A federal appeals court has ruled that two companies that insured millions of dollars' worth of mortgages for the ill-fated Equity Programs Investment Corp. must pay claims arising from EPIC's default five years ago.

The ruling, handed down Monday by the Fourth U.S. Circuit Court of Appeals, is a victory for Meritor Savings Bank, Trustbank Savings (formerly Dominion Federal Savings & Loan), First National Bank of Maryland and others that bought mortgages or complex financial instruments known as mortgage-backed securities issued by EPIC.

"We are delighted by the result. We expected it," said William L. Stauffer Jr. of the law firm of Frank, Bernstein, Conaway & Goldman, which represented Trustbank.

Trustbank chairman William Walde said his institution expects to recover $6.3 million in claims, plus $1.5 million in interest as a result of the decision. "Trustbank has waited almost five years for these two insurance companies to honor their claims," Walde said.

The issues in the case date back to the early 1980s when EPIC flourished by setting up tax-shelter partnerships that bought single-family homes to offer as rentals, expecting to sell them at a profit in four or five years.

Unfortunately for EPIC and its investors, the market for these houses, which was concentrated in Texas, collapsed and the partnerships were unable to sell them. EPIC sustained itself briefly by "resyndicating" the houses -- selling them to new partnerships -- but eventually, since the rental income did not cover the houses' costs, the partnerships were forced into bankruptcy. EPIC defaulted on some $1.4 billion worth of debt involving 350 partnerships and 20,000 houses.

Most of the EPIC mortgages were covered by mortgage insurance under policies that covered about 25 percent of the loan amount. Most of the insurers involved either paid or settled the claims. However, two -- Foremost Guaranty Corp. of Madison, Wis., and United Guaranty Residential Insurance Co. of Greensboro, N.C. -- refused to pay, contending that EPIC had misrepresented its programs in seeking coverage.

The two insurers won a lower court verdict, but the appellate court Monday concluded that the insurers had in their possession documents that should have put them on notice that the oral representations might be wrong.

"When the contradictions came to light, the insurers gambled financially by not confirming {EPIC's oral} representations," Judge H. Emory Widener Jr. wrote for the court.

" ... The contradictions between the written and oral statements should have at the very least prompted the insurers to uncover the truth," Widener wrote.

The decision means that when an insurer knows of or has in its possession contradictory materials with respect to a policy it is about to issue, it has "a duty to look further, and they didn't do that," Stauffer said.