McCullough v. FDIC

• Court: Court of Appeals for the First Circuit
• Decided: March 26, 1993
• Docket: 92-1584
• Status: Published

Opinion

USCA1 Opinion

March 26, 1993    United States Court of Appeals
                            United States Court of Appeals
                                for the First Circuit
                                for the First Circuit

                                _____________________

No. 92-1584

DAVID J. McCULLOUGH AND WINIFRED M. McCULLOUGH,

                               Plaintiffs, Appellants,

                                          v.

                        FEDERAL DEPOSIT INSURANCE CORPORATION,
                      AS RECEIVER FOR BANK OF NEW ENGLAND, N.A.,

                                 Defendant, Appellee.

_____________________

ERRATA SHEET
                                     ERRATA SHEET

The  opinion  of this  Court issued  on  March 12,  1993, is
          amended as follows:

                    On  cover  sheet,  insert   "(now  deceased)"
                    between   "Judge   Brown"  and   "heard  oral
                    argument . . ."

                    On page 6, line 19, delete "supra note 4"
                                                _____

March 12, 1993
                            United States Court of Appeals
                            United States Court of Appeals
                                For the First Circuit
                                For the First Circuit
                                 ____________________
        No. 92-1584

                   DAVID J. McCULLOUGH AND WINIFRED M. McCULLOUGH,

                               Plaintiffs, Appellants,

                                          v.

                        FEDERAL DEPOSIT INSURANCE CORPORATION,
                      AS RECEIVER FOR BANK OF NEW ENGLAND, N.A.,

                                 Defendant, Appellee.
                                 ____________________

               APPEAL FROM AN ORDER OF THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                   [Hon. Edward F. Harrington, U.S. District Judge]
                                               ___________________
                                 ____________________

                                        Before

                               Torruella, Circuit Judge,
                                          _____________
                            Brown,* Senior Circuit Judge,
                                    ____________________
                              and Stahl, Circuit Judge.
                                         _____________
                                 ____________________

            William  H. Sheehan, III  with whom  Pearl, McNiff,  Crean, Cook &
            ________________________             _____________________________
        Sheehan was on brief for appellants.
        _______
            Michelle Kosse,  Counsel, Federal  Deposit Insurance  Corporation,
            ______________
        with  whom  Ann  S.  DuRoss,  Assistant  General Counsel,  Colleen  B.
                    _______________                                ___________
        Bombardier, Senior  Counsel, Daniel  I.  Small, and  Widett, Slater  &
        __________                   _________________       _________________
        Goldman, P.C. were on brief for appellee.
        _____________
                                 ____________________

                                    March 12, 1993
                                 ____________________
        _____________________
        *Of  the  Fifth Circuit,  sitting by  designation.   Judge  Brown (now
        deceased)  heard oral argument in this matter, and participated in the
        semble, but did not participate in the drafting or the issuance of the
        panel's  opinion.   The remaining  two panelists therefore  issue this
        opinion pursuant to 28 U.S.C.   46(d).

STAHL,  Circuit  Judge.    In  Langley  v.  Federal
                              ______________         _______      _______

            Deposit Ins.  Corp., 484  U.S. 86 (1987),  the Supreme  Court
            ___________________

            ruled that 12  U.S.C.   1823(e)1 shields  the Federal Deposit

            Insurance Corporation ("FDIC") from essentially all claims of

            misrepresentation relating to any  asset acquired by it under

            12 U.S.C.    1821 or 1823.  This appeal requires us to decide

            whether  this  rule  should  apply in  situations  where  the

            "misrepresentation" at issue actually is  an unlawful failure

            to disclose crucial information.   Believing that the Langley
                                                                  _______

____________________

            1.  12 U.S.C.   1823(e) provides:

                   No agreement  which tends  to diminish or  defeat
                 the interest of the [FDIC] in any asset acquired by
                 it  under  this section  or  section  1821 of  this
                 title, either as security for a loan or by purchase
                 or   as  receiver   of   any   insured   depository
                 institution,  shall  be  valid against  the  [FDIC]
                 unless such agreement-

                      (1) is in writing
                      (1)

                      (2)  was  executed   by  the   depository
                      (2)
                      institution  and  any person  claiming an
                      adverse  interest  thereunder,  including
                      the  obligor, contemporaneously  with the
                      acquisition   of   the   asset   by   the
                      depository institution,

                      (3)   was  approved   by  the   board  of
                      (3)   
                      directors  of the  depository institution
                      or  its  loan  committee, which  approval
                      shall be reflected in the minutes of said
                      board or committee, and

                      (4) has been, continuously, from the time
                      (4) 
                      of  its execution, an  official record of
                      the depository institution. 

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rule  does  apply,  we  affirm  the  district  court's  order

            dismissing the underlying complaint against the FDIC.

                      Plaintiffs-appellants  David  J.  and  Winifred  M.

            McCullough  initiated  this  action  by  filing  a  complaint

            seeking damages  and  an order  enjoining  defendant-appellee

            FDIC from collecting on a promissory note made  by plaintiffs

            in favor  of the FDIC's predecessor-in-interest,  the Bank of

            New England ("BNE").   The note was given  in exchange for  a

            loan  which plaintiffs  used  to purchase  four  units of  an

            industrial condominium  project ("the project")  in which BNE

            had a  significant  interest because  of  loans made  to  the

            original  developer and  a competing  developer.   Plaintiffs

            contend, inter  alia, that  when  BNE extended  the loan,  it
                     _____  ____

            failed to disclose to them that  the project was subject to a

            Notice of Responsibility  ("NOR"), previously  issued by  the

            Massachusetts    Department    of    Environmental    Quality

            Engineering.    The  NOR  required  the  removal  of  certain

            hazardous waste on the  property.2  In plaintiffs' view,  the

            aforementioned omission constituted  misrepresentation and  a

            violation of the Massachusetts Consumer Protection Act, Mass.

            Gen. Laws Ann. ch. 93A,    2 and 11 (West 1984 & Supp. 1992).

____________________

            2.  In their complaint, plaintiffs also alleged that BNE made
            affirmative misrepresentations at the time the loan agreement
            was  negotiated, but  have  since conceded  that federal  law
            precludes  them  from  proceeding   on  the  basis  of  these
            allegations.  See generally Langley, 484 U.S. at 90-93.  
                          ___ _________ _______

                                         -3-
                                          3

The  FDIC responded  to  plaintiffs'  complaint  by

            filing a  motion to dismiss.  As the basis therefor, the FDIC

            argued  that the  Langley rule  applies as  much to  the non-
                              _______

            disclosure    of   information    as   to    an   affirmative

            misrepresentation.   After  a  hearing,  the  district  court

            agreed and issued a memorandum and order granting  the FDIC's

            motion.   In  so doing,  the court  joined an  ever expanding

            number  of courts  that have  explicitly endorsed  the FDIC's

            argument.   See Federal Deposit  Ins. Corp. v.  State Bank of
                        ___ ___________________________     _____________

            Virden, 893 F.2d  139, 144 (7th  Cir. 1990); Federal  Deposit
            ______                                       ________________

            Ins. Corp. v.  Bell, 892 F.2d 64, 66 (10th  Cir. 1989), cert.
            __________     ____                                     _____

            dismissed, 496  U.S. 913 (1990);  In re NBW  Commercial Paper
            _________                         ___________________________

            Litigation, No.  90-1755(RCL), 1992 WL 73135,  at *11 (D.D.C.
            __________

            March 11, 1992); Federal Deposit Ins. Corp. v. Hudson, 800 F.
                             __________________________    ______

            Supp.  867, 870-71  (N.D.  Cal. 1990);  Federal Deposit  Ins.
                                                    _____________________

            Corp. v. Sullivan, 744 F. Supp. 239, 242-43 (D. Colo. 1990).3
            _____    ________

____________________

            3.  At the time the district  court issued its memorandum and
            order,  one court  had departed  from existing  authority and
            decided  that    1823(e) does  not bar  claims based  upon an
            unlawful omission.  See Grant County Savings & Loan Assoc. v.
                                ___ __________________________________
            Resolution Trust Corp., 770 F. Supp. 1374, 1379-82 (E.D. Ark.
            ______________________
            1991).    This  decision  was, however,  reversed  while  the
            instant  appeal was pending.  See Grant County Savings & Loan
                                          ___ ___________________________
            Assoc. v.  Resolution Trust  Corp.,  968 F.2d  722 (8th  Cir.
            ______     _______________________
            1992).  While the reversal was premised on other grounds, the
            Eighth  Circuit, in  dicta,  expressed its  doubt  as to  the
                                 _____
            district court's conclusion that    1823(e) did not  apply to
            an unlawful  omission.    See  id. at  724  (indicating  that
                                      ___  ___
            defendant's argument that   1823(e) barred plaintiff's  claim
            for failure to disclose "ha[d] merit").

                                         -4-
                                          4

On  appeal, plaintiffs assert that the overwhelming

            prevailing  consensus is incorrect.   In essence, plaintiffs'

            argue that an unlawful  omission of the type at  issue cannot

            be  viewed  as  a form  of  "agreement"  to  which    1823(e)

            applies, as "there  is nothing on the  table to agree  to; no

            promise, condition, or warranty is made."  See  Grant County,
                                                       ___  ____________

            770  F.  Supp. at  1381.   Although  possessing  some surface

            appeal, plaintiffs' contention  fails when analyzed in  light

            of the theoretical foundation upon which Langley rests.4
                                                     _______

                      The holding in Langley  depends upon and flows from
                                     _______

            the  following  observation:    as a  matter  of  contractual

            analysis, a  contractually bound  party's attempt to  avoid a

            contractual obligation and/or to seek damages through a claim

            of misrepresentation is nothing more  than a challenge to the

            truthfulness  of a  warranty  made by  another  party to  the

            contract, and  a concomitant  claim that the  truthfulness of

            that  warranty   was  a   condition  of  the   first  party's

            performance.    See Langley,  484 U.S.  at  90-91.   In other
                            ___ _______

            words,  the claim is analogous to one for breach of warranty,

            with the warranty being a condition precedent to performance.

            Therefore, because  such a warranty falls  within the purview

____________________

            4.  Apparently  conceding that  our  ruling as  to whether   
            1823(e) applies to unlawful non-disclosures also resolves the
            propriety of the district court's dismissal  of their ch. 93A
            claim,   plaintiffs    confine   their   argument    to   the
            misrepresentation context.  We  believe that this approach is
            appropriate, and accordingly so confine our discussion.

                                         -5-
                                          5

of the term  "agreement,"5 this  type of  breach of  warranty

            claim cannot be asserted against the FDIC unless the warranty

            meets the requirements of   1823(e).  See id. at 91-92.
                                                  ___ ___

                      We can find no logical basis for this reasoning not

            obtaining  with equal  force where  the  misrepresentation at

            issue  arises out  of  a non-disclosure  of information.   In

            terms  of  the facts  of this  case,  it makes  no difference

            whether  BNE affirmatively  stated that  the project  was not

            subject  to the NOR  or tacitly indicated this  was so by not

            informing  plaintiffs of  the NOR.   Either  way, plaintiffs'

            misrepresentation claim  is tantamount to a  challenge to the

            truthfulness of BNE's  warranty that the project  was free of

            any NOR, and a  claim that the truthfulness of  this warranty

            was a condition  of plaintiffs' performance.   See Langley at
                                                           ___ _______

            90-91.    The  non-disclosure  at  issue  here  can  only  be

            actionable  at common law as  a misrepresentation if it falls

            into a  narrow range  of circumstances allowing  it, somewhat

            fictionally, to  be treated as an assertion.  Cf. Restatement
                                                          ___

            (Second)  of Contracts,    161  (listing those  situations in

            which a  non-disclosure is  "equivalent to an  assertion" and

            actionable as  a misrepresentation); Restatement  (Second) of

            Torts,   551 (1977) (listing those situations in which a non-

____________________

            5.  As the Supreme Court noted, "[T]he term `agreement' often
            has `a wider meaning than promise,' and embraces [a warranty,
            the truthfulness of which  is] a condition upon performance."
            Id. at  91 (quoting  Restatement (Second) of  Contracts    3,
            ___
            Comment a (1981)).

                                         -6-
                                          6

disclosure  is actionable  as tortious  misrepresentation and

            noting that a person against whom a successful non-disclosure

            claim is brought will be "subject to the same liability . . .

            as  though [s/]he  had  represented the  nonexistence of  the

            matter that [s/]he has failed  to disclose").  Thus, adoption

            of  plaintiffs' view would require us  to endorse this quasi-

            fiction  for purposes  of  viewing the  non-disclosure as  an

            asserted misrepresentation, but to  reject it for purposes of

            viewing  the  non-disclosure  as   a  de  facto  warranty  in
                                                  __  _____

            conducting  our    1823(e)  analysis.   We  are  not inclined

            towards so one-sided an approach.   

                      Not only does the conclusion that   1823(e) applies

            to  misrepresentations  based  upon   non-disclosures  follow

            naturally from  the Supreme  Court's analysis in  Langley, it
                                                              _______

            also comports with  common sense.   We join  the Seventh  and

            Tenth  Circuits in  being unable  to articulate  any rational

            basis  for  a regime  in  which  such misrepresentations  are

            outside  the   scope  of   the   statute  while   affirmative

            misrepresentations  are not.    See generally  State Bank  of
                                            ___ _________  ______________

            Virden, 893  F.2d at 144; Bell,  892 F.2d at 66.   Indeed, we
            ______                    ____

            think it apparent that Congress  could not have intended that

            the  statute be  so  construed.    Moreover, we  share  Judge

            Lamberth's view  that  "permitting suit  on  omissions  would

            practically  swallow  the  Langley  rule  since  parties  can
                                       _______

            generally  turn  a[n affirmative]  misrepresentation  into an

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                                          7

omission by  means of artful  pleading."  In re  NBW, 1992 WL
                                                      __________

            73135, at *11.

                      Before  concluding,  we  observe  that  plaintiffs'

            complaint  does   not  make   entirely   clear  whether   the

            misrepresentation  claim sounds  in contract  or tort.   Such

            fact, however, has no bearing on our analysis.  We previously

            have held that  the common law doctrine announced in D'Oench,
                                                                 ________

            Duhme &  Co. v. FDIC, 315 U.S. 447 (1942), of which   1823(e)
            ____________    ____

            is somewhat  loosely  described as  the  codification,  "bars

            defenses and  affirmative claims whether cloaked  in terms of

            contract or  tort, as long  as those  claims arise out  of an

            alleged secret agreement."   Timberland Design, Inc. v. First
                                         _______________________    _____

            Service Bank for Savings,  932 F.2d 46, 50 (1st  Cir. 1991).6
            ________________________

            In so doing, we remarked that "[t]o allow [a party] to assert

            tort claims  based on  [a secret] agreement  would circumvent

            the very policy behind D'Oench[.]"  Id.  Clearly, the genesis
                                   _______      ___

            of plaintiffs' claim, whether the claim is framed in contract

            or  tort, is the alleged  warranty made by  BNE regarding the

            NOR.  As such, the claim is barred.  

____________________

            6.  Obviously,  in   Timberland,  we  were   considering  the
                                 __________
            application of D'Oench to  contract and tort claims.   We see
                           _______
            no reason,  however, why our ruling in  Timberland should not
                                                    __________
            also  be  implemented where     1823(e),  D'Oench's statutory
                                                      _______
            partner,  is   being  applied.    See   Castleglen,  Inc.  v.
                                              ___   _________________
            Resolution Trust Corp., No. 90-4002, 1993  WL 27915, at *5-*6
            ______________________
            (10th Cir.  Feb. 9, 1993)  (holding that    1823(e) precludes
            tort claims,  as  well as  contract  claims, arising  out  of
            unrecorded agreements).  

                                         -8-
                                          8

In  sum,  we are  persuaded  to join  that  body of

            authority  which has concluded that   1823(e) applies as much

            to misrepresentation claims based upon non-disclosures as  to

            those based  upon affirmative  assertions.  Thus,  we believe

            that    1823(e) governs  plaintiffs' misrepresentation claim.

            Accordingly,  because this  claim  arises out  of an  alleged

            warranty that was unwritten and otherwise did not comply with

            the  requirements of the  statute, we hold  that the district

            court  properly ruled that the  claim cannot, as  a matter of

            law, be asserted against the FDIC.

                      Affirmed.  No costs.
                      _________

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