F.D.I.C. v. Elder Care Services, Inc.

• Decision Date: 06 February 1996
• Docket Number: No. 95-1729,95-1729
• Citation: 82 F.3d 524
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as Liquidating Agent of First Mutual Bank for Savings, Plaintiff, Appellee, v. ELDER CARE SERVICES, INC. and Frank C. Romano, Jr., Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 524

82 F.3d 524

FEDERAL DEPOSIT INSURANCE CORPORATION, as Liquidating Agent of First Mutual Bank for Savings, Plaintiff, Appellee, v. ELDER CARE SERVICES, INC. and Frank C. Romano, Jr. Defendants, Appellants.

No. 95-1729.

United States Court of Appeals First Circuit.

Heard Feb. 6, 1996.

Decided April 24, 1996.

Appeal from the United States District Court for the District of Massachusetts, Hon. Nancy Gertner, U.S. District Judge.

William T. Harrod III with whom Harrod Law Offices, Peabody, MA, was on briefs, for appellants.

Daniel H. Kurtenbach, Counsel, with whom Ann S. Duross, Assistant General Counsel, and Richard J. Osterman, Jr., Senior Counsel, Washington, DC, were on brief, for appellee.

Before SELYA, BOUDIN and LYNCH, Circuit Judges.

BOUDIN, Circuit Judge.

In January 1987, Brandon Woods of Glen Ellyn, Inc., a wholly owned subsidiary of Elder Care, Inc., borrowed $10.1 million from First Mutual Bank for Savings located in Boston. The purpose was to finance the purchase by Brandon Woods of the site of a former seminary in Glen Ellyn, Illinois, and the development of the property into a retirement community. In due course the property was acquired by Brandon Woods for $4.5 million.

The bank loan was secured by a mortgage on the seminary property and by two guaranties from third parties in favor of the bank--one from Elder Care, Inc., and the other from its president Frank Romano in his personal capacity. Both guaranties contained broad waiver provisions, including waivers of any requirements of "diligence or promptness" and (to the extent permitted by law) waivers of "any defense of any kind." The guaranties provided that they were governed by Massachusetts law.

The loan was to be repaid by January 30, 1988, a date later extended to October 28, 1988, but Brandon Woods defaulted. After a delay to allow Brandon Woods time to refinance (which it failed to do), the bank on June 27, 1989 brought a foreclosure action against Brandon Woods in an Illinois state court. On December 26, 1990, the court entered a foreclosure judgment, fixing the amount then owed at just over $12.8 million, including the unpaid balance, interest and attorney's fees. The court ordered that the property be sold on February 5, 1991.

On February 5, 1991, Brandon Woods filed a voluntary bankruptcy petition, blocking the sale of the property under the automatic stay provision of the Bankruptcy Code. 11 U.S.C. § 362(a)(1). On April 8, 1991, the bankruptcy court denied the bank's motion to lift the stay, finding that the property if fully developed would be worth about $13 million, just exceeding the amount then claimed by the bank. In August 1991, the bankruptcy court granted a renewed motion to lift the stay after Brandon Woods failed to gain additional financing. On November 23, 1993, after an unexplained two-year delay, the seminary property was sold at a foreclosure sale for $300,000, all of which went to satisfy a construction firm's prior lien.

In the meantime, on May 24, 1991, the bank filed the present action in Massachusetts state court against the two guarantors. A month later the bank failed and the Federal Deposit Insurance Corporation ("FDIC") was appointed liquidating agent. The FDIC then removed the case to federal court. In April 1993, the district court granted summary judgment in favor of the FDIC as to liability.

In May 1994, the present case was reassigned to a new district judge. On June 8, 1995, the district court granted the FDIC's motion for summary judgment as to damages, and on August 4, awarded the FDIC $15,316,887.33. This represented the then-outstanding balance claimed by the FDIC of $16,416,719.31 (for principal, plus interest and attorney's fees) less specific maintenance expenses incurred by Brandon Woods, claimed by it as an offset, and conceded by the FDIC. The two guarantors now appeal, claiming that there was a material issue of fact precluding summary judgment.

In substance, the guarantors say that there is a gross disparity between estimates of the property's value--notably the $13 million estimate made by the bankruptcy court--and the $300,000 sale price obtained at the foreclosure sale. In the guarantors' view, this discrepancy--coupled with the unexplained two-year delay in the sale--gives rise to a factual dispute about whether the FDIC acted in good faith in liquidating the security. Bad faith or fraud, the guarantors argue, would bar or diminish the FDIC's recovery.

Massachusetts law does permit a guarantor to waive defenses, see Shawmut Bank, N.A. v. Wayman, 34 Mass.App.Ct. 20, 606 N.E.2d 925, 927 (1993), but probably such a waiver could not immunize bad faith or fraud. See Pemstein v. Stimson, 36 Mass.App.Ct. 283, 630 N.E.2d 608, 612, rev. denied, 418 Mass. 1103, 636 N.E.2d 279 (1994). For present purposes, we follow the district court in assuming arguendo that a showing of bad faith or fraud could be used to lessen or prevent recovery; the FDIC asserts the contrary but offers no case directly on point. Still, reviewing the matter de novo, Brown v. Hearst Corp., 54 F.3d 21, 24 (1st Cir.1995), we agree with the district court that there is no genuine issue of material fact to preclude summary judgment.

Determining whether there is a genuine issue ordinarily involves two different dimensions: burden of proof and quantum. The burden of proof on the issue at trial is relevant because, if a party resists summary judgment by pointing to a factual dispute on which it bears the burden at trial, that party must point to evidence affirmatively tending to prove the fact in its favor. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). Here, at trial bad faith or fraud would be an affirmative defense to be proved by the guarantors. See Shawmut, 606 N.E.2d at 928. ¹

The quantum of proof that the guarantors must offer is a different matter. It is merely "sufficient evidence to permit a reasonable jury to resolve the point in the nonmoving party's favor." Hope Furnace Associates, Inc. v. FDIC, 71 F.3d 39, 42-43 (1st Cir.1995). In evaluating the sufficiency of this evidence on summary judgment, inferences are drawn in favor of the nonmoving party. Brown, 54 F.3d at 24. Thus, the guarantor's burden is not a heavy one. But it is still their burden to point to admissible evidence that would "permit" a factfinder to conclude rationally that the FDIC had acted fraudulently or in bad faith.

Here, Brandon Woods has offered no reason whatever why the FDIC should have chosen deliberately to undermine the foreclosure sale. The FDIC relied upon that sale to generate immediate proceeds to cover its claim and, on the surface, it had no motive to diminish the recovery from its own security. The prior contractor's lien was only somewhat above the $300,000 realized at the sale. If the property were worth millions more, it was plainly in the FDIC's interest to obtain the highest price--especially since a deliberate failure to seek it could give the guarantors a defense against claims on the guarantees.

If the mortgagee in a foreclosure case buys the property itself, it may well have an interest in paying less while preserving its claim for the deficit; but Brandon Woods does not suggest that the winning bidder at the foreclosure was a pawn of the...