Adams v. Zimmerman

• Decision Date: 12 September 1995
• Docket Number: 94-2162,94-2246 and 94-2247,Nos. 94-2161,s. 94-2161
• Citation: 73 F.3d 1164
• Parties: Levi C. ADAMS, et al., Plaintiffs, Appellees, v. ZIMMERMAN, et al., Defendants, Appellees. Federal Deposit Insurance Corporation, Defendant, Appellant. Levi C. ADAMS, et al., Plaintiffs, Appellants, v. ZIMMERMAN, et al., Defendants, Appellees. Federal Deposit Insurance Corporation, Defendant, Appellee. Levi C. ADAMS, et al., Plaintiffs, Appellees, v. ZIMMERMAN, et al., Defendants, Appellees. Federal Deposit Insurance Corporation, Defendant, Appellant. Levi C. ADAMS, et al., Plaintiffs, Appellants, v. ZIMMERMAN, et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1164

73 F.3d 1164

64 USLW 2465

Levi C. ADAMS, et al., Plaintiffs, Appellees, v.ZIMMERMAN, et al., Defendants, Appellees.

Federal Deposit Insurance Corporation, Defendant, Appellant.

Levi C. ADAMS, et al., Plaintiffs, Appellants, v.ZIMMERMAN, et al., Defendants, Appellees.

Federal Deposit Insurance Corporation, Defendant, Appellee.

Levi C. ADAMS, et al., Plaintiffs, Appellees, v.ZIMMERMAN, et al., Defendants, Appellees.

Federal Deposit Insurance Corporation, Defendant, Appellant.

Levi C. ADAMS, et al., Plaintiffs, Appellants, v.ZIMMERMAN, et al., Defendants, Appellees.

Nos. 94-2161, 94-2162, 94-2246 and 94-2247.

United States Court of Appeals First Circuit.

Heard Sept. 12, 1995.

Decided Jan. 19, 1996.

Vincent M. Amoroso, with whom Harry A. Pierce and Parker, Coulter, Daley & White, Boston, MA, were on brief, for plaintiffs.

J. Scott Watson, Federal Deposit Insurance Corporation, with whom David S. Mortensen, Glenn D. Woods, and Tedeschi, Grasso and Mortensen, Boston, MA, were on brief, for defendantFederal Deposit Insurance Corporation.

Before TORRUELLA, Chief Judge, LYNCH, Circuit Judge, and STEARNS, ^*District Judge.

LYNCH, Circuit Judge.

A troubled condominium development led to these appeals, which raise issues of federal banking law: whether 12 U.S.C. Sec. 1823(e) and D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956(1942), shield the FDIC, as receiver for a failed bank, from liability for the bank's sale of unregistered securities.We hold that the FDIC has no such shield and is liable, but remand for adjustment of the remedies fashioned by the district court.

These consolidated cross appeals arise out of the development of the Hyannis Harborview Hotel.The units in the Hotel were marketed and sold by the University Bank and Trust Company and the other defendants as "pooled income" condominium units.Although these units were securities, they were never registered, and, when the development of the Hotel faltered, the plaintiffs, purchasers of individual units in the Hotel, sued the Bank for, inter alia, the sale of unregistered securities in violation of the Massachusetts Uniform Securities Act, Mass.Gen.L. ch. 110A, Sec. 410(a)(1).The Bank was later declared insolvent and the FDIC, as receiver, was substituted for the Bank as a defendant.After rejecting the FDIC's argument that Sec. 1823(e) and D'Oench barred the plaintiffs' registration claims, the district court held the FDIC liable under section 410(a)(1) and awarded the plaintiffs rescissionary damages, attorneys' fees and interest.

I.Background And Procedural History

In 1985, Gary Zimmerman, president of Hyannis Harborview Hotel, Inc.(HHI), approached Robert Keezer for financial and marketing advice about converting the Hotel into condominiums.Keezer, who was then the Bank's second largest stockholder, Vice Chairman of its Board of Directors, and a member of the Bank's Loan Committee, agreed to do so for an interest in the project.Keezer brought Norman Chaban, an expert in condominium marketing, into the project to manage the marketing and sales of the condominiums and arranged to have a $6.8 million condominium conversion loan placed through the Bank.

To make the Hotel units more attractive, Keezer, Chaban and Zimmerman marketed and sold the units on a "pooled income" basis.That is, the purchasers were told they would receive income based upon their pro rata interest in the entire condominium project rather than on the income generated by their individual units.The Hotel's Declaration of Trust and By-Laws (these and the Master Deed constitute the "Master Documents") provided that each unit owner:

shall be liable for Common Expenses attributable to the operation of the Condominium in the same proportion as his Beneficial Interest in this Trust bears to the aggregate Beneficial Interest of all Unit Owners ...; [and]

shall be entitled to common profits, if any, attributable to the operations of the motel-type Units of the Condominium in the same proportion as his Beneficial Interest in this Trust bears to the aggregate Beneficial Interest of all [unit] owners.

When several of the plaintiffs were unable to get financing to purchase their units, the Bank's Loan Committee voted to approve $3,000,000 in "end loan" financing to them.After the plaintiffs executed their purchase and sale agreements, which incorporated by reference the Master Documents, the Loan Committee(with Keezer voting) approved end loans to several of the plaintiffs to finance the purchases.This was the first time that the Bank's lending arm, University Financial Services Corporation, had considered and approved such end loans, a type of financing arrangement not considered standard procedure in the banking business at the time.The plaintiffs then purchased the units.Three of the plaintiffs, Marietta Lopes("Lopes") and Michael and Barbara Riley(the "Rileys"), were able to secure financing from other lending institutions.

The units were never registered as securities.About six months after the plaintiffs purchased the units, they were told by HHI that, upon advice of counsel, it would no longer pay unit income based on a rental pool.The unhappy plaintiffs in 1989 filed their six-count amended complaint against HHI, Zimmerman, Chaban, Keezer and the Bank, inter alia.¹On May 31, 1991, the Comptroller of the Currency declared the Bank insolvent and appointed the FDIC as receiver.The FDIC was substituted for the Bank as a defendant.

The district court granted summary judgment for the FDIC based on its special defenses under D'Oench and Sec. 1823(e), except on the state securities registration count (Count V).After a bench trial, the district court issued a Memorandum of Decision, Adams v. Hyannis Harborview, Inc., 838 F.Supp. 676(D.Mass.1993), holding, among other things, that the plaintiffs were entitled to judgment against the FDIC on Count V.

The court held that the provisions in the Master Documents made the Hotel units "investment contracts" and thus securities within the meaning of the securities laws.Id. at 686.It also held that, in light of the financing arrangements made for the purchasers, Keezer was acting as the Bank's agent in the sale of the units and so his actions would be imputed to the Bank.Id. at 692.It reaffirmed its rulings that D'Oench and Sec. 1823(e) provided the FDIC with no special defenses to Count V, id. at 691 n. 14, and rejected the FDIC's argument that the loans to the plaintiffs made by the Bank were "bona fide" loan transactions under Mass.Gen.L. ch. 110A, Sec. 401(i)(6) and thus exempt from registration requirements.Id. at 694 n. 16.

The court later ordered a rescissionary damages award pursuant to Mass.Gen.L. ch. 110A, Sec. 410(a).That statute provides for recovery of "the consideration paid for the security, together with interest at six per cent per year from the date of payment, costs, and reasonable attorneys' fees, less the amount of any income received on the security, upon tender of the security, or for damages if [the plaintiff] no longer owns the security."Id.

Specifically, the court awarded to all plaintiffs except Lopes and the Rileys $855,434, plus interest of 6% per annum from February 11, 1994 to the date of the damages order.The court said it "novated" the amounts the plaintiffs owed on the first and second mortgage notes held by the FDIC and HHI respectively.The "novation" apparently cancelled the plaintiffs' debt on the mortgages.The court denied Lopes and the Rileys a rescissionary damages award under section 410(a)(1) because it believed it could not novate the loans that Lopes and the Rileys owed to third-party banks.It did, however, give Lopes and the Rileys damages of $256,564 (the principal and interest payments they had made on their mortgage loans plus the amount they still owed on those loans) from Keezer, Chaban and HHI on the other securities law claims successfully asserted.

The court gave each plaintiff the option of either accepting the rescission award (and the novation) in exchange for title to the unit or, in lieu of the rescission award, retaining the unit free and clear.It awarded attorneys' fees of $351,213 against Keezer, Chaban, HHI and the FDIC.Finally, it ordered that the plaintiffs' recovery would be subject to the FDIC's "obligation to distribute the assets of [the Bank] on a pro rata basis."

The FDIC appeals the rulings on Sec. 1823(e) and D'Oench with respect to Count V, the finding that the bank loans were not "bona fide" loan transactions, the award of attorneys' fees and post-insolvency interest, and the order that any reconveyance be made to all defendants rather than just to the FDIC.The FDIC does not challenge either the district court's conclusion that the Hotel units were securities or its conclusion that Keezer's actions were imputable to the Bank.The plaintiffs' cross-appeals challenge the district court's method of calculating the rescissionary damages award, its decision to limit the award in accordance with the rule of ratable distribution, and its failure to grant fee enhancements.

II.Section 1823(e) And D'Oench

The FDIC argues that Sec. 1823(e) and D'Oench bar the claims under state securities law because the plaintiffs cannot point to a written agreement regarding the "registrability of securities."Section 1823(e) bars anyone from asserting against the FDIC any "agreement" that is not in writing and is not properly recorded in the records of the bank.12 U.S.C. Sec. 1823(e).D'Oench generally prevents plaintiffs from asserting as either a claim or defense against the FDIC oral agreements or "arrangements."Timberland Design, Inc. v. First Service Bank for Savings, 932 F.2d 46, 48-50(1st Cir.1991).We do not believe that either Sec. 1823(e) or D'Oench shields the FDIC here.²

While expansive in scope, Sec. 1823 and D'Oench only protect the FDIC from claims or defenses based upon an "agreement" or ...