City Nat. Bank v. U.S., 89-1359

• Decision Date: 02 August 1990
• Docket Number: No. 89-1359,89-1359
• Citation: 907 F.2d 536
• Parties: CITY NATIONAL BANK and Texas Bank, Plaintiffs-Appellants, Cross-Appellees, v. UNITED STATES of America, and Federal Deposit Insurance Corp., In Its Corporate Capacity, Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 536

907 F.2d 536

CITY NATIONAL BANK and Texas Bank, Plaintiffs-Appellants Cross-Appellees, v. UNITED STATES of America, and Federal Deposit Insurance Corp., In Its Corporate Capacity Defendants-Appellees, Cross-Appellants.

No. 89-1359.

United States Court of Appeals, Fifth Circuit.

Aug. 2, 1990.

Robert E. Wood, Williford, Collmar & Wood, Dallas, Tex., for plaintiffs-appellants, cross-appellees.

Jerome Madden, U.S. Dept. of Justice, Washington, D.C., William Royal Furgeson, Jr., Raymond E. White, Kemp, Smith, Duncan & Hammond, El Paso, Tex., Sam E. Taylor, Jr., Federal Deposit Ins. Corp., Midland, Tex., for U.S.

Sharon Sivertsen, Federal Deposit Ins. Corp., Washington, D.C., for Federal Deposit Ins. Corp.

Appeals From the United States District Court Western District of Texas.

Before GOLDBERG, REAVLEY, HIGGINBOTHAM, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

City National Bank and Texas Bank filed this suit against the Federal Deposit Insurance Corporation complaining of the FDIC's management as the lead on a loan in which they owned participating interests. The banks originally purchased their interests in the loan from First National Bank of Midland in Midland, Texas. The FDIC acquired the loan through a purchase and assumption transaction after the failure of FNB-Midland. ¹ An amended complaint asked for a declaratory judgment and an accounting. It included claims against the FDIC for breach of contract, breach of fiduciary duty, and breach of the duty of good faith. The banks filed a separate suit against the United States under the Federal Tort Claims Act asserting a gross negligence claim in addition to the above claims. The district court consolidated the cases.

The declaratory judgment and accounting claims were dropped, and the case was tried to a jury. The jury found that the FDIC breached the participation agreements and that the FDIC was grossly negligent in its dealings with the banks. However, the jury rejected claims that the FDIC was guilty of fraud or failed to act in good faith. The district court did not submit the fiduciary duty claims to the jury. The jury found that the FDIC's breach of participation agreements and gross negligence was the proximate cause of damages to each of the banks in the amount of $239,786.00. Sensitive to the statutory contours of the federal government's waiver of sovereign immunity, the banks asserted their contract claim only against the FDIC, pointing to its "sue and be sued" clause, 12 U.S.C. Sec. 1819, and asserted their tort claim only against the United States, pursuant to the FTCA, 28 U.S.C. Sec. 1346(b). See Gregory v. Mitchell, 634 F.2d 199, 204 (5th Cir.1981).

The district court granted the motions for judgment notwithstanding the verdict filed by the FDIC and the United States. The court concluded that the jury's breach of contract and gross negligence findings were not supported by the evidence and that the gross negligence claim against the United States fell within the discretionary function exception to the FTCA. This appeal followed. We are persuaded that the evidence supports the jury's finding that the FDIC breached its contract with the banks and reverse the district court's judgment n.o.v. on this claim and remand the damages portion of the claim. We also conclude that the banks' claim against the United States sounds solely in contract and falls outside the FTCA's waiver of sovereign immunity.

I

During the late 1970's and early 1980's Permian Distributing, Inc., Fred D. George, Inc., their two principals, Larry Stewart and Fred George, and other related companies executed approximately twenty promissory notes in favor of FNB-Midland. The agreements regarding security included cross-collateralization clauses so that, generally, all of the property of the PDI-related companies and their principals secondarily secured all of the notes. The note at issue in this case was executed in July 1983 by FDGI and PDI in the original principal amount of approximately $1.9 million in favor of FNB-Midland. This note was an extension of a loan previously made to FDGI to purchase the "Y" Canyon Ranch in Catron County, New Mexico, and was secured by a deed of trust on the ranch. The "Y" Ranch Note was guaranteed by George, the president of FDGI, and Stewart, the president of PDI. City National Bank and Texas Bank each purchased a 26.25% participating interest in the "Y" Ranch Note from FNB-Midland for $500,000. FNB-Midland owned the remaining 47.5% of the "Y" Ranch Note.

Six of the FNB-Midland notes were executed by PDI in connection with its purchase and operation of a west Texas Coors beer distributorship between October 1979 and May 1983. The first and primary note was for $3,500,000. It funded PDI's purchase of the beer distributorship and was secured by a deed of trust on real property, PDI equipment and inventory, and 48% of PDI stock. Stewart owned the 48% interest in PDI pledged to secure the note. He also guaranteed the note. The other notes funded the operation of the distributorship. A $225,000 note funded a PDI line of credit; two unsecured notes totalling $150,000 allowed PDI to purchase the assets of another distributorship; and two notes totalling $670,000 funded PDI's purchase of inventory. The last two notes were secured by PDI inventory, equipment, and vehicles and Stewart's 48% interest in PDI and were guaranteed by Stewart and George. The face amounts of the six notes totaled $4,545,000.

Some of the other notes executed in favor of FNB-Midland were: a $1,064,333 note to purchase cattle for the "Y" Ranch, an approximately $500,000 note to purchase oil well service equipment, and an approximately $100,000 note to purchase antiques. Each of these notes was primarily secured by the property purchased with the loan proceeds.

In October 1983, approximately three months after the plaintiff banks purchased interests in the "Y" Ranch Note, FNB-Midland failed and the FDIC acquired these notes and collateral. On April 30, 1984, the FDIC extended all the notes in the debtors' credit line in order to assist the debtors in their effort to obtain third-party financing for the entire line of credit. After the extension agreements expired, the FDIC continued to negotiate with the debtors in an attempt to settle the entire credit line. In December 1984 the FDIC entered into nineteen extension and renewal agreements with the debtors. The FDIC extended notes secured by real estate by a year and notes not secured by real estate by two years. The debtors paid the FDIC $150,000 as consideration for the renewals and extensions and agreed to pay monthly installments of $75,000. The banks received a share of the payments made by the debtors pursuant to the nineteen agreements equal to the percentage the "Y" Ranch Note represented in the overall credit line.

The December 1984 renewal and extension agreements, including the "Y" Ranch Note agreement, also stated that the debtors agreed to grant the FDIC additional collateral in the form of a second lien on certain named real estate, a security interest in 100% of the common stock of a certain company, and a "[s]ecurity interest in an additional forty-six percent (46%) of the issued and outstanding common stock of [PDI], resulting in a security interest in a total of ninety-four percent (94%) of the issued and outstanding stock of [PDI]." George owned the 46% interest in PDI. The FDIC never perfected these security interests. Although the first two items of additional collateral were worthless since they already secured primary loans that far exceeded their value, George's 46% interest in PDI was unencumbered. In January 1985 the FDIC informed the plaintiff banks that "[a]dditional collateral totaling over one million and cash of $150,000 was secured to extend the real estate notes for one year."

The FDIC stated shortly after acquiring the "Y" Ranch Note that it was their intention to sell the "Y" Ranch as quickly as possible. An FDIC memorandum emphasized that the one year renewal of the "Y" Ranch Note and other real estate notes in December 1984 was designed to give the debtors one more year, until November 30, 1985, to market the property. C.E. Boyd, a managing officer for the FDIC, testified at trial that it is a very common FDIC practice to allow cooperative debtors of property to market the property for a time rather than the FDIC because the FDIC's direct involvement gives the appearance of a fire sale and causes the price to drop dramatically. The FDIC told the banks it would begin marketing the "Y" Ranch itself at the end of November 1985. The FDIC, however, did not take steps to market the property itself until March 1987, over fifteen months after the November 30, 1985, self-imposed deadline. The ranch sold about eight weeks after the FDIC took over the marketing.

In late 1986 the FDIC settled with the debtors. The key to the settlement was the sale of PDI and its Coors distributorship to Alan Kahn. Kahn, through his company, Sun Country Industries, Inc., purchased 94% of the PDI stock for $3,244,877. Kahn required the release of Stewart and PDI on all notes as a condition to his purchase of PDI. Kahn wanted Stewart free from his indebtedness so he could concentrate on running the Coors distributorship.

The FDIC also renewed two notes from George totaling approximately $1.8 million and released George from liability on all other notes. As consideration for the renewal of the two notes and the releases, George contributed his 46% interest in PDI to the settlement. Because PDI's primary asset, the Coors distributorship, could not be sold separately from PDI, the FDIC needed George to voluntarily contribute his 46% interest in PDI to sell the distributorship to Kahn. Over a year later the FDIC compromised the renewed notes for $1,000,000.

As part of the settlement the debtors deeded the "Y" Ranch to the FDIC in lieu of foreclosure. The FDIC then sold the "Y" Ranch to...