CMF VIRGINIA LAND, LP v. Brinson, Civ. A. No. 92-275.

• Decision Date: 09 November 1992
• Docket Number: Civ. A. No. 92-275.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: CMF VIRGINIA LAND, L.P., Plaintiff, v. Edward L. BRINSON et al., Defendants.

806 F. Supp. 90

CMF VIRGINIA LAND, L.P., Plaintiff, v. Edward L. BRINSON et al., Defendants.

Civ. A. No. 92-275.

United States District Court, E.D. Virginia, Richmond Division.

November 9, 1992.

William Ray Baldwin, III, Brian Keith Jackson, Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., for Resolution Trust Corp. as Conservator for Investors Federal Sav. Bank.

David Gordon Fiske, Thomas Wilfried Mitchell, Shaw, Pittman, Potts & Trowbridge, Washington, D.C., for CMF Virginia Land, L.P.

Jane Marum Roush, Hogan & Hartson, McLean, Va., for Edward L. Brinson, Douglas C. Mullins, Richard N. Rose and Kieran P. Quinn.

Richard John Martin, Winstead, Sechrest & Minick, Washington, D.C., for Kieran P. Quinn.

Richard John Martin, Linda B. Bridgman, Winstead, Sechrest & Minick, Washington, D.C., for Stanley I. Marks and Lynda M. Marks.

Linda B. Bridgman, Winstead, Sechrest & Minick, Washington, D.C., for Francis T. Quinn, Jr. and Julie D. Quinn.

Richard John Martin, Linda B. Bridgman, Winstead, Sechrest & Minick, Washington, D.C., for Arthur B. Benjamin and Karen V. Benjamin.

MEMORANDUM OPINION

RICHARD L. WILLIAMS, Senior District Judge.

This matter is before the Court on two motions by CMF Virginia Land, L.P. ("CMF"): (1) to substitute itself as plaintiff in this action, pursuant to Fed.R.Civ.Proc. 25(c); and (2) for Summary Judgment, pursuant to Fed.R.Civ.Proc. 56(a).

I. FACTUAL SUMMARY

This is a suit on a guaranty. CMF seeks judgment against Defendants Edward L. Brinson, Douglas C. Mullins, Richard N. Rose, Kieran P. Quinn, Stanley I. Marks, Lynda M. Marks, Francis T. Quinn, Jr., Julie D. Quinn, Arthur B. Benjamin and Karen V. Benjamin ("Defendants") based on their alleged voluntary, knowing and unconditional guaranty of a $3.5 million loan (the "Guaranty"). CMF acquired the loan and the Guaranty from the Resolution Trust Corporation ("RTC"), which in turn had acquired the loan from the original plaintiff in this action, Investors Savings Bank, F.S.B. ("Investors").

On or about October 21, 1988, Investors loaned Calibre/Comvest Limited Partnership ("Calibre/Comvest") $3.5 million as financing for a proposed 500-unit apartment project in Fairfax County, Virginia. Calibre/Comvest, in turn, executed a $3.5 million note payable to Investors (the "Note"). Repayment of the Note was guaranteed by the Defendants pursuant to the Guaranty on October 21, 1988. On October 21, 1989, the guarantors consented to an extension of the maturity date of the Note to January 21, 1990. The Note matured on that date, but no payment was made. Pursuant to the terms of the Guaranty, the male defendants, as guarantors, are jointly and severally liable for repayment of all amounts loaned to Calibre/Comvest under the Note. The Guaranty provides in relevant part:

1. Guarantors joint sic and severally, guaranty

(a) the payment in full of the Note, together with all interest and other sums due thereon and all other sums owed by borrower pursuant to the Loan Documents including reasonable attorneys fees which may be incurred in enforcing the payment of said Note or the obligations of guarantors hereunder, and

(b) the performance by borrower of borrowers obligations and covenants under the Loan documents....

On October 31, 1990, Investors filed suit against the Defendants seeking payment under the Guaranty. Investors subsequently failed as a financial institution, and the RTC, as its receiver, acquired Investors' assets, including the loan to Calibre/Comvest. Pursuant to a written Assignment Agreement dated September 9, 1992 (the "Assignment Agreement"), the RTC sold the loan, including the Guaranty, to CMF. The Assignment Agreement provided, in part, that the RTC intended for CMF to be able to assert all of the special defenses available to the RTC, including (1) the "D'Oench Duhme" doctrine, (2) 12 U.S.C. §§ 1823(e) and 1821(d)(9), and (3) the Federal Holder in Due Course defense. (Assignment Agreement at § 21.11.)

II. SUBSTITUTION OF PARTIES

CMF moves, pursuant to Fed.R.Civ.Proc. 25(c), to substitute itself as plaintiff in this action on the basis of the Assignment Agreement which grants CMF all of the RTC's rights, title and interest in this action. The Assignment Agreement and Rule 25(c) both dictate that substitution is permissible and appropriate in this case and, therefore, the motion will be granted.

III. SUMMARY JUDGMENT

A. D'Oench Duhme and Its Statutory Progeny

CMF contends that the so-called "D'Oench Duhme" doctrine and its statutory progeny, Section 13(e) of the Federal Deposit Insurance Act, 12 U.S.C. § 13(e), bar all of the affirmative defenses asserted by the defendants in this action, and entitles CMF to judgment as a matter of law.

The D'Oench Duhme doctrine arises from the Supreme Court's decision in D'Oench Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), that a debtor is estopped from asserting any defense based on a side agreement that would tend to mislead a federal insurance agency about the terms of an asset it acquires. In D'Oench Duhme, the makers of a promissory note raised the defenses of failure of consideration and that the bank had orally agreed that it would never demand payment of the note. Id. at 456, 62 S.Ct. at 679. The Supreme Court held that the debtors were barred from raising those defenses in an action to enforce the terms of the note. Id. at 459-60, 62 S.Ct. at 680-81. The doctrine is based on a policy-oriented recognition that federal regulatory agencies are able to perform their supervisory and insurance functions effectively only if they are able to rely on the books and records of failed financial institutions.

Congress supplemented the D'Oench Duhme doctrine by enacting 12 U.S.C. § 1823(e), which establishes a four-pronged test which must be satisfied before any alleged agreement may be used by a debtor to defend against a claim by the RTC or the FDIC.¹ Specifically, Section 1823(e) states that no agreement that tends to diminish or defeat the interest of the FDIC in any asset shall be valid unless such an agreement (1) is in writing, (2) was executed by the federally insured deposit institution contemporaneously with the acquisition of the asset, (3) was approved by the depository institution's board of directors, and (4) has continuously been a part of the depository institution's official records. Similar policy considerations underlie Section 1823(e) as do the D'Oench Duhme doctrine. See Langley v. FDIC, 484 U.S. 86, 91-92, 108 S.Ct. 396, 399, 98 L.Ed.2d 340 (1987).

Both D'Oench Duhme and Section 1823(e) have been extended to third parties who, like CMF in this case, purchase assets of a failed institution from the FDIC or RTC. Extension of the doctrine to third-party purchasers is intended to "promote purchase and assumption transactions by offering the purchaser protection from secret agreements that tend to affect adversely its rights in the instruments that it acquires" and therefore provides the receiver with a greater opportunity to protect the failed institution's assets. Porras v. Petroplex Sav. Ass'n, 903 F.2d 379, 381 (5th Cir.1990). See also, e.g., FDIC v. Newhart, 892 F.2d 47, 50 (8th Cir.1989). Therefore CMF may invoke both D'Oench Duhme and Section 1823(e) in its attempt to legally bar the defendants' affirmative defenses.

B. The Affirmative Defenses

The defendants set forth three affirmative defenses which, they contend, shield them from liability on the Guaranty. Two of them are barred by D'Oench Duhme and Section 1823(e), and thus the Court eliminates them pursuant to the plaintiff's summary judgment motion. The third "affirmative defense," which alleges that the Guaranty was executed in violation of the Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq. ("ECOA"), while not barred by D'Oench Duhme and Section 1823(e), is not properly asserted as an affirmative defense to liability, and should instead take the form of a compulsory counterclaim. The defendants' ECOA claim cannot, as a matter of law, render their debt void, but still allows them the opportunity at trial to prove the alleged violation and their entitlement to recoupment damages. Therefore, the Court will enter summary judgment on behalf of the plaintiff for the amount of the Guaranty,² and realign the "affirmative defense" as a compulsory counterclaim so that the defendants will, in effect, become plaintiffs in the remaining segment of the case as they attempt to establish an ECOA violation and an entitlement to damages which the Court may award as a setoff against the amount of the Guaranty.

1. The "Agreement to Loan Money" Defense

Paragraph 13 of the Amended Answer and Grounds of Defense of the Quinn, Marks and Benjamin Defendants ("Amended Answer") alleges:

13. Plaintiffs right to recovery is barred by its breach of an enforceable promise to lend the Calibre/Comvest Limited Partnership ("Partnership") funds necessary to pay off the debt which is the subject of this action.

As a threshold matter, this alleged promise, which appears nowhere in the loan documents, fails to satisfy even the first prong of Section 1823(e) because it is not written. In fact, it fails to meet any of Section 1823(e)'s requirements: It was not executed by the bank contemporaneously with the acquisition of the Guaranty; it was not approved by the board of directors or its loan committee or reflected in the minutes of the board or committee; and it was not continuously an official record of the bank. It is nothing more than a garden variety "side agreement," the kind which D'Oench Duhme expressly disallows as a basis for avoiding liability. Courts specifically have held that "breach of contract" and/or "failure of consideration" defenses based on an alleged oral agreement to fund future loans are barred under Section 1823(e). E.g., Federal Sav. & Loan Ins. Corp. v. Murray, 853 F.2d 1251, 1255 (5th Cir.1988) ("alleged oral agreements to fund additional loans ... are simply...