Bolduc v. Beal Bank SSB

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 98-1285



             LIONEL R. BOLDUC and MAUREEN C. BOLDUC,



                      Plaintiffs, Appellees,



                                v.



                         BEAL BANK, SSB,



                      Defendant, Appellant.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF NEW HAMPSHIRE



         [Hon. James R. Muirhead, U.S. Magistrate Judge]


Before



                    Boudin, Lynch and Lipez,

                                

                        Circuit Judges.


Jamie N. Hage with whom Eric Edward Nord and Peabody & Brownwere on brief for appellant.

     Michael C. McLaughlin with whom Law Offices of Michael C.

McLaughlin was on brief for appellees.


January 22, 1999


BOUDIN, Circuit Judge.  Beal Bank, SSB, a Texas

institution, holds second mortgages on two New Hampshire properties

owned by Lionel and Maureen Bolduc.  Following the Bolducs'

default, Beal Bank commenced foreclosure proceedings against the

properties.  At the Bolducs' behest, the district court granted a

preliminary injunction against Beal Bank barring foreclosure based

on an alleged violation of the Equal Credit Opportunity Act, 15

U.S.C.  1691 et seq. ("ECOA"), and the equitable doctrine of

mutual mistake.  Beal Bank appeals.

  The litigation arose out of two related transactions. 

The first occurred in 1987 when Lionel Bolduc obtained two loans

from a now-defunct New Hampshire bank, BankEast, one for $360,000

and the other for $681,000.  As collateral for the loans, Lionel

Bolduc offered commercial properties including condominiums in

Merrimack, New Hampshire, that he owned jointly with his wife,

Maureen Bolduc.  Lionel Bolduc was the sole applicant for the

loans, and BankEast's commitment letter was addressed only to him. 

  At the closing, BankEast required Maureen Bolduc to co-

sign the notes as well as the mortgages.  The couple was not

represented by counsel at the closing, and they were told by the

bank that requiring her signature was standard procedure.  Although

the Bolducs were apparently business partners and had extensive

real estate interests, BankEast's insistence that Maureen Bolduc

co-sign the notes may have violated ECOA's bar on discrimination

based on marital status.  See 15 U.S.C. 1691(a)(1); 12 C.F.R. 

202.7(d)(1) (1998).

  By 1991, the Bolducs were unable to meet the repayment

schedule on the 1987 loans, and on April 17, 1991, they entered

into the second transaction--a forbearance agreement with BankEast. 

The agreement maintained the 1987 notes and mortgages, partly

forgave interest due and extended the payment deadline, added a

small line of credit (never used) in favor of the Bolducs, and

accepted the Bolducs' guarantee of a loan to a third party seeking

to buy several of the Bolducs' condominiums.  As security for these

new extensions of credit and as additional security for the 1987

loans, the Bolducs granted BankEast blanket second mortgages on

their home in Hudson, New Hampshire, owned solely by Maureen

Bolduc, and on an undeveloped 90-acre parcel of land held by the

couple jointly ("the Merrimack land").

  BankEast failed in 1991, and the FDIC was appointed

receiver, acquiring the Bolducs' notes and mortgages.  Thereafter,

the Bolducs defaulted on their payment obligation, and the FDIC

foreclosed its first mortgages on the condominiums and related

properties originally given as security in 1987.  However, the FDIC

did not foreclose on the second mortgages secured by the Hudson

home and the Merrimack land even though the proceeds from the

original collateral were not enough to satisfy the balance due on

the 1987 notes, as amended in 1991.

  In December 1995, the FDIC sold the notes and the second

mortgages to the Loan Acceptance Corporation, a wholly owned

subsidiary of Beal Bank.  Beal Bank subsequently acquired the loans

and second mortgages itself and soon thereafter sought to foreclose

on the second mortgages.  The mortgages contained a statutory

"power of sale" provision permitting Beal Bank to begin foreclosure

proceedings without court involvement.  See N.H. Rev. Stat. Ann. 

477:29 (1997).  The Bolducs then sued Beal Bank in federal district

court to enjoin the foreclosure of the Hudson home and the

Merrimack land; and the parties agreed to disposition by a

magistrate judge under 28 U.S.C.  636(c).

  In February 1998, the magistrate judge granted a

preliminary injunction, forbidding Beal Bank from foreclosing on

either the Hudson house or the Merrimack land pending a trial on

the merits; he enjoined the Bolducs pendente lite to maintain the

properties and not to encumber them.  A detailed opinion, issued on

February 3, 1998, set forth the magistrate judge's reasoning.  Beal

Bank now appeals from that preliminary injunction, which we review

under the customary standards.  See Ross-Simons of Warwick, Inc. v.

Baccarat, Inc., 102 F.3d 12, 15-16 (1st Cir. 1996).

  The district court had before it a substantial number of

different claims urged by the Bolducs, but it rested the injunction

on a limited set of rulings.  It found that the Bolducs had a

likelihood of prevailing at trial on their claim that Maureen

Bolduc's signature on the 1987 notes had been secured in violation

of ECOA.  The court further found a likelihood of the Bolducs'

establishing that the 1991 agreement, which gave rise to the second

mortgages, had been tainted by mutual mistake, i.e., the parties'

belief that a valid claim existed against Maureen Bolduc on the

1987 notes.  Finally, the court found that an injunction was

consistent with the equities and the public interest.

  On this appeal, Beal Bank begins with certain threshold

objections that it advanced below but that the district court

rejected or bypassed.  Beal Bank argues that the Bolducs failed to

exhaust their administrative remedies under the Federal

Institutions Reform, Recovery, and Enforcement Act, 12 U.S.C. 

1821(d) ("FIRREA"); that their suit is barred by the ECOA statute

of limitations; that it is barred by the D'Oench, Duhme doctrine

and its statutory counterpart; and that the suit is premature

because Beal Bank has not yet sought to collect directly against

Lionel and Maureen on the promissory notes.  We start with these

objections.

  The first objection is that the Bolducs' challenge to the

second mortgages is barred because the Bolducs did not pursue it

through administrative channels when the FDIC took over BankEast. 

Under FIRREA, the failure to seek such remedies precludes a court

from entertaining "any claim or action for payment from, or any

action seeking a determination of rights with respect to, the

assets" of any bank for which the FDIC has been made receiver.  12

U.S.C.  1821(d)(13)(D).  Beal Bank, needless to say, asserts that

the Bolducs are now trying to pursue an action seeking to nullify

assets secured from the FDIC, namely, the second mortgages.

  At the outset, the Bolducs might have argued, but did

not, that the second mortgages, having been transferred to Beal

Bank, no longer constitute assets of a bank for which the FDIC has

been made receiver.  Beal Bank might then have argued in response

that a larger purpose of the exhaustion requirement is to clear

title to the failed bank's remaining assets so that the latter can

be mustered or sold.  If so, perhaps the assets when transferred to

a third party by the receiver should be free of any claims that

should have been, but were not, asserted through the administrative

process.

  Our unaided search revealed no case law on this

interesting question.  Some precedent gives transferee banks who

acquire from the receiver claims against third parties the benefit

of the long statute of limitations that the FDIC itself would enjoy

in pursuing such claims.  See, e.g., Cadle Co. v. 1007 Joint

Venture, 82 F.3d 102, 105-06 (5th Cir. 1996); Bruin Holdings, Inc.v. Moderski, 960 F. Supp. 62, 67 (M.D. Pa. 1996).  And some of the

arguments made for this result might be applied by analogy in favor

of Beal Bank.  But since the Bolducs have not argued that the

transfer to Beal Bank has any significance, we proceed on this

issue as if the FDIC still held the second mortgages and the

Bolducs were suing to enjoin their threatened foreclosure.

  Even with this assumption, the issue is difficult.  By

its terms, the FIRREA exhaustion requirement applies to claims

against the bank and not to claims by the bank against those

indebted to it.  As four circuit courts have held, such debtors are

entitled to await an attempt by the receiver to collect and then

assert any available defenses to collection in court; the debtors

need not submit their defenses to the administrative process. 

Although the Bolducs are the plaintiffs here, they say that their

action to enjoin the foreclosure is merely an effort to assert the

defense preemptively and not to recover money or property from the

bank.

     We agree that who happens to be the plaintiff is not

controlling.  The purpose of the exhaustion requirement is to make

persons with claims against bank funds or property submit them

promptly in a single administrative forum.  One alleged merely to

owe the bank money is not in this class, whether the debtor asks a

court for a preemptive declaration or injunction against the bank

claim or merely awaits suit by the bank and then defends.  Cf.Silverman v. Eastrich Multiple Investor Fund, L.P., 51 F.3d 28 (3d

Cir. 1995), qualified by Algrant v. Evergreen Valley Nurseries,

L.P., 126 F.3d 178 (3d Cir. 1997).

     The difficulty is that the mortgages in this case have a

double aspect.  From one standpoint, they are potential claims by

the bank to recover (out of specific property of the Bolducs) debts

owed to the bank by the Bolducs; to this extent, the exhaustion

requirement does not apply.  But from another angle, a successful

injunction suit by the Bolducs could be viewed as cutting off the

bank's rights to property currently in the bank's possession,

namely, a contingent property interest represented by the mortgages

themselves.

     In the end, we think that the Bolducs' suit does not

quite fit within the statutory language that delineates the

exhaustion requirement.  It is not a claim by the Bolducs seeking

any kind of "payment" from any bank, 12 U.S.C.  1821(d)(13)(D);

and as no one disputes that Beal Bank owns the mortgages--the fight

is about the possible defenses to foreclosure--it is hard to

describe the Bolducs' action as one seeking "a determination of

rights with respect to" a bank asset, id.  We therefore conclude

that FIRREA poses no bar to the Bolducs' argument on the merits.

       This brings us to Beal Bank's second threshold

objection:  the Bolducs are asserting rights under ECOA long after

the two-year statute of limitations has run on bringing suits under

that act.  See 15 U.S.C.  1691e(f).  The magistrate judge agreed

that the ECOA violation occurred, if at all, in 1987 when Maureen

Bolduc signed notes for the original loan.  But he relied on cases

holding that a wife, made to co-sign for or guarantee a loan to her

husband in violation of ECOA, may defend on that ground when a

collection suit on the loan is brought against her, even if the

suit comes more than two years after the signing.

     These cases have relied primarily on the common law

doctrine of recoupment, which allows a defendant to "defend"

against a claim by asserting--up to the amount of the claim--the

defendant's own claim against the plaintiff growing out of the same

transaction.  See 6 Wright, Miller & Kane, Federal Practice and

Procedure   1401 (2d ed. 1990).  Recoupment is allowed even where

the defendant's claim would be barred, if asserted in a separate

action, by the statute of limitations.  This approach also

protects the ill-informed spouse where the bank happens or chooses

to wait more than two years before suing on the note.

     We agree that recoupment doctrine could allow Maureen

Bolduc to assert an ECOA defense against BankEast if it sued her to

collect on the 1987 notes and that the defense might be asserted

preemptively by Maureen Bolduc in certain circumstances.  But the

present suit is not a challenge to the 1987 notes but rather to

mortgages issued in a second transaction that occurred in 1991 and

as to which no ECOA violation has been shown.  Whether recoupment

doctrine extends to this latter case is open to serious dispute

since the ECOA violation was committed by someone not a party to

this case in the course of an earlier transaction.

     We need not resolve this interesting question.  Given the

magistrate judge's own ground for relief--mutual mistake--the

action can be viewed as one arising under state law to enjoin

foreclosure of a state-law mortgage because of a contractual defect

recognized under state law.  There is complete diversity between

the parties.  Even if an independent federal action under ECOA were

barred as to the 1991 transaction, this would not preclude the

possibility of mutual mistake based on the unenforceability of the

1987 notes against Maureen Bolduc.

     This brings us to Beal Bank's remaining threshold

objections.  Contrary to the bank's argument, the assertion of

mutual mistake does not involve reliance by the Bolducs on any

secret agreement between the lender and borrower barred by the

D'Oench, Duhme doctrine or the statutory embodiment of the

doctrine.  See 12 U.S.C.  1823(e), 1821(d)(9)(A); D'Oench, Duhme

& Co. v. FDIC, 315 U.S. 447 (1942).  The doctrine and statute are

only directed at protecting the FDIC from unrecorded or oral

agreements not in the insured bank's records; they do not preclude

every possible defense to a bank claim--e.g., that the loan was to

an underage borrower who lacked capacity to contract--merely

because it may depend on information that is not contained in bank

files.

     Further, we do not agree with the bank that the Bolducs'

action was "premature."  Beal Bank does not deny that it was

seeking to foreclose and that it could commence such a foreclosure

without prior court proceedings under the so-called "power of sale"

provisions contained in the mortgages.  Nor (as Beal Bank suggests)

is this independent action a premature assertion of an affirmative

defense under Fed. R. Civ. P. 8; the use of the term in the rule is

concerned with pleading sequence within a case and has nothing to

do with whether an affirmative defense can sometimes be asserted in

a preemptive action for declaratory or injunctive relief.

     At last we come to the central question whether a

"likelihood-of-success" showing adequately supported the

preliminary injunction.  See Ross-Simons, 102 F.3d at 15.  The

district court found such a likelihood based on a single theory: 

that a 1987 violation of ECOA gave rise to a mutual mistake in the

1991 agreement from which the mortgages now at issue sprang.  We

confine ourselves to the theory relied on by the district court, no

other being pressed on this appeal as an alternative ground for the

preliminary injunction.

     The first step in the district court's reasoning--that

there likely was an ECOA violation in 1987--is supportable so far

as necessary for a preliminary injunction.  If Lionel Bolduc sought

the loans himself and was creditworthy, it was arguably a violation

to insist that his wife also sign the notes.  See 15 U.S.C.  1691

et. seq.; 12 C.F.R.  202.7(d).  She could have been required to

sign off on mortgaging the property, since it was tendered by

Lionel Bolduc as security and was jointly held with his wife, but

Beal Bank has not shown that state law required Maureen to co-sign

the notes to make the security effective.

     However, Beal Bank is not proposing to collect personally

against Maureen Bolduc on the 1987 notes but to collect on second

mortgages given in 1991 to secure all of the Bolducs' debts, new

and old.  As already noted, the magistrate judge bridged this gap

by concluding that the 1991 agreement was subject to avoidance on

grounds of mutual mistake.  The magistrate judge posited that had 

Maureen Bolduc known that she was not liable on the 1987 notes, she

"would not have committed her home or her share in the Merrimack

property"; Lionel "may not have risked his share" in the latter;

and, "in short, the mistake induced the Bolducs to enter an

agreement that they would otherwise have refused."

     These findings are unsupported by evidence and, on the

record before us, highly doubtful.  The 1991 forbearance agreement

is on its face a standard workout arrangement between bank and

debtor.  It extended overdue loans, forgave or postponed interest,

and granted new credit--all as described above--in exchange for new

second mortgages.  Maureen Bolduc, as well as her husband, had good

reason to favor the transaction regardless of her possible personal

liability on the 1987 notes (which were already at least partly

secured).  Apart from a practical interest in her husband's

prosperity, she was a co-owner of mortgaged property--comprising

collateral for the 1987 notes--that would be forfeit absent a

workout.

     Under these circumstances, it is far from obvious that

Maureen Bolduc signed the agreement and second mortgages "because"

of a mistaken belief that she would be secondarily liable on the

1987 notes--a liability that itself was limited by the likelihood

that the BankEast would recover considerable value from the 1987

mortgaged property.  It is even less probable that her husband's

consent to the second mortgage on the Merrimack property, a consent

required as a condition of a promising workout of his own

obligations, depended on the mistaken belief that his wife might

otherwise have to pay part of his own 1987 debt.  

     So far as we can tell from the record, the Bolducs

offered no evidence to support either of the magistrate judge's

conjectures in their favor.  The Bolducs do not even appear to have

argued mutual mistake in the district court, contending instead

(quite wrongly) that the existence of a legal defense for Maureen

Bolduc to the 1987 notes created a "failure of consideration" for

the 1991 transaction.  The magistrate judge was entitled to

consider mutual mistake on his own motion, but the lack of evidence

is easily understood and the need for supported findings remains. 

Absent more information or further explanation, the causation issue

is not yet one on which the Bolducs have been shown likely to

prevail.

     We have one other concern about the mutual mistake

doctrine.  The magistrate judge supposed--subject to one

qualification--that mutual mistake rendered the 1991 agreement and

the second mortgages "void."  That is not the law.  In New

Hampshire, see Hillside Assoc. of Hollis, Inc. v. Maine Bonding &

Cas. Co., 605 A.2d 1026, 1029-30 (N.H. 1992), as elsewhere, see E.

Farnsworth, Contracts  9.3, at 685 (2d ed. 1990), a party may be

permitted to avoid a contract based on mutual mistake but only if

avoidance is just and reasonable--a judgment guided, if not in all

cases controlled, by certain preconditions and precedent, see id.

     In general, avoidance based on mutual mistake must not

unfairly prejudice the rights of an innocent third party, and Beal

Bank is a third party to the 1991 agreement, having acquired

BankEast's rights and the second mortgages from the FDIC.  Whether

it is innocent is a difficult question.  Addressing another issue,

the magistrate judge found that Beal Bank should have known of the

claimed ECOA violation when it acquired the mortgages from the

FDIC; a reader of the FDIC file would have uncovered a letter from

the Bolducs alerting the FDIC to their ECOA claims.  Yet Beal Bank

does not directly address the issue and we pass it by.

     What Beal Bank does argue is that the lender side of the

contract has already been performed by the deferral of existing

claims under the 1987 contract, by forgiving in part past interest

due under that agreement, and by extending new credit used to

facilitate sales of Bolduc property to third parties.  If partial

performance has occurred on one side, mutual mistake doctrine does

not mechanically cancel all remaining obligations on the other side

and thereby allow the nonperforming party simply to retain the

benefit conferred by the partial performance.  See Restatement

(Second) of Contracts  158, comment b,  384 (1981).  On the

contrary, the doctrine permits the court to grant relief  only on

such terms "as justice requires."  Id.  158, at 419.

     We need not resolve this concern because we conclude that

the injunction is flawed, as explained above, by inadequate support

for the finding that the putative mutual mistake "caused" the 1991

agreement and second mortgages.  If on remand the district court

does find that this causal connection has been proved to a

sufficient likelihood to support a preliminary injunction--and the

finding would require evidence and not just assertion--the

magistrate judge can also consider the extent to which enjoining

the mortgage foreclosures would be compatible with justice in light

of partial performance of the 1991 agreement and whether the other

conditions for a preliminary injunction (equity, public interest)

are satisfied.

     This case gives every promise of producing more trial

work, and probably further appeals, relating to the effort to

enjoin the mortgages on ECOA grounds, not to speak of other

theories and other relief sought by the Bolducs.  The parties might

therefore wish to consider whether there is any prospect of

settling the case without further litigation.  Absent a settlement,

the present preliminary injunction may be continued in force for 60

days after the mandate issues but thereafter must be vacated

unless, by then, new findings sufficient to support it have been

made and a new order entered by the magistrate judge.  See TEC

Eng'g Corp. v. Budget Molders Supply, Inc., 82 F.3d 542, 546 (1st

Cir. 1996).

     The case is remanded for further proceedings consistent

with this opinion.  Each side shall bear its own costs on this

appeal.