Adams v. Zimmerman
73 F.3d 1164 | 1st Cir. | 1996
United States Court of Appeals
For the First Circuit
No. 94-2161
LEVI C. ADAMS, ET AL.,
Plaintiffs, Appellees,
v.
ZIMMERMAN, ET AL.,
Defendants, Appellees.
FEDERAL DEPOSIT INSURANCE CORPORATION,
Defendant, Appellant.
No. 94-2162
LEVI C. ADAMS, ET AL.,
Plaintiffs, Appellants,
v.
ZIMMERMAN, ET AL.,
Defendants, Appellees.
FEDERAL DEPOSIT INSURANCE CORPORATION,
Defendant, Appellee.
No. 94-2246
LEVI C. ADAMS, ET AL.,
Plaintiffs, Appellees,
v.
ZIMMERMAN, ET AL.,
Defendants, Appellees.
FEDERAL DEPOSIT INSURANCE CORPORATION,
Defendant, Appellant.
No. 94-2247
LEVI C. ADAMS, ET AL.,
Plaintiffs, Appellants,
v.
ZIMMERMAN, ET AL.,
Defendants, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Torruella, Chief Judge,
Lynch, Circuit Judge,
and Stearns,* District Judge.
Vincent M. Amoroso, with whom Harry A. Pierce and Parker,
*Of the District of Massachusetts, sitting by designation.
2
Coulter, Daley & White were on brief, for plaintiffs.
J. Scott Watson, Federal Deposit Insurance Corporation, with
whom David S. Mortensen, Glenn D. Woods, and Tedeschi, Grasso and
Mortensen were on brief, for defendant Federal Deposit Insurance
Corporation.
January 19, 1996
3
LYNCH, Circuit Judge. A troubled condominium
LYNCH, Circuit Judge.
development led to these appeals, which raise issues of
federal banking law: whether 12 U.S.C. 1823(e) and
D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942), shield the
FDIC, as receiver for a failed bank, from liability for the
bank's sale of unregistered securities. We hold that the
FDIC has no such shield and is liable, but remand for
adjustment of the remedies fashioned by the district court.
These consolidated cross appeals arise out of the
development of the Hyannis Harborview Hotel. The units in
the Hotel were marketed and sold by the University Bank and
Trust Company and the other defendants as "pooled income"
condominium units. Although these units were securities,
they were never registered, and, when the development of the
Hotel faltered, the plaintiffs, purchasers of individual
units in the Hotel, sued the Bank for, inter alia, the sale
of unregistered securities in violation of the Massachusetts
Uniform Securities Act, Mass. Gen. L. ch. 110A, 410(a)(1).
The Bank was later declared insolvent and the FDIC, as
receiver, was substituted for the Bank as a defendant. After
rejecting the FDIC's argument that 1823(e) and D'Oench
barred the plaintiffs' registration claims, the district
court held the FDIC liable under section 410(a)(1) and
awarded the plaintiffs rescissionary damages, attorneys' fees
and interest.
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I. Background And Procedural History
In 1985, Gary Zimmerman, president of Hyannis
Harborview Hotel, Inc. (HHI), approached Robert Keezer for
financial and marketing advice about converting the Hotel
into condominiums. Keezer, who was then the Bank's second
largest stockholder, Vice Chairman of its Board of Directors,
and a member of the Bank's Loan Committee, agreed to do so
for an interest in the project. Keezer brought Norman
Chaban, an expert in condominium marketing, into the project
to manage the marketing and sales of the condominiums and
arranged to have a $6.8 million condominium conversion loan
placed through the Bank.
To make the Hotel units more attractive, Keezer,
Chaban and Zimmerman marketed and sold the units on a "pooled
income" basis. That is, the purchasers were told they would
receive income based upon their pro rata interest in the
entire condominium project rather than on the income
generated by their individual units. The Hotel's Declaration
of Trust and By-Laws (these and the Master Deed constitute
the "Master Documents") provided that each unit owner:
[1] shall be liable for Common Expenses
attributable to the operation of the
Condominium in the same proportion as his
Beneficial Interest in this Trust bears to the
aggregate Beneficial Interest of all Unit
Owners . . . ;[and]
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[2] shall be entitled to common profits, if any,
attributable to the operations of the motel-
type Units of the Condominium in the same
proportion as his Beneficial Interest in this
Trust bears to the aggregate Beneficial
Interest of all [unit] owners.
When several of the plaintiffs were unable to get
financing to purchase their units, the Bank's Loan Committee
voted to approve $3,000,000 in "end loan" financing to them.
After the plaintiffs executed their purchase and sale
agreements, which incorporated by reference the Master
Documents, the Loan Committee (with Keezer voting) approved
end loans to several of the plaintiffs to finance the
purchases. This was the first time that the Bank's lending
arm, University Financial Services Corporation, had
considered and approved such end loans, a type of financing
arrangement not considered standard procedure in the banking
business at the time. The plaintiffs then purchased the
units. Three of the plaintiffs, Marietta Lopes ("Lopes") and
Michael and Barbara Riley (the "Rileys"), were able to secure
financing from other lending institutions.
The units were never registered as securities.
About six months after the plaintiffs purchased the units,
they were told by HHI that, upon advice of counsel, it would
no longer pay unit income based on a rental pool. The
unhappy plaintiffs in 1989 filed their six-count amended
complaint against HHI, Zimmerman, Chaban, Keezer and the
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Bank, inter alia.1 On May 31, 1991, the Comptroller of the
Currency declared the Bank insolvent and appointed the FDIC
as receiver. The FDIC was substituted for the Bank as a
defendant.
The district court granted summary judgment for the
FDIC based on its special defenses under D'Oench and
1823(e), except on the state securities registration count
(Count V). After a bench trial, the district court issued a
Memorandum of Decision, Adams v. Hyannis Harborview, Inc.,
838 F. Supp. 676 (D. Mass. 1993), holding, among other
things, that the plaintiffs were entitled to judgment against
the FDIC on Count V.
The court held that the provisions in the Master
Documents made the Hotel units "investment contracts" and
thus securities within the meaning of the securities laws.
Id. at 686. It also held that, in light of the financing
arrangements made for the purchasers, Keezer was acting as
the Bank's agent in the sale of the units and so his actions
1. In addition to their claims under Mass. Gen. L. ch. 110A,
410(a)(1), the complaint also alleged (1) violations of
12(2) of the Securities Act of 1933 (the "1933 Act"), 15
U.S.C. 77l(2) (Count I), (2) violations of the anti-fraud
provisions of 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. 78j(b), and Rule 10b-5 of the Securities and
Exchange Commission, 17 C.F.R. 240.10b-5 (Count II), (3)
common law fraud and deceit (Count III), (4) negligent
misrepresentation (Count IV), and (5) violations of the anti-
fraud provisions of Mass. Gen. L. ch. 110A, 410(a)(2)
(Count VI). Zimmerman was eventually dismissed as a
defendant.
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would be imputed to the Bank. Id. at 692. It reaffirmed its
rulings that D'Oench and 1823(e) provided the FIDC with no
special defenses to Count V, id. at 691 n.14, and rejected
the FDIC's argument that the loans to the plaintiffs made by
the Bank were "bona fide" loan transactions under Mass. Gen.
L. ch. 110A, 401(i)(6) and thus exempt from registration
requirements. Id. at 694 n.16.
The court later ordered a rescissionary damages
award pursuant to Mass. Gen. L. ch. 110A, 410(a). That
statute provides for recovery of "the consideration paid for
the security, together with interest at six per cent per year
from the date of payment, costs, and reasonable attorneys'
fees, less the amount of any income received on the security,
upon tender of the security, or for damages if [the
plaintiff] no longer owns the security." Id.
Specifically, the court awarded to all plaintiffs
except Lopes and the Rileys $855,434, plus interest of 6% per
annum from February 11, 1994 to the date of the damages
order. The court said it "novated" the amounts the
plaintiffs owed on the first and second mortgage notes held
by the FDIC and HHI respectively. The "novation" apparently
cancelled the plaintiffs' debt on the mortgages. The court
denied Lopes and the Rileys a rescissionary damages award
under section 410(a)(1) because it believed it could not
novate the loans that Lopes and the Rileys owed to third-
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party banks. It did, however, give Lopes and the Rileys
damages of $256,564 (the principal and interest payments they
had made on their mortgage loans plus the amount they still
owed on those loans) from Keezer, Chaban and HHI on the other
securities law claims successfully asserted.
The court gave each plaintiff the option of either
accepting the rescission award (and the novation) in exchange
for title to the unit or, in lieu of the rescission award,
retaining the unit free and clear. It awarded attorneys'
fees of $351,213 against Keezer, Chaban, HHI and the FDIC.
Finally, it ordered that the plaintiffs' recovery would be
subject to the FDIC's "obligation to distribute the assets of
[the Bank] on a pro rata basis."
The FDIC appeals the rulings on 1823(e) and
D'Oench with respect to Count V, the finding that the bank
loans were not "bona fide" loan transactions, the award of
attorneys' fees and post-insolvency interest, and the order
that any reconveyance be made to all defendants rather than
just to the FDIC. The FDIC does not challenge either the
district court's conclusion that the Hotel units were
securities or its conclusion that Keezer's actions were
imputable to the Bank. The plaintiffs' cross-appeals
challenge the district court's method of calculating the
rescissionary damages award, its decision to limit the award
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in accordance with the rule of ratable distribution, and its
failure to grant fee enhancements.
II. Section 1823(e) And D'Oench
The FDIC argues that 1823(e) and D'Oench bar the
claims under state securities law because the plaintiffs
cannot point to a written agreement regarding the
"registrability of securities." Section 1823(e) bars anyone
from asserting against the FDIC any "agreement" that is not
in writing and is not properly recorded in the records of the
bank. 12 U.S.C. 1823(e). D'Oench generally prevents
plaintiffs from asserting as either a claim or defense
against the FDIC oral agreements or "arrangements."
Timberland Design, Inc. v. First Service Bank for Savings,
932 F.2d 46, 48-50 (1st Cir. 1991). We do not believe that
either 1823(e) or D'Oench shields the FDIC here.2
2. As modified by the Financial Institutions Reform,
Recovery, and Enforcement Act (FIRREA), 1823(e) provides:
No agreement which tends to diminish or defeat the
interest of the [FDIC] in any asset acquired by
it . . . shall be valid against the [FDIC] unless
such agreement [is in writing and satisfies a
number of other requirements].
12 U.S.C. 1823(e). A circuit split appears to have
developed over the question of whether 1823(e) has
preempted D'Oench. Compare FDIC v. McClanahan, 795 F.2d 512,
514 n.1 (5th Cir. 1986) ("there is no reason to suppose that
Congress intended [by the passage of 1823(e)] to forbid the
rule of estoppel from being applied when the FDIC sues as
receiver of a failed bank") with Murphy v. FDIC, 61 F.3d 34,
39 (D.C. Cir. 1995) (relying on O'Melveny & Myers v. FDIC,
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While expansive in scope, 1823 and D'Oench only
protect the FDIC from claims or defenses based upon an
"agreement" or "arrangement." See 12 U.S.C. 1823(e); In re
NBW Commercial Paper Litigation, 826 F. Supp. 1448, 1461,
1466 (D.D.C. 1992). Although the concept of "agreement" has
been broadly defined to include not only promises to perform,
but also misrepresentations or material omissions, see
Langley v. FDIC, 484 U.S. 86, 92-93 (1987), plaintiffs'
claims against the FDIC are not based upon an agreement or
arrangement.3
Liability for failure to register a security under
Mass. Gen. L. ch. 110A, 410(a)(1) is strict. The right to
a remedy under section 410(a)(1) is independent of anything
that was said or agreed to between the Bank and the
plaintiffs. The act of selling the securities is what
created the liability and, as the district court found, the
Bank, through Keezer, sold the plaintiffs unregistered
securities. See NBW, 826 F. Supp. at 1468 (sale of
114 S. Ct. 2048 (1994) for the proposition that the FIRREA
preempts D'Oench); see also DiVall Insured Income Fund Ltd.
Partnership v. Boatmen's First Nat'l Bank of Kansas City, 69
F.3d 1398, 1402 (8th Cir. 1995) (D'Oench and holder in due
course doctrines preempted by FIRREA); Timberland Design, 932
F.2d at 51 (not reaching the preemption question because it
had been raised for the first time on appeal). We need not,
and do not, reach the question of whether D'Oench has been
preempted by 1823(e).
3. Indeed, after Langley, the terms "agreement" and
"arrangement" appear to be virtually synonymous. See id.
("agreement" is "scheme or arrangement").
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unregistered securities in violation of 12(1) of the 1933
Act does not rest on an agreement or arrangement).4
The FDIC's attempt to shoehorn this case into the
Supreme Court's Langley decision is unfitting. Starting with
the observation in Langley that the term "agreement" includes
an implicit condition such as the "truthfulness of a
warranted fact," see Langley, 484 U.S. at 93, the FDIC argues
that the plaintiffs' claims depend on the Bank's "implied
warranty" that the securities it was selling were legal. But
to the extent that such a warranty can even be characterized
as an agreement or arrangement, the plaintiffs' claims do not
depend upon it. The claims come from an independent legal
obligation arising from the act itself -- the sale of
unregistered securities -- and not from any warranty that the
action was legal. See NBW, 826 F. Supp. at 1468.
The FDIC says that D'Oench and 1823(e) are
designed to shield the FDIC from hidden liabilities and that
the FDIC could not have known from the Bank's records that
the Bank had sold securities to the plaintiffs. But that
does not appear to be the case. Although the Bank's
4. This case is not like typical securities fraud cases in
which plaintiffs claim that they were induced to purchase a
security based upon some material misrepresentation or
omission. In such cases, a plaintiff's claim depends upon
something the bank said or did that misled the plaintiff.
See, e.g., Dendinger v. First Nat'l Corp., 16 F.3d 99 (5th
Cir. 1994); Kilpatrick v. Riddle, 907 F.2d 1523 (5th Cir.
1990), cert. denied, 498 U.S. 1083 (1991).
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documents did not specifically use the term "security," the
pooled income arrangement is disclosed in the documents. The
HHI Declaration of Trust and By-Laws specifically provide
that the Hotel would be operated on a pooled income basis.
The mortgages were reflected in the Bank's records. The Loan
Proposal for the conversion loan states that the condominium
would be operated on a pooled income basis. The plaintiffs'
purchase and sale agreements incorporate by reference the
Declaration of Trust and By-laws; and the Loan Extension
documents for the plaintiffs referenced the condominium units
as collateral. A review of the documents pertinent to the
plaintiffs' promissory notes would have revealed the facts
showing that the Hotel units were pooled income units.
Perhaps recognizing this problem with its general
policy argument, the FDIC presses a slightly refined variant.
It argues that 1823(e) and D'Oench apply because no
specific writing appears on the Bank's records signed by both
a plaintiff and the Bank that "memorializes any obligation of
the Bank with respect to a securities transaction." This
argument, which is premised on the notion that there must be
a written agreement that specifically states in terms that
the condominium units are securities, rests on the incorrect
assumption that the bank examiners must be able to determine
the legal import of the facts reflected in the bank's
records. This assumption ignores that "[t]he real issue
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. . . is not whether the bank examiners could tell whether
the bank's actions were illegal (or indeed whether the
examiners knew what the law was), but rather, whether the
factual predicate for the application of the law is
established on the bank's books." NBW, 825 F. Supp. at 1469
n.28.5 That the plaintiffs' claims rest on collateral
documents referenced in the books of the Bank does not
transform their section 410(a)(1) claims into ones based upon
an agreement or arrangement. Id.6
5. This case is quite similar to NBW, in which the court
held that the FDIC could be liable for a bank's sale of
unregistered securities. The FDIC's attempts to distinguish
NBW on its facts are unpersuasive. First, the FDIC argues
that the bank in NBW was only a seller of securities and the
Bank here was both a seller and a lender. But all that
really means is that the NBW plaintiffs paid for the security
with cash while the plaintiffs here paid for the security
with a promissory note and mortgage. Second, the FDIC argues
that in NBW there was a written agreement which in terms
provided for a securities purchase. But that is not
necessary, and the Bank's records reflect the sale of the
pooled income units. Third, the FDIC claims that unlike in
NBW where the bank was self-dealing, the Bank here was simply
acting as a third party lender in this transaction. That
claim is just not supported by the record. Moreover, none of
these distinctions bears on the central insight of NBW that
the plaintiffs' claims against a bank for the sale of
unregistered securities do not arise from an agreement or
arrangement.
6. It is fair for the FDIC to make the very general point
that the plaintiffs' claims depend upon an agreement because
they depend upon a "sale" of a security and a sale is an
agreement. However, it is undisputed that the sale of these
units to the plaintiffs is clearly reflected in the Bank's
records sufficient to satisfy both 1823(e) and D'Oench.
The FDIC suggests however that there is an absence of a
writing, sufficient to satisfy 1823(e) and D'Oench,
specifically mentioning in terms that the Bank was a "seller"
of the units. As with the FDIC's argument that the documents
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The only policy consideration underlying D'Oench
that the FDIC argues is relevant here is the concern that the
FDIC be able to value the assets of a bank by reviewing a
bank's records either for purposes of liquidation or for
purposes of a purchase and assumption transaction. See
Langley, 484 U.S. at 91-92. Such a valuation must be done
"'with great speed, usually overnight, in order to preserve
the going concern value of the failed bank and avoid an
interruption in banking services.'" Langley, 484 U.S. at 91
(quoting Gunter v. Hutcheson, 674 F.2d 862, 865 (6th Cir.),
cert. denied, 459 U.S. 1059 (1982)). Where the Bank records
reflect adequately the sale of the Hotel units as pooled
income units, these concerns appear to be satisfied.7
must have stated in terms that the units were securities,
this argument assumes that the legal significance of the
documents must be apparent to the bank examiners in order to
overcome 1823(e) and D'Oench. Just as the pooled income
language in the Master Documents made the units securities by
operation of securities law, the loan documents reflected in
the record, as the district court concluded and the FDIC
concedes, made Keezer's sale of the units imputable to the
Bank by operation of principles of agency incorporated into
securities law. That the legal significance of these loan
transactions was not explicitly spelled out does not bar the
plaintiffs' claims. See NBW, 826 F. Supp. at 1469 n.29.
7. Plaintiffs have also argued that notwithstanding whether
their claim depends upon an agreement, their claims will
affect no "asset" for purposes of 1823(e). They point out
that where notes are invalidated by acts or omissions
independent of an alleged secret agreement, the notes are not
an asset protected by 1823(e). See FDIC v. Bracero &
Rivera, Inc., 895 F.2d 824, 830 (1st Cir. 1990). They argue
that because the sales of the condominium units were void,
see Kneeland v. Emerton, 183 N.E. 155, 159 (Mass. 1932)
(under predecessor to Massachusetts Uniform Securities Act,
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III. Sales Of Securities Or Bona Fide Loans?
The FDIC also says that there were no sales of
securities, arguing that these were bona fide loan
transactions instead. We disagree. The pertinent state
securities statute provides that the terms "sale," "sell,"
"offer," or "offer to sell" do not include any "bona fide
pledge or loan." Mass. Gen. L. ch. 110A, 401(i)(6).
The record amply supports the district court's
conclusion that the loans were not made in the ordinary
course of business and were not bona fide. The Bank and
Keezer operated together in the marketing and financing of
these condominium units to the plaintiffs. When it became
apparent that the project might fail because the purchasers
were having trouble getting financing, the Bank departed from
standard banking practice and offered end loans to the
plaintiffs (except Lopes and the Rileys). When it came to
granting the end loans to the plaintiffs, the Bank's agent,
sale of stock was a void transaction where notice of
intention to sell shares had not been filed with the
Department of Public Utilities), the promissory notes based
upon the units were also void, and that, accordingly, no
asset passed to the FDIC when it took over the Bank. The
FDIC counters that notwithstanding Kneeland's use of the term
"void," the case actually employed the concept of
"voidability," see id. (stating that the transaction was void
at the buyer's instance), and that an asset does pass to the
FDIC if the transaction is voidable. See Kilpatrick v.
Riddle, 907 F.2d 1523, 1528 (5th Cir. 1990). Because we hold
that the plaintiffs' claims in this case do not depend upon
an agreement or arrangement, we need not resolve this
question.
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Keezer, knew or should have known that the sales were not
registered and therefore could not be completed in compliance
with the securities laws. He nevertheless participated in
the vote to approve the end loans. That the substitution of
the plaintiffs' good debt for HHI's bad debt may have been in
the interest of the Bank and its shareholders does not
establish that the Bank was involved in bona fide loan
transactions. The substitution was based on the transfer of
an unregistered security to the plaintiffs. Where the loans
were entered into in the course of the Bank's effort to
finance and market, through its agent, securities that the
Bank knew or should have known could not be sold without
registration, the loans were not bona fide.
IV. Remedy
Each side complains about the district court's
remedial order. Plaintiffs argue that the district court
erroneously ordered that any recovery against the FDIC be
subject to the FDIC's responsibility to distribute the assets
of the failed bank in a ratable manner. They also argue that
the district court's method of setting the rescissionary
damages was infirm, that the award improperly excluded Lopes
and the Rileys, and that the court should have awarded an
attorneys' fee enhancement. For its part, the FDIC claims
that the district court erred in awarding post-insolvency
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interest and attorneys' fees and in requiring the plaintiffs
accepting the rescissionary damages to reconvey their units
to all of the defendants rather than only to the FDIC. The
district court's award is reviewed for an abuse of discretion
unless it rests on an erroneous legal determination. See
Downriver Community Federal Credit Union v. Penn Square Bank
through FDIC, 879 F.2d 754, 758 (10th Cir. 1989), cert.
denied, 493 U.S. 1070 (1990).
A. Ratable Distribution
The FDIC, as receiver, is authorized to distribute
the assets of a failed bank to all creditors on a pro rata
basis pursuant to the National Bank Act at 12 U.S.C. 91
and 194, and the FIRREA at 12 U.S.C. 1821(i)(2).8 See
also United States ex rel. White v. Knox, 111 U.S. 784, 786
8. Section 91 prohibits a bank facing insolvency from making
payments that prefer some creditors over others. 12 U.S.C.
91. Section 194 requires a ratable distribution of assets
among all general creditors entitled to a share in the
receivership estate. 12 U.S.C. 194 (providing that the
FDIC "shall make a ratable dividend . . . on all such claims
as may have been proved to [its] satisfaction or adjudicated
in a court of competent jurisdiction"). Section 1821(i)(2)
limits the FDIC's liability as receiver to the amount a
claimant would have received in a straight liquidation of the
failed bank. 12 U.S.C. 1821(i)(2) ("The maximum liability
of the [FDIC] . . . to any person having a claim . . . shall
equal the amount such claimant would have received if the
[FDIC] had liquidated the assets and liabilities of such
institution . . . ."). Section 1821(i)(2) does not, by
itself, resolve the issue of whether a plaintiff is entitled
to a preference because the statute does not "alter[] or
define[] the priorities [that] define liquidation value."
Branch v. FDIC, 825 F. Supp. 384, 417 & n.35 (D. Mass. 1993)
(internal quotation omitted).
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(1884) ("Dividends are to be paid to all creditors ratably;
that is to say, proportionally. To be proportionate they
must be made by some uniform rule. . . . All creditors are
to be treated alike."). While the ratable distribution rule
is not absolute, the statutory framework is "distinctly
unfriendly to the recognition of special interests or
preferred claims." Downriver, 879 F.2d at 762 (internal
quotation omitted).
A plaintiff seeking an exception from the pro rata
rule bears a heavy burden of proof to show that a preference
is warranted. Id.; see also Branch 825 F. Supp. at 416. A
preference might be warranted where a plaintiff is a secured
creditor and is seeking to enforce a lien against the
security, see Ticonic Nat'l Bank v. Sprague, 303 U.S. 406,
413 (1938), or where the plaintiff, although a general
unsecured creditor, can show an entitlement to a constructive
trust. See Downriver, 879 F.2d at 762. Because the
plaintiffs can show neither, their awards are subject to pro
rata distribution.
None of the plaintiffs has a secured claim, and
they argue to no avail that they have claims entitling them
to a constructive trust. The plaintiffs must have shown, and
did not, that the Bank's fraudulent conduct caused a
particular harm that is not shared by substantially all other
creditors, and that granting the relief would not disrupt the
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orderly administration of the estate. Id. The district
court found, however, that the defendants committed no fraud
in this case, and fraud (or violation of a fiduciary duty) is
generally a prerequisite to the formation of a constructive
trust.9 Moreover, the plaintiffs have not shown that a
preference would not interfere with the orderly
administration of the estate. The district court properly
held that the plaintiffs' awards were subject to the pro rata
distribution rule.
B. Rescissionary Damages Award
Rescissionary damages against the FDIC and the
other defendants, jointly and severally, were awarded to all
plaintiffs except Lopes and the Rileys. The district court
also "novated" the remaining debt of all plaintiffs (except
Lopes and the Rileys) on the first and second mortgages held
by the FDIC and HHI. The plaintiffs quarrel with this aspect
of the district court's award in two respects: that the
district court used an incorrect method of calculating
9. The only fraudulent behavior the plaintiffs attribute to
the Bank stems from the Bank's opposition to the plaintiffs'
Motion for Order Segregating Assets filed a few weeks before
the Bank was declared insolvent. In opposing the motion, the
Bank represented to the court that any harm the plaintiffs
feared from an FDIC takeover was mere speculation. The Bank
failed to inform the court that it was in negotiations with
the FDIC and a takeover by the FDIC was imminent. Without
condoning this regrettable lapse by the Bank, it does not
help the plaintiffs. The plaintiffs have not demonstrated
that they would have been entitled to a segregation of assets
had the Bank properly informed the court of its financial
condition as it should have.
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damages, and that the district court improperly excluded
Lopes and the Rileys from the rescissionary damages award
that ran against the FDIC.
1. Method of calculation.
The district court ordered an award of rescission,
excluding interest, of $654,949. The district court started
with the total amount of money at issue -- the principal,
interest and other expenses paid by the plaintiffs minus
income received and the unpaid debt on the first and second
mortgages held by the FDIC, for a total of $2,072,205. The
court then subtracted the unpaid mortgage debt owed to the
FDIC and HHI, a total of $1,271,100, and the principal and
interest payments made by Lopes and the Rileys, a total of
$146,156, to reach $654,949. The court then ordered a
"novation of the notes owed by the plaintiffs to defendants,
HHI and the FDIC," although the court apparently intended an
outright cancellation of the notes.
Plaintiffs argue that the district court should
have awarded them the entire amount of consideration paid for
the units, including the unpaid portions of the loans,
subject to a setoff by the FDIC and HHI for the unpaid
portions of the loans. They also argue that the district
court should also have allowed the plaintiffs to keep the
units as a setoff for any damages owed to the plaintiffs from
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the FDIC that would be left unpaid because of the insolvency
of the Bank.
As a practical matter, there is little difference
between what the district court ordered (return of principal,
interest, fees and expenses minus income and "novation" of
the loans) and what the plaintiffs are requesting (entire
cost of loans plus amount paid on the units minus income,
leaving plaintiffs' debt to the FDIC and HHI intact). As the
plaintiffs recognize, the district court's award "with a
solvent defendant, would fully fund rescission and return to
Plaintiffs their full damages in exchange for title to their
units." The plaintiffs argue, however, that their method of
calculation makes a difference because the Bank is insolvent
and will not be able to pay the damages judgment in full.
Plaintiffs say their method allows them to keep the units as
a setoff and thus make up any shortfall between the damages
owed and the pro rata share of the Bank's assets they will
receive. We disagree.
A setoff is often justified where a plaintiff owes
a debt to an insolvent party and will be forced to pay off
that debt without being allowed to recover a debt the
insolvent party may owe to the plaintiff. See In re Saugus
General Hosp., Inc., 698 F.2d 42, 45 (1st Cir. 1983). It is
typically employed where a depositor, who also owes money to
a bank, seeks to offset the amount owed by the amount
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22
deposited. It is employed where the parties have reciprocal
or mutual obligations to one another.
The plaintiffs have tried to characterize the
obligations between the parties as being mutual and
appropriate for a setoff of the units. Under the plaintiffs'
argument, the offsetting obligations would exist were the
court (1) to create a damages award in the plaintiffs' favor
for the entire amount of the loans and the amount plaintiffs
have paid on the units (minus income) and (2) then award the
FDIC and HHI the amounts the plaintiffs owe on the promissory
notes. With such offsetting obligations, the plaintiffs
argue, they should be entitled to set off the units, i.e.,
keep them, in the face of the Bank's insolvency. See FDIC v.
Mademoiselle of California, 379 F.2d 660, 664 (9th Cir. 1967)
("It is well settled that the insolvency of a party against
whom a set-off is claimed constitutes a sufficient ground for
the allowance of a set-off not otherwise available.")
(internal quotations omitted)).
This argument, however, is incongruous with the
plaintiffs' theory of recovery in this case. Plaintiffs here
sought rescission, a form of restitution. Under this theory,
the restitution by the defendant of the ill-gotten gains
cannot be enforced unless the "plaintiff[s] return[] in some
way what [they] ha[ve] received as a part performance by the
defendant." Arthur L. Corbin, Corbin on Contracts 1114, at
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23
608 (1964); see also Restatement of Restitution 65 (1937)
(the general rule is that the right of a person to
restitution for a benefit conferred upon another in a
transaction is dependent upon his return of, or offer to
return, anything the person received as a part of the
transaction). Thus, under the applicable statute, rescission
is allowed upon "tender of the security" by the plaintiff.
See Mass. Gen. L. ch. 110A, 410(a); see also 15 U.S.C.
77l.
Since tender of the unit is a condition for
triggering the obligation of the Bank to repay the amount
paid for the units, the plaintiffs cannot also use the units
as setoffs. The Bank owes the plaintiffs nothing until the
plaintiffs relinquish their rights to the units. And once
the plaintiffs no longer have rights to the units, the
plaintiffs have no basis to use the units as setoffs.10
10. Even assuming that the plaintiffs might, in theory, be
entitled to set off of the units, that does not automatically
entitle them to do so. A setoff may be denied in order to do
"equity, prevent injustice, and achieve the goals of
procedural fairness." In re Lakeside Hospital, Inc., 151
B.R. 887, 893 (N.D. Ill. 1993). In equitable terms it could
be viewed that plaintiffs have received windfalls from the
remedial order. First, a portion of the consideration paid
for the security awarded to the plaintiffs was the interest
component of the mortgage payments. Assuming that the
interest on the Bank's loans to the plaintiffs was at market
rate, the effect of the award is to give the plaintiffs a
market rate of interest on the price of the units as well as
the statutory interest award of 6%. This issue was not
presented by the parties and we do not reach the issue of
whether 410(a) allows for the calculation of
"consideration" in such a way. Second, the plaintiffs were
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Although the general method employed by the
district court in reaching the rescissionary damages award
was appropriate, one aspect of the order needs to be
modified. The district court ordered a "novation" of the
amounts the plaintiffs owed on the first and second mortgage
notes to the FDIC and HHI. A "novation" is typically a
"substituted contract that includes as a party one who was
neither the obligor nor the obligee of the original duty."
Restatement (Second) of Contracts 280 (1979). The court's
order, however, does not provide for a substitution of
parties and, given the cases cited by the district court in
its order, Limoli v. Accettullo, 265 N.E.2d 92 (Mass. 1970)
and Levy v. Bendetson, 379 N.E.2d 1121 (Mass. App. Ct. 1978),
in which the courts cancelled the notes, it does not appear
that a substitution was intended. Because an outright
cancellation of the notes may render unclear the relative
rights of the parties in the unit, we vacate the portion of
the order which "novates" the notes along with granting
rescissionary damages and remand with directions that the
district court order a novation whereby the "judgment"
defendants (FDIC, Keezer, Chaban, and HHI) are substituted as
obligors on the notes secured by the mortgages and the
given the option of keeping the units free and clear.
Because this allows the plaintiffs to keep what they bought
and effectively have a return of a significant portion of the
consideration paid for the unit, it might be viewed as a
potential over-recovery.
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25
plaintiffs are discharged of any liability on the notes. Any
units eventually tendered to the judgment defendants would be
subject to the mortgages.11
2. Lopes and the Rileys.
Lopes and the Rileys were denied any relief against
the FDIC because they had given mortgages and promissory
notes to disinterested third party banks and the court
believed that it could not "novate" those debts. Although
the district court correctly concluded that it should not
interfere with the debts owed to the third party banks, it
improperly denied Lopes and the Rileys rescissionary damages
against the FDIC. The only
difference between Lopes and the Rileys and the other
plaintiffs is that Lopes and the Rileys paid substantially
more cash to the defendants when purchasing the units. It
was not the entire price because both Lopes and the Rileys
appear to have given second mortgages to HHI. Lopes and the
Rileys were still purchasers of unregistered securities.
They should therefore be able to recover from the FDIC and
11. This approach keeps the respective rights in the units
following the award relatively clear. After the transfer,
the judgment defendants would own as tenants in common the
units subject to the first and second mortgages on the
properties. If the defendants were to default on the notes
to the Bank, then the FDIC could foreclose on the first
mortgage and use the proceeds of any sale to satisfy that
debt. Anything left over would be used to satisfy HHI's
second mortgage debt. Anything remaining after that would be
distributed to the defendants, and presumably could be sorted
out in an action among the defendants.
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26
the other defendants the consideration paid for the units.
See Mass. Gen. L. ch. 110A, 410(a). Unfortunately, the
record does not clearly reveal the consideration Lopes and
the Rileys paid for the units. On remand the district court
should hold a hearing to determine the consideration Lopes
and the Rileys paid for the units. As with the other
plaintiffs, Lopes' and the Rileys' entire claims will be
subject to the ratable distribution rule.
Lopes' and the Rileys' claims do raise additional
wrinkles for consideration on remand. The novation given to
the plaintiffs who borrowed from the Bank was an implicit
setoff of the amount of the mortgage debt. Lopes and the
Rileys are not entitled to such an implicit setoff because,
with respect to the loans to the third-party banks, there
would be no mutuality of obligation. Absent mutual
obligations, a setoff, or its equivalent, is inappropriate.
Cf. In re Lakeside Community Hospital, 151 B.R. at 891
(setoff in bankruptcy). Unlike the other plaintiffs, Lopes
and the Rileys must bear the full cost of the Bank's
insolvency.
If Lopes and the Rileys convey their units to the
defendants, they will remain liable on their promissory
notes. It may be the case, however, that the third party
banks will refuse to allow Lopes and the Rileys to reconvey
their units to the defendants. If that occurs, the district
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court may want to make clear that their remedy is subject to
any terms provided in their loan agreements with the third
party banks. The district court may also consider treating
such a situation like that in which a purchaser cannot tender
the security because she no longer owns it. In that case,
damages are awarded. See Mass. Gen. L. ch. 110A, 410(a).
C. Interest
1. Post-insolvency interest.
Section 410(a) provides for an award of 6% interest
on the consideration paid for the security from the date of
payment of that consideration. The district court awarded
$200,485 statutory interest to the plaintiffs against the
FDIC, Keezer, Chaban and HHI. That amount represents
interest from the date the plaintiffs made each of their
respective mortgage payments until February 11, 1994, the
date the plaintiffs submitted their damages motion. The FDIC
contends that the interest award against it incorrectly
includes interest accruing following the Bank's insolvency,
which occurred on May 31, 1991. According to the FDIC, the
ratable distribution rule precludes such post-insolvency
interest.12 We agree.
12. Because Keezer, Chaban, and HHI can claim no benefit
from the ratable distribution rule under the National Bank
Act and the FIRREA, the following discussions of interest and
attorneys' fees apply only to the extent they were awarded
against the FDIC.
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28
As unsecured creditors, the plaintiffs share
ratably with all other "unsecured creditors, and their claims
bear interest to the same date, that of insolvency."
Ticonic, 303 U.S. at 412.13 There are exceptions to this
rule, but where, as here, the interest is part of the claim
itself, interest accruing after the insolvency should not be
awarded. See United States ex rel. White v. Knox, 111 U.S.
784, 786 (1884); First Empire Bank-New York v. FDIC, 572 F.2d
1361, 1372 (9th Cir.)("First Empire I"), cert. denied, 439
U.S. 919 (1978).14
13. This rule bears similarity to the rule applicable in the
bankruptcy context that post-petition interest is not
available against an insolvent debtor. See Debentureholders
Protective Comm. of Continental Inv. Corp. v. Continental
Inv. Corp., 679 F.2d 264, 268 (1st Cir.), cert. denied, 459
U.S. 894 (1982). This is not surprising. Courts have looked
to bankruptcy law to "decipher the meaning of the ratable
dividend requirement of section 194." Texas American
Bankshares, Inc. v. Clarke, 954 F.2d 329, 338 n.10 (5th Cir.
1992).
14. Some courts have suggested that if a receiver is
unreasonable or vexatious in resisting a claim, or is at
fault in administering the trust, interest may be allowed for
the delay. See Fash v. First Nat'l Bank of Alva, Okl., 89
F.2d 110, 112 (10th Cir. 1937) (citing cases). The
plaintiffs have not shown that these exceptions apply. The
case upon which the plaintiffs rely for the proposition that
post-insolvency interest is available here, First Empire
Bank-New York v. FDIC, 634 F.2d 1222 (9th Cir. 1980) ("First
Empire II"), cert. denied, 452 U.S. 906 (1981), is
inapposite. That case drew a distinction between post-
insolvency interest as part of a claim against a bank (which
would not be allowed) and interest accruing from an
erroneously denied claim after the ratable amount was paid to
other creditors (which it did allow). Id. at 1224. The
plaintiffs, however, seek to include the interest as part of
the original claims against the Bank. They argue "the
general rule regarding post-insolvency interest does not
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29
The FDIC does not challenge the award of pre-
insolvency interest, but says the district court did not
distinguish between the portion of the award representing
pre-insolvency interest and the portion representing post-
insolvency interest. We prefer to allow the district court
to determine the appropriate amount on remand rather than
attempt to do it here.
2. Lopes and the Rileys.
Lopes and the Rileys were erroneously treated in
the interest calculation and that award should be adjusted.
The $200,485 interest award to the other plaintiffs
apparently includes $20,679.93 of interest on the mortgage
payments Lopes made for the condominium unit and $28,240.81
of interest on the payments the Rileys made. Those interest
amounts were calculated according to the same method employed
for the plaintiffs who borrowed from the Bank: the interest
was calculated from the date each loan installment payment
was made. This method was inappropriate for Lopes and the
Rileys since, with respect to the Bank and the other
defendants, Lopes and the Rileys parted with a lump sum at
the time of the purchase. Interest for Lopes and the Rileys
ought to have started accruing on the entire purchase price
control where the interest itself is part of the underlying
claim, as it is here." That type of post-insolvency interest
appears to be precisely the type of interest that First
Empire II said should not be allowed. Id.
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on the date the cash was transferred to the defendants, not
on the date the payments were made to the third party banks.
Because we cannot determine that amount on the present
record, on remand the district court should calculate the
appropriate interest to be awarded to Lopes and the
Rileys.15
D. Attorneys' Fees
1. The award.
The FDIC argues that the award of attorneys' fees
under section 410(a) violates the ratable distribution rule
because the claims for attorneys' fees were not "provable"
within the meaning of the National Bank Act at 12 U.S.C.
194 and case law construing that provision. See Interfirst
Bank-Abilene, N.A. v. FDIC, 777 F.2d 1092, 1097 (5th Cir.
1985); First Empire I, 572 F.2d at 1372. We disagree.
A claim is provable if at the time of the
insolvency there is a present cause of action. First Empire
15. It is also not entirely clear whether the district court
intended to include the interest awards to Lopes and the
Rileys in the order for rescissionary damages. The district
court denied Lopes and the Rileys rescissionary damages on
the 410(a)(1) claim. The court, however, added the full
$200,485 to the rescissionary damages award of $654,949 to
give a total award of rescission of $855,434. Although the
district court could have meant for Lopes and the Rileys to
benefit just from the interest component of that award, it is
unclear whether that was so intended, particularly since the
interest is treated as part and parcel of the rescissionary
damages award based on 410(a)(1) and the district court
appeared to deny Lopes and the Rileys an award under
410(a)(1). The district court should clarify this portion
of the award on remand.
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31
I, 572 F.2d at 1368 (citing Pennsylvania Steel Co. v. New
York City Ry. Co., 198 F. 721, 738 (2d Cir. 1912) ("Claims
which at the commencement of [equitable receivership]
proceedings furnish a present cause of action [are
provable].")). In this case, the plaintiffs were actively
pursuing their claims against the Bank at the time the Bank
became insolvent. At that time, there were claims not only
for rescission but also for attorneys' fees. Accordingly,
the claims for attorneys' fees were provable.
Relying on Interfirst, 777 F.2d at 1097, the FDIC
argues that attorneys' fees are not provable here because
there were no contractual provisions for attorneys' fees
between the plaintiffs and the Bank. According to the FDIC,
the absence of contractual contingency fee provisions for
attorneys' fees before the insolvency shows that no claims
for attorneys' fees existed before the insolvency. We reject
the FDIC's argument that the claims for attorneys' fees did
not exist prior to the insolvency because the contingency fee
agreement between the plaintiffs and their attorneys was not
executed until after the insolvency. The FDIC is aware that
the plaintiffs had an obligation to pay their attorneys, and
in fact did pay their attorneys substantial fees, during the
period prior to the insolvency. Plaintiffs' claims for
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attorneys' fees certainly did exist by statute, and did so
well before the insolvency.16
The FDIC also argues that the claims are not
provable because (1) there was no collateral fund to pay the
fees (only the general assets of the estate to be shared by
all unsecured creditors), and (2) the fees were not fixed and
certain at the time the suit was filed against the FDIC. But
the notion of provability is not the same as the rule of
ratable distribution. "Though related concepts, whether a
claim is provable under section 194, and whether a
distribution is 'ratable' represent two entirely different
inquiries." See Citizens State Bank of Lometa v. FDIC, 946
F.2d 408, 413 (5th Cir. 1991).
The existence of a collateral fund, while perhaps
relevant to ratable distribution, is not relevant to
determining provability; and the FDIC's argument that the
attorneys' fees must have been absolute, fixed, due and owing
for purposes of ratable distribution to be "provable" is not
correct. Id. (provability of claims is not equated to the
absolute, fixed, due-and-owing language which applies to the
concept of a "ratable distribution"). Even if the claims for
16. To the extent Interfirst suggests that statutory claims
for attorneys' fees should be treated differently than claims
based upon contract, see Interfirst, 777 F.2d at 1097 n.2
(stating that the state law providing for attorneys' fees
does not create a claim for purposes of applying the First
Empire I test), we disagree.
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33
attorneys' fees here were "contingent," which they are not, a
claim is provable if its "worth or amount can be determined
by recognized methods of computation." First Empire I, 572
F.2d at 1369. The lodestar approach to calculation of
attorneys' fees is a recognized method of computation.
Nevertheless the attorneys' fees award requires
modification. The rule of ratable distribution "requires
that dividends be declared proportionately upon the amount of
claims as they stand on the date of insolvency." Citizens
State Bank, 946 F.2d at 415. The amount of the claim that
has accrued at the time of insolvency is the basis for
apportionment of dividends. See Kennedy v. Boston-
Continental Nat'l Bank, 84 F.2d 592, 597 (1st Cir. 1936)
("The amount of the claim may be later established, but, when
established, it must be the amount due and owing at the time
of the declaration of insolvency, as of which time it is
entitled, with the claims of the other creditors, to a
ratable distribution of the assets of the bank."); see also
White, 111 U.S. at 787 ("It was clearly right . . . to
ascertain from the judgment how much was due on this claim at
the date of the insolvency, and make the distribution
accordingly."). The availability of attorneys' fees for an
unsecured creditor depends upon whether the fees accrued pre-
insolvency or whether they accrued post-insolvency. Those
incurred prior to the insolvency are recoverable while those
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34
incurred afterwards are not. Cf. Fash v. First Nat'l Bank of
Alva Okl., 89 F.2d 110, 112 (10th Cir. 1937) (post-insolvency
attorneys' fees not available).
We believe this situation is not only analogous to
requests for interest and other costs of collection, see
Interfirst, 777 F.2d at 1097 (relying on Ticonic to deny
post-insolvency attorneys' fees); Fash, 89 F.2d at 112
(treating interest and attorneys' fees under the same
principle); cf. also In re Continental Airlines Corp., 110
B.R. 276, 279-80 (Bankr. S.D. Tex. 1989) (drawing analogy
between attorneys' fees and post-petition interest), but also
is analogous to requests for attorneys' fees in the
bankruptcy context. Pre-petition attorneys' fees of
unsecured creditors against an insolvent debtor are generally
allowed under the bankruptcy code to the extent the
applicable state law so provides, and post-petition
attorneys' fees are generally not allowed. See, e.g., In re
Southeast Banking Corp., 188 B.R. 452, 462-64 (Bankr. S.D.
Fla. 1995) (denying under the bankruptcy code unsecured
creditors' attorneys' fees incurred post-petition but
allowing attorneys' fees incurred pre-petition); but cf. In
re United Merchants and Mfrs., Inc., 674 F.2d 134, 137 (2d
Cir. 1982) (unsecured creditor can recover collection costs
including counsel fees where such costs were a specifically
bargained-for term of a loan contract). Plaintiffs are
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35
entitled to attorneys' fees that had accrued as of the date
of the insolvency but are not entitled to attorneys' fees
following the insolvency.17 Because we are unable to
determine the amount of attorneys' fees accruing prior to the
insolvency, we leave that inquiry to the district court on
remand.
2. Fee enhancements.
The plaintiffs argue that they were entitled to
either a contingency fee enhancement or a results enhancement
to the attorneys' fee award. The district court's fee award
is reviewed for an abuse of discretion, see Brewster v.
Dukakis, 3 F.3d 488, 492 (1st Cir. 1993), and there was none.
As the plaintiffs concede, the argument for a
contingency enhancement in a statutory fee-shifting context
is a difficult one, even if the enhancement requested here is
based on state rather than federal law, in the aftermath of
City of Burlington v. Dague, 112 S. Ct. 2638, 2643 (1992)
(generally disapproving of contingency enhancements under
federal fee-shifting statutes).18 The Massachusetts courts
have stated that where the federal and state law causes of
17. The plaintiffs' motion, filed after oral argument, for
attorneys' fees incurred on appeal is therefore denied.
18. This is not a common fund situation. Cf. In re
Washington Public Power Supply System Securities Litigation,
19 F.3d 1291, 1299-1301 (9th Cir. 1993) (stating the
rationale of Dague did not apply in common fund cases and
that district court had the discretion to allow contingency
enhancements in common fund case).
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36
action are similar, the attorneys' fees "in both fora should,
for the most part, be calculated in a similar manner."
Fontaine v. Ebtec Corp., 613 N.E.2d 881, 891 (Mass. 1993).
The state law counterpart should not be construed to allow
such an enhancement absent direction from the state courts.
Plaintiffs have cited no state cases allowing a contingency
enhancement for a successful securities law action based on
the fee-shifting provision of section 410(a)(1) and we
decline to predict the creation of such a state law rule
here.
A results enhancement is also inappropriate. Such
an enhancement is a "tiny" exception to the lodestar rule.
See Lipsett v. Blanco, 975 F.2d 934, 942 (1st Cir. 1992).
The rates provided to the attorneys in this case "adequately
reflected the lawyers' superior skills and the superb results
obtained." Id.
E. Reconveyance to Defendants
In its damages order the district court provided
that plaintiffs accepting the rescission award reconvey the
units to all the defendants. The FDIC contends that the
district court abused its discretion in ordering the units
deeded to all the defendants rather than just to the FDIC.
The plaintiffs, who presumably are indifferent as to who
among the defendants gets the units, have not argued
otherwise. Where the debts owed on the units have been
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37
novated in the manner prescribed here, conveyance of the
units solely to the Bank might prejudice the rights of the
other defendants. The district court did not abuse its
discretion on this matter.
V. Conclusion
For the foregoing reasons, we affirm the district
court's judgment of liability but vacate and remand the order
on damages, novation, attorneys' fees and interest, as
discussed above, for further proceedings consistent with this
opinion. It is so ordered.
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38