Federal Deposit Ins. Corp. v. Aetna Cas. & Sur. Co., 90-5838

• Decision Date: 24 January 1992
• Docket Number: No. 90-5838,90-5838
• Citation: 947 F.2d 196
• Parties: 15 UCC Rep.Serv.2d 941 FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee, v. The AETNA CASUALTY & SURETY COMPANY, Defendant-Appellant, v. Jacob F. BUTCHER; Jesse A. Barr; and Lionel B. Wilde, Third-Party Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 196

947 F.2d 196

15 UCC Rep.Serv.2d 941

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee, v. The AETNA CASUALTY & SURETY COMPANY, Defendant-Appellant, v. Jacob F. BUTCHER; Jesse A. Barr; and Lionel B. Wilde,

Third-Party Defendants-Appellees.

No. 90-5838.

United States Court of Appeals Sixth Circuit.

Argued May 16, 1991.

Decided Oct. 10, 1991.

As Amended Jan. 24, 1992.

James R. Buckner, Marcia J. Meredith, Raymond R. Murphy, Jr., Miller & Martin, Douglas T. Johnson, Chattanooga, Tenn., John P. Parker (briefed), Richard J. Osterman, Jr., Federal Deposit Ins. Corp., Robert D. McGillicuddy (argued), FDIC, Washington, D.C., for FDIC.

Samuel L. Akers, William B. Luther, Shane Usary, Luther, Anderson, Cleary, Ruth & Speed, Chattanooga, Tenn., Larry L. Simms (argued and briefed), Michael B. Rappaport, Gibson, Dunn & Crutcher, Washington, D.C., for Aetna Cas. & Sur. Co.

Jacob F. Butcher, pro se.

Jesse A. Barr, pro se.

James S. Tipton, Jr., Gentry, Tipton, Kizer & Little, Knoxville, Tenn., for Lionel B. Wilde.

Before GUY and NELSON, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.

RALPH B. GUY, Jr., Circuit Judge.

Defendant Aetna Casualty & Surety Company (Aetna) appeals from a jury verdict awarding $5,950,000 to the Federal Deposit Insurance Corporation (FDIC). Aetna had refused to make payment on a bankers blanket bond issued to the failed United American Bank (UAB) in Knoxville, Tennessee. The FDIC was the receiver for UAB and claimed entitlement to coverage and payment under the bond.

On appeal, Aetna argues that (1) the district court erred when it held that 12 U.S.C. § 1823(e) barred Aetna's misrepresentation and adverse agency defenses, (2) the district court erred when it barred Aetna's alter ego defense, (3) Aetna's motion for judgment notwithstanding the verdict should have been granted because of the overwhelming evidence Aetna presented to support its case, and (4) the district court gave an ambiguous jury instruction which was prejudicial. Upon review, we find that the district court improperly interpreted 12 U.S.C. § 1823(e), as it relates to Aetna's misrepresentation and adverse agency claims, and failed to apply Tennessee law to Aetna's alter ego defense. We reverse and remand on these issues.

I.

UAB was operated and controlled by Jake F. Butcher and his brother, C.H. Butcher, Jr. Jake Butcher was the President, Chairman of the Board of Directors, and the largest shareholder of UAB. Under his control, UAB engaged in unsafe and improper lending practices that eventually led to the bank's insolvency. Specifically, Jake Butcher concealed and misrepresented numerous loans that were for his or his family's personal benefit, forged loan documents, and misrepresented the existence and value of collateral for these loans.

Tennessee's banking commissioner assumed control of UAB on February 14, 1983. The FDIC was then appointed as a receiver and entered into a purchase and assumption agreement. Under the terms of this agreement, the First Tennessee Bank assumed all liabilities and certain assets from the FDIC as a receiver. Assets that were not assumed by First Tennessee, including UAB's claims under the bankers blanket bond, were transferred to the FDIC in its corporate capacity.

Before it dissolved, UAB purchased a bankers blanket bond, effective March 15, 1981, from Aetna with a $6,000,000 limit on liability and a $50,000 deductible. Bankers blanket bonds, which state banks are required to purchase under Tennessee law, generally provide insurance coverage for losses resulting from employee dishonesty, such as theft or fraud. UAB filed an application and provided other supporting documentation in order to obtain coverage. On the application, UAB was required to furnish information that would enable Aetna to evaluate the risks of coverage. Among other things, the application asked whether or not UAB was under investigation by either state or federal authorities in regard to its banking practices. Although UAB indicated that it was not under investigation, Aetna alleges that this information is untrue and provides some evidence to support this allegation. Aetna also alleges that the bank made several other misrepresentations in its application for the bond.

UAB purchased the bond through City and County Insurance (CCI). CCI acted as Aetna's agent in the transaction. CCI was owned and controlled by C.H. Butcher, Jr.

On December 24, 1985, the FDIC in its corporate capacity filed suit against Aetna seeking recovery under the bankers blanket bond. Aetna asserted several defenses. Aetna argued that because UAB made material misrepresentations in its application, the bond was therefore void as a matter of Tennessee law. The district court ruled that 12 U.S.C. § 1823(e) barred this defense.

Aetna also argued that an insurance contract never had been formed. CCI knew of UAB's misrepresentations but failed to inform Aetna. Thus, CCI acted as an adverse agent to Aetna and the contract was a nullity. The district court ruled that 12 U.S.C. § 1823(e) barred this defense as well because the defense depended upon an asserted oral condition to Aetna's obligation to pay under the bond.

Finally, Aetna argued that the Butchers exercised such dominant authority over UAB that they were UAB's alter ego. Because the bankers blanket bond insured UAB only against dishonest acts of its employees, if the Butchers were the alter ego of UAB, then Aetna would not be required to pay insurance benefits to cover losses as a result of the Butchers' actions. The district court struck this defense as well, based on prior case law.

The case was submitted to a jury and the jury rendered a verdict of $5,950,000 plus interest. ¹ Aetna filed a motion for a judgment notwithstanding the verdict or, in the alternative, for a new trial. The district court denied the motion.

Aetna appealed.

II.

The Tenth Circuit, in Grubb v. FDIC, 868 F.2d 1151 (10th Cir.1989), concisely outlined the role of the FDIC in handling the failure of a bank as follows:

When the FDIC serves as receiver of a failed bank, it may pay off the bank's depositors by two methods. The first is simply to liquidate the bank's assets and pay the depositors their insured amounts, covering any shortfall with insurance funds. The FDIC tries to avoid this option, however, because it decreases public confidence in the banking system and may deprive depositors of the uninsured portions of their funds.

The second, and preferred, alternative is to initiate a "purchase and assumption" transaction (P & A). In this type of transaction, the FDIC as receiver arranges to sell acceptable assets of the failed bank to an insured, financially sound bank, which assumes all of the corresponding deposit liabilities and reopens the failed bank without an interruption in operations or loss to depositors. The FDIC as receiver then sells to the FDIC in its corporate capacity the assets that the assuming bank declined to accept. The corporate entity of the FDIC in turn attempts to collect on the unacceptable assets to minimize the loss to the insurance fund.

Id. at 1154-55 (citations omitted). ² The present case involves a suit by the FDIC in its corporate capacity after it chose to initiate a purchase and assumption transaction.

As the Third Circuit observed in FDIC v. Blue Rock Shopping Center, Inc., 766 F.2d 744 (3d Cir.1985), "[n]ot unexpectedly, FDIC's attempts to realize on such assets have been met by defenses which the obligor on the note has against the failed bank." Id. at 752.

In response to the flurry of defenses asserted against the FDIC in purchase and assumption transactions, the Supreme Court in D'Oench, Duhme & Co., Inc. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), held that there was "a federal policy to protect respondent [FDIC], 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." Id. at 457, 62 S.Ct. at 679. The petitioner in D'Oench had argued that, at the time he made the note with the bank, the bank promised that it would not enforce the note. The Court held that this "secret agreement" could not be used as a defense, id. at 460, 62 S.Ct. at 680, because "it would tend to deceive the banking authorities." Langley v. FDIC, 484 U.S. 86, 92, 108 S.Ct. 396, 401, 98 L.Ed.2d 340 (1987).

The D'Oench doctrine was subsequently codified by Congress in 12 U.S.C. § 1823(e), ³ which provides:

No agreement which tends to diminish or defeat the interest of the Corporation [FDIC] in any asset acquired by it under this section or section 1821 of this title, either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the Corporation [FDIC] unless such agreement--

(1) is in writing (2) was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution,

(3) was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the minutes of said board or committee, and

(4) has been, continuously, from the time of its execution, an official record of the depository institution.

Aetna argues that 12 U.S.C. § 1823(e) does not bar its misrepresentation defense. The district court, however, held that the application for the bond did not meet the requirements of section 1823(e). It held that to satisfy section 1823(e)'s requirements for an exception, the board had to approve the misrepresentations on the application specifically; that is, the board must have been aware that the agreement contained fraudulent misrepresentations made by the bank and the board must have effectively endorsed those misrepresentations in its minutes. We disagree. The district court...