capitol, in re: v. 604 columbus ave re, 1st cir. (1992)
TRANSCRIPT
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USCA1 Opinion
July 1, 1992 UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT
____________ No. 91-1976
IN RE: 604 COLUMBUS AVENUE REALTY TRUST,
Debtor,
_________
CAPITOL BANK & TRUST COMPANY, Appellee,
v.
604 COLUMBUS AVENUE REALTY TRUST,
Appellant.
__________ No. 91-1977
IN RE: 604 COLUMBUS AVENUE REALTY TRUST, Debtor,
_________
FEDERAL DEPOSIT INSURANCE CORPORATION, AS RECEIVER/LIQUIDATING AGENT OF CAPITOL BANK & TRUST COMPANY, Appellant,
v.
604 COLUMBUS AVENUE REALTY TRUST, ET AL., Appellees.
____________
ERRATA SHEET
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The opinion of this court issued on June 19, 1992,
amended as follows:
On page 10, line 11 after block quote - add "and" after
word "taxes."
On page 43, line 6 after block quote - "Court" shoul
lower case.June 19, 1992
____________________
No. 91-1976
IN RE: 604 COLUMBUS AVENUE REALTY TRUST,
Debtor,
__________
CAPITOL BANK & TRUST COMPANY,
Appellee,
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v.
604 COLUMBUS AVENUE REALTY TRUST,
Appellant.
__________
No. 91-1977
IN RE: 604 COLUMBUS AVENUE REALTY TRUST,
Debtor,
__________
FEDERAL DEPOSIT INSURANCE CORPORATION,
AS RECEIVER/LIQUIDATING AGENT OF
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CAPITOL BANK & TRUST COMPANY,
Appellant,
v.
604 COLUMBUS AVENUE REALTY TRUST, ET AL.
Appellees.
____________________
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. A. David Mazzone, U.S. District Judge] ___________________
____________________
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Before
Torruella, Circuit Judge,
_____________
Weis* and Bownes, Senior Circuit Judges,_____________________
____________________
Robert Owen Resnick with whom John F. Cullen, George J.____________________ _______________ ________
and Cullen & Resnick were on brief for 604 Columbus Avenue. ________________
Michael H. Krimminger with whom Richard J. Osterman, Jr.,_____________________ _________________________
Duross, and Richard N. Gottlieb were on brief for Federal______ ____________________
Insurance Corporation.
____________________
____________________
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_____________________
*Of the Third Circuit, sitting by designation.
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BOWNES, Senior Circuit Judge. This is a case involvi ____________________
a failed loan transaction that well illustrates Poloniu
advice, "[n]either a borrower, nor a lender be."1 The
appeals require us to determine, inter alia, t _____ ____
applicability of certain federal defenses available to t
Federal Deposit Insurance Corporation (FDIC) in its capaci
as receiver when it seeks to enforce against a bankru
borrower an obligation formerly held by a failed financi
institution.
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PROCEDURAL PATH PROCEDURAL PATH
This case arises from the default by the 604 Columb
Avenue Realty Trust ("the Trust") on payment of a loan fr
the Capitol Bank and Trust Company ("the Bank"). Followi
the Trust's default, the Bank commenced mortgage foreclosu
proceedings on the properties securing its loan, among whi
were the property owned by the Trust itself and properties
the Trust's principal beneficiary, Millicent C. You
("Young").2
To forestall the foreclosures by the Bank, both t
Trust and Young filed for protection under Chapter 11 of t
____________________
1. W. Shakespeare, Hamlet, act I, sc. iii at 75.
2. The Bank also had a mortgage on a property owned by t Young Family Trust, of which Millicent Young was so beneficiary. The Young Family Trust was a named plaintiff
the adversary proceeding in the bankruptcy and distri courts below. For purposes of convenience, we refer to You and the Young Family Trust collectively as "Young."
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Bankruptcy Code in the United States Bankruptcy Court for t
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District of Massachusetts. In May 1988, the Trust, wi
Young as co-plaintiff, initiated an adversary proceedi
against the Bank, its principal secured creditor.
September 1990, the bankruptcy court awarded the plaintif
approximately $140,000 in damages on claims of fraud a
deceit, conversion, and breach of contract, plus interest a
attorney's fees. The bankruptcy court found that the Ba
improperly applied loan proceeds to payment of "soft cost
incurred by the Trust financing fees, interest, taxes a
similar expenses. It also found that an officer of the Ba
extracted kickback payments from the loan proceeds in retu
for his assistance in securing approval of the loan. Un
its power of equitable subordination pursuant to 11 U.S.C.
510(c), the bankruptcy court subordinated the Bank's secur
claim on the Trust's bankruptcy estate to the claims of t
Trust's other creditors by an amount equal to the damage
plus interest and attorney's fees. It ordered the transf
from the Bank to the Trust of a security interest in t
Trust's estate equivalent to the total of the damage
interest and attorney's fees.
During the pendency of an appeal of this judgment to t
district court, the Bank was declared unsound
Massachusetts banking officials. The FDIC was appoint
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receiver, and in February 1991 was substituted as defendan
appellant in the district court.
In August 1991, the district court affirmed
substantial part the bankruptcy court's rulings on the meri
of the Trust's claims and equitable subordination of part
the Bank's secured claim. It ruled, however, that the F
was entitled to raise the defenses available to it under t
doctrine of estoppel established in D'Oench, Duhme & Co._____________________
FDIC, 315 U.S. 447 (1942), and 12 U.S.C. 1823(e). Invoki ____
the D'Oench doctrine, the district court vacated that part_______
the bankruptcy court's judgment that was premised on t
secret agreement by one of the Trust's principals to provi
kickbacks to a Bank officer.
Both the Trust and the FDIC appeal various aspects
the judgments of both the bankruptcy and district courts.
affirm the judgment of the bankruptcy court, as modified
the district court.
BACKGROUND AND FACTS BACKGROUND AND FACTS
Before stating the facts, we think it useful to revi
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the dual role of the FDIC in bank failures. Our rece
decision in Timberland Design, Inc. v. First Service Bank______________________________________________
Savings, 932 F.2d 46, 48 (1st Cir. 1991), provides_______
excellent summary of the FDIC's different functions:
As receiver, the FDIC manages the assets of the failed bank on behalf of the bank's creditors and shareholders. In its corporate capacity, the FDIC is responsible for insuring the failed bank's
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deposits. Although there are many options available to the FDIC when a bank fails, these options generally fall within two categories of approaches, either liquidation or purchase and assumption. The liquidation option is the easiest method, but carries with it two major
disadvantages. First, the closing of the bank weakens confidence in the banking system. Second, there is often substantial delay in returning funds to depositors.
The preferred option when a bank fails, therefore, is the purchase and assumption option. Under this arrangement, the FDIC, in its capacity as receiver, sells the bank's healthy assets to the purchasing bank in exchange for the purchasing bank's promise
to pay the failed bank's depositors. In addition, as receiver, the FDIC sells the "bad" assets to itself acting in its corporate capacity. With the money it receives, the FDIC-receiver then pays the purchasing bank enough money to make up the
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difference between what it must pay out to the failed bank's depositors, and what the purchasing bank was willing to pay for the good assets that it purchased. The FDIC acting in its corporate capacity then tries to collect on the bad assets to minimize the loss to the insurance fund. Generally, the purchase and assumption must be executed in great haste, often overnight.
Id. at 48 (citations omitted). ___
Turning to the case at hand, we first summarize t
extensive findings of fact of the bankruptcy court. See___
re 604 Columbus Avenue Realty Trust, 119 B.R. 350 (Bankr.
____________________________________
Mass. 1990) ("Bankruptcy Court Opinion"). The lo
transaction at issue in these appeals originated in t
efforts of Young and several business associates to purcha
two buildings located at 604-610 Columbus Avenue in Bosto
Massachusetts ("the Columbus Avenue properties"), and
restaurant operated on the premises known as "Bob the Chef
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Young was the owner of a contracting and constructi
company. Among her business partners was Carl Benja
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("Benjamin"), who served as her financial adviser.
In October 1985, Young and Benjamin learned of t
availability for purchase of the Columbus Avenue propertie
Young and Benjamin, along with two other partners, agreed
enter into a business relationship through which they wou
purchase the Columbus Avenue properties, renovate and rese
the properties as condominiums, resell the restaurant, a
share the profits from the condominium sales and sale of t
restaurant. In November 1985, Young and Benjamin offered t
owner of the Columbus Avenue properties $1.2 million for t
buildings and the restaurant.
Young's attorney, Steven Kunian ("Kunian"), suggest
that she and her partners seek financing for the purchase a
renovation of the Columbus Avenue properties from the Ban
Kunian had represented the Bank from time to time on lo
transactions. In December 1985, Benjamin negotiated t
terms of a loan from the Bank on behalf of Young and t
other partners. The Bank was represented in the
negotiations by a loan officer, Arthur Gauthier, and a memb
of the Bank's Board of Directors, Sidney Weiner ("Weiner"
Weiner also served on the Bank's Executive Committee, whi
was responsible for the approval of loans. Although not
salaried employee of the Bank, Weiner was paid director's a
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consultant's fees, and was regarded by Gauthier and ot
bank employees as having primary authority for negotiation
the loan to Young and her partners.
Loans larger than $25,000 required the approval of t
Bank's Executive Committee. Gauthier presented the propos
for the loan for the Columbus Avenue properties three ti
before the Executive Committee approved it on January 1
1986. Final approval by the Executive Committee was achie
when Young agreed to pledge her residence as addition
collateral for the loan. Weiner was one of the Executi
Committee members who voted to approve the loan.
Some time before the Executive Committee voted
approve the loan, Weiner told Benjamin that the loan wou
only be approved on the condition that Benjamin agree to p
Weiner personally for his assistance in securing the Ban
approval of the loan. In exchange for this kickback, Wein
helped the loan proposal reach the Executive Committee, vot
to approve the loan, and influenced other Committee membe
to vote in favor of the loan. There was no evidence t
other members of the Executive Committee were aware
Weiner's kickback arrangement with Benjamin when they vot
to approve the loan. The bankruptcy court found that $26,3
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was paid to Weiner.
Attorney Kunian represented both the Bank and t
borrowers at the closing on the loan on February 27, 198
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Kunian suggested that Young and her associates hold t
Columbus Avenue properties through a realty trust. At t
closing the 604 Columbus Avenue Realty Trust was create
with Young as its trustee. Young was given 62.5% of t
beneficial interest in the trust, while each of her thr
partners, including Benjamin, was made a 12.5% beneficiar
To secure the loan from the Bank, Young executed on behalf
the Trust a "Commercial Real Estate Promissory Note," a "Lo
and Security Agreement" ("L&SA"), an "Addendum to Loan
Security Agreement ("L&SA Addendum"), and a "Constructi
Loan Agreement" (referred to collectively as the "First Lo
Agreement"). The Bank, in turn, agreed to lend the Tru
$1,500,000.
The Bank used a standard-form L&SA, which contained t
following provisions:
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SECTION 6. BANK'S RIGHT TO SET-OFF
6.01 The Borrower agrees that any deposits or other sums at any time credited by or due from the Bank to the Borrower, or any obligor or guarantor of any liabilities of the Borrower in possession of the Bank, may at all times be held and treated as collateral for any liabilities of the Borrower or
any such obligor or guarantor to the Bank. The Bank may apply or set-off such deposits or other sums against said liabilities at any time.
. . . .
SECTION 8. EXPENSES:
8.01 The Borrower shall pay or reimburse the Bank on demand for all out-of-pocket expenses of every
nature which the Bank may incur in connection with this Agreement and the preparation thereof, the
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making of any loan provided for therein, or the
collection of the Borrower's indebtedness under this Agreement . . . . [T]he Bank, if it chooses, may debit such expenses to the Borrower's Loan Account or charge any of the Borrower's funds on deposit with the Bank.
The parties also executed an Addendum to this L&S
which established the following schedule for the Ban
advancement of the proceeds of the loan to the Trus
$1,200,000 at the closing to pay for the Trust's acquisiti
of the Columbus Avenue properties and the restaurant;
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further $200,000 for construction-related expenditures at t
Columbus Avenue properties, but only upon itemiz
requisitions approved by the Trust, its architect, and t
bank; and $100,000 for the "soft costs" incurred with respe
to the loan. "Soft costs" covered the various no
construction costs of the renovation effort, and inclu
closing fees, interest, taxes, and insurance. To secure i
promissory note, the Trust gave the Bank, inter alia,_____ ____
mortgage on the Columbus Avenue properties and a condition
assignment of rents from the properties in favor of the ban
Young, in her individual capacity, also gave the Ba
mortgages on her residence and two other properties owned
held on her behalf.
At the closing, the Bank disbursed approximate
$1,250,000, of which nearly $1,200,000 was paid to the owne
of the Columbus Avenue properties, and the remaining amou
was paid to the Bank itself for the costs of the loan. T
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Bank also created a checking account through which it was
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disburse the remaining amounts of the loan. A signature ca
was created for the account bearing the names of Youn
Benjamin, and another partner of the Trust. Those listed
the signature card had access to loan proceeds upon the
disbursement by the Bank. Young was apparently not awa
that Benjamin's signature was on the card.
The bankruptcy court found that the Trust's ability
repay the loan on the Columbus Avenue properties hinged
several assumptions that Young and her partners understood
reasonably should have understood at the closing. One
these assumptions was that $100,000 for soft cos
anticipated in First Loan Agreement would not cover tho
costs completely and would have to be supplemented by fun
of Young and her partners. Another assumption was that t
Trust could generate the funds necessary to complete t
condominium project by selling the restaurant.
The Bank advanced the remainder of the proceeds of t
loan approximately $250,000 within forty-seven days
the closing, in three large payment. Weiner personal
directed Gauthier to pay these advances into the Trust
account, but did so without the approval of Young and
violation of the procedures specified in the First Lo
agreement. The bankruptcy court found that the Bank pa
itself a total of $102,305.54 out of loan proceeds to co
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soft costs, thereby exceeding by $2,305.54 the amount of so
costs contemplated in the First Loan Agreement. The sum
$26,300 was withdrawn by Benjamin from the loan accou
without Young's knowledge or authorization, which was t
used to make kickback payments to Weiner. Someti
thereafter, Young learned of Benjamin's conduct, a
attempted unsuccessfully to expel him from the Trust and
get him to give up his beneficial interest in it.
When the six-month term of the First Loan Agreeme
expired in August 1986, the Trust could not repay the loa
It therefore negotiated a second six-month loan to refinan
the first (the "Second Loan Agreement"). On September 1
1986, the Trust signed a promissory note to the Bank f
$1,750,000, which was secured by the same mortgages a
guarantees as the First Loan Agreement. Young, on behalf
the Trust, executed a new L&SA that contained provisio
identical to those in the L&SA accompanying the previo
loan. In addition, the Addendum to the L&SA in the Seco
Loan Agreement provided, inter alia, the following scheme f _____ ____
disbursement:
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The Bank shall advance the loan proceeds approximately as follows: a. $1,500,000.00 at closing for acquisition of real estate and personal property[;] b. $190,000.00 for construction costs . . . [;] c. $60,000.00 for soft costs incurred with respect to the loan.
At the closing of the Second Loan Agreement, $1,580,151.11
loan proceeds were disbursed to pay the $1,524,516.11 balan
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remaining on the First Loan agreement and $55,635
origination and attorney's fees for the new loan.
Four months later, in January 1987, the Trust sold t
property at 610 Columbus Avenue for $692,400 and paid t
Bank this amount in order to reduce the outstanding princip
balance of the Second Loan Agreement. In March 198
however, when the Second Loan Agreement came due, the Tru
was unable to repay it. The Bank therefore entered into
"Agreement to Extend Mortgage and Note" with the Trust,
exchange for an extension fee.
The bankruptcy court found that during the term of t
Second Loan Agreement and its extension, the Bank withdr
from the loan proceeds $169,406.12 for various soft cost
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including closing fees, interest, charges for the lo
extension, taxes, and attorney's fees. This amount excee
the "approximately" $60,000 in soft costs originally provi
for in the second L&SA Addendum by $109,406.12.
The Second Loan Agreement, as extended, came due on Ju
10, 1987. The Trust was unable to make payment.
September 1987, the Bank began foreclosure of the vario
mortgages it held as security for the loan. The bankrupt
court found that the reasons for the Trust's defau
included, inter alia: the inability of the Trust to sell t _____ ____
restaurant, and the attendant loss of cash needed to finan
the condominium renovations originally planned; the furt
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deprivation of cash needed for the project as a result of t
kickback payments; and the Bank's overapplication
$109,406.12 in proceeds from the second loan to payment
soft costs. The bankruptcy court also concluded that it
the Trust's failure to sell the restaurant, rather than t
Bank's overapplication of loan proceeds for soft costs a
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the kickback payments, that was by far the single mo
important reason for the failure of the project.
DECISIONS OF THE BANKRUPTCY AND DISTRICT COURTS DECISIONS OF THE BANKRUPTCY AND DISTRICT COURTS
In bankruptcy court, the Trust and Young alleged t
the Bank entered into and administered the loans for t
improper purpose of extracting a kickback from loan procee
They also alleged that the Bank improperly applied procee
from the two loans to the payment of soft costs. T
plaintiffs alleged fraud and deceit, conversion, and brea
of contract by the Bank. They also argued that the Ban
inequitable conduct warranted the subordination of the Ban
secured claim in the Trust's bankruptcy estate to those
all of the Trust's other creditors. In addition, the Tru
and Young requested an order invalidating entirely the Ban
mortgages on their properties.
The bankruptcy court conducted a seven-day trial.
awarded the Trust $138,011.66 in damages. Of this amoun
$26,300 was assessed as damages for the kickback paymen
made to Weiner by Benjamin. The kickback damages were bas
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on claims of conversion, breach of contract and fraud un
Massachusetts law. The remaining $111,711.66 in dama
represented the total amount of soft costs that t
bankruptcy court found to have been improperly removed fr
the loan proceeds by the Bank in violation of the limits s
by the two loan agreements i.e., $2,305.54 on the Fir
Loan Agreement and $109,406.12 on the Second Loan Agreemen
This award was premised on claims of conversion and breach
contract. The bankruptcy court also ordered that t
$138,011.66 damages award be supplemented by an award
reasonable attorney's fees, which it found were warranted
an element of the conversion damages under Massachusetts la
and also of post-judgment interest at the contract ra
specified in the loan agreements.
Invoking its powers of equitable subordination pursua
to 11 U.S.C. 510(c), the court entered an or
subordinating the Bank's secured claim to the claims
priority and general unsecured claimants in an amount equ
to the full amount of the damages, interest and attorney
fees. It further directed that the Bank transfer to t
Trust's estate a portion of its security interest in
amount equal to the total damages. The bankruptcy cou
refused, however, to issue an order entirely invalidating t
mortgages held by the Bank.
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While the Bank's appeal of the bankruptcy court
judgment was pending, the FDIC was appointed receiver a
liquidating agent of the Bank, and substituted for the Ba
as defendant-appellant. The FDIC continued the Bank's appe
of the bankruptcy court's judgment as to the conversio
breach of contract, and fraud claims, as well as i
challenge to the bankruptcy court's equitable subordinati
of its secured interest in an amount equal to the tot
damages. In addition, the FDIC raised two special feder
defenses as to each aspect of the damages claims. The F
argued that the D'Oench doctrine or its statuto
_______
counterpart, 12 U.S.C. 1823(e) precluded the bankrupt
court's award of damages on the kickback arrangement, insof
as this claim was based on a secret agreement between Wein
and Benjamin. The FDIC also argued that the special hol
in due course status accorded it under federal common l
entirely barred the Trust's claims for damages and equitab
subordination against it in its receivership capacity.
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The Trust and Young, on the other hand, challenged t
applicability of the federal defenses urged by the FDIC,
well as the FDIC's right to raise these defenses for t
first time on appeal. They also contested the bankrupt
court's refusal to grant them an order invalidating entire
the Bank's mortgages on their properties.
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In August 1991, the district court affirmed t
bankruptcy court's rulings on the merits of the plaintiff
conversion and breach of contract claims with respect to t
Bank's improper application of loan proceeds for payment
soft costs. Although the district court found that the F
was entitled to raise its federal defenses for the first ti
on appeal, it rejected the FDIC's argument that the feder
common law holder in due course doctrine barred the Trust
claims against it in its capacity as the Bank's receive
The district court also affirmed the equitable subordinati
of the FDIC's secured claim on the Trust's estate in
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amount equal to the damages on the soft costs claims, i.e
$111,711.66, plus post-judgment interest. It reverse
however, the bankruptcy court's inclusion of attorney's fe
as part of the overall amount of the FDIC's claim subject
equitable subordination.
The district court vacated the bankruptcy court's awa
of $26,300 of damages based on the kickback arrangeme
between Benjamin and Weiner. Finding that the FDIC
entitled to raise the D'Oench doctrine for the first time
_______
appeal, the court held that the kickback arrangement was
secret agreement squarely within the coverage of t
doctrine. It therefore reduced the equitable subordinati
against the FDIC by an amount equal to the kickback damage
Because it found that the fraud claims based on the kickba
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arrangement could not stand against the FDIC, the cou
rejected the Trust and Young's arguments that it declare t
loan agreements and the mortgages on the plaintiff
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properties void as illegal contracts in contravention
public policy.
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THE ISSUES ON APPEAL AND STANDARD OF REVIEW THE ISSUES ON APPEAL AND STANDARD OF REVIEW
In their appeals to this court,3 both the FDIC and t
Trust press substantially the same arguments made in the
appeals of the bankruptcy court's judgment to the distri
court.4 The FDIC argues that because it was the receiver
an insolvent bank, federal common law barred the plaintiff
claims of conversion, breach of contract, and fraud, as we
as the equitable subordination of the FDIC's secured intere
in the Trust's estate. The FDIC maintains that any dama
against it in its receivership capacity based on the so
costs claims were barred by the federal common law holder
due course doctrine, and that the equitable subordinati
against it in an amount equal to those damages is contrary
federal common law. The FDIC also attacks the rulings of t
bankruptcy court, affirmed by the district court, that t
Bank misappropriated soft costs monies, as well as t
equitable subordination of its secured claim to reflect t
damages caused by the Bank's misappropriation. It furt
challenges the district court's affirmance of an award
____________________
3. Following the district court's judgment, both the F
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and the Trust docketed separate appeals with this court. T FDIC's appeal is No. 91-1977; the Trust's is No. 91-1976.
4. Young is not a party to the Trust's appeal. Neither t Trust nor Young has challenged the district court affirmance of the bankruptcy court's refusal to void t mortgages on their properties.
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post-judgment interest on the $111,711.66 in damages on t
soft costs claims.
The Trust, on the other hand, argues that the distri
court erred by applying the D'Oench doctrine for the fir _______
time on appeal. The Trust insists that the D'Oench doctri _______
does not bar its recovery on its claims relating to t
kickback scheme. The Trust also maintains that the distri
court erred when it held that the bankruptcy cou
incorrectly included attorney's fees as part of the overa
amount of the FDIC's security interest subject to equitab
subordination in favor of the Trust and other creditors.
In an appeal from a district court's review of
bankruptcy court's decision, we "independently review[] t
bankruptcy court's decision, applying the clearly erroneo
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standard to findings of fact and de novo review
conclusions of law." In re G.S.F. Corp., 938 F.2d 1467, 14 __________________
(1st Cir. 1991). See also In re Navigation Technology Corp ________ _______________________________
880 F.2d 1491, 1493 (1st Cir. 1989) (bankruptcy court
determinations of law subject to de novo review); Briden______
Foley, 776 F.2d 379, 381 (1st Cir. 1985) (clearly erroneo _____
standard of review applied to bankruptcy court's factu
findings).
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DISCUSSION DISCUSSION
I. DISTRICT COURT REVIEW OF THE FDIC'S FEDERAL DEFENSESTHE FIRST TIME ON APPEAL
Before considering the Trust's state law clai
underlying its damages award against the Bank, we fir
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address the FDIC's arguments that two special defens
established under federal law the federal common law hol
in due course and D'Oench doctrines barred all of t _______
plaintiffs' claims and resulting equitable subordinati
against it as the Bank's receiver. In order to address t
merits of these federal defenses, we must, as a thresho
matter, determine whether the FDIC was entitled to raise t
for the first time in the district court in its appeal of t
bankruptcy court's judgment.
The district court based its decision to permit the F
to assert its federal defenses exclusively on the Financi
Institutions Reform, Recovery and Enforcement Act of 19
("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183 (198
(codified at 12 U.S.C. 1811-1833e), which provides
pertinent part:
(13) Additional rights and duties
(A) Prior final adjudication
The Corporation shall abide by any final unappealable judgment of any court of competent jurisdiction which was rendered before the appointment of the Corporation as
conservator or receiver.
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(B) Rights and Remedies of conservator or receiver
In the event of any appealable judgment, the Corporation as conservator or receiver shall
(i) have all the rights and remedies available to the insured depository institution (before the appointment of such conservator or receiver) and the Corporation in its corporate capacity,
including removal to Federal court and all appellate rights; and
(ii) not be required to post any bond in order to pursue such remedies.
12 U.S.C.A. 1821(d)(13)(A)-(B). The district court fou
that the bankruptcy court's judgment in favor of the Tru
was "appealable" within the meaning of 1821(d)(13)(B).
reasoned that the federal defenses against the Trust's cla
asserted by the FDIC in its receivership capacity were amo
"the rights and remedies available to . . . the [FDIC] in i
corporate capacity." The district court concluded that t
"rights and remedies" granted the FDIC in its receivers
capacity included the right to raise its federal defenses f
the first time on appeal. The district court based t
analysis on its reading of FIRREA's text and legislati
history.5
____________________
5. As evidence of Congress' special solicitude for t preservation of the rights of the FDIC in its receivers capacity, the district court emphasized FIRREA's provision
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an automatic stay in any litigation to which the FDIC beco a party. See 12 U.S.C. 1821(d)(12). It also highlight ___ language in FIRREA's legislative history explaining the ne for the automatic stay: "The appointment of a conservator
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The district court acknowledged that this interpretati
of 1821(d)(13)(B) conflicted with that of the Fifth a
Eleventh Circuits, both of which have rejected t
interpretation of FIRREA. In Olney Savings & Lo _____________________
Association v. Trinity Banc Savings Association, 885 F.2d 2 _______________________________________________
(5th Cir. 1989), the Fifth Circuit ruled that
1821(d)(13)(B) did not in any way modify the substanti
rights of the FSLIC in its receivership capacity, but mere
assured the FSLIC standing to pursue all appeals previous
available to it only in its corporate capacity. Accordingl
it held that FIRREA did not entitle the FSLIC to raise t
D'Oench doctrine for the first time on appeal. Id. at 27 _______ ___
In Baumann v. Savers Federal Savings & Loan Assoc., 934 F. _______________________________________________
1506 (11th Cir. 1991), cert. denied, ___ U.S. ___, 1992 U. ____________
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LEXIS 2709, 60 U.S.L.W. 3780 (1992), the Eleventh Circu
followed Olney, and rejected the argument of the Resoluti _____
Trust Corporation ("RTC") that 1821(d)(13)(B) entitled
to raise the D'Oench doctrine. Id. at 1511. In Baumann, t _______ ___ _______
Eleventh Circuit expressly rejected the interpretation of
____________________
receiver can often change the character of the litigatio the stay gives the FDIC a chance to analyze pending matte
and decide how best to proceed." H.R. Rep. No. 54(I), 101 Cong., 1st Sess. 331 (1989), reprinted in 1989 U.S.C.C.A. _____________ 86, 127. The district court further relied on two decisio of the Texas Court of Appeals holding that 1821(d)(13)( permits the FDIC to raise the D'Oench doctrine for the fir _______ time on appeal. See FDIC/Manager Fund v. Larsen, 793 S.W. ___ ___________________________ 37 (Tex. Ct. App.), writ granted, 34 Tex. Sup. Ct. J.
____________ (1990); FSLIC v. T.F. Stone-Liberty Land Assocs., 787 S.W. _________________________________________ 475 (Tex. Ct. App. 1990).
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1821(d)(13)(B) advanced by the district court in this cas
The Baumann court concluded that to read the statu _______
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otherwise would be to grant a federal receiver n
substantive rights, because neither FIRREA nor previous
existing statutes granted the RTC in its corporate capaci
the power to raise arguments for the first time on appea
Id. ___
We think that the Olney and Baumann court _____ _______
interpretation of 1821(d)(13)(B) is the proper one, a
hold that the district court erred when it read FIRREA
allowing the FDIC in its receivership capacity to raise i
federal defenses for the first time on appeal. We agree wi
the distinction drawn by Baumann: "the right at issue in t _______
case is not the right of the [federal receiver] to argue
federal defense], which is unquestioned, but rather the ri
of the [federal receiver] to raise an argument for the fir
time on appeal." Id. at 1512. Section 1821(d)(13)(B) mere ___
accords the FDIC in its receivership capacity standing
raise the same defenses available to the FDIC in i
corporate capacity. It does not establish that the FDIC
receiver is entitled to raise its federal defenses for t
first time on appeal.
Although FIRREA does not grant the FDIC as receiver t
right to raise its special federal defenses to the Trust
claims for the first time on appeal, we must also consi
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whether there is any alternative basis on which the distri
court could have permitted the FDIC to raise its feder
defenses. The FDIC argues that even if 1821(d)(13)(B) do
not grant it the right to raise its federal defenses, t
district court nonetheless had the discretion, in i
capacity as an appellate court, to address these defenses f
the first time on appeal.
The FDIC relies principally on Baumann for t _______
argument. There, the Eleventh Circuit held that i
discretion as an appellate court permitted it to address t
federal receiver's D'Oench doctrine argument for the fir _______
time on appeal. Id. at 1513. The court stressed the fa
___
that the RTC had not had the opportunity to present i
argument in the trial court because it had not become a par
to the suit until after the entry of final judgment. Id.___
order to prevent the RTC from being "penalized for n
raising a defense it had no opportunity to present," t
Baumann court concluded that it would be appropriate_______
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exercise its discretion to exempt the RTC in its receivers
capacity from its general rule precluding argument of issu
for the first time of appeal. Id. The Fifth Circuit___
also adopted Baumann's approach in similar circumstances_______
which the federal conservator or receiver becomes a party
an appeal after the final judgment of the trial court. S
Resolution Trust Corp. v. McCrory, 951 F.2d 68, 71 (5th Ci __________________________________
-28-
1992) (citing Baumann and Union Fed. Bank v. Minyard, 9 _______ ____________________________
F.2d 335, 336 (5th Cir. 1990)).
It is the general rule in this circuit that argumen
not raised in the trial court cannot be raised for the fir
time on appeal. See, e.g., Boston Celtics Ltd. Partners ___ ____ _____________________________
v. Shaw, 908 F.2d 1041, 1045 (1st Cir. 1990); Brown________ ______
Trustees of Boston Univ., 891 F.2d 337, 359 (1st Cir. 1989 _________________________
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cert. denied, ___ U.S. ___, 110 S. Ct. 3217 (1990). Li ____________
other circuit courts of appeals, however, we have recogniz
that an appellate court has the discretion, in exception
circumstances, to reach issues not raised below. See Unit ___ ___
States v. La Guardia, 902 F.2d 1010, 1013 (1st Cir. 1990 _____________________
In United States v. Krynicki, 689 F.2d 289, 291-92 (1st Ci _________________________
1982), we outlined the criteria for determining t
appropriate exercise of our discretion to hear new issue
These criteria include, inter alia, whether the new issue_____ ____
purely legal, such that the record pertinent to the issue c
be developed no further; whether the party's claim appea
meritorious; whether reaching the issue would promo
judicial economy because the same issue is likely to
presented in other cases; and whether declining to reach t
argument would result in a miscarriage of justice. Id. ___
The circumstances of this case were sufficient
exceptional to have permitted the district court to consi
for the first time on appeal the merits of the feder
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defenses raised by the FDIC in its receivership capacit
The question of whether various federal defenses barred t
Trust's claims was purely legal and required no furt
development of the factual record; the FDIC's feder
defenses were colorable, judged by the district court
acceptance of the FDIC's D'Oench argument to bar damages
_______
the kickback claims; judicial economy would have be
promoted by a ruling on the merits of the applicability
the FDIC's federal defenses, given the increasing volume
litigation involving federal receivers and/or conservators
this circuit; and finally, it would have been unfair
prevent the FDIC from raising its federal defenses when
had no such opportunity to assert them before the bankrupt
court. As Baumann and McCrory make clear, it is not uncom _______ _______
for a federal receiver or conservator to become a party to
litigation after the final judgment of the trial court.
prevent the FDIC from raising its federal defenses in su
circumstances would vitiate much of the purpose of allowi
these defenses in the first place.
II. THE D'OENCH DOCTRINE AS A BAR TO THE TRUST'S RECOVERY_______
THE KICKBACK CLAIMS
We next review the question of whether the D'Oen ____
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doctrine, or its statutory counterpart, 12 U.S.C.
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1823(e),6 bars the Trust's claims based on the kickba
scheme and any equitable subordination against the FDIC
receiver.
In D'Oench, the Supreme Court held that in a su _______
brought by the FDIC to collect on a borrower's promisso
note, in which the FDIC was the successor in interest to t
original lender, the borrower was not entitled to rely
agreements outside the documents contained in the len
bank's records to defeat the FDIC's claim. 315 U.S. at 46
61. The Supreme Court announced a federal common l
doctrine of equitable estoppel preventing the borrower fr
using a "secret agreement" with the original lender as
____________________
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6. As amended by FIRREA, 1823(e) provides: No agreement which tends to diminish or defeat the interest of the Corporation in any asset acquired by it under this section . . . , 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 committee, and (4) has been, continuously, from the time of
its execution, an official record of the depository institution. We treat 1823(e) as the statutory codification of t D'Oench doctrine. See Capizzi v. FDIC, 937 F.2d 8, 9 (1 _______ ___ ________________ Cir. 1991); FDIC v. P.L.M. Int'l, Inc., 834 F.2d 248, 2 ____________________________ (1st Cir. 1987).
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defense to the FDIC's demand for payment. Id. D'Oench___ _______
not require that the borrower have the intent to defrau
"The test is whether the note was designed to decei
creditors or the public authority, or would tend to have t
effect. It would be sufficient in this type of case that t
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maker lent himself to a scheme or arrangement whereby t
banking authority . . . was or was likely to be misled." I
at 460.
The contours of the D'Oench doctrine, which ha
_______
expanded since the Court's original decision, are wel
established in this circuit. See Timberland Design, 932 F. ___ _________________
at 48-49; FDIC v. Caporale, 931 F.2d 1, 2 (1st Cir. 1991 ________________
FDIC v. P.L.M. Int'l, Inc., 834 F.2d 248, 252-53 (1st Ci ___________________________
1987). Although the D'Oench decision involved the FDIC_______
its corporate capacity, "courts have consistently applied t
doctrine to those situations where the FDIC was acting in i
capacity as receiver." Timberland Design, 932 F.2d at_________________
(citing cases). We have also adopted the position of t
great majority of the circuits that D'Oench "operates to b _______
affirmative claims as well as defenses which are premis
upon secret agreements." Id. In addition, D'Oench appli
___ _______
to claims involving secret agreements that sound either
tort or in contract. Id. at 50 (citing Langley v. FDIC, 4 ___ _______________
U.S. 86 (1987)). And finally, the fact that the FDIC
have actual knowledge of the secret agreement is irrelevan
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"The proper focus under D'Oench is whether the agreement,_______
the time it was entered into, would tend to mislead t
public authority." Id. ___
Applying the principles enunciated in Timberland, t __________
district court held that D'Oench estopped the Trust fr _______
raising against the FDIC its affirmative claims based on t
kickback scheme. It found that the record established t
the Trust, through its agent Benjamin, had "lent itself" to
kickback scheme with the Bank. The district court conclu
that the unwritten agreement and subsequent kickback paymen
between Weiner and Benjamin were a "secret agreemen
squarely within the coverage of D'Oench. _______
The Trust contends that D'Oench should not have be _______
applied for the district court for several reasons.
argues that its tort claims of conversion and fraud stand
a factual basis independent of the kickback arrangement, a
that these claims therefore cannot be barred by D'Oench._______
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similar reasons the Trust argues that its breach of contra
claim must also be upheld because the removal of $26,300 fr
the loan proceeds was a breach of the express terms of t
written loan agreement, and not a breach of the unwritt
kickback arrangement. In the alternative, the Trust invo
certain recognized exceptions to the D'Oench doctrine:_______
claims (1) that it is a non-negligent victim of "fraud in t
factum," and (2), that the district court should have fou
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that it was innocent of any intentional or neglige
deception because Benjamin was not acting as the Trust
agent at the time he removed loan proceeds for the kickba
payments.
A. The Scope of the Kickback Agreement ___________________________________
We find little merit in the Trust's first argumen
which counsel appears in part to have abandoned during or
argument.7 As we understand it, the Trust's contention
that because its fraud and conversion claims are "n
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premised upon" the kickback arrangement, D'Oench cann _______
apply. According to the Trust, "the kickback arrangeme
merely explains why Capitol Bank chose to misappropriate t
[Trust's] assets, whereas the misappropriations themsel
are the basis of the [Trust's claims]." Brief for Appella
604 Columbus Avenue Realty Trust at 27. The problem with t
Trust's position is that the bankruptcy court's findings
respect to these claims, as well as its equitab
____________________
7. When pressed to explain why the D'Oench doctrine did n _______ apply to all the Trust's claims relating to the secr agreement between Benjamin and Weiner, counsel for the Tru placed exclusive reliance on the argument that the Trust
an innocent party that had not knowingly made itself a par to the kickback arrangement with Weiner. Counsel stated t "if the Trust had in fact entered into an oral agreemen then you would be right; D'Oench would clearly apply. B _______ the bankruptcy court did not find that fact. The bankrupt court found that Benjamin was liable to the Trust for t twenty-six thousand dollars as well as the Bank. . . . [I seems to me to be a very, very broad application of D'Oen ____ where a borrower has not lent themselves [sic] in any fashi to this agreement."
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subordination of $26,300 in lieu of damages, were in fa
explicitly premised on the kickback arrangement. S
Bankruptcy Court Opinion, 119 B.R. at 371 (conversion); i
at 374 (fraud); id. at 377 (equitable subordination).___
does the Trust elaborate as to how other facts, independe
of those relating to the kickback arrangement, provide
alternative basis for the bankruptcy court's findings in i
favor.8 The Trust's tort claims fall squarely un
D'Oench: "D'Oench bars . . . affirmative claims . . . as lo _______ _______
as those claims arise out of an alleged secret arrangement __________________________________________
Timberland, 932 F.2d at 50 (emphasis added). __________
The Trust next argues that D'Oench does not bar i _______
breach of contract claim against the Bank for the $26,3
misappropriated from the Trust's account because this brea
was a violation of the written terms of the loan agreemen
It relies on Howell v. Continental Credit Corp., 655 F.2d 7 __________________________________
(7th Cir. 1981), which held that the FDIC cannot invo
D'Oench "where the document the FDIC seeks to enforce is o _______
. . . which facially manifests bilateral obligations a
serves as the basis of the [promisor's] defense." Id. at 7 ___
(emphasis omitted). Seizing on the language of Howell, t ______
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____________________
8. The Trust's attempts to distinguish Weiner's conduct fr the tortious conduct of the Bank are completely witho merit. The Trust prevailed on its tort claims against t Bank in bankruptcy court on a respondeat superior theory, a
cannot now evade the precepts of D'Oench by intimating t _______ these tort claims against the Bank had nothing to do with t kickback arrangement masterminded by Weiner.
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Trust advances much the same argument with respect to t
breach of contract claim as asserted in its challenge
D'Oench's application to its tort claims, i.e., that t _______
"bilateral obligations" of the loan agreement, and not t
secret kickback agreement, are the basis for its breach
contract claim. Once again, the Trust's argument ignores t
opinion of the bankruptcy court, which expressly stated t
the $26,300 judgment for the Trust on the breach of contra
claim was founded on the kickback arrangement. S
Bankruptcy Court Opinion, 119 B.R. at 375.
The Trust's reliance on Howell is also misplaced. T ______
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Trust's breach of contract claim required proof of t
existence of a secret kickback arrangement. Howell, on t ______
other hand, involved the FDIC's attempted enforcement of
lease that expressly imposed bilateral obligations on bo
the lessor and lessee. See Howell, 655 F.2d at 747. T ___ ______
Seventh Circuit ruled that the FDIC, as successor to t
lessor, could not assert D'Oench to bar the lessee's contra _______
defenses. Id. In Howell, the lessee's contract defens
___ ______
were not premised on any secret agreement, but were based
the failure of the original lessor to fulfill the expre
conditions of the lease. Id. The limited exception to t ___
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D'Oench doctrine crafted by Howell does not apply to t _______ ______
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Trust's breach of contract claim.9
B. Fraud In The Factum ___________________
The Trust further claims that two other recogniz
exceptions to the D'Oench doctrine apply to this case. T
_______
first exception is fraud in the factum. The Supreme Court
decision in Langley v. FDIC, 484 U.S. 86 (1987), whi _________________
addressed to the issue of the FDIC's right to invo
D'Oench's statutory counterpart, 12 U.S.C. 1823(e), is al
_______
applicable to analysis of fraud in the factum as a bar to t
application of D'Oench. In Langley, the Court distinguis _______ _______
between the real defense of fraud in the factum, whi
renders a loan agreement entirely void and takes t
agreement out of 1823(e), and a defense of fraud in t
inducement, which renders the loan agreement voidable b
does not preclude the FDIC's assertion of 1823(e
Langley, 484 U.S. at 93-94. After reviewing the claim by t _______
note makers that their participation in a land transacti
had been procured by misrepresentations as to the size a
character of the property involved, the Court concluded t
____________________
9. Since Howell, the Seventh Circuit has cautioned no
______ makers from the over-hasty invocation against the FDIC of t exception to D'Oench contemplated by that decision: "Less _______ Number One in the study of law is that general language in
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opinion must not be ripped from its context to make a ru far broader than the factual circumstances which called for the language." FDIC v. O'Neil, 809 F.2d 350, 354 (7th Ci _______________ 1987).
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the note makers' argument was a claim of fraud in t
inducement. Accordingly, the Court found that the FDIC cou
properly invoke 1823(e) to bar the assertion by the no
makers of their fraud defense. Id. at 94. ___
We think that the Langley Court's distinction f _______
purposes of 1823(e) between fraud in the inducement a
fraud in the factum applies with equal force in the conte
of D'Oench. We have characterized fraud in the factum as
_______
real defense that may be asserted when the original len
fraudulently procures the borrower's signature to
instrument without that borrower's knowledge of its tr
nature or contents. See FDIC v. Caporale, 931 F.2d 1, 2 n ___ _________________
(1st Cir. 1991) (noting that in the case of fraud in t
factum, "the instruments would be void rather than voidabl
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leaving no title capable of transfer to the FDIC."). S
also E. Allan Farnsworth, Contracts 4.10 (1982) (describi ____ _________
fraud in the factum as arising in the rare situation in whi
the defrauded party "neither knows nor has reason to know
the character of the proposed agreement . . . .").
The Trust analogizes its situation to that of t
defendant in FDIC v. Turner, 869 F.2d 270 (6th Cir. 1989 ______________
There, the defendant signed a blank guaranty form to whi
the name of the debtor and the amount of the guaranty we
later added. In addition, the name of the lending bank
the original guaranty was subsequently obliterated wi
-38-
correction fluid and substituted with that of another ban
Id. at 272. When the FDIC sued to enforce this alter ___
version of the loan guaranty, the defendant raised t
defense of fraud in the factum. The Sixth Circuit agre
that the defendant was defrauded as to the guaranty
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essential terms, and held that the FDIC was therefo
precluded from interposing D'Oench to bar the defense. I _______
at 275-76.
Review of these cases convinces us that the Trust
claim was one of fraud in the inducement, and not of fraud
the factum. The bankruptcy court found that the Bank, acti
under Weiner's supervision, falsely represented to the Tru
that the consideration for the first loan was limited to t
consideration itemized in the original agreement.10 T
Bank's misrepresentation did not go to the very character
the proposed loan agreement, but only to its underlyi
terms. Unlike the note maker in Turner, the Trust cann ______
claim that when it executed the promissory note to the Ban
it was "unaware of the nature of the documents [it] signe
Caporale, 931 F.2d at 2, n.1. The Bank, through Weine ________
____________________
10. The bankruptcy court also found that the damages again the Bank for both the Trust's tort and contract claims we limited to the $26,300 in additional "consideratio
extracted from the proceeds of the First Loan Agreement.declined to declare the First Loan Agreement unenforceab
because of the illegal consideration, reasoning that to dowould "penaliz[e] the Bank in the full amount of the loan,amount . . . grossly disproportionate to the amou
converted."
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induced the Trust to execute the loan agreement
misrepresenting the consideration involved. There wa
however, no fraud in the factum precluding application
D'Oench because there is no evidence to suggest that t _______
Trust did not fully understand the basic nature of t
obligation it assumed by entering the loan agreement. T
Bank's extraction of additional $26,300 in consideration fr
the Trust did not fundamentally alter the nature of t
instruments themselves.
C. Innocence As A Defense to D'Oench _________________________________
The second exception to D'Oench claimed by the Trust_______
that it was completely innocent of any intentional
negligent deception. The Trust contends that it could n
have "lent [itself] to a scheme or arrangement" which misl
the FDIC because Benjamin negotiated and transferred t
kickback payments to Weiner without the knowledge of t
other beneficiaries of the Trust. The Trust maintains t
the district court improperly concluded that the reco
established that the Trust involved itself in the kickba
scheme. Emphasizing that the bankruptcy court found t
both Benjamin and the Bank were liable on the conversi ____
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count, the Trust claims that Benjamin could not have be
acting as its agent or for its benefit when he remo
$26,300 in loan proceeds from the Trust's accounts to ma
kickback payments.
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As authority for its claim of innocence as an excepti
to D'Oench, the Trust cites a footnote to Vernon_______ _______
Resolution Trust Corp., 907 F.2d 1101, 1106 n.4 (11th Ci _______________________
1990), which in turn relies on an earlier decision of t
Ninth Circuit, FDIC v. Meo, 505 F.2d 790 (9th Cir. 1974 ____________
Yet in Baumann, the Eleventh Circuit expressly reject _______
Vernon's suggestion of the continued viability of a "comple ______
innocence" exception: "it is clear that this exception is
longer tenable because lack of bad faith, recklessness,
even negligence is not a defense in D'Oench cases." 934 F. _______
at 1516. See also FSLIC v. Gordy, 928 F.2d 1558, 1567 n. ___ ____ ______________
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(11th Cir. 1991) (observing that innocence doctrine of Me _
in light of Supreme Court decision in Langley, "is based_______
an outdated understanding" of D'Oench). Baumann emphasiz
_______ _______
that such an exception would be contrary to the broad purpo
of D'Oench to prevent a private party from enforcing again _______
the federal authority "any obligation not specifical
memorialized in a written document such that the agency wou
be aware of the obligation when conducting an examination
the institution's records." Baumann, 934 F.2d at 1515._______
In Timberland, this court also stressed the bas __________
purpose of D'Oench to protect a federal receiver even "whe _______
the only element of fault on the part of the borrower was
or her failure to reduce the agreement to writing." 932 F.
at 49 (citation omitted). We agree with the Baumann cou _______
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that the borrower's state of mind is irrelevant, because t
"proper focus under D'Oench is whether the agreement, at t _______
time it was entered into, would tend to mislead the publ
authority."
Id. at 50. Our earlier cases have never recognized t ___
"complete innocence" exception to D'Oench alluded to by t _______
Trust, and we reject the invitation to adopt it now as t
law of this circuit.
Our conclusion that there is no "complete innocenc
exception to D'Oench is not entirely dispositive of t _______
Trust's argument. As we understand it, the "innocenc
professed by the Trust is not the kind of paradigmat
"complete innocence" formerly recognized as an exception
D'Oench i.e., a borrower entering into an unrecorded si _______
agreement innocent of any intentional or negligent deceptio
Rather, the Trust's claim of "innocence" is really
argument that the actions of Benjamin should not
attributed to the Trust and that the Trust did not actual
lend itself to the kickback arrangement.
The factual record belies the assertion that Benja
did not act on behalf of the Trust. The bankruptcy cou
found that it was Benjamin alone who negotiated the terms
the First Loan Agreement on behalf of Young and
associates. It was Benjamin who at the same time agreed
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the kickback arrangement that secured Weiner's assistance
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obtaining approval of the loan by the Executive Committe
At the closing of the First Loan Agreement at which ti
the Trust was formally created a signature card
executed authorizing Benjamin to withdraw funds from t
Trust's loan proceeds account. The bankruptcy court furt
found that Benjamin was also given authority to access t
Trust's funds in other accounts at the Bank, including o
for the restaurant and another for rental income from t
Columbus Avenue properties.
It seems clear that Benjamin acted with the ostensib
authority of the Trust and its principals throughout t
negotiation and execution of the First Loan Agreement. T
Trust, therefore, cannot disclaim all of Benjamin's actio
with respect to the kickback agreement. Indeed, the Trust
willing to concede that "one could argue that Benjamin
acting as an agent of the [Trust] when he entered into t
kickback scheme with Weiner." Brief for Appellant 6
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Columbus Avenue Realty Trust at 32. In these circumstance
the Trust "lent [itself] to a scheme or arrangement where
the banking authority . . . was or was likely to be misle
D'Oench, 315 U.S. at 460.11 _______
____________________
11. Our ruling is consistent with the decision in FDIC_____
Kasal, 913 F.2d 487 (8th Cir. 1990), cert. denied, ___ U. _____ _____ ______ ___, 111 S. Ct. 1072 (1991). In its reply brief, the Tru draws on language from a dissenting opinion in Kasal for t
_____ general proposition that "it is a perversion of justice
hold the borrowers responsible for funds misappropriated bybank officer." Id. at 496 (Heaney, J., dissenting).
___
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Because we find that the district court correct
applied the D'Oench doctrine to bar the Trust's claims a _______
equitable subordination against the Bank based on t
kickback agreement, we do not reach the FDIC's argumen
under 1823(e).
III. THE FEDERAL HOLDER IN DUE COURSE DOCTRINE AS A BARTHE TRUST'S CLAIMS AND EQUITABLE SUBORDINATION AGAINST T
FDIC IN ITS RECEIVERSHIP CAPACITY
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We turn next to the FDIC's principal argument on appea
that the district court erred when it held that the feder
common law holder in due course doctrine did not bar t
Trust's claims against the FDIC in its receivership capaci
and the equitable subordination of the FDIC's secur
interest in the Trust's bankruptcy estate. The F
addresses this argument to the bankruptcy court's judgme
against the Bank for $111,711.66 on the Trust's conversi
and breach of contract claims for misapplication of lo
proceeds for payment of interest, taxes and other so
costs.12 The FDIC has conceded in this case that D'Oen ____
does not bar the Trust's claims based on breach of the so
____________________
Kasal, the borrower was totally unaware of a misappropriati _____ from his accounts by a bank officer. In this case, Benjami a representative of the Trust, both negotiated and carri out the misappropriations from the Trust's account.
12. The FDIC also argues that the federal holder incourse doctrine bars the Trust's fraud claim arising from t
kickback agreement. Because we have already held that t Trust's claims based on the kickback agreement were barred
the D'Oench doctrine, we need not address this aspect of t _______ FDIC's holder in due course argument.
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costs provisions of the two loan agreements. Instead, t
FDIC insists that policy concerns similar to those underlyi
the D'Oench doctrine militate in favor of expanding t _______
federal holder in due course doctrine to the FDIC in i
receivership capacity when, as here, there has been
purchase and assumption transaction by the FDIC in i
corporate capacity.
A. Origins of the Federal Holder in Due Course Doctri _________________________________________________
In order to evaluate the strength of the policy concer
that the FDIC asserts as the basis for extending the feder
holder in due course doctrine to the FDIC in t
circumstances of this case, we first examine this doctrine
it has emerged in cases involving purchase and assumpti
transactions by the FDIC in its corporate capacity.
The germinative opinion in the development of t
federal holder in due course doctrine was Gunter_______
Hutcheson, 674 F.2d 862 (11th Cir.), cert. denied, 459 U. _________ ____________
826 (1982). In Gunter, the FDIC in its corporate capaci ______
acquired a promissory note after a purchase and assumpti
transaction involving a failed Tennessee bank. The no
makers brought suit for rescission of the note held by t
FDIC on the basis of, inter alia, fraudule _____ ____
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misrepresentation by the directors of the failed bank. I
at 866. The FDIC counterclaimed for payment of the note
the district court, asserting that 1823(e) barred the no
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makers' claims, and arguing in the alternative that feder
common law gave it a defense against claims of fraud of whi
it lacked knowledge. Id. at 866-67. ___
Although the Gunter court rejected the application of______
1823(e) to bar the note maker's fraud claims,13 it accept
the FDIC's argument that a federal common law rule of no
liability against these claims was necessary in order for t
FDIC to accomplish its statutory objectives. In reachi
this conclusion, the Gunter court applied the Supreme Court ______
test for determining whether the implementation of a feder
program would be frustrated without the adoption of a unifo
federal rule. See United States v. Kimbell Foods, Inc., 4 ___ ____________________________________
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U.S. 715 (1979). Applying Kimbell Foods, the Gunter cou ______________ ______
stressed the FDIC's duty to promote "the stability of a
confidence in the nation's banking system," id. at 870, a ___
the preferred status of the purchase and assumpti
transaction as a means of accomplishing this duty because "
avoids the specter of closed banks and the interruption
daily banking services." Id. ___
____________________
13. The Gunter court found it necessary to reach the meri ______ of the FDIC's federal common law argument because it fou that the note maker's fraud defenses were not precluded by
1823(e). Gunter, 674 F.2d at 867. This analysis of______
1823(e) as not barring a claim of fraud in the inducementsubsequently disapproved by the Supreme Court in Langle
_____ See Langley, 484 U.S. at 93-94. ___ _______
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The court noted that speed was of the essence in
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purchase and assumption transaction because of the need
preserve the going concern value of the bank:
[T]he FDIC must have some method to evaluate its potential liability in a purchase and assumption versus its potential liability from a liquidation. Because of the time constraints involved, the only
method of evaluating potential loss open to the FDIC is relying on the books and records of the failed bank to estimate what assets would be returned by a purchasing bank and to estimate which of those assets ultimately would be collectible.
Id. After considering the impact of the federal rule___
settled commercial expectations ordinarily governed by sta
law, the court concluded that protection of the FDIC fr
unknown fraud claims "far outweighed" any potential damage
these expectations. Id. at 872. ___
The court therefore announced a federal common l
holder in due course rule applicable to the FDIC in i
corporate capacity:
[A]s a matter of federal common law, the FDIC has a complete defense to state and common law fraud claims on a note acquired by the FDIC in the execution of a purchase and assumption transaction, for value, in good faith, and without actual knowledge of the fraud at the time the FDIC entered into the purchase and assumption agreement.
Id. at 873. Gunter thus expanded federal common law to b ___ ______
fraud claims by the note makers that would not otherwise ha
been barred by the D'Oench doctrine or 1823(e). See id._______ ___ ___
872 & n.14 (noting that D'Oench doctrine and 1823(e) embo
_______
a "more limited" policy of protecting the FDIC).
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This court has adopted the rule of Gunter. See Southe
______ ___ _____
Indus. Realty, Inc. v. Noe, 814 F.2d 1 (1st Cir. 1987) (p __________________________
curiam). See also FDIC v. Bracero & Rivera, Inc., 895 F. _________ _______________________________
824, 828-29 (1st Cir. 1990) (dicta acknowledging holder
due course doctrine's availability to the FDIC in i
corporate capacity). Other circuit courts have expanded t
federal common law holder in due course doctrine to bar a
personal defenses against the FDIC, and have looked to sta
law principles in order to distinguish between real a
personal defenses. See Campbell Leasing Inc. v. FDIC, 9
___ ______________________________
F.2d 1244, 1249 (5th Cir. 1990); FDIC v. Wood, 758 F.2d 15 ____________
161 (6th Cir.) (the FDIC "takes the note free of all defens
that would not prevail against a holder in due course."
cert. denied, 474 U.S. 944 (1985). See also FDIC v. Bank
____________ ________ ____________
Boulder, 911 F.2d 1466, 1474-75 (10th Cir. 1990) (en ban _______
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(adopting federal rule of transferability of letters
credit protecting FDIC in its corporate capacity duri
purchase and assumption), cert. denied, ___ U.S. ___, 111____________
Ct. 1103 (1991). In all of these cases, the underlyi
rationale for a federal holder in due course rule has be
consistent with that articulated by Gunter: to promo ______
purchase and assumption transactions. See Wood, 758 F.2d___ ____
160-61 (federal holder in due course rule necessary becau
"the essence of a purchase and assumption transaction
speed"); Campbell Leasing, 901 F.2d at 1248-1249 (sa _________________
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analysis); Bank of Boulder, 911 F.2d at 1474-75 (uniform ru _______________
of transferability necessary because of time constraints
purchase and assumption).
B. Application Of The Federal Holder in Due Cour ________________________________________________ Doctrine To The FDIC As Receiver ________________________________
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The FDIC argues that the federal holder in due cour
rule should be available to it in its capacity as the Ban
receiver. The FDIC insists that in order for it to deci
whether a purchase and assumption or a liquidation is t
least costly approach to disposing of the assets of a fail
bank, it must be able to make that decision based on absolu
reliance on the bank's records, unimpeded by person
defenses. The FDIC also asserts that if the federal hol
in due course doctrine is limited exclusively to purchase a
assumption transactions, it will be unable to employ
variety of newly-developed "hybrid" transactions for t
resolution of bank failures that include elements drawn fr
both a liquidation and a purchase and assumptio
Accordingly, the FDIC urges that we hold that the feder
holder in due course doctrine applies to the FDIC in i
receivership capacity, regardless of whether a purchase a
assumption transaction is consummated.
To support its argument, the FDIC relies on sever
cases in which the FDIC in its receivership capacity
allowed to invoke the federal holder in due course doctri
to bar the makers of promissory notes from asserting the
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personal defenses. But these cases involved notes acquir
by the FDIC as receiver after a purchase and assumpti
_____
transaction.14 For example, in Campbell Leasing, the F ________________
was appointed receiver of a failed Texas bank and arran
for a purchase and assumption transaction with a federall
established bridge bank, NCNB. 901 F.2d at 1247. During t
purchase and assumption, NCNB acquired a promissory note t
had previously been the subject of a lawsuit by the no
maker against the failed bank. As receiver of the fail
bank, the FDIC, along with NCNB, moved for summary judgme
on the note maker's claims and on a counterclaim f
enforcement of the note, arguing that the D'Oench and feder _______
holder in due course doctrines barred all the note maker
____________________
14. The cases cited by the FDIC either involved t application of the federal holder in due course doctrine
assets acquired by the FDIC as receiver following a purcha and assumption transaction, or were not directly deci under the holder in due course rule. See FDIC v. McCullou ___ ________________ 911 F.2d 593 (11th Cir. 1990), cert. denied, ___ U.S. _ ____________ 111 S. Ct. 2235 (1991); In re CTS Truss, Inc. v. FDIC, 8 _______________________________ F.2d 146 (5th Cir. 1989); Firstsouth, F.A. v. Aqua Const _______________________________
Inc., 858 F.2d 441 (8th Cir. 1988). In McCullough, the cou ____ __________ observed that both the FDIC and FSLIC as receiver a "clothed under federal common law with the same defenses t would be accorded a holder in due course under state la
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911 F.2d at 603. Yet in McCullough, the note on which t __________ federal receiver was seeking to recover had earlier be acquired by the failed savings institution in a purchase a assumption transaction. Id. at 596. CTS Truss involved t ___ _________ enforcement by the FDIC as receiver of an asset acquired
it in its corporate capacity, 868 F.2d at 147, and
decided under 1823(e) rather than the federal holder incourse doctrine. Id. at 150. As for Firstsouth, the feder
___ __________ common law rule at issue was the D'Oench doctrine, and n _______ the more expansive holder in due course doctrine recogniz by Gunter. Firstsouth, 858 F.2d at 443. ______ __________
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claims and affirmative defenses. Id. The district cou ___
granted summary judgment for the FDIC and NCNB, and the Fif
Circuit affirmed the judgment on appeal. The court obser
that it could find
no logical reason to limit federal holder in due course protection to the FDIC in its corporate capacity, to the exclusion of its receivership function. In its corporate capacity, the FDIC is obligated to protect the depositors of a failed bank, while the FDIC as receiver must also protect the bank's creditors and shareholders. In both
cases, the holder in due course doctrine enables the FDIC to efficiently fulfill its role, thus minimizing the harm to depositors, creditors, and shareholders. . . . We conclude that the FDIC enjoys holder in due course status as a matter of
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invoke the federal holder in due course doctrine to bar a
defenses against enforcement of a promissory note acquired
it directly in its capacity as receiver. Id. at 1233-3 ___
After observing that the FDIC's federal holder in due cour
argument had been raised in a "belated supplemental brief
the Fifth Circuit dismissed it peremptorily in a footnote:
Here the FDIC sues only in its capacity as receiver for the institution which made the loan and is payee in the note sued on, and the FDIC does not assert, nor does the record establish, that the loan or note has ever been transferred or was ever
part of a purchase and assumption transaction. To the extent that it precludes defenses beyond those precluded by D'Oench, Duhme, the federal holder in ______________ due course doctrine is inapplicable to such a situation. Gunter . . . . See Campbell Leasing . ______ ___ ________________ . . . Indeed, a major policy goal underlying the federal common-law holder in due course doctrine is to facilitate purchase and assumption transactions of failed financial institutions in lieu of liquidations. Campbell Leasing; Gunter. ________________ ______
Id. at 1239 n.19 (citations partly omitted).___
We likewise reject the FDIC's attempt to expand t
federal holder in due course doctrine far beyond its origin
purpose of promoting purchase and assumption transactio
that preserve the going concern value of the bank. None
the policy considerations that originally prompted t
adoption of a federal holder in due course rule are prese
when, as in this case, the FDIC as receiver is seeking on
to enforce an obligation in a liquidation. A liquidati
does not further the federal policy of "bringing
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transaction was noted in Gunter: ______ The maximum liability of the FDIC in a liquidation is fixed by the $100,000-per-depositor insurance limitation. In a purchase and assumption transaction, however, the FDIC agrees to repurchase any unacceptable assets from the purchasing bank and cannot rely on the statutory limitation of its
liability. Hence to make the [cost test currently codified at 18 U.S.C. 1823(c)(4)(A)], the FDIC must have some method of estimating its potential liability under a purchase and assumption to compare it to the maximum liability in a liquidation. Gunter, 674 F.2d at 870 n.10. This analysis belies t ______ FDIC's assertion that if the federal holder in due cour doctrine were limited solely to assets sold through
purchase and assumption, the federal receiver could n reliably estimate the cost of a liquidation as compared
that of a purchase and assumption.
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However desirable it may be for the FDIC in i
receivership capacity to be able to bar counterclaims
affirmative defenses by the maker of a promissory note n
already eliminated by D'Oench and 1823(e), such a bro _______
principle of federal common law cannot find its justificati
in the federal holder in due course doctrine current
applied by the courts. The district court's well-reason
analysis of the FDIC's federal holder in due course argume
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aptly summarizes some of its deficiencies:
The holder in due course doctrine normally allows innocent purchasers of negotiable instruments to rely on such instruments when they are acquired for value. The FDIC is granted this status so it can quickly scan a bank's balance sheet to negotiate
its sale. Thus, the FDIC is not held up to an obligation to scrutinize the assets of a failed bank before it agrees to execute a purchase and assumption. . . .
The exigencies of a purchase and assumption transaction also differentiate the holder in due course doctrine from D'Oench. D'Oench is concerned _______ _______ with the integrity of a bank's records the FDIC
can only be charged for claims apparent from a search of the bank's files. The holder in due course doctrine, on the other hand, relieves the FDIC even from claims apparent on the face of the Bank's records. . . . The reach of the federal holder in due course doctrine being much wider than even the extraordinary remedy of D'Oench, the _______ circumstances in which it is applied should be correspondingly limited.
The FDIC nonetheless insists that the unavailability
the federal holder in due course rule in the absence of
purchase and assumption would "immeasurably delay a
complicate the resolution of receiverships" and crea
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"delays and difficulties [that] could greatly impair t
FDIC's ability to complete its statutory mission." In t
same breath, however, the FDIC complains that the existi
federal rule is problematic because it "substantively alte
the receiver's evaluation of the alternative transactions
favor" of purchase and assumptions. The FDIC cannot have
both ways. The federal holder in due course doctrine
fashioned precisely for the purpose of expediting t
purchase and assumption transaction. See Gunter, 674 F.2d
___ ______
869-71. It was never intended as a panacea intended
relieve the FDIC of all the "difficulties" arising from sta
law defenses and counterclaims during the liquidation
assets. We decline to address the FDIC's argument that
decision not to extend the federal holder in due course ru
will impair its ability to conduct certain new "hybri
transactions i.e., transactions that involve elements
both a liquidation and a purchase and assumption becau
this case does not involve such a "hybrid."
We therefore hold that the FDIC was not entitled
invoke the federal common law holder in due course doctri
to bar the Trust's claims o