Alexandria Associates, Ltd. v. Mitchell Co. ( 1993 )

United States Court of Appeals,
Fifth Circuit.
No. 92-7584.
ALEXANDRIA ASSOCIATES, LTD., a Florida Limited Partnership and Anthony J. LaSala,
Plaintiffs-Appellants, Cross-Appellees,
v.
The MITCHELL COMPANY, an Alabama General Partnership and Mitchell Equities, a Florida
General Partnership, Defendants-Appellees, Cross-Appellants.
Sept. 24, 1993.
Appeal from the United States District Court for the Southern District of Mississippi.
Before WIENER and EMILIO M. GARZA, Circuit Judges, and LITTLE*, District Judge.
WIENER, Circuit Judge:
We are called upon once again to delineate the boundaries of the D'Oench, Duhme doctrine.
Plaintiffs-Appellants, Alexandria Associates, Ltd., a limited partnership, and Anthony J. LaSala, one
of its general partners (jointly "Alexandria"), appeal the district court's grant of summary judgement,
dismissing their securities fraud and common law tort claims against Defendants-Appellees, The
Mitchell Company, an Alabama general partnership, and Mitchell Equities, a Florida general
partnership (jointly, the "Mitchells"), as barred by the D'Oench, Duhme doctrine. Concluding that
D'Oench does not apply to the instant non-banking transactions, which were sales of partnership
interests in real estate development partnerships, we reverse and remand.
I
FACTS AND PROCEEDINGS
This case comprises four non-bank parties involved in several non-banking transactions
consisting of the purchases and sales of partnership interests in real estate ventures. The essence of
Alexandria's assertions is that the Mitchells made misrepresentations regarding those sales, and that
the interests sold were securities within the contemplation of the federal securities laws. The operable
*
District Judge of the Western District of Louisiana, sitting by designation.
facts, for purposes of this appeal,1 are as follows.
The Mitchells are ordinary or general partnerships—that is, they are not limited partnerships.2
All partners are corporations, each of which is a wholly owned subsidiary of Altus Real Estate. When
the instant transactions occurred, Altus Real Estate was a wholly owned subsidiary of Altus Bank.
It was not until 1991, after Altus Bank failed and went into receivership, that the Resolution Trust
Corporation ("RTC") established Altus Federal Savings Bank ("Altus FSB") and, as receiver of Altus
Bank, transferred the stock of Altus Real Estate to Altus FSB. Thus the multi-tiered organizational
structure on the defense side of this litigation is: (a) Altus FSB (as successor to Altus Bank and not
a party herein) is the parent corporation of Altus Real Estate (also not a party herein); (b) Altus Real
Estate in turn is the parent corporation of each corporate partner of the Mitchells, the two ordinary
partnerships which are Defendants-Appellants herein; (c) the Mitchells in turn were partners in each
of the limited partnerships that (i) owned one of the subject apartment projects, and (ii) was an entity
in which Alexandria purchased a partnership interest.3
In 1986, John Saint, president of each corporate sub-subsidiary which in some combination
controlled the Mitchell partnerships, contacted LaSala in an effort to sell partnership interests in the
limited partnerships owned by the Mitchells to Alexandria.4 Each of these limited partnerships had
1
The Mitchells moved for summary judgement on the contention that Alexandria and LaSala's
claims were barred by D'Oench, Duhme—the central issue of this appeal. The Mitchells also
moved for summary judgement on the contention that the partnership interests were not
securities. The district court found that there was a genuine issue of material fact as to the
securities issue and denied the motion. Alexandria Associates, Ltd. v. Mitchell Co., 800 F. Supp.
1412, 1417 (S.D.Miss.1992). As we generally do not have jurisdiction to consider the denial of a
motion for summary judgement, we express no opinion on the securities issue. E.g., Landry v.
G.B.A., 762 F.2d 462, 464 (5th Cir.1985) (dismissing appeal for want of appellate jurisdiction
when jurisdiction is based on denial of a motion for summary judgement).
2
To be an ordinary or general partnership in Florida and Alabama (the states of domicile for
the Mitchell partnerships) a partnership cannot have any limited partners. To qualify as an entity
that can have limited partners the entity must, inter alia, include Limited or Ltd. in the partnership
name. See ALA.CODE § 10-9A-1 et seq., FLA.STAT. ch. 620.101 et seq.
3
The parties vigorously contest whether the partnership interests acquired by Alexandria were
limited or general. At this stage of the litigation that question is not crucial, so we do not address
it.
4
In addition to the partnership interests here at issue, Saint eventually sold an apartment
complex and warehouse to Alexandria in fee.
been formed to build, own, and manage a particular apartment complex. Alexandria eventually
purchased the contested interests in those partnerships, making cash down payments totaling
$400,000. The remaining balance of the purchase price of each interest thus acquired by Alexandria
was financed with a non-recourse loan from the Mitchells secured by a mortgage on the real estate
of the limited partnership in which such interest was purchased.
Alexandria intended to syndicate itself and sell shares to investors. It planned to use the
proceeds to pay off the purchase loan indebtedness. But Alexandria was unable to confect the
syndication, so it could not service its mortgage debts according to their tenor. When the loans fell
into default, the Mitchells foreclosed. As a result, Alexandria lost its entire $400,000 investment.
The foreclosures occurred in November, 1988, and Alexandria filed suit against the Mitchells in
December, 1988. In March, 1992,—over three years after suit was filed and at a time shortly after
Altus FSB succeeded Altus Bank—the Mitchells moved for summary judgement, contending that
Alexandria's claims were barred by the D'Oench, Duhme doctrine and its statutory counterpart, 12
U.S.C. § 1823(e). The Mitchells advanced the theory that, as the purported misrepresentations were
not in writing, they were "secret agreements" under D'Oench so that Alexandria's claims that were
grounded in those misrepresentations were barred. Even though the transactions in question involved
a partnership owned by subsidiaries of a subsidiary of Altus FSB and even though none among Altus
FSB, Altus Real Estate, the RTC, the FSLIC, or the FDIC ever intervened to assert D'Oench or
FIRREA, the district court concluded that D'Oench applied to the Mitchells and entered summary
judgement for them.5 Alexandria timely appealed.
II
STANDARD OF REVIEW
We review the district court's grant of summary judgement by "reviewing the record under
the same standards which guided the district court."6 A grant of summary judgement is proper when
5
Alexandria Associates, Ltd. v. Mitchell Co., 800 F. Supp. 1412 (S.D.Miss.1992).
6
Walker v. Sears, Roebuck & Co., 853 F.2d 355, 358 (5th Cir.1988).
no genuine issue of material fact exists that would necessitate a trial.7 In determining whether the
grant was proper, all fact questions are viewed in the light most favorable to the nonmovant.
Questions of law, however, are decided de novo.8
III
ANALYSIS
Alexandria asserts three alternative grounds to challenge the district court's holding that
D'Oench, Duhme bars their claims. First, they argue that D'Oench does not apply to non-banking
transactions such as these, involving the ordinary commercial sale of interests in real estate ventures.
Second, Alexandria asserts that, even assuming arguendo that D'Oench could be applicable to these
types of transactions under other circumstances, D'Oench does not apply when such transactions are
conducted by a third generation, non-banking subsidiary. Finally, Alexandria insists that the common
law D'Oench doctrine has been preempted by FIRREA,9 and that FIRREA's reach does not extend
to transactions of the nature here involved. As we agree with Alexandria's first contention—that
D'Oench does not apply to non-banking transactions involving the ordinary commercial sale of
partnership interests in real estate development ventures—we need not and therefore do not address
Alexandria's alternative arguments.10
A. Policies Underlying the D'Oench Doctrine
This court has previously noted that D'Oench is "an arguably harsh rule"11 that is "expansive
7
Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 106 S. Ct. 2548, 2552-54, 91 L. Ed. 2d 265
(1986); see FED.R.CIV.P. 56(c).
8
Walker, 853 F.2d at 358.
9
Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.L. No. 101-73,
103 Stat. 183 (codified at 12 U.S.C. § 1811 et. seq. (1991)).
10
In Garrett v. Commonwealth Mortgage Corp. of America, 938 F.2d 591, 595 (5th Cir.1991)
we found it unnecessary to determine whether subsidiaries may properly assert defenses available
under the D'Oench doctrine. We continue to find it unnecessary to decide this issue to resolve the
present case.
11
Texas Refrigeration Supply, Inc. v. FDIC, 953 F.2d 975, 979 (5th Cir.1992).
and perhaps startling in its severity."12 We have applied D'Oench to bar, inter alia, claims of fraud
under the federal securities law,13 and we have allowed successors in interest to the federal bank
regulatory agencies to invoke the protections of D'Oench.14 The essence of these protections is that
D'Oench bars enforcement of "agreements" against federal banking agencies unless those agreements
have been approved contemporaneously by the bank's board or loan committee and recorded in the
bank's written records.15
The Supreme Court in Langley v. FDIC16 voiced a twofold justification for invoking the
"arguably harsh" bar of D'Oench. The Langley Court found the recordation requirement justified
because it allows federal and state bank examiners to rely exclusively on the bank's records in
evaluating the worth of the bank's assets.17 The Court found justification for the approval
requirement in its assurance of "mature consideration of unusual loan transactions by senior bank
officials."18 We have articulated a third justification for D'Oench: that, among the bank's borrowers
creditors, and depositors, the borrowers are the ones who should bear the risk of loss because they
are better situated than either the creditors or the depositors of federally insured institutions to protect
themselves in regards to agreements made with such institutions.19
B. D'Oench and Non-banking Transactions
The consistent focus of D'Oench 's protection has always been on banking transactions
12
Bowen v. FDIC, 915 F.2d 1013, 1015 (5th Cir.1990).
13
Kilpatrick v. Riddle, 907 F.2d 1523, 1524 (5th Cir.1990), cert. denied sub. nom., Rogers v.
FDIC, 498 U.S. 1083, 111 S. Ct. 954, 112 L. Ed. 2d 1042 (1991).
14
Porras v. Petroplex Savings Ass'n, 903 F.2d 379, 379 (5th Cir.1990).
15
E.g. Thigpen v. Sparks, 983 F.2d 644, 649 (5th Cir.1993); Texas Refrigeration Supply, 953
F.2d at 979.
16
484 U.S. 86, 108 S. Ct. 396, 98 L. Ed. 2d 340 (1987).
17
Id. at 91, 108 S.Ct. at 401; see also Bowen v. FDIC, 915 F.2d 1013, 1016 (5th Cir.1990)
(stating same).
18
Langley, 484 U.S. at 92, 108 S.Ct. at 401.
19
Texas Refrigeration Supply, 953 F.2d at 979; Kilpatrick v. Riddle, 907 F.2d 1523, 1529
(5th Cir.1990).
engaged in by federally insured institutions.20 We have construed the concept of banking transactions
broadly, ranging from the typical loan agreement21 to promises to lend.22 In so doing, however, we
have recognized that the D'Oench doctrine is not transactionally infinite: It is not a limitless, per se
guarantee of victory by federal banking agencies and their successors in interest.23
In Thigpen v. Sparks24 we defined one limit of the D'Oench doctrine which is particularly
germane to the instant appeal. There the appellant, Sparks, purchased a wholly-owned trust company
from BancTexas. The chairman of BancTexas falsely represented to Sparks that the trust company's
charter had been maintained "in good standing" without interruption. Yet when Sparks eventually
attempted to sell the trust company he found that he could not because its charter had been revoked
temporarily for non-payment of franchise taxes. He therefore sued BancTexas under a breach of
warranty claim. Like Altus Bank here, BancTexas became insolvent during the pendency of the suit,
and the FDIC was appointed receiver. But in Thigpen it was the FDIC that moved for and was
granted summary judgement on the theory that Sparks' claim was an "agreement" barred under the
FIRREA provision that incorporated the statutory version of the D'Oench doctrine.25
Reversing the district court in Thigpen, we concluded that § 1821(d)(9)(A) of FIRREA
incorporated the limitations expressed in § 1823(e), the statutory enactment of the D'Oench
20
See Thigpen, 983 F.2d at 649 (commenting that the statutory D'Oench doctrine relates to
banks in their capacity as banks and refusing to extend this doctrine to include a bank's sale of an
asset in a non-banking transaction); Bowen, 915 F.2d at 1016-17 (discussing importance of
D'Oench in relation to the evaluation of bank transactions and protection of federally insured bank
assets); see also, OPS Shopping Center, Inc. v. FDIC, 992 F.2d 306, 310-11 (11th Cir.1993)
(distinguishing between claims based on whether they are predicated on a banking or a
non-banking transactions).
21
E.g., Porras, 903 F.2d at 649 (loans for a construction project).
22
Bowen, 915 F.2d at 1013-14 (holding that D'Oench bars claims based on the breach of a
promise to lend).
23
See Thigpen, 983 F.2d at 649 (noting that D'Oench is not a "meat-axe" for avoiding debts
incurred in the ordinary course of business).
24
983 F.2d 644 (5th Cir.1993).
25
Id. at 645.
doctrine,26 noting that § 1823(e) states expressly that it applies to the acquisition of an asset.27 We
also commented on the problems inherent in adopting a construction of FIRREA that would include
within its ambit any and all agreements regardless of their nature, subject matter, or circumstances.
We reasoned that inclusion of non-banking transactions within the coverage of § 1823(e) and § 1821
could lead to absurd results. For example, each ordinary trade creditor of a bank wo uld find it
necessary to have its purchase order or other contract documents approved by the bank's directors
and recorded in the Board's minutes if such creditor was to avoid potential uncollectibility under
D'Oench.28 Thus, we held in Thigpen that the statutory incarnations of the D'Oench doctrine do not
apply to a bank's disposition of an asset in a non-banking transaction.29 It follows that if D'Oench
does not apply to the bank itself, then surely it does not apply to subsidiaries of the bank's non-bank
subsidiaries!
Thigpen and the policies underlying the D'Oench doctrine mandate a like result in the present
case. The Mitchells were engaged in the ordinary commercial sale of non-bank assets—partnership
interests in real estate development ventures. These sales assuredly were non-banking transactions;
banks simply do not engage in the sale of partnership interests in real estate development ventures
in the ordinary course of banking business.30 The fact that these were sales by a third generation
non-banking subsidiary, thereby implicating the jurisprudential version of the D'Oench doctrine, fails
to distinguish this case from Thigpen.31
26
Id. at 648-49.
27
The relevant language of § 1823(e) states that it applies to: "[Any] agreement which tends to
diminish or defeat the interest of the Corporation in any asset acquired by it under this section or
section 1821 if this title ...". 12 U.S.C. § 1823(e).
28
Thigpen, 983 F.2d at 649.
29
Id.
30
We recognize the possibility that a regulatory agency serving as conservator or receiver, or a
successor financial institution, engaged in liquidating assets of a failed or troubled institution
might dispose of such assets and be within the scope of D'Oench, but that is not what happened
here.
31
We have stated previously that the common law and statutory D'Oench doctrines have been
virtually interchangeable in our jurisprudence. Texas Refrigeration Supply, 953 F.2d at 979 n. 3.
Moreover, even if we assume for the sake of this discussion that FIRREA allows the extension
of the jurisprudential version of the D'Oench doctrine beyond the limits of the statutory one,32 we
discern no reason to do so in the present case.33 The purposes of neither the recordation nor approval
requirements of D'Oench would be furthered by including non-banking transactions within the aegis
of the doctrine. The substantial volume of information regarding areas of commerce outside the bank
examiners' expertise or cognizance, generated day by day in myriad non-banking transactions, would
simply overwhelm the bank's officers and directors; besides, such information would not be likely to
aid the examiners in evaluating miscellaneous non-banking assets of the troubled bank. Requiring
bank boards or loan committees to consider, approve, and record every transaction entered into by
a bank—and especially by entities held by the bank as investments or subsidiaries—would make
virtually impossible the performance by officers and directors of their upper level management and
policymaking functions, not the least of which is deciding constantly whether and on what terms to
grant loans.
Finally, we seriously question whether a third party involved in a non-banking
transaction—particularly a transaction with subsidiaries of a subsidiary such as the ones at issue
here—would be in a better position than depositors or creditors of that bank to protect themselves
by mandating board consideration and recordation in the bank's minutes. Commercial expectations
simply do not include the belief that every agreement with a bank (much less with its
sub-sub-subsidiaries) must be scrutinized, approved, and recorded by the bank's executive committee
And as we note above, this case provides a poor vehicle to justify extending the jurisprudential
D'Oench doctrine beyond the statutory one.
32
Again, it is unnecessary to determine whether FIRREA preempts—or supplants—the
jurisprudential D'Oench doctrine. Cf. In re NBW Commercial Paper Litigation, No. 90-1755,
1992 WL 73135 at 6-9 (D.D.C. March 11, 1992) (concluding that FIRREA does not preempt the
common law D'Oench doctrine).
33
Unlike those prior cases in which we extended D'Oench to fill in the interstices in the
relevant statutes in order to provide protection to entities such as assignees of the FDIC, see
Porras, 903 F.2d at 381, or to protect the FDIC, et al. from affirmative claims based on banking
transactions, see Bowen, 915 F.2d at 1015-16, this case would require us to extend D'Oench to
include a virtually unlimited and undefinable category of transactions if, like the district court, we
were to accept the Mitchells' invitation thus to give virtually unlimited reach to the tentacles of
D'Oench.
or board.34
IV
CONCLUSION
The Mitchells effort to invoke D'Oench as a bar to any judicial consideration whether they
engaged in fraud in connection with the sale of partnership interests in real estate development
partnerships constitutes overreaching in the extreme, and is thus misdirected. Our recent decision
in Thigpen has foreclosed any appeal to a statutory D'Oench bar under FIRREA, and we can find no
reason to extend the venerable jurisprudential version of D'Oench to cover the same type of
transaction, particularly when as here such transactions are engaged in by a third generation
subsidiary. As we conclude that D'Oench does not apply to such non-banking transactions under
circumstances such as those here under review, involving the sale of partnership interests in real estate
development partnerships, we reverse the district court's grant of summary judgement and remand
for trial on Alexandria's securities fraud and common law tort claims. In so doing we imply no
prediction as to the ultimate determination of those claims on their merits.
REVERSED and REMANDED.
34
Cf. Sunbelt Savings, FSB Dallas v. Montross, 923 F.2d 353, 357 (5th Cir.1991) (concluding
that extending the federal holder in due course doctrine to non-negotiable instruments would
defeat the reasonable commercial expectations of the makers).