Wade A. Kilpatrick, Stan E. Golub v. John C. Riddle, the Federal Deposit Insurance Corp., as Receiver for First Republicbank Houston, N.A.

agreement. forceable settlement

bankruptcy power court exceeded the

granted parties interpret to it when, year

enforce the settlement after agreed upon ap-

the settlement was

proved, attempted impose upon it what,

parties its own notions of retro- equitable a fair and

spect, was settlement against'Continental.

of ALPA’s strike

We therefore affirm the district court’s

April 1989 order to the extent that bankruptcy

vacated the court’s Nunc Pro

Tunc Order. We reverse the district April

court’s 1989 order to extent bankruptcy

that it affirmed the court’s ex- acceptance

tension of the recall deadline Option pilots, and to the extent that

the district court further extended the re- acceptance pilots.

call deadline for all We

also affirm the district court’s order rein-

stating reaffirming bankruptcy January Group 14.

court’s Order on of We

reverse the district court’s orders reinstat-

ing affirming bankruptcy court’s

January Resigned Order on and Retired January Prohibiting

Pilots and the Order

Integration Foreign Pilots.- PART,

AFFIRMED IN IN REVERSED

PART, AND RENDERED. KILPATRICK, al.,

Wade A. et

Plaintiffs, al., Golub, E. et

Stan

Plaintiffs-Appellants, RIDDLE, al., Defendants, et

John C. Deposit Corp.,

The Federal Insurance RepublicBank

Receiver for First Hous

ton, N.A., al., Defendants-Appellees. et

No. 89-2963. Appeals,

United States Court of

Fifth Circuit.

July JOLLY, Judge:

E. GRADY Circuit presents following This case doct question: Does the rine,1 protects Deposit the Federal Corporation from Insurance the effect agreements between insured unrecorded an customers, preclude bank and its borrow banks, ers who were defrauded failed bringing an action under federal secu against rities FDIC receiver? laws as have on Although several circuits touched question, squarely have con this none precedent, how sidered it. ever, makes clear that debtors now not raise bank fraud as defense FDIC’s collection efforts. The effectively nulli Duhme doctrine would be if fied could characterize borrowers independent as fraud-based defenses against maintain causes of action and them Thus, although the the federal receiver. course, pursue plaintiffs may, of actions fraud for securities individuals involved, may not they we conclude that causes of recast their barred defenses as action securities laws. under I summary judg- This case arises from defendants, FDIC, granted ment NCNB, bridge used rescue the plain- case. The failed institutions promisso- tiffs are investors who executed ry RepublicBank in favor First men, it, who heavily were in debt to in a terclaimed to enforce the notes. scheme to defraud investors. The two al- The rely D’Oench, defendants on the leged promoted plan swindlers open Duhme doctrine in ways: they two argue several branches of the Texas National ' complete that it is a defense to the inves- (TNB). Bank FRB plan by financed the tors’ fraud claims and that it bars their loaning money the investors pur- for the defenses enforcement of the notes. chase of TNB new stock. The investors The granted district court summary judg- executed promissory notes and FRB thus ment to the defendants. It concluded that acquired new collateral for the debts owed D’Oench, federal common law Duhme by alleged it swindlers. doctrine, precludes defenses re- plaintiffs allege The fraud in that FRB covery against a closed prem- bank that are never told them that the TNB stock was ised on agreements undisclosed between subject trust, voting to a which gave con- bank, borrower and the both barred trol over the stock to the two alleged swin- plaintiffs’ claims and allowed the defen- Furthermore, dlers. plaintiffs allege dants’ counterclaims. Plaintiffs filed overvalued, that the stock was that the and timely appeal. notice of new were doomed banks to fail from the outset, by and was all known II end, however, FRB. the net result stock-for-promissory note transac- plaintiffs The arguments. raise three give obligations tions was to FRB fresh First, although they concede that creditworthy simply investors by D’Oench, precludes doctrine many loaning for a very short time in money claims, of their they contend that it cannot paper transactions that essentially were bar their actions under the federal securi- Although riskless to FRB. FRB Second, that,, ties they argue laws. alleged to have committed the FDIC and escape cannot NCNB for liability fraud, plaintiffs contend that the FDIC securities violations purchas- as “innocent acquired had knowledge by of FRB’s fraud ers” under section 29 of the Securities Ex- receiver, the time it became because it had Act, change because took the notes participated litigation previously involv- with actual knowledge plaintiffs’ of the ing the failed TNB branches. Since claims and Finally, they argue defenses. fraud, FDIC knew of FRB’s and informed judgment that summary was inappropriate it, NCNB of neither the FDIC nor NCNB genuine issues of material fact escape liability pur- can FRB’s as “innocent remain concerning misrepresentations chasers” of the notes. made FRB in the issuance of the securi- The recovery seek ties. Our resolution the first issue bases, eight FDIC and NCNB on all of dispositive appeal. of the entire alleged misrepresentation which involve part alleged fraud on the swindlers III Among and FRB. these causes of action plaintiffs’ are under federal argument claims and securi- essence state They ties laws.2 assert is that the that the FDIC was Duhme doctrine can- actions, claims, liable FRB’s fraudulent not and bar their federal securities law notes, thus collect on the cannot because it because this empower result would them with actual agreements of FDIC to enforce il- are 10(b) 2. Their duty good claims are based on section breach of the faith and fair deal- Exchange ing, Securities Act of and Rule lob- of section 29 of the violations Securi- Act, Exchange 12(2) 33 of the Texas section Securities civil ties Act of 1934 section fraud, conspiracy, statutory and common law the Securities Act of 1933. They Finally, most legal federal securities laws. federal securities laws. under importantly, permitting has held borrowers to main- contend that Court misrep- liable for claims enable national banks tain federal securities insolvent simply made in the sale of own causes resentations them recast as affirmative held stock,3 very that this court has not of action the defenses that the Su- trumps fed- preme long precluded has held are They argue law. further eral securities the doctrine. matter,

that, protecting policy inves- A holding securi- liable for tors part ties on the failed banks need doctrine, system of national bank undercut stated, when originally holds that a federal They assert that the FDIC’s regulation. fails, ly bank insured borrowers limited may appropriately be to liability against collec may bank not later defend in which it assumes a failed bank’s cases by argu of a receiver tion efforts knowledge of the with actual liabilities ing they agreement had an that unrecorded dealings. securities Giv- fraudulent bank’s D’Oench, with the v. bank. Duhme & Co. in participation en FDIC’s the TNB 459-60, 676, FDIC, 447, 62 315 U.S. S.Ct. argue that litigation, plaintiffs 680, (1942). D’Oench, 86 L.Ed. 956 knowledge of fraud behind had FDIC obligations had to an borrower executed acquired it FRB and this transaction before claimed, insured institution but after pur- not an “innocent consequently was failed, orally that bank the bank had question. in of the notes chaser” agreed obligations that these would not be arrangement This oral be Although plaintiffs are correct enforced. side explicitly paradigmatic came the only agreement” court has held fed- “secret one by Congress by be barred the doctrine. has em claims barred eral securities doctrine, D’Oench, Supreme in recent bodied this common law doctrine statu Duhme codified, precludes makes clear that claims te.4 As the doctrine precedent avoiding from indistinguishable obligations in essence borrowers that are arrange to maintain are failed unless have an seek banks those the Moreover, writing, several ment in that was executed by barred the doctrine. borrower, approved by have held that doctrine bars bank and courts claims, in which often bank’s board listed the bank’s securities state overlap action that records.5 provide causes of consider, pacity & Harriman Nat’l Bank Trust as receiver. We need not how Oppenheimer 3. v. 719, ever, 206, case, of N.Y., change applies City U.S. S.Ct. 301 57 81 whether to this Co. of (1937). Oppenheimer, long decided sever L.Ed. 1042 because we held both doctrines D’Oench, FDIC, Beigh & Co. v. years by before al bar similar defenses borrowers. See 676, 447, (1942), FDIC, 776, (5th Cir.1989) ley S.Ct. 315 U.S. v. 868 F.2d stockholders defrauded simply holds that bank (noting that “[c]ourts often consider the [com prior purchasing stock have the same bank D’Oench, into ity mon law] as other unsecured credi the bank fails tandem, after 1823(e) looking § the common nothing ability says about their re tors. It statute”) construing law when and cases receiver. cover from federal therein; Olney Trinity cited Sav. & Loan v. Ass’n Ass’n, (5th Cir.1989) Sav. F.2d Banc doctrines, are two one There ("[a]s 1823(e) aims of are § D’Oench 1823(e)) (12 statutory U.S.C. and one com 1823(e) is a identical and codification only recently, the common law law. Until mon progeny, reasoning applied its D’Oench and protected acted in the FDIC when it its version 1823(e) applicable cases §in to D’Oench FDIC, Beighley v. capacity as See receiver. cases”). Condit, See also FDIC v. 861.F.2d ("Section 1823(e) (5th Cir.1989) (5th Cir.1988). n. 5 to claims of defenses not available as a bar acting capacity it is in its when 1823(e) provides: 5.12 U.S.C. receiver”). August Congress On (e) Agreements against Corporation version, making interests statutory it avail amended the agreement to diminish or No which tends 12 U.S.C. § able to the FDIC-Receiver. 1823(e) Corporation brought defeat interest of the section was before This action amended, by or section in its ca- asset under this section and involves the FDIC recently As the Court has ex- mortgage claimed that the was unenforcea- plained, purposes. the doctrine has two ble because it had predicated been on fraud. purpose They argued

One ... is to allow federal and that the statute bars rely only state bank examiners to on a bank’s defenses based on an unrecorded evaluating “agreement,” records the worth and an obviously assets_ bank’s A purpose requires second ... mutual defense, consent. Their contrast, ensure mature by consideration of alleged an [is to] misrep- unrecorded unusual loan by transactions senior bank resentation the defrauding bank. Uni- officials, prevent fraudulent inser- lateral misrepresentation, their argument terms, tion of new with the collusion of urged, is “agreement,” not an and thus is employees, appears when a bank barred Duhme doc- headed for failure. trine. Langley 91-92, rejected The Court the Langleys’ ar 396, 401, 98 L.Ed.2d 340 Since gument agreements and held that invalidat the initial statement doctrine in ed section “agreements” include D’Oench, Duhme, expanded the Court has predicated fraud, noting preclusive beyond its effect well the con- applied Duhme itself whenever the maker text of agreement” an oral “secret between “lent himself to a scheme or arrangement the bank and the borrower. recently, Most whereby banking the authority ... was Supreme in Langley the Court extended likely to be misled.” 315 U.S. at preclude the doctrine to the same defense 5.Ct. at representations 681. Unwritten plaintiffs that the seek to advance here: concerning the actual size of the land or obligation that the to the failed bank was the value of the deposits mineral procured through fraud in the inducement. naturally examiner, mislead an outside sim- In Langley, Langleys the borrowed mon- ply they because were unwritten. “Cer- ey buy land, from a bank in order to and tainly, signs one facially who a unqualified mortgage a security executed for the subject note to an unwritten and unrecord- loan. After the bank Langleys failed the upon repayment ed condition its has lent it, claiming sued the bank had de- a arrangement himself to scheme or that is concerning ceived them the land’s value. likely banking to mislead authority, the They alleged represented that the bank had whether the condition perform- consists of larger the land as and more valuable than counter-promise (as D’Oench, ance of a representa- it in fact was. None of these Duhme) or the a war- truthfulness of any tions were recorded in of the loan ranted 484 U.S. at 108 S.Ct. at fact.” documents. added).6 Thus, (emphasis it is now receiver, Lang- As the clear that facially the borrowers who execute leys’ mortgage among unqualified obligations may prevent the bank’s assets sought Langleys to enforce it. The federal receiver’s collection by efforts title, security identify 1821 of this exception either loan or 6. The Court did one

by purchase depos- as receiver of insured to the broad reach of section but it is institution, itory against shall be valid the Cor- inapplicable in this case. Where the bank en- poration agreement— unless such gages in fraud "in the rather than factum" (1) writing, is in inducement, fraud in the there is no valid obli- (2) depository was executed institu- gation part on the of the borrower under the any person claiming tion and an adverse in- principle that fraud vitiates consent. The bor- thereunder, including obligor, terest temporaneously con- knowingly promissory rowers here executed acquisition with the They they notes in favor of FRB. claim that did institution, depository asset not realize the risk of the venture because of the (3) approved by the board of directors trust, disguised voting heavy indebtedness of depository of the mittee, institution or its loan com- promoters, and the inflated value of the approval shall be reflected in allegations TNB stock. These are of fraud in committee, the minutes of said board or plaintiffs' obligations the inducement. The to been, (4) continuously, has from the time bank, NCNB, and thus to would therefore be execution, of its an official record of the de- voidable rather than void. pository institution. protected from virtue Section execute FDIC is they to were induced claiming that 1823(e)”). question then is this: by fraud. obligations distinguish themselves plaintiffs authority, and de- previously all the cited B collection efforts against the fend noted, have As we ground receiver on the federal fraudulently they were alleged that have securities “agreement” violated promissory notes. execute induced to word, no. In a laws? in which a scheme part of notes were stock under the rule purchase to’ worthless us that It seems clear to were induced Viewing underlying the facts principles proceeds. and the Langley the loan doctrine, plain- favorable light most inferences nonmovants, without presume, must be barred. we and defenses tiffs’ claims stated a plaintiffs refutes the Langley v. FDIC deciding, that We think pro since it barred bor- arguments plaintiffs’ claim for securities Computer essentially that is indistin- and FRB. defense moters Barrett rower’s (5th Inc., plaintiffs’ Cir. claims Servs., 884 F.2d guishable the outset that “Following we have held 1989). Langley, also observe We case. protects can- misrepresentations Duhme doctrine to borrowers if the NCNB, recovery by protects it also asserted as a defense not be facially unqualified loan doc- recently extended “we FSLIC ” Landry, Porras v. Pe 898 F.2d the FDIC.’ uments.” McLemore v. ‘assignees of (5th Ass’n, Cir.1990). Langley, As in op tr lex Sav. argue & Assocs. that certain war- Cir.1990) (citing Murphy Bell & here the borrowers loans, namely F.2d Gateway, 894 concerning their Bank ranted facts v. Interfirst Cir.1990)). securing (5th underlying asset of the 754-55 value notes, misrepresen- were promissory if the clear further It is Except for the by the bank. ted them are barred plaintiffs’ defenses case is stock the asset in this fact that doctrine, their de D’Oench, then Duhme land,' regulat- sale thus than its rather must causes of action fenses framed law, are the the cases same. ed barred, result because other also be express- only court has It true that one Murphy is Bell & nullify the doctrine. law defenses ly rejected federal securities Gateway, 894 Bank v. & Assocs. Interfirst D’Oench, Duhme doc- Cir.1990) argu of (5th (“this the basis 750, 753 F.2d X, Associates v. Investors recent trine. FDIC light in of our meritless ment [is] Cir.1985), (6th D’Oench, Ltd., F.2d 156 Beighley in holding “fraud in the rejected arguments of court based affirmative claims rule bars Duhme inducement, securi- and state and federal Further agreements”). upon unrecorded defenses” asserted alleged ties law knowledge of FRB’s more, prior FDIC, 660 F.2d v. Gilman gained FDIC. But.see FDIC fraud that Cir.1981) (6th (suggesting pos- plain 693-94 will not aid litigation the TNB to rescind obli- right of borrowers the FDIC sible defense, “even if tiffs’ of securities gations made violation misrepresenta the oral of had Hutcheson, laws), 674 F.2d v. note[s], and Gunter acquisition to its prior tion Cir.1982) (11th (identifying but not relevant to whether knowledge is not such were These decisions deciding question). interest is The voidable 1823(e)applies. Supreme Court’s all rendered before knows or not FDIC whether transferable Although’ no Fifth Langley. which or decision fraud misrepresentation of the extended the expressly Kratz, case has Circuit voidability.” FDIC v. produces the claims D’Oench, to bar Cir.1990) Duhme doctrine (8th (citing 669, 671 F.2d laws, securities arising under the federal v. Roldan FDIC also Langley). See (after Langley was de- held (1st Cir.1986) this court has 1102, 1107 Fonseca, assert similar cided) plaintiff that a cannot what “precisely (claim knowledge is fraud, state common law claims of breach Campbell FDIC, Leasing, Inc. v. 901 F.2d contract, of fiduciary duty or breach (5th Cir.1990). against an receiver. Beighley Finally, this result only is not consistent FDIC, 776, 784, 868 F.2d Cir n. precedent with recent concerning scope . .1989) D’Oench, doctrine, Duhme but also “agreement” We find fact that the in reaffirms a principle basic underlying that allegedly this case involved securities doctrine, particular which is of relevance unimportant purposes D’Oench, today. It is the “federal policy protect analysis. It is Duhme not the nature or public and the [the FDIC] funds enforceability an agreement between a against misrepresentations administers bank and appli- borrower controls the securities other assets in the D’Oench, doctrine; cation of the Duhme if portfolios of the banks which insures or [it] unwritten, D’Oench, to which it makes D’Oench, loans.” D’Oench, applies. 315 U.S. at 447, 457, Duhme & Co. v. at 680. S.Ct. See also 12 U.S.C. 676, 679, This plaintiffs contend, never- policy is just undermined as much unre- theless, “balancing that a poli- of federal representations corded regarding securities cies ... protection demands investor byas agreements secret that condition the embodied outweigh securities laws enforceability obligations federally to a policies the federal behind insured bank. We must therefore conclude Duhme doctrine.” We do not see that this that claims under the federal securities requires striking case such a balance. provide laws no basis from which to carve First, earlier, preclud as we have noted exception an ing deprive plain this action does not doctrine. protection tiffs of under the federal securi They ties -may laws. sue the individuals IY who actually Application defrauded them. Because we conclude that the only here doctrine denies a certain plaintiffs’claims bars the remedy, namely, rescission voluntarily and defenses if FRB even committed fraud obligations undertaken to the federally in of which the knowledge, FDIC had we need Second, authority sured bank. no suggests not consider whether the defendants are right compensated by to be the federal purchasers” “innocent or whether government there because one’s investments fail. genuine were issues of Although material fact con- policy pro there is no federal of cerning alleged the fraud. tecting government the investors under securities,7 writing privately issued Hud reasons, foregoing For the judgment the MacLean, dleston v. Herman & 640 F.2d of the district court is 534, (5th Cir.1981) there ais AFFIRMED. policy protecting of federally insured banks

from the of agreements. effect unrecorded BROWN, Judge, JOHN R. Circuit Obviously, D’Oench, Duhme is not de dissenting. signed protect to investors. The “doctrine I must dissent with the depositors thus favors the interests of Court’s and main bank, holding in question creditors of a failed this case. The pro who cannot D’Oench, tect from agreements, themselves secret whether the Duhme doctrine1 borrowers, over the of interests can.” and counter-part,2 who it’s so-called codified D’Oench, equity, 7. As a of we matter see no the 1. reason & Co. v. position simply should be in a better because the institutions that defrauded them 1823(e) 2. The often recited statement that is a § happened fail rather than to survive. We reit- D’Oench, codification of Duhme does not bear barring against erate that their suit the federal analysis. specific requirements The of preclude suing receiver does not indi- the 1823(e) way provided, are no § in or even men- actually viduals who defrauded them. tioned, D’Oench, in Duhme. promoters fraud to the the securities 1823(e),3 estop ab defenses U.S.C. § and FRB. of failed banks of loans repayment receivership. Is assumed has the FDIC that The FDIC asserts encompass- and all powerful estops appellants-in- so Duhme doctrine doctrine way, in- claim of in its affirmative nothing using stand an can ing vestors negate inves- the sale of securities protecting fraud in statutes cluding federal guarantees. and certain notes obligation on has the answer my judgment, tors? the Securities is based on The fraud claim protection limit is a There be no. appel- The 29.5 Act of Exchange § FDIC. needed violated the Securities that FRB lants claim 1) Although the bank ways. inAct several I. were mil- and Suttles Riddles knew that they in debt continued of dollars lions several on with Court I do concur stock; 2) the bank of the sale promote when It is well established points. precarious fi- actual disclose the failed to 1) applies, D’Oench, Duhme promot- of when position TNB nancial his to frame be allowed not will debtor stock; 3) the bank did and of ed the sale action, of cause affirmative as an defenses voting stock.6 nature of reveal be 2) will afforded bridge banks position FDIC’s implication The agree I also the FDIC.4 protection same the com- expansion of both unacceptable an inat be looked must evidence mon law § to the non-movants favorable light most assume, Court has not ruled on today, this does Circuit (investors) and Until preclude should summary judgment, whether purposes federal securities based fact about defenses question of stated they have been, continuously, (4)shall agreement of non-li- requirement that execution, an record official writing approved time of it’s ability inbe perma- in the the bank. and contained directors board of 1823(e)) (see are 1-4 items nent records Bank Murphy & Assocs. Bell & as reflected Interfirst 4. not the .work Cir.1990); (5th Gateway, 754-55 F.2d are opinion. These exclusive- cited in this much Assoc., Savings Petroplex Porras v. Congress. ly work Cir.1990). than is more rhetorical. The distinction is "whether test established designed the creditors to deceive the note U.S.C. 78cc: codified 29 as authority, tend to have or public or the (b) any Every made violation contract D’Oench, Duhme, atU.S. that effect.” regu- chapter rule or provision at 963. 86 L.Ed. thereunder, (includ- every contract lation (see Majority Opin- apply does not §If security listing a on an ing any contract for 4), comply specifical- ion, failure to supra note made, the exchange) or hereafter heretofore 1823(e) will not requirements §of ly the violation performance of, involves of which applicability of prima facie evidence be any relationship of or the or continuance D’Oench, Duhme. any provision of practice of in violation thereunder, regulation 1823(e): any chapter or or rule § 3.12 U.S.C. rights (1) any regards of the be void as shall diminish or tends to agreement which No who, any provi- such person of in violation Corpo- the right, of or interest title defeat rule, sion, regulation, made shall have or or by acquired it under this any asset ration any performance of such con- engaged in the by action, security a loan or either (2) regards rights any of corpora- tract and against the valid purchase, shall be who, being party to such a con- person tract, not agreement such an tion unless any right acquired thereun- writing, shall have (1) inbe shall by knowledge facts by actual the bank der (2) executed with have been shall making performance claiming or an which persons ad- reason of person or and thereunder, of such including in violation the ob- contract was of such interest verse regulation: acquisi- § 15 U.S.C. 78cc provision, or contemporaneously rule ligor, bank, added). (underline the asset tion by (3) approved the board have been shall original complaint, al- 6. In their loan commit- or its of tee, directors 78j(b), 17 § U.S.C. leged FRB 15 violated in the approval be reflected shall which 240.10b-5, committee, U.S.C. 78t. § and C.F.R. § and or board of said minutes However, law. the 11th Circuit dealt with In Langley 86, v. Hutcheson, (1987), the issue in v. Gunter 674 F.2d L.Ed.2d 340 the Su- (11th Cir.1982), preme denied, Court held that cert. fraud U.S. induce- by lending ment precluded bank was by 74 L.Ed.2d 63 1823(e). However, “We are less confident that these Federal § pointed the Court out that the doctrine will policies [D’Oench, behind the FDIC act always not apply: presence “The of fraud outweigh strong poli doctrine] relevant, however, could be to another re- protection cies of investor embodied in se quirement 1823(e), namely require- § Gunter, curities law.” 674 F.2d at 874. ment question that the ‘tend light In savings the current and loans’ ... to diminish or right, defeat the title or crisis taxpayers up cost to $500 interest’ of the FDIC.” Langley, 484 U.S. billion, President Franklin Roosevelt’s let- 108 S.Ct. at 98 L.Ed.2d at 348. Congress, urging pas- ter to the 73rd Olney Sav. & Loan Ass’n Trinity Banc sage of the Securities Act of 19337 contin- Ass’n, (5th Cir.1989). Sav. 885 F.2d strong ues reflect congressional policy: Fraud under signifi- the Securities Act is “What we seek is the return to a clearer cant since it renders the entire instrument understanding of ancient truth that void, void. If the FDIC never an banks, manage corporations, those who interest in the theoretically non-existent agencies handling using peo- other or other place. “note” in the first The specif- ple’s money acting are trustees for oth- ically allows the defense of fraud in the policy fiduciary responsibili- ers.” The factum. language, Because of its 29 also ty good dealing faith securities should fits exception: into this “Every narrow summarily not be overridden policy contract made in violation ... shall be assuring full regu- information to bank 78cc(b). void.” 15 U.S.C. § lators as reflected in the argues The FDIC that void should be doctrine. read as voidable and cites Gunter. The Exchange The Securities Act is different Court also states that because the fraud is from state and common law fraud claims merely inducement, fraud in the the con 1) for several reasons: Unlike state and merely However, tract voidable. claims, law common the Act makes 11th Circuit in said Gunter that “void” void, voidable; merely transaction only could be read as “voidable” “to assure 2) necessity adjudication for uniform party that the who has violated the securi peculiarly problem a federal is satisfied escape ties laws cannot liability ... no statute; 3) the Act countervailing reasons exist to limit the provides protec- the statute also the FDIC express protection pur afforded innocent tion from most actions under the Securities chasers of debt securities 29.” Gun participation Act since actual knowledge ter, or 674 F.2d at 876. 5th Circuit also part of the fraudulent transaction on the of dealt with the construction of 29. required.9 Properties the FDIC is Regional v. Financial Real Es acquiring preceded Securities Act of 1933 the Secu- such lien shall have actual Exchange rities Act of 1934. The Act was of facts reason of which making of policies such loan or extension of credit continuation of which were enact- acquisition ... or the of such lien is a viola- ed in 1933. provisions chapter any tion of the of this or thereunder, (2) regulation rule or or to afford 85, sess.,- Report Cong. 8. H.R. No. 73rd 1st any a defense to the collection of debt or (1933). obligation any or the enforcement of lien any person acquired shall have who such pertinent provides: 9. The section debt, obligation, good or lien in faith for val-' (c) Nothing chapter in this shall be construed ue and without actual of the viola- (1) validity any provision chapter to affect the of a loan or extension any tion of of this or making of credit ... unless at the regulation time of the affecting rule or legality thereunder the person debt, loan or extension of credit obligation, ... the of such or lien. 15 making 78cc(c) (underline added). such loan or extension of credit ... U.S.C. 1532 bank seriously doubt that (5th might one Co., F.2d 552 678 Consulting tate it made that permanently that its

Cir.1982) pronounced record this would Court theoretically the contract at 29 made position misrepresentations, that earlier such 10 to changed the initio” should be made the “void least, ab could the borrowers act could not of the that violators extent land of amounts actual document bank con language to rescind “void” use in records or in the bank rights and mineral part of an innocent the detriment tract to meetings. officer of bank the minutes case, is, in no this Because there y.11 FRB, Riddles, and However, fact that pro to “voidable” read “void” to reason inves- defrauding the innocent Suttles were Court is purchaser the innocent tect the likely to (borrowers) thing not a was tors as written. the statute left permanent bank's in the recorded be from protects its “smoking gun” proof Section records de- or to diminish tend “agreements intent. fraudulent in Corporation interest feat the the worth is not The issue it_” pro- will This asset do recorded. Investors was not stocks of cases. It majority the FDIC tect as to on an oral claim base their 1) the debtor is when not be successful will Rather, of the stocks. the worth requirements four meet to able fraudu- was of stock that the sale claim is agree- 2) no 1823(e), is actual there what to disclose FRB failed lent. When all. ment at situa- financial precarious about the knew Supreme Court’s accept the Naturally I fi- encouraged and still tion of TNB “As used agreement. definition broad sales, an active it was stock nanced the law, the term and contract in commercial defrauding the investors. participant meaning 'a wider has often 'agreement' such con- embraces promise ... and than investors the defrauded require To ” Langley, performance.’ on dition bank records—which show in the somehow 401, 98 L.Ed.2d at 91, at 108 S.Ct. at U.S. records, normally highly confidential are per- precedent conditions 346. The had to no outsiders —that available agreement. part of the also are formance require unlike- would be been defrauded statutory require- FDIC contends add the burden ly conduct .that fraudulently in not act the FRB ment that buy- to “let beware” “let the borrower repay- a condition of stock the sale could the borrower unless er beware” not write did investors Because the ment. all—in- fault for its bank record make the them, not to defraud FRB down see. cluding examiners—to fraudulent rescind cannot the investors Roosevelt, letter to in the same intent of President stretching the This is contracts. mentioned, “This said: previously limits. Congress beyond reasonable adds to ofAct proposal 1933] [Securities between no difference sees The Court emptor' the fur- rule of ‘caveat the ancient facts in and the Langley the situation It beware.’ seller ‘let the ther doctrine misrep- Langley, case. present telling truth the whole puts the burden lending bank was made resentation impetus give some It should seller. rights actu- mineral of land the amount thereby dealing in securities Although to honest transaction. in the ally involved guilty language Plan, it “establishes the "void” Christ v. National Church 10. Eastside denied, enforcing contract Cir.), precluded Inc., party cert. Mills, 234, 240, party.” unwilling L.Ed.2d 198 innocent 89 S.Ct. 393 U.S. (1968). at L.Ed.2d at protect the Court is to concern 603. The dealt with issue also 11. innocent, case, un- party. In this innocent Auto-Lite, U.S. v. Electric in Mills reading willing, party is served better Court also 24 L.Ed.2d language as “void”. "voidable” to be read as should "void” said that party. How- rights innocent protect the 1823(e). 12.12 U.S.C. statute uses ever, they point because the out that bring public back confidence.”13 If the says, that there is no reason investors are forced to show in the bank why this should not be extended to federal records that the bank intended to defraud law fraud They forget claims. princi- them, unfairly the burden is shifted to the pal why reasons these claims are barred in party innocent when it should be the seller- place, namely first for the sake of lender who bears the burden of fair deal- uniformity and the necessity of the FDIC’s ing. reliance on the bank records. There is no why reason a fraud claim based on viola-

If represen- the issue was the unrecorded tions of the Securities Act should be tation that the stock was worth more than barred. The need was, uniformity is ful- actually there problem would be no filled the fact that this is a application D’Oench, in the Duhme. As statute, subject only out, vagaries to the correctly points the Court “No authori- thirteen ty Appeals Federal Courts of suggests right compensated a to be with present the ever the federal government top. in- Moderators at the one’s However, vestments fail.” investors have rely FDIC will still be able to on the right expect protection of federal bank records which would be available on dqe statutes when the failure comes about supposition that the lending bank is not lending to the actions of the bank con- required to keep make and the records of nection with the sale of stock. its own fraudulent conduct. The Holder in agreements There were no secret ex- Due language Course in 29 of the Securi- changed payment which excused the Exchange protects ties Act the FDIC.15 If notes. payment What excuses is the con- knowledge the FDIC has actual of the fed- lending duct of the violation of the violation, eral security it would not have to Nothing Securities Act. rely particular on those debts of the bank require Duhme would the statutorily de- until a court decides if are in fact attempt frauded borrower-victim to to com- valid. ply recording requirements. with the emphasize I must allowing the Secu- ought apply not to be- rities Act repayment as a defense to the cause the investors are not trying to en- acquired by very loans FDIC is nar- force secret or an unwritten exception row to the Duhme doc- seeking but rather are to enforce a statu- trine and In the majority vast tory right dealing. to fair cases, the act will not be available. And involved, even when Securities Act fraud is II. knowledge requirement the actual will be a The reason that the federal common law tough hurdle to overcome. The Court’s estop state and common law fraud litigation concern about excessive is well simply defenses is because there is an over taken, case, but in this unfounded. riding public policy consideration for a uni dealing form federal rule when policies policy Two assuring collide—the case, leading FDIC.14 In the 5th regulators, Circuit full of bank Beighley policy assuring dealing 868 F.2d 776 Cir. fair in the sale of 1989), plaintiff the court held that a cannot Congress expressly securities. Until choice, assert fraud claims based on state or com makes the I would hold that viola- mon law. (or tion of the Securities Act is a defense sess.,- Report Cong. 13. H.R. No. 73rd 1st federal common law." Trust Co. v. Clearfield (1933) (underline added).- States, 363, 367, United (1943), from, Norcross, quoted policy uniformity "The Federal of decision Insolvency Superpowers, The Bank Game: FDIC arising for cases under federal law would be Doctrine, The D’Oench and Federal Common by great diversity obviated in results if identi Law, Banking L.J. subject vagaries cal transactions were the laws of several states. Where such incon supra occur, 15.See note 8. sistency in decisions would state law is appropriate fashioning not an selection to aid in relief) which neither for affirmative

basis off. nor cuts hold, I re- to so failure Court’s

To the dissent.

spectfully America, STATES

UNITED Plaintiff-Appellant, ERVIN, Wayne

Jerry

Defendant-Appellee.

No. 89-1673. Appeals, Court of States

United Circuit.

Fifth 26, 1990.

July notes (“FRB”), FRB the failed bank. When failed, acquired by the these notes were capacity FDIC in its as receiver. The assigned plaintiffs’ notes to then plaintiffs originally bridge bank. The Clements, Keyes, Evelyn V. Eugene J. alleged pro- sued for fraud in the FRB Tex., Clements, Houston, Porter & stock, motion and sale of certain bank plaintiffs-appellants. by inducing the which FRB underwrote Houston, Tex., Daniel, for de- D. Robert promissory notes plaintiffs to execute the fendants-appellees. then added issue. NCNB, succes- FDIC and defendants sors-in-interest. litigation complex procedural This has a DAVIS, history BROWN, that is relevant the issue JOLLY and Before us, appears appeal. As this case before Judges. Circuit (1942), at 12 was later codified originally stated The doctrine was U.S.C. § U.S. & Co. v. plaintiffs seek rescission of these notes on the gained from its participation in ground they are invalid because NCNB, the TNB litigation. assignee originally were obtained through FDIC, greater can no right to collect They allege fraud. that FRB assisted two on them than did the FDIC. NCNB coun-

Case Details

Case Name: Wade A. Kilpatrick, Stan E. Golub v. John C. Riddle, the Federal Deposit Insurance Corp., as Receiver for First Republicbank Houston, N.A.

Court Name: Court of Appeals for the First Circuit

Date Published: Jul 25, 1990

Citation: 907 F.2d 1523

Docket Number: 89-2963

Court Abbreviation: 1st Cir.