604 Columbus Ave. Realty Trust, In re

• Decision Date: 19 June 1992
• Docket Number: Nos. 91-1976,91-1977,s. 91-1976
• Parties: , 61 USLW 2002, Bankr. L. Rep. P 74,697 In re 604 COLUMBUS AVENUE REALTY TRUST, Debtor. CAPITOL BANK & TRUST COMPANY, Appellee, v. 604 COLUMBUS AVENUE REALTY TRUST, Appellant. In re 604 COLUMBUS AVENUE REALTY TRUST, Debtor. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver/Liquidating Agent of Capitol Bank & Trust Company, Appellant, v. 604 COLUMBUS AVENUE REALTY TRUST, et al., Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 1332

968 F.2d 1332

120 A.L.R.Fed. 719, 61 USLW 2002, Bankr.

L. Rep. P 74,697

In re 604 COLUMBUS AVENUE REALTY TRUST, Debtor.

CAPITOL BANK & TRUST COMPANY, Appellee, v. 604 COLUMBUS AVENUE REALTY TRUST, Appellant.

In re 604 COLUMBUS AVENUE REALTY TRUST, Debtor.

FEDERAL DEPOSIT INSURANCE CORPORATION, as

Receiver/Liquidating Agent of Capitol Bank & Trust

Company, Appellant, v. 604 COLUMBUS AVENUE REALTY TRUST, et al., Appellees.

Nos. 91-1976, 91-1977.

United States Court of Appeals, First Circuit.

Argued March 5, 1992.

Decided June 19, 1992.

Robert Owen Resnick, with whom John F. Cullen, George J. Nader, and Cullen & Resnick, Boston, Mass., were on brief, for 604 Columbus Avenue.

Michael H. Krimminger, with whom Richard J. Osterman, Jr., Ann S. Duross, Washington, D.C., and Richard N. Gottlieb, Charleston, W.Va., were on brief, for F.D.I.C.

Before TORRUELLA, Circuit Judge, WEIS ^* and BOWNES, Senior Circuit Judges.

BOWNES, Senior Circuit Judge.

This is a case involving a failed loan transaction that well illustrates Polonius' advice, "[n]either a borrower, nor a lender be." ¹ These appeals require us to determine, inter alia, the applicability of certain federal defenses available to the Federal Deposit Insurance Corporation (FDIC) in its capacity as receiver when it seeks to enforce against a bankrupt borrower an

obligation formerly held by a failed financial institution.

PROCEDURAL PATH

This case arises from the default by the 604 Columbus Avenue Realty Trust ("the Trust") on payment of a loan from the Capitol Bank and Trust Company ("the Bank"). Following the Trust's default, the Bank commenced mortgage foreclosure proceedings on the properties securing its loan, among which were the property owned by the Trust itself and properties of the Trust's principal beneficiary, Millicent C. Young ("Young"). ²

To forestall the foreclosures by the Bank, both the Trust and Young filed for protection under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Massachusetts. In May 1988, the Trust, with Young as co-plaintiff, initiated an adversary proceeding against the Bank, its principal secured creditor. In September 1990, the bankruptcy court awarded the plaintiffs approximately $140,000 in damages on claims of fraud and deceit, conversion, and breach of contract, plus interest and attorney's fees. The bankruptcy court found that the Bank improperly applied loan proceeds to payment of "soft costs" incurred by the Trust--financing fees, interest, taxes and similar expenses. It also found that an officer of the Bank extracted kickback payments from the loan proceeds in return for his assistance in securing approval of the loan. Under its power of equitable subordination pursuant to 11 U.S.C. § 510(c), the bankruptcy court subordinated the Bank's secured claim on the Trust's bankruptcy estate to the claims of the Trust's other creditors by an amount equal to the damages, plus interest and attorney's fees. It ordered the transfer from the Bank to the Trust of a security interest in the Trust's estate equivalent to the total of the damages, interest and attorney's fees.

During the pendency of an appeal of this judgment to the district court, the Bank was declared unsound by Massachusetts banking officials. The FDIC was appointed receiver, and in February 1991 was substituted as defendant-appellant in the district court.

In August 1991, the district court affirmed in substantial part the bankruptcy court's rulings on the merits of the Trust's claims and equitable subordination of part of the Bank's secured claim. It ruled, however, that the FDIC was entitled to raise the defenses available to it under the doctrine of estoppel established in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and 12 U.S.C. § 1823(e). Invoking the D'Oench doctrine, the district court vacated that part of the bankruptcy court's judgment that was premised on the secret agreement by one of the Trust's principals to provide kickbacks to a Bank officer.

Both the Trust and the FDIC appeal various aspects of the judgments of both the bankruptcy and district courts. We affirm the judgment of the bankruptcy court, as modified by the district court.

BACKGROUND AND FACTS

Before stating the facts, we think it useful to review the dual role of the FDIC in bank failures. Our recent decision in Timberland Design, Inc. v. First Service Bank For Savings, 932 F.2d 46, 48 (1st Cir.1991), provides an excellent summary of the FDIC's different functions:

As receiver, the FDIC manages the assets of the failed bank on behalf of the bank's creditors and shareholders. In its corporate capacity, the FDIC is responsible for insuring the failed bank's deposits. Although there are many options available to the FDIC when a bank fails, these options generally fall within two categories of approaches, either liquidation or purchase and assumption. The liquidation option is the easiest method The preferred option when a bank fails, therefore, is the purchase and assumption option. Under this arrangement, the FDIC, in its capacity as receiver, sells the bank's healthy assets to the purchasing bank in exchange for the purchasing bank's promise to pay the failed bank's depositors. In addition, as receiver, the FDIC sells the "bad" assets to itself acting in its corporate capacity. With the money it receives, the FDIC-receiver then pays the purchasing bank enough money to make up the difference between what it must pay out to the failed bank's depositors, and what the purchasing bank was willing to pay for the good assets that it purchased. The FDIC acting in its corporate capacity then tries to collect on the bad assets to minimize the loss to the insurance fund. Generally, the purchase and assumption must be executed in great haste, often overnight.

                but carries with it two major disadvantages.   First, the closing of the bank weakens confidence in the banking system.   Second, there is often substantial delay in returning funds to depositors
                

Id. at 48 (citations omitted).

Turning to the case at hand, we first summarize the extensive findings of fact of the bankruptcy court. See In re 604 Columbus Avenue Realty Trust, 119 B.R. 350 (Bankr.D.Mass.1990) ("Bankruptcy Court Opinion"). The loan transaction at issue in these appeals originated in the efforts of Young and several business associates to purchase two buildings located at 604-610 Columbus Avenue in Boston, Massachusetts ("the Columbus Avenue properties"), and a restaurant operated on the premises known as "Bob the Chef." Young was the owner of a contracting and construction company. Among her business partners was Carl Benjamin ("Benjamin"), who served as her financial adviser.

In October 1985, Young and Benjamin learned of the availability for purchase of the Columbus Avenue properties. Young and Benjamin, along with two other partners, agreed to enter into a business relationship through which they would purchase the Columbus Avenue properties, renovate and resell the properties as condominiums, resell the restaurant, and share the profits from the condominium sales and sale of the restaurant. In November 1985, Young and Benjamin offered the owner of the Columbus Avenue properties $1.2 million for the buildings and the restaurant.

Young's attorney, Steven Kunian ("Kunian"), suggested that she and her partners seek financing for the purchase and renovation of the Columbus Avenue properties from the Bank. Kunian had represented the Bank from time to time on loan transactions. In December 1985, Benjamin negotiated the terms of a loan from the Bank on behalf of Young and the other partners. The Bank was represented in these negotiations by a loan officer, Arthur Gauthier, and a member of the Bank's Board of Directors, Sidney Weiner ("Weiner"). Weiner also served on the Bank's Executive Committee, which was responsible for the approval of loans. Although not a salaried employee of the Bank, Weiner was paid director's and consultant's fees, and was regarded by Gauthier and other bank employees as having primary authority for negotiation of the loan to Young and her partners.

Loans larger than $25,000 required the approval of the Bank's Executive Committee. Gauthier presented the proposal for the loan for the Columbus Avenue properties three times before the Executive Committee approved it on January 15, 1986. Final approval by the Executive Committee was achieved when Young agreed to pledge her residence as additional collateral for the loan. Weiner was one of the Executive Committee members who voted to approve the loan.

Some time before the Executive Committee voted to approve the loan, Weiner told Benjamin that the loan would only be approved on the condition that Benjamin agree to pay Weiner personally for his assistance in securing the Bank's approval of the loan. In exchange for this kickback, Weiner helped the loan proposal reach the Executive Committee, voted to approve the loan, and influenced other Committee members to vote in favor of the loan. There Attorney Kunian represented both the Bank and the borrowers at the closing on the loan on February 27, 1986. Kunian suggested that Young and her associates hold the Columbus Avenue properties through a realty trust. At the closing the 604 Columbus Avenue Realty Trust was created, with Young as its trustee. Young was given 62.5% of the beneficial interest in the trust, while each of her three partners, including Benjamin, was made a 12.5% beneficiary. To secure the loan from the Bank, Young executed on behalf of the Trust a "Commercial Real Estate Promissory Note," a "Loan and Security Agreement" ("L & SA"), an "Addendum to Loan & Security Agreement ("L & SA Addendum"), and a "Construction Loan Agreement" (referred to collectively as the "First Loan Agreement"). The Bank, in turn, agreed to lend the Trust $1,500,000.

                was no evidence that other members of the Executive

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