In re NBW Commercial Paper Litigation, 90-1755 (RCL)

Decision Date11 March 1992
Docket NumberNo. 90-1755 (RCL),Civ. A. No. 91-0626 (RCL).,90-1755 (RCL)
Citation826 F. Supp. 1448
PartiesIN RE NBW COMMERCIAL PAPER LITIGATION. AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES, Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as receiver of the National Bank of Washington, Defendant.
CourtU.S. District Court — District of Columbia

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

William F. Sheehan, William R. Galeota, Christopher E. Palmer, Shea & Gardner, Washington, D.C., for AFSCME (C.A. 91-0626), Bafton Corp., et al. (C.A. 91-1838), Colson Servs. Corp. (C.A. 91-1839).

Michael Evan Jaffe, Howard B. Possick, Arent, Fox, Kintner, Plotkin & Kahn, Washington, D.C., for George Hyman Constr. Co., et al. (C.A. 90-1297).

Richard O. Duvall, Stephen A. Bogorad, Charles M. Steele, Dunnells, Duvall & Porter, Washington, D.C., for Kaempfer Co., et al. (C.A. 90-1696), Brent Scowcroft (C.A. 91-0996), Thomas Dodd (C.A. 90-1875), Clarendon Square Associates, et al. (C.A. 90-1874).

F. Joseph Nealon, Amy Sanborn Owen, Marianne P. Eby, Ballard, Spahr, Andrews & Ingersoll, Washington, D.C., for Intern. Ass'n of Machinists and Aerospace Workers (C.A. 90-1822).

John H. Harman, William N. Coggins, Silver Spring, Md., for Columbia Real Estate Title Ins. Co. (C.A. 90-1702).

Thomas W. Queen, Joseph L. Ruby, Wiley, Rein & Fielding, Washington, D.C., for Telemet America, Inc. (C.A. 90-1753).

Susan G. Braden, Anderson Kill Olick & Oshinsky, Washington, D.C., for Sherman R. Smoot Corp. (C.A. 90-1795).

Aaron Handleman, Jeffrey J. Hines, Eccleston & Wolf, Washington, D.C., for World Plan Executive Council, et al. (C.A. 90-1841), Ward Corp., et al. (C.A. 90-1810).

David J. Frantz, Walter G. Birkel, Conlon, Frantz, Phelan, Kanpp, Pires & Birkel, Washington, D.C., for National Theater Corp., et al. (C.A. 90-1837).

Philip M. Musolino, Loewinger, Brand & Kappstatter, Washington, D.C., for Bresler & Reiner, Inc., et al. (C.A. 90-3017).

John B. Connor, Leslie M. Alden, Verner, Liipfert, Bernhard, McPherson & Hand, McLean, Va., for Richard Barber Associates Inc. (C.A. 90-3089).

Charles Lee Eisen, Christopher M. McMurray, Kirkpatrick & Lockhart, Washington, D.C., for Clinton Co., et al. (C.A. 91-0997), Route 35 Shrewsbury Ltd. Part., et al. (C.A. 90-1766).

Craig C. Reilly, Murphy, McGettigan & West, P.A., Alexandria, Va., for T.J.B., Inc. (C.A. 91-1704).

George A. Fisher, Washington, D.C., for Jacob A. Stein, et al. (C.A. 91-1706).

William L. Martin, Ellen D'Alelio, Steptoe & Johnson, Washington, D.C., for FDIC (all cases except C.A. 90-1297).

Ronald J. Jessamy, Jessamy, Fort & Botts, Washington, D.C., for FDIC (in C.A. 90-1297 only).

MEMORANDUM OPINION

LAMBERTH, District Judge.

This case is one of the 43 consolidated cases that comprise the litigation captioned In re NBW Commercial Paper Litigation, Master File No. 90-1755. In a status call attended by attorneys from virtually every law firm in the District of Columbia, all counsel agreed to use the action brought by the American Federation of State, County, and Municipal Employees ("AFSCME") as a test case for plaintiffs' claims against the Federal Deposit Insurance Corporation ("FDIC"), in its capacity as receiver for the National Bank of Washington ("NBW").1 By agreement of all counsel, the defendant, the FDIC, in its capacity as receiver of NBW, filed two motions to dismiss. The first motion, if granted, would eliminate all of AFSCME's claims and spell doom for the vast majority of claims in the other 20 cases against the FDIC, which are substantially identical to this one.2 The second motion, if granted, would result in the dismissal of all other claims, including those raised by other plaintiffs, but not by AFSCME.3 Because both motions involve similar issues regarding the commonlaw D'Oench doctrine and certain sections of FIRREA which may create an absolute defense from liability for the FDIC, much of the court's initial discussion of the law will apply to both motions.

I. The Facts

All 43 cases arise from the failure of the National Bank of Washington ("NBW"). For the purposes of this motion, the court must accept the plaintiffs' rendition of the facts; the facts in most of the cases are not substantially in dispute.4 Washington Bancorporation ("WBC")5, the holding company which owned NBW, decided to issue commercial paper in July of 1984. NBW served as the exclusive agent of WBC for the purposes of marketing this commercial paper. To support this program, WBC obtained backup lines of credit from various major banks. In 1989, these banks included Marine Midland Bank, Chase Manhattan Bank, Manufacturers Hanover Bank, and Bank of New York. These backup lines of credit were crucial to the commercial paper program because WBC's debt covenants with Mutual Life Insurance Company of New York required WBC to maintain supporting lines of credit that accounted for 50% of its outstanding commercial paper; in addition, the Federal Reserve Bank of Richmond advised WBC that Federal Reserve guidelines also required supporting lines of credit equal to 50% of the outstanding commercial paper.

All of the plaintiffs in the consolidated cases, including AFSCME, were customers of NBW. All of these companies and individuals invested funds through NBW, most on an overnight basis. All claim to have preferred a low-risk approach to investment and to have communicated this preference to the appropriate officials at NBW. A recitation of the facts of AFSCME's particular case is sufficient to explain generally the events which support all of the plaintiffs' claims. Under a Master Repurchase Agreement, NBW agreed to invest AFSCME's funds in appropriate financial instruments and then to repurchase these financial instruments the following day. AFSCME invested solely in U.S. Treasury Notes and other U.S. government obligations until early 1988, when NBW offered to sell AFSCME commercial paper on an overnight basis. AFSCME alleges that officers of NBW told them that WBC commercial paper was as safe an investment as the government securities which AFSCME had previously been purchasing. Further, AFSCME claims that at no time were they aware that the commercial paper which they were purchasing was issued by WBC, the parent corporation of NBW.

By 1990, WBC and NBW found themselves in extreme financial difficulty. Because of the financial instability of NBW, the four banks which provided the backup lines of credit supporting WBC commercial paper cancelled their lines of credit in early April of 1990; no other banks could be found to provide alternate lines of credit. At this time, WBC and NBW lacked the cash flow to pay off the vast majority of the $45 million dollars in commercial paper that was outstanding. Because, however, investors, such as AFSCME and the other plaintiffs, continued to roll over their money from one overnight investment to another, NBW was not initially faced with the prospect that it would have to default on the commercial paper. AFSCME alleges that NBW did not inform any of the plaintiffs of the failure of its lines of credit (or of the bank's precarious financial position) and that the bank continued to invest their funds in WBC commercial paper. On May 2, 1990, representatives of the Federal Reserve and the Office of the Comptroller of the Currency met with NBW directors to warn them that the further issuance of commercial paper was an unsound practice. On Friday, May 4, 1990, NBW invested $1,800,000 of AFSCME's money in WBC commercial paper that was to mature on Monday, May 7, 1990. On May 7, 1990, WBC announced that it was defaulting on the $25,800,000 of commercial paper that was to mature on that day; the bank also defaulted on $10,900,000 of commercial paper which matured subsequently. WBC filed for Chapter 11 bankruptcy on August 1, 1990, and, on August 10, 1990, the Comptroller of the Currency closed NBW and appointed the FDIC as receiver.

II. Procedural History

Following the procedures set out in the Financial Institutions Return, Recovery, and Enforcement Act of 1989 ("FIRREA"), AFSCME filed an administrative claim with the FDIC, as receiver for NBW, demanding the return of the $1.8 million which they had invested in commercial paper. The FDIC rejected this claim within the 180 days allotted by the statute. The FDIC's notice to AFSCME stated:6

After review of AFSCME's claim, the FDIC has determined that AFSCME's claim is totally disallowed. The claimant has not proven its claim to the satisfaction of the receiver based on applicable principles of common and statutory law, including D'Oench, Duhme and Co. v. FDIC, 315 U.S. 447 62 S.Ct. 676, 86 L.Ed. 956 (1942), 12 U.S.C. §§ 1821(d)(9), 1823(e) and governing principles applicable to the awards of punitive damages against the FDIC. Letter from FDIC to AFSCME (Feb. 13, 1991).

Having exhausted their administrative remedy as required by law, AFSCME filed suit in this court on March 6, 1991, alleging violations of federal securities laws (both the Securities Act of 1933 and the Securities Exchange Act of 1934), various common law claims, and violations of the District of Columbia's Blue Sky laws. Most of the other plaintiffs have filed similar actions, though some raise claims which AFSCME has not. Also consolidated in this action (for pretrial purposes only) are the plaintiffs' related actions against various individual directors of NBW.7 The individual directors have no direct involvement in this motion because they cannot raise the statutory and common law defenses peculiar to the FDIC when it assumes the responsibilities of a failed bank.

Thanks to the efforts of counsel for AFSCME and the FDIC, all parties agreed on October 3, 1991, to stay the consolidated actions pending the court's resolution of the FDIC's motion to dismiss the AFSCME complaint and its motion to dismiss or strike the remaining claims. The parties and the court agreed that resolution of these particular...

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