Notrica v. F.D.I.C.

• Decision Date: 17 August 1993
• Docket Number: Nos. 92-55236,92-55939,s. 92-55236
• Citation: 2 F.3d 961
• Parties: Leon NOTRICA, Plaintiff-Appellant-Cross-Appellee, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Vernon Savings and Loan Association, FSA, Defendant-Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 961

2 F.3d 961

Leon NOTRICA, Plaintiff-Appellant-Cross-Appellee, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Vernon Savings and Loan Association, FSA Defendant-Appellee-Cross-Appellant.

Nos. 92-55236, 92-55939.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 13, 1993.

Decided Aug. 17, 1993.

Carolyn Chapman, San Diego, CA, for plaintiff-appellant-cross-appellee.

Dan Woods, Brobeck, Phleger & Harrison, Los Angeles, CA, for defendant-appellee-cross-appellant.

Appeal from the United States District Court for the Southern District of California.

Before WOOD, Jr. ^* , REINHARDT, and RYMER, Circuit Judges.

RYMER, Circuit Judge:

Leon Notrica appeals the district court's grant of summary judgment in favor of the Federal Deposit Insurance Corporation ("FDIC"). Notrica contends that the district court incorrectly determined that there are no triable issues of material fact with respect to either Notrica's claim that his security interest in a parcel of real property is senior to a lien held by the FDIC, or his claim that the FDIC is liable to him for the balance due on a promissory note executed by Notrica and a third party. The FDIC appeals the district court's denial of its post-judgment motion for attorneys' fees. We have jurisdiction under 28 U.S.C. Sec. 1291, and we affirm both the district court's grant of summary judgment and its order that each side bear its own attorneys' fees.

I

In December 1983, Sandco American, Inc. ("Sandco") exercised an option to purchase from Campo de Leon ("CDL") a parcel of real property located in San Marcos, California ("Santalina Hills"). Under the terms of the option agreement, the purchase price was set at $2,000,000: $750,000 payable in cash, and $1,250,000 due on a promissory note secured by a first deed of trust on the Santalina Hills property. The option agreement and accompanying escrow instructions provided, in part, that "CDL shall subordinate its secured position [with respect] to the property to a construction loan upon the recordation of the final subdivision map and recordation of a construction loan to Sandco American, Inc. or to its assignee." Sandco and CDL opened escrow on January 30, 1984.

On March 8, 1984, Sandco executed and delivered to Vernon Savings & Loan Association ("Vernon") a promissory note payable to Vernon in the principal amount of $13,513,000. The purpose of the loan was to finance Sandco's subdivision and development of a manufactured housing project at Santalina Hills, and the promissory note was secured by a deed of trust on the Santalina Hills property. As part of the loan agreement, Sandco and Vernon entered into a Profits Assignment, which provided that after Sandco had successfully discharged its obligations under the promissory note, Vernon was entitled to receive certain future profits deriving from the Santalina Hills real estate development project.

On March 9, 1984, Sandco and CDL restructured their original real estate purchase transaction by amending their option agreement and escrow instructions, and executing a subordination agreement. According to the new terms and conditions agreed upon by the parties, Sandco was required to make a $1,000,000 cash payment to CDL, and would execute and deliver to CDL a $1,000,000 promissory note. As security for the promissory note, CDL was given a "second and subsequent" deed of trust on Santalina Hills, and deeds of trust on two other Sandco properties. The subordination agreement expressly provided that CDL's deed of trust covering Santalina Hills would be subordinate to the superior lien held by Vernon on the same property.

After escrow closed for the sale of Santalina Hills from CDL to Sandco and the deeds of trust and subordination agreement were duly recorded, Sandco began to experience financial difficulty. Sandco defaulted on the $1,000,000 promissory note held by CDL and filed for bankruptcy protection under Chapter 11. Vernon then declared its $13,513,000 construction loan to Sandco to be in default.

On March 20, 1987, the Federal Home Loan Bank Board appointed the Federal Savings and Loan Insurance Corporation ("FSLIC") as receiver of Vernon. In August 1987, the FSLIC completed a non-judicial foreclosure of the Santalina Hills property under the terms of the first deed of trust formerly held by Vernon. Prior to the application of the net proceeds of the foreclosure sale, Sandco owed the FSLIC over $9.2 million.

On June 2, 1988, CDL filed suit in California state court against the FSLIC, Vernon, and several other parties. CDL's complaint alleged twelve causes of action, all arising from the various agreements with respect to the Santalina Hills property and Sandco's default on its several loan obligations. In December 1988, CDL dissolved and assigned all of its claims to its president, Leon Notrica ("Notrica"), in his individual capacity. The FSLIC removed Notrica's suit to United States District Court for the Southern District of California. The FDIC was substituted in place of the FSLIC, and all other defendants were dismissed from the case. The FDIC moved for summary judgment, arguing that D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942) and 12 U.S.C. Sec. 1823(e) barred each of CDL's claims. The district court agreed, and on January 17, 1992, the court entered an order granting the FDIC's motion for summary judgment.

On February 21, 1992, the FDIC filed a post-judgment motion seeking $413,123.75 in attorneys' fees. The FDIC argued that it was the prevailing party on Notrica's contract-based claims and therefore, was entitled to attorneys' fees under California Civil Code Sec. 1717. Noting that "[w]hile the FDIC ultimately prevailed, it did not prevail on questions of contract enforcement but rather from Federal law policy as outlined in [D'Oench, Duhme ] and 12 U.S.C. Sec. 1823(e)," the district court determined that neither side was entitled to an award of attorneys' fees and denied the FDIC's motion.

II

We review de novo the district court's grant of summary judgment. Hay v. First Interstate Bank, N.A., 978 F.2d 555, 557 (9th Cir.1992). "The proper inquiry is whether, viewing the evidence in a light most favorable to the nonmoving party, there are any genuine issues of material fact, and whether the district court correctly applied the relevant substantive law." Id.

Whether a district court applied the correct legal standard regarding a party's entitlement to attorneys' fees is an issue of law reviewed de novo. United States for Use and Benefit of Reed v. Callahan, 884 F.2d 1180, 1185 (9th Cir.1989), cert. denied, 493 U.S. 1094, 110 S.Ct. 1167, 107 L.Ed.2d 1069 (1990).

III

A

Arguing that Vernon, a Texas corporation, was not legally authorized to do business in California, Notrica claims that each of Vernon's California transactions, including Vernon's $13,513,000 loan to Sandco and the deed of trust securing the loan, is void and therefore unenforceable. As a result, Notrica concludes that CDL's subordination agreement with Sandco, under which CDL's security interest (now held by successor-in-interest Notrica) in Sandco's Santalina Hills property was subordinated to the deed of trust held by Vernon (and now the FDIC), is also void. Further, Notrica maintains that D'Oench, Duhme and section 1823(e) cannot apply to bar his illegality claim because CDL neither borrowed from Vernon, nor was CDL some other form of obligor of Vernon's who now is attempting to avoid its commitment on a particular debt or monetary obligation transferred from Vernon to the FDIC. As CDL was a party completely uninvolved in the transaction which Notrica now challenges as illegal, Notrica contends that he is in a position superior to that of a typical claimant against whom section 1823(e) and D'Oench, Duhme are invoked.

Even assuming that Vernon were not authorized to do business in California, or otherwise operated in violation of California law, there is no support for Notrica's sweeping contention that all of Vernon's California transactions and agreements are void. Notrica fails to demonstrate a coherent legal basis for his challenge to the Vernon-Sandco loan agreement, nor does Notrica explain how a valid (although potentially voidable) contract to which CDL neither consented nor was a party, affects the viability of Sandco's independent subordination agreement with CDL. Thus, the subordination agreement is an enforceable contract, and under its express terms, the FDIC's security interest in the Santalina Hills property was duly recorded first, and is senior to any rights in the property held by Notrica.

Moreover, Notrica's attempt to circumvent D'Oench, Duhme and section 1823(e) is similarly untenable; each serves to preclude Notrica's illegality claim. D'Oench, Duhme "precludes obligors from asserting side deals or secret agreements which may mislead bank examiners against the FDIC to diminish the value of written loan obligations." FDIC v. Zook Bros. Constr. Co., 973 F.2d 1448, 1450 (9th Cir.1992). "Section 1823(e) bars the use of extrinsic agreements to diminish or defeat the FDIC's interest in an asset, unless the documents meet specific requirements." ¹ Id. at 1450-51. Together the effect of D'Oench, Duhme and section 1823(e) is "to allow federal and state bank examiners to rely [exclusively] on a bank's records in evaluating the worth of a bank's assets." Id. at 1451 (quoting Langley v. FDIC, 484 U.S. 86, 91, 108 S.Ct. 396, 401, 98 L.Ed.2d 340 (1987)).

In the more typical D'Oench, Duhme case, a borrower (e.g., Sandco), seeking to free itself of its contractual obligation to pay the amount remaining on its promissory note, would be the party claiming that a Savings & Loan in FDIC receivership (e.g., Vernon) did business illegally. Under these hypothetical facts, if the borrower's attempt to avoid liability were predicated on its argument that the Savings and Loan's illegal behavior rendered the loan...