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Resolution Trust Corporation v. Maplewood Investments

United States Court of Appeals, Fourth Circuit
31 F.3d 1276 (1994)
ELI5:

Rule of Law:

State law, rather than a special federal common law rule, governs whether the Resolution Trust Corporation (RTC) is a holder in due course of a non-negotiable instrument acquired from a failed financial institution. Consequently, the RTC is subject to the same personal defenses, such as an improper foreclosure sale, that the original debtor could have asserted against the failed institution.


Facts:

  • On November 30, 1987, Maplewood Investments executed a promissory note with a variable interest rate in favor of Commonwealth Savings Bank ('Commonwealth'), secured by a Deed of Trust on real property.
  • The trustee named in the Deed of Trust was Progressive Housing Service Corporation ('Progressive'), a wholly-owned subsidiary of Commonwealth.
  • Charles W. Whittaker served as the president of both Commonwealth (the creditor) and Progressive (the trustee), while Charles F. Sievers served as counsel for both entities.
  • After Maplewood defaulted on the note, Whittaker participated in discussions to determine the bid amount that Commonwealth would offer at the foreclosure sale.
  • On June 7, 1991, Sievers conducted the foreclosure sale, where another dual officer, John M. Tyler, Jr., placed the predetermined bid on behalf of Commonwealth.
  • Commonwealth was the sole bidder and purchased the property for an amount that left a deficiency of approximately $118,803.60 on the note.
  • Subsequently, Commonwealth became insolvent, and the Resolution Trust Corporation (RTC) acquired the Maplewood note as part of a purchase and assumption agreement.

Procedural Posture:

  • Commonwealth Savings Bank filed suit against Maplewood Investments and its guarantors for a deficiency judgment in the Circuit Court of Prince William County, Virginia.
  • After Commonwealth failed, the Resolution Trust Corporation (RTC) was appointed as its receiver and conservator.
  • The RTC substituted itself as the plaintiff and removed the case to the U.S. District Court for the Eastern District of Virginia.
  • The district court granted the RTC summary judgment on liability but, in a separate ruling, denied the RTC's motion to be treated as a holder in due course.
  • Following a bench trial on the deficiency amount, the district court entered judgment for the RTC, finding the underlying foreclosure sale complied with Virginia law.
  • Maplewood Investments, the defendant, appealed the judgment to the U.S. Court of Appeals for the Fourth Circuit.
  • The RTC, the plaintiff, cross-appealed the district court's denial of its holder-in-due-course status.

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Issue:

Does federal common law grant the Resolution Trust Corporation the protections of a holder in due course for a non-negotiable promissory note acquired through a purchase and assumption transaction, thereby shielding it from the debtor's personal defense that the underlying foreclosure sale was voidable due to a conflict of interest?


Opinions:

Majority - Kaufman, Senior District Judge

No. The court will not create a federal common law rule to grant the Resolution Trust Corporation (RTC) holder-in-due-course status for a non-negotiable instrument. The court reasoned first that the foreclosure sale was improper under Virginia law due to a clear conflict of interest, as an officer of both the creditor (Commonwealth) and the trustee (Progressive) participated in setting the creditor's bid, violating Virginia statute. Second, the promissory note was deemed non-negotiable under the Virginia law controlling at the time of its 1987 execution because its variable interest rate constituted a 'sum uncertain'. Citing the Supreme Court's recent decision in O'Melveny & Myers v. FDIC, the court found a heavy presumption against creating federal common law to displace state law where no significant federal policy is in conflict. Because Virginia law controls, and the note is non-negotiable, the RTC is merely an ordinary holder subject to Maplewood's personal defense, which bars the RTC's claim for a deficiency judgment.


Dissenting - Niemeyer, Circuit Judge

The dissent would have affirmed the judgment of the district court for the reasons articulated by that court, without further elaboration.



Analysis:

This case, heavily influenced by the Supreme Court's decision in O'Melveny & Myers, signals a significant retreat from the judicial expansion of the federal common law holder-in-due-course doctrine for federal banking agencies. The ruling establishes that when agencies like the RTC acquire non-negotiable instruments, state commercial law—including its specific rules on negotiability and holder status—will generally control. This decision prioritizes the stability of commercial relationships predicated on state law over a federal interest in uniform, favorable outcomes for bank receivers. It consequently limits the ability of the RTC and FDIC to collect on certain assets from failed banks, forcing them to contend with personal defenses that might previously have been cut off by a federal HDC rule.

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