Court Opinion

ID: 4104699
Source: CourtListenerOpinion
Date Created: 2016-12-06 13:09:17.561384+00
Date Added: 2024-06-11T09:23:43.458074
License: Public Domain

IN THE COURT OF APPEALS OF NORTH CAROLINA

                                No. COA15-1055

                             Filed: 6 December 2016

Yancey County, No. 10 CVS 279

SETTLERS EDGE HOLDING COMPANY, LLC; MOUNTAIN AIR DEVELOPMENT
CORPORATION; VIRGINIA A. BANKS; WILLIAM R. BANKS; JEANI H. BANKS;
MICHAEL R. WATSON; SHEREE B. WATSON; VIRGINIA A. BANKS, WILLIAM
R. BANKS, AND SHEREE B. WATSON IN THEIR CAPACITY AS TRUSTEES OF
WILLIAM A. BANKS REVOCABLE TRUST; MORRIS ATKINS IN HIS CAPACITY
AS TRUSTEE OF WILLIAM BANKS FAMILY IRREVOCABLE TRUST NUMBER
1; AND MORRIS ATKINS IN HIS CAPACITY AS TRUSTEE OF WILILAM BANKS
FAMILY IRREVOCABLE TRUST NUMBER 2, Plaintiffs-Appellants,

            v.

RES-NC SETTLERS EDGE, LLC, Defendant-Appellee.

      Appeal by plaintiffs from orders entered 4 November 2013 and 28 May 2015

by Judges Mark Powell and Marvin P. Pope in Superior Court, Yancey County. Heard

in the Court of Appeals 10 February 2016.

      Rayburn Cooper & Durham, P.A., by G. Kirkland Hardymon, Ross R. Fulton,
      and Benjamin E. Shook, for plaintiffs-appellants.

      Nelson Mullins Riley & Scarborough, LLP, by Christopher J. Blake and D.
      Martin Warf, for defendant-appellee.

      STROUD, Judge.

      Plaintiffs appeal from the trial court’s 4 November 2013 order granting

defendant RES-NC Settlers Edge, LLC’s motion for partial summary judgment and

from the order entered 28 May 2015 granting defendant’s motion for lack of subject
        SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                  Opinion of the Court

matter jurisdiction and denying plaintiffs’ motion for summary judgment. On appeal,

plaintiffs argue that the trial court erred in striking their affirmative defenses for

lack of subject matter jurisdiction, not granting collateral estoppel effect to a prior

foreclosure order, and in granting summary judgment in favor of defendant while

denying summary judgment in favor of plaintiffs. After review, we find that in this

case, the FDIC effectively repudiated the loan contract by refusing to fund the draw

requests yet failed to give plaintiffs proper notice of the repudiation. With proper

notice, plaintiffs could have asserted an administrative claim for damages. Although

the trial court would lack jurisdiction for any affirmative claim by plaintiffs for

damages, plaintiffs did not bring any claim for damages, and the trial court does have

jurisdiction to consider defendant’s counterclaim and thus plaintiffs’ affirmative

defenses to that counterclaim.

      Although plaintiffs cannot recover damages from defendant, plaintiffs’

affirmative defenses raise the issue of recoupment. Defendant has not demonstrated

any genuine issue of material fact and all of the evidence, taken in the light most

favorable to defendant, shows that the FDIC effectively repudiated plaintiff Settlers

Edge’s loan contract, but this does not necessarily require judgment forgiving the loan

entirely. Instead, there are genuine issues of material fact as to the amount of

recoupment, if any, plaintiffs are entitled to, based upon defendant’s repudiation of

the loan contract. Accordingly, plaintiffs’ affirmative defense of repudiation raised

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the issue of recoupment based upon defendant’s repudiation of the loan contract.

Because there are questions of material fact as to recoupment, we reverse and

remand for further proceedings to determine the amount of damages, if any,

defendant may recover from plaintiffs on its claim for breach of contract after

deduction of any damages proven by plaintiffs.

   I.      Background

        Plaintiffs’ complaint set forth the following facts.   Plaintiff Settlers Edge

(“Settlers Edge”) is a limited liability company organized in 2007 to develop and

maintain Mountain Air Country Club and residential lots on a parcel of real property

(“the Property”) in Yancey County, North Carolina. In June 2007, Settlers Edge

secured a $15,500,000.00 loan from Integrity Bank in Georgia to finance the

construction of Mountain Air Country Club on the Property. A material term of the

financing agreement between Settlers Edge and Integrity Bank was that “Settlers

Edge would receive funding for the approximately $7 million in construction and

carrying expenses necessary to develop the Property into marketable lots with

utilities and amenities. This funding took the form of monthly loan draw requests

submitted by Settlers Edge to Integrity Bank.”

        Integrity Bank funded the development of the Property with the monthly loan

draws as agreed from 20 June 2007 through 28 August 2008, but then on 29 August

2008, Integrity Bank was placed under the receivership of the Federal Deposit

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Insurance Corporation (“FDIC”), which assumed all of its assets and obligations. On

19 September 2008, Settlers Edge submitted a draw request for the month of August

for $41,677.20. The FDIC refused to disburse the requested funds. After several

attempts to get the FDIC to pay the loan draw, Settlers Edge sent a formal written

notice and demand through counsel to the FDIC stating that it was in “material

breach” of its obligations and demanding performance. The FDIC never responded.

At some point before 27 October 2009, “the FDIC caused a substitute trustee to be

appointed to institute foreclosure proceedings on the Deed of Trust.”

       In the foreclosure proceeding, plaintiffs herein raised the defense of material

breach of the loan agreement by the FDIC. The Yancey County Clerk of Superior

Court entered an order on 11 February 2010 denying the FDIC’s request for

foreclosure, finding plaintiffs were “not in default under the Loan Documents,” so the

FDIC did not “have the right to institute foreclosure proceedings against the property

described in the Deed of Trust.” The FDIC then “appealed the ruling, then claimed

to have assigned all of its rights, title and interest in the Development Financing to

a new entity, Multibank 2009-1 RES-ADC Venture, LLC (‘Multibank’).” Multibank

eventually “claim[ed] to have assigned its right, title and interest in the Development

Financing to defendant RES-NC.” The FDIC, through RES-NC1, after being assigned

       1  We use the FDIC and defendant RES-NC interchangeably throughout the body of this
opinion, as defendant RES-NC eventually stepped in the shoes of the FDIC when it was assigned the
FDIC’s rights, title, and interest in the Development Financing agreement.

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the rights to the Development Financing from Multibank, dismissed the FDIC’s

appeal to the Yancey County Superior Court on 6 May 2010.

      On 15 October 2010, plaintiffs filed this action for a declaratory judgment,

claiming:

                that (a) the FDIC committed a material breach of the terms
                of the Construction Loan Agreement; (b) that pursuant to
                North Carolina law, this material breach excused their
                further performance under the various component
                agreements which comprise the Development Financing;
                (c) that this issue has been previously litigated and
                actually adjudicated and that RES-NC is collaterally
                stopped from re-litigating this issue; and (d) that Plaintiffs
                have no obligation to pay RES-NC any funds.

Defendant filed its answer and counterclaim on 31 July 2013, denying the allegations

in plaintiffs’ complaint and asserting as affirmative defenses that the Yancey County

Clerk of Court’s order has no preclusive effect and that the Yancey County Clerk of

Court lacked jurisdiction or authority to enter an order excusing plaintiffs’

performance under the loan agreement. Defendant also alleged a counterclaim for

breach of contract against plaintiffs to recover the full amount of the loan, plus fees

and interest.

      Defendant filed a motion for partial summary judgment on 19 September 2013

asserting that there were “[n]o genuine issues of material fact” regarding plaintiffs’

material breach and collateral estoppel claims and defendant’s affirmative defenses.

Furthermore, defendant stated that the claims and defenses “are legal issues that

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require no discovery and are ripe for adjudication by the Court.” On 30 September

2013, plaintiffs filed their reply to defendant’s counterclaim, arguing that defendant’s

counterclaim fails to state a claim upon which relief can be granted and asserting the

following affirmative defenses: 1) material breach of contract; 2) counterclaim barred

under Equal Credit Opportunity Act (“ECOA”); 3) laches; 4) estoppel; 5) waiver; 6)

release; 7) unclean hands; 8) repudiation; 9) material modification and release; 10)

failure to mitigate damages; 11) collateral estoppel and res judicata; 12) lack of

standing and not the real party in interest; 13) lack of consideration; and 14)

reservation of any additional defenses that may be revealed during discovery or after

receiving additional information.

      After a hearing on 7 October 2013, the trial court entered an order on 4

November 2013 granting defendant’s motion for partial summary judgment. The

court concluded that defendant’s claim was not precluded by the Yancey County Clerk

of Court’s order denying foreclosure and that the order “does not have preclusive

effect with respect to the issues of (a) whether the FDIC breached the loan documents;

(b) whether the FDIC’s breach was material; and (c) whether Plaintiffs’ obligations to

Defendant under the loan documents are excused.” Plaintiffs filed a notice of appeal

from the court’s order on 4 December 2013, but their appeal was dismissed as

interlocutory by this Court on 16 December 2014.

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        On 14 May 2015, defendant filed a motion to dismiss plaintiffs’ declaratory

judgment for lack of subject matter jurisdiction and motion for summary judgment

as to defendant’s counterclaim. In support of the motion to dismiss for lack of subject

matter jurisdiction, defendant argued that the trial court lacked jurisdiction “over

Plaintiffs’ claims as a matter of federal law under the requirements of 12 U.S.C. §

1821(d)(13)(D).” Defendant also asked for summary judgment, alleging that there

was no genuine issue of material fact regarding (a) plaintiffs’ default of the loan, (b)

plaintiffs’ failure to repay any amounts borrowed under the loan, and (c) plaintiffs

indebtedness to defendant “in the total outstanding amount of $20,523,921.31.”

        On 15 May 2015, plaintiffs also filed a motion for summary judgment, noting

that:

              1.     Plaintiffs commenced this action by filing their
              Complaint against Defendant . . . on October 15, 2010
              seeking a declaratory judgment that, due to the prior
              material breach by the Defendant’s predecessor-in-
              interest, Plaintiffs were excused from further performance
              under the loan documents at issue in this case.

              2.      Following consolidation of this action with a
              separate action commenced by Defendant in the Superior
              Court for Alexander County, North Carolina, Defendant
              filed its Answer and Counterclaim on July 31, 2013 seeking
              to recover from Plaintiffs based on Plaintiffs’ alleged
              breach of the Loan Documents at issue.

              3.    On or about September 30, 2013, Plaintiffs filed
              their Reply to Defendants Counterclaims and asserted,
              among others, affirmative defenses based on (1) the prior
              material breach of the loan documents by Defendant’s

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             predecessor-in-interest, (2) the repudiation of the loan
             documents by Defendant’s predecessor-in-interest, and (3)
             the material modification of the underlying loan obligation.

             4.     Pursuant to Rule 56 of the North Carolina Rules of
             Civil Procedure, “the pleadings, depositions, answers to
             interrogatories, and admission on file, together with the
             affidavits . . . show that there is no genuine issue as to any
             material fact,” and that Defendant is entitled to judgment
             dismissing Defendant’s Counterclaim in its entirety as a
             matter of law based on the aforementioned defenses.
             N.C.R. Civ. P. 56 (2015).

      The trial court heard the parties respective motions at a hearing on 25 May

2015 and subsequently entered an order and judgment on 28 May 2015 granting

defendant’s motion to dismiss for lack of subject matter jurisdiction and defendant’s

motion for summary judgment. Specifically, the court concluded:

             1.     As a matter of federal law, under the requirements
             of the Financial Institutions Reform, Recovery, and
             Enforcement Act (“FIRREA”), 12 U.S.C. § 1821(d)(13)(D),
             this Court lacks subject matter jurisdiction over: (a)
             Plaintiffs’ claim for declaratory relief set forth in Plaintiffs’
             Complaint in this action; and (b) Plaintiffs’ First, Sixth,
             Eighth, Ninth, Tenth, and Eleventh Affirmative Defenses
             set forth in Plaintiffs’ Reply to Counterclaim in this action.
             Defendant’s Motion to Dismiss for Lack of Subject Matter
             Jurisdiction is, therefore, GRANTED, and Plaintiffs’
             Complaint and the First, Sixth, Eighth, Ninth, Tenth, and
             Eleventh Affirmative Defenses set forth in Plaintiffs’ Reply
             to Counterclaim are hereby DISMISSED.

             2.     Defendant has established that there are no genuine
             issues of material fact with respect to its Counterclaim for
             breach of contract, and that Defendant is entitled to
             judgment as a matter of law. Plaintiffs have failed to raise
             any genuine issue of material fact with respect to

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               Defendant’s Counterclaim for breach of contract, or with
               respect to Plaintiffs’ Second, Third, Fourth, Fifth, Seventh,
               Twelfth and Thirteenth Affirmative Defenses set forth in
               Plaintiffs’ Reply to Counterclaim in this action.
               Defendant’s Motion for Summary Judgment on its
               Counterclaim for breach of contract is, therefore,
               GRANTED.

               3.     Plaintiffs are not entitled to summary judgment as
               a matter of law. Plaintiffs’ Motion for Summary Judgment
               is, therefore, DENIED.

The court denied plaintiffs’ motion for summary judgment and entered final

judgment against plaintiffs on defendant’s counterclaim, jointly and severally, for

$20,523,921.31. Plaintiffs filed a notice of appeal on 26 June 2015.

   II.      FIRREA and Affirmative Defenses

         Plaintiffs first argue on appeal that the trial court erred in striking their

affirmative defenses for lack of subject matter jurisdiction and denied plaintiffs due

process.    Specifically, plaintiffs contend that the Financial Institutions Reform,

Recovery, and Enforcement Act (“FIRREA”), 12 U.S.C.A. § 1821(d)(13)(D) (2014),

upon which defendant and the trial court relied, does not bar affirmative defenses.

         FIRREA sets out the authority and procedures for the FDIC to follow when a

depository institution, such as Integrity Bank, becomes insolvent and grants the

FDIC broad powers and duties as a “conservator or receiver” of the depository

institution.   See 12 U.S.C.A. § 1821(d)(2)(A).       Generally, the FDIC becomes the

“Successor to institution” and has “by operation of law”:

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                    (i) all rights, titles, powers, and privileges of the
             insured depository institution, and of any stockholder,
             member, accountholder, depositor, officer, or director of
             such institution with respect to the institution and the
             assets of the institution; and

                    (ii) title to the books, records, and assets of any
             previous conservator or other legal custodian of such
             institution.

Id.

      The FDIC is granted authority, among other things, to “[o]perate the

institution” (B); exercise the functions of any member, stockholder, director, or officer

of the institution (C); take any actions “necessary to put the insured depository

institution in a sound and solvent condition” (D); to liquidate the depository

institution and “proceed to realize upon the assets of the institution” (E); and to pay

“all valid obligations of the insured depository institution in accordance with the

prescriptions and limitations of this chapter.” (H). 12 U.S.C.A. § 1821(d)(2)(B)-(E),

(H). In a case “involving the liquidation or winding up of the affairs of a closed

depository institution,” the receiver is required to

                    (i) promptly publish a notice to the depository
             institution’s creditors to present their claims, together with
             proof, to the receiver by a date specified in the notice which
             shall be not less than 90 days after the publication of such
             notice; and
                    (ii) republish such notice approximately 1 month
             and 2 months, respectively, after the publication under
             clause (i).

12 U.S.C.A. § 1821(d)(3)(B).

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      FIRREA also sets out the administrative process for a debtor to bring “any

claim against a depository institution[.]” See 12 U.S.C.A. § 1821(d)(4)(A)- rulemaking

authority. Thus, FIRREA contemplates that the claims arising out the failure of a

depository institution will be resolved by the receiver, and if a debtor raises a claim

against the institution, that claim will be determined in the federal administrative

process established for this purpose. Therefore, judicial review by the courts is quite

limited.

              (D) Limitation on judicial review

              Except as otherwise provided in this subsection, no court
              shall have jurisdiction over--

                           (i) any claim or action for payment
                    from, or any action seeking a determination of
                    rights with respect to, the assets of any
                    depository institution for which the
                    Corporation has been appointed receiver,
                    including assets which the Corporation may
                    acquire from itself as such receiver; or
                           (ii) any claim relating to any act or
                    omission of such institution or the
                    Corporation as receiver.

12 U.S.C.A. § 1821(d)(13)(D) (emphasis added).

      Here, the FDIC was appointed as receiver for Integrity Bank on 29 August

2008 and assumed all of Integrity Bank’s assets and liabilities at that time --

including the obligation to fund plaintiffs’ draw requests. The FDIC sent a letter on

2 September 2008 informing Settlers Edge that Integrity Bank had been closed and

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the FDIC had taken over as receiver.         The FDIC suggested Settlers Edge seek

refinancing of the loan documents. Settlers Edge submitted a draw request for

August 2008 on 19 September 2008 for $41,677.20 and received no response from the

FDIC. The FDIC sent additional letters on 20 October 2008 to the guarantors of

Integrity Bank’s loan to Settlers Edge notifying the guarantors that they had 30 days

to strictly comply with the terms and provisions of the loan agreement.             On 4

December 2008, Settlers Edge sent written notice to the FDIC of material breach.

      Further, the exhibits submitted with the record on appeal include the

“Supplemental Brief in Opposition to Foreclosure Proceeding” filed by Settlers Edge,

which contains facts indicating that “the FDIC never took the good faith step of

acknowledging the obligations it assumed from Integrity Bank, nor did it exercise its

statutory right to ‘repudiate’ those obligations. Instead, the FDIC took a ‘heads I win,

tails you lose’ position leaving Settlers Edge in limbo.” Settlers Edge noted that in

this case, “the FDIC made unsuccessful efforts to quickly sell off the Loan Documents

with the goal of making the draw request funding the loan purchaser’s problem.

Doubtless, the FDIC also acted on the hope that Settlers Edge would either quietly

accept this situation or that it would go bankrupt and that an appointed trustee

would lack the resources to bring the estate’s claims to recover for the breach.”

      In a deposition on 6 March 2015, William R. Banks, plaintiffs’ representative,

was asked whether Settlers Edge understood “that there was a deadline by which to

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submit claims against the FDIC in connection with the receivership of Integrity

Bank?” Mr. Banks replied, “Not to my knowledge.” The record on appeal does not

contain documents from that time period regarding when or whether plaintiffs

received notice of the receivership or whether plaintiffs filed any claim as provided

by statute. Plaintiffs filed this lawsuit on 31 July 2013.

      Plaintiffs’ declaratory judgment claim in this case does “seek[ ] a determination

of rights,” 12 U.S.C.A. § 1821(d)(13)(D), regarding the assets of the depository

institution so this portion of Plaintiffs’ claim would be barred by FIRREA. But

plaintiffs argue that even if the declaratory judgment action is barred by FIRREA,

their affirmative defenses to defendant’s counterclaims are not. Plaintiffs sought to

raise affirmative defenses of material breach and material modification to

defendant’s counterclaims seeking recovery against Plaintiffs for breach of contract.

      Thus, plaintiffs contend that while the limitation of judicial review in 12

U.S.C.A. § 1821(d)(13)(D) applies to claims for payment or for a determination of

rights against the receiver, it does not apply to plaintiffs’ affirmative defenses.

Although this issue has not been specifically addressed by a court in North Carolina,

other states have dealt with similar cases. The results vary depending upon the facts

and procedural postures of the cases, including rules which may be unique to the

particular state. We have therefore sought to find cases which address the issue in a

context which is most similar to this case. The Nevada Supreme Court considered

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this issue in a similar context and determined that affirmative defenses are not

barred. See Schettler v. Ralron Capital Corp., 275 P.3d 933 (Nev. 2012). In Schettler,

the defendant borrower and Silver State Bank

             executed a Business Loan Agreement (the Loan) and a
             Promissory Note (the Note), under which Silver State
             provided Schettler with a $2,000,000 revolving line of
             credit. Schettler agreed to pay interest on the loan monthly
             until the loan’s maturity date, at which time he would be
             required to pay all outstanding principal and any
             remaining unpaid accrued interest. The original maturity
             date of the Loan and the Note was September 15, 2007. On
             that date, Schettler and Silver State entered into a Change
             in Terms Agreement that modified the maturity date to
             September 15, 2008. That same day, Schettler also
             executed a Commercial Guaranty in his capacity as
             Trustee for the Vincent T. Schettler Living Trust,
             guaranteeing to pay all of the Loan obligations. It is
             undisputed that the Loan, the Note, and the Commercial
             Guaranty (loan agreement) were valid and enforceable
             contracts at their inception.

Id. at 934-35.

      On 14 August 2008, Silver State notified Schettler that it had frozen the funds

remaining on the line of credit because of a change in his financial condition or that

Silver State believed his “prospect of performance on the Note was impaired.” Id. at

935. Silver State also informed Schettler that

             it had decided to cancel any current commitments until
             Schettler cured the defaults, but that until that time,
             Schettler was responsible for payment of interest on the
             loan. At the time of the default notice, however, Schettler
             was current on his payments, and the loan had an
             outstanding principal balance of $1,114,000.

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Id. (quotation marks and brackets omitted).

      A few weeks later, Silver State went into receivership and the FDIC was

appointed as receiver. Id. RalRon later acquired Schettler’s loan agreement and

demanded full payment of principal, interest, and late fees from Schettler; upon

Schettler’s failure to pay, RalRon filed a lawsuit in Nevada state court seeking

recovery upon the loan agreement. Id. Schettler filed an answer which raised several

counterclaims and affirmative defenses for “breach of contract, breach of the implied

covenant of good faith and fair dealing, and estoppel.” Id. RalRon filed a motion for

summary judgment on its claims for breaches of contract and personal guaranty,

claiming that Schettler’s counterclaims and affirmative defenses “were barred

because Schettler failed to file any administrative claims with the FDIC as required

by FIRREA, and that RalRon was a holder in due course immune from Schettler’s

defenses.” Id. The trial court agreed and

             granted summary judgment in favor of RalRon on its
             claims for breach of contract and breach of personal
             guaranty. In so doing, the district court barred Schettler’s
             affirmative defenses and dismissed his counterclaims,
             reasoning that, because they were all essentially claims
             against the FDIC and Schettler had failed to follow the
             claims administration process, they were barred by
             FIRREA.

Id. at 935-36.

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      Schettler appealed, and the Nevada Supreme Court reversed because it

determined that Schettler’s affirmative defenses were not barred by FIRREA and

that genuine issues of material fact remained as to the determination of damages.

Id. at 942. We find the Nevada court’s rationale to be persuasive.

                   Convincingly, a majority of courts addressing this
             issue have held that while FIRREA’s jurisdictional bar
             applies to claims and counterclaims, it does not apply to
             defenses and affirmative defenses.

                    The Third Circuit Court of Appeals, which has
             examined this issue in detail, has explained that FIRREA’s
             jurisdictional bar only applies to four categories of actions:

                   (1) claims for payment from assets of any
                   depository institution for which the FDIC has
                   been appointed receiver; (2) actions for
                   payment from assets of such depository
                   institution;    (3)   actions     seeking     a
                   determination of rights with respect to assets
                   of such depository institution; and (4) a claim
                   relating to any act or omission of such
                   institution or the FDIC as receiver.

             The court held that these categories did not include a
             defense or an affirmative defense because those are neither
             an action nor a claim, but rather a response to an action or
             a claim. Therefore, it held, the jurisdictional bar contained
             in § 1821(d)(13)(D) does not apply to defenses or
             affirmative defenses. To support its conclusion, the court
             explained that interpreting FIRREA’s jurisdictional bar to
             include defenses and affirmative defenses would, in a
             substantial number of cases, result in an unconstitutional
             deprivation of due process. Specifically, if parties were
             barred from presenting defenses and affirmative defenses
             to claims which have been filed against them, they would
             not only be unconstitutionally deprived of their

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             opportunity to be heard, but they would invariably lose on
             the merits of the claims brought against them. Beyond
             constitutional concerns, the court also explained that
             because a defendant is unable to know what his or her
             defense will be before hearing the claim, it seems that it
             would be nearly impossible for a party to submit future
             hypothetical defenses to the administrative claims
             procedure -- defenses to lawsuits which may not yet have
             been brought against a party or which may never be
             brought at all. We join in the majority’s reasoning and
             conclude that while FIRREA’s jurisdictional bar applies to
             claims and counterclaims, it does not apply to defenses or
             affirmative defenses.

Id. at 939-40 (citations, quotation marks, brackets, and ellipses omitted). See also,

e.g., Nat’l Union Fire Ins. Co. v. City Savings, F.S.B., 28 F.3d 376, 393 (3d. Cir. 1994)

(“[T]he plain meaning of the language contained in § 1821(d)(13)(D) indicates that

the statute does not create a jurisdictional bar to defenses or affirmative defenses

which a party seeks to raise in defending against a claim.”); Resolution Trust Corp. v.

Love., 36 F.3d 972, 977-78 (10th Cir. 1994) (“[I]f Congress had intended to remove

from the jurisdiction of the courts any and all actions, claims or defenses which might

diminish the assets of any depository institution . . . or [which might] diminish or

defeat any claims of the [FDIC] in any capacity, it would [have] been simple to so

provide. But Congress did not so provide. Instead, the act gives the [FDIC] authority

over any claim by a creditor or claim of security, preference or priority. Clearly, an

affirmative defense asserted by a defendant in an action brought by the [FDIC] is none

of these.” (Citations and quotation marks omitted) (Emphasis added)).

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       But plaintiffs argue that the FDIC’s refusal to pay the monthly draws was

essentially a repudiation of the agreement, although the FDIC did not formally

repudiate the loan, even if it had a statutory right to repudiate the loan. Although

the lender in Schettler similarly failed to fund his loan, repudiation was not

specifically addressed in Schettler.2 Under 12 U.S.C.A. § 1821, plaintiffs would have

a limited right to recover in the administrative forum for repudiation of the loan.

FIRREA provides the FDIC or a receiver does have “Authority to repudiate

contracts”:

                      In addition to any other rights a conservator or
               receiver may have, the conservator or receiver for any
               insured depository institution may disaffirm or repudiate
               any contract or lease--
                             (A) to which such institution is a party;
                             (B) the performance of which the conservator
                      or receiver, in the conservator’s or receiver’s
                      discretion, determines to be burdensome; and
                             (C) the disaffirmance or repudiation of which
                      the conservator or receiver determines, in the
                      conservator’s or receiver’s discretion, will promote
                      the orderly administration of the institution’s
                      affairs.

12 U.S.C.A. § 1821(e)(1)(A)-(C).

       2 In Schettler, Silver State announced that it would no longer perform under the contract on
14 August 2008, even before going into receivership, claiming concern over Schettler’s ability to pay.
275 P.3d at 935. At the time of Silver State’s default notice to Schettler, however, “Schettler was
current on his payments, and the loan had an outstanding principal balance of $1,114,000.” Id. Silver
State was not placed into receivership until 5 September 2008, a few weeks after the default notice.
Id. Here, the repudiation at issue occurred after Integrity Bank failed and the FDIC did have a right
to repudiate plaintiffs’ loan.

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        SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                   Opinion of the Court

      The conservator or receiver for an insured depository institution is required to

“determine whether or not to exercise the rights of repudiation under this subsection

within a reasonable period following such appointment.” 12 U.S.C.A. § 1821(e)(2).

Damages in a claim for repudiation are generally

                   (i) limited to actual direct compensatory damages;
             and
                   (ii) determined as of--
                           (I) the date of the appointment of the
                   conservator or receiver; or
                           (II) in the case of any contract or agreement
                   referred to in paragraph (8), the date of the
                   disaffirmance or repudiation of such contract or
                   agreement.

12 U.S.C.A. § 1821(e)(3)(A).     The claimant cannot recover any “(i) punitive or

exemplary damages; (ii) damages for lost profits or opportunity; or (iii) damages for

pain and suffering.” 12 U.S.C.A. § 1821(e)(3)(B). For repudiation of a “qualified

financial contract[,]” compensatory damages are

                    (i) deemed to include normal and reasonable costs of
             cover or other reasonable measures of damages utilized in
             the industries for such contract and agreement claims; and
                    (ii) paid in accordance with this subsection and
             subsection (i) of this section except as otherwise specifically
             provided in this section.

12 U.S.C.A. § 1821(e)(3)(C).

      In the present case, the FDIC did not formally repudiate the plaintiffs’ loan

but by its actions the FDIC repudiated the agreement by refusing to honor the terms

of the loan agreement and to pay the monthly draws as required by the agreement.

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        SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                  Opinion of the Court

See 12 U.S.C.A. § 1821(e) (“Provisions relating to contracts entered into before

appointment of conservator or receiver”). In Westberg v. F.D.I.C., 741 F.3d 1301 (D.C.

Cir. 2014), the D.C. Circuit Court of Appeals addressed a situation somewhat similar

to the one before us.   The appellants, husband and wife, obtained a residential

construction loan from a bank that soon collapsed. Id. at 1302. The FDIC was

appointed as receiver and repudiated their loan agreement, “but notified the

Westbergs that they were obligated to continue making payments on the portion of

the loan that had been disbursed to them before [the bank]’s failure.” Id. The D.C.

Circuit found that “the Westbergs’ claim for declaratory relief is inextricably related

to the FDIC’s act of repudiation. Although it is formally brought against Multibank,

it is functionally against the FDIC. It is therefore a ‘claim’ . . . that must first be

resolved in the administrative claims process.”          Id. at 1308.   Therefore, while

Westberg addresses repudiation, it involved a claim brought by the debtor against the

bank, not an affirmative defense. Also, in Westberg, the FDIC did formally repudiate

the contract, and the formal repudiation was important to the D.C. Circuit’s holding

that the claim should have been in the administrative process. Id. Here, by contrast,

the FDIC never gave any notice of repudiation of the contract and plaintiffs have

raised it as an affirmative defense to defendant RES-NC’s counterclaim.

      The FDIC did, however, effectively repudiate it by refusing to fund Settlers

Edge’s draw requests, which is quite similar to Silver State’s action in Schettler. 275

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        SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                   Opinion of the Court

P.3d at 935. See also Lawson v. F.D.I.C., 3 F.3d 11, 15 (1st. Cir. 1993) (“In other

words, the FDIC did not transfer the Lawsons’ CD contracts intact to a new obligor;

it effectively repudiated those contracts when it declined either to pay the promised

interest itself or to oblige anyone else to do so. The repudiation may have been

informal but there was certainly no ambiguity[.]”). Here, Settlers Edge submitted a

draw request on 19 September 2008 for $41,677.20 for August 2008 and received no

response from the FDIC. The FDIC refused to fill that request, and on 4 December

2008, Settlers Edge sent written notice to the FDIC of material breach. Thus, the

question is whether the plaintiffs’ rights are limited to those under 12 U.S.C.A. §

1821(e) where the FDIC has effectively repudiated the contract by its actions,

although it failed to formally notify plaintiffs of repudiation. As in Lawson, the

FDIC’s actions here, though informal, clearly constituted a repudiation. Id. (“At the

same time, it was a repudiation and breach of the contracts represented by the CDs

since the FDIC, which had inherited the contracts, effectively declined to pay the

promised interest in the future or commit Fleet Bank to do so.”).

      As no formal repudiation appears in the record on appeal and defendant seeks

to recover damages from plaintiffs for breach of contract, plaintiffs were free to raise

repudiation as an affirmative defense to defendant’s counterclaim. The receiver

cannot use FIRREA as both a sword and shield at the same time; if it wants the

benefit of the limited damages and administrative procedure that FIRREA provides,

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         SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                  Opinion of the Court

then it must “determine whether or not to exercise the rights of repudiation” under

12 U.S.C.A. § 1821(e)(2) “within a reasonable period” of its appointment and give

notice of repudiation. Once the receiver has given notice of repudiation, then the

debtor must proceed under FIRREA or lose its rights to assert any claims. The facts

regarding the FDIC’s actions as noted herein are undisputed, and the record does not

show, nor does defendant argue, that any formal repudiation was ever made. It is

also undisputed that the FDIC effectively repudiated the contract by its failure to pay

the loan draw requests, so the trial court erred when it denied plaintiffs the

opportunity to raise repudiation as an affirmative defense.

       Although we have determined that the FDIC effectively repudiated the

contract and that plaintiffs are entitled to raise the repudiation as an affirmative

defense, the question remains of the proper remedy.         Plaintiffs argue that the

repudiation is a material breach which excuses them from any performance

whatsoever under the loan contract and thus requires dismissal of defendant’s

counterclaim for breach of contract.    But this argument ignores the fact that the

FDIC did have a right to repudiate the loan contract and that a debtor’s right to

recover damages, even if properly brought as an administrative claim under FIRREA,

is limited.

       In Schettler, the Nevada court addressed how the debtor’s affirmative defense

may be used to offset any claim by the lender and determined that on remand the

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        SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                  Opinion of the Court

trial court must consider recoupment. 275 P.3d at 941-42. Neither plaintiffs nor

defendant specifically requested recoupment here, but the same was true in Schettler.

Id. at 941, n. 7. The Nevada court noted that fair notice of the defense was raised by

the pleadings in Schettler, and the same is true here. Id. (“Although Schettler did

not specifically allege that he was entitled to ‘recoupment’ in his answer to RalRon’s

complaint, when construed as a whole, his answer sufficiently encompassed the

concept of recoupment. Recoupment must be plead affirmatively, and if it is not

raised it is ordinarily deemed waived. However, if a plaintiff had notice that a

defendant was relying on recoupment, the affirmative defense will be allowed. Fair

notice was given because it was specifically raised on reconsideration, which is a part

of the issues on appeal.    Accordingly, we will not treat recoupment as waived.”

(Citations, quotation marks, and brackets omitted)).

             Recoupment is a right of the defendant to have a deduction
             from the amount of the plaintiff’s damages, for the reason
             that the plaintiff has not complied with the cross-
             obligations or independent covenants arising under the
             same contract. Recoupment must arise out of the same
             transaction and involve the same parties; thus, it does not
             apply when the defendant’s allegations arise out of a
             transaction extrinsic to the plaintiff’s cause of action.
             While the defendant may thus defend against the
             plaintiff’s claim by asserting competing rights arising out
             of the same transaction and thereby extinguish or reduce
             any judgment awarded to the plaintiff, recoupment does
             not allow the defendant to pursue damages in excess of the
             plaintiff’s judgment award. Thus, by its very nature and
             regardless of whether the same facts could constitute a
             separate claim for damages, recoupment seeks to challenge

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         SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                   Opinion of the Court

             the foundation of the plaintiff’s claim and, consequently,
             we recognize recoupment as an affirmative defense not
             barred by FIRREA. Here, based on his allegations,
             Schettler may be able to demonstrate that he is entitled to
             recoup against any amount awarded RalRon on its claims,
             up to the amount awarded.

Id. at 941 (citations, quotation marks, and brackets omitted).

        Recoupment has not been addressed as extensively or recently in North

Carolina as in Nevada, but North Carolina’s law of recoupment is essentially the

same.

                    A recoupment is a defence by which a defendant,
             when sued for a debt or damages, might recoup the
             damages suffered by himself from any breach by the
             plaintiff of the same contract. And . . . it [has been] held
             that where a justice has jurisdiction of the principal matter
             of an action, he also has jurisdiction of incidental questions
             necessary to its determination, and hence may even admit
             an equity to be set up as a defence.
                    There are many resemblances and dissimilarities
             between these several defences. In a counter-claim to an
             action upon a contract, where a judgment is prayed against
             the defendant, he may recover the excess, if any. If no
             judgment or relief is prayed, it is a set-off, if it is a claim
             distinct from and independent of the action. But if it is a
             matter growing out of or connected with the subject of the
             action, then it is recoupment.
                    In our case the defendants pleaded “set-off and
             counter-claim,” but they demanded no relief against the
             plaintiffs, and the defense set up arose out of the contract
             set forth in the complaint, and their defence therefore fell
             under the head of recoupment.

Hurst v. Everett, 91 N.C. 399, 404-05 (1884) (citations omitted).

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           SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                    Opinion of the Court

          Recoupment is limited to a set-off against the defendant’s counterclaim, so

plaintiffs cannot recover any damages, even if they were to present evidence of

greater damages than what they would owe on defendant’s counterclaim for breach

of contract. In addition, since defendant had a legal right to repudiate the loan

agreement, the measure of damages which plaintiffs may assert as recoupment

should be limited by the compensatory damages which they would have been allowed

to prove under a FIRREA claim, as set forth in 12 U.S.C.A. § 1821(e)(3)(A).

Depending upon the amount of compensatory damages shown by plaintiffs, the

recoupment could offset all of the damages claimed by defendant, but cannot exceed

the amount of defendant’s damages.          Because the trial court erred by barring

plaintiffs’ affirmative defense and there are genuine issues of material fact regarding

the amount of recoupment plaintiffs may be entitled to as an offset against

defendant’s claim for breach of the loan agreement, we reverse the trial court’s order

granting summary judgment and remand for further proceedings consistent with the

opinion.

   III.     Collateral Estoppel Effect

      Next, plaintiffs argue that the trial court erred in not granting collateral

estoppel effect to the foreclosure order entered by the Clerk of Court which found that

Settlers Edge was not in default of the loan. Plaintiffs contend:

                     Here, it is undisputed that Defendant dismissed the
               appeal of the Foreclosure Order, rendering it a final,

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        SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                  Opinion of the Court

             binding order. It is also undisputed that the Clerk
             determined that Settlers Edge was not in default, that the
             parties to the Foreclosure and this action are the same or
             are in privity with each other, and that entering the Second
             Order necessarily required finding Settlers Edge in
             default.

                    Moreover, there is no dispute that, at the time of the
             Foreclosure, the maturity date of the Note had passed,
             Settlers Edge had not repaid amounts otherwise due under
             the Note, and the Note had been declared in default by the
             FDIC. In Defendant’s Motion and materials submitted in
             support, Defendant states no basis for default other than
             Settlers Edge’s failure to pay the Note in full prior to the
             maturity date. . . . This case has remained substantially
             static, factually and legally, since the Foreclosure Order,
             and the Trial Court’s determination that Settlers Edge was
             in default is inconsistent with the Foreclosure Order. The
             Trial Court erred, first, by entering the First Order
             denying collateral estoppel effect to the Foreclosure Order,
             and, second, by finding Settlers Edge in default in the
             Second Order despite the prior, contrary finding by the
             Clerk in the Foreclosure Order.

      But based upon the prior appeal to this Court, we cannot find that the Clerk’s

foreclosure order may have any collateral estoppel effect. The issue actually decided

by the Yancey County Clerk of Court is not clear from the foreclosure order, which

contains conclusions that seem to go both ways. Nevertheless, we are bound by this

Court’s prior opinion regarding the foreclosure order:

                    The application of the preclusive doctrines of
             collateral estoppel and res judicata must be narrowly
             construed and cannot be left to uncertain inference. Here,
             given that the order denying foreclosure (1) did not include
             specific findings expressly determining that a material
             breach had occurred; and (2) did find that a valid debt

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          SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                   Opinion of the Court

               existed between Plaintiffs and the FDIC, we are unable to
               conclude that the Clerk actually determined that a material
               breach had occurred. Such a conclusion would force us to
               speculate as to the Clerk’s thought processes in rendering
               its findings, which we are not permitted to do.

Settlers Edge Holding Co., LLC, v. RES-NC Settlers Edge, LLC (“Settlers Edge I”),

238 N.C. App. 198, 768 S.E.2d 66, 2014 WL 7149116, *5, 2014 N.C. App. LEXIS 1291,

*12-13 (2014) (unpublished) (citations and quotation marks omitted) (emphasis

added). This Court previously decided that the basis for the Clerk’s order is unclear,

and we are bound by that ruling. In addition, even assuming that a material breach

occurred, as discussed above, this breach was a repudiation and plaintiffs are limited

to asserting their affirmative defense and offsetting defendant’s damages by

recoupment. We therefore decline to address this issue further.

   IV.      Summary Judgment

         Finally, plaintiffs contend that the trial court erred in granting summary

judgment in favor of defendant and denying summary judgment in favor of plaintiffs

“due to its failure to consider the legal and undisputed factual merits of plaintiffs’

affirmative defenses.”     As we have already concluded that the trial court had

jurisdiction to consider plaintiffs’ affirmative defenses and that the contract was

effectively repudiated, we agree that the trial court should not have granted summary

judgment in favor of defendants, and we reverse its order doing so. But this does not

mean that we can grant summary judgment in favor of plaintiffs, since on remand

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           SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC

                                    Opinion of the Court

the trial court must consider the proper measure of offset for the defendant’s breach

of contract in recoupment.

   V.       Conclusion

         In sum, while we decline to find any collateral estoppel effect from the Clerk’s

prior order and cannot grant summary judgment in favor of plaintiffs at this time, we

conclude that the FDIC effectively repudiated the contract and plaintiffs are entitled

to raise the repudiation as an affirmative defense. But because the FDIC had a right

to repudiate, plaintiffs’ right to recover damages is limited. Since we have concluded

that the trial court erred by barring plaintiffs’ affirmative defense, and since there

are genuine issues of material fact remaining in regards to the amount of recoupment

plaintiffs may be entitled to as an offset against defendant’s claim for breach of the

loan agreement, we reverse the trial court’s order granting summary judgment and

remand for further proceedings consistent with this opinion to determine the amount

of damages defendant may recover from plaintiffs, if any, for its breach of contract

claim.

         REVERSED AND REMANDED.

         Judges ELMORE and DIETZ concur.

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