USCA1 Opinion
United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
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No. 93-1487
MIGUEL VILLAFANE-NERIZ,
INSURANCE COMMISSIONER OF PUERTO RICO,
Plaintiff, Appellant,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Juan M. Perez-Gimenez, U.S. District Judqe]
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Before
Breyer, Chief Judge,
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Boudin and Stahl, Circuit Judges.
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Carlos J. Morales-Bauza with whom Jesus R. Rabell-Mendez and
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Rossello-Rentas & Rabell-Mendez were on brief for appellant.
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J. Scott Watson, Senior Attorney, with whom Ann S. DuRoss,
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Assistant General Counsel, and Richard J. Osterman, Jr., Senior
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Counsel, were on brief for appellee.
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April 4, 1994
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STAHL, Circuit Judge. In this appeal plaintiff
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seeks the proceeds of a certificate of deposit issued by a
now-failed bank. Simultaneously with its purchase, the
certificate was assigned to a third party, the Insurance
Commissioner of the Commonwealth of Puerto Rico ("the
Commissioner"). The Commissioner brought suit against the
FDIC seeking to establish his right to the proceeds of the
certificate, and attempted to introduce documents evidencing
both the assignment and the bank's acknowledgment thereof.
The district court applied 12 U.S.C. 1823(e) to bar the
assignee's use of the assignment documents. Finding both
section 1823(e) and the D'Oench1 doctrine inapplicable, we
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reverse.
I.
I.
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FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
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The facts of this case are essentially undisputed.
In order to do business in the commonwealth, Puerto Rico
insurance companies are first required by law to deposit
funds with the Commissioner. See 26 L.P.R.A. 801-809.
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Moreover, once these funds are deposited, Puerto Rico law
provides that they may not be levied upon by creditors or
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1. As we pointed out in McCullough v. FDIC, 987 F.2d 870,
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874 (1st Cir. 1993), section 1823(e) is "somewhat loosely
described as the codification" of the D'Oench doctrine, and
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the parties' briefs in this case address both D'Oench and its
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"statutory partner," id. at 874 n.6. Seeing no reason to
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except D'Oench from our discussion, we address the
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application of both doctrines.
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claimants of the insurance company. Id. 809 ("No judgment
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creditor or other claimant of an insurer shall levy upon any
deposit held pursuant to this chapter, or upon any part
thereof."). On July 20, 1983, in order to satisfy the
statutory deposit requirement, Guaranty Insurance Co.
("Guaranty") purchased a six-month certificate of deposit
from the Girod Trust Company ("Girod" or "the bank") in the
principal amount of $50,000. The certificate of deposit had
a maturity date of January 17, 1984. On the same day that it
purchased the certificate, Guaranty, through one of its
officers, executed a separate document entitled a "Fiduciary
Assignment" in which it irrevocably assigned and conveyed its
interest in the certificate of deposit to the Commissioner.
Girod was not a party to the Fiduciary Assignment.
Accompanying both the certificate of deposit and
the Fiduciary Assignment was yet another document executed on
the same date, July 20, 1983, entitled "Requisition to the
Bank." This Requisition stated, inter alia, that Girod would
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not release the funds represented by the certificate of
deposit, "whether the principal value or income thereof,"
without the authorization of the Commissioner. More
specifically, the Requisition stated, "[W]e [Girod] agree and
promise to dispose of the certificate of deposit . . .
only with prior authorization from the Commissioner of
Insurance of Puerto Rico." The Requisition was signed by
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Allwin Perez "in his capacity as manager of the San Juan
branch of Girod Trust Company." His signature was notarized.
Like the Fiduciary Assignment, the Requisition stated, "This
requisition will be irrevocable." The certificate of deposit
itself was given to, and remains with, the Commissioner.
Less than three months after purchasing the
certificate of deposit from Girod, Guaranty executed a loan
agreement, unrelated to the certificate of deposit, pursuant
to which it borrowed $600,000 from Girod. The loan was
evidenced by a promissory note for that amount, payable to
Girod. The note was due on April 26, 1984, and Guaranty
began making payments according to the loan agreement's
schedule.
On January 17, 1984, the certificate of deposit
came due. At the request of Guaranty, it was "rolled over,"
i.e., extended for a term of six additional months. In the
meantime, Guaranty had fallen behind on payments due to Girod
under the $600,000 loan agreement. On July 16, 1984, the
certificate of deposit came due again. This time, however,
the certificate was not "rolled over." Rather, on July 18,
1984, two days after the certificate had matured, the
proceeds were credited to Guaranty's account. Specifically,
$50,000 from the certificate of deposit was credited toward
Guaranty's outstanding indebtedness under the $600,000 loan
agreement.
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On August 16, 1984, Girod was declared insolvent
and the FDIC was appointed receiver. On December 19, 1984,
Guaranty also became insolvent. The Commissioner was
appointed Guaranty's receiver. On August 25, 1986, the
Commissioner filed a proof of claim with the FDIC, seeking
payment on the certificate of deposit. On May 22, 1991,
having received no payment on the claim, the Commissioner
filed a complaint against the FDIC in the Superior Court of
Puerto Rico seeking to recover the proceeds of the
certificate of deposit. The FDIC removed the action to
federal court pursuant to 12 U.S.C. 1819(b).
The parties filed cross-motions for summary
judgment.2 Without ruling on the motions, the district court
asked the parties to submit briefs on the application of 12
U.S.C. 1823(e).3 Upon submission of the briefs,the district
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2. The Commissioner argued, in essence, that the offset was
improper and that he was entitled to the proceeds of the
certificate of deposit. The FDIC argued, inter alia, that
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the Commissioner's claim was barred by laches.
3. Section 1823(e) states:
No agreement which tends to diminish or
defeat the interest of the [FDIC] in any
asset acquired by it under this section
or section 1821 of this title, 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,
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court held that section 1823(e) barred the Commissioner's
reliance upon either the Fiduciary Assignment or the
Requisition (also referred to hereinafter as "the assignment
documents"). In essence, the court reasoned that the
assignment documents constituted an "agreement which tends to
diminish or defeat the interest of" the FDIC in an asset for
purposes of section 1823(e). The district court went on to
reason that, because the assignment documents failed to meet
the requirements set out in section 1823(e), e.g., they were
approved by neither the bank's board of directors nor its
loan committee, the Commissioner was barred from relying upon
them. Therefore, the district court ordered summary judgment
in favor of the FDIC.4
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2) was executed by the depository
institution and any person claiming an
adverse interest thereunder, including
the obligor, contemporaneously with the
acquisition of the asset by the
depository institution,
3) was approved by the board of directors
of the depository institution or its loan
committee, which approval shall be
reflected in the minutes of said board or
committee, and
4) has been, continuously, from the time
of its execution, an official record of
the depository institution.
4. The district court also summarily concluded that the
assignment of the certificate of deposit "was not validly
consented to by [Girod], represented by Mr. Perez." The
proceedings below reflect only that Girod may have had an
internal procedure which required that two qualified
employees, rather than a single employee, sign agreements
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II.
II.
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DISCUSSION
DISCUSSION
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The sole issue before us is whether section 1823(e)
bars the Commissioner from relying on the Fiduciary
Assignment and the Requisition in making his claim against
the FDIC. We hold that the Commissioner is not so barred.
A. Standard of Review
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Where, as here, the essential facts are undisputed
and the sole issue on appeal involves a pure question of law,
our review is de novo. See, e.g., FDIC v. Keating, 12 F.3d
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314, 316 (lst Cir. 1993).
B. Bank Assets and Bank Liabilities
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We begin with crucial, if rudimentary, banking
terminology. As one commentator recently noted, "It may be
helpful to recall that banks and thrifts have a somewhat
counterintuitive perspective on the accounting of deposits,
which appear on their balance sheets as liabilities.
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which bound Girod. We agree with the Commissioner that the
bank's own internal procedures are not necessarily
dispositive on the issue of whether the bank was bound by
Perez's signature. See, e.g., 10 Am. Jur. 2d Banks 99 (1963)
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("[W]hen a bank opens its doors for business with the public
and places officers in charge, persons dealing with them in
good faith and without any notice of any want of authority
will be protected where an act is performed in the apparent
scope of the officer's authority, whether the officer is
actually clothed with such authority or not."). The FDIC has
offered no argumentation or authority to the contrary, either
below or on appeal. Thus, we conclude that the record does
not support a conclusion as a matter of law that the
assignment was invalid.
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Meanwhile, loans from banks appear on their balance sheets as
assets." David G. Oedell, Private Interbank Discipline, 16
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Harv. J.L. & Pub. Pol'y 327, 384 n.206 (1993) (emphasis
added). In other words, bank deposits, including certificates
of deposit such as the one at issue here, see 12 U.S.C.
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1811(1) (defining a deposit as, inter alia, "the unpaid
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balance of money or its equivalent received or held by a bank
. . . which is evidenced by its certificate of deposit"),
represent obligations on the part of a bank to repay funds to
depositors. As such, they are reflected on a bank's books as
liabilities. Loans made to bank customers, on the other
hand, represent obligations on the part of borrowers to repay
sums certain to the bank, and as such are reflected on a
bank's books as assets.
Obviously, the books of failed banks contain both
assets and liabilities. The FDIC fulfills vastly different
functions as to the two sides of a failed bank's ledger
sheet.
C. The Role of the FDIC in Bank Failures and the Purpose of
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D'Oench and Section 1823(e)
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The role of the FDIC in bank failures is well
established. Its "basic mission is to protect insured
depositors," FDIC v. La Rambla Shopping Ctr., Inc., 791 F.2d
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215, 218 (lst Cir. 1986), which it does by "undertaking an
obligation to pay depositors when an insured bank fails."
FDIC v. Nichols, 885 F.2d 633, 636 (9th Cir. 1989). In other
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words, satisfying a failed bank's liabilities, especially its
deposits, is a primary goal of the FDIC.
A failed bank's assets, on the other hand, are
either liquidated or transferred to a solvent bank.5 See,
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e.g., FDIC v. P.L.M. Int'l, Inc., 834 F.2d 248, 254 (lst Cir.
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1987). Needless to say, not all borrowers (i.e., obligors
with regard to the bank's assets) happily meet their
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obligations toward a failed bank, and many attempt to assert
claims and defenses against the FDIC aimed at relieving those
obligations. The doctrines enunciated in D'Oench, Duhme &
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Co. v. FDIC, 315 U.S. 447 (1942), and its statutory
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counterpart, 12 U.S.C. 1823(e), greatly limit the types of
claims and defenses that borrowers may assert against the
FDIC. In essence, such claims and defenses are limited to
those that are based on documentation in the failed bank's
records. Moreover, these doctrines governing the claims and
defenses of borrowers are designed to enable the FDIC to meet
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more effectively its obligations to pay depositors. See,
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5. Admittedly, the FDIC often, as it did here, transfers
obligations on both sides of a failed bank's ledger sheets to
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a solvent bank. In such situations, the solvent bank
"purchases" certain of the failed bank's assets, and
simultaneously "assumes" that bank's liabilities, i.e., its
deposits. Such a transaction is known commonly as a
"purchase and assumption" transaction. See, e.g., Timberland
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Design Inc. v. First Serv. Bank for Savs., 932 F.2d 46, 48
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(lst Cir. 1991); La Rambla, 791 F.2d at 218. Depositors then
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maintain their insured deposits, while borrowers continue to
meet their obligations, allowing banking business to continue
with some regularity.
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e.g., Timberland Design Inc. v. First Serv. Bank for Savs.,
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932 F.2d 46, 48 (lst Cir. 1991) ("`[T]he D'Oench Duhme
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doctrine . . . favors the interests of depositors and
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creditors of a failed bank, who cannot protect themselves
from secret agreements, over the interests of borrowers, who
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can.'") (emphasis supplied) (quoting Bell & Murphy & Assocs.,
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Inc. v. Interfirst Bank Gateway, N.A., 894 F.2d 750, 754 (5th
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Cir.), cert. denied, 498 U.S. 895 (1990)).
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D. The Assignment Documents: Agreements Affecting a Bank
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Deposit
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Turning to the transaction here, it is evident that
at the time the certificate of deposit was purchased and the
Fiduciary Assignment and the Requisition were executed, they
were agreements having an effect on one of Girod's insured
deposits,6 rather than one of its assets. The significance
of this distinction is made clearer if we examine, step by
step, the banking transactions at issue.
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6. As to the existence of an insured deposit in this case,
we cannot say, given the state of the record below, whether
or to what extent we would be willing to follow the Eighth
Circuit's holding in In re Collins Sec. Corp., 998 F.2d 551,
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554-55 (8th Cir. 1993) (holding that the FDIC is not liable
in its corporate capacity because no account existed at the
time of the bank's failure due to a non-fraudulent
pre-failure bank error). We merely point out to the parties
that similar issues may arise on remand, along with possible
jurisdictional issues. See La Rambla, 791 F.2d at 220-21
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(finding no jurisdictional basis under 12 U.S.C.
1819(b)(2)(D) or (E) for counterclaim against FDIC in its
capacity as receiver).
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It is undisputed that Guaranty purchased and
assigned the certificate of deposit on July 20, 1983.
Suppose that Girod had failed the following day, i.e., after
the purchase and assignment of the certificate of deposit,
but before Guaranty borrowed any funds from Girod. If at
that point the Commissioner sought payment from the FDIC, we
think it indisputable that neither D'Oench nor section
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1823(e) would be implicated at all.
Section 1823(e) would be inapplicable because, by
its terms, that section applies only to agreements which
"tend to diminish or defeat the interest of the FDIC in any
asset acquired by it." Prior to Guaranty's taking of its
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$600,000 loan, Guaranty's certificate of deposit was merely
an insured deposit, unrelated to any particular Girod asset.
Given that the Commissioner's claim would diminish no Girod
asset, and would merely amount to a claim on an insured
deposit, section 1823(e) would have no application.
Nor would the D'Oench doctrine, in the absence of
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section 1823(e), apply in such a situation. At its broadest,
the D'Oench doctrine disallows claims and defenses based on
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schemes or arrangements "whereby banking authorities would be
misled." FDIC v. Caporale, 931 F.2d 1, 2 (lst Cir. 1991).
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Prior to the $600,000 loan to Guaranty, the assignment
presented no such threat. Bank examiners would have been
fully aware of the bank's liability on the certificate of
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deposit, and the Commissioner's claim merely would present an
issue as to who was entitled to payment. Moreover, the FDIC
does not argue that the loan to Guaranty, in and of itself,
altered the validity of the assignment.
In sum, prior to the bank's crediting of the
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proceeds of the certificate of deposit toward Guaranty's
outstanding indebtedness, this case involved an insured bank
deposit, rather than a bank asset. It is equally
indisputable that prior to that crediting transaction,
neither section 1823(e) nor D'Oench would have applied to bar
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the Commissioner's reliance upon the Fiduciary Assignment or
the Requisition in establishing his right to the proceeds of
the certificate of deposit. Rather, the FDIC, as it does
with other deposits, would have paid the proceeds from the
certificate of deposit to the Commissioner7 upon his
establishing his right to those proceeds. Cf. In re Collins
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Sec. Corp., 998 F.2d 551, 553 (8th Cir. 1993) (stating that
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FSLIC, as receiver for failed bank, allowed unsecured claim
by assignee of certificate of deposit which had been wrongly
paid out to assignor).
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7. Absent the crediting of the certificate of deposit toward
Guaranty's indebtedness, the Commissioner would have been
entitled to its proceeds either in his capacity as assignee,
or in his capacity as Guaranty's receiver. The FDIC does not
object to the capacity in which the Commissioner now brings
this appeal, and we therefore assume, without prejudice to
the district court's ability to determine otherwise, that the
Commissioner seeks recovery in his proper capacity.
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E. Reverse Alchemy: Do Girod's Pre-failure Actions Turn
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Gold
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into Lead
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With breathtaking legerdemain, the FDIC assumes
that, upon Girod's crediting of the proceeds of the
certificate of deposit toward Guaranty's $600,000 debt, the
Fiduciary Assignment and the Requisition were transformed
into agreements which tend to diminish the interests of the
FDIC in an asset for purposes of section 1823(e). We decline
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to adopt such a rule for three related reasons.
First, assuming that the Commissioner's version of
facts is correct, Girod's crediting of the certificate of
deposit toward Guaranty's $600,000 loan and the resulting
"relationship" between the certificate of deposit and the
loan, cannot be characterized as anything other than
ineffective. At the time that Girod "credited" the
certificate of deposit toward Guaranty's outstanding
indebtedness, the certificate of deposit had already been
validly assigned to the Commissioner. Moreover, as noted
above, Puerto Rico law specifically prohibits creditors
of insurance companies from levying upon the statutory
deposit at issue here. In other words, given the valid
assignment, as well as the additional statutory
protection it is afforded, the certificate of deposit could
never rightfully become security for Girod's loan to
Guaranty. If the certificate could never rightfully secure
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Guaranty's loan in the first instance, we see no principled
way of now holding that it is nonetheless sufficiently
related to that loan so as to "diminish" the FDIC's interest
in the loan for purposes of section 1823(e).
Second, if the bank's actions in this case somehow
"magically" transformed agreements about a deposit into
agreements which diminish the FDIC's interest in a bank
asset, then all agreements about deposits, even those whereby
a deposit is created, could potentially be subject to section
1823(e). In other words, any time a bank, prior to its
failure, improperly closed a passbook savings account and
credited the proceeds therein toward outstanding indebtedness
from an entirely unrelated account, the depositor would be
without remedy, inasmuch as passbook savings accounts are
rarely, if ever, created with the approval of bank boards of
directors or bank loan committees. See 12 U.S.C.
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1823(e)(3). We have no doubt that Congress could not have
intended such a result.
Third, neither the Fiduciary Assignment nor the
Requisition constitutes an "agreement" for purposes of
section 1823(e). Cf. Bateman v. FDIC, 970 F.2d 924, 927-29
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(lst Cir. 1992) (holding that bank's consent to mechanics'
lien was not an "agreement" for purposes of section 1823(e)).
The bank's "acceptance" of the assignment here did not
involve bargaining, consideration, an exchange of promises,
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or many other ordinary accoutrements of a classical
contractual "agreement." See Langley v. FDIC, 484 U.S. 86,
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91 (1987) (defining "agreement" as used in section 1823(e) in
terms of traditional contract principles). Rather, the
bank's "acceptance" of the assignment in this case appears
very similar to the mortgagee's "consent" to the imposition
of a mechanic's lien in Bateman. "Consent" in Bateman was
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required by state law to give the mechanic's lien priority
over the mortgagee's lien. Bateman, 970 F.2d at 927-29. We
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held there that the mortgagee's "consent" did not amount to
an "agreement" for purposes of section 1823(e). Id. Here,
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the state law mechanism whereby the certificate of deposit
was created, assigned to the Commissioner, and further
protected from levying by creditors is similar to the state
mechanic's lien system in Bateman. Thus, for quite similar
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practical and conceptual reasons, we reach a similar result.
As a final argument urging a contrary result, the
FDIC relies heavily on language on the reverse side of the
certificate of deposit itself, which states that the proceeds
of the certificate may be applied against the named obligee's
outstanding indebtedness. The rationale behind this argument
appears to be that this language warned the Commissioner that
Girod had a right, upon maturity of the certificate, to
credit the certificate of deposit against outstanding
indebtedness on a bank asset, and that therefore the
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Commissioner, though still an obligee of the bank, should
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have sought written board approval of the assignment, much as
a D'Oench-wary obligor would. Again, we disagree.
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First, the certificate of deposit was, by its
terms, assignable.8 Second, the FDIC's argument places
depositors and their assignees essentially in the same
position as borrowers, requiring that they guard against
purely contingent (and in this case, contractually and
statutorily forbidden) bookkeeping maneuvers on the part of
the failed bank. Moreover, in this case, such an expansive
reading of the dual doctrines would penalize rather than
reward, a depositor who, unlike most other depositors, took
steps to preserve and memorialize his rights. We decline to
adopt such a novel and onerous reading of the relevant law.
We reemphasize that this case does not involve an
effort by a borrower who, having promised his bank deposits
as security for a loan, later attempts to destroy that
security by asserting an oral promise by the bank to release
that security notwithstanding the prior written commitment.
Here, the borrower did not promise the certificate of deposit
as security for its loan and, indeed, did not even own the
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8. Language on the reverse side of the certificate of
deposit stated:
The assignment of this Certificate to a
third party will not be considered valid
until said transaction has been notified
to, and accepted by the bank.
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certificate of deposit at the time it borrowed the money from
the bank, for it had previously assigned the certificate of
deposit to the Commissioner. Moreover, the borrower in this
case, namely Guaranty, is not claiming any rights at all to
the funds at issue. Rather, the sole issue before us is
whether section 1823(e) applies to bar the Commissioner's
claims, and we conclude that it does not.
III.
III.
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CONCLUSION
CONCLUSION
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For the foregoing reasons, the order of the
district court entering summary judgment in favor of the FDIC
based upon the application of 12 U.S.C. 1823(e) is
Reversed and remanded for further proceedings
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consistent with this opinion.
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