Riverside Park Rlty. Co. v. Federal Deposit Ins.

• Decision Date: 07 December 1978
• Docket Number: No. 78-3232-NA-CV.,78-3232-NA-CV.
• Parties: RIVERSIDE PARK REALTY COMPANY, William J. Wilson, Jr. and Tommy G. Wilson v. FEDERAL DEPOSIT INSURANCE CORPORATION and Ann Yeager Young.
• Court: U.S. District Court — Middle District of Tennessee

465 F. Supp. 305

RIVERSIDE PARK REALTY COMPANY, William J. Wilson, Jr. and Tommy G. Wilson v. FEDERAL DEPOSIT INSURANCE CORPORATION and Ann Yeager Young.

No. 78-3232-NA-CV.

United States District Court, M. D. Tennessee, Nashville Division.

December 7, 1978.

COPYRIGHT MATERIAL OMITTED

Frank C. Ingraham, Ingraham, Young & Corbett, I. C. Waddey, Jr., Hooker & Waddey, Nashville, Tenn., for plaintiffs.

Gerard Thomas Nebel, Robert J. Walker, Bass, Berry & Sims, Nashville, Tenn., for defendants.

MEMORANDUM

MORTON, Chief Judge.

I. INTRODUCTION

Plaintiff Riverside Park Realty Company (hereinafter referred to as Riverside) and its owners, William J. Wilson, Jr., and Tommy G. Wilson, filed this suit in the Chancery Court for Williamson County, Tennessee, to enjoin defendant Federal Deposit Insurance Corporation (hereinafter referred to as the FDIC) from foreclosing under a deed of trust on real property (Countrywood) owned by Riverside. A temporary restraining order enjoining the foreclosure issued by the state court was continued by this Court after the matter was removed here by the FDIC pursuant to 12 U.S.C. § 1819(4).¹ The temporary restraining order has since expired, but defendants have voluntarily refrained from foreclosing pending the Court's decision on plaintiffs' application for a preliminary injunction, which application is the subject of this memorandum opinion.

The background of this litigation is fairly complex. In November 1973, Riverside and Hamilton Mortgage Company (HMC) entered into a loan agreement whereby HMC agreed to loan Riverside $3,500,000 for the development of a subdivision on the Countrywood property. A deed of trust note and a deed of trust for the Countrywood property were executed in connection with the loan. The note contained a provision for interest at the rate of ten (10%) percent per annum calculated on a 360-day basis. It also contained the promises of HMC to fund draw requests submitted by Riverside and to release lots from the lien of the deed of trust upon tender of certain sums by Riverside. Hamilton National Bank (the Bank) then entered the picture by joining HMC in a participation agreement that provided that the Bank would advance most of the funds required by the loan in exchange for an interest in the loan. From the beginning, the project was beset by difficulties, some caused by HMC's sluggishness in funding draw requests, and some by third parties. As a result, plaintiffs decided to scale down the size of the development and renegotiated the loan in September 1975 so that the total loan commitment was reduced to $2,200,000. In a provision of the amended loan agreement, plaintiffs ratified all prior acts of the lenders and waived all claims arising from the lenders' prior breaches of the contract. Problems remained, however, as HMC continued to be slow in funding Riverside's draw requests and in furnishing certain lot and common area releases. In November 1975, the situation of the parties worsened. Riverside refused to make a $100,000 payment due at that time, contending that the release of lots and common areas by HMC was a condition precedent to the payment. HMC, on the other hand, believed that Riverside's performance was due prior to HMC's. Draw requests were funded until February 1976, when the total amount advanced was just $233,696 short of the $2,200,000 commitment, but then HMC refused to make any more outlays until the $100,000 payment was received from Riverside. HMC did send a release of common areas to Riverside on February 13. On February 16, 1976, the comptroller of the currency declared the Bank insolvent and appointed the FDIC as receiver. Shortly thereafter, HMC filed a petition in bankruptcy court. The FDIC, in its separate corporate capacity as liquidator, acquired a 100% interest in the note and deed of trust by assignments from the FDIC as receiver of the Bank and the trustee in bankruptcy for HMC. In spite of all these adversities, Riverside desired to complete the project and attempted to negotiate a settlement with the FDIC by offering to pay the overdue $100,000 in return for a release of lots and the FDIC's commitment to fund the remainder of the loan. The FDIC rejected the offer. Subsequently, the foreclosure proceeding that is the subject of this lawsuit was initiated by the FDIC.

Plaintiffs advance two theories in support of their contention that they are entitled to permanent injunctive relief against the threatened foreclosure: (1) that the note secured by the deed of trust is usurious, and therefore the note and deed of trust are unenforceable; and (2) that the plaintiffs have a claim for damages arising from the lender's breach of contract that equals or exceeds the amount of plaintiffs' debt. The issue now before the Court is whether or not a preliminary injunction should be issued to enjoin the FDIC from proceeding with the foreclosure until after a full trial on the merits of plaintiffs' claim. Plaintiffs contend that a preliminary injunction should be granted because if it is not, and the foreclosure sale occurs, their right to a permanent injunction after trial on the merits would be rendered worthless. As a secondary ground, plaintiffs argue that even if they are not entitled to a permanent injunction, either because the note is enforceable in spite of the alleged usury or because their damages from the alleged breach of contract do not equal or exceed the amount of the indebtedness, a preliminary injunction should be granted in order to protect their ability to recover such damages as they may be able to establish at trial. In this situation, a preliminary injunction is said to be necessary because plaintiffs' claim for damages can be asserted only by way of setoff or counterclaim against the FDIC, the assignee of the note and deed of trust, and if the FDIC is allowed to proceed with foreclosure, it may never sue plaintiffs for any portion of the indebtedness. This would prevent plaintiffs from making their claim for damages by setoff or counterclaim and cause them to suffer irreparable harm.

II. APPLICABLE LAW

Because the FDIC is a party to this action, and jurisdiction is based upon 12 U.S.C. § 1819(4) rather than diversity of citizenship, the Court must first address the question of what law to apply in determining whether or not plaintiffs have satisfied the standards for a preliminary injunction. The point appears to be settled beyond per-adventure that federal law governs in cases involving the rights of the FDIC. See, e. g., D'Oench, Duhme & Co. v. Federal Deposit Insurance Corp., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942); Federal Deposit Insurance Corp. v. Meo, 505 F.2d 790 n.4 (9th Cir. 1974). See generally Federal Deposit Insurance Corp. v. Ashley, 585 F.2d 157 n.7 (6th Cir. 1978). In the D'Oench, Duhme case, the United States Supreme Court indicated that in cases such as the instant one, in which the liability of a debtor on a note acquired by the FDIC is at issue, the rights and duties of the parties are matters of federal, not state law. Mr. Justice Jackson, concurring in D'Oench, Duhme, explored the point thoroughly and advanced the following analysis:

This case is not entertained by the Federal courts because of diversity of citizenship. It is here because a Federal agency brings the action, and the law of its being provides . . . that: "All civil suits . . . to which the FDIC shall be a party shall be deemed to arise under the laws of the United States ...." That this provision is not merely jurisdictional is suggested by the presence in the same section of the Act of the separate provision that the FDIC may sue and be sued "in any court of law or equity, state or Federal."

. . . . .

A Federal court sitting in a nondiversity case such as this does not sit as a local tribunal. In some cases it may see fit for special reasons to give the law of a particular state highly persuasive or even controlling effect, but in the last analysis its decision turns upon the law of the United States, not that of any state.

315 U.S. at 467-68, 471-72, 62 S.Ct. at 684, 686, 86 L.Ed. at 967, 969 (emphasis added).

Determining that federal law applies solves only half the problem, however. Because no federal statute establishes a rule of decision in this case,² the Court must turn to federal common law. When federal common law applies, federal courts are free to use the "traditional common-law technique of decision and to draw upon all the sources of the common law ...." D'Oench, Duhme, 315 U.S. at 472, 62 S.Ct. at 686, 86 L.Ed. at 970 (Jackson, J., concurring). One such source is, of course, state law. For several reasons, the Court believes that in the instant case reference to Tennessee law is logical, essentially fair, and particularly appropriate, especially with regard to the substantive usury and breach of contract issues. First, the "source or nature of the right sued upon," a contract involving Tennessee real estate and intended to be performed entirely in Tennessee, appears to be a matter in which state law has the most substantial interest. See, e. g., In re Anjopa Paper & Board Manufacturing Co., 269 F.Supp. 241, 253 (S.D.N.Y. 1967). See also Watson v. McCabe, 527 F.2d 286 (6th Cir. 1975), rehearing denied, id. (1976). Second, since both the note and the loan agreement provided that the transaction would be governed by and construed in accordance with Tennessee law, neither party will be unfairly surprised by the application of Tennessee law. Finally, as was recognized in the D'Oench, Duhme case, "many questions as to the liability of parties to commercial paper which comes into the hands of the FDIC will best be solved by applying the local law with reference to which the makers and the insured bank presumably contracted." 315 U.S. at 474, 62 S.Ct. at 687, 86 L.Ed. at 971 (Jackson, J., concurring). In light of these factors, the Court concludes that Tennessee law should be adopted as the federal...