American Bank & Trust of Coushatta v. F.D.I.C.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 94-40377
AMERICAN BANK & TRUST OF COUSHATTA, ET AL.,
Plaintiffs-Appellants,
versus
FEDERAL DEPOSIT INSURANCE CORPORATION,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of Louisiana
(March 29, 1995)
Before HIGGINBOTHAM, SMITH, and PARKER, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
The issue in this case is the meaning of "good faith" under
the Civil Code of Louisiana. Participants in a loan participation
argue that the FDIC breached the duty of a lead bank to act in good
faith. They contend that the duty of good faith is breached by
gross fault, by negligence, or even by violations of the Golden
Rule. The district court rejected these definitions, and found a
failure of proof of malice in the record and granted summary
judgment for the FDIC.
We agree with the reasoning of the distinguished district
court, and affirm.
I.
In 1982, Bossier Bank & Trust loaned Retamco, Inc., $18
million secured by real estate called the Retama Property. BB&T
then made four loans secured by the Retama Property, all
participated in by other banks. The first tier of $8.5 million was
secured by a first lien on the Retama Property and fifteen
institutions, including BB&T, and the appellants were participants.
A second lien on the tract secured a second loan for about $8
million in which BB&T and three other institutions participated.
A third lien secured a third loan shared by five institutions for
$1 million. A fourth loan, shared by three institutions for about
$470,000, was secured by a fourth lien.
Retamco defaulted. BB&T failed. The FDIC was appointed as
receiver and liquidator. The FDIC assumed the role of lead lender,
with the responsibility of liquidating the Retama Property. The
FDIC sold the property in 1991 for $1.2 million at public auction.
It had, however, rejected several multi-million dollar offers for
the Retama Property and had spent more than $1.9 million to
maintain it.
Angry that the FDIC had sold the Retama Property for so
little, four of the participant banks filed this suit. They claim
that the FDIC violated its contractual and statutory duties by
favoring FDIC interests over theirs and by mismanaging the
liquidation. The FDIC held a large interest in the "subordinate"
loans, and the four banks' sole interest was in the first tier
2
loan.1 The banks argue that the FDIC rejected offers that would
have paid much of the debt owed to the first tier lenders, but not
the subordinate loans in which the FDIC had a substantial interest.
The district court granted summary judgment for the FDIC on
this claim.2 The court based its ruling on the key clause of the
participation agreements, providing that BB&T (and now the FDIC)
will exercise the same care with respect to the loan, and
the collateral, if any, as it gives to loans and
collateral in which it alone is interested; but BB&T
shall not be liable for any action taken or omitted so
long as it has acted in good faith.
Emphasizing its second half, the court ruled that the FDIC owed the
banks only a duty to perform in "good faith," and the court looked
to the Louisiana Civil Code for the definition of that critical
term. The Louisiana Civil Code does not define "good faith," but
it does define "bad faith" as "an intentional and malicious failure
to perform." La. Civ. Code Ann. art. 1997 cmt. c (West 1987).3
Following Louisiana law, the district court then equated "good
faith" with the lack of "bad faith." See, e.g., Great Southwest
1
The FDIC had held only a .06 percent interest in the first
tier loan. In the "subordinate" loans, i.e., the second, third,
and fourth tier loans, the FDIC had held much greater interests:
77.8 percent interest in the second loan, no interest in the third
loan, and a 22.5 percent interest in the fourth loan.
2
The court also denied summary judgment on the FDIC's
counterclaim, which sought the banks' share of the cost of
maintaining and liquidating the Retama Property. The FDIC does not
appeal that decision.
3
Unlike the Civil Code, Louisiana's Commercial Laws do
define "good faith." See La. Rev. Stat. Ann. § 10:1-201(19) (West
1993) (defining good faith as "honesty in fact in the conduct or
transaction concerned"). However, neither party contends that the
Commercial Laws' definition controls.
3
Fire Ins. Co. v. CNA Ins. Cos., 557 So. 2d 966, 969 (La. 1990);
Bond v. Broadway, 607 So. 2d 865, 867 (La. Ct. App. 1992), cert.
denied, 612 So. 2d 88 (La. 1993); see also Commercial Nat'l Bank v.
Audubon Meadow Partnership, 566 So. 2d 1136, 1139 (La. Ct. App.
1990) (analyzing bad faith as the mirror image of good faith);
Heirs of Gremillion v. Rapides Parish Police Jury, 493 So. 2d 584,
587 (La. 1986) (implying that a party has acted in good faith
unless he has acted in bad faith). The court held that the FDIC's
actions may have been negligent, imprudent, or bumbling, but
because they were not intentionally malicious, the banks could not
state a claim.
On appeal, the banks challenge the court's definition of good
faith. They argue that the duty to act in good faith is breached
not only by acting in bad faith but by any of three other standards
of care. They are, in descending order of stringency, (1)
violations of the Golden Rule, (2) negligence, or (3) gross fault.
Alternatively, the banks argue that even under the district court's
bad faith standard -- a standard more lenient to the FDIC than any
of their three candidates -- the court should have denied the
FDIC's summary judgment motion in light of the banks' evidence of
the FDIC's self-dealing.
We reject the banks' three definitions of breaches of good
faith: the Golden Rule, negligence, and gross fault. We also
agree with the district court that a trier of fact could not
reasonably conclude on the facts of this record that the FDIC acted
with malice.
4
II.
Louisiana no longer measures good faith by the Golden Rule.
Apparently, it once did. In 1979, the Supreme Court of Louisiana
observed that implied into every Louisiana contract was the
equitable "'christian principle not to do unto others that which we
would not wish others should do unto us.'" National Safe Corp. v.
Benedict & Myrick, Inc., 371 So. 2d 792, 795 (La. 1979) (quoting
La. Civ. Code Ann. art. 1965 (1977)).4 Finding that National fell
short of its implied contractual duty "to do to Benedict & Myrick
that which it would wish Benedict & Myrick to do to it," the court
found National Safe liable. Id.
Five years later, the legislature revised the Civil Code5 and
reenacted the statute that National Safe relied upon -- Article
1965 -- as Article 2055. Although the legislature stated in a
comment that it intended new Article 2055 simply to reproduce the
"substance" of old Article 1965, the legislative revisions dropped
the Golden Rule. Old Article 1965 provided that
The equity intended by this rule is founded in the
christian principle not to do unto others that which we
would not wish others should do unto us; and on the moral
maxim of the law that no one ought to enrich himself at
the expense of another. When the law of the land, and
that which the parties have made for themselves by their
4
Curiously, the word "christian" entered this statute by a
mistake in translation from the French text. According to the Note
to Article 1965, the word should have read "religious." See 16 La.
Stat. Ann. Civ. Code (Compiled Edition) (1973) at 1120 for the
original French text.
5
See Brill v. Catfish Shaks of Am., Inc., 727 F. Supp. 1035,
1039 n.7 (E.D. La. 1989).
5
contract, are silent, courts must apply these principles
to determine what ought to be incidents to a contract,
which are required by equity.
La. Stat. Ann. art 1965 (West 1977) (emphasis in original.) The
Golden Rule is absent from revised Article 2055:
Equity, as intended in the preceding articles, is
based on the principles that no one is allowed to take
unfair advantage of another and that no one is allowed to
enrich himself unjustly at the expense of another.
Usage, as intended in the preceding articles, is a
practice regularly observed in affairs of a nature
identical or similar to the object of a contract subject
to interpretation.
La. Civ. Code Ann. art 2055 (West 1987). Nevertheless, old Article
1965 resists its death. Years after Article 1965 was revised,
federal and state courts still cite the "christian principle" of
old Article 1965, or National Safe's reference to it, without
mentioning that Article 1965, as recodified as new Article 2055,
failed to retain it. See, e.g., Devin Tool & Supply Co. v. Cameron
Iron Works, Inc., 784 F.2d 623, 627 n.2 (5th Cir. 1986) (per
curiam); Owl Constr. Co. v. Ronald Adams Contractor, Inc., 642 F.
Supp. 475, 479 (E.D. La. 1986); Morphy, Makofsky & Masson v. Canal
Place 2000, 538 So. 2d 569, 574 & n.8 (La. 1989); Gibbs Constr. Co.
v. Thomas, 500 So. 2d 764, 767 (La. 1987); Hendricks v. Acadiana
Profile, Inc., 484 So. 2d 242, 245-46 (La. Ct. App. 1986). We are
hesitant then to reject the Golden Rule definition of good faith
despite its loss of its statutory source.
We are persuaded finally to do so because we have been unable
to find a single case since National Safe was decided in 1979 that
actually applies it. Most courts that have cited old Article 1965
6
since 1979 have relied not upon the statute's "christian principle"
but upon its rule that "no one ought to enrich himself at the
expense of another." See, e.g., Owl Construction, 642 F. Supp. at
479; Morphy, 538 So. 2d at 575. Indeed, one Louisiana court has
suggested that the "christian principle" is nothing more than a ban
on unjust enrichment. See Hendricks, 484 So. 2d at 245-46. Even
those courts that have used old Article 1965 to inform the meaning
of the term "good faith" have not held that the duty of good faith
demands refraining from doing unto others that which we would not
wish them to do to us. See, e.g., Devin Tool, 784 F.2d at 627;
Gibbs Construction, 500 So. 2d at 767. In short, the Louisiana
Supreme Court's application of the Golden Rule in National Safe
appears to have been an anomaly. We predict that the Louisiana
Supreme Court would not choose to apply it again, and, in our best
effort to replicate the Louisiana Supreme Court, we refuse to do so
here.
III.
The banks' attempt to define negligent acts as a breach of
good faith is similarly ill-founded. Under Louisiana law a party
can act in good faith and be negligent. In fact, the Louisiana
Supreme Court recently rejected the negligence standard:
Although it is clear that "bad faith" or "lack of good
faith" in this context means something more reprehensible
than ordinary negligence, imprudence or want of skill, it
is apparent that our courts have perceived the terms to
include some forms of gross fault as well as intentional
and malicious failures to perform.
Great Southwest, 557 So. 2d at 969 (emphasis added); see also Bond,
607 So. 2d at 867 ("The term bad faith means more than mere bad
7
judgment or negligence, it implies the conscious doing of a wrong
for dishonest or morally questionable motives."). At oral
argument, counsel for the banks properly conceded that he knew of
no case in Louisiana or anywhere else that stated that negligence
is a breach of good faith.
The banks' second line of argument is that the participation
agreements adopt a negligence standard, both implicitly and
explicitly. By forcing the participant banks to depend on the FDIC
to get the best price for the property, the participation
agreements implicitly created what the banks call an "agency
coupled with an interest," which imposed upon the FDIC the duty to
act "in a manner that a reasonably prudent banker would have acted
for his own interest in a nonparticipated loan."6 The
participation agreements explicitly imposed a negligence standard,
the banks argue, by demanding that the FDIC "exercise the same care
with respect to the loan, and the collateral, if any, as it gives
to loans and collateral in which it alone is interested."
We are not persuaded that the standard the banks find in the
text and subtext of the participation agreements imposes a
negligence standard. As we read it, it imposes an anti-
discrimination standard, which requires the FDIC to treat the
6
In support of their argument, the banks cite Mansura State
Bank v. Southwest Nat'l Bank, 549 So. 2d 1276, 1280 (La. Ct. App.),
cert. denied, 553 So. 2d 473 (La. 1989), which found that a
participation agreement can create an agency relationship, and
Franklin v. Commissioner, 683 F.2d 125, 128 n.9 (5th Cir. 1982),
which found that the terms of the participation agreement at issue
made the lead bank the agent for the purposes of servicing of the
loan.
8
participant banks' loans the same as it treated its own loans, a
matter we will come to.
IV.
Further, we agree with the district court that gross fault
cannot be a breach of good faith under Louisiana law. The
strongest support for the banks' gross fault standard is the
Louisiana Supreme Court's statement that "our courts have perceived
[the term 'lack of good faith'] to include some forms of gross
fault." Great Southwest, 557 So. 2d at 969. Following the civil
law tradition of Louisiana, the district court elevated statutory
law over decisional law and gave Great Southwest little weight.
Because Comment c to Article 1997 of the Civil Code defined bad
faith as an intentionally malicious failure to perform, and because
the Louisiana Supreme Court had made no "definitive statement"
about the meaning of bad faith, the district court stated that it
was "not free to abrogate the Louisiana legislature's unambiguous
declarations." (Memorandum Ruling of March 22, 1994, at 4.)
We agree with the district court's careful adherence to
Louisiana's civil law tradition. As an Erie court, our task is to
anticipate the Louisiana Supreme Court's interpretation of the
meaning of bad faith, see Transcontinental Gas Pipe Line Corp. v.
Transportation Ins. Co., 953 F.2d 985, 988 (5th Cir. 1992), even
when we construe Louisiana's civil law. See id. The Louisiana
Supreme Court's statement in Great Southwest was dicta, sharply
contradicted by the plain text of the comment to Article 1997. We
believe that if the Louisiana Supreme Court were hearing this case,
9
it would brush aside the stray statement in Great Southwest and
follow the clear dictates of the Louisiana Code. The only holding
of Great Southwest was that negligence was not enough. The choice
between gross negligence and malice was not before the court. Of
course, these are common law, not civil law, observations.
Nonetheless, they inform our prediction of the Louisiana Supreme
Court's future course.
V.
Finally, the banks argue that the FDIC's actions were
intentionally malicious.
We review the district court's determination that even after
adequate discovery, the banks have not made a sufficient showing of
bad faith. See FDIC v. Ernst & Young, 967 F.2d 166, 169 (5th Cir.
1992) ("A summary judgment is proper if after adequate time for
discovery and upon motion [the nonmovant] fails to make a showing
sufficient to establish the existence of an element essential to
that party's case, and on which that party will bear the burden of
proof at trial." (internal quotation marks omitted)). The banks
argue that the award of summary judgment was improper in light of
evidence that the FDIC engaged in self-dealing and deliberately
concealed vital information.
The banks' first contention is that the FDIC intentionally
sacrificed the banks' interests in the first tier loan to protect
the FDIC's large interest in the subordinate loans. They cite two
instances. First, they argue that the FDIC elevated its own
10
financial interests over the banks' by rejecting an offer that
would have paid the debt due most first tier participants,
including appellants, but none of the subordinate tier
participants, including the FDIC. The FDIC insists that there is
no evidence that its rejection of this offer, the so-called Bearden
contract, was in bad faith. The banks respond with deposition
testimony of a former FDIC account officer, who stated that in
liquidating the Retama Property he was "trying to do everything I
could to recover a hundred percent of the first tier participants'
monies, and attempting to extend down into the second tier, because
the FDIC's largest dollar amount was in the second tier." The
district court found, and we agree, that this deposition testimony
establishes only that the FDIC properly put its own interest in the
loans on a par with the other participants' interests. There is no
evidence that the FDIC maliciously or spitefully rejected the
Bearden contract to prevent the appellant banks from collecting.
Consequently, we agree with the district court that a reasonable
trier of fact could not conclude that the FDIC's rejection of the
Bearden contract was intentionally malicious.
Second, the banks argue that the FDIC intentionally encouraged
a group of investors, the Straus Group, to withdraw its lucrative
offer to buy the Retama Property. The FDIC's self-interested
motive was, allegedly, to protect itself from a potential
countersuit. The banks' evidence shows that the FDIC promised the
Straus Group that it would not sue the group, but this is no
evidence of bad faith. The banks' evidence establishes that the
11
FDIC determined that the deal with the Straus Group was an option
contract, not a contract of sale, which gave the FDIC no rights
enforceable by suit. Even if the FDIC's assessment of the Straus
Group's deal were wrong, it was not unreasonable, and there is no
evidence that the decision not to sue was made in bad faith. It is
true that the Straus Group later purchased the Retama Property for
only $1,200,000, after having offered $8,750,000 originally. This
embarrassment, however, does not create a jury question of whether
the FDIC's failures were intentionally malicious.
Finally, the banks argue that the FDIC intentionally and
maliciously concealed from them the existence of several offers for
the Retama Property. They allege, for example, that the FDIC
failed to tell them about a $7 million offer from the Straus Group
in November 1988. However, by that time the FDIC had already
committed Retama Property to auction, and the Straus Group's
earnest money would not adequately compensate it for removing the
property from the auction. In any event, the FDIC felt it could
resume negotiations with the Straus Group if the auction did not
produce an acceptable bid. Second, the banks allege that the FDIC
deliberately concealed from them a lucrative auction bid from one
Mr. Louis Cooper. Yet the district court found no evidence that
the FDIC or the auction house knew Mr. Cooper had submitted a bid.
In short, the evidence that the banks have produced -- that
the FDIC rejected the lucrative Bearden contract, that it failed to
sue the Straus Group to enforce an offer, and that it failed to
inform the banks of several offers -- at least would allow a trier
12
of fact to infer that the FDIC was negligent, not intentionally
malicious. We must agree that this is a sorry tale of bureaucratic
bungling, but the step up to intentionally malicious is too great
on this record.
AFFIRMED.
13