Ron Grubb and Weatherford Interstate Financial Corporation, Plaintiffs v. Federal Deposit Insurance Corporation

833 F.2d 222

• Court: Court of Appeals for the Tenth Circuit
• Decided: February 16, 1988
• Docket: 86-1687, 86-1728
• Status: Published

Opinions

SEYMOUR, Circuit Judge.

Federal Deposit Insurance Corporation (FDIC) has moved this court to exonerate supersedeas bonds posted to secure a stay of execution of the judgments below pending this appeal. FDIC contends that, as an entity of the United States government, it is entitled by 28 U.S.C. § 2408 (1982) to be relieved of the obligation to furnish and maintain security. We disagree with this contention and deny the motion to exonerate.

Plaintiffs Ron Grubb and Weatherford Interstate Financial Corporation (Grubb) instituted this suit for damages against First National Bank & Trust Company of Oklahoma City (FNB), alleging that FNB violated federal and Oklahoma securities laws. Judgment was entered in favor of Grubb, and FNB appealed. In accordance with Fed.R.Civ.P. 62(d), FNB posted a superse-deas bond to secure a stay of execution of the judgment pending its appeal. The bond provides as follows:

“Pursuant to the Order of the United States District Court ... The First National Bank and Trust Company of Oklahoma City hereby acknowledges its obligation to deposit Two Million Eight Hundred Fifty Thousand Dollars ($2,850,-000.00) in lawful money or negotiable bonds of the United States with the Clerk....

“The instrument is filed as security for a stay of execution of judgment pending appeal in the above-named action pursuant to Rule 62(D) [62(d) ], Fed. R.Civ.P.

“This obligation arises by virtue of the judgment entered herein on October 31, 1985, in favor of Ronald Grubb against The First National Bank and Trust Company of Oklahoma City in the amount of Two Million Seven Hundred Twenty-Two Thousand Six Hundred Twenty-Nine and 88/100 Dollars ($2,722,629.88)....

“Pursuant to Rule 25(D) [25(d) ] of the Rules of the United States District Court for the Western District of Oklahoma, in lieu of corporate surety, The First National Bank and Trust Company of Oklahoma City hereby deposits a fully secured and negotiable Certificate of Deposit with the Clerk.... Evidence of the fact that the Certificate of Deposit is fully secured will be provided to the Clerk of this Court by the Federal Reserve Bank. Copies of the certificate of deposit and the pledge receipt are attached hereto and made a part hereof.

“The condition of this obligation and deposit is such that if The First National Bank and Trust Company of Oklahoma City shall fully perform and comply with said judgment and the further orders or judgment of this Court in the event the same shall be affirmed in whole or in part, and if The First National Bank and Trust Company of Oklahoma City shall further pay costs, interest and damages for delay if the appeal is dismissed or the judgment is affirmed, or such judgment as the appellate court may award if the judgment is modified, then this obligation is void, and all obligations under this bond are discharged, otherwise this bond shall remain in full force and effect and the said Certificate of Deposit, or proceeds thereof, and accrued interest thereon shall be used immediately to satisfy all judgments, orders and accruals thereon owned [sic] by The First National Bank and Trust Company of Oklahoma City to Ronald Grubb.”

(Emphasis added). Pursuant to the terms of the bond, FNB deposited both the bond and an FNB certificate of deposit (CD) with the district court clerk. The CD was secured by Treasury obligations of the United States owned by FNB. A similar bond and CD were executed and deposited with the clerk to secure a stay of execution pending FNB’s appeal of a second judgment awarding Grubb attorneys’ fees and post-judgment interest.

After the bonds were deposited with the district court and during FNB’s appeal, the Comptroller of the Currency declared FNB insolvent and appointed FDIC as the bank’s receiver. Pursuant to the plan for receivership, FDIC transferred the assets of FNB to First Interstate Bank of Oklahoma City (FIB). FIB CDs were substituted for the FNB CDs as collateral for the bonds. The FIB CDs were also secured by United States Treasury obligations. This court granted FDIC’s motion to be substituted for FNB as appellant. FDIC then moved us to exonerate the bonds.

FDIC argues that the bonds should be exonerated because of the provisions of 28 U.S.C. § 2408, which provide as follows:

“Security for damages or costs shall not be required of the United States, any department or agency thereof or any party acting under the direction of any such department or agency on the issuance of process or the institution or prosecution of any proceeding.”

FDIC claims that it qualifies as an agency of the United States, and that the plain language of section 2408 requires that we exonerate the bonds. For the reasons set out below, we are not persuaded and therefore deny FDIC’s motion.

We first address, as a preliminary matter, Grubb’s argument that we should not consider the motion to exonerate because FDIC did not first attempt to secure relief in the district court and thus failed to comply with Rule 8(a) of the Federal Rules of Appellate Procedure. The rule provides in part as follows:

“Application for a stay of the judgment or order of a district court pending appeal, or for approval of a supersedeas bond, or for an order suspending, modifying, restoring or granting an injunction during the pendency of an appeal must ordinarily be made in the first instance in the district court. A motion for such relief may be made to the court of appeals or to a judge thereof, but the motion shall show that application to the district court for the relief sought is not practicable, or that the district court has denied an application, or has failed to afford the relief which the applicant requested, with the reasons given by the district court for its action.”

Fed.R.App.P. 8(a) (emphasis added). Although we agree that as a general rule matters pertaining to supersedeas bonds should be initially presented to the district court, see Fed.R.App.P. 8(a) advisory committee notes, that general rule applies principally to factual questions, such as the amount or conditions of a bond, because the trial judge who is familiar with the record and the parties is best able to make those judgments. See Cumberland Tel. & Tel. Co. v. Louisiana Pub. Serv. Comm’n, 260 U.S. 212, 219, 43 S.Ct. 75, 77, 67 L.Ed. 217 (1922). Whether the bonds in this case should be exonerated is a question of law, however. In the exercise of our discretion, we elect to decide the exoneration issue without requiring the FDIC to first present it to the trial court.

Grubb claims that the bonds and their collateral, once they were deposited as security with the district court, ceased to be property of FNB and therefore are not now assets of the receivorship that are available to FDIC for distribution to creditors. Thus, Grubb argues, FDIC has no authority to assert that the security should be released.

Grubb cites as authority for this proposition Mid-Jersey Nat’l Bank v. Fidelity-Mortgage Investors, 518 F.2d 640 (3d Cir.1975), a case arising in the analogous private bankruptcy context. In Mid-Jersey, the plaintiff bank was granted summary judgment for the amount owing on an overdue promissory note. The judgment was stayed pending appeal when the defendant made a deposit in court in lieu of a superse-deas bond. The deposit was in the form of a negotiable certificate of deposit. While the appeal was pending, the defendant filed for reorganization under Chapter XI and claimed that the appeal was automatically stayed by Bankruptcy Rule ll-44(a).

The court in Mid-Jersey held that the stay required by Rule ll-44(a) extends only to proceedings that could divest the debtor of property over which the bankruptcy court has jurisdiction. Id. at 643. The court then stated as follows:

“The question we must resolve, therefore, is whether the certificate deposited in the district court is the property of the debtor over which the Chapter XI court has exclusive jurisdiction. We hold that, in the context of this case, such a deposit in court is not the property of the debtor and is not subject to the after-arising jurisdiction of the Chapter XI court.

“Although the legal status of a deposit in court pending an appeal is not entirely pellucid, we are of the opinion that such a deposit in custodia legis may be considered the res of a trust. The court acts as trustee and is charged with the duty of determining the beneficiaries pursuant to the appeal.”

Id. (emphasis added). After reviewing some analogous cases, the court further held that

“FMI parted with its ownership of the certificate of deposit when the certificate was entrusted to the court. Since then, the only property interest FMI has had in the certificate is a contingent reversion-ary interest as a potential beneficiary of the trust. Once we have determined that FMI does have an interest in the trust funds, the Chapter XI court would, of course, have jurisdiction over any funds to which the debtor has a rightful claim. At present, however, the Court is able to proceed with determining which party is entitled to receive the trust res and its accumulated interest.

“Employment of this analysis preserves the function of the deposit as protection for the party prevailing at the trial level from the possibility of future insolvency of the losing party. At the same time our interpretation does no material damage to the automatic stay provision of Rule 11-44, since the deposit serving as a supersedeas is not available to the reorganization court to aid in the execution of the plan in the Chapter XI proceeding.”

Id. at 644 (emphasis added). The court concluded that Rule ll-44(a) did not operate to stay the appeal and proceeded to consider the merits.

Grubb also relies on the similar line of reasoning in Saper v. West, 263 F.2d 422 (2d Cir.), cert. denied, 360 U.S. 916, 79 S.Ct. 1433, 3 L.Ed.2d 1532 (1959). Saper was an action by a trustee in bankruptcy to recover as a preference funds that had been deposited with the court clerk pending appeal of a judgment against the defendant, who subsequently declared bankruptcy. The funds were deposited in August 1948, and were distributed to the judgment creditors in November 1950 when their judgment was affirmed. Less than four months later, the defendant filed a petition in bankruptcy. In refusing to declare a preference, the court said:

“It must be emphasized that on and after August 2, 1948, when Foley deposited the sums awarded to West and Long pursuant to the judgment of the California trial court with the clerk of the court, [the judgment debtor’s] only possible interest in those funds, according to Judge Herlands, was contingent upon the ‘highly remote possibility that the trial court’s judgment would be reversed on appeal.’ On and after August 2, 1948 there was no possible way in which [the judgment debtor] could transfer these funds to a third party so as to cut off the rights of West and Long until or unless that judgment were reversed.”

Id. at 427.

We find these analogous cases highly persuasive and consistent with cases involving the insolvency of national banks. In Ticonic Nat’l Bank v. Sprague, 303 U.S. 406, 58 S.Ct. 612, 82 L.Ed. 926 (1938), for example, a trust deposit in a national bank was secured by bonds, as required by statute. The bank failed. The Supreme Court held that the trust depositor was entitled to be paid from the bonds as against the claims of general creditors:

“The rule as to the date to which interest is to be allowed on secured claims sharing pro rata with unsecured claims, cannot apply to the disposition of pledged or mortgaged assets subject to the lien of individual creditors, unless we are to disregard the rights in these assets prior to insolvency. But ‘liens, equities or rights arising ... prior to insolvency and not in contemplation thereof, are not invalidated.’ Scott v. Armstrong, 146 U.S. 499, 510 [13 S.Ct. 148, 151, 36 L.Ed. 1059 (1892)]; Merrill v. National Bank of Jacksonville, 173 U.S. 131, 145 [19 S.Ct. 360, 366, 43 L.Ed. 640 (1899)]. By contract or, as in this case, by statute, the secured creditors gain or are given a lien on or right in property ‘in addition to their claim against the estate of the bank.’ Section ll(k) of the Federal Reserve Act as amended. The statutory lien prior to receivership withdrew the pledged security from the assets of the bank available to general creditors, in so far as might be necessary to satisfy the lien. Though title to the collateral was in the name of the bank, it was subject to this lien, and to that extent the property pledged could not properly be said to belong to the bank for purposes of distribution to creditors. Scott v. Armstrong, supra [146 U.S.] at 510 [13 S.Ct. at 151].”

Id. at 412-13, 58 S.Ct. at 615 (emphasis added). By analogy to Ticonic, even if the title of the CDs or Treasury obligations in this case is in FDIC or FIB, the property nevertheless is not part of the assets available for ratable distribution.¹ In this sense, Grubb is in the position of a secured creditor.²

Without citing any authority, the dissent argues that because the underlying debt was not secured, Grubb did not become a secured creditor when it became the beneficiary of the supersedeas bond. We disagree. The dissent’s argument overlooks the fact that a debtor and creditor may transform an unsecured debt into a secured debt by agreeing to create a security interest. The creditor gives value for his right to the collateral by acquiring it “as security for or in total or partial satisfaction of a pre-existing claim.” J. White & R. Summers, Uniform Commercial Code § 23-4 at 915 (2d ed. 1980) (emphasis added) (quoting § l-201(44)(b) of the 1972 Official Text of the Uniform Commercial Code); see also Okla.Stat. tit. 12A, § l-201(44)(b); Bank of Lexington v. Jack Adams Aircraft Sales, Inc. 570 F.2d 1220, 1224-25 (5th Cir.1978). In this case Grubb gave additional value by foregoing the right to immediately collect on the judgment. Thus, after judgment, Grubb and FNB entered into a security agreement that in essence transformed the underlying unsecured debt into a secured debt by agreeing that the bond would, as it stated, secure payment of “all judgments, orders and accruals thereon owed by [FNB] to Ronald Grubb.” All of this occurred prior to the declaration of insolvency by the comptroller, and no issue of preference has been raised.

We are persuaded by the cases discussed above that FDIC is without authority to assert that the bonds should be released, notwithstanding section 2408. This result comports with both the rationale of section 2408 and the purpose of supersedeas bonds. The United States is generally entitled to a stay of execution without posting security because judgments against the United States are paid out of a general appropriation to the Treasury set up specifically for that purpose. See Lightfoot v. Walker, 797 F.2d 505, 507 (7th Cir.1986). Thus, collections of judgments against the United States are usually less cumbersome and time-consuming than collections of judgments against other entities. In the present case, however, FDIC has conceded that it does not stand ready to pay Grubb’s judgment in full if it is affirmed on appeal. See Supplemental Authority and Memorandum at 2 (filed May 11,1987) (FDIC asserts that judgment creditor is entitled only to pro rata share of bank’s estate). Moreover, given our view that the bond secures Grubb’s judgment and is not available to the receiver as an asset, FDIC can not claim the return of the funds securing the bond.

Exonerating these bonds would undermine the rationale for requiring a bond pending appeal, which is to secure the judgment throughout the appeal process against the possibility of the judgment debtor’s insolvency. See Poplar Grove Planting & Ref. Co. v. Bache Halsey Stuart, Inc., 600 F.2d 1189, 1190-91 (5th Cir.1979); J. Perez & Cia., Inc. v. United States, 578 F.Supp. 1318, 1320 (D.P.R.), aff'd, 747 F.2d 813 (1st Cir.1984); see also 7 J. Moore & J. Lucas, Moore’s Federal Practice ¶ 62.06, at 62-33 to -34 (2d ed. 1985). Allowing exoneration of these bonds would thus defeat the very purpose for which they were provided.³

The motion to exonerate is denied.

1 . The dissent attempts to distinguish Ticonic because the lien there was created by statute. For the purposes of this case, we see no distinction between a lien created by statute and a lien created by a contract (the bond) that is required by the court as a condition of staying execution of the judgment.

2 . Ticonic is also instructive concerning the extent of protection afforded a secured creditor such as Grubb. Although, in general, creditors of an insolvent national bank are not entitled to interest on their claims accruing after the date of insolvency, a secured creditor is entitled to interest on its claim to the extent of its security, regardless of whether that interest accrues before or after insolvency. See Ticonic, 303 U.S. at 411-13, 58 S.Ct. at 614-15. To the extent that the principal and interest exceed the amount of the security, however, the claim of a secured creditor will be treated just like that of any other creditor. Accordingly, Grubb’s judgments against FNB and the interest on those judgments are protected by the security already pledged by FNB, but Grubb is entitled to no additional security to protect interest accruing beyond the amount of the original CDs. A pledge of additional security would require an improper removal of assets from the receivership.

3 . Under the result advocated in the dissent, a supersedeas bond posted by a financially troubled national bank provides no protection for the judgment creditor. If the dissent’s position were the rule, trial courts would not grant stays of execution to potentially insolvent national banks, because any supersedeas bond posted by such a bank would not serve the purpose for which these bonds are intended. Instead, the banks would be forced to pay trial court judgments immediately, possibly driving them further toward insolvency.