Federal Sav. and Loan Ins. Corp. v. T.F. Stone-Liberty Land Associates

• Decision Date: 09 March 1990
• Docket Number: STONE-LIBERTY,No. 05-88-01325-CV,05-88-01325-CV
• Citation: 787 S.W.2d 475
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION As Receiver for Sunbelt Savings Association of Texas, and Sunbelt Service Corporation, Appellants and Cross-Appellees, v. T.F.LAND ASSOCIATES and Tommy F. Stone, Appellees and Cross-Appellants.
• Court: Texas Court of Appeals

Page 475

787 S.W.2d 475

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION As Receiver for Sunbelt Savings Association of Texas, and Sunbelt Service Corporation, Appellants and Cross-Appellees, v. T.F. STONE-LIBERTY LAND ASSOCIATES and Tommy F. Stone Appellees and Cross-Appellants.

No. 05-88-01325-CV.

Court of Appeals of Texas Dallas.

March 9, 1990.

Rehearing Denied April 13, 1990.

Nina Cortell, Haynes & Boone, Charles R. Haworth, Andrews & Kurth, Dallas, for appellants and cross-appellees.

Charles W. Cunningham, Stephen Cormac Carlin, Frank E. Sheeder, III, Johnson & Gibbs, Dallas, for appellees and cross-appellants.

Before WHITHAM, ROWE and BAKER, JJ.

OPINION

WHITHAM, Justice.

Appellants, Federal Savings and Loan Insurance Corporation, as receiver for Sunbelt Savings Association of Texas, and Sunbelt Service Corporation, appeal from a judgment on the verdict in favor of appellees, Tommy F. Stone, T.F. Stone Companies, Inc. and T.F. Stone-Liberty Land Associates. Service is a wholly owned subsidiary of Sunbelt. We conclude that certain federal law issues are dispositive of this appeal. Those issues are framed in three of FSLIC and Service's points of error. Under their forty-fifth point of error, FSLIC and Service argue that FSLIC's appointment as receiver caused all evidence introduced at trial of matters extraneous to banking records to have been improperly admitted as a matter of federal law. Under their forty-sixth point of error, FSLIC and Service argue that the Stone parties are not entitled to awards for usury, punitive damages or attorney's fees as a matter of federal law. Under their forty-seventh point of error, FSLIC and Service argue that federal law defenses apply even though judgment had been entered before FSLIC's appointment. The federal law issues are grounded on D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987) and the Federal Deposit Insurance Act of 1950, as amended, 12 U.S.C. section 1823(e). We agree with FSLIC and Service. Accordingly, we reverse and remand.

In light of our disposition of this appeal, we reach none of the state law issues. Hence, we deem it unnecessary to fully summarize the facts of this dispute. Suffice it to say that the controversy has its genesis in four written agreements between Service and the Stone parties: (1) a land loan, (2) a construction loan, (3) a purchase agreement and (4) a management agreement. The Stone parties brought this suit for damages, penalties and other relief arising from breach and fraudulent inducement of the four agreements, and arising from wrongful foreclosure, breach of fiduciary duty, and usury in connection with the construction loan. The relief granted by the trial court may be summarized from the components of the trial court's judgment:

                ACTUAL DAMAGES
                      Construction Loan                                $ 8,502,049
                      Service's breach
                      Service's fraudulent inducement
                      Savings' breach of agreement to issue letters
                        of credit
                      Service's and Savings' breach of fiduciary duty
                      Wrongful foreclosure of Liberty Plaza II
                      [Return of Liberty Plaza II]
                      Land Loan                                        $ 9,502,048
                      Service's breach
                      Service's fraud--release of cross default
                      Service's and Savings' breach of fiduciary duty
                      Wrongful foreclosure of Liberty Land Tract       $ 2,407,597
                      Breach of Phase II Contract                      $12,701,751
                      Breach of Management Rights Contract             $ 2,000,000
                      Breach of Fiduciary Duty                          $  295,484
                      Non"Duplication Damages
                                   Total Actual Damages                             $35,408,929
                EXEMPLARY DAMAGES
                      Fraud                                            $ 4,500,000
                      Breach of Fiduciary Duty                         $ 2,000,000
                      Wrongful Foreclosure of Liberty Plaza II         $ 1,000,000
                      Wrongful Foreclosure of Liberty Land Tract       $ 2,000,000
                      Fraudulent Inducement of Stone's Guaranty        $ 1,000,000
                                  Total Exemplary Damages                           $10,500,000
                USURY PENALTY
                      Statutory penalties and return of interest paid               $18,921,224
                ATTORNEY'S FEES                                                      $  300,000
                

In addition to this relief, FSLIC and Service assert that the judgment entitles the Stone parties to receive other relief including:

                Value of Liberty Plaza II                                           $18,000,000
                    Conveyed free and clear of encumbrances in lieu of wrongful
                      foreclosure damages
                Voided deficiencies owed to Sunbelt and Service
                    Owed on Liberty Plaza II (approx.)                              $ 8,100,000
                    Owed on Liberty Land Tract (approx.)                            $16,800,000
                Prejudgment Interest (approx.)                                      $ 6,700,000
                ----------
                

Thus, FSLIC and Service assert that the trial court's total "package" included a net benefit to the Stone parties of approximately $114,730,153. For the reasons that follow, we conclude that we must reverse the total "package" and remand for a new trial in which FSLIC and Service may assert their federal law defenses.

A Brief Introduction to The Federal Law Defenses

The federal law defenses are sometimes referred to as D'Oench or section 1823(e) defenses. The nature of the federal law defenses takes form from the Supreme Court's decision in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). Indeed, in Langley, the Supreme Court tells us that prior to enactment of section 1823(e) in 1950, D'Oench, Duhme & Co. was the leading case in this area. See Langley v. FDIC, 484 U.S. 86, 92, 108 S.Ct. 396, 403, 98 L.Ed.2d 340 (1987). The Congress codified D'Oench as the Federal Deposit Insurance Act of 1950, section 2(13)(e), 64 Stat. 889, as amended, 12 U.S.C. section 1823(e). See FSLIC v. Kroenke, 858 F.2d 1067, 1070 (5th Cir.1988). D'Oench applies to FSLIC in its receivership capacity. Kroenke, 858 F.2d at 1070. Section 1823(e) provides:

No agreement which tends to diminish or defeat the right, title or interest of the Corporation [FDIC] 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.

One purpose of section 1823(e) is to allow federal and state bank examiners to rely on a bank's records in evaluating the worth of the bank's assets. Langley, 484 U.S. at 91, 108 S.Ct. at 402. Such evaluations are necessary when a bank is examined for fiscal soundness by state or federal authorities, see 12 U.S.C. §§ 1817(a)(2), 1820(b), and when the FDIC is deciding whether to liquidate a failed bank, see § 1821(d), or to provide financing for purchase of its assets (and assumption of its liabilities) by another bank, see § 1823(c)(2), (4)(A). Langley, 484 U.S. at 91, 108 S.Ct. at 402. The last kind of evaluation, in particular, must be made with great speed, usually overnight, in order to preserve the going concern value of the failed bank and avoid an interruption in banking services. Langley, 484 U.S. at 91, 108 S.Ct. at 402. Neither the FDIC nor state banking authorities would be able to make reliable evaluations if bank records contained seemingly unqualified notes that are in fact subject to undisclosed conditions. Langley, 484 U.S. at 91-92, 108 S.Ct. at 402. A second purpose of section 1823(e) is implicit in its requirement that the "agreement" not merely be on file in the bank's records at the time of an examination, but also have been executed and become a bank record "contemporaneously" with the making of the note and have been approved by officially recorded action of the bank's board or loan committee. Langley, 484 U.S. at 92, 108 S.Ct. at 403. These latter requirements ensure mature consideration of unusual loan transactions by senior bank officials, and prevent fraudulent insertion of new terms, with the collusion of bank employees, when a bank appears headed for failure. Langley, 484 U.S. at 92, 108 S.Ct. at 403. Neither purpose can be adequately fulfilled if an element of a loan agreement so fundamental as a condition upon the obligation to repay is excluded from the meaning of "agreement." Langley, 484 U.S. at 92, 108 S.Ct. at 403. From these sources the federal law defenses here at issue developed. In short, schemes or arrangements likely to mislead banking authorities (see Langley, 484 U.S. at 92-93, 108 S.Ct. at 402-04) gave birth to the federal law defenses. Of necessity much of this introduction of the federal law defenses will be repeated as we dispose of the issues presented. Hopefully, we have provided some hint as to how all this got started.

The Role of the Federal Deposit Insurance Corporation in the Affairs of an Insolvent Savings and Loan

On August 9, 1989, President Bush signed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. No. 101-73, 103 Stat. 183 (1989). FIRREA abolished the FSLIC, but this does not affect the validity of any right, duty, or obligation of FSLIC. FIRREA § 401(f)(1), 103 Stat. at 356. FIRREA also provides that no action commenced by or against FSLIC abates as a result of the enactment of the bill, except that the appropriate successor to the interest of FSLIC shall be substituted as a party. FIRREA § 401(f)(2), 103...