Federal Deposit Ins. Corp. v. First Mortg. Inv.

• Decision Date: 20 February 1980
• Docket Number: No. 78-C-212.,78-C-212.
• Citation: 485 F. Supp. 445
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, a United States Corporation v. FIRST MORTGAGE INVESTORS, a Massachusetts trust, Defendant and Third-Party Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver for American City Bank & Trust Company, N.A., Third-Party Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

485 F. Supp. 445

FEDERAL DEPOSIT INSURANCE CORPORATION, a United States Corporation v. FIRST MORTGAGE INVESTORS, a Massachusetts trust, Defendant and Third-Party Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver for American City Bank & Trust Company, N.A., Third-Party Defendant.

No. 78-C-212.

United States District Court, E. D. Wisconsin.

February 20, 1980.

COPYRIGHT MATERIAL OMITTED

William J. French, Gibbs, Roper, Loots & Williams, Milwaukee, Wis., for plaintiff and third-party defendant.

Russell A. Eisenberg, Howard, Peterman & Eisenberg, Milwaukee, Wis., for defendant and third-party plaintiff.

MEMORANDUM AND ORDER

WARREN, District Judge.

This is an action seeking recovery on a note made by defendant First Mortgage Investors ("FMI") payable to the American City Bank & Trust Company ("American"). On its face the note held by the plaintiff, Federal Deposit Insurance Corporation ("FDIC"), is a demand note in the principal sum of $1,000,000.00. The FDIC became a holder of the note when it purchased that note and other assets of American in order to supply the funds necessary to facilitate the assumption of certain American assets and liabilities by the Marine National Exchange Bank. There is no dispute that the FDIC properly acquired the note in issue.

The conflict in this litigation arises out of the tortured relationship between American and FMI. The parties in their briefs have reviewed the facts of this case at length in order to establish their positions on plaintiff's pending motion for summary judgment. Defendant has gone so far as to assert that the law and the evidence requires not only denial of plaintiff's motion, but also summary judgment in its favor.

Notwithstanding the parties' lengthy review of the facts of this case, they are really quite simple. A representative for FMI, Mr. Joseph Gratton, contacted American in late 1973 and discussed establishing a line of credit with the bank. By letter of August 21, 1973, Mr. Gratton set the ground rules for the credit. Among other things, Gratton promised that FMI would maintain a 10 percent compensating balance with American. He further indicated that the line of credit would not be used for approximately ten months. Consequently, about two weeks later, Gratton sent American a check for $100,000.00 to establish the account.

The line of credit was utilized sooner than expected because one of defendant's biggest borrowers, Walter Judd Kassuba, had filed a bankruptcy petition. Therefore, on February 21, 1974, FMI drew down on its line of credit. There is no dispute between the parties on the facts leading up to the February 21, 1974 loan; rather, what occurred thereafter has caused this controversy.

Without question, the bankruptcy of Kassuba had a profound effect on the financial condition of FMI. Thus, from February through June 6, 1974, FMI attempted to convince its creditors to enter into a revolving credit agreement (RCA). This arrangement would essentially permit FMI to defer payment of principal and merely pay interest charges during its period of financial strain. Of course, FMI through Gratton made overtures to American. The parties contest whether FMI and American reached some accord, but, at any rate, the debt incurred on February 21, 1974 was due May 30, 1974. Therefore, Gratton, by letter dated May 22, 1974, forwarded a demand note to replace the note due on May 30, 1974. Both the letter and the note itself indicate that the note was one due "on demand."

The demand note constituted a renewal of the February 21, 1974 loan. According to Gratton, FMI and American had orally agreed (1) that FMI would keep interest current on the demand and (2) that FMI would pay principal consistent with the terms of the RCA. At this time, American was in financial trouble itself and it had a strong interest in keeping FMI from defaulting. There is some question of just when FMI was obligated to pay, but certainly it was not due immediately. Going further, based upon the assertions made by Gratton in his affidavit, taken as true by the Court on this motion for summary judgment, American entered into an agreement in May to accept only interest.

Interestingly, on June 4, 1974, the director's loan committee of American met and approved the request of Messrs. Sinclair and Wilson, American employees, for American to participate in the RCA. However, the minutes of the July 17, 1974 meeting of the board of directors indicates that American had declined to participate. (Hudson affidavit, exhibit H). Nevertheless, the testimony of Gratton by affidavit is contrary.

In any event, the bank confiscated (setoff) the $200,000.00 compensating balance it held against the $1,000,000.00 debt and then it demanded payment which it did not receive. Suit was commenced in 1974. In August of 1974, the bank, however, apparently withdrew its demand for payment and instead offered to carry the note as current if FMI paid the accumulated interest due. FMI sent a check to cover the interest demanded for June and July and, in addition, covered the August interest. American accepted these payments.

Although the record in unclear as to why, American continued to pursue the litigation it had commenced. Furthermore, on the circuit level of the Wisconsin courts, American prevailed on a motion for summary judgment. The circuit court held that the evidence offered by FMI to vary the terms of the note was barred by the parol evidence rule and was, furthermore, insufficient to establish a contract.

FMI appealed the order granting summary judgment and the Wisconsin Supreme Court, after the FDIC had intervened, reversed the circuit court. Federal Deposit Insurance Corp. v. First Mortgage Investors, 76 Wis.2d 151, 250 N.W.2d 362 (1977). The court found that where an agreement is partially integrated, "that is the parties reduced some provisions to written form and left others unwritten," id. at 157, 250 N.W.2d at 1366, "it is proper to consider parol evidence which established the full agreement, subject to the limitation that such parol evidence does not conflict with the part that has been integrated in writing." Morn v. Schalk, 14 Wis.2d 307, 314, 111 N.W.2d 80, 84 (1961) cited with approval in FDIC v. FMI, 76 Wis.2d at 157, 250 N.W.2d 362. Finding that by their nature negotiable instruments are generally only partial integrations of the parties full agreements, and finding that a key term, the interest rate, was absent, the court held that an issue of fact remained. Specifically, the factual issue was whether the note was intended as a complete or only a partial integration of the parties' agreement. If the parties did not intend the instrument to be a complete integration of their agreement, "then the parol evidence would be admissible to show the parties' true intent." FDIC v. FMI, 76 Wis.2d at 164, 250 N.W.2d at 369.

On remand, the FDIC again moved for summary judgment. This time it relied upon 12 U.S.C. § 1823(e) which 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 hereunder, 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.

This section is applicable where the FDIC in its corporate capacity, as here, purchases certain assets of a closed bank to facilitate the sale to and assumption by another bank of the assets and liabilities of the closed institution. Without elaborating, the circuit court denied the motion ruling that section 1823(e) was not "a sword of Damocles" and holding that there were issues of fact remaining.

The FDIC next removed the action to this Court pursuant to 12 U.S.C. § 1819. FMI filed a motion for remand, but on several grounds its motion was denied. Federal Deposit Insurance Corp. v. First Mortgage Investors, 459 F.Supp. 880 (E.D. Wis.1978). The FDIC has now, in effect, renewed its motion for summary judgment relying upon 12 U.S.C. § 1823(e), the parol evidence rule, and a purported failure to contract. In resolving plaintiff's motion, the Court must also consider FMI's affirmative defenses of bad faith, estoppel and waiver. Finally, the motion of the FDIC, a third-party defendant as receiver of American, for summary judgment of defendant's third-party complaint must be resolved.

Addressing the 12 U.S.C. § 1823(e) ground first, this Court must initially determine the effect, if any, of the circuit court's denial of plaintiff's motion for summary judgment which was based upon this ground. Defendant asserts that under the so-called "law of the case" doctrine, the denial of the motion in the state trial court should foreclose plaintiff from again relying on this ground in a motion for summary judgment. Under this doctrine, as a general rule courts should not reconsider issues which have already been decided in an action. Messenger v. Anderson, 225 U.S. 436, 32 S.Ct. 739, 56 L.Ed. 1152 (1912). However, where good reasons exist, prior rulings can be reevaluated taking into account the changed circumstances. See Zdanok v. Glidden Co., 327 P.2d 944 (2d Cir. 1964).

Significantly, the trial court did not enter a final order or judgment in this matter. He could have reexamined his opinion at any time and this power was not lost by the removal of the matter to this tribunal. See Hill v. United States Fidelity and Guaranty Co., 428 F.2d 112 (5th Cir. 1970). Of course, judicial economy is an important factor, for...