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Federal Deposit Insurance Corp. v. Blue Rock Shopping Center Inc.


decided: June 19, 1985.


On Appeal from the United States Court for the District of Delaware (D.C. Civ. No. 80-398).

Adams, Becker, Circuit Judges, and O'Neill, District Judge.*fn*

Author: O'neill


O'NEILL, District Judge.

Federal Deposit Insurance Corporation has brought this action on a note against Blue Rock Shopping Center, Inc., Max Ambach and his wife Rose Ambach. The district court granted summary judgment to plaintiff. 567 F. Supp. 952 (D. Del. 1983).

Summary judgment is, of course, proper only if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Moreover, the inferences drawn from the evidence submitted to the trial court must be viewed in the light most favorable to the party opposing the motion. On review, this Court is required to apply the same test the district court should have used. Hollinger v. Wagner Mining Equipment Corp., 667 F.2d 402, 405 (3d Cir. 1981).

Viewed most favorably to defendants, the facts may be summarized as follows. On September 29, 1966, in return for a loan by Farmers Bank of the State of Delaware in the amount of $800,000, Blue Rock, by its President, Mr. Ambach, executed a Bond and Warrant in which it promised to pay Farmers $800,000 plus annual interest of 6.25 percent. The Bond was secured by a first mortgage on real estate owned by Blue Rock and located in Blue Rock Shopping Center, Wilmington, Delaware. As additional collateral, Blue Rock assigned to Farmers its interest in a lease of a warehouse located on the real estate. The payments to be made by the lessee, A.T.C. of Wilmington, Inc., which were assigned to Farmers, coincided with Blue Rock's installment obligations to Farmers under the Bond. Payment of the rent was guaranteed by Atlantic Thrift Centers, Inc., and ultimately by Arlen Realty and Development Corporation, its corporate successor.

Settlement of the transaction was held on September 29, 1966, the day that the Bond and Assignment of Lease were signed. These documents and others were delivered to Farmers, and the proceeds were disbursed.*fn1 Two letters were exchanged. Farmers' letter to the attorney for Blue Rock stated:

"P.S. the $800,000 Bond and Warrant is to be signed by Max Ambach and his wife, Rose."

The attorney's letter to Farmers said:

"I understand that it is your desire to have Max Ambach and Rose Ambach, his wife, individually sign the corporate bond and warrant, and consequently, I have prepared a new such bond and warrant and have forwarded it to Mrs. Ambach today for signature. When returned to me, I will then substitute this bond and warrant for the one which you presently possess."

Since the Bond sued upon is dated September, 1966, and is signed by all defendants, it is apparent that the contemplated substitution occurred.*fn2 The individual defendants did not receive any of the borrowed funds.

In July, 1975, Blue Rock defaulted on its obligations to Farmers. Its default was caused by the concomitant default of ATC and Arlen, who had discontinued operations at the Shopping Center. Farmers declined Blue Rock's request that it agree to a settlement proposal made by Arlen, which offered to pay $100,000 for the immediate termination of the lease and an additional $24,000 if the premises were not relet within a year. At the time of this request, approximately $428,000 remained due from Arlen on its guaranty of the lease. Instead, Farmers and Blue Rock executed a letter agreement in which Blue Rock assigned to Farmers all of its interest in the Arlen guaranty in consideration of Farmers' refraining from enforcement of its rights against Blue Rock arising out of the default.*fn3 Thereafter, in March, 1976, Farmers sued Arlen on the guaranty in the Delaware Superior Court.

On October 25, 1976, pursuant to an Assistance Agreement previously made between FDIC and Farmers, Farmers assigned to FDIC all of its interest in the Bond and Mortgage, the Assignment of Lease, and the guaranty of the lease payments.

In January, 1980, the Shopping Center was sold for $325,000 at a sheriff's sale which occurred because taxes due to the City of Wilmington had not been paid. FDIC received $188,115.33 from the proceeds of the sale, which was applied to the amount owing on the Bond. On November 12, 1982, without the consent of defendants, FDIC settled its Superior Court action against Arlen for the sum of $148,467. As a result, as of October 22, 1982, there was a deficiency balance of $523,105.71 plus interest. This suit seeks to collect the remaining debt.

The district court granted summary judgment to plaintiff and dismissed defendants' affirmative defense which asserted that FDIC's unreasonable delay in prosecuting the claim against Arlen and its unilateral settlement of the suit against Arlen constitute an impermissible impairment of collateral barring recovery in this action. The district court held that: (1) as a matter of Delaware law, section 3-606(1)(b) of the Uniform Commercial Code does not operate to discharge a co-maker of a note, as opposed to an accommodation maker; (2) because defendants do not rely upon any written agreements to prove that the Ambachs acted as accommodation makers, the FDIC should be considered a holder in due course under 12 U.S.C. § 1823(e) and any parol evidence tending to establish the Ambachs as accommodation makers would be barred; and (3) Max and Rose Ambach are co-makers, not accommodation makers, and are not discharged by virtue of section 3-606(1)(b).

The question to be resolved on this appeal is whether a co-maker of a negotiable instrument is entitled to assert the defense of unjustifiable impairment of collateral as provided by section 3-606(1)(b) of the Uniform Commercial Code. Since we hold that a co-maker with a right of recourse may assert the defense, we also will comment on the extent to which 12 U.S.C. § 1823(e) limits the evidence which the individual defendants may offer on remand.

The parties, the district court and this panel on its previous remand have all assumed, incorrectly, that the Uniform Commercial Code as enacted in Delaware determines whether a co-maker may assert the defense of unjustified impairment of collateral. Since the Supreme Court of Delaware has not resolved this issue, the case thus far has been concerned with a prediction as to how that Court would decide were it confronted with the problem. McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 661-62 (3d Cir.), cert. denied, 449 U.S. 976, 101 S. Ct. 387, 66 L. Ed. 2d 237 (1980).

Jurisdiction of this action is not, however, based on diversity of citizenship but on 28 U.S.C. § 1345 and 12 U.S.C. § 1819. The first of these provisions confers upon the district courts jurisdiction of all civil actions commenced by the United States or any agency thereof expressly authorized to sue by Act of Congress. The second provision, derived from the statute which created FDIC, provides in part:

Upon June 16, 1933, the Corporation shall become a body corporate and as such shall have power --

Fourth. To sue and be sued, complain and defend, in any court of law or equity, State or Federal. All suits of a civil nature at common law or in equity to which the 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 . . ..*fn4

This action has been brought by FDIC in its corporate capacity. Accordingly, the suit arises under the laws of the United States and we are to apply federal law. D'Oench, Duhme & Co., Inc. v. F.D.I.C., 315 U.S. 447, 455-456, 86 L. Ed. 956, 62 S. Ct. 676 (1942).

While it is evident that federal law must supply the rule of decision, we must next determine whether to turn to federal common law or state law for guidance. The leading Supreme Court case interpreting the FDIC Act counsels us to turn to federal common law for guidance. In his concurrence in D'Oench, Duhme & Co., Inc. v. F.D.I.C., 315 U.S. at 467-468, Justice Jackson concluded that federal common law should supply the rule of decision in civil actions such as this one. His conclusion was based on his interpretation of the language of 12 U.S.C. § 1819 and a prior version of the Act. The Act in effect at the time of D'Oench, Duhme provided in § 1819 that "all suits of civil nature . . . shall be deemed to arise under the laws the United States" and provided in another section that the FDIC may sue or be sued in any state or federal court of law or equity. Justice Jackson reasoned that § 1819 is not "merely jurisdictional" because of the presence of the separate jurisdictional section, id. at 467-68, and concluded that the Court should turn to federal common law for guidance. The United States Court of Appeals for the First Circuit followed this reasoning in Santoni v. Federal Deposit Ins. Corp., 677 F.2d 174, 178 (1st Cir. 1982) and found that Justice Jackson's analysis is further supported by a 1969 amendment to § 1819 adding that "the United States Courts shall have original jurisdiction" over cases involving the FDIC. Id. at 177.

We would also be compelled to turn to federal common law for guidance if we followed other courts*fn5 and applied the Kimbell Foods,*fn6 test to determine whether federal common law is the source of the appropriate rule of decision. In Kimbell Foods,*fn7 the Supreme Court identified three factors governing this determination: first, whether the nature of the federal program requires national uniformity; second, whether the application of state law would frustrate specific objectives of the federal program; and third, whether the application of federal law would disrupt commercial relationships predicated on state law. Id. at 728-29. The substantive issue which we are being asked to resolve is whether a co-maker of a negotiable instrument is entitled to assert the defense of unjustifiable impairment of collateral against the holder of the note, the FDIC. Kimbell Foods directs us to consider the application of state law or federal common law to that issue in light of the federal policy animating the creation of the FDIC. By a 1933 amendment to the Federal Reserve Act of 1913,*fn8 Congress created the FDIC "to promote the stability of the banking system by preventing runs on banks by depositors and keeping open the channels of trade and commercial exchange." FDIC v. Harrison, 735 F.2d 408, 413 (11th Cir. 1984). FDIC insures bank deposits; as an insurer one of its primary duties is to pay the depositors of a failed bank. In the course of fulfilling this duty, FDIC frequently purchases the assets of a failed bank and then attempts to collect on them in order to minimize the loss to the insurance fund.*fn9

With respect to the first and second factors of the Kimbell Foods test, national uniformity is important to permit the FDIC to promote the stability of and confidence in our nation's banking system. "Holding the FDIC to different standards of care in different states would frustrate its attempts to promote the stability of, and confidence in, the nation's banking system." F.D.I.C. v. Rodenberg, 571 F. Supp. 455, 460 (D.Md. 1983).

With respect to the third factor, the application of federal law would not disrupt commercial relationships predicated on state law. It may be that the Ambachs, Blue Rock and Farmers Bank entered into their agreement with the understanding that Delaware law would govern any dispute arising therefrom because they are all from Delaware, and the loan was made and the real estate is located there. The issue here, however, does not involve a dispute among these parties, but instead involves the ability of a co-maker to raise the unjustifiable impairment of collateral defense against the FDIC. There is no reason to believe that as to that question any of the parties to the transaction predicated their behavior upon state law.

Accordingly, we will turn to federal common law to supply the rules of decision. In so doing, we are required to fashion rules of decision which effectuate the federal policy expressed or implicit in the FDIC statute, but may consider state precedents and use them "interstitially"*fn10 where a federal answer has not been provided. D'Oench, Duhme & Co., Inc. v. F.D.I.C., 315 U.S. at 471-75. Because this appeal involves an interpretation of commercial paper law, it is appropriate for us to turn to Article 3 of the Model Uniform Commercial Code for guidance. See United States v. Unum, 658 F.2d 300, 304 (5th Cir. 1981).*fn11 Like the Unum court, we will "follow the model UCC and those cases which best supplement the UCC and further its purposes and design." 658 F.2d at 304, n.2.

Section 3-606(1) of the UCC provides thar "a holder discharges any party to the instruction to the extent that without such party's consent the holder . . . (b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse."

This language extends the protection of the statute to "any party to the instrument." Nevertheless, there is a division of authority as to whether 3-606 operates to discharge a maker of a note. Some courts have concluded that the statute must be read literally and that the words "any party" clearly include a maker or co-maker:

There is a split of authority in other jurisdictions as to whether a maker of a note is discharged by the holder's impairment of collateral . . . . We are impressed with the clear and unambiguous language used in the statute in providing that any party to the instrument is discharged to the extent the holder unjustifiably impairs any collateral. The plain meaning of the phrase 'any party' clearly would include a co-maker. No one can deny that a co-maker is a party to the instrument. Many times we are called upon to construe ambiguous provisions in the statutes and in doing so we must employ various rules of construction to arrive at the meaning of the words used. But unless we are faced with some ambiguity we should give words their plain meaning and stop there. We believe this is such a case.

Southwest Florida Production Credit Assn. v. Schirow, 388 So. 2d 338, 339 (Fla. App. 1980) (citations omitted).

Other courts look to the policy which the defense is designed to serve and reason as follows:

At first blush, this section appears to provide a defense. However, a maker of a note, as opposed to a surety, is not entitled to invoke this defense . . . .

This interpretation of 3-606 is soundly based. The maker of a note is always primarily responsible for the debt with no recourse except against co-makers. Sureties, whether accommodation makers or endorsers . . . retain a right of recourse against the primary obligor . . . . Fairness dictates that if the risk a surety has agreed to undertake is increased through the impairment of the securing collateral by the person to whom payment is due, the surety should be discharged to the extent of impairment.

United States v. Unum, 658 F.2d at 304-305 (citations omitted).

The district court adopted the reasoning of the Unum Court and similar state decisions, which it regarded as the majority view, and held that "Section 3-606 does not operate to discharge a co-maker on a note, as opposed to an accommodation maker." We agree with the Unum Court that 3-606 is meant to apply only to parties who act as sureties. We hold, however, that a co-maker who signs a note to accommodate the primary obligor and who has a right of recourse against the primary obligor is a surety who can assert the defense of 3-606(1)(b).

Section 3-606 of the Code is derived from section 120 of the Uniform Negotiable Instruments Law, which provided for discharge, in certain circumstances, of "a person secondarily liable on the instrument . . . ."*fn12 The Comment to the Code explains the nature and purposes of the change as follows:

Sec. 3-606.1. Draftsmen's Comment.

Prior Uniform Statutory Provision: Section 120, Uniform Negotiable Instruments Law.

Changes: reworded; new provisions.

Purposes of Changes and New Matter.

To make it clear that:

1. The words 'any party to the instrument' remove an uncertainty arising under the original section. The suretyship defenses here provided are not limited to parties who are secondarily liable,' but are available to any party who is in the position of a surety, having a right of recourse either on the instrument or dehors it, including an accommodation maker or acceptor known to the holder to be so . . . .

5. Paragraph (b) of subsection (1) is new. The suretyship defense stated has been generally recognized as available to endorsers or accommodation parties . . . .

It is evident from this Comment and the prior law that the draftsman of the Code used the words "any party" in place of "persons secondarily liable" to make it clear that the newly codified defense of 3-606(1)(b) would be available to any party to the instrument who is in the position of a surety with a right of recourse. As under § 120 of the N.I.L., this party can be one who is "secondarily liable" such as an indorser. Now, however, any accommodation party, including a co-maker who has a right of recourse against the maker who posted the collateral, may claim the suretyship defenses of 3-606*fn13 even though the co-maker possessing that right is jointly and severally liable to the holder on the note.*fn14

This analysis is supported by American Express Internat'l Banking Corp. v. Sabet, 512 F. Supp. 463 (S.D.N.Y. 1980), decided under New York's enactment of the Code, in which the Court said:

These sections [3-606 and 9-207] defining impairment of collateral have been applied to discharge a party to a loan transaction other than the party actually pledging collateral which was subsequently unjustifiably impaired, but only when the party seeking discharge was entitled to look to the collateral for reimbursement of any payment made to the creditor, either as a result of the discharged party's position with respect to the creditor -- e.g., as a guarantor with a right to be subrogated to the creditor's right against the collateral . . . or as a result of the discharged party's status as co-maker or accommodation party with respect to the owner of the collateral, entitling the discharged party to contribution or indemnification from the owner . . . .

Id. at 469-70 (citations omitted).

One of the authorities cited in American Express was Indianapolis Morris Plan Corp. v. Karlen, 28 N.Y.2d 30, 34, 319 N.Y.S.2d 831, 834, 268 N.E.2d 632, 634 (1971), in which the Court of Appeals of New York, per Breitel, J., noted that 3-606 differs from the N.I.L. in that it refers to any party on the instrument and not merely to persons secondarily liable, and recognized that 3-606 was available to individual defendants who were co-makers of a note with a corporation.*fn15 In that case, it was not disputed that the corporation was the borrower and that only the form of the note made the individual defendants co-makers.*fn16

In light of the above analysis, we conclude that if the individual defendants were co-makers with a right of recourse they may assert the defense provided in 3-606(1)(b) of the Code.

With respect to the corporate defendant, we reach a different conclusion. Since the words "any party" read literally include Blue Rock, the question is not free from doubt. We are persuaded, however, by the Draftsmen's Comment to the Code and the reasoning in Unum and American Express that, absent a contrary provision, the primary obligor as among co-makers, i.e., the one who posted the collateral and received the proceeds of the loan and who therefore is not a surety, remains liable to the holder for the debt incurred regardless of any impairment of collateral by the holder.

We believe that these conclusions conform to the clearly expressed intent and policy of the Code to protect any party to an instrument who is in the position of a surety with a right of recourse, but not a party who does not occupy such a position. Our conclusions require a remand for an evidentiary hearing with respect to whether the Ambachs were sureties with a right of recourse, and if they were whether they can prove that FDIC unjustifiably impaired the collateral securing the Bond.


In the district court, the Ambachs contended that they were accommodation makers. The court recognized that this was a factual question and held that parol evidence would not be barred under the UCC because the FDIC was not a holder in due course;*fn17 however, the court also held that 12 U.S.C. § 1823(e) barred the Ambachs from offering such evidence to prove that they were accommodation makers. Since the case is to be remanded for an evidentiary hearing, it may be helpful to express some views on the effect of § 1823(e) upon the evidence which may be offered at that hearing.

We have noted that in the course of fulfilling its duty to pay the depositors of a failed bank, FDIC frequently purchases the assets of the failed bank and then attempts to collect on them in order to minimize the loss to the insurance fund.*fn18 Not unexpectedly, FDIC's attempts to realize on such assets have been met by defenses which the obligor on the note has against the failed bank. In the leading case, D'Oench, Duhme & Co., Inc. v. F.D.I.C., 315 U.S. 447, 86 L. Ed. 956, 62 S. Ct. 676 (1942), the maker alleged that at the time the note was given an oral agreement was made with the bank that the bank would not enforce it.*fn19 Relying on a criminal provision of the Federal Reserve Act, Section 12(b)(s), 12 U.S.C. § 264(a)*fn20 and another section of the Act,*fn21 the Court found "a federal policy to protect respondent [FDIC], and the public funds which it administers, against misrepresentations as to the securities or other assets in the portfolios of the banks which respondent insured or to which it makes loans." 315 U.S. at 457. The Court further held that federal policy requires the protection of the FDIC against such secret agreements whether or not the obligor and the bank had arranged to use the note for the purpose of deceiving the FDIC. In a concurring opinion, Justice Jackson emphasized that generally "the corporation would succeed only to the rights which the bank itself acquired where ordinary and good-faith commercial transactions are involved. But petitioners' conduct here was not intended to confer any right on the bank itself, for as to it the note was agreed to be a nullity." 315 U.S. at 474. See also F.D.I.C. v. Alker, 151 F.2d 907 (3d Cir. 1945), cert. denied, 327 U.S. 799, 66 S. Ct. 901, 90 L. Ed. 1025 (1946) (following D'Oench, Duhme).

The Federal Deposit Insurance Act, enacted in 1950, transferred the provisions relating to the FDIC from the Federal Reserve Act, Section 12B, to 12 U.S.C. § 1811 et seq.,*fn22 and enacted a new provision, 12 U.S.C. § 1823(e), which provides, in part:

No agreement which tends to diminish or defeat the right, title or interest of the Corporation [FDIC] in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the Corporation unless such agreement (1) shall be in writing, (2) shall have been executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the bank, (3) shall have been adopted by the board of directors of the bank or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (4) shall have been, continuously, from the time of its execution, an official record of the bank.

The statute makes ineffective, as against the FDIC, any " agreement which tends to diminish or defeat the right, title or interest of . . . [FDIC] in any asset acquired by it . . ." (emphasis supplied) and which is not embodied in a writing conforming to the requirements of the statute. Thus, by its terms*fn23 the statute protects the FDIC only against agreements not satisfying its requirements.*fn24 As the Court of Appeals for the Eleventh Circuit has observed, "the common thread running through [most of the cases decided under the statute] has been the assertion by the obligor that an oral side agreement with the bank controlled the rights of the parties."*fn25

Section 1823(e) does not, however, protect FDIC against all defenses. We have found nothing to demonstrate that the section was designed to protect the FDIC against the consequences of its own conduct with respect to the asset after acquiring it, which is the present situation. See FDIC v. Harrison, 735 F.2d at 412 (11th Cir. 1984) (FDIC subject to defense of equitable estoppel arising from acts and representations of FDIC agents). In other instances where "the parties contend that no asset exists or an asset is invalid and that such invalidity is caused by the acts independent of any understanding or side agreement," § 1823(e) has not been applied to bar such defenses. FDIC v. Merchants Nat. Bank of Mobile, 725 F.2d 634, 639 (11th Cir.), cert. denied, 469 U.S. 829, 105 S. Ct. 114, 83 L. Ed. 2d 57 (1984), citing Gunter, supra, and Howell v. Continental Credit Corp., 655 F.2d 743, 746-48 (7th Cir. 1981); Riverside Park Realty Co. v. FDIC, 465 F. Supp. 305, 312-13 (M.D. Tenn. 1978).

While research discloses a dearth of legislative history on this provision, this interpretation of § 1823(e) is consistent with the language of § 1823(e) and the reasonable inference that a purpose of the section was to codify the rule of D'Oench, Duhme.*fn26

At this point, we do not know whether the Ambachs will offer any agreement not conforming to the requirements of § 1823(e) to prove that they were co-makers with a right of recourse. Certainly, § 1823(e) would preclude evidence of an agreement that the Ambachs were not liable jointly or severally on the note or that Blue Rock did not have the right to pledge the collateral as security for the obligation to Farmers. However, in § 1823(e), Congress did not intend, nor did the Supreme Court in D'Oench, Duhme, to encompass agreements as remote as an agreement between a principal and a surety as to recourse, even though the status established by such an agreement might affect the ability of someone ultimately found liable to the FDIC as an accommodation maker to assert the § 3-606 defense. Section 1823(e) is directed at agreements between a bank and its obligor showing or attempting to show that the obligation was illusory or conditional. We do not believe that Congress intended, even by language which speaks of "diminishing or defeating" the title of FDIC, to extend § 1823(e) to cover agreements between the Ambachs and the corporation relative to the Ambachs' status.


The judgment of the district court against Blue Rock Shopping Center, Inc. will be affirmed. The judgment against Max Ambach and Rose Ambach will be vacated and the case will be remanded for further proceedings consistent with this opinion.

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