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FDIC v. HUDSON

March 15, 1990

FEDERAL DEPOSIT INSURANCE CORPORATION as Manager of the Federal Savings and Loan Insurance Corporation Resolution Fund, as Receiver for Centennial Savings and Loan Association, a Federal Savings and Loan Association, Guerneville, California, Plaintiff,
v.
ALICE HUDSON, Defendant



The opinion of the court was delivered by: JENSEN

D. LOWELL JENSEN, UNITED STATES DISTRICT JUDGE

On February 21, 1990, this Court heard plaintiff's motion for judgment on the pleadings. Richard Frank of Cooley Godward Castro Huddleson & Tatum appeared for plaintiff. John Banker appeared for defendant. After consideration of the relevant pleadings, affidavits and argument of counsel, the Court GRANTS plaintiff's motion for judgment on the pleadings.

 I.

 This action is brought by the Federal Deposit Insurance Corporation ("FDIC") as receiver for Centennial Savings and Loan Association ("Centennial") for repayment of a line of credit demand loan executed by defendant on May 30, 1984 in favor of Centennial. The note was in the principal amount of $ 37,500.00 with interest to be accrued at the rate of 13.5 percent per annum. As of February 2, 1989, when the complaint was filed, the amount of principal and interest outstanding totalled $ 20,488.01.

 The loan was part of a plan to buyout Centennial stock held by Siddarth S. Shah. The plan was arranged by Centennial's president, Erwin Hansen. Shah owned 24 percent of Centennial stock, which made him an "affiliated person" within the meaning of the Federal Home Loan Bank Act. The purpose of the stock buyout plan was to reduce Shah's holdings of Centennial stock below 10 percent and was designed to counter criticism by the Federal Home Loan Bank Board ("FHLBB") as to a conflict of interest in regard to several transactions between Centennial and Shah, and his controlled corporation Lakewood Enterprises.

 As part of the plan, Centennial financed the downpayment on the stock sale by advancing each purchaser of stock a line of credit loan while Shah agreed to take back promissory notes for the balance. Centennial's board of directors, of which Hudson was a member, approved Centennial's partial financing of the stock buyout and Centennial notified the FHLBB of its terms. On May 30, 1984, defendant executed the note at issue in order to purchase the stock. She initially made payments on the note but has since ceased to pay.

 Defendant admits all material facts relating to the express terms of the stock purchase and the loan but alleges as a single affirmative defense that she is not obligated to repay the loan because of fraudulent material nondisclosures by Shah and Hansen which induced her to purchase the stock at an inflated price. Defendant contends that Centennial, through Shah and Hansen, failed to disclose 1) the contingent nature of the real estate sales on which Centennial's 1983 earnings were based and which rendered those earnings illusory; and 2) that Centennial had been insolvent since late 1983 but that management had raised operating funds through a secret loan and a check kiting scheme. Defendant contends that these facts were material in that had she known the true nature of Centennial's financial status she would not have purchased the stock and would therefore have never made the loan.

 The FDIC now moves for judgment on the pleadings. It asks for an award of costs and attorneys fees as well as unpaid principal and interest in the amount of $ 20,581.83 from defendant Ross.

 II.

 In determining a motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure, a court must accept the allegations of the non-moving party as true, while the allegations of the moving party which have been denied by the non-moving party are assumed to be false. Hal Roach Studios v. Richard Feiner and Co., 883 F.2d 1429, 1436 (9th Cir. 1989). The court should grant judgment on the pleadings only if the moving party clearly establishes that no material issue of fact remains to be resolved and that it is entitled to judgment as a matter of law. Id.

 In this case, defendant has admitted all material facts regarding the express terms of the loan. Therefore, the only issue remaining is whether the longstanding doctrine of D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1941), and its progeny bars defendant from asserting her affirmative defense. D'Oench involved a facially valid promissory note, executed without valid consideration, with the secret understanding that the borrower would not be required to repay the loan. The note was executed to hide the fact that the bank had past due bonds. The United States Supreme Court held that the FDIC could enforce the note in spite of the secret agreement because of the federal policy to protect the FDIC and the public funds which it administers against misrepresentations as to the validity of the assets of insured institutions. Id. at 457. The test of whether the D'Oench rule applies is "whether the note was designed to deceive the creditors or the public authority or would tend to have that effect." Id. at 460.

 The D'Oench doctrine is codified in Title 12, United States Code section 1823(e) ("Section 1823(e)") which states that:

 No agreement which tends to diminish or defeat the right, title or interest of the Corporation [FDIC] in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the Corporation [FDIC] unless such agreement (1) shall be in writing, (2) shall have been executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the bank, (3) shall have been approved by the board of directors of the bank or its loan committee, which approval shall be ...


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