BANKING LAW
by Dean G. Pawlowic·
I.
II.
INTRODUCTION
385
LITIGATION ARISING FROM BANK FAILURES ...•............ 386
Trembling Prairie Land Co. v. Verspoor & First State BankKeene v. Metroplex Petroleum Inc.: No Interest ofFDIC
Subject to Tax Sale Without Consent ofFDIC
386
B. Ferguson v. FDIC: Authority 0/Agents/or FDIC
391
C. SMS Financial, LLC v. ABBCa Homes, Inc.:
Tolling 0/ Limitations Period/or Contract
.. 394
III. CRIMINAL ACTIONS AGAINST INSIDERS
396
A.
IV. MISCELLANEOUS
A.
B.
V.
401
Martinez Tapia v. The Chase Manhattan Bank, N.A.:
Fiduciary Duty ofInvestment Adviser in Context of
Tolling ofStatute 0/ Limitations
401
Voest-Alpine Trading USA Corp. v. Bank of China:
Commercial Activity Exception to Sovereign Immunity In
Context ofFailure to Pay Under Letter o/Credit . . . . . . . .. 402
CONCLUSION
403
I. INTRODUCTION
Litigation arising from bank failures continues to fonn a prominent part
of the banking law landscape for this survey period. Under this general
heading, the Fifth Circuit continued to refine its analysis of the interplay
between local law relating to tax sales and the special rights afforded to the
FDIC,1 reviewed the special law applicable to the authority (or lack thereof)
of agents for the FDIC,2 and considered whether the special statute of
limitations applicable to claims brought by the FDIC should be judicially
amended, or rather construed, to include a tolling clause borrowed from the
general limitation statute.3
Unfortunately, criminal actions relating to banking law were numerous
during the survey period. For a discussion of those topics, the reader is
referred to the Criminal Procedure article of this survey. The Fifth Circuit
• Professor of Law. Texas Tech University School of Law; B.A., Creighton University, 1970;
M.A., Creighton University, 1972; J.D., summa cum laude, Creighton University, 1979.
1. See discussion infra Part II.A.
2. See discussion infra Part II.B.
3. See discussion infra Part II.C.
385
HeinOnline -- 31 Tex. Tech L. Rev. 385 (2000)
386
TEXAS TECH LA W REVIEW
[Vol. 31:385
considered five appeals involving criminal actions against bank insiders, and
this article reviews the facts of those cases. 4
Lastly, two miscellaneous decisions are included. s One opinion relates
to whether a limitations period should be tolled due to the fiduciary
relationship that may exist between a bank giving investment advice and the
bank's customer.6 The other decision addresses whether the issuer of a letter
of credit may be sued in the United States if the issuer is an instrumentality
of a foreign state. 7
II. LITIGATION ARISING FROM BANK FAILURES
A. Trembling Prairie Land Co. v. Verspoor & First State Bank-Keene v.
Metroplex Petroleum Inc.: No Interest ofFDIC Subject to Tax Sale
Without Consent ofFDIC
A recurring issue under the Financial Institution Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) involves the construction of 12 U.S.c.
§ 1825(b)(2), which starkly provides that a[n]o property of the Corporation
[the FDIC] shall be subject to levy, attachment, garnishment, foreclosure, or
sale without the consent of the Corporation.... "8 On at least five occasions
over the last few years, the Fifth Circuit has considered the interplay between
§ 1825(b)(2) and local law governing tax sales of property in which the FDIC
holds a mortgage lien. 9 Two decisions in the current survey period examine
this topic: Trembling Prairie Land Co. v. Verspoor and First State
Bank-Keene v. Metroplex Petroleum Inc. 10
In Trembling Prairie, certain lands located in Louisiana were
encumbered by a mortgage in favor of a bank. II The owners did not pay the
property taxes and the lands were purchased by Trembling Prairie Land
Company (the "Tax Purchaser") at a series of tax sales, the last of which
4. See discussion infra Part III.
5. See Martinez Tapia v. The Chase Manhattan Bank, N.A., 149 F.3d 404 (5th Cir. Aug. 1998);
Voest-A1pine Trading USA Corp. v. Bank ofChina, 142 F.3d 887 (5th Cir. June 1998), cert. denied, 119
S. Ct. 591 (1998).
6. See Martinez Tapia, 149 F.3d at 406; discussion infra Part IVA
7. See Voest-Alpine, 142 F.3d at 887; discussion infra Part IV.B.
8. Financial Institution Refonn, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73,
103 Stall83 (1989) (codified as amended in scattered sections of5 U.S.C., 12 U.S.C., 18 U.S.C. and 31
U.S.C.) [hereinafter FlRREA]; FlRREA, § 219, 12 U.S.C. § I825(b)(2) (1994).
9. See First State Bank-Keene v. Metrop1ex Petroleum Inc., 155 F.3d 732 (5th Cir. Sept. 1998);
Trembling Prairie Land Co. v. Verspoor, 145 F.3d 686 (5th Cir. July 1998), cert. dismissed sub nom.;
Trembling Prairie Land Co. v. FDIC, 119 S. Ct. 1594 (May (999); FDIC v. Lee, 130 F.3d 1139 (5th Cir.
1997); Donna Indep. Sch. Dist. v. Balli, 21 F.3d 100 (5th Cir. 1994); Matagorda County v. Russell Law,
19 F.3d 215 (5th Cir. 1994). For a discussion of FDIC v. Lee, see Dean G. Pawlowic, Banking Law, Fifth
Circuit Survey, 30 TEX. TEcH L. REv. 425, 435-37 (1999).
10. 145 F.3d at 686; First State Bank-Keene, 155 F.3d at 732.
II. 145 F.3d at 688.
HeinOnline -- 31 Tex. Tech L. Rev. 386 (2000)
BANKlNGUW
2000]
387
occurred on June 8, 1990. 12 On August 2, 1990, the bank that held the
mortgage failed, and the FDIC was appointed receiver and succeeded to the
rights of the bank with respect to the mortgage. 13 No further legal action
appears to have occurred with respect to the property or the mortgage until
April 20, 1994, when the FDIC obtained a default judgment for the amounts
due under the prior owner's mortgage. 14 Such amounts were not paid, and in
1995, the mortgage was reinscribed. IS On March 10, 1995, the Tax Purchaser
filed the instant suit, a petition to quiet tax title, in the Louisiana COurts. 16 The
FDIC intervened, and removed the action to federal district court. I? The
district court granted summary judgment to the FDIC, finding that the FDIC
did not consent to foreclosure as required by § 1825(b)(2).18
On appeal, the Fifth Circuit noted two differences between the facts of
this case and those of its earlier § 1825 decisions. 19 First, the actual tax sales
in Trembling Prairie occurred prior to the time the FDIC acquired any interest
in the property, not after. 20 Second, Trembling Prairie was a petition to quiet
title, not a foreclosure or sale as referenced in § 1825(b)(2),21
As to the fact that the FDIC had no interest in the property at the time of
the actual tax sales, the Fifth Circuit found that some property rights survived
the tax sales and were in existence when the FDIC was appointed receiver. 22
Reviewing Louisiana law, the court noted that the law mandates a three-year
period for redemption after a tax sale, a mortgagor succeeds to the redemption
rights of the tax debtor, and a mortgage is canceled only if the property is not
redeemed. 23 The redemption period had not run at the time the FDIC was
appointed receiver, and the Fifth Circuit ruled that this property right, under
§ 1825(b)(2), could not be foreclosed without the FDIC's consent. 24 The
reason that, absent the operation of § 1825(b)(2), the FDIC's right to redeem
would be foreclosed is that it was not exercised within the three-year period. 2s
12.
13.
14.
15.
16.
17.
18.
See id.
See id.
See id.
See id. at 688·89.
See id. at 689.
See id.
See id. at 688 (citing 12 U..S.C. § 1825(b)(2) (1994». The FDIC had also argued that neither
it nor the failed bank had received constitutionally sufficient notice of the tax sales, but both the district
court and the Fifth Circuit resolved the dispute on the basis of § 1825(b)(2) and found it unnecessary to
reach the constitutional issue. See id. at 689 n.3.
19. See id. at 689.
20.
21.
22.
23.
24.
25.
See id.
See id.
See id. at 690.
See id.
See id.
See id.
HeinOnline -- 31 Tex. Tech L. Rev. 387 (2000)
388
TEXAS TECH LA WREVIEW
[Vol. 31:385
If the property is not redeemed within three years, then under Louisiana law
a conventional mortgage is automatically canceled. 26
With respect to the second issue, that the instant action was a petition to
quiet title and not one ofthe specific actions enumerated in § 1825(b)(2), the
Fifth Circuit concluded that the purpose of § 1825(b)(2), in the context of tax
foreclosures, is to protect the FDIC from any deprivation of property initiated
by a state without its consent.27 From this perspective, certainly, the
Louisiana tax sales are the functional equivalent ofthe foreclosure procedures
previously addressed by the Fifth Circuit, as found by the Trembling Prairie
court. 28 The court could not stop there, however, because the FDIC had no
property interests at the time of the tax sales because it had not yet been
appointed receiver. 29 That is, the tax sales deprived the FDIC of no property
because the FDIC had no interest to lose at that time. 30 At the time of the
receivership, the only property right of the FDIC identified by the court was
the right to redeem within three years. 31 Accordingly, the court went on to
decide that the petition to quiet title was also the functional equivalent of the
actions listed in § 182S(b)(2) because the end result would be the same-"the
FDIC loses the Property."32
However, the property lost by the FDIC was, as referenced above, the
right to redeem, and the reason it was lost was that it was not exercised within
the three-year period.33 In effect, the Trembling Prairie court was construing
§ 1825(b)(2) to prevent the expiration of a statute of Iimitations. 34 The court
acknowledged this in a footnote, but stated its belief that such a result was
compelled by public policy reasons-"the necessity of recouping economic
stability in the financial industry."3s In context, it's difficult to determine
whether the Fifth Circuit meant anything more by this statement than that the
FDIC fund should be protected from depletion, a policy previously rejected
by the Supreme Court as without statutory foundation. 36
Assuming the correctness ofthe court's fmdings that (i) the FDIC had no
property interest at the time of the tax sales, (ii) the only property interest
succeeded to by the FDIC at the time of the receivership was the right to
26. See LA. REv. STAT. ANN. 47 § 2183 (West 1999). "The statute cancels conventional mortgages
as a convenient means to clear title to property sold for taxes and relieve a tax-vendee ofsuch burdens."
Grieshaber v. Cannon, 346 So.2d 166, 168 (La. 1977).
27. See Trembling Prairie, 145 F.3d at 691.
28. See id. at 690.
29. See id. at 688; supra notes 12-13 and accompanying text.
30. See supra note 29.
31. See Trembling Prairie, 145 F.3d at 690; supra note 24 and accompanying text
32. Trembling Prairie, 145 F.3d at 691.
33. See id. at 690; supra notes 24-26 and accompanying text.
34. 145 F.3d at 691.
35. Id. at 690-91 n.5.
36. See O'Melveny & Myers v. FDIC, 512 U.S. 79, 88-89 (1994) ("there is no federal policy that
the fund should always win").
HeinOnline -- 31 Tex. Tech L. Rev. 388 (2000)
2000]
BANKING LAW
389
redeem, and (iii) the FDIC would lose the right to redeem by virtue of the
petition to quiet title, one might expect that the application of § 1825(b)(2)
would protect the FDIC from the loss of the right to redeem. Without
explanation, however, the Trembling Prairie court went beyond its findings
relating to the quiet title petition and the FDIC's loss of redemption rights to
hold that "the tax sale at issue was conducted without the consent of the FDIC.
Accordingly, the tax sale violated 12 U.S.C. § 1825(b)(2) and thus is null and
void."3? As applied in this case, therefore, § 1825(b)(2) did not merely
preserve the FDIC's position, but improved it. Two months later, however,
the breadth of this holding, as well as the court's analysis relating to the
expiration of redemption rights and statutes of limitation, was undercut to
some extent by the reasoning in First State Bank-Keene, discussed below.38
First State Bank-Keene involved some of the same issues as Trembling
Prairie, but reached quite different results. In First State Bank-Keene, a
bank which held a note and deed of trust on certain real property located in
Texas had accelerated the note on June 23, 1989, due to a payment default. 39
On June 30, 1989 the bank was declared insolvent and the FDIC was
appointed as receiver. 40 In 1991, local taxing authorities commenced suit to
foreclose their tax lien against the property and obtained a judgment ordering
the property sold.41 The FDIC, which had succeeded to the rights of the bank
in the property, was not joined as a party to the tax suit, and did not consent
to the foreclosure or sale of the property.42 The property was sold on March
5, 1992, to an individual (the "Tax Purchaser") for approximately $10,000.43
On March 22, 1996, the FDIC filed the instant suit seeking, among other
things, a judgment foreclosing the deed of trust and a declaration that the tax
foreclosure and sale were void in their entirety.44 While the suit waS pending,
the FDIC transferred the note and deed of trust to First State Bank-Keene,
which was substituted for the FDIC in the suit. 4s After a bench trial, the
district court declared the tax sale null and void. 46
The Tax Purchaser's primary defense was that the statute of limitations
applicable to the note had expired prior to the date the FDIC commenced
suit. 4 ? Although the district court found that the FDIC's suit had not been
filed within the limitations period, the court ruled that the Tax Purchaser
37.
145 F.3d 81691.
38.
See First State Bank-Keene v. Metroplex Petroleum, Inc., 155 F.3d 732, 733 (5th CiT. Sept.
1998).
39.
40.
41.
42.
43.
44.
45.
46.
47.
See First State Bank-Keene, 155 F.3d at 733.
See id.
See id. 81734.
See id.
See id.
See id.
See id.
See id.
See id. at 734-35.
HeinOnline -- 31 Tex. Tech L. Rev. 389 (2000)
TEXAS TECH LA WREVIEW
390
[Vol. 31:385
lacked standing to raise the limitations defense because the tax sale was null
and v<?id and transferred no inter~st in the property to the Tax Purchaser.48
The tax sale was null and void, held the district court, because the FDIC was
a necessary party and had not been named as a defendant,49
The key issue on appeal, therefore, was the effect ofthe failure to join the
FDIC as a party to the tax foreclosure. 50 If the tax sale was null and void, then
the Tax Purchaser received no interest in the property and was without
standing to raise a limitations defense. 51 If the tax sale was valid, but it did
not affect the FDIC's interest because the FDIC was not a party, then the Tax
Purchaser did receive title to the property, but subject to the lien of the
FDIC. 52 In that event, the Tax Purchaser would have standing to plead the
defense oflimitations, and the FDIC's claim would be time-barred. s3
Under Texas law, the Fifth Circuit held that the rule appears to be that
the failure to join a lienholder in a tax foreclosure suit does not render a
judgment void, hut subjects the property transferred to the lien. 54 Based on
Texas law, therefore, the Tax Purchaser did have title. 55 The FDIC's lien
continued and was not affected by the tax sale, but the Tax Purchaser did have
standing to plead the defense of limitations. 56
The Fifth Circuit next turned to § 1825(b)(2).57 Reviewing the principles
derived from FDIC v. Lee and Trembling Prairie, the Fifth Circuit identified
the underlying thread of the cases applying § 1825(b)(2) to be that the FDIC
must consent to any deprivation of its property.S8 The central issue in First
State Bank~eene was whether, under the tax sale, the FDIC was deprived
of any property.59 The tax sale deprived the FDIC of no property, concluded
the court, since the FDIC's only property was its lien and under Texas law the
lien passed through the tax sale unaffected because the FDIC was not joined
as a party.60 Accordingly, the tax sale was not void under § I825(b), and the
Tax Purchaser had standing to plead the defense of Iimitations. 61 Under the
48.
49.
50.
51.
52.
53.
54.
55.
56.
See id. at 734.
See id.
See id. at 735.
See id.
See id.
See id.
See id. at 736-37.
See id.
See id.
57. See id. at 737(citing FIRREA, § 219,12 U.S.C. § 1825(b)(2)(l994».
58. See First Stare Bank-l<eene, 155 F.3d at 737-38 (citing FDIC v: Lee, 130 F.3d 1139 (5th Cir.
1997); Trembling Prairie Land Co. v. Verspoor, 145 F.3d 686 (5th Cit. July 1998); FIRREA § 1825(b)(2».
59. See 155 F.3d at 738.
60. See id. at 739.
61. See id.
HeinOnline -- 31 Tex. Tech L. Rev. 390 (2000)
2000]
BANKING LAW
391
facts, the limitations period had run prior to the filing of the FDIC's suit;
therefore, the court ruled that the FDIC's lien had become unenforceable. 62
The First State Bank-Keene court attempted to reconcile its holding
with that of Trembling Prairie by noting that, in Trembling Prairie, the suit
to quiet title sought to deprive the FDIC of the right to redeem, whereas in
Keene the FDIC's lien survived the tax sale.63 As suggested above, the
distinction could provide grounds for restoring the FDIC's redemption rights
in Trembling Prairie, but in that case the court didn't just restore redemption
rights, but rather held that the tax sale was null and void. 64 The First State
Bank-Keene court hinted that such a drastic remedy may not have been
necessary when it remarked:
As in Lee, we assume that [in Trembling Prairie] the FDIC had no particular
interest in who held legal title to the property in question as long as the
FDIC's equitable rights in the property were not prejudiced and could be
exercised at the discretion ofthe FDIC without additional cost. 6S
Not directly addressed by the Keene court was the fact that in both cases
the FDIC had lost its property rights due to the expiration of a limitations
period. The Trembling Prairie court ruled that § 1825 overrode the
limitations applicable to the redemption rights in that case. 66 In First State
Bank-Keene, the court concluded that the FDIC's lien was subject to the
limitations period, commenting that the FDIC "never had the right to prevent
Metroplex [the original owner], or any party holding an interest in the
Property under Metroplex, from pleading the statute of limitations once the
statute had run."67
B. Ferguson v. FDIC: Authority ofAgentsfor FDIC
A business entity is not liable in contract for the acts of its agent unless
the agent was acting within the scope ofthe agent's authority.68 An agent may
have actual authority; that is, the principal may expressly or impliedly
authorize its agent to act on the principal's behalf with respect to a particular
matter. 69 Or, even if there is no actual authority, a principal by words or
62.
63.
64.
65.
66.
See id.
See id. (citing Trembling Prairie, 145 F.3d at 686).
See id.; see supra note 37 and accompanying text.
First State Bank-Keene, 155 F.3d at 739.
See 145 F.3d 686, 690 (5th Cir. July 1998); see supra notes 32-34 and accompanying text.
67. 155 FJd at 738.
68. See REsTATEMENT (SECOND) OF AGENCY § 140 (l957). In addition to actual authority. see
i'lfra note 69 and accompanying text, and apparent authority, see infra notes 70-71 and accompanying text,
the Restatement also recognizes the concept of inherent agency power. See REsTA TEMENT (SECOND) OF
AGENCY § 8A (1957).
69. See REsTATEMENT (SECOND) OF AGENCY §§ 7, 26 (1957).
HeinOnline -- 31 Tex. Tech L. Rev. 391 (2000)
TEXAS TECH LA W REVIEW
392
[Vol. 31 :385
conduct may cause others to reasonably believe that its agent is authorized to
act in the matter. 70 In that case, the agent has apparent authority, or there may
be agency by estoppeUI Where there is neither actual authority nor apparent
authority or estoppel, liability for the principal may still result if the principal
ratifies the agent's acts. n To what extent may one rely upon these general
rules of agency law in dealing with the FDIC? In Ferguson v. Federal
Deposit Insurance Corp., the Fifth Circuit warned that special federal rules
apply to the FDIC, and that anyone entering into an arrangement with the
FDIC takes the risk of accurately determining the authority ofFDIC officers. 73
Ferguson involves a dispute concerning the scope ofa settlement entered
into between the FDIC and a borrower on a number of notes held by the FDIC
in its corporate capacity.74 The borrower was an insider ofthe bank which had
made the loans. 75 The bank failed and the FDIC was appointed as receiver. 76
The notes were delinquent at the time of the receivership, and the FDIC as
receiver transferred the notes to the FDIC in its corporate capacity pursuant
to a contract of sale. 77 The borrower arranged to sell certain property which
was collateral for some of the notes and to pay $1.727 million to the FDIC in
exchange for what the borrower alleges was a global settlement of all of the
notes. 78 Soon after payment of the $1.727 million, a dispute arose as to
whether the settlement extended to all of the notes as maintained by the
borrower, or to only three of the notes, as asserted by the FDIC. 79 The
borrower filed this action in the Texas courts for a declaratory action, and the
FDIC removed the case to federal court. 80 The district court granted the
FDIC's motion for summary judgment on the basis that only the FDIC Credit
Review Committee, and not the FDIC officers negotiating with the borrower,
had the authority to approve a global settlement. 81
On appeal, the first issue discussed by the Fifth Circuit was whether
federal or state law should govern the issue of authority.82 Mindful of the
Supreme Court's recent reaffirmation that" '[t]here is no federal general
70.
See id. §§ 8,27.
71. See id. § 8B. The Texas Supreme Court has suggested that the tenns ostensible agency,
apparent agency, apparent authority, and agency by estoppel are, as a practical matter. interchangeable.
See Baptist Mem'l Hosp. Sys. v. Sampson, 969 S.W.2d 945, 948 n.2 (Tex. 1998). According to the Texas
court, "[r]egardless of the term used, the purpose of the doctrine is to prevent injustice and protect those
who have been misled." [d.
72. See REsTATEMENT (SECOND) OF AGENCY §§ 82-100A (1957).
73. 164 F.3d 894, 898-99 (5th Cir. Jan. 1999).
74. See id. at 895.
75.
76.
77.
78.
79.
80.
81.
82.
See id.
See id.
See id.
See id.
See id. at 896.
See id.
See id.
See id. at 897.
HeinOnline -- 31 Tex. Tech L. Rev. 392 (2000)
2000]
BANK./NG LA W
393
common law,' n83 the Fifth Circuit nonetheless concluded that in this instance
federal common law should apply.84 First, the Fifth Circuit observed that the
Supreme Court did not purport to overrule case law placing the burden on
those dealing with the federal government to determine accurately the
authority of agents for the government. 85 The Fifth Circuit also emphasized
that in those cases in which courts have applied state law to the FDIC, the
FDIC was acting in its capacity as receiver for a failed bank, and was
asserting the rights of the failed bank, not its own. 86 In contrast, the notes in
Ferguson were transferred to the FDIC in its corporate capacity, and
settlement negotiations were between the borrower and agents for the FDIC
in its corporate capacity.87 Thus, Ferguson did not involve the derivative
rights of a failed bank, but the primary authority of officers of the FDIC to
bind the FDIC. 88 The Fifth Circuit ruled that long-established federal law
should govern that issue.89
The federal common law rule, according to the Ferguson court, is "that
the Government is not bound by the action of agents acting outside the scope
of their authority."90 By authority, the Fifth Circuit meant actual authority,
and the court cited cases providing that" 'anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that
he who purports to act for the Government stays within the bounds of his
authority,' /191 and that in "most cases the Government cannot be estopped
based on unauthorized representations made by its agents,"92 and that 'the
federal government will not be bound by a contract or agreement entered into
by one of its agents unless such agent is acting within the limits of his actual
authority.' n93
The only evidence as to actual authority was presented by the FDIC. 94
The FDIC's evidence indicated that all settlements had to be approved by the
FDIC Credit Review Committee, and the borrower presented no evidence that
the FDIC officers negotiating the settlement had actual authority to enter into
a global settlement.95 Rather, the borrower contended that the FDIC officers
II
83.
84.
85.
Id. (quoting O'Melveney & Myers v. FDIC, 512 U.S. 79, 83 (1994».
See id. at 898.
See id.
86. See id.
87. See id.
88. See id.
89. See id.
90. Id.
91. Id. (quoting Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380,384 (1947».
92. Id. (citing Office ofPersonnel Management v. Richmond, 496 U.S. 414, 432-33 (1990); United
States v. Perez-Torres, 15 F.3d 403, 407 (5th Cir. 1994); Fano v. O'Neill, 806 F.2d 1262, 1265 (5th Cir.
1987».
93. Id. at 899 (quoting United States v. D'Apice, 664 F.2d 75, 78 (5th Cir. 1981».
94. See id.
95. See id.
HeinOnline -- 31 Tex. Tech L. Rev. 393 (2000)
TEXAS TECH LA W REVIEW
394
[Vol. 31:385
had apparent authority, and pointed to the actions ofthe officers in negotiating
settlements, signing lien releases, and the FDIC's failure to communicate its
internal restrictions on the authority ofthe officers.96 With respect to apparent
authority, the Fifth Circuit repeated that the risk was on the borrower to
accurately determine the bounds ofa government agent's authority.97 Without
further elaboration, the court opined that, even assuming that apparent
authority was relevant, the evidence presented by the borrower was not
sufficient to show that a reasonable person would have believed that the FDIC
officers had the authority to enter into a global settlement. 98
C. SMS Financial, LLC v. ABBCa Homes, Inc.: Tolling ofLimitations
Period/or Contract
When the FDIC commences an action based on a contract claim relating
to a note acquired by the FDIC from a failed bank, two different statutes of
limitation may apply.99 The general limitation statute setting forth the time
periods for commencing actions brought by the United States is 28 U.S.c. §
2415. 100 Section 24IS(a) provides that, except as otherwise provided by
Congress, a contract action by the United States or an officer or agency
thereof is barred unless filed within six years after the right of action
accrues. 101 Section 2415(a) also contains a tolling clause, which provides that
"in the event of later partial payment or written acknowledgment of debt, the
right of action shall be deemed to accrue again at the time of each such
payment or acknowledgment."I02 The other relevant statute, 12 U.S.C. §
1821 (d)( 14), provides the statute of limitations for claims brought by the
FDIC as conservator or receiver of a failed bank. tOJ Although § 1821 (d)( 14)
specifically applies to the FDIC as conservator or receiver, another statute
grants the same rights to the FDIC in its corporate capacity with respect to any
assets acquired by the FDIC in connection with a failed bank. 104 Under §
1821(d)(l4), the FDIC is allowed six years within which to bring suit, or such
longer period, if any, provided under applicable state law, and the limitation
period does not begin to run until the later of (i) the date the FDIC is
appointed conservator or receiver, or (ii) the date the cause of action
accrues. lOS Section 1821(d)(14), therefore, provides some advantages to the
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
See id.
Seeid.
Seeid.
See 28 U.S.C. § 2415 (1994); 12 U.S.C. § 1821(d)(14)(1994).
See 28 U.S.C. § 2415.
See id. § 2415(a).
Id.
See 12 U.S.C. § 1821(d)(14) (1994).
See id. § 1823(d)(3).
See id. § 1821(d)(14).
HeinOnline -- 31 Tex. Tech L. Rev. 394 (2000)
2000]
BANKING LAW
395
FDIC that are not presented in 28 U.S.C. § 2415.1 06 However, what §
l82l(d)(14) lacks is a tolling clause, such as that contained in 28 U.S.C. §
2415. 107 What the FDIC would like to do, ofcourse, is to pick the best of both
worlds. In SMS Financial Limited Liability Co. v. ABCO Homes, Inc., the
FDIC gets its wish. lOS
For the purposes of this issue, the facts of SMS Financial can be
simplified,, 09 A bank made a loan to the borrower. llo The bank later failed
and the FDIC took over the bank's operations. 11I When the borrower
defaulted, the FDIC agreed to a refmancing that included a number of parties
related to the borrower as obligors, and the note was payable to the FDIC in
its corporate capacity.1I2 The FDIC endorsed the refinancing note to SMS
Financial Limited Liability Company ("SMS").1I3 The note matured on
February 15, 1991, but was not paid" 14 In April and May of 1991, one of the
obligors made two payments on the noteYs On July 30, 1991, another of the
obligors wrote the FDIC requesting an extension oftime, offering a reduced
payment, and "assuring that 'they' anticipated 'their' cash flow would soon
increase enabling 'them' to retire 'their' debt with the FDIC."1I6 SMS
commenced the instant action on the note on April 9, 1997. 117 The district
court granted the obligors' motion for summary judgment (reversed on
appeal) on grounds not related to the defense of limitations. IIB
On appeal, the obligors argued that the court could affirm the district
court's grant of summary judgment on alternative grounds, including
limitations. 1I9 Although the holder of the note was SMS;20 based on prior
Fifth Circuit precedent SMS, as an assignee of the FDIC, was entitled to the
same limitations period that would apply to the FDIC. 121 The Fifth Circuit
106.
107.
See id.; 28 U.S.C. § 2415 (1994).
See 12 U.S.C. § 1821(d)(I4); 28 U.S.C. § 2415.
108.
109.
167 F.3d 235 (5th Cir. Feb. 1999).
See id. Those facts not relevant to the limitations issue have been omitted. The district court
in SMS Financial granted the defendants' motion for summary judgment on the grounds that the plaintiff,
SMS Financial Limited Liability Co. was not the owner or holder of the note. See id. at 237. The Fifth
Circuit reversed on this ground, and considered whether it could affirm the district court's grant of
summary judgment on the alternative grounds of: "(I) equitable estoppel; (2) limitations; (3) commercially
unreasonable disposition of collateral; and (4) no relation back ofSMS's amended complaint." [d. at 239.
110. See id. at 237.
III.
112.
113.
114.
liS.
116.
117.
118.
119.
120.
121.
1993».
See id.
See id.
See id.
See id. at 239.
See id.
[d. at 239-40.
See id. at 240.
See id.; supra text accompanying note 109.
See SMS Financial, 167 F.3d at 239; supra text accompanying note 109.
See SMS Financial, 167 F.3d at 237·39; supra text accompanying note 109.
See SMS Financial, 167 F.3d at 240 (citing FDIC v. Bledsoe, 989 F.2d 80S, 811 (5th Cir.
HeinOnline -- 31 Tex. Tech L. Rev. 395 (2000)
396
TEXAS TECH LAW REVIEW
[Vol. 31 :385
noted that if § 2415 applies, then summary judgment would not be afftrmed. 122
Rather, the April and May payments for 1991 and the July 30, 1991, letter
relating to the note would create an issue of material fact as to whether the
tolling provision of § 2415 applies. l23 Conversely, ifonly § 1821 applies, then
SMS's suit would be barred because it was not filed within the six-year period
allowed by § 1821, and § 1821 contains no tolling provision. 124
After reviewing the limited and indecisive case law relating to this issue,
the Fifth Circuit turned to legislative history.125 The court found the
legislative history relating to § 1821 to be quite limited also, but the
legislative history that did exist evidenced Congress' intent to broaden the
FDIC's powers and to extend the limitations period through § 1821. 126 Based
on these congressional goals, the Fifth Circuit decided that § 1821 should be
extended beyond the statutory provisions crafted by Congress to include also
the tolling provision of § 2415. 127 The Fifth Circuit was undeterred by the
Supreme Court's recent admonition that unless there is some statutory basis
within FIRREA for creating an exception to one of its provisions, "[t]o create
additional 'federal common-law' exceptions is not to 'supplement' this
scheme, but to alter it."I28 Because of the court's engrafting of the tolling
provision of § 2415 onto the limitations period of § 1821, a genuine issue of
material fact was created with respect to whether the payments and the letter
served to toll the limitations period, precluding summary judgment on that
ground. 129
III. CRIMINAL ACTIONS AGAINST INSIDERS
During the survey period, the Fifth Circuit considered at least eight
appeals from criminal prosecutions relating to banking law. 13o Five of the
eight appeals involved bank insiders. 131 This article will not discuss the
122.
123.
124.
12S.
126.
127.
128.
129.
130.
See id. (citing 28 U.S.C.A. § 241S(a».
See id.
See id. (citing 12 U.S.C.A. § 1821(d)(14».
See id. at 242.
See id.
See id.
See O'Melveny & Myers v. FDIC, S12 U.S. 79, 87 (1994).
See id.
See United States v. Morrow, 177 F.3d 272 (Sth Cir. May 1999); United States v. Anderson,
174 F.3d S15 (Sth Cir. Apr. 1999); United States v. Doke, 171 F.3d 240 (Sth Cir. Mar. 1999), cert. denied,
120 S. Ct. 2S0 (1999); United States v. Bums, 162 F.3d 840 (Sth Cir. Dec. 1998); United States v. Hanson,
161 F.3d 896 (Sth Cir. Nov. 1998); United States v. Mann, 161 F.3d 840 (Sth Cir. Nov. 1998); United
States v. Scott, IS9 F.3d 916 (Sth Cir. Oct 1998); United States v. Schnitzer, 14S F.3d 721 (Sth Cir. July
1998).
131. See United States v. Morrow, 177 F.3d 272 (Sth Cir. May 1999); United States v. Doke, 171
F.3d 240 (Sth Cir. Mar. 1999), cerl. denied, 120 S. Ct2S0 (1999); United States v. Hanson, 161 F.3d 896
(Sth Cir. Nov. 1998); United States v. Mann, 161 F.3d 840 (Sth Cir. Nov. 1998); United States v.
Schnitzer, 145 FJd 721 (Sth Cir. July 1998).
HeinOnline -- 31 Tex. Tech L. Rev. 396 (2000)
BANKING LAW
2000]
397
criminal law or procedural rule at issue in these decisions but will briefly
review the factual circumstances which led to the prosecution of bank
insiders, with the thought that to be forewarned is to be forearmed.
United States v. Schnitzer is the only insider case decided in this survey
period in which the Fifth Circuit overturned a conviction. '32 In Schnitzer,
three directors of a savings association were convicted by a jury of
misapplying bank funds, making a false entry in bank records, devising or
attempting to devise a scheme and artifice to defraud a bank, and conspiring
to commit at least one of these offenses. 133 The district court directed an
acquittal for each defendant on each count, and in the alternative, granted a
new trial on all counts. l34 With respect to the counts of misapplication, bank
fraud, and conspiracy to commit misapplication and bank fraud, the Fifth
Circuit affIrmed the district court's acquittal. '35 With respect to the false entry
count, the court of appeals reversed the judgment of acquittal but affirmed the
grant of a new trial. '36
Schnitzer involved the operations of a savings and loan located in Texas
in the mid-1980s.' 37 Like a lot of savings and loans at that time and place, this
savings and loan had a history of losses, and owned property in the Houston
area that was a large part of its financial problems. 138 The savings and loan
decided to sell the Houston property and the three defendant directors
negotiated and approved, in large part, a transaction in which the savings and
loan sold the Houston property for $46 million. 139 As part of the exchange,
the savings and loan agreed to purchase other property located in the DallasFort Worth area for $26 million. 140 After this transaction, the financial
condition ofthe savings and loan appeared on paper to be greatly improved. 141
Most prominently, the savings and loan recognized a gain on the sale of the
Houston property that made it appear profitable for the first time in its
history. 142 Approximately one year later, the purchaser defaulted on the
Houston property and the savings and loan was forced to foreclose.1 43
This transaction presented three potential problems. First, the purchaser
of the Houston property was in reality also the seller of the Dallas property.144
This fact was critical because, under the accounting rules followed by the
132.
133.
134.
135.
136.
137.
138.
139.
140.
141.
142.
143.
144.
145 F.3d at 724.
See id.
See id.
See id.
See id.
See id.
See id.
See id.
See id. at 724-25.
See id. at 726.
See id.
See id.
See id. at 725-26.
HeinOnline -- 31 Tex. Tech L. Rev. 397 (2000)
TEXAS TECH LA W REVIEW
398
[Vol. 31:385
savings and loan, it could not book a profit on the sale ofthe Houston property
if the sale was conditional on the savings and loan's purchase of other
property from the purchaser. 14s Importantly, evidence existed from which the
jury could infer that the defendant directors knew of this and that the
transaction was structured to conceal the true identity of the seller of the
Dallas property so that the profit from the transfer of the Houston property
would be recognized on the books ofthe savings and 10an. l46 However, a new
trial on the count of false entry was granted because of the confusion
engendered by the government's introduction of an alternate theory offalse
entry discussed below. 147
Second, the savings and loan financed not only 80% of the price of the
Houston property, but also in effect the $9 million down payment. 148 The
savings and loan agreed to make a $15 million down payment on the Dallas
property, and it was this money that was the source of the purchaser's down
payment on the Houston property.149 Under FinanCial Accounting Standards
Board (FASB) 66, this fact also would preclude immediate recognition of a
profit on the sale ofthe Houston property.'so The Fifth Circuit had previously
ruled, however, that FASB 66 was not applicable to savings and loans at the
time of the transaction, and found the government's reliance on this
accounting rule improper. ISI
Third, the purchase price of the Dallas property to the savings and loan
was $26 million, but the seller had purchased it immediately prior to the sale
for $13 million. 152 The government argued that the defendants knew the seller
had paid only $13 million for the Dallas property, and that the savings and
loan's purchase for $26 million constituted bank fraud and a criminal
misapplication of bank funds. ls3 The appellate court ruled that the
government failed to prove that the defendants knew ofthe $13 million price,
or that the $26 million price paid by the savings and loan "was outside the
range of a value-for-value transaction. -154
United States v. Mann involved another savings and loan located in
Texas in theI980's.lss In Mann, two insiders were convicted on numerous
counts relating to a number oftransactions involving the savings and loan and
its successor institutions. 1s6 Among the abusive transactions were the
145.
146.
147.
148.
149.
ISO.
I5 I.
152.
153.
154.
See id. at 726,729.
See id. at 728-29.
See id. at 729-31; infra notes 148-51 and accompanying text.
See id. at 726.
See id.
See id. at 729-30.
See id. at 729-31.
See id. at 725-26.
See id. at 731-36.
[d.
ISS.
161 F.3d 840, 847 (5th Cir. Nov. 1998).
156.
See id.
HeinOnline -- 31 Tex. Tech L. Rev. 398 (2000)
2000]
BANKING LAW
399
purchase of certain oil and gas properties by one of the insiders for $9.6
million and the simultaneous sale of the properties to the savings and loan for
$13.8 million. ls7 The $4 million profit was funneled to associates of the
insider and used to purchase control of the savings and loan. 158 In another
transaction, the insider caused a successor of the savings and loan to swap the
stock of a subsidiary, which then held the same oil and gas properties, to the
insider in exchange for real estate owned by the insider. 159 Evidence indicated
that the oil and gas properties were worth $4 million, and the real estate had
a negative worth of $5 million, culminating in a loss to the savings and loan
of $9 million. l60 At the same time, the books of the savings and loan showed
the value of the real estate to be $18.8 million. 161 The same insider was also
convicted on counts relating to the promise of loans in exchange for purchases
of assets belonging to the insider. 162
In United States v. Hanson, the president of a branch of a bank was
convicted of bank fraud, misapplication of bank funds, and false bank records
entry.l63 The jury verdict was overturned by the district court, but reinstated
by the Fifth Circuit. 164 The president's offense began with the construction of
a custom home for his benefit. l65 A construction loan was made to the owner
of the lot, and the branch president participated in its approval and the
supervision of loan draw downs without any disclosure of the president's
involvement in the house project. l66 The president delayed approving draws
on the loan to save interest expense, caused the bank to pay overdraft amounts
on the builder's account relating to construction expenses for the house, and
ordered $24,134 in such amounts to be charged off by the bank. 167 The
president failed to repay the bank the charged-off amount until an FBI
investigation commenced. 168 After completion of the house, the president
sought pennanent financing from the bank. 169 In order to avoid a down
payment requirement in connection with the pennanent financing, the
president claimed that he was the borrower on the construction loan and that
the pennanent financing was therefore a refinancing that did not require a
down payment. 170
157.
158.
159.
160.
161.
162.
163.
164.
165.
166.
167.
168.
169.
170.
See id. at 848-49.
See id.
See id. at 852-53.
See id. at 853.
See id. at 854.
See id. at 855-56.
161 F.3d 896,898 (5th Cir. Nov. 25, 1998).
See id.
See id.
See id.
See id. at 899.
See id.
See id. at 899-900.
See id. at 900.
HeinOnline -- 31 Tex. Tech L. Rev. 399 (2000)
TEXAS TECH LA W REVIEW
400
[Vol. 31 :385
United States v. Doke involved another nominee loan made for the
benefit of insiders without full disclosure to the bank. 171 The two bank
insiders, one a significant shareholder and the other an attorney and member
of the bank's board of directors, "were convicted of conspiracy, bank fraud,
and two counts of making false statements" to a financial institution. 172 The
shareholder wanted to borrow $600,000 from the bank in order to exercise an
option to buy certain land. 173 The bank's lending limit as applied to the
shareholder, however, would have permitted a loan of only $40,000. 174 To
avoid this lending limit problem, the attorney insider was named as the
borrower and the bank made the loan to acquire the land to the attorney
insider. 17s The shareholder supplied the down payment and the semi-annual
payments on the loan for two years, but the continuing involvement of the
shareholder was never disclosed to the bank. 176 When the shareholder was no
longer financially able to make the payments, the attorney sought to
restructure the loan with the bank, but again no mention was made of the
shareholder's involvement. J77 The bank denied the restructuring request, and
no further payments were made on the loan. 178 Soon thereafter, the bank
foreclosed on the property, and resold it at a 10ss.l79
In United States v. Morrow, eleven individuals, ten connected with a
mobile home dealer and one a bank vice president, were convicted of bank
fraud, conspiracy to commit bank fraud, and aiding and abetting bank fraud
in the financing of mobile homes. 180 There was nothing subtle about the
alleged schemes in this case. The mobile home dealer acquired mobile homes
under a floor plan with the bank. 181 Bank policy required loans to be made at
the lower of the dealer cost and 60% of wholesale value. 182 Although the
actual dealer cost was lower than 60% of wholesale value, the mobile home
dealer obtained loans based on the higher 60% of wholesale value, and
allegedly divided the excess loan amount among the owners ofthe dealer and
the bank vice president. 183 Evidence also indicated that, in connection with
bank loan applications for the purchase of mobile homes by customers of the
dealer, the bank officer knew that a regular practice of dealer representatives
was to "short down payments," that is, to overstate the amount of down
171.
172.
173.
174.
175.
176.
177.
178.
179.
180.
181.
182.
183.
171 F.3d 240,242 (5th Cir. Mar. 1999), cert. denied, 120 S. Ct. 250 (1999).
[d. at 241-42.
See id. at 242.
See id.
See id.
See id.
See id.
See id.
See id.
177 F.3d 272, 285 (5th Cir. May 1999).
See id. at 286-87.
See id. at 287.
See id.
HeinOnline -- 31 Tex. Tech L. Rev. 400 (2000)
2000]
BANKING LAW
401
payments paid by customers, and to falsify customer information in order to
obtain loan approvals. 184
IV. MISCELLANEOUS
A. Martinez Tapia v. Chase Manhattan Bank, N.A.: Fiduciary Duty
ofInvestment Adviser in Context ofTolling ofStatute ofLimitations
Two other banking-related opinions decided during the survey period
deserve at least quick mention. lg5 Martinez Tapia v. Chase Manhattan Bank,
NA. involved a suit against a bank by a customer who, over a period of years,
had sought and relied upon extensive investment advice from the bank. l86 The
customer's claim arose out of losses suffered by the customer in connection
with an investment in a real estate unit fund sponsored by the bank. 18? The
customer's theories of recovery included "breach of contract, fraud and
misrepresentation, breach of fiduciary duty, breach of the duty of good faith
and fair dealing, and violations of the Racketeer Influenced and Corrupt
Organizations ACt." 18g The district court granted the bank's motion for
summary judgment, finding that all of the customer's claims were time-barred
under the applicable Texas statutes of limitations. 189
On appeal, the customer argued, among other things, that the fiduciary
or confidential relationships between himself and certain bank employees and
the bank subsidiary which agreed to provide management and administrative
services to the customer, "lessened the degree of care he was required to
exercise and tolled the statute of limitations on his claims."I90 Without much
discussion, however, the Fifth Circuit characterized the relationship between
all of the defendants and the customer as one simply for the provision of
brokerage services. 191 With respect to the nature ofthe duty owed by a broker,
the appellate court ruled that although the duty may vary, "where the investor
controls a nondiscretionary account and retains the ability to make investment
decisions, the scope of any duties owed by the broker will generally be
confined to executing the investor's order."I92 The court observed that nothing
in the summary judgment record suggested that any of the defendants had any
184.
185.
Id. at 288-92.
See Martinez Tapia v. Chase Manhattan Bank, N.A., 149 F.3d 404 (5th CiT. Aug. 1998);
Voest·A1pine Trading USA Corp. v. Bank of China, 142 F.3d 887 (5th Cir. June 1998), cert. denied, 119
S. Ct 591 (1998).
186. 149 F.3d at 406-08.
187. See id.
188. Id. at 408.
189. See id.
190. [d. at 412.
191. See id.
192. Id.
HeinOnline -- 31 Tex. Tech L. Rev. 401 (2000)
402
TEXAS TECH UW REVIEW
[Vol. 31 :385
discretionary investment authority. 193 Therefore, the court concluded that (i)
any fiduciary relationship between the customer and the defendants was
limited to making the investments approved by the customer, (ii) this
relationship did not relieve the customer from exercising reasonable diligence,
and (iii) this relationship did not toll the statute of limitations.194 What seems
remarkable about this decision is not the court's analysis of the duties owed
by a broker, but the court's characterization of the extensive relationship
between the customer and the defendants as an ordinary brokerage account. 195
B. Voest-Alpine Trading USA Corp. v. Bank of China: Commercial
Activity Exception to Sovereign Immunity In Context ofFailure to Pay
Under Letter ofCredit
Can an American beneficiary of a letter of credit issued by a bank that is
an instrumentality ofa foreign state enforce the letter of credit in an American
court if the bank refuses to honor the credit? The Fifth Circuit addressed this
issue in Voest-Alpine Trading USA Corp. v. Bank of China. 196 In Bank of
China, a New York corporation with its principal place of business in
Houston, Texas, agreed to sell certain goods for delivery in China to a Chinese
corporation. 197 To secure the buyer's payment obligation, the buyer arranged
for the Bank of China to issue a letter of credit for the benefit of the,American
seller. 198 The goods were delivered in accordance with the contract tenns but
were seized by Chinese customs. l99 The seller presented the necessary
documents for a drawing on the letter of credit, but the Bank of China refused
payment. 2OO
The seller commenced the instant suit against the Bank of China in
federal court in Houston, Texas. 201 The Bank of China responded that as a
foreign state it is immune from suit under the Foreign Sovereign Immunities
Act (FSIA).202 The FSIA does provide exceptions to the general rule of
immunity for certain commercial activities,203 but the Bank of China argued
that all of its acts with respect to the letter of credit had occurred in China, and
that it had engaged in no legally significant act in the United States. 204 At
issue was the third clause of the commercial activities exception to the FSIA,
193.
194.
195.
196.
197.
198.
199.
200.
201.
202.
203.
204.
See id.
See id.
See id.
142 F.3d 887 (5th Cir. June 1998), cerl. denied, 119 S. Ct. 591 (1998).
See id. at 890.
See id.
See id.
See id.
See id.
See id. at 890-91 (citing 28 U.S.C. § 1603 (1994».
See id. at 891-92.
See id. at 893-94.
HeinOnline -- 31 Tex. Tech L. Rev. 402 (2000)
2000]
BANKING LAW
403
which provides for jurisdiction over a foreign state in any case "in which the
action is based ... upon an act outside the territory of the United States in
connection with a commercial activity ofthe foreign state elsewhere and that
act causes a direct effect in the United States."205
The Fifth Circuit assumed that the Bank of China had engaged in no
legally significant act in the United States, but held that under the third clause,
no act in the United States is required. 206 Rather, the only requirements of the
third clause are: "(1) an act outside the United States (2) in connection with
commercial activity outside the United States (3) that causes a direct effect in
the United States."207 The Bank ofChina court found that the American seller
suffered a loss in the United States asa direct effect of the Bank of China's
refusal to pay on the letter of credit, and held that such loss was sufficient to
establish jurisdiction under the third clause. 208 As noted in the concurring
opinion, the Fifth Circuit's construction ofthe FSIA in this case is in conflict
with that of other circuits. 209
V. CONCLUSION
The Fifth Circuit continues to wade through the flotsam and jetsam left
by the banking crises of the 1980s.2IO When banks fail, the impact is not only
immediate, but enduring, as evidenced by both the civil and the criminal
litigation that remains from events which occurred more than a decade ago. 2l1
The cases decided this survey period do not greatly advance the court's
banking jurisprudence, but in some instances, such as First State
Bank-Keene, the Fifth Circuit has significantly refined its analysis. 212 Other
decisions, such as Trembling Prairie and SMS Financial, appear to be
informed and determined by only one policy consideration-the maximization
of recoveries for the FDIC. 213
205.
206.
207.
208.
209.
210.
211.
212.
213.
28 U.S.C. § 1605(a)(2) (1994).
See 142 F.3d at 894.
[d.
See id. at 897.
See id. (Reavley, C.J., concurring).
See discussion supra, Part 11.
See. e.g., id.; United States v. Schnitzer, 145 F.3d 721 (5th Cir. July 1998).
See ISS F.3d 732 (5th Cir. Sept. 1998).
See supra notes 35-36 and 127-28 and accompanying text.
HeinOnline -- 31 Tex. Tech L. Rev. 403 (2000)
HeinOnline -- 31 Tex. Tech L. Rev. 404 (2000)