Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-93-05268/USCOURTS-caDC-93-05268-0/pdf.json

Parties Involved:
Federal Deposit Insurance Corporation
Appellee
Bruce G. Murphy
Appellant

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 7, 1995 Decided August 1, 1995

No. 93-5268

BRUCE G. MURPHY,

APPELLANT

v.

FEDERAL DEPOSIT INSURANCE CORPORATION,

AS RECEIVER FOR SOUTHEAST BANK, N.A.,

APPELLEE

Consolidated with

93-5412

-

Appeals from the United States District Court

for the District of Columbia

(No. 92cv01924)

Bruce G. Murphy, pro se, argued the cause and filed the briefs as appellant.

John P. Parker, Senior Attorney, Federal Deposit Insurance Corporation, argued the cause for

appellee. With him on the brief was Ann S. DuRoss, Assistant General Counsel, and Colleen J.

Bombardier, Senior Counsel, FederalDeposit Insurance Corporation. Claire L. McGuire and David

A. Felt, Attorneys, Federal Deposit Insurance Corporation, entered appearances.

Before: EDWARDS, Chief Judge; WALD and GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge GINSBURG.

GINSBURG, Circuit Judge: Bruce Murphy, an investor in an unsuccessful real estate venture,

seeks damages from the FDIC on the theory that the failed bank that financed the venture, of which

the FDIC is the receiver, was responsible for his loss. The district court granted summary judgment

in favor of the FDIC upon the ground that the appellant's claims are barred both by federal common

law, see D'Oench, Duhme & Co., Inc. v. FDIC, 315 U.S. 447 (1942), and by 12 U.S.C. § 1823(e).

We hold that (1) § 1823(e) does not bar Murphy's claims because the FDIC has not demonstrated,

as required by that statute, that the FDIC's interest in a specific asset would be diminished if the

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claims were upheld; and (2) the Supreme Court's recent decision in O'Melveny & Myers v. FDIC,

114 S. Ct. 2048 (1994), removesthe federal common law D'Oench doctrine as a separate bar to such

claims. We therefore reverse the district court and remand the case for further proceedings.

I. BACKGROUND

In his complaint Murphy tells the following story (which we take as true for the purpose of

this appeal). In 1989 he paid approximately $515,000 for one "partnership unit" in the Orchid Island

Associates Limited Partnership, which was then in the process of developing the Orchid Island Golf

and BeachClub near Vero Beach, Florida. The investment contract guaranteed that he would receive

a "6.1 multiple return on investment" but to date he has received nothing.

Southeast Bank, N.A. wasthe lead lenderfor the Orchid Island project. In the late 1980's and

early 1990's the bank made several loans to the partnership, in a total amount approximating $50

million. Southeast was also involved in a plan whereby Orchid would engage in a public bond

offering to raise additional funds in order to complete the project. Pursuant to that plan, Orchid

would take a "bridge loan" from Southeast to cover expenses until the bonds were sold, and the

proceeds from the bond offering would be used both to repay the bridge loan and to reduce the

amounts outstanding on Southeast's earlier loans. When Southeast informed Orchid's other lenders

that the proposed bond financing would result in a lien on the project superior to theirs, however,

they rejected the proposal and the deal fell through. Orchid subsequently defaulted on its loan

obligations, and Southeast foreclosed upon the property. Shortly thereafter Southeast was itself

declared insolvent, the FDIC was appointed receiver of the bank, and Murphy filed this lawsuit.

Although somewhat vague, the gravamen of Murphy's claim is that the bank effectively

controlled Orchid and thus assumed the role, and the corresponding legal duties, of a joint venturer

or partner. Murphy contends that the bank is therefore responsible for various misdeeds allegedly

committed by Orchid officials, including: "failure to register securities" (count 3); "unlawful offer

and sale ofsecurities" (count 4); "breach of fiduciary duties" (count 5); "breach of contract" (count

6); and "accounting" improprieties (count 7). Murphy further contends that, in its role as promoter

of the aborted bond offering, the bank itself engaged in "fraud" (count 8) and made "negligent

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misrepresentation[s]" (count 9). In addition, Murphy complains that the FDIC has failed to establish

alternative dispute resolution (ADR) procedures, asrequired bystatute, and therefore hasimproperly

denied him the opportunity to pursue his claim through an ADR channel (counts 1 and 2). Murphy

seeks money damages (in counts 3-6 and 8-9), and an order requiring the FDIC to give him certain

accounting statements (count 7) and to adopt ADR procedures and apply them to his claim (counts

1-2).

Each of the loan agreements between Orchid and the bank contains a provision to the

following effect: "The Lender is a lender only and shall not be considered a shareholder, joint

venturer or partner of the Borrower." Relying upon those written provisions, Murphy's inability to

point to any written agreement that supports hisjoint-venture theory of liability, the federal common

law D'Oench doctrine, and 12 U.S.C. § 1823(e), the district court granted summary judgment in

favor of the FDIC on counts 3 through 9. The district court also granted summary judgment in favor

of the FDIC on the first two counts, holding that, under the governing statute, the FDIC has the

discretion to decide whether to adopt an ADR procedure and, if it doesso, whether a particular claim

is suitable therefor.

II. ANALYSIS

Murphy raises distinct substantive and procedural points before this court. First, he argues

that 12 U.S.C. § 1823(e) does not apply to hissubstantive claims and that the recent Supreme Court

decision in O'Melveny & Myers v. FDIC makes clear that the federal common law D'Oench doctrine

has been displaced by a federal statute. Second, he renews his claim that the FDIC is required to

establish an ADR procedure and to apply it to his claim.

A. 12 U.S.C. § 1823(e)

In 1950, eight years after the Supreme Court decided D'Oench, the Congress enacted the

Federal Deposit Insurance Act, 12 U.S.C. § 811 et seq., which "bars anyone from asserting against

the FDIC any agreement not properly recorded in the records of the bank that would diminish the

value of an asset held by the FDIC." E.I. du Pont de Nemours & Co. v. FDIC, 32 F.3d 592, 596

(D.C. Cir. 1994). That provision, as modified in 1989 by the Financial Institutions Reform, Recovery,

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and Enforcement Act, Pub. L. No. 101-73, 103 Stat. 183 (better known as the FIRREA), currently

provides that:

No agreement which tendsto diminish or defeat the interest ofthe [FDIC] in anyasset

acquired by it under this section or section 1821 of this title, either as security for a

loan or by purchase or asreceiver of any insured depository institution, shall be valid

against the [FDIC] unless such agreement

(A) is in writing,

(B) was executed by the depository institution and any person claiming an

adverse interest thereunder, including the obligor, contemporaneously with

the acquisition of the asset by the depository institution,

(C) was approved by the board of directors of the depository institution or its

loan committee, which approvalshall be reflected in the minutes ofsaid board

or committee, and

(D) has been, continuously, from the time of its execution, an official record

of the depository institution.

12 U.S.C. § 1823(e)(1). The Congress further provided in the FIRREA that "any agreement which

does not meet the requirements set forth in section 1823(e) of this title shall not form the basis of, or

substantially comprise, a claim against the [FDIC]." 12 U.S.C. § 1821(d)(9)(A).

By their terms, these statutory provisions bar any claim that (1) is based upon an agreement

that is either (a) unwritten or (b) if in writing, does not meet the stringent requirements of §§

1823(e)(1)(B)-(D), and (2) would diminish or defeat the interest of the FDIC in an asset acquired by

it in its capacity as receiver of a failed depository institution. Murphy concedes that his claims (save

one) are (1) premised upon the existence of an unwritten joint-venture agreement between the bank

and Orchid, but argues that § 1823(e) does not bar his claims because (2) the FDIC has failed to

demonstrate that its interest in any specific asset assigned from Southeast would be diminished were

he to prevail. He points out that he is not a borrower (or "obligor" per the statute) attempting to

avoid payment of a loan owed to Southeast Bank but israther an investor in a failed business venture

in which, he claims, the failed bank was a culpable participant. To be sure, Murphy's claims, if

successful, would diminish the value of the bank in the hands of the FDIC but that, according to

Murphy, is not sufficient to meet the "asset" requirement of § 1823(e). We agree.

We recently held that § 1823(e)(1) is "applicable only to cases involving a specific asset,

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usually a loan, which in the ordinary course of business would be recorded and approved by the

bank'sloan committee or board of directors" and that "the requirements of § 1823(e) effectively limit

that provision to conventional loan transactions." du Pont, 32 F.3d at 597. That interpretation gains

support from subsection (C) of § 1823(e)(1), which specifically requires that, if a suit is to go

forward, the agreement upon which it is based must have been approved by "the board of directors

of [the bank] or its loan committee." See In Re NBW Commercial Paper Litigation, 826 F. Supp.

1448, 1463-64 (D.D.C. 1992) (§ 1823(e) applies primarily to loan transactions). An agreement that

does not involve an extension of credit would not ordinarily be submitted to the board or to a loan

committee for approval. Moreover, while any agreement to make a significant loan will ordinarily

meet the exacting requirements of § 1823(e), see Langley v. FDIC, 484 U.S. 86, 92 (1987)

(requirements of § 1823(e) "ensure mature consideration of unusual loan transactions by senior bank

officials"), those requirements will almost never be met by an agreement between the bank and an

investor, a trade creditor, or most clearly, a tort claimant (such as Murphy is, at bottom). Without

so much as a "hint in any of Congress' pronouncements that such individuals should be disfavored,"

du Pont, 32 F.3d at 597 (quoting NBW, 826 F. Supp. at 1463), it would be positively wanton for a

court to construe the asset requirement so broadly as to destroy their otherwise valid claims.

Even if we assume for the sake of argument that the asset requirement of § 1823(e) is so

undemanding that § 1823(e) is a defense to any claim that would diminish the FDIC's interest in any

asset that it has acquired from a failed bank, including an asset other than a loan, Murphy's claims

would still survive. The FDIC does not point to an interest in any specific asset of any type that

would be diminished by Murphy's claims. Indeed, the FDIC does not even respond directly to

Murphy's assertion that its interest in no specific asset would be diminished, preferring instead to

argue only that other courts have applied the federal common law D'Oench doctrine to bar claimsthat

would not diminish its interest in a specific asset. That response not only fails to speak to the proper

interpretation of the asset requirement of § 1823(e), it amounts to a near concession that the statute

does not bar Murphy's claims and that if the FDIC is to find any refuge it must be in federal common

law.

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In a footnote to its brief the FDIC does observe that its "recovery from the loan transactions

would clearly be diminished by any liabilities arising out of the same transactions." That statement

could charitably be read implicitly to argue that the loans that Southeast made to Orchid are the

specific assets in which the FDIC's interest would be diminished by Murphy's claims. If that is the

FDIC's argument, however, then we find it singularly unconvincing. The value of the loans

themselves would be diminished not at all by Murphy's claims. The FDIC may collect those loans or

execute upon the propertysecuring themto the same extent regardless whether Murphyprevails upon

his damage claims. Only the overall value of the bankrupt's estate, not the receiver's interest in any

specific asset, would be diminished if Murphy were to prevail.

Because the FDIC hasfailed to demonstrate that any specific assetlet alone a specific asset

"which in the ordinary course of business would be recorded and approved by the bank's loan

committee or board of directors," du Pont, 32 F.3d at 597would be diminished were Murphy to

succeed, we reverse the judgment of the district court (which did not discuss the specific asset

requirement in holding that § 1823(e) bars Murphy's claims). Although the FDIC does not rely

separately upon § 1821(d)(9)(A), the statutory cousin of § 1823(e), we note also that that section

simply "incorporates by reference the requirements of § 1823(e)," including the asset requirement,

du Pont, 32 F.3d at 597, and therefore can not provide an independent ground for judgment in favor

of the FDIC.

B. Federal common law: herein of D'Oench, Duhme & Co.

The D'Oench case involved a securities dealer who had sold certain bonds to a bank insured

by the FDIC. The issuer later defaulted on the bonds. In order to allow the bank to avoid carrying

past due bonds on its books, the securities dealer executed unconditional notes in the amount of the

bonds, pursuant (the dealer alleged) to a secret side agreement that the bank would not call the notes

for payment. When the bank failed, however, the FDIC was appointed receiver and it demanded

payment of the notes. The Supreme Court held that to allow the securities dealer to rely upon the

secret agreement as a defense to payment of its note would violate the policy behind the Federal

Reserve Act, viz. "to protect [the FDIC], and the public funds which it administers, against

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misrepresentations asto the securities or other assetsin the portfolios of the banks which [the FDIC]

insures." 315 U.S. at 457.

Thus was born the federal common law doctrine that courts have since expanded "beyond the

paradigm in which a debtor seeks to assert a defense to liability on a note held by the FDIC" to bar

a variety of both claims made and affirmative defenses raised against the FDIC as receiver. See du

Pont, 32 F.3d at 597-99 (and cases cited therein). Indeed, in the instant case the district court held

that the D'Oench doctrine extends to (and therefore bars) Murphy's substantive claim that the bank

by its actions assumed the liabilities of a joint-venturer because that theory of liability contradicts the

written agreements between the bank and Orchid in the records of the bank.

Although various circuits, including this one, have had occasion to apply the common law

D'Oench doctrine since the passage ofthe FIRREAin 1989, Murphyarguesthat the Supreme Court's

recent decision inO'Melveny &Myers now makes clearthat the commonlaw doctrine was preempted

by that statute. To be sure, in O'Melveny & Myers the Supreme Court does not flatly state that

D'Oench has been preempted by the FIRREA, but it does set forth some more general propositions

that, we think, lead ineluctably to that conclusion.

InO'Melveny &Myersthe FDIC, asreceiver of a California savings bank,sued a law firmthat

had performed services for the bank; it claimed that the firm had been negligent and had breached

its fiduciary duty by failing to uncover the wrongdoing of certain officers of the bank. 114 S. Ct. at

2052. The district court entered summary judgment in favor of the law firm, apparently upon the

ground that under California law knowledge of the employees' misconduct is imputed to the

employerand thence to the FDIC as receiver in the employer's stead. Id. The FDIC argued that

the question whether to impute knowledge of a bank employee's conduct to the FDIC is governed

not byCalifornia law but by federal common law. Id. The Supreme Court unanimously rejected that

contention, holding that the FIRREA preempted the creation offederal common law on thisissue and

that the rule of decision is therefore to be found either in the federalstatute itself or in state law. Id.

at 2054. 

The Court began its discussion of preemption with the proposition that it "would [not] adopt

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a court-made rule to supplement federal statutory regulation that is comprehensive and detailed;

matters left unaddressed in such a scheme are presumably left subject to the disposition provided by

state law." Id. The Court then turned to 12 U.S.C. § 1821(d)(2)(A)(i), which, as amended by the

FIRREA, provides that the FDIC "shall ... by operation of law, succeed to all rights, titles, powers,

and privileges of the insured depository institution," and explained that this provision "appears to

indicate that the FDIC as receiver steps into the shoes of the failed S&L [so that] any defense good

against the original party is good against the receiver." Id.

The Court went on to hold that the above-quoted provision is an exclusive grant of rights to

the FDIC as receiver, which can be neither "supplemented [nor] modified by federal common law."

Id. Here the Court cited four provisions of the FIRREAincluding § 1821(d)(9), which it described

parenthetically as "excluding certain state-law claims against FDIC based on oral agreements by the

S&L"that "specifically create special federal rules of decision regarding claims by, and defenses

against, the FDIC as receiver.... Inclusio unius, exclusio alterius." Id. The Court concluded this

aspect of the opinion with the broad observation:

It is hard to avoid the conclusion that § 1821(d)(2)(A)(i) placesthe FDIC in the shoes

of the insolvent S&L, to work out its claims under state law, except where some

provision in the extensive framework of FIRREA provides otherwise. To create

additional "federal common-law" exceptions is not to "supplement" this scheme, but

to alter it.

Id.

Although the Court'sreasoning appearsto leave no room for a federal common law D'Oench

doctrine, the FDIC here emphasizes that the continuing vitality of D'Oench was not directly before

the Supreme Court and that the Court did not specifically mention D'Oench in its opinion. That is

hardly compelling, however, when one considersthat "[i]n cases of doubt, the institutionalrole ofthe

Supreme Court weighs in favor of considering its rulings to be general rather than limited to the

particular facts." Cowin v. Bresler, 741 F.2d 410, 425 (D.C. Cir. 1984). That point has particular

force in this instance, for while the vitality of D'Oench was not directly at issue in O'Melveny &

Myers the Court was specifically advised by both sides on brief and at oral argument that resolution

of the issue before it could also affect the D'Oench doctrine. Moreover, although the opinion for the

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Court does not specifically mention D'Oench, it does expressly include one of the D'Oench-like

statutory provisions(§ 1821(d)(9)) in the list ofspecialfederalstatutory rules of decision from which

it infers that "[i ]nclusio unius, exclusio alterius." O'Melveny & Myers, 114 S. Ct. at 2054. In so

doing the Supreme Court, we think, necessarily decided the D'Oench question. To translate: the

inclusion of § 1821(d)(9) in the FIRREA implies the exclusion of overlapping federal common law

defenses not specifically mentioned in the statuteof which the D'Oench doctrine is one.

The FDICnext contendsthat thisinterpretation isinconsistent with both the Supreme Court's

earlier decision in Langley v. FDIC, 484 U.S. 86 (1987), and the decisions of several lower courts

(including this one) holding that D'Oench survives the enactment of the FIRREA. The FDIC

suggeststhat in Langley the Court signalled the continuing validity of the D'Oench doctrine because

it relied upon the D'Oench case itself to inform its interpretation of the term "agreement" in §

1823(e). Even if we accepted that interpretation of Langley, however, it would surely not dispose

of the present issue because the Court decided Langley before the Congress enacted the FIRREA.

In any event, in Langley itself the Court suggested, if anything, that D'Oench was even then a dead

letter:

That "agreement" in § 1823(e) covers more than promises to perform acts in the

future is confirmed by examination of the leading case in the area prior to the

enactment of § 1823(e) in 1950 ... D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447

(1942)....

Id. at 92. Referring to D'Oench as the leading case "prior to the enactment of § 1823(e) in 1950"

implies that D'Oench had lost its vitality as federal common law with the enactment of the FDIA in

1950. At most the Court in Langley left that question open.

As for the post-FIRREA decisions of the lower courts, the FDIC is undeniably correct in its

assertion that many courts, including we, have either explicitly stated or implicitly assumed that the

federal common law remains alive and well alongside itsstatutory cousin. See, e.g. du Pont, 32 F.3d

at 596-97; NBW, 826 F. Supp. at 1457-61 (and cases cited therein). Most courts, however, have

done so "without even considering the preemption question." NBW, 826 F. Supp. at 1458. More

specifically, not one court has discussed the impact oflast year's decision in O'Melveny &Myers upon

the continuing vitality of D'Oench. As the FDIC notes, our own du Pont opinion issued after

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O'Melveny & Myers; but it was briefed and argued before the Supreme Court decision issued, and

no party in du Pont brought the pendency of the issue in O'Melveny & Myers to the attention of the

court. We can therefore state with confidence that this court has not heretofore decided what impact

O'Melveny & Myers has upon the D'Oench doctrine.

Finally, as a fallback the FDIC characterizesthe O'Melveny & Myers opinion as a prohibition

only upon "the creation of new federal common law," thus suggesting that the Supreme Court

decision does not reach the question whether already extant federal common law was preempted by

the enactment of the FIRREA. That interpretation is not literally inconsistent with anything the

Supreme Court says in O'Melveny & Myers: The federal common law rule at issue in that case

appears to have been newly announced by the court of appeals post-FIRREA, and at one point the

Court framed the issue before it as whether to "adopt a court-made rule to supplement federal

statutory regulation." 114 S. Ct. at 2054.

The problemwith such a narrow focus upon O'Melveny &Myersisthat it excludesfromview

all that the Supreme Court has said before about the impact of comprehensive new legislation upon

existing federal common law. Although federal common law is sometimes a "necessary expedient,"

Milwaukee v. Illinois, 451 U.S. 304, 314-15 (1981), the Court has made clear that

when Congress addresses a question previously governed by a decision rested on

federal common law the need for such an unusual exercise of law-making by federal

courts disappears.... [The Court's] commitment to the separation of powers is too

fundamental to continue to rely on federal common law ... when Congress has

addressed the problem.

By stating that "§ 1821(d)(2)(A)(i) places the FDIC in the shoes of the insolvent S&L, to

work out its claims under state law, except where some provision in the extensive framework of

FIRREA provides otherwise," O'Melveny & Myers, 114 S. Ct. at 2054, the Supreme Court appears

to have concluded that the Congress in the FIRREA did indeed address the question previously

governed by D'Oench. It follows that the need for a body of federal common law under the rubric

of D'Oench has now "disappeared" and that the district court erred in holding that Murphy's claims

are barred under D'Oench.

C. The procedural claims

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In count 1 of his complaint Murphy seeks a declaratory judgment that the FDIC is required

by statute to establish an ADR procedure and to offer Murphy the option of resolving his claim

through that procedure; in count 2, he seeks a writ of mandamus compelling that result. The district

court granted summary judgment in favor of the FDIC on both counts.

The FIRREA doesseem to require the FDIC either to establish an ADR process or to explain

why such a process is not appropriate for resolving any claims. 12 U.S.C. § 1821(d)(7)(B)(i) ("The

[FDIC]shall also establish such alternative dispute resolution processes as may be appropriate for the

resolution of claims"). The FDIC appears, however, to have initiated an ADR program since Murphy

raised his dispute with the agency. See Resolution of the Board of Directors of the FDIC Concerning

the Implementation of ADR (Dec. 20, 1994). Therefore, Murphy's request that we order the FDIC

to take that step appears to be moot.

As for Murphy's request for an order compelling the FDIC to direct his case to an ADR

process, we see that the statute gives the agency the discretion to decide whether to refer any

particular case to ADR. 12 U.S.C. § 1821(d)(7)(B)(iii) ("all parties, including ... the [FDIC], must

agree to the use of [an ADR] process in a particular case"). Consequently, we decline Murphy's

invitation to compel such action.

III. CONCLUSION

For the foregoing reasons, we affirm the district court's grant of summary judgment in favor

of the FDIC on counts 1 and 2 and reverse the district court's grant ofsummary judgment on counts

3 through 9. The latter claims are remanded to the district court for further proceedings consistent

with this opinion.

So ordered.

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