Federal Deposit Ins. Corp. v. Barness
28 U.C.C. Rep. Serv. (West) 704, 1980 U.S. Dist. LEXIS 17211, 484 F. Supp. 1134 (1980)
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Rule of Law:
Under the common law of assignment, an assignee of a non-negotiable instrument must prove valid ownership of the claim, and the obligor may assert as a defense that the assignee's title is invalid because it was acquired through an illegal transaction.
Facts:
- On April 28, 1975, Herbert Barness executed a non-negotiable promissory note for $64,835 to Centennial Bank, payable on demand and containing a confession of judgment clause.
- Barness alleges he signed the note as an accommodation to Centennial Bank with the understanding and oral agreement that the bank would not hold him liable for payment.
- On October 20, 1976, the Pennsylvania Department of Banking closed Centennial Bank and took possession of its assets, with the Secretary of Banking becoming the bank's receiver.
- On October 21, 1976, the Secretary, as receiver, assigned certain assets of Centennial, including the Barness note, to the Federal Deposit Insurance Corporation (FDIC).
- Barness alleges that the state's takeover of Centennial Bank was illegal, involving violations of due process and improper collaboration between state regulators and the FDIC.
Procedural Posture:
- The Federal Deposit Insurance Corporation (FDIC) obtained a judgment by confession against Herbert Barness in the Court of Common Pleas of Bucks County, a state trial court.
- Barness removed the action to the United States District Court for the Eastern District of Pennsylvania.
- Barness filed a Motion to Open Judgment, asserting several defenses.
- FDIC filed a motion to dismiss Barness's motion.
- The District Court denied the FDIC's motion to dismiss and allowed the parties to conduct discovery on the motion to open judgment.
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Issue:
May an obligor on a non-negotiable instrument assert as a defense against an assignee that the assignee's title to the instrument is void due to the illegality of the underlying bank takeover through which the instrument was acquired?
Opinions:
Majority - Edward R. Becker
Yes. An obligor may assert as a defense that an assignee's title to a non-negotiable instrument is void due to an illegal underlying transfer. Because the note at issue is non-negotiable, the common law of assignment governs, meaning the assignee (FDIC) takes the instrument subject to all defenses available against the original obligee (Centennial Bank). Under modern procedural rules, an assignee must plead and prove the validity of its ownership, which entitles the obligor to challenge the assignee's chain of title. If the bank takeover that transferred the note to the state receiver was illegal, the transfer was ineffective and void, meaning the receiver had no valid title to pass to the FDIC. Therefore, the illegality of the takeover constitutes a meritorious defense for the obligor, Barness, sufficient to open the confessed judgment against him.
Analysis:
This decision establishes that the legality of a bank takeover can be litigated as a defense by an individual debtor in a collection action brought by the FDIC. It clarifies that under modern assignment law, an obligor can directly challenge the assignee's chain of title, shifting from older precedents where such challenges were disallowed. This ruling places a greater burden on the FDIC when acquiring assets from failed banks, as it must now be prepared to defend the procedural and substantive legality of the underlying bank closing. The case underscores the significant legal differences between negotiable and non-negotiable instruments, confirming that assignees of the latter do not receive the enhanced protections afforded to holders in due course.
