Fair v. NCNB Texas Nat. Bank

• Decision Date: 22 March 1990
• Docket Number: Civ. A. No. CA3-89-0820-D.
• Citation: 733 F. Supp. 1099
• Parties: Ted FAIR, H. Dale Curry, and Carrie Sturgis Dalton, Plaintiffs, v. NCNB TEXAS NATIONAL BANK and Federal Deposit Insurance Corporation, as Receiver for First RepublicBank Waco, N.A., Defendants.
• Court: U.S. District Court — Northern District of Texas

733 F. Supp. 1099

Ted FAIR, H. Dale Curry, and Carrie Sturgis Dalton, Plaintiffs, v. NCNB TEXAS NATIONAL BANK and Federal Deposit Insurance Corporation, as Receiver for First RepublicBank Waco, N.A., Defendants.

Civ. A. No. CA3-89-0820-D.

United States District Court, N.D. Texas, Dallas Division.

March 22, 1990.

COPYRIGHT MATERIAL OMITTED

Marshal W. Dooley of Dooley, Rucker, Maris & Foxman, Dallas, Tex., for plaintiffs Ted Fair, H. Dale Curry and Carrie Sturgis Dalton.

Brian J. Hurst of Jenkens & Gilchrist, Dallas, Tex., for defendants NCNB Texas Nat. Bank and FDIC, as Receiver for First RepublicBank Waco, N.A.

FITZWATER, District Judge:

This case presents questions concerning the applicability of the D'Oench, Duhme¹ doctrine to transactions in which a failed financial institution acts both as a lender for and seller of property.

I

The facts set out by the plaintiffs are as follows. In 1982 First RepublicBank Waco, N.A. ("First Republic") loaned money to Vector Development Company to develop a condominium project in College Station, Texas. First Republic hired an inspecting architect to ensure compliance with plan specifications. After completion of the development, Vector became unable to pay the debt and defaulted. First Republic acquired the property by foreclosure. Thereafter, a senior vice president of the bank contacted plaintiff H. Dale Curry ("Curry") to inquire whether Curry and his partners, plaintiffs Ted Fair ("Fair") and Carrie Sturgis Dalton ("Dalton"), would be interested in purchasing the condominium project. The bank official represented that First Republic would make the partnership a good deal. Curry and the bank official drove by the property so that Curry could assess it, but Curry did not physically inspect the condominiums. Curry also reviewed the construction plans, which showed that the project had cedar siding, firewalls between each unit, and four-inch pipes for plumbing. The bank official told Curry that these plans represented the details of the construction.

Curry and his partners initially concluded they did not wish to purchase the condominium project. First Republic continued to urge the partnership to acquire the property, however, and promised to make them "a deal they could not turn down." Because the bank wanted to dispose of the property before year-end, the details of the transaction were hastily arranged. The parties did not enter a written contract for purchase and the plaintiffs neither inspected the property nor insisted on a title policy. Based on assurances of various bank officials that the project was constructed in accordance with the plans, the plaintiffs took title by warranty deed. After assuming possession and conducting an inspection, plaintiffs discovered that the project did not have cedar siding or firewalls and that the plumbing pipes measured less than four inches in diameter. These defects precluded the individual units from being sold as condominiums. The rental income they generated was insufficient to service the debt. In early July 1988 plaintiffs advised the bank by letter of the problems with the project. The letter was placed in the loan file. At that time First Republic recognized in various internal memoranda that it would likely foreclose on the property or take a deed in lieu of foreclosure within a few months.

Later in July 1988 the Comptroller of the Currency declared First Republic insolvent and appointed the Federal Deposit Insurance Corporation ("FDIC") receiver. The FDIC subsequently entered into a purchase and assumption agreement with NCNB Texas National Bank, N.A. ("NCNB") in which NCNB acquired substantially all of First Republic's assets, including the notes involved in this transaction, and certain liabilities. In December 1988 plaintiffs filed an action against NCNB in Texas state court alleging violations of the Texas Deceptive Trade Practices—Consumer Protection Act in connection with the sale of the property. The FDIC intervened and removed the action to this court.² Plaintiffs now seek to add claims for fraud, breach of the duty of good faith and fair dealing, intentional and negligent misrepresentation, prima facie tort, breach of fiduciary duty, breach of contract, and vicarious liability for the failure of the supervising architect to detect non-conformity with the plans. Plaintiffs also seek exemplary damages and attorney's fees. The FDIC and NCNB contend the D'Oench, Duhme and federal common law holder in due course doctrines mandate summary judgment on all claims in the original action. They oppose on the same ground plaintiffs' motion for leave to amend their complaint. The FDIC and NCNB also argue that NCNB cannot be liable because the FDIC retained liability for the claims plaintiffs now assert.

II

A

The court agrees that, because the FDIC retained liability for claims made in connection with the loan transaction in question, NCNB cannot be liable to the plaintiffs.

As noted, following the FDIC's appointment as receiver for First Republic, the FDIC entered into a purchase and assumption agreement with NCNB. Section 2.1 of the agreement sets forth the liabilities expressly assumed by NCNB. Section 2.1(j) provides for the assumption of "liabilities arising from any claims or litigation brought by the Failed Bank as of Bank Closing against third parties and related to any asset of the Failed Bank purchased by the Assuming Bank...." All parties agree that the claims asserted by the plaintiffs are "related to" the notes NCNB acquired. Plaintiffs urge that NCNB assumed liability for the claims because, prior to the closing of First Republic, plaintiffs had missed several payments on their notes and First Republic therefore had a claim against plaintiffs as of the bank closing. The court declines to adopt this reasoning.

Plaintiffs' argument would construe § 2.1(j) as providing for the assumption of two classes of liabilities: "liabilities arising from any claims ... as of Bank Closing against third parties ..." and "liabilities arising from ... litigation brought by the Failed Bank as of Bank Closing against third parties...." This is not a natural reading of the unambiguous language of the purchase and assumption agreement. This and other courts in this circuit have construed the same agreement to mean that NCNB assumed liability only for counterclaims raised in response to suits that the failed bank initiated prior to bank closing. See, e.g., Royal Bank of Canada v. FDIC, No. CA4-84-0161-D, slip op. at 4-5 (N.D.Tex. Dec. 11, 1989); Property Asset Equity Corp. v. NCNB Tex. Nat'l Bank, No. S-89-7-CA, slip op. at 7 (E.D.Tex. March 6, 1989). The instant litigation was not commenced by First Republic—the failed bank—but by plaintiffs. Moreover, it was not filed prior to bank closing. Hence, it fails to meet the requirements of § 2.1(j) in at least two respects.

B

Assuming arguendo that NCNB is not exculpated from liability by virtue of the purchase and assumption agreement, the court turns to the question whether NCNB can be immunized under the D'Oench, Duhme rule of estoppel.

When this motion was briefed and orally argued, this issue required the court to decide as a threshold matter whether D'Oench, Duhme applied in its common law form to a party other than the FDIC itself. This question has now been resolved by the Fifth Circuit in favor of extending the benefits of the doctrine to NCNB. See Bell & Murphy and Assocs., Inc. v. InterFirst Bank Gateway, N.A., 894 F.2d 750, 754 (5th Cir.1990) ("We agree with the FDIC that failure to extend D'Oench, Duhme's protection to bridge banks would undermine the effectiveness of bridge banks as a means of continuing the normal banking operations, and thereby protecting the depositors and creditors, of a failed bank"). Accordingly, NCNB may rely upon the D'Oench, Duhme rule of estoppel in the present case.

C

The question for decision therefore becomes whether, as a matter of law based upon the undisputed material facts, D'Oench, Duhme precludes plaintiffs' claims against NCNB and the FDIC.³

The D'Oench, Duhme doctrine is essentially a rule of estoppel. D'Oench, Duhme, 315 U.S. at 475, 62 S.Ct. at 688 (Jackson, J., concurring); FDIC v. McClanahan, 795 F.2d 512, 515 (5th Cir.1986) (referring to D'Oench, Duhme doctrine as a rule of estoppel). It prevents those who give notes to federally insured institutions from raising defenses based on side agreements made with officers of failed institutions regarding the enforceability of promissory notes. The doctrine encourages debtors to memorialize all agreements in writing and reflects the equitable principle that losses incurred as a result of unrecorded arrangements should not fall on deposit insurers, depositors, or creditors but rather upon the person who could have best avoided the loss. McClanahan, 795 F.2d at 516 (defendant "rather than the FDIC or the innocent depositors or creditors of the failed bank" should bear loss); cf. Chatham Ventures, Inc. v. FDIC, 651 F.2d 355, 363 n. 16 (5th Cir. Unit B 1981) (borrowers could have protected themselves from loss by complying with 12 U.S.C. § 1823(e)), cert. denied, 456 U.S. 972, 102 S.Ct. 2234, 72 L.Ed.2d 845 (1982). The D'Oench, Duhme doctrine bars affirmative claims as well as defenses. Beighley v. FDIC, 868 F.2d 776, 783-84 (5th Cir.1989).

D'Oench, Duhme does not, however, preclude a maker from interposing all defenses to a regulator's attempt to collect on a note. McClanahan, 795 F.2d at 515. "The test is whether the note was designed to deceive the creditors or the public authority, or would tend to have that effect." D'Oench, Duhme, 315 U.S. at 460, 62 S.Ct. at 680. In applying this standard "it would be sufficient ... that the maker lent himself to a scheme or arrangement whereby the banking authority on which respondent relied in insuring the bank was or was likely to be misled." Id.; see also Beighley, 868 F.2d at 784 (same); FSLIC v. Murray, 853 F.2d 1251,...