Federal Deposit Ins. Corp. v. MM & S PARTNERS

• Decision Date: 06 December 1985
• Docket Number: No. 84 C 9392.,84 C 9392.
• Citation: 626 F. Supp. 681
• Court: U.S. District Court — Northern District of Illinois
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. MM & S PARTNERS, et al., Defendants.

626 F. Supp. 681

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. MM & S PARTNERS, et al., Defendants.

No. 84 C 9392.

United States District Court, N.D. Illinois, E.D.

December 6, 1985.

Thomas B. McNeill, Patricia R. McMillen, Mayer Brown Platt, Chicago, Ill., for plaintiff.

John P. Lynch, David F. Pursel, Latham & Watkins, Chicago, Ill., for defendants.

MEMORANDUM OPINION

GRADY, District Judge.

In September 1984, Continental Illinois National Bank & Trust Co. of Chicago ("Continental") conveyed its interest under certain loan documents to the Federal Deposit Insurance Corporation ("FDIC"). The FDIC acquired these documents pursuant to 12 U.S.C. § 1823(c)(1)(A) as part of a plan of assistance to prevent Continental's demise. See Memorandum of Plaintiff FDIC in Support of Motion for Summary Judgment, Exh. H.

In the instant case, the FDIC seeks to recover on a note and guaranty signed by the defendants which the FDIC acquired as a part of this plan of assistance. The defendants have raised six affirmative defenses and a five-count counterclaim, generally premised on the argument that Continental agreed to alter the terms of the written note, or by its conduct waived certain terms, and, therefore, the FDIC, as Continental's assignee, is estopped from enforcing the written terms of the loan documents. In response, the FDIC argues that under 12 U.S.C. § 1823(e), the doctrine announced in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and federal common law, the defendants may not assert these defenses against it. Because the FDIC is immune to such defenses, it argues that summary judgment should be granted in its favor on both its action and defendants' counterclaim against it and Continental. For the reasons given below, we agree that the defendants may not assert these defenses against the FDIC, but continue its motion for summary judgment.

FACTS

The FDIC and defendants agree to the following facts. There are six defendants: (1) MM & S Partners ("MM & S"), a general partnership; MM & S' three general partners, (2) Mehl MM & S Limited, (3) Smith MM & S Limited, and (4) Patrick D. Maher, (5) Robert L. Mehl, and (6) Jordan Smith. On or about May 7, 1980, MM & S entered into a credit agreement with Continental, by which the bank provided the partnership with a line of credit not to exceed $10 million. Pursuant to that 1980 credit agreement, the partnership executed a promissory note, and, subsequently, MM & S drew upon the line of credit. Two years later, the credit agreement was amended to increase the line of credit to $20 million; MM & S executed another promissory note and drew on the line of credit. Finally, on or about March 22, 1983, the 1982 credit agreement was further amended by an agreement titled Amended and Restated Agreement ("Restated Agreement"). Pursuant to the Restated Agreement, MM & S executed a promissory note in the amount of $23 million, and the partnership's line of credit was again increased. On the same day, defendants Maher, Mehl and Smith executed a guaranty by which they guaranteed the full and prompt payment of all of MM & S' obligations to the bank.

Since that date, MM & S has not paid the amounts stated in the Restated Agreement to be due on certain dates, and Continental has declared the outstanding principal of and all accrued interest on the 1983 note to be immediately due and payable. It notified the partnership of its alleged default, has demanded payment in full, and MM & S has not paid the sum declared to be owing. Continental has also notified the guarantors of MM & S' default and the acceleration of the partnership's indebtedness and have demanded payment in full, but the guarantors have not paid.

The defendants add to this scenario two disputed fact assertions: Continental, either by agreement or conduct, excused the defendants from meeting certain terms in the Restated Agreement, and the FDIC was aware of this excuse when it purchased the loan documents. Specifically, the defendants allege that Continental "understood" that defendants would be using the money to purchase oil and gas properties, and "represented" to defendants that it would not require MM & S to make payments at the times or in the amounts stated in the Restated Agreement. First Affirmative Defense, ¶ 2. Continental further "represented" that it would accept, in full satisfaction of MM & S' obligations under the Restated Agreement, the proceeds of sales of MM & S' assets. Id., ¶ 3.

Relying on Continental's understandings, agreements and representations, defendants allege that they performed certain acts, such as selling the partnership's assets and providing Continental with additional collateral. Id., ¶¶ 4, 5. Continental has accepted defendants' payments not made in accordance with the terms of the Restated Agreement, and the FDIC "had knowledge" of Continental's conduct. Id., ¶ 8.

Based on these additional fact allegations, defendants argue that Continental waived MM & S' compliance with the written terms of the Restated Agreement, and the FDIC is barred by Continental's waiver. Id. This waiver concept is rephrased in defendants' other affirmative defenses and counterclaim counts to allege estoppel and breach of contract.

DISCUSSION

The FDIC argues that even if defendants' additional factual allegations are true (which it disputes), it cannot be bound by Continental's agreements or conduct for two reasons. First, 12 U.S.C. § 1823(e) prevents a debtor from asserting an agreement between him and the bank from which the FDIC purchased the note unless certain requirements are met, and these requirements were admittedly not met here. Second, even if § 1823(e) does not apply, under D'Oench, the defendants still cannot utilize these defenses, even if the FDIC knew of Continental's conduct.

In response, the defendants argue that § 1823(e) does not apply because their defenses are based on Continental's conduct, not an "agreement," and, under federal common law, they may assert such a defense if the FDIC had actual knowledge of the defenses when it purchased the defendants' note. Because recent cases on these two points are somewhat contradictory, we must look at the law in some detail.

D'Oench, § 1823(e) and Federal Common Law

In 1942, the Supreme Court decided D'Oench. There, the FDIC sought to enforce a note, and the maker argued that he was not liable because the note was an accommodation paper, given without consideration and upon an understanding that it would not be collected. Applying federal common law, the Court held that the maker could not use this defense, because, although he had not known that the note would be used to deceive the FDIC, by his actions he had "lent himself" to the bank's scheme to make the FDIC believe that the note was good and owing. Since it is a federal policy to protect the institution of banking from secret agreements, the maker could not assert the agreement not to pay and lack of consideration as defenses. D'Oench, 315 U.S. at 461-62, 62 S.Ct. at 681.

Subsequent to this decision, Congress codified the case in § 1823(e). FDIC v. Van Laanen, 769 F.2d 666, 667 (10th Cir.1985) (§ 1823(e) codification of D'Oench); FDIC v. Blue Rock Shopping Center, 766 F.2d 744, 753 (3d Cir.1985) (same); Howell v. Continental Credit Corp., 655 F.2d 743, 746 (7th Cir.1981) (same). Section 1823(e) states:

(e) Agreements against interests of Corporation

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.

Thus, if a maker tries to defend by asserting an agreement between him and the bank altering the written terms of a note, unless that agreement meets all four requirements of § 1823(e), the defense is so frivolous as to merit the sanction of attorney's fees. Van Laanen, 769 F.2d at 667.

Under § 1823(e) and D'Oench it is irrelevant whether the FDIC actually knows that an agreement not meeting the section's four requirements exists. FDIC v. Investors Associates X., Ltd., 775 F.2d 152, 155-56 (6th Cir. Oct. 23, 1985); FDIC v. Merchants National Bank of Mobile, 725 F.2d 634, 640 (11th Cir.), cert. denied, ___ U.S. ___, 105 S.Ct. 114, 83 L.Ed.2d 57 (1984); FDIC v. de Jesus Velez, 678 F.2d 371, 375 (1st Cir.1982); FDIC v. First Mortgage Investors, 485 F.Supp. 445, 451 (E.D.Wis. 1980). This is because D'Oench is "essentially premised upon the proposition that a wrongdoer or one who lends himself to aid a fraudulent scheme should not be able to defend his actions based upon events emanating out of a transaction which violates public policy." Investors Associates, at 155-56. Therefore, "regardless of the FDIC's knowledge of the circumstances surrounding the transaction, the fraudulent scheme is still contrary to public policy and the wrongdoer still should not be able to benefit from something that transpired during the course of such a scheme." Id. at 6. See also First Mortgage Investors, 485 F.Supp. at 451.

Also, usually the FDIC open-bank division examiners visit insured banks, especially failing ones. If the closed-bank division, which determines whether to purchase failing banks' assets, were held to the open-bank division's knowledge, "the protection of Sec. 1823(e) would be lost.... The resulting uncertainty would undercut FDIC's ability to value assets quickly...