Dendinger v. First Nat. Corp. ( 1994 )

United States Court of Appeals,
Fifth Circuit.
No. 93-3193.
Duane DENDINGER, et al., Plaintiffs-Appellants,
Saeed Ahmed, Plaintiff-Appellant,
v.
FIRST NATIONAL CORPORATION, et al., Defendants,
Federal Deposit Insurance Corporation, as receiver for First
National Bank, Defendant-Appellee.
March 16, 1994.
Appeals from the United States District Court for the Eastern
District of Louisiana.
Before HIGGINBOTHAM and DUHÉ, Circuit Judges and STAGG,1 District
Judge.
DUHÉ, Circuit Judge:
This appeal presents two disputes involving the now insolvent
First National Bank of Covington, Louisiana ("FNB"). The first
dispute involves a number of plaintiffs, suing together, seeking
rescission and money damages under federal and state law for notes
they signed in favor of FNB to purchase securities. The second
dispute involves Appellant, Saeed Ahmed, who seeks damages for an
alleged wrongful offset of a certificate of deposit ("CD"). The
district court granted summary judgment against all Appellants. We
affirm.
BACKGROUND
Appellant, Duane Dendinger, and other named plaintiffs,
1
District Judge of the Western District of Louisiana,
sitting by designation.
1
executed promissory notes payable to the order of FNB, or payable
to the order of another institution later consolidated with FNB,
for the purpose of purchasing shares of stock. Following their
suit against FNB, the Comptroller of the Currency declared FNB
insolvent and appointed the FDIC as receiver for FNB. The FDIC
took possession and control of the assets, property, and affairs of
FNB, including the promissory notes. The FDIC was substituted as
the party in interest to defend all claims asserted against FNB.
The FDIC also filed counterclaims against many of the plaintiffs to
recover the amounts due on their notes. Appellants admitted in
their complaint and answer that they executed the notes, but have
not asserted that any written agreements were entered into that
modified the obligations on the notes. Appellants allege, however,
that their obligations on the notes are not enforceable due to
alleged material misrepresentations by FNB that prompted their
execution of the notes and purchase of the stock. The district
court granted summary judgment for the FDIC dismissing all
affirmative claims by Appellants against the FDIC and granted
summary judgment on the FDIC's counterclaims, awarding judgments to
the FDIC on the note obligations. Appellants appeal the summary
judgment granted on the FDIC's counterclaims.
The second dispute involves Saeed Ahmed's claims against FNB.
In 1984 Ahmed bought a $100,000 CD from the First Progressive Bank
of Metairie, Louisiana, which he deposited with the Louisiana
Commission of Insurance in 1985 to qualify as a self-insured health
care provider under the Louisiana Medical Malpractice Act. Later
2
in 1985, Ahmed bought securities for $110,000, financed by a note
executed in favor of First National Bank of Riverlands, a
subsidiary of FNB. First Progressive, the issuer of the CD, then
became a subsidiary of FNB as well. After Ahmed had defaulted on
his loans, FNB off set the CD against the balance due. Ahmed sued
seeking damages for an alleged wrongful offset. Ahmed appeals the
district court's grant of summary judgment for the FDIC.
DISCUSSION
I. Standard of Review
We review a summary judgment de novo. Abbott v. Equity Group,
Inc., 2 F.3d 613, 618 (5th Cir.1993). Summary judgment may be
granted if there is "no genuine issue as to any material fact and
... the moving party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c).
II. Claims on the Promissory Notes
The FDIC does not dispute the factual allegations made by
Appellants regarding the circumstances surrounding the execution of
the promissory notes. Rather, the FDIC argues that despite any
alleged illegality attendant to the execution of the notes,
Appellants do not have a defense to FDIC recovery under the
doctrine set forth in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447,
62 S.Ct. 676, 86 L.Ed. 956 (1942) and that doctrine's codification
in 12 U.S.C. § 1823(e).2 The D'Oench, Duhme doctrine, and its
2
At one time, § 1823(e) did not apply to the FDIC in its
receiver capacity. Beighley v. FDIC, 868 F.2d 776, 783 (5th
Cir.1989). In 1989, the statute was amended to include the FDIC
as receiver. Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA), Pub.L. No. 101-73, 103 Stat. 183.
3
statutory counterpart, bar borrowers from defending against
collection efforts of the FDIC by arguing that they had an
unrecorded agreement with the failed bank. D'Oench, Duhme, 315
U.S. at 459-60, 62 S.Ct. at 680; § 1823(e).
Appellants respond that the D'Oench Duhme doctrine has no
application in this case. Appellants arrive at this conclusion as
follows. They contend that the execution of the notes violated §
10(b) of the Securities Exchange Act and, thus, the notes are
voidable at the discretion of the innocent victim under § 29(b) of
the Act, 15 U.S.C. § 78cc(b).3 See Mills v. Electric Auto-Lite
Co., 396 U.S. 375, 386-88, 90 S.Ct. 616, 622-23, 24 L.Ed.2d 593(1970) (holding that under § 29(b) a contract is voidable at the
option of the innocent party). Appellants argue that they elected
to hold the contracts void when they filed suit against FNB prior
to the receivership. They contend that the FDIC has no right or
interest that could be defeated or diminished by an unwritten
FIRREA took effect after the events in question and before the
judgment by the district court. Nonetheless, we need not
consider whether the statute applies retroactively because we
have long held that both the statutory and common law doctrines
bar similar defenses by borrowers. See Resolution Trust Corp. v.
Camp, 965 F.2d 25, 31 (5th Cir.1992); Kilpatrick v. Riddle, 907
F.2d 1523, 1526 n. 4 (5th Cir.1990), cert. denied, 498 U.S. 1083,
111 S.Ct. 954, 112 L.Ed.2d 1042 (1991).
3
This section provides in pertinent part:
Every contract made in violation of any provision of
this chapter or of any rule or regulation thereunder,
and every contract (including any contract for listing
a security or an exchange) heretofore or hereafter
made, the performance of which involves the violation
of, or the continuance of any relationship or practice
in violation of, any provision of this chapter or any
rule or regulation thereunder, shall be void....
4
agreement because the FDIC does not take title to a note if it is
void. See Langley v. FDIC, 484 U.S. 86, 93-94, 108 S.Ct. 396, 402-
03, 98 L.Ed.2d 340 (1987).
Although Appellants state correct propositions of law, they
have mistaken the nature of their obligations on the notes. The
Supreme Court in Langley did conclude that the FDIC does not take
title to void obligations, but it explained that a transaction is
void only if a plaintiff successfully asserts a fraud in the factum
defense; "that is, the sort of fraud that procures a party's
signature to an instrument without knowledge of its true nature or
contents." Id. at 93, 108 S.Ct. at 402. In contrast, Appellants
assert that FNB fraudulently induced them to execute the promissory
notes, a defense that makes the notes merely voidable. Id. at 94,
108 S.Ct. at 402-403. Thus, title of the notes properly passed to
the FDIC.
Because Appellants' obligations on the notes are voidable
rather than void, the principles we announced in Kilpatrick v.
Riddle, 907 F.2d 1523 (5th Cir.1990), cert. denied, 498 U.S. 1083,
111 S.Ct. 954, 112 L.Ed.2d 1042 (1991), control this case. In
Kilpatrick, the plaintiffs claimed that swindlers coaxed them into
signing notes in connection with the financing of new branches of
a bank. The plaintiffs sued several defendants for violating
federal securities law. While the suit was pending, the bank
failed, and the notes were assigned to a bridge bank by the FDIC.
The FDIC-created bridge bank in turn sued plaintiffs on their
notes. We concluded that an oral misrepresentation by a lender to
5
a borrower, whether in violation of federal securities law or not,
constitutes an unwritten "agreement" that does not bind the FDIC
under the D'Oench, Duhme doctrine. Id. at 1527 (citing Langley,
484 U.S. at 92-93, 108 S.Ct. at 402). Second, we concluded that a
" "voidable interest is transferable whether or not FDIC knows of
the misrepresentation or fraud which produces the voidability.' "
Id. at 1528 (quoting FDIC v. Kratz, 898 F.2d 669, 671 (8th
Cir.1990)). Accordingly, we held that the D'Oench, Duhme doctrine
precluded the plaintiffs from asserting their federal securities
law claims and defenses.
Appellants next argue that as innocent borrowers from the
bank, with no intent to deceive the bank or its regulators, they
fall in an exception to the D'Oench, Duhme doctrine recognized by
the Ninth Circuit in FDIC v. Meo, 505 F.2d 790 (9th Cir.1974). The
court in Meo allowed a good faith borrower to assert the defense of
failure of consideration against the FDIC because he was "a
completely innocent party." Id. at 792-93. We admit that the two
cases relied on by Appellants, FDIC v. McClanahan, 795 F.2d 512,
516 (5th Cir.1986), and Buchanan v. Federal Savings & Loan
Insurance Corp., 935 F.2d 83, 85-86 (5th Cir.), cert. denied, ---
U.S. ----, 112 S.Ct. 639, 116 L.Ed.2d 657 (1991), acknowledge the
holding in Meo and a possible "innocent borrower" defense.
The Ninth Circuit's decision, however, is not binding on this
Court, and, more importantly, we have recently disapproved of the
"innocent borrower" exception to the D'Oench, Duhme doctrine:
We need not consider Payne's innocence. Even if Payne's
reliance on Meo might have been well placed at one time, it is
6
misplaced today and has been since Langley was decided in
1987. In Langley, the makers of the note were "wholly
innocent" in that they relied on false representations by the
bank in executing the note. Yet the Supreme Court held that
the makers could not assert their defense. In so doing the
Langley Court destroyed the "wholly innocent borrower"
exception to the D'Oench, Duhme doctrine.
FDIC v. Payne, 973 F.2d 403, 407 (5th Cir.1992). Similarly, in
Bowen v. FDIC, 915 F.2d 1013, 1016 (5th Cir.1990), we disavowed any
inference in McClanahan that malfeasance was necessary in order for
the D'Oench, Duhme doctrine to apply. See also Bell & Murphy and
Assocs., Inc. v. Interfirst Bank Gateway, N.A., 894 F.2d 750, 753-
54 (5th Cir.), cert. denied, 498 U.S. 895, 111 S.Ct. 244, 112
L.Ed.2d 203 (1990); Beighley v. FDIC, 868 F.2d 776, 784 (5th
Cir.1989). Thus, the weight of the authority in this Circuit
militates against an "innocent borrower" defense.
In sum, Appellants are barred by the D'Oench Duhme doctrine
from asserting any of their defenses against the FDIC.
Accordingly, the FDIC is entitled to summary judgment as a matter
of law.
III. Ahmed's Claims
FNB had a statutory right under 6:316 of the Louisiana
Revised Statutes4 and a contractual right5 to setoff Ahmed's CD
4
Section 6:316(A) provides:
[C]ompensation takes place by operation of law between
funds held on deposit with a bank organized under this
Title or with a national bank domiciled in this state
and any loan, extension of credit, or other obligation
incurred by the depositor in favor of the bank.... The
funds to which this compensation applies shall be
deemed to be pledged by the depositor in favor of the
depository bank.
7
against the amount owed and due on his loan. Ahmed argues,
however, that the bank wrongfully set off the CD because the
Louisiana Insurance Commission had a superior right to it. He
claims that depositing his CD with the Insurance Commission in 1985
created a pledge under the Louisiana Civil Code. Ahmed contends
that because he did not receive the loan to which the CD was set
off until later in 1985 and the bank from which he received the
loan did not merge with the bank that issued the CD until December
31, 1987, the Insurance Commission's right to the CD primed the
bank's right of setoff.
The FDIC correctly points out the critical flaw in Ahmed's
argument: the CD was not pledged to the Louisiana Insurance
Commission. A pledge is "a contract by which one debtor gives
something to his creditor as a security for his debt." La.Civ.Code
Ann. art. 3133 (West 1952). For the CD to be pledged, Ahmed must
prove a valid underlying principal obligation. Alley v. Miramon,
614 F.2d 1372, 1382 (5th Cir.1980). In Ahmed's case, however, no
La.Rev.Stat.Ann. § 6:316(A) (West Supp.1993).
5
The pertinent part of the loan agreement states:
This note ... shall be secured by ... the balance
of every deposit account of the parties hereto or any
of them, may at any time have with the Bank.
Bank is hereby authorized at any time and from
time to time at its option to compensate itself by
applying any part or all of the balance of every
deposit account of the parties hereto or any of them,
and/or any or all monies now or hereafter in the hands
of the Bank, or in transit to or from the Bank, and
belonging to the parties hereto or any of them to the
payment, in whole or in part, of this note, in
principal, interest, costs and attorney's fees.
8
underlying obligation exists for which the pledge could serve as
security.
Ahmed argues that his principal obligation to the Insurance
Commission was to produce an unencumbered asset worth $125,000 in
order to be considered a self-insured health care provider who
qualified to participate in the Patients' Compensation Fund. See
La.Rev.Stat.Ann. §§ 40:1299.41-.48 (West 1992). Contrary to
Ahmed's assertion, however, he did not owe the Commission any
obligation to become self-insured. He voluntarily chose to be
classified as self-insured and could have changed that
classification at any time by filing proof of adequate insurance
policy coverage with the Commission. See id. § 40:1299.42(E);
La.Ins.Regulation, Malpractice Self-Insurance, Rule No. 2
(effective 11/20/75). Alternatively, Ahmed argues that contingent
malpractice claims serve as the underlying obligation because the
Commission could use the CD to cover claims not paid. Yet, a
"[p]ledge is an accessory contract which secures the performance of
an underlying existing principal obligation." Texas Bank of
Beaumont v. Bozorg, 457 So.2d 667, 671 n. 4 (La.1984).6 No
malpractice claims were pending when FNB offset the loan, and
malpractice claims not yet risen into existence cannot serve as the
principal obligation.
Ahmed next argues that even if there were no pledge, the
transaction still qualifies as a transfer of an instrument for
6
But see Wolf v. Wolf, 12 La.Ann. 529, 532 (1857) (finding
no principle of law which prevents a pledge being made to secure
an obligation not yet risen into existence).
9
valuable consideration in accordance with La.Rev.Stat.Ann. § 10:3-
302 (West 1993). The CD issued by the bank to Ahmed was stamped
with the term "non-transferable". When an instrument on its face
notes that it is non-transferable, the instrument is non-negotiable
under Louisiana commercial law. Id. § 10:3-104(d). The Louisiana
Insurance Commission cannot be a holder in due course as Ahmed
argues. Thus, the Insurance Commission has no superior rights over
the bank's right of setoff under statute and the loan agreement.7
Finally, Ahmed argues that if the bank had a right of setoff,
it did not satisfy the notice requirements of § 6:316(D) of the
Louisiana Revised Statutes when it asserted its setoff claim, and
as a result, it did not satisfy a condition precedent to making an
offset. Ahmed failed to raise this argument to the district court,
and accordingly, we will not consider this claim. See Topalian v.
Ehrman, 954 F.2d 1125, 1131-32 n. 10 (5th Cir.), cert. denied, ---
U.S. ----, 113 S.Ct. 82, 121 L.Ed.2d 46 (1992) (parties may not
advance new theories or raise new issues to secure reversal of
summary judgment). The district court did not err in granting
summary judgment for the FDIC.
CONCLUSION
For the foregoing reasons, we affirm the district court's
grant of summary judgment for the FDIC against all Appellants.
AFFIRMED.
7
Ahmed devotes considerable time to briefing the argument
that the recipient of a pledge does not have to give notice to
subsequent creditors to have priority. Because we find no
pledge, we will not address this argument.
10
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