The opinion of the court was delivered by: McCURN, Chief Judge.
MEMORANDUM-DECISION AND ORDER
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.
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 ...