Court Opinion

ID: 9478985
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:05:24.186468+00
Date Added: 2024-06-11T17:46:45.720702
License: Public Domain

JERRE S. WILLIAMS, Circuit Judge,
dissenting in part:
A. Applicability of D’Oench, Duhme
I respectively dissent to Section III. I find the application of the D’Oench, Duhme doctrine to these facts unwarranted and undesirable. The majority rests its holding on the assertion that this case is controlled by Langley, in which the doctrine was applied. I find, however, not only Langley, but also the typical D’Oench, Duhme case, clearly distinguishable from the facts of the case before us.
The D’Oench, Duhme doctrine typically applies where a person, usually a borrower, is a party to a transaction that has misled the FDIC. Such was the situation in Langley. A party to such a transaction can expect to be obligated to investigate the transaction thoroughly and responsibly. For cases involving the obligations of parties in such transactions, see e.g., FDIC v. Cardinal Oil Well Servicing Co., 837 F.2d 1369 (5th Cir.1988) (borrowers “lent themselves to a scheme” under D’Oench, Duhme by failing to revoke unconditional guaranty covering future loans); FDIC v. McClanahan, 795 F.2d 512 (5th Cir.1986) (borrower signed blank promissory note); FDIC v. Hoover-Morris Enterprises, 642 F.2d 785 (5th Cir. Unit B, 1981) (borrower participated in unwritten side agreement which would defeat FDIC’s interest in the loan).
In contrast, TNB “participated” in the loan only after it was made, and in no way participated in the underlying transaction. Just as did the FDIC, TNB came into the picture after the deceptive scheme was completed. The fictitious loan had already been made. In buying a portion of the loan after it was negotiated, TNB in no possible way contributed to the concealed deceptive scheme, unlike the debtor in Langley. The scheme was already complete. In Langley, the borrowers were the participants in the transaction that misled the FDIC. Not so was TNB.
Under 12 U.S.C. § 1823(e), which codifies D’Oench, Duhme, our analysis is the same. Unlike the majority, I find the relevant *272“agreements] which tend to diminish or defeat the right” of the FDIC to be the fraudulent loans themselves. TNB only came into the picture after the fraudulent loans were made.
Banks, in the normal course of business, cannot be expected to investigate thoroughly for fraud totally concealed from them in loan participation agreements into which they enter. I find it hard to imagine a requirement that would tie up to a greater extent the normal day to day banking business in placing such loans with other banks. The majority view implies that a simple “boilerplate” written form that representatives were not fraudulent would be sufficient to satisfy D’Oench, Duhme and the statute. That kind of meaningless requirement would have added nothing at all to the clear proof in this case that TNB had no knowledge of fraud and that it was a banking transaction of utterly routine nature. I do not read D’Oench, Duhme nor the statute to establish an “I am my brother’s keeper” relationship in arms length bank dealings so that a completely innocent bank is responsible for the concealed fraud of another bank. Yet this is what the majority view demands. I cannot accept that demand as the law.
Because I find D’Oench, Duhme inapplicable, the FDIC’s counter arguments need to be addressed.1 I discuss each in turn.
B. Rescission Based on Fraud As Grounds for A Setoff
The district court found setoff proper by TNB because the Gunther and Adams loans were based on fraud. The GBSB’s officers induced TNB to participate in the loans with misrepresentations. The court found to be material the statements made by the president of GBSB which were that the signatures of Bell and Gunther on their respective loan documents, on the security agreements, and on the supporting documents were genuine and that the collateral had been personally inspected by the officers of GBSB. The material statements were fraudulent. The court further found that TNB’s reliance on the statements was justified, making setoff before insolvency appropriate. This finding is not clearly erroneous.
In a case with similar facts we found setoff appropriate. Interfirst Bank Abilene v. FDIC, 777 F.2d 1092 (5th Cir.1985). See also First Empire Bank v. FDIC, 572 F.2d 1361, 1367-69 (9th Cir.1978), cert. denied, 439 U.S. 919, 99 S.Ct. 293, 58 L.Ed.2d 265 (1978). In Interfirst, the court held that a participating bank could set off against debts owed to a lead bank upon proving its claim of entitlement to rescission based on fraud. The participating bank (Interfirst) had purchased partic-ipations in four loans, two of which were fraudulent. After the lead bank was declared insolvent, the FDIC made a demand on Interfirst for funds held. The bank responded by exercising a setoff, and we affirmed.2
Interfirst was found to be entitled to a setoff because its claim was provable. A claim is provable if “(1) it exists before the bank’s insolvency and does not depend on any new contractual obligations arising later; (2) liability on the claim is absolute and certain in amount when suit is filed ..., and (3) the claim is made in a timely manner, well before any distribution of the assets of the receivership other than a distribution through a purchase and assumption agreement.” 777 F.2d at 1094. Inter-first asserted provability on two grounds, one of them being entitlement to rescission based on fraud. The court upheld Inter-first’s actions under either of the bases argued, finding also the required “mutuality” of obligations making setoff appropriate. 777 F.2d at 1095.
As in Interfirst, TNB’s claim for rescission based upon fraud predated the insolvency of GBSB and was absolute in amount. The fraud occurred at the time of the inducement to participate in the loans. TNB’s claim was also made in a timely *273manner. As in Interfirst, while TNB did not seek rescission until the lead bank was declared insolvent, it did do so before the distribution of assets of the receivership. Thus, for TNB to have a right to rescission, the only issues left to address are the actual elements of the claim of fraud.
A party seeking rescission under Texas law must establish five elements: (1) that a false representation was made by a party with authority; (2) that the party making the representation was aware of its falsity; (3) that the representation was made with intent to induce the receiving party to take some action; (4) that the receiving party acted in reliance on the misrepresentation; and (5) that such reliance was detrimental. Chemetron Corp. v. Business Funds, Inc., 682 F.2d 1149, 1171-72 (5th Cir.1982), vacated on other grounds, 460 U.S. 1013, 103 S.Ct. 1254, 75 L.Ed.2d 483 (1983). The district court correctly found from the evidence at trial, that the GBSB’s president invented the two loans and presented them as legitimate to try to procure the participation of other banks. Even one of the FDIC’s witnesses admitted that the loans were fictitious.
As to the reliance, both parties agree it had to be reasonable.3 The FDIC asserts that TNB’s reliance on the president’s statements was not reasonable and that they should have researched the loans independently to determine their validity. The FDIC’s assertions cannot stand. While it is true that a party is under a duty to exercise reasonable care and diligence in relying on statements of an adverse party, a defrauded party:
is under no duty to make an investigation to discover the existence of fraud, unless and until he has acquired some knowledge of facts that would put a reasonable prudent person on inquiry.
Traylor v. Gray, 547 S.W.2d 644, 653 (Tex.Civ.App.—Corpus Christi 1977, writ ref’d n.r.e.). In Traylor, the parties had had prior business dealings. A “simple telephone call” would have led to the discovery of the fraud. The subject matter and method of dealing between the parties, however, was no different from previous transactions, making the reliance reasonable. Id. We are faced with the same situation here.
TNB had participated in at least fourteen other loan participations originated by GBSB with the same degree of inquiry and without problem. Each of the loans was valid and had been paid in its entirety. In fact, the testimony at trial showed that TNB used the same procedures in loan participations it had purchased with banks in Little Rock, Dallas, and other places, and that this practice was common among banks. TNB’s practice depended upon the representations of the officers of other banks as to the validity of the documents for the particular loan transaction. Banks are entitled to assume “that when dealing with another bank in a commercial undertaking that bank is competent to conduct its own affairs.” See Barclays Bank D.C.O. v. Mercantile National Bank, 481 F.2d 1224, 1235 (5th Cir.1973), cert. dismissed, 414 U.S. 1139, 94 S.Ct. 888, 39 L.Ed.2d 96 (1974). Thus, TNB’s practice was reasonable.
The FDIC argues that the size of the Gunther and Bell loans, each $100,000, should have put TNB on notice that additional investigation was needed. The record, however, indicates that TNB purchased at least two other loans which were around the same amount as the two fraudulent loans and which were valid and subsequently paid. TNB had purchased partic-ipations in loans made to James C. Carlow in the aggregate amount of $88,000, and to Freeman Nurseries in the amount of $120,-000. There was nothing unusual in the size of the Gunther and Bell loan participation transactions that should have put a reasonable, prudent banker on notice of any irregularities, creating a duty of further inquiry. The representations by GBSB officers that the loans were genuine, and that the collateral existed and had been inspected, were *274made in the ordinary course of doing business and did not differ from other prior loan participation agreements between the parties. We conclude that the district court’s finding of a right to rescission based upon fraud was not clearly erroneous.
C. Possible Intervention of FDIC Corporate’s Rights to Bar TNB’s Right to Set off the Fictitious Loans
Finally, the FDIC argues that the rights of FDIC Corporate intervened to bar TNB’s rights to a setoff as to the fictitious loans. Because setoff was proper as to the two fraudulent loans, however, it is only “the balance, if any, after the setoff is deducted, which can justly be held to form part of the assets of the insolvent.” Scott, 146 U.S. at 510, 13 S.Ct. at 151. Thus, the FDIC Receiver had no assets represented by the Bell and Gunther loan participations because GBSB did not have the assets. So it could not convey them to the FDIC Corporate in the purchase and assumption transaction. Intervention by the FDIC Corporate as to these assets was impossible. It never had them.
In summary, I dissent because I would affirm the district court’s finding that set-off was proper. The D’Oench, Duhme doctrine was not applicable, and the majority view sets up a grave and unjustified impediment to normal banking operations. Two further claims of the FDIC are without merit. They are, first, that FDIC Corporate’s legal operations constituted a bar to TNB’s right to setoff, and second, that the district court was in error in finding the right of TNB to rescind because of fraud.

. See note 5 in the opinion of the Court.

. FDIC concedes that there is an equitable right of setoff when there are mutual debts and that the insolvency of one party may justify setoff by the other. Scott v. Armstrong, 146 U.S. 499, 507-08, 13 S.Ct. 148, 150, 36 L.Ed. 1059 (1892).

. The FDIC claims that the district court as a matter of law erred by not entering a finding on reasonableness. The court did enter a finding that reliance was justified, however, which suffices as a finding of reasonableness.