Fletcher Village Condominium Ass'n v. FDIC

• Decision Date: 14 October 1994
• Docket Number: Civ. A. No. 92-10691-RGS.
• Citation: 864 F. Supp. 259
• Parties: FLETCHER VILLAGE CONDOMINIUM ASSOCIATION, Howland Village II Condominium Association, and Billington Village II Condominium Association v. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Boston Trade Bank, and Federal Deposit Insurance Corporation, in its Corporate Capacity.
• Court: U.S. District Court — District of Massachusetts

864 F. Supp. 259

FLETCHER VILLAGE CONDOMINIUM ASSOCIATION, Howland Village II Condominium Association, and Billington Village II Condominium Association v. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Boston Trade Bank, and Federal Deposit Insurance Corporation, in its Corporate Capacity.

Civ. A. No. 92-10691-RGS.

United States District Court, D. Massachusetts.

October 14, 1994.

David L. Klebanoff, Boston, MA, for plaintiffs.

Thomas L. Holzman, Fed. Deposit Ins. Corp., Washington, DC, for defendants.

MEMORANDUM AND ORDER ON DEFENDANT'S MOTION TO DISMISS OR FOR SUMMARY JUDGMENT

STEARNS, District Judge.

Plaintiff condominium associations brought this lawsuit against the Federal Deposit Insurance Corporation ("FDIC") in its capacity as receiver of the defunct Boston Trade Bank ("BTB") and in its corporate capacity as an insurer of the bank's deposits. Plaintiffs allege that BTB, in disregard of oral instructions, caused money entrusted for the purchase of U.S. Treasury bills to be deposited instead into the plaintiffs' regular checking accounts. At the time BTB became insolvent, these accounts contained amounts in excess of the federal deposit insurance limits. Plaintiffs are seeking to recover the excess funds. The FDIC now moves to dismiss, or in the alternative, for summary judgment.

FACTS

The undisputed material facts are as follows. Plaintiffs are three associations of condominium owners. The plaintiffs instructed Corcoran Jennison, their management company, to invest condominium fee receipts in Treasury bills through BTB. The Treasury bills were purchased under a program called Treasury Direct. The program allows the Federal Reserve Bank to credit and debit an investor's bank account automatically when Treasury bills are purchased or sold.

According to the plaintiffs, Corcoran Jennison orally instructed BTB to reinvest the proceeds of the bills as they matured, one of the options offered by Treasury Direct. According to the FDIC, BTB's records do not reflect such an understanding.¹ The Treasury Direct form filled out by a BTB employee directs the Federal Reserve to deposit the proceeds into plaintiffs' BTB checking accounts. On April 29, 1991, the bills at issue matured and the Federal Reserve credited the funds to plaintiffs' BTB accounts. On May 3, 1991, BTB was declared insolvent and the FDIC was appointed receiver. Each plaintiff's checking account exceeded the FDIC $100,000 insured limit. This excess, aggregating some $75,000, was deemed by the FDIC to be uninsured.²

The FDIC duly notified plaintiffs that the insured portions of their accounts were being transferred to another bank. Corcoran Jennison, on the plaintiffs' behalf, submitted Proof of Claim forms as to the excess funds in a timely fashion. On August 2, 1991, the FDIC issued receiver's certificates to the plaintiffs recognizing them as creditors of BTB. At least one nominal dividend has been paid to each plaintiff out of the receivership assets.³

On March 23, 1992, the plaintiffs filed this lawsuit seeking to recover the uninsured balances of their accounts. Count I of the Amended Complaint alleges that the FDIC, as receiver, unlawfully withheld and converted the proceeds of the Treasury bills. Count II, naming the FDIC in its corporate capacity, alleges that the proceeds were held in trust for the plaintiffs and, as such, were separately insured. Count III seeks declaratory relief. The FDIC has moved to dismiss, or in the alternative, for summary judgment, arguing that the D'Oench Duhme doctrine and its statutory analog, 12 U.S.C. § 1823(e), make BTB's written records determinative of the plaintiffs' claims.

DISCUSSION

Summary judgment is appropriate when, based upon pleadings, affidavits, and depositions, "there is no genuine issue as to any material fact and where the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Gaskell v. Harvard Coop Society, 3 F.3d 495, 497 (1st Cir.1993). A material fact is one which has "the potential to affect the outcome of the suit under applicable the law." Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d 701, 703 (1st Cir.1993). In considering the affidavit testimony and documentary evidence provided to the court, the non-moving party is indulged with all favorable inferences. Oliver v. Digital Equipment Corp., 846 F.2d 103, 105 (1st Cir.1988).

The D'Oench Duhme doctrine and its statutory complement, 12 U.S.C. § 1823(e), limit claims and defenses that borrowers may assert against the FDIC to those that are verified by a failed bank's records. See Villafane-Neriz v. FDIC, 20 F.3d 35, 40 (1st Cir.1994). By its own terms, 12 U.S.C. § 1823(e) does not apply to a bank's liabilities.⁴ Because of the intervening decision in Villafane-Neriz, the FDIC concedes that it "can no longer maintain that section 1823(e) applies in this case." The FDIC contends, however, that the D'Oench Duhme doctrine, as an independent expression of common law, defeats this court's jurisdiction over the plaintiff's claims. While the argument that the D'Oench Duhme doctrine is more expansive in its reach than § 1823(e) is technically correct, it does not address the distinction between a bank's assets and liabilities, a distinction which has the same limiting effect on D'Oench Duhme as it does on § 1823(e)⁵.

The FDIC's "core" mission is to protect the interests of a failed bank's depositors. Both D'Oench Duhme and § 1823(e) are intended to serve this objective by "favoring the interests of depositors and creditors of a failed bank ... over the `interests of borrowers.'" Villafane-Neriz, supra at 40 (quoting Bell & Murphy and Associates, Inc. v. Interfirst Bank Gateway, N.A., 894 F.2d 750, 754 (5th Cir.1990)). See also Timberland Design, Inc. v. First Service Bank for Sav., 932 F.2d 46, 48 (1st Cir.1991). To invoke D'Oench Duhme as a bar to depositors' claims would defeat the very purpose of the doctrine. Cf. FDIC v. La Rambla Shopping Center, Inc., 791 F.2d 215, 218 (1st Cir.1989).

Because neither the D'Oench Duhme doctrine nor § 1823(e) provides an answer to this case, it is necessary to consider the character of the Treasury bill proceeds at the time they were deposited to the plaintiffs' accounts, as it relates to the institutional, and quite distinct roles of the FDIC. The plaintiffs' principal contention is that the bank's failure to honor the directions given on their behalf requires that the excess funds be impressed with a constructive trust. The settled rule, however, is that when a general deposit of money is made in a commercial bank, "the bank becomes a debtor to the depositor, with a superadded duty to honor the checks of the depositor, for a violation of which it may be held liable for damages. The bank is in no sense a trustee." 5 Scott on Trusts § 526 at 3670 (3d ed. 1967) (footnote omitted). The rule is no different when a bank fails to honor a depositor's instructions that money on general deposit be applied to a particular purpose.⁶ "In such a case unless the bank actually sets aside specific money for the intended purpose, it can hardly be said that it has become a trustee.... If the bank fails before it sets aside the money, it is liable to the depositor only for breach of contract, and upon the bank's insolvency the depositor has no claim to priority over other creditors of the bank." Id., § 546 at 3746. See also Blakey v. Brinson, 286 U.S. 254, 52 S.Ct. 516, 76 L.Ed. 1089 (1932) (no trust created where a bank failed to purchase government bonds as directed by a depositor despite its false assurances that it had done so). Moreover, a court of equity will impose a constructive trust only to avoid the unjust enrichment of a party that obtains legal title to property by means of a fraud or a fiduciary violation.⁷ Nessralla v. Peck, 403 Mass. 757, 762, 532 N.E.2d 685 (1989); Collins v. Guggenheim, 417 Mass. 615, 618, 631 N.E.2d 1016 (1994). Here not only is there no credible suggestion of fraud on the part of the bank, it also cannot be said that the bank enriched itself at the plaintiffs' expense. By accepting deposit of the plaintiffs' funds, the bank accomplished the opposite result by enlarging the total sum of its liabilities.

Much of the plaintiffs' argument seems to confuse the FDIC's dual persona. The FDIC acts in two distinct capacities as a monitor of the banking system. When the FDIC takes over a failed bank, it acts as a receiver. When the FDIC reimburses depositors for money lost as a result of a bank's failure, the FDIC acts in its corporate capacity as an insurer. If the plaintiffs are, as they claim, beneficiaries of a trust, that does not improve their position against the FDIC as receiver. "If a trustee dissipates the trust property and has nothing to show for it, the beneficiary is entitled to no priority over the trustee's general creditors." 5 Scott on Trusts, § 525 at 3669 (3d ed 1967). In other words, no matter how they choose to frame their cause of action, the plaintiffs have no remedy against the FDIC as receiver other than the one generally available to all of the bank's creditors—a claim to a pro rata share of any recovered assets. See Hale House Center, Inc. v. FDIC, 788 F.Supp. 1309, 1317 (S.D.N.Y.1992).

Plaintiffs' alternative argument that their funds should be deemed trust funds for FDIC insurance purposes, while not very clearly made, has a basis in FDIC regulations. Funds held by a bank under instructions to invest were at the time BTB failed considered by the FDIC as "trust funds" within the meaning of 12 U.S.C. § 1817(i) and deemed separately insured. FDIC Advisory Opinion No. 88-63 (September 14, 1988). See also 12 U.S.C. § 1813(l)(3). Ultimately, however, the characterization of funds as trust funds for insurance purposes, according to FDIC regulations, is conclusively determined by a bank's records. 12 C.F.R. § 330.4. Here, because of the absence of any indication in BTB's records that the proceeds of the Treasury bills were...