Walsh v. New West Federal Savings & Loan Assn.

• Decision Date: 13 September 1991
• Docket Number: No. D011477,D011477
• Citation: 1 Cal.Rptr.2d 35,234 Cal.App.3d 1539
• Court: California Court of Appeals Court of Appeals
• Parties: John WALSH et al., Plaintiffs, Appellants and Cross-Respondents. v. NEW WEST FEDERAL SAVINGS AND LOAN ASSOCIATION, et al., Defendants, Respondents and Cross-Appellants.

Page 35

1 Cal.Rptr.2d 35

234 Cal.App.3d 1539

John WALSH et al., Plaintiffs, Appellants and Cross-Respondents. v. NEW WEST FEDERAL SAVINGS AND LOAN ASSOCIATION, et al., Defendants, Respondents and Cross-Appellants.

No. D011477.

Court of Appeal, Fourth District, Division 1, California.

Sept. 13, 1991.

As Modified on Denial of Rehearing Oct. 8, 1991.

Review Denied Jan. 16, 1992.

Anderson & Kriger, Clayton M. Anderson and Charles A. Bott, La Mesa, for plaintiffs, appellants and cross-respondents.

Brown & Wood and Thomas G. Wood, San Francisco, for defendants, respondents and cross-appellants.

WIENER, Associate Justice.

Plaintiffs John Walsh and Sydney Walsh appeal from the judgment in favor of defendant New West Federal Savings & Loan Association (New West). New West cross-appeals from the court's denial of its motion for reasonable attorney's fees pursuant to Civil Code section 1717. We affirm the judgment and reverse the order denying New West attorney's fees.

FACTUAL AND PROCEDURAL BACKGROUND

I

The case comes to us after a court trial on New West's defense which was severed from the main action. For purposes of this appeal we therefore assume the truth of the allegations of the Walshes's complaint.

In 1982 the Walshes owned approximately 15 real properties, many of which were in default, nearing foreclosure. In attempting to extricate themselves from their financial difficulties, they met defendant Richard Gallegos who was allegedly going to solve their problems. They would deed their properties to him in exchange for $5,000 cash and Gallegos' promise to transfer to them property owned by defendant State Savings and Loan Association. The savings and loan property consisted of REO's, i.e., "real estate owned" by the bank, generally undesirable properties to retain because of the adverse effect on the bank's capital requirements. In addition Gallegos agreed to give the Walshes three promissory notes totalling $5,000,000, secured by a second deed of trust on land owned by Gallegos on which he was constructing an office building (the Scripps Mesa Project). The loan by State Savings, the construction lender on the Scripps Mesa Project, was secured by a first deed of trust.

For reasons which are not clear, Gallegos was unable to convince State Savings to exchange the Walshes's former properties for bank-owned PROPERTY. ^{1 1} Gallegos later lost the properties previously owned by the Walshes when the trust deed holders on the properties foreclosed. In addition, Gallegos was unsuccessful in developing the Scripps Mesa Project, resulting in State Savings foreclosing on its first trust deed, thus causing the Walshes to lose their security interest in that property. Gallegos paid nothing on the $500,000 secured note to the Walshes and later declared bankruptcy.

II

Seeking legal and equitable relief, the Walshes sued Gallegos and State Savings alleging fraud, conspiracy to defraud, and breach of contract. The purported liability of State Savings was predicated on the Walshes's allegations Gallegos served as its agent and/or that State Savings was a co-conspirator with Gallegos.

Later the Federal Home Loan Bank Board (FHLBB) declared State Savings ² to be insolvent and appointed the Federal Savings and Loan Insurance Corporation (FSLIC) as receiver. FSLIC took possession of all the assets of State Savings, ultimately resulting in a transfer of substantially all its asserts and liabilities, including the Walshes's litigation, to New West.

III

Soon after it became the real party in interest, New West raised as a defense a federal doctrine, known as the D'Oench Duhme ³ doctrine and its statutory counterpart, 12 United States Code section 1823(e). ⁴ The parties thereafter stipulated to sever the D'Oench Duhme defense for trial and to stay the remaining issues pending final resolution (including appeals) of the first trial.

The trial proceeded in two stages. First, the parties asked the court to determine whether the D'Oench Duhme doctrine applied to the facts of the case, presenting the question as a purely legal issue. After reviewing the parties written submissions and hearing oral argument, the court concluded the doctrine did apply to the circumstances of the case. The court then provided the Walshes the opportunity to present facts showing they satisfied the requirements of the doctrine. In response, the Walshes admitted they were unable to come forward with such factual showing. ⁵ The court consequently entered judgment in favor of New West. This appeal ensued.

DISCUSSION

THE WALSHES'S APPEAL

THE D'OENCH DUHME DOCTRINE

The D'Oench Duhme doctrine, an equitable rule of estoppel, emanates from the United States Supreme Court decision in D'Oench, Duhme & Co. v. FDIC (1942) 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956. In D'Oench Duhme, the Federal Deposit Insurance Corporation (FDIC) sued on a promissory note which had been assigned to it in connection with a bank failure. In defense, the obligors alleged the bank had orally agreed it would not call the note for payment. Rejecting the defense, the Supreme Court held an obligor who "lent himself to a scheme or arrangement" that was "likely to ... mislead" bank examiners may not assert against the FDIC any part of an agreement that might diminish the value of his written loan obligation. (Id., at p. 460, 62 S.Ct. at p. 680.) The Supreme Court based its ruling on a "federal policy ... to protect [the FDIC], ... from misrepresentations made to induce or influence [its] action[s], including misstatements as to the genuineness or integrity of securities in the portfolios of banks which it insures or to which it makes loans." (Id., at p. 459, 62 S.Ct. at p. 680.) Congress thereafter codified the doctrine at 12 United States Code section 1823(e). ⁶ (See fn. 4, ante, p. 37.)

Since its inception, courts have dramatically expanded the reach of the common law doctrine and its statutory counterpart. (Beighley v. Federal Deposit Ins. Corp. (5th Cir.1989) 868 F.2d 776, 784; Bowen v. Federal Deposit Ins. Corp. (5th Cir.1990) 915 F.2d 1013, 1015.) "The doctrine has been expanded to encompass any claim against an insolvent institution that would either diminish the value of the assets held by the FSLIC or increase the liabilities of the insolvent institution." (Castleglen, Inc. v. Commonwealth Sav. Ass'n (D. Utah 1989) 728 F.Supp. 656, 671, citing First State Bank v. City and County Bank (6th Cir.1989) 872 F.2d 707, 716-717.) The doctrine applies, for example, not only to defensive use of alleged oral promises (such as in the original D'Oench Duhme case), but also to offensive use, such as fraud or breach of contract claims based upon alleged oral agreements. (Beighley v. Federal Deposit Ins. Corp., supra, 868 F.2d at pp. 783-785; Webb v. Superior Court (1990) 225 Cal.App.3d 990, 275 Cal.Rptr. 581.) Courts hold the defense applies, moreover, even where the party asserting an oral agreement was innocent of any wrongdoing. The relevant question is not whether the oral "agreement was itself fraudulent or whether the borrower intended to deceive banking authorities, but rather whether the borrower 'lent himself to a scheme or arrangement' whereby '[the] authorities were likely to be misled.' " (Bell & Murphy & Assoc. v. Interfirst Bank Gateway (5th Cir.1990) 894 F.2d 750, 753-754.)

As the Supreme Court recently explained, a primary purpose of the doctrine "is to allow federal and state bank examiners to rely on a bank's records in evaluating the worth of the bank's assets." (Langley v. FDIC (1987) 484 U.S. 86, 91, 108 S.Ct. 396, 401, 98 L.Ed.2d 340.) Such evaluations must frequently "be made 'with great speed, usually overnight, in order to preserve the going concern value of the failed bank and avoid an interruption in banking services.' Gunter v. Hutcheson, [11th Cir.1982], 674 F.2d at 865." (Ibid.) The doctrine also seeks to "ensure mature consideration of unusual loan transactions by senior bank officials, and prevent fraudulent insertion of new terms, with the collusion of bank employees, when a bank appears headed for failure." (Id. at p. 92, 108 S.Ct. at 401.) Thus, "[t]he doctrine encourages debtors to memorialize all agreements in writing and reflects the equitable principle that losses incurred as a result of unrecorded arrangements should not fall on deposit insurers, depositors, or creditors but rather upon the person who could have best avoided the loss." (Webb v. Superior Court, supra, 225 Cal.App.3d at p. 995, 275 Cal.Rptr. 581, quoting Fair v. NCNB Texas Nat. Bank (N.D.Tex.1990) 733 F.Supp. 1099, 1103.)

APPLICATION OF D'OENCH DUHME DOCTRINE

Admittedly this case does not fit within the usual pattern into which a D'Oench Duhme defense is generally asserted. The Walshes do not allege a borrower/lender relationship between themselves and State Savings. Moreover, the focus of their action is not the enforceability of a promissory note to which they made a contemporaneous oral agreement. Nonetheless, mindful of the federal court's expansive interpretations of the doctrine and consistent with the authorities cited above, we conclude this case comes within the D'Oench Duhme doctrine because (1) the Walshes are attempting to enforce an oral agreement (their property exchange agreement with Gallegos) and/or to recover for oral misrepresentations made by Gallegos in connection with that agreement (2) which would reduce the value of assets formerly held by State Savings.

The Walshes counter the doctrine is inapplicable because there was never any agreement or relationship between them and State Savings. We agree the D'Oench Duhme doctrine generally bars enforcement of obligations only when those obligations arise from an agreement, as the term has been broadly construed by the courts (see Langley v. FDIC, supra, 484 U.S., at pp. 90-92, 108 S.Ct., at pp. 400-401) and the Walshes had no direct relationship with New West. A direct relationship, however, is not an...