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03/22/89 Holcomb State Bank, v. Federal Deposit Insurance

March 22, 1989





536 N.E.2d 453, 180 Ill. App. 3d 840, 129 Ill. Dec. 613 1989.IL.387

Appeal from the Circuit Court of Ogle County; the Hon. Thomas E. Hornsby, Judge, presiding.


JUSTICE DUNN delivered the opinion of the court. LINDBERG and NASH, JJ., concur.


Petitioner, Holcomb State Bank, appeals from a grant of summary judgment in favor of respondent, Federal Deposit Insurance Corporation , in this action for payment on a loan participation agreement. Holcomb contends (1) that the trial court improperly applied the doctrine of collateral estoppel in determining that Holcomb's rights under a participation agreement had already been determined in prior Federal court foreclosure proceedings; (2) that FDIC, in its capacity as receiver of an insolvent bank, was obligated to pay Holcomb the amount of its participation agreement upon sale of an underlying loan to FDIC in its corporate capacity; and (3) that summary judgment was improper because the trial court assumed facts not in the record.

On January 26, 1977, Rochelle Bank & Trust Co. (Rochelle), an Illinois State bank, loaned $200,000 to John W. Tilton Industries, Inc. (Tilton). The loan was secured by a trust deed to real estate consisting of a 50-lot subdivision in Ogle County. Shortly thereafter, Rochelle Bank and Holcomb State Bank (Holcomb) entered into a participation agreement whereby Holcomb agreed to participate in the Tilton loan to the extent of $40,000. They executed a "Certificate of Participation" evidencing Holcomb's participation in the Tilton loan. The certificate of participation states in relevant part:

"We [Rochelle Bank & Trust] hereby . . . confirm your [Holcomb State Bank's] participation in the [Tilton] note, in the interest to accrue thereon from and after the date hereof, and in the pledged collateral in the proportion which your payment bears to the unpaid principal of the note on the date hereof.

As payments of principal and interest on said note are received by us, we shall remit to you all principal payments until your participation has been repaid in full, plus interest in proportion to the outstanding balances of our respective participations in the loan on the date for which such interest is paid, provided, however, that all amounts realized by us from the collateral, if there shall be an event of default, shall be applied pro rata to the payment of the balances of principal and interest then due on our respective participations in the loan on the date of such default."

On October 11, 1980, the Commissioner of Banks and Trust Companies of the State of Illinois determined that Rochelle Bank was insolvent, ordered it to be closed, and appointed the FDIC as receiver to dissolve and wind up the affairs of Rochelle.

Upon its appointment as receiver, the FDIC filed, and the circuit court of Ogle County approved, an ex parte "Petition for an Order Approving Sale of Certain Assets and Transfer of Certain Liabilities." The petition requested the court's approval of a "Purchase and Assumption" agreement whereby (1) FDIC would transfer Rochelle's assets, except for its substandard loans, to an assuming bank (United Bank of Rochelle) which, in consideration of that transfer as well as a cash payment from the FDIC, would assume the deposit and certain other liabilities of Rochelle; (2) the FDIC, in its capacity as receiver of Rochelle, would sell all of Rochelle's substandard loans to the FDIC, acting in its separate corporate capacity, in exchange for payment of the cash necessary to facilitate the transaction with the assuming bank.

FDIC/corporate paid $4,432,600 for the purchase of the substandard loans. This figure represents the amount necessary for the assuming bank to balance the assets it was acquiring against the liabilities it was assuming. FDIC v. Merchants National Bank (11th Cir. 1984), 725 F.2d 634, 637-38, cert. denied (1984), 469 U.S. 829, 83 L. Ed. 2d 57, 105 S. Ct. 114.

A purchase and assumption transaction such as this one is the preferred method of the FDIC in discharging its duties when an insured bank fails. It avoids the numerous disadvantages of the liquidation and deposit payoff alternative. (Merchants National Bank, 725 F.2d at 637.) The FDIC loan purchase was authorized under section 1823(e) of the Federal Deposit Insurance Act (Act) (12 U.S.C.A. § 1823(e) (West 1980)) and is now authorized under section 1823(c) of the Act (12 U.S.C.A. § 1823(c) (West 1980)).

One of the substandard loans transferred to FDIC/corporate was the $200,000 Tilton loan in which Holcomb was participating. As of December 1980, the Tilton loan was in default. FDIC/corporate brought suit in the United States District Court for the Northern District of Illinois against Holcomb and all other interested parties to foreclose upon the real estate collateral securing the note. Pursuant to section 1819 of the Act (12 U.S.C.A. ยง 1819 (West 1980)), the Federal courts have jurisdiction in cases involving FDIC/corporate and its property interests. Holcomb filed a counterclaim in the Federal action seeking declaratory and injunctive relief and asking the court to enjoin FDIC/corporate from foreclosing on the trust deed until Holcomb either released its interest in the trust deed or consented to the foreclosure. On March 19, 1984, the Federal court dismissed Holcomb's amended counterclaim holding that the participation agreement ...

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