Merrill Lynch Mortg. Capital, Inc. v. F.D.I.C.

• Decision Date: 06 November 2003
• Docket Number: No. CIV.A. 02-01123(HHK).,CIV.A. 02-01123(HHK).
• Parties: MERRILL LYNCH MORTGAGE CAPITAL, INC., Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant.
• Court: U.S. District Court — District of Columbia

293 F.Supp.2d 98

MERRILL LYNCH MORTGAGE CAPITAL, INC., Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant.

No. CIV.A. 02-01123(HHK).

United States District Court, District of Columbia.

November 6, 2003.

COPYRIGHT MATERIAL OMITTED

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David R. Kuney, Sidley, Austin, Brown & Wood, LLP, Washington, DC, for Plaintiff.

Hugo A. Zia, Washington, DC, for Defendant.

MEMORANDUM OPINION

KENNEDY, District Judge.

Plaintiff, Merrill Lynch Mortgage Capital, Inc. ("Merrill"), brings this action against defendant, Federal Deposit Insurance Corporation ("FDIC"), as receiver for Superior Bank, FSB ("Superior"), alleging that it wrongfully seized funds from an account to which plaintiff had legal title. In the alternative, plaintiff alleges that defendant, as receiver, wrongly applied an offset to plaintiff's uninsured deposit claim, reducing its value. Plaintiff brings the present action pursuant to 12 U.S.C. § 1821(d)(6), which provides for judicial review of administrative adjudications of claims decided by FDIC in its role as a receiver for defunct financial institutions.

Before this court are the parties. motions for summary judgment. Upon consideration of the motions, the respective opposition thereto, and the record of this case, the court concludes that plaintiff's motion for summary judgment on the issue of wrongful seizure of funds must be granted and defendant's cross-motion on the same issue must be denied.

I. BACKGROUND

In March 2001, Merrill and Superior, a federally-insured savings and loan institution, entered into an agreement in which Merrill was to purchase, from time to time, large pools of residential mortgages originated by Superior. See Compl. Ex. A (Amended and Restated Purchase and Warranties Agreement, Mar. 1, 2001) ("Agreement"). The Agreement indicated that ownership and title over the mortgages, in a given pool, vested immediately with Merrill upon sale. Id. § 2.02. Indeed, "immediately upon transfer" of the mortgages, Merrill held "good and indefeasible title to, and [was] sole owner of, each Mortgage Loan subject to no liens, charges, mortgages, encumbrances or rights of others." Id. § 3.02(h).

Superior agreed to service the mortgages for Merrill, meaning that it collected principal and interest from individual mortgage borrowers, aggregated the funds, and remitted a monthly payment to Merrill, less certain expenses for servicing. Specifically, Superior was obligated to

segregate and hold all funds collected and received pursuant to each Mortgage Loan separate and apart from any of its own funds and general assets and establish and maintain at Superior Bank FSB one or more Custodial Accounts ... in the form of time deposit or demand accounts, which may be interest bearing, titled `Superior Bank FSB, in trust for Merrill Lynch Mortgage Capital, Inc.' Such Custodial Account shall be an Eligible Account.

Id. § 4.05. The Agreement defines "Eligible Account" as follows:

Either (A) a segregated account or accounts maintained at Superior Bank FSB, (B) a segregated account or accounts maintained with [some other solvent banking institution] ..., or (C) a trust account or accounts (which shall be a "special deposit account") maintained with the trust department of a federal or state chartered depositor institution or trust company, having capital and surplus of not less than $50,000,000, acting in its fiduciary capacity.

Agreement at 4.

In June 2001, after numerous other transactions under the Agreement, Merrill and Superior concluded a final sale of mortgages at a price of $60,941,127.73. Merrill withheld from the purchase price of the mortgages approximately $4,869,388 ("Offset") as security for Superior's performance of the Repurchase Obligation, which provided that Superior would buy back mortgages if they were defective according to the terms of the warranty in the Agreement.

In late July 2001, the Office of Thrift Supervision ("OTS") closed Superior and appointed as receiver FDIC, which succeeded to all of Superior's rights, titles, interests, obligations and liabilities, including those under the Agreement between Superior and Merrill. Initially, FDIC agreed to honor the Agreement and to keep servicing loans for Merrill. At the time, $10,084,567.43¹ remained in the account set up under Agreement § 4.05 ("Custodial Account") from mortgage payments received in July 2001 but not yet remitted to Merrill. In spite of its promise, in August 2001, FDIC breached the Agreement and refused to remit the $10 million remaining in the Custodial Account, effectively seizing those funds for the receivership proceedings. Merrill demanded the $10 million, arguing that the funds were a "special deposit" and therefore Merrill's sole property, not a general deposit or asset of the defunct Superior Bank. At the same time, and separately, Merrill demanded that FDIC repurchase certain mortgages because they had breached the warranty in the Agreement. FDIC refused both of Merrill's demands. Merrill then timely filed two administrative claims with FDIC, in its role as a federal agency; these claims largely repeated Merrill's earlier demands. Again, Merrill claimed that the $10 million in the Custodial Account were a "special deposit" to which Merrill had full title and that FDIC was obligated to remit the funds. Merrill also argued that FDIC was obligated to repurchase $36 million in mortgage loans, under the Agreement's warranty. In addition Merrill indicated that FDIC could apply the Offset of $4,869,388, which Merrill kept as security from the June 2001 transaction, to reduce FDIC's repurchase obligation of $36 million.

In April 2002, FDIC issued a final determination regarding Merrill's claims. With regard to the Custodial Account, it found that Merrill did not have title to the funds, the Custodial Account was a general deposit, and Merrill was not entitled to be paid off in full but had an uninsured deposit claim. That is, instead of having priority over all other claims to Superior's assets and a right to be paid in full, Merrill was to be paid a reduced pro rata share, probably about 65%, of its original deposit of about $10 million, just as Superior's other uninsured depositors would be paid according to the priority scheme in 12 U.S.C. § 1821(d)(11) of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. § 1811 et seq. FDIC's final determination also stated that FDIC had breached its repurchase obligation and that Merrill was entitled to approximately $6 million in repudiation damages. On these damages, however, Merrill had the priority of a general creditor, to be paid after uninsured deposit creditors. Since the uninsured deposit creditors were receiving only a pro rata share of their full claims, Merrill was unlikely to be paid at all on its repurchase damages. FDIC further found that Merrill's $4.8 million offset could only be applied to Merrill's uninsured deposit claim of $10 million, not its $6 million repurchase claim. FDIC therefore further reduced Merrill's uninsured deposit claim: It took the original deposit ($10,084,567), reduced it by the offset amount ($4,869,388) and applied to the remainder ($5,215,179) the pro rata share uninsured depositors were to receive-eventually, about 65% of what depositors originally had in their accounts. That is, under FDIC's determinations, Merrill eventually will receive about $3.4 million on a $10 million deposit claim once Superior's assets are liquidated. As a result, Merrill filed the present action. The bottom line, for Merrill, is as follows. If Merrill prevails on Count I, and the court finds the Customary Account to be a special deposit, Merrill will be entitled to full recovery and will receive about $10 million. If Merrill loses on Count I but prevails on Count II, Merrill will have an uninsured deposit claim but will be permitted to apply the offset against the repurchase claim (which it is unlikely to recover), and Merrill would receive about $6.55 million of its original deposit.

II. ANALYSIS

A. Legal Standard

Under Fed.R.Civ.P. 56, summary judgment shall be granted if the pleadings, depositions, answers to interrogatories, admissions on file and affidavits show that there is no genuine issue of material fact in dispute and that the moving party is entitled to judgment as a matter of law. Material facts are those "that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In considering a motion for summary judgment, the "evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Id. at 255, 106 S.Ct. 2505. But the non-moving party's opposition must consist of more than mere unsupported allegations or denials and must be supported by affidavits or other competent evidence setting forth specific facts showing that there is a genuine issue for trial. Fed.R.Civ.P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The non-moving party is "required to provide evidence that would permit a reasonable jury to find" in its favor. Laningham v. United States Navy, 813 F.2d 1236, 1242 (D.C.Cir.1987). If the evidence is "merely colorable" or "not significantly probative," summary judgment may be granted. Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505.

B. Count I: Special Deposit

Deposits can be categorized as either specific or general. Specific deposits are like bailments in which the bank becomes a bailee and the depositor retains title to the things or money deposited. Special deposits are not the property of a bank. If a bank fails, special deposits do not become part of the receivership estate, and therefore special depositors are entitled to be paid in full before other creditors of the bank. See, e.g., Union Elec. Light & Power Co. v. Cherokee Nat'l Bank of St. Louis, 94 F.2d 517, 519-20 (8th Cir.1938); Bank of Am. Nat'l...