REW Enterprises, Inc. v. Premier Bank, N.A.

• Decision Date: 27 March 1995
• Docket Number: No. 93-3829,93-3829
• Parties: REW ENTERPRISES, INC. as Receiver for Federal Land Bank of Jackson, Plaintiff-Appellee, Cross-Appellant, v. PREMIER BANK, N.A., f/k/a Ouachita National Bank, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 163

49 F.3d 163

REW ENTERPRISES, INC. as Receiver for Federal Land Bank of Jackson, Plaintiff-Appellee, Cross-Appellant, v. PREMIER BANK, N.A., f/k/a Ouachita National Bank Defendant-Appellant, Cross-Appellee.

No. 93-3829.

United States Court of Appeals Fifth Circuit.

March 27, 1995.

Rehearing and Suggestion for Rehearing En Banc Denied April

27, 1995.

R. Patrick Vance, Andrew R. Lee, Jones, Walker, Waechter, Poitevent, Carrere & Denegre, New Orleans, for appellant.

Jean M. Sweeney, William C. Gambel, J. Timothy Betbeze, Milling, Benson, Woodward, Hillyer, Pierson & Miller, New Orleans, for appellee.

Appeals from the United States District Court for the Middle District of Louisiana.

Before POLITZ, Chief Judge, and HIGGINBOTHAM and DeMOSS, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

The Farm Credit Bank of Texas seeks to recover a payment made by the Federal Land Bank of Jackson to Premier Bank. ¹ FCBT seeks to rescind the payment transaction as ultra vires or as payment of a thing not due under Louisiana law. Premier claims that FCBT is equitably estopped from relying on an ultra vires claim. Premier also counterclaims for recoupment.

The district court granted summary judgment for FCBT on the ultra vires claim and against Premier on the recoupment claim. It also held that FCBT abandoned its alternative state law claims. Premier appeals the district court's grant of summary judgment, and FCBT cross-appeals the ruling that it abandoned its alternative state law claims. We affirm in part and reverse and remand in part.

I.

Thomas A. Grant, Suzanne Brunazzi Grant, and James C. Steele purchased timber land in northeast Louisiana with a $15 million loan from FLBJ. In 1983, the Grants and Steele submitted the loan application to Lawrence Bingham, President of the Federal Land Bank Association of Monroe. Federal land banks may generally lend only through federal land bank associations. 12 U.S.C. Sec. 2020 (1982). ² Bingham signed the loan on behalf of the Federal Land Bank of New Orleans, FLBJ's predecessor. The loan was secured by a mortgage on the purchased acreage, which then had an appraised value of $36 million.

A payment was to come due on January 1, 1985, and in the fall of 1984, the Grants and Steele approached A.J. Burns, Bingham's successor as President of the Monroe Association, about their expected inability to pay. The parties agreed that Burns would seek FLBJ's approval for a reamortization of the principal amount. Burns also agreed to provide a letter of credit to a commercial lender to secure a loan whose proceeds would be applied to the interest portion of the loan payment. The Ouachita National Bank agreed. ONB lent the Grants and Steele approximately $1.5 million upon receipt of a standby letter of credit and upon taking a mortgage on additional collateral, namely, 2,000 acres of the borrowers' unencumbered real property. Burns signed the letter of credit on behalf of FLBJ. The letter of credit required FLBJ to repay the loan in the event of default by the Grants and Steele. The proceeds from the ONB loan were used to pay the interest due on the FLBJ loan.

The Grants and Steele defaulted on the ONB loan, and ONB called the letter of credit. Only then did Burns tell FLBJ officers that there was a letter of credit. FLBJ officers decided to honor the letter, but asked Burns to negotiate a thirty-day extension. ONB agreed to the extension. FLBJ then honored the letter of credit, and ONB released its mortgage on the additional collateral. At FLBJ's request, the Grants and Steele executed a promissory note for the amount FLBJ paid to ONB, and FLBJ took a first lien on the additional collateral.

Burns was fired from the Monroe Association and later pleaded guilty to a violation of 18 U.S.C. Sec. 1018 in connection with his issuance of the letter of credit. Ben Marshall, the loan officer at ONB, pleaded guilty to falsifying bank records.

Six months after FLBJ honored the letter of credit, the Grants and Steele defaulted on the promissory note. On May 20, 1988, the Farm Credit Administration closed FLBJ due to its insolvency, and REW was appointed as its receiver. REW transferred to FCBT the mortgagee rights in the additional collateral as well as in the collateral securing the original $15 million loan. On February 26, 1992, FCBT instituted foreclosure proceedings and at the sheriff's sale bought all of the property except approximately 1,000 acres of the additional collateral that it claims are contaminated with dioxins. FCBT then resold the property for approximately $22.5 million. The parties disagree on how much of that amount can be attributed to the additional collateral.

REW also sued to recover the payment made to ONB on the letter of credit. It then transferred its interest in the lawsuit to FCBT in consideration for FCBT's assumption of FLBJ's bond indebtedness.

II.

Before Congress enacted the 1987 Agricultural Credit Act, see supra note 2, the Farm Credit System was organized into twelve areas known as farm credit districts. In each district, three distinct Farm Credit System banks served the needs of farmers: (1) a federal land bank, which made long-term real estate mortgage loans through federal land bank associations; (2) a bank for cooperatives, which made loans to agricultural, aquatic, and rural utility cooperatives; and (3) a federal intermediate credit bank, which funded the short- and intermediate-term loans made by production credit associations. Federal land banks were authorized to make loans only through federal land bank associations. 12 U.S.C. Sec. 2020 (1982). Borrowers were required to apply for a loan at a land bank association and were also required to buy stock in the association. Id. Secs. 2020, 2034(a). Section 2014 gave federal land banks the authority to "make or participate with other lenders in long-term real estate mortgage loans in rural areas ... and make continuing commitments to make such loans under specified circumstances, or extend other financial assistance of a similar nature to eligible borrowers, for a term of not less than five nor more than forty years." Federal land banks were also authorized to "[e]xercise ... all such incidental powers as may be necessary or expedient to carry on the business of the bank." Id. Sec. 2012(21).

FCBT argues that issuance of a letter of credit was outside the statutory powers of a land bank. The district court agreed, holding that issuance of a standby letter of credit was not "necessary or expedient in the conduct of the business of the bank" because the business of the bank included only long-term lending against real estate security. We agree.

Congress created federal land banks for the sole purpose of providing long-term real estate mortgage loans. A rural borrower could seek short-term credit from banks for cooperatives or production credit associations. In fact, in 1971, Congress amended the Farm Credit Act to give banks for cooperatives and production credit associations the power to issue guaranties, instruments similar in function to letters of credit. Farm Credit Act of 1971, Pub.L. No. 92-181, Sec. 2.15, 1971 U.S.C.C.A.N. (85 Stat.) 655, 677. Farm Credit Administration regulations provided that banks for cooperatives could issue letters of credit. 12 C.F.R. Sec. 614.4810. These powers, granted to institutions charged with providing short-term secured and unsecured credit, were never expressly conferred on land banks. The implication we draw from the structure of the Farm Credit System and from the language of the statute is that Congress could have authorized land banks to issue letters of credit, but chose not to. Because land banks were not authorized by statute to issue letters of credit, to do so was an ultra vires act.

When FLBJ decided to ask for an extension of time to pay the letter of credit, it was seeking to ratify an action it was not statutorily empowered to take. There is no evidence in the record that the board attempted to disavow the letter or that it paid the letter to settle what surely would have escalated to a significant controversy had it not paid. Rather, the extension stated that ONB was to consider it "as an amendment to our Irrevocable Letter of Credit No. 1, dated December 31, 1984.... All terms and conditions of the original Letter of Credit shall remain in force and will not be affected by this amendment except as referenced above in the expiration date." In short, we are not confronted with the authority of the board to settle a claim arising from an ultra vires act. We have before us only the unauthorized issuance and payment of a letter of credit. The act of FLBJ's board in honoring the letter of credit was an ultra vires act.

Premier argues that because national banks have the power to issue letters of credit, 12 C.F.R. Sec. 7.7016, by analogy, so should land banks. Premier's argument is not persuasive. National banks are engaged in the general business of banking--that is, they provide both long- and short-term credit. National banks are empowered "to carry on the business of banking." 12 U.S.C. Sec. 24 (emphasis added). Banks in the Farm Credit System, by contrast, engaged in only those banking activities necessary to carry out their specific mission, which, in the case of land banks, was making long-term real estate mortgage loans. In other words, land banks exercised only those powers "necessary or expedient to carry on the business of the bank." 12 U.S.C. Sec. 2012(21) (1982) (emphasis added). The distinction between "the business of banking" and "the business of the bank" illustrates the reason why national banks have the power to issue letters of credit while land banks do not. The difference in the language is not, as Premier suggests, insignificant.

Premier also asserts that the letter of credit falls within the bank's incidental powers because it benefited FLBJ by enabling it to keep "a major loan in the current and 'health...