Brookside Associates, a California Limited Partnership Douglas F. McRae and Chad R. Turner v. Michael Rifkin, Husband, and Anita Rifkin, Wife Frederick Weaver, Husband, and Denise Weaver, Wife Resolution Trust Corporation, as Receiver for Southwest Savings and Loan Association
Docket: 93-15048
Court: Court of Appeals for the Ninth Circuit; February 20, 1995; Federal Appellate Court
Brookside Associates, a California limited partnership, along with its general partners, filed a fraud lawsuit against the Resolution Trust Corporation (RTC) and two former officers of Southwest Savings and Loan Association, claiming damages due to misrepresentations made during the sale of 28 condominium units in Mesa, Arizona. The RTC and the individual defendants sought summary judgment based on the D'Oench, Duhme doctrine and 12 U.S.C. § 1823(e), which the district court granted. Brookside appealed the decision.
Brookside purchased the condominiums in June 1986, relying on a letter from Anita Rifkin, a senior vice president at Southwest, which falsely stated that a recent appraisal valued the units at $1.78 million, while the actual appraisal was only $1,374,500. Rifkin reassured Brookside about the appraisal's accuracy at a meeting, but when asked for supporting documentation, claimed it was confidential. Subsequent appraisals also confirmed the lower value, which were concealed by waiving the appraisal fees according to Southwest's policy. Brookside ultimately defaulted on its loan from Southwest, leading to a foreclosure in March 1989, where Southwest reacquired the property through a credit bid at auction. The appellate court affirmed part of the district court's ruling while reversing other aspects.
In September 1989, the RTC was appointed as receiver for Southwest, acquiring ownership of all its assets, including condominiums, which were subsequently transferred to a new entity, Southwest Savings, Loan Association, F.A. (New Southwest). New Southwest sold the condominiums to a third party in August 1990. Prior to the RTC's appointment, Brookside had filed a lawsuit against Southwest in state court, which was later removed to federal court and dismissed without prejudice. Brookside also submitted a claim to the RTC that was unsuccessful. In June 1992, Brookside initiated a new complaint alleging fraud, fraudulent concealment, and negligent misrepresentation by Rifkin and Weaver, seeking compensatory and punitive damages related to the condominiums.
Instead of responding to the complaint, the RTC, Rifkin, and Weaver sought summary judgment, conceding the allegations for the motion's purpose. The district judge granted the motion, citing the D'Oench, Duhme doctrine and 12 U.S.C. Sec. 1823(e). Brookside appealed this decision. The appellate review of the summary judgment is conducted de novo, assessing whether the RTC is entitled to judgment as a matter of law when viewing evidence favorably towards Brookside.
The RTC contends that Brookside's claims are barred by the D'Oench, Duhme doctrine, which protects the FDIC and public funds from undisclosed agreements related to financial assets. This doctrine was established in D'Oench, Duhme, Co. v. FDIC, where the Supreme Court ruled that undisclosed agreements cannot be used as a defense against the FDIC to uphold the integrity of its financial evaluations. The doctrine serves to prevent liability based on hidden conditions or deceitful documents, ensuring bank examiners can rely on accurate bank records.
Congress enacted 12 U.S.C. § 1823(e), codifying the D'Oench, Duhme doctrine, which provides that certain agreements cannot undermine the interests of the FDIC (or RTC) in assets unless specific conditions are met: the agreement must be in writing, executed contemporaneously with the asset acquisition, approved by the institution’s board or loan committee, and maintained as an official record. This statute was extended to the RTC in 1989 prior to its acquisition of Southwest. In Langley v. FDIC, the Supreme Court addressed whether fraud in the inducement could be a defense against the FDIC under § 1823(e), concluding that unrecorded representations by a bank regarding property conditions constituted a secret agreement that could not be asserted against the FDIC, as they could mislead banking authorities. The Langley case broadened the application of the D'Oench, Duhme doctrine to include misrepresentation claims as secret agreements. Brookside's claims of misrepresentations about condominium values parallel those in Langley, with the RTC asserting that such claims fall under the doctrine and are unenforceable. However, a key distinction is noted: in Langley, the misrepresentations were initially presented as a defense against the note obligation, whereas here, Brookside's claims are being addressed in a different context.
Debtors signing notes with "unwritten and unrecorded" conditions risk misleading banking authorities relying on the bank's records. In the case at hand, when the RTC took over Southwest in September 1989, no enforceable note existed as the note and deed of trust were extinguished prior to the RTC's acquisition. Southwest retained ownership of the condominiums obtained through foreclosure. Brookside argues that because the note was extinguished before the RTC's takeover and its suit does not contest the RTC's rights to the condominiums, there was no relevant asset at the time of takeover, thus neither common law nor statute bars its suit.
The argument holds potential strength regarding Section 1823(e), which pertains to agreements affecting the banking authority's interests in specific bank assets. The Murphy v. FDIC case illustrated that Section 1823(e) does not prevent the enforcement of agreements that are not tied to the bank's assets. If Section 1823(e) applies only when the secret agreement impacts the value of an asset acquired by the RTC, Brookside's suit would not be barred. Various cases reaffirm that a discharged note, independent of any secret agreements before the FDIC's acquisition, does not qualify as an asset under Section 1823(e).
However, the D'Oench, Duhme doctrine ultimately prohibits Brookside's suit against the RTC. This doctrine aims to protect the RTC from misrepresentations concerning insured bank assets. It posits that debtors asserting "secret agreements" not documented by the bank favor bank examiners and the insuring agency. Borrowers are expected to ensure all agreement terms are in writing to protect their interests, thereby placing the burden on them if they fail to do so. The relevant inquiry centers on whether the party could have reasonably taken steps to secure a written agreement.
The underlying policy of Section 1823(e) is relevant to the application of the D'Oench, Duhme doctrine, which seeks to prevent secret agreements from affecting the value of bank assets. The court asserts that the doctrine should not be limited to situations involving assets that were on a bank's books at the time of an RTC takeover, as exemplified by Brookside's lawsuit, which was filed after the satisfaction of the note. Allowing debtors to circumvent D'Oench, Duhme protections by waiting until a note is extinguished undermines the doctrine's purpose and could encourage manipulative behavior.
The ruling emphasizes that the focus should be on whether the agreement misled the banking authority at its inception, not on the current status of the note. Brookside's claims illustrate a violation of D'Oench, Duhme, as the unrecorded agreement hindered the bank's ability to make informed evaluations regarding the loan. The court concludes that the D'Oench, Duhme doctrine applies even in cases where no specific asset was acquired by the RTC, aligning with precedent from other appellate cases that have consistently rejected limitations on the doctrine based on the nature of the agreements involved.
Brookside's claim against the FDIC is barred by the D'Oench, Duhme doctrine, which protects the FDIC from claims based on undisclosed agreements that are not reflected in bank records. Brookside's situation involves a fraudulent appraisal linked to a loan for real estate, a standard banking transaction. Had Brookside incorporated the false appraisal into the loan documents, it is likely the fraud would have been detected by bank officials. The court concluded that the burden of loss falls on Brookside, as it failed to safeguard itself by documenting the “secret agreement.”
Brookside's arguments that its claims for fraudulent and negligent concealment should not be barred by D'Oench, Duhme were rejected, aligning with the broader judicial consensus. The court emphasized that recasting active misrepresentation as concealment would undermine the D'Oench, Duhme policy aimed at preventing claims based on undisclosed facts.
Regarding the individual defendants, the court granted summary judgment in their favor, reasoning that allowing claims against bank officers would circumvent the protections offered by D'Oench, Duhme. However, the court noted that there is no policy rationale to extend these protections to bank officials in their individual capacities, particularly if public funds are not implicated. The Seventh Circuit has also suggested that individual bank officers are not necessarily shielded by the D'Oench, Duhme doctrine.
Collateral agreements are enforceable against their signatories but not against the FDIC, as established in FDIC v. State Bank of Virden. Plaintiffs can pursue individual wrongdoers even if their claim against the federal banking authority is barred under the D'Oench, Duhme doctrine, which does not affect their rights under federal securities laws. While the validity of indemnification agreements binding the federal banking authority is not determined, the agreements between Southwest and Rifkin and Weaver state indemnification only for actions taken in good faith, as per Arizona law. However, Rifkin and Weaver have stipulated to fraudulent behavior, acknowledging knowledge of false appraisal values intended to deceive plaintiffs. This stipulation precludes their claim for indemnification at this stage. The district court's summary judgment in favor of the RTC is affirmed, while the judgment for Rifkin and Weaver is reversed, with RTC awarded costs of appeal. The record indicates no fraudulent representations were documented in the bank's records, and the RTC's knowledge of the lawsuit prior to acquiring the bank is deemed irrelevant to the harm suffered. Various cases are cited to support the application of D'Oench, Duhme in similar contexts.
The Meo exception is inapplicable because, despite Brookside's good faith in signing a note linked to an unrecorded agreement, it created a potential for misleading the RTC. The parties suggest that D'Oench, Duhme, and Section 1823(e) share the same scope but do not claim that the statute overrides the common-law doctrine, thus preemption is not addressed. A district court has indicated that the statute does not preempt the common-law doctrine. The D'Oench, Duhme doctrine applies to obligations owed by the bank as well as loans to it, and prohibits enforcement of alleged agreements to lend in the future. This doctrine protects the FDIC even without a specific asset interest, and agreements increasing a bank's liabilities are denied enforcement under it. It is noted that Section 1823(e) and D'Oench, Duhme prevent a debtor from using documents not in the bank's records to argue that an asset did not exist at the time the banking authority assumed control. However, this specific issue is not relevant here, as no argument is made regarding Brookside's note and deed of trust remaining on the bank's records post-foreclosure.
