Federal Deposit Ins. Corp. v. Webb

• Decision Date: 21 December 1978
• Docket Number: No. CIV-1-78-22.,CIV-1-78-22.
• Citation: 464 F. Supp. 520
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, in its separate corporate capacity as Liquidator of the Hamilton National Bank of Chattanooga, Chattanooga, Tennessee v. Gaylord S. WEBB.
• Court: U.S. District Court — Eastern District of Tennessee

464 F. Supp. 520

FEDERAL DEPOSIT INSURANCE CORPORATION, in its separate corporate capacity as Liquidator of the Hamilton National Bank of Chattanooga, Chattanooga, Tennessee v. Gaylord S. WEBB.

No. CIV-1-78-22.

United States District Court, E. D. Tennessee, S. D.

December 21, 1978.

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James R. Buckner, Miller & Martin, Chattanooga, Tenn., for plaintiff.

L. Caesar Stair, III, Bernstein, Dougherty & Susano, Knoxville, Tenn., for defendant.

MEMORANDUM

FRANK W. WILSON, Chief Judge.

This is an action on three promissory notes. Jurisdiction is invoked pursuant to 12 U.S.C. § 1819 and is not in dispute. The plaintiff is the Federal Deposit Insurance Corporation (FDIC) suing in its corporate capacity as liquidator of Hamilton National Bank (HNB). The case is presently before the Court on the plaintiff's motion for summary judgment and defendant's motion to amend the Final Pre-Trial Order.

The following facts are undisputed. The defendant, a former employee of HNB, signed several notes payable to HNB. Those notes on their face are as follows: (1) a note executed on November 8, 1975 for a principal amount of Two Thousand Five Hundred and no/100 ($2,500.00) Dollars, with interest at the rate of 4½, per cent per annum to maturity and 10 per cent per annum thereafter until paid; (2) a note executed on December 3, 1975 for the principal amount of Twelve Thousand and no/100 ($12,000.00) Dollars, with interest at 4½ per cent per annum to maturity and 10 per cent per annum thereafter until paid; and (3) a note executed on October 26, 1975 for the principal amount of Five Thousand Five Hundred Forty-One and no/100 ($5,541.00) Dollars, with interest at 9½ per cent per annum to maturity and 10 per cent per annum thereafter until paid Court File # 10 ¶ (a). Each of the above notes was due 90 days after execution and each note was secured by 600 shares of Hamilton Bancshares, Incorporated (The parent corporation of HNB).

In February of 1976 Hamilton National Bank became insolvent and the FDIC was appointed as receiver. Later, pursuant to court order (In the Matter of the Liquidation of HNB, E.D.Tn., So. Division, CIV-1-76-32), the FDIC as corporate liquidator purchased from itself as receiver the remaining assets of HNB. These assets included the notes executed by the defendant.

The plaintiff's claim is based upon the notes executed by Mr. Webb to Hamilton National Bank. The FDIC contends that a balance is owed on the November 28, 1975 note in the sum of $2,499.76, a balance is owed on the December 3, 1975 note in the sum of $11,998.16, and a balance is owed on the October 26, 1975 note in the sum of $5,540.31. The plaintiff seeks recovery of the principal due on each note, plus interest to the date of judgment, attorney's fees as provided for in the notes, and costs.

The defendant admits signing the notes. He contends, however, that by his understanding with HNB each note was renewable for a ten-year period at 4½ per cent interest. Further, the defendant contends that he executed each note in blank. HNB was to later add the terms for time and interest in accordance with an agreement existing between it and the defendant. The defendant contends that the October 26, 1975 note was not executed in a manner authorized by the agreement. Further, the defendant contends that HNB, by its actions, violated the Truth in Lending Act (15 U.S.C. §§ 1601 et seq.).

In addition, defendant contends that HNB director Roundtree Youmans fraudulently induced the defendant to borrow money from HNB in order to purchase the stock of Hamilton Bancshares, Incorporated (HBI). Defendant contends that when Youmans induced him to purchase the stock Youmans knew or should have known that HNB was being operated in an unsafe manner and that the stock of HBI was worthless. Defendant also contends that the FDIC is proceeding against the directors of HNB for fraud and mismanagement and the FDIC should therefore be estopped from denying the fraud alleged in the present case.

Finally, defendant seeks to amend the Final Pre-Trial Order to allege, first, that HNB impaired the collateral (HBI stocks) which secured the notes and thereby discharged defendant's debt. Second, the defendant seeks to allege a failure of consideration.

The notes in this case evidence both a promise to pay and a security agreement. Tennessee's Uniform Commercial Code requires that a note in order to be negotiable:

(a) be signed by the maker or drawer; and

(b) contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by this chapter; and

(c) be payable on demand or at a definite time; and

(d) be payable to order or to bearer. Code Annotated Tennessee § 47-3-104(1).

Negotiability is not destroyed by: (1) a recitation of the security given, T.C.A. § 47-3-105(e) and Comment 4, (2) a statement that upon default the holder may realize against the collateral, T.C.A. § 47-3-112(b), (3) a promise or power to maintain or protect collateral or give additional collateral, T.C.A. § 47-3-112(c), (4) a term authorizing confession of judgment if the debt is not paid when due, T.C.A. § 47-3-112(d); nor is negotiability destroyed by an acceleration clause, T.C.A. § 47-3-109(c) and Comment 4. Payment under the notes in this case is not conditioned upon any occurrence other than those permitted by the Code itself. Therefore it is this Court's opinion that the notes are negotiable.

However, since the FDIC as corporate liquidator of HNB purchased HNB's assets in a bulk transaction pursuant to court order, the FDIC cannot be a holder in due course. According to T.C.A. § 47-3-302(1)(3):

A holder does not become a holder in due course of an instrument:

(a) by purchase of it at a judicial sale or by taking it under legal process; or . . .

(c) by purchasing it as part of a bulk transaction not in regular course of business of the transferor.

While the FDIC is not a holder in due course, it does retain a favored status in the law. FDIC v. Vogel, 437 F.Supp. 660 (E.D. Wis.1977). Under 12 U.S.C. § 1823, the F.D.I.C. acting in its corporate capacity is not bound by any prior oral agreement that would tend to diminish or defeat the corporation's interest in any asset purchased by it from a closed bank. Any prior agreement by the bank in order to be valid against the corporation

(1) shall be in writing, (2) shall have been executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the bank, (3) shall have been approved by the board of directors of the bank or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (4) shall have been, continuously, from the time of its execution, an official record of the bank. 12 U.S.C. § 1823.

The defendant has not provided sufficient written evidence of the alleged understanding with the bank that his loans could be extended over a ten-year period. The defendant offers written evidence of HNB policy concerning employee stock purchase loans (Affidavit of Gaylord S. Webb, Court File # 12 ¶ 8-9). The policy statement, however, is insufficient as measured by 12 U.S.C. § 1823. The statement does not provide the specific terms of Mr. Webb's loan nor was it executed by the bank and Mr. Webb at the time of the loan.

In addition, the defendant provides no documentary evidence to support his allegation that HNB breached its agreement concerning the terms of defendant's October 26, 1975 note executed in blank or that HNB exceeded authorization when it completed the note. In his deposition, the defendant admits that there is no written evidence of this agreement (Deposition of Gaylord S. Webb, p. 56, lines 14-17). Since the FDIC is not bound by prior oral agreements, breach of those agreements will not affect the corporation's right to recover the amount appearing on the face of the note.

Further, it is irrelevant whether HNB by its actions breached the Truth In Lending Law. First, violation of the law does not discharge liability on the note. Grandway Credit Corp. v. Brown, 295 So.2d 714 (Fla.App.1974); Charter Finance Co. v. Henderson, 60 Ill.2d 323, 326 N.E.2d 372 (1975). Second, the Truth In Lending Law specifically provides that "No civil or criminal penalty provided under this subchapter for any violation thereof may be imposed upon the United States or any agency thereof . . .." 15 U.S.C. § 1612. The FDIC acting in its corporate capacity is an agency of the federal government. See 12 U.S.C. § 1819 and § 1827; Freeling v. FDIC, 221 F.Supp. 955, aff'd 326 F.2d 971 (10th Cir. 1963). Therefore the FDIC is not subject to any claims concerning HNB's violations of the Truth In Lending Law.

Defendant contends that he was fraudulently induced to borrow money from HNB in order to purchase HBI stock. Since the FDIC is merely a holder of the defendant's notes, it is subject to the defense of fraud in the inducement. T.C.A. § 47-3-306(b). It is the opinion of this Court that there remains a genuine issue of material fact concerning the alleged fraud. Therefore this issue will be preserved for trial. However, this Court considers as without merit the defendant's contention that the FDIC is estopped to deny the alleged fraud. The FDIC is presently maintaining an action against Roundtree Youmans and other HNB directors for breach of statutory and common law duties of care in managing Hamilton National Bank (FDIC v. Roundtree Youmans, et al., Civ. No. 1-77-209). Claims by the FDIC that the directors mismanaged the bank are not, however, admissions by the FDIC that the directors purposely misrepresented the value of the HBI stock to purchasers in order to induce borrowing from HNB. The fraud alleged in FDIC v. Youmans relates to fraud on stockholders and creditors. While the...