Federal Deposit Ins. Corp. v. Barness, Civ. A. No. 78-10.

• Decision Date: 31 January 1980
• Docket Number: Civ. A. No. 78-10.
• Citation: 484 F. Supp. 1134
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION v. Herbert BARNESS.
• Court: U.S. District Court — Eastern District of Pennsylvania

484 F. Supp. 1134

FEDERAL DEPOSIT INSURANCE CORPORATION v. Herbert BARNESS.

Civ. A. No. 78-10.

United States District Court, E. D. Pennsylvania.

January 31, 1980.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Arthur R. Littleton, Joseph H. Huston, Jr., Morgan, Lewis & Bockius, Philadelphia, Pa., for plaintiff.

Arlen Specter, Bruce A. Cohen, Dechert, Price & Rhoads, Philadelphia, Pa., for defendant and applicants for intervention.

OPINION AND ORDER

EDWARD R. BECKER, District Judge.

I. Procedural History

This case is before us on defendant's motion to open a judgment entered against him by confession in the Court of Common Pleas of Bucks County, and on the motion of Centennial Bank and Peter D. Carlino for leave to intervene as defendants. After the entry of judgment in state court, Federal Deposit Insurance Corporation v. Barness, No. 77-12385 (Bucks Co. Dec. 16, 1977), defendant removed to this court under 28 U.S.C. § 1441 by virtue of 12 U.S.C. § 1819(4), which provides that all civil suits to which the Federal Deposit Insurance Corporation ("FDIC") is a party shall be deemed to arise under the laws of the United States and are within the original jurisdiction of the United States District Courts. The procedural history of this and related cases is enormously involved. An understanding of the issues before us requires a threshold recitation of that procedural history.

FDIC's claim is based on a non-negotiable promissory note executed by defendant on April 28, 1975, to Centennial Bank ("Centennial") in the amount of $64,835, payable on demand ("the Barness note" or "the note"). The note includes a provision wherein the defendant authorizes the confession of judgment against him "with or without default." The note came into the possession of FDIC after the Department of Banking of the Commonwealth of Pennsylvania closed Centennial on October 20, 1976, and took possession of its business and property under 71 P.S. § 733-504 ("the takeover"). By operation of law, the Secretary of Banking, William E. Whitesell, ("the Secretary"), then became the receiver of Centennial. Id. § 733-601. On October 21, 1976, the Secretary executed documents entitled "Contract of Sale" and "Assignment" by which he sold or assigned certain assets to FDIC. The parties to the present action disagree on whether the note was conveyed in the Contract of Sale, but agree that it was included in the terms of the Assignment. The Contract of Sale was approved by the Court of Common Pleas of Philadelphia County on October 21, 1976. The approval has been affirmed by the Commonwealth Court under circumstances described below, and subject to a caveat which is of considerable import in this action.

After the entry of judgment in the Bucks County court and removal to this court, defendant filed the Motion to Open Judgment, verified by his affidavit. In it he stated that he has valid defenses to plaintiff's action on the note, as detailed in four separate counts in the motion. In his third count, defendant also alleged that he has a counterclaim which he would assert if the judgment were opened. FDIC thereupon moved to dismiss defendant's motion to open judgment, arguing that he had failed to state a legally sufficient basis for opening the judgment. By order of July 27, 1978, we denied the plaintiff's motion to dismiss, reserved decision on the defendant's motion to open judgment, and granted both parties leave to obtain discovery. In our letter to counsel, made an exhibit to that order, we looked to the Pennsylvania Rules of Civil Procedure to discover the standards by which to assess the validity of plaintiff's motion to dismiss defendant's motion to open judgment.¹ See Pa.R.Civ.P. 2959.

After our order of July 27, 1978, defendant embarked on extensive discovery. At the time fixed for filing his brief on the motion to open judgment, he filed instead a Motion for Partial Summary Judgment on the counterclaim asserted in count three of his motion to open judgment. We have determined that this motion for summary judgment is not properly before us at this time,² and have treated defendant's memorandum in support of his summary judgment motion as a memorandum in support of his motion to open judgment. As the plaintiff has responded with its memorandum, and both parties have filed supplemental memoranda, the motion to open judgment is now ripe for decision.

At oral argument on the motion to open judgment, certain questions were raised as to whether the defendant is entitled to assert as a defense to the note the illegality of the takeover by which the Secretary acquired the note, or whether that defense could be asserted only by Centennial, the original payee from whom the Secretary acquired the note. See n.9, infra. As a result of these questions, Centennial has moved for leave to intervene as a defendant. Moreover, Peter D. Carlino ("Carlino"), who was Chairman of the Board of Directors of Centennial on October 20, 1976, and is a major shareholder in Centennial, has moved for leave to intervene as representative of all shareholders of Centennial, in the event that we should determine that Centennial may not intervene because the Secretary, by reason of the takeover, has succeeded to all its legal claims and defenses.

In order to explain fully the issues before us, we must recite briefly the history of three other legal actions.³ This case was assigned to our docket as a "related case" because the circumstances allegedly surrounding the making of the note were already before us in Centennial Bank v. Hills, Civil Action No. 76-2410 (E.D.Pa. filed July 30, 1976) hereinafter cited as "Hills". See Local Rule of Civil Procedure 3(d). That action was brought by Centennial prior to the takeover to recover funds which Centennial alleged it had advanced for the construction of housing on premises known as Mount Carmel Gardens at 5700 Race Street, Philadelphia. The principal defendant was the Secretary of the United States Department of Housing and Urban Development ("HUD"). After the takeover, FDIC acquired Centennial's claim in Hills and assumed control of the litigation. Defendant alleges in this action that his note was given in connection with the Mount Carmel Gardens financing. Specifically, he alleges that the note was given as an accommodation to Centennial and various parties involved in the building project, on the understanding that he would not be liable for payment on the note. Defendant also alleges that FDIC has failed to prosecute properly Centennial's claim in Hills.

The second lawsuit which is relevant to the issues before us is pending in the state courts in Pennsylvania. The early proceedings in that action are recounted in Centennial Bank v. Whitesell, 30 Pa.Cmwlth. 445 375 A.2d 1333 (1977) hereinafter cited as "Whitesell".⁴ On October 20, 1976, the day of the takeover, Centennial presented to Judge Rosenwald of the Court of Common Pleas of Philadelphia County a petition for review of the takeover. On October 21, 1976, Judge Rosenwald ruled that the Court of Common Pleas lacked jurisdiction over the subject matter of the petition for review, which he believed was within the exclusive jurisdiction of the Commonwealth Court. On the same day, Judge Rosenwald approved the sale by the Secretary, as Centennial's receiver, of the bank's assets and the transfer of its liabilities. Certain of Centennial's assets and liabilities were transferred to FDIC.

Centennial appealed Judge Rosenwald's jurisdictional ruling and his approval of the sale and transfer to the Commonwealth Court. That court held that the Court of Common Pleas did have jurisdiction over the petition for review, and remanded the action to the lower court for the purpose of conducting a proceeding under Section 605 of the Banking Code, 71 P.S. § 733-605. The Commonwealth Court dismissed Centennial's appeal from the approval of sale of its assets and transfer of its liabilities. The appeal was dismissed purely on procedural grounds, however, and the Commonwealth Court expressly reserved to the Court of Common Pleas the power to set aside its approval:

We do not pass upon the merits nor shall this dismissal be considered as affecting or limiting the power and authority of the court below to afford such equitable relief as may be appropriate in the remand of proceedings on the petition for review and, if necessary, to set aside its approval of the sale and transfer of Centennial's assets and liabilities if the circumstances so require.

30 Pa.Cmwlth. at 460, 375 A.2d at 1339.

On remand, Centennial sought to enlarge the scope of the Section 605 proceeding. While the Court of Common Pleas granted Centennial's petition, the Commonwealth Court reversed and clarified its disposition of the prior appeal. It ordered that the proceedings on remand be limited to the issues cognizable under Section 605, but authorized a second hearing if the lower court should conclude that the takeover was illegal. The second hearing would be directed toward fashioning a remedy which would either restore the status quo of Centennial prior to the takeover, or else compensate Centennial's shareholders. The Commonwealth Court observed that a second hearing to fashion a remedy would be necessary

because of the action . . . by the Secretary as statutory receiver of Centennial in seeking and receiving court approval of the sale of assets and transfer of liabilities of Centennial. Absent power and authority in the Secretary to issue notice of and to take possession of Centennial, he could not have become its statutory receiver and thus lacked authority to seek court approval of the sale and transfer of Centennial's assets and liabilities.

Centennial Bank v. Commonwealth, No. 1973 C.D.1976, slip op. at 3-4 (Pa. Commw.Ct. July 6, 1979). Centennial's petition for appeal from this decision of the Commonwealth Court is pending in the Pennsylvania Supreme Court. Centennial Bank v. Commonwealth, No....