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FDIC v. BARNESS

January 31, 1980

FEDERAL DEPOSIT INSURANCE CORPORATION
v.
HERBERT BARNESS



The opinion of the court was delivered by: BECKER

OPINION AND ORDER

I. Procedural History

 This case is before us on defendant's motion to open a judgment entered against him by confession in the Court of Common Pleas of Bucks County, and on the motion of Centennial Bank and Peter D. Carlino for leave to intervene as defendants. After the entry of judgment in state court, Federal Deposit Insurance Corporation v. Barness, No. 77-12385 (Bucks Co. Dec. 16, 1977), defendant removed to this court under 28 U.S.C. § 1441 by virtue of 12 U.S.C. § 1819(4), which provides that all civil suits to which the Federal Deposit Insurance Corporation ("FDIC") is a party shall be deemed to arise under the laws of the United States and are within the original jurisdiction of the United States District Courts. The procedural history of this and related cases is enormously involved. An understanding of the issues before us requires a threshold recitation of that procedural history.

 After the entry of judgment in the Bucks County court and removal to this court, defendant filed the Motion to Open Judgment, verified by his affidavit. In it he stated that he has valid defenses to plaintiff's action on the note, as detailed in four separate counts in the motion. In his third count, defendant also alleged that he has a counterclaim which he would assert if the judgment were opened. FDIC thereupon moved to dismiss defendant's motion to open judgment, arguing that he had failed to state a legally sufficient basis for opening the judgment. By order of July 27, 1978, we denied the plaintiff's motion to dismiss, reserved decision on the defendant's motion to open judgment, and granted both parties leave to obtain discovery. In our letter to counsel, made an exhibit to that order, we looked to the Pennsylvania Rules of Civil Procedure to discover the standards by which to assess the validity of plaintiff's motion to dismiss defendant's motion to open judgment. *fn1" See Pa.R.Civ.P. 2959.

 After our order of July 27, 1978, defendant embarked on extensive discovery. At the time fixed for filing his brief on the motion to open judgment, he filed instead a Motion for Partial Summary Judgment on the counterclaim asserted in count three of his motion to open judgment. We have determined that this motion for summary judgment is not properly before us at this time, *fn2" and have treated defendant's memorandum in support of his summary judgment motion as a memorandum in support of his motion to open judgment. As the plaintiff has responded with its memorandum, and both parties have filed supplemental memoranda, the motion to open judgment is now ripe for decision.

 At oral argument on the motion to open judgment, certain questions were raised as to whether the defendant is entitled to assert as a defense to the note the illegality of the takeover by which the Secretary acquired the note, or whether that defense could be asserted only by Centennial, the original payee from whom the Secretary acquired the note. See n.9, infra. As a result of these questions, Centennial has moved for leave to intervene as a defendant. Moreover, Peter D. Carlino ("Carlino"), who was Chairman of the Board of Directors of Centennial on October 20, 1976, and is a major shareholder in Centennial, has moved for leave to intervene as representative of all shareholders of Centennial, in the event that we should determine that Centennial may not intervene because the Secretary, by reason of the takeover, has succeeded to all its legal claims and defenses.

 In order to explain fully the issues before us, we must recite briefly the history of three other legal actions. *fn3" This case was assigned to our docket as a "related case" because the circumstances allegedly surrounding the making of the note were already before us in Centennial Bank v. Hills, Civil Action No. 76-2410 (E.D.Pa. filed July 30, 1976) (hereinafter cited as "Hills "). See Local Rule of Civil Procedure 3(d). That action was brought by Centennial prior to the takeover to recover funds which Centennial alleged it had advanced for the construction of housing on premises known as Mount Carmel Gardens at 5700 Race Street, Philadelphia. The principal defendant was the Secretary of the United States Department of Housing and Urban Development ("HUD"). After the takeover, FDIC acquired Centennial's claim in Hills and assumed control of the litigation. Defendant alleges in this action that his note was given in connection with the Mount Carmel Gardens financing. Specifically, he alleges that the note was given as an accommodation to Centennial and various parties involved in the building project, on the understanding that he would not be liable for payment on the note. Defendant also alleges that FDIC has failed to prosecute properly Centennial's claim in Hills.

 The second lawsuit which is relevant to the issues before us is pending in the state courts in Pennsylvania. The early proceedings in that action are recounted in Centennial Bank v. Whitesell, 30 Pa.Cmwlth. 445, 375 A.2d 1333 (1977) (hereinafter cited as "Whitesell "). *fn4" On October 20, 1976, the day of the takeover, Centennial presented to Judge Rosenwald of the Court of Common Pleas of Philadelphia County a petition for review of the takeover. On October 21, 1976, Judge Rosenwald ruled that the Court of Common Pleas lacked jurisdiction over the subject matter of the petition for review, which he believed was within the exclusive jurisdiction of the Commonwealth Court. On the same day, Judge Rosenwald approved the sale by the Secretary, as Centennial's receiver, of the bank's assets and the transfer of its liabilities. Certain of Centennial's assets and liabilities were transferred to FDIC.

 Centennial appealed Judge Rosenwald's jurisdictional ruling and his approval of the sale and transfer to the Commonwealth Court. That court held that the Court of Common Pleas did have jurisdiction over the petition for review, and remanded the action to the lower court for the purpose of conducting a proceeding under Section 605 of the Banking Code, 71 P.S. § 733-605. The Commonwealth Court dismissed Centennial's appeal from the approval of sale of its assets and transfer of its liabilities. The appeal was dismissed purely on procedural grounds, however, and the Commonwealth Court expressly reserved to the Court of Common Pleas the power to set aside its approval:

 
(W)e do not pass upon the merits nor shall this dismissal be considered as affecting or limiting the power and authority of the court below to afford such equitable relief as may be appropriate in the remand of proceedings (on the petition for review) and, if necessary, to set aside its approval of the sale and transfer of Centennial's assets and liabilities if the circumstances so require.

 30 Pa.Cmwlth. at 460, 375 A.2d at 1339.

 On remand, Centennial sought to enlarge the scope of the Section 605 proceeding. While the Court of Common Pleas granted Centennial's petition, the Commonwealth Court reversed and clarified its disposition of the prior appeal. It ordered that the proceedings on remand be limited to the issues cognizable under Section 605, but authorized a second hearing if the lower court should conclude that the takeover was illegal. The second hearing would be directed toward fashioning a remedy which would either restore the status quo of Centennial prior to the takeover, or else compensate Centennial's shareholders. The Commonwealth Court observed that a second hearing to fashion a remedy would be necessary

 
because of the action . . . by the Secretary as statutory receiver of Centennial in seeking and receiving court approval of the sale of assets and transfer of liabilities of Centennial. Absent power and authority in the Secretary to issue notice of and to take possession of Centennial, he could not have become its statutory receiver and thus lacked authority to seek court approval of the sale and transfer of Centennial's assets and liabilities.

 Centennial Bank v. Commonwealth, No. 1973 C.D.1976, slip op. at 3-4 (Pa.Commw.Ct. July 6, 1979). Centennial's petition for appeal from this decision of the Commonwealth Court is pending in the Pennsylvania Supreme Court. Centennial Bank v. Commonwealth, No. 4458 (Pa.Sup.Ct. filed July 27, 1979).

 Thus, after more than three years, the state court action is nowhere near resolution. Centennial has not yet had the opportunity to have its charges against the Secretary and Department of Banking heard on the merits in the Court of Common Pleas. While the transfer of Centennial's assets and liabilities received judicial approval on October 21, 1976, the Commonwealth Court has ruled twice that the validity of that approval is contingent on the legality of the takeover, and the approval itself may eventually be set aside.

 Centennial and its stockholders have also challenged the takeover in federal court, seeking damages in excess of one million dollars. Centennial Bank v. Lincoln Bank, Civil Action No. 77-1872 (E.D.Pa. filed May 27, 1977) (pending before Troutman, J.) (hereinafter cited as "Lincoln "). Herbert Barness, the defendant here, and Peter D. Carlino, who seeks to intervene in this action, are plaintiffs in Lincoln as shareholders of Centennial. FDIC and the Secretary and the Pennsylvania Department of Banking are defendants in Lincoln. The various causes of action alleged in Lincoln are incorporated by reference in the third count of defendant's motion to open judgment in this action. Defendant thus argues here that because the takeover was illegal, the Secretary's acquisition of the note and his transfer of it to FDIC were illegal. The gravamen of his claim, as asserted here, is the violation of procedural statutes and regulations, both state and federal, and of constitutionally required due process, by the Pennsylvania Department of Banking and the FDIC acting in concert. These alleged violations are the basis of two counts of the complaint in Lincoln. FDIC and other defendants in Lincoln have filed a motion to dismiss the complaint which is awaiting decision.

 Having reviewed the procedural history of this and related actions, we must turn to a more detailed analysis of the parties' contentions. Before doing so, however, we must address a dispute over which legal standard we should apply to the motion to open judgment. Defendant argues that the Federal Rules of Civil Procedure govern procedure after removal in cases removed from state court, F.R.Civ.P. 81(c), and accordingly would have us apply the federal standards for relief from judgment, F.R.Civ.P. 60(b), although he concedes that we may look to the Pennsylvania Rules of Civil Procedure to guide our exercise of discretion under Rule 60(b). *fn5" Plaintiff argues that the Pennsylvania Rules are controlling since the federal rules have no procedure for opening a judgment entered by confession. We find it unnecessary to decide this issue, for we have determined that even if the Pennsylvania standard applies, as plaintiff argues, the judgment must be opened. A fortiori, if the federal standards, which the defendant prefers, were applicable, the judgment would still be opened.

 The state rule for opening of judgments entered by confession is stated in Pa.R.Civ.P. 2959(e):

 
If evidence is produced which in a jury trial would require the issues to be submitted to the jury the court shall open the judgment.

 Thus defendant must allege a meritorious defense to liability on the note, and must produce evidence sufficient to present a jury question and avoid a directed verdict. First Pennsylvania Bank v. Weber, 240 Pa.Super. 593, 360 A.2d 715 (1976). In the absence of a defense to the plaintiff's claim, a judgment may not be opened merely to permit the defendant to assert a counterclaim or set-off. The Fidelity Bank v. Act of America, Inc., 258 Pa.Super. 261, 392 A.2d 784 (1978). As will appear, much of the dispute before us turns on whether defendant has asserted a defense, as opposed to a counterclaim or set-off. For the reasons stated below, we find that he has.

 II. The Contentions of the Parties

 In explicating the contentions of the parties, we shall deal with counts one and four together, because they are closely related, and take them up first. We shall at the same time set forth the factual basis for these contentions, as they have been developed thus far and have been advanced to us. We note in this regard that the factual record on this motion consists of any of defendant's allegations which he has supported with evidence sufficient to avoid a directed verdict against him. As we have also noted, defendant's motion is verified, and no contrary evidence has been produced by plaintiff. In addition, defendant has produced voluminous evidence of procedural deficiencies related to the takeover, the bulk of which emanated from extensive depositions and document production; that evidence is relevant to count three of his motion. Consequently, the record consists of all the factual allegations of defendant's motion, and the evidence produced with respect to count three. *fn6"

 In the first count, defendant alleges that the note was given as an accommodation to Centennial Bank and others in connection with the financing of Mount Carmel Gardens, that Centennial agreed at the time that it would not hold him liable on the note, and that FDIC is bound by that agreement between Centennial and defendant. In count four defendant alleges that there was no consideration for the note. These allegations are supported by his affidavit.

 The underlying basis of defendant's position is that the note was given to Centennial in order to satisfy HUD's requirements for increasing the amount of HUD's mortgage guarantee on Mount Carmel Gardens to cover a letter of credit which Centennial issued to Associated East Mortgage Company, the direct lender for the Mount Carmel Gardens construction. The letter of credit was intended to cover cost overruns in the construction project. It was issued the same day as defendant's note to Centennial, and in the same amount. Defendant contends that he signed the note at the request of Centennial, a corporation in which he was a major shareholder, in order to promote Centennial's interests. HUD's refusal to approve the increased mortgage insurance which Centennial sought, despite the Barness note, precipitated the Hills litigation.

 B. Count Two

 In the second count, defendant alleges that before the takeover, Centennial had worked out a proposed settlement in Hills which included the payment of $ 165,000 to Centennial and the release of defendant's obligation on the note. He alleges that FDIC abandoned the proposed settlement when it took control of the litigation, and failed to file an amended complaint in Hills which had already been prepared by Centennial's counsel and which joined an additional defendant. He alleges that FDIC has failed to prosecute properly the claims of Centennial in Hills and that if FDIC had properly prosecuted that action it would have received funds from the defendants in that action, which would have satisfied defendant's obligation at issue here. He also alleges that FDIC has made payments to unnamed third parties, for which it now seeks reimbursement from defendant in this action on ...


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