Downriver Community Federal Credit Union v. Penn Square Bank Through Federal Deposit Ins. Corp.

• Citation: 879 F.2d 754
• Decision Date: 03 July 1989
• Docket Number: Nos. 87-1648,87-1649 and 87-1707,s. 87-1648
• Parties: DOWNRIVER COMMUNITY FEDERAL CREDIT UNION, Plaintiff-Appellant, v. PENN SQUARE BANK, through its Receiver, FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant-Appellee. WOOD PRODUCTS CREDIT UNION, Plaintiff-Appellant/Cross-Appellee, v. PENN SQUARE BANK, through its Receiver, FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant-Appellee/Cross-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 754

879 F.2d 754

58 USLW 2045

DOWNRIVER COMMUNITY FEDERAL CREDIT UNION, Plaintiff-Appellant, v. PENN SQUARE BANK, through its Receiver, FEDERAL DEPOSIT

INSURANCE CORPORATION, Defendant-Appellee.

WOOD PRODUCTS CREDIT UNION, Plaintiff-Appellant/Cross-Appellee, v. PENN SQUARE BANK, through its Receiver, FEDERAL DEPOSIT

INSURANCE CORPORATION, Defendant-Appellee/Cross-Appellant.

Nos. 87-1648, 87-1649 and 87-1707.

United States Court of Appeals, Tenth Circuit.

July 3, 1989.

Thomas S. Dann, of Timothy D. Naegele & Associates, Washington, D.C., and Robert A. Wiener, of Weinberg, Zipser, Arbiter, Heller & Quinn, Los Angeles, Cal. (Timothy D. Naegele, of Timothy D. Naegele & Associates, Washington, D.C., and C. Alexander Hewes, Jr., of Hewes, Morella, Gelband & Lamberton, Washington, D.C., with them, on the briefs), for plaintiffs-appellants.

Ann S. DuRoss (Donald B. McKinley, Regional Counsel, and Jane Rossowski, of Federal Deposit Ins. Corp., Washington, D.C., and Ronald N. Ricketts, of Gable & Gotwals, Tulsa, Okl., with her, on the briefs), Asst. Gen. Counsel, of Federal Deposit Ins. Corp., Washington, D.C., for defendant-appellee.

Before McKAY, and TACHA, Circuit Judges, and O'CONNOR, District Judge. ^*

TACHA, Circuit Judge.

This appeal arises from a dispute between certain uninsured depositors in the insolvent Penn Square Bank, N.A. (PSB), and the Federal Deposit Insurance Corporation (FDIC), in its capacity as receiver, over the priority of the depositors' claims against the insolvent bank's assets. The district court found that PSB fraudulently induced the plaintiffs to deposit funds through issuing financial statements that were materially misleading as to PSB's financial condition. In the remedy phase of the trial, the district court imposed a constructive trust upon PSB's assets in favor of the plaintiff-depositors, thereby entitling them to recover the full amount of their deposits, rather than their pro rata share under the relevant provision of the National Bank Act, 12 U.S.C. Sec. 194. We hold that federal law limits these depositors' recovery to their pro rata share of the assets held by the receiver, and reverse.

I.

The plaintiffs, Downriver Community Federal Credit Union (Downriver) and Wood Products Credit Union (Wood Products), were among the 140 credit unions, 48 savings and loans, and 47 commercial banks holding substantial uninsured deposits in PSB when the Comptroller of the Currency ordered PSB closed on July 5, 1982. See Penn Square Bank Failure: Hearings Before the House Comm. on Banking, Finance and Urban Affairs, 97th Cong., 2d Sess., pt. 2, at 271 (1983). Like many other credit unions, Wood Products and Downriver had purchased certificates of deposit in PSB relying in part upon recommendations and financial information provided by money brokers, "the middlemen in the CD market whose fees were paid not by the credit unions, but by Penn Square." Id. at 267.

In December 1981 Downriver was solicited by First United Fund (FUF), a money broker located in Garden City, New York, that claimed to perform a "complete financial analysis" of all banking institutions that it represented. Downriver purchased its first PSB certificate of deposit on April 1, 1982, in reliance upon financial information that FUF provided over the telephone. FUF later provided Downriver with PSB's financial statements, prepared by PSB's accountants, Peat, Marwick, Mitchell & Co. (PMM), and Downriver purchased additional certificates of deposit in reliance upon the information contained therein. On the date that the Comptroller of the Currency closed PSB, Downriver held over $4 million in PSB certificates of deposit. The FDIC paid Downriver deposit insurance of $100,000 and issued a receiver's certificate for the uninsured balance of $3,938,240. As of December 10, 1986, Downriver had received dividend payments on that receiver's certificate totaling $2,166,031.42.

Wood Products similarly purchased a PSB certificate of deposit in reliance upon information provided by a money broker, Professional Asset Management, Inc. (PAM). PAM provided a list of financial institutions in which to invest and produced a "Capital Adequacy Report" reflecting the financial condition of each of those institutions. Financial information provided by the institutions that PAM represented formed the basis for those reports. After analyzing the financial information contained in the report on PSB, Wood Products purchased a $500,000 PSB certificate of deposit on June 14, 1982. Upon PSB's closure, Wood Products received federal deposit insurance of $100,000 and a receiver's certificate covering the uninsured balance of $404,583.32. As of December 10, 1986, Wood Products had received dividends upon its receiver's certificate totaling $222,520.82.

As noted by the district court, the "calamitous event" of the closing of PSB generated many lawsuits against PSB, its officers, directors, and accountants, and the money brokers responsible for soliciting funds for the bank. Both Downriver and Wood Products commenced suits in the United States District Court for the Western District of Oklahoma, claiming in part that PSB knowingly or recklessly induced their deposits through issuing financial statements that materially mistated the bank's financial condition. Those suits were consolidated with suits filed by several other parties who eventually settled during the trial, leaving only the claims of Downriver and Wood Products.

The case was tried in several phases, two of which are most relevant to this appeal. The first phase involved primarily the factual issue of whether PSB had fraudulently misrepresented its financial condition in its financial statements, and whether the plaintiffs had relied upon those misrepresentations in purchasing certificates of deposit in PSB. Downriver's claim was tried to the jury, and Wood Products' claim was tried to the court. In both cases, the trier of fact returned verdicts in favor of the plaintiffs, finding that PSB's December 31, 1981, and March 31, 1982, financial statements contained material misrepresentations; such misrepresentations were relied upon by the plaintiffs; and PSB's management and directors knew that those financial statements contained false or misleading information, or recklessly made those representations knowing that there was no reasonable ground for believing they were true.

The second phase of the trial involved remedy questions: whether a constructive trust could be imposed upon the assets held by the receiver, and, if so, whether such a constructive trust should include the postinsolvency interest that the receiver earned on the plaintiffs' deposits. ¹ The district court held that Oklahoma law, rather than federal law, governed whether a constructive trust could be imposed. Although the relevant provision of the National Bank Act, 12 U.S.C. Sec. 194, requires ratable distribution among holders of receiver's certificates, the district court held that this provision did not "preclude identification and recovery of property that does not rightfully belong to the bank."

The district court found that the plaintiffs had satisfied the factual and legal prerequisites for imposition of a constructive trust under Oklahoma law: PSB had obtained the plaintiffs' deposits by fraud; such deposits had augmented PSB's assets; and the deposits could be traced into assets held by the receiver. ²

The court also found that the imposition of a constructive trust would be equitable. First, the court noted that recovery by the plaintiffs would have only minimal impact upon the assets available to other uninsured depositors holding receiver's certificates. Second, the court noted that imposing a constructive trust in favor of the plaintiffs was not unfair to other uninsured depositors because other depositors could have brought similar claims on their own or intervened in the present case.

The district court therefore imposed a constructive trust on the assets held by the receiver to the extent of the principal amount of the deposits and interest accrued to the date of insolvency. The court denied the plaintiffs' claim for a constructive trust on the postinsolvency interest that the receiver earned on the plaintiffs' deposits, however, holding that federal law governed the distribution of interest accruing on a claim after insolvency of a national bank and that payment of interest on one claim while other claims remained unpaid in whole or in part would violate the requirement of ratable distribution of assets.

Although neither party challenges the district court's factual findings, both the plaintiffs and the FDIC contend that the court made legal errors. The plaintiffs contend that the district court erred in denying their claim for postinsolvency interest. The FDIC contends that the court erred in imposing a constructive trust for any amount of the plaintiffs' deposits, arguing that an imposition of a constructive trust in this case is a preference contrary to certain provisions of the National Bank Act, 12 U.S.C. Secs. 91, 194. Because we agree with the FDIC that a constructive trust may not be imposed in this case, we do not reach the question of whether an award of postinsolvency interest is permissible.

II.

Although an award of equitable relief is generally reviewed only for an abuse of discretion, see McKinney v. Gannett Co., 817 F.2d 659, 670 (10th Cir.1987), we review de novo the district court's judgment when, as here, the availability of such equitable relief depends upon an interpretation of law, see Pratte v. NLRB, 683 F.2d 1038, 1040 (7th Cir.1982). In deciding the question of whether a constructive trust may be imposed in this case, the first issue to be resolved is the source of the applicable law.

Prior to the insolvency of a national bank, state law generally governs the nature of the relationship between a national bank and its depositors. See Reno Nat'l Bank v. Seaborn, 99...