Opinion ID: 2253153
Heading Depth: 1
Heading Rank: 5

Heading: Application of Section 1823(e)

Text: In this case, O'Malley seeks to avoid application of section 1823(e) entirely. He examines the language of section 1823(e) and argues that the FDIC must first acquire an asset before the statute applies. According to O'Malley, the FDIC has the burden of establishing the existence of an asset before it can invoke the statute. O'Malley presents three separate no-asset arguments.
O'Malley first argues that the guarantee never formed part of the Dine loan transaction. He argues that he left the guarantee with Bekta, to be used only if Dine could not get the loan otherwise. In support of his argument, O'Malley relies on bank records that do not refer to a guarantee. O'Malley contends that it was insufficient for the FDIC to merely show that a document called a guarantee existed in the bank files. As the appellate court noted, O'Malley's argument is very similar to an argument rejected in Powers, 576 F.Supp. 1167. In Powers, the FDIC sued to enforce a guarantee. Although Powers acknowledged signing the guarantee, he argued that he had never agreed to let the bank use the guarantee. When Powers signed the document, he left the remainder of the document blank, to be completed later. The FDIC later found the guarantee among the bank's files. Powers introduced affidavits to prove that the guarantee was not executed in connection with the underlying loan. The court, however, barred Powers' defenses under section 1823(e), finding that Powers relied on an unwritten understanding to undermine a facially sufficient guarantee. Other courts have barred unwritten understandings arising under similar circumstances. See, e.g., Wright, 942 F.2d 1089 (note maker was barred from asserting that notes found in bank files were not intended to be used until bank approved a line of credit); Federal Deposit Insurance Corp. v. McClanahan (5th Cir.1986), 795 F.2d 512 (the defendant recklessly signed a document in blank and thereby lent himself to a scheme that permitted the misrepresentation of assets); Adams v. Madison Realty & Development, Inc. (3d Cir.1991), 937 F.2d 845 (investors who signed unconditional promissory notes could not raise fraud in the inducement as a defense); Federal Deposit Insurance Corp. v. Gardner (S.D.Miss.1985), 606 F.Supp. 1484 (note maker could not assert agreement between bank president and note maker that bank would look solely to a third party for payment of the note). Ultimately, O'Malley's argument is based on an understanding between O'Malley and Bekta that the guarantee would only be used if Dine could not get the loan on his own. O'Malley signed the guarantee, he left it with a bank director, the FDIC found the guarantee in the files, and O'Malley now argues that the guarantee would not be used unless certain circumstances arose. O'Malley's argument is based on the existence of an unwritten understanding that does not meet the statutory requirements. Once the FDIC found the guarantee in the bank records, it did not have to disregard the facially sufficient guarantee simply because other bank records did not refer to it. See Bowen v. Federal Deposit Insurance Corp. (5th Cir. 1990), 915 F.2d 1013, 1016 (the FDIC has no duty to compile oral histories of the bank's customers and loan officers and need not retain linguists and cryptologists to tease out the meaning of facially-unencumbered notes); Armstrong v. Resolution Trust Corp. (1993), 157 Ill.2d 49, 191 Ill.Dec. 46, 623 N.E.2d 291 (the borrowers could not avoid section 1823(e) by inferences drawn from bank records); see also Federal Deposit Insurance Corp. v. O'Neil (7th Cir.1987), 809 F.2d 350, 353-54; Federal Deposit Insurance Corp. v. Zook Brothers Construction Co. (9th Cir. 1992), 973 F.2d 1448, 1453; Beighley v. Federal Deposit Insurance Corp. (5th Cir. 1989), 868 F.2d 776, 783-84.
O'Malley next argues that he had a release agreement with the Bank that extinguished the guarantee. According to O'Malley, O'Malley and the Bank agreed to end their working relationship in 1979 and exchanged mutual letters of release. The circuit court found that this release agreement did not meet the requirements of section 1823(e). Specifically, the purported release agreement was not approved by the board of directors or loan committee of the Bank. O'Malley argues that the statutory requirements do not apply to the release agreement. According to O'Malley, section 1823(e) does not bar agreements showing that the FDIC never acquired an asset. Federal courts have rejected O'Malley's argument. ( Federal Deposit Insurance Corp. v. P.L.M. International, Inc. (1st Cir. 1987), 834 F.2d 248, 252; Wright, 942 F.2d at 1100-01; Federal Deposit Insurance Corp. v. Merchants National Bank (11th Cir.1984), 725 F.2d 634, 639; Zook, 973 F.2d at 1452-53; Federal Deposit Insurance Corp. v. Waldron (D.S.C.1979), 472 F.Supp. 21, 25) (this no-asset argument is circular because it requires a defendant to rely on an agreement, barred by the statute, to show that no asset exists); ( Federal Deposit Insurance Corp. v. Cover (D.Kan.1988), 714 F.Supp. 455 (an asset shown in the records of the bank remains an asset for purposes of section 1823(e) until the defendants show payment or introduce an agreement meeting the requirements of section 1823(e)).) Section 1823(e) allows the FDIC to rely on facially unqualified instruments contained in bank records. Agreements that defeat these facially unqualified instruments must meet the statutory requirements. To allow O'Malley's defense would render the protection of the statute meaningless. Merchants, 725 F.2d at 639. O'Malley relies on Commerce Federal Savings Bank v. Federal Deposit Insurance Corp. (6th Cir.1989), 872 F.2d 1240, and Federal Deposit Insurance Corp. v. Prann (D.P.R.1988), 694 F.Supp. 1027, aff'd sub nom. Federal Deposit Insurance Corp. v. Bracero & Rivera (1st Cir.1990), 895 F.2d 824, to support his no-asset argument. In those cases, however, the courts found that the underlying debts had been paid. Section 1823(e) does not apply where the parties contend that no asset exists    and that such invalidity is caused by acts independent of any understanding or side agreement. (Emphasis in original.) ( Merchants, 725 F.2d at 639.) A party asserting payment as a defense is not relying on a separate agreement to prove the asset invalid. ( Federal Deposit Insurance Corp. v. Bracero & Rivera (1st Cir.1990), 895 F.2d 824, 830.) In contrast, O'Malley's release defense is based on an agreement between O'Malley and the Bank. Federal courts have applied section 1823(e) to bar individuals from asserting release agreements. In P.L.M., 834 F.2d at 252, the court rejected an argument based on similar facts. In that case, the defendants signed a continuing guarantee in favor of the bank. The defendants later obtained a release from the bank, but the guarantee remained in an active collateral file with no notation of cancellation. The FDIC sued to enforce the guarantee, and the defendants offered the release agreement to show that the guarantee had been extinguished before the FDIC took control. The court barred the use of this release agreement because it failed to meet the requirements of section 1823(e). See also Federal Deposit Insurance Corp. v. Rivera-Arroyo (1st Cir.1990), 907 F.2d 1233 (written release agreements did not meet requirements of section 1823(e) and were therefore barred); Manatt, 922 F.2d 486 (the defendant, who had been a stockholder and lawyer for a bank, was barred from asserting an agreement where the notes were in the bank's files and bore no notation of cancellation); Resolution Trust Corp. v. McCrory (5th Cir.1992), 951 F.2d 68 (the defendants could not assert a letter agreement of release even though bank officers testified that they had executed the agreement, two documents in the bank's official files referred to the agreement, and the agreement was kept in the files of the bank's outside attorney); Federal Deposit Insurance Corp. v. Krause (8th Cir.1990), 904 F.2d 463 (the defendants could not assert a settlement agreement with the bank president because the notes were located in the bank's active files, bore no paid notation, and the bank's minutes did not reflect approval of this agreement); see also Federal Deposit Insurance Corp. v. Allen (6th Cir.1986), 801 F.2d 863 (written agreement located in the bank's loan file was barred because it did not satisfy all of the statutory requirements). O'Malley also relies on Federal Deposit Insurance Corp. v. Nemecek (D.Kan.1986), 641 F.Supp. 740, to support his no-asset argument. In Nemecek, the court allowed the defendants to introduce an oral accord and satisfaction against the FDIC. In that case, the court held that an oral accord and satisfaction extinguished a note before the FDIC took control of a bank, so section 1823(e) did not apply. O'Malley argues that the same reasoning should apply to his release agreement. We note that the reasoning in Nemecek has been criticized by other courts. ( Federal Deposit Insurance Corp. v. National Consumer Alliance, Inc. (D.Kan.1994), 1994 WL 326064 (noting that Nemecek was decided before the Supreme Court's narrow construction of section 1823(e) in Langley); Cimarron Federal Savings & Loan Association v. McKnight (Okla.App.1992), 840 P.2d 648; Cover, 714 F.Supp. 455.) In Cover, the court stated that to adopt the logic of Nemecek would destroy the effect and protection of § 1823(e) and hamper the FDIC's ability to follow the purchase and assumption alternative by injecting uncertainty into the valuation of assets. ( Cover, 714 F.Supp. at 458.) In addition, the Nemecek reasoning is inconsistent with the reasoning of other courts that have addressed O'Malley's no-asset argument. We therefore decline to follow Nemecek.
O'Malley next argues that his release defense arises from the instrument the FDIC seeks to enforce. The guarantee explicitly gave the Bank the right to release O'Malley from his obligation. In some instances, Federal courts have held that section 1823(e) does not apply where a defense arises from the instrument the FDIC seeks to enforce. O'Malley relies on Howell v. Continental Credit Corp. (7th Cir.1981), 655 F.2d 743, and Riverside Park Realty Co. v. Federal Deposit Insurance Corp. (M.D.Tenn.1978), 465 F.Supp. 305, in support of his position. In Howell, Continental Credit Corporation (Continental) and Howell entered into several lease agreements, which imposed obligations on both parties. Continental subsequently breached the agreements. The FDIC later took control of Continental and sought to enforce the leases against Howell. The Seventh Circuit held that the FDIC could not ignore the terms contained on the face of the leases. The court distinguished earlier cases involving a facially valid note or guarantee imposing a unilateral obligation to pay. Howell, 655 F.2d at 746. In Riverside, the FDIC sought to foreclose a deed of trust that specifically incorporated the terms of a loan agreement by reference. Again, the court did not invoke section 1823(e) because the terms of the loan agreement appeared on the deed of trust that the FDIC was trying to enforce. Riverside was therefore allowed to raise breach of the loan agreement as a defense. The court found that section 1823(e) did not apply because the asset upon which the FDIC is attempting to recover is the very same agreement that the makers allege has been breached. (Emphasis in original.) Riverside, 465 F.Supp. at 313. In both cases, the court held that the FDIC could not selectively seek to enforce an agreement. The FDIC could not enforce some terms and ignore others that appeared in the same agreement. Here, in contrast, the guarantee did not contain terms that imposed responsibilities on the Bank. The guarantee provided only for the bare possibility that the Bank might issue a release at some point in the future. Thus, the FDIC would not know from a review of the guarantee that such a release existed. (See Federal Deposit Insurance Corp. v. Venture Contractors, Inc. (7th Cir.1987), 825 F.2d 143, 149-50 (refusing to apply Howell to a continuing guarantee that imposed a unilateral obligation to pay); O'Neil, 809 F.2d at 354 (refusing to apply Howell because the note merely referred to a side agreement and did not contain the terms of the side agreement).) In this case, O'Malley relies on a separate release agreement to extinguish the guarantee. In a related argument, O'Malley contends that the guarantee provides him with the unilateral right to cancel by giving written notice to the Bank. He again argues that this defense arises from the language of the guarantee and is therefore not barred by section 1823(e). O'Malley relies on Federal Deposit Insurance Corp. v. Panelfab Puerto Rico, Inc. (1st Cir.1984), 739 F.2d 26. In Panelfab, the court allowed the defendants to introduce a letter of cancellation because the letter was not part of a separate agreement between the bank and the defendants. But see O'Neil, 809 F.2d 350; P.L.M., 834 F.2d 248; Federal Deposit Insurance Corp. v. Virginia Crossings Partnership (8th Cir.1990), 909 F.2d 306 (cancellation letter barred by section 1823(e)). Even assuming that section 1823(e) does not apply to this written notice of cancellation, we find that O'Malley never executed a written notice satisfying the terms of the guarantee. The guarantee specifically requires written notice by O'Malley for cancellation. The circuit court found that no evidence had been introduced to show that O'Malley had invoked his right to cancel by written notice. The only written document to the Bank offered by O'Malley was a copy of a letter he purportedly sent to the Bank. The letter purported to release the Bank from its obligations; it did not refer to any obligations O'Malley owed to the Bank. Thus, even if section 1823(e) allows evidence of cancellation by written notice, O'Malley has not shown that he gave written notice.