Timberland Design, Inc. v. FDIC, Civ. A. No. 89-40032-XX.

• Decision Date: 23 August 1990
• Docket Number: Civ. A. No. 89-40032-XX.
• Citation: 745 F. Supp. 784
• Parties: TIMBERLAND DESIGN INC. and William C. Barnsley, Plaintiffs, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as Liquidating Agent for First Service Bank for Savings, Defendant.
• Court: U.S. District Court — District of Massachusetts

745 F. Supp. 784

TIMBERLAND DESIGN INC. and William C. Barnsley, Plaintiffs, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as Liquidating Agent for First Service Bank for Savings, Defendant.

Civ. A. No. 89-40032-XX.

United States District Court, D. Massachusetts.

July 31, 1990.

As Corrected August 23, 1990.

Henry A. Brown, Potters & Sands, Boston, Mass., for plaintiffs.

Robert J. Stillman, Ropes & Gray, Boston, Mass., for defendant.

MEMORANDUM AND ORDER

WOODLOCK, District Judge.

Defendant Federal Deposit Insurance Corporation ("FDIC"), as liquidating agent for the First Service Bank for Savings ("First Service"), brings motions seeking a) to establish that plaintiffs Timberland Design, Inc. ("Timberland") and William C. Barnsley may not enforce a $3.9 million purported oral loan commitment with First Service and b) to recover a judgment of some $5.7 million in principal and accrued interest for monies First Service actually extended to the plaintiffs, pursuant to written promissory notes.

I

On December 7, 1987, First Service, a Massachusetts savings bank, loaned Timberland $4 million to develop seven hundred fifty acres in southern New Hampshire. The note for the loan was executed by Timberland and was secured by the written personal guarantee of Timberland's principal, William C. Barnsley. At the same time, plaintiffs contend, First Service orally committed to lend Timberland an additional $3.9 million in May, 1988. First Service's books and records do not reflect the oral commitment. First Service did, however, pursuant to another promissory note, jointly executed by Timberland and Barnsley, provide another $500,000 to Timberland to build roads and thus obtain building permits. Neither Timberland nor Barnsley have made any payments of principal or interest on the monies actually extended by First Service.

First Service never provided Timberland with the monies which are the subject of its alleged oral commitments and plaintiffs brought this suit to enforce First Service's oral agreements. The FDIC has been approved as liquidating agent for First Service and substituted for First Service as the defendant. FDIC answered the Timberland complaint contending that the oral commitments were unenforceable and counterclaiming for repayment of the principal and interest due under the loans actually made. The plaintiffs in turn defend against repayment by contending affirmatively that the failure to satisfy the oral loan commitment relieves them of the repayment obligation.

FDIC now presses separately before me a motion for summary judgment against plaintiffs' claim-in-chief on the oral agreement, a motion to strike the plaintiffs' affirmative defenses and a motion for summary judgment on its counterclaim. The disposition of each motion turns on the enforceability of the oral loan commitment alleged by plaintiffs.

II

FDIC contends that oral lending agreements of the type alleged by plaintiffs are unenforceable against the FDIC for two reasons: (A) the doctrine established in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942) and (B) 12 U.S.C. § 1823(e).

A

In D'Oench, the Supreme Court held in an opinion by Justice Douglas that a borrower could not rely on a "secret" agreement with the lender as a defense to an action brought by the FDIC to recover on a loan. 315 U.S. at 460, 62 S.Ct. at 680. The borrower in D'Oench agreed to execute a note in favor of the bank if the bank agreed not to collect on the note. The bank recorded the note, instead of the defaulted bonds previously sold to the bank by the borrower, apparently in an effort to inflate its assets prior to a bank examination. Id. at 454, 62 S.Ct. at 678. When the FDIC attempted to enforce the note against the borrower, the borrower relied in defense upon the bank's agreement never to collect on the note.

The Supreme Court rejected the defense "because of the federal policy ... to protect the FDIC from misrepresentations ... as to the genuineness or integrity of securities in the portfolios of banks which it insures." Id. at 459, 62 S.Ct. at 680. The Court held that "the fact that creditors may not have been deceived or specifically injured is irrelevant." The test was framed as whether the agreement between the borrower and the FDIC insured bank "would tend to have the effect" of deceiving the FDIC. Id. at 460, 62 S.Ct. at 681. In this connection, the Court concluded that "it would be sufficient in this type of case that the maker lent himself to a scheme or arrangement whereby the banking authority on which FDIC relied in insuring the bank was or was likely to be misled." Id.

The First Circuit has held broadly that the federal estoppel doctrine established in D'Oench applies if the arrangement is "capable of misleading the FDIC in its assessment of a bank's financial condition." FDIC v. P.L.M. International, Inc., 834 F.2d 248, 252 (1st Cir.1987).

The purported oral arrangement to provide an additional $3.9 million was never recorded in First Service's accounts. The failure to record the $3.9 million loan commitment created an inaccurate picture of the bank's assets. This multi-million dollar agreement was plainly material to the FDIC in its assessment of First Service's financial condition. The omission of the arrangement from the records of the bank would, at the least, have a tendency to mislead the FDIC.

Plaintiffs do not dispute that the D'Oench doctrine, if applied, would be dispositive against them. Instead, they contend the doctrine is not applicable. Plaintiffs argue first that this federal estoppel doctrine is limited to actions brought by the FDIC in its corporate capacity. Neither precedent nor policy supports plaintiffs' argument.

To be sure, the two most recent First Circuit cases applying the federal estoppel doctrine established in D'Oench have arisen in circumstances where the FDIC was acting in its corporate capacity. See FDIC v. Municipality of Ponce, 904 F.2d 740, 745-46 (1st Cir.1990); P.L.M. International, Inc., 834 F.2d at 252-53. But neither case limited its holding to those circumstances. Rather, the First Circuit in P.L.M. International used broad language in outlining the test for applying the estoppel doctrine: "the rule prohibits all `secret agreements' which enable the parties to undermine the federal policy of protecting the FDIC." 834 F.2d at 253 (emphasis added) (quoting D'Oench). That outline comprehends the FDIC in both its corporate and receiver capacity. Other circuits have not hesitated in applying D'Oench to the FDIC in its capacity as receiver. FDIC v. McClanahan, 795 F.2d 512, 514 n. 1 (5th Cir.1986); FDIC v. First National Finance, 587 F.2d 1009, 1012 (9th Cir.1978); see also FSLIC v. Two Rivers Associates, Inc., 880 F.2d 1267, 1276 (11th Cir.1989) (applying D'Oench to FSLIC in receiver capacity).

From a policy perspective, plaintiffs argue that the underlying purpose of the D'Oench doctrine is the protection of the FDIC when it purchases assets quickly in its corporate capacity. The D'Oench doctrine, plaintiffs contend, is unnecessary when the FDIC acts as receiver. Plaintiffs overlook, however, the much broader policy grounds for the estoppel doctrine: protection of depositors and the deposit insurance program. Irrespective of whether the FDIC ultimately acts in a corporate or a receiver capacity, the protection of the integrity of the deposit insurance program requires that the FDIC be able to rely on bank records when it examines banks. The role of the estoppel doctrine in securing reliability is not limited to the FDIC's corporate manifestations. D'Oench itself recognized the federal policy of "protecting the FDIC in its various functions." 315 U.S. at 461, 62 S.Ct. at 681. I conclude that the doctrine applies to the FDIC as receiver.

Plaintiffs seek to distinguish D'Oench by suggesting narrow definitions for certain of the vivid words employed by Justice Douglas in his opinion. For example, they note that D'Oench explicitly requires a "secret" agreement. Apparently, plaintiffs contend that their oral agreement was not a "secret" agreement because it was openly negotiated among the signatories. But for purposes of D'Oench analysis, a secret agreement is one that is unknown to those examining the bank's records. The unwritten and unrecorded agreement was unknown to the bank examiners and the FDIC. It was plainly kept a secret from them.

Plaintiffs also note that in D'Oench a borrower is said to be responsible when he has "lent himself to a scheme or arrangement." 315 U.S. at 460, 62 S.Ct. at 681. Based on this statement, they contend that the estoppel doctrine only operates against borrowers who are at fault. The Eleventh Circuit once made such a suggestion. See Gunter v. Hutcheson, 674 F.2d 862, 872 n. 14 (11th Cir.), cert. denied, 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982) (D'Oench doctrine requires an "element of fault on the part of the obligor"). That dicta does not, however, appear to apply currently in the Eleventh Circuit. Two Rivers Associates, 880 F.2d at 1277 (11th Cir.1989) (questioning validity of Gunter in light of holding in Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1988)). Other circuits, moreover, have applied the D'Oench doctrine when the borrower was innocent of any specific wrongdoing. Bell & Murphy & Associates, Inc. v. Interfirst Bank Gateway, N.A., 894 F.2d 750, 754 (5th Cir.1990) (under D'Oench "it is irrelevant ... whether the borrower acted in good faith and even whether the borrower was `coerced,' or under `economic duress'"); FDIC v. Investors Associates X, Ltd., 775 F.2d 152, 155 (6th Cir.1985) ("D'Oench estoppel will apply regardless of the maker's intent"). FDIC v. First National Finance Co., 587 F.2d 1009, 1012 (9th Cir.1978) ("it is not necessary for the accommodation maker to have knowledge of the specific scheme or fraudulent arrangement" to apply D'Oench).

Even accepting the Eleventh Circuit's footnote ...