Federal Deposit Ins. Corp. v. Stith

• Decision Date: 16 July 1991
• Docket Number: Civ. A. No. 90-1477-N.
• Citation: 772 F. Supp. 279
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, in its Corporate Capacity as Assignee of the Receiver of the Atlantic National Bank, Norfolk, Virginia, Plaintiff, v. Salvage DeLacy STITH and Leah Stith, Defendants.
• Court: U.S. District Court — Eastern District of Virginia

772 F. Supp. 279

FEDERAL DEPOSIT INSURANCE CORPORATION, in its Corporate Capacity as Assignee of the Receiver of the Atlantic National Bank, Norfolk, Virginia, Plaintiff, v. Salvage DeLacy STITH and Leah Stith, Defendants.

Civ. A. No. 90-1477-N.

United States District Court, E.D. Virginia, Norfolk Division.

July 16, 1991.

Henry C. Morgan, Jr., Pender & Coward, Virginia Beach, Va., for plaintiff.

Salvage DeLacy Stith, Portsmouth, Va., pro se.

OPINION AND FINAL ORDER

REBECCA BEACH SMITH, District Judge.

This matter comes before the court for decision following a bench trial. Plaintiff Federal Deposit Insurance Corporation, in its corporate capacity ("plaintiff FDIC corporate"), brought this action pursuant to 12 U.S.C. § 1819(b)(2)(A) to enforce a promissory note against defendant Salvage DeLacy Stith ("Stith") and a deed of trust against the property of defendants Stith and Leah Stith.

I. Facts

Defendant Stith was employed as an Asset Recovery Specialist by Atlantic National Bank, Norfolk, Virginia ("Atlantic National Bank") from March, 1988, until September, 1988. His supervisor was Herbert L. Boone, Senior Lender. See Plaintiff's Rebuttal Exhibit 2; Plaintiff's Exhibit 3 (hereinafter "Exhibit" to be referred to as "Ex.").

In May of 1988, defendant Stith sought personally to secure a loan from Atlantic National Bank primarily to assist another individual, Edward Delk. It was defendant Stith's intention that proceeds of the loan would be applied to the account of Edward Delk at Atlantic National Bank to forestall an otherwise imminent foreclosure on Edward Delk's home.¹

On May 19, 1988, defendant Stith executed in favor of Atlantic National Bank a promissory note in the amount of $30,000 plus interest, of which $25,000 was to be applied to Edward Delk's account. See Plaintiff's Ex. 1; Excerpt of Proceedings at 2, 4 (Feb. 20 and 21, 1991).² As security for the debt evidenced by said promissory note, defendants Stith and Leah Stith, also on May 19, 1988, executed a deed of trust on property in Greensville County, Virginia. See Plaintiff's Ex. 2.³ Both the promissory note and the deed of trust were prepared by defendant Stith as an employee of Atlantic National Bank. Furthermore, defendant Stith, himself, or an agent on his behalf, recorded the deed of trust with the Clerk of the Circuit Court of Greensville County on May 31, 1988. See id. (official receipt of recordation); Excerpt of Proceedings at 32, 38, 45 (Feb. 20 and 21, 1991).

The terms of the promissory note obligated defendant Stith to make thirty-five (35) monthly payments of $498.03 commencing on June 19, 1988, and one (1) final balloon payment of $20,434.88. Plaintiff's Ex. 1. No payments ever have been made on the note, which was not funded at the time of the transaction. As a bank employee, defendant Stith was familiar with the task of booking a loan, and he knew that his loan was not funded, i.e. booked, on May 19, 1988, or anytime shortly thereafter.⁴

On or about October 26, 1988, defendant Stith, citing his financial situation and the fact that the funds had not been disbursed, requested the assistance of the president of Atlantic National Bank, Levi E. Willis, in securing a release of the $30,000 deed of trust. Plaintiff's Ex. 5. No release was secured, and on November 4, 1988, $25,000 was credited to the account of Edward Delk at Atlantic National Bank. See Plaintiff's Ex. 11 at 7.⁵

In early 1989, defendants Stith and Leah Stith filed suit against Atlantic National Bank in the Circuit Court of the County of Greensville seeking, in part, the court to marginally release the deed of trust executed on May 19, 1988. See Plaintiff's Ex. 12.⁶ Subsequent to filing suit, defendant Stith acknowledged in writing his obligation to Atlantic National Bank, but sought to restructure the terms of the loan. Plaintiff's Ex. 6; Plaintiff's Rebuttal Ex. 1; see Plaintiff's Ex. 7. The loan never was restructured.

On December 7, 1989, Atlantic National Bank was declared insolvent and, pursuant to 12 U.S.C. §§ 191 and 1821(c), the FDIC was appointed receiver ("FDIC receiver"). Upon accepting its appointment as receiver of Atlantic National Bank, FDIC receiver entered into a purchase and assumption transaction and, pursuant thereto, executed a contract of sale with plaintiff FDIC corporate through which plaintiff FDIC corporate was assigned, among other assets, the aforementioned promissory note and deed of trust.⁷

Plaintiff FDIC corporate, on July 20, 1990, filed suit in this court to enforce the aforementioned promissory note and deed of trust. The case proceeded to trial. Based upon the trial testimony and documents introduced into evidence, the court found as a fact that the promissory note was partially funded on November 4, 1988, when $25,000 was credited directly to the account of Edward Delk.⁸

After hearing final argument the court decided, for the reasons stated in the record, all but one of the issues which the parties wished further to brief. The matter is now ripe for decision. The sole issue remaining for the court to decide is whether plaintiff FDIC corporate is foreclosed from enforcing the promissory note and deed of trust because there was a failure of consideration.⁹

Defendants argue that the failure of consideration, namely the failure of Atlantic National Bank fully to fund the transaction on May 19, 1988, prevents plaintiff FDIC corporate from enforcing the promissory note and deed of trust at issue. See Defendants' Letter of Memorandum (Apr. 17, 1991). Plaintiff FDIC corporate, however, argues that it occupies a preferred position under the law, and because of this preferred position it is entitled to collect on the face of the promissory note and enforce the deed of trust.

II. Legal Analysis

In D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), the FDIC had acquired a note in a purchase and assumption transaction and the maker asserted the defense of failure of consideration based upon an undisclosed agreement, between the maker and the failed bank, that the note would not be collected. The Supreme Court held that such a "secret agreement" could not be used as a defense against the FDIC because of the actual or potential deceit to banking authorities. Id. at 460, 62 S.Ct. at 680-81. Accordingly, the Court set forth a common law rule of estoppel that bars defenses against the FDIC based upon secret or unrecorded collateral agreements, written or oral, that alter the terms of a facially unqualified obligation, regardless of the borrower's intent, if the borrower lent himself to a scheme likely to mislead authorities. See, e.g., Campbell Leasing, Inc. v. FDIC, 901 F.2d 1244, 1248 (5th Cir.1990) (citing Bell & Murphy and Assocs. v. Interfirst Bank Gateway, N.A., 894 F.2d 750, 753 (5th Cir.1990)); cf. FDIC v. R-C Marketing and Leasing, Inc., 714 F.Supp. 1535, 1544 (D.Minn.1989) (citing FDIC v. Timbalier Towing Co., 497 F.Supp. 912, 920-21 (N.D.Ohio 1980)) (notwithstanding absence of a secret collateral agreement, D'Oench doctrine still may bar failure of consideration defense). In 1950, the D'Oench doctrine was codified, in part, by Congress in 12 U.S.C. § 1823(e), amended by Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.L. No. 101-73, § 217, 103 Stat. 183, 256 (1989).¹⁰

Although the D'Oench doctrine and 12 U.S.C. § 1823(e) do not, as a matter of law, bar the maker of a promissory note from asserting against the FDIC the defense of failure of consideration in every case, important inquiries in applying this doctrine and statute are: 1) whether the defense of failure of consideration sought to be interposed against the FDIC arises from a secret collateral agreement; and 2) whether the maker "contributed" to the overstatement of the bank's assets which the FDIC seeks to enforce.¹¹

In making these inquiries in the instant case, it is clear that the D'Oench doctrine and 12 U.S.C. § 1823(e) bar defendants from asserting the defense of failure of consideration. The promissory note and deed of trust at issue are facially unqualified obligations. The alleged failure of consideration arises from "secret" collateral agreements, and defendant Stith contributed to a scheme that was likely to mislead banking authorities.

Specifically, defendant Stith served in two roles with respect to the loan transaction at issue. He was the bank officer who prepared and recorded the commercial paper, and he was the borrower. Defendant Stith undertook to close his own loan, both as bank officer and borrower. Therefore, the decisions made by defendant Stith while he acted in these dual capacities constituted an agreement between the borrower and the bank. Defendant Stith was familiar with the task of booking a loan and yet he did not book his own loan nor have it booked, and he knew that it had not been booked. The failure to book the loan on May 19, 1988, constituted an unwritten agreement between Atlantic National Bank and the borrower not to fund the loan. This collateral, unwritten agreement, when asserted and established, alters the terms of a facially unqualified obligation. Moreover, notwithstanding that he prepared, executed, and recorded the documents in question, defendant Stith testified that the loan never should have been booked and that two days after the deed of trust was recorded, Rick Spillberg, a representative of the Office of the Comptroller of the Currency, told him not to do anything else on the loan because it should not be done. Defendant Stith himself was an Asset Recovery Specialist for Atlantic National Bank.

Even in the absence of a secret collateral agreement, courts have held that the D'Oench doctrine is applicable to bar the defense of failure of consideration when the maker's action or acquiescence contributes to the overstatement of the bank's assets which the FDIC seeks to enforce. See, e.g., R-C Marketing and Leasing, Inc., 714 F.Supp. at 1544; Timbalier Towing...