US v. NBD Bank, NA

• Decision Date: 04 April 1996
• Docket Number: Civil Action No. 95-40343.
• Citation: 922 F. Supp. 1235
• Parties: UNITED STATES of America, Plaintiff, v. NBD BANK, N.A., Defendant.
• Court: U.S. District Court — Eastern District of Michigan

922 F. Supp. 1235

UNITED STATES of America, Plaintiff, v. NBD BANK, N.A., Defendant.

Civil Action No. 95-40343.

United States District Court, E.D. Michigan, Southern Division.

April 4, 1996.

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Mitchell J. Matorin, Tracy J. Whitaker, J. Christopher Kohn, Department of Justice, Civil Division, Washington, DC, for U.S.

Judy B. Calton, Honigman, Miller, Schwartz & Cohn, Detroit, MI, for NBD Bank N.A.

MEMORANDUM AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

GADOLA, District Judge.

This is a complex case in which the Government is trying to recover funds from NBD that were improperly diverted from a federally-backed mortgage program and then allegedly given to NBD in repayment of a loan. The Government has three claims: (1) constructive trust, (2) conversion, and (3) breach of contract. Both parties have moved for summary judgment on all three claims. A hearing was held in this matter on February 14, 1996. For the following reasons, this court will deny defendant's motion for summary judgment and partially grant plaintiff's motion for summary judgment.

I. Factual Background

A. The Federal Mortgage-Backed Securities Program

The federal government operates a mortgage-backed securities program, pursuant to 12 U.S.C. § 1721(g), under which it authorizes "issuers," who are private lenders, to issue securities backed by mortgages. The securities are guaranteed by the Government National Mortgage Association (hereinafter "GNMA"). Fidelity Guarantee Mortgage Corp. (hereinafter "Fidelity") was an issuer under this program.

Under the standard Guaranty Agreement between an issuer and GNMA, the issuer assigns to GNMA all equitable title in the mortgages it holds. The issuer retains only a bare legal title so that it may service these mortgages. The issuer collects the mortgage payments (which include payments for principle, interest, insurance, and taxes) and places them in various custodial accounts. Separate custodial accounts exist for principle and interest payments and insurance and tax payments. The issuer pays the money allocated to the principle and interest account to the investors who purchased securities from the issuer. The issuer pays the money in the tax and insurance account to various insurance companies and taxing agencies.

Since the securities are backed by the government, if the issuer cannot pay the proper amount of money to the investors, the government will pay any shortage of money. Thus, the investors are guaranteed a certain return on their investment.

Upon the default of the issuer, the GNMA takes the legal title to the mortgages (all equitable title to the mortgages already belongs to GNMA) and begins to service the mortgages itself. Further, all money held in the custodial accounts by the issuer goes to GNMA for proper disbursement. Insolvency or pending insolvency is a default under the standard Guaranty Agreement.

B. The Case At Bar

On November 12, 1980, GNMA approved Fidelity as an issuer in its mortgage-backed securities program. Fidelity serviced mortgages under this program until October 13, 1992. As part of this program, Fidelity established custodial accounts at NBD. One of the custodial accounts was for tax and insurance payments collected by Fidelity. This account ("the T & I account") was numbered 10973-03, and was the account from which funds were allegedly misdirected. Under §§ 4.13 & 7.03 of the Guaranty Agreement between GNMA and Fidelity, T & I funds could only be withdrawn for payments of taxes and insurance on the mortgages being serviced. Further, there was a letter agreement between NBD and Fidelity concerning the T & I account. This letter agreement provided: "In no instance shall the funds in the Escrow Custodial Account be used to offset funds which may have been advanced to, or on behalf of, the issuer by the custodian institution." This letter agreement and the signature cards for the T & I account authorized Mr. Jacobs (hereinafter "Jacobs"), Fidelity's president, to withdraw funds from the account.

In addition to the custodial accounts, Fidelity also had its corporate accounts at NBD. One of these accounts, acct. no. 11795-63, was the "operating account" for Fidelity. It was into this operating account that the funds from the T & I account were allegedly misdirected.

NBD had made significant loans to Fidelity. On November 15, 1990, NBD extended Fidelity a $4,500,000 line of credit. On August 12, 1991, this was reduced to $4,000,000 due to Fidelity's default on the first loan. NBD received security interests in Fidelity's bank accounts and various mortgages owned by Fidelity as collateral for these loans. Throughout 1991 and 1992, Fidelity's indebtedness to NBD ranged from approximately 2.7 to 4 million dollars. As Fidelity received income from the sale of mortgages, it would repay NBD the money it had borrowed for those mortgages and NBD would release the liens that it had on those mortgages and decrease the balance of Fidelity's indebtedness.

On September 28, 1992, Jacobs withdrew $225,000 from the T & I account by way of check made payable to Fidelity (not made payable to either an insurance company or a taxing agency). Jacobs then deposited this check in Fidelity's operating account at NBD. The $225,000 was mingled with other funds belonging to Fidelity. The operating account balance remained above $225,000 until October 9, 1992 when it fell to $64,033.52. On October 9, Fidelity paid $566,209.49 to NBD and $539,549.24 to various other entities from its operating account. It is not clear from the record if the money paid to NBD from the operating account was withdrawn before or after these other withdrawals on October 9, 1992. Between October 9, 1992 and October 13, 1992, the operating account balance rose to $73,876. The next debit to the operating account occurred on October 13, 1993, when the entire balance of the account was paid to NBD.

On October 13, 1992 Fidelity filed for bankruptcy under Chapter 11. On October 27, 1992, the bankruptcy was converted to a Chapter 7 bankruptcy. On October 5, 1994, the bankruptcy trustee sued NBD for, among other things, the $225,000 taken from the T & I account. This claim was settled, with the parties agreeing that these funds were not property of the estate. On November 8, 1994, GNMA sued the trustee for the $225,000 at issue here. On April 27, 1995, Jacobs was convicted of fraud. On July 20, 1995, GNMA moved to add NBD as a party to the bankruptcy proceeding. This motion was denied on August 14, 1995. Thus, on September 18, 1995, GNMA filed the present action against NBD to recover the T & I funds, asserting claims for constructive trust, conversion, and breach of contract. NBD and GNMA both move for summary judgment on all three claims.

II. Standard of Review

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment may be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." "A fact is `material' and precludes grant of summary judgment if proof of that fact would have the effect of establishing or refuting one of the essential elements of the cause of action or defense asserted by the parties, and would necessarily affect the application of appropriate principles of law to the rights and obligations of the parties." Kendall v. Hoover Co., 751 F.2d 171, 174 (6th Cir.1984) (citation omitted). The court must view the evidence in a light most favorable to the nonmovant as well as draw all reasonable inferences in the nonmovant's favor. See United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962); Bender v. Southland Corp., 749 F.2d 1205, 1210-11 (6th Cir.1984).

The movant bears the burden of demonstrating the absence of all genuine issues of material fact. See Gregg v. Allen-Bradley Co., 801 F.2d 859, 861 (6th Cir.1986). This burden "may be discharged by `showing' — that is, pointing out to the district court — that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). Once the moving party discharges that burden, the burden shifts to the nonmoving party to set forth specific facts showing a genuine triable issue. Fed.R.Civ.P. 56(e); Gregg, 801 F.2d at 861.

To create a genuine issue of material fact, however, the nonmovant must do more than present some evidence on a disputed issue. As the United States Supreme Court stated in Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986),

There is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the nonmovant's evidence is merely colorable, or is not significantly probative, summary judgment may be granted.

(Citations omitted). See Catrett, 477 U.S. at 322-23, 106 S.Ct. at 2552-53; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986). The evidence itself need not be the sort admissible at trial. Ashbrook v. Block, 917 F.2d 918, 921 (6th Cir.1990). However, the evidence must be more than the nonmovant's own pleadings and affidavits. Id.

III. Analysis

A. Constructive Trust

Constructive trusts "may be imposed when property `has been obtained through fraud, misrepresentation, concealment, undue influence, ... or any other similar circumstances which render it unconscionable for the holder of the legal title to retain and enjoy the property.'" Kammer Asphalt Paving Co., Inc. v. East China Township Sch., 443 Mich. 176, 188, 504 N.W.2d 635 ...