
USCA1 Opinion

	




          March 26, 1993    United States Court of Appeals                            United States Court of Appeals                                for the First Circuit                                for the First Circuit                                _____________________          No. 92-1584                   DAVID J. McCULLOUGH AND WINIFRED M. McCULLOUGH,                               Plaintiffs, Appellants,                                          v.                        FEDERAL DEPOSIT INSURANCE CORPORATION,                      AS RECEIVER FOR BANK OF NEW ENGLAND, N.A.,                                 Defendant, Appellee.                                _____________________                                     ERRATA SHEET                                     ERRATA SHEET               The  opinion  of this  Court issued  on  March 12,  1993, is          amended as follows:                    On  cover  sheet,  insert   "(now  deceased)"                    between   "Judge   Brown"  and   "heard  oral                    argument . . ."                    On page 6, line 19, delete "supra note 4"                                                _____          March 12, 1993                            United States Court of Appeals                            United States Court of Appeals                                For the First Circuit                                For the First Circuit                                 ____________________        No. 92-1584                   DAVID J. McCULLOUGH AND WINIFRED M. McCULLOUGH,                               Plaintiffs, Appellants,                                          v.                        FEDERAL DEPOSIT INSURANCE CORPORATION,                      AS RECEIVER FOR BANK OF NEW ENGLAND, N.A.,                                 Defendant, Appellee.                                 ____________________               APPEAL FROM AN ORDER OF THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                   [Hon. Edward F. Harrington, U.S. District Judge]                                               ___________________                                 ____________________                                        Before                               Torruella, Circuit Judge,                                          _____________                            Brown,* Senior Circuit Judge,                                    ____________________                              and Stahl, Circuit Judge.                                         _____________                                 ____________________            William  H. Sheehan, III  with whom  Pearl, McNiff,  Crean, Cook &            ________________________             _____________________________        Sheehan was on brief for appellants.        _______            Michelle Kosse,  Counsel, Federal  Deposit Insurance  Corporation,            ______________        with  whom  Ann  S.  DuRoss,  Assistant  General Counsel,  Colleen  B.                    _______________                                ___________        Bombardier, Senior  Counsel, Daniel  I.  Small, and  Widett, Slater  &        __________                   _________________       _________________        Goldman, P.C. were on brief for appellee.        _____________                                 ____________________                                    March 12, 1993                                 ____________________        _____________________        *Of  the  Fifth Circuit,  sitting by  designation.   Judge  Brown (now        deceased)  heard oral argument in this matter, and participated in the        semble, but did not participate in the drafting or the issuance of the        panel's  opinion.   The remaining  two panelists therefore  issue this        opinion pursuant to 28 U.S.C.   46(d).                      STAHL,  Circuit  Judge.    In  Langley  v.  Federal                              ______________         _______      _______            Deposit Ins.  Corp., 484  U.S. 86 (1987),  the Supreme  Court            ___________________            ruled that 12  U.S.C.   1823(e)1 shields  the Federal Deposit            Insurance Corporation ("FDIC") from essentially all claims of            misrepresentation relating to any  asset acquired by it under            12 U.S.C.    1821 or 1823.  This appeal requires us to decide            whether  this  rule  should  apply in  situations  where  the            "misrepresentation" at issue actually is  an unlawful failure            to disclose crucial information.   Believing that the Langley                                                                  _______                                            ____________________            1.  12 U.S.C.   1823(e) provides:                   No agreement  which tends  to diminish or  defeat                 the interest of the [FDIC] in any asset acquired by                 it  under  this section  or  section  1821 of  this                 title, either as security for a loan or by purchase                 or   as  receiver   of   any   insured   depository                 institution,  shall  be  valid against  the  [FDIC]                 unless such agreement-                      (1) is in writing                      (1)                      (2)  was  executed   by  the   depository                      (2)                      institution  and  any person  claiming an                      adverse  interest  thereunder,  including                      the  obligor, contemporaneously  with the                      acquisition   of   the   asset   by   the                      depository institution,                      (3)   was  approved   by  the   board  of                      (3)                         directors  of the  depository institution                      or  its  loan  committee, which  approval                      shall be reflected in the minutes of said                      board or committee, and                      (4) has been, continuously, from the time                      (4)                       of  its execution, an  official record of                      the depository institution.                                                                                            -2-                                          2            rule  does  apply,  we  affirm  the  district  court's  order            dismissing the underlying complaint against the FDIC.                      Plaintiffs-appellants  David  J.  and  Winifred  M.            McCullough  initiated  this  action  by  filing  a  complaint            seeking damages  and  an order  enjoining  defendant-appellee            FDIC from collecting on a promissory note made  by plaintiffs            in favor  of the FDIC's predecessor-in-interest,  the Bank of            New England ("BNE").   The note was given  in exchange for  a            loan  which plaintiffs  used  to purchase  four  units of  an            industrial condominium  project ("the project")  in which BNE            had a  significant  interest because  of  loans made  to  the            original  developer and  a competing  developer.   Plaintiffs            contend, inter  alia, that  when  BNE extended  the loan,  it                     _____  ____            failed to disclose to them that  the project was subject to a            Notice of Responsibility  ("NOR"), previously  issued by  the            Massachusetts    Department    of    Environmental    Quality            Engineering.    The  NOR  required  the  removal  of  certain            hazardous waste on the  property.2  In plaintiffs' view,  the            aforementioned omission constituted  misrepresentation and  a            violation of the Massachusetts Consumer Protection Act, Mass.            Gen. Laws Ann. ch. 93A,    2 and 11 (West 1984 & Supp. 1992).                                            ____________________            2.  In their complaint, plaintiffs also alleged that BNE made            affirmative misrepresentations at the time the loan agreement            was  negotiated, but  have  since conceded  that federal  law            precludes  them  from  proceeding   on  the  basis  of  these            allegations.  See generally Langley, 484 U.S. at 90-93.                            ___ _________ _______                                         -3-                                          3                      The  FDIC responded  to  plaintiffs'  complaint  by            filing a  motion to dismiss.  As the basis therefor, the FDIC            argued  that the  Langley rule  applies as  much to  the non-                              _______            disclosure    of   information    as   to    an   affirmative            misrepresentation.   After  a  hearing,  the  district  court            agreed and issued a memorandum and order granting  the FDIC's            motion.   In  so doing,  the court  joined an  ever expanding            number  of courts  that have  explicitly endorsed  the FDIC's            argument.   See Federal Deposit  Ins. Corp. v.  State Bank of                        ___ ___________________________     _____________            Virden, 893 F.2d  139, 144 (7th  Cir. 1990); Federal  Deposit            ______                                       ________________            Ins. Corp. v.  Bell, 892 F.2d 64, 66 (10th  Cir. 1989), cert.            __________     ____                                     _____            dismissed, 496  U.S. 913 (1990);  In re NBW  Commercial Paper            _________                         ___________________________            Litigation, No.  90-1755(RCL), 1992 WL 73135,  at *11 (D.D.C.            __________            March 11, 1992); Federal Deposit Ins. Corp. v. Hudson, 800 F.                             __________________________    ______            Supp.  867, 870-71  (N.D.  Cal. 1990);  Federal Deposit  Ins.                                                    _____________________            Corp. v. Sullivan, 744 F. Supp. 239, 242-43 (D. Colo. 1990).3            _____    ________                                            ____________________            3.  At the time the district  court issued its memorandum and            order,  one court  had departed  from existing  authority and            decided  that    1823(e) does  not bar  claims based  upon an            unlawful omission.  See Grant County Savings & Loan Assoc. v.                                ___ __________________________________            Resolution Trust Corp., 770 F. Supp. 1374, 1379-82 (E.D. Ark.            ______________________            1991).    This  decision  was, however,  reversed  while  the            instant  appeal was pending.  See Grant County Savings & Loan                                          ___ ___________________________            Assoc. v.  Resolution Trust  Corp.,  968 F.2d  722 (8th  Cir.            ______     _______________________            1992).  While the reversal was premised on other grounds, the            Eighth  Circuit, in  dicta,  expressed its  doubt  as to  the                                 _____            district court's conclusion that    1823(e) did not  apply to            an unlawful  omission.    See  id. at  724  (indicating  that                                      ___  ___            defendant's argument that   1823(e) barred plaintiff's  claim            for failure to disclose "ha[d] merit").                                         -4-                                          4                      On  appeal, plaintiffs assert that the overwhelming            prevailing  consensus is incorrect.   In essence, plaintiffs'            argue that an unlawful  omission of the type at  issue cannot            be  viewed  as  a form  of  "agreement"  to  which    1823(e)            applies, as "there  is nothing on the  table to agree  to; no            promise, condition, or warranty is made."  See  Grant County,                                                       ___  ____________            770  F.  Supp. at  1381.   Although  possessing  some surface            appeal, plaintiffs' contention  fails when analyzed in  light            of the theoretical foundation upon which Langley rests.4                                                     _______                      The holding in Langley  depends upon and flows from                                     _______            the  following  observation:    as a  matter  of  contractual            analysis, a  contractually bound  party's attempt to  avoid a            contractual obligation and/or to seek damages through a claim            of misrepresentation is nothing more  than a challenge to the            truthfulness  of a  warranty  made by  another  party to  the            contract, and  a concomitant  claim that the  truthfulness of            that  warranty   was  a   condition  of  the   first  party's            performance.    See Langley,  484 U.S.  at  90-91.   In other                            ___ _______            words,  the claim is analogous to one for breach of warranty,            with the warranty being a condition precedent to performance.            Therefore, because  such a warranty falls  within the purview                                            ____________________            4.  Apparently  conceding that  our  ruling as  to whether               1823(e) applies to unlawful non-disclosures also resolves the            propriety of the district court's dismissal  of their ch. 93A            claim,   plaintiffs    confine   their   argument    to   the            misrepresentation context.  We  believe that this approach is            appropriate, and accordingly so confine our discussion.                                         -5-                                          5            of the term  "agreement,"5 this  type of  breach of  warranty            claim cannot be asserted against the FDIC unless the warranty            meets the requirements of   1823(e).  See id. at 91-92.                                                  ___ ___                      We can find no logical basis for this reasoning not            obtaining  with equal  force where  the  misrepresentation at            issue  arises out  of  a non-disclosure  of information.   In            terms  of  the facts  of this  case,  it makes  no difference            whether  BNE affirmatively  stated that  the project  was not            subject  to the NOR  or tacitly indicated this  was so by not            informing  plaintiffs of  the NOR.   Either  way, plaintiffs'            misrepresentation claim  is tantamount to a  challenge to the            truthfulness of BNE's  warranty that the project  was free of            any NOR, and a  claim that the truthfulness of  this warranty            was a condition  of plaintiffs' performance.   See Langley at                                                           ___ _______            90-91.    The  non-disclosure  at  issue  here  can  only  be            actionable  at common law as  a misrepresentation if it falls            into a  narrow range  of circumstances allowing  it, somewhat            fictionally, to  be treated as an assertion.  Cf. Restatement                                                          ___            (Second)  of Contracts,    161  (listing those  situations in            which a  non-disclosure is  "equivalent to an  assertion" and            actionable as  a misrepresentation); Restatement  (Second) of            Torts,   551 (1977) (listing those situations in which a non-                                            ____________________            5.  As the Supreme Court noted, "[T]he term `agreement' often            has `a wider meaning than promise,' and embraces [a warranty,            the truthfulness of which  is] a condition upon performance."            Id. at  91 (quoting  Restatement (Second) of  Contracts    3,            ___            Comment a (1981)).                                         -6-                                          6            disclosure  is actionable  as tortious  misrepresentation and            noting that a person against whom a successful non-disclosure            claim is brought will be "subject to the same liability . . .            as  though [s/]he  had  represented the  nonexistence of  the            matter that [s/]he has failed  to disclose").  Thus, adoption            of  plaintiffs' view would require us  to endorse this quasi-            fiction  for purposes  of  viewing the  non-disclosure as  an            asserted misrepresentation, but to  reject it for purposes of            viewing  the  non-disclosure  as   a  de  facto  warranty  in                                                  __  _____            conducting  our    1823(e)  analysis.   We  are  not inclined            towards so one-sided an approach.                         Not only does the conclusion that   1823(e) applies            to  misrepresentations  based  upon   non-disclosures  follow            naturally from  the Supreme  Court's analysis in  Langley, it                                                              _______            also comports with  common sense.   We join  the Seventh  and            Tenth  Circuits in  being unable  to articulate  any rational            basis  for  a regime  in  which  such misrepresentations  are            outside  the   scope  of   the   statute  while   affirmative            misrepresentations  are not.    See generally  State Bank  of                                            ___ _________  ______________            Virden, 893  F.2d at 144; Bell,  892 F.2d at 66.   Indeed, we            ______                    ____            think it apparent that Congress  could not have intended that            the  statute be  so  construed.    Moreover, we  share  Judge            Lamberth's view  that  "permitting suit  on  omissions  would            practically  swallow  the  Langley  rule  since  parties  can                                       _______            generally  turn  a[n affirmative]  misrepresentation  into an                                         -7-                                          7            omission by  means of artful  pleading."  In re  NBW, 1992 WL                                                      __________            73135, at *11.                      Before  concluding,  we  observe  that  plaintiffs'            complaint  does   not  make   entirely   clear  whether   the            misrepresentation  claim sounds  in contract  or tort.   Such            fact, however, has no bearing on our analysis.  We previously            have held that  the common law doctrine announced in D'Oench,                                                                 ________            Duhme &  Co. v. FDIC, 315 U.S. 447 (1942), of which   1823(e)            ____________    ____            is somewhat  loosely  described as  the  codification,  "bars            defenses and  affirmative claims whether cloaked  in terms of            contract or  tort, as long  as those  claims arise out  of an            alleged secret agreement."   Timberland Design, Inc. v. First                                         _______________________    _____            Service Bank for Savings,  932 F.2d 46, 50 (1st  Cir. 1991).6            ________________________            In so doing, we remarked that "[t]o allow [a party] to assert            tort claims  based on  [a secret] agreement  would circumvent            the very policy behind D'Oench[.]"  Id.  Clearly, the genesis                                   _______      ___            of plaintiffs' claim, whether the claim is framed in contract            or  tort, is the alleged  warranty made by  BNE regarding the            NOR.  As such, the claim is barred.                                              ____________________            6.  Obviously,  in   Timberland,  we  were   considering  the                                 __________            application of D'Oench to  contract and tort claims.   We see                           _______            no reason,  however, why our ruling in  Timberland should not                                                    __________            also  be  implemented where     1823(e),  D'Oench's statutory                                                      _______            partner,  is   being  applied.    See   Castleglen,  Inc.  v.                                              ___   _________________            Resolution Trust Corp., No. 90-4002, 1993  WL 27915, at *5-*6            ______________________            (10th Cir.  Feb. 9, 1993)  (holding that    1823(e) precludes            tort claims,  as  well as  contract  claims, arising  out  of            unrecorded agreements).                                           -8-                                          8                      In  sum,  we are  persuaded  to join  that  body of            authority  which has concluded that   1823(e) applies as much            to misrepresentation claims based upon non-disclosures as  to            those based  upon affirmative  assertions.  Thus,  we believe            that    1823(e) governs  plaintiffs' misrepresentation claim.            Accordingly,  because this  claim  arises out  of an  alleged            warranty that was unwritten and otherwise did not comply with            the  requirements of the  statute, we hold  that the district            court  properly ruled that the  claim cannot, as  a matter of            law, be asserted against the FDIC.                      Affirmed.  No costs.                      _________                                         -9-                                          9
