Oench, Duhme Co v. Federal Deposit Ins Corporation

• Decision Date: 02 March 1942
• Docket Number: No. 206,206
• Citation: 62 S.Ct. 676,86 L.Ed. 956,315 U.S. 447
• Parties: D'OENCH, DUHME & CO., Inc., v. FEDERAL DEPOSIT INS. CORPORATION
• Court: U.S. Supreme Court

315 U.S. 447

62 S.Ct. 676

86 L.Ed. 956

D'OENCH, DUHME & CO., Inc.,

v FEDERAL DEPOSIT INS. CORPORATION.

No. 206.

Argued Jan. 9, 1942.

Decided March 2, 1942.

Rehearing Denied March 30, 1942.

See 315 U.S. 830, 62 S.Ct. 910, 86 L.Ed. —-.

[Syllabus from pages 447-449 intentionally omitted] Messrs. John W. Giesecke, Harold C. Ackert, and Franklin E. Reagan, all of St. Louis, Mo., for petitioner.

[Argument of Counsel from pages 449-453 intentionally omitted] Mr. Francis M. Shea, Asst. Atty. Gen., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

Respondent instituted this suit in the United States District Court for the Eastern Division of the Eastern District of Missouri on a demand note for $5000 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.

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. 8 Cir., 117 F.2d 491. Petitioner contends that under the rule of Klaxon Company v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477, 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, 62 S.Ct. 80, 86 L.Ed. —-, 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, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487, was based. 313 U.S. at page 496, 61 S.Ct. at page 1021, 85 L.Ed. 1477. 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 Reserve Act, 12 U.S.C. § 264(j), 12 U.S.C.A. § 264(j), 48 Stat. 162, 168, 172, 49 Stat. 684, 692. And see 28 U.S.C. § 42, 28 U.S.C.A. § 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, 60 S.Ct. 481, 84 L.Ed. 694.

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), 12 U.S.C.A. § 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, know- ing 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 misrepresentations as to the securities or other assets in the portfolios of the banks which respondent insures or to which it makes loans. If petitioner and the bank had arranged to use the note for the express purpose of deceiving respondent on insurance of the bank or on the making of the loan, the case would be on all fours with Deitrick v. Greaney, supra. In that case the defendant for the purpose of concealing a national bank's acquisition of its own stock had the shares held by a straw man and executed a note to the bank, it being agreed that the shares were to be held for the bank and that he was not to be liable on the note. We held as a matter of federal law, based on the policy of the National Banking Act to prevent the impairment of a bank's capital resources by prohibiting such acquisitions, that the defendant could not rely on his own wrongful act to defeat the obligation of the note as against the receiver of the bank. The defendant's act was itself a violation of the statute. 309 U.S. page 198, 60 S.Ct. page 484, 84 L.Ed. 694. But the reach of the rule which prevents an accommodation maker of a note from setting up the defense of no consideration against a bank or its receiver or creditors is not delimited to those instances where he has committed a statutory offense. As indicated by the cases cited in the Deitrick case, 309 U.S. page 198, 60 S.Ct. page 484, 84 L.Ed. 694, an accommodation maker is not allowed that defense as against the receiver of the bank and its creditors, or at times even as against the bank itself, where his act contravenes a general policy to protect the institution of banking from such secret agreements. In some of those cases the accommodation maker was party to the scheme of deception in the sense that he had full knowledge of the intended use of the paper. Putnam v. Chase, 106 Or. 440, 212 P. 365; Vallely v. Devaney, 49 N.D. 1107, 194 N.W. 903; Niblack v. Farley, 286 Ill. 536, 122 N.E. 160; Cedar State Bank v. Olson, 116 Kan. 320, 226 P. 995; Bay Parkway Nat. Bank v. Shalom, 270 N.Y. 172, 200 N.E. 685; German-American Finance Corp. v. Merchants & Mfrs. State Bank, 177 Minn. 529, 225 N.W. 891, 64 A.L.R. 582. In others he had 'no positive idea of committing any fraud upon any one.' Denny v. Fishter, 238 Ky. 127, 129, 36 S.W.2d 864, 865; Iglehart v. Todd, 203 Ind. 427, 442, 178 N.E. 685; Mount Vernon Trust Co. v. Bergoff, 272 N.Y. 192, 5 N.E.2d 196. And see Pauly v. O'Brien, C.C., 69 F. 460; Williston on Contracts (Rev.Ed.) § 1632. Yet he has not been allowed to escape liability on the note as against the receiver even though he was 'very ignorant and ill-informed of the character of the transaction'. Rinaldi v. Young, 67 App.D.C. 305, 92 F.2d 229, 231. Indeed recovery was allowed by the bank itself in Mount Vernon Trust Co. v. Bergoff, supra, where the court said (272 N.Y. page 196, 5 N.E.2d page 197): 'The defendant may not have intended to deceive any person, but, when she executed and delivered to the plaintiff bank an instrument in the form of a note, she was chargeable with knowledge that, for the accommodation of the bank, she was aiding the bank to conceal the actual transaction. Public policy requires that a person who, for the accommodation of the bank, executes an...