Randolph v. Resolution Trust Corp.

• Decision Date: 19 July 1993
• Docket Number: No. 92-2394,92-2394
• Citation: 995 F.2d 611
• Parties: Robert L. RANDOLPH, et al., Plaintiff-Counter Defendants Appellants, v. RESOLUTION TRUST CORPORATION, As Receiver for First South Savings Association, Defendant-Counter Plaintiff Cross Plaintiff Third Party Plaintiff Appellant-Appellee, v. PHILLIPS, KING & SMITH, Attorneys at Law, et al., Defendants Cross Defendants Appellees, v. E. ASHLEY SMITH, P.C., et al. Third Party Defendants Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 611

995 F.2d 611

Robert L. RANDOLPH, et al., Plaintiff-Counter Defendants Appellants, v. RESOLUTION TRUST CORPORATION, As Receiver for First South

Savings Association, Defendant-Counter Plaintiff Cross Plaintiff Third Party Plaintiff Appellant-Appellee, v. PHILLIPS, KING & SMITH, Attorneys at Law, et al., Defendants Cross Defendants Appellees, v. E. ASHLEY SMITH, P.C., et al. Third Party Defendants Appellees.

No. 92-2394.

United States Court of Appeals Fifth Circuit.

July 19, 1993.

James L. Cornell, Tammy C. Manning, Gilpin, Paxson & Bersch, Houston, TX, David R. Boyd, Joseph G. Davis, Linda A. Madrid, Washington, DC, for RTC.

Miller B. Walker, Jr., Gregory Lynn Hennig, Houston, TX, for Randolph, et al.

Daniel K. Hedges, Porter & Clements, Houston, TX, for Ashley & Smith only.

J. Preston Wrotenbery, Hirsch, Glover, Robinson & Sheiness, Houston, TX, for Phillips, King & Smith.

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

Before WISDOM, DAVIS, and SMITH, Circuit Judges.

PER CURIAM:

I.

A.

In 1984, John Beeson entered into an agreement with two other individuals to purchase a controlling interest in Lincoln Savings & Loan ("Lincoln") in Miami, Florida. As counsel, the investors chose the firm of Phillips, King & Smith (the "Firm"). The Federal Home Loan Bank Board ("FHLBB") objected to the participation of the two individuals, and they withdrew. Beeson then collected a group of other investors, including five of the appellants here (the Five Investors), and completed the transaction with the help of the Firm.

During this period, the Firm learned that the FHLBB might raise questions about potential acting-in-concert violations involving the purchase of Lincoln. "Acting in concert" refers to the aggregation of voting power when one or more persons, purporting to act independently, are actually acting as a group. The Firm's alleged knowledge of these potential problems was a central issue in the district court.

On January 5, 1985, First South loaned Beeson and the other investors over $5.4 million for the purchase of Lincoln. As security, Beeson pledged shares of common stock of Lincoln as well as 7.6382 acres of Texas real estate. On January 7, 1985, Beeson, the Five Investors, and several other investors purchased a controlling interest in Lincoln, with the aid of the Firm.

In August 1985, the FHLBB began to investigate Lincoln, and the FHLBB examiner raised the acting-in-concert problem. Beeson consulted with the Firm regarding the issue, and the Firm decided that Beeson should buy out some of the other investors to attempt to solve the problem. On September 30, 1986, Beeson obtained from First South an extension and renewal of his earlier loan for $2,576,000 and a new loan for $689,295.50. As security, Beeson pledged 237,120 shares of Lincoln stock and his interest in two additional pieces of real estate.

In 1987, the FHLBB required Beeson and the Five Investors to withdraw from participation in Lincoln and placed Beeson's stock in trust. ¹ In June 1988, First South notified Beeson that it was accelerating his $2,576,000 note for failure to make payments on time. First South sent notices of default to Beeson on August 4, 1988, and to the other investors on January 19, 1989.

B.

On January 31, 1989, First South initiated separate lawsuits against the Five Investors in the state district court. Beeson joined with the Five Investors in a separate suit against First South and the Firm on February 2, 1989, charging that the Firm and First South had fraudulently induced them to enter into the loan transactions that gave rise to the notes without disclosing their knowledge of potential regulatory problems that would arise in the stock transactions for which the funds were being borrowed. Beeson and the Five Investors (collectively, the "Plaintiffs") further contend that the fraudulent conduct caused the FHLBB to remove them from control of Lincoln, thus preventing them from infusing additional capital into Lincoln and using their expertise to save Lincoln.

On March 15, 1989, the FHLBB appointed the FSLIC conservator of First South pursuant to the Home Owners' Loan Act of 1933 and the Housing Act. Acting on behalf of the FSLIC, the Federal Deposit Insurance Corporation ("FDIC") removed all of the state court actions to federal court on April 14, 1989. With the enactment, on August 9, 1989, of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Resolution Trust Corporation ("RTC") replaced the FSLIC as conservator of First South. The district court consolidated the actions on August 15, 1989. The RTC later was appointed receiver of First South and now litigates in that capacity. On April 27, 1992, the district court granted several motions for summary judgment; this appeal followed.

The district court held that Beeson and the Five Investors could not succeed on their fraudulent inducement theory, as it was barred by the D'Oench, Duhme doctrine. See D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). The district court also held that the legal malpractice actions of Beeson and the RTC were barred by the statute of limitations, while the malpractice action of the Five Investors was barred because there was no privity of contract.

II.

First, the Plaintiffs argue that the district court erred in holding that their defense of fraudulent inducement was barred by the doctrine of D'Oench, Duhme. While this appeal was pending, the RTC sold the promissory notes of appellants Johnson, Randolph, Ranzau, and Altman. As to these notes, this appeal is moot. The RTC still retains three notes, however, thus requiring us to address the merits of the Plaintiffs' argument.

A.

Plaintiffs allege that their promissory notes are not negotiable because they employ a variable interest rate based upon a prime rate that is not ascertainable from the face of the note. In Amberboy v. Societe de Banque Privee, 831 S.W.2d 793 (Tex.1992), the court held that promissory notes based upon the prime rate of an identified bank satisfied the 'sum certain' requirement, thereby preserving negotiability. The court thus carved an exception to the 'four corners' rule that requires the 'sum certain' to be calculable from the instrument itself without reference to an outside source. See TEX.BUS. & COM.CODE ANN. § 3.106, comment 1 (Vernon 1968). The Amberboy decision, however, limits this narrow exception to situations where the prime rate is published or readily ascertainable by any interested person. 831 S.W.2d at 796.

Here, the Plaintiffs assert that the interest rates for the various notes are not ascertainable from the face of the notes, thereby making them nonnegotiable. We find it unnecessary to decide whether these notes are negotiable, as the D'Oench, Duhme doctrine may defeat Plaintiffs defenses to collection regardless of negotiability. See RTC v. Montross, 944 F.2d 227, 228 (5th Cir.1991) (per curiam) (en banc); Park Club, Inc. v. RTC, 967 F.2d 1053, 1055 (5th Cir.1992). Although holder in due course status affects the types of defenses available against the RTC, these defenses still must be ascertainable from the records of the bank at the time the RTC takes control of the bank.

B.

The plaintiffs argue that First South fraudulently induced them to sign the promissory notes. In Kilpatrick v. Riddle, 907 F.2d 1523 (5th Cir.1990), cert. denied, 498 U.S. 1083, 111 S.Ct. 954, 112 L.Ed.2d 1042 (1991), we held that claims of fraudulent inducement were barred by D'Oench, Duhme even if the FDIC had prior knowledge of the fraud. We find no meaningful distinction between the present case and Kilpatrick.

C.

Plaintiffs argue that because they had filed suit prior to the failure of First South, the FDIC had knowledge of the fraud because the pleadings in the Plaintiffs' suit were among the 'records of the bank' when the FDIC took over. We reject this argument. Past precedent indicates that the term 'records of the bank' refers to the note itself or related loan documents. See Langley v. FDIC, 484 U.S. 86, 91-92, 108 S.Ct. 396, 401, 98 L.Ed.2d 340 (1987). We hold that pleadings of a lawsuit do not constitute 'records of the bank' for the purpose of applying D'Oench, Duhme.

As the Court stated in Langley, the D'Oench, Duhme doctrine "allow[s] federal and state bank examiners to rely on a bank's records in evaluating the worth of the bank's assets ... [and] ensure[s] mature consideration of unusual loan transactions ... [thereby] preventing fraudulent insertion of new terms, with the collusion of bank employees, when a bank appears headed for failure." 484 U.S. at 91-92, 108 S.Ct. at 401. This passage suggests that the defense to payment of the note must be based upon evidence in the bank's records; it is not sufficient that the bank's records give notice of the defense.

Here, the defense is barred because, although the FDIC may have been put on notice of plaintiffs' defense, the defense itself cannot be supported by records of the bank. Were we to hold otherwise, federal and state banking authorities would be required to speculate as to the outcome of various lawsuits pending against the bank where such outcomes depend on oral testimony of bank officials. Such uncertainty is precisely what D'Oench, Duhme seeks to avoid. We affirm the district court's holding on this issue. ²

III.

Second, the Five Investors contend that the district court erred in granting summary judgment on their legal malpractice claim against the Firm. The district court held that no attorney-client relationship existed between the Five Investors and the Firm, thus barring a legal malpractice claim, as the parties were not in privity of contract. In reviewing the judgment, we view the facts in a light most favorable to the Five Investors and engage in a de novo application of the law to these facts.

In Texas, an attorney-client relationship may be implied from the conduct of ...