Federal Deposit Ins. Corp. v. Merchants Nat. Bank of Mobile

• Decision Date: 24 February 1984
• Docket Number: No. 82-7351,82-7351
• Citation: 725 F.2d 634
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee, v. The MERCHANTS NATIONAL BANK OF MOBILE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 634

725 F.2d 634

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee, v. The MERCHANTS NATIONAL BANK OF MOBILE, Defendant-Appellant.

No. 82-7351.

United States Court of Appeals Eleventh Circuit.

Feb. 24, 1984.

Brock B. Gordon, Alan C. Christian, Mobile, Ala., for defendant-appellant.

Joseph B. Mays, Jr., Birmingham, Ala., Donald J. Stewart, Mobile, Ala., for plaintiff-appellee.

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

Before GODBOLD, Chief Judge, RONEY and SMITH ^*, Circuit Judges.

GODBOLD, Chief Judge:

I. Introduction

By 12 U.S.C. Sec. 1823(e) (1976) Congress gave to assets acquired by the Federal Deposit Insurance Corporation special protections that are not available to ordinary holders of commercial paper and are not dependent on whether FDIC would qualify as a holder in due course under state law. This case concerns application of Sec. 1823(e) to an asset acquired by FDIC from a failed bank. Section 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.

Merchants National Bank (MNB) held 80% of a $3.9 million loan to Ball-Co Contractors, Inc. Wilcox County Bank (WCB), along with other banks, participated in the remaining 20% of the loan. WCB's share was $84,000. The $3.9 million Ball-Co loan carried an 80% guarantee from the Farmers Home Administration. WCB says that it participated ratably in the guaranteed portion. MNB says that WCB participated in only the unguaranteed portion.

The certificate of participation issued by MNB to WCB says:

To: WILCOX COUNTY BANK

This is to certify that you have a participation of $84,000.00 EIGHTY FOUR THOUSAND & NO/100 DOLLARS in the following described loan held by the undersigned:

BORROWER: BALL-CO CONTRACTORS, INC.

ADDRESS: P.O. Box 880 Bay Minette, AL

AMOUNT OF NOTE: $3,900,000.00

DATED: August 31, 1977 DUE: ---

INTEREST RATE: 3% over Prime INTEREST TO YOU: Same

COLLATERAL: All accounts receivable and contract rights of Debtor, all of Debtor's inventory, including all raw materials, work in process, finished goods and other tangible property owned and held for sale or lease or furnished under contracts of service or used or consumed in Debtor's business, all equipment used in the conduct of the business of Debtor; and all motor vehicles and automotive equipment used in the conduct of the business of Debtor now owned or hereafter existing or acquired.

* * *

* * *

The Merchants National Bank of Mobile shall be entitled to hold the note or other evidence of debt together with all collateral or security thereto, and to share in same on a pro rata basis with the holder hereof, and to exercise its discretion in collecting the same and selling any security therefor. The said Merchants National Bank of Mobile shall be free from any liability to the holder hereof except for its proportionate share of collections of principal and interest when received. It is agreed that any attorneys' fees or collection charges incurred will be shared on a pro rata basis by the participating banks.

The MNB/Ball-Co loan agreement delivered to WCB with the certificate indicates that the loan is protected by an 80% FmHA guarantee.

The minutes of WCB directors' meetings say:

A participation loan previously approved by the Loan Committee Members Jim Branum and Joe Williams was ratified. This loan for $84,000 participating with the Merchants National Bank of Mobile on Ball-Co Contractors, Inc., which has an 80% FHA guarantee on an original loan of $3,900,000. This loan is considered a credit worthy loan, however, it was approved only after being advised by the Merchants National Bank of Mobile that the loan sufficient to reduce personal loans held by the bank on Lowell Harrelson would be placed in jeopardy if we did not participate. Our loans to Mr. Harrelson including the loan charged off amount of $78,450.46 and an additional loan of $38,700.00, which we had previously sold to our principal correspondent, Southern National Bank. The advantage we gained from getting these loans paid in full certainly justifies our participation in a loan for approximately the same amount, which has an 80% FHA guarantee. We have been assured by the participating bank that funds have been provided in the advance on the new loan to retire Mr. Harrelson's personal debts and we have, also, been assured by Mr. Harrelson that these loans will be taken out soon.

(emphasis added).

MNB sold its 80% participation in the loan to Eastern Airlines Pension Fund. Ball-Co defaulted on its obligations under the note and loan agreement, Eastern called on FmHA to honor its guarantee, and FmHA paid Eastern an amount equal to 80% of the value of the loan.

WCB, of Camden, Alabama, was formerly a state banking association chartered under the laws of Alabama. The Alabama superintendent of banks declared WCB insolvent and appointed FDIC as receiver pursuant to 12 U.S.C. Sec. 1821(e) (1976). FDIC, as receiver, executed an agreement of sale with FDIC in its general corporate capacity. This agreement vested FDIC in its general corporate capacity with all right, title and interest in and to certain assets of WCB, including the $84,000 loan participation.

WCB received none of the proceeds from the MNB-Eastern sale and none of the payment by FmHA to Eastern on the guarantee. FDIC in its general corporate capacity sued MNB and alleged that FDIC was entitled to participate in the guaranteed portion of the loan. Specifically, FDIC alleged breach of fiduciary duty, breach of contract, and negligence by MNB because of its failure to remit to FDIC its share of MNB's "collection" on the 80% guaranteed portion of the loan that MNB sold to Eastern and FmHA subsequently paid when Ball-Co defaulted. FDIC's pleadings could also be construed, though less clearly, to allege breach of contract, breach of fiduciary duty, and negligence by MNB in the sale of WCB's participation in the 80% guaranteed portion to Eastern (taking at face value FDIC's contention that its asset was participation in the guaranteed portion) without WCB's consent and without remitting to WCB its portion of the proceeds of the sale.

MNB took the position that WCB had participated in only the unguaranteed portion of the Ball-Co loan. FDIC maintains that the books and records of the bank showed that WCB participated ratably in the guaranteed portion and that under Sec. 1823(e) FDIC, as holder of the participation, had the right to share in the proceeds of the guarantee on a pro rata basis. MNB asserted that FDIC, by its alleged knowledge of WCB's participation in the unguaranteed portion, was equitably estopped from relying on the books and records of the bank and that extrinsic evidence, such as intent of the parties, knowledge by FDIC, and surrounding circumstances, showed that WCB's participation was in the unguaranteed portion of the loan.

In determining whether WCB's participation was in the guaranteed or unguaranteed portion the district court correctly applied Sec. 1823(e) to exclude as irrelevant any evidence not found in the records of the bank and not meeting the statute's strict requirements. After a bench trial the district court correctly found that WCB participated in the guaranteed portion of the Ball-Co loan and accordingly entered judgment for FDIC for $87,691.40 (representing 80% of WCB's $84,000 participation plus $20,491.40 in interest). We affirm.

II. Section 1823(e) and the finding of the district court

A. FDIC's purchase and assumption alternative

We recently discussed the alternatives available to FDIC in discharging its duties when an insured bank fails. See Gunter v. Hutcheson, 674 F.2d 862, 865-66 (11th Cir.), cert. denied, --- U.S. ----, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982). When an insured bank fails, FDIC can make direct deposit insurance payoffs on insured deposits. The bank remains permanently closed, and all insured accounts are paid off to the insured limit. The direct payoff alternative is not the preferred one:

The undesirability of the deposit insurance payoff alternative is readily apparent. A bank failure and a subsequent payoff of insured deposits results in an interruption of vital banking services to the community which the failed bank served. The failed bank's main office and any branches which it operated are permanently closed. As a consequence, virtually all of the failed bank's employees are without jobs. All time, demand and saving deposit accounts of the failed bank are frozen and any checks in transit at the time the bank closed are returned unpaid to the drawer. Furthermore, any depositor of the failed bank with a deposit account that exceeded the $40,000 statutory insurance limitations (and any other creditor with provable claims) must await the payment of ratable dividends to recover the uninsured portion of his or her deposits. Even those depositors whose accounts are fully insured suffer some hardship since the FDIC ordinarily requires several days in which to reconcile accounts and prepare deposit insurance checks. Finally, any going concern value that the failed bank may have had as a viable banking enterprise is lost irrevocably with the permanent closing of its business. As a consequence of the foregoing, the FDIC is concerned that a deposit insurance payoff in...