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April 14, 1964


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 28, U.S.C.

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 warranty:

    "All right, title and interest of the undersigned
  is hereby assigned (without warranty except that the
  note qualifies for insurance) to the UNITED STATES OF

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 of Law:

    "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
  15, 1957.
    "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 course.

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 against Bashore. Affirming this action by the trial court, the Citizens opinion states:

  "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 ...

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