Federal Deposit Ins. Corp. v. U.S. Nat. Bank

• Citation: 685 F.2d 270
• Decision Date: 23 August 1982
• Docket Number: No. 80-6043,80-6043
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Franklin National Bank, Appellant, v. UNITED STATES NATIONAL BANK, a National Banking Association; Federal Deposit Insurance Corporation, as Receiver of United States National Bank, et al., Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 270

685 F.2d 270

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of

Franklin National Bank, Appellant, v. UNITED STATES NATIONAL BANK, a National Banking Association;

Federal Deposit Insurance Corporation, as Receiver

of United States National Bank, et al., Appellees.

No. 80-6043.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 1, 1982.

Decided Aug. 23, 1982.

Jeffery M. Epstein, New York City, for appellant.

Charles A. Legge, Bronson, Bronson & McKinnon, San Francisco, Cal., for appellees.

Appeal from the United States District Court for the Southern District of California.

Before SKOPIL and SCHROEDER, Circuit Judges, and KING, ^* District Judge.

SCHROEDER, Circuit Judge:

This case is yet another eddy in the whirlpool of litigation that followed the 1973 collapse of the United States National Bank in San Diego, California. ¹ In this litigation the Federal Deposit Insurance Corporation ("FDIC"), in its capacity as receiver of another failed bank, Franklin National Bank, is suing itself, in its capacity as receiver of U.S. National Bank, to recover $5,000,000 which the U.S. National Bank allegedly borrowed by means of fraudulent representations. The district court granted summary judgment against the plaintiff and we reverse.

FACTS

In 1972, United States National Bank ("USNB") merged with Beverly Hills Fidelity On October 18, 1973, the Comptroller of the Currency closed U.S. National Bank, and appointed the FDIC as receiver. FDIC as receiver of USNB ("USNB Receiver"), entered into a purchase and assumption agreement with Crocker National Bank, whereby Crocker purchased certain assets and assumed certain liabilities of USNB. In order to implement the purchase and assumption agreement the USNB Receiver obtained a loan from the FDIC as corporation, and granted the FDIC a lien on the remaining assets retained by the USNB Receiver.

Bank. In connection with the merger, USNB required additional capital. On June 30, 1972, Franklin National Bank ("FNB") loaned $5,000,000 to USNB, in return for $5,000,000 worth of USNB capital notes, as evidenced in a written contract entitled "Subordinated Capital Note Agreement." These notes bore interest at a rate of 1/2% above FNB's prime rate. Under the agreement the notes were expressly subordinated to the payment of "senior obligations" in the event of USNB's failure. The loans were authorized under USNB's Articles of Association and were approved by the Comptroller of the Currency as complying with the requirements of the National Banking Act ("NBA").

FNB began this suit on November 26, 1973, claiming that it was induced to enter into the Subordinated Capital Note Agreement by reason of misrepresentations on the part of USNB. Approximately one year later, on October 8, 1974, the Comptroller of the Currency declared FNB insolvent and appointed FDIC as receiver of FNB as well.

FDIC, as receiver of FNB ("FNB Receiver"), is in the process of winding up the affairs of that failed bank, and thus now prosecutes this action standing in the shoes of FNB. It filed FNB's amended complaint alleging fraud in connection with the Subordinated Capital Note Agreement and seeks rescission of the agreement and return of the $5,000,000 paid by FNB to purchase the capital notes, plus interest.

On June 17, 1980, the USNB Receiver filed an amended answer which asserted as an affirmative defense that the FNB Receiver was barred from recovering damages from the USNB Receiver until the FDIC loan was completely satisfied. The balance due on the FDIC loan exceeds $200,000,000 and the remaining assets held by the USNB Receiver are approximately $100,000,000. Thus there will in all likelihood be a deficit in the FDIC loan of approximately $100,000,000. Due to that deficit, if the USNB Receiver prevails in this defense, the FNB Receiver will recover nothing.

Shortly after filing that answer, the USNB Receiver moved for summary judgment on the affirmative defense. For purposes of the motion, the FNB Receiver and the USNB Receiver stipulated that USNB had made fraudulent representations to FNB which would permit rescission of the note agreement under applicable law, and that holders of "senior liabilities" as defined in the Subordinated Capital Note Agreement did not rely on the subordination provisions contained in that agreement.

On November 14, 1980, the district court granted summary judgment in favor of the USNB Receiver, and held that the claim of the FNB Receiver must be deferred to the prior payment in full of the FDIC. The FNB Receiver filed a timely notice of appeal.

DISCUSSION

The principal issue is whether the FNB, assuming that it was fraudulently induced to make a subordinated loan, is entitled to share in the ratable distribution of assets to creditors afforded by §§ 91 and 194 of the NBA, 12 U.S.C. §§ 91, 194. ²

FNB Receiver's threshold argument is that, although the note agreement expressly subordinates FNB's right of payment to all "senior liabilities," the FDIC loan is not included in that class of obligations because nothing in the note agreement expressly subordinates FNB's right of payment to the prior payment in full of the FDIC loan.

This argument is not consistent with the terms of the note agreement itself. The definition of senior liabilities contained in the note agreement includes:

All Banking Liabilities, and obligations to the FDIC and any rights acquired by the FDIC as a result of loans made by the FDIC to the Company or the purchase or guarantee of any of the Company's assets by the FDIC pursuant to the provisions of Title 12, United States Code, Section 1823, Paragraphs (c), (d) or (e) ....

Because the FDIC purchase and assumption transaction was conducted pursuant to 12 U.S.C. § 1823(e), the note agreement clearly contemplates subordination of the $5,000,000 FNB loan to the rights of the FDIC.

We therefore must consider FNB Receiver's principal argument, which deserves closer analysis and which we find to be meritorious. Appellant's argument is that, as a defrauded subordinated noteholder entitled to rescission of the loan agreement under applicable law, it assumes the position of a general creditor allowed to benefit from 12 U.S.C. § 194. That section provides for a "ratable dividend" on all claims proved to the satisfaction of the receiver. Since the ratable distribution in this case took the form of a purchase and assumption by Crocker Bank of the assets and liabilities of USNB, ratable distribution would assure FNB of total repayment. ³

Assuming as we must by virtue of the parties' stipulation that appellant's subordinated position was the product of fraud, then its entitlement to status as a general creditor is fully supported by the Supreme Court's decision in Oppenheimer v. Harriman National Bank & Trust Co., 301 U.S. 206, 57 S.Ct. 719, 81 L.Ed. 1042 (1937). There the plaintiff was fraudulently induced to buy stock in a bank. The bank failed and the plaintiff rescinded the sale of stock and sought to recover against the bank on the same level as other unsecured creditors. The Court first required plaintiff to comply with NBA § 64 (since repealed), requiring stockholders to pay an assessment up to the par value of their stock to protect creditors who relied upon the state capital. After paying the Comptroller's assessment, the Court held that plaintiff was entitled to "stand on the same footing as other creditors. Discrimination against (creditors') USNB Receiver argues that Oppenheimer provides no support for appellant's position, and cites several lower court decisions, all interpreting different regulatory schemes, where defrauded holders of corporate obligations were not allowed to join the class of unsecured creditors. Particular reliance is placed upon In re Weis Securities, Inc., 425 F.Supp. 212 (S.D.N.Y.1977), aff'd, 605 F.2d 590 (2d Cir. 1978), which arose in the context of the Securities Investor Protection Act of 1970, 15 U.S.C. §§ 78aaa et seq.

claims is not authorized by the statute. It follows that plaintiff's judgment is entitled to rank on a parity with other unsecured creditors' claims." Id. at 215, 57 S.Ct. at 724.

In Weis, subordinated lenders brought an action against the trustee of a failed broker-dealer claiming fraud and seeking rescission of their subordination agreements. The broker-dealer had borrowed money on a subordinated basis so that the amount of this indebtedness would not be considered in the determination of the broker-dealer's compliance with the "net capital rules" of the SEC and the New York Stock Exchange. These rules limited a broker's indebtedness to a certain multiple of its net capital. Because subordinated liabilities, approved by the Exchange, were not added to indebtedness, "(i)n substance the subordinated loans, with the knowledge of the lenders, were used as capital for purposes of the net capital rules." 425 F.Supp. at 214.

The district court in Weis held that despite any fraud which might entitle the lenders to rescission, customers and general creditors of Weis should be paid before subordinated lenders because every customer and general creditor knew, or was presumed to have known, that under federal law Weis was required to maintain a certain level of capital. The subordinated lenders provided capital to Weis with the express understanding that their funds enabled Weis to comply with the rule. Id. at 217. The Second Circuit affirmed the district court, holding that when a lender subordinated a loan made to a securities broker to enable the broker to comply with regulatory capital requirements, the lender was estopped to rescind the subordination agreement. Whether customers actually relied on the subordination agreement was "irrelevant." 605 F.2d at 596-97.

As noted by the Second Circuit, the purpose of the net capital rules was to assure a broker's ability to meet the demands of its customers by limiting aggregate indebtedness to a specific amount greater...