1, 17 (1981). "The State chose to participate in the Title I program and, as a condition of receiving the *639 grant, freely gave its assurances that it would abide by the conditions of Title I." 461 U. S., at 790. A State that failed to fulfill its assurances has no right to retain the federal funds, and the Federal Government is entitled to recover amounts spent contrary to terms of the grant agreement. Id., at 791; see id., at 794 (WHITE, J., concurring). In order to obtain the Title I funds involved here, New Jersey gave assurances that the money would be distributed to local education agencies for programs that qualified under the existing statute and regulations. See 20 U. S. C. § 241f(a) (1976 ed.); 45 CFR § 116.31(c) (1972). Assuming that these assurances were not met for the years 1970-1972, see 461 U. S., at 791, the State became liable for the improper expenditures; as a correlative, the Federal Government had, before the 1978 Amendments, a pre-existing right of recovery. Id., at 782, and n. 7.
The fact that the Government's right to recover any misused funds preceded the 1978 Amendments indicates that the presumption announced in Bradley does not apply here. Bradley held that a statutory provision for attorney's fees applied retroactively to a fee request that was pending when the statute was enacted. This holding rested on the general principle that a court must apply the law in effect at the time of its decision, see United States v. Schooner Peggy, 1 Cranch 103 (1801), which Bradley concluded holds true even if the intervening law does not expressly state that it applies to pending cases. 416 U. S., at 715. Bradley, however, expressly acknowledged limits to this principle. "The Court has refused to apply an intervening change to a pending action where it has concluded that to do so would infringe upon or deprive a person of a right that had matured or become unconditional." Id., at 720. This limitation comports with another venerable rule of statutory interpretation, i. e., that statutes affecting substantive rights and liabilities are presumed to have only prospective effect. See, e. g., United States v. Security Industrial Bank, 459 U. S. 70, 79 *640 (1982); Greene v. United States, 376 U. S. 149, 160 (1964). Cf. Bradley, supra, at 721 (noting that statutory change did not affect substantive obligations).
Practical considerations related to the enforcement of the requirements of grant-in-aid programs also suggest that expenditures must presumptively be evaluated by the law in effect when the grants were made. The federal auditors who completed their review of the disputed expenditures in 1975 could scarcely base their findings on the substantive standards adopted in the 1978 Amendments.[4] Similarly, New Jersey when it applied for and received Title I funds for the years 1970-1972 had no basis to believe that the propriety of the expenditures would be judged by any standards other than the ones in effect at the time. Cf. Pennhurst State School and Hospital, supra, at 17, 24-25. Retroactive application of changes in the substantive requirements of a federal grant program would deny both federal auditors and grant recipients fixed, predictable standards for determining if expenditures are proper.
Requiring audits to be redetermined in response to every statutory change that occurs while review is pending would be unworkable and would unfairly make obligations depend on the fortuitous timing of completion of the review process. Moreover, the practical difficulties associated with retroactive application of substantive provisions in the 1978 Amendments would be particularly objectionable, because Congress *641 expressly intended those Amendments to strengthen the auditing process by clarifying the Department's responsibilities and specifying the procedures to be followed. See Bell v. New Jersey, 461 U. S., at 789; S. Rep. No. 95-856, at 37, 131; H. R. Rep. No. 95-1137, at 53, 161. We conclude that absent a clear indication to the contrary in the relevant statutes or legislative history, changes in the substantive standards governing federal grant programs do not alter obligations and liabilities arising under earlier grants.

III
Neither the statutory language nor the legislative history indicates that Congress intended the substantive standards of the 1978 Amendments to apply retroactively. Congress adopted the amendments as part of a general reauthorization of Title I that did not depart from the program's basic philosophy, but instead sought to clarify and simplify provisions concerning implementation. H. R. Rep. No. 95-1137, at 2, 8; S. Rep. No. 95-586, at 2, 8, 130. The substantive provisions of the 1978 Amendments to Title I were expressly made applicable for grants between October 1, 1978, and September 30, 1983. 20 U. S. C. § 2702. See also Pub. L. 95-561, § 1530, 92 Stat. 2380 (provisions shall take effect on October 1, 1978, "[e]xcept as otherwise specifically provided in this Act"). The House Report similarly stated that the changed requirements were intended to clarify "the manner in which school districts are to distribute Title I funds among eligible schools and children." H. R. Rep. No. 95-1137, at 21 (emphasis added). Thus, both the general purpose of the 1978 Amendments and the more specific references in the statute and legislative history suggest that the new requirements were intended to apply prospectively.
The Court of Appeals did not rely on evidence from the legislative history to conclude that the 1978 Amendments in general have retroactive effect. Instead, the court below observed that the amendments to the school attendance area *642 eligibility requirements "were designed to correct regulations that frustrated the basic objectives of the Title I program." 724 F. 2d, at 36-37. This observation mischaracterizes both the regulations in effect prior to 1976 and the provisions adopted by Congress in 1978. Regulations adopted in 1967, see 32 Fed. Reg. 2742, and in effect for nearly 10 years, generally restricted Title I assistance to school attendance areas having a percentage of low-income children at least as high as the districtwide average. Supra, at 636; see also Office of Education, Title I Program Guide No. 44, ¶ 1.1 (1968) (explaining eligibility requirements). This requirement deliberately channeled funds to the poorest areas within any particular school district. One consequence of this comparative approach, however, was that a school located in a disadvantaged district might be ineligible for assistance even though it would have qualified if it were located in a wealthier district.[5] Although later changes in the eligibility standards attempted to mitigate this incidental effect, *643 they do not indicate that the earlier regulations conflicted with the policies of Title I.
During consideration of 1974 Amendments to Title I, a House Committee observed that inflexible application of the existing regulations might make schools with high proportions of low-income children ineligible. H. R. Rep. No. 93-805, p. 17 (1974) ("[I]t was never intended by the Act to render any school with a 30% concentration ineligible"). Although the 1974 Amendments made changes in the school eligibility requirements, they did not specifically address this situation.[6] Apparently prompted by the concerns of Congress, the Department modified its regulations in 1976 to permit a school attendance area to qualify for funds if more than 30% of its children were from low-income families, even though the districtwide average might exceed 30%. See 42 Fed. Reg. 42914, 42917 (1976), codified in 45 CFR § 116a.20 (b)(2) (1977); National Institute of Education, Title I Funds Allocation: The Current Formula 57, 109 (1977). The 1978 Amendments refined this alternative by lowering the percentage to 25% and requiring the school district to guarantee that state and federal funding for compensatory education would not be reduced for any other school attendance area that received Title I funds in the preceding year. 20 U. S. C. § 2732(a)(1).
The evolution of the school eligibility requirements no doubt reflects a reassessment of the proper means to implement *644 the goals of Title I. Nonetheless, the changes made since 1976 simply do not support the conclusion of the Court of Appeals and the contention of New Jersey that the earlier regulations were inconsistent with Title I's policies. The regulations in place from 1967 to 1976 targeted assistance to the neediest areas within each school district in conformance with the statutory directive that funds should go to school attendance areas having high concentrations of children from low-income families. See 20 U. S. C. § 241e(a) (1976 ed.). Moreover, available funds never were sufficient to provide services to all eligible students, H. R. Rep. No. 95-1137, at 7, and Title I required funds to be concentrated on particular projects rather than diffused among all eligible school attendance areas. See 20 U. S. C. § 241e(a)(1)(B) (1976 ed.); 45 CFR § 116.17(c) (1972). Thus, the school eligibility requirements helped to assure that funds would not be spread so thinly as to impair the effectiveness of particular Title I projects. Cf. H. R. Rep. No. 1814, 89th Cong., 2d Sess., 3 (1966) (suggesting that limited funds should be directed to schools with highest concentrations of children from low-income families); S. Rep. No. 95-856, at 7 ("[T]itle I is successful in directing substantial federal aid to those areas which have the highest proportions of children from low-income families").
Congress did not abandon the concerns underlying the earlier regulations when it enacted the 1978 Amendments. Legislative Reports spoke approvingly of the longstanding policy to direct funds to school attendance areas "having the highest concentrations of low-income families." Id., at 11; H. R. Rep. No. 95-1137, at 21. Although the 1978 Amendments relaxed the eligibility requirements for school attendance areas, the intent was "to give districts more flexibility without watering down the targeting features intended to give the programs a focus when funds are limited." Ibid. The 25% eligibility standard was itself the product of a compromise at Conference. The House bill, see id., at 22, 211, but not the Senate amendment, provided that any school *645 attendance area having a 20% concentration of poor children must be designated as eligible for Title I. H. R. Conf. Rep. No. 95-1753, p. 255 (1978). The Conference agreed to an amendment that made the designation of these areas optional, increased the required percentage to 25%, and provided that other areas must retain the same amount of funds they received the preceding year. Ibid. Although it is fair to infer that Congress determined that the targeting features of Title I would not be unduly compromised by adoption of the 25% standard, the background to the 1978 Amendments does not suggest the earlier regulations frustrated the program or that Congress intended the Amendments to apply to prior grants.

IV
New Jersey urges that we affirm the holding below on the ground that the Court of Appeals reached an equitable result. The determination by the Secretary does not question the good faith of New Jersey or the Newark School District with respect to the disputed expenditures, which we acknowledge might be permissible under standards enacted in 1978 or currently in effect.[7] Nonetheless, we find no inequity in requiring repayment of funds that were spent contrary to the assurances provided by the State in obtaining the grants. Particular cases might appear to present exceptions to this rule, but given the statutory and administrative framework for assuring compliance with the requirements of Title I, we do not think recognizing such *646 exceptions is within the province of the courts. Congress has already accommodated equitable concerns in the statutory provisions governing recovery of misused funds. Those provisions limit liability for repayment to funds received during the five years preceding the final written notice of liability, 20 U. S. C. § 884 (1976 ed.), repealed and replaced by 20 U. S. C. § 1234a(g), and authorize the Secretary, under certain conditions, to return to the State up to 75% of any amount recovered. § 1234e(a). Of course, if Congress believes that the equities so warrant, it may relax the requirements applicable to prior grants or forgive liability entirely. The role of a court in reviewing a determination by the Secretary that funds have been misused is to judge whether the findings are supported by substantial evidence and reflect application of the proper legal standards. Bell v. New Jersey, 461 U. S., at 792. Where the Secretary has properly concluded that funds were misused under the legal standards in effect when the grants were made, a reviewing court has no independent authority to excuse repayment based on its view of what would be the most equitable outcome. Cf. Bennett v. Kentucky Dept. of Education, post, at 662-663.
Because the Court of Appeals has not yet addressed New Jersey's arguments that the demanded repayment does not reflect proper application of the standards in effect during 1970-1972, the State may renew these contentions on remand. Accordingly, the decision of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
JUSTICE POWELL took no part in the consideration or decision of this case.
JUSTICE STEVENS, with whom JUSTICE MARSHALL joins, dissenting.
The Elementary and Secondary Education Act of 1965, 79 Stat. 27, was a part of the broader program that President *647 Johnson characterized as the "war on poverty."[1] Title I of the Act authorized the expenditure of large sums of federal money to improve the education of children in low-income areas. The statute, however, did not contain a specific definition of the schools that would qualify for assistance under the program. It merely stated that "payments under this subchapter will be used for programs and projects . . . (A) which are designed to meet the special educational needs of educationally deprived children in school attendance areas having high concentrations of children from low-income families. . . ." 20 U. S. C. § 241e(a)(1) (1976 ed.).
As the case comes to us, the underlying issue is whether 10 of the public schools in Newark, New Jersey,[2] that received federal assistance in the 1971-1972 school year were located "in school attendance areas having high concentrations of children from low-income families" within the meaning of the Act as it was enacted and as it was clarified by subsequent amendments. If funds were incorrectly allocated to those schools, the total federal grant was not increased; instead, the consequence was a lower distribution to other Newark schools that admittedly qualified for federal aid.[3] There is *648 no dispute about the fact that the money that was allocated to these schools  like that allotted to over 60 other schools in Newark  was used in programs and projects properly designed to meet the special educational needs of educationally deprived children.[4] The only "misuse" of federal funds that is at issue is the suggestion that the money should have been spent in different school-attendance areas. The remedy for this misuse is not a redistribution to the more needy areas, but is a recapture of the funds by the Federal Government.
The Court agrees that the areas in dispute would have qualified for federal assistance under the statute as amended in 1978, and under the Secretary's regulations that are now in effect. Ante, at 645. I think the Court would also agree that the Secretary had authority under the original Act to issue the regulations that are in effect today; indeed, in 1976 the Secretary did issue regulations that would have qualified seven of the attendance areas that are now in dispute.[5] As the case comes to us it is also clear that we must assume that none of the disputed areas qualified under the Secretary's regulations that were in effect in 1971-1972.[6] Thus, the *649 question for decision is whether the legal standard that should govern the disposition of this controversy is to be derived from the Secretary's regulations in effect during the 1971-1972 school year  which admittedly were violated  or from the statutory language, which plainly was broad enough to authorize these expenditures when the statute was first enacted in 1965 as well as after its amendment in 1978.
The Court holds that the now repudiated regulations must be strictly enforced. I agree with the Court's view that the fact that its holding produces an inequitable outcome does not authorize a reviewing court to depart from the controlling legal standard,[7] but I am convinced that the Court has seriously misread the intent of Congress.

I
In order to understand the impact of the regulations that must be strictly enforced under the Court's holding  and which I submit Congress later repudiated  it is useful to set forth the relevant facts concerning one of the school-attendance areas where federal money was allegedly "misused." The federal auditors disallowed expenditures of $104,842 for special programs at Newark's South 17th Street Elementary School. The disallowance was based on a determination that only 33.5% of the 1,549 children in the school were from low-income families.[8] Because the average percentage of children from low-income families in the entire *650 Newark School District was slightly higher  33.9%  the South 17th Street Elementary School did not satisfy one of the eligibility criteria in the Secretary's regulations.[9] Under those regulations, unless the entire Newark School District qualified for assistance, only those school-attendance areas in which the percentage exceeded the districtwide average could qualify. Thus, even though South 17th Street's percentage of 33.5 would have qualified for federal aid in any other school district in New Jersey and, indeed, in almost any school district in the entire United States,[10] it did not meet the Secretary's rigid standard.
*651 When the anomalous consequences of this regulation came to the attention of Congress during its consideration of amendments to the Act in 1974, the House Committee on Labor and Education issued a Report that expressed the opinion that "it was never intended by the Act to render any school with a 30% concentration ineligible."[11] Presumably it was that Report that prompted the Secretary to modify the regulations in 1976 to permit school-attendance areas with more than 30% of the children from low-income families to qualify even though the districtwide percentage was even higher.[12] Regardless of whether that is a correct explanation *652 of the regulatory change in 1976, it is significant that the Secretary then interpreted the 1965 Act as allowing a school in a 30% area to qualify even though its attendance area had a lower percentage than the districtwide average.
In its consideration of the 1978 Amendments, Congress plainly expressed its disapproval of the kind of interpretation of the 1965 Act that is reflected in the regulations involved in this case. One example, described in the hearings before the Subcommittee on Elementary, Secondary and Vocational Education, provides a precise analogue to this case:
"In Baltimore City any school district which has less than 30.3% Title I children was not eligible to receive Title I funds. This minimum is higher than the maximum incidence in schools receiving Title I funds in 11 other counties. This means there are schools in relatively affluent counties receiving Title I assistance with no more than 5% Title I children while schools in Baltimore City with 25-30% Title I children are excluded from the program."[13]
In response to testimony of that kind, Congress amended the statute to make it clear that a local school district could designate any attendance area with a 25% incidence of poverty as eligible for Title I funds. The House Report explained the purpose of the change (which originally proposed a reduction to 20%):
"[C]urrent OE regulations [45 CFR § 116a-20(b)(2)] provide that any school attendance area with 30 percent *653 or more children from low-income families (based on eligibility for free lunch) may be designated a target area. . . . The Committee bill reduces this minimum to 20 percent out of a concern that inflexible targeting requirement could force some school districts with very high incidences of poverty to declare school[s] with 20 percent low-income enrollment ineligible, while schools with only 10 percent low-income enrollment or less might be eligible in wealthier neighboring districts."[14]
When Congress amended the Act in 1978 to provide that any school-attendance area would be eligible for federal assistance if at least 25% of its children were from low-income families, it did not change the basic eligibility standard that had been adopted in 1965. Thus, the statute as amended in 1978, like the statute prior to those Amendments, provides that a "local educational agency shall use funds received under this subchapter in school attendance areas having high concentrations of children from low-income families (hereinafter referred to as `eligible school attendance areas')." 92 Stat. 2161, 20 U. S. C. § 2732(a)(1). In adding the specific provision that a local educational agency may designate any school-attendance area in which at least 25% of the children are from low-income families, Congress did not broaden that standard, but merely ensured that the Secretary would not improperly narrow it. Thus, the only practical effect of the 1978 Amendments was to deny the Secretary the legal authority to promulgate the kind of rigid regulation that is being strictly enforced today.

II
In my opinion this is plainly a case for application of the normal rule that a reviewing court must apply the law in effect at the time of its decision. As JUSTICE WHITE correctly noted when this litigation was before the Court two Terms ago:

*654 "A federal court or administrative agency must `apply the law in effect at the time it renders its decision, unless doing so would result in manifest injustice or there is statutory direction or legislative history to the contrary.' Bradley v. Richmond School Board, 416 U. S. 696, 711 (1974). Accord, Gulf Offshore Co. v. Mobil Oil Corp., 453 U. S. 473, 486, n. 16 (1981). Here, nothing in the 1978 Amendments or the legislative history suggests that the Amendments were not intended to be applied retroactively, and their application to this case would not result in manifest injustice." Bell v. New Jersey, 461 U. S. 773, 793-794 (1983).
In my view, it is the Court's holding, rather than an application of the 1978 Amendments to this case, that results in manifest injustice.
Ever since the statute was enacted in 1965 Congress has expressed a strong preference for allowing broad discretion to local governmental units in the administration of these federally funded programs.[15] We should therefore adopt a strong presumption supportive of a local school board's decision concerning the proper allocation of money among different school-attendance areas subject to its jurisdiction.[16] Finally, it is appropriate to note that, just as the 1978 Amendments *655 themselves protected local school districts from overly prescriptive federal regulations, Congress in 1981 again identified the same interest in further amendatory legislation. Thus, the Education Consolidation and Improvement Act in 1981 directed that federal assistance be provided "in a manner which will eliminate burdensome, unnecessary and unproductive paperwork and free the schools of unnecessary federal supervision, direction and control," 95 Stat. 464, and specifically indicated that federal assistance of the kind involved in this case would be most effective "if educational officials, principals, teachers, and supporting personnel are freed from overly prescriptive regulations and administrative burdens which are not necessary for fiscal accountability and make no contribution to the instructional program." Ibid.[17]
In sum, I simply cannot understand how the Court reaches the conclusion that its disposition of this case accords with the intent of Congress.
Accordingly, I respectfully dissent.
NOTES
[*]  Fred N. Fishman, Robert H. Kapp, Norman Redlich, William L. Robinson, and Norman J. Chachkin filed a brief for the Lawyers' Committee for Civil Rights Under Law as amicus curiae urging reversal.
[1]  The Education Amendments of 1978, Pub. L. 95-561, 92 Stat. 2143, 20 U. S. C. § 2701 et seq., reauthorized the Title I program and generally amended the Elementary and Secondary Education Act. The Title I program was subsequently succeeded by Chapter 1 of the Education Consolidation and Improvement Act of 1981, Pub. L. 97-35, 95 Stat. 464, 20 U. S. C. § 3801 et seq. Chapter 1 retains Title I's focus upon assisting educationally deprived children who live in low-income areas.
[2]  In 1980, the Department of Education replaced the former Office of Education as the federal agency responsible for administering Title I. See Bell v. New Jersey, 461 U. S. 773, 776, n. 1 (1983). For simplicity, unless the distinction is significant, we will refer to both the Office of Education and the Department of Education as the Department and to both the former Commissioner of Education and the Secretary of Education as the Secretary. See ibid.
[3]  In determining compliance with federal grant programs, other Courts of Appeals have consistently applied the legal requirements in effect when the grants were made. See, e. g., Indiana v. Bell, 728 F. 2d 938, 941, n. 6 (CA7 1984); North Carolina Comm'n of Indian Affairs v. Department of Labor, 725 F. 2d 238, 239 (CA4 1984); Woods v. United States, 724 F. 2d 1444, 1446 (CA9 1984); West Virginia v. Secretary of Education, 667 F. 2d 417, 420 (CA4 1981).
[4]  The eligibility requirements for school attendance areas have been altered many times since the years 1970-1972. Changes were made by 1974 Amendments to Title I, and the requirements were modified by regulation in 1976 and again amended in 1978. Infra, at 643, and n. 6. The Department issued regulations in 1981 clarifying the requirements of the 1978 Amendments. 34 CFR § 201.51(d)(ii) (1981). Later in 1981, the enactment of Chapter 1, see n. 1, supra, superseded the provisions of Title I. Chapter 1 has its own provisions governing eligibility for attendance areas within school districts, see 20 U. S. C. § 3805(b), and these provisions were amended in 1983. See Pub. L. 98-211, § 3, 97 Stat. 1413, 20 U. S. C. § 3805(d) (1982 ed., Supp. I).
[5]  Of course, relatively poor school districts would receive a greater districtwide allocation of Title I funds because this amount was determined by the number of poor children within the district. This fact is illustrated by the present case: for the period from September 1, 1970, to August 31, 1973, Newark was allocated more than $28 million in Title I funds, or 18.4% of New Jersey's total allocation. App. 14.

Moreover, from the outset of the Title I program, the regulations provided that in certain circumstances an entire school district could qualify as a Title I project. 45 CFR § 116.17(b) (1966). This alternative responded to indications by Congress that districtwide eligibility might be appropriate for particularly impoverished areas. See S. Rep. No. 146, 89th Cong., 1st Sess., 9 (1965) ("There may be circumstances where a whole school system is basically a low-income area and the best approach in meeting the needs of educationally deprived children would be to upgrade the regular program"); H. R. Rep. No. 1814, 89th Cong., 2d Sess., 3 (1966) ("[W]hen 30 or 40 percent of the children in the school district are from low-income families, all of the children in the district could be considered disadvantaged and the whole school system could be upgraded").
We do not address whether the Secretary correctly determined that Newark did not qualify for districtwide eligibility under the legal provisions in effect during the years 1970-1972. See supra, at 637.
[6]  The 1974 Amendments liberalized the eligibility standards by providing that an otherwise ineligible school attendance area would be deemed eligible if it had qualified and received Title I funds in either of the two preceding fiscal years. Pub. L. 93 380, § 101(a)(5)(D), 88 Stat. 500, 20 U. S. C. § 241e(a)(13) (1976 ed.). Furthermore, the 1974 Amendments allowed a local education agency to deem a school attendance area eligible for Title I assistance based on the actual attendance, rather than the residency, of children from low-income families. § 101(a)(5)(B), 88 Stat. 500, 20 U. S. C. § 241e(a)(1)(A) (1976 ed.). See S. Rep. No. 93-763, p. 30 (1974); H. R. Rep. No. 93-805, pp. 16-17 (1974); S. Conf. Rep. No. 93-1026, p. 144 (1974).
[7]  New Jersey contends that 10 of the disputed attendance areas had concentrations of low-income children exceeding 25%, and under the 1978 standards, the State is liable for a minimum of $249,607. As the Court of Appeals noted, 724 F. 2d, at 37, the 1978 standards would not be satisfied if compensatory funding was not maintained at prior-year levels in other schools receiving Title I aid. Ibid. The present record leaves unclear whether this requirement was satisfied, ibid., and the possibility that the necessary information is no longer available merely underscores the practical problems resulting from retroactive application of changes in the eligibility requirements. Brief for Petitioner 46, and n. 37.
[1]  Cf. S. Rep. No. 146, 89th Cong., 1st Sess., 4 (1965) (" `Poverty will no longer be a bar to learning, and learning shall offer an escape from poverty. We will neither dissipate the skills of our people, nor deny them the fullness of a life informed by knowledge. And we will liberate each young mind  in every part of this land  to reach the furthest limits of thought and imagination' ") (statement of President Johnson).
[2]  The original dispute between the parties involved 10 elementary schools and 3 high schools. If the Court of Appeals' disposition were accepted, the determination of ineligibility for two elementary schools and for one high school would no longer be at issue. See State of New Jersey, Dept. of Education v. Hufstedler, 724 F. 2d 34 (CA3 1983); Brief for Respondent 15-16, n. 12 (acknowledging that, under the Third Circuit's decision, it would have to repay "to the Secretary a minimum of $249,607"); id., at 16-17, n. 13.
[3]  The Title I funds allotted to the New Jersey State Department of Education for the 3-year period between September 1, 1970, and August 31, 1973, aggregated $156,166,574. Of this total, $28,709,198 was suballotted to the Newark School District. There was no question about the total amount of money that either New Jersey or Newark was entitled to receive. The only question at issue in this case is whether Newark distributed some of that money to the wrong schools. Ante, at 636; Brief for Petitioner 4, n. 1 ("[T]he Newark school district received its correct allocation of Title I funds"); Brief for Respondent 5; App. 14.
[4]  Brief for Petitioner 9 ("[T]he principal issue in the audit was the method of calculating eligibility of school attendance areas in 1971-1972").
[5]  The "low-income percentage" as determined by the federal auditors for the 10 disputed school-attendance areas ranged from a low of 27.9% to a high of 33.5%. In seven of these areas the figure was in excess of 30%. The auditors also disqualified two elementary-school-attendance areas with percentages of 22.9% and 20.6% and one high-school-attendance area with a percentage of 13%. App. 23-24. The determinations for those three areas would apparently no longer be in dispute if the Court of Appeals' decision were affirmed. See Brief for Respondent 15-16, n. 12, 16-17, n. 13. See also n. 3, supra.
[6]  New Jersey argued that, if the children who were not attending school and those who were attending special schools in the area were counted, the correct percentage of the low-income children in most of the attendance areas would be increased. Thus, for example, in the attendance area of the South 17th Street Elementary School, the low-income percentage would be 40.3%. See App. to Pet. for Cert. 53a; for purposes of decision, I assume that argument was correctly rejected by the auditors. However, I note that New Jersey has represented that the poverty level in the attendance area of the South 17th Street Elementary School had risen to 73.91% in 1984-1985. See Brief for Respondent 8, n. 5.
[7]  Ante, at 646; cf. Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U. S. 243, 277 (1984) (STEVENS, J., dissenting).
[8]  App. 23, 25.
[9]  Title 45 CFR § 116.17(d) (1972) then provided:

"A school attendance area for either a public elementary or a public secondary school may be designated as a project area if the estimated percentage of children from low-income families residing in that attendance area is as high as the percentage of such children residing in the whole of the school district, or if the estimated number of children from low-income families residing in that attendance area is as large as the average number of such children residing in the several school attendance areas in the school district. In certain cases, the whole of a school district may be regarded as an area having a high concentration of such children and be approved as a project area, but only if there are no wide variances in the concentrations of such children among the several school attendance areas in the school district."
[10]  It is undisputed that Newark's poverty level was one of the highest in the Nation. New Jersey offers the following description:

"The Newark School District for the years 1970 through 1973, the period covered by the federal audit before this Court, could readily be characterized as the prototypic Title I district. The application for Title I funds for the year 1971-72 school year, the primary focus of the audit, showed that 33.9% of the children in the Newark School District were from low-income families (J. A. 108). The narrative portion of this application clearly demonstrated that Newark was uniformly disadvantaged in other ways. Statistics showed a jobless rate in 1970 of 14%; a rate which was double that needed to qualify under the Economic Development Act. Another 35,000 residents were earning $3,000 per year or less. In 1971, the Model Cities program in Newark was expanded to include the entire city. At the time the 1971-72 application was submitted, Newark had a black population of 54.2% with another 11% of its population of hispanic background. The City also had the highest percentage of slum housing in the nation, the highest incidence of crime per 10,000 population, the highest population density, a high rate of maternal mortality and the second highest birth rate. Of particular significance to the Title I program, and exacerbating the inherent difficulties of obtaining precise statistics for Newark's low-income population, was the fact that in 1970-71 Newark had the highest population turnover in the nation. Indeed, Model Cities data indicated that mobility rates reached as high as 80% for schools in the Title I area (J. A. 113 to J. A. 114; J. A. 69)." Brief for Respondent 3-4 (footnote omitted).
[11]  The quoted statement appears in the following paragraph from H. R. Rep. No. 93-805, p. 17 (1974):

"As originally conceived and as extended, Title I authority is basically centered in the local educational agency (the school district). The special needs of the educationally disadvantaged child and programs to meet those needs must be locally devised. This is consistent with the Congress' historical concern that local communities should, not in conflict with constitutional and legal prescriptions, formulate educational policy. . . . This is not consistent with strict Federal administration regulations which so narrowly define `target school' that a school in one local educational agency with 10% of its enrollment of `educationally deprived' is an eligible `target school,' whereas a school in another local educational agency with 30% or more is not eligible as a target school. While it is clearly the expressed objective to serve children in schools with high concentrations, it was never intended by the Act to render any school with a 30% concentration ineligible."
[12]  See 45 CFR § 116a.20(b)(2) (1977), which stated, in pertinent part:

"An attendance area may be designated under paragraph (b)(1) on a percentage basis if the percentage of children from low-income families in that attendance area is at least as high as the percentage of such children residing in the whole of the school district. In addition, upon specific request by the local educational agency, the State educational agency may approve the designation of attendance areas in which at least 30 percent of the children are from low-income families."
[13]  Education Amendments of 1977: Hearings on H. R. 15 before the Subcommittee on Elementary, Secondary and Vocational Education of the House Committee on Education and Labor, 95th Cong., 1st Sess., pt. 12, p. 392 (1978) (testimony of Ruth Mancuso, vice president of the National Association of State Boards of Education).
[14]  H. R. Rep. No. 95-1137, p. 22 (1978).
[15]  See, e. g., S. Rep. No. 146, 89th Cong., 1st Sess., 9 (1965), which stated:

"It is the intention of the proposed legislation not to prescribe the specific type of programs or projects that will be required in school districts. Rather such matters are left to the discretion and judgment of the local public educational agencies. . . . What may be an acceptable and effective program in a school district serving a rural area may be entirely inappropriate for a school district serving an urban area, and vice versa. There may be circumstances where a school system is basically a low-income area and the best approach in meeting the needs of educationally deprived children would be to upgrade the regular program. On the other hand, in many areas the needs of educationally deprived children will not be satisfied by such an approach."
[16]  There is, of course, an important distinction between the broad power of Congress to control certain actions of state governmental units, see, e. g., EEOC v. Wyoming, 460 U. S. 226, 244-248 (1983) (STEVENS, J., concurring), and the proper interpretation of congressional action which presumptively should accord state governmental units the broadest measure of respect. See, e. g., New York Telephone Co. v. New York Dept. of Labor, 440 U. S. 519, 539-540, 545-546 (1979) (opinion of STEVENS, J.).
[17]  This thought was echoed in a recent study, which noted that one "Title I administrator compared the current federal Title I role to `the people who hide in the mountains until the war is over and then come down to kill the dead.' " L. McDonnell & M. McLaughlin, Education Policy and the Role of the States 105 (1982).


105 F.3d 778
FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver for theBank For Savings, Plaintiff, Appellant,v.INSURANCE COMPANY OF NORTH AMERICA, Defendant,Appellee/Third-Party Plaintiff, Appellant,v.Paul J. BONAIUTO and Dolores DiCologero, Third-PartyDefendants, Appellees.
Nos. 96-1556, 96-1557.
United States Court of Appeals,First Circuit.
Heard Nov. 4, 1996.Decided Feb. 3, 1997.

Eugene J. Comey, with whom Robert D. Luskin, Comey Boyd & Luskin, Ann S. DuRoss, Assistant General Counsel, F.D.I.C., Thomas L. Hindes, Counsel, E. Whitney Drake, Special Counsel, and Leslie Ann Conover, Senior Attorney, were on brief, Washington, D.C., for FDIC.
Gerald W. Motejunas, with whom Marie Cheung-Truslow and Lecomte, Emanuelson, Motejunas & Doyle were on brief, Quincy, MA, for Insurance Company of North America.
Before SELYA, Circuit Judge, CYR, Circuit Judge, and LYNCH, Circuit Judge.
LYNCH, Circuit Judge.

1
In 1977 the Massachusetts legislature enacted a statute, Mass.Gen.Laws ch. 175, § 112, which provided that, for certain types of liability insurance, the Commonwealth would adopt a "notice prejudice" rule.  This new statutory rule departed from the traditional common law rule which had strictly enforced notice provisions in insurance policies, allowing forfeiture of coverage where notice to an insurer of a claim was late.  The Supreme Judicial Court of Massachusetts subsequently extended, by common law, and then limited the extension of, the notice prejudice rule for liability insurance policies.  At issue here is whether the notice due under a fidelity bond was late.  If so, does the state common law notice prejudice rule, under which an insurer must show prejudice in order to be excused from coverage by the insured's late notice, extend to the Financial Institution Bond at issue.

2
The import here is whether a suit by the Federal Deposit Insurance Corporation ("FDIC"), as receiver for the failed Bank for Savings, may proceed against the Bank's insurer, the Insurance Company of North America ("INA"), for coverage of losses due to certain dishonest acts committed by a Bank officer and by a lawyer retained by the Bank.  The loss to the Bank from these activities is asserted to be $10 million.  The FDIC, as receiver for the Bank, seeks reimbursement for these losses to the full amount covered by the Financial Institution Bond issued by INA, $4 million.

I.

3
The Bank gave INA notice of potential loss under the Bond on January 16, 1990.  The insurer declined to pay, and the Bank brought suit.  The district court, interpreting the Bond provisions on a motion for summary judgment, held that the Bank's notice was late because it had not been filed within 30 days of discovery of loss as required by the policy.  FDIC v. Insurance Co. of N. Am., 928 F.Supp. 54, 62-63 (D.Mass.1996).  The court granted summary judgment for the defendant.  Id.  The Bank appeals, disputing the district court's analysis of the date of discovery and claiming that its notice was timely.  The Bank further asserts that, even if its notice was late, the district court erred in failing to apply the notice prejudice rule to the Bond.1

4
Our review of a grant of summary judgment is de novo.  Wood v. Clemons, 89 F.3d 922, 927 (1st Cir.1996).  We hold that the district court was plainly correct in holding that the notice was late, but we do so on different grounds than the district court.  We also hold that the notice prejudice rule does not apply in this instance.2

II.

5
The facts of the employee misconduct underlying the Bank's losses are taken from the Bank's Bond claim and accepted as true for present purposes.  From 1987 to 1989, Dolores DiCologero, an Assistant Vice President of the Bank and the manager of the mortgage department, and Paul Bonaiuto, an attorney retained to represent the Bank in mortgage closings, conspired with a condominium development group, the Rostoff Group, to make hundreds of mortgage loans using inflated appraisals and purchase prices in violation of Bank regulations and the law.

6
The Bank made loans on condominium projects developed by the Rostoff Group until February 1989.  Although internal regulations forbade the Bank from participating in more than one-third of the units in a particular development, the Bank exceeded these limits as to Rostoff Group properties.  In addition, despite regulations prohibiting the financing of more than 80% of the purchase price of a property, the Bank made loans to purchasers for the full value of condominiums in Rostoff Group properties.  Bonaiuto prepared closing documents overstating the purchase price of the condominiums and falsely indicating that the purchasers had equity in the property.  The loan documentation reflected nonexistent down payments.  In fact, the "down payments" took the form of discounts on the purchase price.  DiCologero expedited approval of the mortgages without any investigation of the creditworthiness of the applicants, many of whom were not creditworthy for the loans given.  The aggregate face value of the loans was approximately $30 million, and many culminated in default.

7
Other DiCologero family members also participated in the scheme, to their profit.  The overstated values of the condominiums were supported by appraisals prepared by DiCologero's son.  He earned more than $33,000 for his work;  DiCologero's daughter received $4,550 from the Rostoff Group for secretarial work.  DiCologero's husband received $12,000 in referral fees for directing potential purchasers to the Rostoff Group and purchased a condominium himself without paying a deposit, although the Bank records falsely reflected that he had done so.  Other aspects of this tale of avarice and corruption need not be detailed.  The Bank was declared insolvent on March 20, 1992, and the FDIC was appointed receiver.  The FDIC asserts that these events helped bring down the Bank.

8
In March 1989, the Bank received a letter from counsel for Erna Hooton, a former bookkeeper of the Rostoff Group and a mortgagee on six Rostoff Group units.  Ms. Hooton had defaulted on the loans, and the Bank had begun foreclosure proceedings.  The letter said that the Bank had misrepresented in the loan documents that Ms. Hooton had made down payments on the properties.  The letter also said that Ms. Hooton's financial position should have led the Bank to refuse financing.  The letter claimed that Bonaiuto, as closing counsel on the Hooton loans, was aware of the false documentation.  The Bank investigated these charges;  representatives of the Bank met with Steven Rostoff, a principal of the Rostoff Group, on March 21, 1989.  Rostoff said that the down payment for some loans, including Ms. Hooton's, had taken the form of a discounted purchase price.  He denied that anyone associated with the Bank was aware of this.  DiCologero also denied knowledge of any irregularities.  The Bank responded to the Hooton letter by denying the allegations.  Because Ms. Hooton did not pursue the matter, neither did the Bank.

9
Then, in August 1989, Herbert and Deanna Bello, two defaulting borrowers on six Rostoff Group units, sued the Bank for damages and asserted counterclaims in a foreclosure action brought by the Bank.  The Bellos asserted, as had Ms. Hooton, that Bonaiuto was aware that they had not made the down payments reflected in the closing documents.  They also alleged that when they told Steven Rostoff that they had previously been unable to obtain financing, he replied that they would "not have to worry about financing" because he had made a "deal" with the Bank.  The Bank, the Bellos said, never asked for financial information from them.  The Bellos further alleged that, at one closing, they had pointed out to Bonaiuto that the closing documents stated an inflated purchase price and an inflated down payment.  Bonaiuto referred them to Rostoff, who said this was "what the Bank wanted."   In the foreclosure action, the Bellos' counterclaim specifically alleged that the Bank knowingly permitted Rostoff's misrepresentations.

10
Another couple who had purchased Rostoff Group properties, Edward and Dorothy Giamette, filed suit on September 22, 1989 against the Bank and the Rostoff principals.  Again the complaint alleged that down payments were falsely represented on the closing documents, that Steven Rostoff told the plaintiffs that the Bank knew the figures were false, that the appraisals, which were done by DiCologero's son, were for more than the fair market value of the properties, and that this scheme had been repeated with at least eight other purchasers who had bought a total of forty-five condominiums.  Earlier, on September 11, 1989, Mr. Giamette had made similar allegations in a counterclaim in the Bank's foreclosure action against him.  None of these claims, however, prompted the Bank to notify INA of possible losses due to alleged employee misconduct.  What eventually did lead the Bank to submit a notice of claim was a conversation in October 1989 between DiCologero and a Vice President of the Bank during which DiCologero remarked that her husband had purchased a condominium from the Rostoff Group without making a down payment.  The Vice President reported DiCologero's remark to the Bank's President, who met with the Bank's Audit Committee on November 6, 1989.  Outside legal counsel from Gaston & Snow were present at the meeting.  The Committee discussed "the possibility of 100% loans, the unknown extent of these loans, employee involvement and legal ramifications."   Gaston & Snow was asked to prepare a preliminary analysis which was submitted on November 15, 1989.  Gaston & Snow then investigated and reported back to the Bank on December 18, 1989.  The report recommended, among other measures, that the Bank refer the matter to federal authorities, notify INA, and dismiss DiCologero.  On December 27, 1989, the Bank filed a Report of Apparent Crime with the FDIC, advising that it had learned of suspected violations of federal law on December 18, 1989.  The Bank also notified the FBI and the U.S. Attorney's Office.  DiCologero, Bonaiuto, and the development group were later convicted on federal bank fraud and conspiracy charges.  United States v. Rostoff, 53 F.3d 398 (1st Cir.1995).

11
On January 16, 1990, the Bank gave INA notice of a potential loss arising from employee misconduct.  The Bank enclosed copies of the complaints in the Giamettes' state and federal lawsuits with its letter of notice.

III.

12
As is customary in the banking industry, the Bank had obtained a Financial Institution Bond, Standard Form No. 24, from INA.  The Bond period originally ran from January 1, 1988 to April 1, 1989, and was later extended by agreement to April 1, 1990.  Insured losses include those resulting from employee dishonesty and fraud.3  For present purposes, we assume that the actions of DiCologero and Bonaiuto caused the Bank to sustain losses of the type covered by the "INSURING AGREEMENTS FIDELITY" section of the Bond.4

13
The obligation of the insurer to indemnify the insured for covered losses is explicitly made:

14
subject to the Declarations, Insuring Agreements, General Agreements, Conditions and Limitations and other terms [of the Bond].

15
The "CONDITIONS AND LIMITATIONS" section of the Bond contains, among other clauses, the "DISCOVERY" clause.  Under that clause, the Bond applies to "loss discovered by the Insured during the Bond Period."   The clause then defines "Discovery" in two ways:

16
Discovery occurs when the Insured first becomes aware of facts which would cause a reasonable person to assume that a loss of the type covered by this bond has been or will be incurred, regardless of when the act or acts causing or contributing to such loss occurred, even though the exact amount or details of the loss may not then be known.

17
Discovery also occurs when the Insured receives notice of an actual or potential claim in which it is alleged that the Insured is liable to a third party under circumstances which, if true, would constitute a loss under this bond.

18
The "CONDITIONS AND LIMITATIONS" section of the Bond also contains pertinent notice provisions which state in relevant part:

19
NOTICE/PROOF--LEGAL PROCEEDINGS AGAINST UNDERWRITER

20
a) At the earliest practicable moment, not to exceed 30 days, after discovery of loss, the Insured shall give the Underwriter notice thereof.

21
Construing the Bond's first definition of discovery, the district court found that, at the latest, the Bank had discovered the loss by November 15, 1989.  The court thus determined that the Bank was required to give notice to INA no later than December 15, 1989 and that the January 16, 1990 notice was therefore untimely.  The district court concluded that, "[i]f notice to INA was untimely, the Bank is precluded from recovery, regardless of whether INA can prove any actual prejudice as a result of the delay.  J.I. Corp. v. Federal Ins. Co., 920 F.2d 118, 120 (1st Cir.1990) (interpreting Johnson Controls v. Bowes, 381 Mass. 278, 409 N.E.2d 185 (1980))."  Insurance Co. of N. Am., 928 F.Supp. at 59.   The district court then granted INA's motion for summary judgment.

22
We agree that discovery was earlier than the Bank posits.  Although the district court relied on the Bond's first definition of discovery to reach this conclusion, it is most clearly reached under the second definition.  See Levy v. FDIC, 7 F.3d 1054, 1056 (1st Cir.1993).  Under the second definition, discovery occurs "when the Insured receives notice of an actual or potential claim in which it is alleged that the Insured is liable to a third party under circumstances which, if true, would constitute a loss under this bond."   The lawsuits and counterclaims brought by the Bellos and the Giamettes plainly constituted actual claims.  The complaints alleged knowing acts of dishonesty or fraud by Bank employees.5  Any harm caused by these alleged acts would qualify as loss under the Bond.6

23
The Bank weakly argues that these complaints "did not rise to the level of allegations of deceit and misrepresentation on the part of Bank employees seeking to obtain improper financial benefits but rather were nothing more than the litigation tactics of defaulting borrowers who were confronting foreclosure proceedings."   That argument misses the point.  The Bond requires notice to the insurer upon a claim of employee dishonesty and does not allow the insured to wait until the claim is proved.  Further, General Agreement F of the Bond independently required the Bank to provide INA--within thirty days--with all pleadings and pertinent papers in any legal proceeding brought to determine the insured's liability for any loss.

24
The Bank also asserts that third-party claims do not trigger discovery under the second definition of discovery unless those claims are reasonable.  Whether or not Massachusetts adopts such a reasonableness standard,7 the claims here met any such requirement and triggered the notice requirement by, at the latest, mid-September 1989.  By that time, the Bank had been informed that at least ten persons claimed to have purchased more than fifty condominiums from the Rostoff Group without any down payment or with a lower down payment than the Bank's loan documentation reflected.  The Bank was charged with knowing that the figures in the loan documentation were false.  The Bank's attorney was alleged to be complicit in the falsehoods.  The son of the Bank's mortgage department manager purportedly had been paid for false appraisals.  A principal of the Rostoff Group had confirmed that this had happened.  The similarity of all the allegations is telling.  If a "smell test" was in order, the smell was rank indeed.  Accordingly, the notice given by the Bank on January 16, 1990 was untimely.

IV.

25
More difficult is the question of whether the Massachusetts courts would apply the common law "notice prejudice" rule to Financial Institution Bonds of this sort.  This is a question of law.  See J.I. Corp. v. Federal Ins. Co., 920 F.2d 118, 119 (1st Cir.1990).

A.

26
The two primary cases from the Supreme Judicial Court on the notice prejudice rule are Johnson Controls, Inc. v. Bowes, 381 Mass. 278, 409 N.E.2d 185 (1980), which creates a common law notice prejudice rule for liability policies, and Chas. T. Main, Inc. v. Fireman's Fund Insurance Co., 406 Mass. 862, 551 N.E.2d 28 (1990), which limits the rule in the context of liability policies.  The Massachusetts law of notice prejudice has been previously visited by the decisions of this court in J.I. Corp., supra; National Union Fire Insurance Co. v. Talcott, 931 F.2d 166 (1st Cir.1991);  and Liberty Mutual Insurance Company v. Gibbs, 773 F.2d 15 (1st Cir.1985).  For various reasons, in all three of these cases this court declined to apply the notice prejudice rule.

27
The Bank urges us to analyze the issue in terms of whether the admittedly different policy language in the Financial Institution Bond is closer to an "occurrence" liability policy or a "claims made and reported" liability insurance policy.  There is, however, a logically prior question and one which it is prudent to ask under our obligation to apply state substantive law (in the absence here of any conflict with or a threat to federal policies).  See Atherton v. FDIC, 519 U.S. 213, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997);  Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938);  see also infra n. 1.  We must apply the law of Massachusetts as given by its state legislature and state court decisions.  And in that lies the difficulty of the Bank's position.

28
The Supreme Judicial Court has never applied the notice prejudice rule to a Financial Institution Bond.  Such fidelity bonds, as discussed later, are different in kind from liability insurance policies.  In creating a common law notice prejudice rule, the Johnson Controls court did so in the context of liability policies.  The statutory progenitor to Johnson Controls concerned automobile liability policies.8  The refinement and limitation of the notice prejudice rule in Chas. T. Main was also in the context of liability policies.  And the usual posture in which the court has applied the rule has been in liability policies.  See, e.g., Darcy v. Hartford Ins. Co., 407 Mass. 481, 554 N.E.2d 28 (1990).  No court has yet extended the Massachusetts notice prejudice rule to fidelity policies such as this Bond.  See, e.g., J.I. Corp., 920 F.2d at 118;  Boston Mut. Life Ins. Co. v. Fireman's Fund Ins. Co., 613 F.Supp. 1090 (D.Mass.1985).

29
When guidance is sought from Massachusetts caselaw concerning fidelity policies, that law, admittedly not of recent vintage, does not require our application of the notice prejudice rule here.  The background law of Massachusetts, which we believe is not overruled by Johnson Controls, was that conditions and limitations in such policies are construed as written.9  In Gilmour v. Standard Surety and Casualty Co., 292 Mass. 205, 197 N.E. 673 (1935), the court was concerned with a bond for acts of dishonesty.  "The contract of suretyship made by the defendant provided indemnity to the plaintiffs in the event they sustained loss through dishonest conduct on the part of the agency."  Id. 197 N.E. at 673.   The bond had the following condition and limitation:  "That loss be discovered during the continuance of the suretyship or within six (6) months after its termination, and notice delivered to the Surety at its Home Office within ten (10) days after such discovery."  Id. at 673.   The court held that "[t]he giving of such notice was made a condition precedent to recovery on the bond."  Id. at 675.   The court noted that it was concerned not with "the question of the circumstances under which at common law an obligation is imposed on the obligee in a fidelity bond to give the surety notice," but rather with the question of the timing of the notice given.  Id. at 674.   The question was whether the plaintiffs had complied with the ten day notice period in order to be able to recover on the bond.  The notice was apparently given during the bond year, but the court still considered the dispositive question to be whether the notice was given within the ten day period.  Id. at 674.  (The court concluded that it had).  No case has said that Gilmour has been overruled.

30
In Liberty Mutual Insurance Co. v. Gibbs, 773 F.2d 15 (1st Cir.1985), this court held that, Johnson Controls notwithstanding, the contract of insurance there must be enforced according to its terms and that the notice prejudice rule did not apply.  At issue was a contract of reinsurance.  The contract's notice clause required notice to be given "as soon as possible."  Id. at 18.   Our court thought important three things.  First, the parties involved were not lay policyholders who required protection.  Id.  Second, the case involved two insurance companies, experienced businesses, that had bargained at arm's length.  Id.  Third, the Massachusetts insurance statute, as is true here,10 distinguished between the contracts at issue (reinsurance) and liability policies.  Id.

31
In Cheschi v. Boston Edison Co., 39 Mass.App.Ct. 133, 654 N.E.2d 48, 53 (1995), Chief Judge Warner of the Appeals Court of Massachusetts rejected application of the notice prejudice rule to an indemnity contract, distinguishing Johnson Controls.   The court adopted and expanded upon this court's reasoning in Liberty Mutual, doubting that the notice prejudice rule would apply to types of insurance other than liability insurance when the insureds were not laypersons and when the parties to the contract were two sophisticated business concerns.  654 N.E.2d at 53.   The court held that it would apply traditional contract principles to the language of the indemnity clause, saying:  "Rules addressing the special circumstances of certain insurance policies should not be applied in these circumstances."  Id. at 53-54.   Because it found language in the policy equivalent to making prompt notice a condition, the court held that the lack of prompt notice relieved the insurer of its obligation to reimburse the insured.  Id. at 54.

32
Guided by these principles, we analyze Massachusetts law.  Cheschi cautions against automatic application of notice prejudice rules designed for one type of insurance to other insuring arrangements.11  654 N.E.2d at 53-54.   The Bond here is a Financial Institution Bond, Standard Form No. 24, as revised in 1986.  It is the most recent form in a long line of Financial Institution Bond forms utilized by members of the Surety Association of America.  See generally Knoll & Bolduan, "A Brief History of the Financial Institution Bond," in Financial Institution Bonds (1995), supra, at 1.   Such bonds are basically fidelity bonds, written specifically for financial institutions, including commercial and savings banks, savings and loan associations, credit unions, stockbrokers, finance companies, and insurance companies.  I Fitzgerald et al., Principles of Suretyship 67 (1st ed. 1991).

33
Fidelity bonds are a sort of "honesty insurance," insuring against employee dishonesty.  See Weldy, "History of the Bankers Blanket Bond and the Financial Institution Bond with Comments on the Drafting Process," in Financial Institution Bonds 1, 1 (1989);  Knoll & Bolduan, supra, at 1.   The capacity of one who ensures the fidelity of another's employee has been described as part insurer and part surety, with liability in either capacity being primary and direct.  1 Russ & Segalla, Couch on Insurance 3d § 1:16 (1995).  Early Massachusetts cases about the Blanket Bankers Bond, the predecessor to the Financial Insurance Bond, use both the language of surety and the language of insurance.  See, e.g., Fitchburg Sav. Bank v. Massachusetts Bonding & Ins. Co., 274 Mass. 135, 174 N.E. 324, 328 (1931).

34
It is said that "[i]n most cases and for most purposes, ... [fidelity bonds] are recognized to be a form of insurance that are subject to the rules applicable to insurance contracts generally."   1 Couch on Insurance 3d, supra, § 1:16 (citing law from various states).  Nonetheless, scholars have noted that, while fidelity bonds have, over time, become more like insurance contracts,12 a fidelity bond is still not liability insurance:

35
Although often referred to as insurance, it is not liability insurance, but rather a two-party indemnity agreement through which the insurer reimburses the insured for losses actually suffered in accordance with the contract provisions.

36
Weldy, supra, at 2;  see also Knoll & Bolduan, supra, at 5.

37
It is significant that the Bond possesses some characteristics of surety arrangements which distinguish them from liability policies.  "The nature of the risk assumed by the party in the role of 'insurer' is a major distinction between insurance and the arrangements of guaranty and surety....  [T]he risk can be characterized in terms of the degree to which the contingency is within the control of one of the parties.  In the classic instance of insurance, the risk is controlled only by chance or nature.  In guaranty and surety arrangements, the risk tends to be wholly or partially in the control of one of the three parties [promisor, creditor, or debtor]."  1 Couch on Insurance 3d, supra, § 1:18.  There is also a difference in the liability of a classic insurer and that of surety/guarantor.  An insurer, upon the occurrence of the contingency, must bear the ultimate loss, while a surety is entitled to indemnity in case the surety is compelled to perform.

38
It is also significant, as was true in Liberty Mutual, 773 F.2d at 18, that the Massachusetts legislature has made distinctions in this area.  The Massachusetts legislature has decided that, for most regulatory purposes, surety bonds are not insurance contracts.  See Mass.  Gen. Laws ch. 175, § 107.  In Williams v. Ashland Engineering Co., 45 F.3d 588, 592 (1st Cir.), cert. denied, 516 U.S. 807, 116 S.Ct. 51, 133 L.Ed.2d 16 (1995), this court found that "surety bonds are not insurance contracts, and are thus not subject to the Commonwealth's insurance laws."   See also General Elec. Co. v. Lexington Contracting Corp., 363 Mass. 122, 292 N.E.2d 874, 876 (1973).  That expression of public policy undercuts any automatic application of the insurance notice prejudice rule to surety bonds, and thus to Financial Institution Bonds to the extent that they partake of the characteristics of surety bonds.

39
These distinctions confirm our reluctance to extend the state notice prejudice rule for liability insurance to Financial Institution Bonds.  The material technical and substantive differences between a Financial Institution Bond and liability insurance make it difficult to apply easily the common law notice prejudice rule, developed as it was in the liability insurance context, to the insuring arrangement here.

40
In Cheschi, as in Liberty Mutual, the court considered the fact that the insuring arrangements (not liability policies) did not involve layperson consumers.  Rather, they involved sophisticated businesses.  Accordingly, there was little reason to depart from the usual rule of holding the parties to their bargain.  In Johnson Controls, the Supreme Judicial Court had stated that one reason for applying the notice prejudice rule in that case was that the insurance policy was:

41
not a negotiated agreement;  rather its conditions are by and large dictated by the insurance company to the insured.  The only aspect of the contract over which the insured can 'bargain' is the monetary amount of the coverage.

42
409 N.E.2d at 187 (quoting Brakeman v. Potomac Ins. Co., 472 Pa. 66, 371 A.2d 193, 196 (1977)).

43
Here, in contrast, the Bond is an agreement whose basic terms are negotiated between two industries.  Over the years, the banking industry and the fidelity bond companies have negotiated various standard forms of the Financial Institution Bonds.  See generally Knoll & Bolduan, supra;  Weldy, supra.   As one commentator has noted, "the fidelity bond is an arms-length, negotiated contract between sophisticated business entities, the standard form for which was drafted by the joint efforts of the Surety Association of America and the American Bankers Association."   Koch, supra, at vii.  For example, at the request of the American Bankers Association, the 1986 Bond added coverage for Uncertificated Securities, and adopted the UCC definitions of these financial instruments.  Knoll & Bolduan, supra, at 25;  see also Calcasieu-Marine Nat'l Bank v. American Employers' Ins. Co., 533 F.2d 290, 295 n. 6 (5th Cir.)  (bankers bond being construed was drafted as a joint effort by the American Bankers Association and the American Surety Association), cert. denied, 429 U.S. 922, 97 S.Ct. 319, 50 L.Ed.2d 289 (1976).

44
The Bank brings up the doctrine of contra proferentem arguing that "[a]mbiguities are resolved against the insurer, who drafted the policy, and in favor of the insured."  GRE Ins. Group v. Metropolitan Boston Hous.  Partnership, Inc., 61 F.3d 79, 81 (1st Cir.1995).  This doctrine provides the Bank no refuge.  The presumption against the insurer is not applied where the policy language results from the bargaining between sophisticated commercial parties of similar bargaining power.  Falmouth Nat'l Bank v. Ticor Title Ins. Co., 920 F.2d 1058, 1062 (1st Cir.1990)(applying Massachusetts law).13

45
Thus, to the extent the notice prejudice rule is supported by the policy of protecting consumers who effectively have little or no bargaining leverage, that policy provides no basis here to extend the notice prejudice rule.

B.

46
Finally, the Bank draws support for its position from a Tenth Circuit decision, FDIC v. Oldenburg, 34 F.3d 1529 (10th Cir.1994), cert. denied, 516 U.S. 861, 116 S.Ct. 171, 133 L.Ed.2d 112 (1995) and district court decisions from other jurisdictions.  The court in Oldenburg predicted that Utah law would require a Financial Institution Bond company to show prejudice in order to avoid coverage where the bank gave late notice.  Id. at 1546.   The court held that the notice prejudice rule applied in light of:  (1) the failure of the policy to expressly make notice within a specific time a condition precedent to recovery;  (2) the Utah rule that provisions excluding coverage are strictly construed against the insurer;  and (3) a Utah statute, enacted after the Bond period, which expressed a public policy that the notice prejudice rule be applied to all insurance policies.  Id. at 1545-46.   Whatever the requirements of Utah or other law, Massachusetts law governs this issue, and Massachusetts has, until the Supreme Judicial Court or the state legislature decides otherwise, framed its public policy choices differently.

47
We hold that the notice prejudice rule does not apply.

48
Affirmed.

1
 The parties have agreed that Massachusetts law applies.  The FDIC here sues as the receiver of a Massachusetts bank, and we discern no conflict between state law and federal statutory provisions or significant federal policies.  O'Melveny & Myers v. FDIC, 512 U.S. 79, 87-89, 114 S.Ct. 2048, 2055, 129 L.Ed.2d 67 (1994);  Wallis v. Pan Am.  Petroleum Corp., 384 U.S. 63, 68, 86 S.Ct. 1301, 1304, 16 L.Ed.2d 369 (1966)

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

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

4
 That provision reads:
INSURING AGREEMENTS
FIDELITY
Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.  Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:
(a) to cause the Insured to sustain such loss, and
(b) to obtain financial benefit for the Employee or another person or entity.
However, if some or all of the Insured's loss results directly or indirectly from Loans, that portion of the loss is not covered unless the Employee was in collusion with one or more parties to the transactions and has received, in connection therewith, a financial benefit with a value of at least $2,500.
As used throughout this Insuring Agreement, financial benefit does not include any employee benefits earned in the normal course of employment, including:  salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions.

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

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

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

8
 In Goodman v. American Casualty Co., 419 Mass. 138, 643 N.E.2d 432, 434 (1994), the court applied the usual notice prejudice rule for automobile liability coverage to uninsured motorist coverage, finding no meaningful distinction between the two.  Accord MacInnis v. Aetna Life and Cas. Co., 403 Mass. 220, 526 N.E.2d 1255 (1988)

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

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

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

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

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