Court Opinion

ID: 2964067
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:19:58.141862+00
Date Added: 2024-06-11T11:42:49.934107
License: Public Domain

USCA1 Opinion

	

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

        No. 95-1729

                        FEDERAL DEPOSIT INSURANCE CORPORATION,
                AS LIQUIDATING AGENT OF FIRST MUTUAL BANK FOR SAVINGS,

                                 Plaintiff, Appellee,

                                          v.

                            ELDER CARE SERVICES, INC. and
                                FRANK C. ROMANO, JR.,

                               Defendants, Appellants.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                      [Hon. Nancy Gertner, U.S. District Judge]
                                           ___________________

                                 ____________________

                                        Before

                               Selya, Boudin and Lynch, 

                                   Circuit Judges.
                                   ______________

                                 ____________________

            William T. Harrod III  with whom Harrod Law Offices was on  briefs
            _____________________            __________________
        for appellants.
            Daniel H. Kurtenbach, Counsel, with whom Ann S. Duross,  Assistant
            ____________________                     _____________
        General Counsel, and Richard J. Osterman, Jr., Senior Counsel, were on
                             ________________________
        brief for appellee. 

                                 ____________________

                                    April 24, 1996
                                 ____________________

                 BOUDIN, Circuit  Judge.  In January  1987, Brandon Woods
                         ______________

            of Glen Ellyn, Inc., a wholly owned subsidiary of Elder Care,

            Inc.,  borrowed  $10.1 million  from  First  Mutual Bank  for

            Savings  located in Boston.   The purpose was  to finance the

            purchase by Brandon Woods of the site of a former seminary in

            Glen  Ellyn, Illinois,  and the  development of  the property

            into  a retirement community.  In due course the property was

            acquired by Brandon Woods for $4.5 million.

                 The  bank loan was secured by a mortgage on the seminary

            property and by two guaranties from third parties in favor of

            the bank--one from Elder  Care, Inc., and the other  from its

            president  Frank  Romano  in  his personal  capacity.    Both

            guarantees  contained  broad  waiver   provisions,  including

            waivers of any requirements  of "diligence or promptness" and

            (to the extent permitted  by law) waivers of "any  defense of

            any  kind."  The guaranties  provided that they were governed

            by Massachusetts law.

                 The loan was to  be repaid by  January 30, 1988, a  date

            later  extended  to  October  28,  1988,  but  Brandon  Woods

            defaulted.   After  a delay  to allow  Brandon Woods  time to

            refinance  (which it failed to do), the bank on June 27, 1989

            brought  a foreclosure  action  against Brandon  Woods in  an

            Illinois  state  court.   On  December  26, 1990,  the  court

            entered a  foreclosure judgment, fixing the  amount then owed

            at  just over  $12.8 million,  including the  unpaid balance,

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            interest and attorney's  fees.   The court  ordered that  the

            property be sold on February 5, 1991.

                 On  February 5,  1991, Brandon  Woods filed  a voluntary

            bankruptcy petition, blocking the  sale of the property under

            the  automatic stay  provision of  the Bankruptcy  Code.   11

            U.S.C.   362(a)(1).   On April 8, 1991, the  bankruptcy court

            denied the bank's motion  to lift the stay, finding  that the

            property if fully developed would be worth about $13 million,

            just  exceeding  the amount  then claimed  by  the bank.   In

            August 1991, the bankruptcy court granted a renewed motion to

            lift the stay  after Brandon Woods failed to  gain additional

            financing.  On  November 23, 1993, after  an unexplained two-

            year delay,  the seminary property was sold  at a foreclosure

            sale  for   $300,000,  all  of   which  went  to   satisfy  a

            construction firm's prior lien.

                 In the meantime,  on May  24, 1991, the  bank filed  the

            present action  in Massachusetts state court  against the two

            guarantors.   A month later  the bank failed  and the Federal

            Deposit   Insurance   Corporation   ("FDIC")  was   appointed

            liquidating agent.  The FDIC then removed the case to federal

            court.   In April  1993, the  district court  granted summary

            judgment in favor of the FDIC as to liability.

                 In  May 1994, the present  case was reassigned  to a new

            district  judge.  On June 8, 1995, the district court granted

            the  FDIC's motion for summary judgment as to damages, and on

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            August 4, awarded the  FDIC $15,316,887.33.  This represented

            the   then-outstanding  balance  claimed   by  the   FDIC  of

            $16,416,719.31 (for  principal, plus interest  and attorney's

            fees)  less specific maintenance expenses incurred by Brandon

            Woods, claimed by  it as an offset, and conceded by the FDIC.

            The  two guarantors  now  appeal, claiming  that there  was a

            material issue of fact precluding summary judgment.

                 In substance, the guarantors say  that there is a  gross

            disparity between estimates  of the property's value--notably

            the $13  million estimate  made by the  bankruptcy court--and

            the $300,000 sale price obtained at the foreclosure sale.  In

            the  guarantors'  view,  this discrepancy--coupled  with  the

            unexplained  two-year  delay in  the  sale--gives  rise to  a

            factual dispute about whether the FDIC acted in good faith in

            liquidating the security.  Bad faith or fraud, the guarantors

            argue, would bar or diminish the FDIC's recovery.

                  Massachusetts  law does  permit  a guarantor  to  waive

            defenses, see Shawmut Bank,  N.A. v. Wayman, 606 N.E.2d  925,
                      ___ ___________________    ______

            927 (Mass. App. Ct.  1993), but probably such a  waiver could

            not  immunize bad faith or  fraud.  See  Pemstein v. Stimson,
                                                ___  ________    _______

            630 N.E.2d 608, 612 (Mass. App. Ct.), rev. denied, 636 N.E.2d
                                                  ____ ______

            279  (Mass. 1994).    For  present  purposes, we  follow  the

            district court  in assuming  arguendo that  a showing  of bad
                                         ________

            faith or fraud could  be used to lessen or  prevent recovery;

            the  FDIC asserts the contrary but offers no case directly on

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            point.   Still, reviewing the matter de novo, Brown v. Hearst
                                                 _______  _____    ______

            Corp., 54  F.3d 21,  24 (1st  Cir. 1995), we  agree with  the
            _____

            district court  that there  is no  genuine issue  of material

            fact to preclude summary judgment.

                 Determining whether  there is a genuine issue ordinarily

            involves  two  different dimensions:    burden  of proof  and

            quantum.   The  burden of  proof  on the  issue  at trial  is

            relevant  because, if  a  party resists  summary judgment  by

            pointing to a factual dispute on which it bears the burden at

            trial,  that  party  must  point  to  evidence  affirmatively

            tending to  prove the fact  in its  favor.  Celotex  Corp. v.
                                                        ______________

            Catrett, 477 U.S.  317, 322-23  (1986).  Here,  at trial  bad
            _______

            faith or fraud would  be an affirmative defense to  be proved

            by the guarantors.  See Shawmut, 606 N.E.2d at 928.1
                                ___ _______

                 The quantum of proof that the guarantors must offer is a

            different  matter.   It  is  merely  "sufficient evidence  to

            permit  a  reasonable  jury  to  resolve  the  point  in  the

            nonmoving party's  favor."  Hope Furnace  Associates, Inc. v.
                                        ______________________________

            FDIC,  71 F.3d 39, 42-43 (1st Cir.  1995).  In evaluating the
            ____

            sufficiency of this evidence  on summary judgment, inferences

                                
            ____________________

                 1Courts  often  say  that  the  party  seeking   summary
            judgment  bears the burden to  show that there  is no genuine
            issue  of fact.  See,  e.g., Johnson v.  United States Postal
                             ___   ____  _______     ____________________
            Serv., 64 F.3d 233, 236 (6th Cir. 1995).  This is true enough
            _____
            in  general terms, and true specifically as to facts that the
            moving party would have to prove at trial; but given Celotex,
                                                                 _______
            the generalization  may be misleading  as to  facts that  the
            nonmoving party would have  to prove at trial as  part of its
            own claim or defense.

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            are drawn in favor of the nonmoving party.  Brown, 54 F.3d at
                                                        _____

            24.  Thus, the guarantor's burden is not a heavy one.  But it

            is still  their burden to  point to admissible  evidence that
                      _____

            would "permit"  a factfinder to conclude  rationally that the

            FDIC had acted fraudulently or in bad faith. 

                 Here, Brandon  Woods has offered no  reason whatever why

            the  FDIC should  have chosen  deliberately to  undermine the

            foreclosure sale.  The FDIC relied upon that sale to generate

            immediate proceeds to cover its claim and, on the surface, it

            had no motive to diminish the recovery from its own security.

            The  prior  contractor's lien  was  only  somewhat above  the

            $300,000  realized at the sale.   If the  property were worth

            millions  more,  it was  plainly  in the  FDIC's  interest to

            obtain  the  highest  price--especially  since  a  deliberate

            failure to  seek  it  could  give the  guarantors  a  defense

            against claims on the guarantees.

                 If the mortgagee in a foreclosure case buys the property

            itself, it may  well have  an interest in  paying less  while

            preserving its claim for the deficit;  but Brandon Woods does

            not  suggest that the winning bidder at the foreclosure was a

            pawn  of  the  FDIC.   Other  malign  motives  could also  be

            imagined but are not suggested here either by the  guarantors

            or the surrounding circumstances.   In a negligence case this

            would not  matter  but  bad  faith almost  always  assumes  a

            motive.   It is an uphill  effort for the guarantors  to urge

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            that, without any  apparent motive  and contrary  to its  own

            best interest, the FDIC chose to sabotage its own foreclosure

            sale.

                 Nor is  there any indication of how,  in the guarantors'

            view, this sabotage  was carried  out.  An  affidavit of  the

            FDIC  describes the  notice  given for  the  auction and  the

            bidding  process.  Notice was  given in a  number of journals

            (e.g., The Chicago  Tribune, Crain's  Chicago Business,  Glen
             ____  ____________________  _________________________   ____

            Ellyn  News), and  it  appears that  marketing  efforts by  a
            ___________

            professional   were  made   in   addition  to   the  notices.

            Allegedly,  20 potential  bidders  appeared.   In the  event,

            three persons bid.  The  state court thereafter confirmed the

            sale, finding that the sale was properly conducted.

                 Normally,  a  party suggesting  fraud  or  bad faith  is

            expected  to point  to the  misconduct (lies,  rigged account
                                        __________

            books,  self-dealing by  a fiduciary)  that reflects  the bad

            faith or constitutes  the fraud.  Cf.  Fed. R. Civ. P.  9(b).
                                              ___

            True, on some occasions  the inference of fraud or  bad faith

            might be compelled by the combination  of motive and outcome;

            but here motive is  utterly lacking and the outcome  far more

            ambiguous than  the guarantors suggest.   In all  events, the

            failure  to  allege any  specific  misconduct  consonant with

            fraud or bad faith further impairs the guarantors' claim.

                 Against  this background,  Brandon  Woods points  to two

            circumstances:  the supposed  discrepancy in  amounts between

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            estimates of value and  the price received, and  the admitted

            delay in the sale.   The most striking difference  in amounts

            is between the $13 million  suggested by the bankruptcy court

            and the $300,000 winning bid two years later.   Massachusetts

            courts  have  held  what  common sense  would  in  any  event

            suggest:  that  the  disparity between  appraised  value  and

            amount received  in foreclosure  does not generally  show bad

            faith  but might do so  in extreme circumstances.   Seppala &
                                                                _________

            Aho  Constr. Co.  v.  Petersen, 367  N.E.2d  613, 620  (Mass.
            ________________      ________

            1977); see  also RTC  v. Carr,  13  F.3d 425,  430 (1st  Cir.
                   _________ ___     ____

            1993).  

                 In this  instance, however,  the $13 million  figure was

            not a serious estimate  of the property's then-current value.

            As the  transcript of  the bankruptcy  hearing shows,  it was

            simply  an  attempt  to  approximate   what  the  retirement-

            community  project would be worth  if it were  ever built and

            all of its  units sold at  a projected  price.  Finding  that

            this amount would (slightly) exceed the debt then owed to the

            bank, the bankruptcy court offered a few months' delay in the

            foreclosure  for Brandon Woods to seek more financing.  There

            was  no finding that completion of the project or the sale of

            the units was likely.

                 It is  true that  in the  same bankruptcy  proceeding, a

            bank expert  apparently testified that the  property was then

            worth  just  under $7.5  million.   But  it appears  that the

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            bank's  interest  at the  time was  simply  to show  that the

            property  was worth  less  than the  $12  millon or  so  then

            claimed  by the  bank, and  thereby to  justify an  immediate

            sale.    Nor do  we  know whether  the  bank was  valuing the

            property  at a supposed market value rather than at the lower

            price their  forced liquidation would ordinarily  be expected

            to bring.  See BFP v. RTC, 114 S. Ct. 1757, 1761-62 (1994).
                       ___ ___    ___

                 Not only is the $7.5 million figure largely unexplained,

            but  it is also undermined as a liquidation value by Romano's

            own admission.   Romano himself  warned the FDIC  only a  few

            months  later, in  September  1991, that  the property  might

            bring  only $2 million on liquidation.  And when the property

            was sold two years  later for $300,000, it was  burdened with

            $1.1  million  in back  taxes and  the  cost of  dealing with

            certain environmental hazards, including asbestos.  Adjusting

            the  purchase   price  for  these  burdens   assumed  by  the

            purchaser, the discrepancy between Romano's $2 million figure

            and the sale price hardly seems large.

                 Brandon Woods also points  to the delay of two  years in

            carrying out the sale, which  is as close as it ever  gets to

            identifying  a deficiency  in  the FDIC's  conduct.   Brandon

            Woods  makes  no  effort to  show  that  the  delay caused  a

            substantial  reduction in the  price ultimately obtained, but

            the  district court  said  that property  values did  decline

            during the delay.  In any event, the FDIC had itself urged an

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            immediate sale; such  a sale  would have  avoided upkeep  and

            taxes on  the  property  (which  may  have  been  earning  no

            income); and the FDIC  is oddly silent about the  reasons for

            the delay.

                 The  facts just described might be an ample basis for an

            inference  that  the FDIC  acted  negligently  in failing  to

            dispose  more promptly of the  property.  The impression that

            the  FDIC lost track of the matter  is reinforced by the fact

            that,  after failing  to  act for  two  years, the  FDIC  was

            spurred  to make the sale by news that the property was about

            to be  sold for unpaid  taxes.2   If this were  a case  about

            negligence, it  might well be  one in which  summary judgment

            could not be granted for the FDIC.

                 But  the  broad  waiver   provision  in  the  guaranties

            forecloses such defenses against the bank or its successor in

            interest.   Brandon Woods does  not question this reading nor

            claim that Massachusetts law forbids such a waiver.  So while

            negligence  may  be a  plausible  inference  (and could  also

            explain the FDIC's  reticence), it is  no defense to  summary

            judgment in these circumstances.  If anything, the likelihood

            of negligence tends  further to undermine the  claim that bad

                                
            ____________________

                 2At oral argument counsel suggested that the explanation
            for the delay may be found in efforts of the parties to reach
            a  "global  settlement"  involving   other  Romano-controlled
            property  in  Massachusetts.    But  in  determining  whether
            summary  judgment  was properly  granted,  we  must take  the
            record as it existed in the district court.

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            faith or fraud could  be inferred as the explanation  for the

            delay.  In all events, there was inadequate evidence of fraud

            or bad faith to raise a genuine issue of material fact.

                  It is unnecessary  to consider the  issue to which  the

            parties  devote much  of  their briefs,  namely, whether  the

            guarantors were  entitled to  litigate about the  fairness of

            the sale price  at all.  The FDIC  argues that the guarantors

            are precluded from doing so because of the state court ruling

            that the sale was fair; the guarantors say that they were not
                                                            ____

            parties to  that proceeding even though  Brandon Woods itself

            was a  party.   We express no view on the collateral estoppel

            issue since it does not affect the outcome.

                 Affirmed.
                 ________

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