FDIC v. Elder Care Services

• Court: Court of Appeals for the First Circuit
• Decided: April 24, 1996
• Docket: 95-1729
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT

                                 ____________________



        No. 95-1729



                        FEDERAL DEPOSIT INSURANCE CORPORATION,

                AS LIQUIDATING AGENT OF FIRST MUTUAL BANK FOR SAVINGS,



                                 Plaintiff, Appellee,



                                          v.



                            ELDER CARE SERVICES, INC. and

                                FRANK C. ROMANO, JR.,



                               Defendants, Appellants.



                                 ____________________



                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                      [Hon. Nancy Gertner, U.S. District Judge]
                                           ___________________



                                 ____________________



                                        Before



                               Selya, Boudin and Lynch, 



                                   Circuit Judges.
                                   ______________



                                 ____________________



            William T. Harrod III  with whom Harrod Law Offices was on  briefs
            _____________________            __________________

        for appellants.

            Daniel H. Kurtenbach, Counsel, with whom Ann S. Duross,  Assistant
            ____________________                     _____________

        General Counsel, and Richard J. Osterman, Jr., Senior Counsel, were on
                             ________________________

        brief for appellee. 


____________________



                                    April 24, 1996

                                 ____________________



BOUDIN, Circuit  Judge.  In January  1987, Brandon Woods
                         ______________



            of Glen Ellyn, Inc., a wholly owned subsidiary of Elder Care,



            Inc.,  borrowed  $10.1 million  from  First  Mutual Bank  for



            Savings  located in Boston.   The purpose was  to finance the



            purchase by Brandon Woods of the site of a former seminary in



            Glen  Ellyn, Illinois,  and the  development of  the property



            into  a retirement community.  In due course the property was



            acquired by Brandon Woods for $4.5 million.



                 The  bank loan was secured by a mortgage on the seminary



            property and by two guaranties from third parties in favor of



            the bank--one from Elder  Care, Inc., and the other  from its



            president  Frank  Romano  in  his personal  capacity.    Both



            guarantees  contained  broad  waiver   provisions,  including



            waivers of any requirements  of "diligence or promptness" and



            (to the extent permitted  by law) waivers of "any  defense of



            any  kind."  The guaranties  provided that they were governed



            by Massachusetts law.



                 The loan was to  be repaid by  January 30, 1988, a  date



            later  extended  to  October  28,  1988,  but  Brandon  Woods



            defaulted.   After  a delay  to allow  Brandon Woods  time to



            refinance  (which it failed to do), the bank on June 27, 1989



            brought  a foreclosure  action  against Brandon  Woods in  an



            Illinois  state  court.   On  December  26, 1990,  the  court



            entered a  foreclosure judgment, fixing the  amount then owed



            at  just over  $12.8 million,  including the  unpaid balance,


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interest and attorney's  fees.   The court  ordered that  the



            property be sold on February 5, 1991.



                 On  February 5,  1991, Brandon  Woods filed  a voluntary



            bankruptcy petition, blocking the  sale of the property under



            the  automatic stay  provision of  the Bankruptcy  Code.   11



            U.S.C.   362(a)(1).   On April 8, 1991, the  bankruptcy court



            denied the bank's motion  to lift the stay, finding  that the



            property if fully developed would be worth about $13 million,



            just  exceeding  the amount  then claimed  by  the bank.   In



            August 1991, the bankruptcy court granted a renewed motion to



            lift the stay  after Brandon Woods failed to  gain additional



            financing.  On  November 23, 1993, after  an unexplained two-



            year delay,  the seminary property was sold  at a foreclosure



            sale  for   $300,000,  all  of   which  went  to   satisfy  a



            construction firm's prior lien.



                 In the meantime,  on May  24, 1991, the  bank filed  the



            present action  in Massachusetts state court  against the two



            guarantors.   A month later  the bank failed  and the Federal



            Deposit   Insurance   Corporation   ("FDIC")  was   appointed



            liquidating agent.  The FDIC then removed the case to federal



            court.   In April  1993, the  district court  granted summary



            judgment in favor of the FDIC as to liability.



                 In  May 1994, the present  case was reassigned  to a new



            district  judge.  On June 8, 1995, the district court granted



            the  FDIC's motion for summary judgment as to damages, and on


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August 4, awarded the  FDIC $15,316,887.33.  This represented



            the   then-outstanding  balance  claimed   by  the   FDIC  of



            $16,416,719.31 (for  principal, plus interest  and attorney's



            fees)  less specific maintenance expenses incurred by Brandon



            Woods, claimed by  it as an offset, and conceded by the FDIC.



            The  two guarantors  now  appeal, claiming  that there  was a



            material issue of fact precluding summary judgment.



                 In substance, the guarantors say  that there is a  gross



            disparity between estimates  of the property's value--notably



            the $13  million estimate  made by the  bankruptcy court--and



            the $300,000 sale price obtained at the foreclosure sale.  In



            the  guarantors'  view,  this discrepancy--coupled  with  the



            unexplained  two-year  delay in  the  sale--gives  rise to  a



            factual dispute about whether the FDIC acted in good faith in



            liquidating the security.  Bad faith or fraud, the guarantors



            argue, would bar or diminish the FDIC's recovery.



                  Massachusetts  law does  permit  a guarantor  to  waive



            defenses, see Shawmut Bank,  N.A. v. Wayman, 606 N.E.2d  925,
                      ___ ___________________    ______



            927 (Mass. App. Ct.  1993), but probably such a  waiver could



            not  immunize bad faith or  fraud.  See  Pemstein v. Stimson,
                                                ___  ________    _______



            630 N.E.2d 608, 612 (Mass. App. Ct.), rev. denied, 636 N.E.2d
                                                  ____ ______



            279  (Mass. 1994).    For  present  purposes, we  follow  the



            district court  in assuming  arguendo that  a showing  of bad
                                         ________



            faith or fraud could  be used to lessen or  prevent recovery;



            the  FDIC asserts the contrary but offers no case directly on


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point.   Still, reviewing the matter de novo, Brown v. Hearst
                                                 _______  _____    ______



            Corp., 54  F.3d 21,  24 (1st  Cir. 1995), we  agree with  the
            _____



            district court  that there  is no  genuine issue  of material



            fact to preclude summary judgment.



                 Determining whether  there is a genuine issue ordinarily



            involves  two  different dimensions:    burden  of proof  and



            quantum.   The  burden of  proof  on the  issue  at trial  is



            relevant  because, if  a  party resists  summary judgment  by



            pointing to a factual dispute on which it bears the burden at



            trial,  that  party  must  point  to  evidence  affirmatively



            tending to  prove the fact  in its  favor.  Celotex  Corp. v.
                                                        ______________



            Catrett, 477 U.S.  317, 322-23  (1986).  Here,  at trial  bad
            _______



            faith or fraud would  be an affirmative defense to  be proved



            by the guarantors.  See Shawmut, 606 N.E.2d at 928.1
                                ___ _______



                 The quantum of proof that the guarantors must offer is a



            different  matter.   It  is  merely  "sufficient evidence  to



            permit  a  reasonable  jury  to  resolve  the  point  in  the



            nonmoving party's  favor."  Hope Furnace  Associates, Inc. v.
                                        ______________________________



            FDIC,  71 F.3d 39, 42-43 (1st Cir.  1995).  In evaluating the
            ____



            sufficiency of this evidence  on summary judgment, inferences



                                
            ____________________



                 1Courts  often  say  that  the  party  seeking   summary

            judgment  bears the burden to  show that there  is no genuine

            issue  of fact.  See,  e.g., Johnson v.  United States Postal
                             ___   ____  _______     ____________________

            Serv., 64 F.3d 233, 236 (6th Cir. 1995).  This is true enough
            _____

            in  general terms, and true specifically as to facts that the

            moving party would have to prove at trial; but given Celotex,
                                                                 _______

            the generalization  may be misleading  as to  facts that  the

            nonmoving party would have  to prove at trial as  part of its

            own claim or defense.



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are drawn in favor of the nonmoving party.  Brown, 54 F.3d at
                                                        _____



            24.  Thus, the guarantor's burden is not a heavy one.  But it



            is still  their burden to  point to admissible  evidence that
                      _____



            would "permit"  a factfinder to conclude  rationally that the



            FDIC had acted fraudulently or in bad faith. 



                 Here, Brandon  Woods has offered no  reason whatever why



            the  FDIC should  have chosen  deliberately to  undermine the



            foreclosure sale.  The FDIC relied upon that sale to generate



            immediate proceeds to cover its claim and, on the surface, it



            had no motive to diminish the recovery from its own security.



            The  prior  contractor's lien  was  only  somewhat above  the



            $300,000  realized at the sale.   If the  property were worth



            millions  more,  it was  plainly  in the  FDIC's  interest to



            obtain  the  highest  price--especially  since  a  deliberate



            failure to  seek  it  could  give the  guarantors  a  defense



            against claims on the guarantees.



                 If the mortgagee in a foreclosure case buys the property



            itself, it may  well have  an interest in  paying less  while



            preserving its claim for the deficit;  but Brandon Woods does



            not  suggest that the winning bidder at the foreclosure was a



            pawn  of  the  FDIC.   Other  malign  motives  could also  be



            imagined but are not suggested here either by the  guarantors



            or the surrounding circumstances.   In a negligence case this



            would not  matter  but  bad  faith almost  always  assumes  a



            motive.   It is an uphill  effort for the guarantors  to urge


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that, without any  apparent motive  and contrary  to its  own



            best interest, the FDIC chose to sabotage its own foreclosure



            sale.



                 Nor is  there any indication of how,  in the guarantors'



            view, this sabotage  was carried  out.  An  affidavit of  the



            FDIC  describes the  notice  given for  the  auction and  the



            bidding  process.  Notice was  given in a  number of journals



            (e.g., The Chicago  Tribune, Crain's  Chicago Business,  Glen
             ____  ____________________  _________________________   ____



            Ellyn  News), and  it  appears that  marketing  efforts by  a
            ___________



            professional   were  made   in   addition  to   the  notices.



            Allegedly,  20 potential  bidders  appeared.   In the  event,



            three persons bid.  The  state court thereafter confirmed the



            sale, finding that the sale was properly conducted.



                 Normally,  a  party suggesting  fraud  or  bad faith  is



            expected  to point  to the  misconduct (lies,  rigged account
                                        __________



            books,  self-dealing by  a fiduciary)  that reflects  the bad



            faith or constitutes  the fraud.  Cf.  Fed. R. Civ. P.  9(b).
                                              ___



            True, on some occasions  the inference of fraud or  bad faith



            might be compelled by the combination  of motive and outcome;



            but here motive is  utterly lacking and the outcome  far more



            ambiguous than  the guarantors suggest.   In all  events, the



            failure  to  allege any  specific  misconduct  consonant with



            fraud or bad faith further impairs the guarantors' claim.



                 Against  this background,  Brandon  Woods points  to two



            circumstances:  the supposed  discrepancy in  amounts between


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estimates of value and  the price received, and  the admitted



            delay in the sale.   The most striking difference  in amounts



            is between the $13 million  suggested by the bankruptcy court



            and the $300,000 winning bid two years later.   Massachusetts



            courts  have  held  what  common sense  would  in  any  event



            suggest:  that  the  disparity between  appraised  value  and



            amount received  in foreclosure  does not generally  show bad



            faith  but might do so  in extreme circumstances.   Seppala &
                                                                _________



            Aho  Constr. Co.  v.  Petersen, 367  N.E.2d  613, 620  (Mass.
            ________________      ________



            1977); see  also RTC  v. Carr,  13  F.3d 425,  430 (1st  Cir.
                   _________ ___     ____



            1993).  



                 In this  instance, however,  the $13 million  figure was



            not a serious estimate  of the property's then-current value.



            As the  transcript of  the bankruptcy  hearing shows,  it was



            simply  an  attempt  to  approximate   what  the  retirement-



            community  project would be worth  if it were  ever built and



            all of its  units sold at  a projected  price.  Finding  that



            this amount would (slightly) exceed the debt then owed to the



            bank, the bankruptcy court offered a few months' delay in the



            foreclosure  for Brandon Woods to seek more financing.  There



            was  no finding that completion of the project or the sale of



            the units was likely.



                 It is  true that  in the  same bankruptcy  proceeding, a



            bank expert  apparently testified that the  property was then



            worth  just  under $7.5  million.   But  it appears  that the


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bank's  interest  at the  time was  simply  to show  that the



            property  was worth  less  than the  $12  millon or  so  then



            claimed  by the  bank, and  thereby to  justify an  immediate



            sale.    Nor do  we  know whether  the  bank was  valuing the



            property  at a supposed market value rather than at the lower



            price their  forced liquidation would ordinarily  be expected



            to bring.  See BFP v. RTC, 114 S. Ct. 1757, 1761-62 (1994).
                       ___ ___    ___



                 Not only is the $7.5 million figure largely unexplained,



            but  it is also undermined as a liquidation value by Romano's



            own admission.   Romano himself  warned the FDIC  only a  few



            months  later, in  September  1991, that  the property  might



            bring  only $2 million on liquidation.  And when the property



            was sold two years  later for $300,000, it was  burdened with



            $1.1  million  in back  taxes and  the  cost of  dealing with



            certain environmental hazards, including asbestos.  Adjusting



            the  purchase   price  for  these  burdens   assumed  by  the



            purchaser, the discrepancy between Romano's $2 million figure



            and the sale price hardly seems large.



                 Brandon Woods also points  to the delay of two  years in



            carrying out the sale, which  is as close as it ever  gets to



            identifying  a deficiency  in  the FDIC's  conduct.   Brandon



            Woods  makes  no  effort to  show  that  the  delay caused  a



            substantial  reduction in the  price ultimately obtained, but



            the  district court  said  that property  values did  decline



            during the delay.  In any event, the FDIC had itself urged an


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immediate sale; such  a sale  would have  avoided upkeep  and



            taxes on  the  property  (which  may  have  been  earning  no



            income); and the FDIC  is oddly silent about the  reasons for



            the delay.



                 The  facts just described might be an ample basis for an



            inference  that  the FDIC  acted  negligently  in failing  to



            dispose  more promptly of the  property.  The impression that



            the  FDIC lost track of the matter  is reinforced by the fact



            that,  after failing  to  act for  two  years, the  FDIC  was



            spurred  to make the sale by news that the property was about



            to be  sold for unpaid  taxes.2   If this were  a case  about



            negligence, it  might well be  one in which  summary judgment



            could not be granted for the FDIC.



                 But  the  broad  waiver   provision  in  the  guaranties



            forecloses such defenses against the bank or its successor in



            interest.   Brandon Woods does  not question this reading nor



            claim that Massachusetts law forbids such a waiver.  So while



            negligence  may  be a  plausible  inference  (and could  also



            explain the FDIC's  reticence), it is  no defense to  summary



            judgment in these circumstances.  If anything, the likelihood



            of negligence tends  further to undermine the  claim that bad


____________________



                 2At oral argument counsel suggested that the explanation

            for the delay may be found in efforts of the parties to reach

            a  "global  settlement"  involving   other  Romano-controlled

            property  in  Massachusetts.    But  in  determining  whether

            summary  judgment  was properly  granted,  we  must take  the

            record as it existed in the district court.



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faith or fraud could  be inferred as the explanation  for the



            delay.  In all events, there was inadequate evidence of fraud



            or bad faith to raise a genuine issue of material fact.



                  It is unnecessary  to consider the  issue to which  the



            parties  devote much  of  their briefs,  namely, whether  the



            guarantors were  entitled to  litigate about the  fairness of



            the sale price  at all.  The FDIC  argues that the guarantors



            are precluded from doing so because of the state court ruling



            that the sale was fair; the guarantors say that they were not
                                                            ____



            parties to  that proceeding even though  Brandon Woods itself



            was a  party.   We express no view on the collateral estoppel



            issue since it does not affect the outcome.



                 Affirmed.
                 ________


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