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FSLIC v. SMITH

October 31, 1989

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for FirstSouth, F.A., PLAINTIFF,
v.
W. ROBERT SMITH, DEFENDANT, COUNTERPLAINTIFF AND THIRD PARTY PLAINTIFF, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for FirstSouth, F.A., et al., THIRD PARTY DEFENDANTS



The opinion of the court was delivered by: EISELE

 GARNETT THOMAS EISELE, CHIEF UNITED STATES DISTRICT JUDGE

 Defendant borrowed some $ 494,000 from FirstSouth, F.A. Subsequently, defendant failed to repay the loan and the FSLIC was appointed receiver for FirstSouth, succeeding to all of FirstSouth's rights against defendant. FSLIC as receiver filed suit in this Court to collect on defendant's note. Defendant responded that he had been duped into borrowing the money for the purpose of buying now worthless FirstSouth stock, and that this misconduct excused his duty to repay the loan. He also asserts other affirmative defenses. In addition, defendant filed a counterclaim against FirstSouth and a third party complaint against Mr. Rod Beason, seeking to recover for violations of federal and state securities law and for fraud, constructive fraud, negligence, and conspiracy. FSLIC has moved to strike the affirmative defenses, to dismiss the counterclaim and third-party complaint, and for summary judgment.

 CLAIMS, DEFENSES, AND COUNTERCLAIMS

 The complaint is a simple one, asserting execution of a note, default, and demand. In his counterclaim, defendant alleges that FirstSouth and and third party defendant Rod Beason materially misrepresented FirstSouth's financial condition, leading defendant to buy a block of FirstSouth stock. Furthermore, defendant says he was induced to borrow from FirstSouth the money to buy the stock. FirstSouth later failed, rendering the stock worthless and leaving defendant with a claimed debt of nearly half of a million dollars to FirstSouth.

 As affirmative defenses, defendant relies upon the alleged fraudulent conduct asserted in his counterclaim and third party complaint, claiming that he is entitled to rescission, recoupment, and other affirmative relief, and that plaintiff is barred by estoppel, illegality, unclean hands, and lack of consideration. He further asserts a right of setoff for the damages asserted in the counterclaim, and finally claims that he lacked capacity at the time he signed the notes.

 REGULATORY FRAMEWORK

 Absent the FSLIC's takeover of FirstSouth, this lawsuit would be a garden variety collection case with not uncommon counter-allegations of fraud. But this case cannot be understood apart from the pervasive regulatory scheme which surrounds savings and loans. This Court's very jurisdiction is based on the fact that the FSLIC has been appointed receiver. 12 U.S.C. 1730(k)(1)(B). To make the matter even more complex, that regulatory scheme has recently undergone substantial revision as Congress responds to the industry crisis. We begin with a sketch of pertinent portions of the regulatory plan under which the FSLIC operates.

 First to be reviewed is the law as it stood at the time this lawsuit was filed. The Federal Home Loan Bank Act, 12 U.S.C. 1421, et seq., created a Federal Home Loan Bank Board ("Board") which regulates Federal Savings and Loans Associations pursuant to the Home Owners' Loan Act of 1933, 12 U.S.C. 1461, et seq. The FSLIC was created in 12 U.S.C. 1724, et seq., and directed to "insure the accounts of institutions eligible for insurance" under the provisions of 12 U.S.C. 1726. 12 U.S.C. 1725(a). The FSLIC was under the direction of the Board. Id. See generally, Coit Independence Joint Venture v. FSLIC, 489 U.S. 561, 103 L. Ed. 2d 602, 109 S. Ct. 1361, 1366-68 (1989).

 The Board was empowered to appoint a conservator or receiver for any savings and loan association on any of the grounds listed in 12 U.S.C. 1464(d)(6)(A). Ordinarily, the Board was required to appoint the FSLIC as receiver for an association. 12 U.S.C. 1464(d)(6)(D). Some of FSLIC's powers and duties as receiver were set forth in 12 U.S.C. 1729(b)(1). FSLIC is authorized to take over the assets of and operate the savings and loan, to take necessary action to put the association in a sound solvent condition, to merge it with another insured institution, to organize a new association to take over the assets, to liquidate the assets, or to make such other disposition of the matter as it deems appropriate, whichever it deems to be in the best interest of the association, its savers and the FSLIC. 12 U.S.C. 1729(b)(1)(A). It was FSLIC's duty to "pay all valid credit obligations of the association." 12 U.S.C. 1729(b)(1)(B). Additional powers of FSLIC as receiver were set forth in 12 U.S.C. 1729(d), including the power to "collect all obligations to the insured institutions, to settle, compromise, or release claims in favor of or against the insured institutions, and to do all other things that may be necessary in connection therewith, subject only to the regulation of the [Board]." FSLIC brought this action pursuant to its powers as receiver. Complaint, para. 1.

 The FSLIC was also authorized to take steps in its corporate capacity to assist regulated savings and loans. For example, it was empowered to make loans to, to make deposits in, to purchase the assets or securities of, to assume the liabilities of, or to make contributions to insured institutions which were in default or which were threatened with default. 12 U.S.C. 1729(f)(1). FSLIC was also authorized to facilitate mergers or consolidation of institutions or the sale of assets of an institution by purchasing assets or assuming liabilities, making loans, contributions, deposits, or purchases of securities or giving guarantees. 12 U.S.C. 1729(f)(2).

 The Eleventh Circuit Court of Appeals in Gunter v. Hutcheson, 674 F.2d 862, 865 (11th Cir. 1982), cert. denied 459 U.S. 826, 74 L. Ed. 2d 63, 103 S. Ct. 60 (1982), has explained the courses of action available to the FDIC when it takes over a failed bank. (The same options are available to the FSLIC.)

 
As insurer one of the primary duties of the FDIC is to pay the depositors of a failed bank. The FDIC has two methods of accomplishing this duty. The simplest method is to liquidate the assets of the bank and then pay the depositors their insured amounts, covering any shortfall with insurance funds. This option, however, has two major disadvantages. First, the sight of a closed bank, even an insured one, does not promote the utmost confidence in the banking system. . . . To avoid the significant problems with liquidation, the FDIC whenever feasible employs a "purchase and assumption" transaction to arrange for another bank to "purchase" the failed bank and reopen it without interrupting banking operations and with no loss to the depositors. A purchase and assumption involves three entities: the receiver of the failed bank, the purchasing bank, and the FDIC as insurer. In most cases, the FDIC is appointed receiver by the appropriate banking authority and thus acts in two separate capacities, as receiver and as corporate insurer. . . .
 
Because the time constraints often prohibit a purchasing bank from fully evaluating its risks, as well as to make a purchase and assumption an attractive business deal, the purchase and assumption agreement provides that the purchasing bank need purchase only those assets which are of the highest banking quality. Those assets not of the highest quality are returned to the receiver, resulting in the assumed liabilities exceeding the purchased assets. To equalize the difference, the FDIC as insurer purchases the returned assets from the receiver which in turn transfers the FDIC payments to the purchasing bank.

 Whether FSLIC acts in its corporate or receivership capacity, its obligations are the same: to protect the interests of itself, the association, and the savers. Whether a particular asset remains with the association or is purchased by the corporation depends on the needs of the association for cash and the quality of the asset.

 Plaintiff brings this action in its capacity as receiver for FirstSouth, not in its corporate capacity. It therefore holds the note by assignment, rather than through purchase. The consequences of that distinction will be explored further below. This summary of pertinent portions of the regulatory law applicable at the time this action was filed will suffice as a foundation for the discussion to follow.

 On August 9, 1989, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) became law. Pertinent here are the provisions of that Act which dissolved the FSLIC and made FDIC the federal deposit insurer for banks and savings and loan associations alike. FDIC is generally given the same responsibilities as FSLIC with respect to administering insolvent associations. The other provision of FIRREA relevant to this case is the extension of 12 U.S.C. 1823(e), the scope of which is discussed below, to FDIC in its capacity as receiver.

 MOTION TO DISMISS COUNTERCLAIM

 Defendant asserts both affirmative defenses to the collection of the note and a counterclaim sounding in deceit. These are two distinct issues: the affirmative defenses raise difficult questions as to whether -- and, if so, the extent to which -- personal defenses to the note are cut off by the appointment of FSLIC as receiver. The counterclaim, so far as the Court can ascertain, does not implicate any of these questions. The motion to dismiss the counterclaim will be taken up first because it provides an appropriate context for discussion of the affirmative defenses, and because the Court takes resolution of that motion to be straightforward.

 The counterclaim asserts that defendant was injured by fraud and deceit for which FirstSouth is liable. Considered strictly as a claim for securities and other types of fraud, it makes no difference whatever where the money for the stock purchase came from. If defendant had used strictly his own money and been defrauded, he would be allowed to assert his claim in a lawsuit in a court with subject matter jurisdiction. The Court does not accept plaintiff's flat assertion that "for the same reasons that [defendant's] allegations do not constitute defenses which can be raised against the Receiver, they do not constitute a basis for affirmative relief against it." Reply to Opposition, n. 1. Plaintiff appears to contend that the mere fact that the FSLIC is appointed receiver washes away fraud claims against the association. That result is precluded by ...


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