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July 13, 1955


The opinion of the court was delivered by: Hoffman, District Judge.

This is an action by The Central National Bank in Chicago against the Reconstruction Finance Corporation for breach of contract. Federal jurisdiction rests upon the ownership by the United States of the entire capital stock of the Reconstruction Finance Corporation, the requisite jurisdictional amount being involved. The statute creating the RFC and amendatory legislation provided that all of its stock be held by the United States Government, 15 U.S.C. § 601, 15 U.S.C.A. § 601. Any suit by or against the RFC is therefore a suit arising under the laws of the United States within the meaning of 28 U.S.C. § 1331. Machine Tool & Equipment Corp. v. Reconstruction Finance Corp., 9 Cir., 1942, 131 F.2d 547, 549; Marks v. Reconstruction Finance Corp., 4 Cir., 1942, 129 F.2d 759, 760.

The complaint herein cites only 28 U.S.C. § 1349 as the basis for jurisdiction in this suit. This section provides:

    "The district courts shall not have jurisdiction of
  any civil action by or against any corporation upon
  the ground that it was incorporated by or under an
  Act of Congress, unless the United States is the
  owner of more than one-half of its capital stock."

While, strictly speaking, the foregoing section is a limitation upon jurisdiction rather than a grant of jurisdiction, Fields v. Community Federal Savings & Loan Ass'n, D.C.Mo. 1941, 37 F. Supp. 367, the failure to cite the correct section of the Federal Judicial Code is immaterial where, as here, it is clear from the face of the complaint that federal jurisdiction exists. Prior to the enactment of 28 U.S.C. § 1349 any suit against a federal corporation was held to be a suit arising under the laws of the United States for purposes of federal jurisdiction. Osborn v. United States Bank, 1824, 9 Wheat. 738, 817, 828, 6 L.Ed. 204; Union Pac. R. Co. v. Myers, 1885, 115 U.S. 1, 2, 5 S.Ct. 1113, 29 L.Ed. 319; Matter of Dunn, 1909, 212 U.S. 374, 383-384, 29 S.Ct. 299, 53 L.Ed. 558. The enactment of 28 U.S.C. § 1349 does not alter the legal basis of federal jurisdiction over federal corporations where more than half of its stock is owned by the United States.

The contract upon which the Bank here brings suit is a printed, standard-form document known as the "Blanket Participation Agreement" which the RFC made available to banks generally throughout the country beginning in March 1945. The Bank alleges that the RFC breached this Agreement by refusing to purchase a 75% participation in a loan which the Bank made to the Kungsholm Baking Company and on which the Bank sustained a loss of approximately $135,000. The RFC justifies its refusal to purchase the participation in this loan on the ground that it was only obligated to purchase participations in loans which were secured by "validly pledged collateral having an appraised value (deemed reasonable by Bank) in excess of the unpaid balance" prior to any disbursement on the loan. The Bank concedes that the steps necessary to perfect the validity of the mortgages which were to secure the loan were not completed prior to the Bank's disbursement thereon. The Bank, however, claims that the loan was validly secured by adequate collateral prior to the date upon which it made demand on the RFC for the purchase of a participation and that this was sufficient.

The issues for decision here are these: First, whether the loan to Kungsholm was secured by validly pledged collateral prior to the disbursement thereon. Second, if it was not, whether it is a condition precedent to the obligation of the RFC to purchase a participation that the loan be validly secured prior to disbursement by the Bank thereon. Third, whether the Bank ever had an appraisal deemed reasonable by the Bank showing the value of the collateral to be in excess of the disbursement on the loan.

The Blanket Participation Agreement between the Bank and the RFC was signed December 12, 1945. The parties made no alterations in the standard printed form but merely inserted in the appropriate blank spaces the date of the execution of the agreement, the name of the Bank, the date of December 31, 1945, as the termination of the first quarter for which the recurring quarterly participation charge was due from the Bank to the RFC, and the signature of the parties.

The Blanket Participation Agreement was introduced to banks and business concerns by the issuance by the Reconstruction Finance Corporation of its Circular No. 25. The Bank attached a copy of this circular to its complaint and relies upon it for its interpretation of the Blanket Participation Agreement. The circular was issued on March 25, 1945, and bore the heading "Information Regarding Blanket Participation In Loans Made By Banks to Business Enterprises." This circular contains a page and a half explanation of the purpose and intent of the Agreement, a copy of the form of Agreement and excerpts from "Acts of Congress Applicable to Loans of the Character Herein Described." The purpose and intent of this Blanket Participation Agreement is set forth as follows:

    "Reconstruction Finance Corporation has adopted a
  program which in effect provides for a practically
  automatic guaranty of 75% (or such lesser percentage
  as may be requested by the bank) of loans made by
  approved banks to business enterprises which meet the
  requirements of the Blanket Participation Agreement
  set forth on pages 2 to 6 of this Circular. Under
  this program, such loans would be made by banks upon
  terms and conditions satisfactory to them without the
  necessity of filing loan applications with the R.F.C.
  as heretofore.
    "This action has been taken in order to adequately
  and promptly care for the large volume of
  applications for loans which it is anticipated may
  develop during and subsequent to the period of
  conversion from a wartime to a peacetime economy.
    "It is and always has been the policy of the
  Corporation to carry on its business in a manner
  which fosters private enterprise and avoids
  competition with banks. It is in furtherance of this
  established policy that the plan herein described has
  been made available to banks and industry.
    "In order to qualify for protection under this new
  arrangement, a bank will make application for a
  Blanket Participation Agreement * * * (If) approved
  the Agency Manager will execute the Agreement.
    "Thereafter, a bank desiring to make a loan under
  the protection of the Agreement will first submit to
  the Agency Manager a schedule of the salaries and
  other compensation of the officers * * * of proposed
  borrower * * * If such * * * are found * * * to be
  reasonable and the proposed loan meets the
  requirements of the Agreement it will automatically
  be covered by the Agreement upon notice to the Loan
  Agency on a simple one page form.
    "* * * The simplicity of this procedure and the
  fact that the handling of the loan is in the bank's
  hands make it very attractive to banks desiring this

The Blanket Participation Agreement provided that the Bank, immediately upon making any loan as to which it desired the protection of the Agreement, should send the RFC a written notice, on a form supplied by the RFC, of the percentage of participation, not in excess of 75%, designated by the Bank, together with such other information respecting the loan as might be requested by the RFC. The Agreement further provided that thereafter the Bank should pay the RFC a participation charge of three-fourths of one per cent per annum on all loans on which it had designated the participation of the RFC as in excess of 50% of the loan and furnish the RFC with monthly reports of payments of principal and interest on the loans.

The Agreement did not require the RFC to indicate any acceptance of loans nor to sign any guaranties nor to advance any funds unless the Bank should call upon it to purchase a participation in one or more of the loans protected by the Agreement. The Agreement did however obligate the RFC to purchase for cash from the Bank the designated percentage of participation upon ten days' written demand given at any time not later than 60 days after maturity of the loan, provided the loan was of the proper type and met the conditions listed in the Agreement. If the RFC purchased a participation, the RFC then became subject to a provision in the Agreement requiring it to share with the Bank any loss on the loan in the proportion of its participation.

The language of the Agreement respecting the securing of loans by collateral appears in the following context:

    "3. * * * RFC will * * * purchase for cash from
  Bank * * provided:
    "(a) At the time of the first disbursement on
  account of such loan Bank received a statement of
  Borrower's financial condition * *
    "(b) At the time of the first and each subsequent
  disbursement * * * Bank received evidence * * * that
  there has been no adverse change * * * in Borrower's
  financial condition, * * *
    "(c) No disbursement was made by Bank on account of
  such loan unless such loan was secured by validly
  pledged collateral having an appraised value (deemed
  reasonable by Bank) in excess of the unpaid balance
  of amounts previously disbursed on account of such
  loan and the amount then to be disbursed.
    "(d) RFC Agency Manager promptly received reports
  and notice * * * as provided * *
    "(e) No part of the proceeds of such loan was used
  directly or indirectly in payment of indebtedness of
  Borrower to Bank incurred prior to the making of such
  loan * *."

Operating under this Blanket Participation Agreement, the Bank made in all some $3,125,000 of loans on which it sought and obtained the protection of the RFC. We are here concerned with only one of those loans, that made by the Bank on June 27, 1946, to the Kungsholm Baking Company. The Bank promptly designated the loan to Kungsholm as one on which it desired the protection of the Agreement. It did so by sending to the RFC on June 28, 1946, on the usual form, notice that it had loaned the Kungsholm Baking Company the sum of $350,000 and that it desired the protection afforded by the Blanket Participation Agreement to the extent of 75% in connection with this loan. This notice further showed that the Bank had disbursed $275,000 to the Borrower on June 27, 1946, and that the balance of the loan would be disbursed from time to time upon the Borrower's ...

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