Brandt v. FDIC (In re Equip. Acquisition Res., Inc.), 560 B.R. 501 (N.D. Ill. Bankr. 2016)
The Bankruptcy Court for the Northern District of Illinois (“Bankruptcy Court”) held that: (i) the common law and statutory defenses which preclude claims against the Federal Deposit Insurance Corporation (the “FDIC”) as the receiver for a failed bank based on a fraudulent scheme between a bankruptcy debtor and its affiliate were applicable to the bankruptcy case and (ii) a bankruptcy plan administrator’s claims against the FDIC for fraudulent transfers from the bankruptcy debtor to the bank based on the fraudulent scheme were precluded.
William Brandt (the “Plaintiff”), in his capacity as plan administrator for Equipment Acquisition Resources, Inc. (“EAR”), filed suit in the Bankruptcy Court for the Northern District of Illinois against the FDIC as receiver for Charter National Bank and Trust (“Charter”). EAR filed a Chapter II bankruptcy petition on October 23, 2009, and a plan was confirmed on July 15, 2010. Under the terms of the plan, the Plaintiff was appointed plan administrator with an ability to pursue litigation claims. The Plaintiff filed a proceeding against Charter on October 21, 2011. On February 10, 2012, Charter was closed and the FDIC was appointed its receiver.
The case revolves around the agreement between Charter and EAR to fund equipment‑leasing arrangements. EAR entered into a number of similar financing arrangements with other parties. EAR and its principles were fraudulently refinancing and re‑leasing the same equipment over and over again with Machine Tools Direct, Inc. (“MTD”), an affiliated corporation being used as a straw man to conceal the fraudulent nature of the equipment leasing transactions. The fraud occurred when EAR repeated this pattern of selling and re-leasing equipment to and from new financers, but did so with the same equipment it had previously sold to other financers, without disclosing to any financer that EAR was selling equipment to which it no longer owned title. The relationship between Charter and EAR was evidenced by three promissory notes, with the total principal obligation as of the petition date of $593,964.99. EAR made regular monthly payments on the three notes to Charter from November 2007 through July 2009 totaling $1,496,824.54. Charter filed a proof of claim for $593,964.99, representing the outstanding amounts due on the note. In connection therewith, Plaintiff sought (i) to avoid and recover transfers from EAR to Charter, (ii) relief for actual fraud pursuant to 11 U.S.C. § 548(a)(1)(A) and 740 Ill. Comp. Stat. 160/5(a)(1), (iii) to recover $1,496,514.72 in payments made by EAR to Charter and (iv) to recover the value of the transfers pursuant to 11 U.S.C. § 550, and further requested to disallow the claim Charter had against EAR pursuant to 11 U.S.C. § 502(d). Plaintiff argued that the three notes and monthly payments were fraudulent because they were made in furtherance of a fraudulent scheme by EAR and therefore served to defraud EAR’s creditors. The FDIC stood in the shoes of Charter and intervened in the suit as a defendant.
The Bankruptcy Court
The Bankruptcy Court determined that the D’Oench doctrine and 12 U.S.C. § 1823(e) served as defenses to all of Plaintiff’s claims. In D’Oench, the Supreme Court held that a party may not enforce against the FDIC any unrecorded or secret agreement which is not contained in the records of a bank in which the FDIC has acquired rights. There is a strong federal policy to protect the FDIC against misrepresentations as to the assets of banks. Similarly, 12 U.S.C. § 1823(e) of the FDIC Act states that no agreement which tends to diminish or defeat the interest of the FDIC shall be valid against the FDIC unless certain conditions are met. Section 1823(e) invalidates the use of secret agreements as a defense or claim against the FDIC when such an agreement was intended to defeat the right, title, or interest of the FDIC in any asset acquired by it.
The question for the Bankruptcy Court was whether the D’Oench doctrine and § 1823(e) are coextensive or whether §1823(e) superseded D’Oench. In answering that the doctrine and statute are coextensive, the Bankruptcy Court first acknowledged that the case law surrounding each had become so intertwined that it was difficult to determine where the doctrine ended and the statute begun. Further, they both serve to protect the same policy concern: federal banking regulators must be able to rely on banks’ records that the FDIC insures so they will be able to assess a bank’s insolvency accurately.
The Bankruptcy Court then examined two of the Plaintiff’s arguments: first, that a trustee in bankruptcy cannot be estopped from asserting the terms of a secret agreement because the language of 1823(e) does not touch the federally‑created right of a bankruptcy trustee to act on behalf of innocent creditors. The Bankruptcy Court rejected the argument that a trustee in bankruptcy is immune from Title 12 defenses and held that the Bankruptcy Code and § 1823(e) should be interpreted in a way so as to give meaning to both Title 11 and 12. The Court concluded that both the Plaintiff and FDIC are equally deserving of specialized tools to carry out their powers.
The Bankruptcy Court then rejected Plaintiff’s second argument: that the secret agreement must be one between a debtor and the acquired bank. The Court reasoned that there is no requirement explicitly stated in either D’Oench or in § 1823(e) mandating that the acquired bank must be a party to the secret agreement. While it may be true in practice that most cases in which these defenses are asserted involve secret agreements between the acquired bank and its borrower, nothing in the doctrine or statute requires that factor to be present. Further, the purpose of the doctrine and § 1823(e) is to ensure that bank examiners can rely on a bank’s records when evaluating its assets. As the court found, D’Oench and § 1823(e) deal with the evidence used to defeat the government’s interest, not who is attempting to do so. They apply to any party attempting to defeat the government’s interest in assets, not only to those who are the contractual parties. The Court concluded that the D’Oench doctrine and § 1823(e) apply in bankruptcy cases to estop a party from relying on an unwritten agreement outside of the institution’s records in an effort to defeat or diminish the FDIC’s interest in an asset.
Next, the Bankruptcy Court rejected the Plaintiff’s argument that the §1823(e) defense does not apply to a fraudulent transfer because such claim does not rely on the enforcement of a secret agreement. The Court acknowledged that it is theoretically possible for a bankruptcy trustee to prove a debtor’s fraudulent intent through evidence other than a failed bank’s books and records, but determined that because there was a secret agreement present in the facts of this case, that secret arrangement was critical to the Plaintiff’s fraudulent conveyance claims against the FDIC.
The Bankruptcy Court then found that in order to determine whether the Plaintiff’s claims were precluded by D’Oench or §1823(e), the Court needed only to decide whether the Plaintiff sought to introduce a secret agreement as evidence of the fraudulent transfer in order to defeat the FDIC’s interest in the payments. The Court concluded that the Plaintiff’s claims against the FDIC depended upon him proving the existence of the alleged scheme between EAR and MTD. Therefore, if the Plaintiff could not introduce evidence of the scheme, he would have failed to establish the requisite level of intent, and his causes of action for recovery of fraudulent conveyances would fail.
In rejecting Plaintiff’s last count seeking to disallow Charter’s claim under § 502(d), the Bankruptcy Court found that the transfers made by EAR to Charter could not be avoided and recovered by the Plaintiff as fraudulent, and granted judgment in favor of the FDIC.
The Bankruptcy Court concluded that because there was a secret agreement between EAR and MTD, which was at the heart of the Plaintiff’s claims, and because the defenses of D’Oench and §1823(e) precluded the Plaintiff from relying on such secret agreements to prove EAR’s fraudulent intent, the FDIC was entitled to summary judgment.