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October 27, 1994


Nickels, Bilandic, Harrison

The opinion of the court was delivered by: Nickels

JUSTICE NICKELS delivered the opinion of the court:

This case involves an action by plaintiff, the Federal Deposit Insurance Corporation (FDIC), to enforce a guarantee signed by defendant, Michael J. O'Malley, in connection with a bank loan. The bank that made the loan subsequently failed. The FDIC then took control of the bank's assets and found the guarantee in the bank's files. At trial, O'Malley argued that the guarantee was invalid from the outset or, in the alternative, had been extinguished by the bank before the FDIC acquired the bank's assets. The circuit court found, as a matter of law, that these defenses were barred by 12 U.S.C. § 1823(e) (1988). The circuit court therefore ruled in favor of the FDIC, and the appellate court affirmed. (249 Ill. App. 3d 340.) For the following reasons, we affirm the judgment of the appellate court.

I. Facts

The parties presented the following evidence at trial. In 1975, Michael J. O'Malley and Wayne J. Bekta were directors and shareholders of the First National Bank of Oak Lawn (the Bank). They had also worked together as business partners in past real estate transactions. In 1975, O'Malley and Bekta became interested in purchasing and developing a tract of real estate located in Country Club Hills, Illinois. At this time, O'Malley and Bekta were acquainted with Dennis Dine, whom they knew as a customer of the Bank and an experienced real estate developer. They therefore approached him and asked him if he would participate in the purchase of the Country Club Hills property. Dine agreed. The three of them subsequently determined that Dine would apply for a loan from the Bank and purchase the property. Later, if the property showed a profit from development or sale, the three would split this profit.

When Dine applied for the loan, he submitted the property as collateral. Bekta and O'Malley decided that, if the Bank did not approve the loan, they would offer their personal guarantees as security. O'Malley and Bekta therefore signed a guarantee in the amount of $225,000, the purchase price of the Country Club Hills property. They did not wait to see if the Bank would approve the loan without this additional security.

At trial, O'Malley acknowledged signing the guarantee and conceded that he was generally aware of the legal effect of a guarantee. O'Malley stated that he left the signed guarantee with Bekta but that he was uncertain of what happened to the guarantee after that point. The guarantee and two promissory notes signed by Dine were later found in the Bank's files. At trial, O'Malley claimed that the guarantee was not intended to be used unless additional security was needed. Dine also testified with respect to O'Malley's guarantee and supported O'Malley's testimony. He stated that he was unawarethat Bekta or O'Malley had guaranteed the loan. The first time he became aware of any such guarantee was during his deposition.

John Geary was the loan officer who handled and approved the loan to Dine in 1975. Geary was also president of the Bank. At trial, Geary testified that the only collateral required for the loan was the Country Club Hills property. The purchased property was appraised at $420,000 and would therefore adequately serve as collateral for a loan of $225,000. Geary testified that he first saw the guarantee during a deposition before trial.

O'Malley offered bank records into evidence. No reference to a guarantee was found in the loan proposal, the collateral checklist, or a collateral audit report. Other bank records also did not refer to the guarantee. In addition, Paul Adamonis, an employee of the FDIC, testified that he found no mention of the guarantee in the bank records, aside from the guarantee itself.

The Bank later sold the Dine notes to LaSalle National Bank (LaSalle). LaSalle's records did not refer to a guarantee signed by O'Malley and Bekta. La Salle later sold the notes back to the Bank.

In 1979, four years after the Bank made the loan to Dine, O'Malley decided to end his relationship with the Bank. He therefore sold his stock and resigned as director. According to O'Malley, as part of the termination, the Bank and O'Malley exchanged mutual releases. At trial, O'Malley introduced a letter from the Bank, dated October 1, 1979, which purported to release O'Malley from any obligations he owed to the Bank, including guarantees. This letter did not refer to the Dine notes. The letter was signed by Bank president Geary and notarized by vice-president Adams. At the time, Geary had the requisite authority to release guarantees in the amount of $225,000, the amount of the guarantee. Neither Geary nor Adams was aware of the guarantee signed by O'Malley.

O'Malley also introduced a letter dated October 4, 1979, that he purportedly wrote to the Bank. In the letter, O'Malley released the Bank from any obligations it owed to him. Geary testified that he placed both letters in the bank files.

Adamonis, the FDIC examiner, testified that he did not find any releases in his examination of bank records. Adamonis searched Dine's loan file, the board of director minutes, the loan committee minutes, internal audit reports, and other bank records. Adamonis did not find any personal loan file of O'Malley among bank records. He also stated that the FDIC possessed 400 or 500 boxes of bank documents and that he had not personally inspected all of the documents. Adamonis had not personally inspected Bekta's personal loan file or the bank corporate files.

On April 29, 1983, about 3 1/2 years after the purported releases were exchanged, the Bank was declared insolvent. The FDIC took control of the Bank and acquired its assets. James Murphy, an FDIC employee, testified with respect to the closing procedures used by the FDIC. Murphy testified that he closed the Bank pursuant to standard FDIC procedures.

During the closing, Murphy found the guarantee signed by Bekta and O'Malley among the Bank's collateral files. The guarantee, on its face, provided that it was absolute, continuing, and applied unconditionally to all of Dine's obligations at the Bank, as they existed or would exist in the future. The guarantee also authorized the Bank to extend and renew Dine's obligations, authorized release of the guarantors, and authorized the Bank to waive notice and demand. Under the terms of the guarantee, no action by the Bank would impair the Bank's rights against either guarantor. The guarantee was specifically limited to $225,000, plus interest due on the note and legal expenses.

During the closing, Murphy also found two outstanding and unpaid notes signed by Dine. The note relating to the Country Club Hills real estate had been renewed by Dine, and the principal under the renewal note was $279,456.49. Murphy also found another note for $643,852.50 signed by Dine. Dine did not pay any principal or interest on these notes. The FDIC subsequently sought repayment from Dine but Dine filed for bankruptcy. On September 15, 1983, the FDIC demanded payment from O'Malley under the terms of the guarantee. O'Malley refused and the FDIC brought this action. Further facts will be provided as needed for Discussion.

II. Lower Court Proceedings

After a bench trial, the circuit court found that Dine was indebted to the Bank in excess of $225,000, that O'Malley had executed a guarantee for $225,000, and that the FDIC located the guarantee in the collateral files of the Bank. It then found that O'Malley was barred under 12 U.S.C. § 1823(e) (1988) from arguing that the guarantee was legally insufficient or had been extinguished. Accordingly, the circuit court entered judgment in favor of the FDIC for $464,490.89, representing $225,000 in principal and $239,490.89 in interest.

On January 16, 1990, O'Malley filed a post-trial motion in which he asserted that he was entitled to a new trial because, inter alia, the circuit court Judge should have disqualified himself pursuant to Supreme Court Rule 63(C)(1)(c) based on his prior representation of the FDIC. O'Malley also contested, inter alia, the amount of interest awarded by the circuit court. After a hearing, the circuit court denied the motion for a new trial but reduced the amount of interest awarded from $239,490.89 to $81,666.14. The appellate court affirmed the judgment but modified the award of interest from $81,666.14 to $83,446.71.

On appeal to this court, O'Malley raises, inter alia, the following issues: (1) whether the circuit court Judge violated Supreme Court Rule 63(C)(1)(c) by failing to disqualify himself; (2) whether 12 U.S.C. § 1823(e) (1988) bars O'Malley from asserting that the guarantee was not an asset of the Bank; and (3) whether section 1823(e) is constitutional. The FDIC has cross-appealed, claiming that the award of interest by the lower courts was incorrect. Other issues raised by O'Malley are discussed below.

III. Disqualification of the Circuit Court Judge

O'Malley first argues that the circuit court violated Supreme Court Rule 63(C)(1)(c). At the time of trial, this Rule provided:

"C. Disqualification.

(1) A Judge should disqualify himself in a proceeding in which his impartiality might reasonably be questioned, including but not limited to instances where

(c) he was, within the preceding three years, associated in the private practice of law with any law firm or lawyer currently representing any party in the controversy * * * or, for a period of seven years following the last date on which he represented such a party, he represented any party to the controversy while he was an attorney engaged in the private practice of law." (113 Ill. 2d R. 63(C)(1)(c).)

If a Judge is disqualified under Rule 63(C)(1)(c), the Judge may still participate in the proceedings. At the time of trial, Supreme Court Rule 63(D) provided:

"D. Remittal of Disqualification.

A Judge disqualified by the terms of Canon 3(C)(1)(c) * * * may, instead of withdrawing from the proceeding, disclose on the record the basis of his disqualification. If, based on such disclosure, the parties and lawyers, independently of the Judge's participation, all agree in writing that the Judge's relationship or interest is immaterial, the Judge is no longer disqualified and may participate in the proceeding. The agreement, signed by all parties and lawyers, shall be incorporated in the record of the proceeding." 113 Ill. 2d R. 63(D).

O'Malley contends that the circuit court Judge represented the FDIC within seven years of the commencement of trial. O'Malley argues that the Judge participated in the case even though the parties did not complete a written remittal of disqualification. O'Malley argues that disqualification can only be waived by a written remittal. Thus, according to O'Malley, there was no effective waiver of disqualification and a new trial is required. We disagree.

The record reveals the following pertinent facts. On March 13, 1989, before trial, the circuit court Judge disclosed his previous representation of the FDIC and his involvement in the liquidation of Gateway National Bank. The Judge did not disclose how recent his representation of the FDIC was. Both sides indicated orally that they had no objection to the Judge continuing in the case.

The case then went to trial. O'Malley did not raise the issue of disqualification during trial, and the Judge entered judgment in favor of the FDIC. On January 16, 1990, ten months after the Judge disclosed his representation of the FDIC, O'Malley filed a post-trial motion, asking the Judge to grant a new trial because the Judge had failed to disqualify himself and obtain a written remittal. After the post-trial motion was filed, the Judge investigated further and discovered that he had worked on three FDIC cases as an attorney about six years before trial. These cases all involved ...

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