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Federal Deposit Insurance Corp. v. Lauterbach

decided: July 17, 1980.


Appeals from the United States District Court for the Eastern District of Wisconsin. Nos. 76 C 341, 76 C 342 and 76 C 340 -- Robert W. Warren, Judge.

Before Pell and Sprecher, Circuit Judges, and Markey, Chief Judge.*fn*

Author: Sprecher

This is an appeal from the district court's granting of summary judgment in favor of plaintiff, Federal Deposit Insurance Corporation (FDIC).*fn1 The defendants contend that the district court erred in its interpretation of the relevant statute, 12 U.S.C. § 1823(e), and that genuine issues of material fact precluded summary judgment. We find defendants' arguments without merit and affirm the judgment below.



In these actions, the FDIC seeks payment of principal and accrued interest on three promissory notes.*fn2 Each of the notes is payable to the American City Bank & Trust Company (American) and all were due on April 28, 1976. Each defendant admits executing a note and admits that no payments of principal or interest have been made.*fn3

By order of the Comptroller of the Currency, American was declared insolvent on October 21, 1975, and the FDIC was appointed its receiver. The FDIC, as receiver, entered into a purchase and assumption agreement with the Marine National Exchange Bank of Milwaukee. In order to facilitate this agreement, the FDIC, in its corporate capacity, purchased from the FDIC, in its capacity as receiver, certain assets of American, including the three notes at issue here.*fn4 The purchase and assumption agreement was approved by the district court in an ex parte proceeding. See In re Liquidation of American City Bank & Trust Co., N.A., 402 F. Supp. 1229 (E.D.Wis.1975).

In the district court, the defendants raised essentially three defenses to the FDIC's claims. First, each defendant denied receiving value for his note. Second, each defendant challenged the validity of the purchase and assumption transaction and the effectiveness of the transfer of the notes to the FDIC.*fn5 Finally, each defendant asserted that execution of his note was induced by fraud committed by American and the FDIC in connection with a 1974 stock purchase. Each defendant had purchased stock of American Bankshares Corporation (Bankshares), the parent of American, in 1974; the purchases were financed through loans from an affiliated bank subsequently repaid with the proceeds of the notes at issue here. The defendants asserted that they were fraudulently induced to purchase this stock by misrepresentations on the part of American's officers. The FDIC allegedly aided this fraud by failing to advise the defendants that the assurances given them by the officers were misrepresentations.

The FDIC moved for summary judgment in each of the three suits. The defendants opposed the motions and filed identical affidavits alleging additional instances of fraud on the part of the Bank's officers. The district court granted summary judgment in favor of the FDIC in all three suits, finding that none of the defenses raised by the defendants presented a genuine issue of material fact. With respect to the fraud defense, which is our primary concern on this appeal, the district court found for the FDIC on two alternate theories. First, the court held that 12 U.S.C. § 1823(e) clothed the FDIC, in this situation, with the same protection from the defense of fraud in the inducement accorded a holder in due course of a negotiable instrument.*fn6 See Wis.Stat. § 403.305. In the alternative, the district found that even if the fraud defense could be asserted against the FDIC, the pleadings, affidavits, depositions and other materials in the record did not reveal a genuine issue of material fact with respect to that defense. The district court also ruled that no genuine issue of material fact existed with respect to whether defendants had received value for their notes and found no defect in the purchase and assumption transaction or the transfer of the notes to the FDIC.

On this appeal, the issues have been narrowed somewhat. In the district court, the defendants raised the alleged defects in the purchase and assumption transaction and the transfer of the notes to the FDIC as a separate defense, independent of the fraud allegations. On appeal, however, the defendants raise this defense only in connection with their argument that the defense of fraud in the inducement maybe asserted against the FDIC. See Brief of Defendants-Appellants at 15-21, 37-38. Because we find that defendants' allegations of fraud present no genuine issues of material fact, we need not decide whether the FDIC is protected from this defense. We therefore will not address the challenges to the purchase and assumption transaction or the transfer of the notes. The issues are further narrowed because the defendants do not contend on appeal that the FDIC was involved in the alleged fraud. Finally, although they continue to assert that they received no value for their notes, it is apparent that they consider this defense substantially equivalent to the fraud defense. See Brief of Defendants-Appellants at 35-37.


A description of the circumstances underlying the stock purchases and loan transactions at issue here is necessarily complicated but nonetheless essential to an understanding of the defendants' allegations of fraud. These underlying facts are essentially undisputed and are set out below substantially as recited by the district court.

American City Bank & Trust was a national banking association in Milwaukee, Wisconsin. One hundred percent of the capital stock of American was owned by American Bankshares, a holding company for American and several other banks. The defendants were all nonemployee directors of American and two, Henry Lauterbach and Nicholas Lesselyoung, were also directors of Bankshares.*fn7 The defendants had served as directors of American for varying terms: Mr. DeBelak served from approximately 1965 to 1975, Mr. Lauterbach served from approximately 1970 through 1974, and Mr. Lesselyoung served from 1972 through 1975. The depositions reveal that, in addition to their service on American's board, the defendants all possess a wide variety of business and financial experience.

During 1974, the defendants, as directors of American, received a large volume of information concerning the poor and continually deteriorating financial condition of the Bank.*fn8 At a regular directors meeting on April 17, 1974, the directors were informed that the Regional Administrator of National Banks had classified over $5.9 million of American's loans as loss, doubtful, substandard or special mention. The Bank's classified loan to capital ratio of 40% was considered on the high end of acceptable. In addition, American's outside auditors had informed American that 1973 earnings must be adjusted downward by $600,000 in order to increase the loan loss reserve. The auditors also recommended creation of an additional reserve of $1 to $3 million in connection with a particular group of loans, the Bradley loans.

The Bradley loans were a topic of discussion at a May 4, 1974, joint meeting of the Bankshares and American boards. The directors were advised that the outside auditors had required creation of a $3 million reserve for possible losses on these loans. The auditors had contacted the Comptroller to suggest further review and consideration of the recent report of examination of American. A reexamination was in progress with respect to Bankshares operations in general and the Bradley loans in particular; the examiners had already required an immediate charge off of $929,426 on those loans. In addition, the Regional Administrator had advised the Bank that $3 million in additional capital would be required. American's board authorized acquisition of the additional capital within seven business days and directed the officers to take action to reduce loans and borrowings. This action was confirmed by a letter to the Regional Administrator acknowledging American's liquidity, loan and capitalization problems.

The two boards again met jointly on May 10, 1974. According to the minutes, a comprehensive history of the events of the preceding three years which had led to the present situation was delivered. The plan for acquisition of additional capital was discussed in detail. It was expected that Bankshares stock would be sold at $20 per share, with the proceeds used to purchase stock in American. Funding for this transaction had been arranged with another bank. At the regular board meeting on May 15, 1974, American's directors were informed that the proceeds of the sale of ...

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