Grubb v. Federal Deposit Ins. Corp., s. 86-1687

CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)
Writing for the CourtBefore McKAY and BRORBY; BRIGHT
Citation868 F.2d 1151
PartiesFed. Sec. L. Rep. P 94,197 Ron GRUBB; Weatherford Interstate Holding Company, Plaintiffs-Appellees-Cross-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION (successor-in-interest to First National Bank and Trust Company of Oklahoma City), Defendant-Appellant-Cross-Appellee.
Docket Number86-1728,Nos. 86-1687,s. 86-1687
Decision Date16 February 1989

Terry W. Tippens (Eric S. Eissenstat and Dino E. Viera with him, on the brief) of Fellers, Snider, Blankenship, Bailey & Tippens, Oklahoma City, Okl., for plaintiffs-appellees-cross-appellants.

Jay B. Williams (Kenneth I. Jones, Jr. with him, on the brief) of Jones, Blaney & Pringle, Oklahoma City, Okl., and Thomas S. Richey (G. Patrick Watson with him, on the brief) of Powell, Goldstein, Frazer & Murphy, Atlanta, Ga. (Michael Paul Kirschner, Teree E. Foster, and Shannon Self of Hastie and Kirschner, Oklahoma City, Okl.; and Alan R. Bromberg, Dallas, Tex., on the brief) for defendant-appellant-cross-appellee.

Before McKAY and BRORBY, Circuit Judges and BRIGHT *, Senior Circuit Judge.

BRIGHT, Senior Circuit Judge.

Ronald J. Grubb recovered a judgment upon a jury trial in district court against First National Bank and Trust Company of Oklahoma City (First National) in the sum of $2,722,629.88 on a complaint alleging that First National committed fraud in violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission, as well as Oklahoma state law, when it induced Grubb and a coinvestor to buy a second bank, Security State Bank of Weatherford, Oklahoma (Security State), by misrepresenting the financial condition of Security State. The judgment resting on the jury verdict also dismissed First National's counterclaims for recovery of amounts due it on promissory notes from Grubb and the Weatherford Interstate Holding Company (Weatherford Holding), a holding company in which Grubb held a fifty percent interest. After denial of First National's post-trial motions for judgment notwithstanding the verdict, for a new trial, or for remittitur, First National brought this appeal. 1 We affirm in part and reverse in part. Specifically, the judgment on liability and the dismissal of the counterclaims will stand, but we remand for a new trial on damages unless Grubb accepts a remittitur reducing the award to $222,629.88. The cross-appeal is dismissed. See infra note 2. We explain our reasons below.

The following issues are raised in this appeal: (1) whether the Supreme Court's decision in Langley v. FDIC, --- U.S. ----, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987), entitles appellant Federal Deposit Insurance Corporation (FDIC) to summary disposition of its challenge to the verdicts for Grubb on the securities fraud claims and against First National on the counterclaims; (2) whether Grubb has standing as a "purchaser" of securities to bring a private action under federal and state securities laws; (3) whether Grubb acted recklessly so as to render erroneous the jury's award resting on findings that he justifiably relied on First National's alleged misrepresentations; and (4) whether the alleged misrepresentations proximately caused Grubb's consequential damages of $2.5 million based on two infusions of capital he made into Security State. 2

A. District Court Proceedings

In their suit against First National, Grubb and Weatherford Holding alleged the following: (1) violations of federal and state securities laws; (2) common-law fraud; (3) breach of fiduciary duties; (4) breach of express warranties; (5) breach of contract; and (6) promissory estoppel. First National counter-claimed against Grubb and Weatherford Holding to recover principal and interest due on promissory notes and guaranties the plaintiffs executed in return for loans they used to purchase Security State stock. The district court consolidated the case with a similar action brought by William Schulte, Grubb's partner in this transaction, but Schulte settled his claims before trial.

At the close of evidence, on First National's motion for directed verdict of dismissal on all claims made against it, the district court directed a verdict for First National on all claims asserted by Grubb and Weatherford Holding except those alleging violations of statutory state and federal securities laws.

The jury awarded Weatherford Holding no damages, but awarded Grubb $2,722,629.88 on the federal and state securities fraud claims. Based on the proof the plaintiffs adduced at trial, these damages consisted of interest payments on the notes and capital Grubb contributed to Security State in September 1983 and March 1984. The jury also denied First National any recovery on its counterclaims against Grubb and Weatherford Holding on the notes. On October 31, 1985, the district court entered judgment on the jury verdicts.

After trial, First National filed a motion for judgment notwithstanding the verdict, or in the alternative for new trial or remittitur. 3 The district court denied these motions, and First National thereafter filed this timely appeal. 4

After First National filed its notice of appeal, it encountered severe financial difficulties. The Comptroller of the Currency declared the bank insolvent on July 14, 1986, and appointed the FDIC receiver.

B. FDIC's Status as Appellant

When the FDIC serves as receiver of a failed bank, it may pay off the bank's depositors by two methods. The first is simply to liquidate the bank's assets and pay the depositors their insured amounts, covering any shortfall with insurance funds. The FDIC tries to avoid this option, however, because it decreases public confidence in the banking system and may deprive depositors of the uninsured portions of their funds. FDIC v. Merchants Nat'l Bank, 725 F.2d 634, 637 (11th Cir.), cert. denied, 469 U.S. 829, 105 S.Ct. 114, 83 L.Ed.2d 57 (1984).

The second, and preferred, alternative is to initiate a "purchase and assumption" transaction (P & A). In this type of transaction, the FDIC as receiver arranges to sell acceptable assets of the failed bank to an insured, financially sound bank, which assumes all of the corresponding deposit liabilities and reopens the failed bank without an interruption in operations or loss to depositors. The FDIC as receiver then sells to the FDIC in its corporate capacity the assets that the assuming bank declined to accept. The corporate entity of the FDIC in turn attempts to collect on the unacceptable assets to minimize the loss to the insurance fund. Id. at 637-38.

In this case, the FDIC reviewed First National's records and decided upon a P & A transaction. Through the resulting transaction, the FDIC in its corporate capacity allegedly acquired the notes and guaranties executed by Grubb and Weatherford Holding.

The FDIC as receiver thereafter became appellant on the portions of this appeal relating to Grubb's judgment against First National. In its corporate capacity, the FDIC became appellant on the part of the appeal challenging the denial of First National's counterclaims seeking to collect on the notes signed by Grubb and Weatherford Holding. 5

C. Facts

In 1982, Security State began experiencing loan and management problems that aroused the scrutiny of state and federal banking regulatory agencies. The Oklahoma State Banking Department and the Federal Reserve Board sent examiners to review Security State's credit files in January 1983. By early February, the preliminary findings of the examination classified $20 million of Security State's loans in three categories: substandard, doubtful, and loss. The examiners classified $5.2 million of the loans as loss. Charge-off of these loan losses would have absorbed Security State's existing capital reserves. These findings prompted state regulators to order the infusion of $5 million in capital by February 9, 1983, to prevent the liquidation of Security State.

On February 3, 1983, the state banking department notified First National, as pledgee of Security State stock, of the impending capital call and possible closing of Security State. Previously unaware of problems at Security State, First National sent a team of its own examiners to review Security State's credit files and verify the state's findings. The examination lasted two days, and the examiners left their review notes in the Security State files. In two internal First National memoranda dated February 8, 1983, the examiners confirmed the state board's classification of $5.2 million of the loans as total loss, but estimated that unidentified future losses could bring the total up to $15 million.

Schulte, the chairman of the board of Security State and owner of the largest block of shares of Weatherford Bancshares, Inc. (Bancshares), the holding company that then owned Security State, received notice of the state banking department's findings in early February. To prevent the failure of Security State, Schulte decided to find a partner to help him recapitalize and reorganize the bank. Officials at First National suggested to him Grubb, a First National customer who also owned several small banks in the area.

Schulte called Grubb on February 5 to see if he wanted to participate, and followed up by sending Grubb a computer printout listing names, amounts, interest rates, and due dates on 1,200 to 1,300 Security State loans. Grubb received the printout on Monday, February 7, and examined it for about an hour. Later that day, a First National officer called Grubb to give him the state's audit numbers, including the potential charge-off of $5.2 million, and to tell him of the impending capital call.

Initially, Grubb told First National officials that he only had an interest in acquiring Security State assets through a purchase and assumption transaction after the bank had closed. Nevertheless, First National's executive vice president, Robert Gilbert, with whom Grubb had dealt in several...

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