Court Opinion

ID: 8983850
Source: CourtListenerOpinion
Date Created: 2022-11-27 11:35:25.255421+00
Date Added: 2024-06-11T17:10:43.852936
License: Public Domain

HEANEY, Senior Circuit Judge,
dissenting.
There are two issues in this case: (1) whether the FDIC is bound by an unrecorded agreement between Dennis Albertson, the president of the Citizens State Bank of Gibbon, Minnesota, and Francis Kasai that the bank would look to Francis Kasai for payment of promissory notes signed by Bruce Kasai, Stanley Kasai, John D. Schilling, Roger Schaufler, George Ruzicka, and Grant G. Knutson;1 and (2) whether Francis Kasai should be entitled to prove the true balance on the notes.
I agree with the majority that the FDIC is not bound by the secret agreement between Albertson, Francis Kasai, and borrowers other than Francis Kasai, and that each borrower is obligated to pay the amount due on the note signed by him. Furthermore, Francis Kasai is obligated on the entire amount due.
I cannot, however, agree that Francis Kasai is not entitled to prove the true balance outstanding. He submitted an affidavit dated February 26, 1989 in which he stated that on three occasions, June 10, 1982, June 22, 1982, and August 20, 1983, he signed promissory notes to the bank totaling $160,000. Jt. App. at 468. No deposits were made to his accounts for the sums involved, and no credits were given on earlier notes. Id. Moreover, he received no cash from the bank. Id. Kasai’s affidavit further recited that on two occasions, July 5, 1982 and December 20, 1982, a total of $95,000 was taken from Francis Kasai’s account without his consent. Id. The affidavit also recounts that on March 24, 1983, Kasai gave Albertson, the president of the bank, $90,000 to deposit into Kasai’s account. Id. No such deposit was made. The affidavit finally recounts that on several occasions from January 1981 to October 1985 Kasai’s account was debited by approximately $180,000 without corresponding credits being given for the notes payable or without any other explanation as to why the accounts were debited. Id. at 469. Kasai’s theory as to these transactions was that Albertson had appropriated in excess of $500,000 from his account through the transactions noted above and that the FDIC should credit Kasai for these sums against the notes signed by him and the other debtors.2
In my view, Francis Kasai is entitled to prove at trial that Albertson had in fact misappropriated all or a part of the $500,-000 and that these sums should have been *495credited to the notes signed by him and the other borrowers. It follows that the district court erred in granting FDIC’s motion for summary judgment. Under my view, the FDIC would remain free to collect the balance due from Francis Kasai or the others who had signed the notes, but in no event should it be permitted to recover more than the amount actually due. A bank customer should not be expected to protect the FDIC against an officer or employee who misappropriates that customer’s funds.
I have carefully read each of the cases cited by the majority in its opinion and do not find authority in any of them for the proposition that Francis Kasai is not entitled to prove the true balance of his debt owed.
Certainly, neither section 1823(e) or Langley v. Federal Deposit Insurance Corp., 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987), supports the majority’s view. Section 1823(e) provides as follows:
No agreement which tends to diminish or defeat the right, title or interest of the Corporation [FDIC] in any asset acquired by it under this section, 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.
This section, as the majority notes, permits the FDIC to recover the full balance due on the notes signed by Francis Kasai and his friends and relatives because the side agreements reached did not meet writing, approval, and filing requirements of 12 U.S.C. § 1823(e). Thus, each person who signed a note is liable for the balance due on the note signed, and Francis Kasai is jointly and severally liable for the balance due on all the notes signed. The section, however, does not place the risk of loss on a bank customer where a director, officer, or employee of the bank has misappropriated funds from that customer.
The Supreme Court in Langley held that section 1823(e) has two purposes: (1) to allow bank examiners to rely on a bank’s record in evaluating the worth of a bank’s assets, and (2) to require agreements to be properly recorded so that terms other than those expressed in an agreement cannot be fraudulently inserted in an agreement when a bank heads for failure. Id. at 91-92, 108 S.Ct. at 401-402. The Langley Court reasoned:
Certainly one who signs a facially unqualified note subject to an unwritten and unrecorded condition upon its repayment has lent himself to a scheme or arrangement that is likely to mislead the banking authorities, whether the condition consists of performance of a coun-terpromise (as in D’Oench, Duhme) or of the truthfulness of a warranted fact.
Id. at 93, 108 S.Ct. at 402. The thrust of Langley is that only those who participate in the secret scheme or arrangement are to be prejudiced. Nothing in Langley requires that bank customers, rather than the bank or the FDIC, should bear the loss if a bank officer or employee misappropriates funds from a customer.
It follows that where a bank customer has neither authorized, ratified, nor participated in the fraudulent action resulting in the loss, the FDIC, rather than the depositor, should bear that loss. Here, no relationship between Albertson’s misappropriation of funds and the side agreements exists.3 One does not need to prove the exist*496ence of the side agreements to prove that payments were made. It is a perversion of justice to hold the borrowers responsible for funds misappropriated by a bank officer, funds which should have been applied to the payment of the notes.4
In D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), the debtor alleged that the note in question was given with the understanding that no suit would be brought thereon. The Court rejected this defense. I agree that the defense raised by the debtors other than Francis Kasai should be reversed here for the same reason: that Kasai was alone responsible for repayment of these debts is not a valid defense. The debtor in D’Oench, Duhme, however, did not assert that he had actually paid the note in question.
In FDIC v. Kuang Hsung Chuang, 690 F.Supp. 192 (S.D.N.Y.1988), the court considered a number of transactions and rejected defenses based on fraud, misrepresentation, conflicts of interest, and collateral unwritten and unannounced agreements. On the other hand, it held that if the debtor could prove actual payment, that would constitute a defense. It stated:
The T & C Note and Mortgage Note
As stated earlier, defendants have the burden of establishing their defense with evidence sufficient for a reasonable trier of fact to return a verdict in their favor. Defendants admit that the Note and Mortgage Note were duly executed, but argue that the documents provided in Ms. Teng’s Supplemental Affidavit raise genuine issues of material fact concerning repayment of the loans. These documents, described in detail above, are generally inconclusive, though they do establish that the Bank credited T & C for “repayment” of something.
Though the documents are confusing and may not in the final analysis prove anything, this Court believes summary judgment is not warranted on the question of the amount owing....
Id. at 199.
It took the same position respecting an unrelated guaranty by the debtor on certain notes. It stated:
Ms. Teng does argue, however, that the monies owed to the Bank on these notes have been repaid, and that the obligations on the Unlimited Guaranty would thus be zero. While her premise is correct, she has not conclusively established how much was in fact borrowed or repaid, as discussed above. Consequently, plaintiffs motion for summary judgment is granted on the liability question, but denied on the question of the amount presently owing. As noted above, a Magistrate will conduct an inquest to determine the amount due, and Teng’s estate will be liable for that amount.
Id.5
In FDIC v. Wright, 684 F.Supp. 536 (N.D.Ill.1988), the FDIC brought an action *497to recover monies due and owing on four promissory notes. The FDIC moved for summary judgment. In contesting the motion on two of the notes, defendant maintained that both notes had been paid. She, however, had evidentiary support for her claims of payment on only one of the notes.
Regarding the claim of payment lacking evidentiary support, the court stated that “although Defendant contests the FDIC’s motion for summary judgment by claiming that she had made partial payment on the relevant note, she provides no evidentiary support for the assertion. She bears the burden of persuasion for this defense.” Id. at 540 (citing State Bank of Moline v. Young, 149 Ill.App.3d 460, 102 Ill.Dec. 839, 500 N.E.2d 732 (1986)). The FDIC’s motion for summary judgment was granted on this count. Id.
Regarding the payment that was supported by evidence, the court stated:
Defendant contests summary judgment on the note on the ground that she has paid it in full. For this count, unlike the previous one, she supports this argument with her sworn affidavit to that effect. Nevertheless, the FDIC maintains that it is entitled to summary judgment on this count because Defendant concedes that she has no documentary evidence to support her argument and, in Illinois, such evidence is required to satisfy her preponderance burden.
In this case, the FDIC has pointed to no testimony at all that conflicts with Defendant’s claim that she made full payment on the note. Nor has it pointed to any documentary evidence to that effect. Accordingly, a genuine issue as to a material fact exists, and summary-judgment must be denied.
Id. (emphasis added). The court, relying on the defense of payment, denied FDIC's motion for summary judgment on this count. Id.
In FDIC v. Manatt, 688 F.Supp. 1327 (E.D.Ark.1988), prior to the closing of the bank, the defendant, pursuant to a written agreement with the bank, conveyed certain items of collateral to the bank that were liquidated and sold either by the bank or the FDIC. The proceeds received were only applied in partial satisfaction of defendant’s indebtedness. However, the defendant claimed that this agreement was to satisfy completely his indebtedness to the bank. The court held that nowhere in the deed was it suggested that all of defendant’s debt was to be forgiven. The court found that defendant’s agreement with the bank for liquidation of collateral in satisfaction of the debt was not made contemporaneously with the bank’s acquisition of the asset and therefore was invalid. 12 U.S.C. § 1823(e)(2). As such, this “side” agreement was not enforceable against the FDIC. However, the FDIC did give defendant credit for the amount realized from the sale of his property.
At oral argument, FDIC cited FDIC v. Krause, 904 F.2d 463 (8th Cir.1990), in support of its position that section 1823(e) es-tops the defense of payment. I find no support in that opinion for the proposition that actual payment is not a defense. In Krause, the FDIC sought to collect only the difference between the amounts paid pursuant to the loan settlement agreement and the pre-settlement loan balance. Krause was required to pay that difference even though he had a private arrangement with the president of the bank that he would not have to do so. Krause never claimed that he had paid this difference. It thus seems to me that Krause fully supports the view that I urge in this dissent.
There is one final point that should be made. I sense that the FDIC, and perhaps the majority, takes the position that the unwritten agreement between Kasai, Al-bertson, and Kasai’s friends and relatives with respect to the notes signed by the friends and relatives taints all other transactions, as a matter of law, with the bank. *498I reject this view. The language and the policy embodied in section 1823(e) are fully satisfied if the signers of the notes and Kasai are all held responsible for the payment of the notes. Simply stated, no reason exists for not giving Francis Kasai full credit for payments made. Since the affidavits establish a genuine dispute, the amount of these payments, if any, must be established at trial rather than on a motion for summary judgment.
To summarize, I do not disagree with the stated holding in this case that section 1823(e) and the common law doctrine of D’Oench, Duhme & Co. bars the debtors from raising the secret unwritten side agreements with the bank as a defense to the FDIC’s claim on the notes. I do, however, disagree that section 1823(e) bars defendants from proving the true balance due on the notes. Thus, I respectfully dissent.

. The table below is taken from the February 14, 1989 affidavit of Patrick R. Mach, an FDIC examiner. Jt.App. at 482-83. It shows the balance due on each note as of that date.
Principal Interest Total
Bruce Kasai 108,936 55,839 164,775
Stanley Kasai 28,497 16,313 44,810
John D. Schilling 50,000 26,390 76,390
Roger Schaufler 25,000 12,708 37,708
George Ruzicka 221,452 64,253 285,705
Grant G. Knutson 50,000 25,562 75,562
Francis Kasai 501,473 241,109 742,582
We note the dismissal of appellants Schilling and Knutson on June 6, 1990 and July 19, 1990, respectively, both on their own motions.

. Albertson was indicted and convicted on several counts of misappropriation of bank funds. Some of the counts for which he was convicted were related to the transactions enumerated above.

. Section 1823(e) should not bar fraud in the inducement as a defense, and a fortiori, section 1823(e) should not necessarily bar misappropriation as a defense. The plain meaning and legislative history of section 1823(e) permit such a reading. See Note, Borrower Beware: D'Oench, Duhme and Section 1823 Overprotect the Insurer When Banks Fail, 62 So.Cal.L.Rev. 253, 308-311 (1988). Allowing these defenses will not open the floodgates of litigation be*496cause the equitable principles of D’Oench, Duhme still apply. See id. at 310. Thus, any bank customer who lent himself or herself to a scheme that as a result deceived the FDIC would be liable to the full amount of the debt as reflected in the bank records. Id. In this case, the defendants’ original side agreements should be barred, but the defense arising from Albert-son’s misappropriation, in which none of the defendants participated, should not be barred.

. 12 U.S.C. § 1822(d) provides:
(d) Withholding payments to meet liability to depository institution
The Corporation may withhold payment of such portion of the insured deposit of any depositor in a depository institution in default as may be required to provide for the payment of any liability of such depositor to the depository institution in default or its receiver, which is not offset against a claim due from such depository institution, pending the determination and payment of such liability by such depositor or any other person liable therefor.
Under this section, it was appropriate for the FDIC to offset any funds held by the bank on deposit for Francis Kasai against money owed by Kasai to the bank. The problem here is that the president of the bank misappropriated funds from Kasai’s account. To the extent that Kasai can prove that funds from his account were misappropriated by a director, officer, or employee of the bank, he should be permitted an offset against the amount owed by him.

. The majority distinguishes Chuang from the instant case stating that in Chuang the bank's records reflected the payments made by the debtors. As I read the record in Chuang regarding the T & C note, it is the same as it is here. The debtor on the T & C note established certain *497debits to his account through the use of personal bank records rather than official bank records and was permitted both to prove the purpose of these debits and to show that they were intended to be repayment on the note in question. Chuang, 690 F.Supp. at 199. This is all that Francis Kasai asks here.