Dimuzio v. Resolution Trust , 68 F.3d 777 ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
10-20-1995
Dimuzio v Resolution Trust
Precedential or Non-Precedential:
Docket 95-5066
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 95-5066
RICCARDO DIMUZIO; RUTH DIMUZIO,
on behalf of themselves and all
others similarly situated
v.
RESOLUTION TRUST CORPORATION IN
ITS CAPACITY AS RECEIVER OF CARTERET
SAVINGS BANK, F.A. AND IN ITS
CAPACITY AS CONSERVATOR OF
CARTERET FEDERAL SAVINGS BANK
(D.C. Civil No. 94-cv-01559)
RICCARDO DIMUZIO; RUTH DIMUZIO
v.
RESOLUTION TRUST CORPORATION AS
CONSERVATOR OF CARTERET FEDERAL SAVINGS
BANK AND CARTERET SAVINGS BANK
(D.C. Civil No. 94-cv-04800)
KAZUYUKI KAMEDA; TANEKO KAMEDA;
ESMIE J. WINT, on behalf of themselves
and all others similarly situated
v.
RESOLUTION TRUST CORPORATION AS
CONSERVATOR OF CARTERET FEDERAL SAVINGS
BANK AND CARTERET SAVINGS BANK
(D.C. Civil No. 94-cv-04831)
Riccardo Dimuzio, Ruth Dimuzio,
Kazuyuki Kameda, Taneko Kameda and Esmie Wint,
Appellants
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Nos. 94-cv-01559;
1
94-cv-04800; and 94-cv-4831)
Argued August 25, 1995
Before: GREENBERG, COWEN and SAROKIN, Circuit Judges
(Filed October 20, 1995)
Douglas S. Lyons (argued)
Lyons & Farrar
201 Alhambra Circle
Suite 711
Coral Gables, Florida 33134
COUNSEL FOR APPELLANTS
John H. Denton
Connell, Foley & Geiser
85 Livingston Avenue
Roseland, New Jersey 07068
Jeffrey Ehrlich (argued)
Room 3129
Resolution Trust Corporation
Legal Division
1717 H Street, N.W.
Washington, D.C. 20006
COUNSEL FOR APPELLEE
OPINION
COWEN, Circuit Judge.
This breach of contract and fraud action is brought by
real estate owners against the Resolution Trust Corporation
("RTC") in its capacities as receiver for Carteret Savings Bank
and as conservator of Carteret Federal Savings Bank. The
district court granted the RTC's motion to dismiss brought
2
pursuant to Fed. R. Civ. P. 12(b)(6). Because we find that 12
U.S.C. § 1823(e) bars plaintiffs-appellants' cause of action
against the RTC, we will affirm the district court's order of
dismissal.
I.
The following facts are alleged in plaintiffs'
complaints. The plaintiffs are the victims of a widespread fraud
perpetrated by General Development Corporation ("GDC"). GDC was
one of the largest land development companies in Florida. It
primarily sold real estate to out-of-state residents using
monthly installment contracts. GDC's advertisements touted its
low down payments and small monthly payments as making the
"Florida dream" widely affordable.
After purchasing a GDC lot, GDC customers were
encouraged to use the "equity" they had built up in their
property as a down payment on a GDC house or condominium. They
were given, among other inducements, roast beef suppers at the
local Holiday Inn, flyers portraying the joys of GDC home
ownership, and personal attention by GDC sales representatives.
During these sessions, prospective purchasers were told that,
after taxes and rental income, the cost of owning a GDC home
would be only slightly more than the payments they were making
for their vacant lots.
Interested pre-qualified buyers were invited to travel
to Florida to visit a GDC community and to choose a home from
among numerous GDC models. The cost of the trip ($299.00) could
be applied against the sales price if they purchased a house or
3
condominium. GDC representatives accompanied prospective
purchasers from the time they departed for Florida until the time
they returned home. While in Florida, they stayed at GDC-
selected hotels, dined with GDC personnel, and traveled with GDC
sales representatives to GDC communities. The GDC contract to
purchase was signed during the trip. Under no circumstances were
the purchasers allowed to extend their Florida stay or view other
real estate development communities.
In addition to these hard-sell sales tactics, the GDC
customers were persuaded to apply for a mortgage from GDC's
"designated lender," GDV Financial Corporation ("GDV"). GDV, a
wholly owned subsidiary of GDC, was created to finance the
purchase of GDC houses, and to sell and service the mortgages. As
part of the loan process, GDV had the GDC houses appraised. These
appraisals failed to comply with industry guidelines.0 Instead,
the homes were appraised in conformance with GDC's inflated
selling price. The houses were highly over-valued, and the
mortgages were for amounts far greater than the market value of
the real property that secured them. The purchasers did not seek
independent appraisals, nor did they retain legal representation
in purchasing the real estate.
GDV entered into an arrangement with several
institutional investors to sell the mortgages. One of those
investors, Carteret Savings Bank ("Carteret"), a federally
0
Those guidelines are established by the Federal National
Mortgage Corporation ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"), respectively the first and second largest
purchasers of residential homeowners' mortgages.
4
insured savings & loan, bought the mortgages despite the non-
conforming appraisals. Carteret allegedly was aware of the non-
conforming appraisals, and purchased the mortgage loans with
certain credit enhancements: it required GDV to obligate itself
to repurchase the loans in case of a default, and further
required that GDV's performance be secured by letters of credit
and cash deposits.
On December 4, 1992, the Office of Thrift Supervision
ordered Carteret closed and appointed the RTC as its receiver. On
that same date, the assets of the former Carteret were
transferred to Carteret Federal Savings Bank, a newly chartered
federal savings association, and the RTC was appointed
conservator of the new bank.
Following an investigation, GDC as well as its
directors were indicted and convicted of criminal fraud and
conspiracy to commit fraud. Both GDC and GDV filed for
protection under Chapter 11 of the Bankruptcy Code. GDC emerged
from bankruptcy as Atlantic Gulf Communities Corporation and GDV
was dissolved.
GDC customers Riccardo and Ruth Dimuzio filed an action
in the United States District Court for the District of Columbia
against the RTC as conservator of Carteret Federal Savings Bank
and Carteret Savings Bank. Kazuyuki Kameda, Taneko Kameda and
Esmie Wint filed a class action against the RTC on behalf of
those persons who obtained mortgage financing from GDV in the
United States District Court for the District of Columbia. These
actions were transferred to the United States District Court for
5
the District of New Jersey, and consolidated by order of the
district court on October 19, 1994.
Each complaint alleged, inter alia, breach of fiduciary
duty, breach of contract, fraudulent concealment, mortgage fraud,
and unfair and deceptive trade practices. Plaintiffs allege that
GDV knew and failed to disclose that: (1) the loan arranged would
result in the purchasers losing their cash equity in the lot they
traded in; (2) the GDV appraisal of the housing unit was
inaccurate and did not conform to industry standards; (3) no
lender applying industry standards would accept the GDV appraisal
or make a purchase money loan in the amount requested; and (4)
GDV, because of its GDC-controlled status, had a conflict of
interest and did not intend to negotiate a conventional arms-
length loan as requested by the purchasers in their loan
applications. Plaintiffs further allege that Carteret knew or
should have known of GDC's and GDV's concealment of material
facts upon which the notes were secured.
The district court dismissed the complaints pursuant to
Fed. R. Civ. P. 12(b)(6), holding that plaintiffs' causes of
action were precluded by Adams v. Madison Realty & Development,
Inc., 937 F.2d 845 (3d Cir. 1991) and 12 U.S.C. § 1823(e).0 This
appeal followed.
0
Although the RTC advanced a number of grounds in support of its
motion to dismiss, the district court relied upon § 1823(e) to
decide the motion. On this appeal, the RTC seeks an affirmance
on this statutory basis. Accordingly, our discussion is limited
to § 1823(e), and we need not apply the federal common law
doctrine of D'Oench, Duhme. Indeed, we note that the D'Oench,
Duhme doctrine may no longer be a separate bar to plaintiffs'
6
II.
The district court had jurisdiction over this case
under 12 U.S.C. § 1441a(l)(1) and 28 U.S.C. § 1331. We have
jurisdiction pursuant to 28 U.S.C. § 1291. This is an appeal
from the district court's dismissal of the plaintiffs' complaints
pursuant to Fed. R. Civ. P. 12(b)(6). Accordingly, our review is
plenary. Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993).
III.
The Federal Deposit Insurance Act of 1950 includes a
provision, 12 U.S.C. § 1823(e), which is generally thought to
codify the result reached in D'Oench, Duhme & Co. v. FDIC, 315
U.S. 447, 62 S. Ct. 676 (1942). See Adams v. Madison Realty &
Development, Inc., 937 F.2d 845, 852 (3d Cir. 1991)(citing FDIC
v. Blue Rock Shopping Center, Inc., 766 F.2d 744, 745 (3d Cir.
1985)). Section 1823(e) provides:
No agreement which tends to diminish or defeat the
interest of the Corporation in any asset acquired by it
... either as security for a loan or by purchase or as
receiver of any insured depository institution, shall
be valid against the Corporation unless such agreement
--
(1) is in writing,
(2) was executed by the depository institution and any
person claiming an adverse interest thereunder,
including the obligor, contemporaneously with the
acquisition of the asset by the depository institution,
(3) was approved by the board of directors of the
depository institution or its loan committee, which
approval shall be reflected in the minutes of said
board or committee, and
claims. See, O'Melveny & Myers v. FDIC, __ U.S. __, 114 S. Ct.
2048 (1994); Murphy v. FDIC, 61 F.3d 34 (D.C. Cir. 1995).
7
(4) has been, continuously, from the time of its
execution, an official record of the depository
institution.
One purpose of this section is to permit federal and
state bank examiners accurately and quickly to assess the
financial condition of a federally insured depository institution
by examining its books and records. The statute accomplishes
this objective, in part, by limiting the enforceability of
"agreements" affecting the institution's assets held by the
receiver to those that are properly recorded in the books and
records of the institution. See Langley v. FDIC, 484 U.S. 86,
108 S. Ct. 396 (1987).
A second purpose of § 1823(e), implicit in its
requirement that the agreement be executed "contemporaneously"
with the acquisition of the asset and approved by officially
recorded action of the bank's board or loan committee, is 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." Langley, 484 U.S. at 91, 108 S. Ct. at 401.
The Supreme Court has construed the word "agreement"
broadly in the context of § 1823(e). In Langley, the plaintiffs
purchased real estate from a federally insured bank and were
obligors on an unconditional promissory note. When the bank
sought to collect on the note, the Langleys sued to avoid
payment, claiming that the bank had made misrepresentations
8
concerning the value and amount of the real estate at issue.
After the bank failed, the FDIC was substituted as a party.
The Langley Court held that § 1823(e) bars a claim of
fraud in the inducement when an obligor seeks to avoid payment on
a note that has come into the FDIC's possession. The Court
reasoned that for purposes of the statute, the term "agreement"
includes warranties concerning real estate, the truthfulness of
which is a condition precedent to the Langleys' obligation to pay
the note. Because this "agreement" had not been recorded on the
bank's records, the Court held that the defense of fraud in the
inducement was statutorily barred.
In Adams, 937 F.2d at 845, we held that § 1823(e)
extends to any warranty on which a party's performance is
conditioned, and is not limited to obligations made between a
bank and its obligor. In Adams, the plaintiffs had executed
promissory notes for investments in fraudulent tax shelters.
Although each of the notes was payable to one of three originator
banks, the notes were eventually purchased on the secondary
market by Empire of America Federal Savings Bank, a federally
regulated savings and loan. The RTC was appointed as conservator
of Empire and came into possession of the notes. The Adams court
held that plaintiffs had not made the agreement, i.e.,
representations and warranties related to the fraudulent tax
shelters, part of the official bank record. Thus, the
requirements of § 1823(e)(3) were not satisfied.
The Adams court specifically rejected the plaintiffs'
claim that § 1823(e) was inapplicable in cases where the obligors
9
had no direct dealings with a federally regulated depository
institution:
Langley makes it clear that the "agreement" covered by
§ 1823(e) and the D'Oench doctrine extends to any
warranty on which a party's performance is conditioned.
There is absolutely no indication that the Court's
reasoning should be limited to obligations between a
bank and its obligor.
Adams, 937 F.2d at 858. Therefore, § 1823(e) applies to
agreements between an obligor and parties other than a depository
institution.
A.
A threshold question exists in this case as to what is
the "agreement" that diminished or defeated the interest of the
RTC in its acquisition of the subject promissory notes.
Appellants contend, and the district court found, that the
"agreement" sought to be enforced is the home appraisals and the
Loan Purchase Agreements between GDV and Carteret. The district
court concluded that the "agreement" in the form of the Loan
Purchase Agreements and the appraisals met the "in writing"
requirement of § 1823(e)(1).
Although the appraisals may be evidence of the alleged
fraud, they are not a written form of the representations and
warranties regarding the real estate, the truthfulness of which
is a condition precedent upon which the plaintiffs base their
claims. Specifically, the appraisals were not a bargained for
promise or warranty that the real estate was priced at market
value. See, Langley v. FDIC, 484 U.S. at 91. ("agreement" under
10
§ 1823(e) is a warranty or a promise which imposes duties or
conditions.). Similarly, the Loan Purchase Agreements did not
diminish the interest of the RTC; nor were the plaintiffs parties
to these agreements. Accordingly, we reject the district court's
conclusion that the "agreement" in this case is the appraisals
and Loan Purchase Agreements.
Representations and warranties regarding the real
estate, the truthfulness of which was allegedly a condition
precedent to the plaintiffs' obligations to repay the notes,
would constitute an "agreement" that diminishes the interest of
the RTC. There are no allegations that such an "agreement" was
put in writing. Therefore, the agreement in this case does not
meet the "in writing" requirement of § 1823(e)(1).0
B.
Appellants next assert that because § 1823(e) always
would bar a claim in a situation such as the one presented in
0
One purpose of the writing requirement in § 1823(e) is to enable
bank examiners to make reliable examinations of the bank's worth.
Langley, 484 U.S. at 91. Judge Sarokin in his dissent maintains
that, in this case "the RTC could evaluate the worth of
Carteret's assets and examine these appraisals and agreements
and indeed, discover the fraud alleged by the plaintiffs."
Dissent typescript at 7. We respectfully disagree. Plaintiffs'
complaints allege that the official bank record included
appraisals stating that they were not made in accordance with
FNMA/FHLMC guidelines, and that Carteret was aware of this fact
when it bought the Loan Purchase Agreements. We cannot say,
based on these allegations, that the official bank record showed
on its face that the notes were procured by fraud in the
inducement. Nor can we conclude, as Judge Sarokin does, that
these documents put the bank examiners "on notice" of the real
worth of the assets. Dissent typescript at 7-9.
11
this case, we should decline to apply it. The obligors here seek
to avoid payment on promissory notes which have been purchased by
a depository institution on the secondary market. They claim
that such an "agreement" could never be executed by the
depository institution and the obligor contemporaneously with the
depository institution's acquisition of the asset as required by
§ 1823(e)(2).
The fact that it is not possible for the
representations and warranties made in this case to constitute an
"agreement" that meets the contemporaneous requirement of
§1823(e)(2), however, does not inextricably lead to the
conclusion that Congress did not intend the recording statute to
apply in these cases, or that an exception should be carved out
of the statute. Adams teaches that § 1823(e) applies to
"agreements" between obligors and third parties and, therefore,
applies in this case. Adams cannot be overruled except by an in
banc court. IOP Chapter 8. Hearing or Rehearing in Banc.
We note that every other court of appeals that has
considered this issue has come to the same conclusion as we did
in Adams. See Victor Hotel Corp. v. FCA Mortg. Corp., 928 F.2d
1077, 1083 (11th Cir. 1991) (§ 1823(e) does not only apply where
the note is initially executed in favor of a bank); Chatham
Ventures, Inc. v. FDIC, 651 F.2d 355, 360-61 (5th Cir. Unit B
1981) (§ 1823(e) makes no exception for agreements initiated by a
12
third party and the obligors), cert. denied, 465 U.S. 972, 102 S.
Ct. 2234 (1982).0
Appellants contend that Adams is distinguishable
because the representations at issue in Adams were oral, while
the "agreement" here, the Loan Purchase Agreements and
appraisals, was in writing. As we have determined that the
"agreement" in this case--the representations and warranties made
by GDV and GDC to the plaintiffs--was not in writing, Adams is
not distinguishable on this basis.
Appellants also argue that Adams is distinguishable
because the Adams court affirmed the district court's grant of
summary judgment whereas here the district court granted
defendant's motion to dismiss without giving appellants the
opportunity to discover Carteret's records at the time it
purchased the notes. This argument must also be rejected.
Accepting, as we must, all allegations of fact as true,
appellants would not be entitled to relief under any state of
facts which could be proven in support of their claims.
Appellants concede the point by arguing that § 1823(e)(2)'s
contemporaneous requirement could not possibly be met under the
facts of this case.
0
Judge Sarokin in his dissent suggests there is an emerging
circuit split on whether the contemporaneous requirement must be
strictly interpreted. Dissent typescript at 10. However, the
case upon which he principally relies, RTC v. Midwest Federal
Sav. Bank of Minot, 36 F.3d 785, 797-98 (9th Cir. 1994), did not
involve a note that was purchased on the secondary market.
Moreover, FDIC v. Manatt, 922 F.2d 486 (8th Cir. 1991) expressly
left open the question of the reach and scope of § 1823(e)(2).
Id. at 489 n.4.
13
Appellants next assert that because of market
realities, an obligor whose promissory note is purchased on the
secondary market can never execute an agreement contemporaneously
with the bank's acquisition of the note, and, therefore, an
equitable exception to the statute should apply in this case.
They claim that the Adams court did not recognize such an
equitable exception because the appellants in Adams knew that
they were creating negotiable instruments, whereas here, the
appellants did not know their notes were negotiable. This
distinction is not dispositive. We agree that Adams raised the
issue of the possible availability of an equitable exception to
§1823(e). That discussion, however, was dictum included in the
opinion after the court had already held that § 1823(e) applied
in that case. The Langley Court similarly rejected the
availability of an equitable exception after it reached its
holding. Langley, 484 U.S. at 96, 108 S. Ct. at 403. We
likewise will not carve out an equitable exception.
As the Supreme Court stated in Langley, "Congress opted
for the certainty of the requirements set forth in § 1823(e). . .
. Such a categorical recording scheme is of course not unusual."
Langley, 484 U.S. at 95, 108 S. Ct. at 403. Either the statutory
requirements are met or they are not. We cannot ignore the plain
language of the statute and binding precedent of our court to
reach an arguably more equitable result. If Congress wishes to
provide relief to obligors whose promissory notes were procured
by fraud and later transferred on the secondary market to a
federal insured depository institution, it may amend the statute
14
accordingly. We have no reason to believe that Congress intended
to exempt from the recording statute a situation such as the one
presented in this case.0
The order of the district court dismissing plaintiffs'
complaints pursuant to Fed. R. Civ. P. 12(b)(6) will be affirmed.
0
Judge Sarokin argues in his dissent that the contemporaneous
requirement "must be read in light of commercial reality. When
there exists a secondary market for mortgage notes, the original
loan and subsequent acquisition will never be precisely
contemporaneous." Dissent typescript at 12. We agree that it is
virtually impossible for an original loan and subsequent
acquisition on a secondary market to be made contemporaneously.
We further agree that there is a dearth of legislative history to
this statute. However, it is hornbook law that in interpreting
undefined statutory language, we must look to the term's common
usage and general acceptance. Hertz Corporation v. United
States, 268 F.2d 604, 607 (3d Cir. 1959), aff'd, 364 U.S. 122, 80
S. Ct. 1420 (1960). "Contemporaneous" means "living, existing or
occurring at the same time." Webster's New Int'l Dictionary 575
(2nd ed. 1959). Therefore, we respectfully disagree with Judge
Sarokin that Congress intended contemporaneous to mean "not
precisely contemporaneous." We conclude that any "agreement"
that is not entered into at the same time as the acquisition of
the asset fails to meet the contemporaneous requirement of
§1823(e)(2).
15
Dimuzio v. RTC, No. 95-5066
SAROKIN, Circuit Judge, dissenting:
The RTC as receiver accepts an insolvent institution's
portfolio in its then-posture. The RTC is entitled to rely upon
what it discovers in the records of the institution in evaluating
its financial condition and determining what future action to
take as a result of that examination. The purpose of § 1823(e)
is to avoid subjecting the RTC to claims or defenses not readily
apparent from a reasonable inspection of the documents maintained
by the insolvent institution in the ordinary course of its
business. The RTC, as contrasted to the FDIC, has no discretion
to deal with the institution's assets and liabilities other than
as it finds them.
Here, the fraud about which plaintiffs complain
virtually leaps out from the documents, and it is thus eminently
clear that there was evidence that the institution had knowledge
and notice of the fraud when it acquired the loans. Clearly if
Carteret acquired the loans with such knowledge, it took them
subject to the claims and defenses of the defrauded borrowers.
The question raised here is whether the applicable statute
defeats those claims and defenses if asserted against the RTC. In
my view it does not, and thus I respectfully dissent and would
reverse.
I.
16
In reviewing this case below, the district court
examined the third Loan Purchase Agreement between Carteret and
GDV. Dimuzio, et al. v. RTC, No. 94-1559, slip op. at 14 (D.N.J.
Nov. 15, 1994). Indeed, the Loan Purchase Agreements between GDV
and Carteret are at the center of this case, as they are written
documents demonstrating that Carteret was aware that GDV's
appraisals were inflated above the fair-market value of the sites
and did not conform to the standards of the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"). In all Carteret entered into three bulk
purchase agreements with GDV. As to mortgages issued under GDV's
"Lot Trade Program," in which plaintiffs participated, the
commitment letter which was incorporated into the third purchase
agreement provided:
Appraisal reports on the housing package and
condominiums do not conform to FNMA/FHLMC guidelines.
These appraisals are based on prices of comparable
units sold by General Development and may not reflect
the sales price of similar properties offered by local
builders or the resale price of the home in the local
market. Accordingly, there can be no assurance that
the appraised value can be realized in the event of
foreclosure, liquidation or sale of the property.
Appendix ("App.") at 195. Carteret's second bulk purchase
agreement and the incorporated commitment letter with GDV
contained very similar language. These two agreements also
acknowledged that because the appraisals were non-conforming, the
loans could not be sold to FNMA or FHLMC.0
0
Carteret's first commitment letter with GDV did not state that
the appraisals were non-conforming or the reason for this
failure, but Carteret did acknowledge "[w]e also understand that
these loans are not salable [sic] to FNMA." App. at 179. It is
not clear from the complaint whether Carteret purchased
17
II.
The majority's general discussion of 12 U.S.C. §1823(e)
and the case law interpreting it, Majority Opinion, typescript at
7-10, is well presented, and I concur in their overall conclusion
therein that § 1823(e) is applicable to the mortgages in this
case.
A.
The majority correctly concludes that, under Langley v.
FDIC, 484 U.S. 86 (1987) and Adams v. Madison Realty &
Development, Inc., 937 F.2d 845 (3d Cir. 1991) ("Adams II"), the
misrepresentations alleged by plaintiffs in the inflated, non-
conforming appraisals of the GDC properties constitute an
"agreement" for purposes of § 1823(e). As we set forth in Adams
II, "any warranty on which the performance of a party is
conditioned is an 'agreement' within the meaning of section
1823(e)." Adams II, 937 F.2d at 853. See also FDIC v. Bathgate,
27 F.3d 850, 862 (3d Cir. 1994) (agreements include "promises to
perform acts [and] conditions to the performance of a party's
obligation"). Accordingly, we have held that misrepresentations
underlying a claim of fraud in the inducement are "agreements"
and hence enforceable against the RTC only when they satisfy the
four requirements of § 1823(e). Adams II, 937 F.2d at 857. The
misrepresentations in GDV's appraisals are thus "agreements" for
purposes of § 1823(e).
B.
plaintiffs' mortgages pursuant to the first, second, or third
agreement.
18
Similarly, I agree with the majority that under Adams
II we are constrained to conclude that, although plaintiffs
executed the loans with something other than a depository
institution, the loans are nonetheless subject to § 1823(e).
Adams involved the application of § 1823(e) to a situation where,
just as here, the RTC acquired notes initiated by a mortgage
company by taking over a failed bank that had purchased the notes
on the secondary market. Adams II, 937 F.2d at 850 (citing Adams
v. Madison Realty & Development, Inc., 853 F.2d 163, 164-65 (3d
Cir. 1988) ("Adams I")). In concluding that it was appropriate
to apply § 1823(e) to the agreement in Adams II, we looked
specifically to the fact that, even though the loans had been
purchased on the secondary market, plaintiffs obligations
ultimately ran to the failed bank when the bank acquired
plaintiffs' notes. Id. at 858.
The facts of Adams are indistinguishable from those in
the instant case for purposes of determining whether § 1823(e)
applies, and I thus agree with the majority that § 1823(e)
necessarily applies here.
III.
Unlike the majority, however, I conclude that the home
appraisals and Loan Purchase Agreements between GDV and Carteret
should be considered as part of the "agreement" for purposes of
§1823(e).
19
In Langley, the Supreme Court held that
misrepresentations made by a bank regarding the acreage of land,
"the truthfulness of which was a condition to performance of
[petitioners'] obligation to repay the loan," constituted an
"agreement" for purposes of applying § 1823(e). Langley v. FDIC,
484 U.S. at 90-91. In my view it would be ironic and
inconsistent to give a broad meaning to "agreement," so as to
incorporate oral representations and warranties, but then exclude
written appraisals and loan documents upon which the parties
relied in acquiring the loans. Thus, it is difficult to accept,
under Langley's analysis, that the written appraisals in this
case "are not a written form of the representations and
warranties regarding the real estate." Majority Opinion,
typescript at . Just as the petitioners in Langley, plaintiffs
accepted loans based on representations by the lender that the
plaintiffs now allege to be false. The written non-conforming
appraisals in the instant case were acquired by GDV, and were
designed to support the selling price of the GDC houses. In
providing these appraisals to plaintiffs without disclosing that
they were inaccurate and did not conform to industry standards,
GDV represented that the properties GDC was selling to plaintiffs
were actually worth the appraisal amount -- a condition upon
which the plaintiffs relied. The appraisals thus plainly are
part of the agreement. Adams II, 937 F.2d at 853 (holding "any
warranty on which the performance of a party is conditioned is an
'agreement' within the meaning of section 1823(e)").
20
In addition, in considering the "agreement" to which
§1823(e) applies, we must also consider the Loan Purchase
Agreements between GDV and Carteret but for different reasons. It
is through these Loan Purchase Agreements that Carteret has
become the bank to which the plaintiffs are obliged. See Adams
II, 937 F.2d at 858 (holding that plaintiffs became obligors to
the failed bank that bought their promissory notes on the
secondary market). While we held in Adams II that the
application of § 1823(e) should not be "limited to obligations
between a bank and its obligor," Adams II, 937 F.2d at 858, we
also concluded that alternative grounds for applying § 1823(e)
also existed -- namely that the transferal of the loans to the
failed bank meant that the plaintiffs were the obligors of the
bank, and that the statute applied because of that link. This is
the exact situation that exists here; the plaintiffs are
Carteret's obligors. It is only logical, then, that the
documents transferring plaintiffs' obligations to Carteret -- the
Loan Purchase Agreements -- be considered as part of the
agreement for purposes of applying § 1823(e).
Furthermore, we must remember that one of the principle
purposes of § 1823(e) 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, 484 U.S. at 91 (emphasis added).
Indeed, in Adams II, this court examined "the extent [to which
the] promises [at issue] were made a part of the bank's official
records." Adams II, 937 F.2d at 857 (emphasis added). The
contents of Carteret's official records, complete with the Loan
21
Purchase Agreements and the home appraisals, then, are the
appropriate subject of the § 1823(e) analysis. It is from these
official records that one could find that the RTC could evaluate
the worth of Carteret's assets and examine these appraisals and
agreements and indeed, discover the fraud alleged by the
plaintiffs.0
This conclusion is not undermined by the Supreme
Court's decision in Langley. There, the Supreme Court ruled that
the FDIC's knowledge of a misrepresentation at the time it
acquired a note is not relevant to whether § 1823(e) applies.
Langley 484 U.S. at 94. The Court reasoned that:
[h]arm to the FDIC . . . is not avoided by
knowledge at the time of acquiring the note.
The FDIC is an insurer of the bank, and is
liable for the depositors' insured losses
whether or not it decides to acquire the
note. The harm to the FDIC caused by the
failure to record occurs no later than the
time at which it conducts its first bank
examination that is unable to detect the
unrecorded agreement and to prompt the
invocation of available protective measures,
including termination of the bank's deposit
insurance. Thus, insofar as the recording
provision is concerned, the state of the
FDIC's knowledge at that time is what is
crucial.
Id. at 94-95 (citations omitted).
0
Indeed, when considering a motion to dismiss under Rule
12(b)(6), courts are to determine "whether in the light most
favorable to the plaintiff, and with every doubt resolved in his
behalf, the complaint states any valid claim for relief." 5A
Charles Alan Wright and Arthur R. Miller, Federal Practice and
Procedure § 1357, at 332-36. Under such a standard, any doubts
as to whether the non-conforming nature of the appraisals put
Carteret and the RTC on notice that plaintiffs had been defrauded
must thus be resolved in plaintiffs' favor.
22
In the RTC's context, by contrast, knowledge of a
bank's assets is important at the time the RTC acquires them, not
before. There are no measures the RTC could take to protect
itself before this time, as opposed to the FDIC which could opt
not to insure a bank. In this case, the purpose of the recording
provision is to apprise the RTC of the bank's assets so it can
determine the appropriate course of action, and the RTC looks to
the bank's official records in order to do this.
IV.
Concluding as I do that the "agreement" to be
considered here includes the home appraisals and Loan Purchase
Agreements, I now look to see whether this agreement meets the
four requirements of § 1823(e). I believe that it does.
A.
In considering whether the agreement meets the "in
writing" condition of § 1823(e)(1), we have held that "no
agreement between a borrower and a bank which does not plainly
appear on the face of an obligation or in the bank's official
records is enforceable against the FDIC." Adams II, 937 F.2d at
852. More recently, we "slightly extend[ed]" Adams II to add
that, "not only does the existence of the agreement have to
appear plainly on the face of an obligation, but the basic
structure of that agreement -- its essential terms -- must also
appear plainly on the face of that obligation." RTC v. Daddona,
9 F.3d 312, 319 (3d Cir. 1993). See also Bathgate, 27 F.3d at
864.
23
Not surprisingly, in "misrepresentation" cases,
plaintiffs have often failed to satisfy the writing requirement.
See Langley, 484 U.S. at 89 ("No reference to these
representations appears in the documents executed by
[plaintiffs]"); Adams II, 937 F.2d at 857 ("Since plaintiffs did
not make these promises part of the official records, they are
estopped from raising their claims of fraud in the inducement
against the RTC"); Daddona, 9 F.3d at 317; Bathgate, 27 F.3d at
865-66. In most instances of fraudulent inducement, it would be
rare to find the fraud in the documents themselves. But bearing
in mind that the documents must place the RTC on notice, the
requirement is sound.
The district court concluded that, in this instance,
the writing requirement was satisfied. For reasons I explained
above, I believe that the district court correctly looked to
Carteret's records and the third Loan Purchase Agreement with
GDV, which acknowledged that the appraisals were non-conforming
and likely in excess of the fair market value, as well as the
appraisals themselves. Dimuzio. et al. v. RTC, No. 94-1559, slip
op. at 14 (D.N.J. Nov. 15, 1994). The non-conformity of the
appraisals, and importantly the recognition that the appraisals
may not reflect the fair market or resale value of the
properties, "plainly appear on the face," Adams II, 937 F.2d at
852, of the second and third Loan Purchase Agreements. App. at
190-91, 195. Moreover, the "basic structure" of the alleged
misrepresentation, Daddona, 9 F.3d at 317, namely the reliance on
non-conforming, inflated appraisals in calculating the
24
plaintiffs' mortgages, appears plainly on the face of the
agreements. Thus, although the commitment in writing of
representations that fraudulently induce borrowers to execute a
loan may be rare, I conclude that such is the case here and that
the first criteria of § 1823(e) is satisfied.
B.
The district court dismissed plaintiffs' complaint on
the ground that Carteret's Loan Purchase Agreement from GDV was
not executed contemporaneously with the original mortgages
between GDV and plaintiffs, thus failing the requirement of
§1823(e)(2). Certainly it is undisputed that these two
transactions were separated by a period of years. I believe the
district court's conclusion, however, is premised on a flawed
construction of § 1823(e)(2).
We have not previously considered the meaning of the
"contemporaneous execution" condition, but a split may be
emerging among other circuits. Some courts have strictly
enforced this requirement. See, e.g., FDIC v. La Rambla Shopping
Center, Inc., 791 F.2d 215, 220 (1st Cir. 1986) (lease executed
two years before note unenforceable); Cardente v. Fleet Bank of
Maine, Inc., 796 F. Supp. 603, 611 (D.Me. 1992) (lease executed
two weeks before note unenforceable, where note lacks any
reference to lease); RTC v. Crow, 763 F. Supp. 887, 892-94 (N.D.
Tex. 1991) (refinancing agreement signed three years after
execution of original loan unenforceable).
More recently, however, the Eighth Circuit suggested
that the contemporaneous execution requirement might be best
25
understood in light of "general business practice." FDIC v.
Manatt, 922 F.2d 486, 489 n.4 (8th Cir. 1991) (observing accord
and satisfaction will necessarily be executed subsequent in time
to original note), cert. denied, 501 U.S. 1250 (1991).0 Adopting
the Eighth Circuit's suggestion, the Ninth Circuit held that
"satisfaction of the contemporaneousness requirement should be
considered in light of commercial reality." RTC v. Midwest
Federal Sav. Bank of Minot, 36 F.3d 785, 797-98 (9th Cir. 1994).
The Ninth Circuit went on to conclude that a commitment letter
executed more than two months before loan documents had satisfied
the contemporaneous execution requirement. Id. See also
Erbafina v. FDIC, 855 F. Supp. 9, 12 (D. Mass. 1994) (commitment
letter negotiated several days before execution of loan satisfies
§ 1823(e)(2)).
A review of the legislative history of § 1823(e), which
was enacted in 1950 and slightly amended in 1989, lends no
insight into the legislative intent behind the contemporaneous
execution requirement. See H.R. Rep. No 2564, 81st Cong., 2d
Sess. (1950), reprinted at 1950 U.S.C.C.A.N. 3765; Conf. Rep. No.
3049, 81st Cong., 2d Sess. (1950), reprinted at 1950 U.S.C.C.A.N.
3776; H.R. Rep. No. 54(I), 101st Cong., 1st Sess. (1989),
0
Prior to its decision in Manatt, the Eighth Circuit had relied
on a strict interpretation of the contemporaneousness requirement
to conclude that he Eighth and Ni executed five months before the
making of a note was unenforceable. FDIC v. Virginia Crossings
Partnership, 909 F.2d 306, 309-10 (8th Cir. 1990). However,
Manatt suggests that Virginia Crossings may no longer be good law
in the Eighth Circuit, although the panel there declined to
overrule it explicitly since "an interpretation of [§ 1823(e)(2)]
[was] not necessary to a decision in [that] case." Manatt, 922
F.2d at 489 n.4.
26
reprinted at 1989 U.S.C.C.A.N. 86; Conf. Rep. No. 222, 101st
Cong., 1st Sess. (1989), reprinted at 1989 U.S.C.C.A.N. 432.
On balance I am persuaded by the reasoning of the
Eighth and Ninth Circuits, and conclude that § 1823(e)(2) must be
read in light of commercial reality. When there exists a
secondary market for mortgage notes, the original loan and
subsequent acquisition will never be precisely contemporaneous.
Nonetheless, where execution of a side agreement either (1) is
contemporaneous with origination of a note, and the "basic
structure of the agreement," Daddona, 9 F.3d at 319, is evident
from the face of the resale documents, or (2) is contemporaneous
with a bank's acquisition of a note in the secondary market, then
§ 1823(e)(2) should be satisfied.
In addition to the respect for common sense and
commercial reality which shaped the decisions of the Eighth and
Ninth Circuits, my conclusion is supported by several other
considerations. First, it would be contradictory and illogical
to rely on the Loan Purchase Agreements as the link that made
plaintiffs Carteret's obligors and thus requires that § 1823(e)
applies in this case, but then disregard those same agreements in
considering § 1823(e)(2).
Second, my construction of § 1823(e)(2) comports with
the legislative intent identified by the Supreme Court as
underlying § 1823(e), namely that bank examiners be on notice of
the real worth of an asset, that "unusual transactions" be
approved by senior bank officials, and that "new terms" not be
added to a loan subsequent to its origination. Langley, 484 U.S.
27
at 92. These concerns are met by enforcing the requirement that
either (1) a side agreement be executed contemporaneous with a
bank's acquisition of a note on the secondary market, or (2) it
be executed contemporaneous with execution of original note and
that its basic structure be clear from the face of the subsequent
resale documents.
Finally, to hold otherwise would immunize the RTC from
honoring an otherwise valid collateral agreement -- one done in
writing, contemporaneous with the origination or resale of the
loan, approved by a bank's directors, and maintained continuously
in its records -- simply because the loan was resold on the
secondary market. Taken to its extreme, the contemporaneousness
requirement could deny relief to defrauded borrowers even if the
subsequent loan purchase documents specifically acknowledged the
existence of a likely fraud claim or defense based upon the
initial transaction, and the purchase was openly discounted as a
result.
Here, the "agreement" -- GDV's inflated, non-conforming
appraisals -- is referenced in writing and in detail in the very
same documents by which Carteret acquired the mortgages. These
references are thus contemporaneous with Carteret's acquisition
of the notes. Bank examiners were on notice of the problems with
the mortgages, senior Carteret officials had the opportunity to
review these "unusual transactions," and there is no allegation
that "new terms" were added after the purchase agreement. Hence
I conclude that plaintiffs have satisfied the contemporaneous
execution condition of § 1823(e)(2).
28
C.
On this appeal the RTC does not contend that the final
two criteria of § 1823(e) -- approval by Carteret's board of
directors and continuous maintenance of the loan documents in
Carteret's records -- are unmet, except in a brief aside that
cites to nothing in the record but states "[t]he representations,
warranties and conditions that Appellants seek to enforce are not
in writing, and hence were not executed by Appellants or by
Carteret." RTC Brief at 12.
I have already urged that the discussion of the
inflated, non-conforming appraisals in the Loan Purchase
Agreements are adequate to satisfy the writing requirement of
§1823(e)(1). The only evidence of record before us shows that
the Loan Purchase Agreements, as well as the commitment letters
which are incorporated into the purchase agreements, bear
signatures of various Carteret, GDC, and GDV officials. App. at
182, 187, 189, 192, 199, 209, 222. In addition, the Complaints
allege that plaintiffs executed mortgages which were originated
by GDV. App. at 39, 90.
Accordingly, I would not affirm the order of the
district court on the ground that the third or fourth conditions
of § 1823(e) are unsatisfied.
V.
It is undisputed that the plaintiffs in this matter
were defrauded. Carteret accepted the loans with knowledge of
that fraud, and that knowledge was readily ascertainable from a
reasonable inspection of the loan documents. Neither the purpose
29
or language of the statute would be satisfied by denying
plaintiffs the right to assert such fraud so readily apparent and
so flagrant.
For the foregoing reasons, I would reverse the order of
the district court.
30