FDIC v. Hughes Development Co., Inc.

• Decision Date: 12 April 1988
• Docket Number: Civ. No. 4-87-223.
• Citation: 684 F. Supp. 616
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff, v. HUGHES DEVELOPMENT COMPANY, INC., Francis R. Hughes, and Bernadette J. Hughes, Defendants.
• Court: U.S. District Court — District of Minnesota

684 F. Supp. 616

FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff, v. HUGHES DEVELOPMENT COMPANY, INC., Francis R. Hughes, and Bernadette J. Hughes, Defendants.

Civ. No. 4-87-223.

United States District Court, D. Minnesota, Fourth Division.

April 12, 1988.

Karen Park Gallivan, Rider, Bennett, Egan & Arundel, Minneapolis, Minn., for plaintiff.

Ann K. Newhall, Dale M. Wagner, Moss & Barnett, Minneapolis, Minn., for defendants.

ORDER

DOTY, District Judge.

This case comes before the Court on a motion for summary judgment by plaintiff Federal Deposit Insurance Corporation ("FDIC") and a cross motion for partial summary judgment by the defendants Hughes Development Company, Inc. ("HDCI"), Francis R. Hughes ("Mr. Hughes"), and Bernadette J. Hughes ("Mrs. Hughes").

FACTUAL BACKGROUND

In 1982, Mr. Hughes and Guaranty State Bank of St. Paul ("Bank") executed a Combination Note, Security Agreement and Disclosure ("Cathedral Court Note") in the amount of $300,000 on behalf of HDIC. Mr. Hughes intended to use the proceeds to remodel three commercial condominium units located in the Cathedral Court complex developed by HDCI and owned by the Hugheses. To secure the note, Mr. and Mrs. Hughes signed a Security Agreement and Mortgage Deed ("Cathedral Court Mortgage"), granting a mortgage interest to the Bank in the three condominium units. Mr. and Mrs. Hughes also signed a Guaranty which provided that the couple would promptly pay any existing and future indebtedness from HDCI to the Bank.

On the same day, Mr. and Mrs. Hughes signed a Combination Note, Security Agreement and Disclosure in the amount of $100,000 ("Lombard Note"), the loan proceeds from which were to be used to remodel the family residence on Lombard Avenue, St. Paul, Minnesota. Mr. Hughes alleges that, before he and the Bank signed the loan documents, the Bank agreed to refinance the Lombard loan after completion of the home improvements. The terms of this agreement appear in a letter signed by both Mr. Hughes and Harry Jensen, the Bank's president.

In 1984, the FDIC was appointed receiver of the Bank's property and business after the Bank was adjudged insolvent. The FDIC, in its corporate capacity, purchased the Cathedral Court Note, the Cathedral Court Mortgage, the Lombard Note, and the Lombard Mortgage from the Bank. After purchasing these assets from the Bank, the FDIC discovered that the defendants had defaulted in their payments, and that the Hugheses had been delinquent in the payment of real estate taxes. The FDIC paid $8,324.07 in delinquent Cathedral Court property taxes, and $4,686.23 in delinquent real estate taxes for the Lombard property.

Approximately one month before the Bank was adjudged insolvent, Mr. Hughes allegedly sent a letter to the Bank ("rescission letter") notifying its officials that they had failed to make certain disclosures on the Lombard loan, as required by the Truth-In-Lending Act. He stated in this letter that he wished to rescind and cancel the Lombard loan agreement. Apparently, neither this letter of rescission nor the letter agreement on refinancing appeared in any of the Bank's records at the time the FDIC purchased the Lombard loan documents. In any event, the FDIC denies having any knowledge of either document's existence before the commencement of this suit.

Mr. Hughes indicates that the FDIC negotiated with him throughout the fall of 1985 in an attempt to work out an agreement for repayment of the two loans. The parties apparently did not reach a resolution. In May 1986, the FDIC notified the Hugheses that they had defaulted on both the Cathedral Court and Lombard loans and commenced this mortgage foreclosure and deficiency action.

The FDIC has moved for summary judgment on its action for foreclosure of the Cathedral Court and Lombard mortgages pursuant to Minn.Stat. §§ 581.03, 581.09 and 582.30 (1986). Defendants move for partial summary judgment dismissing the FDIC's foreclosure action on the Lombard property.

DISCUSSION

Rule 56 of the Federal Rules on Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to the interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law." Once a properly supported motion for summary judgment has been made, the burden is on the nonmoving party to produce some evidence demonstrating the existence of a factual dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511, 91 L.Ed. 2d 202 (1986). Rule 56(e) requires the nonmoving party to go beyond the pleadings and by affidavits, depositions, answers to interrogatories, and admissions, designate "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). The nonmoving party must produce enough evidence that a reasonable jury could return a verdict for the nonmoving party. Anderson, 106 S.Ct. at 2510.

I. Cathedral Court Mortgage

To support this motion, the FDIC has submitted pleadings, affidavits and Bank documents indicating the existence of the mortgage, note and guaranty, and the failure of the Hugheses to make the appropriate payments on that loan. The Hugheses have admitted the execution of these obligations and the default in payment.

In response to the FDIC's motion, defendants raise three issues which, in their opinion, render summary judgment inappropriate. First, the Bank and its assignee, the FDIC, allegedly breached an agreement with the Hugheses to refinance the Lombard loans. Second, the defendants feel that the FDIC has taken inconsistent factual positions regarding the rescission letter and the interest due on the loans, thereby raising a genuine issue of material fact. Finally, Mr. Hughes asserts that he agreed to turn over the deeds of the three condominiums to the FDIC as a settlement on the Cathedral Court loan, and as a result, he is no longer liable for the Cathedral Court Mortgage. Because the burden of producing evidence of a factual dispute rests with defendants, the Court must examine each issue to determine if they have designated specific facts which present a genuine issue for trial.

A. Letter Agreement of June 1, 1982

Defendants allege that foreclosure on the Cathedral Court Mortgage is inappropriate because the Bank and its assignee, the FDIC, breached a letter agreement between the Bank and Mr. Hughes by failing to arrange a refinancing of the loans. Apparently, defendants feel that their reliance on the refinancing agreement led them to sign the loan documents, and because the FDIC failed to change the terms of the Lombard loan, the defendants are somehow relieved of liability under the notes and mortgages.

The FDIC responds that, assuming a refinancing agreement existed, it would be unenforceable against the FDIC, as a matter of law, because under 12 U.S.C. § 1823(e),¹ such a side agreement cannot diminish the FDIC's interest in an asset, unless that agreement is in writing, is executed at the same time as the loan document, and is approved by the Bank's board of directors. Defendants request this Court to deny FDIC's motion for summary judgment so that they may complete discovery to determine if the requirements of § 1823(e) were met. If the agreement is unenforceable against the FDIC as a matter of law, the Court need not determine the effect that a breach might have on the notes and mortgages.

To support their contention that an agreement exists, defendants point to a letter which Mr. Hughes drafted and which Harry Jensen signed. This letter does include a reference to a refinancing arrangement, which was to occur after the home improvements on the Lombard residence were completed. The record indicates, however, that the time for discovery ended on December 1, 1987. Since that time, the defendants have not shown this Court any evidence supporting their claim that the letter agreement meets the statutory requirements of § 1823(e). The FDIC states that the Bank did not have the June letter agreement in its official records and that the minutes of its board meetings do not reflect an approval of this agreement. (Affidavit of Stephen Kunde at pars. 11 and 12 (June 25, 1987)). Because the defendants have not presented any evidence to the contrary, this Court must conclude that the letter agreement of June 1, 1982 does not meet the requirements of § 1823(e) and is, therefore, unenforceable against the FDIC.

B. Inconsistent Factual Positions

Defendants urge this Court to deny summary judgment because the FDIC has taken inconsistent positions with regard to the receipt and validity of Mr. Hughes' notice of rescission of the Lombard loan and to the amount of interest payments Mr. Hughes has made on the Cathedral Court loan.

First, even if the rescission letter presents an issue of fact, this letter does not affect the Cathedral Court Mortgage. The notice of rescission clearly applied only to the $100,000 Lombard loan. (See Plaintiff's Exhibit A.) The letter reads in pertinent part: "I hereby rescind and cancel the $100,000.00 construction loan dated June 18, 1982 made by the Bank to Francis R. Hughes and Bernadette J. Hughes for work on our home at 1030 Lombard Avenue, Saint Paul, Mn." The rescission letter never mentions the Cathedral Court Mortgage, and, therefore, does not raise any factual issues with regard to the Cathedral Court Mortgage.

Second, although the FDIC never directly disputes that the Bank received this letter, it does dispute the validity of the rescission under the Truth-in-Lending Act ("TILA"), 15 U.S.C. § 1601 et seq. The FDIC contends that, without the signature of Mrs. Hughes, and without a contemporaneous tender of loan proceeds from Mr. Hughes, the rescission letter is invalid. The signature and tender...