Tips for Enforcing Notes Purchased from the FDIC as Receiver for a Failed Bank
[This article was previously published on Law360. It has been edited for this website.]
Did your institution purchase assets of a failed bank, such as promissory notes, from the FDIC through a Purchase and Assumption Agreement? Are you planning to sue to collect?
A borrower may attempt to challenge the right of your institution (called the Assuming Institution) to enforce the note. This can be a costly and time consuming process. Fortunately, for Assuming Institutions who purchase notes of a failed bank from the FDIC as receiver under typical Purchase and Assumption Agreements, a solid body of law protects their enforcement rights.
A. Do I need to have an allonge showing the name of my institution as the payee before I can enforce the note?
Probably not. The transfer of possession of the note and the expressed intent to give the Assuming Institution the rights of a holder is accomplished through the language of a typical Purchase and Assumption Agreement (P&A Agreement) itself. You should always check the language of your institution's particular agreement to confirm this.
Typical P&A Agreement language conveys to the Assuming Institution "all right, title and interest of the Receiver" and this includes the FDIC's right to enforce the note. See U.C.C. § 3-301. In addition to enforcement rights under the U.C.C., the Assuming Institution can also rely on applicable federal law, which vests the Assuming Institution "holder in due course" status. Accordingly, barring a peculiarity in the language of a P&A Agreement or other unusual factual circumstance, the Assuming Institution will be considered a holder in due course, and therefore a "person entitled to enforce" the note under U.C.C. § 3-301.
B.What if I have an allonge but the name on the allonge is different than the name of my institution? Does that somehow nullify the transfer?
Do not worry. An allonge in this context is merely an indorsement and the Uniform Commercial Code states that the intent of the indorser governs the identity of the indorsee. In other words, the note may be enforced by "the person intended by the [FDIC]" even if that person is identified by a different name in the allonge. See U.C.C. § 3-110. The language of a typical P&A Agreement demonstrates the FDIC's intent to negotiate the note to the Assuming Institution. So, while an Allonge might serve as further evidence to demonstrate the FDIC's intent, the allonge is not a necessary document when the transfer has already been accomplished by a typical P&A Agreement and any minor defects in the allonge will not invalidate the transfer or impair the Assuming Institution's enforcement rights.
A typographical error in the name of the bank, a subsequent bank name change or any other non-material error in the allonge will not prevent enforcement even if it might affect the note's negotiability. Negotiability and enforceability are different concepts. Courts and borrower's attorneys may not immediately appreciate this nuance, and unless provided with clear guidance by counsel for the Assuming Institution, could be led astray. Obviously, having clear and accurate documentation that unambiguously demonstrates the Assuming Institution's right to enforce a note is always preferable, but a minor or apparent defect in an allonge should not cause a major legal setback.
C.We sued to collect and the borrower is contesting our right to enforce the note. What should we do?
Put the issue before the court and borrower's counsel early and forcefully. You may prevail on summary judgment and could even recover attorney fees. In a recent Colorado case in the District Court for Gunnison County, the defendant attempted to avoid an enforcement action by arguing that the Assuming Institution did not own the Note due to an apparent discrepancy in the allonge. The defendant filed a claim for declaratory relief seeking a declaration that the Assuming Institution did not own the note, and sought attorney fees and costs against the institution for bringing the enforcement case. See Community Banks of Colorado v. Covelli, No. 13-CV-30105 JSP, (Colo. Dist. Ct. Dec. 30, 2014).
In the Covelli case, the Allonge pertaining to the note in question was executed months after the P&A Agreement, and used the bank's new name, but was backdated to reflect the date of the P&A Agreement. The defendant claimed that because the trade name had not yet been registered as of the date shown on the Allonge, the Note could not be enforced by the Assuming Institution, and the Assuming Institution was violating state and federal banking laws by operating without authorization. On the parties' cross motions for summary judgment, the Court granted the Assuming Institution's motion, finding that the name change and trade name registration would in no way affect the validity of the entity's transactions or the Assuming Institution's right to enforce the Note.
In its opinion, the Court also recognized that the position asserted by the defendant lacked substantial justification, and granted attorneys' fees against the defendant and defendants' counsel, finding the defense "was groundless or vexatious and interposed solely for purposes of delay." Thus when a defendant (or defendant's counsel) raises claims or defenses to enforcement of a note based on irrelevant, apparent defects in the Allonge to that note, it does so at its own risk of being held responsible for the Assuming Institution's costs and attorney fees.
The above analysis may not cover every situation in which a borrower raises defenses to enforcement of a note based upon a defect or apparent defect in a document relating to that note. It does demonstrate however that those defenses, which might appear credible at first blush, often lack any real legal or factual merit. An Assuming Institution will be well served to know its rights when faced with defenses of this kind.
Daniel Wennogle works out of Stinson Leonard Street’s Denver office. His practice focuses on all aspects of commercial litigation, construction litigation, oil and gas, property rights, bankruptcy and professional liability claims. He can be reached by email or by phone at 303.376.8415.
Christy Milliken works in Stinson Leonard Street's Washington, DC, office, primarily in the areas of financial services, class actions and construction litigation. Admitted in Virginia only, Christy is supervised by Steven White, a member of the D.C. Bar. She can be reached by email or by phone at 202.728.3029.