Bartram v. Federal Deposit Ins. Corp.

• Decision Date: 20 November 1991
• Docket Number: No. G009613,G009613
• Citation: 1 Cal.Rptr.2d 614,235 Cal.App.3d 1749
• Court: California Court of Appeals Court of Appeals
• Parties: Harold D. BARTRAM et al., Plaintiffs and Appellants, v. FEDERAL DEPOSIT INSURANCE CORP. et al., Defendants and Respondents.

Page 614

1 Cal.Rptr.2d 614

235 Cal.App.3d 1749

Harold D. BARTRAM et al., Plaintiffs and Appellants, v. FEDERAL DEPOSIT INSURANCE CORP. et al., Defendants and Respondents.

No. G009613.

Court of Appeal, Fourth District, Division 3, California.

Nov. 20, 1991.

Review Denied Feb. 27, 1992.

[235 Cal.App.3d 1750] Snell & Wilmer and Raymond J. Ikola, Irvine, for plaintiffs and appellants.

Arter, Hadden, Lawler, Felix & Hall, Edwin W. Duncan and J. Michael Echevarria, Los Angeles, Ann S. DuRoss, Asst. Gen. Counsel of Federal Deposit Ins. Corp., Colleen B. Bombardier, Sr. Counsel, and Christopher

J. Bellotto, Counsel, Washington, D.C., for defendants and respondents

OPINION

SONENSHINE, Associate Justice.

Is the Federal Deposit Insurance Corporation (FDIC), acting as manager of the Federal Savings and Loan Insurance Corporation (FSLIC) Resolution Trust and receiver for an insolvent savings and loan, protected from a claim of fraud when the debtors have performed their obligations? Relying on D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp. (1942) 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956, we conclude that it is.

I.

Harold and Donna Bartram and Joseph and Vita Tessitors (hereafter the Bartrams) engaged a realtor to sell or exchange two of the four parcels of land they owned. On May 31, 1985, the Bartrams and John Molinaro, the chairman of the board of Ramona Savings and Loan, executed a real estate exchange contract. Ramona would receive the Bartrams' two undeveloped parcels of land valued at $2,279,600 in exchange for 32 condominium units owned by Ramona and valued at $3,410,450. A $1,130,850 note provided the difference in value between the land and the condominiums.

A few weeks later and before escrow closed, the Bartrams were told their parcels had been over-valued and the promissory note had to be increased to $1,730,000. Subsequently, Molinaro explained that Ramona would be developing the parcels it was purchasing and the value of the land retained by the Bartrams would therefore increase. On June 25, the real estate contract was amended: The land's value was decreased, and the amount of the note was increased. No mention was made of Ramona's intent to develop the property. On July 1, escrow closed. Subsequently, the Bartrams paid the $1,730,000 note.

Ramona did not develop the property; in fact, less than a month after the close of escrow, Ramona sold the property to a third party. Unhappy, the Bartrams filed the underlying suit in June 1986, alleging fraud and negligence. The Bartrams sought $600,000 in compensatory damages, the difference between the property's alleged market value and the contract price, plus punitive damages and costs.

Ramona and Molinaro cross-complained against the Bartrams for fraud, negligent misrepresentation, and rescission. The cross-complaint also sought declaratory relief for indemnification from Rancho and Walmer.

On September 12, the Federal Home Loan Bank Board placed the state-chartered Ramona into receivership, appointed the FSLIC receiver and created a new federally-chartered entity, Ramona Federal Savings and Loan Association (Ramona Federal).

On August 9, 1989, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which abolished FSLIC and established for institutions like Ramona, the FSLIC Resolution Fund. The FDIC was appointed manager of the FSLIC Resolution Fund (12 U.S.C. § 1441a(b)(6)), and in that capacity replaced Ramona as defendant and cross-complainant. The FDIC's answer alleged that the doctrine set forth in D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp., supra, 315 U.S. 447, 62 S.Ct. 676, as well as 12 United States Code section 1823(e), barred the Bartrams' action. The trial court granted the FDIC's motion for judgment on the pleadings. Thereafter, the FDIC dismissed the Ramona cross-complaint with prejudice. Rancho, Walmer, and the Bartrams settled. The Bartrams were awarded a $600,000 default judgment against Molinaro.

II. The D'Oench Doctrine

In D'Oench, Duhme & Co., a securities dealer sold bonds to a bank. After default on the bonds, the firm's president executed a note in favor of the bank so that the transaction could be carried on the bank's books as an asset rather than as a liability. An oral agreement that the note need not be paid was reflected on a receipt, but not on the note. Thereafter, the bank charged off the note.

The bank was declared insolvent and the FDIC was appointed as receiver. When the FDIC sued on the note, the oral agreement was raised as an affirmative defense. The court held that a federal policy, evidenced by the Federal Reserve Act, existed to "protect [the FDIC] from misrepresentations made [by the bank] to induce or influence [third parties], including misstatements as to the ... integrity of securities...." (D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp., supra, 315 U.S. at p. 459, 62 S.Ct. at p. 680.) Allowing a secret agreement as a defense would enable the notemaker to defeat the statute's purpose. The purpose of the federal policy articulated by the Supreme Court in D'Oench "is to allow federal and state bank examiners to rely on a ... bank's assets." (Langley v. Federal Deposit Ins. Corp. (1987) 484 U.S. 86, 91, 108 S.Ct. 396, 401, 98 L.Ed.2d 340.) " 'The doctrine encourages debtors to memorialize all agreements in writing and reflects the equitable principle that losses incurred as a result of unrecorded arrangements should not fall on deposit insurers, depositors, or creditors but rather upon the person who could have best avoided the loss. [Citations.]' " (Webb v. Superior Court (1990) 225 Cal.App.3d 990, 995, 275 Cal.Rptr. 581.)

Recently, an even "more expansive protection of federal bank insurers developed in the federal common law following D'Oench." (Vernon v. Resolution Trust Corp. (11th Cir.1990) 907 F.2d 1101, 1106.) "The doctrine has been expanded to encompass any claim against an insolvent institution that would either diminish the value of the assets held by the FSLIC or increase the liabilities of the insolvent institution. [Citation.]" (Castleglen, Inc. v. Commonwealth Sav. Ass'n (D.Utah 1989) 728 F.Supp. 656, 671, italics added.)

III. D'Oench Bars the Bartram Claim

The Bartrams acknowledge the D'Oench doctrine but maintain it is inapt here. They concede "D'Oench bars any defense or claim based upon a 'secret agreement' which seeks to defeat or diminish the value of a particular asset held by the federal insurer where the claim or defense is asserted as a dollar-for-dollar offset against the specific asset sought to be collected by the federal insurer; but [argue] to the extent the affirmative claim represented by the 'secret agreement' is otherwise established as a valid claim, the holder of the claim is entitled to share pro rata in the general assets of the receivership estate together with all general creditors."

The Bartrams recognize they could not defend on the basis of the secret agreement if they were being sued on the note. They concede they could not rely on the secret agreement if they were suing to invalidate the note. They urge, however, such is not the case. They are plaintiffs suing in tort for compensation for damages resulting from the bank's misrepresentation. They maintain that because they do not seek dollar-for-dollar compensation, they should not be denied the opportunity to stand as general creditors and be compensated pro rata with all of the other bank's creditors.

Several courts have already addressed these arguments. In Hall v. Federal Deposit Ins. Corp. (6th Cir.1990) 920 F.2d 334, the plaintiffs were parties to a loan contract requiring the lender to fully fund their project. Because the Halls never provided the required security interest, the lender failed to fully fund the project. The Halls received funding elsewhere, paid off the original lender, and then sued the lender for breach of contract. The Halls claimed an oral agreement excused them from providing the security. The court held, even if such secret agreement existed, D'Oench barred the claim. (Id. at p. 340.)

The Hall court acknowledged that in most cases where the D'Oench doctrine has been applied, "an interest in an asset of an insolvent bank" existed. (Hall v. Federal Deposit Ins. Corp., supra, 920 F.2d at p. 339, italics added.) But the court explained that was only because "typically [the] FDIC was suing to collect on a note...." (Ibid.) It observed the "logic of D'Oench should still apply to protect FDIC" (ibid.) even when an interest in an asset ceases to exist. ¹

The Hall court recognized the sound policy reason for applying D'Oench to our facts. "If ... D'Oench did not apply to bar the introduction of evidence of a side agreement in a claim against FDIC (or FSLIC), then an obligor could circumvent the sound policy behind D'Oench by asserting as a counterclaim that which could not be asserted as an affirmative defense.... [p] ... [Thus e]xaminers for FSLIC could easily have over-estimated the value of the loan agreement [or property] on the books because of the alleged unevidenced [agreement to develop the property].... The D'Oench doctrine is intended to avoid exactly this sort of potential confusion." (Id. at p. 340.) ²

Bell & Murphy & Assoc. v. Interfirst Bank Gateway (5th Cir.1990) 894 F.2d 750 is also instructive. After Bell sought help from a bank in solving severe cash flow problems, the parties entered into an agreement. Bell was to surrender its accounts receivable and its pension and profit sharing plans to the bank, which would extend open loans and honor checking overdrafts. This arrangement was memorialized in a letter but was not reflected in the bank's records. After the bank failed to live up to the terms of the letter agreement, the plaintiffs sought damages for fraudulent misrepresentations. The FDIC intervened as receiver and was successful in its summary judgment motion. The trial court concluded the...