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Capitol, In Re: v. 604 Columbus Ave RE

Case Date: 07/01/1992
Court: United States Court of Appeals
Docket No: 91-1976

July 1, 1992 UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT ____________ No. 91-1976 IN RE: 604 COLUMBUS AVENUE REALTY TRUST, Debtor, _________ CAPITOL BANK & TRUST COMPANY, Appellee, v. 604 COLUMBUS AVENUE REALTY TRUST, Appellant. __________ No. 91-1977 IN RE: 604 COLUMBUS AVENUE REALTY TRUST, Debtor, _________ FEDERAL DEPOSIT INSURANCE CORPORATION, AS RECEIVER/LIQUIDATING AGENT OF CAPITOL BANK & TRUST COMPANY, Appellant, v. 604 COLUMBUS AVENUE REALTY TRUST, ET AL., Appellees. ____________ ERRATA SHEET The opinion of this court issued on June 19, 1992, is amended as follows: On page 10, line 11 after block quote - add "and" after the word "taxes." On page 43, line 6 after block quote - "Court" should be lower case.June 19, 1992 ____________________ No. 91-1976 IN RE: 604 COLUMBUS AVENUE REALTY TRUST, Debtor, __________ CAPITOL BANK & TRUST COMPANY, Appellee, v. 604 COLUMBUS AVENUE REALTY TRUST, Appellant. __________ No. 91-1977 IN RE: 604 COLUMBUS AVENUE REALTY TRUST, Debtor, __________ FEDERAL DEPOSIT INSURANCE CORPORATION, AS RECEIVER/LIQUIDATING AGENT OF CAPITOL BANK & TRUST COMPANY, Appellant, v. 604 COLUMBUS AVENUE REALTY TRUST, ET AL. Appellees. ____________________ APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. A. David Mazzone, U.S. District Judge] ___________________ ____________________ Before Torruella, Circuit Judge, _____________ Weis* and Bownes, Senior Circuit Judges, _____________________ ____________________ Robert Owen Resnick with whom John F. Cullen, George J. Nader, ____________________ _______________ _______________ and Cullen & Resnick were on brief for 604 Columbus Avenue. ________________ Michael H. Krimminger with whom Richard J. Osterman, Jr., Ann S. _____________________ _________________________ _______ Duross, and Richard N. Gottlieb were on brief for Federal Deposit ______ ____________________ Insurance Corporation. ____________________ ____________________ _____________________ *Of the Third Circuit, sitting by designation. BOWNES, Senior Circuit Judge. This is a case involving ____________________ a failed loan transaction that well illustrates Polonius' advice, "[n]either a borrower, nor a lender be."1 These appeals require us to determine, inter alia, the _____ ____ applicability of certain federal defenses available to the Federal Deposit Insurance Corporation (FDIC) in its capacity as receiver when it seeks to enforce against a bankrupt borrower an obligation formerly held by a failed financial institution. PROCEDURAL PATH PROCEDURAL PATH This case arises from the default by the 604 Columbus Avenue Realty Trust ("the Trust") on payment of a loan from the Capitol Bank and Trust Company ("the Bank"). Following the Trust's default, the Bank commenced mortgage foreclosure proceedings on the properties securing its loan, among which were the property owned by the Trust itself and properties of the Trust's principal beneficiary, Millicent C. Young ("Young").2 To forestall the foreclosures by the Bank, both the Trust and Young filed for protection under Chapter 11 of the ____________________ 1. W. Shakespeare, Hamlet, act I, sc. iii at 75. 2. The Bank also had a mortgage on a property owned by the Young Family Trust, of which Millicent Young was sole beneficiary. The Young Family Trust was a named plaintiff in the adversary proceeding in the bankruptcy and district courts below. For purposes of convenience, we refer to Young and the Young Family Trust collectively as "Young." -6- Bankruptcy Code in the United States Bankruptcy Court for the District of Massachusetts. In May 1988, the Trust, with Young as co-plaintiff, initiated an adversary proceeding against the Bank, its principal secured creditor. In September 1990, the bankruptcy court awarded the plaintiffs approximately $140,000 in damages on claims of fraud and deceit, conversion, and breach of contract, plus interest and attorney's fees. The bankruptcy court found that the Bank improperly applied loan proceeds to payment of "soft costs" incurred by the Trust financing fees, interest, taxes and similar expenses. It also found that an officer of the Bank extracted kickback payments from the loan proceeds in return for his assistance in securing approval of the loan. Under its power of equitable subordination pursuant to 11 U.S.C. 510(c), the bankruptcy court subordinated the Bank's secured claim on the Trust's bankruptcy estate to the claims of the Trust's other creditors by an amount equal to the damages, plus interest and attorney's fees. It ordered the transfer from the Bank to the Trust of a security interest in the Trust's estate equivalent to the total of the damages, interest and attorney's fees. During the pendency of an appeal of this judgment to the district court, the Bank was declared unsound by Massachusetts banking officials. The FDIC was appointed -7- receiver, and in February 1991 was substituted as defendant- appellant in the district court. In August 1991, the district court affirmed in substantial part the bankruptcy court's rulings on the merits of the Trust's claims and equitable subordination of part of the Bank's secured claim. It ruled, however, that the FDIC was entitled to raise the defenses available to it under the doctrine of estoppel established in D'Oench, Duhme & Co. v. ________________________ FDIC, 315 U.S. 447 (1942), and 12 U.S.C. 1823(e). Invoking ____ the D'Oench doctrine, the district court vacated that part of _______ the bankruptcy court's judgment that was premised on the secret agreement by one of the Trust's principals to provide kickbacks to a Bank officer. Both the Trust and the FDIC appeal various aspects of the judgments of both the bankruptcy and district courts. We affirm the judgment of the bankruptcy court, as modified by the district court. BACKGROUND AND FACTS BACKGROUND AND FACTS Before stating the facts, we think it useful to review the dual role of the FDIC in bank failures. Our recent decision in Timberland Design, Inc. v. First Service Bank For _________________________________________________ Savings, 932 F.2d 46, 48 (1st Cir. 1991), provides an _______ excellent summary of the FDIC's different functions: As receiver, the FDIC manages the assets of the failed bank on behalf of the bank's creditors and shareholders. In its corporate capacity, the FDIC is responsible for insuring the failed bank's -8- deposits. Although there are many options available to the FDIC when a bank fails, these options generally fall within two categories of approaches, either liquidation or purchase and assumption. The liquidation option is the easiest method, but carries with it two major disadvantages. First, the closing of the bank weakens confidence in the banking system. Second, there is often substantial delay in returning funds to depositors. The preferred option when a bank fails, therefore, is the purchase and assumption option. Under this arrangement, the FDIC, in its capacity as receiver, sells the bank's healthy assets to the purchasing bank in exchange for the purchasing bank's promise to pay the failed bank's depositors. In addition, as receiver, the FDIC sells the "bad" assets to itself acting in its corporate capacity. With the money it receives, the FDIC-receiver then pays the purchasing bank enough money to make up the difference between what it must pay out to the failed bank's depositors, and what the purchasing bank was willing to pay for the good assets that it purchased. The FDIC acting in its corporate capacity then tries to collect on the bad assets to minimize the loss to the insurance fund. Generally, the purchase and assumption must be executed in great haste, often overnight. Id. at 48 (citations omitted). ___ Turning to the case at hand, we first summarize the extensive findings of fact of the bankruptcy court. See In ___ __ re 604 Columbus Avenue Realty Trust, 119 B.R. 350 (Bankr. D. ____________________________________ Mass. 1990) ("Bankruptcy Court Opinion"). The loan transaction at issue in these appeals originated in the efforts of Young and several business associates to purchase two buildings located at 604-610 Columbus Avenue in Boston, Massachusetts ("the Columbus Avenue properties"), and a restaurant operated on the premises known as "Bob the Chef." -9- Young was the owner of a contracting and construction company. Among her business partners was Carl Benjamin ("Benjamin"), who served as her financial adviser. In October 1985, Young and Benjamin learned of the availability for purchase of the Columbus Avenue properties. Young and Benjamin, along with two other partners, agreed to enter into a business relationship through which they would purchase the Columbus Avenue properties, renovate and resell the properties as condominiums, resell the restaurant, and share the profits from the condominium sales and sale of the restaurant. In November 1985, Young and Benjamin offered the owner of the Columbus Avenue properties $1.2 million for the buildings and the restaurant. Young's attorney, Steven Kunian ("Kunian"), suggested that she and her partners seek financing for the purchase and renovation of the Columbus Avenue properties from the Bank. Kunian had represented the Bank from time to time on loan transactions. In December 1985, Benjamin negotiated the terms of a loan from the Bank on behalf of Young and the other partners. The Bank was represented in these negotiations by a loan officer, Arthur Gauthier, and a member of the Bank's Board of Directors, Sidney Weiner ("Weiner"). Weiner also served on the Bank's Executive Committee, which was responsible for the approval of loans. Although not a salaried employee of the Bank, Weiner was paid director's and -10- consultant's fees, and was regarded by Gauthier and other bank employees as having primary authority for negotiation of the loan to Young and her partners. Loans larger than $25,000 required the approval of the Bank's Executive Committee. Gauthier presented the proposal for the loan for the Columbus Avenue properties three times before the Executive Committee approved it on January 15, 1986. Final approval by the Executive Committee was achieved when Young agreed to pledge her residence as additional collateral for the loan. Weiner was one of the Executive Committee members who voted to approve the loan. Some time before the Executive Committee voted to approve the loan, Weiner told Benjamin that the loan would only be approved on the condition that Benjamin agree to pay Weiner personally for his assistance in securing the Bank's approval of the loan. In exchange for this kickback, Weiner helped the loan proposal reach the Executive Committee, voted to approve the loan, and influenced other Committee members to vote in favor of the loan. There was no evidence that other members of the Executive Committee were aware of Weiner's kickback arrangement with Benjamin when they voted to approve the loan. The bankruptcy court found that $26,300 was paid to Weiner. Attorney Kunian represented both the Bank and the borrowers at the closing on the loan on February 27, 1986. -11- Kunian suggested that Young and her associates hold the Columbus Avenue properties through a realty trust. At the closing the 604 Columbus Avenue Realty Trust was created, with Young as its trustee. Young was given 62.5% of the beneficial interest in the trust, while each of her three partners, including Benjamin, was made a 12.5% beneficiary. To secure the loan from the Bank, Young executed on behalf of the Trust a "Commercial Real Estate Promissory Note," a "Loan and Security Agreement" ("L&SA"), an "Addendum to Loan & Security Agreement ("L&SA Addendum"), and a "Construction Loan Agreement" (referred to collectively as the "First Loan Agreement"). The Bank, in turn, agreed to lend the Trust $1,500,000. The Bank used a standard-form L&SA, which contained the following provisions: SECTION 6. BANK'S RIGHT TO SET-OFF 6.01 The Borrower agrees that any deposits or other sums at any time credited by or due from the Bank to the Borrower, or any obligor or guarantor of any liabilities of the Borrower in possession of the Bank, may at all times be held and treated as collateral for any liabilities of the Borrower or any such obligor or guarantor to the Bank. The Bank may apply or set-off such deposits or other sums against said liabilities at any time. . . . . SECTION 8. EXPENSES: 8.01 The Borrower shall pay or reimburse the Bank on demand for all out-of-pocket expenses of every nature which the Bank may incur in connection with this Agreement and the preparation thereof, the -12- making of any loan provided for therein, or the collection of the Borrower's indebtedness under this Agreement . . . . [T]he Bank, if it chooses, may debit such expenses to the Borrower's Loan Account or charge any of the Borrower's funds on deposit with the Bank. The parties also executed an Addendum to this L&SA, which established the following schedule for the Bank's advancement of the proceeds of the loan to the Trust: $1,200,000 at the closing to pay for the Trust's acquisition of the Columbus Avenue properties and the restaurant; a further $200,000 for construction-related expenditures at the Columbus Avenue properties, but only upon itemized requisitions approved by the Trust, its architect, and the bank; and $100,000 for the "soft costs" incurred with respect to the loan. "Soft costs" covered the various non- construction costs of the renovation effort, and included closing fees, interest, taxes, and insurance. To secure its promissory note, the Trust gave the Bank, inter alia, a _____ ____ mortgage on the Columbus Avenue properties and a conditional assignment of rents from the properties in favor of the bank. Young, in her individual capacity, also gave the Bank mortgages on her residence and two other properties owned or held on her behalf. At the closing, the Bank disbursed approximately $1,250,000, of which nearly $1,200,000 was paid to the owners of the Columbus Avenue properties, and the remaining amount was paid to the Bank itself for the costs of the loan. The -13- Bank also created a checking account through which it was to disburse the remaining amounts of the loan. A signature card was created for the account bearing the names of Young, Benjamin, and another partner of the Trust. Those listed on the signature card had access to loan proceeds upon their disbursement by the Bank. Young was apparently not aware that Benjamin's signature was on the card. The bankruptcy court found that the Trust's ability to repay the loan on the Columbus Avenue properties hinged on several assumptions that Young and her partners understood or reasonably should have understood at the closing. One of these assumptions was that $100,000 for soft costs anticipated in First Loan Agreement would not cover those costs completely and would have to be supplemented by funds of Young and her partners. Another assumption was that the Trust could generate the funds necessary to complete the condominium project by selling the restaurant. The Bank advanced the remainder of the proceeds of the loan approximately $250,000 within forty-seven days of the closing, in three large payment. Weiner personally directed Gauthier to pay these advances into the Trust's account, but did so without the approval of Young and in violation of the procedures specified in the First Loan agreement. The bankruptcy court found that the Bank paid itself a total of $102,305.54 out of loan proceeds to cover -14- soft costs, thereby exceeding by $2,305.54 the amount of soft costs contemplated in the First Loan Agreement. The sum of $26,300 was withdrawn by Benjamin from the loan account without Young's knowledge or authorization, which was then used to make kickback payments to Weiner. Sometime thereafter, Young learned of Benjamin's conduct, and attempted unsuccessfully to expel him from the Trust and to get him to give up his beneficial interest in it. When the six-month term of the First Loan Agreement expired in August 1986, the Trust could not repay the loan. It therefore negotiated a second six-month loan to refinance the first (the "Second Loan Agreement"). On September 12, 1986, the Trust signed a promissory note to the Bank for $1,750,000, which was secured by the same mortgages and guarantees as the First Loan Agreement. Young, on behalf of the Trust, executed a new L&SA that contained provisions identical to those in the L&SA accompanying the previous loan. In addition, the Addendum to the L&SA in the Second Loan Agreement provided, inter alia, the following scheme for _____ ____ disbursement: The Bank shall advance the loan proceeds approximately as follows: a. $1,500,000.00 at closing for acquisition of real estate and personal property[;] b. $190,000.00 for construction costs . . . [;] c. $60,000.00 for soft costs incurred with respect to the loan. At the closing of the Second Loan Agreement, $1,580,151.11 in loan proceeds were disbursed to pay the $1,524,516.11 balance -15- remaining on the First Loan agreement and $55,635 in origination and attorney's fees for the new loan. Four months later, in January 1987, the Trust sold the property at 610 Columbus Avenue for $692,400 and paid the Bank this amount in order to reduce the outstanding principal balance of the Second Loan Agreement. In March 1987, however, when the Second Loan Agreement came due, the Trust was unable to repay it. The Bank therefore entered into an "Agreement to Extend Mortgage and Note" with the Trust, in exchange for an extension fee. The bankruptcy court found that during the term of the Second Loan Agreement and its extension, the Bank withdrew from the loan proceeds $169,406.12 for various soft costs, including closing fees, interest, charges for the loan extension, taxes, and attorney's fees. This amount exceeded the "approximately" $60,000 in soft costs originally provided for in the second L&SA Addendum by $109,406.12. The Second Loan Agreement, as extended, came due on June 10, 1987. The Trust was unable to make payment. In September 1987, the Bank began foreclosure of the various mortgages it held as security for the loan. The bankruptcy court found that the reasons for the Trust's default included, inter alia: the inability of the Trust to sell the _____ ____ restaurant, and the attendant loss of cash needed to finance the condominium renovations originally planned; the further -16- deprivation of cash needed for the project as a result of the kickback payments; and the Bank's overapplication of $109,406.12 in proceeds from the second loan to payment of soft costs. The bankruptcy court also concluded that it was the Trust's failure to sell the restaurant, rather than the Bank's overapplication of loan proceeds for soft costs and the kickback payments, that was by far the single most important reason for the failure of the project. DECISIONS OF THE BANKRUPTCY AND DISTRICT COURTS DECISIONS OF THE BANKRUPTCY AND DISTRICT COURTS In bankruptcy court, the Trust and Young alleged that the Bank entered into and administered the loans for the improper purpose of extracting a kickback from loan proceeds. They also alleged that the Bank improperly applied proceeds from the two loans to the payment of soft costs. The plaintiffs alleged fraud and deceit, conversion, and breach of contract by the Bank. They also argued that the Bank's inequitable conduct warranted the subordination of the Bank's secured claim in the Trust's bankruptcy estate to those of all of the Trust's other creditors. In addition, the Trust and Young requested an order invalidating entirely the Bank's mortgages on their properties. The bankruptcy court conducted a seven-day trial. It awarded the Trust $138,011.66 in damages. Of this amount, $26,300 was assessed as damages for the kickback payments made to Weiner by Benjamin. The kickback damages were based -17- on claims of conversion, breach of contract and fraud under Massachusetts law. The remaining $111,711.66 in damages represented the total amount of soft costs that the bankruptcy court found to have been improperly removed from the loan proceeds by the Bank in violation of the limits set by the two loan agreements i.e., $2,305.54 on the First Loan Agreement and $109,406.12 on the Second Loan Agreement. This award was premised on claims of conversion and breach of contract. The bankruptcy court also ordered that the $138,011.66 damages award be supplemented by an award of reasonable attorney's fees, which it found were warranted as an element of the conversion damages under Massachusetts law, and also of post-judgment interest at the contract rate specified in the loan agreements. Invoking its powers of equitable subordination pursuant to 11 U.S.C. 510(c), the court entered an order subordinating the Bank's secured claim to the claims of priority and general unsecured claimants in an amount equal to the full amount of the damages, interest and attorney's fees. It further directed that the Bank transfer to the Trust's estate a portion of its security interest in an amount equal to the total damages. The bankruptcy court refused, however, to issue an order entirely invalidating the mortgages held by the Bank. -18- While the Bank's appeal of the bankruptcy court's judgment was pending, the FDIC was appointed receiver and liquidating agent of the Bank, and substituted for the Bank as defendant-appellant. The FDIC continued the Bank's appeal of the bankruptcy court's judgment as to the conversion, breach of contract, and fraud claims, as well as its challenge to the bankruptcy court's equitable subordination of its secured interest in an amount equal to the total damages. In addition, the FDIC raised two special federal defenses as to each aspect of the damages claims. The FDIC argued that the D'Oench doctrine or its statutory _______ counterpart, 12 U.S.C. 1823(e) precluded the bankruptcy court's award of damages on the kickback arrangement, insofar as this claim was based on a secret agreement between Weiner and Benjamin. The FDIC also argued that the special holder in due course status accorded it under federal common law entirely barred the Trust's claims for damages and equitable subordination against it in its receivership capacity. The Trust and Young, on the other hand, challenged the applicability of the federal defenses urged by the FDIC, as well as the FDIC's right to raise these defenses for the first time on appeal. They also contested the bankruptcy court's refusal to grant them an order invalidating entirely the Bank's mortgages on their properties. -19- In August 1991, the district court affirmed the bankruptcy court's rulings on the merits of the plaintiffs' conversion and breach of contract claims with respect to the Bank's improper application of loan proceeds for payment of soft costs. Although the district court found that the FDIC was entitled to raise its federal defenses for the first time on appeal, it rejected the FDIC's argument that the federal common law holder in due course doctrine barred the Trust's claims against it in its capacity as the Bank's receiver. The district court also affirmed the equitable subordination of the FDIC's secured claim on the Trust's estate in an amount equal to the damages on the soft costs claims, i.e., $111,711.66, plus post-judgment interest. It reversed, however, the bankruptcy court's inclusion of attorney's fees as part of the overall amount of the FDIC's claim subject to equitable subordination. The district court vacated the bankruptcy court's award of $26,300 of damages based on the kickback arrangement between Benjamin and Weiner. Finding that the FDIC was entitled to raise the D'Oench doctrine for the first time on _______ appeal, the court held that the kickback arrangement was a secret agreement squarely within the coverage of the doctrine. It therefore reduced the equitable subordination against the FDIC by an amount equal to the kickback damages. Because it found that the fraud claims based on the kickback -20- arrangement could not stand against the FDIC, the court rejected the Trust and Young's arguments that it declare the loan agreements and the mortgages on the plaintiffs' properties void as illegal contracts in contravention of public policy. -21- THE ISSUES ON APPEAL AND STANDARD OF REVIEW THE ISSUES ON APPEAL AND STANDARD OF REVIEW In their appeals to this court,3 both the FDIC and the Trust press substantially the same arguments made in their appeals of the bankruptcy court's judgment to the district court.4 The FDIC argues that because it was the receiver of an insolvent bank, federal common law barred the plaintiffs' claims of conversion, breach of contract, and fraud, as well as the equitable subordination of the FDIC's secured interest in the Trust's estate. The FDIC maintains that any damages against it in its receivership capacity based on the soft costs claims were barred by the federal common law holder in due course doctrine, and that the equitable subordination against it in an amount equal to those damages is contrary to federal common law. The FDIC also attacks the rulings of the bankruptcy court, affirmed by the district court, that the Bank misappropriated soft costs monies, as well as the equitable subordination of its secured claim to reflect the damages caused by the Bank's misappropriation. It further challenges the district court's affirmance of an award of ____________________ 3. Following the district court's judgment, both the FDIC and the Trust docketed separate appeals with this court. The FDIC's appeal is No. 91-1977; the Trust's is No. 91-1976. 4. Young is not a party to the Trust's appeal. Neither the Trust nor Young has challenged the district court's affirmance of the bankruptcy court's refusal to void the mortgages on their properties. -22- post-judgment interest on the $111,711.66 in damages on the soft costs claims. The Trust, on the other hand, argues that the district court erred by applying the D'Oench doctrine for the first _______ time on appeal. The Trust insists that the D'Oench doctrine _______ does not bar its recovery on its claims relating to the kickback scheme. The Trust also maintains that the district court erred when it held that the bankruptcy court incorrectly included attorney's fees as part of the overall amount of the FDIC's security interest subject to equitable subordination in favor of the Trust and other creditors. In an appeal from a district court's review of a bankruptcy court's decision, we "independently review[] the bankruptcy court's decision, applying the clearly erroneous standard to findings of fact and de novo review to conclusions of law." In re G.S.F. Corp., 938 F.2d 1467, 1474 __________________ (1st Cir. 1991). See also In re Navigation Technology Corp., ________ _________________________________ 880 F.2d 1491, 1493 (1st Cir. 1989) (bankruptcy court's determinations of law subject to de novo review); Briden v. _________ Foley, 776 F.2d 379, 381 (1st Cir. 1985) (clearly erroneous _____ standard of review applied to bankruptcy court's factual findings). -23- DISCUSSION DISCUSSION I. DISTRICT COURT REVIEW OF THE FDIC'S FEDERAL DEFENSES FOR THE FIRST TIME ON APPEAL Before considering the Trust's state law claims underlying its damages award against the Bank, we first address the FDIC's arguments that two special defenses established under federal law the federal common law holder in due course and D'Oench doctrines barred all of the _______ plaintiffs' claims and resulting equitable subordination against it as the Bank's receiver. In order to address the merits of these federal defenses, we must, as a threshold matter, determine whether the FDIC was entitled to raise them for the first time in the district court in its appeal of the bankruptcy court's judgment. The district court based its decision to permit the FDIC to assert its federal defenses exclusively on the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183 (1989) (codified at 12 U.S.C. 1811-1833e), which provides in pertinent part: (13) Additional rights and duties (A) Prior final adjudication The Corporation shall abide by any final unappealable judgment of any court of competent jurisdiction which was rendered before the appointment of the Corporation as conservator or receiver. -24- (B) Rights and Remedies of conservator or receiver In the event of any appealable judgment, the Corporation as conservator or receiver shall (i) have all the rights and remedies available to the insured depository institution (before the appointment of such conservator or receiver) and the Corporation in its corporate capacity, including removal to Federal court and all appellate rights; and (ii) not be required to post any bond in order to pursue such remedies. 12 U.S.C.A. 1821(d)(13)(A)-(B). The district court found that the bankruptcy court's judgment in favor of the Trust was "appealable" within the meaning of 1821(d)(13)(B). It reasoned that the federal defenses against the Trust's claim asserted by the FDIC in its receivership capacity were among "the rights and remedies available to . . . the [FDIC] in its corporate capacity." The district court concluded that the "rights and remedies" granted the FDIC in its receivership capacity included the right to raise its federal defenses for the first time on appeal. The district court based this analysis on its reading of FIRREA's text and legislative history.5 ____________________ 5. As evidence of Congress' special solicitude for the preservation of the rights of the FDIC in its receivership capacity, the district court emphasized FIRREA's provision of an automatic stay in any litigation to which the FDIC becomes a party. See 12 U.S.C. 1821(d)(12). It also highlighted ___ language in FIRREA's legislative history explaining the need for the automatic stay: "The appointment of a conservator or -25- The district court acknowledged that this interpretation of 1821(d)(13)(B) conflicted with that of the Fifth and Eleventh Circuits, both of which have rejected this interpretation of FIRREA. In Olney Savings & Loan ________________________ Association v. Trinity Banc Savings Association, 885 F.2d 266 _______________________________________________ (5th Cir. 1989), the Fifth Circuit ruled that 1821(d)(13)(B) did not in any way modify the substantive rights of the FSLIC in its receivership capacity, but merely assured the FSLIC standing to pursue all appeals previously available to it only in its corporate capacity. Accordingly, it held that FIRREA did not entitle the FSLIC to raise the D'Oench doctrine for the first time on appeal. Id. at 275. _______ ___ In Baumann v. Savers Federal Savings & Loan Assoc., 934 F.2d _______________________________________________ 1506 (11th Cir. 1991), cert. denied, ___ U.S. ___, 1992 U.S. ____________ LEXIS 2709, 60 U.S.L.W. 3780 (1992), the Eleventh Circuit followed Olney, and rejected the argument of the Resolution _____ Trust Corporation ("RTC") that 1821(d)(13)(B) entitled it to raise the D'Oench doctrine. Id. at 1511. In Baumann, the _______ ___ _______ Eleventh Circuit expressly rejected the interpretation of ____________________ receiver can often change the character of the litigation; the stay gives the FDIC a chance to analyze pending matters and decide how best to proceed." H.R. Rep. No. 54(I), 101st Cong., 1st Sess. 331 (1989), reprinted in 1989 U.S.C.C.A.N. _____________ 86, 127. The district court further relied on two decisions of the Texas Court of Appeals holding that 1821(d)(13)(B) permits the FDIC to raise the D'Oench doctrine for the first _______ time on appeal. See FDIC/Manager Fund v. Larsen, 793 S.W.2d ___ ___________________________ 37 (Tex. Ct. App.), writ granted, 34 Tex. Sup. Ct. J. 91 ____________ (1990); FSLIC v. T.F. Stone-Liberty Land Assocs., 787 S.W.2d _________________________________________ 475 (Tex. Ct. App. 1990). -26- 1821(d)(13)(B) advanced by the district court in this case. The Baumann court concluded that to read the statute _______ otherwise would be to grant a federal receiver new substantive rights, because neither FIRREA nor previously existing statutes granted the RTC in its corporate capacity the power to raise arguments for the first time on appeal. Id. ___ We think that the Olney and Baumann courts' _____ _______ interpretation of 1821(d)(13)(B) is the proper one, and hold that the district court erred when it read FIRREA as allowing the FDIC in its receivership capacity to raise its federal defenses for the first time on appeal. We agree with the distinction drawn by Baumann: "the right at issue in this _______ case is not the right of the [federal receiver] to argue [a federal defense], which is unquestioned, but rather the right of the [federal receiver] to raise an argument for the first time on appeal." Id. at 1512. Section 1821(d)(13)(B) merely ___ accords the FDIC in its receivership capacity standing to raise the same defenses available to the FDIC in its corporate capacity. It does not establish that the FDIC as receiver is entitled to raise its federal defenses for the first time on appeal. Although FIRREA does not grant the FDIC as receiver the right to raise its special federal defenses to the Trust's claims for the first time on appeal, we must also consider -27- whether there is any alternative basis on which the district court could have permitted the FDIC to raise its federal defenses. The FDIC argues that even if 1821(d)(13)(B) does not grant it the right to raise its federal defenses, the district court nonetheless had the discretion, in its capacity as an appellate court, to address these defenses for the first time on appeal. The FDIC relies principally on Baumann for this _______ argument. There, the Eleventh Circuit held that its discretion as an appellate court permitted it to address the federal receiver's D'Oench doctrine argument for the first _______ time on appeal. Id. at 1513. The court stressed the fact ___ that the RTC had not had the opportunity to present its argument in the trial court because it had not become a party to the suit until after the entry of final judgment. Id. In ___ order to prevent the RTC from being "penalized for not raising a defense it had no opportunity to present," the Baumann court concluded that it would be appropriate to _______ exercise its discretion to exempt the RTC in its receivership capacity from its general rule precluding argument of issues for the first time of appeal. Id. The Fifth Circuit has ___ also adopted Baumann's approach in similar circumstances in _______ which the federal conservator or receiver becomes a party to an appeal after the final judgment of the trial court. See ___ Resolution Trust Corp. v. McCrory, 951 F.2d 68, 71 (5th Cir. __________________________________ -28- 1992) (citing Baumann and Union Fed. Bank v. Minyard, 919 _______ ____________________________ F.2d 335, 336 (5th Cir. 1990)). It is the general rule in this circuit that arguments not raised in the trial court cannot be raised for the first time on appeal. See, e.g., Boston Celtics Ltd. Partnership ___ ____ ________________________________ v. Shaw, 908 F.2d 1041, 1045 (1st Cir. 1990); Brown v. ________ _________ Trustees of Boston Univ., 891 F.2d 337, 359 (1st Cir. 1989), _________________________ cert. denied, ___ U.S. ___, 110 S. Ct. 3217 (1990). Like ____________ other circuit courts of appeals, however, we have recognized that an appellate court has the discretion, in exceptional circumstances, to reach issues not raised below. See United ___ ______ States v. La Guardia, 902 F.2d 1010, 1013 (1st Cir. 1990). _____________________ In United States v. Krynicki, 689 F.2d 289, 291-92 (1st Cir. _________________________ 1982), we outlined the criteria for determining the appropriate exercise of our discretion to hear new issues. These criteria include, inter alia, whether the new issue is _____ ____ purely legal, such that the record pertinent to the issue can be developed no further; whether the party's claim appears meritorious; whether reaching the issue would promote judicial economy because the same issue is likely to be presented in other cases; and whether declining to reach the argument would result in a miscarriage of justice. Id. ___ The circumstances of this case were sufficiently exceptional to have permitted the district court to consider for the first time on appeal the merits of the federal -29- defenses raised by the FDIC in its receivership capacity. The question of whether various federal defenses barred the Trust's claims was purely legal and required no further development of the factual record; the FDIC's federal defenses were colorable, judged by the district court's acceptance of the FDIC's D'Oench argument to bar damages on _______ the kickback claims; judicial economy would have been promoted by a ruling on the merits of the applicability of the FDIC's federal defenses, given the increasing volume of litigation involving federal receivers and/or conservators in this circuit; and finally, it would have been unfair to prevent the FDIC from raising its federal defenses when it had no such opportunity to assert them before the bankruptcy court. As Baumann and McCrory make clear, it is not uncommon _______ _______ for a federal receiver or conservator to become a party to a litigation after the final judgment of the trial court. To prevent the FDIC from raising its federal defenses in such circumstances would vitiate much of the purpose of allowing these defenses in the first place. II. THE D'OENCH DOCTRINE AS A BAR TO THE TRUST'S RECOVERY ON _______ THE KICKBACK CLAIMS We next review the question of whether the D'Oench _______ doctrine, or its statutory counterpart, 12 U.S.C. -30- 1823(e),6 bars the Trust's claims based on the kickback scheme and any equitable subordination against the FDIC as receiver. In D'Oench, the Supreme Court held that in a suit _______ brought by the FDIC to collect on a borrower's promissory note, in which the FDIC was the successor in interest to the original lender, the borrower was not entitled to rely on agreements outside the documents contained in the lender bank's records to defeat the FDIC's claim. 315 U.S. at 460- 61. The Supreme Court announced a federal common law doctrine of equitable estoppel preventing the borrower from using a "secret agreement" with the original lender as a ____________________ 6. As amended by FIRREA, 1823(e) provides: No agreement which tends to diminish or defeat the interest of the Corporation in any asset acquired by it under this section . . . , either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the Corporation unless such agreement (1) is in writing, (2) was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution, (3) was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the minutes of said board committee, and (4) has been, continuously, from the time of its execution, an official record of the depository institution. We treat 1823(e) as the statutory codification of the D'Oench doctrine. See Capizzi v. FDIC, 937 F.2d 8, 9 (1st _______ ___ ________________ Cir. 1991); FDIC v. P.L.M. Int'l, Inc., 834 F.2d 248, 253 ____________________________ (1st Cir. 1987). -31- defense to the FDIC's demand for payment. Id. D'Oench did ___ _______ not require that the borrower have the intent to defraud: "The test is whether the note was designed to deceive creditors or the public authority, or would tend to have that effect. It would be sufficient in this type of case that the maker lent himself to a scheme or arrangement whereby the banking authority . . . was or was likely to be misled." Id. ___ at 460.