Opinion ID: 402195
Heading Depth: 1
Heading Rank: 2

Heading: Defenses to the State and Common Law Fraud Claims

Text: 12 The FDIC first asserts that the Gunters' rescission action is barred by 12 U.S.C. § 1823(e) which states in relevant part:No agreement which tends to diminish or defeat the right, title or interest of the Corporation in any asset acquired by it under this action, either as security for a loan or by purchase, shall be valid against the Corporation unless such agreement (1) shall be in writing, (2) shall have been executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the bank, (3) shall have been approved by the board of directors of the bank or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (4) shall have been, continuously, from the time of its execution, an official record of the bank. 13 The FDIC argues that the fraud asserted by the Gunters is in the nature of an agreement between the Gunters and Chattanooga Hamilton's officers and directors to perform certain promises made in connection with the Atlanta Hamilton stock sale. Because the agreement was not in writing, the argument continues, it cannot defeat the rights of the FDIC under the no agreement language of § 1823(e). 7 14 We cannot agree with the FDIC's analysis of this issue, although several recent Fifth Circuit cases have involved the protection of § 1823(e), and in all the FDIC has prevailed. In Black v. FDIC, 640 F.2d 699 (5th Cir.), cert. denied, --- U.S. ----, 102 S.Ct. 143, 70 L.Ed.2d 119 (1981), for example, the obligor attempted to prove that a real estate development loan agreement with a bank included the unwritten understanding to make construction loans on certain real estate. The court held that the unwritten agreement could not be asserted against the FDIC. Similar situations occurred in FDIC v. Lattimore Land Corp., 656 F.2d 139 (5th Cir. 1981) (oral agreement to make future loans), Chatham Ventures, Inc. v. FDIC, 651 F.2d 355 (5th Cir. 1981) (assertion that bank breached joint-venture agreement), and FDIC v. Hoover-Morris Enterprises, 642 F.2d 785 (5th Cir. 1981) (obligor asserted that bank had agreed to take a deed in satisfaction of the debt). 15 The common thread running through these cases has been the assertion by the obligor that an oral side agreement with the bank controlled the rights of the parties. 8 The cases, therefore, came squarely within the no agreement ... shall be valid language of § 1823(e). The claim asserted by the Gunters, in contrast, is quite different. The essence of their argument is that no agreement existed because of the fraud of Chattanooga Hamilton's officers. While certain of the alleged misrepresentations could be construed as agreements to perform certain acts in the future, such as deferring interest on the Gunters' notes, others clearly are not agreements of any sort. For example, the Gunters alleged that the chairman of the board of Chattanooga Hamilton fraudulently represented that the Hamilton banking system was in sound financial condition. Far from claiming that an oral agreement is valid and controls the rights of the parties, the Gunters assert that the entire transaction was invalid from the beginning. As the district court noted, this claim is directly opposite to the shall be valid language of § 1823(e). Consequently, we agree with the trial court that the fraud claims at issue here are not barred by the statutory language in § 1823.B. The Defense of Federal Common Law
16 Although we conclude that the specific language of § 1823(e) does not protect the FDIC from the Gunters' allegations, we agree with the trial court that principles of federal common law protect the FDIC from ordinary fraud claims of which it lacks knowledge. 17 Any analysis of federal common law must begin with the seminal Supreme Court case on the subject, United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). Kimbell Foods dealt with the law governing priority of liens created by Small Business Administration and Farmers Home Administration loans. The SBA and FHA had argued that the priority of their liens was governed by federal, not state, law and that a uniform federal rule of first priority was necessary to protect federal interests. 18 The Supreme Court adopted a two-part analysis for determining the applicable law. First, the Court decided whether federal law applied at all to the SBA and FHA. The Court noted that it had consistently held that federal law governs questions involving the rights of the United States arising under nationwide federal programs, and that: 19 When the United States disburses its funds or pays its debts, it is exercising a constitutional function or power... The authority (to do so) had its origin in the Constitution and the statutes of the United States and was in no way dependent on the laws (of any State). The duties imposed upon the United States and the rights acquired by it ... find their roots in the same federal sources. In absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards. 20 Id. at 726, 99 S.Ct. at 1457 (quoting Clearfield Trust Co. v. United States, 318 U.S. 363, 366-67, 63 S.Ct. 573, 574-75, 87 L.Ed. 838 (1943)). Because the SBA and FHA derive(d) their authority to effectuate loan transactions from specific Acts of Congress passed in the exercise of a 'constitutional function or power,'  the Court held that federal law controlled the rights of the agencies. Id. at 726-27, 99 S.Ct. at 1457-58. 21 Having determined that federal law was applicable, the Court moved to the second step in its analysis: giving content to this law. The Court reasoned that federal law does not always require a uniform federal rule, and that the decision on whether to formulate a uniform federal rule or adopt state law as the federal rule of decision hinged on balancing three factors: whether the federal program was one which by its nature required nationwide uniformity, whether adopting the state law would frustrate the specific objectives of the federal program, and whether applying a federal rule would disrupt commercial relations predicated on state law. 22 Applying this analysis to the SBA and FHA, the Court concluded that a uniform rule of federal law was unnecessary. The Court acknowledged that adopting a state rule would not interfere either with a need for uniformity or federal objectives. The loan programs in question had already adopted state law in their operating practices, and because each loan application was already heavily scrutinized for credit-worthiness, no significant delay in loan processing would result from adopting state priority rules. Moreover, unlike the federal tax lien situation, in which the United States was an involuntary creditor with no prior opportunity to protect its interest, the voluntary loan programs of the SBA and FHA provided ample opportunity for the agencies to verify the priority of their liens under state law. Finally, the Court noted that adopting a uniform rule of first priority for voluntary federal loan programs would significantly interfere with the settled expectations of other lienholders under state law. As a result, the Court held that state law embodied in the Uniform Commercial Code was an appropriate substantive law for these cases. 23 Since Kimbell Foods, the federal courts have been reluctant to fashion new rules of federal law when state rules of decision provided adequate protection for federal interests. The former Fifth Circuit, for example, twice held in cases involving the SBA that state rules of decision were the proper basis for federal law governing the rights of the agency. In United States v. S. K. A. Associates, Inc., 600 F.2d 513 (5th Cir. 1979), the court followed the Kimbell Foods analysis in holding that the Florida rule of priority for a landlord's lien over a perfected security interest controlled a suit by the SBA. Similarly, in United States v. Dismuke, 616 F.2d 755, 758-59 (5th Cir. 1980) the court held that the Georgia rule prohibiting suit for a deficiency judgment unless the prior foreclosure sale had been judicially confirmed within thirty days of the sale applied to the SBA. 24 In both S. K. A. Associates and Dismuke, the court stressed the Supreme Court's emphasis in Kimbell Foods on the fact that adoption of state law would not hinder the administration of the SBA loan programs and on the SBA's ability to protect its interests through the loan approval procedure. See Dismuke, supra, 616 F.2d at 759. In contrast to these cases, other federal courts have fashioned special uniform federal rules when necessary to protect important federal interests. In United States v. Pisani, 646 F.2d 83 (3d Cir. 1981), for example, the court confronted the problem of whether the sole stockholder of a nursing home corporation would be personally liable for repaying Medicare overpayments to the corporation. The court held that a uniform federal rule governing the piercing of the corporate veil should displace state law when medicare overpayments were at issue in order to protect the federal interests behind the Medicare program. 9 25 Given this background, we conclude, as did the trial court, that the principles delineated in Kimbell Foods mandate adopting a uniform rule of federal law to protect the FDIC from fraud claims of which it lacked knowledge. The first step in the analysis, determining whether federal law applies in the first instance, need not long detain us. Aside from the fact that the Supreme Court has already held in D'Oench, Duhme, & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942) that federal law controls the rights and obligations of the FDIC, the FDIC operates under authority derived from a specific statutory scheme passed by Congress in exercise of a constitutional function or power to protect and stabilize the national banking system. Hence, federal law applies. 26 The substance of the federal rule requires more extensive analysis. Two of the three factors enumerated in Kimbell Foods weigh heavily in favor of protection for the FDIC. First, the nature of the FDIC as insuror for a variety of banks across the country and the necessity for overnight decisions in dealing with a failed bank requires a uniform federal rule governing the FDIC's rights. Unlike the loan programs of the SBA and FHA, which provided ample opportunity for federal officials to ascertain the impact of state law on loan decisions, decisions concerning the appropriate method of dealing with a bank failure must be made with extraordinary speed if the going concern value of the failed institution is to be preserved. Subjecting the FDIC to the additional burden of considering the impact of possibly variable state law on the rights involved could significantly impair the FDIC's ability to choose between the liquidation and purchase-and-assumption alternatives in handling a bank failure. 27 By far the most persuasive reason for adopting a federal rule of non-liability for fraud claims, however, is the fact that the absence of such a rule would make the FDIC's task of executing its statutory mandate under the first paragraph of § 1823(e) nearly impossible. That paragraph reads: 28 Whenever in the judgment of the Board of Directors such action will reduce the risk or avert a threatened loss to the Corporation and will facilitate a merger or consolidation of an insured bank with another insured bank, or will facilitate the sale of the assets of an open or closed insured bank to and assumption of its liabilities by another insured bank, the Corporation may, upon such terms and conditions as it may determine, make loans secured in whole or in part by assets of an open or closed insured bank, which loans may be in subordination to the rights of depositors and other creditors, or the Corporation may purchase any such assets or may guarantee any other insured bank against loss by reason of its assuming the liabilities and purchasing the assets of an open or closed insured bank. Any insured national bank or District bank, or the Corporation as receiver thereof, is authorized to contract for such sales or loans and to pledge any assets of the bank to secure such loans. 29 Under the above paragraph, the FDIC may enter into a purchase and assumption transaction only whenever in the judgment of the Board of Directors such action will reduce the risk or avert a threatened loss to the Corporation ... To make this statutory judgment, the FDIC must have some method to evaluate its potential liability in a purchase and assumption versus its potential liability from a liquidation. Because of the time constraints involved, the only method of evaluating potential loss open to the FDIC is relying on the books and records of the failed bank to estimate what assets would be returned by a purchasing bank and to estimate which of those assets ultimately would be collectible. The Corporation can then compare its estimated loss from a purchase and assumption against its estimated loss from a liquidation and make the statutory judgment required under § 1823(e). 10 30 If the FDIC's right to collect on returned assets, however, were subject to fraud claims of which the FDIC lacked knowledge, estimating its potential loss from a purchase and assumption would be impossible. The Corporation could not predict from the bank records which assets would likely be collectible and which would be subject to unknown claims of fraud. Consequently, the FDIC could not make the judgment necessary under § 1823(e) and the purchase and assumption method of handling bank failures would be effectively foreclosed. 31 Such a result would run directly counter to the policies behind the creation of the FDIC. As many courts have recognized, these policies are promoting the stability of and confidence in the nation's banking system. E.g., First State Bank v. United States, 599 F.2d 558, 562 (2d Cir. 1979), cert. denied, 444 U.S. 1013, 100 S.Ct. 662, 62 L.Ed.2d 642 (1980); FDIC v. Godshall, 558 F.2d 220, 221 (4th Cir. 1977); Doherty v. United States, 94 F.2d 495, 497 (8th Cir.), cert. denied, 303 U.S. 658, 58 S.Ct. 763, 82 L.Ed. 1117 (1938). As discussed in Part I of this opinion, supra, a purchase and assumption is often the best method of promoting these goals because it avoids the spectre of closed banks and the interruption of daily banking services. Adopting a state rule of law which would permit asserting unknown fraud claims against the FDIC, therefore, would significantly interfere with the federal policies behind the FDIC. 32 The Gunters attempt to counter this analysis with two arguments. First they assert that the placement of the first comma in the initial sentence of § 1823(e) requires an interpretation that the FDIC can select a purchase and assumption either (1) when the risk of loss will be no greater than a liquidation and the purchase and assumption will facilitate a merger or consolidation with another insured bank or (2) the purchase and assumption would facilitate a sale of assets to and assumption of liabilities by another insured bank. According to the Gunters, under this interpretation the FDIC need not make any judgment concerning its potential loss unless the purchase and assumption results in a merger or consolidation as opposed to a simple sale of assets. Because a purchase and assumption rarely results in a merger or consolidation, the argument continues, adoption of state fraud rules would not impair the FDIC's use of the purchase and assumption device. 33 This interpretation of § 1823(e) is untenable. The absorption of one corporation by another through a sale of assets/assumption of liabilities is substantively similar to achieving the same result by merger or consolidation, 11 and none of the three devices bears any relation to the liability incurred by the FDIC. It is illogical, therefore, to hold that Congress intended the FDIC to make a risk assessment before arranging a purchase and assumption which resulted in a merger, but not when the purchase and assumption facilitated a sale of assets/assumption of liabilities. Thus we conclude that § 1823(e) requires a risk assessment by the FDIC regardless of the device used by the purchasing bank to absorb the failed bank. 34 The Gunters second argument is that regardless of the statutory language in § 1823(e), the FDIC does not in fact determine whether its losses under a purchase and assumption will be no greater than in liquidation. To support this contention the Gunters assert that the purchase and assumption in this case cost the FDIC more than a liquidation would have. 12 We need not determine whether the Gunters' arithmetic is correct, however, because we find that their argument suffers from two fundamental misconceptions. First, the ultimate liability of the FDIC will not be known until it has completed its attempts to collect on the assets returned by First Tennessee. Second, the statute does not require that the FDIC know its ultimate losses to the last cent before selecting a purchase and assumption. Rather, § 1823(e) requires a reasoned judgment that the risk of a purchase and assumption is not greater than a liquidation. The statute permits error; hence the mere fact that in a particular case the FDIC's final liability in a purchase and assumption exceeds that of a liquidation does not warrant the inference that the FDIC is ignoring its statutory mandate. 13 35 The necessity for an assessment of risk under § 1823(e), however, is not the only reason for concluding that adopting state law in this situation would frustrate federal policy. As the former Fifth Circuit noted in FDIC v. Lattimore Land Co., 656 F.2d 139, 146 n.13 (5th Cir. 1981), if an obligor could assert that the failure of a bank to perform certain promises constituted fraud and grounds for rescission, the obligor would successfully thwart the no agreement protection of § 1823(e) by asserting as fraudulent the same unwritten agreement of which a breach ... may not under § 1823(e) be asserted against the FDIC. Moreover, we note that the Supreme Court itself in the past has recognized a federal policy for protecting the FDIC, albeit in a more limited manner. See D'Oench, Duhme, & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). 14 36 The final Kimbell Foods factor, the effect of a federal rule on settled commercial expectations under state law, is more equivocal. The Gunters strongly argue that this court should not upset the settled rules of commercial paper permitting assertion of fraud claims against one not a holder in due course in favor of a special rule for the FDIC. Unlike loan priority, however, which lenders rely on daily in processing loan applications, we doubt that the eventuality of a bank failure plays a significant role in the ordinary commercial expectations of the parties to negotiable instruments. In fact, the reason the FDIC was not a holder in due course here is because the Gunter note was not transferred in the ordinary course of business. Had the bank not failed but instead transferred the note in the ordinary course of business to another institution for value, in good faith, and without knowledge of the fraud, the transferee would have taken the note as a holder in due course, free from the fraud claims. Inasmuch as the notes contained no transfer restrictions, the latter prospect was likely more within the commercial expectations of the parties than the failure of the Hamilton banking system. The Gunters, therefore, are in no worse position under a federal rule protecting the FDIC than they would have been had Chattanooga Hamilton transferred the note to another banking institution in the ordinary course of business. Protecting the FDIC, moreover, does not leave the Gunters without a remedy; they may still pursue their action against the wrongdoers, the officers and directors of Chattanooga Hamilton. We conclude, therefore, that the potential damage to commercial expectations of a federal rule of non-liability for unknown fraud claims is far outweighed by the interference with the federal goals of stability and confidence in the national banking system that would result from permitting such claims. 37 Having found that the Kimbell Foods analysis mandates a uniform federal rule prohibiting the assertion of fraud claims against the FDIC when the fraud was unknown to the FDIC, we proceed to circumscribe the boundaries of our decision. First, because this rule is based largely upon the need for quick decisions by the FDIC regarding the method to best handle a bank failure, the rule applies only when the FDIC acquires a note in the execution of a purchase and assumption transaction. In other, more normal, commercial contexts, we see no reason to relieve the FDIC from the ordinary operation of state law. Second, because another primary basis of the rule is the need for the FDIC to rely on the books and records of the failed bank in assessing its potential liability under a purchase and assumption vis-a-vis a liquidation, the protection from unknown fraud is available only to the extent the FDIC pays value for the note and thereby jeopardizes a portion of the insurance fund. Finally, we require that the FDIC have taken the note in a good-faith execution of its part of the purchase and assumption transaction. 38 Accordingly, we hold that as a matter of federal common law, the FDIC has a complete defense to state and common law fraud claims on a note acquired by the FDIC in the execution of a purchase and assumption transaction, for value, in good faith, and without actual knowledge of the fraud at the time the FDIC entered into the purchase and assumption agreement. We note, moreover, that the rule we adopt today is in accord with similar decisions by other federal courts. See, e.g., FDIC v. First Southern Trust Co., Nos. 80-1139 and 80-1367 (6th Cir. Jan. 13, 1982) and Gilman v. FDIC, 660 F.2d 688 (6th Cir. 1981) (holding that when FDIC acquired a note in good faith, for value, and without actual knowledge that the note was executed in violation of the securities laws, the FDIC took the note free from securities law fraud claims); FDIC v. Rockelman, 460 F.Supp. 999 (E.D.Wis.1978) (holding that § 1823(e) impliedly gives the FDIC rights of a holder in due course). 15
39 Having decided that when the FDIC acquires a note in a purchase and assumption transaction for value, in good faith, and without actual knowledge of the claims of fraud, it takes the note free of those claims, we must assess whether the FDIC has met the requirements of the rule in this case. 40 We note initially that here the FDIC unquestionably acquired the note in the execution of a purchase and assumption transaction and paid value for it. The Gunters, moreover, do not claim that the FDIC had actual knowledge of the fraud claims at the time of the purchase and assumption transaction. As part of their argument relating to the securities law fraud claims, however, the Gunters strongly assert that the intra-family transfer of the note from the FDIC as receiver to the FDIC as corporate insuror was a sham transaction which cannot meet a good faith requirement. 41 We have no quarrel with the many cases cited by the Gunters holding that intracorporate transfers of commercial paper cannot cut off defenses of the maker. Unlike private corporations, however, the FDIC is not structured for its own convenience. Rather, the division of authority between the FDIC as receiver and FDIC as corporate insuror is statutorily mandated in the Federal Deposit Insurance Corporation Act. One entire section of the Act, for example, sets standards for the Corporation as receiver. 12 U.S.C. § 1822. Section 1823(d), moreover, clearly contemplates transactions between the FDIC as receiver and FDIC as corporate insuror, stating receivers or liquidators of insured banks ... shall be entitled to offer the assets of such banks for sale to the Corporation.... In light of this Congressionally-mandated division of authority, we cannot hold that the transfer of the Gunter note according to the statutory procedure was not a good-faith transaction. Such a holding would call into question the propriety of a variety of routine intergovermental transactions which unquestionably are conducted in good faith. We recognize that the Gunters in this case made a strong factual record concerning FDIC operations in Chattanooga showing that the FDIC did not maintain separate offices for its receiver and insuror capacities, and that the same FDIC personnel who acted for the FDIC as receiver also acted for the FDIC as corporate insuror. The record, however, also shows that the FDIC was fully aware of its dual capacity in executing the purchase and assumption transaction. The parties to the purchase and assumption, for example, executed two separate agreements to facilitate the transaction: one between First Tennessee and the FDIC as receiver, and a second between the FDIC as receiver and the FDIC as corporate insuror. 42 Finally, we note that other federal courts have recognized that under the statute the FDIC may act in a dual capacity. FDIC v. Ashley, 585 F.2d 157 (6th Cir. 1978); FDIC v. Godshall, 558 F.2d 220 (4th Cir. 1977); FDIC v. Glickman, 450 F.2d 416, 418 (9th Cir. 1971); Freeling v. Sebring, 296 F.2d 244, 245 (10th Cir. 1961). In Ashley and Godshall, moreover, the courts held that transactions between the FDIC as receiver and FDIC as corporate insuror were bona fide transactions. Ashley, supra, 585 F.2d at 160-62; Godshall, supra, 558 F.2d at 222-23. 16 See Gilman v. FDIC, 660 F.2d 688, 695 n.11 (6th Cir. 1981) (sale of note by FDIC as receiver to FDIC as corporate insuror satisfies good faith criterion of the innocent purchaser defense of § 29(c) of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc(c)). We conclude, therefore, that the FDIC as corporate insuror acquired the Gunter note as part of a good faith sale of that note by the FDIC as receiver, for value, and without actual knowledge of the Gunters' claims of fraud. Accordingly, we affirm the district court's grant of summary judgment in favor of the FDIC on the Gunters' state and common law fraud claims. 17