Opinion ID: 540346
Heading Depth: 2
Heading Rank: 2

Heading: The Federal Holder In Due Course Doctrine.

Text: 15 The federal holder in due course doctrine bars the makers of promissory notes from asserting various personal defenses against the FDIC in connection with purchase and assumption transactions involving insolvent banks. Wood, 758 F.2d at 161; see also FSLIC v. Murray, 853 F.2d 1251, 1256 (5th Cir.1988). The protection extends to subsequent holders of the notes. See id. 16 This doctrine is grounded in the federal policy of bringing to depositors sound, effective, and uninterrupted operation of the [nation's] banking system with resulting safety and liquidity of bank deposits. S.REP. NO. 1269, 81st Cong., 2d Sess., reprinted in 1950 U.S.CODE CONG. & ADMIN.NEWS 3765, 3765-66. The most effective way for the FDIC to implement this policy when a bank becomes insolvent is by arranging a purchase and assumption transaction rather than by liquidating the bank. Wood, 758 F.2d at 160-61; see also Murray, 853 F.2d at 1256-57. If the FDIC were required to determine the value of the bank's notes in light of all possible personal defenses, a purchase and assumption transaction could not take place in the timely fashion necessary to ensure uninterrupted operation of the bank and the safety and liquidity of deposits. Thus, the FDIC as a matter of federal common law enjoys holder in due course status in order to effectively perform its congressionally mandated function. 17 In this case, the appellants assert various defenses and counterclaims to liability on the note. They contend that RepublicBank tortiously interfered with their efforts to lease the Piper airplane to a third party and delayed too long after the plane's seizure before attempting to sell it. They maintain that the note could have been completely discharged absent RepublicBank's wrongful actions. They also claim that RepublicBank elected to keep the airplane in full satisfaction of the note and caused Day to suffer mental and emotional distress. Because these are personal rather than real defenses to liability on the note, see TEX.BUS. & COM.CODE Sec. 3.305, the FDIC and NCNB as holders in due course acquired the note free of these claims. See Murray, 853 F.2d at 1256; Wood, 758 F.2d at 160. 18 The appellants challenge this conclusion, contending that the federal holder in due course doctrine does not apply to this case because the FDIC was not acting in its corporate capacity. See Wood, 758 F.2d at 161. They also argue that the FDIC and NCNB do not qualify as holders in due course under Texas law because they acquired the note in a bulk transaction by legal process and had notice that the note was overdue. See TEX. BUS. & COM. CODE Sec. 3.302. We reject these contentions. 19 We find no logical reason to limit federal holder in due course protection to the FDIC in its corporate capacity, to the exclusion of its receivership function. In its corporate capacity, the FDIC is obligated to protect the depositors of a failed bank, while the FDIC as receiver must also protect the bank's creditors and shareholders. Gilman v. FDIC, 660 F.2d 688, 690 (6th Cir.1981); see generally 12 U.S.C. Sec. 1821. In both cases, the holder in due course doctrine enables the FDIC to efficiently and effectively fulfill its role, thus minimizing the harm to depositors, creditors, and shareholders. See Wood, 758 F.2d at 160-61; Murray, 853 F.2d at 1256. For example, the doctrine prevents note makers from gaining absolute priority over a failed bank's assets, by asserting personal claims as defenses or setoff to their notes, to the detriment of the bank's other creditors and potentially its depositors. Wood, 758 F.2d at 160-61; see also Murray, 853 F.2d at 1256-57. We conclude that the FDIC enjoys holder in due course status as a matter of federal common law whether it is acting in its corporate or its receivership capacity. See Wood, 758 F.2d at 160. 20 In addition, the FDIC and subsequent note holders enjoy holder in due course status whether or not they satisfy the technical requirements of state law. The court in Wood assumed that the FDIC did not qualify as a holder in due course under state law, yet it still held that the FDIC was entitled to the protections of a holder in due course as a matter of federal common law. See 758 F.2d at 158. We reached the same conclusion with respect to the FSLIC. Murray, 853 F.2d at 1256. This rule promotes the necessary uniformity of law in this area while it counters individual state laws that would frustrate [basic FDIC objectives]. Id. 21 However, the district court erred in granting summary judgment against the appellants on all their claims. The appellants have a statutory right to continue their action against the FDIC as receiver for First RepublicBank on their claims of tortious interference with contract, breach of the Campbell Leasing security agreement, and intentional infliction of mental and emotional distress. 12 U.S.C. Sec. 1821(d)(6)(A). While the holder in due course doctrine prevents the appellants from asserting these claims as a set-off to liability on the note, it does not prevent the appellants from trying these claims to the district court, liquidating the amount of damages, and subsequently receiving a pro-rata share of First RepublicBank's remaining assets along with the bank's other creditors. See id. Sec. 1821(d)(11)(A)(ii). We therefore must vacate that part of the district court's judgment dismissing the appellants' breach of contract and tort claims and remand for additional proceedings. 22 In light of these statutory provisions, we reject the appellants' further contention that application of the holder in due course doctrine violates due process or amounts to an unconstitutional taking of property without just compensation. 23 A negotiable instrument is subject to transfer at any time, and the maker must always be aware that the transferee may be a holder in due course. From the maker's view, there is no difference between his bank failing and the note going to the ... FDIC, and his bank failing after selling the note to a holder in due course. 24 Wood, 758 F.2d at 161. The appellants have not been denied the opportunity to assert their claims because they may pursue them against the FDIC as receiver for First RepublicBank. The appellants have therefore suffer[ed] no prejudice. Murray, 853 F.2d 1256-57; see also Chatham Ventures, Inc. v. FDIC, 651 F.2d 355, 362-63 (5th Cir.1981), cert. denied, 456 U.S. 972, 102 S.Ct. 2234, 72 L.Ed.2d 845 (1982); Hardy v. Gissendaner, 508 F.2d 1207, 1209 (5th Cir.1975). 25