REW Enterprises, Inc. v. Premier Bank, N.A. ( 1995 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 93-3829
REW ENTERPRISES, INC. as RECEIVER
for FEDERAL LAND BANK OF JACKSON,
Plaintiff-Appellee/Cross-
Appellant,
versus
PREMIER BANK, N.A.,
Defendant-
Appellant/Cross-Appellee.
Appeal from the United States District Court
for the Middle District of Louisiana
(March 27, 1995)
Before POLITZ, Chief Judge, and HIGGINBOTHAM and DeMOSS, Circuit
Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
The Farm Credit Bank of Texas seeks to recover a payment made
by the Federal Land Bank of Jackson to Premier Bank.1 FCBT seeks
to rescind the payment transaction as ultra vires or as payment of
a thing not due under Louisiana law. Premier claims that FCBT is
equitably estopped from relying on an ultra vires claim. Premier
also counterclaims for recoupment.
1
FLBJ and Premier were formerly Federal Land Bank of New
Orleans and Ouachita National Bank, respectively. FCBT was
substituted as plaintiff after it purchased this claim from REW
Enterprises, Inc, which originally filed this suit in its capacity
as receiver of FLBJ.
The district court granted summary judgment for FCBT on the
ultra vires claim and against Premier on the recoupment claim. It
also held that FCBT abandoned its alternative state law claims.
Premier appeals the district court's grant of summary judgment, and
FCBT cross-appeals the ruling that it abandoned its alternative
state law claims. We affirm in part and reverse and remand in
part.
I.
Thomas A. Grant, Suzanne Brunazzi Grant, and James C. Steele
purchased timber land in northeast Louisiana with a $15 million
loan from FLBJ. In 1983, the Grants and Steele submitted the loan
application to Lawrence Bingham, President of the Federal Land Bank
Association of Monroe. Federal land banks may generally lend only
through federal land bank associations. 12 U.S.C. § 2020 (1982).2
Bingham signed the loan on behalf of the Federal Land Bank of New
Orleans, FLBJ's predecessor. The loan was secured by a mortgage on
the purchased acreage, which then had an appraised value of $36
million.
A payment was to come due on January 1, 1985, and in the fall
of 1984, the Grants and Steele approached A. J. Burns, Bingham's
successor as President of the Monroe Association, about their
expected inability to pay. The parties agreed that Burns would
2
The 1987 Agricultural Credit Act, effective January 6,
1988, significantly changed the organization of the Farm Credit
System. The relevant events in this case occurred before January
6, 1988; accordingly, we apply the law in effect before the 1987
Act.
2
seek FLBJ's approval for a reamortization of the principal amount.
Burns also agreed to provide a letter of credit to a commercial
lender to secure a loan whose proceeds would be applied to the
interest portion of the loan payment. The Ouachita National Bank
agreed. ONB lent the Grants and Steele approximately $1.5 million
upon receipt of a standby letter of credit and upon taking a
mortgage on additional collateral, namely, 2,000 acres of the
borrowers' unencumbered real property. Burns signed the letter of
credit on behalf of FLBJ. The letter of credit required FLBJ to
repay the loan in the event of default by the Grants and Steele.
The proceeds from the ONB loan were used to pay the interest due on
the FLBJ loan.
The Grants and Steele defaulted on the ONB loan, and ONB
called the letter of credit. Only then did Burns tell FLBJ
officers that there was a letter of credit. FLBJ officers decided
to honor the letter, but asked Burns to negotiate a thirty-day
extension. ONB agreed to the extension. FLBJ then honored the
letter of credit, and ONB released its mortgage on the additional
collateral. At FLBJ's request, the Grants and Steele executed a
promissory note for the amount FLBJ paid to ONB, and FLBJ took a
first lien on the additional collateral.
Burns was fired from the Monroe Association and later pleaded
guilty to a violation of 18 U.S.C. § 1018 in connection with his
issuance of the letter of credit. Ben Marshall, the loan officer
at ONB, pleaded guilty to falsifying bank records.
3
Six months after FLBJ honored the letter of credit, the Grants
and Steele defaulted on the promissory note. On May 20, 1988, the
Farm Credit Administration closed FLBJ due to its insolvency, and
REW was appointed as its receiver. REW transferred to FCBT the
mortgagee rights in the additional collateral as well as in the
collateral securing the original $15 million loan. On February 26,
1992, FCBT instituted foreclosure proceedings and at the sheriff's
sale bought all of the property except approximately 1,000 acres of
the additional collateral that it claims are contaminated with
dioxins. FCBT then resold the property for approximately $22.5
million. The parties disagree on how much of that amount can be
attributed to the additional collateral.
REW also sued to recover the payment made to ONB on the letter
of credit. It then transferred its interest in the lawsuit to FCBT
in consideration for FCBT's assumption of FLBJ's bond indebtedness.
II.
Before Congress enacted the 1987 Agricultural Credit Act, see
supra note 2, the Farm Credit System was organized into twelve
areas known as farm credit districts. In each district, three
distinct Farm Credit System banks served the needs of farmers: (1)
a federal land bank, which made long-term real estate mortgage
loans through federal land bank associations; (2) a bank for
cooperatives, which made loans to agricultural, aquatic, and rural
utility cooperatives; and (3) a federal intermediate credit bank,
which funded the short- and intermediate-term loans made by
4
production credit associations. Federal land banks were authorized
to make loans only through federal land bank associations. 12
U.S.C. § 2020 (1982). Borrowers were required to apply for a loan
at a land bank association and were also required to buy stock in
the association. Id. §§ 2020, 2034(a). Section 2014 gave federal
land banks the authority to "make or participate with other lenders
in long-term real estate mortgage loans in rural areas . . . and
make continuing commitments to make such loans under specified
circumstances, or extend other financial assistance of a similar
nature to eligible borrowers, for a term of not less than five nor
more than forty years." Federal land banks were also authorized to
"[e]xercise . . . all such incidental powers as may be necessary or
expedient to carry on the business of the bank." Id. § 2012(21).
FCBT argues that issuance of a letter of credit was outside
the statutory powers of a land bank. The district court agreed,
holding that issuance of a standby letter of credit was not
"necessary or expedient in the conduct of the business of the bank"
because the business of the bank included only long-term lending
against real estate security. We agree.
Congress created federal land banks for the sole purpose of
providing long-term real estate mortgage loans. A rural borrower
could seek short-term credit from banks for cooperatives or
production credit associations. In fact, in 1971, Congress amended
the Farm Credit Act to give banks for cooperatives and production
credit associations the power to issue guaranties, instruments
similar in function to letters of credit. Farm Credit Act of 1971,
5
Pub. L. No. 92-181, § 2.15, 1971 U.S.C.C.A.N. (85 Stat.) 655, 677.
Farm Credit Administration regulations provided that banks for
cooperatives could issue letters of credit. 12 C.F.R. § 614.4810.
These powers, granted to institutions charged with providing short-
term secured and unsecured credit, were never expressly conferred
on land banks. The implication we draw from the structure of the
Farm Credit System and from the language of the statute is that
Congress could have authorized land banks to issue letters of
credit, but chose not to. Because land banks were not authorized
by statute to issue letters of credit, to do so was an ultra vires
act.
When FLBJ decided to ask for an extension of time to pay the
letter of credit, it was seeking to ratify an action it was not
statutorily empowered to take. There is no evidence in the record
that the board attempted to disavow the letter or that it paid the
letter to settle what surely would have escalated to a significant
controversy had it not paid. Rather, the extension stated that ONB
was to consider it "as an amendment to our Irrevocable Letter of
Credit No. 1, dated December 31, 1984. . . . All terms and
conditions of the original Letter of Credit shall remain in force
and will not be affected by this amendment except as referenced
above in the expiration date." In short, we are not confronted
with the authority of the board to settle a claim arising from an
ultra vires act. We have before us only the unauthorized issuance
and payment of a letter of credit. The act of FLBJ's board in
honoring the letter of credit was an ultra vires act.
6
Premier argues that because national banks have the power to
issue letters of credit, 12 C.F.R. § 7.7016, by analogy, so should
land banks. Premier's argument is not persuasive. National banks
are engaged in the general business of banking -- that is, they
provide both long- and short-term credit. National banks are
empowered "to carry on the business of banking." 12 U.S.C. § 24
(emphasis added). Banks in the Farm Credit System, by contrast,
engaged in only those banking activities necessary to carry out
their specific mission, which, in the case of land banks, was
making long-term real estate mortgage loans. In other words, land
banks exercised only those powers "necessary or expedient to carry
on the business of the bank." 12 U.S.C. § 2012(21) (1982)
(emphasis added). The distinction between "the business of
banking" and "the business of the bank" illustrates the reason why
national banks have the power to issue letters of credit while land
banks do not. The difference in the language is not, as Premier
suggests, insignificant.
Premier also asserts that the letter of credit falls within
the bank's incidental powers because it benefited FLBJ by enabling
it to keep "a major loan in the current and 'healthy' category on
the bank's books." This argument is without merit. As a result of
the letter of credit, all of the monies paid to FLBJ from the ONB
loan were ultimately returned to ONB, with interest, such that FLBJ
itself funded the Grants and Steele's installment.
7
III.
A.
By honoring the letter of credit, FLBJ committed an ultra
vires act. However, Premier claims FCBT is estopped from
rescinding the transaction because, as a rule, an ultra vires claim
cannot be pleaded by one who obtains benefits from the act and
induces the adverse party to take measures detrimental to it. See
7A William M. Fletcher, Fletcher Cyclopedia of the Law of Private
Corporations §§ 3407-3409 (perm. ed. rev. vol. 1989). Premier's
predecessor, ONB, detrimentally relied on the actions of FLBJ by
releasing its mortgage on the additional collateral. FLBJ
benefitted by obtaining an interest in the additional collateral.
Though these benefits might otherwise support estoppel,
estoppel is not permitted against the government. See Office of
Personnel Management v. Richmond, 496 U.S. 414, 419 (1990) (OPM);
INS v. Hibi, 414 U.S. 5, 8 (1973) (per curiam); Federal Crop Ins.
Corp. v. Merrill, 332 U.S. 380, 384 (1947); see also David K.
Thompson, Note, Equitable Estoppel of the Government, 79 Colum. L.
Rev. 551, 551 (1979) (Equitable Estoppel). The Court in Merrill
stated the rule as follows: "Whatever the form in which the
Government functions, anyone entering into an arrangement with the
Government takes the risk of having accurately ascertained that he
who purports to act for the Government stays within the bounds of
his authority." 332 U.S. at 384.
The Merrill doctrine vindicates two central policies. The
first is protection of the public fisc. To allow an assertion of
8
estoppel against the government would be to "invite endless
litigation over both real and imagined claims of misinformation by
disgruntled citizens, imposing an unpredictable drain on the public
fisc." OPM, 496 U.S. at 433. There is no risk to the public fisc
here because FLBJ was privately funded. The second "policy" is
simply a sensitivity to separation of powers. We must give
"respect for congressional intent within our constitutional system
of allocated powers." McCauley v. Thygerson, 732 F.2d 978, 982
(D.C. Cir. 1984). Estopping an agency from disavowing an
unauthorized act would validate the "agency's improper infringement
of the authority of a coordinate branch." Equitable Estoppel,
supra, at 565. It would permit "government employees to
'legislate' by misinterpreting or ignoring an applicable statute or
regulation." Portmann v. United States, 674 F.2d 1155, 1159 (7th
Cir. 1982).
B.
While the Merrill doctrine erects a high wall against the
assertion of estoppel, it does so only to protect government
entities. Whether an entity is governmental for purposes of
estoppel does not turn on its label, such as agency,
instrumentality, or private corporation, but rather on
congressional intent. See McCauley, 732 F.2d at 982; Equitable
Estoppel, supra, at 565-67.
In Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95
(1941), the Court had to determine whether the land bank was
required to pay a sales tax imposed by the North Dakota
9
legislature. The Court concluded that Congress could
"constitutionally immunize from state taxation activities in
furtherance of the lending functions of federal land banks." Id.
at 99. The state had argued that the bank's business of lending
money was essentially a private function. The Court rejected this
argument: "Through the land banks the federal government makes
possible the extension of credit on liberal terms to farm
borrowers. . . . They are `instrumentalities of the federal
government, engaged in the performance of an important governmental
function.'" Id. at 102 (quoting Federal Land Bank v. Priddy, 295
U.S. 229, 231 (1935)); see also 12 U.S.C. § 2011 (1982) (federal
land banks are "federally chartered instrumentalities of the United
States").
Premier argues that while a land bank may be immune from
taxation based on its status as a federal instrumentality, that
immunity does not insulate it from principles of equitable
estoppel. It is true that national banks, as federal
instrumentalities, are not subject to state taxes but are subject
to estoppel defenses. See First Agric. Nat'l Bank v. State Tax
Comm'n, 392 U.S. 339, 340-43 (1968); Department of Employment v.
United States, 385 U.S. 355, 360 (1966). We also recognize that
the rule that federal instrumentalities are immune from state
taxation is a unique rule, clothed in pedigree. See McCulloch v.
Maryland, 17 U.S. (4 Wheat.) 316 (1819). However, the language of
Bismarck is broad, stretching beyond the limits of immunity from
taxation to the broader governmental function of land banks and the
10
federal agricultural banking system in general: "Through the land
banks the federal government makes possible the extension of credit
on liberal terms to farm borrowers." 314 U.S. at 102. The Farm
Credit Act limits the functions of land banks to long-term lending.
To permit lending outside that function would thwart that statutory
purpose. Because the relevant inquiry is not what label can be
attached to land banks but rather what Congress intended, we hold
that Premier may not assert an estoppel defense against FCBT.3
This conclusion fits with the limited number of decisions that
have considered the issue. In Williams v. FLBJ, 954 F.2d 774 (D.C.
Cir.), cert. denied, 113 S. Ct. 299 (1992), Katherine Williams and
her mother, Elizabeth Saunders, used their plantation as security
for a loan of $1.3 million. Some six years after obtaining the
loan, Williams and Saunders wanted to sell the plantation to Duncan
Williams for $1.45 million or about $999 per acre and reduce their
debt to approximately $400,000. The land bank association, on
behalf of the land bank and at the direction of the Farm Credit
System Capital Corporation, rejected the proposal. After the death
of her mother and less than one month after their first proposal,
3
We decide today only that a pre-1987 Act land bank is not
subject to an equitable estoppel defense. Whether or not a land
bank could be considered a government actor for due process
purposes, Federal Tort Claims Act purposes, or any other purpose is
an issue we leave for another day. Cf. Mendrala v. Crown Mortgage
Co., 955 F.2d 1132, 1138-39 (7th Cir. 1992) (holding that Federal
Home Loan Mortgage Corporation was not an agency for purposes of
Federal Tort Claims Act but was sufficiently governmental to be
immune from an estoppel defense); LPR Land Holdings v. Federal Land
Bank, 651 F. Supp. 287, 292 (E.D. Mich. 1987) (holding that land
banks are not government actors for purpose of due process
challenge).
11
Williams submitted another proposal to sell the plantation and an
adjoining tract for $1.6 million or $903 per acre and extinguish
her debt. This time, the land bank association approved the offer
on behalf of the land bank. The sale closed, and Williams paid off
the loan.
Williams filed suit against the land bank association, the
land bank, and the Capital Corporation, alleging various torts and
breaches of contract related to the two proposals. In defense, the
banks alleged they were required by regulation to reject Williams
and Saunders' first proposed borrowing because it would exceed
eighty-five percent of the appraised value of the real estate
security.
Williams responded that the banks could not invoke the eighty-
five percent rule because they had ignored it in the past. The
court rejected this argument, finding that estoppel would allow
continued violations. Id. at 778.4 "The extreme judicial
reluctance to apply estoppel against the government arises out of
a concern that otherwise negligent or dishonest officials could
bring about violations of law by making misrepresentations.
[Williams'] proposed rule would engender illegality on a far
greater scale, and for far less equitable justification." Id.
(citation omitted).
4
The Williams court used the term "federal agency" in
describing the land bank. See 954 F.2d at 778. Since application
of the Merrill doctrine turns on congressional intent rather than
whether an institution can be considered a federal agency, we
decline to decide whether a land bank is a federal agency.
12
In Mendrala v. Crown Mortgage Co., 955 F.2d 1132 (7th Cir.
1992), the Mendralas borrowed $110,000 from Crown Mortgage Company
to finance the purchase of an apartment building. The loan
application form disclosed that the Federal Home Loan Mortgage
Corporation would be involved and had to approve the loan. At
closing, the Mendralas "executed an Estoppel Certificate which
certified the validity and enforceability of the loan documents in
order 'to induce [FHLMC] . . . to accept an assignment of [the]
Note and Mortgage.'" Id. at 1133. Without the Mendralas'
permission, Crown added a "lockout" provision to the loan
documents. Under this provision, the Mendralas could not prepay
the loan for five years. Four years after obtaining the loan, the
Mendralas requested and received a pay-off statement from Crown.
The Mendralas then paid the balance of the loan. When FHLMC
learned of the attempted prepayment, it advised Crown to return the
Mendralas' check. The check was returned, but the Mendralas
stopped paying monthly installments on the loan. The Mendralas
filed suit against Crown and the FHLMC alleging breach of contract,
slander of title, and fraudulent alteration of the note. The
Mendralas also sought to quiet title, cancel the note, and release
the mortgage of record. The FHLMC filed a counterclaim for
foreclosure.
The district court dismissed the Mendralas' tort claims on the
grounds that it lacked subject matter jurisdiction. The court
reasoned that FHLMC's activity fell within the intentional tort
exception to the waiver of sovereign immunity contained in the
13
Federal Tort Claims Act. The court of appeals reversed, holding
that the FHLMC was not an agency under the FTCA and, therefore, was
"prima facie suable under its enabling statute." Id. at 1134.
Despite its holding that the FHLMC was not an agency for FTCA
purposes, the court invoked the Merrill doctrine and held that
FHLMC could not be bound by Crown's unauthorized conduct. The
court concluded that the FHLMC had "a public statutory mission: to
maintain the secondary mortgage market and assist in meeting low-
and moderate-income housing goals. Holding the FHLMC responsible
for the unauthorized actions of an entity such as Crown would
thwart its congressional purpose." Id. at 1140-41 (footnote
omitted). This conclusion, the Mendrala court held, was
strengthened by the fact that the unauthorized act was committed by
a separate entity and not by an employee of the FHLMC. Id. at
1141.
This case is similar to both Williams and Mendrala. As in
Williams, upholding the letter of credit transaction would permit
a land bank to continue to violate its enabling statute. As in
Mendrala, to bind FLBJ to Burns's unauthorized issuance of the
letter of credit would impede the bank's statutory mission to
provide farmers with long-term real estate credit on favorable
terms. See also Greene County Nat'l Farm Loan Ass'n v. Federal
Land Bank, 152 F.2d 215, 220 (6th Cir. 1945), cert. denied, 328
U.S. 834 (1946).
14
IV.
Premier claims that even if the Merrill doctrine applies in
this case, FCBT should still be estopped from asserting ultra vires
because FLBJ's actions fall into an affirmative misconduct
exception.5 Under this exception, a party may be entitled to
equitable relief against the government if it establishes that the
government engaged in affirmative misconduct. See United States v.
Lair, 854 F.2d 233, 237-38 (7th Cir. 1988). To qualify as
affirmative misconduct, a "party must allege more than mere
negligence, delay, inaction, or failure to follow an internal
agency guideline." Fano v. O'Neill, 806 F.2d 1262, 1265 (5th Cir.
1987). In Fano, an alien claimed that he lost an opportunity to
obtain permanent residence in the United States because the
Immigration and Naturalization Service failed to act quickly enough
on his application for permanent resident status. Fano claimed
that the INS failed to follow its own internal directive and,
therefore, was estopped from denying him permanent resident status.
The court, recognizing that agencies are normally immune from such
estoppel arguments, nevertheless reversed the lower court's grant
of summary judgment on the grounds that Fano's allegation that the
INS acted "willfully, wantonly, recklessly, and negligently" was
5
The Supreme Court has never squarely decided whether
affirmative misconduct can serve as a basis for avoiding the
Merrill doctrine. This court expressed similar uncertainty in
Premier Bank v. Mosbacher, 959 F.2d 562, 569 n.3 (5th Cir. 1992).
However, since at least one panel in this circuit has recognized
this exception, we too will assume that affirmative misconduct is
an exception to the Merrill doctrine.
15
sufficient to fall within the affirmative misconduct exception.
Id. at 1265-66.
For Premier to prevail under this theory, we would have to
impute Burns's act of issuing the letter of credit to FLBJ.
However, in FDIC v. Langley, 792 F.2d 547, 549 (5th Cir. 1986), we
held that land bank association officers are not agents of land
banks in disbursing the proceeds of a loan. When Burns issued the
letter of credit to the Grants and Steele, he was not acting as the
agent of FLBJ.
Premier argues that Burns is an employee of the land bank
because FLBJ claimed that Burns was an employee in separate
litigation. In this separate suit, FLBJ sought to recover under a
fidelity bond for losses resulting from Burns's unauthorized
conduct. Because the fidelity bond covers the entire Farm Credit
System, specific institutional employee designations lacked
consequence. As such, the designation has little significance
here.
Next, Premier argues that by asking for a thirty-day extension
and then honoring the letter of credit, FLBJ itself committed
affirmative misconduct. However, Premier argues in its brief
nothing more than that FLBJ's acts "definitely went beyond mere
negligence." This type of conclusory allegation will not suffice
to overcome the Merrill rule. The Supreme Court has counseled that
courts should be cautious in recognizing exceptions to the Merrill
doctrine. OPM, 496 U.S. at 422. There is no suggestion that FLBJ
officers deliberately induced ONB to release its mortgage on the
16
additional collateral by honoring a letter of credit it thought
unenforceable.
Finally, Premier argues that the Merrill doctrine does not
apply to preclude its assertion of estoppel because FLBJ was acting
in its proprietary capacity. Under this purported exception,
government activities that are undertaken primarily for the
commercial benefit of the government are subject to estoppel. See
FDIC v. Harrison, 735 F.2d 408, 411 (11th Cir. 1984); United States
v. Florida, 482 F.2d 205, 209 (5th Cir. 1973). This argument is
sunk by Bismarck:
The argument that the lending functions of the federal
land banks are proprietary rather than governmental
misconceives the nature of the federal government with respect
to every function which it performs. The federal government
is one of delegated powers, and from that it necessarily
follows that any constitutional exercise of its delegated
powers is governmental. It also follows that, when Congress
constitutionally creates a corporation through which the
federal government lawfully acts, the activities of such
corporation are governmental.
314 U.S. at 102 (citations omitted). While the force of this
language undoubtedly is limited to the case's land bank facts, see
supra note 3, its continued applicability has yet to be questioned.
V.
Because the letter of credit transaction was ultra vires and
FCBT is not estopped from so claiming, we must next decide to what
extent FCBT should recover. Premier counterclaimed for recoupment.
"Recoupment is the act of rebating or recouping a part of a claim
upon which one is sued by means of a legal or equitable right
resulting from a counterclaim arising out of the same transaction."
17
Howard Johnson, Inc. v. Tucker, 157 F.2d 959, 961 (5th Cir. 1946)
(citation and internal quotation marks omitted); see also
University Medical Ctr. v. Sullivan (In re University Medical
Ctr.), 973 F.2d 1065, 1079-80 (3d Cir. 1992). Recoupment differs
from setoff in that "setoff is a counter demand which a defendant
holds against a plaintiff arising out of a transaction extrinsic of
plaintiff's cause of action." Howard Johnson, 157 F.2d at 961.
Premier claims a right to recoup the money that FCBT recovered when
it sold the additional collateral and the money that FLBJ received
when ONB loan proceeds were used to pay interest on the FLBJ loan.
FCBT argues that Premier is not entitled to recoupment because
FCBT purchased only the claim from REW and not any liabilities.
"The purchaser of an asset from a failed institution is not liable
for the conduct of the receiver or [failed] institution unless the
liability is transferred and assumed." Kennedy v. Mainland Sav.
Ass'n, 41 F.3d 986, 990 (5th Cir. 1994) (citation and internal
quotation marks omitted); see also First Indiana Fed. Sav. Bank v.
FDIC, 964 F.2d 503, 506-07 (5th Cir. 1992); Trigo v. FDIC, 847 F.2d
1499, 1503 (11th Cir. 1988). Premier's claim for the money paid to
FLBJ is a general claim properly asserted against FLBJ's receiver,
REW. See Kennedy, 41 F.3d at 990-91. However, Premier may
maintain its claim to recoup the amount FCBT recovered when it sold
the additional collateral.
Although FCBT did not assume the general liabilities of FLBJ,
it did purchase the mortgagee rights to the additional collateral.
FCBT's argument that when it purchased this ultra vires claim, it
18
only assumed FLBJ's bond indebtedness and not liability for
recoupment misconceives the remedy. In determining the
availability of recoupment, we do not look to the liabilities FCBT
assumed when it purchased this ultra vires claim but to the
original letter of credit transaction. Premier's claim of
recoupment for the amount that FCBT recovered in its sale of the
additional collateral arises out of the same transaction as the
ultra vires claim. But for FLBJ's payment of the letter of credit,
Premier would not have released its interest in the additional
collateral.
Because an ultra vires contract is null and void, the remedy
for rescission of that contract is to put the parties in the
position they would have occupied had the unlawful agreement not
been made. See Fletcher, supra, § 3571. Accordingly, Premier may
recoup the amount FCBT recovered on the sale of the additional
collateral. This adjustment ensures that FCBT does not receive a
windfall as a result of its rescission of the ultra vires contract.
The record indicates that the parties disagree as to the
amount that should be apportioned to the additional collateral;
therefore, we must remand to give the district court the
opportunity to make findings on this issue.
VI.
In its cross-appeal, FCBT claims that the district court erred
in dismissing its state law claims as abandoned. FCBT had planned
to pursue these claims if its ultra vires claim did not succeed.
19
Because we have affirmed the district court's determination that
the transaction was ultra vires and FCBT will recover the letter of
credit payment less any recoupment, we find resolution of this
issue to be unnecessary.
AFFIRMED IN PART, REVERSED AND REMANDED IN PART.
20