Gunter v. Hutcheson

• Decision Date: 12 May 1980
• Docket Number: Civ. A. No. C76-1702.
• Citation: 492 F. Supp. 546
• Parties: William L. GUNTER and Camille S. Gunter v. Theodore M. HUTCHESON et al.
• Court: U.S. District Court — Northern District of Georgia

492 F. Supp. 546

William L. GUNTER and Camille S. Gunter v. Theodore M. HUTCHESON et al.

Civ. A. No. C76-1702.

United States District Court, N. D. Georgia, Atlanta Division.

March 4, 1980.

On Motion of Reconsideration and Rehearing May 12, 1980.

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Harold L. Russell, Thomas W. Rhodes, Jane K. Wilcox, Gambrell, Russell & Forbes, Atlanta, Ga., for plaintiffs.

J. D. Fleming, John A. Chandler, H. Wayne Phears, Sutherland, Asbill & Brennan, Atlanta, Ga., Myers N. Fisher, Robert J. Green, Legal Div., Washington, D. C., Jerry Bonneau, Chattanooga, Tenn., for FDIC.

ORDER OF COURT

MOYE, Chief Judge.

This action is one of many to arise out of the failure of the Hamilton National Bank of Chattanooga (HNB/C). On December 31, 1974, the plaintiffs purchased 61% of the stock of the Hamilton Bank and Trust Company of Atlanta (HB&T/A) for $5.5 million from defendant Theodore M. Hutcheson. The Gunters allege that during the negotiations preceding the stock purchase some of the defendants caused fraudulent misrepresentations concerning the financial condition of HN&T/A to be made to the Gunters. These alleged misrepresentations include, among others, the following:

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(b) The Chattanooga Bank would leave seven million dollars in certificates of deposit in the Atlanta Bank for at least one year from the Gunters' acquisition of the stock;

(c) The Atlanta Bank had and would continue to have a federal funds line of at least one million dollars ($1,000,000) through the Chattanooga Bank;

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(f) The Atlanta Bank was projected to make five hundred thousand dollars ($500,000) per year, and Mr. and Mrs. Gunter would make enough in dividends from the Atlanta Bank to pay interest on the notes; and

(g) The interest on notes given by Mr. and Mrs. Gunter would be deferred until January, 1977, and upon the giving of a balance sheet showing the separate assets and liabilities of Mr. Gunter, apart from those of his wife, new notes would be substituted for notes to be given at the closing of the Gunters' purchase of the stock, and those new notes would be payable by Mr. Gunter only. The new notes would provide for interest payments only for the first two years, with principal to be payable thereafter over a ten year period at ten percent of principal per year for seven years and the remaining thirty percent of principal in the last year.

Amended Complaint, ¶ 16(b), (c), (f), (g). These alleged misrepresentations were not in writing, were not executed by the HNB/C, were not approved by the Board of Directors of the HNB/C, and were not official records of the HNB/C.

In order to finance the acquisition of the HB&T/A stock, the Gunters borrowed $5.5 million from HNB/C, giving HNB/C two notes in the original principal amounts of $2.5 million and $3 million and securing those notes with the HB&T/A stock. Only the $3 million note is involved here.

On February 16, 1976, the Comptroller of the Currency declared the HNB/C insolvent and appointed the FDIC as receiver. The FDIC in its capacity as insurer may adopt either of two procedures when faced with a bank failure. It may arrange for payment of insured deposits and then liquidate the bank's assets over a period of time, or alternatively, assist the receiver in arranging what is commonly known as a "purchase and assumption" transaction. The latter procedure usually enables the FDIC to minimize the losses to its deposit insurance fund, avoid the disruption of a payout, and provide maximum protection to depositors of the failed bank. In the case of the failure of the HNB/C, the FDIC determined to use the purchase and assumption procedure in order to achieve the aforementioned goals. Miailovich affidavit ¶¶ 2, 4, 6; Agreement of Sale between FDIC as receiver and FDIC as corporate insurer (Exhibit B to Miailovich affidavit) (hereinafter Agreement of Sale) pp. 1-2.

The adoption of the purchase and assumption procedure required the FDIC to find a bank willing to assume the liabilities of the failed bank when paid a compensating amount of assets. Although the transaction was effected quickly to maintain the "going concern value" of the failed bank, the liabilities of HNB/C exceeded its assets by $70 million — $384 million of liabilities as compared to $314 million of assets. To obtain the right to purchase the HNB/C liabilities, First Tennessee National Bank (FTNB) bid approximately $16 million, thus reducing the net liabilities-assets discrepancy to approximately $54 million. The FDIC in its capacity as insurer may, pursuant to 12 U.S.C. § 1823(e), provide financial assistance to the receiver to facilitate a purchase and assumption, and in this case the FDIC agreed to pay the receiver $54 million. Miailovich affidavit ¶¶ 2, 4, 6.

In order to effect the purchase and assumption with the promptness necessary to ensure the retention of the going concern value of the failed bank's assets, the purchasing bank cannot immediately examine the loans of the failed bank to determine whether they are of acceptable quality. Miailovich affidavit ¶ 7. The purchaser is thus given a period of time in which to examine the loans and to return to the receiver any unacceptable loans. Id.; Purchase and Assumption Agreement between First Tennessee National Bank and the FDIC as receiver (Exhibit A to Miailovich affidavit) (hereinafter Purchase and Assumption Agreement) § 3.1(c). One of the means by which the FDIC as corporate insurer attempts to effectuate the aforementioned goals of a purchase and assumption is by agreeing to acquire from the receiver any returned assets, Miailovich affidavit ¶ 7, and in this case it did acquire the Gunter note from the receiver for $3,220,794.50 after it was returned by FTNB. Agreement of Sale § 1.1. When the FDIC acquired the Gunter note in its corporate capacity, it had no actual knowledge of any violations of the securities laws. Miailovich affidavit ¶ 9.

The plaintiffs, William L. and Camille S. Gunter, seek rescission and damages for alleged fraud in connection with their purchase of stock in the HB&T/A; against the FDIC, the Gunters seek only rescission. Plaintiffs have attempted to state claims under the following theories: (1) Count I — Securities Exchange Act § 10(b), 15 U.S.C. § 78j(b); Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; and Exchange Act § 29, 15 U.S.C. § 78cc; (2) Count II — 1933 Securities Act § 17(a), 15 U.S.C. § 77q; (3) Count III — Ga.Code Ann. §§ 97-112(a) and 97-114; (4) Count IV — Ga.Code Ann. §§ 105-301, 302, and 304; and (5) Count V — common law fraud and deceit. The FDIC has counterclaimed for payment on the $3 million note given by the Gunters to HNB/C (and now held by the FDIC) to finance the purchase of stock. The case is presently before the Court on the motion of defendant FDIC for summary judgment with respect to plaintiffs' claims and defendant FDIC's counterclaim. For purposes of this motion the FDIC admits plaintiffs' allegations of fraud.

Defendant FDIC advances two legal theories in support of its motion for summary judgment. First, the FDIC argues that under 12 U.S.C. § 1823(e) it may disregard any agreement which the Gunters seek to enforce against the FDIC. At oral argument and in its post-argument brief, the FDIC emphasized a related argument — i. e. that federal common law allows the FDIC to disregard any fraud upon which the Gunters rely in seeking to invalidate the note.¹ Second, the FDIC contends that Section 29 of the Exchange Act precludes the use of the fraud allegation by the Gunters against the FDIC in its capacity as insurer because it acquired the Gunter note in good faith, for value, and without actual knowledge of any violations of the securities laws. Plaintiffs respond in several ways. First, they argue that a transferee of a note takes no greater rights than his transferor had. Second, they insist that 12 U.S.C. § 1823(e) is inapplicable on these facts. Third, they contend that there is no principle of federal common law which protects the FDIC. Fourth, they contend that the FDIC has failed to satisfy the requirements of Section 29 of the Exchange Act because the FDIC has not really acted in two separate capacities with respect to its handling of the Gunter note and further because the FDIC had notice of defenses to collection on the note. Finally, they maintain that in any event Section 29 provides no defense to their claims based on Securities Act Section 17 and common law fraud. In reply to the latter argument the FDIC argues that for several reasons the Gunters have no cause of action under Section 17 and further that under common law, bona fide purchaser principles the FDIC had no notice of any fraud when it obtained the note in question.²

I. 12 U.S.C. § 1823(e).

Defendant's primary argument, based on 12 U.S.C. § 1823(e), relies upon the following language from that provision:

No agreement which tends to diminish or defeat the right, title or interest of the Corporation in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the Corporation unless such agreement (1) shall be in writing, (2) shall have been executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the bank, (3) shall have been approved by the board of directors of the bank or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (4) shall have been, continuously, from time of its execution, an official record of the bank.

Although there are several cases dealing with the applicability of 12 U.S.C. § 1823(e), none are very helpful in resolving the precise issue confronting this Court. Section 1823(e) immunizes the FDIC from such defenses to payment on a note as collateral agreements to make future loans, FDIC v. Allen, CA No. C78-592A (N.D.Ga. ...