Federal Deposit Insurance Corporation v. The Aetna Casualty & Surety Company v. Jacob F. Butcher Jesse A. Barr and Lionel B. Wilde, Third-Party, 947 F.2d 196

Federal Deposit Insurance Corporation v. The Aetna Casualty & Surety Company v. Jacob F. Butcher Jesse A. Barr and Lionel B. Wilde, Third-Party

947 F.2d 196

3rd Cir.

1992

Check Treatment

*3 NELSON, Before GUY and Circuit Judges, CELEBREZZE, and Senior Circuit Judge. GUY, Jr.,

RALPH Judge. B. Circuit Defendant Aetna Casualty Surety & (Aetna) Company appeals jury from a ver- $5,950,000 awarding dict to the Federal De- posit Corporation (FDIC). Insurance Aet- na had refused payment to make on a bankers blanket bond issued to the failed (UAB) Knoxville, United American Bank Tennessee. The FDIC was the receiver for UAB coverage and claimed entitlement to payment and under the bond. (1) appeal, On Aetna district court erred when it held that 12 U.S.C. barred misrepre- Aetna’s § defenses, (2) sentation agency and adverse the district court erred when it barred Aet- defense, (3) ego na’s alter Aetna’s motion judgment notwithstanding the verdict granted should have been because of the overwhelming presented evidence Aetna (4) support its the district court gave ambiguous jury instruction which review, prejudicial. Upon was we find that improperly interpreted the district court 1823(e), U.S.C. as it relates to Aetna’s § misrepresentation agency and adverse claims, apply and failed to Tennessee law ego Aetna’s alter defense. We reverse Buckner, Meredith, R. James Marcia J. and remand on these issues. Jr., Raymond Martin, Murphy, R. Miller & Johnson, Douglas Tenn., T. Chattanooga, I. (briefed),

John P. Parker Richard J. Oster- man, Jr., Deposit Corp., Federal Ins. Rob- operated UAB was and controlled ert D. McGillicuddy(argued), Wash- brother, Jake F. Butcher and his C.H. ington, D.C., for FDIC. Butcher, Jr. Jake Butcher was the Presi- Akers, Luther, dent,

Samuel L. Directors, William B. Chairman of the Board of Luther, Usary, Anderson, Shane Cleary, largest and the shareholder of UAB. Un- 24, 1985, control, engaged in unsafe On December the FDIC in its UAB his der practices corporate capacity that even- filed suit lending improper seeking recovery under insolvency. Specifi- the bankers blan- tually led to the bank’s ket Aetna asserted misrepre- bond. several defens- concealed and cally, Butcher Jake argued es. Aetna that because made UAB that were for his or numerous loans sented misrepresentations applica- material in its benefit, forged loan family’s personal his tion, the bond was therefore void as a documents, the exist- misrepresented matter of Tennessee law. district loans. of collateral for these ence and value court ruled that U.S.C. barred banking commissioner as- Tennessee’s this defense. February control of UAB sumed argued Aetna also that an insurance con- appointed was then *4 tract never had been formed. knew of CCI purchase into a and receiver and entered misrepresentations UAB’s failed to in- but the terms assumption agreement. Under Thus, form Aetna. CCI acted as an ad- agreement, the First Tennessee of this agent verse to Aetna and the contract was and certain as- Bank assumed all liabilities nullity. The district court ruled that 12 Assets from the FDIC as a receiver. sets U.S.C. barred this defense as well Tennessee, not assumed First that were depended upon an because the defense as- including claims under the bankers UAB’s obligation serted oral condition to Aetna’s bond, transferred to the blanket were pay to under the bond. capacity. corporate in its FDIC Finally, argued that Butchers Aetna dissolved, purchased a it UAB Before authority dominant exercised such over 15, bond, effective March bankers blanket they ego., were UAB’s alter Be- UAB $6,000,000 1981, limit on from Aetna with cause the bankers blanket bond insured $50,000 Bankers liability and a deductible. only against UAB dishonest acts of its em- bonds, state banks are re- blanket which ployees, ego alter the Butchers were the law, quired under Tennessee UAB, required then Aetna would not be provide coverage for generally insurance pay insurance benefits to cover losses as resulting employee dishonesty, losses from a result of the Butchers’ actions. The dis- appli- as theft or fraud. UAB filed an such well, this defense as trict court struck provided supporting docu- cation and other prior based on case law. coverage. in mentation order to obtain On jury to a and the The case was submitted application, required to fur- UAB was $5,950,000 plus jury rendered a verdict of nish information that would enable Aetna judg- filed a motion for a interest.1 Aetna coverage. Among to evaluate the risks of or, notwithstanding in ment the verdict things, application asked whether other alternative, The district for a new trial. investigation by was under UAB court denied the motion. in regard either state or federal authorities appealed. Aetna Although banking practices. its UAB investiga- that it was not under indicated

tion, alleges that this information is II. sup- provides

untrue and some evidence to Circuit, FDIC, in The Tenth Grubb v. alleges port allegation. this Aetna also Cir.1989), concisely outlined misrepre- that the bank made several other handling in the failure the role of the FDIC in sentations for the bond. of a bank as follows: of a through City the FDIC serves as receiver purchased UAB the bond When (CCI). bank, may pay bank’s County acted as failed it off the and Insurance CCI first is depositors by two The agent Aetna’s in the transaction. CCI was methods. Butcher, liquidate assets and simply to the bank’s owned and controlled C.H. Jr. that the FDIC has million. 1. Aetna states in its brief agreed dispute $2.5 to limit the amount flurry defenses amounts, response to the In their insured depositors

pay the purchase and against the FDIC asserted with insurance any shortfall covering transactions, Supreme op- assumption this tries to avoid The funds. Co., D’Oench, Inc. v. & Duhme pub- Court however, it decreases tion, because 86 L.Ed. U.S. S.Ct. banking system in the lic confidence “a federal (1942), that there was held uninsured depositors may deprive [FDIC], respondent protect policy funds. portions of their administers, funds which public alternative second, preferred, as to the securi- misrepresentations assump- “purchase and is to initiate portfolios in the ties or other assets A). type (P & tion” transaction insures or to respondent which banks receiver ar- transaction, FDIC as at it makes loans.” Id. which assets of the acceptable ranges to sell had petitioner D’Oench at 679. insured, financially to an failed bank that, he made the note argued at the time all of the bank, assumes sound that it promised the bank with the and re- deposit liabilities corresponding the note. The Court not enforce would an inter- without opens failed bank agreement” could not this “secret held that deposi- or loss to ruption operations defense, *5 id. at 62 S.Ct. as be used sells to as receiver then tors. The FDIC 680, deceive the “it would to tend because capacity the corporate in its the FDIC FDIC, v. banking Langley authorities.” assuming declined the bank assets that 401, 92, 396, 86, 98 484 U.S. entity the corporate of accept. The (1987). 340 L.Ed.2d the attempts to on in collect FDIC turn loss to minimize the unacceptable assets subsequently was The doctrine D’Oench fund. the insurance by Congress in 12 U.S.C. codified 1823(e),3 provides: which § omitted).2 (citations Id. at 1154-55 by a suit the FDIC present case involves agreement tends to diminish which No after it to initi- corporate capacity chose Corporation its the or the interest of defeat assumption transaction. by ate a and it under any acquired asset [FDIC] title, 1821 of this this section or section observed FDIC As the Third Circuit security by pur- a loan or for either Center, Inc., 766 Shopping Blue Rock any insured de- as receiver of chase or (3d Cir.1985), unexpectedly, F.2d 744 “[n]ot institution, against be valid pository shall on such assets attempts to realize FDIC’s unless such Corporation the [FDIC] by the obli- have been defenses which met agreement— the failed gor against has on the note (1) writing, is in bank.” Id. at thereunder, including following the ob- dis- adverse interest additional 2. One court the noted contemporaneously acquisition advantages liquidation: ligor, of the failed with the "[M]ost jobs, are employees bank, (3) their by bank’s lose accounts shall have been the asset the of unpaid the returned frozen and checks are by approved of directors of the the board Co. National Union Fire Ins. drawer." committee, approval of which bank or its loan 1149, (W.D.La. Pa., Pittsburgh, F.Supp. 1153 in the of said board be reflected minutes shall 1986). been, committee, (4) and have contin- or shall execution, uously, time its an from the of 9, August was amended effective 3. The statute record of the bank. official Reform, Recovery, Institutions 1989. Financial comparison reveals the fol- A of both statutes 1989, Pub.L. No. 101— Act of and Enforcement changes: explicit application lowing of the the (1989). previously It read Stat. receiver, capacity in its as a to the FDIC statute as follows: form, change paragraph to clause the from agreement or tends to diminish No which phrase Additionally, change the Corpo- in tenses. right, of the defeat the title or interest changed by "right, to “inter- any acquired under this title or interest” was ration in asset section, by security party a loan or law. either as under the new Neither est" Corpora- amendments, purchase, be valid shall became effective these that which (1) agreement be in such shall any tion writing, litigation unless bear- during have of (2) by been shall have executed ing the outcome. claiming person persons an bank and or meetings. depository loan committee The bank that (2) by the was executed subsequently issued the loan failed and the claiming an any person institution and corporate capacity, in its substituted thereunder, including interest adverse for the in the suit. The itself bank Su- contemporaneously obligor, preme framed the issue it as Court before by the de- of the asset acquisition 1823(e) that whether bars defense institution, “§ pository procured by the note was fraud (3) approved the board was inducement even when the fraud did not institution depository directors of express promise.” take the form of an committee, approval its or loan Supreme 108 S.Ct. at 400. The U.S. minutes of reflected shall be ultimately held that condition to Court “[a] committee, and said board note, including payment of a the truth (4) been, continuously, from has express warranty, part ‘agree- is of the execution, an official record time of its writing, approval, ment’ to which the depository institution. requirements filing U.S.C. § argues that 12 U.S.C. representations attach. Because the al- misrepresentation defense. does not bar leged petitioners constitute such a condi- however, court, that the held The district requirements tion and did not meet the did not meet the application for the bond statute, they cannot be asserted as 1823(e). It held requirements of section defenses_” Id. at 108 S.Ct. at 404. 1823(e)’s require- satisfy that section conclusion, reaching its Before Su- exception, the board had to ments for an preme history poli- Court discussed ap- misrepresentations on the approve the prompting cies the enactment of section is, specifically; the board plication 1823(e). Supreme Court noted agreement have been aware that the must *6 primary purposes the of section one of misrepresentations contained fraudulent 1823(e)is “to allow federal and state bank have by the and the board must made bank in rely examiners to on a bank’s records misrepresenta- effectively endorsed those evaluating the worth of the bank’s assets. disagree. The in its minutes. We tions necessary a evaluations are when Such part Supreme in on the district court relied by is examined for fiscal soundness bank in 484 Langley decision Court’s when or federal authorities ... and state 396, 86, 98 L.Ed.2d 340 U.S. deciding liquidate to a the FDIC is whether (1987). both Because the district court and provide financing for failed bank ... or to extent, rely Langley, parties, to some by purchase of its assets ... another starting discuss it and use it as a we will bank_” 91, (cita- 401 Id. at 108 S.Ct. at point analysis for our of the facts before omitted). continued: “The The Court tions us. evaluation, must particular, last kind of great speed, usually over made ‘with be petitioners pur- had Langley, In the preserve going the con night, order to property, which was financed chased some avoid an value of the failed bank and cern savings In through a loan from a bank. ” banking interruption in services.’ Id. loan, Langleys exe- consideration of the the Hutcheson, 674 (quoting Gunter note, mortgage, and a a collateral cuted denied, 862, (11th Cir.), 459 U.S. cert. guarantees. Langleys personal (1982)). S.Ct. 74 L.Ed.2d stopped paying on the loan and the bank by Langley policy articulated Langleys alleged that the filed suit. The by articulated echoes the concern Court procured land and the notes were nearly fifty years earlier. Court D’Oench misrepresentations regarding the through agree Essentially, if secret oral or side acreage and the type and of the land total and the maker of ments between a bank land. of mineral leases on the existence enforced, the function of were note representations ap- No references to these significantly undermined. FDIC would be executed peared in the documents contrac- records, or unwritten in the min- None of the secret Langleys, the bank’s or present both the D’Oench or tual conditions the bank’s board of directors utes of 1823(e) present in the facts ated in section and concluded that are Langley cases appli- “requirements written these ensure mature consid- on UAB’s us. Based before documentation, supporting eration of unusual loan transactions and other cation officials, prevent blanket bond. fraudu- Aetna issued UAB bankers senior bank Indeed, terms, application was contained lent insertion of new the collu- arguing ap- If Aetna were employees, bank’s records. sion of bank when a bank that, stated that although the bond pears headed for failure.” Id. 484 U.S. at $5,000,- dishonesty employee was limit for Supreme at 401. The Court S.Ct. limit, agreed orally was that, the real noted under the circumstances before $1,000,000, then by the was it, “[njeither purpose adequately be [could] gave equitable to the the concerns that rise agreement fulfilled if an element of a loan and the sub- estoppel doctrine of D’Oench upon fundamental as a condition so sequent of section would enactment obligation repay is excluded from the ” making Aetna is not triggered. But be meaning ‘agreement.’ In the cur- argument. such an colluding with offi- rent Aetna is not attempt in an cers of the failed bank assuming that an insurance Additionally, rewrite the terms of the contract. Addi- policy meaning is an asset within tionally, alleged misrepresentations statute, a Aetna contested at the conclusion bank made bond level, policy, an insurance due district court sufficiency are no reflection of the or ade- nature, type to its conditional is not the quacy of the consideration the bank’s di- easily itself to an “over- asset that lends gave rectors to the bond’s terms. night” or instantaneous assessment. Gen- provisions erally, policies insurance contain Supreme point Another Court specifying the conditions under which in Langley type focused on was the or obligated pay those insurer is under being nature of the defense asserted. obligated pay. is not which the insurer Supreme Langley, Court stated that promissory nego- note or other Unlike apply to a con section would instrument, certainty, tiable there is no tract that was void but would to a contract reviewing potential policy defenses without 93-94, merely that was voidable. Id. at limitations, proceeds whether insurance at 402-403. This is because a S.Ct. paid. will be It would thus be difficult to *7 qualifies voidable title as a title or interest instantaneously likely pro- ascertain 1823(e).4 meaning of section within ceeds, any, to which the would be FDIC Thus, of an as the characterization “asset” entitled. significant either void or voidable has rami Also, Supreme following excerpt in re- fications. The of the Re Langley, Court (Second) requirements some of the enumer- statement of Contracts describes a viewed 1151, (10th Cir.1989); generally Taylor held that Trust Circuit courts have assets 1158-59 v. void, voidable, Ass’n, Inc., opposed Security 337, to are L F.2d that are subject as not Trust Fed. S & 844 1823(e). (6th 1988) ("The requirements to the of section 342-43 Cir. Trust also Rivera, Inc., 824, is, stated, simply See FDICv. Bracero & 895 F.2d claims that the Trust not (1st Cir.1990) ("[S]ection 1823(e) by pledge agreements Taylor would not 830 bound because note, authority pledge entitle FDIC to recover on the because the had no the trust account to discharged by payment party. note was and cancel- secure the indebtedness of a third This underlying before FDIC ever defense a to the of a lation of debt is real defense formation initio, by obtained it. Since the note was invalidated contract and renders the contract void ab alleged merely independent acts that were secret rather than voidable. A real defense agreement, agreements protected the note was not an asset would take the doctrine....’’); out of the D'Oench 1823(e).”); by section Commerce Fed. Sav. Bank FDIC v. Merchants Nat’l Bank of 634, FDIC, 1240, (6th Cir.1989); Mobile, (11th Cir.) ("Section v. 872 F.2d 1244-45 725 F.2d 639 Turner, 270, apply every inquiry v. F.2d Cir. not concern FDIC 869 273-74 does 1989) ing parties (finding that the FDIC was a holder in an asset.... In such cases the con and, such, subject due course of a note as it was tend that no asset exists or an asset is invalid defenses, by invalidity to real which included real fraud and that such is caused acts inde factum; understanding agreement.”), holding pendent any or side or fraud in the FDIC was 829, 114, denied, enforcing guaranty U.S. 105 S.Ct. barred from as a result of t. 469 cer (1984). factum); in the Grubb v. 868 F.2d 83 L.Ed.2d 57 fraud

203 misrepresentation as to instrument with whom the holder has not “If a contract: void pro- (c) except misrepresentation terms of a dealt ... such or essential the character ap- party sign conduct that as has induced the posed contract induces the instru- by knowledge a manifestation of assent ment neither pears to be nor reason- neither knows nor has reasonable opportunity knowledge one who able to obtain of its ” the character or opportunity to know of character or its essential terms.... contract, proposed 3-305(2). Hence, terms of the essential U.C.C. while fraud in as a manifesta- conduct is not effective his may the inducement a serve as defense (Second) of tion of assent.” Restatement course, against a holder due fraud in the (1979). simply, no 163 Put Contracts § factum can. circum- contract is formed under these or, availability accurately, more the contract stances because the terms of non-availability of certain defenses by par- one of the were never assented to particularly a holder in due course becomes commonly called ties. This situation is important one when considers that our cir or fraud in the es- fraud the factum cuit and others have held that the is FDIC or, stated, Supreme as Court sence— acquired a holder in due course of *8 “[ujsually power is the to avoid confined incorporated the federal rule should be contract_” party Addi- one to the Id. factors are of decision. The determinative tionally, power may the avoidance be of nationally for a uni whether there is need party if the who was induced forfeited law, body application whether of form agreement fraud to enter into the unrea- specific objec state law would frustrate sonably delays avoiding the contract. Fi- program, the federal and whether tives of nally, may ratified. voidable contract be disrupt a federal rule would relationships predicated on

Although the distinctions between commercial Wood, F.2d at 159. Al exist across all state law.” void and voidable contracts contexts, though the Kimbell Foods Court concluded contractual the difference be it that it was unneces a void contract and one which is on the facts before tween rule, concluded significant sary adopt a federal we particularly voidable is with re that, “if law mandates that gard negotiable A holder in state instruments. Wood in cannot be a holder negotiable corporate in due course holds a instrument the FDIC course, application of state law any party due free from “all defenses of to the the[] from makers with objectives of the FDIC could not collect important frustrate would personal defenses would make the transac- Id. program.” federal Id. And expensive.” tion that much more following. on the We based our effects finally, we assessed the deleterious First, unjustified “an receive makers would granting the relationships of on commercial Id. at 160. held otherwise. windfall” in “A ne- FDIC holder due course status. against personal claim maker has a “If the subject to transfer gotiable instrument is effectively he would defunct time, always any at and the maker must be priority on that claim.... have absolute may that the transferee a holder aware be against the defunct maker with a claim [A] view, in course. From the maker's due in line with the have to stand bank should bank there is no difference his between proceeding creditors other unsecured going corporate to the failing and the note capacity in as a receiv- against the FDIC selling failing and his bank after Second, hold- er.” Id. affording the FDIC Id. note to a holder in due course.”5 in status would facilitate er due course Lang- backdrop It is this that the assumption use of a FDIC’s factum, ley Court noted that fraud in the transaction, vastly preferable to a which is hold- citing the Uniform Commercial Code’s liquidation is more effective at and which provision, er in due course “would take the promoting fostering FDIC’s mission of 1823(e), it instrument out of because public’s stability and the confidence entirely would void_” render instrument Because, pur- banking system. Langley, 484 U.S. at assumption speed transactions is chase and however, opined, at 402. The S.Ct. Court essence, is forced to the FDIC “[i]f alleged misrepresentations the bank’s examine the bank’s files to determine acreage about or mineral interests “would light of the defenses to inducement, value of its notes constitute fraud in the them, place.” the transaction will not take the note voidable which renders but Id. Additionally, at 161. amount void.” 108 S.Ct. at “[t]he grant- gives purchaser should be holder in due course sta- 5. The conclusion that is, fact, way large ed the of a holder in due course has met status tus for these banks with some criticism. One commentator asserts paper create a form of commercial from bank that the extension of the holder in due course Only loans. the best loans are sold because permissible the FDIC "exceed[s] doctrine to purchaser takes them without recourse fixed in boundaries of the D'Oench doctrine selling assurance that bank wants 1823(e).” Gray, on the section Limitations good being purchased. assets are Common- FDIC’s D’Oench Doctrine Federal fact, fairly public can be sure that Estoppel: Congressional Preemption & Au- Law may borrowing fail, type from the of bank that Construction, Statutory thoritative 31 S.Tex. certainty a virtual that its note will is (1990). Specifically, rule L.Rev. simply not be sold. Since individuals “key provision[s] state commer- vitiates of ... do not have to be aware of holder in due 282, i.e., statute[s],” cial id. at "that one under its law, impact course since it cannot them. protection be a of the instrument and holder that, practice, know as a matter of Businesses only part that the instrument not be of a bulk trans- sale, paper commercial intended for (footnotes omitted). action.” Id. at 280 loans, in due not bank will result holder questions conclu- Another commentator our course status. extending sion that holder in due course status Therefore, treating the FDIC as a holder in expectations to the FDIC will not disturb the disruption due course creates an enormous commercial transactions. relationships predi- commercial established not, rule, do as a sell banks [C]ommercial away legal rights cated on state law. It takes notes and leave their customers to face hold- protected prior the borrower to transfer course. The holder in due course ers in due *9 It factor which led the to the FDIC. is this developed status was to allow for market Court in Kimbell to hold that Foodfs] "[b]e- Thus, paper. or transfer of commercial four altering consequences cause the ultimate of largest country five of the banks in the have practices to settled commercial are so difficult packaging been commercial loans for sale in foresee, uncertain- we hesitate to create new However, past years. the notify few the banks first ties, legislative delib- in the absence of careful the to sell the customers of intention Also, eration.” the notes. the fact that the note will be Note, D'Oench, Duhme and Borrower Beware: clearly sold is over, disclosed on its face. More- Overprotect Insurer When Section 1823 the all of these borrowers have benefit (1988) Fail, legal during Banks 62 S.Cal.L.Rev. 304-305 counsel The transaction. omitted). packaging reselling (emphasis original; which footnotes of these loans in the area of insurance bonds. As negotiable trine law of with the Consistent and, specifically, states, correctly more defendant an insur- instruments of the provision in due course holder promise “is a conditional to ance contract U.C.C., held that Court Langley “[t]he pay money an sum of that is uncertain transfer to and could therefore had bank payable only upon the occurrence of an title, enough is to which FDIC voidable (i.e., loss) only to uncertain condition in the note.... ‘title interest’ constitute or contrast, “negotiable In the insured.” ‘interest’ un- not an If title were voidable instrument, note, writing such as a is a subject 1823(e), be the FDIC would der § maker, signed by containing an uncon- fraud defenses but only to undisclosed not promise pay to a sum certain in ditional range of other undisclosed to a wide also time, money, on demand or at a definite to voidable, make a contract that defenses Wood, or to 758 F.2d at order bearer.” and inno- kinds of mistakes such as certain extrapolated to the context of 160. When misrepresentations.”6 material cent but bonds, logic Langley insurance at 402. Indeed, decision unravels. such an exten- us, asserting Aetna is In case before holding Langley sion of the Court’s seems defense, rather inducement a fraud in the unintended. The U.C.C. sections cited for Thus, fraud in the factum defense.7 than a Court, 3- support by Langley sections negotiable contract were a if the insurance 201(1) 3-305(2)(c), applicable only are not, instrument, the FDIC as a which it is negotiable instruments. U.C.C. 3- See § collect on the in due course8 could holder 102(l)(e) instrument, (defining the term bond, protestations that despite Aetna’s 3-201(1) is used in sections and 3- misrepresentations were made fraudulent instrument). 305(2)(c), Thus, negotiable holding by Langley UAB. The Court’s negotiable the transfer of a voidable while is an “interest” for that voidable title is, transactions, instrument for commercial 1823(e) logical is both purposes of section interest that would indis- the transfer of an accepted principles and consistent fall within the ambit of section however, putably is, There no commercial law.' 1823(e),9 assumption the transfer or in due course doe- equivalent to the holder pro- pre- [Extending Langley applied federal holder in due course Court 6. We note that non-negotiable 1823(e), instruments would tection to version of section 1989 amendments changing the FDIC bestow a benefit on phrase "title or interest.” which contained the actually enhancing their value. assets’ amendments, the current in the context of nature — negotiable is in the When the note ... party inconsequential. are Neither course, in due the maker is hands of a holder otherwise. defenses, thus, the instrument’s left with few Non-negotiable instru- is enhanced. value made, however, argument can be 7. An however, ments, obligations, are contractual voidable. void ab initio rather than bond was enjoy pro- in due course which do not holder Co., Hartley Accident & Indent. See Hartford rate makers of variable interest tections. (5th Cir.1968) curiam) (per 389 F.2d obligation sign only a contractual notes repay (under applica applicable fraud in the state law debt; they expectation their had no rendered bond for a bankers blanket bond tion doctrine would in due course holder [the] Loan, initio); & Inc. v. ab Phoenix Sav. void strip of their defenses. them Co., (4th Cas. & Sur. ATI F.2d F.2d at 356. Cir.1970). holding is that section are not 9.We negotiable In applicable instruments. fact, misrep- the FDIC contends that Aetna’s fact, implicit- either circuit and others have our is barred the holder in resentation defense unknowingly rejected dis- ly, explicitly, pro- The FDIC does not due course doctrine. Turner, F.2d 270 tinction. FDIC suggests doctrine law that that this vide case Cir.1989) analysis guar- (applying negotiable imported from the law of should be instrument, anty, non-negotiable but ultimate- Because to the current contexts. instruments guaranty ly void for fraud that the is doctrine, we will find no need to extend this Inti, Inc., factum); 834 F.2d FDIC v. P.L.M. the 248, point. adopt position the FDIC’s on this Cir.1987) (the speed (1st "necessity for appeals majority courts of support conclusion in led the We find further for our has reject *10 Sav., treating negotiable and nonne- Sunbelt FSB the idea a recent Fifth Circuit differently”); Montross, FDIC v. reh’g gotiable en banc instruments 923 F.2d Dallas Gulf Cir.1984). Co., (5th Cir.1991): 737 F.2d 1513 Ins. granted, 932 F.2d 363 Life one, here, subject enforce is such as leases ordinarily is not bond insurance manifests bilateral obli- law, facially which of commercial the doctrines serves as the basis of the gations and not be.10 should situations, In defense. these lessee’s the lessee should be held results do not believe logical outcome A more automatically simply because the liable by the course outlined Sev we follow party a belated to the has become FDIC v. Continental Howell enth Circuit transaction. (7th Cir.1981).11 Corp., F.2d 743 Credit Howell, rents sued to recover the FDIC held equipment leases due on some This is not a case such as D’Oench ... Howell, lessee, stopped had The

bank. progeny where the makers’ de- and its making payments on the leases because depended solely upon a secret or fense its contractual oral, had failed to meet usually bank agreement, unrecorded equipment acquire title to the obligation to no- the FDIC could have had no The Howell court dis leasing. appellant posits here that was tice. The defense applying directly explicitly cases section from the tinguished arises 1823(e): provisions of the leases which were files and which the now the bank’s FDIC cases ... the FDIC was In all of th[o]se seeks to enforce. seeking facially enforce a valid note (emphasis original). 746-47 guarantee imposing a unilateral obli- gation pay the maker to a sum certain Admittedly, the bankers blanket because makers’ amount bank.... Aetna issued to UAB does not contain bond [T]he entirely upon sep- providing coverage specific provision defenses were founded agreements.... misrepresen- in the event of a arate and undisclosed is withdrawn the Howell ratio- holdings inapplicable application, ... on the [Tjhese are tation perfectly analogous.12 But the seeks to nale is not where the document approval applicability to non- 11. The Fifth Circuit cited Howell with of section unbridled, McClanahan, (5 go negotiable instruments should not th in FDIC v. Cir.1986). with the This limitation is consistent however. realm of contours of commercial law. In the continuum, law, from commercial agreements there is O'Neil, (7th Cir.1987), 809 F.2d 350 In FDIC negotiable instru- which differ from Circuit reflected on its decision in the Seventh those, only respects, minor such as ments in ordinary O’Neil’sdiscussion of Howell can be Howell. contracts, entirely satisfy which fail limiting construed as Howell's to allow negotiable requirements instruments. only those defenses on the face of the asset. noted, example, Summers "[a] White and however, Significantly, the asset at issue in party may claim he is a holder in due course of promissory was a note. The O’Neilcourt O’Neil hybrid instrument which lies somewhere observed: negotiable the borderland between instruments contracts_” ordinary quarrel J. White & R. and Summers, re- [the Howell] It is hard to Commercial Code 555 only explicit about the sult. Not was the lease Uniform However, noted, (1980). they should obligation; "[c]ourts it a lease lessor’s not was negotiability willing how, even less to find in cases (and be involving promissory rather than a note hybrid paper paper which interest, but merely by buying the lessor's could other, recog- bears all the characteristics of well duties?); become a lessor without the FDIC legal forms such as a contract or other nized agreement was no side but there [also] merely executory instrument.” Id. at 556. The conditions that Mrs. Howell Howell. The fails even to resemble a ne- insurance contract sought to enforce the FDIC’s asset and, thus, gotiable should not be instrument lease) (i.e., appeared in the asset itself purposes treated as such for the of section agreement merely referred rather than in 1823(e). may doubt sec- to in the asset. One whether any application would tion had additionally note that the conditions of 10.We —that arguing ignore the be like that the FDIC could any Langley the note in were not referred to in bought promissory in a note it had due date Langley, written documents. 484 U.S. at contrast, and call the loan imme- from a troubled S.Ct. at 400. In interpre- diately. fact that there was an accompanying supporting bond not defeat Mrs. misrepresentations tive issue in Howell could contain materials —all claim; obligation does not Howell’s a written which are written documents.

207 further, bond, only unlike Carried a little that the blanket remains ments]. fact note, obli- transformation would affect all contracts involves bilateral promissory a property. the title to Al- of the defense of and even real strip To gations.13 chemy province Congress.... is the of a defense rec- misrepresentation, material law,14would ef- ognized under Tennessee Savings, 923 F.2d at 357. Sunbelt of the benefit of its fectively deny Aetna 1823(e) survey note that a We of section 1823(e)was bargain. To hold that section majority case law reveals that the vast a engraft have to applicable, we would cases involve notes or other commercial insur- in due course doctrine onto holder paper. only Our research reveals cir- one result, the Fifth Circuit law. As a as ance interpreting cuit decision section Sav., analogous stated an Sunbelt applied to an insurance contract. In FDIC Montross, F.2d Dallas v. 923 FSB Co., Insurance 737 F.2d 1513 Gulf Life 932 F.2d 363 reh’g granted, en banc (11th Cir.1984), sued Life to Gulf Cir.1991), “giving the FDIC we would be premiums paid by recover insurance certain gold.” ability to transmute lead into borrowers to insure installment loans. The 923 primary beneficiary bank was named as the attested, “the fact As the Howell court policies. on the The bank collected the the leases go the court must outside premiums from the debtors then strength test the and va- passed percent [or contracts] 35 of the monies to Gulf not fatal where the lidity of the defenses is Life; remaining the bank retained the of that defense is basis percent. policies The insurance contained a foundation arguably meeting the nonsecre- a document provision provided for a refund of F.2d at cy requirements of 1823.” 655 premiums § if the was termi- indebtedness (emphasis original). The bond prior period nated the end of application for the bond are not secret premium. which the insured contributed a agreements. Both of these documents consequence of the and as- As records. contained the bank’s were involving sumption transaction the failed pre- many of the insured loans were The rationale from the recent Fifth Cir- maturely terminated. FDIC sued to supports Savings cuit decision Sunbelt percent premiums; Gulf recover analysis: our responsible for Life countered that it was Allowing transform con- the FDIC to i.e., percent, the amount received negotiable would tracts into instruments from the bank. expec- commercial defeat reasonable held that Life of the variable interest note mak- The Eleventh Circuit Gulf tations percent premiums of the negotiable are not instru- was liable for ers [which circumstances, ques- applied just when in these become unwritten because there is statute because, before, policy meaning. behind a as noted "the tion about its O'Neil, (citations omitted). statute the] statute and the words of [literal 809 F.2d at 354 be identical.” itself need not ... discussed, in the context 13. One commentator Gray, Doc- Limitations on the FDIC's D’Oench decision, application of sec- of the Howell Estoppel: Federal-Common Law Con- trine of bilateral, conditional, 1823(e) to or con- tion Statutory gressional Preemption & Authoritative tracts: Construction, (1990) 31 S.Tex.L.Rev. fit into Howell] It is difficult to [the omitted; omitted). (footnote citation 1823(e) paradigm established here: the section provides: 14. Tenn.Code Ann. 56-7-103 agreement with its does the nature of warranty components Misrepresentation will not or facial bilateral take it out "agreement” policy Exceptions.—No written or in the statute? Or does this avoid term — warranty legally satisfy misrepresentation therein each of the oral or facial bilateralism 1823(e), negotiations or such made in the contract four conditions of section meet, insurance, agreement policy frequently or in the would not therefor, behalf, shall approval or the assured or in his such as the loan committee possible void the be deemed material or defeat or directors? These two rationales for attaching, agreement policy prevent unless such or the Howell decision—not an within warranty misrepresentation made with meaning is of section satis- and/or deceive, the matter actual intent to or unless faction of the four conditions —should both be accepted necessary gloss represented of loss. on the increases the risk and made a *12 208 rejecting knowledge recognized Life’s theories the

paid, thereby Gulf defenses waiver, estoppel, unjust enrichment. available under insurance law. Our hold- Circuit, applying a Kimbell ing particular The Eleventh only. is limited to this bond analysis, concluded that the decision finding way Foods upon Our no touches the mer- purchase assump- whether to select a misrepresentation its of Aetna’s defense. liquidation transaction or a would be tion required were thwarted the FDIC III. available under each consider the defenses argues Aetna also the dis Additionally, the court con- state’s law. barred, pursuant trict court erred when it process “demands cluded 1823(e), agency to section Aetna’s adverse uniformity.” Life, national 737 F.2d Gulf CCI, agent, defense. Aetna claims that its ultimately at 1517. The court considered by which was owned Jake Butcher’s broth the effect of the denial of state defenses to er, misrepresentations was aware of the noting that the case Gulf Life. While be- by made UAB on its for the negotiable a instru- fore it did not involve Thus, bankers blanket bond. Aetna ar ment, the Eleventh Circuit observed that gues, under Tennessee law the insurance 1823(e) majority of section cases in- inception.” contract “was invalid from its notes, volved which would be immune from 1823(e)inapplicable We find section to Aet Life’s defenses under the holder in Gulf agency na’s adverse defense for the same due course doctrine. The Eleventh Circuit inapplicable reasons we found it to Aetna’s persuaded majority was thus that “in the misrepresentation defense. We note that dashing expec- of cases little of commercial long recognized Tennessee state law has result tations would from a uniform federal agency the adverse defense. Under Ten protecting rule the FDIC from such defens- law, if agent, princi nessee an without the es.” at 1518. pal’s knowledge, represents the adverse Importantly, although, as the Eleventh transaction, party in resulting con noted, majority Circuit of section option tract is voidable of the un 1823(e) may negotiable cases involve instru- principal. informed See Delta Materials ments, the case before us does not. We Prince, Handling, Shelby Equity Inc. v. necessity fashioning

believe that the for No. 1989 WL (Tenn.Ct.App.1989) 40861 uniform regard federal rule with to insur- (unpublished); W.W.Dillon & v.Co. Shar ance contracts is very belied fact ber, Tenn.App. 90 S.W.2d 533 brought that so few cases are that involve (1936); Byrn, Hawkins v. 150 Tenn. conditional, bilateral, Thus, contracts. (1924). S.W. 980 agree we do not with the Eleventh Circuit’s rationale uniform rule.15 IV. light preceding analysis, of the we

find that inapplicable section is Aetna also asserts that the district Aetna’s bankers pri- blanket bond. The court erred when it barred Aetna’s alter mary purpose ego following. D’Oench and section defense. Aetna provide is fidelity notice to federal bank A corporation bond insures a change resulting examiners not to conditional losses from the acts of its promises pay obligations. employees into absolute corporation but acts it Essentially, individual, we are that when the self are not insured. If an Butcher, in the course aof and this case Jake corpo dominates a transaction, assumption authority finds a bankers ration based derived from his bond, acquires blanket ownership bond with of stock and offices held Additionally, Cir.1991); Riddle, Kilpatrick the FDIC cites to several more 907 F.2d 1523 - (5th 1990), denied, -, recent Eleventh Circuit decisions in this area. Cir. cert. U.S. (11th Gordy, (1991). See FSLIC v. 928 F.2d 1558 Cir. S.Ct. 112 L.Ed.2d 1042 To the ex 1991); Corp. Mortgage Corp., VictorHotel v. FCA tent that our decision is not in accordance with (11th Cir.1991); Constr., decisions, disagree Twin those with the Eleventh Raton, Inc., 1823(e). interpretation Inc. v. Boca 925 F.2d 378 Circuit's of section president controlling individual constitutes bank was a corporation, and, such, corporation operated is shareholder and also ego alter terms of employee within the the Fifth Circuit held that longer ego alter no Hence, such individual is not theory was not an defense the bond. available under *13 presented. the bond. part, covered the circumstances In Lott presi- was based on the fact that the bank defines an em- bankers blanket bond The dent “was not the bank’s sole shareholder” “(1) an officer pertinent part, ployee, “participat[e] and that he could not in any Insured, the while employee other of or recovery.” Additionally, at 87. Id. the in, at, by any of the Insured’s employed presi- Lott court determined that the bank premises covered hereunder....” offices or knowledge imputed dent’s could not be Butcher argues Aetna therefore that Jake corporation the because “he deemed [was] employee as defined in the bond was not an to have an adverse interest the [to bank] result, and, not re- as a Aetna should be knowledge possessed by the him [thus] pay quired to on bond. imputable in the transaction not [was] support position of its Aetna offers Finally, the bank.” Id. at 88. the Lott case, Loan, Fourth Circuit Phoenix Sav. & expressed court the concern that “[inno- Co., 381 Casualty Inc. v. Aetna & Sur. cent shareholders and creditors should not (4th Cir.1967) I), and its F.2d 245 {Phoenix have to bear a loss the fraudulent when (4th Cir.1970) successor, 427 F.2d 862 majority shareholder will not from benefit II). I, (Phoenix In the district Phoenix his fraud.” at 87. ego allowed Aetna’s alter court granted summary judg- Fifth recently defense but also The Circuit revisited this in favor of Aetna on the issue. The in City Wellington ment issue State Bank in not, Co., It did Fourth Circuit reversed. how- Fidelity Guaranty United States & ever, dispute availability (5th Cir.1985). of the alter 778 F.2d 1103 In Welling- Rather, ego it held that there ton, defense. applied ego the Fifth Circuit the alter i.e., question, “the record was a factual theory recovery. It to bar found that clearly corporate not demonstrate ... president, vice who was aware of [did] bank’s by the malefactors.” 381 F.2d at control per- president’s dishonesty, owned 40 recognized viability court 251. The directly and would cent of the bank’s stock ego expressed concern an alter defense and bond, any recovery from under the benefit that, possibility if Aetna about the were unlike the situation Lott. bond, then, required pay on the as stock- that, recovery The FDIC because holders, in essence the malefactors could Butcher, under the bond will not benefit from their own malfeasance. benefit justifying appli- equitable concerns wrongdoers stated that “the ... court ego defense are not cation of the alter any should not be allowed under circum- agree equity here. present While we profit reprehen- from their own stances to may of an alter not mandate at 252. sible and criminal conduct.” Id. defense, Aetna is also ego we find that II, granted In the district court Phoenix asserting a defense based on its contract. Aetna a directed verdict favor of based If Butcher were not considered an Jake ego The Fourth on its alter defense. Cir- bond, employee language within recognized again cuit reversed still but pay required to then Aetna would not be defense; ego merely it held that the alter aspect The FDIC dismisses this the bond. improperly granted a directed district court ego in a footnote. Aetna’s alter defense verdict. court, however, did not review The district bar, to determine whether In the case at the district court Tennessee law but, Aetna un- ego defense is available to chose not to follow the Phoenix cases alter may well be urging, Aetna’s der the facts before us. at the FDIC’s chose to bar exam- a defense. For ego on the of a Fifth able to assert such alter defense basis Fund Insur- Lott, ple, in v. Fireman’s 460 F.2d 82 Neese Circuit Cir.1972). Lott, Co., Tenn.App. 386 S.W.2d 918 despite fact ance dishonesty Board Directors or to the appeals court found (1964), Tennessee reality regulatory authorities as evidence of col- subsidiary company was that a parent corporation and lusion. ego of its the alter parent bankruptcy trustee of the

thus earlier, Aetna asserts that As we stated on the subsid- not recover corporation could equates this instruction silence with collu- Thus, remand for recon- iary’s bond. argu- rejected court sion. district of this issue. sideration Further, aptly why stated Aetna’s ment. argument fail: should V. equate instruction does not silence [T]he *14 court argues Aetna also district collusion; simply logi- states judg- grant Aetna a when it failed to erred may that silence be con- cal conclusion notwithstanding the verdict or new ment as evidence of such collusion. sidered presented Aetna overwhelm- trial because following immediately The sentence this officers, not in col- ing that UAB evidence reads, charge in “I fur- one the Court’s Butcher, had dis- knew that he lusion with you ther instruct that someone who col- honestly employed a felon at the convicted enables, is one who ludes with another bank, coverage terminate would and participates with or otherwise aids under section 12. bond by his act action or inac- abets dishonest context, in tion.” Placed this the state- in question to be addressed by ment the Court was not erroneous. reviewing a district court’s denial of a mo adopt the district court’s sound ratio- We directed verdict is tion for JNOV or for a reject argument that the nale and Aetna’s evidence, in the when viewed whether prejudicial. instruction was nonmoving par light most favorable to ty, any questions material of fact for raises PART, AFFIRMED IN REVERSED IN jury. pass This court must not on the pro- PART and REMANDED for further witnesses, weigh the evi credibility of opinion. this ceedings consistent with dence, judgment our for that or substitute Agristor Leasing of the factfinder. NELSON, Judge, DAVID A. Circuit Prods., Inc., 869 A.O. Smith Harvestore concurring judgment in in all but (6th Cir.1989); v. Haw F.2d Frost Judge Guy’s opinion. Parts II and III of Educ., County kins Bd. Cir.), denied, cert. 488 U.S. Although agree I with much of (1988). Be 102 L.Ed.2d 561 II, what is said in Part it seems to me testified that the cause several witnesses unnecessary to decide whether U.S.C. employed by allegedly felon applicable is or is not to Aetna’s Barr, really employed as Jake Jesse was 1823(e) applies bond. Even to such consultant, personal Butcher’s the district I am inclined to think that an bonds—and denying Aetna's motion court did not err right asserted to recover on an insurance judgment notwithstanding the verdict 1823(e)no contract can be an “asset” under or for a new trial. right to on a less than an asserted recover negotiable instrument-—it seems to me that Aetna district also that the arguably “agreement” tends to prejudicial by committed error in court interest diminish or defeat FDIC’s structing jurors that mere silence part parcel asset the asset is dishonesty officers .as to Butcher’s could itself, and as such it meets each of the four no merit constitute collusion. We find requirements of the statute. argument Specifically, either. objects following jury to the instruction: ripen application did not into bank’s determining agreement until Aetna issued the bond. whether a director or offi- issued, Butcher,

cer was collusion with Jake When the bond was (1) integral part it was you may per- consider the silence of that was an of it—and bank, (3) (2) ap- report writing, executed son or his or her failure to (4) Directors, by the proved Board continuously been an official record of

has “agree- It me

the bank. seems to that the question is thus valid

ment” plain language under the of the stat-

ute. above,

Except to the extent indicated I

agree entirety. with Part III in its On

remand, Aetna should be allowed to

present misrepresentation and adverse

agency defenses. America,

UNITED STATES of

Plaintiff-Appellee, (89-2130);

Toufic S. NAGI Robert F. Bar (89-2140);

ash and Richard Weaver

(89-2131), Defendants-Appellants. 89-2130,

Nos. 89-2140 and 89-2131. Appeals,

United States Court of

Sixth Circuit. May

Submitted 1991.

Decided Oct. 1991.

Rehearing Rehearing En Banc 89-2130,

Denied Nos. 89-2140

Jan. notes procures party’s “the sort of fraud that is assumption transaction. knowl- signature to an instrument without See, Newhart, 47, e.g., v. F.2d 892 or contents.” edge of its true nature (8th Cir.1989); Murray, 50-51 FSLIC 93, at 108 at 402 Langley, 484 U.S. S.Ct. 1251, (accord (5th Cir.1988) 853 F.2d (citation omitted). ing status); FSLIC holder in due course contrast, In a contract is voidable Wood, 156, (6th Cir.), FDIC v. 758 F.2d parties pow have the “where one or more denied, 308, 944, cert. 474 U.S. 106 S.Ct. so, er, by a of election to do manifestation (1985); Hutcheson, L.Ed.2d 286 Gunter legal by the to avoid the relations created 862, (11th Cir.), denied, cert. contract, the contract or ratification of 103 S.Ct. 74 L.Ed.2d 63 U.S. extinguish power of avoidance.” Re (1982). Wood, incorporated In into fed (Second) (1979). statement of Contracts 7§ concept eral of holder in common law provides following il The Restatement due course from state commercial law. Id. examples lustrative of voidable contracts: part decision was 159. Our based are those where one contracts “[V]oidable Supreme Court’s decision United infant, party was an or where the contract Foods, Inc., 440 U.S. States v. Kimbell fraud, mistake, duress, was induced (1979). 59 L.Ed.2d 711 warranty or other or where breach of a Wood, we summarized the Kimbell promise justifies aggrieved party in follows: Foods Court’s putting an end to the contract.” Id. at “[Wjhere unnecessary a national rule is comment b. The Restatement notes that interests, effectuate federal state law