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,
              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
         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
         Appellant,   Duane   Dendinger,   and    other   named   plaintiffs,
          District Judge of the Western District of Louisiana,
    sitting by designation.
    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
    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.
    I. Standard of Review
         We review a summary judgment de novo. Abbott v. Equity Group,
    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
          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.
    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
    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.
    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
          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....
    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-
    98 L. Ed. 2d 340
         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.
    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
    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
           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
            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.
    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).
          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.
    underlying obligation exists for which the pledge could serve as
             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
          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).
    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.
    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.
         For the foregoing reasons, we affirm the district court's
    grant of summary judgment for the FDIC against all Appellants.
          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.