Settlers Edge Holding Co., LLC v. RES-NC Settlers Edge

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA15-1055
Filed: 6 December 2016
Yancey County, No. 10 CVS 279
SETTLERS EDGE HOLDING COMPANY, LLC; MOUNTAIN AIR DEVELOPMENT
CORPORATION; VIRGINIA A. BANKS; WILLIAM R. BANKS; JEANI H. BANKS;
MICHAEL R. WATSON; SHEREE B. WATSON; VIRGINIA A. BANKS, WILLIAM
R. BANKS, AND SHEREE B. WATSON IN THEIR CAPACITY AS TRUSTEES OF
WILLIAM A. BANKS REVOCABLE TRUST; MORRIS ATKINS IN HIS CAPACITY
AS TRUSTEE OF WILLIAM BANKS FAMILY IRREVOCABLE TRUST NUMBER
1; AND MORRIS ATKINS IN HIS CAPACITY AS TRUSTEE OF WILILAM BANKS
FAMILY IRREVOCABLE TRUST NUMBER 2, Plaintiffs-Appellants,
v.
RES-NC SETTLERS EDGE, LLC, Defendant-Appellee.
Appeal by plaintiffs from orders entered 4 November 2013 and 28 May 2015
by Judges Mark Powell and Marvin P. Pope in Superior Court, Yancey County. Heard
in the Court of Appeals 10 February 2016.
Rayburn Cooper & Durham, P.A., by G. Kirkland Hardymon, Ross R. Fulton,
and Benjamin E. Shook, for plaintiffs-appellants.
Nelson Mullins Riley & Scarborough, LLP, by Christopher J. Blake and D.
Martin Warf, for defendant-appellee.
STROUD, Judge.
Plaintiffs appeal from the trial court’s 4 November 2013 order granting
defendant RES-NC Settlers Edge, LLC’s motion for partial summary judgment and
from the order entered 28 May 2015 granting defendant’s motion for lack of subject
SETTLERS EDGE HOLDING CO., LLC V. RES-NC SETTLERS EDGE, LLC
Opinion of the Court
matter jurisdiction and denying plaintiffs’ motion for summary judgment. On appeal,
plaintiffs argue that the trial court erred in striking their affirmative defenses for
lack of subject matter jurisdiction, not granting collateral estoppel effect to a prior
foreclosure order, and in granting summary judgment in favor of defendant while
denying summary judgment in favor of plaintiffs. After review, we find that in this
case, the FDIC effectively repudiated the loan contract by refusing to fund the draw
requests yet failed to give plaintiffs proper notice of the repudiation. With proper
notice, plaintiffs could have asserted an administrative claim for damages. Although
the trial court would lack jurisdiction for any affirmative claim by plaintiffs for
damages, plaintiffs did not bring any claim for damages, and the trial court does have
jurisdiction to consider defendant’s counterclaim and thus plaintiffs’ affirmative
defenses to that counterclaim.
Although plaintiffs cannot recover damages from defendant, plaintiffs’
affirmative defenses raise the issue of recoupment. Defendant has not demonstrated
any genuine issue of material fact and all of the evidence, taken in the light most
favorable to defendant, shows that the FDIC effectively repudiated plaintiff Settlers
Edge’s loan contract, but this does not necessarily require judgment forgiving the loan
entirely. Instead, there are genuine issues of material fact as to the amount of
recoupment, if any, plaintiffs are entitled to, based upon defendant’s repudiation of
the loan contract. Accordingly, plaintiffs’ affirmative defense of repudiation raised
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the issue of recoupment based upon defendant’s repudiation of the loan contract.
Because there are questions of material fact as to recoupment, we reverse and
remand for further proceedings to determine the amount of damages, if any,
defendant may recover from plaintiffs on its claim for breach of contract after
deduction of any damages proven by plaintiffs.
I. Background
Plaintiffs’ complaint set forth the following facts. Plaintiff Settlers Edge
(“Settlers Edge”) is a limited liability company organized in 2007 to develop and
maintain Mountain Air Country Club and residential lots on a parcel of real property
(“the Property”) in Yancey County, North Carolina. In June 2007, Settlers Edge
secured a $15,500,000.00 loan from Integrity Bank in Georgia to finance the
construction of Mountain Air Country Club on the Property. A material term of the
financing agreement between Settlers Edge and Integrity Bank was that “Settlers
Edge would receive funding for the approximately $7 million in construction and
carrying expenses necessary to develop the Property into marketable lots with
utilities and amenities. This funding took the form of monthly loan draw requests
submitted by Settlers Edge to Integrity Bank.”
Integrity Bank funded the development of the Property with the monthly loan
draws as agreed from 20 June 2007 through 28 August 2008, but then on 29 August
2008, Integrity Bank was placed under the receivership of the Federal Deposit
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Insurance Corporation (“FDIC”), which assumed all of its assets and obligations. On
19 September 2008, Settlers Edge submitted a draw request for the month of August
for $41,677.20. The FDIC refused to disburse the requested funds. After several
attempts to get the FDIC to pay the loan draw, Settlers Edge sent a formal written
notice and demand through counsel to the FDIC stating that it was in “material
breach” of its obligations and demanding performance. The FDIC never responded.
At some point before 27 October 2009, “the FDIC caused a substitute trustee to be
appointed to institute foreclosure proceedings on the Deed of Trust.”
In the foreclosure proceeding, plaintiffs herein raised the defense of material
breach of the loan agreement by the FDIC. The Yancey County Clerk of Superior
Court entered an order on 11 February 2010 denying the FDIC’s request for
foreclosure, finding plaintiffs were “not in default under the Loan Documents,” so the
FDIC did not “have the right to institute foreclosure proceedings against the property
described in the Deed of Trust.” The FDIC then “appealed the ruling, then claimed
to have assigned all of its rights, title and interest in the Development Financing to
a new entity, Multibank 2009-1 RES-ADC Venture, LLC (‘Multibank’).” Multibank
eventually “claim[ed] to have assigned its right, title and interest in the Development
Financing to defendant RES-NC.” The FDIC, through RES-NC1, after being assigned
1 We use the FDIC and defendant RES-NC interchangeably throughout the body of this
opinion, as defendant RES-NC eventually stepped in the shoes of the FDIC when it was assigned the
FDIC’s rights, title, and interest in the Development Financing agreement.
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the rights to the Development Financing from Multibank, dismissed the FDIC’s
appeal to the Yancey County Superior Court on 6 May 2010.
On 15 October 2010, plaintiffs filed this action for a declaratory judgment,
claiming:
that (a) the FDIC committed a material breach of the terms
of the Construction Loan Agreement; (b) that pursuant to
North Carolina law, this material breach excused their
further performance under the various component
agreements which comprise the Development Financing;
(c) that this issue has been previously litigated and
actually adjudicated and that RES-NC is collaterally
stopped from re-litigating this issue; and (d) that Plaintiffs
have no obligation to pay RES-NC any funds.
Defendant filed its answer and counterclaim on 31 July 2013, denying the allegations
in plaintiffs’ complaint and asserting as affirmative defenses that the Yancey County
Clerk of Court’s order has no preclusive effect and that the Yancey County Clerk of
Court lacked jurisdiction or authority to enter an order excusing plaintiffs’
performance under the loan agreement. Defendant also alleged a counterclaim for
breach of contract against plaintiffs to recover the full amount of the loan, plus fees
and interest.
Defendant filed a motion for partial summary judgment on 19 September 2013
asserting that there were “[n]o genuine issues of material fact” regarding plaintiffs’
material breach and collateral estoppel claims and defendant’s affirmative defenses.
Furthermore, defendant stated that the claims and defenses “are legal issues that
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require no discovery and are ripe for adjudication by the Court.” On 30 September
2013, plaintiffs filed their reply to defendant’s counterclaim, arguing that defendant’s
counterclaim fails to state a claim upon which relief can be granted and asserting the
following affirmative defenses: 1) material breach of contract; 2) counterclaim barred
under Equal Credit Opportunity Act (“ECOA”); 3) laches; 4) estoppel; 5) waiver; 6)
release; 7) unclean hands; 8) repudiation; 9) material modification and release; 10)
failure to mitigate damages; 11) collateral estoppel and res judicata; 12) lack of
standing and not the real party in interest; 13) lack of consideration; and 14)
reservation of any additional defenses that may be revealed during discovery or after
receiving additional information.
After a hearing on 7 October 2013, the trial court entered an order on 4
November 2013 granting defendant’s motion for partial summary judgment. The
court concluded that defendant’s claim was not precluded by the Yancey County Clerk
of Court’s order denying foreclosure and that the order “does not have preclusive
effect with respect to the issues of (a) whether the FDIC breached the loan documents;
(b) whether the FDIC’s breach was material; and (c) whether Plaintiffs’ obligations to
Defendant under the loan documents are excused.” Plaintiffs filed a notice of appeal
from the court’s order on 4 December 2013, but their appeal was dismissed as
interlocutory by this Court on 16 December 2014.
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On 14 May 2015, defendant filed a motion to dismiss plaintiffs’ declaratory
judgment for lack of subject matter jurisdiction and motion for summary judgment
as to defendant’s counterclaim. In support of the motion to dismiss for lack of subject
matter jurisdiction, defendant argued that the trial court lacked jurisdiction “over
Plaintiffs’ claims as a matter of federal law under the requirements of 12 U.S.C. §
1821(d)(13)(D).” Defendant also asked for summary judgment, alleging that there
was no genuine issue of material fact regarding (a) plaintiffs’ default of the loan, (b)
plaintiffs’ failure to repay any amounts borrowed under the loan, and (c) plaintiffs
indebtedness to defendant “in the total outstanding amount of $20,523,921.31.”
On 15 May 2015, plaintiffs also filed a motion for summary judgment, noting
that:
1. Plaintiffs commenced this action by filing their
Complaint against Defendant . . . on October 15, 2010
seeking a declaratory judgment that, due to the prior
material breach by the Defendant’s predecessor-in-
interest, Plaintiffs were excused from further performance
under the loan documents at issue in this case.
2. Following consolidation of this action with a
separate action commenced by Defendant in the Superior
Court for Alexander County, North Carolina, Defendant
filed its Answer and Counterclaim on July 31, 2013 seeking
to recover from Plaintiffs based on Plaintiffs’ alleged
breach of the Loan Documents at issue.
3. On or about September 30, 2013, Plaintiffs filed
their Reply to Defendants Counterclaims and asserted,
among others, affirmative defenses based on (1) the prior
material breach of the loan documents by Defendant’s
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predecessor-in-interest, (2) the repudiation of the loan
documents by Defendant’s predecessor-in-interest, and (3)
the material modification of the underlying loan obligation.
4. Pursuant to Rule 56 of the North Carolina Rules of
Civil Procedure, “the pleadings, depositions, answers to
interrogatories, and admission on file, together with the
affidavits . . . show that there is no genuine issue as to any
material fact,” and that Defendant is entitled to judgment
dismissing Defendant’s Counterclaim in its entirety as a
matter of law based on the aforementioned defenses.
N.C.R. Civ. P. 56 (2015).
The trial court heard the parties respective motions at a hearing on 25 May
2015 and subsequently entered an order and judgment on 28 May 2015 granting
defendant’s motion to dismiss for lack of subject matter jurisdiction and defendant’s
motion for summary judgment. Specifically, the court concluded:
1. As a matter of federal law, under the requirements
of the Financial Institutions Reform, Recovery, and
Enforcement Act (“FIRREA”), 12 U.S.C. § 1821(d)(13)(D),
this Court lacks subject matter jurisdiction over: (a)
Plaintiffs’ claim for declaratory relief set forth in Plaintiffs’
Complaint in this action; and (b) Plaintiffs’ First, Sixth,
Eighth, Ninth, Tenth, and Eleventh Affirmative Defenses
set forth in Plaintiffs’ Reply to Counterclaim in this action.
Defendant’s Motion to Dismiss for Lack of Subject Matter
Jurisdiction is, therefore, GRANTED, and Plaintiffs’
Complaint and the First, Sixth, Eighth, Ninth, Tenth, and
Eleventh Affirmative Defenses set forth in Plaintiffs’ Reply
to Counterclaim are hereby DISMISSED.
2. Defendant has established that there are no genuine
issues of material fact with respect to its Counterclaim for
breach of contract, and that Defendant is entitled to
judgment as a matter of law. Plaintiffs have failed to raise
any genuine issue of material fact with respect to
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Defendant’s Counterclaim for breach of contract, or with
respect to Plaintiffs’ Second, Third, Fourth, Fifth, Seventh,
Twelfth and Thirteenth Affirmative Defenses set forth in
Plaintiffs’ Reply to Counterclaim in this action.
Defendant’s Motion for Summary Judgment on its
Counterclaim for breach of contract is, therefore,
GRANTED.
3. Plaintiffs are not entitled to summary judgment as
a matter of law. Plaintiffs’ Motion for Summary Judgment
is, therefore, DENIED.
The court denied plaintiffs’ motion for summary judgment and entered final
judgment against plaintiffs on defendant’s counterclaim, jointly and severally, for
$20,523,921.31. Plaintiffs filed a notice of appeal on 26 June 2015.
II. FIRREA and Affirmative Defenses
Plaintiffs first argue on appeal that the trial court erred in striking their
affirmative defenses for lack of subject matter jurisdiction and denied plaintiffs due
process. Specifically, plaintiffs contend that the Financial Institutions Reform,
Recovery, and Enforcement Act (“FIRREA”), 12 U.S.C.A. § 1821(d)(13)(D) (2014),
upon which defendant and the trial court relied, does not bar affirmative defenses.
FIRREA sets out the authority and procedures for the FDIC to follow when a
depository institution, such as Integrity Bank, becomes insolvent and grants the
FDIC broad powers and duties as a “conservator or receiver” of the depository
institution. See 12 U.S.C.A. § 1821(d)(2)(A). Generally, the FDIC becomes the
“Successor to institution” and has “by operation of law”:
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(i) all rights, titles, powers, and privileges of the
insured depository institution, and of any stockholder,
member, accountholder, depositor, officer, or director of
such institution with respect to the institution and the
assets of the institution; and
(ii) title to the books, records, and assets of any
previous conservator or other legal custodian of such
institution.
Id.The FDIC is granted authority, among other things, to “[o]perate the
institution” (B); exercise the functions of any member, stockholder, director, or officer
of the institution (C); take any actions “necessary to put the insured depository
institution in a sound and solvent condition” (D); to liquidate the depository
institution and “proceed to realize upon the assets of the institution” (E); and to pay
“all valid obligations of the insured depository institution in accordance with the
prescriptions and limitations of this chapter.” (H). 12 U.S.C.A. § 1821(d)(2)(B)-(E),
(H). In a case “involving the liquidation or winding up of the affairs of a closed
depository institution,” the receiver is required to
(i) promptly publish a notice to the depository
institution’s creditors to present their claims, together with
proof, to the receiver by a date specified in the notice which
shall be not less than 90 days after the publication of such
notice; and
(ii) republish such notice approximately 1 month
and 2 months, respectively, after the publication under
clause (i).
12 U.S.C.A. § 1821(d)(3)(B).
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FIRREA also sets out the administrative process for a debtor to bring “any
claim against a depository institution[.]” See 12 U.S.C.A. § 1821(d)(4)(A)- rulemaking
authority. Thus, FIRREA contemplates that the claims arising out the failure of a
depository institution will be resolved by the receiver, and if a debtor raises a claim
against the institution, that claim will be determined in the federal administrative
process established for this purpose. Therefore, judicial review by the courts is quite
limited.
(D) Limitation on judicial review
Except as otherwise provided in this subsection, no court
shall have jurisdiction over--
(i) any claim or action for payment
from, or any action seeking a determination of
rights with respect to, the assets of any
depository institution for which the
Corporation has been appointed receiver,
including assets which the Corporation may
acquire from itself as such receiver; or
(ii) any claim relating to any act or
omission of such institution or the
Corporation as receiver.
12 U.S.C.A. § 1821(d)(13)(D) (emphasis added).
Here, the FDIC was appointed as receiver for Integrity Bank on 29 August
2008 and assumed all of Integrity Bank’s assets and liabilities at that time --
including the obligation to fund plaintiffs’ draw requests. The FDIC sent a letter on
2 September 2008 informing Settlers Edge that Integrity Bank had been closed and
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the FDIC had taken over as receiver. The FDIC suggested Settlers Edge seek
refinancing of the loan documents. Settlers Edge submitted a draw request for
August 2008 on 19 September 2008 for $41,677.20 and received no response from the
FDIC. The FDIC sent additional letters on 20 October 2008 to the guarantors of
Integrity Bank’s loan to Settlers Edge notifying the guarantors that they had 30 days
to strictly comply with the terms and provisions of the loan agreement. On 4
December 2008, Settlers Edge sent written notice to the FDIC of material breach.
Further, the exhibits submitted with the record on appeal include the
“Supplemental Brief in Opposition to Foreclosure Proceeding” filed by Settlers Edge,
which contains facts indicating that “the FDIC never took the good faith step of
acknowledging the obligations it assumed from Integrity Bank, nor did it exercise its
statutory right to ‘repudiate’ those obligations. Instead, the FDIC took a ‘heads I win,
tails you lose’ position leaving Settlers Edge in limbo.” Settlers Edge noted that in
this case, “the FDIC made unsuccessful efforts to quickly sell off the Loan Documents
with the goal of making the draw request funding the loan purchaser’s problem.
Doubtless, the FDIC also acted on the hope that Settlers Edge would either quietly
accept this situation or that it would go bankrupt and that an appointed trustee
would lack the resources to bring the estate’s claims to recover for the breach.”
In a deposition on 6 March 2015, William R. Banks, plaintiffs’ representative,
was asked whether Settlers Edge understood “that there was a deadline by which to
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submit claims against the FDIC in connection with the receivership of Integrity
Bank?” Mr. Banks replied, “Not to my knowledge.” The record on appeal does not
contain documents from that time period regarding when or whether plaintiffs
received notice of the receivership or whether plaintiffs filed any claim as provided
by statute. Plaintiffs filed this lawsuit on 31 July 2013.
Plaintiffs’ declaratory judgment claim in this case does “seek[ ] a determination
of rights,” 12 U.S.C.A. § 1821(d)(13)(D), regarding the assets of the depository
institution so this portion of Plaintiffs’ claim would be barred by FIRREA. But
plaintiffs argue that even if the declaratory judgment action is barred by FIRREA,
their affirmative defenses to defendant’s counterclaims are not. Plaintiffs sought to
raise affirmative defenses of material breach and material modification to
defendant’s counterclaims seeking recovery against Plaintiffs for breach of contract.
Thus, plaintiffs contend that while the limitation of judicial review in 12
U.S.C.A. § 1821(d)(13)(D) applies to claims for payment or for a determination of
rights against the receiver, it does not apply to plaintiffs’ affirmative defenses.
Although this issue has not been specifically addressed by a court in North Carolina,
other states have dealt with similar cases. The results vary depending upon the facts
and procedural postures of the cases, including rules which may be unique to the
particular state. We have therefore sought to find cases which address the issue in a
context which is most similar to this case. The Nevada Supreme Court considered
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this issue in a similar context and determined that affirmative defenses are not
barred. See Schettler v. Ralron Capital Corp., 275 P.3d 933 (Nev. 2012). In Schettler,
the defendant borrower and Silver State Bank
executed a Business Loan Agreement (the Loan) and a
Promissory Note (the Note), under which Silver State
provided Schettler with a $2,000,000 revolving line of
credit. Schettler agreed to pay interest on the loan monthly
until the loan’s maturity date, at which time he would be
required to pay all outstanding principal and any
remaining unpaid accrued interest. The original maturity
date of the Loan and the Note was September 15, 2007. On
that date, Schettler and Silver State entered into a Change
in Terms Agreement that modified the maturity date to
September 15, 2008. That same day, Schettler also
executed a Commercial Guaranty in his capacity as
Trustee for the Vincent T. Schettler Living Trust,
guaranteeing to pay all of the Loan obligations. It is
undisputed that the Loan, the Note, and the Commercial
Guaranty (loan agreement) were valid and enforceable
contracts at their inception.
Id. at 934-35.
On 14 August 2008, Silver State notified Schettler that it had frozen the funds
remaining on the line of credit because of a change in his financial condition or that
Silver State believed his “prospect of performance on the Note was impaired.” Id. at
935. Silver State also informed Schettler that
it had decided to cancel any current commitments until
Schettler cured the defaults, but that until that time,
Schettler was responsible for payment of interest on the
loan. At the time of the default notice, however, Schettler
was current on his payments, and the loan had an
outstanding principal balance of $1,114,000.
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Id. (quotation marks and brackets omitted).
A few weeks later, Silver State went into receivership and the FDIC was
appointed as receiver. Id. RalRon later acquired Schettler’s loan agreement and
demanded full payment of principal, interest, and late fees from Schettler; upon
Schettler’s failure to pay, RalRon filed a lawsuit in Nevada state court seeking
recovery upon the loan agreement. Id. Schettler filed an answer which raised several
counterclaims and affirmative defenses for “breach of contract, breach of the implied
covenant of good faith and fair dealing, and estoppel.” Id. RalRon filed a motion for
summary judgment on its claims for breaches of contract and personal guaranty,
claiming that Schettler’s counterclaims and affirmative defenses “were barred
because Schettler failed to file any administrative claims with the FDIC as required
by FIRREA, and that RalRon was a holder in due course immune from Schettler’s
defenses.” Id. The trial court agreed and
granted summary judgment in favor of RalRon on its
claims for breach of contract and breach of personal
guaranty. In so doing, the district court barred Schettler’s
affirmative defenses and dismissed his counterclaims,
reasoning that, because they were all essentially claims
against the FDIC and Schettler had failed to follow the
claims administration process, they were barred by
FIRREA.
Id. at 935-36.
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Schettler appealed, and the Nevada Supreme Court reversed because it
determined that Schettler’s affirmative defenses were not barred by FIRREA and
that genuine issues of material fact remained as to the determination of damages.
Id. at 942. We find the Nevada court’s rationale to be persuasive.
Convincingly, a majority of courts addressing this
issue have held that while FIRREA’s jurisdictional bar
applies to claims and counterclaims, it does not apply to
defenses and affirmative defenses.
The Third Circuit Court of Appeals, which has
examined this issue in detail, has explained that FIRREA’s
jurisdictional bar only applies to four categories of actions:
(1) claims for payment from assets of any
depository institution for which the FDIC has
been appointed receiver; (2) actions for
payment from assets of such depository
institution; (3) actions seeking a
determination of rights with respect to assets
of such depository institution; and (4) a claim
relating to any act or omission of such
institution or the FDIC as receiver.
The court held that these categories did not include a
defense or an affirmative defense because those are neither
an action nor a claim, but rather a response to an action or
a claim. Therefore, it held, the jurisdictional bar contained
in § 1821(d)(13)(D) does not apply to defenses or
affirmative defenses. To support its conclusion, the court
explained that interpreting FIRREA’s jurisdictional bar to
include defenses and affirmative defenses would, in a
substantial number of cases, result in an unconstitutional
deprivation of due process. Specifically, if parties were
barred from presenting defenses and affirmative defenses
to claims which have been filed against them, they would
not only be unconstitutionally deprived of their
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opportunity to be heard, but they would invariably lose on
the merits of the claims brought against them. Beyond
constitutional concerns, the court also explained that
because a defendant is unable to know what his or her
defense will be before hearing the claim, it seems that it
would be nearly impossible for a party to submit future
hypothetical defenses to the administrative claims
procedure -- defenses to lawsuits which may not yet have
been brought against a party or which may never be
brought at all. We join in the majority’s reasoning and
conclude that while FIRREA’s jurisdictional bar applies to
claims and counterclaims, it does not apply to defenses or
affirmative defenses.
Id. at 939-40 (citations, quotation marks, brackets, and ellipses omitted). See also,
e.g., Nat’l Union Fire Ins. Co. v. City Savings, F.S.B., 28 F.3d 376, 393 (3d. Cir. 1994)
(“[T]he plain meaning of the language contained in § 1821(d)(13)(D) indicates that
the statute does not create a jurisdictional bar to defenses or affirmative defenses
which a party seeks to raise in defending against a claim.”); Resolution Trust Corp. v.
Love., 36 F.3d 972, 977-78 (10th Cir. 1994) (“[I]f Congress had intended to remove
from the jurisdiction of the courts any and all actions, claims or defenses which might
diminish the assets of any depository institution . . . or [which might] diminish or
defeat any claims of the [FDIC] in any capacity, it would [have] been simple to so
provide. But Congress did not so provide. Instead, the act gives the [FDIC] authority
over any claim by a creditor or claim of security, preference or priority. Clearly, an
affirmative defense asserted by a defendant in an action brought by the [FDIC] is none
of these.” (Citations and quotation marks omitted) (Emphasis added)).
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But plaintiffs argue that the FDIC’s refusal to pay the monthly draws was
essentially a repudiation of the agreement, although the FDIC did not formally
repudiate the loan, even if it had a statutory right to repudiate the loan. Although
the lender in Schettler similarly failed to fund his loan, repudiation was not
specifically addressed in Schettler.2 Under 12 U.S.C.A. § 1821, plaintiffs would have
a limited right to recover in the administrative forum for repudiation of the loan.
FIRREA provides the FDIC or a receiver does have “Authority to repudiate
contracts”:
In addition to any other rights a conservator or
receiver may have, the conservator or receiver for any
insured depository institution may disaffirm or repudiate
any contract or lease--
(A) to which such institution is a party;
(B) the performance of which the conservator
or receiver, in the conservator’s or receiver’s
discretion, determines to be burdensome; and
(C) the disaffirmance or repudiation of which
the conservator or receiver determines, in the
conservator’s or receiver’s discretion, will promote
the orderly administration of the institution’s
affairs.
12 U.S.C.A. § 1821(e)(1)(A)-(C).
2 In Schettler, Silver State announced that it would no longer perform under the contract on
14 August 2008, even before going into receivership, claiming concern over Schettler’s ability to pay.
275 P.3d at 935. At the time of Silver State’s default notice to Schettler, however, “Schettler was
current on his payments, and the loan had an outstanding principal balance of $1,114,000.” Id. Silver
State was not placed into receivership until 5 September 2008, a few weeks after the default notice.
Id. Here, the repudiation at issue occurred after Integrity Bank failed and the FDIC did have a right
to repudiate plaintiffs’ loan.
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The conservator or receiver for an insured depository institution is required to
“determine whether or not to exercise the rights of repudiation under this subsection
within a reasonable period following such appointment.” 12 U.S.C.A. § 1821(e)(2).
Damages in a claim for repudiation are generally
(i) limited to actual direct compensatory damages;
and
(ii) determined as of--
(I) the date of the appointment of the
conservator or receiver; or
(II) in the case of any contract or agreement
referred to in paragraph (8), the date of the
disaffirmance or repudiation of such contract or
agreement.
12 U.S.C.A. § 1821(e)(3)(A). The claimant cannot recover any “(i) punitive or
exemplary damages; (ii) damages for lost profits or opportunity; or (iii) damages for
pain and suffering.” 12 U.S.C.A. § 1821(e)(3)(B). For repudiation of a “qualified
financial contract[,]” compensatory damages are
(i) deemed to include normal and reasonable costs of
cover or other reasonable measures of damages utilized in
the industries for such contract and agreement claims; and
(ii) paid in accordance with this subsection and
subsection (i) of this section except as otherwise specifically
provided in this section.
12 U.S.C.A. § 1821(e)(3)(C).
In the present case, the FDIC did not formally repudiate the plaintiffs’ loan
but by its actions the FDIC repudiated the agreement by refusing to honor the terms
of the loan agreement and to pay the monthly draws as required by the agreement.
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Opinion of the Court
See 12 U.S.C.A. § 1821(e) (“Provisions relating to contracts entered into before
appointment of conservator or receiver”). In Westberg v. F.D.I.C., 741 F.3d 1301 (D.C.
Cir. 2014), the D.C. Circuit Court of Appeals addressed a situation somewhat similar
to the one before us. The appellants, husband and wife, obtained a residential
construction loan from a bank that soon collapsed. Id. at 1302. The FDIC was
appointed as receiver and repudiated their loan agreement, “but notified the
Westbergs that they were obligated to continue making payments on the portion of
the loan that had been disbursed to them before [the bank]’s failure.” Id. The D.C.
Circuit found that “the Westbergs’ claim for declaratory relief is inextricably related
to the FDIC’s act of repudiation. Although it is formally brought against Multibank,
it is functionally against the FDIC. It is therefore a ‘claim’ . . . that must first be
resolved in the administrative claims process.” Id. at 1308. Therefore, while
Westberg addresses repudiation, it involved a claim brought by the debtor against the
bank, not an affirmative defense. Also, in Westberg, the FDIC did formally repudiate
the contract, and the formal repudiation was important to the D.C. Circuit’s holding
that the claim should have been in the administrative process. Id. Here, by contrast,
the FDIC never gave any notice of repudiation of the contract and plaintiffs have
raised it as an affirmative defense to defendant RES-NC’s counterclaim.
The FDIC did, however, effectively repudiate it by refusing to fund Settlers
Edge’s draw requests, which is quite similar to Silver State’s action in Schettler. 275
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P.3d at 935. See also Lawson v. F.D.I.C., 3 F.3d 11, 15 (1st. Cir. 1993) (“In other
words, the FDIC did not transfer the Lawsons’ CD contracts intact to a new obligor;
it effectively repudiated those contracts when it declined either to pay the promised
interest itself or to oblige anyone else to do so. The repudiation may have been
informal but there was certainly no ambiguity[.]”). Here, Settlers Edge submitted a
draw request on 19 September 2008 for $41,677.20 for August 2008 and received no
response from the FDIC. The FDIC refused to fill that request, and on 4 December
2008, Settlers Edge sent written notice to the FDIC of material breach. Thus, the
question is whether the plaintiffs’ rights are limited to those under 12 U.S.C.A. §
1821(e) where the FDIC has effectively repudiated the contract by its actions,
although it failed to formally notify plaintiffs of repudiation. As in Lawson, the
FDIC’s actions here, though informal, clearly constituted a repudiation. Id. (“At the
same time, it was a repudiation and breach of the contracts represented by the CDs
since the FDIC, which had inherited the contracts, effectively declined to pay the
promised interest in the future or commit Fleet Bank to do so.”).
As no formal repudiation appears in the record on appeal and defendant seeks
to recover damages from plaintiffs for breach of contract, plaintiffs were free to raise
repudiation as an affirmative defense to defendant’s counterclaim. The receiver
cannot use FIRREA as both a sword and shield at the same time; if it wants the
benefit of the limited damages and administrative procedure that FIRREA provides,
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Opinion of the Court
then it must “determine whether or not to exercise the rights of repudiation” under
12 U.S.C.A. § 1821(e)(2) “within a reasonable period” of its appointment and give
notice of repudiation. Once the receiver has given notice of repudiation, then the
debtor must proceed under FIRREA or lose its rights to assert any claims. The facts
regarding the FDIC’s actions as noted herein are undisputed, and the record does not
show, nor does defendant argue, that any formal repudiation was ever made. It is
also undisputed that the FDIC effectively repudiated the contract by its failure to pay
the loan draw requests, so the trial court erred when it denied plaintiffs the
opportunity to raise repudiation as an affirmative defense.
Although we have determined that the FDIC effectively repudiated the
contract and that plaintiffs are entitled to raise the repudiation as an affirmative
defense, the question remains of the proper remedy. Plaintiffs argue that the
repudiation is a material breach which excuses them from any performance
whatsoever under the loan contract and thus requires dismissal of defendant’s
counterclaim for breach of contract. But this argument ignores the fact that the
FDIC did have a right to repudiate the loan contract and that a debtor’s right to
recover damages, even if properly brought as an administrative claim under FIRREA,
is limited.
In Schettler, the Nevada court addressed how the debtor’s affirmative defense
may be used to offset any claim by the lender and determined that on remand the
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Opinion of the Court
trial court must consider recoupment. 275 P.3d at 941-42. Neither plaintiffs nor
defendant specifically requested recoupment here, but the same was true in Schettler.
Id. at 941, n. 7. The Nevada court noted that fair notice of the defense was raised by
the pleadings in Schettler, and the same is true here. Id. (“Although Schettler did
not specifically allege that he was entitled to ‘recoupment’ in his answer to RalRon’s
complaint, when construed as a whole, his answer sufficiently encompassed the
concept of recoupment. Recoupment must be plead affirmatively, and if it is not
raised it is ordinarily deemed waived. However, if a plaintiff had notice that a
defendant was relying on recoupment, the affirmative defense will be allowed. Fair
notice was given because it was specifically raised on reconsideration, which is a part
of the issues on appeal. Accordingly, we will not treat recoupment as waived.”
(Citations, quotation marks, and brackets omitted)).
Recoupment is a right of the defendant to have a deduction
from the amount of the plaintiff’s damages, for the reason
that the plaintiff has not complied with the cross-
obligations or independent covenants arising under the
same contract. Recoupment must arise out of the same
transaction and involve the same parties; thus, it does not
apply when the defendant’s allegations arise out of a
transaction extrinsic to the plaintiff’s cause of action.
While the defendant may thus defend against the
plaintiff’s claim by asserting competing rights arising out
of the same transaction and thereby extinguish or reduce
any judgment awarded to the plaintiff, recoupment does
not allow the defendant to pursue damages in excess of the
plaintiff’s judgment award. Thus, by its very nature and
regardless of whether the same facts could constitute a
separate claim for damages, recoupment seeks to challenge
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the foundation of the plaintiff’s claim and, consequently,
we recognize recoupment as an affirmative defense not
barred by FIRREA. Here, based on his allegations,
Schettler may be able to demonstrate that he is entitled to
recoup against any amount awarded RalRon on its claims,
up to the amount awarded.
Id. at 941 (citations, quotation marks, and brackets omitted).
Recoupment has not been addressed as extensively or recently in North
Carolina as in Nevada, but North Carolina’s law of recoupment is essentially the
same.
A recoupment is a defence by which a defendant,
when sued for a debt or damages, might recoup the
damages suffered by himself from any breach by the
plaintiff of the same contract. And . . . it [has been] held
that where a justice has jurisdiction of the principal matter
of an action, he also has jurisdiction of incidental questions
necessary to its determination, and hence may even admit
an equity to be set up as a defence.
There are many resemblances and dissimilarities
between these several defences. In a counter-claim to an
action upon a contract, where a judgment is prayed against
the defendant, he may recover the excess, if any. If no
judgment or relief is prayed, it is a set-off, if it is a claim
distinct from and independent of the action. But if it is a
matter growing out of or connected with the subject of the
action, then it is recoupment.
In our case the defendants pleaded “set-off and
counter-claim,” but they demanded no relief against the
plaintiffs, and the defense set up arose out of the contract
set forth in the complaint, and their defence therefore fell
under the head of recoupment.
Hurst v. Everett, 91 N.C. 399, 404-05 (1884) (citations omitted).
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Recoupment is limited to a set-off against the defendant’s counterclaim, so
plaintiffs cannot recover any damages, even if they were to present evidence of
greater damages than what they would owe on defendant’s counterclaim for breach
of contract. In addition, since defendant had a legal right to repudiate the loan
agreement, the measure of damages which plaintiffs may assert as recoupment
should be limited by the compensatory damages which they would have been allowed
to prove under a FIRREA claim, as set forth in 12 U.S.C.A. § 1821(e)(3)(A).
Depending upon the amount of compensatory damages shown by plaintiffs, the
recoupment could offset all of the damages claimed by defendant, but cannot exceed
the amount of defendant’s damages. Because the trial court erred by barring
plaintiffs’ affirmative defense and there are genuine issues of material fact regarding
the amount of recoupment plaintiffs may be entitled to as an offset against
defendant’s claim for breach of the loan agreement, we reverse the trial court’s order
granting summary judgment and remand for further proceedings consistent with the
opinion.
III. Collateral Estoppel Effect
Next, plaintiffs argue that the trial court erred in not granting collateral
estoppel effect to the foreclosure order entered by the Clerk of Court which found that
Settlers Edge was not in default of the loan. Plaintiffs contend:
Here, it is undisputed that Defendant dismissed the
appeal of the Foreclosure Order, rendering it a final,
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Opinion of the Court
binding order. It is also undisputed that the Clerk
determined that Settlers Edge was not in default, that the
parties to the Foreclosure and this action are the same or
are in privity with each other, and that entering the Second
Order necessarily required finding Settlers Edge in
default.
Moreover, there is no dispute that, at the time of the
Foreclosure, the maturity date of the Note had passed,
Settlers Edge had not repaid amounts otherwise due under
the Note, and the Note had been declared in default by the
FDIC. In Defendant’s Motion and materials submitted in
support, Defendant states no basis for default other than
Settlers Edge’s failure to pay the Note in full prior to the
maturity date. . . . This case has remained substantially
static, factually and legally, since the Foreclosure Order,
and the Trial Court’s determination that Settlers Edge was
in default is inconsistent with the Foreclosure Order. The
Trial Court erred, first, by entering the First Order
denying collateral estoppel effect to the Foreclosure Order,
and, second, by finding Settlers Edge in default in the
Second Order despite the prior, contrary finding by the
Clerk in the Foreclosure Order.
But based upon the prior appeal to this Court, we cannot find that the Clerk’s
foreclosure order may have any collateral estoppel effect. The issue actually decided
by the Yancey County Clerk of Court is not clear from the foreclosure order, which
contains conclusions that seem to go both ways. Nevertheless, we are bound by this
Court’s prior opinion regarding the foreclosure order:
The application of the preclusive doctrines of
collateral estoppel and res judicata must be narrowly
construed and cannot be left to uncertain inference. Here,
given that the order denying foreclosure (1) did not include
specific findings expressly determining that a material
breach had occurred; and (2) did find that a valid debt
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existed between Plaintiffs and the FDIC, we are unable to
conclude that the Clerk actually determined that a material
breach had occurred. Such a conclusion would force us to
speculate as to the Clerk’s thought processes in rendering
its findings, which we are not permitted to do.
Settlers Edge Holding Co., LLC, v. RES-NC Settlers Edge, LLC (“Settlers Edge I”),
238 N.C. App. 198, 768 S.E.2d 66, 2014 WL 7149116, *5, 2014 N.C. App. LEXIS 1291,
*12-13 (2014) (unpublished) (citations and quotation marks omitted) (emphasis
added). This Court previously decided that the basis for the Clerk’s order is unclear,
and we are bound by that ruling. In addition, even assuming that a material breach
occurred, as discussed above, this breach was a repudiation and plaintiffs are limited
to asserting their affirmative defense and offsetting defendant’s damages by
recoupment. We therefore decline to address this issue further.
IV. Summary Judgment
Finally, plaintiffs contend that the trial court erred in granting summary
judgment in favor of defendant and denying summary judgment in favor of plaintiffs
“due to its failure to consider the legal and undisputed factual merits of plaintiffs’
affirmative defenses.” As we have already concluded that the trial court had
jurisdiction to consider plaintiffs’ affirmative defenses and that the contract was
effectively repudiated, we agree that the trial court should not have granted summary
judgment in favor of defendants, and we reverse its order doing so. But this does not
mean that we can grant summary judgment in favor of plaintiffs, since on remand
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Opinion of the Court
the trial court must consider the proper measure of offset for the defendant’s breach
of contract in recoupment.
V. Conclusion
In sum, while we decline to find any collateral estoppel effect from the Clerk’s
prior order and cannot grant summary judgment in favor of plaintiffs at this time, we
conclude that the FDIC effectively repudiated the contract and plaintiffs are entitled
to raise the repudiation as an affirmative defense. But because the FDIC had a right
to repudiate, plaintiffs’ right to recover damages is limited. Since we have concluded
that the trial court erred by barring plaintiffs’ affirmative defense, and since there
are genuine issues of material fact remaining in regards to the amount of recoupment
plaintiffs may be entitled to as an offset against defendant’s claim for breach of the
loan agreement, we reverse the trial court’s order granting summary judgment and
remand for further proceedings consistent with this opinion to determine the amount
of damages defendant may recover from plaintiffs, if any, for its breach of contract
claim.
REVERSED AND REMANDED.
Judges ELMORE and DIETZ concur.
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