DiVall Insured Income Fund Ltd. Partnership v. Boatmen's First Nat. Bank of Kansas City

• Citation: 69 F.3d 1398
• Decision Date: 26 January 1996
• Docket Number: No. 95-1081,95-1081
• Parties: , 28 UCC Rep.Serv.2d 589 DiVALL INSURED INCOME FUND LIMITED PARTNERSHIP, a Wisconsin Limited Partnership, Appellant, v. BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1398

69 F.3d 1398

64 USLW 2308, 28 UCC Rep.Serv.2d 589

DiVALL INSURED INCOME FUND LIMITED PARTNERSHIP, a Wisconsin

Limited Partnership, Appellant, v. BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY, Appellee.

No. 95-1081.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 11, 1995.

Decided Nov. 13, 1995.

Rehearing and Suggestion for Rehearing En Banc Jan. 26,

1996. ^*

Leonard B. Rose, Kansas City, Missouri, argued (Martha A. Halvordson, on the brief), for appellant.

Steven E. Mauer, Kansas City, Missouri, argued (John M. Edgar and Lisa J. Henoch, on the brief), for appellee.

Before BOWMAN, BRIGHT, and BEAM, Circuit Judges.

BRIGHT, Circuit Judge.

DiVall Insured Income Fund, L.P. ("DiVall L.P." or "DiVall") filed this declaratory judgment action against Boatmen's First National Bank of Kansas City ("Boatmen's") claiming that it was not liable on a promissory note due to lack of consideration. Boatmen's had acquired the note from the Federal Deposit Insurance Corporation ("FDIC") through a purchase and assumption agreement. The district court granted summary judgment for Boatmen's determining that the defense was barred by the federal holder in due course doctrine. The district court, however, rejected Boatmen's additional claims that 12 U.S.C. Sec. 1823(e) and the common law D'Oench Duhme doctrine also barred DiVall from raising the defense of lack of consideration against enforcement of the note.

DiVall appeals asserting that state rather than federal law should govern the holder in due course issue. In light of the United States Supreme Court's decision in O'Melveny & Myers v. FDIC, --- U.S. ----, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994), we conclude that the extensive statutory framework of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") ¹ implicitly excludes federal common law defenses not specifically mentioned in the statute. Accordingly, we reverse the summary judgment and remand for trial.

I. BACKGROUND

For the purposes of this appeal, we will assume the following facts to be true. In April 1991, Gary DiVall and Paul Magnuson, the two general partners of DiVall Insured Income Fund, L.P., executed a promissory note (the "Note") for $600,000 payable to Metro North State Bank ("Metro North"). The general partners also executed a security agreement in favor of Metro North. The stated purpose of the Note was to provide DiVall L.P. with working capital.

The loan agreement provided that advances on the loan could be made by wire transfer to DiVall L.P. pursuant to instructions provided by DiVall L.P. Metro North subsequently wired the funds, at the two general partners' instruction, to a DiVall Reserves account and not to a DiVall L.P. account. ² DiVall L.P. maintains that the money was then used for the personal benefit of the general partners and not for the benefit of DiVall L.P. Although payments were made on the Note, none were made by DiVall L.P. Gary DiVall and Paul Magnuson have since resigned as the general partners of DiVall L.P.

In November 1992, Metro North entered receivership under the FDIC. The following April, Boatmen's First National Bank of Kansas City acquired assets which formerly belonged to Metro North from the FDIC pursuant to a purchase and assumption agreement. ³ The Note was among these assets.

After the Note went into default, Boatmen's demanded that DiVall L.P. satisfy the outstanding debt. DiVall filed this declaratory judgment action claiming that the Note was unenforceable due to lack of consideration and seeking to prevent Boatmen's from foreclosing on certain collateral. Boatmen's filed a motion to dismiss for failure to state a claim. Both parties submitted affidavits and other documents in support of and in opposition to the motion to dismiss. Because matters outside the pleadings were presented and not excluded by the district court, the district court treated the motion as a motion for summary judgment.

Boatmen's argued that it possessed the rights of a holder in due course, and as such was not subject to the personal defenses asserted by DiVall. The district court ruled that Boatmen's was not a holder in due course under Missouri law because the Note did not qualify as a negotiable instrument. Nonetheless, the district court held that the FDIC had the rights of a holder in due course under federal common law and that Boatmen's had attained those rights through the purchase and assumption agreement. ⁴

The district court also briefly addressed the issue of whether the D'Oench Duhme doctrine and/or 12 U.S.C. Sec. 1823(e) applied to the case. The district court held that DiVall's pleading did not assert a claim based on an unwritten agreement and thus the D'Oench Duhme doctrine and its statutory analogue did not apply.

II. DISCUSSION

We review the district court's granting of summary judgment de novo and apply the same standards as did the district court. Educational Employees Credit Union v. Mutual Guar. Corp., 50 F.3d 1432, 1436 (8th Cir.1995).

A. THE DEVELOPMENT OF FEDERAL COMMON LAW POWERS OF THE FDIC

In D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), the Supreme Court created a federal common law rule barring the invocation of "secret agreements" which were not recorded in a bank's records as defenses against payment of a promissory note. See generally, James J. White & Robert S. Summers, Uniform Commercial Code Sec. 14-12, at 740 (3d ed. 1988); Murphy v. FDIC, 61 F.3d 34, 38 (D.C.Cir.1995). In D'Oench, a securities broker had sold certain bonds to a bank. When the bonds defaulted, the broker executed a promissory note to the bank in the amount of the bonds, pursuant to a secret agreement that the bank would not request payment of the note. The arrangement effectively concealed the worthlessness of the bonds and misrepresented to bank examiners the value of the bank's assets. When the bank failed, the FDIC became the bank's receiver and in its capacity as receiver demanded payment of the note. The broker asserted the secret agreement and lack of consideration as defenses. The Supreme Court held that federal common law prohibited the obligor from raising the defenses. Id. at 461-62, 62 S.Ct. at 681-82.

Although the Supreme Court acknowledged that the arrangement was not an outright violation of the Federal Reserve Act, it created the common law rule to facilitate the federal policy behind the Act. Id. at 459, 62 S.Ct. at 680. The Court stated that the Act revealed a federal policy to protect the FDIC, and the public funds which it administers, against misrepresentations as to the securities or other assets in the portfolios of the banks which the FDIC insures. Id. at 457, 62 S.Ct. at 679.

Congress subsequently adopted the D'Oench decision in the 1950 amendments to the Federal Deposit Insurance Act. ⁵ Congress amended the provision in 1989 as part of FIRREA. ⁶ The amendment broadened the statute to protect assets acquired by the FDIC when it acts as receiver for a failed bank. The current version may be found at 12 U.S.C. Sec. 1823(e). Section 1821(d)(9)(A), which was also a part of FIRREA, further provides that "any agreement which does not meet the requirements set forth in section 1823(e) of this title shall not form the basis of, or substantially comprise, a claim against the [FDIC]." 12 U.S.C. Sec. 1821(d)(9)(A) (1994).

The D'Oench decision also spawned the development of a body of federal common law which protected the FDIC against certain defenses as well as affirmative claims. See White & Summers, Uniform Commercial Code Sec. 14-12, at 740; Fred Galves, FDIC and RTC Special Powers in Failed Bank Litigation, 22 Colo.Law. 473 (1993); Marie T. Reilly, The FDIC as Holder in Due Course: Some Law and Economics, 1992 Colum.Bus.L.Rev. 165, 176-97 (1992). These federal common law rules served to advance federal policy by furthering the FDIC's ability to protect and transfer the assets of failed banks. See FDIC v. Newhart, 892 F.2d 47, 50 (8th Cir.1989); FDIC v. Gulf Life Ins. Co., 737 F.2d 1513, 1517-18 (11th Cir.1984).

Among these federal common law protections are the D'Oench Duhme doctrine and the federal holder in due course doctrine. The common law D'Oench Duhme doctrine is roughly analogous to the statutory provision but does provide the FDIC with broader protections in certain instances. See E.I. du Pont de Nemours & Co. v. FDIC, 32 F.3d 592, 596-97 (D.C.Cir.1994); Inn At Saratoga Associates v. FDIC, 60 F.3d 78, 81-82 (2d Cir.1995). The federal holder in due course doctrine bars makers of promissory notes from asserting personal defenses against the FDIC and its successors even though the defenses are based on a written agreement. Sunbelt Sav., FSB Dallas, Texas v. Montross, 923 F.2d 353, 355 modified on other grounds in RTC v. Montross, 944 F.2d 227 (5th Cir.1991); FDIC v. Aetna Cas. & Sur. Co., 947 F.2d 196, 203 (6th Cir.1991).

B. O'MELVENY AND THE FEDERAL COMMON LAW

In O'Melveny, the Supreme Court considered whether, in a suit by the FDIC as receiver of a federally insured bank, federal or state law governed the tort liability of attorneys who provided services to the bank. --- U.S. at ----, 114 S.Ct. at 2051. After the FDIC took over as receiver, investors claiming that they had been deceived in connection with two real estate syndications operated by the failed bank demanded refunds. Id. at ----, 114 S.Ct. at 2052. The FDIC caused the bank to rescind the syndications and return the investors' money plus interest. Id. The FDIC then sued the bank's attorneys, alleging professional negligence and breach of fiduciary duty, presumably for failing to inform the bank of the ultra vires acts of its officers. Id. The attorneys moved for summary judgment claiming that, under California law, knowledge of the conduct of the bank's controlling officers must be imputed to the bank and thus to the FDIC which, as receiver, stood in the shoes of the bank. Id. The FDIC...