Opposition Brief — Wright v. Federal Deposit Insurance ex rel. Union Nation Bank of Chicago

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Oe APR G ede

No. 91-1274

In the Supreme Court of the Guted States

OCTOBER TERM, 1991

LILLIAN WRIGHT, PETITIONER

FEDERAL DEPOSIT INSURANCE CORPORATION, ETC.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE RESPONDENT

IN OPPOSITION

KENNETH W. STARR

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 514-2217

ALFRED J.T. BYRNE

General Counsel

DOROTHY L. NICHOLS

Associate General Counsel

ANN S. DuROsSS

Assistant General Counsel

COLLEEN B. BOMBARDIER

Senior Counsel

JACLYN C. TANER

Counsel

Federal Deposit Insurance Corporation

Washington, D.C. 20429

QUESTION PRESENTED

Whether the court of appeals correctly applied the rule

of D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942),

and 12 U.S.C. 1823(e) to allow the FDIC to enforce

promissory notes acquired as receiver of a failed bank,

despite petitioner’s affirmative defenses based on an

unrecorded side agreement.

————————

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

Campbell Leasing, Inc. v. FDIC, 901 F.2d 1244 (5th Cir.

a a aie vueucucussecvnnvanee s

Chatham Ventures, Inc. v. FDIC, 651 F.2d 355 (Sth Cir.

1981), cert. denied, 456 U.S. 972 (1982)............000..000000... 7

Commerce Federal Savings Bank v. FDIC, 872 F.2d 1240

ia ons caccsnaecuoarnadaswastensassosevs fj

D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942)....... 3

FDIC vy. Bracero & Rivera, Inc., 895 F.2d 824 (ist Cir.

ec Ls capauneneavukeaseaonveuner 5

FDIC vy. Caporale, 931 F.2d 1 (st Cir. 1991) ........0.0.0...... 7

FDIC v. Manatt, 922 F.2d 486 (8th Cir.), cert. denied,

Neen ee en eee as cebusbuhansuassuedevssweenbees 7 5

FDIC v. McClanahan, 795 F.2d 512 (5th Cir. 1986)......... 7

FDIC v. McCullough, 911 F.2d 593 (11th Cir. 1990), cert.

I Ds, ss sunisuunnnnanponsensneces 7

FDIC v. Merchants National Bank, 725 F.2d 634 (11th

Cir.), cert. denied, 469 U.S. 829 (1984) ...................0..00. 6

FDIC v. Rivera-Arroyo, 907 F.2d 1233 (st Cir. 1990)...... 7

FDIC vy. State Bank, 893 F.2d 139 (7th Cir. 1990) ........... ~

FDIC ¥. Venture Contractors, Inc., 825 F.2d 143 (7th

arene eis viha” <lnacauvocesnasseninisesesso san’ 4

Goodman v. Lukens Steel Co., 482 U.S. 656 (1987)............ 7

| Grubb v. FDIC, 868 F.2d 1151 (0th Cir. 1989)... 6}

Langley v. FDIC, 484 U.S. 86 (1987) ................ccsccsessscceeee 7

(III)

Cases—Continued:

Logan v. Zimmerman Brush Co., 455 U.S. 422 (1982)......

Savers Fed. Sav. & Loan Ass’n vy. Amberley Huntsville,

ee 6h UE! UU Ee |) nner

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

Pe ee Oe Ce Ce Ne iacacinntantstishctsececiccnncdisssianrcanins

Twin Constr., Inc. v. Boca Raton, Inc., 925 F.2d 378

CR Fe Pisaiebinkcaenchncstieneietnsgatncatheuscinacalkgidenasscseosienieves

Constitution and statutes:

U.S. Const. Amend. V (Due Process Clause)....................

Act of Sept. 21, 1950, ch. 967, § 2, 64 Stat. 889.......00.0000....

Financial Institution Reform, Recovery, and Enforce-

ment Act of 1989, Pub. L. No. 101-73, § 217(4), 103 Stat.

256 (12 U.S.C. 1823(e) (Supp. I 1989)).............eeesseeees

Ee Spahr, BOC Passcnaninepecciccesstnnns vennineehuanaianadeaasievenss 4, 5,

6,7

—

In the Supreme Court of the Anited States

OCTOBER TERM, 1991

No. 91-1274

LILLIAN WRIGHT, PETITIONER

Vv.

FEDERAL DEPOSIT INSURANCE CORPORATION, ETC.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE RESPONDENT

IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals, Pet. App. Al-A24,

is reported at 942 F.2d 1089. The opinion of the district

court, Pet. App. B1-B21, is unreported.

JURISDICTION

The judgment of the court of appeals was entered on

August 29, 1991. The petition for a writ of certiorari was

filed on November 27, 1991. The jurisdiction of this Court

is invoked under 28 U.S.C. 1254(1).

(1)

STATEMENT

1. On October 30, 1982, petitioner—then a director of

Union National Bank, a federally insured national

bank—executed two unconditional promissory notes

payable to the bank for $75,200 and $25,600, respectively.

Pet. App. B4-B5. The $75,200 note consolidated and re-

newed several prior notes that petitioner had previously

signed and delivered to the bank. Jd. at B7-B8. On

November 12, 1982, petitioner executed a third uncondi-

tional promissory note for $27,000 payable to the bank.

Id. at Bd.

On July 8, 1983, the Comptroller of the Currency de-

clared the bank insolvent and appointed the FDIC as re-

ceiver. Pet. App. B2. Petitioner’s promissory notes were

among the assets of the Bank acquired by the FDIC in

its receivership capacity. The bank’s records showed

that petitioner had made no payments of the principal

amounts owing on any of the notes. /d. at B7.

2. The FDIC sued petitioner in federal district court

seeking to collect on the notes.' Petitioner admitted

signing and delivering the notes to the bank, and stipu-

lated that the notes were assets of the bank at the time

the FDIC took over as receiver. Pet. App. A4. She as-

serted, however, that she had executed the $75,200 and

$25,000 notes as part of an application for a line of credit,

and that the bank had agreed not to enforce the notes

unless it granted the loan application, which it never did.

According to petitioner, no funds were ever advanced on

the notes and thus they were invalid for lack of consider-

ation. /d. at A5. Petitioner further claimed that she had

repaid the $27,000 note. /bid.

' The FDIC also sued petitioner on two additional notes. Pet.

App. B1-B2. Petitioner did not appeal from the judgments obtained

by the FDIC on those notes.

The FDIC filed a motion in limine seeking to exclude

any evidence in support of petitioner’s defense of lack of

consideration, relying on the common law estoppel rule

established in D’Oench, Duhme & Co. v. FDIC, 315 U.S.

447 (1942), which forbids proof of secret side agreements

that would defeat the FDIC’s efforts to collect facially

valid bank assets. The district court denied the motion,

ruling that the D’Oench doctrine was inapplicable be-

cause the FDIC had failed to establish that petitioner’s

execution of the notes was part of a scheme or

arrangement likely to mislead banking authorities. Pet.

App. A4.

At trial, petitioner introduced a letter dated March 10,

1983, from the bank’s president to petitioner. According

to petitioner, the letter released her from any obliga-

tions on the $25,000 and $75,200 notes and indicated that

the $27,000 note would be repaid from an escrow account.

Pet. App. A5-A6.

The district court found for petitioner on all three

notes. Pet. App. B1-B21. Even though the notes were

“facially unqualified (albeit unsecured) unconditional

promises to pay,” id. at B5, the court concluded that the

D’Oench doctrine was inapplicable because the FDIC had

failed to demonstrate that the bank had carried the notes

as assets at the time of the FDIC’s takeover in July 1983.

Id. at B17-B18. The court then found that the March 10,

1983, letter had cancelled the $75,200 and $25,000 notes.

Id. at B7, B19-B20.,The court also relied on the letter to

conclude that the $27,000 note had been satisfied from an

escrow account. /d. at B20.

3. The court of appeals reversed. Pet. App. Al-A24.

The court held that the district court had “misap-

prehended the requirement of proving a scheme or

agreement likely to mislead banking authorities” under

the D’Oench doctrine, Pet. App. A17, and that D’Oench

applies even in the absence of any intent to defraud. Pet.

App. A18. Thus, the court concluded that D’Oench and its

statutory counterpart, 12 U.S.C. 1823(e),? barred peti-

tioner’s claim that the bank had agreed not to enforce the

facially unconditional $25,000 and $75,200 notes. Pet. App.

A19-A20.

The court of appeals also held that the district court

erred in requiring the FDIC to prove that the $25,000

and $75,200 notes had been obtained from the bank’s open

files. Relying on testimony to the effect that the FDIC

does not generally seek to enforce instruments found in

a failed bank’s closed files, and pointing to petitioner’s

stipulation that the notes were assets of the failed bank,

the court held that the FDIC had met its burden of estab-

lishing an inference that the notes were valid assets of

the bank. Pet. App. A20-A22, citing FDIC v. Venture

Contractors, Inc., 825 F.2d 143 (7th Cir. 1987).

The court of appeals next concluded that 12 U.S.C.

1823(e) barred petitioner’s claim that, as set forth in the

March 10 letter, the bank had agreed to accept funds

from an escrow account in satisfaction of the $27,000

2 Section 1823(e) bars the assertion of an agreement against the

FDIC to defeat or diminish the FDIC’s interest in an asset unless

the agreement meets each of four requirements: (1) it must be in

writing; (2) it must have been executed by both the bank and the

obligor contemporaneously with the acquisition of the asset by the

failed bank; (3) it must have been approved by the bank’s board of

directors or loan committee and the approval must be reflected in

the minutes of the board or committee; and (4) it must have been

continuously maintained as an official bank record. Section 1823(e)

was enacted in 1950 as a statutory counterpart of the D’Oench

doctrine. See Act of Sept. 21, 1950, ch. 967, § 2, 64 Stat. 889. The

original version of the statute applied only to the FDIC in its

corporate capacity, but the statute was amended by the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989

(FIRREA), Pub. L. No. 101-73, § 217(4), 103 Stat. 256 (12 U.S.C.

1823(e) (Supp. I 1989)), to apply to the FDIC in its capacity as re-

ceiver as well. The court of appeals held that the 1989 amendment

was applicable to petitioner’s claims. Pet. App. A11-A16.

note. The court found that the agreement embodied in

the March 10 letter was subject to Section 1823(e)

because it tended to “diminish or defeat the” FDIC’s

interest in the note within the meaning of the statute.

Since the letter failed three of the requirements of

Section 1823(e)—it was not executed contemporaneously

with the bank’s acquisition of the note, it was not ap-

proved by the bank’s board of directors or loan commit-

tee, and it had not been an official record of the bank

continuously from the date of its execution—the letter

could not be used to support petitioner’s defense of

accord and satisfaction. Pet. App. A22-A24.

ARGUMENT

The court of appeals’ holding that petitioner’s affirma-

tive defenses are barred by the D’Oench doctrine and by

Section 1823(e) is a correct application of settled law.

The court’s decision does not conflict with any decision

of this Court or of any other court of appeals. Accord-

ingly, further review by this Court is not warranted.

1. Petitioner first argues (Pet. 15-19) that the court

of appeals’ decision conflicts with decisions of other

courts of appeals finding D’Oench and Section 1823(e)

inapplicable where a note has been invalidated by acts

independent of an unrecorded side agreement. The cases

on which she relies, however, are inapposite. In F'DIC vy.

Bracero & Rivera, Inc., 895 F.2d 824 (1st Cir. 1990), the

FDIC sought to enforce a mortgage note that had been

paid and canceled before the FDIC took over as receiver;

the district court expressly found that the bank records

showing the note’s cancellation and repayment “were in

the hands of FDIC at all relevant times.” Id. at 829

(emphasis by court of appeals). Thus, the court held that

any “secret agreement” between the defendants and the

bank was beside the point because the repayment and

cancellation of the note “were independent of the alleged

secret agreement.” /d. at 830.

) 5 ERED FES

Similarly, in Commerce Federal Savings Bank v.

FDIC, 872 F.2d 1240 (6th Cir. 1989), the FDIC sought to

enforce a mortgage even though the bank’s records

clearly showed that the underlying debt had been repaid

prior to the bank’s failure, thus extinguishing the mort-

gage by operation of law. 872 F.2d at 1242 & n.3, 1244-

1246. The mortgage contained a “dragnet clause” secur-

ing any subsequently incurred debts that came into

existence prior to the satisfaction of the original debt,

but the FDIC was unable to prove that any such debts

existed. Thus, the Sixth Circuit held that the repayment

of the original debt—an act independent of any side

agreement and clearly reflected in the bank’s records—

extinguished the mortgage for purposes of Section

- 1823(e).$

In this case, by contrast, the bank’s alleged promise

not to enforce the $25,000 and $75,200 notes was itself a

secret side agreement, and thus could not constitute a

3 Grubb v. FDIC, 868 F.2d 1151 (10th Cir. 1989), is of no assis-

tance to petitioner. See Pet. 17. In Grubb, the district court had en-

tered judgment denying the bank recovery on certain notes before

the FDIC acquired the bank’s assets. Noting that the district

court’s “judgment provided the FDIC a reliable record indicating

that the notes were void,” 868 F.2d at 1159, the court held that the

FDIC had acquired no interest in the notes, and that Section

1823(e) and D’Oench were therefore inapplicable. Grubb is clearly

distinguishable, because in this case the FDIC had no “reliable

record” of the alleged side agreement canceling the notes.

Finally, petitioner’s reliance (Pet. 16) on dicta in FDIC v. Mer-

chants National Bank, 725 F.2d 634 (11th Cir.), cert. denied, 469

U.S. 829 (1984), is of no avail. That case holds that, in general, the

only evidence that may be admitted to defeat a claim by the FDIC

to collect a failed bank’s asset is evidence meeting the strict

requirements of Section 1828(e). See 725 F.2d at 639. This case

does not fall within the “narrow exceptions” to Section 1823(e)

noted in Merchants National, because petitioner’s defenses are not

based on “acts independent of any understanding or side agree-

ment.” Jbid.

valid defense against the FDIC. There is simply no fac-

tual basis for petitioner’s claim (Pet. 16) that the alleged

cancellation of her promissory notes was an act indepen-

dent of that undisclosed side agreement. Neither the

notes she executed, nor the bank’s official records,

revealed any conditions on repayment of the notes.‘ The

court of appeals’ decision is fully consistent with this

Court’s decisions in D’Oench and Langley v. FDIC, 484

U.S. 86 (1987), as well as decisions of other courts of ap-

peals that have consistently applied D’Oench and Section

1823(e) to protect the FDIC from a defense of lack of

consideration. See, e.g., FDIC v. Caporale, 931 F.2d 1, 2

(Ist Cir. 1991); FDIC v. McCullough, 911 F.2d 5938, 601

(11th Cir. 1990), cert. denied, 111 S. Ct. 2235 (1991); FDIC

v. McClanahan, 795 F.2d 512, 515-516 (5th Cir. 1986).

Similarly lacking in merit is petitioner’s assertion

(Pet. 18) that Section 1823(e) does not apply to her de-

fense that the March 10 letter shows satisfaction of the

$27,000 note. The court of appeals’ decision on that issue

is fully consistent with the decisions of other circuits

applying Section 1823(e) to exclude accord and satisfac-

tion defenses based on written side agreements. See, e.g.,

FDIC v. Manatt, 922 F.2d 486, 488-489 (8th Cir.), cert.

denied, 111 S. Ct. 2889 (1991); FDIC v. Rivera-Arroyo,

907 F.2d 1233, 12386 (1st Cir. 1990). Moreover, the

D’Oench doctrine compels the same result, because the

March 10 letter constituted an unrecorded side agree-

ment that was likely to mislead banking authorities.

See, e.g., Savers Fed. Sav. & Loan Ass’n v. Amberley

4 Petitioner asserts (Pet. 22) that the notes were in fact facially

qualified and conditional. The district court’s findings to the con-

trary, Pet. App. B5, were not disturbed on appeal, however, and

should be deemed conclusive. See Goodman v. Lukens Steel Co.,

482 U.S. 656, 665 (1987). Likewise, the court of appeals’ fact-bound

determination that the March 10 letter was not found in the bank’s

records, Pet. App. A238, is not worthy of review.

Huntsville, Ltd., 934 F.2d 1201, 1206-1207 (11th Cir. 1991)

(D’Oench bars reliance on any written or unwritten side

agreement that does not appear in the bank’s records).®

2. Petitioner also contends (Pet. 19-27) that the appli-

cation of D’Oench and Section 1823(e) to foreclose her de-

fenses to the notes constitutes a violation of due process.

There is no merit to that claim.

As this Court has observed, under the Due Process

Clause government “remains free to create substantive

defenses or immunities for use in adjudication.” Logan v.

Zimmerman Brush Co., 455 U.S. 422, 432 (1982). The

Clause generally forbids government to deprive persons

of property interests without providing them an oppor-

tunity to be heard, id. at 433, but petitioner had ample

opportunity to contest the applicability of D’Oench and

Section 1823(e) to the facts of her case. Due process

requires no more.®

> Petitioner suggests in passing (Pet. 24 n.5) that the court of

appeals erred in applying the amended version of Section 1823(e)

to this case. That issue is irrelevant, however, because the D’Oench

doctrine would compel the same result even if Section 1823(e) were

inapplicable. D’Oench has consistently been applied in cases where

the FDIC acted as receiver, see Timberland Design, Inc. v. First

Serv. Bank for Sav., 932 F.2d 46, 49 (1st Cir. 1991) (citing cases),

and thus the 1989 extension of Section 1823(e) to the FDIC in its

receivership capacity merely restated existing law, see Twin

Constr., Inc. v. Boca Raton, Inc., 925 F.2d 378, 382 & n.2 (11th

Cir. 1991); FDIC v. State Bank, 893 F.2d 139, 143 (7th Cir. 1990).

6 The courts of appeals have uniformly rejected similar due

process challenges. See, e.g., Campbell Leasing, Inc. v. FDIC, 901

F.2d 1244, 1248 (5th Cir. 1990); FDIC v. State Bank, 893 F.2d 139,

144 (7th Cir. 1990); Chatham Ventures, Inc. v. FDIC, 651 F.2d

355, 362-363 (5th Cir. 1981), cert. denied, 456 U.S. 972 (1982).

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.