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Federal Deposit Insurance Corp. v. Braemoor Associates

August 13, 1982; As Amended, October 28, 1982.*fn*.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 76 C 3295 -- Nicholas J. Bua, Judge.

Wood and Posner, Circuit Judges, and Campbell, Senior District Judge.*fn**

Author: Posner

POSNER, Circuit Judge.

The Federal Deposit Insurance Corporation, as successor in interest to a defunct Illinois state bank, the State Bank of Clearing, brought this suit against Braemoor Associates, a joint venture, and against five individuals who are the surviving joint venturers in Braemoor, seeking to recover bank monies that the bank's president, Paul Bere, had funneled to Braemoor in breach of his fiduciary obligations to the bank. The asserted basis of federal jurisdiction over the suit is 12 U.S.C. § 1819 Fourth, which provides that "all suits of a civil nature at common law or in equity to which the [Federal Deposit Insurance] Corporation shall be a party shall be deemed to arise under the laws of the United States, and the United States district courts shall have original jurisdiction thereof, without regard to the amount in controversy . . . ." There was a bench trial, but at the close of the FDIC's case the defendants moved for dismissal of the complaint under Rule 41(b) of the Federal Rules of Civil Procedure, and the motion was granted.

We consider first, as we must though no party to this litigation has raised the question, whether the federal courts have jurisdiction over the subject matter of the litigation. Section 1819 Fourth excepts from its grant of jurisdiction to those courts any suit to which the FDIC "is a party in its capacity as receiver of a State bank and which involves only the rights or obligations of depositors, creditors, stockholders, and such State bank under State law . . . ." When the State Bank of Clearing was closed down, the Illinois banking commissioner appointed the FDIC as receiver, see Ill. Rev. Stat. 1981, ch. 17, § 370, and the FDIC accepted appointment pursuant to 12 U.S.C. § 1821(e). Had the FDIC brought this suit -- a suit to impose a constructive trust by reason of Paul Bere's violation of his fiduciary obligations under state law -- in its capacity as receiver, the proviso, quoted above, to the grant of federal jurisdiction in section 1819 Fourth would have prevented the FDIC from maintaining the suit in federal court, at least under that section, which is the only basis of federal jurisdiction alleged. FDIC v. Sumner Financial Corp., 602 F.2d 670, 679-80 (5th Cir. 1979). The complaint goes on to allege, however, that the FDIC, in conformity with Illinois law, used its position as receiver to transfer to itself certain bank assets, including the bank's cause of action against the defendants, and that it is suing in its capacity as owner of those assets rather than in its capacity as receiver. These allegations have not been denied; nor is there any doubt that the FDIC has authority under federal law to obtain bank assets in this fashion. See 12 U.S.C. §§ 1821(e), 1823(e). And when the FDIC is suing to realize on such assets there is federal jurisdiction under section 1819 Fourth. FDIC v. Ashley, 585 F.2d 157, 161-62 (6th Cir. 1978).

The only novelty is that the asset that the FDIC is suing to realize on in this case is a cause of action, rather than as in the usual case a note or other financial instrument. Ashley is some authority for the proposition that this makes no difference, because the court in Ashley mentioned that the assets that had been transferred to the FDIC included causes of action against the bank's directors, 585 F.2d at 160; but since the opinion contains no separate discussion of these assets, we cannot be certain that the court would have thought them enough to support federal jurisdiction over the suit. The difficulty with basing jurisdiction solely on such an asset is that the enforcement of a bank's cause of action is precisely the sort of thing that a receiver would do, and the receiver's action in transferring the cause of action to itself therefore seems like an effort -- a rather transparent one at that -- to get around the jurisdictional limitations in section 1819 Fourth.

But we think it is necessary to distinguish between a transfer for value and one not for value. If the FDIC purchased the claims of the State Bank of Clearing against these defendants that would be the bona fide acquisition of a genuine asset, and a suit to realize on that asset would not be a suit in the FDIC's capacity as a receiver. Cf. Ashley, supra, 585 F.2d at 162; FDIC v. Godshall, 558 F.2d 220, 223 (4th Cir. 1977). The complaint alleges, without contradiction, that the transfer of assets to the FDIC was in accordance with Illinois law and was consented to by the circuit court of Cook County; and we think it unlikely, to say the least, that the circuit court would have allowed the FDIC to pocket assets of the State Bank of Clearing without giving anything in return. We find nothing in the Illinois Banking Act that would authorize such conduct. See Ill. Rev. Stat. 1981, ch. 17, §§ 372-73. We also think there is no question of the assignability of the bank's claim to the FDIC. See Pattiz v. Semple, 12 F.2d 276 (E.D. Ill. 1926), aff'd, 18 F.2d 955 (7th Cir. 1927). Of course it is possible that the jurisdictional allegations are a lie -- that the FDIC and the defendants are colluding to confer jurisdiction on the federal courts in contravention of the limitations in section 1819 Fourth -- but we do not think that our obligation to police the limitations on our jurisdiction requires us to investigate such a hypothesis. We conclude that we have jurisdiction, though we deprecate the FDIC's failure to allege more fully the facts establishing federal jurisdiction.

There is another threshold issue not raised by the parties, and though it does not go to subject-matter jurisdiction we shall consider it on our own initiative. It is whether the substantive law to be applied in this case is federal common law or state law (if the latter, the state whose law applies is clearly Illinois). From the predominance of Illinois citations in the briefs and in the district court's conclusions of law we infer that the parties and the district court assumed that Illinois law supplied the rule of decision; but they did not say so, and it is at least possible, in light of the language of 12 U.S.C. § 1819 Fourth and certain judicial decisions, that they thought federal common law applied but was identical to Illinois law.

We expressed recently and remark once again our queasiness at being asked to decide an appeal without being told by the district court what substantive law to apply -- state or federal, and if the former which state's law it is. Central Soya Co. v. Epstein Fisheries, Inc., 676 F.2d 939, 941 (7th Cir. 1982). In some cases insistence on an explicit statement of the source of law would be pedantic, but not here. Maybe the "arising under" language of section 1819 Fourth is just a redundant way of conferring jurisdiction on the federal courts rather than a direction to those courts to create a common law of rights and obligations of the FDIC; but an unbroken line of decisions beginning with D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 86 L. Ed. 956, 62 S. Ct. 676 (1942), holds that the substantive law to be applied in suits to which the FDIC is a party is indeed federal common law, not state law. See FDIC v. Timbalier Towing Co., 497 F. Supp. 912, 918 (N.D. Ohio 1980), and cases cited there. When the FDIC is suing as a receiver appointed under state law the applicable substantive law is state rather than federal, FDIC v. Leach, 525 F. Supp. 1379, 1384 (E.D. Mich. 1981), but as we have pointed out this is not such a suit and could not be brought in federal court if it were.

However, the D'Oench line of cases is not so devastating to the approach taken below as might appear. As we noted recently in considering a related question -- whether state or federal common law should supply the rule of decision for cases involving the construction of U. S. Postal Service leases -- one choice for the federal common law judge is to adopt local law as the rule of decision. Powers v. United States Postal Serv., 671 F.2d 1041, 1043 (7th Cir. 1982). That choice is attractive in the present case given the nature of the FDIC's claim.

The FDIC is suing as the assignee of the State Bank of Clearing's cause of action under state law against the defendants, and it is difficult to see why assignment to the FDIC should alter or enlarge that cause of action. D'Oench, though the Supreme Court refused in that case to follow state law, does not support such a metamorphosis. In D'Oench the FDIC had lent money to a bank that it had insured, and had received a note as collateral; and the question on which the Court refused to follow state law was whether the FDIC was a holder in due course, so that it could collect on the note free of the defenses that the payor might have had against the original payee. D'Oench was thus a case involving the rights of the United States in contracts to which it is a party, and is one of several cases all decided at about the same time that suggest that the rule of decision in such cases should be federal rather than state. See Clearfield Trust Co. v. United States, 318 U.S. 363, 367, 87 L. Ed. 838, 63 S. Ct. 573 (1943); United States v. County of Allegheny, 322 U.S. 174, 183, 88 L. Ed. 1209, 64 S. Ct. 908 (1944); Priebe & Sons, Inc. v. United States, 332 U.S. 407, 411, 92 L. Ed. 32, 68 S. Ct. 123 (1947). Whatever the contemporary vitality of these cases -- on which see In re Murdock Machine & Engineering Co. of Utah, 620 F.2d 767, 772 (10th Cir. 1980), and Powers v. United States Postal Serv., supra, 671 F.2d at 1045 -- they do not control the present case: it does not involve a contract to which the FDIC is a party.

True, the FDIC has a vital stake in any asset of a defunct bank that it has insured; the statute under which it operates contemplates the transfer of assets, presumably including causes of action, from such a bank to the FDIC, see 12 U.S.C. §§ 1823(d), (e); and D'Oench teaches that an asset can confer on its holder greater rights when it comes into the hands of the FDIC. These considerations, coupled with the language of section 1819 Fourth, suggest that in an appropriate case a federal court could reject state substantive law if that was necessary to protect the FDIC's interest in minimizing depositor losses which it must make good. But the absence of any ready-made federal common law in most of the areas of law in which it might be applied, and a general reluctance to displace state law without explicit statutory or constitutional direction to do so, support a presumption that state law is adequate and should be adopted by the federal court as the rule of decision. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 740, 59 L. Ed. 2d 711, 99 S. Ct. 1448 (1979); Powers v. United States Postal Serv., supra, 671 F.2d at 1045. The presumption is unrebutted here, so we can turn at last to the merits.

Braemoor Associates was formed in 1970 by several individuals, including Paul Bere, the president and board chairman of the State Bank of Clearing, to develop real estate. (Bere died before this suit was brought, and neither he nor his estate is a defendant.) Between 1970 and 1972 Bere caused the bank to make nine loans, totaling more than $500,000, to various of the joint venturers for use by Braemoor. These loans violated state law. Although it is not unlawful per se for an Illinois bank to make a loan to its officers, or to enterprises which the officers control or actively manage, such loans, if they exceed $10,000, as each of the nine loans did-- require the approval of the bank's board of directors, see Illinois Banking Act, § 37(1), Ill. Rev. Stat. 1981, ch. 17, § 347(1), and implicitly therefore disclosure of the conflict of interest to the board. Since that disclosure was not made, the board's approval of these loans, an approval procured by fraud, was ineffective. However, all these loans were eventually repaid to the bank and are not in issue here.

Ringbloom, a real estate entrepreneur with whom Paul Bere had extensive business dealings, owned a company called Western. Bere and Ringbloom agreed that Western would purchase some land owned by Braemoor but the terms of payment were left somewhat indefinite. Late in 1971 Braemoor found itself owing a $60,000 installment payment to one of its contractors. Braemoor had less than $2000 in its bank account. Bere asked Ringbloom to pay Braemoor $60,000 on account of Western's land purchase so that Braemoor could pay the contractor, but Ringbloom said that Western did not have the money. Bere thereupon had the State Bank of Clearing lend Ringbloom $60,000 and Ringbloom immediately made out a check drawn on Western's bank account in the State Bank of Clearing for the same amount, payable to Braemoor. Ringbloom handed the check to Bere, who had it deposited in Braemoor's bank account. Braemoor then paid the contractor $60,000. The fact that the ...

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