Howell v. Continental Credit Corp.

• Decision Date: 17 July 1981
• Docket Number: No. 80-1566,80-1566
• Citation: 655 F.2d 743
• Parties: Lillian Lincoln HOWELL and Lincoln Television, Inc., Plaintiffs-Counter-Defendants-Appellants, v. CONTINENTAL CREDIT CORP., and The Drovers National Bank of Chicago, Defendant, and The Federal Deposit Insurance Corporation, Defendant-Counter-Plaintiff-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 743

655 F.2d 743

Lillian Lincoln HOWELL and Lincoln Television, Inc. Plaintiffs-Counter-Defendants-Appellants, v. CONTINENTAL CREDIT CORP., and The Drovers National Bank of Chicago, Defendant and The Federal Deposit Insurance Corporation Defendant-Counter-Plaintiff-Appellee.

No. 80-1566.

United States Court of Appeals Seventh Circuit.

Argued Jan. 16, 1981.

Decided July 17, 1981.

Carol R. Thigpen, Jenner & Block, Chicago, Ill., for plaintiffs-counter-defendants-appellants.

Robert C. Knuepfer, Asst. U. S. Atty., Chicago, Ill., for defendant-counter-plaintiff-appellee.

Before FAIRCHILD and PELL, Circuit Judges, and SPEARS, Senior District Judge. ^*

PELL, Circuit Judge.

This case arises from a highly complex but not well-managed financial transaction through which the Federal Deposit Insurance Corporation (FDIC) became the purported lessor of various items of equipment to appellant Howell as lessee. The FDIC is now claiming the amounts due under the leases and the appellants defend on the ground that the original lessor, Continental Credit Corp. (Continental) failed to provide adequate consideration. The district court granted summary judgment in favor of the FDIC dismissing the appellants' complaint on the ground that the leases did not explicitly require Continental to furnish the consideration appellants now claim. It concluded, therefore, that any agreement requiring such consideration must have been a "secret agreement," and thus held, relying upon 12 U.S.C. § 1823(e) and D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), that the agreement was not binding upon the FDIC. Howell has appealed the district court's summary judgment that the leases were enforceable against her.

I

Lillian Lincoln Howell is the sole shareholder of Lincoln Television Inc., (Lincoln) also an appellant, a California corporation licensed to operate a television station in San Francisco, California. ¹ In 1974, Mrs. Howell determined the need for various broadcasting equipment to be used by Lincoln and on October 11 of that year, she placed orders with RCA for more than $856,000 worth of equipment. RCA required a down payment of 2% of the total amount ordered, and a down payment of up to 35% for some of the custom-made equipment, to be submitted with the orders. RCA also required an irrevocable letter of credit from appellant in favor of RCA for an amount sufficient to cover the full unpaid balance of the purchase price plus sundry other costs and expenses. By the beginning of 1976, appellant had paid RCA a total of $280,000 and furnished a $500,000 letter of credit.

Although the exact date of the decision is open to question, sometime during the occurrence of these events appellant became aware of the tax advantages to be gained by structuring her acquisition of the equipment as a lease as opposed to a purchase. On March 1, 1976, therefore, appellant and Continental entered into a lease of the equipment with Continental serving as lessor and appellant as lessee. The precise rationale behind appellant's putting herself in the unfortunate position of being both the lessee and the purchaser of the same equipment has eluded this court. It does appear that in order for Continental to be able to purchase the equipment, it required a bank loan and the signed leases were needed to serve as collateral. There seems little question, however, that the parties intended Continental to acquire title to the equipment in order to lease the equipment to Howell. Eventually, Continental did discount the leases with the Drovers National Bank in Chicago, Illinois (Drovers) and assigned all of its rights under the leases in return for more than $900,000 to be used to purchase the equipment. To secure her performance under the leases, appellant pledged over $1 million worth of common stock which she deposited in an escrow account with Drovers.

For awhile, the transaction progressed as the parties had planned and Continental used some of the proceeds from Drovers to purchase some of the equipment. It soon became clear, however, that Continental was using the bulk of the money for its own benefit elsewhere. Although Continental had placed purchase orders with RCA for the equipment already ordered by Howell and had instructed RCA to bill it directly for the amounts due, RCA apparently never acknowledged nor accepted these orders. In any event, Continental never paid RCA for the $856,000 worth of equipment covered by the leases at issue in this case. As a result of this failure, RCA began to draw upon appellant's letter of credit. Appellant authorized payment under the letter of $316,778.30 on March 11, 1976, ten days after she had executed the leases in favor of Continental. RCA withdrew a further $108,221.70 on April 15, 1976, two days after Continental had received the proceeds from the discounting to Drovers.

In spite of the fact that appellant was aware that RCA was drawing upon her letter of credit, she began payment of the rentals due under the leases to Drovers. Appellant paid the May and June 1976 rentals, but refused to pay the July rental after notifying Drovers of Continental's failure to purchase the equipment. Appellant claimed that Continental's acquisition of title to the equipment was required under the leases and that the failure to do so was a failure to provide consideration for the rental payments. As a result of appellant's failure to pay the rentals, Drovers seized the stock it was holding in escrow. Appellant then initiated this action to secure the stock's return and to have the leases determined to be void.

In the ensuing litigation, both parties filed motions for summary judgment which were denied. Appellant claimed that the leases were invalid because Continental had failed to obtain ownership of the equipment. Drovers relied upon a clause in the leases stating that appellant waived the right to assert against Continental's assignee any defense she might have against Continental. The court denied the motions on August 25, 1977, because it found, inter alia, that there was a genuine issue of material fact as to whether the bank took the assignment with notice of appellant's defenses. Under the Uniform Commercial Code as codified in Ill.Rev.Stat. ch. 26 § 9-206(1), such notice would have precluded Drovers from enforcing the waiver clause. Regarding the duty of Continental to acquire title to the equipment, the court stated:

The lease is written in standard boiler plate language and does not specifically define Continental's obligations with respect to the purchase of the equipment from the vendors (RCA). It is evident that there was some agreement, presumably oral, between Continental and Howell whereby Continental would obtain title to the equipment it was leasing to the plaintiffs.

This daedalian situation was further confused on January 19, 1978, when the Comptroller of the Currency determined that Drovers would no longer be able to meet its obligations to depositors. Accordingly, he declared Drovers insolvent and appointed the FDIC as receiver. The FDIC consequently executed a purchase and assumption transaction which consisted of two agreements. Under the first agreement, the FDIC transferred Drover's deposit liabilities, $130,000,000 in cash, and a low-risk installment loan portfolio to a new bank, The Drovers Bank of Chicago, which paid a $3,125,501 premium for the value of the ongoing business. Pursuant to the second agreement, the FDIC as receiver transferred all of Drover's assets which were not readily marketable to the FDIC in its corporate capacity. Included among these assets was the "substandard" loan portfolio containing the Howell leases.

After being allowed to intervene in the present litigation, the FDIC counterclaimed against appellant contending that the leases were valid and enforceable according to their terms, and moved for summary judgment. The FDIC's motion claimed that appellant was estopped to defend against the FDIC upon her claims against Continental under D'Oench, supra and § 1823(e). On October 16, 1979, the district court granted the motion relying upon its prior factual finding that the leases contained no explicit obligation of Continental to obtain title to the equipment, and that any such obligation could only have been contained in a "secret agreement" which both D'Oench and § 1823(e) made unenforceable against the FDIC.

II

In D'Oench, the plaintiff executed a note in favor of a bank in order to deceive a state bank examiner by falsely inflating the bank's assets. The maker and the bank had a separate agreement whereby the bank would not seek to enforce the note. This agreement, however, was not recorded in the bank's records for obvious reasons. A year later, in 1934, the FDIC was formed and relied upon the state bank examiner's sanction in granting insurance protection to the bank. In 1938, the bank required a loan from the FDIC to remain solvent, and the Corporation acquired the plaintiff's note as collateral for the loan. When the bank finally did fail, the FDIC sought to enforce the note and the plaintiff protested upon the basis of the separate agreement and upon the ground that the note had been issued without adequate consideration. The Supreme Court held that the note was enforceable in the hands of the FDIC. Finding that the plaintiff was equitably estopped to defend upon the ground of the separate "secret" agreement, the Court applied the well-established rule disallowing an individual to profit from or defend upon the basis of his own wrongful act. Justice Douglas speaking for the Court noted:

If the secret agreement were allowed as a defense in this case, the maker of the note would be enabled to defeat the purpose of the statute by taking advantage of an undisclosed and fraudulent arrangement which the statute condemns and which the maker of the note made possible.

315 U.S. at 461, 62 S.Ct. at...