The opinion of the court was delivered by: Will, District Judge.
The plaintiff United States of America has moved for summary
judgment against defendant University National Bank in a suit
brought before this Court under the provisions of § 1345, Title
On or about October 29, 1959, the defendant bank was an insured
financial institution as defined in Title I of the National
Housing Act, 12 U.S.C. § 1701 et seq., and as such assigned and
delivered to the United States a promissory note dated July 23,
1957, payable by the makers Jose R. Flores and Martha Flores to
C. Herrington & Sons which had been endorsed in August, 1957, by
the payee to the order of the defendant. In assigning the note to
the plaintiff, the defendant executed thereon its express
The assignment and warranty by defendant was part of its claim
for reimbursement for loss pursuant to Title I of the National
Housing Act, supra, and
the regulations thereunder, 24 C.F.R. § 201.1 et seq. Under that
Act and those provisions, a note, to be qualified for insurance,
must "be valid and enforceable against the borrower or
borrowers." The Flores had executed their note as "borrowers"
within the meaning of the above.
After receiving the note from the defendant, together with
documents in support of the defendant's claim, the plaintiff, by
its agency the Federal Housing Administration, certified the
claim for payment and paid the sum of $3,623.88 to the defendant.
Upon payment to defendant, plaintiff sought to enforce the note
against the makers, the Flores. A civil suit, United States v.
Jose R. and Martha Flores, Civil No. 3333, was filed in the
United States District Court for the Northern District of Indiana
Hammond Division. Following trial of the issues, judgment was
entered in favor of the Flores. Based on Findings of Fact entered
simultaneously, the Indiana court made the following Conclusions
"6. When the University National bank `purchased'
the note in question on August 15, 1957, it reserved
payment of consideration for a six-day period for the
express purpose of ascertaining whether or not there
was `any infirmity in the instrument or defect in the
title of the person negotiating it.' The day
following the `purchase', the bank was expressly
informed by the defendant, Martha Flores, that
Herrington had failed to perform the contract upon
which the note was executed. This constituted notice
to the bank of an `infirmity' or `defect of title'
such as to prevent the bank from becoming a holder in
due course. Since the bank did not disburse the
proceeds of the note until the expiration of six
days, the note was not negotiated until that time
even though the `purchase' had taken place on August
"7. The bank had notice of an `infirmity' or
`defect in the title' before it accepted the note.
Therefore, the University National Bank was not a
holder in due course. Consequently, the United States
does not derive its title through a holder in due
course. A person, other than a holder in due course,
holds the instrument subject to the same defenses as
if it were non-negotiable. Ind.Ann.Stat. § 19-408.
"8. The United States holds the note subject to the
defense of non-performance of the contract by
Herrington. Herrington clearly failed to perform the
contract. Therefore, the United States is not
entitled to recover in this action."
The Indiana court having found the note unenforceable against
the maker, the plaintiff demanded payment of the defendant in the
amount of $3.623.88. Upon defendant's refusal to pay, plaintiff
brought this suit, alleging a breach of warranty and
misrepresentation. The defense urges that the Findings of the
Indiana court are not binding upon it, that it did not have
proper notice of the Indiana proceeding, and that the case
against the Flores was mishandled by the government attorney
assigned to it, hence giving the defendant the right to
relitigate the question of whether the bank was a holder in due
This case is substantially similar to Citizens National Trust
& Savings Bank of Los Angeles v. United States, 270 F.2d 128 (9th
Cir. 1959). That case, also arising out of the United States'
role as an insurer under the National Housing Act, followed the
two stage pattern of the case before this Court. In its initial
suit against one Bashore, the United States was found not to be
a holder in due course as against the maker, having received the
note there in question from a bank which had notice of defects in
the note. In the second stage, the United States' suit against
the bank for breach of warranty, the trial court accepted as
conclusive the findings made by the court in the earlier case
Affirming this action by the trial court, the Citizens opinion
"It is well established that where a question of
fact, or a mixed question of fact and law, essential
to a judgment is actually litigated and determined by
a valid and final judgment, the determination is
conclusive between the parties and their privies in a
subsequent but different cause of action involving
the same facts. [Citing numerous cases] Since this is
the law, it is apparent that the determination of
fact made by the trial judge in Bashore is binding on
the parties to this suit, because, as we have said,
the same facts are present in both suits and the
government and the bank are in privity. It is clear
that there was an insurer-insured relationship
between them under the provisions of the National
Housing Act, as well as an assignor-assignee
relationship stemming from the assignment of the note
to the United States by the bank, which carried the
express warranty that the note was insurable. Because
of this, and because the determination that the note
was not valid and enforceable was necessary to the
Bashore judgment, we hold that under the doctrine of
collateral estoppel the findings in Bashore are
binding on the appellant in the instant case." Id.,
270 F.2d at 131-132.
There is ample precedent for the above holding. In Southern
Pac. R. Co. v. United States, 168 U.S. 1, 18 S.Ct. 18, 42 L.Ed.
355 (1897), the first Mr. Justice Harlan wrote as follows:
"The general principle announced in numerous cases is
that a right, question, or fact distinctly put in
issue, and directly determined by a court of
competent jurisdiction, as a ground of recovery,
cannot be disputed in a subsequent suit between the
same parties or their privies; and, even if the
second suit is for a different cause of action, the
right, question, or fact once so determined must, as
between the same parties or their privies, be taken
as conclusively established, so long as the judgment
in the first suit remains unmodified. This general
rule is demanded by the very object for which civil
courts have been established, which is to secure the
peace and repose of society by the settlement of
matters capable of judicial determination." Id., 168
U.S. at 48-49, 18 S.Ct. at 27, 42 L.Ed. 355.
The defendant seeks to distinguish Citizens on the ground that
at the Bashore trial, the initial proceeding against the maker of
the note, the bank's counsel was present though, as here, the
bank was not a party to the suit and counsel did not participate
in the trial. It also urges that it was not given adequate notice
of the Indiana proceeding. The affidavits submitted by the
parties indicate that the bank received notice of the Flores case
on the day before the trial. There was sufficient time to secure
the documents which were subpoenaed for that trial. Moreover, an
employee of the bank was present and testified at the trial. The
failure of the bank to advise its counsel of the pendency of that
proceeding, to ask leave to intervene or to take other action to
protect its interests, cannot now be grounds for this Court to
reexamine facts already ruled upon in a sister federal court. Nor
are the allegations regarding the competence of the Assistant
United States Attorney who tried the Indiana case sufficient to
warrant retrial of the questions there decided.
The defendant having admitted the execution of the warranty, no
issue remains as to any material fact. Thus, in view of the
foregoing, the motion of the United States will be granted and
judgment entered in the amount of $3,623.88.
An order consistent with the above will be entered.
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