Federal Deposit Ins. Corp. v. Galloway, 85-2699

• Decision Date: 07 September 1988
• Docket Number: No. 85-2699,85-2699
• Citation: 856 F.2d 112
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant, v. Jack GALLOWAY, Jack Galloway d/b/a Jack's Excavating a/k/a Jack's Excavating Co., Defendants, John W. Meyers, Jr., Lorna M. Meyers, Harry D. Sharp and Brenda C.M. Sharp, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 112

856 F.2d 112

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant, v. Jack GALLOWAY, Jack Galloway d/b/a Jack's Excavating a/k/a Jack's Excavating Co., Defendants John W. Meyers, Jr., Lorna M. Meyers, Harry D. Sharp and Brenda C.M. Sharp, Defendants-Appellees.

No. 85-2699.

United States Court of Appeals Tenth Circuit.

Sept. 7, 1988.

Robert W. Pass of Carlton, Fields, Ward, Emmanuel, Smith & Cutler, Tampa, Florida (Lawrence F. Bates, Office of the General Counsel, Federal Deposit Ins. Corp., Washington, D.C., with him, on the briefs), for plaintiff-appellant.

Ernest C. Ballweg (Bruce E. Moore with him, on the brief), of Cooke, Ballweg, Tuley & Moore, Leawood, Kan., for defendants-appellees.

Before LOGAN and BALDOCK, Circuit Judges, and PHILLIPS, District Judge. ^*

LOGAN, Circuit Judge.

In this action, plaintiff Federal Deposit Insurance Corporation (FDIC), in its corporate capacity as the purchaser of certain assets of the Mission State Bank & Trust Company (the Bank), seeks to recover from the guarantors of certain promissory notes made out to the Bank as payee. The district court held that the guarantors were not liable on the notes, and the FDIC appeals.

The facts are undisputed. Between October 25, 1977, and March 21, 1979, Jack Galloway, president of Jack's Excavating Co. (the Company), signed seven promissory notes ¹ as loans from the Bank for a total of $890,599.51 plus interest. The loan proceeds were used primarily to purchase equipment for the Company. Galloway used most of the proceeds from the first of these notes, Plaintiff's Exhibit 13, to purchase equipment from Johnson County Equipment Company (JCEC). Before the Bank loaned Galloway these proceeds, Bank president Theodore Meyer asked defendant John W. Meyers, Jr., a stockholder in JCEC, to sign an unconditional guaranty for $63,000 of Galloway's debt. Executed and delivered on October 20, 1977, the guaranty agreement provided in relevant part as follows:

"The undersigned ... does hereby absolutely and unconditionally guarantee to said Bank, its successor, successors or assigns, payment at maturity of any and all existing and future indebtedness and liability of every kind, nature and character of $63000.00 (Plus all legal interest charges made by said Bank) either made or endorsed by Jack Galloway ... to the Bank, howsoever and whensoever created, or arising, or evidenced, or acquired....

This guaranty is made and shall continue as to any and all such indebtedness and liability of the borrower to the bank incurred or arising prior to receipt by the bank of written notice of the termination hereof from the undersigned.

This guaranty shall bind the heirs, personal representatives, successors [and] assigns of the undersigned and shall inure to the Bank, its successors and assigns."

FDIC v. Galloway, 613 F.Supp. 1392, 1396 (D.Kan.1985).

On March 20, 1979, Meyers and defendant Harry D. Sharp, who were then stockholders in Kan-Tuck Equipment Company, each executed guaranties for $531,000 of Galloway's debt to the Bank so that the Company could purchase equipment from Kan-Tuck Equipment and JCEC. These guaranties were identical in all respects to Meyers' October 20, 1977, guaranty except for the dates, the amounts, and the signatures appearing thereon. Galloway, 613 F.Supp. at 1396. Meyers and his wife signed one guaranty; Sharp and his wife signed the other.

Before signing these guaranties, Sharp and Meyers asked the Bank's president, Meyer, if Galloway was a good credit risk. The bank president orally assured Sharp and Meyers that the first note Meyers guaranteed had been paid and that the bank would establish a $50,000 escrow account to help cover the first payments on the new note. In fact, however, the bank president knew that Galloway had not paid off the earlier note; further, he did not intend to establish such an escrow account for the new note. Galloway, 613 F.Supp. at 1396.

On August 8, 1980, the FDIC was appointed as receiver of the Bank, and received court authorization to sell to itself as a corporate entity all of the Bank's assets not acquired by the successor bank. On March 25, 1981, the FDIC in its corporate capacity acquired these assets, including the notes and guaranties at issue in this case. On March 9, 1984, the FDIC brought this action against Galloway and the Company, and against Meyers and Sharp as guarantors.

After a bench trial, the district court found by "clear and convincing" evidence that the bank president's misrepresentations in 1979 were made with the intent to deceive Sharp and Meyers by understating the risk of guaranteeing Galloway's debt. Id. at 1397. Consequently, the court held that these misrepresentations constituted fraud in the inducement, which "unless otherwise barred as a legal defense ... would relieve these defendants of liability on their guaranty agreements." Id. at 1399-1400. In determining whether Sharp and Meyers could rely on fraud in the inducement as a defense, the court distinguished between the statement of intention to open an escrow account and the statement that the 1977 note had been retired. The court held that the bank president's statement of intention to open the $50,000 escrow account constituted an agreement between the Bank and these defendants and, as such, was barred as a defense against the FDIC by 12 U.S.C. Sec. 1823(e) and federal common law; it held, however, that the misrepresentation about Galloway paying off the 1977 note constituted fraud in the inducement not based on an agreement, and was a defense available against the FDIC. Galloway, 613 F.Supp. at 1403. The district court also held that the FDIC could not recover from Meyers on the 1977 guaranty because the statute of limitations on this guaranty had run before the FDIC brought the instant action. The FDIC appeals the district court's denial of recovery on both guaranties.

I

We address first the district court's holding that the 1979 guaranties by Meyers and Sharp can be avoided because of fraud in the inducement. The FDIC does not dispute the finding of fraud in the inducement but argues instead that 12 U.S.C. Sec. 1823(e) prevents these defendants from raising such fraud as a defense against the FDIC in its capacity as assignee of the Bank's assets. Section 1823(e) provides in relevant part as follows:

"No agreement which tends to diminish or defeat the right, title or interest of the [FDIC] in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the [FDIC] unless such agreement (1) shall be in writing, (2) shall have been executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the bank, (3) shall have been approved by the board of directors of the bank or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (4) shall have been, continuously, from the time of its execution, an official record of the bank."

The district court found that the representations made by the president of the Bank were not made in writing, were not approved by the board of directors or its loan committee, and were not kept as an official record of the bank. But because the court thought one of the acts of misrepresentation--Meyer's false statement that Galloway had paid off the October 1977 note--was not an "agreement," it held that Sec. 1823(e) did not apply.

As the FDIC points out, a Supreme Court case decided after entry of the district court's judgment, Langley v. FDIC, --- U.S. ----, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987), rejects the district court's construction of the term "agreement" as contemplated by Sec. 1823(e). In Langley, the makers of a promissory note alleged that the payee procured their agreement to pay through factual misrepresentations. Id. 108 S.Ct. at 400. The Court unanimously rejected the makers' argument that the word "agreement" encompasses only an express promise to perform an act in the future; the Court held that "agreement" also includes conditions imposed upon the obligation to repay and representations or warranties made by the payee bank as part of the loan transaction. Id. 108 S.Ct. at 401-02. Specifically, the Court held that "one who signs a facially unqualified note subject to an unwritten and unrecorded condition upon its repayment has lent himself to a scheme or arrangement that is likely to mislead the banking authorities, whether the condition consists of performance of a counterpromise ... or of the truthfulness of a warranted fact." Id. 108 S.Ct. at 402 (emphasis added).

Meyers and Sharp argue that Sec. 1823(e) should not apply to fraudulent misrepresentations of which the FDIC was aware when it acquired the note. The Langley Court also specifically rejected this argument, holding that neither the guarantors' assertion of fraud in the inducement as a defense nor the FDIC's knowledge of the misrepresentation when it acquired the note prevented the application of Sec. 1823(e). Id.

Although Langley involved liability of the makers of a promissory note its reasoning surely applies to guarantors, and directly controls the instant case. The Court explained that one of the purposes underlying Sec. 1823(e) is to allow the FDIC to rely on a bank's records in assessing its financial condition. Id. 108 S.Ct. at 401. The reliability of this assessment, according to the Court, necessarily depends on protecting the FDIC from undisclosed conditions to facially unqualified notes. Id. Likewise, because the FDIC relies on the existence and strength of guaranties in assessing the financial condition of a bank, it also must be protected from undisclosed conditions to seemingly unqualified guaranties. Although the Court stated that Sec. 1823(e) would not prevent the real defense of fraud in the factum, "that is, the sort of fraud that procures a party's...