Federico v. Brockton Credit Union, 94-P-353

• Decision Date: 26 September 1995
• Docket Number: No. 94-P-353,94-P-353
• Citation: 39 Mass.App.Ct. 57,653 N.E.2d 607
• Court: Appeals Court of Massachusetts
• Parties: Robert FEDERICO & another 1 v. BROCKTON CREDIT UNION.

Page 607

653 N.E.2d 607

39 Mass.App.Ct. 57

Robert FEDERICO & another ¹ v. BROCKTON CREDIT UNION.

No. 94-P-353.

Appeals Court of Massachusetts Plymouth.

Argued March 20, 1995.

Decided Aug. 4, 1995.

Further Appellate Review Denied Sept. 26, 1995.

John P. Zelonis, Boston, for plaintiffs.

Thomas Paul Gorman, Boston, for defendant.

Before KASS, SMITH and GREENBERG, JJ.

KASS, Justice.

Under the doctrine developed in D'Oench Duhme & Co. v. Federal Deposit Ins. Corp., 315 U.S. 447, 459-462, 62 S.Ct. 676, 680-682, 86 L.Ed. 956 (1942), later codified in 12 U.S.C. § 1823(e)(1) (1994), an agreement between a bank and a borrower does not bind the Federal Deposit Insurance Corporation (FDIC) or its assignees unless: (1) the agreement is in writing; (2) was executed by the bank and the borrower contemporaneously with the note that is evidence of the borrower's debt; (3) the agreement was approved by the board of directors of the bank; and (4) it has continuously been part of the official bank records. ² See Federal Sav. & Loan Ins. Corp. v. Griffin, 935 F.2d 691, 698 (5th Cir.1991), cert. denied, 502 U.S. 1092, 112 S.Ct. 1163, 117 L.Ed.2d 410 (1992); Fleet Bank of Maine v. Steeves, 785 F.Supp. 209, 213 (D.Me.1992); Fleet Bank of Maine v. Prawer, 789 F.Supp. 451, 454-455 (D.Me.1992). The same codification of the D'Oench, Duhme, principles applies to National Credit Union Administration Board liquidations of credit unions. See 12 U.S.C. § 1787(p)(2) (1994). The question in the instant case is whether a bank commitment letter for a residential mortgage loan was a sufficiently contemporaneous and official bank document so that it may be considered as evidence that the interest rate set forth in a mortgage note was misstated. A Superior Court judge allowed the Brockton Credit Union's motion to dismiss the plaintiffs' complaint ³ under Mass.R.Civ.P. 12(b)(6), 365 Mass. 755 (1974), ⁴ and the Federicos have appealed. We affirm.

What underlies the statute and case law (for convenience we shall refer to them collectively as the D'Oench, Duhme doctrine) is the idea that government insurers of banks such as the FDIC and purchasers of assets from them, in assessing the assets of failing banks, must in the public interest be able to rely on the primary documents that govern the loan transaction--e.g., notes, mortgages, construction loan agreements--and ought not to be bound by off-record collateral agreements, written or unwritten, that depreciate the value of those assets. See Langley v. Federal Deposit Ins. Corp., 484 U.S. 86, 91-92, 108 S.Ct. 396, 401-402, 98 L.Ed.2d 340 (1987); Federal Deposit Ins. Corp. v. P.L.M. Intl., Inc., 834 F.2d 248, 252 (1st Cir.1987). By way of illustration, an undersecured loan may look more valuable because the credit-worthy principal shareholder of the strapped corporate borrower has given his personal guaranty. A side agreement between borrower and lender that the lender would never assert its rights under the guaranty would not be enforceable against the FDIC or its assignees.

We turn to the facts stated in the verified complaint, to which various documentary exhibits were attached. On October 5, 1989, Randolph Credit Union issued to Robert and Patricia Federico a commitment letter to lend them $90,000 at a variable interest rate, to be adjusted annually, at a "rate which will be 3.0 basis points over the One-Year Treasury Note at the time of review." ⁵ About a month later, on November 8, 1989, the loan closed. The lawyer handling the loan for the credit union prepared, and at the loan closing had the Federicos sign, a note for a fixed interest rate of 10.5% per year, forgetting to include any language about varying the interest rate in subsequent years. ⁶ In mop up work after the closing, bank counsel noticed the mistake and told the Federicos that they would receive a superseding note, with the correct interest rate, to be signed on the anniversary of the loan, the date on which the interest rate would begin to vary if the prescribed index so dictated.

The superseding note proffered to the Federicos, which they signed--the record does not set out the precise date ⁷--in November, 1990, was wrong again. Although it provided for a variable interest rate, rather than tying it to a treasury rate as provided in the commitment letter, the adjustment formula was on the basis of "contract interest rate, purchase of previously occupied homes, national average for all major types of lenders published by the Federal Home Loan Bank Board in the First District fact sheet." When questioned at the time of the signing of the second note, the credit union's counsel told the borrowers that the adjustment rate in the note would produce the same result as the commitment letter formula. That was a remarkable response as the note form used this time (Bankers Group Purchasing Form 706) contained an alternative adjustment formula (the choice of formula was made by checking a box on the form) based on United States Treasury securities. What the difference is in terms of dollars between the commitment formula and the note formula does not appear in the record but at argument we were assured by the parties that there was one.

Apparently the Federicos noticed the discrepancy between the commitment rate and the superseding note rate in May, 1992, and called the difference to the attention of James Donovan, a vice president of the Randolph Credit Union. Donovan acknowledged the mistake and told the Federicos the note would be corrected on its next anniversary, November, 1992. All those communications were by word-of-mouth. On July 2, 1992, the Commissioner of Banks declared that the Randolph Credit Union was unsound and unsafe and ordered its liquidation. The National Credit Union Administration became the liquidating agent. That same day, by a purchase and assumption agreement, the National Credit Union Administration sold certain assets, including the Federico loan, to the Brockton Credit Union. To that successor lender the Federicos communicated the problem of the errant interest rate. The Brockton Credit Union stood on its rights under D'Oench, Duhme and 12 U.S.C. § 1787(p)(2) and declined to take any corrective measures. This action followed.

The commitment letter is in writing and thereby meets the first of the criteria of 12 U.S.C. § 1787(p)(2) or § 1823(e). As complaints are, of course, read indulgently in favor of the pleader when considering a motion to dismiss under rule 12(b)(6), Nader v. Citron, 372 Mass. 96, 98, 360 N.E.2d 870 (1977), we may regard as susceptible of proof, even though not specifically pleaded, the third and fourth conditions of the statute, namely that the commitment letter was approved by the loan committee--with that approval noted in the minutes of the committee--of the Randolph Credit Union and that the commitment letter remained as part of the official records of the credit union. Squarely raised by the complaint, however, is whether the commitment letter, which was executed by both parties on October 5, 1989, satisfied the second statutory requirement, that the writing which purports to vary the note has been executed contemporaneously with the note. The superseding note was executed thirteen months after the commitment letter.

The word "contemporaneously," in the context of 12 U.S.C. § 1823(e)(1), has been strictly construed, see Resolution Trust Corp. v. Midwest Fed. Sav., 36 F.3d 785, 797 (9th Cir.1993), with one court having gone so far as to write that a commitment letter dated three and eight months before the notes executed on the basis of it necessarily was not a contemporaneous agreement because the parties signed the commitment letter before the later notes. Resolution Trust Corp. v. Dubois, 771 F.Supp. 154, 156 (M.D.La.1991). That case, as here, involved a commitment to make a variable interest loan and the notes executed were fixed rate. The court invoked the D'Oench, Duhme doctrine in favor of the Resolution Trust Corporation, which had acquired the assets of the bank that had made the loan. Ibid. See also Federal Deposit Ins. Corp. v. Virginia Crossings Partnership, 909 F.2d 306, 309-310 (8th Cir.1990) (earlier written agreement which limits the amount of partners' guarantees not enforceable); Fleet Bank of Maine v. Steeves, 785 F.Supp. at 215 (previously executed construction loan agreement cannot be used as a basis for varying later executed note); Fleet Bank of Maine v. Prawer, 789 F.Supp. at 455-456 & n. 7 (later executed notes supersede any inconsistent terms of commitment letters).

Of course commitment letters, since they set forth the business terms of a loan yet to be made, almost invariably precede the documents, such as the note, that are evidence of the loan. If sequence were all that were to it, a commitment letter would never be a contemporaneous document, except for the unlikely, though conceivable circumstance when the commitment letter and loan documents are executed simultaneously. Commitment letters have been determined to be contemporaneous, however, when copies of them are referred in the notes later executed. Erbafina v. Federal Deposit Ins. Corp., 855 F.Supp. 9, 12 (D.Mass.1994).

Incorporation of the earlier document in the note (or other simultaneously executed loan...