Federal Sav. & Loan Ins. Corp. v. Gordy

• Decision Date: 25 April 1991
• Docket Number: No. 90-7367,90-7367
• Parties: The FEDERAL SAVINGS & LOAN INSURANCE CORP., as Receiver for Vernon Savings and Loan Association, FSA, Plaintiff-Appellee, v. William J. GORDY; Mamie K. Kovac, Defendants-Appellants, Robert D. Word, Jr.; Elizabeth Payne Word, Defendants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1558

928 F.2d 1558

59 USLW 2742

The FEDERAL SAVINGS & LOAN INSURANCE CORP., as Receiver for

Vernon Savings and Loan Association, FSA, Plaintiff-Appellee, v. William J. GORDY; Mamie K. Kovac, Defendants-Appellants, Robert D. Word, Jr.; Elizabeth Payne Word, Defendants.

No. 90-7367.

United States Court of Appeals, Eleventh Circuit.

April 25, 1991.

M. Roland Nachman, Jr., John S. Bowman, Robin G. Laurie, Balch & Bingham, Montgomery, Ala., for defendants-appellants.

Warren B. Lightfoot, Mac M. Moorer, William H. King, III, Lightfoot, Franklin, White & Lucas, Birmingham, Ala., Paul E. Ridley, Peter F. Lovato, III, John P. Greenan, Hopkins & Sutter, Dallas, Tex., James Scott Watson, Federal Deposit Ins. Corp., Appellate Litigation, Legal Div., Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Alabama.

Before KRAVITCH and ANDERSON, Circuit Judges, and ATKINS ^*, Senior District Judge.

ATKINS, Senior District Judge:

Appellants William J. Gordy and Mamie L. Kovac appeal from a summary judgment by the District Court for the Northern District of Alabama in favor of appellee, The Federal Deposit Insurance Corporation ("FDIC"). ¹ The district court based its ruling on a body of federal common law known as the D'Oench doctrine, which protects FDIC and The Federal Savings & Loan Insurance Corporation ("FSLIC") from "agreements" between borrowers and banks which tend to misrepresent the value of a bank's assets. ² We must decide whether the court correctly determined that such agreements encompass a bank's warranty of the truth of its false financial statement, which was relied upon reasonably and in good faith by appellants in the course of negotiations culminating in their guaranteeing the notes presently sued upon. We also must decide whether the district court correctly determined that the bank's misrepresentation of its financial condition constituted fraud in the inducement, and not fraud in the factum, which would have rendered the guaranties void ab initio and thus provided FDIC, the bank's successor-in-interest, no basis for suit. Because we agree that the district court correctly decided these questions, its judgment is AFFIRMED.

I

The relevant facts are not in dispute. In December of 1982, appellants commenced negotiations with Vernon Savings & Loan Association, FSA ("Vernon") ³ in connection with appellants' plans to acquire and develop a hotel in Natchez, Mississippi. These negotiations culminated in a transaction whereby Natchez Hotel Properties, Inc. ("Natchez Hotel") received funds for the acquisition and development of the hotel. The project was financed by industrial revenue bonds issued by the City of Natchez; the bond issuance closed on September 1, 1984. As part of the transaction, Vernon issued a letter of credit in favor of the indenture trustee, Merchants National Bank of Mobile. The letter, insured by Industrial Indemnity Company of California ("Industrial Indemnity"), entitled the indenture trustee to make a demand on the letter of credit upon the occurrence of any event of default specified in the documents connected with the bond issue. One such specified event was the insolvency of Vernon. On March 31, 1985, appellants executed facially unqualified guarantees obligating them to pay $3,167,312 upon the occurrence of a default event specified in the bond closing documents.

Vernon, it turned out, unknown to the appellants, was insolvent throughout the negotiations described above. On April 21, 1987, the indenture trustee, having learned of the insolvency, demanded payment of Vernon pursuant to its letter of credit obligation. ⁴ Industrial Indemnity paid the amount demanded by the trustee and entered into a negotiated settlement with Vernon, which acquired the notes and underlying guaranties executed by appellants. Subsequently, FSLIC, as receiver for Vernon, made demands of Natchez Hotel for payment of the notes. Natchez Hotel defaulted. On November 29, 1988, FSLIC filed this suit against the appellants seeking payment of the amounts secured by the guaranties.

In the district court, the appellants defended and counterclaimed against FSLIC on the basis of misrepresentations made by Vernon to the appellants during the course of the negotiations regarding the plans to acquire and develop the Natchez Hotel. At the heart of the misrepresentations was a written statement of Vernon's financial condition as of June 30, 1984, which Vernon submitted for the use of all participants in the Natchez Hotel transaction. At a time when Vernon already was insolvent, the statement portrayed a sound financial condition. The truth of the statement was certified by an October 9, 1984 certificate signed by a vice-president of Vernon. The guaranties signed by appellants did not indicate that Vernon had certified the truth of its financial statement or that the truth thereof was a condition to appellants' fulfillment of their obligations under the facially unqualified guaranties.

The parties eventually filed cross-motions for summary judgment. In an October 25, 1989 opinion, the district court identified the threshold issue with regard to the motions as whether Vernon's misrepresentation and concealment of its financial condition provide a basis for defendants' defense or counterclaims in light of the D'Oench doctrine. Conceding fraud on the part of Vernon, its predecessor-in-interest, appellee argued that the doctrine precluded appellants from relying on Vernon's misrepresentations as a basis for a defense or counterclaim. Appellants argued, inter alia, that given their good faith and reasonableness, the misrepresentations did not constitute a "secret agreement" within the meaning of D'Oench, and also that because Vernon's misrepresentations went to the essence of the guaranties, the guaranties were void ab initio and thus provided no basis for appellants' liability.

In the October 25 opinion, the district court preliminarily granted appellee's summary judgment motion, accordingly denying those of appellants. The court rejected appellants' contention that Vernon's misrepresentations created a condition to their duty to pay under their guaranties and that this condition fell outside the scope of the D'Oench doctrine: "[T]he court finds no agreement which creates a condition to or qualification of defendants' obligation to pay on their guaranties.... There was no written agreement whereby defendants' duty to pay was so conditioned." ⁵ October 25, 1989 Opinion at 14-15. The court also rejected appellants' argument that Vernon's misrepresentations constituted fraud in the factum. In a December 4, 1989 opinion, the court revisited the fraud in the factum issue before finalizing its ruling in favor of appellee: "No matter how gross or severe the alleged fraud may be, it did not relate to the nature, contents or terms of the guaranty agreements. At best, it was a mere inducement to their execution." December 4, 1989 Opinion at 2. Because voidable documents, unlike void documents, are capable of transfer, FSLIC had a basis for its suit. On April 25, 1990 the court issued a final judgment for appellee in the amount of $3,980,515 on the guaranties, including interest and attorneys' fees. ⁶

Appellants appealed from this judgment on May 16, 1990 and now advance two arguments. First, they primarily contend that Vernon's misrepresentations constituted not fraud in the inducement, but fraud in the factum, thus taking the misrepresentations outside the D'Oench doctrine's reach. Second, appellants argue that the bank's misrepresentation of its financial condition does not fall within the doctrine because appellants acted reasonably and in good faith. We turn to these arguments after reviewing the relevant history of the D'Oench doctrine and applying the Eleventh Circuit D'Oench standard to the facts before us.

II

A grant of summary judgment is subject to de novo review by this court. Vernon v. Resolution Trust Corp., 907 F.2d 1101, 1104 (11th Cir.1990). Because the relevant facts are not in dispute, we must determine only whether FDIC is entitled as a matter of law to the summary judgment issued by the district court. Id.; Fed.R.Civ.P. 56(c).

III

The D'Oench doctrine was created by the United States Supreme Court in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 reh'g denied, 315 U.S. 830, 62 S.Ct. 910, 86 L.Ed. 1224 (1942). FDIC had sued to collect on notes which had been executed with the understanding that they would never be called for payment. The guarantor defended by alleging failure of consideration, that is, that FDIC's predecessor-in-interest failed to perform a promise--not to call in the loan--that was a condition precedent to payment of the note. The Court held that this "secret agreement" could not be a defense to the FDIC suit because it would tend to deceive federal banking authorities who, given their responsibility to protect the fiscal stability of financial institutions, must be able to evaluate a given bank's true assets and commitments. The Court explained that the guarantor need not have been aware that the secret agreement was designed to mislead federal banking authorities. "It would be sufficient ... that the maker lent himself to a scheme or arrangement whereby the banking authority ... was or was likely to be misled." ⁷ Id. at 460, 62 S.Ct. at 681.

The policy considerations leading to the development of the D'Oench doctrine have resulted in its extension "well beyond [the] precise factual setting [found in D'Oench ]." Federal Deposit Ins. Corp. v. McCullough, 911 F.2d 593, 600, en banc reh'g denied, 920 F.2d 13 (11th Cir.1990). Most significantly, the Supreme Court has expanded the doctrine to encompass not only a "secret arrangement" such as that found in D'Oench, but also "[a] condition to payment of a note, including the truth of an express warranty." Langley v. Federal Deposit Ins. Corp., 484...