315 U.S. 447 (1942), 20, D'Oench, Duhme & Co., Inc. v. Federal Deposit Insurance Corporation

Docket Nº:No. 20
Citation:315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956
Party Name:D'Oench, Duhme & Co., Inc. v. Federal Deposit Insurance Corporation
Case Date:March 02, 1942
Court:United States Supreme Court

Page 447

315 U.S. 447 (1942)

62 S.Ct. 676, 86 L.Ed. 956

D'Oench, Duhme & Co., Inc.


Federal Deposit Insurance Corporation

No. 20

United States Supreme Court

March 2, 1942

Argued January 9, 1942




1. Jurisdiction of the District Court of an action by the Federal Deposit Insurance Corporation to collect a note, part of the assets acquired by the Corporation as collateral securing a loan made by it to a state bank, is based upon the fact that the plaintiff is a federal corporation suing under an Act of Congress authorizing it to sue and be sued "in any court of law or equity, State or Federal," and providing that

All suits of a civil nature at common law or in equity to which the Corporation shall be a party shall be deemed to

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arise under the laws of the United States.

Federal Reserve Act, § 12B. P. 455.

2. Whether the doctrine of Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, requiring a federal District Court to follow the conflict of law rules of the State in which it sits, is applicable where federal jurisdiction is not based on diversity of citizenship need not be decided where the issue is a federal question. P. 456.

3. In view of the federal policy evinced by the Federal Reserve Act, § 12B(s) and former subdivision (y), to protect the Federal Deposit Insurance Corporation and the public funds which it administers against misrepresentations of the assets of banks which it insures or to which it makes loans, the maker of a note which was part of the assets of a state bank when the Corporation insured it and was acquired later by the Corporation as part of the collateral furnished by the bank for a subsequent loan is estopped to defend against the Corporation upon the ground that the note was accommodation paper, given without consideration and upon an understanding that it would not be collected, in order to enable the bank to carry it as a real asset in lieu of defaulted paper and thereby deceive the public examiners. Pp. 459, 461.

4. Although the maker of the note here involved did not know that it was to be used to deceive the Federal Deposit Insurance Corporation, which had not then been created, yet the permission which the maker gave the bank to carry the note as a real asset was a continuing one, and had not been revoked when the Corporation acquired the paper, and that permission must be presumed to have included authority from the maker to treat the note as genuine for the purposes of examination by public authorities, as well as for general banking activities. P. 459.

5. Inasmuch as the Federal Deposit Insurance Corporation was authorized to insure a state bank only on a certificate from state authority that the bank was solvent, it is presumed that, in this case, such certificate was given. P. 460.

6. The inability of the accommodation maker to plead the defense of no consideration does not depend upon the commission of a penal offense in violation of § 12B(s) of the Federal Reserve Act, but upon whether the note was designed to deceive the creditors or the public examining authority, or would tend to have that effect. P. 460.

7. The fact that the note was charged off by the bank after the bank had been insured by the Federal Deposit Insurance Corporation and before the latter had acquired the note under the loan is immaterial,

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since a note may be nonetheless an asset though it is charged off, and the suit here is to protect the rights of the Corporation as insurer. The right to recover on the note is not dependent upon proof of loss or damage caused by the fraudulent practice. P. 460. 117 F.2d 491, affirmed.

Certiorari, 314 U.S. 592, to review the affirmance of a judgment holding the present petitioner liable to the respondent on a promissory note.

Page 453

DOUGLAS, J., lead opinion

MR. JUSTICE DOUGLAS delivered the opinion of the Court.

[62 S.Ct. 678] Respondent instituted this suit in the United States District Court for the Eastern Division of the Eastern

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District of Missouri on a demand note for $5,000 executed by petitioner in 1933 and payable to the Belleville Bank & Trust Co., Belleville, Illinois. Respondent insured that bank January 1, 1934, and it acquired the note in 1938 as part of the collateral securing a loan of over $1,000,000 to the bank, made in connection with the assumption of the latter's deposit liabilities by another bank. Since 1935, the note had been among the charged off assets of the bank. The note was executed by petitioner in renewal of notes which it had executed in 1926. Petitioner, who was engaged in the securities business at St. Louis, Missouri, had sold the bank certain bonds which later defaulted. The original notes were executed to enable the bank to carry the notes and not show any past due bonds. Proceeds of the bonds were to be credited on the notes.1 The receipts for the notes contained the statement, "This note is given with the understanding it will not be called for payment. All interest payments to be repaid." Respondent had no knowledge of the existence of the receipts until after demand for payment on the renewal note was made in 1938. Certain interest payments on the notes were made prior to renewal for the purpose of keeping them "as live paper." Petitioner's president, who signed the original notes, knew that they were executed so that the past due bonds would not appear among the assets of the bank, and that the purpose of the interest payments was "to keep the notes alive." The original notes were signed in St. Louis, Missouri, were payable at petitioner's office there, and were delivered to the payee in Illinois. The evidence does not disclose where the note sued upon was signed, though it was dated at Belleville, Illinois, and payable to the bank there.

Page 455

The main point of controversy here revolves around the question as to what law is applicable. The District Court held that Illinois law was applicable and that petitioner was liable. The Circuit Court of Appeals applied "general law" to determine that the note was an Illinois, rather than a Missouri, contract, and it decided that, under Illinois law, respondent was the equivalent of a holder in due course, and entitled to recover. 117 F.2d 491. Petitioner contends that, under the rule of Klaxon Company v. Stentor Electric Mfg. Co., 313 U.S. 487, a federal court sitting in Missouri must apply Missouri's conflict of law rules; that if, as was the case here, Illinois law was not pleaded or proved, a Missouri court would have ascertained Illinois law from Missouri decisions, since, in such a case, Illinois law would be presumed to be the same as the Missouri law, and that the District Court was bound to follow that same course. We granted the petition for certiorari, 314 U.S. 592, because of the asserted conflict between the decision below and Klaxon Company v. Stentor Electric Mfg. Co., supra.

We held in the latter decision that a failure of a federal court in a diversity of citizenship case to follow the forum's conflict of laws rules "would do violence to the principle of uniformity within a state" upon which Erie R. Co. v. Tompkins, 304 U.S. 64, was based. 313 U.S. at 496. The jurisdiction of the District Court in this case, however, is not based on diversity of citizenship. Respondent, a federal corporation, brings this suit under an Act of Congress authorizing it to sue or be sued "in any court of law or equity, State or Federal."2 Sec. 12B, Federal

Page 456

Reserve Act, 12 U.S.C. § 264(j), 48 Stat. 162, 168, 172, 49 Stat. 684, [62 S.Ct. 679] 692. And see 28 U.S.C. § 42, 43 Stat. 941. Whether the rule of the Klaxon case applies where federal jurisdiction is not based on diversity of citizenship, we need not decide. For we are of the view that the liability of petitioner on the note involves decision of a federal, not a state, question under the rule of Deitrick v. Greaney, 309 U.S. 190.

Petitioner, in its answer, alleged that the note was given without any consideration whatever, and with the understanding that no suit would be brought thereon, and that respondent was not a holder in due course. Respondent, in its reply, alleged that petitioner was estopped to assert those defenses on the grounds that the note was executed for the purpose of permitting the bank to avoid having its records show any past due bonds; that this constituted a misrepresentation which would deceive the creditors of the bank, the state banking authorities and respondent; that petitioner participated in the misrepresentation not only by reason of its knowledge as to the purpose which the note would serve, but also by reason of its payment of interest in order to make the notes appear as a good asset. The District Court held that respondent was an innocent holder of the note in good faith and for value, and that petitioner was estopped to assert want of consideration as a defense.

Sec. 12B(s) of the Federal Reserve Act, 12 U.S.C. § 264(s), provides that

Whoever, for the purpose of obtaining any loan from the Corporation . . . or for the purpose of influencing in any way the action of the Corporation under this section, makes any statement, knowing

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it to be false, or willfully overvalues any security, shall be punished by a fine of not more than $5,000, or by imprisonment for not more than two years or both.

Subdivision (y) of the same section provided, at the time respondent insured the Belleville bank,3 that such a state bank "with the approval of the authority having supervision" of the bank and on "certification" to respondent "by such authority" that the bank "is in solvent condition" shall, "after examination by, and with the approval of," the respondent be entitled to insurance.4

These provisions reveal a federal policy to protect respondent and the public funds which it administers against...

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