Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-87-01648/USCOURTS-ca10-87-01648-0/pdf.json

Nature of Suit Code: 430
Nature of Suit: Banks and Banking
Cause of Action: 

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PUBLISH 

UNITED ST~TES COURT OF APPEALS 

TENTH CIRCUIT 

DOWNRIVER COMMUNITY FEDERAL CREDIT UNION, 

Plaintiff-Appellant, 

v. 

PENN SQUARE BANK, through its Receiver, 

FEDERAL DEPOSIT INSURANCE CORPORATION, 

Defendant-Appellee. 

WOOD PRODUCTS CREDIT UNION, 

Plaintiff-Appellant/Cross-A?pellee, 

v. 

PENN SQUARE BANK, through its Receiver, 

FEDERAL DEPOSIT INSURANCE CORPORATION, 

Defendant-Appellee/Cross-Appellant. 

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JUL 0 J l§§Q 

ROBERT L. HOECKER 

Clerk 

No. 87-1645 

No. 87-1707 

Consolidated with 

Cross-Appeals 

No. 87-1648 

No. 87-1649 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE WESTERN DIS~RICT OF OKLAHOMA 

(D.C. Nos. CIV-83-59-A and CIV-84-1663-A 

Thomas s. Dann, of Timothy D. Naegele & Associates, of Washington, 

D.C., and Robert A. Wiener, of Weinberg, Zipser, Arbiter, Heller & 

Quinn, of Los Angeles, California (Timothy D. Naegele, of Timothy 

D. Naegele & Associates, of Washington, D.C., and c. Alexander 

Hewes, Jr., of Hewes, Morella, Gelband & Lamberton, of Washington, 

D.C., with them on the briefs), for the plaintiffs-appellants. 

Ann S. DuRoss (Donald B. McKinley, Regional Counsel, and Jane 

Rossowski, of Federal Deposit Insurance Corp., of Washington, 

D.C.; and Ronald N. Ricketts, of Gable & Gotwals, of Tulsa, 

Oklahoma, with her on the briefs), Assistant General Counsel, of 

Federal Deposit Insurance Corp., of Washington, D.C., for the 

defendant-appellee. 

Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 1 
Before McKAY, and TACHA, Circuit Judges, and O'CONNOR, District 

Judge.* 

TACHA, Circuit Judge. 

* The Honorable Earl E. O'Connor, Chief Judge, United States 

District Court for the District of Kansas, sitting by designation. 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 2 
This appeal arises from a dispute between certain uninsured 

depositors ip the insolvent Penn Square Bank, N.A. (PSB), and the 

Federal Deposit Insurance Corporation (FDIC), in its capacity as 

receiver, over the priority of the depositors' claims against the 

insolvent bank's assets. The district court found that PSB 

fraudulently induced the plaintiffs to deposit funds through 

issuing financial statements that were materially misleading as to 

PSB's financial condition. In the remedy phase of the trial, the 

district court imposed a constructive trust upon PSB's assets in 

favor of the plaintiff-depositors, thereby entitling them to 

recover the full amount of their deposits, rather than their pro 

rata share under.the relevant provision of the National Bank Act, 

12 u.s.c. § 194. We hold that federal law limits these 

depositors' recovery to their pro rata share of the assets held by 

the receiver, and reverse. 

I • 

The plaintiffs, Downriver Community Federal Credit Union 

(Downriver) and Wood Products Credit Union (Wood Products), were 

among the 140 credit unions, 48 savings and loans, and 47 

commercial banks holding substantial uninsured deposits in PSB 

when the Comptroller of the Currency ordered PSB closed on July 5, 

1982. See Penn Square Bank Failure: Hearings Before the House 

Comm. on Banking, Finance and Urban Affairs, 97th Cong., 2d Sess., 

pt. 2, at 271 (1983). Like many other credit unions, Wood 

Products and Downriver had purchased certificates of deposit in 

PSB relying in part upon recommendations and financial information 

provided by money brokers, "the middlemen in the CD market whose 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 3 
fees were paid not by the credit unions, but by Penn Square." Id. 

at 267. 

In December 1981 Downriver was solicited by First United Fund 

(FUF), a money broker located in Garden City, New York, that 

claimed to perform a "complete financial analysis" of all banking 

institutions that it represented. Downriver purchased its first 

PSB certificate of deposit on April 1, 1982, in reliance upon 

financial information that FUF provided over the telephone. FUF 

later provided Downriver with PSB's financial statements, prepared 

by PSB's accountants, Peat, Marwick, Mitchell & Co. (PMM), and 

D·ownriver purchased additional certificates of deposit in reliance 

upon the information contained therein. On the date that the 

Comptroller of the Currency closed PSB, Downriver held over $4 

million in PSB certificates of deposit. The FDIC paid Downriver 

deposit insurance of $100,000 and issued a receiver's certificate 

for the uninsured balance of $3,938,240. As of December 10, 1986, 

Downriver had received dividend payments on that receiver's 

certificate totaling $2,166,031.42. 

Wood Products similarly purchased a PSB certificate of 

deposit in reliance upon information provided by a money broker, 

Professional Asset Management, Inc. (PAM). PAM provided a list of 

financial institutions in which to invest and produced a "Capital 

Adequacy Report" reflecting the financial condition of each of 

those institutions. Financial information provided by the 

institutions that PAM represented formed the basis for those 

reports. After analyzing the financial information contained in 

the report on PSB, Wood Products purchased a $500,000 PSB 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 4 
certificate of deposit on June 14, 1982. Upon PSB's closure, Wood 

Products received federal deposit insurance of $100,000 and a 

receiver's certificate covering the uninsured balance of 

$404,583.32. As of December 10, 1986, Wood Products had received 

dividends upon its receiver's certificate totaling $222,520.82. 

As noted by the district court, the "calamitous event'' of the 

closing of PSB generated many lawsuits against PSB, its officers, 

directors, and accountants, and the money brokers responsible for 

soliciting funds for the bank. Both Downriver and Wood Products 

commenced suits in the United States District Court for the 

Western District of Oklahoma, claiming in part that PSB knowingly 

or recklessly induced their deposits through issuing financial 

statements that materially mistated the bank's financial 

condition. Those suits were consolidated with suits filed by 

several other parties who eventually settled during the trial, 

leaving only the claims of Downriver and Wood Products. 

The case was tried in several phases, two of which are most 

relevant to this appeal. The first phase involved primarily the 

factual issue of whether PSB had fraudulently misrepresented its 

financial condition in its financial statements, and whether the 

plaintiffs had relied upon those misrepresentations in purchasing 

certificates of deposit in PSB. Downriver's claim was tried to 

the jury, and Wood Products' claim was tried to the court. In 

both cases, the trier of fact returned verdicts in favor of the 

plaintiffs, finding that PSB's December 31, 1981, and March 31, 

1982, financial statements contained material misrepresentations; 

such misrepresentations were relied upon by the plaintiffs; and 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 5 
PSB's management and directors knew that those financial 

statements contained false or misleading information, or 

recklessly made those representations knowing that there was no 

reasonable ground for believing they were true. 

The second phase of the trial involved remedy questions: 

whether a constructive trust could be imposed upon the assets held 

by the receiver, and, if so, whether such a constructive trust 

should include the postinsolvency interest that the receiver 

earned on the plaintiffs' deposits. 1 The district court held that 

Oklahoma law, rather than federal law, governed whether a 

constructive trust could be imposed. Although the relevant 

provision of the National Bank Act, 12 U.S.C. § 194, requires 

ratable distribution among holders of receiver's certificates, the 

district court held that this provision did not "preclude 

identification and recovery of property that does not rightfully 

belong to the bank." 

The district court found that the plaintiffs had satisfied 

the factual and legal prerequisites for imposition of a 

1 Downriver had also asserted a claim for a constructive trust 

on the proceeds of one of its certificates of deposit that had 

matured on July 2, 1982, the last banking day on which PSB was 

open. Downriver's money broker, FUF, had issued wiring 

instructions to PSB to send the funds from the matured certificate 

to another bank, but the funds were not wired and remained in the 

bank on July 5, 1982, the date the Comptroller of the Currency 

closed PSB and appointed a receiver. The jury found that FUF was 

negligent in its attempt to have the funds wired, but rejected 

Downriver's allegation that PSB was guilty of fraud in failing to 

wire the funds. The court also rejected Downriver's theories that 

the proceeds constituted a segregated fund, and that PSB became 

its agent and breached a fiduciary duty in failing to transfer the 

funds. The district court therefore denied Downriver's plea for a 

constructive trust on the proceeds of the wire transfer. 

Downriver apparently does not appeal this aspect of the district 

court's decision. 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 6 
constructive trust under Oklahoma law: PSB had obtained the 

plaintiffs' deposits by fraud; such deposits had augmented PSB's 

assets; and the deposits could be traced into assets held by the 

receiver. 2 

The court also found that the imposition of a constructive 

trust would be equitable. First, the court noted that recovery by 

the plaintiffs would have only minimal impact upon the assets 

available to other uninsured depositors holding receiver's 

certificates. Second, the court noted that imposing a 

constructive trust in favor of the plaintiffs was not unfair to 

other uninsured depositors because other depositors could have 

brought similar claims on their own or intervened in the present 

case. 

The district court therefore imposed a constructive trust on 

the assets held by the receiver to the extent of the principal 

amount of the deposits and interest accrued to the date of 

insolvency. The court denied the plaintiffs' claim for a 

constructive trust on the postinsolvency interest that the 

receiver earned on the plaintiffs' deposits, however, holding that 

federal law governed the distribution of interest accruing on a 

claim after insolvency of a national bank and that payment of 

interest on one claim while other claims remained unpaid in whole 

2 The district court found no Oklahoma cases discussing the 

augmentation and tracing requirements. The court noted, however, 

that because other jurisdictions imposed such requirements on 

parties seeking a constructive trust, see, ~, Converse Rubber 

Co. v. Boston-Continental Nat'l Bank, 12 F. Supp. 887, 890 (D. 

Mass-.-1935), aff'd, 87 F.2d 8 (1st Cir. 1936), Oklahoma could be 

expected to impose similar requirements. 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 7 
or in part would violate the requirement of ratable distribution 

of assets. 

Although neither party challenges the district court's 

factual findings, both the plaintiffs and the FDIC contend that 

the court made legal errors. The plaintiffs contend that the 

district court erred in denying their claim for postinsolvency 

interest. The FDIC contends that the court erred in imposing a 

constructive trust for any amount of the plaintiffs' deposits, 

arguing that an imposition of a constructive trust in this case is 

a preference contrary to certain provisions of the National Bank 

Act, 12 U.S.C. §§ 91, 194. Because we agree with the FDIC that a 

constructive trust may not be imposed in this case, we do not 

reach the question of whether an award of postinsolvency interest 

is permissible. 

II. 

Although an award of equitable relief is generally reviewed 

only for an abuse of discretion, see McKinney Y..!. Gannett Co., 817 

F.2d 659, 670 (10th Cir. 1987), we review de novo the district 

court's judgment when, as here, the availability of such equitable 

relief depends upon an interpretation of law, ~ Pratte Y..!. NLRB, 

683 F.2d 1038, 1040 (7th Cir. 1982). In deciding the question of 

whether a constructive trust may be imposed in this case, the 

first issue to be resolved is the source of the applicable law. 

Prior to the insolvency of a national bank, state law 

generally governs the nature of the relationship between a 

national bank and its depositors. See Reno Nat'l Bank v. Seaborn, 

99 F.2d 482, 483 (9th Cir. 1938). 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 8 
The creditor rights of a depositor of a national bank, 

by virtue of his loan to the bank and the effects of the 

conduct of the bank as altering such rights, are 

determined by the law of the state of the deposit, in 

the absence of a federal statute creating a different 

relationship. There is no underlying general federal 

law determining such rights (Erie Ry. Co. v. Tompkins, 

304 U.S. 64, 58 s.ct. 817, 82 L.Ed. 1188, 114 A.L.R. 

1487), and no federal statute denying to a cestui his 

right against a bank as its trustee, where, in the 

course of its business prior to the receivership, such a 

trust relationship has been created by the conduct of 

the bank. 

Id. The parties' intention is critical in determining whether a 

relationship of debtor and creditor, or trustee and beneficiary, 

has been established by depositing funds in a national bank. See 

Blakey Y..!. Brinson, 286 U.S. 254, 261-62 (1932). 

State law governance of the preinsolvency contracts of 

national banks is limited, of course, by the paramount authority 

of Congress to regulate national banks. 

National banks are instrumentalities of the federal 

government, created for a public purpose, and as such 

necessarily subject to the paramount authority of the 

united States. It follows that an attempt by a state to 

define their duties or control the conduct of their 

affairs is absolutely void, wherever such attempted 

exercise of authority expressly conflicts with the laws 

of the United States, and either frustrates the purpose 

of the national legislation or impairs the efficiency of 

these agencies of the federal government to discharge 

the duties for the performance of which they were 

created. These principles are axiomatic, and are 

sanctioned by the repeated adjudications of this court. 

Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896); see id. at 

290 ("general and undiscriminating state laws'' govern contracts of 

national banks "so long as such laws do not conflict with the 

letter or the general objects and purposes of congressional 

legislation"). 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 9 
Although Congress has not enacted specific legislation to 

govern the preinsolvency relationship between national banks and 

their depositors, Congress has enacted legislation governing the 

distribution of assets upon the insolvency of a national bank. 

Most relevant here are provisions of the National Bank Act 

precluding payments by the bank that prefer some creditors over 

others, 12 U.S.C. S 91,3 and requiring a ratable distribution of 

assets among all general creditors entitled to share in the 

receivership estate, 12 u.s.c. S 194. 4 As of the moment that a 

3 Section 91 provides in relevant part: 

All transfers of the notes, bonds, bills of 

exchange, or other evidences of debt owing to any 

national banking association, or of deposits to its 

credit; all assignments of mortgages, sureties on real 

estate, or of judgments or decrees in its favor; all 

deposits of money, bullion, or other valuable thing for 

its use, or for the use of any of its shareholders or 

creditors; and all payments of money to either, made 

after the commission of an act of insolvency, or in 

contemplation thereof, made with a view to prevent the 

application of its assets in the manner prescribed by 

this chapter, or with a view to the preference of one 

creditor to another, except in payment of its 

circulating notes, shall be utterly null and void 

12 u.s.c. s 91. 

4 Section 194 provides: 

From time to time, after full provision has been 

first made for refunding to the United States any 

deficiency in redeeming the notes of such association, 

the comptroller shall make a ratable dividend of the 

money so paid over to him by such receiver on all such 

claims as may have been proved to his satisfaction or 

adjudicated in a court of competent jurisdiction, and, 

as the proceeds of the assets of such association are 

paid over to him, shall make further dividends on all 

claims previously proved or adjudicated; and the 

remainder of the proceeds, if any, shall be paid over to 

the shareholders of such association, or their legal 

(Footnote Continued on Following Page) 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 10 
national bank is declared insolvent and goes into the hands of a 

receiver, federal law governs the distribution of the bank's 

assets. See American Surety Co. Y..!. Bethlehem Nat'l Bank, 314 U.S. 

314, 316-17 (1941); First Nat'l Bank Y..!. Selden, 120 F. 212, 215 

(7th Cir. 1903). All state laws inconsistent with the "system of 

equal distribution" established by the National Bank Act are 

preempted. Jennings Y..!. United States Fidelity~ Guar. Co., 294 

U.S. 216, 226 (1935). "In no other way could there be unity of 

administration, and a carrying out of the federal mandate of 

equality." Selden, 120 F. at 215. As the Supreme Court has 

noted: 

We consider [the National Bank Act] as constituting by 

itself a complete system for the establishment and 

government of national banks, prescribing the manner in 

which they may be formed • • • and the manner • • • in 

which their affairs shall be wound up, their circulating 

notes redeemed, and other debts paid, or their property 

applied toward such payment. 

Cook County Nat'l Bank Y..!. United States, 107 U.S. 445, 448 (1883). 

When, as here, the FDIC is involved in its capacity as 

receiver, we must also read the National Bank Act in conjunction 

with the Federal Deposit Insurance Act. FDIC Y..!. McKnight, 769 

F.2d 658, 662 (10th Cir. 1985), cert. denied, 475 U.S. 1010 

(1986). The FDIC is empowered by statute "[t]o sue and be sued." 

12 U.S.C. § 1819 (Fourth). The statute further provides that 

"[a]ll suits of a civil nature at common law or in equity to which 

the [FDIC] shall be a party shall be deemed to arise under the 

(Footnote Continued from Previous Page) 

representatives, in proportion to the stock by them 

respectively held. 

12 u.s.c. § 194 (emphasis added). 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 11 
laws of the United States." Id.;5 see D'Oench, Duhme ~Co. ~ 

FDIC, 315 U.S. 447, 467-68 (1942) (Jackson, J., concurring); FDIC 

v. Braemoor Assocs., 686 F.2d 550, 553 (7th Cir. 1982), cert. 

denied, 461 U.S. 927 (1983). Upon the insolvency of a national 

bank and appointment of the FDIC as receiver, therefore, it is 

well settled that all claims against the receiver's estate are 

governed by federal law. See, ~, FDIC ~ Bank of San 

Francisco, 817 F.2d 1395, 1398 (9th Cir. 1987); FDIC~ Palermo, 

815 F.2d 1329, 1334 (10th Cir. 1987); Interfirst Bank Abilene, 

N.A. v. FDIC, 777 F.2d 1092, 1094 (5th Cir. 1985); McKnight, 769 

F.2d at 661; Selden, 120 F. at 215. 

The plaintiffs attempt to avoid· the application of federal 

law to their claim, however, on the ground that their equitable 

right to the funds arose prior to insolvency. They contend that 

Oklahoma law governs the nature of their preinsolvency 

relationship with PSB, and that, because of PSB's fraud, their 

deposits never became part of PSB's assets, but were instead 

impressed with a trust relating back to the date of their initial 

deposits. The equitable fiction of the trusts relating back to 

the date that the plaintiffs deposited funds in PSB, however, does 

not change the fact that by purchasing a certificate of deposit in 

PSB, the plaintiffs intended a debtor and creditor relationship. 

See Atlantic Gypsum Co. ~Federal Nat'l Bank, 76 F.2d 59, 60 (1st 

5 Section 1819 creates an exception to this prov1s1on for "any 

••• suit to which [FDIC] is a party in its capacity as receiver 

of a State bank and which involves only the rights or obligations 

of depositors, creditors, stockholders, and such State banks under 

State law." 12 u.s.c. S 1819 (Fourth) (emphasis added). That 

exception is not this case. 

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Cir. 1935) ("Deposits with national banks, evidenced by a 

certificate of deposit, are ordinarily made on the credit of the 

bank, and create only a debtor and creditor relation.") Although 

the state law of contracts governs whether the parties intended to 

form a trust or a debtor/creditor relationship prior to 

·insolvency, any attempt to recharacterize that relationship 

equitably after insolvency is governed by federal law. 6 

6 The plaintiffs rely upon Reno Nat'l Bank v. Seaborn, 99 F.2d 

482 (9th Cir. 1938), for the proposition that state law.determines 

whether a trust relationship arose prior to insolvency. In 

Seaborn, the Ninth Circuit considered whether the conduct of a 

national bank prior to insolvency converted the plaintiff's 

deposit into a trust fund. Id. at 483. The plaintiff, the 

receiver of a failed state bank, sought to establish that its 

deposit in a national bank was transformed into a trust fund when 

the national bank promised to transfer the receiver's funds to 

another state bank, but failed to do so prior to becoming 

insolvent. Id. at 482-83. The question before the court 

concerned the legal effect of an instruction to transfer funds, 

and the court held that state law governed this question. Id. at 

483. "No need of federal uniformity exists requiring that federal 

banks in each state shall conduct their ordinary banking business 

exactly as in every other state." Id. After examining the 

plaintiff's instruction to transfer the funds, and the bank's 

agreement to do so, the court concluded that no trust had been 

established. Id. at 484. The plaintiff's credit balance at the 

bank was not segregated into a separate fund and was still subject 

to the receiver's check. Id. The debtor and creditor 

relationship was still intact, and no trust had been established 

by the plaintiff's order. See id. Instead of full recovery, the 

plaintiff merely had a claim to-a-pro rata share in the 

distribution of the national bank's assets. See id. at 483. 

To the extent that Seaborn is interpreted to have applied 

state law to determine whether the parties intended a trust to be 

formed, or whether the bank created a trust by segregating the 

plaintiff's funds, it is consistent with our analysis. To the 

extent that Seaborn may be interpreted as support for the position 

that equitable claims against the receiver's estate are governed 

only by state law, we disagree. As discussed more fully in part 

III of this opinion, we may choose to adopt state law as the rule 

of decision, but we need not do so when a conflict with the 

purposes of the National Bank Act would result. 

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The FDIC, as receiver, takes control of an insolvent national 

bank subject to the ''rights and equities" existing prior to 

insolvency. Palermo, 815 F.2d at 1334. The relevant provisions 

of the National Bank Act admittedly do not provide explicit 

guidance for the disposition of all claims against the receiver's 

estate. See D'Oench, Duhme ~Co., 315 U.S. at 470 (Jackson, J., 

concurring) (noting "recognized futility of attempting allcomplete statutory codes"). "Congress has seen fit not to 

anticipate by specific rules solution of problems that inevitably 

arise in national bank liquidations." Bethlehem Nat'l Bank, 314 

U.S. at 316. "Instead, [Congress] chose achievement of a 'just 

and equal distribution' of an insolvent bank's assets through the 

operation of familiar equitable doctrines evolved by the courts." 

Id. (quoting Elmira Sav. Bank, 161 U.S. at 284). Federal common 

law governs the application of such equitable doctrines. See FDIC 

v. Mademoiselle of Cal., 379 F.2d 660, 662-63 (9th Cir. 1967). 

III. 

Having decided that federal common law governs the 

plaintiffs' claims does not necessarily preclude the application 

of Oklahoma law allowing a constructive trust remedy. "In 

fashioning the federal common law in this area we may look for 

guidance to the law of the state having the closest connection to 

the transaction at issue when to do so would not conflict with the 

need for uniform rules governing bank liquidations." Palermo, 815 

F.2d at 1334. 

When a "federal policy or need for uniformity" would be 

"frustrated" by the application of state law as the federal rule 

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of decision, Palermo, 815 F.2d at 1334-35, however, we must devise 

from sources other than state law our own principles that conform 

with that policy or need. See id.; see also Bank of San 

Francisco, 817 F.2d at 1398 (noting that federal court making 

"'specialized federal common law'" may "adopt the law of the state 

involved" or "draw on the federal law merchant" (quoting Friendly, 

In Praise of Erie -- And of the New Federal Common Law, 39 N.Y.U. 

L. Rev. 383, 406 (1964))); Braemoor Assocs., 686 F.2d at 554 

(suggesting that "in an appropriate case a federal court could 

reject state substantive law if • • • necessary to protect the 

FDIC's interest in minimizing depositor losses"). As Justice 

Jackson stated: 

A federal court sitting in a non-diversity case 

such as this does not sit as a local tribunal. In some 

cases it may see fit for special reasons to give the law 

of a particular state highly persuasive pr even 

controlling effect, but in the last analysis its 

decision turns upon the law of the United States, not 

that of any state. Federal law is no juridical 

chameleon, changing complexion to match that of each 

state wherein lawsuits happen to be commenced because of 

the accidents of service of process and of the 

application of the venue statutes. It is found in the 

federal Constitution, statutes, or common law. Federal 

common law implements the federal Constitution and 

statutes, and is cond~tioned by them. Within these 

limits, federal courts are free to apply the traditional 

common-law technique of decision and to draw upon all 

the sources of the common law • . 

[The substantive issue here] is not a 

question to be answered from considerations of 

geography. That a particular state happened to have the 

greatest connection in the conflict of laws sense with 

[the activity forming the basis of the claim] is not 

enough to make us subservient to the legislative policy 

or the judicial views of that state. 

D'Oench, Duhme ~Co., 315 U.S. at 471-73 (Jackson, J., concurring) 

(footnote omitted); cf. Silkwood Y..!. Kerr-McGee Corp., 464 U. s. 

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238, 248 (1984) (noting preemption of state law when "the state 

law stands as an obstacle to the accomplishment of the full 

purposes and objectives of Congress"). 

Here, we must utilize governing principles that are in 

conformity with the policies underlying the National Bank Act. 

See Palermo, 815 F.2d at 1334. Most important to this case are 

the policies of achieving the "equity of equality among 

creditors," Scott Y..!. Armstrong, 146 U.S. 499, 511 (1892), and of 

the orderly liquidation of the receiver's estate, see Bryant Y..!. 

Linn County, Or., 27 F. Supp. 562, 565 (D. Or. 1938), that are 

implicit in 12 u.s.c. §§ 91, 194. 

Congress chose to achieve, through the National Bank Act, "a 

just and equal distribution of the assets of national banks among 

all unsecured creditors." Elmira Sav. Bank, 161 U.S. at 284. 

"This public aim in favor of all the citizens of every state of 

the Union is manifested by the entire context of the national bank 

act." Id. "The FDIC, when acting as a receiver for an insolvent 

bank, cannot prefer some creditors over others; rather, all 

creditors must share in a ratable distribution of the insolvent 

bank's assets." Hibernia Nat'l Bank Y..!. FDIC, 733 F.2d 1403, 1407 

(10th Cir. 1984). The receiver is charged with the duty of 

"securing equal justice to all its creditors • • . under a law 

which sternly forbids preferences." Casey Y..!. Cavaroc, 96 U.S. 

467, 489 (1878). The National Bank Act is "distinctly unfriendly 

to the recognition of special interests or preferred claims. 

Doubts should be resolved against them." Atlantic Gypsum, 76 F.2d 

at 61 (citations omitted). 

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The Act's unfriendliness to special interests requires a 

claimant seeking a preference from pro rata distribution of assets 

to bear a heavy burden of proof. See Hibernia Nat'l Bank, 733 

F.2d at 1408; see also Bryant, 27 F. Supp. at 565 ("[a]s a matter 

of orderly liquidation in acordance with [the Act]" federal courts 

uniformly put burden on claimant seeking preference based on trust 

arising ex maleficio). A national bank's fraudulent conduct may 

give rise to a constructive trust only when the plaintiff can show 

that the bank's fraud caused a particular harm that is not shared 

by substantially all other depositors, and that granting relief to 

the plaintiff does not disrupt the orderly administration of the 

receiver's estate. This general rule is exemplified in the cases 

involving constructive trusts imposed upon the assets of a 

hopelessly insolvent bank. 

A bank receiving deposits after 'its officers know that the 

bank is hopelessly insolvent is deemed to commit fraud upon those 

depositors, entitling them to reclaim their deposits.7 See, ~' 

St. Louis & S.F. ~ Y..:_ Johnston, 133 U.S. 566, 576-77 (1890}; 

Carnegie-Illinois Steel Corp. Y..:_ Berger, 105 F.2d 485, 487 (3d 

Cir.), cert •. denied, 308 U.S. 603 (1939); Standard Oil Co. v. 

Elliott, 80 F.2d 158, 161 (4th Cir. 1935); Federal Reserve Bank v. 

Omaha Nat'l Bank, 45 F.2d 511, 519 (8th Cir. 1930), cert. denied, 

282 U.S. 902 (1931). This right to reclaim is restricted to 

7 As in other cases involving the recovery of a trust fund, the 

right to reclaim a deposit is contingent upon the plaintiff's 

proof that the deposit augmented the receiver's estate and can be 

traced into the possession of the receiver. See Queenan Y..:. Mays, 

90 F.2d 525, 531-32 (10th Cir.), cert. denied, 302 U.S. 724 

(1937); Flynn Y..:. Smith, 90 F.2d 305, 310-11 (7th Cir. 1937); 

Kershaw v. Jenkins, 71 F.2d 647, 649 (10th Cir. 1934). 

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Appellate Case: 87-1648 Document: 01019743437 Date Filed: 07/03/1989 Page: 17 
claimants who deposited funds after the date the bank is known by 

its officers to be hopelessly insolvent, and it extends only to 

"the sum paid in" at such time. Berger, 105 F.2d at 487. "[M]ere 

embarrassed circumstances, or even simple insolvency of a bank at 

the time of receiving a deposit, without more, does not warrant 

the rescission, for fraud, of the contract of deposit, if, when 

the deposit was accepted, there was a present genuine and 

reasonably founded hope, expectation, and intention on the part of 

the bank's officers to carry on the business." Byrd~ Ross, 58 

F.2d 377, 378 (S.D. Fla. 1932). If the bank's officers have 

"ground for the supposition that the bank might continue in 

business," Johnston, 133 U.S. at 578, and merely 6mit to disclose 

the precarious financial condition of the bank, a constructive 

trust is not available. See id. 

Those who deposit funds after a bank is hopelessly insolvent 

can show a specific act of fraud that affects only them, and 

therefore they have a superior equitable position over others who 

deposited funds prior to hopeless insolvency with a hope or belief 

in the bank's future ability to repay the deposit. Furthermore, a 

hopelessly insolvent bank should have been closed by the 

Comptroller of the Currency as of the date of such insolvency, 

thereby preventing the receipt of further deposits. Equity 

therefore "regards that as done which should have been done," 

O'Neal v. White, 79 F.2d 835, 835 (4th Cir. 1935), cert. denied, 

297 U.S. 706 (1936), and permits the rescission of deposit 

contracts made after the bank should have been closed. 

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Even in the case of hopeless insolvency, however, full 

restitution may be denied when it would sufficiently disrupt the 

orderly administration of the receiver's estate or otherwise 

result in inequitable treatment to other similarly situated 

depositors. See Bryant, 27 F. Supp. at 565. In Bryant, the court 

refused a claim for a constructive trust by a party which had 

deposited funds in a national bank that had been insolvent "for 

many years." Id. at 563. That party, as well as many other 

depositors who were not parties to the suit, had made such 

deposits "upon the faith of the solvency of the Bank." Id. 

Because the complaining party did not "assert the claim of trust 

ex malef icio until almost twenty-three months after the closing of 

the Bank," and because virtually all other depositors could have 

been considered in the same situation due to the unusual length of 

time that the bank was hopelessly insolvent, the court denied a 

constructive trust. See id. at 565-66; see also Berger, 105 F.2d 

at 487-88 (denying constructive trust due to delay in bringing 

claim when allowing claim "would work havoc in the orderly 

administration" of bank's affairs); Leonard v. Gage, 94 F.2d 19, 

25-26 (4th Cir.), cert. denied, 303 U.S. 653 (1938) (allowing 

recovery in favor of receivers of national banks against receivers 

of state bank when relief could be awarded "without disrupting in 

any way the orderly administration of the estate or prejudicing 

the just rights of any of the creditors"); Poole v. Elliott, 76 

F.2d 772, 774-75 (4th Cir. 1935) (denying constructive trust upon 

assets of insolvent state bank when claim "would affect a large 

part of the obligations to depositors and probably all of the cash 

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assets passing into the hands of the receivers" and cause 

"injustice to other persons interested in the administration of 

the estate"). 

Here, the application of these policies -- preserving the 

orderly administration of the receiver's estate and achieving an 

equitable distribution among creditors -- is not a question to be 

decided fortuitously because "a particular state happened to have 

the greatest connection in the conflict of laws sense." D'Oench, 

Duhme & Co., 315 U.S. at 473 (Jackson, J., concurring). We refuse 

here to adopt Oklahoma law as the federal rule of decision because 

to do so would permit a constructive trust in favor of plaintiffs 

in contravention of the principles implicit in the National Bank 

Act.· 

In awarding a constructive trust in favor of the plaintiffs, 

the district court relied upon an Oklahoma statute providing that: 

[o]ne who practices a deceit with intent to defraud the 

public, or a particular class of persons, is deemed to 

have intended to defraud every individual in that class, 

who is actually misled by the deceit. 

Okla. Stat. Ann. tit. 76, § 4 (West 1987). The plaintiffs, having 

proved reliance upon PSB's published financial statements, were 

deemed to have been "actually misled" by PSB at the time they 

purchased PSB certificates of deposit, and accordingly the trial 

court ordered that they be allowed to recover all of their 

deposits. Such recovery violates both of the federal policies 

implicit in the National Bank Act. 

Permitting recovery to the plaintiffs because they could 

prove reliance upon the financial statements, to the detriment of 

other uninsured depositors who could not or did not come forward 

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to prove reliance upon PSB financial statements, fails to accord 

equal treatment to PSB creditors. PSB's deceptive acts could not 

have reached only the plaintiffs. A congressional committee 

investigating the failure of PSB found that many financial 

institutions similarly relied upon financial statements 

representing PSB's financial integrity. 

Through the final months of Penn Square's 

existence, and even up to the last day before the bank's 

doors were closed, in fact, just hours before the doors 

were closed, many small financial institutions were 

placing funds in this shopping center bank, reassured by 

a Peat, Marwick, Mitchell & Co. audit that some have 

said gave the bank a "clean bill of health." 

So healthy did some find it that they put in sums 

well above the insured amounts -- in many cases running 

into the millions of dollars from individual 

institutions. All told, credit unions alone lost $111 

million in uninsured funds in Penn Square -- over 20 

percent of the bank's deposits when .it failed. 

Penn Square Bank Failure: Hearings Before the House Comm. on 

Banking, Finance and Urban Affairs, 97th Cong., 2d Sess., pt. 2, 

at 267 (1983) (statement of Rep. St Germain, committee chairman). 

Whether independently analyzing PSB financial statements, or 

relying upon money brokers who analyzed PSB's financial condition 

based upon the information contained in those statements, 

financial institutions other than the plaintiffs undoubtedly 

placed similar trust in PSB's misrepresented financial condition 

in assessing their risk of future loss. 8 See id. at 271. The 

8 The plaintiffs argue that no other financial institutions 

relied upon PSB financial statements in depositing uninsured funds 

in PSB because, as noted in a report prepared by the FDIC, 

"[s]ince 1960 about three-fourths of all failed commercial banks 

and, until Penn Square Bank, all failures over $100 million in 

size have been handled through purchase and assumption 

transactions (P&As)." FDIC, Deposit Insurance in~ Changing 

(Footnote Continued on Following Page) 

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National Bank Act precludes these depositors from being treated 

differently. Cf. Beacon Mfg. Co. Y...!.. Hood, 168 S.E. 523, 524 (N.C. 

1933) (reaching identical result under state law in denying 

depositor's claim for preference in state bank assets). "[I]t is 

clear that other depositors as to deposits made during this period 

are entitled in equity to the same relief as [the party seeking a 

constructive trust], and in granting relief the court should see 

that their rights are protect.ea." Standard Oil Co., 80 F. 2d at 

161. "In the absence of a false and fraudulent representation 

made specifically to the plaintiff, with respect to the financial 

condition of the [bank], the plaintiff has no equity superior to 

the rights of other depositors or creditors of the [bank], who 

made deposits in said [bank] in reliance upon the statements 

published by said [bank] .• II Beacon Mfg., 168 S.E. at 524. 

(Footnote Continued from Previous Page) 

Environment ch. I, at 6 (1983) (report submitted to Congress 

pursuant to § 712 of the Garn-St Germain Depository Institution 

Act of 1982). "In P&As all deposits (including uninsured 

deposits) and other liabilities of general creditors are assumed 

by a new or existing bank. Thus, despite a bank failure, all 

depositors and other general creditors are made whole in a P&A." 

Id.; see id. ch. III, at 4. According to the FDIC report, the 

widespread use of P&A transactions, instead of merely paying off 

uninsured depositors their pro rata share of the bank's assets, 

has altered public perceptions of the safety of funds. Id. ch. 

III, at 1. "[T]his growing perception of almost absolute-8afety 

of funds in large institutions is having the effect of removing 

the consideration of bank risk from business decisions." Id. 

The fact that risk considerations may have been reduced at 

that time due to the historical pattern of FDIC practices does not 

mean that risk of failure was completely excluded from the market. 

The fact that both of the plaintiffs utilized the services of 

money brokers, who performed some degree of financial analysis on 

the institutions they represented, and who were responsible for 

soliciting the deposits of numerous other institutions, clearly 

shows that the market was not blind to the ris~ of failure. 

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( Although the plaintiffs contend that we might avoid this 

unequal treatment by permitting all depositors situated similarly 

to the plaintiffs to sue as a class to establish· constructive 

trusts, to allow such suits would potentially jeopardize the 

orderly administration of the receiver's estate that is required 

by the Act. We do not think that Congress would have intended to 

deluge the FDIC with the potentially crushing weight of claims for 

preferences on behalf of all the uninsured depositors who could 

allege that they relied upon misleading information that was 

available to all depositors. Allowing such a preference to be 

based upon a "race of diligence" among creditors would make "the 

equality promised to them by the [National Bank Act] .•• a mere 

mockery." First Nat' 1 Bank Y.!. Colby, 88 U.S. ( 21 Wall. ) 609, 614 

(1875). Any remedy for fraudulent representations that affects, 

or potentially affects, all creditors belongs to the receiver, who 

asserts such claims for the benefit of all creditors. Cf. In re 

Longhorn Sec. Litig., 573 F. Supp. 255, 272 (W.D. Okla. 1983) 

(noting "general rule" that "wrongs committed by a bank's officers 

or directors that injure all depositors and creditors alike create 

a liability which is an asset of the bank itself and for which 

only the bank or its receiver may recover"). When all creditors 

have been similarly harmed, pro rata distribution of the assets in 

accordance with the mandate of the National Bank Act accomplishes 

the same result as if all uninsured depositors had brought suit on 

their own behalf. Bryant, 27 F. Supp. at 565. 

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I 

( Accordingly, the order of the district court imposing a 

constructive trust upon the assets of PSB in favor of the 

plaintiffs is REVERSED. 

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