*2 RYAN, Before MERRITT and Circuit WALINSKI, Judges; and Senior Judge.* District WALINSKI, Judge. Senior District on third- This cause before Court defendant, Turner’s, appeal Milton A. party trial, following judgment, from the a bench District of the United States Court Tennessee, Eastern Division of Northern Division. appeal continuing present

The involves a $2,141,270.91, guaranty in the amount executed Milton A. Turner to the United Bank in The Federal American Knoxville. (hereinafter Corporation Deposit Insurance “FDIC”), acquired corporate capacity, in its compel and sued its collec- * Ohio, Walinski, sitting by designation. Nicholas J. District of Honorable Judge, States Senior District for the Northern places, replaced City and trial, in two Turner raised number At Mr.

tion. (hereinafter enforcement, including Knox County County Bank of of defenses “CCB-Knoxville”). and material alteration. in the factum fraud trial, Judge granted District After Roger partners included Lovell Road’s Turn- Mr. favor FDIC. Mr. Moore and Butcher. Moore was a M. claiming Dis- appeals, error er now 20%, partner owning Butcher general while 1) finding Turner’s trict Court’s *3 owning partner limited Turner awas 80%. containing guaranty of a blanks execution ownership no interest in Lovell Road. had asserting ma- subsequent him from bars however, in some past, He had done defense; form a alteration of that as terial consulting partnership. Fur- work for the trans- 2) Turner lent himself to a that Mr. thermore, the court that trial determined authorities; banking likely to mislead action in- knowledge Butcher Turner had no that in 3) negligent not that Turner was and Mr. guaranty to secure a tended use his demanding guaranty returned that the be his Road and not the debt of Lovell debt writing in he once to him released lines, Along Turner company. those own We that learned of its existence. conclude not the bank name would was aware that is not Turner defrauded and Mr. was modified read CCB-Knoxville. While be in order from that defense barred Butcher nor Turner were involved neither guar- enforcing his estop the FDIC from CCB-Knoxville, Butcher’s with Jacob Therefore, the dis- anty. brother, Butcher, part C.H. was owner reversed. trict court will be that bank. 1981, applied in Turner for a loan at Late I. At that time Ha- CCB-Knoxville. Steve 1980, third-party early In defendant Mil- bank, president him that good, of the told “Turner”) (hereinafter and ton A. Turner request loan be denied because would companies he controlled were makers on legal lending limit. Mr. he was over the promissory by *4 note, against the stem from the fenses but Ten- for the State of Institutions Financial such, al transaction. As these are actual eventually appoint- The FDIC was nessee. against original only the lowed as defenses purchase entered into a and ed as receiver wrongdoer. Once the note comes into the FDIC, transaction with the assumption and of holder in due course he takes it hands a capacity, and CCB-Knox- corporate in its personal from all such defenses and free result, acquired the the FDIC As a ville. 745; Armstrong, 784 F.2d at claims. including guaranty, Road notes and Lovell (1979). Tenn.Code Ann. 47-3-305 How § guaranty and his Novem- Turner’s altered ever, due course remains sus a holder in 24th letter. ber ceptible to all “real” defenses. Real de duress, II. infancy, incapacity, fenses include alterations, and fraud. some material real rule, and general a both federal As fraud is defined as: Real or essential acquires the FDIC a apply state law where induced assumption misrepresentation as has purchase in a and such bank’s assets Hutcheson, sign party v. to the instrument with transaction. See Gunter the (11th Cir.1982) (de oppor 862, knowledge nor reasonable F.2d 865-66 neither 674 assumption knowledge its scription purchase tunity and trans of charac to obtain action). state contra where law essential terms. ter its law, domi dicts federal the federal law 47-3-305(2)(c). ap- Ann. Tenn.Code FDIC, D’Oench, nates. Duhme and Co. v. guaran- is that the proach of the defense 686-87, 447, 473-74, 676, 315 U.S. 62 S.Ct. instrument is not signature on the tor’s (Jackson, J., (1942) concur 86 L.Ed. 956 expect sign he didn’t effective because Wood, (6th F.2d 156 ring); v. 758 FDIC place. in the first It an instrument such Cir.1985). defense is further noted that this should be assumption trans purchase Because signed with good against an instrument depositors more than other actions benefit negotiable, but without knowledge that it is after liquidating bank assets methods knowledge essential terms. Id. of its failures, has held that the bank this Circuit 47-3-305 comment 7. rights the same as a may acquire whether The central issue here becomes good it in faith in due course when holder opportunity to Turner had a reasonable assumption purchase obtains notes terms of knowledge of the essential obtain 161; Wood, at Gil transaction. required by 47-3-305. guaranty, as (6th FDIC, 660 F.2d 695 Cir. man v. factors deciding this issue all relevant 1981); Armstrong, 784 F.2d FDIC v. age, These include: are to be considered. Cir.1986). 745 education, rely on the party’s reason representations or to have confidence there is no judice,

In the case sub them, making apparent ne- party and the suggest the FDIC did not evidence to acting swiftly. cessity for Id. good notes in faith. In addi- receive the 274 good pays the instrument in faith and

Turner contends that the FDIC is enforcing commer- from be accordance with the reasonable barred payor’s as to its essential cause he was defrauded of the drawee’s or cial standards The FDIC contends that the fraud terms. business. fraud, legal at best fraud in here is not but Therefore, 47-3-406, under Turner will (“fraud inducement connected with the the defense of fraud not be able assert underlying transaction and not the nature negligently in the factum if he contributed signed,” Dic of the document Black’s Law guaranty. to the alteration of the (5th Ed.1979)). tionary 595 First, the Court will examine wheth just filling held It has been blanks execution him er Turner’s method of bars on an instrument is not fraud the factum applicable from defenses. signer opportunity had an because executing guaran Turner contends that knowledge of the instrument’s es obtain proximately ty in blank did not cause the Deposit sential terms. Federal Ins. Cor alteration. The District Court found that Culver, (D.C.

poration F.Supp. by leaving Turner facil a number blanks Kan.1986). However, that is not the situa itated the alteration because the falsifier present Appellant, case. in this tion replace the name had to white out and instance, of essential terms was unaware bank; just the other lines could be the instrument. Butcher induced Turn filled in. signing guaranty misrep on er into based disagree. If this were a case where We concerning principle resentations mak completed party an unauthorized a doc- er and the bank. This not mere *5 ument, negligence Turner’s him would bar ly incomplete guaranty being a case of an asserting against from these defenses fraudulently completed. Butcher erased holder in due course. Higgins, Holman v. original bank’s name and inserted the (1915). 134 Tenn. 183 S.W. 1008 How- name of another bank. Turner had no ever, this Court can find no facts in the opportunity to know that until it inadvert record which would lead us to believe Turn- ently came to his attention at a much later er the cause the fraud. Nor can was we time. any compel find case law that would us to Thus, conclude we that the District Court Compare find Turner liable. the altered correctly determined that Turner was de- case, guaranty, in this with what it would guaranty’s frauded as to the essential if in have been the blanks were filled may terms. He declare the defense of and the criminal character of the act is fraud in the factum under Ann. Tenn.Code apparent, Angle v. N. W. Mutual Ins. Life 47-3-305(2)(c)against the on FDIC based Co., 329, 337, (1875). 92 U.S. 23 L.Ed. 556 misrepresentations of Butcher as to the legal guaranty.1 essence of the Second, we must decide whether upon learning Turner’s behavior Next we must decide whether Turner’s negligence fraudulent scheme constituted method subsequent of execution and behav- under 47-3-406. The District Court negligence ior constituted which substan- in found the affirmative. This Court dis tially contributed to the alteration. Section agrees. 47-3-406 of the Tennessee Code reads: Any person by negligence upon discovery who sub- Turner took action letter, stantially contributes to a material alter- requested alteration. He wrote a as making by Hagood, asking ation of the instrument or the guaranty for the signature precluded an unauthorized be cancelled. The letter was followed asserting inquiry. Upon learning from the alteration or lack of another that the against authority a holder in guaranty allegedly destroyed, due course against payor or probing. appel- drawee other who ceased his acts of While Ordinarily, guaranty the maker of a note or is not contested here because the FDIC is not materially seeking guaranty origi- which has been altered is still liable to enforce the as it was original nally on the note under its terms. That issue written. may subsequently completed constituted lax business and the lant have bank’s negli- they did not amount to such practice, sought name was altered. The FDIC gence constitute a bar to declar- as would guaranty enforce the and the Dukas’s de- in ing defense of fraud the factum. by claiming assent, fended lack of mutual laxity in the conduct of business af- Mere inducement, fraud material altera- degree negligence is not the as fairs tion, consideration, estoppel. failure of 47-3-406, required in see East Gasden held Court the Dukas’s were Bank, City National Bank v. First asserting from barred the defenses be- (1973), Ala.App. 281 So.2d 431 unless cause of their reckless conduct. proximate conduct cause of lax significantly Morrison differs from the practice loss. Id. The lax business present case. In point- Morrison the Court the case at was not the cause of the bar ed out that the blanks filled in were con- repeated requests loss. Turner made guaranty’s sistent with the intended use— guaranty have the removed from his file at Further, campaign to secure debts. no one CCB-Knoxville, finally and was informed told defendants how the instrument orally had been de- completed, they would be nor did care. appellees stroyed. As much as would have They merely signed specific a form for a this Court that without Turner’s believe purpose purpose and that is the for which negligence the fraudulent scheme would Thus, it was used. to let the defendants prevented, have been we are not convinced. obligation avoid their would have been un- that, light This Court finds of Turner’s reasonable. conduct both at the time of execution and fraud, after he discovered the he is not hand, On the other judi- the case sub asserting from barred 47-3-406 valid ce, Turner’s was used for an en- defenses. tirely unforeseen design. and unrelated signed He upon urgence the document Finally, we must decide whether banker to secure his own debts. likely Turner’s behavior was to mislead Ultimately altered, part it was as of a banking authorities, stopping thus him scheme, fraudulent and used to secure the from feasible defenses. company of a debts which he had no D’Oench, FDIC, Duhme and Co. v. *6 Therefore, interest. the of rationale Mor- Supreme 315 U.S. 62 S.Ct. the inapplicable is rison here. pre- Court held that note makers would be Powers, F.Supp. In v. 576 1167 FDIC against cluded from defenses the (N.D.Ill.1983), any the court held that se completing if in FDIC the note the maker agreement comply cret did not which with lent himself to a fraudulent transaction 1823(e)2 12 U.S.C. was unenforceable likely banking which is to mislead authori- against the In as much as FDIC. Powers ties. Id. This Court has had occasion 1823(e) and 12 defenses U.S.C. bar based many times 1942 to since revisit the agreements, they on reflect Morrison, doctrine. In unwritten D’Oench FDIC v. protects (6th Cir.1987), defendants, policy sound which the FDIC. 816 F.2d 679 Nevertheless, George Dukas, they unfitting are the and Justine were to asked sign campaign present defending a for their case. Turner is not his son’s position any agreement. debt. Mr. and Mrs. Dukas exe- on thereafter based oral Nor parties cuted a blank. The form was is a case the tried to this where 1823(e) provides: persons claiming 2. 12 U.S.C. an interest adverse thereun- der, (e) including obligor, contemporaneously Agreements the against Corpora- interests of bank, (3) acquisition by tion. with the of the asset the agreement No which tends to diminish or defeat approved by shall have been the board of di- right, corporation the any title or interest of the rectors the bank or its loan committee which section, acquired by asset it under this ei- approval shall be reflected in the minutes of security by purchase, ther as for a loan or shall committee, (4) said board or and shall have against corporation be valid agreement the such unless been, continuously, from the time of its execu- (1) (2) writing, be in shall shall have tion, an official record of the bank. by person been executed the bank and the or 276 by not on

intentionally banking authorities noted this Court these cases are mislead agree signing thing agreeing point. executing and to anoth- We that an instru- one by deceptive 784 F.2d at leads to schemes. Armstrong, FDIC v. ment blank er. See However, simply agree no There is evidence available we do not that a case Turner and Butcher inten- and here that shows are filled essential terms where blanks banking tionally tried to mislead authori- is the same as a case are erased where Rather, defending posi- Turner ties. are Nor do completed. we feel that blanks on fraud. tion based we fur- Turner liable would be thering policies the laid down in D’Oench. Likewise, Hatmaker, v. FDIC encourage pur- In order to the FDIC (6th Cir.1985), not the issue does reach congress courts and have chase banks our present There maker was case. the However, privileges. then afforded certain induced, by promises, a bank officer’s oral holding party these do not include liable a sign blank note forms. The maker was responsible not a part who was a for using oral subsequently estopped from fraudulent scheme. as a promises a defense because it was agreement which not meet collateral did conclusion, agree with District we 1823(e). requirements of 12 U.S.C. § finding Turner was defrauded Court’s that Thus, agreement it was which would an But guaranty’s as to the terms. essential banking mislead authorities. finding hold the we District Court’s negligence substantially Turner’s contrib- upon is Another case the FDIC relies uted to the fraud and that Turner’s actions McClanahan, 795 F.2d 512 banking clearly misled authorities to be Cir.1986). Mr. McClanahan executed a Moreover, erroneous. we hold the District Thereafter, presi- note in blank. the bank finding that Court’s Turner’s behavior dent told loan would be McClanahan learning upon consti- fraudulent note president filled in declined. negligence er- clearly tuted additional kept money note himself. for roneous. decision of the District Court loan When defendant learned that the steps is reversed. refused he no retrieve his took Further, note. Mr. McClanahan was blank RYAN, Judge, dissenting. Circuit president a crimi- aware the bank had record nal and therefore should have been agree I that under Ann. Tenn.Code more careful. The court found Mr. McCla- 47-3-305(2)(c) may establish nahan “lent himself to scheme ... where- “real” defense of fraud the factum due authority banking misled.” ... was resulting to the alteration from the “whit- F.2d at 516-7. ing out” of American in Knox- Bank First, guaranty, ville as creditor on the and the Such is not the case here. to the City County Bank of substitution perpetrator extent that of the fraud *7 lines, County. I beyond filling in crimi- Knox differ with the went blank in its majority analysis acts are Turner’s entitle- nal not the fault of Turner. Sec- ond, upon learning fraud, the to defense defendant ment assert a under Tenn.Code Third, steps negate I guaranty. took to Ann. 47-3-406. Because conclude that § Turner, finding in judice, the case sub had no the district court’s that Turner’s negligence executing guaranty to did the in in reason distrust Butcher as Looking substantially in at the contributed to the alter- defendant McClanahan. blank case, in not totality, guaranty clearly facts of this this Court ation of was erro- neous, binding. I that does not find McClanahan would hold under Tenn.Code preclud- Ann. 47-3-406 Turner should be § Last, that the District Court concluded defense ed from of alteration. con the execution of instruments blank schemes, deceptive citing majority to Hat Turner nor the serious- tributes Neither maker, 34; Powers, F.Supp. ly 756 contend Turner’s execution of the F.2d 576 that Limited, The 1167; guaranty negligent. not v. Associates X blank was Cir.1985). is not previously majority’s F.2d 152 As 47-3-406 775

277 applicable is on its observation that it Aman, based 1476, Brownlow v. “can find no facts in the record which (10th Cir.1984). The loss this case lead would believe that Turner, [it] upon should fall whose execution the cause of the fraud.” (Emphasis add- substantially con- blank ed.) alteration, tributed to and facilitated its majority inappropriately takes an FDIC, upon rather than which has a requirement narrow view the causation status akin to a holder in due course. of 47-3-406. Section 47-3-406 is entitled I would affirm the of the dis- “Negligence contributing to alteration or trict court.1 signature” (emphasis added), unauthorized plainly provides and it applies it

“[a]ny person sub- negligence who

stantially contributes to a material altera- added). (emphasis

tion” Comment 47-3-406 states that the section is intend- ed to follow the doctrine that “a drawer America, UNITED STATES negligently who so draws an instrument as Plaintiff-Appellee, its material alteration is liable facilitate to a pays drawee who the altered instru- added). good (emphasis ment in faith” (87-1011/2135) Edwin John HAGEN The district court held: John Varellas William If Mr. Turner had sure that the made (87-1012/2134), Defendants-Appellants. completed properly, 87-1011, 87-1012, Nos. 87-2134 forger’s job would have been much more and 87-2135. difficult. Not would he have to bank, alter the name of the but he would Appeals, United States Court of also have to alter identity Sixth Circuit. possibly debtor and the amount of the 15, Argued Dec. 1988. guaranty. By executing continuing Decided Feb. 1989. blank, guaranty in Mr. Turner made the easier____ forger’s job much This con- Rehearing in No. 87-2134 proximate duct was a guar- cause of the April Denied anty being misused. Rehearing Denied in No. 87-2134 In light of the broad language of causation 4, 1989. April 47-3-406, this finding by the district Rehearing Denied in 87-1011, Nos. court is not clearly erroneous. May 5, 1989. 87-2135 hold might appear harsh to Although it fraudulently altered on the

Turner liable

guaranty, one of equitable maxim that where [t]he persons must suffer rea- innocent

two person, third of the fraud of a

son act, omission, negligence

party whose person third to consummate

enabled the loss, is a fun- should bear the

the fraud theory upon

damental which the Uniform

Commercial Code rests. majority’s 1. I also differ with the with (6th Cir.1987) curiam); (per Deposit Federal regard estoppel to the D’Oench doctrine. Based X., Ltd., Corp. Insurance v. Investors Associates progeny, on D’Oench and Turner’s execution of Cir.1985). 775 F.2d 152 in blank lent himself to a transac- only precludes D’Oench doctrine assertion of likely misleading banking tion authorities— defenses; therefore, "personal” because Turner’s majority acknowledges indeed the that such an defense, defense is a “real” the D’Oench doctrine deceptive act "leads to schemes.” See Federal preclude would not its assertion. Deposit Morrison, Corp. Insurance notes number of held Hagood informed that further Turner (herein- American Bank Knoxville continuing guaran- held CCB-Knoxville “UAB-Knoxville”). H. Butch- after Jacob Properties. Turner ex- ty for Lovell Road “Butcher”) (hereinafter presi- er was ignorance guaranty of the and pressed dent and chief executive officer of UAB- Hagood not told Mr. he was involved with Knoxville. On or about June Hagood Road. Turner Lovell Mr. assured him Butcher Turner to inform contacted he “look into” the matter. would being that UAB-Knoxville was audited. Hagood Subsequently, Mr. told Turner continuing He asked Turner to execute a error had and he could an occurred place guaranty to in the loan files for one guaranty from if remove the the files Turner Turner of the controlled entities. requesting Turner wrote a letter removal. agreed airport. at a to meet Butcher local 24, 1981, signed November and On Turner airport, gave at Turn- While Butcher following Hagood. letter mailed the to Mr. “continuing guaranty” er a form. Regarding: Properties Road Lovell blanks, guaranty left one for the name two Dear Steve: for the of the debtor and one amount longer Please be that we are no advised signed guaranty. Turner the form and re- captioned matter. involved the above filling it turned without the blanks. understanding personal It is our that our guaranty complet- Consequently, was guaranty matter is and this cancelled person. Lo- ed an The name unknown ap- of no further force effect. We Partnership Properties Road vell Limited preciate your to this detail. attention Road") (hereinafter as “Lovell named Sincerely, in at the debtor. The amount was filled M.A. Turner $2,141,270.91. Last, the Bank name United Knoxville, printed (Letter Hagood, on the from M.A. Turner which Steve form, fluid, 24, 1981). was obliterated with correction Nov. tion, the fact that Turner’s letter and the thereafter, Mr. Ha- Turner asked Shortly guaranty. He were in the bank files altered the status good about any it be to him on notice of that either returned does not render requested page. Morrison, Mr. torn off the signature possible be defense. FDIC v. or his that the (6th Cir.1987). Meanwhile, Turner Hagood assured Turn- F.2d 679 and de- from the files removed had been actual er has not shown that the FDIC had addition, Hagood Mr. informed stroyed. purchase any notice of defenses before request his loan could now be Turner assumption transpired. transaction Hagood sent letters to also approved. Therefore, agree the District we with Road involved with Lovell the other banks Court, and hold that the FDIC stands was re- telling them that CCB-Knoxville in due course. shoes of a holder guaranty. from the leasing defenses, such as fail “Personal” 27, 1983, CCB-Knoxville was May On consideration, actually ure of are not de insolvent the Commissioner declared