Chase Manhattan Bank, NA v. FDIC, CIV 82-1074-R.

• Decision Date: 05 January 1983
• Docket Number: No. CIV 82-1074-R.,CIV 82-1074-R.
• Citation: 554 F. Supp. 251
• Parties: The CHASE MANHATTAN BANK, N.A., a national banking association, Plaintiff, v. The FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as Receiver for Penn Square Bank, N.A., Defendant.
• Court: U.S. District Court — Western District of Oklahoma

554 F. Supp. 251

The CHASE MANHATTAN BANK, N.A., a national banking association, Plaintiff, v. The FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as Receiver for Penn Square Bank, N.A., Defendant.

No. CIV 82-1074-R.

United States District Court, W.D. Oklahoma.

January 5, 1983.

William D. Watts, Andrews, Davis, Legg, Bixler, Milsten & Murrah, Oklahoma City, Okl., Stephen J. Blauner, Milbank, Tweed, Hadley & McCloy, New York City, for plaintiff.

Joe E. Edwards, Edwards, Roberts & Winterstein, Oklahoma City, Okl., Albert J. Tumpson, F.D.I.C., Washington, D.C., Charles C. Baker, Gable & Gotwals, Tulsa, Okl., for defendant.

ORDER

DAVID L. RUSSELL, District Judge.

The Plaintiff, Chase Manhattan Bank, N.A. ("Chase") has filed a Motion to Compel, pursuant to Rule 37 of the Federal Rules of Civil Procedure, for an order compelling Defendant, the Federal Deposit Insurance Corporation, in its capacity as Receiver for Penn Square Bank, N.A. (the "FDIC") to produce the documents requested by Plaintiff and answer the Plaintiff's first set of interrogatories to Defendant.

In conjunction with its response to Plaintiff's motion, Defendant filed a Motion to Dismiss and Alternative Motion for Summary Judgment. Plaintiff filed a brief in opposition to Defendant's motions and a reply to Defendant's brief in opposition to Plaintiff's Motion to Compel. A reply brief was submitted by Defendant in support of its motion to dismiss or motion for summary judgment.

On July 5, 1982 the Comptroller of the Currency of the United States declared Penn Square Bank, N.A. insolvent and appointed the FDIC as receiver of Penn Square Bank, N.A., ("Penn Square Bank") pursuant to 12 U.S.C. §§ 191 and 1821(c), for the purpose of taking custody of and liquidating the insolvent bank's assets.

Prior to July 5, 1982 Plaintiff, Chase had purchased from Penn Square Bank pursuant to written agreements, participations in certain loans made by Penn Square Bank. The aggregate amount of the participations purchased by Chase is approximately $212,225,000.00.

On July 5, 1982, the FDIC commenced to effectuate offsets of funds on deposit with it as successor to Penn Square Bank against indebtedness owed to Penn Square Bank on the participated loans, thereby reducing or cancelling the borrower's indebtedness.

By letter to the FDIC dated July 16, 1982, Chase demanded that the FDIC remit to Chase the amounts equal to Chase's share of the benefits of such offsets. Chase also requested that the FDIC provide an accounting of all amounts offset by the FDIC, the manner and method of such offset and the obligation against which each offset was credited. The FDIC refused to pay to Chase its pro rata share of offsets effectuated against the participated loans. Rather FDIC represented to this Court that it will deal with Chase and other participating banks as follows:

a) The FDIC will give to Chase, as a participant, a Receiver's Certificate for its pro rata share of the amounts offset. For example, if Penn Square Bank loaned the Borrower $1,000,000.00 and the same Borrower had $500,000.00 on deposit with Penn Square Bank as of July 5, 1982, the following steps would be taken: The Borrower would be allowed to exercise his right to offset his entire $500,000.00 deposit against his $1,000,000.00 debt. The Borrower's debt to Penn Square Bank would be reduced from $1,000,000.00 to $500,000.00. Penn Square Bank's liability to the Borrower on his $500,000.00 deposit would be extinguished. Assuming that Chase had a 90% participation, the FDIC would send to Chase a Receiver's Certificate in the amount of $450,000.00. (90% of the offset).

b) The FDIC will remit to Chase, as a participant, its pro rata share of all payments made on the loan. For example, if the Borrower, subsequent to July 5, 1982, made a $500,000.00 payment on his loan from Penn Square Bank, $450,000.00 will be remitted to Chase, again assuming Chase has a 90% participation.

Further, the FDIC has not provided any of the information concerning the offsets which was requested by Chase. It is this information which is sought by Plaintiff's Motion to Compel.

This action was commenced by Chase on July 19, 1982 seeking injunctive relief against the FDIC and an accounting of funds of depositors offset against participated loans. Plaintiff's Application for a Temporary Restraining Order was denied by the Court on July 19, 1982. On August 2, 1982 Chase filed an Amended Complaint alleging, inter alia, that the funds offset by the FDIC constitute collateral for the participated loans and, consequently, that Chase has a preferred claim to all funds offset by the FDIC against participated loans to the extent of Chase's participation therein.

Here, Plaintiff asserts that in order to be entitled to such a preferred claim on the deposit accounts offset, it must be able to identify a specific fund in the possession of the receiver cognizable in equity as its own property. According to the Plaintiff, in order to meet this burden of proof, Chase must be able to trace the funds offset to the underlying accounts that allegedly constitute collateral for the participated loans. This requires other factual evidence sought in Plaintiff's motion, including identification of the borrower with accounts offset, the nature of the account, the source of the funds offset, and the manner of offset.

In its specific response to Plaintiff's Motion to Compel the FDIC merely argues that the motion is premature and improperly raised because Defendant is not yet in default in responding to Plaintiff's interrogatories and document requests. As Plaintiff notes, Defendant is elevating form over substance since the obvious thrust of the motion is to urge that Chase be permitted to go forward with discovery in order to place the issues in context prior to any dispositive ruling. In addition to opposing Plaintiff's motion Defendant filed a Motion to Dismiss or Motion for Summary Judgment wherein Defendant contends that there is no need for discovery at all in this action because Plaintiff's Amended Complaint fails to state a claim for relief and should be dismissed pursuant to Rule 12(b) of the Federal Rules of Civil Procedure. In the alternative Defendant alleges that there is no genuine issue as to any material fact with respect to Plaintiff's claim and therefore Defendant is entitled to judgment as a matter of law pursuant to Rule 56.

Plaintiff argues that Defendant is attempting to stifle Plaintiff's discovery rights by filing such motions. The Court however views the Defendant's alternative motions as embracing the threshold issue of whether the participating bank is entitled to an undiminished pro rata share of the deposits offset against participated loans and thus concludes that consideration of the motions is necessary at the outset since a ruling in favor of Defendant will be dispositive of this action.

The essence of the Amended Complaint is Chase's claim that it is entitled to be a preferred claimant with respect to funds obtained by the FDIC as receiver of Penn Square Bank through the process of offsetting deposits against certain debts owed to Penn Square Bank. The borrower's right to offset is not in issue. Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 36 L.Ed. 1059 (1892) establishes the right of a depositor in an insolvent bank to set-off any deposits against indebtedness owing to the bank. The equitable right to set-off was held to survive insolvency because "liens, equities or rights arising by express agreement, or implied from the nature of the dealings between the parties, or by operation of law, prior to the insolvency and not in contemplation thereof, are not invalidated." Scott, supra at 510, 13 S.Ct. at 151.

The leading and in fact only cited authority in the present action is the Ninth Circuit decision in F.D.I.C. v. Mademoiselle of California, 379 F.2d 660 (9th Cir.1967), which extended the general rule of the depositors' right of offset to situations involving loan participations.

There the Court held, as a matter of law, that an offset of a deposit against a participated loan does not augment the insolvent estate and therefore does not generate funds which could become the basis for a preferred claim. It therefore determined that a participating bank was not entitled to a preferred payment as a result of an offset transaction between the loan bank and its borrower. According to Mademoiselle, in order for a participating bank to establish a preferred claim as to its pro rata share to the offset deposits it must demonstrate that the offsets have resulted in "funds" which have augmented the insolvent estate and which constitute a traceable res upon which a constructive trust can be imposed, or that the deposit accounts being offset are collateral for the loans in which it has participated and that it has property rights in those deposits by virtue of the participation agreements.

The Plaintiff Chase has alleged these elements in its Amended Complaint and the Defendant, FDIC submits that both the elements of Chase's claim raise purely questions of law.

In Mademoiselle the Court noted that a participating bank may establish a right to recovery against the receiver in preference to the general pro rata distribution of assets "in situations where the facts are such that the court must say in equity that the property is not that of the bank but that of the claimant." Citing John L. Walker Co. v. Alden, 6 F.Supp. 262, 267 (E.D.Ill.1934). In this...