OCI Mortgage Corp. v. Marchese

• Decision Date: 20 March 2001
• Docket Number: (SC 16300)
• Court: Connecticut Supreme Court
• Parties: OCI MORTGAGE CORPORATION v. CAROLE N. MARCHESE ET AL.

255 Conn. 448

774 A.2d 940

OCI MORTGAGE CORPORATION v. CAROLE N. MARCHESE ET AL.

(SC 16300)

Supreme Court of Connecticut.

Argued December 5, 2000.

Officially released March 20, 2001.

Borden, Norcott, Katz, Palmer and Vertefeuille, JS. Matthew B. Woods, for the appellant (plaintiff).

Edward T. Murnane, Jr., with whom, on the brief, was Gary A. Mastronardi, for the appellees (named defendant et al.).

Opinion

KATZ, J.

The issue presented in this certified appeal is whether the Appellate Court properly concluded that 12 U.S.C. § 1823 (e),¹ codifying the doctrine established in D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp., 315 U.S. 447,62 S. Ct. 676,86 L. Ed. 956 (1942)(D'Oench, Duhme doctrine), did not apply to the defendants Carole N. Marchese and Anthony J. Marchese² to bar their defenses of setoff and payment of a mortgage note issued by them to a savings and loan association that later had been declared insolvent. The plaintiff, OCI Mortgage Corporation (OCI), had acquired the mortgage note after the savings and loan association's failure, and initiated this foreclosure action on the defendants' property. The Appellate Court concluded that, because the defendants, pursuant to a subsequent debenture agreement, had loaned the savings and loan association substantially more than the original mortgage note, and because the savings and loan association had defaulted on the interest payments under the debenture, which, subsequent to the debenture, had been tied to the mortgage payments, the defendants had executed a valid setoff prior to the savings and loan association's insolvency. OCI Mortgage Corp. v. Marchese, 56 Conn. App. 668, 682, 745 A.2d 819 (2000). We conclude that no setoff occurred in this case prior to the savings and loan association's insolvency and that 12 U.S.C. § 1823 (e) applies to bar that defense. Accordingly, we reverse the judgment of the Appellate Court.

The opinion of the Appellate Court reveals the following facts. On September 13, 1985, the defendants "executed a promissory note in the amount of $220,000, payable to Community Federal Savings and Loan Association [association], and secured by a mortgage on property that the defendants owned in Southport. While the note was still outstanding, the defendant Carole N. Marchese lent [the association] $900,000 pursuant to a subordinated debenture agreement.³ Thereafter, [the defendant] Carole N. Marchese and [the association] agreed that the defendants' mortgage note would be paid by applying [the association's] interest payments on the debenture to the defendants' monthly mortgage payments.⁴ In October, 1989, [the association] defaulted on its interest payments." (Internal quotation marks omitted.) Id., 670.

"The defendants mailed a letter to [the association] on November 14, 1989, giving written notice pursuant to § 10.01 of the [subordinated debenture] agreement.⁵ The letter stated that if the default was not cured [within the fifteen day grace period provided in the agreement], the defendants `will exercise all rights available to them not only under Section 10.02 of the foregoing Subordinated Debenture Agreement, but also under statutory and common law.' No further letter or notification followed before [the association's] demise." Id., 676 n.3.

On December 7, 1989, the association "was declared insolvent and the Resolution Trust Corporation [Resolution Trust] was appointed as its receiver in bankruptcy.⁶ [Resolution Trust] assigned the defendants' mortgage and loan documents to Fairfield Affiliates, the original plaintiff [in this action]. Fairfield Affiliates then assigned the defendants' note and mortgage to [OCI] and OCI was substituted as the plaintiff.⁷

"The trial court referred the case to an attorney trial referee [who heard testimony on June 21, 1996 and accepted the parties' stipulation of facts and exhibits]. After the trial concluded, the attorney trial referee filed her report, in which she recommended that judgment enter in favor of the defendants. Specifically, the attorney trial referee found that [Resolution Trust] knew about the agreements between [the association] and the defendants, and that [a]ll subsequent assignees of the [defendants'] mortgage note ... including the plaintiff, OCI, accepted assignment of the note with notice of the $900,000 debt owed to the defendants, as well as the defendants' claim of set-off and payment. "[OCI] moved to correct various portions of the attorney trial referee's report. The attorney trial referee, however, denied the majority of [OCI's] requests. [OCI] then filed exceptions to the attorney trial referee's report, as well as an objection to the acceptance of the report.

"The trial court sustained [OCI's] objection to the acceptance of the attorney trial referee's report. The [trial] court ruled that, pursuant to 12 U.S.C. § 1823 (e), [Resolution Trust] is entitled to the same protection as the Federal Deposit Insurance Corporation (FDIC). According to 12 U.S.C. § 1823 (e), [n]o agreement which tends to diminish or defeat the interest of the [FDIC] in any asset acquired by it ... as receiver of any depository institution, shall be valid against the [FDIC] unless such agreement ... [is] executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with acquisition of the asset by the depository institution. The [trial] court concluded that because the execution of the defendants' mortgage and the execution of the subordinated debenture agreement were not contemporaneous, the subordinated debenture agreement was not valid against [Resolution Trust], and, therefore, it was not valid against [Resolution Trust's] assignees. The trial court remanded the case to the attorney trial referee, directing the referee to proceed in a manner not inconsistent with the trial court's memorandum of decision." (Internal quotation marks omitted.) OCI Mortgage Corp. v. Marchese, supra, 56 Conn. App. 670-71.

The defendants appealed from that decision to the Appellate Court, which dismissed the appeal, concluding that, because the trial court had sustained the objection to the attorney trial referee's report and ordered that the case "`proceed in a manner not inconsistent with'" that determination, no appealable final judgment had been rendered. OCI Mortgage Corp. v. Marchese, 48 Conn. App. 750, 752-54, 712 A.2d 449 (1998). Thereafter, the parties entered into a stipulation in order to obtain a final judgment from which the defendants properly could appeal, and, in accordance with that stipulation, the trial court rendered a judgment of strict foreclosure. The defendants then appealed from that judgment to the Appellate Court. See OCI Mortgage Corp. v. Marchese, supra, 56 Conn. App. 672.

The Appellate Court determined that the balance of the mortgage note had been set off against the subordinated debenture by operation of law and that, therefore, no agreement existed as a predicate to the application of 12 U.S.C. § 1823 (e). Id., 679. Similarly, the Appellate Court concluded that the setoff had extinguished the mortgage note, thereby eliminating it as an asset of the association, before the association had been declared insolvent. Id. In addition, the court determined that the mortgage note and the debenture had been "sufficiently bound together to constitute a bilateral agreement for purposes of avoiding [12 U.S.C. § 1823 (e) and] the D'Oench, Duhme doctrine." Id., 682. Finally, citing equitable considerations, the court concluded that allowing OCI to foreclose on the mortgage when the defendants had been owed far more than the balance due on the note by OCI's predecessor in interest would "[shock] the judicial conscience." Id., 683. The Appellate Court reversed the judgment of strict foreclosure and remanded the case with direction to render judgment for the defendants. Id.

We granted OCI's petition for certification, limited to the following issue: "Did the Appellate Court properly conclude that 12 U.S.C. § 1823 (e) and the doctrine of D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp., [supra, 315 U.S. 447], did not apply to the defendants so as to bar their defenses of setoff and payment of the mortgage note?" OCI Mortgage Corp. v. Marchese, 253 Conn. 903, 753 A.2d 937 (2000). This appeal followed.

I

This case has its origins in the widespread failure of banks and savings and loan associations during the mid-1980s and early 1990s. The federal government, as the insurer of these institutions through the FDIC and the Federal Savings and Loan Insurance Corporation and its successor, Resolution Trust; see footnote 6 of this opinion; stepped in to bail out the vast majority of these failed institutions. See 1 Federal Deposit Insurance Corporation, Managing the Crisis: The FDIC and RTC Experience 1980-1994 (1998) pp. 4-5 (Managing the Crisis) (noting that at height of banking crisis between 1988 and 1992, there was average of one federally insured bank or savings and loan association failure per day). The FDIC and Resolution Trust successfully controlled, liquidated and resolved literally thousands of federally insured banks and savings and loan associations and, while avoiding any major disruptions, managed to stabilize the nation's banking system. Id., pp. 4, 46.

"The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ... gives the receivers of failed savings and loan institutions wide-ranging powers to consolidate and liquidate those institutions." Nashville Lodging Co. v. Resolution Trust Corp., 59 F.3d 236, 241 (D.C. Cir. 1995). As the receiver of a failed savings and loan association, Resolution Trust attempts to maximize the return for its assets, often selling them as quickly as possible for the highest available price. See Suffield Bank v. Berman, 228 Conn. 766, 778, 639 A.2d 1033 (1994) (discussing FDIC's role as receiver of failed bank); see also 12 U.S.C. § 1821 (d) (13) (...