First State Bank of Wayne County, Kentucky v. City and County Bank of Knox County, Tennessee.
| Decision Date | 06 April 1989 |
| Docket Number | No. 88-5583,88-5583 |
| Citation | 872 F.2d 707 |
| Parties | FIRST STATE BANK OF WAYNE COUNTY, KENTUCKY (Formerly City and County Bank of Wayne County), Plaintiff-Appellant, v. The CITY AND COUNTY BANK OF KNOX COUNTY, TENNESSEE, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Margaret E.M. Keane, James E. Milliman (argued), Greenebaum, Doll & McDonald, Louisville, Ky., for City and County Bank of Wayne County.
Margaret E.M. Keane, James E. Milliman, Louisville, Ky., for Federal Deposit Ins. Corp., in its capacity as Receiver for City and County Bank of Knox County.
Ronald D. Bowling, J.M. Trimble, Kevin G. Henry (argued), Trimble & Henry, Lexington, Ky., for First State Bank of Wayne County, Ky., fka The City and County Bank of Wayne County.
Before MILBURN and BOGGS, Circuit Judges, and CONTIE, Senior Circuit Judge.
Plaintiff-appellant First State Bank of Wayne County, Kentucky ("First State") appeals from the final judgment of the district court and a subsequent denial of its motion for a new trial in this action on an oral contract wherein the now defunct City & County Bank of Knox County, Tennessee ("C & C Knox") allegedly agreed to repurchase certain loans or loan participations at any time upon demand. First State seeks specific performance or damages from the Federal Deposit Insurance Corporation ("FDIC") in its capacity as receiver for C & C Knox. The principal issues on appeal are (1) whether the district court erred in holding that the oral agreement was unenforceable under the Tennessee parol evidence rule; and (2) whether the district court erred in further holding that the oral agreement was contrary to public policy and therefore unenforceable. For the reasons that follow, we affirm.
On May 27, 1983, First State filed this action seeking to compel C & C Knox to repurchase certain loans and loan participations and named numerous other defendants, including the FDIC in its corporate capacity. C & C Knox was closed later that same day, and the FDIC was appointed as its receiver. 1 On September 9, 1983, the FDIC, in its capacity as receiver for C & C Knox, was substituted as a defendant for C & C Knox.
First State's breach of contract claim against C & C Knox and the FDIC in its corporate capacity was severed from First State's other claims prior to trial. First State's claim for damages was also bifurcated, and a bench trial was held solely on the issue of liability of the FDIC as receiver with respect to the alleged oral agreement to repurchase the loan participations. Trial commenced on September 18, 1984, and continued through September 21, 1984.
On September 28, 1987, while the case was still under submission, First State filed a motion pursuant to Rule 59 of the Federal Rules of Civil Procedure to reopen the proof for the limited purpose of taking the testimony of C.H. Butcher, Jr. ("Butcher"), and attached Butcher's affidavit setting forth his proposed testimony confirming the oral contract. Butcher had invoked his Fifth Amendment privilege against self-incrimination during the trial, but after having pleaded guilty to several federal offenses, Butcher stated that he was prepared to testify that he had entered into an agreement to repurchase on demand with First State before C & C Knox sold any loan participations to it. The district court denied the motion, however, on the grounds that the proffered testimony was merely cumulative of testimony heard at trial.
On January 8, 1988, the district court entered a Memorandum Opinion containing findings of fact and conclusions of law, dismissing First State's claims on the ground that any oral agreement to repurchase the loan participations was unenforceable. The district court concluded (1) that the oral contract for repurchase was barred by the Tennessee parol evidence rule since the participations were evidenced by written certificates, and (2) that the oral contract for repurchase was unenforceable because it was the type of secret side agreement which offends federal public policy designed to protect the FDIC when it purchases the assets of failed banks.
The district court delayed entry of judgment, however, because First State had numerous other unresolved claims outstanding, and instructed First State to apprise the court of the status of those claims. Prior to the entry of judgment, First State filed motions to amend the judgment and for a new trial. 2 On January 28, 1988, noting First State's failure to apprise the court of any outstanding unresolved claims, the district court entered a final judgment dismissing First State's claims against C & C Knox, the FDIC in its receiver capacity, and the FDIC in its corporate capacity. First State's motions were denied on April 20, 1988, and First State filed a notice of appeal on May 19, 1988.
In November 1981, Millard Oakley, an attorney and former Commissioner of Insurance for the State of Tennessee, approached his long-time friend and associate, Butcher, then Chairman of the Board of C & C Knox, concerning the possibility of obtaining financing to purchase First State, which is located in Monticello, Kentucky. Butcher suggested that Oakley contact Butcher's friend, Phillip Hayes, a banker who was also interested in purchasing First State, and Oakley and Hayes eventually formed a bank holding company, Wayne Bancshares, and purchased First State on May 17, 1982.
The next day, Oakley met with Butcher and Emmett Foster, then President of C & C Knox, to discuss the future profitability of First State and the need to have additional loans with high rates of interest. Butcher and Foster advised Oakley that they planned to form a bank consulting company, later incorporated on June 16, 1982, under the name of C & C Interstate Financial Corporation, which would offer a wide range of services to small rural banks. Oakley testified that both Butcher and Foster advised him that C & C Knox could provide First State with high-yielding loans and loan participations which would improve First State's profitability. It was also suggested that Foster serve as Chairman of the Board of First State in order to lend his experience and expertise in helping to increase First State's profitability. The next day, May 19, 1982, Oakley and Foster were elected to First State's Board of Directors.
Although the Board of Directors had not adopted a resolution allowing First State to purchase loan participations from C & C Knox, Oakley met with Butcher and Foster in Knoxville, Tennessee, on May 27, 1982. At this meeting, Butcher and Foster, on behalf of C & C Knox, offered to sell loans and loan participations to First State. Even though he had not been authorized to make such an agreement, Oakley agreed to purchase loans and loan participations. Butcher orally agreed that C & C Knox would repurchase the loans or loan participations at any time, for any reason, on demand by First State. The district court found that this was a general policy C & C Knox had with all of its affiliated banks. Pursuant to the agreement, the loans were supposed to have been for a short duration and for not more than a few hundred thousand dollars. This agreement was never put into writing, and Oakley testified that this oral agreement is the sole agreement First State relies on in this action.
On June 22, 1982, Foster was elected Chief Executive Officer of First State and was granted authority to make loans in the full lending limits of $200,000 unsecured and $300,000 secured. On that same day, Foster brought with him six loan participations totaling $1.8 million. He reiterated his agreement with C & C Knox that they would repurchase the loans, if requested. However, the Board of Directors never memorialized the oral agreement in writing. Although no resolution was passed by First State authorizing the purchase of the participations brought in by Foster, First State purchased them on June 25, 1982, without any written agreement requiring C & C Knox to repurchase them.
Thereafter, and continuing through January 5, 1983, loan participations were purchased by First State from C & C Knox in the aggregate sum of $7,384,574.00. During the same time First State received $1,342,995.00 which was credited to its account at C & C Knox as payment of principal, not interest on these loan participations. Each loan participation certificate issued by C & C Knox and accepted by First State contained the following language:
We [C & C Knox] will exercise the same care and diligence in making, handling, and collecting this loan as if it were solely for our account and no further responsibility or liability is assumed or implied ... [W]e reserve the right, at any time, to repurchase all or any part of this participation at par plus accrued interest, or at par less unearned discount, whichever shall apply.
The record shows that all of the loan participation certificates were accepted by First State without protest of the limited responsibility assumed by C & C Knox in the certificates. Moreover, First State never requested nor insisted that C &
The only resolution by the Board of Directors of First State authorizing the purchase of the participations was adopted on November 11, 1982, five months after the first $1.8 million in participations had been placed with First State. The Board acknowledged in the minutes of the meeting that it had assumed the entire risk of the loans purchased and indicated that the loans were nonrecourse as to C & C Knox:
Since loan participations are nonrecourse unless otherwise stated by the lead bank, this bank is buying a pro-rata share of the credit risk in the collateral value....
During a routine examination of First State on August 23, 1982, an FDIC examiner discovered that two of the...
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