
USCA1 Opinion

	




          July 1, 1992      UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                     ____________          No. 91-1976                      IN RE:  604 COLUMBUS AVENUE REALTY TRUST,                                       Debtor,                                      _________                            CAPITOL BANK & TRUST COMPANY,                                      Appellee,                                          v.                          604 COLUMBUS AVENUE REALTY TRUST,                                      Appellant.                                      __________          No. 91-1977                      IN RE:  604 COLUMBUS AVENUE REALTY TRUST,                                       Debtor,                                      _________                        FEDERAL DEPOSIT INSURANCE CORPORATION,                           AS RECEIVER/LIQUIDATING AGENT OF                            CAPITOL BANK & TRUST COMPANY,                                      Appellant,                                          v.                      604 COLUMBUS AVENUE REALTY TRUST, ET AL.,                                      Appellees.                                     ____________                                     ERRATA SHEET               The  opinion of  this  court issued  on  June 19,  1992,  is          amended as follows:               On page  10, line 11 after block quote - add "and" after the          word "taxes."               On page  43, line  6 after block  quote - "Court"  should be          lower case.June 19, 1992                                 ____________________        No. 91-1976                      IN RE:  604 COLUMBUS AVENUE REALTY TRUST,                                       Debtor,                                      __________                            CAPITOL BANK & TRUST COMPANY,                                      Appellee,                                          v.                          604 COLUMBUS AVENUE REALTY TRUST,                                      Appellant.                                      __________        No. 91-1977                      IN RE:  604 COLUMBUS AVENUE REALTY TRUST,                                       Debtor,                                      __________                        FEDERAL DEPOSIT INSURANCE CORPORATION,                           AS RECEIVER/LIQUIDATING AGENT OF                            CAPITOL BANK & TRUST COMPANY,                                      Appellant,                                          v.                       604 COLUMBUS AVENUE REALTY TRUST, ET AL.                                      Appellees.                                 ____________________                    APPEALS FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                     [Hon. A. David Mazzone, U.S. District Judge]                                             ___________________                                 ____________________                                        Before                               Torruella, Circuit Judge,                                          _____________                      Weis* and Bownes, Senior Circuit Judges,                                         _____________________                                 ____________________            Robert  Owen Resnick with  whom John  F. Cullen,  George J. Nader,            ____________________            _______________   _______________        and Cullen & Resnick were on brief for 604 Columbus Avenue.            ________________            Michael H. Krimminger with whom Richard  J. Osterman, Jr., Ann  S.            _____________________           _________________________  _______        Duross,  and Richard  N. Gottlieb  were on  brief for  Federal Deposit        ______       ____________________        Insurance Corporation.                                 ____________________                                 ____________________        _____________________            *Of the Third Circuit, sitting by designation.                 BOWNES, Senior Circuit Judge.  This  is a case involving                         ____________________            a failed  loan  transaction that  well illustrates  Polonius'            advice,  "[n]either a  borrower, nor  a lender  be."1   These            appeals  require   us   to   determine,   inter   alia,   the                                                      _____   ____            applicability of  certain federal  defenses available to  the            Federal Deposit Insurance Corporation  (FDIC) in its capacity            as  receiver  when it  seeks  to enforce  against  a bankrupt            borrower an  obligation formerly  held by a  failed financial            institution.                                   PROCEDURAL PATH                                   PROCEDURAL PATH                 This  case arises from  the default by  the 604 Columbus            Avenue Realty Trust ("the  Trust") on payment of a  loan from            the Capitol  Bank and Trust Company ("the  Bank").  Following            the Trust's default, the  Bank commenced mortgage foreclosure            proceedings on the properties  securing its loan, among which            were the property owned by the Trust itself and properties of            the   Trust's  principal  beneficiary,   Millicent  C.  Young            ("Young").2                 To  forestall the  foreclosures  by the  Bank, both  the            Trust  and Young filed for protection under Chapter 11 of the                                            ____________________            1.  W. Shakespeare, Hamlet, act I, sc. iii at 75.            2.  The  Bank also had a mortgage on  a property owned by the            Young  Family  Trust,  of  which  Millicent  Young  was  sole            beneficiary.  The Young Family Trust was a named plaintiff in            the  adversary  proceeding  in the  bankruptcy  and  district            courts below.  For purposes of convenience, we refer to Young            and the Young Family Trust collectively as "Young."                                         -6-            Bankruptcy Code in the United States Bankruptcy Court for the            District  of Massachusetts.   In  May  1988, the  Trust, with            Young  as  co-plaintiff,  initiated an  adversary  proceeding            against  the  Bank,  its  principal  secured  creditor.    In            September 1990, the bankruptcy  court awarded the  plaintiffs            approximately  $140,000 in  damages  on claims  of fraud  and            deceit, conversion, and breach of contract, plus interest and            attorney's  fees.  The  bankruptcy court found  that the Bank            improperly applied  loan proceeds to payment  of "soft costs"            incurred by  the Trust   financing fees,  interest, taxes and            similar expenses.  It also found  that an officer of the Bank            extracted kickback payments from  the loan proceeds in return            for his assistance in  securing approval of the loan.   Under            its power of equitable subordination  pursuant to 11 U.S.C.              510(c), the bankruptcy court subordinated  the Bank's secured            claim on the Trust's  bankruptcy estate to the claims  of the            Trust's  other creditors by  an amount equal  to the damages,            plus interest and attorney's  fees.  It ordered the  transfer            from the  Bank to  the Trust  of a  security interest in  the            Trust's  estate  equivalent  to  the total  of  the  damages,            interest and attorney's fees.                 During the pendency of an appeal of this judgment to the            district   court,   the   Bank   was   declared  unsound   by            Massachusetts  banking officials.    The FDIC  was  appointed                                         -7-            receiver, and in February  1991 was substituted as defendant-            appellant in the district court.                 In  August   1991,  the  district   court  affirmed   in            substantial part the bankruptcy court's rulings on the merits            of the Trust's claims and  equitable subordination of part of            the Bank's secured claim.   It ruled, however, that  the FDIC            was  entitled to raise the defenses available to it under the            doctrine of estoppel established in  D'Oench, Duhme & Co.  v.                                                 ________________________            FDIC, 315 U.S. 447 (1942), and 12 U.S.C.   1823(e).  Invoking            ____            the D'Oench doctrine, the district court vacated that part of                _______            the  bankruptcy court's  judgment  that was  premised on  the            secret agreement by one of  the Trust's principals to provide            kickbacks to a Bank officer.                 Both the  Trust and the  FDIC appeal various  aspects of            the judgments of both the bankruptcy and district courts.  We            affirm  the judgment of the  bankruptcy court, as modified by            the district court.                                 BACKGROUND AND FACTS                                 BACKGROUND AND FACTS                 Before stating the facts,  we think it useful  to review            the dual  role  of the  FDIC in  bank failures.   Our  recent            decision in Timberland Design, Inc. v. First Service Bank For                        _________________________________________________            Savings,  932  F.2d  46,  48  (1st  Cir.  1991),  provides an            _______            excellent summary of the FDIC's different functions:                 As  receiver, the  FDIC manages  the assets  of the                 failed bank  on behalf of the  bank's creditors and                 shareholders.   In its corporate capacity, the FDIC                 is  responsible  for  insuring  the  failed  bank's                                         -8-                 deposits.     Although   there  are   many  options                 available  to the  FDIC  when a  bank fails,  these                 options generally  fall  within two  categories  of                 approaches,  either  liquidation  or  purchase  and                 assumption.  The liquidation option is the  easiest                 method,    but   carries   with    it   two   major                 disadvantages.    First, the  closing  of the  bank                 weakens confidence in the banking  system.  Second,                 there is often substantial delay in returning funds                 to depositors.                 The preferred option when a bank fails,  therefore,                 is the purchase and  assumption option.  Under this                 arrangement, the FDIC, in its capacity as receiver,                 sells the bank's  healthy assets to the  purchasing                 bank in  exchange for the purchasing bank's promise                 to pay the failed  bank's depositors.  In addition,                 as  receiver, the  FDIC sells  the "bad"  assets to                 itself acting in its  corporate capacity.  With the                 money it receives, the  FDIC-receiver then pays the                 purchasing   bank  enough  money  to  make  up  the                 difference  between what  it  must pay  out to  the                 failed bank's  depositors, and what  the purchasing                 bank was willing to pay for the good assets that it                 purchased.    The  FDIC  acting  in  its  corporate                 capacity then tries to collect on the bad assets to                 minimize   the   loss   to   the   insurance  fund.                 Generally,  the purchase  and  assumption  must  be                 executed in great haste, often overnight.            Id. at 48 (citations omitted).            ___                 Turning to  the  case at  hand, we  first summarize  the            extensive findings of fact  of the bankruptcy court.   See In                                                                   ___ __            re  604 Columbus Avenue Realty Trust, 119 B.R. 350 (Bankr. D.            ____________________________________            Mass.  1990)   ("Bankruptcy  Court   Opinion").     The  loan            transaction  at  issue in  these  appeals  originated in  the            efforts of Young and  several business associates to purchase            two buildings  located at 604-610 Columbus  Avenue in Boston,            Massachusetts  ("the  Columbus  Avenue  properties"),  and  a            restaurant operated on  the premises known as "Bob the Chef."                                         -9-            Young  was  the  owner  of  a  contracting  and  construction            company.    Among her  business  partners  was Carl  Benjamin            ("Benjamin"), who served as her financial adviser.                 In  October  1985, Young  and  Benjamin  learned of  the            availability for  purchase of the Columbus Avenue properties.            Young and Benjamin, along with two other partners,  agreed to            enter into  a business relationship through  which they would            purchase the Columbus Avenue properties,  renovate and resell            the  properties as condominiums,  resell the  restaurant, and            share  the profits from the condominium sales and sale of the            restaurant.  In November 1985, Young and Benjamin offered the            owner of the Columbus Avenue  properties $1.2 million for the            buildings and the restaurant.                 Young's  attorney,  Steven Kunian  ("Kunian"), suggested            that she and her partners seek financing for the purchase and            renovation of  the Columbus Avenue properties  from the Bank.            Kunian had represented  the Bank  from time to  time on  loan            transactions.    In December  1985,  Benjamin negotiated  the            terms  of a  loan from the  Bank on  behalf of  Young and the            other  partners.     The   Bank  was  represented   in  these            negotiations by a loan officer, Arthur Gauthier, and a member            of the  Bank's Board of Directors,  Sidney Weiner ("Weiner").            Weiner also  served on the Bank's  Executive Committee, which            was  responsible for the approval  of loans.   Although not a            salaried employee of the Bank, Weiner was paid director's and                                         -10-            consultant's  fees, and  was regarded  by Gauthier  and other            bank employees as having primary authority for negotiation of            the loan to Young and her partners.                 Loans larger  than $25,000 required the  approval of the            Bank's Executive  Committee.  Gauthier presented the proposal            for  the loan for the Columbus  Avenue properties three times            before  the Executive  Committee approved  it on  January 15,            1986.  Final approval by the Executive Committee was achieved            when  Young  agreed to  pledge  her  residence as  additional            collateral for the  loan.   Weiner was one  of the  Executive            Committee members who voted to approve the loan.                 Some  time  before  the  Executive  Committee  voted  to            approve the loan,  Weiner told Benjamin  that the loan  would            only  be approved on the condition that Benjamin agree to pay            Weiner personally  for his assistance in  securing the Bank's            approval  of the loan.  In exchange for this kickback, Weiner            helped the loan proposal reach the Executive Committee, voted            to approve  the loan, and influenced  other Committee members            to vote in  favor of the  loan.  There  was no evidence  that            other  members  of  the  Executive Committee  were  aware  of            Weiner's kickback  arrangement with Benjamin when  they voted            to approve the loan.  The bankruptcy court found that $26,300            was paid to Weiner.                 Attorney  Kunian  represented  both  the  Bank  and  the            borrowers  at the closing on  the loan on  February 27, 1986.                                         -11-            Kunian  suggested  that Young  and  her  associates hold  the            Columbus  Avenue properties through  a realty trust.   At the            closing  the 604  Columbus Avenue  Realty Trust  was created,            with  Young as  its trustee.   Young was  given 62.5%  of the            beneficial interest  in the  trust, while  each of  her three            partners, including  Benjamin, was made a  12.5% beneficiary.            To secure the loan from the Bank, Young executed on behalf of            the Trust a "Commercial Real Estate Promissory Note," a "Loan            and  Security Agreement"  ("L&SA"),  an "Addendum  to Loan  &            Security  Agreement  ("L&SA Addendum"),  and  a "Construction            Loan Agreement" (referred to  collectively as the "First Loan            Agreement").  The  Bank, in  turn, agreed to  lend the  Trust            $1,500,000.                 The Bank used a  standard-form L&SA, which contained the            following provisions:                 SECTION 6.  BANK'S RIGHT TO SET-OFF                 6.01   The  Borrower  agrees that  any deposits  or                 other  sums at any time credited by or due from the                 Bank to  the Borrower, or any  obligor or guarantor                 of any liabilities of the Borrower in possession of                 the Bank, may at  all times be held and  treated as                 collateral  for any liabilities  of the Borrower or                 any such  obligor or  guarantor to the  Bank.   The                 Bank may  apply or  set-off such deposits  or other                 sums against said liabilities at any time.                 . . . .                 SECTION 8.  EXPENSES:                 8.01  The Borrower shall pay or reimburse  the Bank                 on demand  for all out-of-pocket expenses  of every                 nature which the Bank  may incur in connection with                 this  Agreement and  the  preparation thereof,  the                                         -12-                 making  of any  loan provided  for therein,  or the                 collection  of  the  Borrower's indebtedness  under                 this Agreement . .  . . [T]he Bank, if  it chooses,                 may  debit such  expenses  to  the Borrower's  Loan                 Account or  charge any  of the Borrower's  funds on                 deposit with the Bank.                 The  parties also  executed  an Addendum  to this  L&SA,            which  established  the  following  schedule  for the  Bank's            advancement of  the  proceeds  of  the  loan  to  the  Trust:            $1,200,000 at the closing to  pay for the Trust's acquisition            of  the  Columbus Avenue  properties  and  the restaurant;  a            further $200,000 for construction-related expenditures at the            Columbus   Avenue   properties,   but  only   upon   itemized            requisitions approved  by the  Trust, its architect,  and the            bank; and $100,000 for the "soft costs" incurred with respect            to  the   loan.    "Soft  costs"  covered  the  various  non-            construction costs  of the  renovation  effort, and  included            closing  fees, interest, taxes, and insurance.  To secure its            promissory  note, the  Trust  gave the  Bank,  inter alia,  a                                                           _____ ____            mortgage on the Columbus  Avenue properties and a conditional            assignment of rents from the properties in favor of the bank.            Young,  in  her  individual  capacity,  also  gave  the  Bank            mortgages on her  residence and two other properties owned or            held on her behalf.                 At  the   closing,  the  Bank   disbursed  approximately            $1,250,000, of which nearly $1,200,000 was paid to the owners            of the  Columbus Avenue properties, and  the remaining amount            was paid to the Bank  itself for the costs of the  loan.  The                                         -13-            Bank  also created a checking account through which it was to            disburse the remaining amounts of the loan.  A signature card            was  created for  the  account bearing  the  names of  Young,            Benjamin,  and another partner of the Trust.  Those listed on            the signature  card had  access to  loan proceeds  upon their            disbursement by  the Bank.   Young was  apparently not  aware            that Benjamin's signature was on the card.                 The bankruptcy  court found that the  Trust's ability to            repay the  loan on the  Columbus Avenue properties  hinged on            several assumptions that Young and her partners understood or            reasonably should  have understood  at the closing.   One  of            these   assumptions  was   that  $100,000   for   soft  costs            anticipated  in First  Loan Agreement  would not  cover those            costs completely and  would have to be  supplemented by funds            of Young and her  partners.  Another assumption was  that the            Trust  could generate  the  funds necessary  to complete  the            condominium project by selling the restaurant.                 The Bank advanced the  remainder of the proceeds of  the            loan   approximately  $250,000   within  forty-seven days  of            the  closing,  in three  large  payment.   Weiner  personally            directed  Gauthier to  pay  these advances  into the  Trust's            account,  but did  so without  the approval  of Young  and in            violation  of  the procedures  specified  in  the First  Loan            agreement.   The bankruptcy court  found that  the Bank  paid            itself a total of  $102,305.54 out of loan proceeds  to cover                                         -14-            soft costs, thereby exceeding by $2,305.54 the amount of soft            costs contemplated in the  First Loan Agreement.  The  sum of            $26,300  was  withdrawn by  Benjamin  from  the loan  account            without  Young's knowledge  or authorization, which  was then            used  to   make  kickback  payments  to   Weiner.    Sometime            thereafter,   Young  learned   of  Benjamin's   conduct,  and            attempted  unsuccessfully to expel him  from the Trust and to            get him to give up his beneficial interest in it.                 When  the six-month  term  of the  First Loan  Agreement            expired in August 1986,  the Trust could not repay  the loan.            It therefore negotiated a  second six-month loan to refinance            the first  (the "Second Loan  Agreement").  On  September 12,            1986,  the Trust  signed a  promissory note  to the  Bank for            $1,750,000,  which  was secured  by  the  same mortgages  and            guarantees  as the First Loan Agreement.  Young, on behalf of            the  Trust, executed  a  new L&SA  that contained  provisions            identical  to those  in  the L&SA  accompanying the  previous            loan.  In addition,  the Addendum to  the L&SA in the  Second            Loan Agreement provided, inter alia, the following scheme for                                     _____ ____            disbursement:                 The   Bank   shall   advance  the   loan   proceeds                 approximately as  follows:   a.   $1,500,000.00  at                 closing for acquisition of real estate and personal                 property[;]  b.  $190,000.00 for construction costs                 .  . . [;]  c.   $60,000.00 for soft costs incurred                 with respect to the loan.            At the closing of the Second Loan Agreement, $1,580,151.11 in            loan proceeds were disbursed to pay the $1,524,516.11 balance                                         -15-            remaining  on  the  First   Loan  agreement  and  $55,635  in            origination and attorney's fees for the new loan.                 Four months later,  in January 1987, the  Trust sold the            property  at 610  Columbus Avenue for  $692,400 and  paid the            Bank this amount in order to reduce the outstanding principal            balance of the Second Loan Agreement.  In     March     1987,            however,  when the Second Loan  Agreement came due, the Trust            was  unable to repay it.  The  Bank therefore entered into an            "Agreement to  Extend Mortgage and  Note" with the  Trust, in            exchange for an extension fee.                 The bankruptcy court  found that during the term  of the            Second Loan  Agreement and  its extension, the  Bank withdrew            from the  loan proceeds  $169,406.12 for various  soft costs,            including  closing  fees,  interest,  charges  for  the  loan            extension, taxes, and attorney's  fees.  This amount exceeded            the "approximately" $60,000 in soft costs originally provided            for in the second L&SA Addendum by $109,406.12.                 The Second Loan Agreement, as extended, came due on June            10, 1987.    The  Trust  was  unable to  make  payment.    In            September  1987, the  Bank began  foreclosure of  the various            mortgages it held as  security for the loan.   The bankruptcy            court  found  that  the   reasons  for  the  Trust's  default            included, inter alia:  the inability of the Trust to sell the                      _____ ____            restaurant, and the attendant loss of cash needed  to finance            the condominium renovations  originally planned; the  further                                         -16-            deprivation of cash needed for the project as a result of the            kickback   payments;  and   the  Bank's   overapplication  of            $109,406.12 in  proceeds from the  second loan to  payment of            soft  costs.  The bankruptcy court also concluded that it was            the Trust's failure  to sell the restaurant,  rather than the            Bank's overapplication  of loan  proceeds for soft  costs and            the kickback  payments,  that  was by  far  the  single  most            important reason for the failure of the project.                   DECISIONS OF THE BANKRUPTCY AND DISTRICT COURTS                   DECISIONS OF THE BANKRUPTCY AND DISTRICT COURTS                 In bankruptcy  court, the  Trust and Young  alleged that            the  Bank entered  into and  administered  the loans  for the            improper purpose of extracting a kickback from loan proceeds.            They also  alleged that the Bank  improperly applied proceeds            from  the two  loans  to  the payment  of  soft  costs.   The            plaintiffs alleged fraud  and deceit, conversion, and  breach            of contract by  the Bank.  They  also argued that  the Bank's            inequitable conduct warranted the subordination of the Bank's            secured claim  in the Trust's  bankruptcy estate to  those of            all of the Trust's  other creditors.  In addition,  the Trust            and Young requested an order invalidating entirely the Bank's            mortgages on their properties.                 The bankruptcy  court conducted  a seven-day trial.   It            awarded the  Trust $138,011.66 in  damages.  Of  this amount,            $26,300  was assessed  as damages  for the  kickback payments            made  to Weiner by Benjamin.  The kickback damages were based                                         -17-            on claims of conversion,  breach of contract and  fraud under            Massachusetts law.    The remaining  $111,711.66  in  damages            represented  the   total  amount  of  soft   costs  that  the            bankruptcy court  found to have been  improperly removed from            the loan proceeds  by the Bank in violation of the limits set            by  the two  loan agreements   i.e.,  $2,305.54 on  the First            Loan Agreement and $109,406.12  on the Second Loan Agreement.            This award was premised on claims of conversion and breach of            contract.    The  bankruptcy  court  also  ordered  that  the            $138,011.66  damages award  be  supplemented by  an award  of            reasonable attorney's fees, which  it found were warranted as            an element of the conversion damages under Massachusetts law,            and  also  of post-judgment  interest  at  the contract  rate            specified in the loan agreements.                 Invoking its powers  of equitable subordination pursuant            to  11  U.S.C.      510(c),  the   court  entered  an   order            subordinating  the  Bank's secured  claim  to  the claims  of            priority and  general unsecured claimants in  an amount equal            to the full  amount of the  damages, interest and  attorney's            fees.   It  further directed  that the  Bank transfer  to the            Trust's  estate a  portion  of its  security  interest in  an            amount equal  to the  total  damages.   The bankruptcy  court            refused, however, to issue an order entirely invalidating the            mortgages held by the Bank.                                         -18-                 While  the  Bank's  appeal  of  the  bankruptcy  court's            judgment  was pending,  the FDIC  was appointed  receiver and            liquidating agent of  the Bank, and substituted  for the Bank            as defendant-appellant.  The FDIC continued the Bank's appeal            of  the bankruptcy  court's  judgment as  to the  conversion,            breach  of  contract,  and  fraud  claims,  as  well  as  its            challenge to the  bankruptcy court's equitable  subordination            of  its  secured interest  in an  amount  equal to  the total            damages.   In addition, the  FDIC raised two  special federal            defenses as to each  aspect of the damages claims.   The FDIC            argued  that   the   D'Oench  doctrine   or   its   statutory                                 _______            counterpart, 12  U.S.C.   1823(e)   precluded  the bankruptcy            court's award of damages on the kickback arrangement, insofar            as  this claim was based on a secret agreement between Weiner            and Benjamin.  The  FDIC also argued that the  special holder            in due  course status  accorded it  under federal common  law            entirely barred the Trust's  claims for damages and equitable            subordination against it in its receivership capacity.                 The Trust and Young,  on the other hand,  challenged the            applicability of the  federal defenses urged by the  FDIC, as            well  as the  FDIC's right  to raise  these defenses  for the            first  time on  appeal.  They  also contested  the bankruptcy            court's refusal to grant  them an order invalidating entirely            the Bank's mortgages on their properties.                                         -19-                 In  August  1991,   the  district  court  affirmed   the            bankruptcy court's  rulings on the merits  of the plaintiffs'            conversion and breach of contract  claims with respect to the            Bank's improper  application of loan proceeds  for payment of            soft  costs.  Although the district court found that the FDIC            was entitled to raise its federal defenses for the first time            on  appeal, it rejected the  FDIC's argument that the federal            common law holder in due  course doctrine barred the  Trust's            claims  against it  in its  capacity as the  Bank's receiver.            The district court also affirmed the equitable  subordination            of  the  FDIC's secured  claim on  the  Trust's estate  in an            amount equal to the  damages on the soft costs  claims, i.e.,            $111,711.66,  plus  post-judgment  interest.    It  reversed,            however, the bankruptcy court's  inclusion of attorney's fees            as part of the overall amount of the FDIC's claim  subject to            equitable subordination.                 The district court vacated the bankruptcy court's  award            of  $26,300  of damages  based  on  the kickback  arrangement            between  Benjamin  and Weiner.    Finding that  the  FDIC was            entitled  to raise the D'Oench doctrine for the first time on                                   _______            appeal, the  court held that  the kickback arrangement  was a            secret  agreement  squarely   within  the  coverage  of   the            doctrine.   It therefore  reduced the equitable subordination            against  the FDIC by an amount equal to the kickback damages.            Because  it found that the fraud claims based on the kickback                                         -20-            arrangement  could  not stand  against  the  FDIC, the  court            rejected  the Trust and Young's arguments that it declare the            loan  agreements   and  the   mortgages  on  the  plaintiffs'            properties   void  as illegal  contracts in  contravention of            public policy.                                         -21-                     THE ISSUES ON APPEAL AND STANDARD OF REVIEW                     THE ISSUES ON APPEAL AND STANDARD OF REVIEW                 In their appeals to  this court,3 both the FDIC  and the            Trust press  substantially the  same arguments made  in their            appeals of  the bankruptcy  court's judgment to  the district            court.4  The  FDIC argues that because it was the receiver of            an insolvent bank, federal  common law barred the plaintiffs'            claims of conversion,  breach of contract, and fraud, as well            as the equitable subordination of the FDIC's secured interest            in the Trust's estate.   The FDIC maintains that  any damages            against it in  its receivership  capacity based  on the  soft            costs  claims were barred by the federal common law holder in            due  course doctrine,  and that  the  equitable subordination            against it in an amount equal to those damages is contrary to            federal common law.  The FDIC also attacks the rulings of the            bankruptcy court,  affirmed by  the district court,  that the            Bank  misappropriated  soft  costs  monies, as  well  as  the            equitable subordination  of its secured claim  to reflect the            damages caused  by the  Bank's misappropriation.   It further            challenges  the district  court's affirmance  of an  award of                                            ____________________            3.   Following  the district court's judgment,  both the FDIC            and the Trust docketed separate appeals with this court.  The            FDIC's appeal is No. 91-1977; the Trust's is No. 91-1976.            4.  Young is not a party to the Trust's  appeal.  Neither the            Trust  nor   Young  has   challenged  the   district  court's            affirmance  of the  bankruptcy  court's refusal  to void  the            mortgages on their properties.                                         -22-            post-judgment interest  on the $111,711.66 in  damages on the            soft costs claims.                 The Trust, on  the other hand, argues  that the district            court erred by  applying the D'Oench  doctrine for the  first                                         _______            time  on appeal.  The Trust insists that the D'Oench doctrine                                                         _______            does  not  bar its  recovery on  its  claims relating  to the            kickback scheme.   The Trust also maintains that the district            court  erred   when  it   held  that  the   bankruptcy  court            incorrectly included  attorney's fees as part  of the overall            amount of  the FDIC's security interest  subject to equitable            subordination in favor of the Trust and other creditors.                 In  an  appeal  from  a district  court's  review  of  a            bankruptcy court's decision,  we "independently review[]  the            bankruptcy  court's decision, applying  the clearly erroneous            standard   to  findings  of  fact  and   de  novo  review  to            conclusions of law."  In re G.S.F. Corp., 938 F.2d 1467, 1474                                  __________________            (1st Cir. 1991).  See also In re Navigation Technology Corp.,                              ________ _________________________________            880  F.2d  1491, 1493  (1st  Cir.  1989) (bankruptcy  court's            determinations of law subject  to de novo review);  Briden v.                                                                _________            Foley, 776 F.2d  379, 381 (1st Cir. 1985)  (clearly erroneous            _____            standard  of review  applied  to  bankruptcy court's  factual            findings).                                         -23-                                      DISCUSSION                                      DISCUSSION            I.   DISTRICT COURT REVIEW OF THE FDIC'S FEDERAL DEFENSES FOR            THE FIRST TIME ON APPEAL                 Before   considering  the   Trust's  state   law  claims            underlying  its  damages award  against  the  Bank, we  first            address  the  FDIC's  arguments  that  two  special  defenses            established under federal law   the federal common law holder            in  due  course and  D'Oench  doctrines   barred  all of  the                                 _______            plaintiffs'  claims  and  resulting  equitable  subordination            against it  as the Bank's receiver.   In order to address the            merits of  these federal defenses,  we must,  as a  threshold            matter, determine whether the FDIC was entitled to raise them            for the first time in the district court in its appeal of the            bankruptcy court's judgment.                 The district court based its decision to permit the FDIC            to assert  its federal defenses exclusively  on the Financial            Institutions  Reform, Recovery  and Enforcement  Act of  1989            ("FIRREA"),  Pub.  L.  No.   101-73,  103  Stat.  183  (1989)            (codified  at 12  U.S.C.     1811-1833e),  which provides  in            pertinent part:                 (13)  Additional rights and duties                      (A) Prior final adjudication                           The Corporation shall  abide by any final                      unappealable   judgment   of   any  court   of                      competent  jurisdiction   which  was  rendered                      before the  appointment of the  Corporation as                      conservator or receiver.                                         -24-                      (B)    Rights and  Remedies of  conservator or                      receiver                            In  the event of any appealable judgment,                      the  Corporation  as  conservator or  receiver                      shall                              (i)  have  all  the rights  and  remedies                           available   to  the   insured  depository                           institution  (before  the appointment  of                           such  conservator  or  receiver) and  the                           Corporation  in  its corporate  capacity,                           including  removal  to Federal  court and                           all appellate rights; and                           (ii) not be required  to post any bond in                           order to pursue such remedies.            12 U.S.C.A.    1821(d)(13)(A)-(B).  The  district court found            that  the bankruptcy court's  judgment in favor  of the Trust            was "appealable" within the meaning  of   1821(d)(13)(B).  It            reasoned that the federal  defenses against the Trust's claim            asserted by the FDIC in  its receivership capacity were among            "the rights and remedies available to . . . the [FDIC] in its            corporate capacity."   The district court  concluded that the            "rights and  remedies" granted  the FDIC in  its receivership            capacity included the right to raise its federal defenses for            the  first time  on appeal.   The  district court  based this            analysis  on its  reading  of FIRREA's  text and  legislative            history.5                                            ____________________            5.  As evidence  of  Congress'  special  solicitude  for  the            preservation of  the rights of  the FDIC in  its receivership            capacity, the district court emphasized FIRREA's provision of            an automatic stay in any litigation to which the FDIC becomes            a party.   See 12 U.S.C.    1821(d)(12).  It also highlighted                       ___            language in FIRREA's legislative history explaining the  need            for the automatic  stay: "The appointment of a conservator or                                         -25-                 The district court acknowledged that this interpretation            of    1821(d)(13)(B) conflicted  with that of  the Fifth  and            Eleventh  Circuits,   both  of  which   have  rejected   this            interpretation  of   FIRREA.     In  Olney  Savings   &  Loan                                                 ________________________            Association v. Trinity Banc Savings Association, 885 F.2d 266            _______________________________________________            (5th   Cir.   1989),  the   Fifth   Circuit   ruled  that                1821(d)(13)(B)  did not  in  any way  modify the  substantive            rights of the FSLIC in its receivership  capacity, but merely            assured the  FSLIC standing to pursue  all appeals previously            available to it only in its corporate capacity.  Accordingly,            it held  that FIRREA did not  entitle the FSLIC to  raise the            D'Oench  doctrine for the first time  on appeal.  Id. at 275.            _______                                           ___            In  Baumann v. Savers Federal Savings & Loan Assoc., 934 F.2d                _______________________________________________            1506  (11th Cir. 1991), cert. denied, ___ U.S. ___, 1992 U.S.                                    ____________            LEXIS  2709, 60  U.S.L.W. 3780  (1992), the  Eleventh Circuit            followed Olney,  and rejected the argument  of the Resolution                     _____            Trust Corporation  ("RTC") that    1821(d)(13)(B) entitled it            to raise the D'Oench doctrine.  Id. at 1511.  In Baumann, the                         _______            ___              _______            Eleventh Circuit expressly rejected  the interpretation of                                               ____________________            receiver can  often change  the character of  the litigation;            the stay gives the  FDIC a chance to analyze  pending matters            and decide how best to proceed."  H.R. Rep.  No. 54(I), 101st            Cong., 1st  Sess. 331 (1989), reprinted  in 1989 U.S.C.C.A.N.                                          _____________            86,  127.  The district court further relied on two decisions            of the Texas Court  of Appeals holding that    1821(d)(13)(B)            permits  the FDIC to raise the D'Oench doctrine for the first                                           _______            time  on appeal.  See FDIC/Manager Fund v. Larsen, 793 S.W.2d                              ___ ___________________________            37  (Tex. Ct.  App.), writ granted,  34 Tex.  Sup. Ct.  J. 91                                  ____________            (1990); FSLIC v. T.F.  Stone-Liberty Land Assocs., 787 S.W.2d                    _________________________________________            475 (Tex. Ct. App. 1990).                                         -26-            1821(d)(13)(B) advanced  by the district court  in this case.            The  Baumann  court  concluded   that  to  read  the  statute                 _______            otherwise  would   be  to   grant  a  federal   receiver  new            substantive  rights,  because neither  FIRREA  nor previously            existing statutes  granted the RTC in  its corporate capacity            the  power to raise arguments  for the first  time on appeal.            Id.            ___                 We   think   that   the   Olney  and   Baumann   courts'                                           _____        _______            interpretation  of    1821(d)(13)(B) is  the proper  one, and            hold that the  district court  erred when it  read FIRREA  as            allowing the FDIC  in its receivership capacity to  raise its            federal defenses for the first time on appeal.  We agree with            the distinction drawn by Baumann: "the right at issue in this                                     _______            case is not  the right of the [federal receiver]  to argue [a            federal defense], which is unquestioned, but rather the right            of  the [federal receiver] to raise an argument for the first            time on appeal."  Id. at 1512.  Section 1821(d)(13)(B) merely                              ___            accords  the FDIC  in its  receivership capacity  standing to            raise  the  same  defenses  available  to  the  FDIC  in  its            corporate capacity.  It  does not establish that the  FDIC as            receiver is  entitled to raise  its federal defenses  for the            first time on appeal.                 Although FIRREA does not grant  the FDIC as receiver the            right to  raise its special  federal defenses to  the Trust's            claims  for the first time  on appeal, we  must also consider                                         -27-            whether there is any alternative basis  on which the district            court  could have  permitted the  FDIC  to raise  its federal            defenses.  The FDIC argues that even if   1821(d)(13)(B) does            not grant it  the right  to raise its  federal defenses,  the            district  court   nonetheless  had  the  discretion,  in  its            capacity as an appellate court, to address these defenses for            the first time on appeal.                 The  FDIC  relies   principally  on  Baumann  for   this                                                      _______            argument.    There,  the   Eleventh  Circuit  held  that  its            discretion as an appellate court permitted  it to address the            federal  receiver's D'Oench  doctrine argument for  the first                                _______            time on  appeal.  Id. at  1513.  The court  stressed the fact                              ___            that  the  RTC had  not had  the  opportunity to  present its            argument in the trial court because it had not become a party            to the suit until after the entry of final judgment.  Id.  In                                                                  ___            order to  prevent  the  RTC from  being  "penalized  for  not            raising a  defense  it had  no opportunity  to present,"  the            Baumann  court  concluded that  it  would  be appropriate  to            _______            exercise its discretion to exempt the RTC in its receivership            capacity from its general  rule precluding argument of issues            for the  first time of  appeal.  Id.   The Fifth  Circuit has                                             ___            also adopted Baumann's  approach in similar circumstances  in                         _______            which the federal conservator or  receiver becomes a party to            an appeal after the final  judgment of the trial court.   See                                                                      ___            Resolution  Trust Corp. v. McCrory, 951 F.2d 68, 71 (5th Cir.            __________________________________                                         -28-            1992) (citing Baumann  and Union  Fed. Bank  v. Minyard,  919                          _______      ____________________________            F.2d 335, 336 (5th Cir. 1990)).                 It is  the general rule  in this circuit  that arguments            not raised in the trial court cannot be raised for  the first            time on appeal.   See, e.g., Boston  Celtics Ltd. Partnership                              ___  ____  ________________________________            v.  Shaw, 908  F.2d  1041, 1045  (1st  Cir. 1990);  Brown  v.            ________                                            _________            Trustees  of Boston Univ., 891 F.2d 337, 359 (1st Cir. 1989),            _________________________            cert. denied, ___  U.S. ___,  110 S. Ct.  3217 (1990).   Like            ____________            other circuit courts of  appeals, however, we have recognized            that an  appellate court  has the discretion,  in exceptional            circumstances,  to reach issues not raised below.  See United                                                               ___ ______            States  v. La Guardia, 902  F.2d 1010, 1013  (1st Cir. 1990).            _____________________            In  United States v. Krynicki, 689 F.2d 289, 291-92 (1st Cir.                _________________________            1982),  we   outlined  the   criteria  for   determining  the            appropriate exercise  of our  discretion to hear  new issues.            These criteria include,  inter alia, whether the new issue is                                     _____ ____            purely legal, such that the record pertinent to the issue can            be developed  no further;  whether the party's  claim appears            meritorious;  whether  reaching   the  issue  would   promote            judicial economy  because  the same  issue  is likely  to  be            presented in other cases; and  whether declining to reach the            argument would result in a miscarriage of justice.  Id.                                                                ___                 The   circumstances  of  this   case  were  sufficiently            exceptional to have permitted  the district court to consider            for  the first  time  on appeal  the  merits of  the  federal                                         -29-            defenses  raised by  the FDIC  in its  receivership capacity.            The question  of whether various federal  defenses barred the            Trust's  claims  was purely  legal  and  required no  further            development   of  the  factual  record;  the  FDIC's  federal            defenses  were colorable,  judged  by  the  district  court's            acceptance  of the FDIC's D'Oench argument  to bar damages on                                      _______            the  kickback  claims;  judicial   economy  would  have  been            promoted  by a ruling on  the merits of  the applicability of            the FDIC's  federal defenses, given the  increasing volume of            litigation involving federal receivers and/or conservators in            this circuit;  and  finally, it  would  have been  unfair  to            prevent the  FDIC from raising  its federal defenses  when it            had no such opportunity to assert them before the  bankruptcy            court.  As Baumann and McCrory make clear, it is not uncommon                       _______     _______            for a federal receiver or conservator to become a party  to a            litigation after the final  judgment of the trial court.   To            prevent  the FDIC from  raising its federal  defenses in such            circumstances would  vitiate much of the  purpose of allowing            these defenses in the first place.            II.  THE D'OENCH DOCTRINE AS A BAR TO THE TRUST'S RECOVERY ON                     _______            THE KICKBACK CLAIMS                 We  next  review the  question  of  whether the  D'Oench                                                                  _______            doctrine,  or   its  statutory   counterpart,  12  U.S.C.                                             -30-            1823(e),6  bars  the Trust's  claims  based  on the  kickback            scheme and  any equitable  subordination against the  FDIC as            receiver.                 In  D'Oench, the  Supreme  Court  held  that in  a  suit                     _______            brought by  the FDIC  to collect  on a  borrower's promissory            note, in which the FDIC was the  successor in interest to the            original lender,  the borrower  was not  entitled to rely  on            agreements  outside  the documents  contained  in  the lender            bank's records to defeat the FDIC's claim.   315 U.S. at 460-            61.    The  Supreme  Court  announced a  federal  common  law            doctrine of equitable  estoppel preventing the  borrower from            using  a "secret  agreement" with  the original  lender as  a                                            ____________________            6.  As amended by FIRREA,   1823(e) provides:                 No agreement which tends  to diminish or defeat the                 interest of  the Corporation in any  asset acquired                 by it under this section . . . , either as security                 for a loan  or by  purchase or as  receiver of  any                 insured  depository  institution,  shall  be  valid                 against the Corporation unless such agreement                         (1) is in writing,                      (2) was executed by the depository 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 directors of                      the   depository   institution  or   its  loan                      committee, which approval  shall be  reflected                      in the minutes of said board committee, and                      (4) has been,  continuously, from the  time of                      its  execution,  an  official  record  of  the                      depository institution.            We  treat    1823(e)  as  the statutory  codification  of the            D'Oench doctrine.   See Capizzi v.  FDIC, 937 F.2d 8,  9 (1st            _______             ___ ________________            Cir. 1991); FDIC  v. P.L.M.  Int'l, Inc., 834  F.2d 248,  253                        ____________________________            (1st Cir. 1987).                                         -31-            defense  to the FDIC's demand for  payment.  Id.  D'Oench did                                                         ___  _______            not require  that the  borrower have the  intent to  defraud:            "The  test  is  whether  the note  was  designed  to  deceive            creditors or the public authority, or would tend to have that            effect.  It would be sufficient in this type of case that the            maker lent  himself to a  scheme or  arrangement whereby  the            banking authority . . . was or was likely to be misled."  Id.                                                                      ___            at 460.                 The  contours  of  the  D'Oench  doctrine,   which  have                                         _______            expanded  since  the  Court's  original  decision,  are well-            established in this circuit.  See Timberland Design, 932 F.2d                                          ___ _________________            at 48-49;  FDIC v. Caporale,  931 F.2d 1, 2  (1st Cir. 1991);                       ________________            FDIC  v. P.L.M. Int'l, Inc.,  834 F.2d 248,  252-53 (1st Cir.            ___________________________            1987).   Although the D'Oench  decision involved the  FDIC in                                  _______            its corporate capacity, "courts have consistently applied the            doctrine to those situations where the FDIC was acting in its            capacity  as receiver."   Timberland Design,  932 F.2d  at 49                                      _________________            (citing cases).   We have  also adopted the  position of  the            great majority of the circuits that  D'Oench "operates to bar                                                 _______            affirmative  claims as  well as  defenses which  are premised            upon secret agreements."   Id.  In  addition, D'Oench applies                                       ___                _______            to claims  involving secret  agreements that sound  either in            tort or  in contract.  Id. at 50 (citing Langley v. FDIC, 484                                   ___               _______________            U.S.  86 (1987)).   And finally,  the fact that  the FDIC may            have actual knowledge of  the secret agreement is irrelevant:                                         -32-            "The proper focus under D'Oench is  whether the agreement, at                                    _______            the  time  it was  entered into,  would  tend to  mislead the            public authority."  Id.                                ___                 Applying  the principles  enunciated in  Timberland, the                                                          __________            district  court held  that  D'Oench estopped  the Trust  from                                        _______            raising against the FDIC its affirmative claims based  on the            kickback  scheme.  It found  that the record established that            the Trust, through its agent Benjamin, had "lent itself" to a            kickback scheme  with the Bank.  The district court concluded            that the unwritten agreement and subsequent kickback payments            between   Weiner  and  Benjamin  were  a  "secret  agreement"            squarely within the coverage of D'Oench.                                            _______                 The  Trust contends  that D'Oench  should not  have been                                           _______            applied  for the  district  court for  several  reasons.   It            argues  that its tort claims of conversion and fraud stand on            a factual basis independent  of the kickback arrangement, and            that these claims therefore cannot be barred by D'Oench.  For                                                            _______            similar reasons  the Trust argues that its breach of contract            claim must also be upheld because the removal of $26,300 from            the  loan proceeds was  a breach of the  express terms of the            written loan  agreement, and  not a  breach of  the unwritten            kickback arrangement.  In  the alternative, the Trust invokes            certain recognized  exceptions  to the  D'Oench doctrine:  it                                                    _______            claims (1) that it is a non-negligent victim of "fraud in the            factum,"  and (2), that the  district court should have found                                         -33-            that  it  was  innocent   of  any  intentional  or  negligent            deception  because Benjamin  was  not acting  as the  Trust's            agent at the time  he removed loan proceeds for  the kickback            payments.                 A.  The Scope of the Kickback Agreement                     ___________________________________                 We  find little  merit  in the  Trust's first  argument,            which  counsel appears in part  to have abandoned during oral            argument.7   As we  understand it, the  Trust's contention is            that  because  its  fraud  and  conversion  claims  are  "not            premised  upon"  the  kickback  arrangement,  D'Oench  cannot                                                          _______            apply.   According  to the  Trust, "the  kickback arrangement            merely explains why Capitol  Bank chose to misappropriate the            [Trust's]  assets,  whereas the  misappropriations themselves            are  the basis of the [Trust's claims]."  Brief for Appellant            604 Columbus Avenue Realty Trust at 27.  The problem with the            Trust's position  is that the bankruptcy  court's findings in            respect   to  these   claims,  as   well  as   its  equitable                                            ____________________            7.  When pressed to explain why  the D'Oench doctrine did not                                                 _______            apply  to  all  the Trust's  claims  relating  to the  secret            agreement between Benjamin and  Weiner, counsel for the Trust            placed  exclusive reliance on the argument that the Trust was            an  innocent party that had not knowingly made itself a party            to the kickback arrangement with Weiner.  Counsel stated that            "if the Trust  had in  fact entered into  an oral  agreement,            then  you would be right;  D'Oench would clearly  apply.  But                                       _______            the  bankruptcy court did not find that fact.  The bankruptcy            court found that  Benjamin was  liable to the  Trust for  the            twenty-six thousand dollars as well  as the Bank. . . .  [I]t            seems to  me to be a very,  very broad application of D'Oench                                                                  _______            where a borrower has not lent themselves [sic] in any fashion            to this agreement."                                         -34-            subordination of $26,300  in lieu  of damages,  were in  fact            explicitly  premised  on  the  kickback  arrangement.     See                                                                      ___            Bankruptcy Court  Opinion, 119 B.R. at  371 (conversion); id.                                                                      ___            at 374 (fraud);  id. at 377  (equitable subordination).   Nor                             ___            does the Trust  elaborate as to how  other facts, independent            of  those relating  to the  kickback arrangement,  provide an            alternative basis for the  bankruptcy court's findings in its            favor.8    The  Trust's   tort  claims  fall  squarely  under            D'Oench: "D'Oench bars . . . affirmative claims . . . as long            _______   _______            as those claims arise out of  an alleged secret arrangement."                            ___________________________________________            Timberland, 932 F.2d at 50 (emphasis added).            __________                 The  Trust next  argues that  D'Oench does  not bar  its                                               _______            breach  of contract  claim against the  Bank for  the $26,300            misappropriated from the Trust's  account because this breach            was a violation of  the written terms of the  loan agreement.            It relies on Howell v. Continental Credit Corp., 655 F.2d 743                         __________________________________            (7th Cir.  1981),  which held  that  the FDIC  cannot  invoke            D'Oench  "where the document the FDIC seeks to enforce is one            _______            .  . .  which  facially manifests  bilateral obligations  and            serves as the basis of the [promisor's] defense."  Id. at 746                                                               ___            (emphasis omitted).   Seizing on the language  of Howell, the                                                              ______                                            ____________________            8.  The Trust's attempts to distinguish Weiner's conduct from            the  tortious  conduct of  the  Bank  are completely  without            merit.   The Trust prevailed  on its tort  claims against the            Bank in bankruptcy court on a respondeat superior theory, and            cannot  now evade the precepts of  D'Oench by intimating that                                               _______            these tort claims against the Bank had nothing to do with the            kickback arrangement masterminded by Weiner.                                         -35-            Trust advances much  the same  argument with  respect to  the            breach  of contract  claim as  asserted  in its  challenge to            D'Oench's  application to  its  tort claims,  i.e., that  the            _______            "bilateral obligations"  of the  loan agreement, and  not the            secret kickback  agreement, are the  basis for its  breach of            contract claim.  Once again, the Trust's argument ignores the            opinion of the bankruptcy  court, which expressly stated that            the  $26,300 judgment for the Trust on the breach of contract            claim  was   founded  on  the  kickback   arrangement.    See                                                                      ___            Bankruptcy Court Opinion, 119 B.R. at 375.                 The Trust's reliance  on Howell is also misplaced.   The                                          ______            Trust's  breach  of  contract  claim required  proof  of  the            existence of  a secret kickback arrangement.   Howell, on the                                                           ______            other hand,  involved the  FDIC's attempted enforcement  of a            lease that expressly  imposed bilateral  obligations on  both            the lessor and  lessee.  See  Howell, 655 F.2d  at 747.   The                                     ___  ______            Seventh Circuit  ruled  that the  FDIC, as  successor to  the            lessor, could not assert D'Oench to bar the lessee's contract                                     _______            defenses.  Id.   In  Howell, the  lessee's contract  defenses                       ___       ______            were  not premised on any secret agreement, but were based on            the failure  of the  original lessor  to fulfill  the express            conditions of the  lease.  Id.  The limited  exception to the                                       ___                                         -36-            D'Oench  doctrine  crafted by  Howell does  not apply  to the            _______                        ______            Trust's breach of contract claim.9                 B.  Fraud In The Factum                     ___________________                 The Trust  further  claims  that  two  other  recognized            exceptions to the D'Oench  doctrine apply to this case.   The                              _______            first  exception is fraud in the factum.  The Supreme Court's            decision in  Langley  v.  FDIC, 484  U.S.  86  (1987),  while                         _________________            addressed  to  the  issue  of  the  FDIC's  right  to  invoke            D'Oench's statutory counterpart, 12 U.S.C.   1823(e), is also            _______            applicable to analysis of fraud in the factum as a bar to the            application of D'Oench.   In Langley, the Court distinguished                           _______       _______            between  the  real defense  of  fraud  in the  factum,  which            renders  a  loan  agreement   entirely  void  and  takes  the            agreement out  of   1823(e),  and a  defense of fraud  in the            inducement,  which  renders the  loan agreement  voidable but            does  not  preclude  the   FDIC's  assertion  of     1823(e).            Langley, 484 U.S. at 93-94.  After reviewing the claim by the            _______            note makers  that their  participation in a  land transaction            had been procured  by misrepresentations as  to the size  and            character of the property  involved, the Court concluded that                                            ____________________            9.  Since  Howell, the  Seventh  Circuit  has cautioned  note                       ______            makers from the over-hasty invocation against the FDIC of the            exception to D'Oench  contemplated by that decision:  "Lesson                         _______            Number One in the study of law is that general language in an            opinion  must not be  ripped from its context  to make a rule            far broader than the factual circumstances which called forth            the language."  FDIC  v. O'Neil, 809 F.2d 350,  354 (7th Cir.                            _______________            1987).                                         -37-            the  note  makers'  argument was  a  claim  of  fraud in  the            inducement.  Accordingly, the Court found that the FDIC could            properly  invoke   1823(e) to  bar the assertion  by the note            makers of their fraud defense.  Id. at 94.                                            ___                 We  think  that  the  Langley  Court's  distinction  for                                       _______            purposes of    1823(e) between  fraud in  the inducement  and            fraud in the factum  applies with equal force in  the context            of  D'Oench.  We have characterized fraud  in the factum as a                _______            real defense  that may be  asserted when the  original lender            fraudulently   procures  the   borrower's  signature   to  an            instrument  without  that borrower's  knowledge  of its  true            nature or contents.  See FDIC  v. Caporale, 931 F.2d 1, 2 n.1                                 ___ _________________            (1st Cir.  1991) (noting  that in  the case of  fraud in  the            factum, "the instruments would  be void rather than voidable,            leaving no title  capable of  transfer to the  FDIC.").   See                                                                      ___            also E. Allan Farnsworth, Contracts   4.10 (1982) (describing            ____                      _________            fraud in the factum as arising in the rare situation in which            the  defrauded party "neither knows nor has reason to know of            the character of the proposed agreement . . . .").                 The  Trust  analogizes  its  situation to  that  of  the            defendant  in FDIC v. Turner,  869 F.2d 270  (6th Cir. 1989).                          ______________            There, the defendant  signed a blank  guaranty form to  which            the name  of the debtor  and the amount of  the guaranty were            later added.   In addition, the  name of the  lending bank on            the  original  guaranty  was  subsequently  obliterated  with                                         -38-            correction fluid  and substituted with that  of another bank.            Id.  at 272.   When  the FDIC  sued  to enforce  this altered            ___            version  of  the  loan  guaranty, the  defendant  raised  the            defense of fraud  in the  factum.  The  Sixth Circuit  agreed            that  the  defendant  was  defrauded  as  to  the  guaranty's            essential  terms,  and  held  that  the  FDIC  was  therefore            precluded  from interposing D'Oench to  bar the defense.  Id.                                        _______                       ___            at 275-76.                   Review  of these  cases  convinces us  that the  Trust's            claim was one of fraud in the inducement, and not of fraud in            the factum.  The bankruptcy court found that the Bank, acting            under Weiner's  supervision, falsely represented to the Trust            that  the consideration for the first loan was limited to the            consideration  itemized in  the  original  agreement.10   The            Bank's misrepresentation did not go to the very  character of            the  proposed  loan agreement,  but  only  to its  underlying            terms.  Unlike  the note  maker in Turner,  the Trust  cannot                                               ______            claim  that when it executed the promissory note to the Bank,            it  was "unaware of the nature of the documents [it] signed."            Caporale,  931 F.2d  at 2,  n.1.   The Bank,  through Weiner,            ________                                            ____________________            10.  The bankruptcy court also found that the damages against            the Bank for both  the Trust's tort and contract  claims were            limited   to  the   $26,300  in   additional  "consideration"            extracted  from the proceeds of the First Loan Agreement.  It            declined to  declare the  First Loan Agreement  unenforceable            because of the illegal consideration, reasoning that to do so            would "penaliz[e] the Bank in the full amount of the loan, an            amount  .   .  .  grossly  disproportionate   to  the  amount            converted."                                         -39-            induced  the   Trust  to   execute  the  loan   agreement  by            misrepresenting  the  consideration  involved.    There  was,            however,  no fraud  in the  factum precluding  application of            D'Oench because  there is  no  evidence to  suggest that  the            _______            Trust  did  not fully  understand  the  basic nature  of  the            obligation it  assumed by entering  the loan agreement.   The            Bank's extraction of additional $26,300 in consideration from            the Trust  did  not fundamentally  alter  the nature  of  the            instruments themselves.                 C.  Innocence As A Defense to D'Oench                     _________________________________                 The  second exception to D'Oench claimed by the Trust is                                          _______            that  it  was  completely  innocent  of  any  intentional  or            negligent deception.   The Trust contends  that it could  not            have "lent [itself] to a  scheme or arrangement" which misled            the  FDIC  because Benjamin  negotiated  and  transferred the            kickback  payments to  Weiner  without the  knowledge of  the            other beneficiaries of the Trust.   The Trust maintains  that            the district  court  improperly  concluded  that  the  record            established that  the Trust  involved itself in  the kickback            scheme.   Emphasizing  that the  bankruptcy court  found that            both  Benjamin and  the Bank  were liable  on the  conversion            ____            count,  the Trust  claims that Benjamin  could not  have been            acting  as its  agent  or for  its  benefit when  he  removed            $26,300 in  loan proceeds from  the Trust's accounts  to make            kickback payments.                                         -40-                 As authority for its claim of  innocence as an exception            to   D'Oench,  the  Trust  cites  a  footnote  to  Vernon  v.                 _______                                       __________            Resolution Trust  Corp., 907 F.2d  1101, 1106 n.4  (11th Cir.            _______________________            1990), which in  turn relies  on an earlier  decision of  the            Ninth Circuit, FDIC  v. Meo,  505 F.2d 790  (9th Cir.  1974).                           ____________            Yet  in  Baumann,  the Eleventh  Circuit  expressly  rejected                     _______            Vernon's suggestion of the continued viability of a "complete            ______            innocence" exception:  "it is clear that this exception is no            longer tenable  because lack  of bad faith,  recklessness, or            even negligence is not a defense in D'Oench cases."  934 F.2d                                                _______            at 1516.  See also  FSLIC v. Gordy, 928 F.2d 1558,  1567 n.14                      ___ ____  ______________            (11th Cir.  1991) (observing that innocence  doctrine of Meo,                                                                     ___            in light of Supreme  Court decision in Langley, "is  based on                                                   _______            an outdated  understanding" of D'Oench).   Baumann emphasized                                           _______     _______            that such an exception would be contrary to the broad purpose            of D'Oench to  prevent a private party from enforcing against               _______            the  federal  authority  "any  obligation   not  specifically            memorialized in a written document such that the agency would            be aware of the obligation when  conducting an examination of            the institution's records."  Baumann, 934 F.2d at 1515.                                           _______                 In  Timberland,  this  court  also  stressed  the  basic                     __________            purpose of D'Oench to protect a federal receiver even  "where                       _______            the only element of fault on the part of the borrower was his            or her failure to reduce the agreement to writing."  932 F.2d            at  49 (citation omitted).   We agree with  the Baumann court                                                            _______                                         -41-            that the borrower's state of mind  is irrelevant, because the            "proper  focus under D'Oench is whether the agreement, at the                                 _______            time  it was entered into,  would tend to  mislead the public            authority."            Id.  at  50.   Our earlier  cases  have never  recognized the            ___            "complete innocence"  exception to D'Oench alluded  to by the                                               _______            Trust, and we reject  the invitation to  adopt it now as  the            law of this circuit.                 Our conclusion  that  there is  no "complete  innocence"            exception  to  D'Oench is  not  entirely  dispositive of  the                           _______            Trust's  argument.   As  we  understand  it, the  "innocence"            professed  by  the Trust  is  not  the kind  of  paradigmatic            "complete innocence"  formerly recognized as an  exception to            D'Oench   i.e., a  borrower entering into an  unrecorded side            _______            agreement innocent of any intentional or negligent deception.            Rather,  the  Trust's  claim  of  "innocence"  is  really  an            argument  that   the  actions  of  Benjamin   should  not  be            attributed to the Trust  and that the Trust did  not actually            lend itself to the kickback arrangement.                 The factual  record belies  the assertion  that Benjamin            did not  act on behalf  of the Trust.   The bankruptcy  court            found  that it was Benjamin alone who negotiated the terms of            the  First  Loan  Agreement  on   behalf  of  Young  and  her            associates.  It was Benjamin  who at the same time  agreed to            the  kickback arrangement that secured Weiner's assistance in                                         -42-            obtaining approval  of the  loan by the  Executive Committee.            At  the closing of  the First Loan  Agreement   at which time            the  Trust  was  formally  created   a  signature  card   was            executed  authorizing  Benjamin to  withdraw  funds from  the            Trust's loan proceeds account.   The bankruptcy court further            found that  Benjamin was also  given authority to  access the            Trust's funds in  other accounts at  the Bank, including  one            for  the restaurant and  another for  rental income  from the            Columbus Avenue properties.                 It seems  clear that Benjamin acted  with the ostensible            authority  of the  Trust  and its  principals throughout  the            negotiation and execution  of the First Loan  Agreement.  The            Trust, therefore,  cannot disclaim all of  Benjamin's actions            with respect to the kickback agreement.  Indeed, the Trust is            willing to  concede that "one  could argue that  Benjamin was            acting as an  agent of the [Trust]  when he entered  into the            kickback  scheme  with  Weiner."   Brief  for  Appellant  604            Columbus Avenue  Realty Trust at 32.  In these circumstances,            the Trust "lent [itself]  to a scheme or  arrangement whereby            the banking  authority . . . was or was likely to be misled."            D'Oench, 315 U.S. at 460.11            _______                                            ____________________            11.  Our ruling is  consistent with the  decision in FDIC  v.                                                                 ________            Kasal, 913 F.2d 487  (8th Cir. 1990), cert. denied,  ___ U.S.            _____                                 _____ ______            ___, 111 S. Ct. 1072  (1991).  In its reply brief,  the Trust            draws  on language from a dissenting opinion in Kasal for the                                                            _____            general proposition  that "it is  a perversion of  justice to            hold the borrowers responsible for funds misappropriated by a            bank  officer."   Id. at  496 (Heaney,  J., dissenting).   In                              ___                                         -43-                 Because  we  find  that  the  district  court  correctly            applied  the D'Oench doctrine  to bar the  Trust's claims and                         _______            equitable  subordination  against  the  Bank  based  on   the            kickback  agreement, we  do  not reach  the FDIC's  arguments            under   1823(e).            III.  THE  FEDERAL HOLDER IN DUE COURSE DOCTRINE  AS A BAR TO            THE TRUST'S  CLAIMS AND EQUITABLE  SUBORDINATION AGAINST  THE            FDIC IN ITS RECEIVERSHIP CAPACITY                 We turn next to the FDIC's principal argument on appeal:            that the district court  erred when it held that  the federal            common  law holder  in due  course doctrine  did not  bar the            Trust's claims against the  FDIC in its receivership capacity            and  the   equitable  subordination  of  the  FDIC's  secured            interest  in  the  Trust's   bankruptcy  estate.    The  FDIC            addresses this  argument to  the bankruptcy  court's judgment            against the  Bank for  $111,711.66 on the  Trust's conversion            and  breach of  contract  claims for  misapplication of  loan            proceeds  for  payment  of  interest, taxes  and  other  soft            costs.12  The  FDIC has  conceded in this  case that  D'Oench                                                                  _______            does  not bar the Trust's claims based  on breach of the soft                                            ____________________            Kasal, the borrower was totally unaware of a misappropriation            _____            from his accounts by a bank officer.  In this case, Benjamin,            a representative  of the  Trust, both negotiated  and carried            out the misappropriations from the Trust's account.            12.  The FDIC  also argues  that the  federal  holder in  due            course doctrine bars the Trust's fraud claim arising from the            kickback agreement.   Because we have  already held that  the            Trust's claims based on the kickback agreement were barred by            the  D'Oench doctrine, we need not address this aspect of the                 _______            FDIC's holder in due course argument.                                         -44-            costs provisions of  the two loan  agreements.  Instead,  the            FDIC insists that policy concerns similar to those underlying            the  D'Oench  doctrine militate  in  favor  of expanding  the                 _______            federal  holder in  due course  doctrine to  the FDIC  in its            receivership  capacity  when,  as  here, there  has  been  no            purchase  and  assumption  transaction  by the  FDIC  in  its            corporate capacity.                 A.  Origins of the Federal Holder in Due Course Doctrine                     ____________________________________________________                 In order to evaluate the strength of the policy concerns            that  the FDIC asserts as the basis for extending the federal            holder  in   due  course   doctrine  to  the   FDIC  in   the            circumstances of this case, we first examine this doctrine as            it  has emerged  in cases  involving purchase  and assumption            transactions by the FDIC in its corporate capacity.                 The  germinative  opinion  in  the  development  of  the            federal  holder   in  due  course  doctrine   was  Gunter  v.                                                               __________            Hutcheson, 674 F.2d 862 (11th  Cir.), cert. denied, 459  U.S.            _________                             ____________            826  (1982).  In Gunter,  the FDIC in  its corporate capacity                             ______            acquired a  promissory note  after a purchase  and assumption            transaction  involving a  failed  Tennessee bank.   The  note            makers  brought suit for rescission  of the note  held by the            FDIC   on   the    basis   of,    inter   alia,    fraudulent                                              _____   ____            misrepresentation by the  directors of the failed  bank.  Id.                                                                      ___            at 866.  The FDIC  counterclaimed for payment of the  note in            the district court,  asserting that   1823(e) barred the note                                         -45-            makers' claims,  and arguing in the  alternative that federal            common law gave it a defense against claims of fraud of which            it lacked knowledge.  Id. at 866-67.                                  ___                 Although the Gunter court  rejected the application of                                ______            1823(e) to bar  the note maker's fraud  claims,13 it accepted            the  FDIC's argument that a  federal common law  rule of non-            liability against these claims was necessary in order for the            FDIC  to accomplish  its statutory  objectives.   In reaching            this conclusion, the Gunter court applied the Supreme Court's                                 ______            test for determining whether  the implementation of a federal            program would be frustrated without the adoption of a uniform            federal  rule.  See United States v. Kimbell Foods, Inc., 440                            ___ ____________________________________            U.S. 715 (1979).   Applying Kimbell  Foods, the Gunter  court                                        ______________      ______            stressed the  FDIC's duty  to promote  "the stability  of and            confidence  in the nation's banking system,"  id. at 870, and                                                          ___            the   preferred  status  of   the  purchase   and  assumption            transaction as a means of accomplishing this duty because "it            avoids the  specter of closed  banks and the  interruption of            daily banking services."  Id.                                      ___                                            ____________________            13.  The Gunter court found it necessary to reach the  merits                     ______            of the  FDIC's federal common  law argument because  it found            that  the note maker's fraud defenses were not precluded by              1823(e).   Gunter,  674 F.2d  at  867.   This analysis  of                          ______            1823(e) as not barring a claim of fraud in the inducement was            subsequently  disapproved by  the  Supreme Court  in Langley.                                                                 _______            See Langley, 484 U.S. at 93-94.            ___ _______                                         -46-                 The  court  noted that  speed was  of  the essence  in a            purchase and  assumption transaction  because of the  need to            preserve the going concern value of the bank:                 [T]he FDIC  must have  some method to  evaluate its                 potential  liability in  a purchase  and assumption                 versus its potential liability from  a liquidation.                 Because of the time constraints involved,  the only                 method  of evaluating  potential loss  open to  the                 FDIC is  relying on  the books and  records of  the                 failed  bank  to  estimate  what  assets  would  be                 returned by a purchasing bank and to estimate which                 of those assets ultimately would be collectible.            Id.  After  considering the  impact  of the  federal rule  on            ___            settled  commercial expectations ordinarily governed by state            law, the  court concluded  that protection of  the FDIC  from            unknown fraud claims "far outweighed" any potential damage to            these expectations.  Id. at 872.                                 ___                 The  court  therefore  announced a  federal  common  law            holder  in  due course  rule applicable  to  the FDIC  in its            corporate capacity:                 [A]s a matter of federal common law, the FDIC has a                 complete  defense to  state  and  common law  fraud                 claims  on  a  note acquired  by  the  FDIC  in the                 execution of a purchase and assumption transaction,                 for  value,  in  good  faith,  and  without  actual                 knowledge of the fraud at the time the FDIC entered                 into the purchase and assumption agreement.            Id. at 873.   Gunter thus expanded federal common  law to bar            ___           ______            fraud claims by the note makers that would not otherwise have            been barred by the D'Oench doctrine or   1823(e).  See id. at                               _______                         ___ ___            872 & n.14 (noting that D'Oench doctrine and   1823(e) embody                                    _______            a "more limited" policy of protecting the FDIC).                                         -47-                 This court has adopted the rule of Gunter.  See Southern                                                    ______   ___ ________            Indus. Realty, Inc. v. Noe,  814 F.2d 1 (1st Cir.  1987) (per            __________________________            curiam).  See  also FDIC v. Bracero & Rivera,  Inc., 895 F.2d                      _________ _______________________________            824, 828-29  (1st Cir.  1990) (dicta acknowledging  holder in            due  course  doctrine's  availability  to  the  FDIC  in  its            corporate capacity).  Other  circuit courts have expanded the            federal common law holder  in due course doctrine to  bar all            personal defenses against the FDIC, and have  looked to state            law  principles  in order  to  distinguish  between real  and            personal defenses.   See Campbell Leasing  Inc. v. FDIC,  901                                 ___ ______________________________            F.2d 1244, 1249 (5th Cir. 1990);  FDIC v. Wood, 758 F.2d 156,                                              ____________            161 (6th Cir.) (the FDIC "takes the note free of all defenses            that  would not  prevail against a  holder in  due course."),            cert. denied,  474 U.S. 944 (1985).  See also FDIC v. Bank of            ____________                         ________ _______________            Boulder, 911  F.2d 1466, 1474-75  (10th Cir. 1990)  (en banc)            _______            (adopting  federal  rule  of  transferability  of letters  of            credit  protecting  FDIC  in  its  corporate  capacity during            purchase and  assumption), cert. denied, ___ U.S. ___, 111 S.                                       ____________            Ct.  1103  (1991).   In all  of  these cases,  the underlying            rationale  for a federal holder  in due course  rule has been            consistent  with  that articulated  by  Gunter:   to  promote                                                    ______            purchase and assumption transactions.  See Wood, 758 F.2d  at                                                   ___ ____            160-61 (federal  holder in due course  rule necessary because            "the  essence of  a  purchase and  assumption transaction  is            speed");  Campbell  Leasing,  901  F.2d  at  1248-1249  (same                      _________________                                         -48-            analysis); Bank of Boulder, 911 F.2d at 1474-75 (uniform rule                       _______________            of  transferability necessary because  of time constraints of            purchase and assumption).                 B.   Application Of  The  Federal Holder  in Due  Course                      ___________________________________________________                 Doctrine To The FDIC As Receiver                 ________________________________                 The FDIC argues  that the federal  holder in due  course            rule should be available to it in its capacity  as the Bank's            receiver.   The FDIC insists that  in order for  it to decide            whether  a purchase  and assumption or  a liquidation  is the            least  costly approach to disposing of the assets of a failed            bank, it must be able to make that decision based on absolute            reliance  on  the  bank's  records,   unimpeded  by  personal            defenses.  The FDIC  also asserts that if the  federal holder            in due course doctrine is limited exclusively to purchase and            assumption  transactions,  it  will  be unable  to  employ  a            variety  of  newly-developed  "hybrid"  transactions  for the            resolution of bank failures  that include elements drawn from            both   a  liquidation   and   a   purchase  and   assumption.            Accordingly, the  FDIC urges  that we  hold that  the federal            holder  in due  course doctrine  applies to  the FDIC  in its            receivership capacity,  regardless of whether  a purchase and            assumption transaction is consummated.                 To  support its  argument,  the FDIC  relies on  several            cases  in  which the  FDIC in  its receivership  capacity was            allowed to invoke  the federal holder in due  course doctrine            to bar  the makers of  promissory notes from  asserting their                                         -49-            personal defenses.   But these cases  involved notes acquired            by the  FDIC  as receiver  after  a purchase  and  assumption                                       _____            transaction.14   For example,  in Campbell Leasing,  the FDIC                                              ________________            was appointed receiver  of a failed  Texas bank and  arranged            for a  purchase and assumption transaction  with a federally-            established bridge bank, NCNB.  901 F.2d at 1247.  During the            purchase and assumption, NCNB acquired a promissory note that            had  previously been  the subject  of a  lawsuit by  the note            maker against the  failed bank.   As receiver  of the  failed            bank, the FDIC, along  with NCNB, moved for  summary judgment            on  the  note  maker's  claims  and  on  a  counterclaim  for            enforcement of the note, arguing that the D'Oench and federal                                                      _______            holder in due  course doctrines barred  all the note  maker's                                            ____________________            14.  The  cases  cited  by   the  FDIC  either  involved  the            application of the federal  holder in due course  doctrine to            assets acquired by the FDIC as receiver following  a purchase            and  assumption  transaction, or  were  not  directly decided            under the holder in due course rule.  See FDIC v. McCullough,                                                  ___ __________________            911  F.2d 593 (11th Cir.  1990), cert. denied,  ___ U.S. ___,                                             ____________            111 S.  Ct. 2235 (1991); In  re CTS Truss, Inc.  v. FDIC, 868                                     _______________________________            F.2d 146 (5th  Cir. 1989); Firstsouth,  F.A. v. Aqua  Constr.                                       __________________________________            Inc., 858 F.2d 441 (8th Cir. 1988).  In McCullough, the court            ____                                    __________            observed  that  both  the  FDIC and  FSLIC  as  receiver  are            "clothed under federal common law with the same defenses that            would  be accorded a holder  in due course  under state law."            911 F.2d  at 603.  Yet  in McCullough, the note  on which the                                       __________            federal  receiver was  seeking  to recover  had earlier  been            acquired by the failed savings  institution in a purchase and            assumption  transaction.  Id. at 596.  CTS Truss involved the                                      ___          _________            enforcement by the FDIC  as receiver of an asset  acquired by            it  in its  corporate  capacity, 868  F.2d  at 147,  and  was            decided under   1823(e) rather than the federal holder in due            course doctrine.  Id. at 150.  As for Firstsouth, the federal                              ___                 __________            common  law rule at issue  was the D'Oench  doctrine, and not                                               _______            the more  expansive holder in due  course doctrine recognized            by Gunter.  Firstsouth, 858 F.2d at 443.               ______   __________                                         -50-            claims and affirmative  defenses.   Id.   The district  court                                                ___            granted summary judgment for the FDIC and NCNB, and the Fifth            Circuit affirmed the judgment on  appeal.  The court observed            that it could find                  no logical  reason to  limit federal holder  in due                 course protection  to  the FDIC  in  its  corporate                 capacity,  to  the  exclusion of  its  receivership                 function.   In its corporate capacity,  the FDIC is                 obligated  to protect  the depositors  of a  failed                 bank, while the FDIC  as receiver must also protect                 the  bank's  creditors and  shareholders.   In both                 cases, the  holder in  due course doctrine  enables                 the FDIC  to  efficiently fulfill  its  role,  thus                 minimizing  the harm to  depositors, creditors, and                 shareholders.  . . .   We  conclude that  the  FDIC                 enjoys  holder in due course status  as a matter of                 federal  common law  whether  it is  acting in  its                 corporate or receivership capacity.            Id. at 1249 (citations omitted).              ___                 The  FDIC argues  that  because the  protections of  the            federal holder in due course doctrine  have been available to            it  in  its  receivership  capacity in  cases  like  Campbell                                                                 ________            Leasing,  the logical next step  is to apply  the doctrine to            _______            the FDIC in its receivership capacity regardless of whether a            purchase and assumption transaction has  occurred.  According            to  the FDIC,  this extension  of the  federal holder  in due            course  rule is  necessary to  enable it  to  decide properly            whether a liquidation or purchase and assumption is the least            costly means of dealing with the failed bank.                 In  its  briefs in  this appeal,  however, the  FDIC has            neglected  to  mention the  one  decision  that has  directly            addressed  this argument.  In FDIC v. Laguarta, 939 F.2d 1231                                          ________________                                         -51-            (5th  Cir. 1991),  the FDIC  argued that  it was  entitled to            invoke the federal holder  in due course doctrine to  bar any            defenses against enforcement of a promissory note acquired by            it directly in  its capacity  as receiver.   Id. at  1233-35.                                                         ___            After observing that the FDIC's  federal holder in due course            argument had  been raised in a  "belated supplemental brief,"            the Fifth Circuit dismissed it peremptorily in a footnote:                 Here the FDIC sues only in its capacity as receiver                 for  the institution  which  made the  loan and  is                 payee  in the note sued  on, and the  FDIC does not                 assert,  nor does  the record  establish, that  the                 loan or note has ever been  transferred or was ever                 part of a purchase  and assumption transaction.  To                 the  extent that it precludes defenses beyond those                 precluded by D'Oench, Duhme, the  federal holder in                              ______________                 due  course doctrine  is  inapplicable  to  such  a                 situation.  Gunter . . . .  See Campbell Leasing  .                             ______          ___ ________________                 . . .   Indeed, a major policy goal  underlying the                 federal common-law holder in due course doctrine is                 to facilitate purchase and  assumption transactions                 of  failed  financial   institutions  in  lieu   of                 liquidations.  Campbell Leasing; Gunter.                                ________________  ______            Id. at 1239 n.19 (citations partly omitted).              ___                 We  likewise reject  the  FDIC's attempt  to expand  the            federal holder in due course doctrine far beyond its original            purpose  of  promoting purchase  and  assumption transactions            that preserve the going concern  value of the bank.  None  of            the  policy  considerations   that  originally  prompted  the            adoption of a federal  holder in due course rule  are present            when,  as in this case, the  FDIC as receiver is seeking only            to enforce  an obligation in  a liquidation.   A  liquidation            does  not   further  the  federal  policy   of  "bringing  to                                         -52-            depositors sound, effective,  and uninterrupted operation  of            the  [nation's]  banking  system  with  resulting safety  and            liquidity  of bank  deposits."   Campbell, 901  F.2d at  1248                                             ________            (quoting S. Rep. No. 1269, 81st Cong., 2d Sess., reprinted in                                                             ____________            1950 U.S.C.C.A.N. 3765, 3765-66).  Likewise, there is no need            for speedy evaluation of the assets of a  failed institution,            and therefore  little justification  for adoption of  a broad            federal  rule   that   would  displace   settled   commercial            expectations controlled by state  law.  Cf. Gunter, 674  F.2d                                                    ___ ______            at  872  (applying the  Kimbell  Foods test  for  adoption of                                    ______________            federal common  law rule).   Furthermore, the  FDIC does  not            rely  as heavily on the books  and records of the failed bank            to  estimate its total loss in a  liquidation as it must in a            purchase and assumption.15                                            ____________________            15.  This  distinction  between   the  cost  estimate   of  a            liquidation  versus  that   in  a  purchase  and   assumption            transaction was noted in Gunter:                                     ______                 The maximum liability of  the FDIC in a liquidation                 is  fixed  by the  $100,000-per-depositor insurance                 limitation.      In  a   purchase   and  assumption                 transaction, however, the FDIC agrees to repurchase                 any  unacceptable assets  from the  purchasing bank                 and cannot rely on  the statutory limitation of its                 liability.  Hence to  make the [cost test currently                 codified  at 18 U.S.C.    1823(c)(4)(A)],  the FDIC                 must have  some method of estimating  its potential                 liability  under  a   purchase  and  assumption  to                 compare   it  to   the  maximum   liability  in   a                 liquidation.            Gunter,  674  F.2d at  870 n.10.    This analysis  belies the            ______            FDIC's assertion  that if  the federal  holder in  due course            doctrine  were  limited  solely  to  assets  sold  through  a            purchase  and  assumption,  the federal  receiver  could  not            reliably  estimate the cost  of a liquidation  as compared to            that of a purchase and assumption.                                         -53-                 However  desirable  it  may  be  for  the  FDIC  in  its            receivership  capacity to  be  able to  bar counterclaims  or            affirmative defenses  by the maker  of a promissory  note not            already  eliminated by  D'Oench and    1823(e), such  a broad                                    _______            principle of federal common law cannot find its justification            in  the  federal  holder  in due  course  doctrine  currently            applied by  the courts.   The district  court's well-reasoned            analysis of the FDIC's federal holder in  due course argument            aptly summarizes some of its deficiencies:                 The holder  in due course  doctrine normally allows                 innocent  purchasers  of negotiable  instruments to                 rely on such instruments when they are acquired for                 value.  The FDIC  is granted this status so  it can                 quickly scan  a bank's  balance sheet to  negotiate                 its sale.   Thus,  the FDIC is  not held  up to  an                 obligation  to scrutinize  the assets  of a  failed                 bank  before it  agrees to  execute a  purchase and                 assumption. . . .                      The  exigencies of  a purchase  and assumption                 transaction  also differentiate  the holder  in due                 course doctrine from D'Oench.  D'Oench is concerned                                      _______   _______                 with the  integrity of a bank's  records   the FDIC                 can  only be  charged  for claims  apparent from  a                 search of  the bank's  files.   The  holder in  due                 course  doctrine, on  the other hand,  relieves the                 FDIC even from  claims apparent on the  face of the                 Bank's records. .  . .   The reach  of the  federal                 holder in due course doctrine being much wider than                 even  the  extraordinary  remedy  of  D'Oench,  the                                                       _______                 circumstances  in which  it  is applied  should  be                 correspondingly limited.                 The FDIC nonetheless insists that  the unavailability of            the federal  holder in due  course rule in  the absence  of a            purchase  and   assumption  would  "immeasurably   delay  and            complicate   the  resolution  of  receiverships"  and  create                                         -54-            "delays  and  difficulties [that]  could  greatly  impair the            FDIC's  ability to complete  its statutory mission."   In the            same breath,  however, the  FDIC complains that  the existing            federal  rule is problematic because it "substantively alters            the receiver's  evaluation of the alternative transactions in            favor"  of purchase and assumptions.  The FDIC cannot have it            both ways.   The federal  holder in due  course doctrine  was            fashioned  precisely  for  the  purpose   of  expediting  the            purchase and assumption transaction.  See Gunter, 674 F.2d at                                                  ___ ______            869-71.    It was  never intended  as  a panacea  intended to            relieve the FDIC of all the "difficulties" arising from state            law  defenses  and  counterclaims during  the  liquidation of            assets.  We  decline to  address the FDIC's  argument that  a            decision  not to extend the federal holder in due course rule            will  impair  its ability  to  conduct  certain new  "hybrid"            transactions   i.e.,  transactions  that involve  elements of            both a  liquidation and a  purchase and  assumption   because            this case does not involve such a "hybrid."                 We  therefore  hold that  the FDIC  was not  entitled to            invoke the federal  common law holder in due  course doctrine            to  bar  the  Trust's  claims   of  breach  of  contract  and            conversion as to the soft costs damages.16                                            ____________________            16.  Because the FDIC is not entitled to holder in due course            status  under the federal common law rule, we need not decide            whether  the Trust's  soft costs  claims  would be  barred by            Massachusetts holder in due course law.                                         -55-            IV.  FEDERAL COMMON  LAW AS A BAR TO  EQUITABLE SUBORDINATION            OF THE FDIC'S SECURED CLAIM AGAINST THE TRUST                 The   FDIC  next   argues   that   to  allow   equitable            subordination of part of its secured claim  would be contrary            to  federal   common  law.     The  FDIC  asserts   that  the            availability of the equitable subordination remedy against it            would  frustrate federal  policies intended  to assist  it in            fulfilling its  statutory duty to recover  the maximum amount            from bankrupt  borrowers during the liquidation  of assets of            failed  banks.  The FDIC also insists that to allow equitable            subordination  against it  would be  inappropriate where  the            misconduct leading to the equitable subordination was that of            the  Bank and its officers,  and not of  the innocent federal            receiver.                  Section  510(c)  of  the  Bankruptcy  Code  specifically            authorizes  a   bankruptcy  court  to  apply  "principles  of            equitable  subordination."17   The  judicially-developed case            law of equitable subordination is of long standing.  See 3 L.                                                                 ___            King,  Collier  on  Bankruptcy      510.01  (15th  ed.  1992)                   _______________________                                            ____________________            17.  11 U.S.C.   510(c) provides:                 Notwithstanding subsections (a) and (b) of this section,                 after notice and a hearing, the court may                         (1)    under     principles    of    equitable                      subordination,  subordinate  for  purposes  of                      distribution all or  part of an  allowed claim                      to all or part of another allowed claim or all                      or part of an allowed  interest to all or part                      of another allowed interest; or                       (2)  order  that  any  lien  securing  such  a                      subordinated  claim  be  transferred   to  the                      estate.                                         -56-            ("Collier").   The  doctrine  permits a  bankruptcy court  to            rearrange the  priorities  of creditors'  interests,  and  to            place all or  part of  the wrongdoer's claim  in an  inferior            status.     The   generally-recognized  test   for  equitable            subordination, adopted by this  court, is set forth in  In re                                                                    _____            Mobile Steel Co., 563 F.2d 692, 703 (5th Cir. 1977):            ________________                 (i)  The claimant must have engaged in some type of                 inequitable conduct.                 (ii)   The misconduct must have  resulted in injury                 to the  creditors of  the bankrupt or  conferred an                 unfair advantage on the claimant.                 (iii)   Equitable subordination  of the  claim must                 not  be  inconsistent with  the  provisions of  the                 Bankruptcy Act.            Id.  at 699-700 (citations omitted).  See also In re Giorgio,            ___                                   ___ ____ _____________            862 F.2d 933, 938-39  (1st Cir. 1988) (applying Mobile  Steel                                                            _____________            test); 3 Collier at    510.05[2].  Before reaching  the issue            of whether this  test was properly applied by  the bankruptcy            court,  we first  determine  whether equitable  subordination            against a  federal receiver should be prohibited  as a matter            of federal common law.                 Only  one decision in the federal  courts of appeals has            directly  addressed  the  issue  of  equitable  subordination            against the  FDIC.  See In  re CTS Truss, Inc.,  868 F.2d 146                                ___ ______________________            (1989), withdraw'g, 859  F.2d 357  (5th Cir. 1988).   In  CTS                    __________                                        ___            Truss,  the FDIC in its  corporate capacity filed  a proof of            _____            claim  in  bankruptcy court  on  certain  notes and  security            documents made by  the debtor.   The debtor  objected to  the                                         -57-            proof  of  claim, arguing  that  the FDIC's  claim  should be            equitably  subordinated  to  the  claims  of  all  the  other            creditors  because the  failed bank  had engaged  in wrongful            conduct against  the debtor prior to  the FDIC's intervention            as receiver.  Id. at 147.  The bankruptcy and district courts                          ___            held that the FDIC's claims could not be subordinated because            the "FDIC was a transferee innocent of any misconduct against            CTS."  Id.                   ___                 The  Fifth  Circuit   affirmed  the  bankruptcy  court's            decision, but  on different grounds,  holding that  equitable            subordination against  the FDIC would have  been improper for            two distinct reasons.  First, the court found that "[e]ven if            the Bank's  actions could be imputed  to the FDIC,  we do not            believe that the unusual remedy of equitable subordination is            appropriate  to the facts alleged  by the [debtor]."   Id. at                                                                   ___            148.  Applying the Mobile Steel test, the court held that the                               ____________            debtor had failed to allege facts that  demonstrated that the            bank's conduct towards it  would have justified the equitable            subordination of a claim  on the debtor's assets subsequently            acquired by the FDIC.  Id. at 148-49.   The court disregarded                                   ___            the issue of the FDIC's "innocence" in assuming the assets of            the  failed bank,  focussing  instead on  whether the  failed            bank's actions  fit "within  any of  the classic  patterns of                                         -58-            conduct that have led the courts to fashion the extraordinary            remedy of equitable subordination."  Id. at 148.18                                                 ___                 The other ground for the  Fifth Circuit's holding in CTS                                                                      ___            Truss was the  availability to the  FDIC of    1823(e)   and,            _____            implicitly,  the  D'Oench  doctrine   to  bar   the  debtor's                              _______            claims.  Id. at 149-50 &  n.8.  The court thought it "likely"                     ___            that the debtor had  deliberately decided against raising its            defenses to  its indebtedness premised on  the bank's conduct            because it  realized that  the FDIC  would  be shielded  from            these claims.    Id.  at  149.    It  found  that     1823(e)                             ___            "squarely" covered the debtor's  claims against the Bank, and            that the  debtor would  therefore have  been unable  to raise            these claims  against the  FDIC.   Id.  at  150.   The  court                                               ___            concluded   that   "[e]ven   if   principles   of   equitable            subordination otherwise permitted  the imputation of wrongful            conduct  to  a  transferee such  as  the  FDIC,  we would  be            constrained  to hold  that  [ 1823(e)] forbids  that result."            Id.            ___                 The Fifth  Circuit's decision  in CTS Truss  establishes                                                   _________            several principles  that are  useful to consideration  of the                                            ____________________            18.  The court  also noted  that to  the extent  the debtor's            claims  of  fraud  and  breach   of  an  oral  promise   were            "allegations [that] would  justify disallowance or  an offset            against  the Bank's  secured  claim, they  would prevent  the            assertion of a claim of equitable subordination."  Id. at 149                                                               ___            (citing Mobile Steel for  the proposition that "claims should                    ____________            be subordinated  only to the  extent necessary to  offset the            harm done by the inequitable conduct").                                         -59-            FDIC's  argument  in this  case.   CTS  Truss stands  for the                                               __________            proposition that equitable subordination against the  FDIC is            barred when the claims on which the request for subordination            is premised cannot  be asserted against  the FDIC because  of            federal law.   On the other hand, CTS Truss does not entirely                                              _________            preclude  the possibility  of equitable  subordination of  an            interest acquired by the  FDIC because of the conduct  of the            failed  bank.    The  Fifth  Circuit  declined to  adopt  the            reasoning of the bankruptcy  court below that the FDIC  could            not be  equitably subordinated  because it was  "a transferee            innocent  of any misconduct" against the debtor.  Id. at 147.                                                              ___            Instead,  the court  focussed  on the  issue  of whether  the            conduct  of  the  FDIC's  predecessor  in  interest  fit  the            "classic  pattern[]"  necessary  for equitable  subordination            under the test  in Mobile Steel.   Because it found  that the                               ____________            bank's conduct in relation to the debtor in CTS Truss did not                                                        _________            fit that  pattern, the  Fifth Circuit never  directly reached            the  issue of whether it  would be appropriate  to impute the            actions of the  bank to  the FDIC for  purposes of  equitable            subordination.                 In  this case,  the FDIC  asks that we  adopt a  rule of            federal common law preventing the  equitable subordination of            the  secured claim  of  a federal  receiver  as a  result  of            misconduct by a failed bank.  We reject this approach because            we think that the analysis of  the Fifth Circuit in CTS Truss                                                                _________                                         -60-            demonstrates  that such a broad rule of federal common law is            unnecessary to protect a federal receiver.                 As  evidence of a federal policy to protect the value of            assets acquired by the FDIC in its receivership capacity, the            FDIC cites the developing federal  common law embodied in the            D'Oench  and federal holder in  due course doctrines.   As an            _______            additional example of Congressional intent to protect it, the            FDIC also points to the recent amendments in FIRREA extending            the  coverage  of     1823(e)  to  the  FDIC  as  receiver.19            Drawing on these examples,  the FDIC urges that  the adoption            of  a  federal  rule  barring equitable  subordination  is  a            logical  extension  of  this  policy to  protect  it  in  its            receivership  capacity.    Otherwise,  the  FDIC  warns,  the            "absence of a federal rule barring equitable subordination of            the  receiver's   claims  against  bankrupt   borrowers  will            materially  and adversely restrict  the receiver's ability to            resolve bank receiverships at the lowest cost to the public."            Brief  for Appellant  FDIC As  Receiver for Capitol  Bank and            Trust Company at 32.                                              ____________________            19.  FIRREA amended 1823(e) by extending its coverage to "any            asset . . . acquired  by [the FDIC] . . .  either as security            for  a loan  or by  purchase or  as receiver  of  any insured                                         ________________________________            depository institution  . .  . ."  (Emphasis added).   Before            ______________________            FIRREA,   1823(e) applied  only to the FDIC in  its corporate            capacity,  and it  was  only through  decisions applying  the            D'Oench doctrine that the FDIC as receiver was protected from            _______            unrecorded agreements.  See Timberland, 932 F.2d at 49.                                    ___ __________                                         -61-                 The   problem   with  this   argument,   as   CTS  Truss                                                               __________            demonstrates,  is that the  adoption of a  federal common law            rule precluding equitable  subordination would be superfluous            in  those  cases in  which  the debtor's  claims  against the            receiver were already barred under D'Oench,   1823(e), or, if                                               _______            the asset was acquired  by the receiver after a  purchase and            assumption, the federal  holder in due course doctrine.  Only            if  the  debtor's request  for  equitable  subordination were            based on  claims not  already barred  by  the FDIC's  federal            defenses would a federal common law rule preventing equitable            subordination  be necessary  to protect  the value  of assets            acquired  by the  FDIC  in its  receivership  capacity.   The            FDIC's  suggestion that the absence of such a common law rule            would  "undercut the  policy underlying  the well-established            federal common  law D'Oench Duhme  and federal holder  in due                                _____________            course doctrines"  is plainly  hyperbole.  A  rule precluding            equitable subordination against the FDIC would in fact work a            significant  expansion of the protections already afforded it            in  its receivership  capacity under  D'Oench and    1823(e).                                                  _______            Claims or  defenses that a borrower  might otherwise properly            assert  against  the  federal   receiver  would  be  rendered            meaningless   if  the  borrower  entered  bankruptcy  because            equitable subordination  would  be unavailable  even  if  the            borrower prevailed on these claims or defenses.                                         -62-                 The  FDIC   maintains  that  such  a   result  would  be            consistent   with  the  policy   of  enhancing   the  federal            receiver's  ability to  resolve bank  failures at  the lowest            cost to the  public.  Yet  if the maximization of  the FDIC's            recovery  on the  assets  of  a  failed  bank  was  the  sole            objective  of federal statutory and common  law in this area,            then all claims  or defenses against  the FDIC's recovery  on                 ___            assets would by now  have been barred by federal  statutes or            common law.  As our discussion of D'Oench,    1823(e) and the                                              _______            federal holder in due  course doctrine makes clear,  while it            is certainly  true that  federal law affords  the FDIC  broad            protection against the claims and defenses of borrowers, that            protection has never amounted to total immunity.  Cf. FDIC v.                                                              ___ _______            Jenkins, 888 F.2d 1537, 1546 (11th Cir. 1989) ("Of course, it            _______            would  be  convenient  to the  FDIC  to  have  an arsenal  of            priorities, presumptions and defenses to maximize recovery to            the  insurance fund, but  this does  not require  that courts            must grant  all of these tools  to the FDIC in  its effort to            maximize  deposit insurance  fund  recovery.").   Nor are  we            convinced  that  the absence  of  a  federal rule  preventing            equitable  subordination would  impair the  operation of  the            FDIC  as receiver to the  same extent that,  for example, the            absence  of a  federal holder  in due  course doctrine  would            impair the FDIC's ability  to conduct purchase and assumption            transactions.    Cf.  Gunter,  674  F.2d  at  870  (principal                             ___  ______                                         -63-            justification  for  federal  common  law rule  was  that  its            absence  would  "make  the   FDIC's  task  of  executing  its            statutory mandate . . . nearly impossible").  Maximization of            the  FDIC's  recovery  alone   has  never  been  an  adequate            justification for  the adoption of  a rule of  federal common            law.                 The FDIC also argues  that equitable subordination would            never be appropriate when it was only the wrongful conduct of            the failed bank  and its  officers, and not  of the  innocent            federal receiver, that provided the bankruptcy court with the            basis for  subordination.20   This argument raises  the issue            left undecided by CTS Truss:  whether it would be appropriate                              _________            to impute the misconduct of officials of a failed bank to the            federal receiver for purposes of equitable subordination.                 While the question  is a  close one, we  think that  any            inequity that  would  result from  imputing  bank  officials'            misconduct  to the  federal receiver  would be  outweighed by            adoption  of a  federal common  law rule that  would entirely            prevent the debtor/borrower or its creditors from benefitting            from the remedy  of equitable subordination.  The  FDIC would                                            ____________________            20.  The  FDIC relies for  this argument, inter  alia, on the                                                      ___________            reasoning of the  lower courts' decisions  in CTS Truss  that                                                          _________            there  would  be  "no   basis  for  equitably  adjusting  the            distribution of  the bankrupt's  assets because the  claimant                                                                 ________            never engaged in misconduct."  Brief for Appellant FDIC at 34            (citing  district court decision in  CTS Truss).   As we have                                                 _________            noted,  the Fifth  Circuit expressly  declined to  ground its            decision on this rationale.                                         -64-            not necessarily  be the only "innocent"  creditor affected by            the adoption of such  a rule.  Many of  the debtor/borrower's            other  "innocent"   creditors  would  be   deprived  of   any            possibility  of recovery  from  the estate  in bankruptcy  if            equitable  subordination  was  barred  against   the  federal            receiver.    The  FDIC  should  also  be  subjected   to  the            constraints of equity.                 CTS Truss  prevents  equitable subordination  against  a                 _________            federal  receiver   based  on  claims  or   defenses  of  the            debtor/borrower  that are  barred  by the  FDIC's established            federal statutory and  common law protections.  The  FDIC has            not identified  any additional policy  considerations, beyond            those  already supporting its preexisting federal protections            against borrowers' claims, that would favor the adoption of a            new federal common law rule giving the federal  receiver even            greater  protection   in   the  event   of   the   borrower's            bankruptcy.21   Accordingly, we  find that there  is no basis                                            ____________________            21.  The  FDIC  maintains that  in  this  case the  statutory            limitation  on  its liability  as  a  receiver justifies  the            denial  of   equitable  subordination.    See   12  U.S.C.                                                         ___            1821(i)(2).  This fact-specific  argument is not pertinent to            our  consideration of whether it is necessary to adopt a rule            of federal common law barring equitable subordination against            the federal receiver.   We also note  that we doubt that  the            diminution  of  the secured  claim  of  the federal  receiver            resulting from equitable subordination would be a "liability"            against the FDIC within the meaning of this provision.  Texas                                                                    _____            American Bancshares, Inc. v.  Clarke, 954 F.2d 329  (5th Cir.            ____________________________________            1992),  a case involving the priority of payments by the FDIC            to  creditors  of   a  failed  bank  after  a   purchase  and            assumption, is not material to the issue before us.                                         -65-            for totally  exempting the FDIC in  its receivership capacity            from  the remedy of  equitable subordination  permitted under            the Bankruptcy Code.                 We hold  that  equitable  subordination  may  be  sought            against a federal receiver as long as this claim survives the            test   imposed  by  CTS  Truss.     The  claim  of  equitable                                __________            subordination is valid only if, (1) the claims or defenses on            which the borrower's claim  for subordination is premised are            not already barred by the FDIC's recognized protections under            federal  law,  and, (2)  if the  misconduct alleged  in these            claims  or  defenses against  the  receiver's predecessor  in            interest falls within "any of the classic patterns of conduct            that have  led courts to fashion the  extraordinary remedy of            equitable subordination."  CTS Truss, 868 F.2d at 148.                                       _________            V.   THE  BANKRUPTCY COURT'S  JUDGMENT ON  THE MERITS  OF THE            TRUST'S SOFT COSTS CLAIMS                 The district court correctly determined that the federal            holder  in  due  course  doctrine  did  not  bar  the Trust's            conversion and  breach of  contract claims stemming  from the            misapplication  of  loan  proceeds  to  soft costs  payments.            Having decided that equitable  subordination is not barred as            a matter of federal common law against a federal receiver, we            must now consider the  FDIC's challenge on the merits  to the            bankruptcy  court's  rulings in  favor  of the  Trust  on the                                         -66-            breach  of contract,  conversion and  equitable subordination            claims relating to the soft costs overages.22                  A.  Breach of Contract and Conversion                     _________________________________                 The FDIC challenges  the district court's  affirmance of            the ruling of the bankruptcy court that the Bank breached the            loan agreements  by removing  from the loan  proceeds amounts            that  exceeded  the  agreed-upon  limits for  soft  costs  by            $111,711.66.    It  contends   that  the  provisions  of  the            standard-form L&SA used for  each loan agreement required the            Trust  to  pay  all  expenses  incurred   by  the  Bank,  and            authorized the  Bank  to withdraw  from  any of  the  Trust's            account  any monies  necessary to  repay  those expenditures.            The FDIC places particular emphasis on sections 6.01 and 8.01            of the  L&SA, which provide,  inter alia, that  "the Borrower                                          _____ ____            agrees that any deposits or other sums . . . may at all times            be  held and treated as collateral for any liabilities of the            Borrower . . . ."; that "the  Borrower shall pay or reimburse            the Bank  on demand for  all out-of-pocket expenses  of every            nature . . . ."; and that "the Bank, if it chooses, may debit                                            ____________________            22.  The  merits  of  the  Trust's claims  arising  from  the            kickback arrangement  are not  at issue because  the district            court properly applied  D'Oench to  vacate that  part of  the                                    _______            bankruptcy's  court's  judgment  and equitable  subordination            award in favor of the Trust that was premised on the kickback            claims.                                         -67-            such expenses to the Borrower's Loan Account or charge any of            the Borrower's funds on deposit with the Bank."23                 The FDIC  argues that  both the district  and bankruptcy            court  concluded  erroneously that  the  allocations of  soft            costs  provided  in the  addendum to  the  L&SA in  each loan            agreement prohibited the Bank  from removing from the Trust's            loan account additional amounts necessary to cover soft costs            expenses  once  the original  estimates  were  exceeded.   It            contends that both the Bank and the Trust  knew that the soft            costs allowances  in both loan  agreements   $100,000 in  the            First Loan  Agreement  and  "approximately"  $60,000  in  the            Second Loan  Agreement   would be  inadequate to pay  all the            soft costs  expenses.  According to the  FDIC, by withdrawing            payments  for soft costs in excess of these amounts, the Bank            was  within its rights under the express terms of both L&SAs.            More importantly, the FDIC argues, the Bank never intended to            relinquish its rights under the L&SAs to complete recovery of            unpaid  expenses  by  limiting   itself  to  the  soft  costs            allowances included in the addenda to the L&SAs.                   Following the lead of the parties and both courts below,            we treat Massachusetts law as controlling in this case.  This            circuit has recognized that when interpreting contracts under            Massachusetts  law, "[i]n  the  search for  plain meaning,  a                                            ____________________            23.  The FDIC  also relies  on several similar  provisions of            the construction loan agreements.                                         -68-            court  should consider  'every phrase  and clause  . .  . [in            light  of]  all  the   other  phraseology  contained  in  the            instrument,  which  must  be  considered as  a  workable  and            harmonious means for carrying out and effectuating the intent            of the parties.'"   Boston Edison Co.  v. FERC, 856  F.2d 361                                __________________________            (1st Cir. 1988) (quoting J.A. Sullivan Corp. v. Commonwealth,                                     ___________________________________            494  N.E.2d  374, 378  (Mass.  1986)).    The  principles  of            interpretation applied by the Massachusetts courts conform to            those of  the leading commentators.  Specific terms are given            greater weight than general  language.  See Lembo  v. Waters,                                                    ___ ________________            294  N.E.2d 566, 569 (Mass. App. Ct. 1973) ("'If the apparent            inconsistency is between a clause that is general and broadly            inclusive  in  character and  one  that is  more  limited and            specific in its coverage, the latter should generally be held            to  operate as a modification and  pro tanto nullification of            the  former.'") (quoting 3 A. Corbin, Contracts   547, at 176                                                  _________            (1960)).   Separately  negotiated  or added  terms are  given            greater  weight than  standardized terms  or other  terms not            specifically negotiated.  See Carrigg v. Cordeiro, 530 N.E.2d                                      ___ ___________________            809, 813 (Mass. App. Ct.  1988) ("If . . . there  is conflict            and inconsistency  between a  printed provision and  one that            was inserted by the parties especially for the contract  that            they  are then  making, the  latter should  prevail over  the            former.") (citations omitted).                                         -69-                 Applying these principles to  the Bank's conduct in this            case, we  conclude  that the  courts  below were  correct  in            holding  that  the  Bank  breached both  loan  agreements  by            withdrawing from the Trust's accounts payments for soft costs            that  exceeded  the  agreed-upon allocations.    Although the            provisions of  the  standard  form  L&SA used  in  both  loan            agreements gave the  Bank broad authority to recover its out-            of-pocket expenses, each L&SA was supplemented by an addendum            prepared by the parties  that specifically limited the amount            of  loan proceeds recoverable by the Bank as soft costs.  The            L&SA  Addendum to the First Loan Agreement provided that only            $100,000  of the  loan proceeds  were to  be applied  to soft            costs and the  remaining $200,000 in  proceeds would be  used            for  construction funding.   The  Bank's withdrawals  of soft            costs exceeded  that $100,000  allocation by $2,305.54.   The            L&SA Addendum to  the Second Loan Agreement provided that the            Bank  would  "advance  the  loan  proceeds  approximately  as            follows:  . . . $60,000 for soft costs incurred with  respect            to  the loan."  The Bank's withdrawals of soft costs exceeded            this "approximate" allocation by $109,406.12.                 We reject the FDIC's arguments that the soft cost limits            were  merely  estimates.     The   loan  agreements   clearly            contemplated that while a portion  of the loan proceeds would            be used  for the soft costs, the balance of the proceeds were            to be applied  by the Trust to the costs  of the construction                                         -70-            project  that was the objective of the entire transaction.  A            finding  that the Bank breached these provisions does not, as            the FDIC maintains, necessarily conflict with the  bankruptcy            court's determination that  both parties understood  that the            $100,000 soft  costs allocation  in the First  Loan Agreement            would have  to be supplemented  by payments from  the Trust's            funds.                 The FDIC correctly points out that when the Trust failed            to  cover the entirety of soft costs expenses incurred by the            Bank, the Bank  had the authority  to recover these  expenses            from any of the Trust's accounts under the general provisions            of the L&SAs used in each  loan.  Yet the means by which  the            Bank  chose   to  exercise   that  authority   that   is,  by            immediately recovering all its  excess expenses directly from            the  loan  proceeds   otherwise  earmarked  for  construction            costs   countermanded the specifically-agreed upon allocation            of loan  proceeds between soft costs  and construction costs.            As  the district  court  correctly noted,  while the  general            provisions of the L&SAs  and the construction loan agreements            gave the Bank discretion to apply the Trust's payments on the                                                          ________            loan as it saw  fit, these provisions did not  "give the Bank            the  untrammelled right  to advance  and apply  loan proceeds            willy-nilly."   We  therefore affirm  the bankruptcy  court's            judgment  for an amount equivalent to the total of the excess            withdrawals made by  the Bank towards soft costs payments for                                         -71-            both loans   i.e., $2,305.54 for the First Loan Agreement and            $109,406.12 for the Second, for a total of $111,711.66.                 The FDIC also challenges the finding of the courts below            that the Bank  was also  liable for conversion  of the  extra            $111,711.66 removed  from the  loan proceeds for  soft costs.            Conversion consists  of the wrongful exercise  of dominion or            control  over the personal property  of another.   See 14A D.                                                               ___            Simpson & H. Alperin,  Massachusetts Practice: Summary of the                                   ______________________________________            Law     1771 (1974).   In  order  to recover  for conversion,            ___            plaintiffs  must  show  that  at  the  time  of  the  alleged            conversion  they had either actual possession or the right to            immediate possession or control  of the property in question.            Id.  See also  Mechanics Nat'l Bank of Worcester  v. Killeen,            ___  ___ ____  _____________________________________________            384 N.E.2d 1231, 1240 (Mass. 1979).                 The  FDIC argues  that the  Bank's withdrawal  of excess            soft costs payments did not constitute conversion because the            Trust never had an immediate  right to possession or  control            over the loan proceeds.  It contends that the Trust failed to            satisfy the  conditions of  the loan agreement  that required            the Trust,  inter alia,  to provide itemized  requisitions of                        _____ ____            its construction expenses prior to the Bank's disbursement of            any  proceeds.   Because  of  its  failure to  satisfy  these            conditions  precedent,  the  FDIC  reasons,  the Trust  never            acquired  a  right  to  control  or  possession  of any  loan            proceeds disbursed for construction purposes.  Thus, the FDIC                                         -72-            concludes, when the Bank  disbursed loan proceeds for payment            of construction costs and then applied these payments to soft            costs  payments,  the Bank  could  not  have converted  those            funds.                 The  problem  with  the  FDIC's  reasoning  is  that  it            misstates the factual circumstances of this case that explain            why   the  Bank   chose   to  disburse   loan  proceeds   for            ___            construction.  The FDIC ignores the finding by the bankruptcy            court that Bank officers, under Weiner's orders, deliberately            violated the conditions precedent of the First Loan Agreement            in order to expedite  the advancement of loan proceeds.   See                                                                      ___            Bankruptcy Court Opinion, 119 B.R. at 360-61.  The bankruptcy            court also found  that portions of  those proceeds were  then            removed  by Benjamin to make kickback payments to Weiner.  As            for  the Second  Loan Agreement,  the bankruptcy  court found            that   the   conditions  precedent   for   construction  fund            disbursement were in fact complied with by the Trust.  Id. at                                                                   ___            367.  The record  demonstrates that the Bank advanced  monies            to  the   Trust's  loan  account  after   the  completion  of            construction work, only  to apply these loan proceeds  to the            payments of soft costs.                   We reject  the FDIC's  argument  that the  Trust had  no            right  to  possess and  control  the  proceeds of  both  loan            agreements once  they were deposited to  the Trust's account.            There is no basis in the record for the claim that violations                                         -73-            by the Trust of the conditions precedent entitled the Bank to            disburse funds  for construction  costs, begin to  charge the            Trust interest,  and at  the same  time withdraw  portions of            these proceeds for  soft costs payments.   Both courts  below            correctly concluded that the Bank, by withdrawing amounts for            soft  costs  beyond  the  agreed-upon  limits  of  both  loan            agreements, thereby converted funds belonging to the Trust.                 B.  Equitable Subordination                     _______________________                 Because  we  have  determined  that  the district  court            correctly found that the  Trust's soft costs claims  were not            barred  against  the FDIC  by federal  law,  we focus  on the            second  element  of the  CTS  Truss  analysis:   whether  the                                     __________            misconduct  of  the  Bank  fit  "within  any  of  the classic            patterns of conduct that  have led the courts to  fashion the            extraordinary remedy of equitable subordination."  CTS Truss,                                                               _________            868 F.2d at 148.24                  The FDIC argues that even if the district court properly            upheld the Trust's breach  of contract and conversion claims,            equitable subordination was nonetheless erroneous because the            Trust failed to establish  two of the elements of  the Mobile                                                                   ______            Steel test:  that the Bank's overapplication of loan proceeds            _____            to soft  costs was misconduct sufficient to  support an award            of equitable subordination, or that this  misconduct resulted                                            ____________________            24.  We  disregard  the  FDIC's   arguments  that  it  is  an            "innocent" receiver,  having rejected this  line of reasoning            in Part IV, supra.                        _____                                         -74-            in injury to the  Trust's other creditors.  See  Giorgio, 862                                                        ___  _______            F.2d  at 938-39;  Mobile Steel,  563 F.2d  at  692.   It also                              ____________            claims that to permit  equitable subordination of its secured            claim would result in a double recovery by the Trust.                 Although the  remedy of equitable subordination has been            applied  relatively  infrequently,  it  is  usually  directed            towards  misconduct  arising in  three  situations:   when  a            fiduciary  of   the  debtor  misuses  his   position  to  the            disadvantage of other creditors; when a third party dominates            or controls the debtor to the disadvantage of others; or when            a  third party defrauds the  other creditors.   Id. at 148-49                                                            ___            (citing 3 Collier at   510.05).   See also A. DeNatale and P.                                              ___ ____            Abram, The Doctrine of  Equitable Subordination as Applied to                   ______________________________________________________            Nonmanagement  Creditors, 40  Bus.  Law.  417, 430-45  (1985)            ________________________            ("DeNatale & Abram").  This court has summarized  briefly the            purpose of the remedy:                 The case law does not suggest that  the doctrine of                 equitable subordination gives the  bankruptcy court                 a  general license  to weigh  the moral  quality of                    _______                 each debt or to compare creditors in terms of moral                 worth;  rather it  indicates  that  the  bankruptcy                 court  may equitably  subordinate those  debts, the                 creation  of which was  inequitable vis-a-vis other                                                     _______________                 creditors.   It permits a bankruptcy  court to take                 _________                 account  of  misconduct  of  one  creditor  towards                 another, just as that  court often can take account                 of a creditor's misconduct towards  the debtor when                                                         ______                 considering  whether to  allow, or  to  disallow, a                 claim.                       Thus,   most    cases   involving   "equitable                 subordination" also involve  corporate insiders  or                 fiduciaries  who  have  obtained unfair  advantages                 over other  creditors through, for  example, fraud.                                         -75-                 Where a bankruptcy court has  subordinated the debt                 of a creditor who  was not an insider, it  has done                 so on  the ground  that that conduct  was egregious                 and severely unfair in relation to other creditors.            Giorgio, 862 F.2d at 939  (citations omitted and emphasis  in            _______            original).                 Whether the creditor is  an insider or fiduciary  of the            debtor is  fundamentally important  to the level  of scrutiny            that  courts apply  to  allegations of  misconduct against  a            creditor.  See In  re Fabricators, Inc., 926 F.2d  1458, 1465                       ___ ________________________            (5th  Cir. 1991).   See also  DeNatale &  Abram at  424 ("The                                ___ ____            creditor's  duty of fair dealing is  increased in the precise            degree  that  the creditor  has  power and  control  over the            debtor's affairs.").  Claims  arising from dealings between a            debtor  and  an insider  are  rigorously  scrutinized by  the            courts.  Fabricators, 926 F.2d  at 1465.  On the other  hand,                     ___________            if the claimant  is not  an insider, "then  evidence of  more            egregious   misconduct   such   as   fraud,   spoliation   or            overreaching  is   necessary."     Id.  (citing  In   re  N&D                                               ___           ____________            Properties, Inc., 799 F.2d  726 (11th Cir. 1986)).   See also            ________________                                     ___ ____            In re Friedman,  126 B.R.  63, 71-72 (Bankr.  9th Cir.  1991)            ______________            (same principle).                 Rather than decide the question of whether  the Bank was            a  fiduciary or  insider of  the Trust, the  bankruptcy court            based its  decision to  award equitable subordination  on its            finding that  the Bank's conduct was  "illegal, egregious and            severely  unfair to  other creditors"  within the  meaning of                                         -76-            Giorgio.  Bankruptcy  Court Opinion,  119 B.R. at  377.   The            _______            bankruptcy  court's equitable subordination  of the  Bank was            grounded on the  Trust's claims of fraud,  breach of contract            and conversion claims relating to the kickback scheme and its                                                                  ___            claims of breach  of contract and conversion  premised on the            soft costs overages.  The court specifically cited the Bank's            "fraud  and illegality,"  which  the  bankruptcy court  found            "together constitute  one of the three  general categories of            misconduct  recognized by the  courts as warranting equitable            subordination."  Id.                             ___                 The  district court  upheld the  equitable subordination            against  the FDIC's challenge on appeal, but at the same time            vacated that portion of the original judgment that was  based            on  the kickback  claims, which  it properly  determined were            barred by  D'Oench.  Accordingly, the  district court removed                       _______            from the  judgment of equitable subordination  the $26,300 in            damages attributable  to the  kickback scheme.   The district            court otherwise  affirmed  in  its  entirety  the  bankruptcy            court's  determination that  the Bank's  misconduct justified            equitable  subordination  with  respect  to  the  soft  costs            claims.                 The FDIC  argues that the Bank's  misconduct in relation            to  the   breach  of  contract  and   conversion  claims  was            insufficient  to  support   equitable  subordination.    This            argument  raises an issue that was not fully addressed by the                                         -77-            district  court  when  it  reviewed   the  Trust's  equitable            subordination  claim against the FDIC as the successor to the            Bank:   whether the bar under D'Oench to the Trust's kickback                                          _______            claims,  and  in particular  its  fraud  claim, affected  the            validity  of the  bankruptcy  court's  original  judgment  of            equitable subordination.                 The bankruptcy court specifically premised the equitable            subordination on  the Bank's "fraud and  illegality," and the            Trust  has never argued  in this  case that  the Bank  was an            insider  or fiduciary of the  Trust.  Nor  has the Trust ever            asserted  that   the  Bank   dominated   or  controlled   its            affairs.25   Accordingly,  the  issue  is  whether  equitable            subordination can be based solely on the Bank's misconduct in            relation to the excess withdrawals of soft costs.                 Courts have struggled to define precisely the misconduct            necessary   to  support  equitable  subordination  against  a            creditor who is not an  insider.  Fraud or  misrepresentation                                            ____________________            25.  We add  that such  allegations, if  made  in this  case,            would  not  have  been  sufficient to  satisfy  the  rigorous            standard  necessary to  prove  control or  domination of  the            Trust's affairs by  the Bank.  See,  e.g., In re  Burner, 109                                           ___   ____  _____________            B.R.  216,  228  (Bankr.  W.D. Texas  1989)  ("A  non-insider            creditor  will be held to a fiduciary standard only where his            ability to control  the debtor is so  overwhelming that there            has  been a merger  of identities.");  In re  Beverages Int'l                                                   ______________________            Ltd., 50 B.R. 273,  282 (Bankr. D. Mass. 1985)  ("[m]ore than            ____            mere  pressure or influence on a debtor  must be shown").  We            also  note  that  "[a]s  a   general  rule  lenders  are  not            fiduciaries when it comes to collection  on their claims." In                                                                       __            re  Kelton Motors,  Inc., 121  B.R. 166,  191 (Bankr.  D. Vt.            ________________________            1990) (citing  In re W.T.  Grant Co., 699  F.2d 599, 609  (2d                           _____________________            Cir.), cert. denied, 464 U.S. 822 (1983)).                   ____________                                         -78-            are   the  most   frequent   justifications   for   equitable            subordination of  the non-insider.26  They  are not, however,            required:                 Something  less  than  actual  fraud  .  .  .  will                 suffice.   The fixing  of the  lower  limit is  the                 elusive  boundary which cannot  be clearly defined.                 Although the courts have used general terms such as                 injustice or  unfairness to  fix this  lower limit,                 the minimum  level of offending  conduct appears to                 be conduct that shocks the conscience of the court.                 . . .            DeNatale &  Abram at 423-24.  Types  of misconduct sufficient            to warrant equitable subordination against  non-insiders have            included   instances   of   "[v]ery  substantial   misconduct            involving   moral   turpitude   or   some  breach   or   some            misrepresentation  where  other  creditors  were  deceived to            their  damage   .  .  .  or  gross  misconduct  amounting  to            overreaching .  . . ."  In re Mayo, 112 B.R. 607, 650 (Bankr.                                    __________            D.  Vt. 1990) (citations omitted).  For the most part, courts                                            ____________________            26.  See,  e.g., In re Bowman  Hardware & Elec.  Co., 67 F.2d                 ___   ____  ___________________________________            792, 795  (7th Cir.  1933) (where creditor  participated with            debtor in  scheme to  misrepresent debtor's  financial state,            creditor's  claim  subordinated  to  that  of  other creditor            injured by  that misrepresentation);  In re Osborne,  42 B.R.                                                  _____________            988,   1000   (W.D.  Wis.   1984)   (equitable  subordination            appropriate against lender based on its misrepresentations to            another   creditor  about   that  creditor's   prospects  for            payment);  In re Slefco, 107  B.R. 628, 644  (Bankr. D. Minn.                       ____________            1989) (equitable subordination of  bank's claim predicated on            bank's  misrepresentation  of  amounts  it  intended  to loan            debtor).                                         -79-            have been reluctant to find the requisite level of misconduct            in arms-length dealings between borrowers and lenders.27                 In Kham  & Nate's  Shoes No.  2, Inc.  v. First  Bank of                    _____________________________________________________            Whiting, 908  F.2d 1351 (7th Cir. 1990),  the Seventh Circuit            _______            reversed  the equitable  subordination of  a  bank's priority            claim  to  a  borrower's estate.    Id.  at  1356-1359.   The                                                ___            bankruptcy court had justified the equitable subordination on            the  basis  of,  inter  alia,  the  hardship  caused  to  the                             _____  ____            borrower/debtor  by the  bank's suspension  of a new  line of            credit.28   Finding  that  the bank  was  not an  insider  or            fiduciary of  the borrower,  and that the  suspension of  the            borrower's  line  of  credit  was permitted  under  the  loan            contract, the  Seventh Circuit rejected the  reasoning of the            bankruptcy court.  Id. at 1356-58.   During the course of its                               ___            opinion, the court stated:                                              ____________________            27.  See In  re Pacific  Express, Inc.,  69 B.R. 112,  117-18                 ___ _____________________________            (Bankr.  9th  Cir.  1986)  (creditors'  loan  agreement  with            debtor,  which  effectively shifted  risk  of  loss to  other            creditors, was not "the type of overreaching, fraud or  other            conduct which would justify  subordination of a non-insider's            claim");  In re Dry Wall  Supply, Inc., 111  B.R. 933, 937-39                      ____________________________            (D. Colo. 1990)  (rejecting equitable subordination based  on            allegations that  creditor knew  that loan transaction  would            render borrower insolvent); In re Pinetree Partners, Ltd., 87                                        _____________________________            B.R. 481, 490  (Bankr. N.D. Ohio  1988) (lender's refusal  to            provide  additional  credit  and  threatened  foreclosure  of            debtor's  mortgage  not  sufficiently  egregious  to  warrant            equitable subordination).            28.  The  other basis  for  the  district  court's  equitable            subordination was its finding  that the bank had  induced the            borrower's  suppliers to  draw  on letters  of credit  issued            prior to the bank's provision of the new line of credit.  Id.                                                                      ___            at 1354.                                           -80-                 [W]e  are  not  willing  to  embrace  a  rule  that                 requires  participants  in commercial  transactions                 not  only  to  keep  their contracts  but  also  do                 "more"   just   how  much   more  resting   in  the                 discretion  of  a  bankruptcy judge  assessing  the                 situation years  later.  . .  .   Unless pacts  are                 enforced  according to their terms, the institution                 of  contract,  with   all  the  advantages  private                 negotiation and agreement brings, is jeopardized.                      "Inequitable conduct" in commercial life means                 breach plus some advantage-taking, such as the star                        ____                 who agrees  to act  in a  motion picture and  then,                 after  $20 million  has  been spent,  sulks in  his                 dressing  room   until   the  contract   has   been                 renegotiated.  Firms that have negotiated contracts                 are entitled to enforce them to the letter, even to                 the great  discomfort  of their  trading  partners,                 without being mulcted for lack of "good faith."             Id. at 1356-57 (citations omitted).  The Seventh Circuit also            ___            rebutted the debtor's  arguments that equitable subordination            could  be  based on  a breach  of  contract arising  from the            bank's failure  to provide it  telephonic as well  as written            notice of the suspension  of the line of credit,  noting that            "[e]quitable subordination . .  . is not a device  to magnify            the   damages  available  for   inconsequential  breaches  of            contract."  Id. at 1359.                        ___                  Applying the  somewhat amorphous case law standards for            equitable  subordination to the  facts of this  case, we find            that the Bank's excess withdrawals  of soft costs was conduct            sufficiently  egregious  to justify  equitable subordination.            The Bank's  actions could  fairly be characterized  as "gross            misconduct  amounting to  overreaching."   Mayo, 112  B.R. at                                                       ____            650.  Unlike  the insubstantial breach of contract alleged in                                         -81-            Kham & Nate's Shoes,  the Bank's withdrawal of  over $100,000            ___________________            in  excess  of  the  agreed-upon  soft  costs  limits  was  a            substantial  breach of  the loan  agreements.   Moreover, the            fact  that  the  Bank  advanced and  withdrew  loan  proceeds            arbitrarily, and at the  same time caused interest to  run on            misappropriated  proceeds, in our view rises  to the level of            "advantage-taking" within the meaning of Kham & Nate's Shoes.                                                     ___________________                 As the  bankruptcy court  also found, the  conversion of            the soft  costs monies handicapped the  renovation effort and            resulted in the Bank's  recovering for its own  benefit funds            that the Trust  had bargained with the Bank to  set aside for            construction creditors.  Bankruptcy  Court Opinion, 119  B.R.            at 377.   While  the Bank  was entitled to  enforce the  loan            agreements  without regard  to  the hardship  imposed on  the            Trust,  Kham &  Nate's Shoes,  908 F.2d  at 1357,  those loan                    ____________________            agreements did  not authorize the Bank  to seek reimbursement            for unpaid  soft costs  from the Trust's  construction funds.            In  this  case, the  hardship imposed  on  the Trust  and its            construction creditors  flowed from  the Bank's improper  and            unauthorized administration of the loans, and could therefore            properly  have been  considered an  element of  the equitable            subordination  inquiry.     We  conclude   that  the   Bank's            misconduct  in   relation  to  the  soft   costs  claims  was            sufficient evidence  of misconduct on which  to predicate the            equitable subordination of the FDIC's secured claim.                                         -82-                 The FDIC nonetheless argues that equitable subordination            would be  not appropriate  under the second  prong of  Mobile                                                                   ______            Steel because the Bank's misconduct  did not result in injury            _____            to the Trust's other creditors.  The FDIC bases this argument            on   the   bankruptcy   court's   determination    that   the            misappropriation of  loan proceeds by  the Bank  was not  the            principal  cause of the   failure of the Trust's construction            project  and failure to repay  the loan.   The FDIC maintains            that  the   bankruptcy  would  have  resulted   even  if  the            misapplication of  loan proceeds  had not occurred,  and that            any  harm  to the  Trust's  other  creditors  thus cannot  be            attributed to the Bank's conduct.                 The  FDIC's argument  boils down  to the  assertion that            equitable   subordination   is   inappropriate   unless   the            misconduct  at  issue  is  a  major  cause  of  the  debtor's            bankruptcy.   This argument  is without  support in the  case            law.   The second prong of Mobile Steel establishes only that                                       ____________            equitable  subordination is  appropriate when  the misconduct            results  in actual harm to the debtor or the other creditors,            "or conferred an unfair advantage on the claimant":                 In  examining   the  effect   of  the   conduct  on                 creditors,  the court should consider the effect on                 the  then-known  creditors,   as  well  as   future                 creditors.   In this  analysis, the question  to be                 answered  is whether or  not the  offending conduct                 had an  impact on the bankruptcy  results, that is,                 the  bottom  line,  in  the  proceeding  before the                 court. . .  . This would encompass all  the effects                 of fraud and inequitable conduct that would have an                                         -83-                 impact  upon [other  creditors' legal  or equitable                 rights in the bankruptcy results]. . . .                      In demonstrating the harm, the objecting party                 usually   need   not  identify   specifically  each                 particular creditor who was harmed and quantify the                 injury suffered by each.  If the misconduct results                 in harm to the  entire creditor body, the objecting                 party need  demonstrate  only that  the  misconduct                 harmed  the creditor body  in some  general, albeit                 concrete, manner.            DeNatale & Abram  at 426 (footnotes omitted).  The bankruptcy            court found,  inter alia, that the  Bank's misconduct damaged                          _____ ____            other   creditors  by  depleting   the  Trust's  assets  and,            consequently,  its  bankruptcy estate,  and  by substantially            handicapping the renovation  effort, on which  many creditors            ultimately had  to rely  for compensation.   Bankruptcy Court            Opinion, 119 B.R. at 377.  We find that this depletion of the            funds available for construction, and its attendant impact on            the  success  of  the   Trust's  renovation  efforts,  was  a            sufficiently concrete harm to  the Trust's other creditors to            warrant equitable  subordination  of the  Bank.   Cf.  In  re                                                              ___  ______            Beverages Int'l Ltd., 50 B.R. 273, 283 (Bankr. D. Mass. 1985)            ____________________            ("the misconduct may  result in harm  to the entire  creditor            body, [or] a particular class of creditors") (citing DeNatale            & Abram).                 There is no merit to the FDIC's argument that the Bank's            conduct did  not reduce the  money present in  the bankruptcy            estate available to the other creditors.  The FDIC points out            that  the  Bank's  overages  of soft  costs  payments  merely                                         -84-            reduced  the overall amounts due  the Bank (and  FDIC) as the            Trust's principal  secured creditor.   It reasons  that there            could be no harm  to the Trust's other creditors  because the            FDIC's secured claim exceeds the value of the Trust's assets.            Such an  argument ignores  the very  nature of  the equitable            subordination  remedy, whose  precise  purpose  is to  permit            recovery  by  other  creditors  with  lower  priority  claims            because of  misconduct of  a particular creditor  whose claim            would otherwise enjoy priority.                 We  also  reject  the  FDIC's  assertion  that equitable            subordination  of its secured  claim would grant  the Trust a            windfall double recovery.  It is clear that it is the Trust's            unsecured  creditors  who  will   benefit  from  the  partial            subordination of the FDIC's claim, not the Trust.  The FDIC's            contention  that damages  are  an adequate  remedy at  law is            equally spurious.   The FDIC asserts  that its secured  claim            far  exceeds  the  value  of   the  Trust's  estate  or   its            properties.  Payment of damages by the FDIC on the soft costs            claim, rather than equitable  subordination of an  equivalent            amount,  would simply increase  the value of  the estate that            the FDIC would recover.  Without equitable subordination, the            FDIC  would  recoup  from  the  Trust's  estate  any  damages            attributable   to   the   Bank's   misconduct.      Equitable            subordination is necessary in order to permit recovery by the                                         -85-            Trust's other creditors to  reflect the injury caused  by the            Bank's misappropriation of loan proceeds for soft costs.                 Accordingly,  we affirm  the equitable  subordination of            the FDIC's secured claim, as reduced by the district court to            an  amount  equivalent to  the  damages  attributable to  the            excess soft costs monies withdrawn by the Bank.            VI.  INTEREST                 The FDIC next attacks the  inclusion of interest on  the            soft  costs overages  as  part of  the  total amount  of  its            secured  claim  subject  to  equitable  subordination.     It            contends  that  the   district  court's  affirmance   of  the            bankruptcy's court  award of  post-judgment interest "at  the            contract   rate   from  the   dates   on   which  they   were            misappropriated" was contrary to law.   The FDIC argues that:            (1) federal law forbids a post-judgment award of  interest to            the extent that it provides for interest after appointment of            a receiver; and (2) the district court erred by setting post-            judgment interest at the rate found in the Loan Agreements.                 Because the FDIC did not raise its first argument in the            district  court below, we will not consider it.  The district            court's  opinion makes no mention  of the federal  law bar to            post-judgment  interest  claimed  by  the FDIC.    The  Trust            asserts  in its brief that the  issue was never raised in the            district court, and the FDIC has not refuted  this contention            in its  reply brief.   There  is also  nothing in  the record                                         -86-            before us that  indicates that  the issue  was raised  below.            We, therefore, deem the argument waived.  See Boston Celtics,                                                      ___ ______________            908 F.2d at 1045.                 The FDIC relies for its second argument on section 6C of            chapter  231  of the  General  Laws  of Massachusetts,  which            provides in pertinent part:                 In  all actions  based on  contractual obligations,                 upon a  verdict, finding or order  for judgment for                 pecuniary damages, interest  shall be added by  the                 clerk of the court to the amount of damages, at the                 contract rate,  if established,  or at the  rate of                 twelve  per cent  per annum  from the  date of  the                 breach or demand.            Mass.  Gen. Laws Ann.  ch. 231,    6C.  The  FDIC argues that            this  statute requires a twelve percent rate of interest on a            judgment  on a  contract  unless the  contract obligated  the            judgment debtor   in this case  the Bank   to pay interest at            a  different rate.  The  FDIC contends that  because the Loan            Agreements  imposed  no obligation  on  the Bank  to  pay any            interest  to  the  Trust,  Massachusetts'   default  judgment            interest rate of twelve percent must be applied.                 To  our  knowledge, the  Massachusetts  Supreme Judicial            Court has  never  addressed the  issue  of whether  rates  of            interest  in  a promissory  note  should  be treated  as  the            "contract rate" for purpose of post-judgment interest against            the lender.   See Mechanics  Nat'l Bank, 384  N.E.2d at  1240                          ___ _____________________            n.14  (declining to  address  issue).   After  review of  the            bankruptcy court's  interpretation  of  section  6C,  we  are                                         -87-            persuaded that the court  correctly decided to apply interest            at the contract rate specified in the loan agreements:                 The contract rate is appropriate here . . . because                 the Bank charged interest  at the contract rate for                 the misappropriated proceeds.  Some of the interest                 charged has been paid, and the remainder is part of                 the Bank's secured claim[]. . . .            Bankruptcy  Court Opinion, 119 B.R at  371 n.17.  Application            of  the contract rate of  interest was necessary  in order to            assure that the equitable subordination award fully reflected            the  damages to  the Trust  resulting from the  Bank's excess            withdrawal of soft  costs.   We affirm  the district  court's            rejection of the FDIC's challenge on this issue.            VII.  ATTORNEY'S FEES                 The  district  court  affirmed  equitable  subordination            against the FDIC's  secured claim in an  amount equivalent to            the  damages  incurred  by  the  Trust  from  the soft  costs            overages plus interest.  It reversed, however, the bankruptcy            court's  determination  that   Massachusetts  law   permitted            attorney's fees  as an element of the damages for conversion.            The district court held:                 The Bankruptcy Code permits equitable subordination                 of "all or part of an allowed claim to all  or part                 of another allowed claim."   11 U.S.C.   510(c)(1).                 As I have previously held  that it was improper  to                 award attorney's fees  as an element of  conversion                 damages,  the attorney's  fees  can  no  longer  be                 considered part of appellees' allowed claim against                 the  estate.    Thus,  the plain  language  of  the                 statute precludes  the subordination of  the Bank's                 claim to the fee award.                                         -88-            While the district court rejected subordination of attorney's            fees  on the grounds  identified by the  bankruptcy court, it            also observed in a footnote that "[a]ttorney's fees [could] .            .  .  still  be  allowed,  of  course,  as  an administrative            expense,  see 11  U.S.C.    503(b)(3), accorded  the priority                      ___            specified in the Bankruptcy Code."                 The Trust  challenges the  district court's  reversal of            the bankruptcy  court's inclusion  of attorney's fees  in the            equitable  subordination.    The  Trust  does  not,  however,            contest  the district court's interpretation of Massachusetts            conversion law.   Rather, the Trust   or  more precisely, the            Trust's attorneys   argue  that attorney's  fees are a  valid            administrative  expense claim  against the  bankruptcy estate            within   the  meaning   of   11  U.S.C.       330(a)(1)   and            503(b)(2).29    The Trust's  attorneys  contend  that because                                            ____________________            29.    Section 503(b)  of  the  Bankruptcy Code  governs  the            allowance   of   administrative   expenses.       Among   the            administrative  expenses  permitted,   after  notice  and   a            hearing,  are  claims  for  "compensation  and  reimbursement            awarded  under section  330(a)  of this  title."   11  U.S.C.            503(b)(2).  Section 330(a) provides in pertinent part:                 (a)  After notice to any parties in interest and to                 the United States trustee  and a hearing . .  . the                 court  may award to a trustee, to an examiner, to a                 professional person  employed under section  327 or                 1103 of this title, or to the debtor's attorney                         (1)   reasonable   compensation  for   actual,                      necessary services rendered  by such  trustee,                      examiner,  professional  person, or  attorney,                      . . . based on the nature, the extent, and the                      value of such services, the time spent on such                      services, and the cost of  comparable services                      other than in a case under this title . . . .                                         -89-            their  fees  are  in   fact  a  valid  "claim"   under  these            provisions,  the  bankruptcy  court's  decision   to  include            attorney's fees  in the equitable  subordination against  the            Bank was proper.  See 11 U.S.C.   510(c)(1) (bankruptcy court                              ___            may,   "under   principles   of    equitable   subordination,            subordinate for  purposes of distribution  all or part  of an            allowed  claim to all or part of  another allowed claim . . .            .").                 This argument  puts the cart before the horse.  Although            both  the bankruptcy  and  district courts  acknowledged,  in            dicta,  that a request by the Trust for attorney's fees might            _____            be an allowable administrative  expense under the  Bankruptcy            Code, neither court expressly made such a determination.   In            fact, the Trust's attorneys  acknowledge in their reply brief            that they have  not, as  yet, asked the  bankruptcy court  to            award  them  attorney's  fees  as  an administrative  expense            claim.   See Reply  Brief for  Appellant 604  Columbus Avenue                     ___            Realty Trust at 2-3.  Any such award of attorney's fees as an            administrative expense under sections 330(a)(1) and 503(b)(2)            would require notice and a hearing.  See  11 U.S.C.    330(a)                                                 ___            and 503(b).                                            ____________________            11 U.S.C.   330(a).   Administrative expenses allowable under              503(b),  which include expenses  under   330(a),  are given            first  priority of payment under the Bankruptcy Code.  See 11                                                                   ___            U.S.C.   507(a)(1).                                         -90-                 In these circumstances, we need not address the argument            that  the bankruptcy court  should properly have subordinated            the Bank's  secured claim to an  administrative expense claim            of the Trust's attorneys.  Such a claim had neither been made            nor  allowed by  the  bankruptcy court  at  the time  of  its            equitable subordination  of the Bank.   We, therefore, affirm            the  district  court's  reversal of  the  bankruptcy  court's            inclusion of attorney's  fees in the equitable  subordination            against the Bank, insofar as that decision reversed the award            of  attorney's   fees  as   an  element  of   the  conversion            damages.30                                      CONCLUSION                                      CONCLUSION                 To summarize, we find that:                 (1)  the FDIC  was entitled to raise its  defenses under                 federal law for the first time on appeal in the district                 court;                 (2)  the D'Oench doctrine barred the  Trust's claims for                          _______                 fraud, conversion, and  breach of contract  arising from                 the kickback scheme;                 (3)  the federal  holder in due course doctrine  did not                 apply to  the FDIC in  its receivership capacity  in the                 absence of a  purchase and  assumption transaction,  and                                            ____________________            30.  We express no opinion on the merits of the Trust's claim            that its  attorney's fees are  administrative expenses within            the meaning of sections 330(a)(1) and 503(b)(2).                                         -91-                 therefore did not bar  the Trust's claims for conversion                 and breach of contract based on the soft costs overages;                 (4)    federal common  law  did  not preclude  equitable                 subordination  against  the  FDIC  in  its  receivership                 capacity;                  (5)   the bankruptcy and district  courts properly found                 for  the Trust on its  breach of contract and conversion                 claims based on the soft costs overages;                 (6)  equitable subordination of the FDIC's secured claim                 in an amount  equivalent to the  soft costs damages  was                 proper;                 (7)  the  bankruptcy court properly included  as part of                 the  overall  amount  of  the FDIC's  claim  subject  to                 equitable  subordination  an   award  of   post-judgment                 interest on the soft costs damages at the contract rate;                 and                 (8)  attorney's fees were  not an element of  conversion                 damages, and  could not  properly have been  included in                 the amount equitably subordinated.            AFFIRMED.            ________                                         -92-
