Federal Deposit Ins. Corp. v. De Jesus Velez, s. 81-1465

• Citation: 678 F.2d 371
• Decision Date: 21 May 1982
• Docket Number: Nos. 81-1465,81-1625,s. 81-1465
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, Appellee, v. Manuel de JESUS VELEZ, Defendant, Appellant. Luis DOMINGUEZ, Plaintiff, Appellant, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 371

678 F.2d 371

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, Appellee, v. Manuel de JESUS VELEZ, Defendant, Appellant.

Luis DOMINGUEZ, Plaintiff, Appellant, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant, Appellee.

Nos. 81-1465, 81-1625.

United States Court of Appeals First Circuit.

Argued Feb. 2, 1982.

Decided May 21, 1982.

Celestino Morales, Jr., San Juan, P. R., for defendant, appellant, Manuel de Jesus Velez.

Jose R. Otero, Hato Rey, P. R., with whom Otero Suro & Otero Suro, Hato Rey, P. R., was on brief for plaintiff, appellant, Luis Dominguez.

Wayne D. Baller, Washington, D. C., Senior Atty., with whom Thomas A. Brooks, Gen. Counsel, Washington, D. C., Gustavo A. Gelpi, and Feldstein, Gelpi, Hernandez & Castillo, Old San Juan, P. R., were on briefs, for Federal Deposit Ins. Corp.

Before BOWNES, Circuit Judge, GIBSON, Senior Circuit Judge, ^* and BREYER, Circuit Judge.

FLOYD R. GIBSON, Senior Circuit Judge.

Appellants contest district court findings ¹ that they are liable to the Federal Deposit Insurance Corporation (FDIC) for certain promissory notes. They had executed notes payable to the now insolvent Banco de Ahorro and had served as directors of that bank. They argue that the courts below erred in finding that agreements collateral to the notes did not relieve them of liability on the notes.

I. Facts

Appellants Manuel de Jesus Velez and Luis Dominguez each purchased twenty-five debentures issued by the Banco de Ahorro (the Bank) with a face value of $1,000 each, dated April 15, 1966, and due on April 15, 1976. Velez was a director of the Bank from 1966 ² until April 26, 1976, when he resigned. Dominguez became a director in 1967 and resigned on the same day as Velez. The Bank was a state bank organized under the laws of Puerto Rico and insured by the FDIC.

The debentures were not redeemed on the due date. The record does not show why the Velez debentures were not redeemed, but the record shows that the Secretary of the Treasury of the Commonwealth of Puerto Rico suggested that redemption of the Dominguez debentures be delayed. Both sets of debentures provided that the FDIC and the Secretary of the Treasury of Puerto Rico must approve payment of the principal on the debentures. Also, Puerto Rican law allows the Puerto Rican treasury secretary to suspend payment on capital debentures at their maturity. P. R. Laws Ann. tit. 7, § 1017(b) (Supp.1979). ³ Federal law prohibits redemption of debentures without the prior consent of the FDIC. 12 U.S.C. § 1828(i)(1) (1976). ⁴

In the summer of 1976, several months after the due date, Velez and Dominguez made new arrangements for redemption of the debentures. The president of the Bank arranged a $25,000 loan for Velez from the Banco Obrero de Ahorro y Prestamo de Puerto Rico (Banco Obrero). This loan was due on July 9, 1977, one year from the date it was granted. In a July 9, 1976, letter, the Bank president stated that the Bank obligated itself to pay the Banco Obrero loan when it became due. The Bank loaned Velez the money to pay the Banco Obrero loan after it became due. Velez gave the Bank a note for this loan, which was secured by the debentures pursuant to the July 9, 1976, letter agreement with the Bank president. This note was due on April 15, 1981, and the letter agreement stated that the debentures' due date had been postponed to April 15, 1981. The letter agreement stated that the Bank would not attempt to collect on Velez's note to the Bank until the Bank redeemed Velez's debentures. Each party agreed to make interest payments to the other. Until 1978, Velez and the Bank were making interest payments to each other.

This arrangement allowed Velez to collect $25,000 when the debentures came due, without the prior approval of the Puerto Rican treasury secretary and the FDIC. The Bank president's letter agreement pledge not to collect on Velez's note until the debentures were redeemed would have assured Velez he would not have to come up with $25,000 if there was another delay in redemption of the debentures.

Dominguez was involved in a slightly different arrangement. After his debentures were not redeemed, the Bank gave him a $25,000 loan evidenced by a note. A letter agreement from the Bank president provided that the loan would not have to be repaid until the Bank redeemed the debentures. The debentures were security for the loan. The letter agreement stated that the Bank would collect interest on the note at the same rate as the interest earned on the debentures, although the note provided for a seven and one-half percent interest rate, while the debentures had a six percent interest rate.

Both letter agreements were kept in the personal safe of the Bank president. Neither one was made a part of the Bank's official records.

In April 1978, the Bank stopped paying interest on the debentures. On September 5, 1978, the Puerto Rican treasury secretary closed the Bank and appointed the FDIC the receiver. The notes of Velez and Dominguez were purchased by the FDIC in its corporate capacity from the FDIC as the receiver. ⁵ Velez and Dominguez eventually stopped making their interest payments, prompting the FDIC (as the purchaser of the notes, not as the receiver) to accelerate the notes. The FDIC brought an action against Velez to collect on the note, and Dominguez brought a declaratory judgment action against the FDIC. Velez and Dominguez argued that the letter agreements with the Bank president absolved them of liability on the notes until the debentures were paid. The district courts found Velez and Dominguez liable on the notes and denied them a right to set off the unredeemed debentures against the notes.

II. Jurisdiction

Before addressing the merits, we will respond to Velez's argument that the district court lacked jurisdiction. Jurisdiction was based on 12 U.S.C. § 1819 (1976), which states that district courts shall have jurisdiction over actions brought by the FDIC. ⁶ However, the section has an exception when the FDIC is a party in its capacity as a receiver of a state bank. ⁷ Therefore, if the FDIC was merely acting as a receiver, the district court would not have jurisdiction. Velez argues that the transfer of the note from the FDIC as a receiver to the FDIC in its corporate capacity was a sham transaction and in substance, if not in form, the complainant was the FDIC as a receiver. If Velez were correct, the exception to jurisdiction in § 1819 would be triggered, and the district court would be deprived of jurisdiction.

We agree with the district court that there was jurisdiction. The intra-FDIC transaction was not a sham. The statute expressly creates separate receiver and corporate/purchaser functions for the FDIC. The receivership function for state banks is authorized by 12 U.S.C. § 1821(e) (Supp. II 1978). ⁸ The FDIC is authorized to purchase assets by 12 U.S.C. § 1823(e) (1976). ⁹ That section authorizes, among other things, purchases of assets by the FDIC as a corporation from the FDIC as a receiver: "(T)he Corporation ... may guarantee any other insured bank against loss by reason of its assuming the liabilities and purchasing the assets of an open or closed insured bank .... (T)he Corporation as receiver thereof, is authorized to contract for such sales...." Also, the intra-FDIC transaction affects matters other than the jurisdiction. For instance, as a result of the transaction, any recovery upon the note would flow to the FDIC's corporate treasury. If the intra-FDIC transaction were not made, money collected by the FDIC as a receiver would flow to the receivership estate. See FDIC v. Godshall, 558 F.2d 220, 223 (4th Cir. 1977). Furthermore, several circuits have considered intra-FDIC transactions like the one involved here. They have all concluded that for purposes of jurisdiction under § 1819, the FDIC's capacity as a purchaser does not change to a receiver merely because the seller was the FDIC acting as a receiver. FDIC v. Citizens Bank & Trust Co., 592 F.2d 364, 367 (7th Cir.), cert. denied, 444 U.S. 829, 100 S.Ct. 56, 62 L.Ed.2d 37 (1979); FDIC v. Ashley, 585 F.2d 157, 160-64 (6th Cir. 1978); Godshall, 558 F.2d at 223. It seems apparent that the FDIC must be permitted to operate in a dual capacity simultaneously, as a receiver and an insurer, to carry out its functions as a receiver, liquidator, and insurer. Velez cites only one case which found the exception-to-jurisdiction section triggered an intra-FDIC transaction. FDIC v. Ashley, 408 F.Supp. 591 (E.D.Mich.1976). That decision was reversed. FDIC v. Ashley, 585 F.2d 157. We join the Fourth, Sixth, and Seventh Circuits in holding that the exception to § 1819 jurisdiction is not triggered when the FDIC in its corporate capacity is a party because it purchased assets from the FDIC in its receiver capacity.

III. Effect of the Collateral Agreements

The substantive issue in this case is whether the letter agreements provide a defense in the FDIC's attempts to collect on the notes. We hold that the agreements are invalid for two reasons. The first is that federal law makes invalid an agreement which diminishes the FDIC's interest in an asset unless certain procedures are followed, and those procedures were not followed here. Section 1823(e), paragraph 2, of Title 12 reads:

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 ... 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...