REW Enterprises, Inc. v. Premier Bank, N.A.REW Enterprises, Inc. v. Premier Bank, N.A.
The Farm Credit Bank of Texas seeks to recover a payment made by the Federal Land Bank of Jackson to Premier Bank.1 FCBT seeks to rescind the payment transaction as ultra vires or as payment of a thing not due under Louisiana law. Premier claims that FCBT is equitably estopped from relying on an ultra vires claim. Premier also counterclaims for recoupment.
I.
Thomas A. Grant, Suzanne Brunazzi Grant, and James C. Steele purchased timber land in northeast Louisiana with a $15 million loan from FLBJ. In 1983, the Grants and Steele submitted the loan application to Lawrence Bingham, President of the Federal Land Bank Association of Monroe. Federal land banks may generally lend only through federal land bank associations.
A payment was to come due on January 1, 1985, and in the fall of 1984, the Grants and Steele approached A. J. Burns, Bingham‘s successor as President of the Monroe Association, about their expected inability to pay. The parties agreed that Burns would
The Grants and Steele defaulted on the ONB loan, and ONB called the letter of credit. Only then did Burns tell FLBJ officers that there was a letter of credit. FLBJ officers decided to honor the letter, but asked Burns to negotiate a thirty-day extension. ONB agreed to the extension. FLBJ then honored the letter of credit, and ONB released its mortgage on the additional collateral. At FLBJ‘s request, the Grants and Steele executed a promissory note for the amount FLBJ paid to ONB, and FLBJ took a first lien on the additional collateral.
Burns was fired from the Monroe Association and later pleaded guilty to a violation of
REW also sued to recover the payment made to ONB on the letter of credit. It then transferred its interest in the lawsuit to FCBT in consideration for FCBT‘s assumption of FLBJ‘s bond indebtedness.
II.
Before Congress enacted the 1987 Agricultural Credit Act, see supra note 2, the Farm Credit System was organized into twelve areas known as farm credit districts. In each district, three distinct Farm Credit System banks served the needs of farmers: (1) a federal land bank, which made long-term real estate mortgage loans through federal land bank associations; (2) a bank for cooperatives, which made loans to agricultural, aquatic, and rural utility cooperatives; and (3) a federal intermediate credit bank, which funded the short- and intermediate-term loans made by
FCBT argues that issuance of a letter of credit was outside the statutory powers of a land bank. The district court agreed, holding that issuance of a standby letter of credit was not “necessary or expedient in the conduct of the business of the bank” because the business of the bank included only long-term lending against real estate security. We agree.
Congress created federal land banks for the sole purpose of providing long-term real estate mortgage loans. A rural borrower could seek short-term credit from banks for cooperatives or production credit associations. In fact, in 1971, Congress amended the Farm Credit Act to give banks for cooperatives and production credit associations the power to issue guaranties, instruments similar in function to letters of credit. Farm Credit Act of 1971,
When FLBJ decided to ask for an extension of time to pay the letter of credit, it was seeking to ratify an action it was not statutorily empowered to take. There is no evidence in the record that the board attempted to disavow the letter or that it paid the letter to settle what surely would have escalated to a significant controversy had it not paid. Rather, the extension stated that ONB was to consider it “as an amendment to our Irrevocable Letter of Credit No. 1, dated December 31, 1984. . . . All terms and conditions of the original Letter of Credit shall remain in force and will not be affected by this amendment except as referenced above in the expiration date.” In short, we are not confronted with the authority of the board to settle a claim arising from an ultra vires act. We have before us only the unauthorized issuance and payment of a letter of credit. The act of FLBJ‘s board in honoring the letter of credit was an ultra vires act.
Premier also asserts that the letter of credit falls within the bank‘s incidental powers because it benefited FLBJ by enabling it to keep “a major loan in the current and ‘healthy’ category on the bank‘s books.” This argument is without merit. As a result of the letter of credit, all of the monies paid to FLBJ from the ONB loan were ultimately returned to ONB, with interest, such that FLBJ itself funded the Grants and Steele‘s installment.
A.
By honoring the letter of credit, FLBJ committed an ultra vires act. However, Premier claims FCBT is estopped from rescinding the transaction because, as a rule, an ultra vires claim cannot be pleaded by one who obtains benefits from the act and induces the adverse party to take measures detrimental to it. See 7A William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations §§ 3407-3409 (perm. ed. rev. vol. 1989). Premier‘s predecessor, ONB, detrimentally relied on the actions of FLBJ by releasing its mortgage on the additional collateral. FLBJ benefitted by obtaining an interest in the additional collateral.
Though these benefits might otherwise support estoppel, estoppel is not permitted against the government. See Office of Personnel Management v. Richmond, 496 U.S. 414, 419 (1990) (OPM); INS v. Hibi, 414 U.S. 5, 8 (1973) (per curiam); Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 384 (1947); see also David K. Thompson, Note, Equitable Estoppel of the Government, 79 Colum. L. Rev. 551, 551 (1979) (Equitable Estoppel). The Court in Merrill stated the rule as follows: “Whatever the form in which the Government functions, anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority.” 332 U.S. at 384.
The Merrill doctrine vindicates two central policies. The first is protection of the public fisc. To allow an assertion of
B.
While the Merrill doctrine erects a high wall against the assertion of estoppel, it does so only to protect government entities. Whether an entity is governmental for purposes of estoppel does not turn on its label, such as agency, instrumentality, or private corporation, but rather on congressional intent. See McCauley, 732 F.2d at 982; Equitable Estoppel, supra, at 565-67.
In Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95 (1941), the Court had to determine whether the land bank was required to pay a sales tax imposed by the North Dakota
Premier argues that while a land bank may be immune from taxation based on its status as a federal instrumentality, that immunity does not insulate it from principles of equitable estoppel. It is true that national banks, as federal instrumentalities, are not subject to state taxes but are subject to estoppel defenses. See First Agric. Nat‘l Bank v. State Tax Comm‘n, 392 U.S. 339, 340-43 (1968); Department of Employment v. United States, 385 U.S. 355, 360 (1966). We also recognize that the rule that federal instrumentalities are immune from state taxation is a unique rule, clothed in pedigree. See McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819). However, the language of Bismarck is broad, stretching beyond the limits of immunity from taxation to the broader governmental function of land banks and the
This conclusion fits with the limited number of decisions that have considered the issue. In Williams v. FLBJ, 954 F.2d 774 (D.C. Cir.), cert. denied, 113 S. Ct. 299 (1992), Katherine Williams and her mother, Elizabeth Saunders, used their plantation as security for a loan of $1.3 million. Some six years after obtaining the loan, Williams and Saunders wanted to sell the plantation to Duncan Williams for $1.45 million or about $999 per acre and reduce their debt to approximately $400,000. The land bank association, on behalf of the land bank and at the direction of the Farm Credit System Capital Corporation, rejected the proposal. After the death of her mother and less than one month after their first proposal,
Williams filed suit against the land bank association, the land bank, and the Capital Corporation, alleging various torts and breaches of contract related to the two proposals. In defense, the banks alleged they were required by regulation to reject Williams and Saunders’ first proposed borrowing because it would exceed eighty-five percent of the appraised value of the real estate security.
Williams responded that the banks could not invoke the eighty-five percent rule because they had ignored it in the past. The court rejected this argument, finding that estoppel would allow continued violations. Id. at 778.4 “The extreme judicial reluctance to apply estoppel against the government arises out of a concern that otherwise negligent or dishonest officials could bring about violations of law by making misrepresentations. [Williams‘] proposed rule would engender illegality on a far greater scale, and for far less equitable justification.” Id. (citation omitted).
The district court dismissed the Mendralas’ tort claims on the grounds that it lacked subject matter jurisdiction. The court reasoned that FHLMC‘s activity fell within the intentional tort exception to the waiver of sovereign immunity contained in the
Despite its holding that the FHLMC was not an agency for FTCA purposes, the court invoked the Merrill doctrine and held that FHLMC could not be bound by Crown‘s unauthorized conduct. The court concluded that the FHLMC had “a public statutory mission: to maintain the secondary mortgage market and assist in meeting low- and moderate-income housing goals. Holding the FHLMC responsible for the unauthorized actions of an entity such as Crown would thwart its congressional purpose.” Id. at 1140-41 (footnote omitted). This conclusion, the Mendrala court held, was strengthened by the fact that the unauthorized act was committed by a separate entity and not by an employee of the FHLMC. Id. at 1141.
This case is similar to both Williams and Mendrala. As in Williams, upholding the letter of credit transaction would permit a land bank to continue to violate its enabling statute. As in Mendrala, to bind FLBJ to Burns‘s unauthorized issuance of the letter of credit would impede the bank‘s statutory mission to provide farmers with long-term real estate credit on favorable terms. See also Greene County Nat‘l Farm Loan Ass‘n v. Federal Land Bank, 152 F.2d 215, 220 (6th Cir. 1945), cert. denied, 328 U.S. 834 (1946).
Premier claims that even if the Merrill doctrine applies in this case, FCBT should still be estopped from asserting ultra vires because FLBJ‘s actions fall into an affirmative misconduct exception.5 Under this exception, a party may be entitled to equitable relief against the government if it establishes that the government engaged in affirmative misconduct. See United States v. Lair, 854 F.2d 233, 237-38 (7th Cir. 1988). To qualify as affirmative misconduct, a “party must allege more than mere negligence, delay, inaction, or failure to follow an internal agency guideline.” Fano v. O‘Neill, 806 F.2d 1262, 1265 (5th Cir. 1987). In Fano, an alien claimed that he lost an opportunity to obtain permanent residence in the United States because the Immigration and Naturalization Service failed to act quickly enough on his application for permanent resident status. Fano claimed that the INS failed to follow its own internal directive and, therefore, was estopped from denying him permanent resident status. The court, recognizing that agencies are normally immune from such estoppel arguments, nevertheless reversed the lower court‘s grant of summary judgment on the grounds that Fano‘s allegation that the INS acted “willfully, wantonly, recklessly, and negligently” was
For Premier to prevail under this theory, we would have to impute Burns‘s act of issuing the letter of credit to FLBJ. However, in FDIC v. Langley, 792 F.2d 547, 549 (5th Cir. 1986), we held that land bank association officers are not agents of land banks in disbursing the proceeds of a loan. When Burns issued the letter of credit to the Grants and Steele, he was not acting as the agent of FLBJ.
Premier argues that Burns is an employee of the land bank because FLBJ claimed that Burns was an employee in separate litigation. In this separate suit, FLBJ sought to recover under a fidelity bond for losses resulting from Burns‘s unauthorized conduct. Because the fidelity bond covers the entire Farm Credit System, specific institutional employee designations lacked consequence. As such, the designation has little significance here.
Next, Premier argues that by asking for a thirty-day extension and then honoring the letter of credit, FLBJ itself committed affirmative misconduct. However, Premier argues in its brief nothing more than that FLBJ‘s acts “definitely went beyond mere negligence.” This type of conclusory allegation will not suffice to overcome the Merrill rule. The Supreme Court has counseled that courts should be cautious in recognizing exceptions to the Merrill doctrine. OPM, 496 U.S. at 422. There is no suggestion that FLBJ officers deliberately induced ONB to release its mortgage on the
Finally, Premier argues that the Merrill doctrine does not apply to preclude its assertion of estoppel because FLBJ was acting in its proprietary capacity. Under this purported exception, government activities that are undertaken primarily for the commercial benefit of the government are subject to estoppel. See FDIC v. Harrison, 735 F.2d 408, 411 (11th Cir. 1984); United States v. Florida, 482 F.2d 205, 209 (5th Cir. 1973). This argument is sunk by Bismarck:
The argument that the lending functions of the federal land banks are proprietary rather than governmental misconceives the nature of the federal government with respect to every function which it performs. The federal government is one of delegated powers, and from that it necessarily follows that any constitutional exercise of its delegated powers is governmental. It also follows that, when Congress constitutionally creates a corporation through which the federal government lawfully acts, the activities of such corporation are governmental.
314 U.S. at 102 (citations omitted). While the force of this language undoubtedly is limited to the case‘s land bank facts, see supra note 3, its continued applicability has yet to be questioned.
V.
Because the letter of credit transaction was ultra vires and FCBT is not estopped from so claiming, we must next decide to what extent FCBT should recover. Premier counterclaimed for recoupment. “Recoupment is the act of rebating or recouping a part of a claim upon which one is sued by means of a legal or equitable right resulting from a counterclaim arising out of the same transaction.”
FCBT argues that Premier is not entitled to recoupment because FCBT purchased only the claim from REW and not any liabilities. “The purchaser of an asset from a failed institution is not liable for the conduct of the receiver or [failed] institution unless the liability is transferred and assumed.” Kennedy v. Mainland Sav. Ass‘n, 41 F.3d 986, 990 (5th Cir. 1994) (citation and internal quotation marks omitted); see also First Indiana Fed. Sav. Bank v. FDIC, 964 F.2d 503, 506-07 (5th Cir. 1992); Trigo v. FDIC, 847 F.2d 1499, 1503 (11th Cir. 1988). Premier‘s claim for the money paid to FLBJ is a general claim properly asserted against FLBJ‘s receiver, REW. See Kennedy, 41 F.3d at 990-91. However, Premier may maintain its claim to recoup the amount FCBT recovered when it sold the additional collateral.
Although FCBT did not assume the general liabilities of FLBJ, it did purchase the mortgagee rights to the additional collateral. FCBT‘s argument that when it purchased this ultra vires claim, it
Because an ultra vires contract is null and void, the remedy for rescission of that contract is to put the parties in the position they would have occupied had the unlawful agreement not been made. See Fletcher, supra, § 3571. Accordingly, Premier may recoup the amount FCBT recovered on the sale of the additional collateral. This adjustment ensures that FCBT does not receive a windfall as a result of its rescission of the ultra vires contract.
The record indicates that the parties disagree as to the amount that should be apportioned to the additional collateral; therefore, we must remand to give the district court the opportunity to make findings on this issue.
VI.
In its cross-appeal, FCBT claims that the district court erred in dismissing its state law claims as abandoned. FCBT had planned to pursue these claims if its ultra vires claim did not succeed.
AFFIRMED IN PART, REVERSED AND REMANDED IN PART.