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Federal Deposit Insurance Corp. v. Pioneer State Bank

Decided: November 29, 1977.

FEDERAL DEPOSIT INSURANCE CORPORATION, LIQUIDATOR OF THE BANK OF BLOOMFIELD, FORMERLY ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF NEW JERSEY, PLAINTIFF,
v.
PIONEER STATE BANK, A BANKING INSTITUTION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF NEW JERSEY, DEFENDANT



Yanoff, J.c.c., Temporarily Assigned.

Yanoff

The issues herein arise as the result of the insolvency of the Bank of Bloomfield (Bloomfield).

On January 10, 1976 the Commissioner of Banking of New Jersey, by reason of such insolvency, took possession of the business and property of Bloomfield. On the same day the Commissioner transferred certain of the assets of Bloomfield to First National State Bank of New Jersey (assuming bank), which assumed some of the liabilities of Bloomfield, primarily to depositors, and to Federal Deposit Insurance Corporation (FDIC), which agreed to indemnify assuming bank and hold it harmless from specified claims. Among the assets transferred by the Commissioner to FDIC were two certificates of deposit made by defendant, Pioneer State Bank (Pioneer), each in the amount of $100,000, one due December 1, 1975 and the other December 30, 1975.

FDIC sues to recover upon these certificates.

Pioneer counterclaims for the sum of approximately $300,000 by reason of an agreement dated June 19, 1975 arising from the sale of machinery leasing agreements (also loans) by Bloomfield to Pioneer for the sum of $589,068.20. This sale was "with recourse" under an agreement in which Bloomfield undertook to repurchase any loan delinquent for 60 days and to indemnify Pioneer for losses resulting from such loans. The minutes of Bloomfield make no reference to the repurchase agreement. However, the minutes of May 27, 1975 reflect the considerations which motivated the board of that bank in authorizing its president to sell some of the bank's assets. The figure that Mr. Prodan, president of the bank, mentioned at that meeting as attributable to assets to be sold was $839,000. As to these he stated that Bloomfield

had already taken the better part of the interest attributable thereto so that it would make a profit, presumably on a sale of $839,000 of assets, of $48,848.62. The second consideration was that the transaction would supply Bloomfield with cash for other loans. At the meeting Prodan pointed out that the large banks would not deal with Bloomfield, but indicated that Pioneer would enter into the transaction. The result was passage of a resolution "for the proposal of the sale of the portfolio, as outlined, and leave it to Mr. Prodan to work out."

Both parties move for summary judgment on the basis of affidavits which set forth the foregoing. Pioneer bases its claim upon breach of Bloomfield's repurchase agreement. It asserts, also, a "banker's lien" upon funds represented by the certificates of deposit. In response FDIC urges that the repurchase agreement is invalid. Both state and federal law are advanced in support of this contention.

The argument under New Jersey law has two aspects. One is that N.J.S.A. 17:9A-213.1 renders illegal all bank guaranties, citing New Jersey Bank v. Palladino , 146 N.J. Super. 6 (App. Div. 1976), certif. den. 73 N.J. 64 (1977).*fn1 Another is that Pioneer failed to honor the certificates of deposit, in violation of the "midnight deadline" rule (N.J.S.A. 12A:4-302). Pioneer, in turn, relies upon that aspect of Palladino which holds the guarantying bank liable on equitable principles for benefit obtained.

N.J.S.A. 17:9A-213.1 reads:

Except as in this act or otherwise by law provided, no bank or savings bank shall have power to guarantee the obligations of others; or to insure or indemnify against the acts, omissions, undertakings, liabilities or losses of others. [emphasis added]

The facts in Palladino were that Palladino was indebted to the First State Bank of Hudson County in the sum of $60,000. He borrowed $100,000 from the New Jersey Bank on the security of a guaranty executed by the First State Bank. He used the proceeds of the loan to reduce his indebtedness to the First State Bank. On default of his obligation to the New Jersey Bank that bank sought payment from the First State Bank. The trial judge entered judgment against both Palladino and the First State Bank. The Appellate Division reversed, holding that the guaranty was "an illegal act and void." (at p. 13) It held also that the defendant bank was not estopped to assert the defense of illegality. Additionally, it ruled:

However, the application of equitable principles may prevent one party to such a transaction from retaining a benefit or unfair advantage over another received as a result thereof. Therefore, if defendant-bank received a benefit from the illegal transaction, it should be required to repay the sums so received. [at 14]

It is significant that in this transaction the guarantying bank incurred a liability which did not involve assets which it already had and which it was selling.

Invoking federal law, FDIC cites 12 U.S.C.A. ยง 1819, which provides in part that "[a]ll suits of a civil nature at common law or in equity to which the [FDIC] shall be a party shall be deemed to arise under the laws of the United States * * ...


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