YANKEE BANK FOR FINANCE & SAV. v. TASK

The opinion of the court was delivered by: McCURN, Chief Judge.

Introduction

This is an action to foreclose on a mortgage pursuant to N Y Real Property Actions and Proceedings Law § 1301 et seq. The subject of this litigation is a premises known as the SA & K building in Syracuse, New York. When first instituted, this matter was an ordinary foreclosure action pursuant to state law, instituted in state court. Yankee Bank for Finance and Savings, as mortgagee, had brought suit against the defendant real estate developers, as the mortgagors, who had allegedly defaulted on a loan. The bank also joined, as defendants, persons who had placed mechanic's liens on the property for uncompensated labor and materials provided in the course of renovating the SA & K building. While the litigation was proceeding, the Federal Home Loan Bank Board found Yankee Bank to be insolvent and appointed the FDIC as its receiver. As a result, the FDIC was effectively substituted as the plaintiff in this action.

The participation of the FDIC operated to "federalize" the suit — greatly complicating many of the legal issues. In prior decisions this court has determined, among other things, that the action was properly removed to federal court and that the FDIC was entitled to summary judgment of foreclosure and sale as against defendant Hanover Square Associates-Two Limited Partnership — the real estate developer and mortgagor with respect to the SA & K building. The process for the foreclosure sale of the premises has been set in progress. Presently before the court is the January 2, 1990, report-recommendation of Magistrate Gustave J. Di Bianco which addresses the issue of who has priority of right, as between the plaintiff FDIC and the "mechanic's lienor" defendants, to the foreclosure sale proceeds. In a thorough report, familiarity with which is assumed, the Magistrate recommended that this court adopt state law as the rule of decision, find the plaintiff to have violated N.Y. Lien Law § 22, and based on this violation, hold that the plaintiff's interest in the foreclosure sale proceeds after the first $610,000 is inferior to the interest of the mechanic's lienor defendants. Both the plaintiff and the mechanic's lienor defendants submitted objections to the Magistrate's report-recommendation. The plaintiff also requests, should the court adopt the Magistrate's recommendations, that it be awarded interest on the $610,000 to which it would have first priority.

In its August 4, 1989, memorandum-decision and order, this court requested further briefing on the issue of whether it had jurisdiction to entertain the remaining claims and counterclaims between the plaintiff FDIC and the mechanic's lienors, as well as the claims between the mechanic's lienors themselves. The submissions of counsel revealed that the parties were in agreement that this court, in light of its decision in Yankee Bank v. Hanover Square Associates-One, 693 F. Supp. 1400, 1412 (N.D.N.Y. 1988), had jurisdiction pursuant to 12 U.S.C. § 1819. On October 11, 1989, this court issued an order which held that it has subject matter jurisdiction to entertain the unresolved claims and counter claims in this matter and that it would proceed to hear and determine those issues. In his report-recommendation the Magistrate has provided a more detailed analysis of the reasons why this court has federal question and ancillary jurisdiction over the remaining legal claims. This court agrees with the Magistrate's analysis on the jurisdictional issue and adopts it as its own.

II. Choice of Law

The plaintiff FDIC and the mechanic's lienor defendants both claim priority to the proceeds from the foreclosure sale of the SA & K building. A key issue in this regard is whether New York State law should be employed as the rule of decision or whether a federal common law rule based on the "first in time, first in right" principle should be adopted by this court. The mechanic's lienors contend that the plaintiff has lost its priority interest because Yankee Bank, before it was placed into the receivership of the FDIC, failed to comply with provisions of N.Y. Lien Law § 22.

Among other things, section 22 of the Lien Law requires material modifications of building loan contracts to be filed within ten days after making the modification; "[i]f not so filed the interest of each party to such contract in the real property affected thereby, is subject to [subsequent mechanics'] lien[s]." The "subordination penalty" provided for in Lien Law § 22 was a result of the New York Legislature's intent to provide a special protection to the "materialmen, supplymen and laborers" on construction projects within the state. Nanuet National Bank v. Eckerson Terrace, Inc., 47 N Y2d 243, 247-48, 417 N.Y.S.2d 901, 903-04, 391 N.E.2d 983, 985-87 (1979). Section 22 in its present form was intended to enable persons interested in supplying labor and materials to a construction project "to learn exactly what sum the loan in fact made available to the owner of the real estate for the project." Id. at 247, 417 N.Y.S.2d at 903, 391 N.E.2d at 985. Knowledge of the amount of available monies for the project would presumably permit a subcontractor to determine the ability of the general contractor to pay for supplies and services.

The mechanic's lienors assert that the plaintiff, as Yankee Bank, violated § 22 when it advanced funds on the SA & K project without first securing a surety payment bond from the real estate developers for the protection of the subcontractors. The mechanic's lienors assert that such a bond was required by the construction loan agreement and that the failure of Yankee Bank to require such a bond before advancing funds to the developer constituted an unfiled material modification. The plaintiff, while maintaining that it did not violate § 22, contends that the application of state law would interfere with important federal objectives — requiring this court to adopt an alternate federal common law rule.

The parties agree with the Magistrate that federal law applies to legal matters involving the FDIC in its administration of nationwide federal programs. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979) (federal law applies to federal agencies when administering nationwide federal programs); Gunter v. Hutcheson, 674 F.2d 862, 869 (11th Cir.), cert. denied 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982) (FDIC is vested by Congress with the authority to "protect and stabilize the national banking system"). There being no specific congressional directive as to the federal rule of decision concerning foreclosure actions involving the FDIC, the court must apply the three-part balancing test articulated in United States v. Kimbell Foods, Inc., 440 U.S. at 727-28, 99 S.Ct. at 1457-58, to determine the correct rule of decision. As stated by the Magistrate, Kimbell requires a court to first "determine the nature of the federal program," secondly, decide "whether the application of state law would frustrate the specific objectives of the federal program," and thirdly, "consider the extent to which the application of a federal rule would disrupt commercial relations based upon state law." Magistrate's Report at 14. This choice of law analysis is aimed at avoiding the application of a state law which presents a "significant threat to any identifiable federal policy or interest" or is "specifically aberrant or hostile" to federal policy. Burks v. Lasker, 441 U.S. 471, 479-80, 99 S.Ct. 1831, 1837-38, 60 L.Ed.2d 404 (1979).

After reviewing the nature of the FDIC's role in the administration of the federal system of deposit insurance, the procedure used by the FDIC when acting as a receiver for an insolvent bank, and the statutory obligations of the agency, the Magistrate concluded that uniform national laws generally are necessary to protect the FDIC. Magistrate's Report at 22. However, the Magistrate went on to conclude that the adoption of state law as the rule of decision in this particular case would not pose a significant threat to federal policy or interests. Id. at 31. On this basis Magistrate Di Bianco recommended that the determination of who has priority of right to the proceeds from the foreclosure sale be based upon state law. Id. at 32.

The plaintiff, in its objections to the report-recommendation, asserts that the application of N Y Lien Law § 22 would operate to impair important federal objectives with respect to the FDIC's deposit insurance program, and therefore, should not be adopted as the rule of decision. The FDIC contends that application of section 22 would prevent it from being able to rely on the bank's written records when making determinations concerning the value of specific assets of a bank which has been placed in receivership. According to the plaintiff it would have to "independently verify" compliance with the bank's written covenants. In this manner, plaintiff attempts to place this issue within the doctrine enunciated in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 460, 62 S.Ct. 676, 680-81, 86 L.Ed. 956 (1942) — that secret or unwritten agreements may not be raised as a defense to a suit by the FDIC because such agreements operate to deceive the banking authorities. See also Langley v. Federal Deposit Ins. Corp., 484 U.S. 86, 108 S.Ct. 396, 401-02, 98 L.Ed.2d 340 (1987).

This court agrees with the Magistrate that the D'Oench doctrine is not implicated by the claims of the mechanic's lienors. The court is not addressing a situation where an unwritten agreement is being used to defend against a claim of the FDIC in its role as a receiver. Rather, the defendant mechanic's lienors are asserting their claim based on an alleged failure on the part of Yankee Bank to comply with a written agreement. It would be incorrect to classify all failures by banks in FDIC receivership to comply with the terms of contracts to which they are parties as unwritten modifications to those agreements. If such were the case, the FDIC as a receiver could raise D'Oench as an ...