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July 24, 1992



The opinion of the court was delivered by: GERARD L. GOETTEL


 In recent years, our nation's banking system has been crumbling under the combined weight of bank failures and a depressed economy, a plight that continues to sap the federal government of much of its scarce resources and ordinary people of their financial security. In the midst of all this, courts must continually decide the fate of the latest in an endless line of failed banks that have slipped into the red and into the courthouse. This case represents another small chapter in an all too familiar story of a loan gone bad, an insolvent bank in receivership, and the federal regulators who step in and settle its tangled affairs.


 This case concerns a loan made in August 1988 to defendant Vernon Real Estate Investments, LTD. ("VREI") in the principal amount of $ 6 million for renovation of a building. In connection with this loan, VREI executed in favor of Citytrust a promissory note ("Note") for the same amount payable in monthly installments and due in full in August 1990. Pursuant to a 1988 building loan contract (the "Building Loan Contract"), VREI also executed in favor of Citytrust a mortgage for a property owned by defendants in the Town of Mt. Kisco to secure their obligations under the Note. Additional security for the $ 6 million loan was provided to Citytrust as a guaranty by the Estate of Alan Vernon.

 The Building Loan contract states that the failure of VREI "to timely make any payment of interest due" on the mortgage constitutes a default. Upon default, Citytrust was entitled under the Building Loan contract at its option to make the Note and Mortgage "immediately due and payable."

 According to plaintiff, the Vernons (referring to both Vernon Real Estate and Alan Vernon) defaulted on the loan in February 1990 after failing to pay the monthly interest due and complete the required improvements, a default in the principal amount of some $ 5.48 million plus interest. Defendants contend that the default occurred only after Citytrust stopped making interest payments to itself pursuant to the Note. Citytrust notified the Vernons of their default by letter dated June 21, 1990.

 In July 1991, Citytrust filed suit seeking foreclosure against the various defendants. The FDIC was appointed receiver for Citytrust by court order on August 9, 1991. The Vernons were notified by letter dated August 22, 1991 that the FDIC had to be notified of any claims against it by November 19, 1991.

 Before the court today is the FDIC's motion for appointment of a receiver and summary judgment on the foreclosure of the mortgage. The FDIC argues (1) that a temporary receiver is necessary to prevent any further deterioration in the condition and value of the property; (2) that summary judgment is appropriate on the Vernons' 6 affirmative defenses and first 2 counterclaims under the terms of the loan agreements.

 The Vernons' affirmative defenses and counterclaims include: failure to state any grounds upon which relief can or should be granted, the wrongful withholding of payments due under the agreement which prevented VREI from completing the contract, unclean hands by Citytrust, and wrongful use of loan funds by Citytrust to pay itself interest it deemed due.

 Plaintiff argues that the Vernons' claims are barred because agreements not contained in official loan documents cannot be the basis for any claims against the FDIC under D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 86 L. Ed. 956, 62 S. Ct. 676 (1942) (hereinafter "D'Oench"), and 12 U.S.C. § 1823(e). Plaintiff also contends that the claims are barred by the FDIC's status as a federal holder in due course and the Vernons' failure to exhaust administrative remedies by not filing a notice of claim with the FDIC after it was appointed receiver. *fn1"


 A. Appointment of Temporary Receiver

 We address first the FDIC's request for the appointment of a temporary receiver. The FDIC argues that New York law expressly and unequivocally entitles it to have a receiver appointed during the pendency of the foreclosure action. Defendants strenuously argue that, despite the applicable New York statutes and lease provision, appointment of a receiver is not a matter of absolute right but rather a matter of equitable discretion by the court.

 Under New York law, the FDIC is granted broad powers to have a receiver appointed in a foreclosure action where the underlying mortgage so provides. In particular, New York law provides:

 A covenant "that the holder of this mortgage, in any action to foreclose it, shall be entitled to the appointment of a receiver," must be construed as meaning that the mortgagee, his heirs, successors or assigns, in any action to foreclose the mortgage, shall be entitled, without notice and without regard to adequacy of security of the debt, to the appointment of a receiver of the rents and profits of the premises covered by the mortgage; and the rents and profits in the event of any default or defaults in paying the principal, interest, taxes, water rents, assessments or premiums of insurance, are assigned to the holder of the mortgage as further security for the payment of the indebtedness.

 New York Real Property Law ("RPL") § 254 (McKinney 1989); see also New York Real Property Actions and Procedures Law § 1325(i). In the present case, the mortgage provides "that the holder of this mortgage, in any action to foreclose is, shall be entitled to the appointment of a receiver." Ferguson Affidavit, Exhibit M at P 5.

 Plaintiff is correct that lack of notice or insufficient security are not grounds to resist appointment of a receiver. However, the court has the discretion to deny appointment of a receiver under the appropriate circumstances even though the mortgage provides the mortgagee a specific right to an appointment. See Foxfire Enterprises, Inc. v. Enterprise Holding Corp., 837 F.2d 597, 598 (2d Cir. 1988) (citing Clinton Capital Corp. v. One Tiffany Place Developers, Inc., 112 A.D.2d 911, 492 N.Y.S.2d 427 (2nd Dep't 1985)).

 Although no automatic entitlement to a receiver exists, we shall not deny the appointment of a receiver unless the circumstances require us to as a matter of equity. Since both RPL § 254 and the mortgage itself give plaintiff a right to a receiver, although not absolute, it is incumbent upon defendants to demonstrate why a receiver should not be appointed.

 Defendants argue that the circumstances here do not warrant a receiver. Specifically, they contend that Vernon has presented prospective new tenants to plaintiff and no substantial deterioration has occurred except possibly further damage associated with the need for a new roof, a situation exacerbated by plaintiff's failure to remedy this known threat. Defendants also stress that Vernon is on the premises on a daily basis, lives nearby, and has personally performed tasks necessary for the daily maintenance of the building. They also note Vernon's willingness to provide monthly reports on the condition of the premises to plaintiff. From this, defendants conclude that the circumstances show no necessity for plaintiff's application for a receiver.

 It appears undisputed after oral argument that, with the exception of Vernon, all but one commercial tenant has vacated the premises during this current year. In addition, plaintiff states that certain "prospective tenants" were rejected because Vernon had placed conditions such as additional funding or forbearance of a foreclosure action to their proposals. Plaintiffs also highlight the significant decrease in the building's appraised value that has occurred over the last two years as evidence of the premise's deteriorating condition. Defendants have offered nothing to dispute the drop in the building's appraised value.

 The parties debate how necessary a receiver is for upkeep of the building. However, where the mortgagor has defaulted, the mortgagee has accelerated the entire debt pursuant to the mortgage, and full payment has not been tendered, proof of the necessity of a receiver is not required. See Febbraro v. Febbraro, 70 A.D.2d 584, 416 N.Y.S.2d 59, 59-60 (2nd Dep't 1979). And while we may question whether a receiver will be available to the same degree as Vernon, who maintains his office on the premises, the equities do not tip against plaintiff enough to justify denying their application for appointment of a receiver. Therefore, we grant this portion of plaintiff's motion.

 B. The D'Oench Doctrine

 We next turn to plaintiff's motion for summary judgment of foreclosure. As it often stated, to prevail on a motion for summary judgement, the moving party must demonstrate "that there is no genuine issue as to any material fact and that [it] is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Material facts are facts that "might affect the outcome of the suit under the governing law. . .factual disputes that are irrelevant or ...

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