Timberland Design, Inc. v. First Service Bank for Sav.

• Decision Date: 11 January 1991
• Docket Number: No. 90-1862,90-1862
• Citation: 932 F.2d 46
• Parties: TIMBERLAND DESIGN, INC. and William C. Barnsley, Plaintiffs, Appellants, v. FIRST SERVICE BANK FOR SAVINGS, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 46

932 F.2d 46

TIMBERLAND DESIGN, INC. and William C. Barnsley, Plaintiffs Appellants, v. FIRST SERVICE BANK FOR SAVINGS, Defendant, Appellee.

No. 90-1862.

United States Court of Appeals First Circuit.

Heard Jan. 11, 1991.

Decided May 3, 1991.

Robert S. Potters with whom Henry A. Brown, and Potters & Brown, Boston, Mass., were on brief, for plaintiffs, appellants.

J. Scott Watson with whom Ann S. Duross, Joan E. Smiley, Robert D. McGillicuddy, Washington, D.C., William L. Patton, Robert J. Stillman, and Ropes & Gray, Boston, Mass., were on brief, for defendant, appellee.

Before BREYER, Chief Judge, CAMPBELL, Circuit Judge, and CAFFREY, ^* Senior District Judge.

PER CURIAM.

This is an appeal by the plaintiffs, Timberland Design Inc. and William C. Barnsley, ¹ from an order of the United States District Court for the District of Massachusetts granting summary judgment in favor of the defendant, the Federal Deposit Insurance Corporation ("FDIC"), which was acting as liquidating agent for the First Service Bank for Savings ("First Service"). The dispute arose out of the following facts. On December 7, 1987, First Service, a Massachusetts Savings Bank, loaned Timberland four million dollars to develop seven hundred and fifty acres of land in southern New Hampshire. Timberland executed the note, which was guaranteed by Barnsley, Timberland's principal. Timberland contends that First Service orally agreed to lend it an additional sum of $3,900,000.00 in the future. That agreement was never recorded in First Service's files or records.

It is further alleged that, throughout June and July of 1988, First Service orally assured Timberland that the loan would be made. This second loan, which the plaintiffs term the "second phase," never was made, although First Service did lend an additional $500,000.00 to Timberland in May, 1988. Finally, in September, 1988, First Service informed Timberland that it intended to foreclose on the mortgaged property. Timberland filed its lender liability complaint on March 29, 1990. The complaint, which was served on First Service on March 30, alleged the following claims: deceit; negligent misrepresentation; breach of fiduciary duty; breach of contract; and violation of Mass.Gen.L. ch. 93A. On March 31, 1989, the Commissioner of Banks for Massachusetts appointed the FDIC as receiver of the assets and liabilities of First Service. The FDIC moved for summary judgment based on the doctrine of estoppel established in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). Alternatively, the FDIC argued that summary judgment in its favor was warranted based on the retroactive application of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), the 1989 amendment to 12 U.S.C. Sec. 1823(e), which both parties agree would extinguish Timberland's claims, if applicable. The district court granted summary judgment in favor of the FDIC on all five counts and on the FDIC's counterclaims for payment of the note, finding Timberland's action and defenses to be barred by the doctrine established in D'Oench. See Timberland Design Inc. & William C. Barnsley v. FDIC, 745 F.Supp. 784, 787 (D.Mass.1990).

I.

We turn first to the district court's application of the D'Oench doctrine. Some brief background concerning the FDIC's functions when a bank fails is necessary in light of the arguments raised by Timberland. The FDIC has two separate roles. As receiver, the FDIC manages the assets of the failed bank on behalf of the bank's creditors and shareholders. In its corporate capacity, the FDIC is responsible for insuring the failed bank's deposits. Although there are many options available to the FDIC when a bank fails, these options generally fall within two categories of approaches, either liquidation or purchase and assumption. See FDIC v. La Rambla Shopping Center, Inc., 791 F.2d 215, 218 (1st Cir.1986); Gunter v. Hutcheson, 674 F.2d 862, 865 (11th Cir.), cert. denied, 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982). The liquidation option is the easiest method, but carries with it two major disadvantages. First, the closing of the bank weakens confidence in the banking system. Second, there is often substantial delay in returning funds to depositors. Gunter, 674 F.2d at 865.

The preferred option when a bank fails, therefore, is the purchase and assumption option. La Rambla Shopping Center, Inc., 791 F.2d at 218. Under this arrangement, the FDIC, in its capacity as receiver, sells the bank's healthy assets to the purchasing bank in exchange for the purchasing bank's promise to pay the failed bank's depositors. Id. In addition, as receiver, the FDIC sells the "bad" assets to itself acting in its corporate capacity. Id. With the money it receives, the FDIC-receiver then pays the purchasing bank enough money to make up the difference between what it must pay out to the failed bank's depositors, and what the purchasing bank was willing to pay for the good assets that it purchased. Id. The FDIC acting in its corporate capacity then tries to collect on the bad assets to minimize the loss to the insurance fund. Generally, the purchase and assumption must be executed in great haste, often overnight.

With this in mind, we now turn to the district court's application of the D'Oench doctrine. D'Oench involved a situation where the defendant executed a note payable to the bank with the understanding that the note would never be called for payment. D'Oench, Duhme & Co. v. FDIC, 315 U.S. at 454, 62 S.Ct. at 678. The FDIC insured the bank in 1934, and acquired the notes at issue in its corporate capacity through a purchase and assumption in 1938 after the bank failed. Id. The FDIC then made a demand for payment, at which time it learned of the agreement that the notes would never have to be repaid. The Supreme Court refused to allow the defendant to defend against the FDIC's action on the basis of this secret agreement. Id. at 461, 62 S.Ct. at 681. In enunciating the new estoppel doctrine, the Court set forth the following test:

The test is whether the note was designed to deceive the creditors or the public authority, or would tend to have that effect. 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 respondent relied in insuring the bank was or was likely to be misled.

Id. at 460, 62 S.Ct. at 681.

Significantly, the D'Oench doctrine does not require a showing that a party had the intent to defraud. FDIC v. P.L.M. Int'l, Inc., 834 F.2d 248, 252-53 (1st Cir.1987). Rather, the doctrine prohibits all secret agreements that tend to make the FDIC susceptible to fraudulent arrangements. Id. at 253. In requiring merely that the borrower "lends himself to a scheme or arrangement," the "D'Oench, Duhme doctrine thus favors the interests of depositors and creditors of a failed bank, who cannot protect themselves from secret agreements, over the interests of borrowers, who can." Bell & Murphy & Assoc. v. Interfirst Bank Gateway, N.A., 894 F.2d 750, 754 (5th Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 244, 112 L.Ed.2d 203 (1990); FDIC v. McCullough, 911 F.2d 593, 600 (11th Cir.) (quoting Bell & Murphy & Assoc., 894 F.2d at 754), reh'g denied, 920 F.2d 13 (1990). Thus, the D'Oench doctrine applies where the only element of fault on the part of the borrower was his or her failure to reduce the agreement to writing. Bell & Murphy & Assoc., 894 F.2d at 754.

D'Oench itself addressed the situation where the FDIC was acting in its corporate capacity. Nonetheless, since the Supreme Court first enunciated the D'Oench doctrine, courts have consistently applied the doctrine to those situations where the FDIC was acting in its capacity as receiver. See, e.g., McCullough, 911 F.2d at 599; Beighley v. FDIC, 868 F.2d 776, 784 (5th Cir.1989); FDIC v. First Nat'l Fin. Co., 587 F.2d 1009, 1012 (9th Cir.1978); FDIC v. McClanahan, 795 F.2d 512 at 516 (5th Cir.1986); see also Federal Sav. & Loan Ins. Corp. v. Two Rivers Assoc., Inc., 880 F.2d 1267, 1277 (11th Cir.1989) (D'Oench applied to FSLIC acting as receiver). Recognizing the lack of support for its main argument below that the D'Oench doctrine does not apply to the FDIC when acting in its capacity as receiver, Timberland instead argues on appeal that D'Oench merely estops a borrower from raising a secret agreement as a defense to an FDIC action. Thus, according to Timberland's argument, the doctrine in no way bars a borrower's affirmative claims against the FDIC. Timberland's invitation to this court to distinguish between affirmative claims on one hand, and defenses, on the other, must be rejected. To distinguish between affirmative claims and defenses for purposes of applying the D'Oench doctrine would reduce the protection offered by the doctrine to a nullity. As stated by one court:

"To allow a claim against the FDIC asserting the very grounds that could not be used as a defense to a claim by the FDIC is to let technicality stand in the way of principle. Moreover, the effect of such an approach would be to reduce actions Congress has allowed the FDIC to pursue to nullities since defendants could counterclaim and recover what they lost."

Hall v. FDIC, 920 F.2d 334, 340 (6th Cir.1990) (quoting Beighley v. FDIC, 676 F.Supp. 130, 132 (N.D.Tex.1987), aff'd, 868 F.2d 776 (5th Cir.1989)). Realizing that such a distinction would elevate form over substance, most courts have recognized that D'Oench operates to bar affirmative claims as well as defenses which are premised upon secret agreements. See, e.g., Bowen v. FDIC, 915 F.2d 1013, 1015 (5th Cir.1990); Kilpatrick v. Riddle, 907 F.2d 1523, 1528 (5th Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 954, 112 L.Ed.2d 1042 (1991); FSLIC v. Gemini Management, 921 F.2d 241, 244 (9th Cir.1990); Hall, 920 F.2d at 340; Two Rivers Assoc., 880 F.2d at 1277; Castleglen, Inc. v. Commonwealth Sav. Assoc., ...