Federal Deposit Ins. Corp. v. Bernstein, 1191

Citation944 F.2d 101
Decision Date11 September 1991
Docket NumberNo. 1191,D,1191
PartiesFEDERAL DEPOSIT INSURANCE CORPORATION, as receiver of Guardian Bank, N.A., Plaintiff-Appellee, v. Louis B. BERNSTEIN; Susan L. Bernstein; Guardian Diversified Services, Inc., a Delaware Corporation, Defendants-Appellants. ocket 90-6315.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Frank H. Wohl, New York City (Richard M. Strassberg, Lankler, Siffert & Wohl, of counsel), for defendants-appellants.

Evan S. Widlitz, New York City (Louis Epstein, Charles M. Yoon, Reid & Priest, New York City, Ann S. DuRoss, Asst. Gen. Counsel, Joan E. Smiley, Sr. Counsel, Daniel H. Kurtenbach, Sr. Atty., Rae Schupack Nathan, Regional Counsel, Marguerite Sagatellian, Managing Atty., Marc E. Wieman, Sr. Atty., F.D.I.C., Washington, D.C., of counsel), for plaintiff-appellee.

Before MESKILL, MINER and ALTIMARI, Circuit Judges.

MINER, Circuit Judge:

Defendants-appellants Guardian Diversified Services, Inc. ("GDSI") and Louis B. Bernstein and Susan L. Bernstein, his wife, ("the Bernsteins") appeal from a partial summary judgment in the amount of $175 million plus interest entered in the United States District Court for the Eastern District of New York (Mishler, J.) against GDSI and the Bernsteins and in favor of plaintiff-appellee Federal Deposit Insurance Corporation ("FDIC") as Receiver of Guardian Bank, N.A. The judgment represents the amount due on a loan made by Guardian Bank to GDSI. The loan is documented by a loan agreement and note executed by GDSI and is guaranteed by the Bernsteins, who executed a Guaranty and Suretyship Agreement with the Bank to guarantee payment.

In the district court, GDSI and the Bernsteins contended that the FDIC procured the default of the note and loan agreement by inducing the termination of a mortgage servicing contract between a subsidiary of GDSI and the Government National Mortgage Association ("GNMA"). The Bernsteins also contended that their guaranty, having been given as part of a divestiture transaction the FDIC claims is void, is unenforceable for failure of consideration. The district court found that these contentions raised no issues as to any material fact and concluded that the FDIC was entitled to judgment as a matter of law on both the loan and the guaranty as successor to the rights of the Guardian Bank.

On appeal, GDSI and Bernstein advance the same arguments they put forward in the district court. In addition, they claim that this court lacks appellate jurisdiction because the district court improperly granted certification for partial summary judgment pursuant to Fed.R.Civ.P. 54(b). We affirm the judgment of the district court in all respects.

I. Of the Loan and Guaranty

The loan and the guaranty were parts of a complex set of simultaneous transactions through which the Guardian Bank divested itself of the ownership of GDSI and GDSI's subsidiary, New York Guardian Mortgage Corp. ("NYGMC"). Engaged in the mortgage servicing business, NYGMC derived most of its revenues from issuing mortgage-backed securities and servicing the mortgages underlying those securities pursuant to agreements with GNMA. Divestiture was accomplished when LBB Company, Inc. ("LBB"), a holding company owned by Louis B. Bernstein, purchased from the Guardian Bank 100% of the stock of GDSI and thereby acquired NYGMC as well. The purchase price was the sum of $1 million and a personal guaranty from the Bernsteins of the $175 million loan made by the Bank to GDSI to facilitate the divestiture. During the course of all these transactions, which occurred on March 30-31, 1987, the principal shareholder of the Guardian Bank was Louis B. Bernstein.

Two cease and desist orders issued by the Office of the Controller of the Currency ("OCC") provided the impetus for the divestiture. In September of 1984, OCC NYGMC had become a wholly-owned subsidiary of the Guardian Bank in 1979 when Louis Bernstein assigned to it, in return for approximately 75% of the Bank's stock, the shares of a holding company which then owned NYGMC. As of June 21, 1989, NYGMC was one of the largest mortgage servicing companies in the nation, with approximately 350 employees engaged in servicing more than 168,000 mortgages having a principal balance of $8.3 billion. Approximately 80% of NYGMC's business consisted of its activities as an issuer of mortgaged-backed securities and as the servicer of the mortgages underlying those securities under the GNMA Pass-Through Program. The structure of the Program was as follows: Individual home mortgages were assembled into "pools," which were sold to brokerage houses in the form of securities. These securities were divided into small denominations and re-sold to individual and institutional investors. The monthly payments of principal and interest made by the individual mortgagors were collected by NYGMC and remitted to the holders of the securities. Timely payment to each security holder was guaranteed by GNMA.

                determined that the Guardian Bank was inadequately capitalized and that its earnings and overall condition had declined to an unsafe level.   According to the OCC, these conditions were brought about by the Bank's use of federally-insured deposits to fund the rapid growth of the mortgage-servicing business conducted by its immediate subsidiary, NYGMC.   Consequently, on November 16, 1984, the Bank stipulated to the first cease and desist order, which required a plan to limit growth and to maintain a minimum capitalization ratio of 7%.   Continuing losses from NYGMC's mortgage servicing business culminated in a second OCC cease and desist order on July 29, 1986.   That order required the Bank to submit to the OCC for review and approval a plan for the divestiture of NYGMC in the event that the Bank's pending plan for divestiture was withdrawn or disapproved.   A planned merger never occurred, and it appears that the terms of the March, 1987 divestiture, in which LBB acquired GDSI after the Bank restructured its subsidiaries to make GDSI the parent of NYGMC, never were submitted to the OCC for review

When GMNA terminated the authority of NYGMC to act as an issuer or servicer under the Pass-Through Program on June 21, 1989, NYGMC was servicing some 3,500 pools containing 140,000 mortgages. Approximately 70% of the mortgages in the pools were insured by the Federal Housing Administration ("FHA"). The remainder were guaranteed by the Veterans Administration ("VA"). For each pool of mortgages established under the GNMA Pass-Through Program, NYGMC entered into a "Guaranty Agreement" ("Agreement") with GNMA. The Agreements recited that NYGMC was an approved issuer; described NYGMC's responsibility for administering the securities, servicing the pooled mortgages and making full and timely payments to security holders; and provided for the GNMA guaranty, supported by the full faith and credit of the United States. Each Agreement reserved to GNMA the right to terminate NYGMC's servicing function and to take ownership of the mortgage pool upon the occurrence of an event of default, subject to the unsatisfied rights of the security holders. It was the declaration of an event of default by GNMA and the consequent termination of NYGMC as an issuer and servicer that resulted in the loss of revenues to NYGMC and made it impossible for GDSI, the parent of NYGMC, to repay the loan to Guardian Bank.

II. Of the FDIC Takeover

The FDIC takeover of the Guardian Bank was precipitated by financial problems that included the inability of GDSI to repay the $175 million loan, rendering the Bank insolvent. GDSI's inability to pay was precipitated by the termination of its subsidiary, NYGMC, as a participant in the GNMA mortgage backed securities Pass-Through Program. We therefore examine the "event of default" that impelled GNMA to terminate NYGMC as a participant in its Program. According to GNMA's letter to NYGMC dated June 21, 1989, which "declare[d] an event of default":

GNMA has been advised that NYGMC did not remit in a timely manner all payments due to holders of some mortgage-backed securities issued and outstanding under the Guaranty and Contractual Agreements. The failure to remit such payment constitutes a breach of Section 4.01 of those Guaranty Agreements and Sections 15-2a and 15-2c of the GNMA II Mortgage-Backed Securities Guide. (GNMA 5500.2, the Guide).

The letter of June 21, 1989 was the result of a review of the activities of NYGMC conducted by the accounting firm of Coopers and Lybrand ("C & L") at the request of GNMA. C & L reported that it was the practice of NYGMC not to pass through to security holders payments made to it by the FHA and the VA on defaulted mortgages issued or guaranteed by those agencies. C & L also reported that the amounts of partial claims payments due securities holders were reduced by the amounts of any delinquent principal and interest due on the mortgages. Also noted was NYGMC's practice of charging a monthly service fee on the total amount of the partial claims payments. GNMA concluded that the failure to pass through to securities holders the total amount of partial claims payments was violative of its regulations and of the Agreements executed by NYGMC; that its regulations also were violated by NYGMC's use of partial claims payments to reimburse advances previously made to cover delinquent mortgage payments; and that NYGMC's charges of service fees on the total monthly payments, rather than only on the interest portion, was improper. Information provided by C & L indicated that NYGMC failed to pass through to securities holders in a timely manner approximately $30 million in partial FHA and VA claims payments. Although GNMA found that the full amounts received ultimately were passed through to the securities holders, it also found that NYGMC was benefitting substantially from the improper retention.

On June 21, 1989, the OCC determined that the Guardian Bank was...

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