Villafane-Neriz v. F.D.I.C.

• Decision Date: 08 October 1993
• Docket Number: No. 93-1487,I,VILLAFANE-NERI,93-1487
• Citation: 20 F.3d 35
• Parties: Miguelnsurance Commissioner of Puerto Rico, Plaintiff, Appellant, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 35

20 F.3d 35

Miguel VILLAFANE-NERIZ, Insurance Commissioner of Puerto Rico, Plaintiff, Appellant, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant, Appellee.

No. 93-1487.

United States Court of Appeals, First Circuit.

Heard Oct. 8, 1993.

Decided April 4, 1994.

Carlos J. Morales-Bauza with whom Jesus R. Rabell-Mendez and Rossello-Rentas & Rabell-Mendez, San Juan, PR, were on brief, for appellant.

J. Scott Watson, Sr. Atty., Philadelphia, PA, with whom Ann S. DuRoss, Asst. General Counsel, and Richard J. Osterman, Jr., Sr. Counsel, Washington, DC, were on brief, for appellee.

Before BREYER, Chief Judge, BOUDIN and STAHL, Circuit Judges.

STAHL, Circuit Judge.

In this appeal plaintiff seeks the proceeds of a certificate of deposit issued by a now-failed bank. Simultaneously with its purchase, the certificate was assigned to a third party, the Insurance Commissioner of the Commonwealth of Puerto Rico ("the Commissioner"). The Commissioner brought suit against the FDIC seeking to establish his right to the proceeds of the certificate, and attempted to introduce documents evidencing both the assignment and the bank's acknowledgment thereof. The district court applied 12 U.S.C. Sec. 1823(e) to bar the assignee's use of the assignment documents. Finding both section 1823(e) and the D'Oench ¹ doctrine inapplicable, we reverse.

I. FACTUAL BACKGROUND AND PRIOR PROCEEDINGS

The facts of this case are essentially undisputed. In order to do business in the commonwealth, Puerto Rico insurance companies are first required by law to deposit funds with the Commissioner. See 26 L.P.R.A. Secs. 801-809. Moreover, once these funds are deposited, Puerto Rico law provides that they may not be levied upon by creditors or claimants of the insurance company. Id. Sec. 809 ("No judgment creditor or other claimant of an insurer shall levy upon any deposit held pursuant to this chapter, or upon any part thereof."). On July 20, 1983, in order to satisfy the statutory deposit requirement, Guaranty Insurance Co. ("Guaranty") purchased a six-month certificate of deposit from the Girod Trust Company ("Girod" or "the bank") in the principal amount of $50,000. The certificate of deposit had a maturity date of January 17, 1984. On the same day that it Accompanying both the certificate of deposit and the Fiduciary Assignment was yet another document executed on the same date, July 20, 1983, entitled "Requisition to the Bank." This Requisition stated, inter alia, that Girod would not release the funds represented by the certificate of deposit, "whether the principal value or income thereof," without the authorization of the Commissioner. More specifically, the Requisition stated, "[W]e [Girod] agree and promise to dispose of the certificate of deposit ... only with prior authorization from the Commissioner of Insurance of Puerto Rico." The Requisition was signed by Allwin Perez "in his capacity as manager of the San Juan branch of Girod Trust Company." His signature was notarized. Like the Fiduciary Assignment, the Requisition stated, "This requisition will be irrevocable." The certificate of deposit itself was given to, and remains with, the Commissioner.

purchased the certificate, Guaranty, through one of its officers, executed a separate document entitled a "Fiduciary Assignment" in which it irrevocably assigned and conveyed its interest in the certificate of deposit to the Commissioner. Girod was not a party to the Fiduciary Assignment.

Less than three months after purchasing the certificate of deposit from Girod, Guaranty executed a loan agreement, unrelated to the certificate of deposit, pursuant to which it borrowed $600,000 from Girod. The loan was evidenced by a promissory note for that amount, payable to Girod. The note was due on April 26, 1984, and Guaranty began making payments according to the loan agreement's schedule.

On January 17, 1984, the certificate of deposit came due. At the request of Guaranty, it was "rolled over," i.e., extended for a term of six additional months. In the meantime, Guaranty had fallen behind on payments due to Girod under the $600,000 loan agreement. On July 16, 1984, the certificate of deposit came due again. This time, however, the certificate was not "rolled over." Rather, on July 18, 1984, two days after the certificate had matured, the proceeds were credited to Guaranty's account. Specifically, $50,000 from the certificate of deposit was credited toward Guaranty's outstanding indebtedness under the $600,000 loan agreement.

On August 16, 1984, Girod was declared insolvent and the FDIC was appointed receiver. On December 19, 1984, Guaranty also became insolvent. The Commissioner was appointed Guaranty's receiver. On August 25, 1986, the Commissioner filed a proof of claim with the FDIC, seeking payment on the certificate of deposit. On May 22, 1991, having received no payment on the claim, the Commissioner filed a complaint against the FDIC in the Superior Court of Puerto Rico seeking to recover the proceeds of the certificate of deposit. The FDIC removed the action to federal court pursuant to 12 U.S.C. Sec. 1819(b).

The parties filed cross-motions for summary judgment. ² Without ruling on the motions, the district court asked the parties to submit briefs on the application of 12 U.S.C. Sec. 1823(e). ³ Upon submission of the briefs, the district court held that section 1823(e) barred the Commissioner's reliance upon either the Fiduciary Assignment or the Requisition (also referred to hereinafter as

"the assignment documents"). In essence, the court reasoned that the assignment documents constituted an "agreement which tends to diminish or defeat the interest of" the FDIC in an asset for purposes of section 1823(e). The district court went on to reason that, because the assignment documents failed to meet the requirements set out in section 1823(e), e.g., they were approved by neither the bank's board of directors nor its loan committee, the Commissioner was barred from relying upon them. Therefore, the district court ordered summary judgment in favor of the FDIC. ⁴

II. DISCUSSION

The sole issue before us is whether section 1823(e) bars the Commissioner from relying on the Fiduciary Assignment and the Requisition in making his claim against the FDIC. We hold that the Commissioner is not so barred.

A. Standard of Review

Where, as here, the essential facts are undisputed and the sole issue on appeal involves a pure question of law, our review is de novo. See, e.g., FDIC v. Keating, 12 F.3d 314, 316 (1st Cir.1993).

B. Bank Assets and Bank Liabilities

We begin with crucial, if rudimentary, banking terminology. As one commentator recently noted, "It may be helpful to recall that banks and thrifts have a somewhat counterintuitive perspective on the accounting of deposits, which appear on their balance sheets as liabilities. Meanwhile, loans from banks appear on their balance sheets as assets." David G. Oedell, Private Interbank Discipline, 16 Harv.J.L. & Pub.Pol'y 327, 384 n. 206 (1993) (emphasis added). In other words, bank deposits, including certificates of deposit such as the one at issue here, see 12 U.S.C. Sec. 183(l ) (defining a deposit as, inter alia, "the unpaid balance of money or its equivalent received or held by a bank ... which is evidenced by its certificate of deposit"), represent obligations on the part of a bank to repay funds to depositors. As such, they are reflected on a bank's books as liabilities. Loans made to bank customers, on the other hand, represent obligations on the part of borrowers to repay sums certain to the bank, and as such are reflected on a bank's books as assets.

Obviously, the books of failed banks contain both assets and liabilities. The FDIC fulfills vastly different functions as to the two sides of a failed bank's ledger sheet.

C. The Role of the FDIC in Bank Failures and the Purpose of D'Oench and Section 1823(e)

The role of the FDIC in bank failures is well established. Its "basic mission is to protect insured depositors," FDIC v. La Rambla Shopping Ctr., Inc., 791 F.2d 215, 218 (1st Cir.1986), which it does by "undertaking an obligation to pay depositors when an insured bank fails." FDIC v. Nichols, 885 F.2d 633, 636 (9th Cir.1989). In other words, satisfying a failed bank's liabilities, especially its deposits, is a primary goal of the FDIC.

A failed bank's assets, on the other hand, are either liquidated or transferred to a solvent bank. ⁵ See, e.g., FDIC v. P.L.M.

Int'l, Inc., 834 F.2d 248, 254 (1st Cir.1987). Needless to say, not all borrowers (i.e., obligors with regard to the bank's assets ) happily meet their obligations toward a failed bank, and many attempt to assert claims and defenses against the FDIC aimed at relieving those obligations. The doctrines enunciated in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and its statutory counterpart, 12 U.S.C. Sec. 1823(e), greatly limit the types of claims and defenses that borrowers may assert against the FDIC. In essence, such claims and defenses are limited to those that are based on documentation in the failed bank's records. Moreover, these doctrines governing the claims and defenses of borrowers are designed to enable the FDIC to meet more effectively its obligations to pay depositors. See, e.g., Timberland Design Inc. v. First Serv. Bank for Savs., 932 F.2d 46, 48 (1st Cir.1991) (" '[T]he D'Oench Duhme doctrine ... 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.' ") (emphasis supplied) (quoting Bell & Murphy & Assocs., Inc. v. Interfirst Bank Gateway, N.A., 894 F.2d 750, 754 (5th Cir.), cert. denied, 498 U.S. 895, 111 S.Ct. 244, 112 L.Ed.2d 203 (1990)).

D. The Assignment Documents: Agreements Affecting a Bank Deposit

Turning to the transaction here, it is evident that at the time the certificate of deposit was purchased...