Cadle Company v. Patoine

Cadle Company v Patoine (2000-209); 172 Vt. 178; 772 A.2d 544

[Filed 13-Apr-2001]

  NOTICE:  This opinion is subject to motions for reargument under V.R.A.P.
  40 as well as formal  revision before publication in the Vermont Reports. 
  Readers are requested to notify the Reporter of  Decisions, Vermont Supreme
  Court, 109 State Street, Montpelier, Vermont 05609-0801 of any  errors in
  order that corrections may be made before this opinion goes to press.


                                 No. 00-209


Cadle Company	                                 Supreme Court

                                                 On Appeal from
     v.	                                         Caledonia Superior Court


Barbara Patoine	                                 March Term, 2000


Alan W. Cook, J.

Thomas R. Paul of Paul and Paul, St. Johnsbury, for Plaintiff-Appellee.

Robert A. Gensburg, St. Johnsbury, for Defendant-Appellant.


PRESENT:  Amestoy, C.J., Dooley, Morse, Johnson and Skoglund, JJ.


       AMESTOY, C.J.   Defendant Barbara Patoine, a co-signer on a defaulted
  promissory note  purchased by plaintiff Cadle Company from the Federal
  Deposit Insurance Corporation (FDIC),  appeals the superior court's summary
  judgment ruling refusing to apply any of her asserted defenses  against
  plaintiff.  We reverse.

       In August 1991, Wayne Kimball obtained a $40,000 construction loan
  from Caledonia  National Bank.  Defendant co-signed the loan as an
  accommodation maker and thus was equally  liable for its payment upon
  default.  See 9A V.S.A. § 3-419(b); Federal Fin. Co. v. Landers, 169 Vt. 
  570, 571, 740 A.2d 345, 346 (1999) (mem.).  Kimball died less than two
  months before the note  became due.  His estate did not have the funds to
  satisfy the note.  In January 1993, five months after 

 

  the note became due, the bank gave the estate a written extension of time
  until July 1, 1993 to pay  the debt.  The bank did not obtain defendant's
  consent to the agreement.  Nor did the agreement  contain a reservation of
  rights against defendant.

       Eventually, the bank foreclosed on the real estate that served as
  collateral for the loan.   Following sale of the real estate, a deficiency
  remained. The bank became insolvent in 1994, was  placed in receivership
  and taken over by the FDIC, and was eventually liquidated.  Plaintiff later 
  purchased the disputed note from the FDIC.  When defendant declined to pay,
  plaintiff sued  defendant to obtain the deficiency, which was approximately
  $21,000 in principal.  Defendant  claimed that her liability on the note
  was discharged because the bank had unjustifiably impaired the  collateral
  and had given Kimball's estate a six-month extension of time to pay the
  note without  obtaining her consent or reserving its rights against her in
  writing.  See 9A V.S.A. § 3-606(1)(a)-(b)  (repealed effective January 1,
  1995). (FN1)

       The superior court granted summary judgment to plaintiff.  Regarding
  the impairment-of-collateral defense, id.§ 3-606(1)(b), the court ruled
  that defendant had failed to meet her burden to  demonstrate either the
  fact of unjustifiable impairment or the extent of any such impairment.  As
  for  defendant's contention that the extension agreement discharged her
  liability on the note, the court  ruled that § 3-606(1)(a) could not be
  asserted against plaintiff because it had purchased the note from  the FDIC
  and thus was entitled to holder-in-due-course status, which immunized it
  from the statute.

       Because our resolution of the issues surrounding the extension
  agreement is controlling, we  need not address defendant's
  impairment-of-collateral claim.  On appeal, plaintiff concedes that (1)

 

  § 3-606(1)(a) was the governing law at all times material to this action;
  (2) application of that  provision discharged defendant's liability on the
  note in question as to all except holders in due  course; and (3) neither
  the FDIC nor any subsequent purchaser, including plaintiff, was or is a
  holder  in due course under Vermont state law, 9A V.S.A. § 3-302(c),
  because the FDIC purchased the note  as part of a bulk transaction not in
  the ordinary course of the transferor's business.  For her part,  defendant
  concedes on appeal that if the FDIC was a holder in due course under
  federal law, then  plaintiff, as a subsequent purchaser of the note, is a
  holder in due course, and the discharge under §  3-606(1) was not effective
  against plaintiff.  See id. § 3-601(b) (former § 3-602) (discharge of 
  obligation of party is not effective against person acquiring rights of
  holder in due course of  instrument without notice of discharge).

       Therefore, the issue on appeal is whether the FDIC was entitled to
  holder-in-due-course  status under federal law, notwithstanding its lack of
  that status under Vermont law.  Defendant  argues that neither the relevant
  federal statute, nor any federal common law, provided the FDIC or 
  plaintiff with holder-in-due-course status under the facts of this case. 
  We agree.

       Most courts and commentators agree that the relevant federal statute,
  12 U.S.C. § 1823(e), is  a codification of the federal common law holding
  in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447  (1942).  See, e.g., FDIC v.
  Newhart, 892 F.2d 47, 49 (8th Cir. 1989); 2 J. White & R. Summers,  Uniform
  Commercial Code § 17-13, at 202 (4th ed. 1995).  In D'Oench, the obligor
  sold the bank  certain bonds that were in default.  To allow the bank to
  avoid showing the defaulted bonds on its  books, the obligor executed notes
  to the bank, with the secret understanding that the notes would  never be
  repaid.  After the FDIC acquired the notes, it sued for payment.  The Court
  held that the  obligor was estopped from denying its liability under the
  notes.  D'Oench, 315 U.S.  at 461-62.

 

       In relevant part, § 1823(e) provides that no agreement tending to
  defeat the interest of the  FDIC in any "asset" acquired by it shall be
  valid unless the agreement was in writing, was properly  executed and
  approved, and was part of the bank's official records.   "By its terms, the
  statute  protects the FDIC from unwritten agreements that otherwise might
  be asserted to diminish or defeat  its rights in assets acquired from a
  failed bank."  FDIC v. Leach, 772 F.2d 1262, 1267 (6th Cir.  1985). 
  Neither D'Oench nor § 1823(e) appears to apply to the instant agreement,
  which was neither  secret nor undocumented.  See First Heights Bank, FSB v.
  Gutierrez, 852 S.W.2d 596, 607 (Tex.  App. 1993); Alaska S. Partners v.
  Prosser, 972 P.2d 161, 164 (Alaska 1999).

       In any event, the situation here fits within the so-called "no-asset
  exception" to D'Oench and  § 1823(e).  FDIC v. McFarland, 33 F.3d 532, 537
  (5th Cir. 1994).  That exception precludes the  application of D'Oench or §
  1823 when no asset actually existed at the time it was acquired by the 
  FDIC.  Id.; see Prosser, 972 P.2d  at 165 (no-asset exception is widely
  recognized).  This exception  has been invoked where, before the FDIC
  acquired the bank's assets, the asset at issue was  extinguished by the
  bank's failure to comply with state law notice requirements for the sale of 
  collateral.  FDIC v. Percival, 752 F. Supp. 313, 317, 319-20 (D. Neb.
  1990).  The situation in this  case is highly analogous to that in
  Percival, regardless of whether the statutory discharge is labeled a 
  personal or real defense.  Accordingly, we conclude that federal law did
  not preclude § 3-606(1)(a)  from discharging defendant's liability on the
  note in question.

       Plaintiff argues that defendant has waived any reliance on the
  no-asset exception because it  was not raised before the superior court. 
  While it is true that defendant did not specifically identify  the
  exception or cite case law to support it, she did contend that discharge
  under § 3-606(1)(a) was  not precluded by § 1823(e), and she asked the
  court to examine § 1823(e), rather than federal 

 

  common law, to determine whether federal or state law applied.  Under these
  circumstances, we find  no waiver.  In any event, as noted, plaintiff has
  failed to demonstrate that any one of the criteria set  forth in § 1823(e)
  was not met.

       Rather, in claiming holder-in-due-course status for the FDIC and
  itself, plaintiff relies  primarily on federal case law that has gone
  beyond the holding of D'Oench and given the FDIC a  super
  holder-in-due-course status beyond that permitted under state law adopting
  the Uniform  Commercial Code.  See 2 White & Summers, supra, at 203-05
  (discussing expanded federal holder-in-due-course doctrine).  We reject
  plaintiff's reliance on federal common law creating a federal 
  holder-in-due-course doctrine because most federal and state courts agree
  that the United States  Supreme Court has recently rejected supplementing
  federal statutory law with federal common law  to determine whether federal
  or state law governs holder-in-due-course status.  See FDIC  v. Deglau, 
  207 F.3d 153, 170-71 (3d Cir. 2000) (citing and joining federal circuit
  courts concluding that federal  common law expanding upon D'Oench doctrine
  is no longer viable, given recent United States  Supreme Court decisions; §
  1823(e) is comprehensive and need not be supplemented by federal  common
  law); FDIC v. Houde, 90 F.3d 600, 604 (1st Cir. 1996) (Supreme Court has
  recently held  that matters left unaddressed by federal statutory law are
  controlled by state law); DiVall Insured  Income v. Boatmen's First Nat'l
  Bank, 69 F.3d 1398, 1402 (8th Cir. 1995) (federal common law  doctrine and
  federal holder-in-due-course doctrine are no longer viable under recent
  Supreme Court  case law); see also Sun NLF Ltd. P'ship v. Sasso, 713 A.2d 538, 545 (N.J. Super. Ct. App. Div.  1998) (stating that it was
  "constrained to reject" federal holder-in-due-course doctrine, given recent 
  pronouncements by United States Supreme Court and other federal courts);
  R.I. Depositors Econ.  Protection v. Ryan, 697 A.2d 1087, 1093 n.4 (R.I.
  1997) (noting that federal holder-in-due-course 

 

  doctrine based on federal common law was in doubt after recent Supreme
  Court cases, but  concluding that such doctrine would be applied in that
  case under state law).

       Because plaintiff has conceded that it is not a holder of due course
  under state law, and  because the no-asset exception precludes federal law
  from negating the effect of the extension  agreement under § 3-606(1)(a),
  the latter provision discharged defendant's liability, and thus plaintiff 
  may not look to defendant to collect the deficiency stemming from the note
  it purchased from the  FDIC.

       Reversed.


                                       FOR THE COURT:


                                       _______________________________________
                                       Chief Justice


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                                  Footnotes


FN1.  Section 3-606 of the Uniform Commercial Code was repealed effective
  January 1, 1995  and replaced by § 3-605.  The parties agree that former §
  3-606 was in effect at all material times to  this action and is the
  governing law in the case at bar.  Accordingly, we will refer to the
  repealed  section throughout the opinion.