UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

FEDERAL FINANCIAL COMPANY,
Assignee of the Federal Deposit
Insurance Company as Receiver for
the National Bank of Washington,
                                                               No. 99-2516
Plaintiff-Appellant,

v.

JOHN L. KNOTT, JR.,
Defendant-Appellee.

Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Alexander Williams, Jr., District Judge.
(CA-96-4007-AW)

Argued: June 6, 2000

Decided: July 10, 2000

Before NIEMEYER and WILLIAMS, Circuit Judges, and
Robert R. BEEZER, Senior Circuit Judge of the
United States Court of Appeals for the Ninth Circuit,
sitting by designation.

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Affirmed by unpublished per curiam opinion.

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COUNSEL

ARGUED: Audra Joy Small, BROMBERG, ROSENTHAL, SIEGEL
& GOODMAN, Rockville, Maryland, for Appellant. Robert Olin
Johnston, JOHNSTON & WESTERFIELD, P.C., Washington, D.C.,
for Appellee. ON BRIEF: Jonathan R. Bromberg, Barry J. Rosenthal,
BROMBERG, ROSENTHAL, SIEGEL & GOODMAN, Rockville,
Maryland, for Appellant. Mark Westerfield, JOHNSTON &
WESTERFIELD, P.C., Washington, D.C., for Appellee.

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Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

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OPINION

PER CURIAM:

Federal Financial Company (FFC) filed suit in the United States
District Court for the District of Maryland seeking to recover the bal-
ance of a loan that John Knott, Jr. (Knott) had unconditionally guar-
anteed on behalf of Capitol Knolls Limited Partnership (Capitol
Knolls). After a bench trial, the district court ruled in favor of Knott
on the grounds that FFC had not met its burden of showing that Capi-
tol Knolls was in default in its payments; that the National Bank of
Washington (NBW), the bank with whom Capitol Knolls entered the
loan agreement, breached the loan agreement prior to any default by
Capitol Knolls by failing to fund Capitol Knolls; and that the Federal
Deposit Insurance Company (FDIC) impaired the collateral. FFC
noted a timely appeal of this judgment. Finding no reversible error,
we affirm.

I.

In 1987, Capitol Knolls entered into various loan agreements with
NBW in order to acquire and construct a townhome community. In
December 1989, after unforeseen environmental problems delayed the
project, Capitol Knolls entered into a new loan agreement with NBW
under which NBW agreed to advance up to $5,000,000 to Capitol
Knolls through monthly payments. Knott unconditionally guaranteed
this loan on behalf of Capitol Knolls.1 In May 1990, Capitol Knolls
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1 Knott was the president of Phillips and Knott Community Developers,
Inc., which was a general partner of Capitol Knolls.

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was late on at least one of its monthly interest payments.2 During the
same time period, in either April or May 1990, NBW stopped funding
the project.3 In July 1990, NBW sent a letter to Capitol Knolls
expressing its concern over overdue payments, and strongly urging
Capitol Knolls to pay the amount due so that NBW would not have
to "consider the alternatives available." (J.A. at 490.) This letter did
not, however, formally notify Capitol Knolls that it was in default. On
August 10, 1990, the Comptroller of the Currency declared NBW
insolvent and appointed the FDIC as Receiver. In November 1990,
the FDIC sent Capitol Knolls a formal written notice of default. This
was the first formal written notice of default that Capitol Knolls or
Knott received relating to the loan agreement.4 On July 21, 1995, the
FDIC sold and assigned all right, title, and interest in and to the deed
of trust and loan guaranty to FFC. On February 19, 1996, FFC made
a formal demand upon Capitol Knolls for payment of the loan. On
March 26, 1996, FFC foreclosed upon the property.

On December 23, 1996, FFC filed a civil action against Knott to
recover the balance of the loan under the guaranty. At a bench trial,
Knott testified that in March or April of 1990,"NBW stopped funding
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2 On May 29, 1990, Capitol Knolls sent a check to NBW to cover the
overdue interest payment as of that month. The May check was later can-
celed and replaced by another check in June 1990. Knott testified that the
May check was canceled because NBW lost the check, while FFC main-
tains that the May check was replaced because it was dishonored, and
that even if the check was lost, Capitol Knolls was at least two months
late in its interest payments.
3 FFC's counsel conceded at oral argument that NBW stopped funding
the project in April or May 1990.
4 The loan agreement between Capitol Knolls and NBW provided that
upon an event of default by Capitol Knolls -- such as a failure by Capi-
tol Knolls to make payments -- NBW had to give written notice of the
default to Capitol Knolls and stipulate a date by which Capitol Knolls
had to cure the default. NBW was required to give this notice if it wanted
to pursue its remedies under the agreement, and, if Capitol Knolls failed
to cure the default after the written notice, NBW could then "without fur-
ther notice declare [Capitol Knolls] to be in default." (J.A. at 450.) As
noted above, Capitol Knolls received its first written notice of default
from the FDIC in November 1990, well after NBW had been declared
insolvent.

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the loan on a consistent basis," (J.A. at 189), that Capitol Knolls con-
tinued to pay its interest payments until the time that NBW was
declared insolvent, and that although Capitol Knolls was at one point
behind in its interest payments, it was current on its payments on
August 10, 1990, when NBW was declared insolvent. Knott also testi-
fied that shortly before NBW was declared insolvent, NBW and Capi-
tol Knolls had been attempting to negotiate a means of moving the
project forward, but that the FDIC stalled the project after taking over
the loan by, among other things, failing to respond to Knott's requests
to find a way to complete the project. Knott stated that because the
FDIC stalled the project at a critical time, the project lost most of its
value. Thomas Helt, former president of McIntyre, a construction
company that worked on the project, corroborated Knott's testimony
concerning NBW's failure to fund Capitol Knolls, testifying that
McIntyre had received its last payment in March 1990. The district
court explicitly found Knott's testimony to be credible.

Relying upon Knott's testimony and stating that the documentary
evidence offered by FFC was inconclusive, the district court found
that FFC had not met its burden of proof in showing that Capitol
Knolls was in default in its payments. The district court also found
that NBW had initially breached the loan agreement and frustrated
Capitol Knoll's performance under the loan agreement by failing to
fund Capitol Knolls beginning in April or May 1990, and that the
FDIC impaired the collateral. On August 31, 1999, the district court
entered judgment in Knott's favor. On October 21, 1999, the district
court denied FFC's motion to alter or amend the judgment. On
November 8, 1999, FFC filed its notice of appeal.

FFC raises several issues on appeal. FFC argues that the district
court erred as a matter of law in considering Knott's affirmative
defenses because Knott failed to exhaust his administrative remedies
pursuant to the Financial Institutions Reform, Recovery, and Enforce-
ment Act of 1989 (FIRREA). FFC also argues that the district court
erred in relying upon Knott's and Helt's oral testimony rather than the
documentary evidence FFC offered at trial, and that the documentary
evidence clearly shows that Capitol Knolls was continuously in
default from April 1990. FFC also maintains that the district court
erred in concluding that NBW breached the loan agreement prior to
any default by Capitol Knolls by failing to fund the project, and that

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the district court erred in finding that the FDIC impaired the collateral
by refusing to cooperate with Capitol Knolls and allowing the collat-
eral to deteriorate.

II.

"On appeal from a bench trial, we may only set aside findings of
fact if they are clearly erroneous, and we must give due regard to the
opportunity of the district court to judge the credibility of the wit-
nesses." Scrimgeour v. Internal Revenue, 149 F.3d 318, 324 (4th Cir.
1998). A district court's factual finding is clearly erroneous "when
although there is evidence to support it, the reviewing court on the
entire evidence is left with the definite and firm conviction that a mis-
take has been committed." Id. (internal quotation marks omitted).
"[W]here there are two permissible views of the evidence, the fact-
finder's choice between them cannot be clearly erroneous." Id. (inter-
nal quotation marks omitted) (alteration in original). We review the
district court's legal conclusions de novo. See Williams v. Sandman,
187 F.3d 379, 381 (4th Cir. 1999).

We have reviewed the record, briefs, and pertinent case law on this
matter, and we have had the benefit of oral argument. Our careful
review persuades us that the rulings of the district court were correct.5
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5 Although FFC argues that the district court should not have consid-
ered Knott's affirmative defenses because he did not exhaust his reme-
dies prior to asserting those defenses, FIRREA's exhaustion requirement
does not encompass affirmative defenses. See Bolduc v. Beal Bank, SSB,
167 F.3d 667, 671-72 (1st Cir. 1999) (finding that the Bolducs' defense
"does not quite fit within the statutory language that delineates the
exhaustion requirement. It is not a claim by the Bolducs seeking any kind
of `payment' from any bank"); Tri-State Hotels, Inc. v. FDIC, 79 F.3d
707, 715 (8th Cir. 1996) (agreeing with other circuits "that true affirma-
tive defenses may still be asserted" even though Tri-State did not exhaust
its remedies); Resolution Trust Corp. v. Love , 36 F.3d 972, 976-78 (10th
Cir. 1994) (concluding that exhaustion is not required for a court to have
jurisdiction over an affirmative defense); Resolution Trust Corp. v. Mid-
west Fed. Sav. Bank, 36 F.3d 785, 793 (9th Cir. 1994) (concluding that
defense of mutual mistake does not require exhaustion); National Union
Fire Ins. Co. v. City Sav., FSB, 28 F.3d 376, 393 (3d Cir. 1994) (con-
cluding that "the statute does not create a jurisdictional bar to defenses
or affirmative defenses which a party seeks to raise in defending against
a claim").

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Accordingly, we affirm the judgment in favor of Knott on the reason-
ing set forth in the district court's oral ruling after trial.

AFFIRMED

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