Federal Deposit Ins. Corp. v. Percival
| Decision Date | 31 August 1990 |
| Docket Number | No. CV. 88-0-257.,CV. 88-0-257. |
| Citation | 752 F. Supp. 313 |
| Parties | FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. Pauline M. PERCIVAL, Defendant. |
| Court | U.S. District Court — District of Nebraska |
Paul A. Zoss, Des Moines, Iowa, for plaintiff.
Knapp, Mues, Beavers & Luther, Wesley C. Mues, Daniel L. Aschwege, Kearney, Neb., for defendant.
This matter is before the Court on the report and recommendation of the magistrate (Filing No. 36), and memorandum supplementing the report and recommendation (Filing No. 39). The magistrate filed the report and recommendation relating to cross-motions for summary judgment (Filing Nos. 25 and 28). Pursuant to 28 U.S.C. § 636, the Court has made a de novo determination of those portions of the recommendation to which objection has been made. For the reasons set forth, the Court will adopt the recommendation of the magistrate and grant defendant's motion for summary judgment.
The FDIC filed its complaint seeking to collect on a guarantee agreement which was executed and signed by the defendant. The guarantee was given to the Security State Bank of Oxford, Nebraska, on June 6, 1979, and guarantees payment to the extent of $35,000 on notes executed by the "Percival Brothers (Mark Percival and Gary Percival)" (Filing No. 1, Exhibit A). On September 11, 1987, an agreement was entered into between the principal debtors and the Security State Bank whereby collateral securing the indebtedness was surrendered to the Bank in return for a release of the obligations owed to the Bank (Filing No. 4, Exhibit D). The collateral was surrendered and sold at public auction by the Bank on September 29, 1987. Plaintiff admits that the Security State Bank did not provide defendant with written notice of this sale of the collateral securing the debts of the Percival Brothers. On October 1, 1987, the Security State bank was declared insolvent and the FDIC appointed receiver.
Defendant asserts that her liability on the guarantee was extinguished on September 11, 1987, by virtue of an accord and satisfaction with Security State Bank. Defendant further alleges that the right to seek a deficiency judgment was extinguished prior to the time the FDIC entered into the purchase and assumption agreement because the Security State Bank failed to provide the defendant with notice of sale of the collateral as required by Neb. U.C.C. § 9-504(3). In support of its proposition that the defenses raised by the defendant are invalid, the plaintiff relies on 12 U.S.C. § 1823(e) and on its alleged status as a holder in due course.
Generally, when the FDIC serves as receiver of a failed bank, it may pay off the bank's depositors by two methods. The first is simply to liquidate the bank's assets and pay the depositors their insured amounts, covering any shortfall with insurance funds. The FDIC tries to avoid this option, however, because it decreases public confidence in the banking system and may deprive depositors of the uninsured portions of their funds. Grubb v. FDIC, 868 F.2d 1151, 1155 (10th Cir.1989), citing FDIC v. Merchants National Bank, 725 F.2d 634, 637 (11th Cir.), cert. denied, 469 U.S. 829, 105 S.Ct. 114, 83 L.Ed.2d 57 (1984). See also, Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987). The second, and preferred alternative, is to initiate a purchase and assumption transaction. In this type of transaction, the FDIC as receiver arranges to sell acceptable assets of the failed bank to an insured, financially sound bank, which assumes all of the corresponding deposit liabilities and reopens the failed bank without an interruption in operations or loss to depositors. The FDIC as receiver then sells to the FDIC in its corporate capacity the assets that the assuming bank declined to accept. The corporate entity of the FDIC in turn attempts to collect on the unacceptable assets to minimize the loss to the insurance funds. Grubb v. FDIC, 868 F.2d at 1155 (citing FDIC v. Merchants National Bank, 725 F.2d at 637-38).
In this case, when the Security State Bank was declared insolvent on October 1, 1987, the FDIC accepted appointment as receiver of the Bank and took possession of the Bank's assets and affairs. The FDIC purchased the defendant's guaranty in its corporate capacity.
When the FDIC is deciding whether to liquidate a failed bank or to provide financing for purchases of its assets and assumption of its liabilities by another bank pursuant to 12 U.S.C. § 1823(c)(2), federal and state bank examiners are allowed to rely on bank records in evaluating the worth of the bank's assets by 12 U.S.C. § 1823(e). See Langley v. FDIC, 484 U.S. 86, 91, 108 S.Ct. 396, 400, 98 L.Ed.2d 340 (1987). Specifically, 12 U.S.C. § 1823(e) provides:
No agreement which tends to diminish or defeat the right, title or interest of the Corporation in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the Corporation unless such agreement (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.
Any agreement which tends to diminish the right, title or interest of the FDIC in any asset acquired by it is not valid unless all four criteria are met. Otherwise, neither the FDIC nor state banking authorities would be able to make reliable evaluations of whether to liquidate or undertake a purchase and assumption agreement because bank records could contain seemingly unqualified notes which are in fact subject to undisclosed conditions. Langley, 484 U.S. at 92, 108 S.Ct. at 401. Further, this evaluation must be made with great speed, usually overnight, in order to preserve the going concern value of the failed bank and avoid an interruption in banking services, particularly when a purchase and assumption agreement is undertaken. Id. at 91, 108 S.Ct. at 401.
In determining what constitutes an "agreement" for the purposes of 12 U.S.C. § 1823(e), Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987) is illustrative. In that case, the petitioners borrowed money from a bank insured by the FDIC to purchase land, and executed a note and other guarantees in consideration for the loan. The bank subsequently failed and the FDIC was substituted as plaintiff in an action against petitioners for principal and interest due on a note. The petitioners defended by alleging that the bank had fraudulently misrepresented the quantity of the land and the mineral assets contained thereon. The Court stated that the defense of fraud in the factum—that is, the sort of fraud that procures a party's signature to an instrument without knowledge of its true nature or contents—would take the instrument out of § 1823(e) because it would render the instrument entirely void thus leaving no right, title or interest that could be defeated. Id. at 93-94, 108 S.Ct. at 402-03. However, the Court stated that the alleged misrepresentations in the instant case would not constitute fraud in the factum, but rather would constitute only fraud in the inducement which would render the note voidable but not void. Id. at 94, 108 S.Ct. at 402. Accordingly, the bank could transfer to the FDIC voidable title which is enough to constitute "title or interest" in the note within the meaning of § 1823(e). Id. (emphasis in original). The Court therefore held that 12 U.S.C. § 1823(e) barred the defense that the note was procured by fraud in the inducement.
In this case, an agreement was executed on September 11, 1987, by Blake Howsden, vice-president of Security State Bank, and the principal debtors whereby certain of debtors' property was transferred to the Bank to release obligations owing to the Bank. Pursuant to the agreement, the transfer of the collateral was to release obligations owed on several notes to the Bank by Mark Percival and the Percival Brothers Partnership, and release "Pauline Percival's guarantee of the Percival Brothers Partnership debt" (Filing No. 4, Exhibit D). As previously noted, the collateral was surrendered and sold at public auction on September 29, 1987, which was prior to the declared insolvency of the Bank, October 1, 1987.
In FDIC v. Nemecek, 641 F.Supp. 740 (D.Kan.1986), the debtors were in default of a note executed in favor of the Decatur County National Bank. In November, 1984, the Bank and the defendants agreed to a settlement whereby the Bank would accept quit claim deeds on the land which secured the note in lieu of foreclosing and seeking a deficiency. On November 21, 1985, the Bank was declared insolvent and the FDIC appointed as receiver. The FDIC argued that the settlement agreement should not be enforced against it pursuant to § 1823(e). In rejecting the FDIC's argument and thereby enforcing the agreement against it, the Court stated:
In order for § 1823(e) to apply, the FDIC must first have acquired the asset from the failed bank. This section has no application where "the parties contend that no asset exists or an asset is invalid and that such invalidity is caused by acts independent of any understanding or side agreement." (citations omitted).
Id. at 742. The Court held that an accord and satisfaction of the Bank's claim against the debtors had been reached prior to the FDIC's acquisition of any assets. Id. This was true even though a formal "release of liability" had not been signed by the Bank prior to its closure. Id. Contra FDIC v. Manatt, 688 F.Supp. 1327 (E.D.Ark.1988).
In FDIC v. Merchants National Bank of Mobile, 725 F.2d 634 (11th Cir.), cert. denied, 469 U.S. 829, ...
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