FDIC v. R & A Nenni Builders CV-91-626-B 03/12/93 UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF NEW HAMPSHIRE

Federal Deposit Insurance Corporation

v. Civil No. 91-626-B

R & A NENNI BUILDERS, et al.

O R D E R

This action arises from a loan made by Numerica Savings Bank

to R & A Nenni Builders, Inc. ("Nenni Builders"). The loan went

into default and the bank foreclosed on the property securing the

loan. The Bank then commenced actions in state court against

Nenni Builders and two alleged guarantors, Robert and Arline

Nenni, to recover the deficiency remaining due on the loan. In a

separate state court action, the defendants filed various claims

against the bank which they also allege are defenses to their

liability for the deficiency. The Federal Deposit Insurance

Corporation ("FDIC") removed these actions to Federal Court after

Numerica Savings Bank failed.

The matter is before me on the FDIC's motion for partial

summary judgment. FACTS

The following facts are stated in the light most favorable

to the defendants.

Numerica Savings Bank agreed to loan Nenni Builders $750,000

in the spring of 1988. The loan commitment letter ("the

commitment"), which was signed by Mr. Nenni at the loan closing,

specifies that the loan is "for the purpose of a revolving line

of credit to purchase land and construct 9 single-family

homes . . . ." The commitment further states that the loan is to

be secured by a mortgage on the real estate and that the note is

to be endorsed by Robert Nenni, president of Nenni Builders. The

commitment is silent on the subject of personal guarantees.

Moreover, the only circumstance identified in the commitment

under which the bank may reguire additional security such as

personal guarantees is "if the bank discovers additional relevant

facts" warranting additional security.

A loan agreement also was signed by Mr. Nenni at the

closing. The agreement provides that $560,000 of the loan

proceeds is to be used to refinance the acguisition of the land

on which the homes were to be built. The loan agreement

obligates the bank to advance the loan proceeds in installments

as construction progresses. However, the agreement is silent as

2 to the bank's obligation to make additional disbursements once

the entire amount of the loan is distributed. Although the

agreement references "any guarantor," it does not state that

either Mr. or Mrs. Nenni must execute a personal guarantee.

Instead, it provides only that the loan agreement shall be

secured by a first mortgage on the land.

Mr. Nenni also signed a note at the closing. The note

provides that payment of the note is to be secured by "personal

guarantees, not necessarily of even date herewith, executed by

Robert Nenni and Arline Nenni, as guarantors."

Robert Nenni signed a personal guarantee at the closing.

Arline Nenni was present at the closing, but was not asked to

sign a new guarantee.

Both Robert and Arline Nenni had previously executed

personal guarantees in favor of Numerica Savings Bank in

connection with a 1987 loan. These guarantees provide in

pertinent part that:

IN CONSIDERATION of credit heretofore or hereafter granted by Numerica Savings Bank, FSB (hereinafter called Bank) to R&A Nenni Builders, Inc. (herein called Customer), and to enable such credit to be obtained or maintained by Customer, the undersigned does hereby guarantee to Bank the prompt payment at maturity, expressed or declared, of all liabilities, primary, secondary, direct, contingent, sole, joint, several, or joint

3 and several and interest thereon, now or hereafter at any time or times incurred, by Customer.

The guarantees further provide that Mr. and Mrs. Nenni could

terminate their obligations under the guarantees for future loans

by giving the bank written notice of termination. However,

neither Mr. nor Mrs. Nenni ever gave the bank written notice of

an intention to discontinue the 1987 guarantees.

The entire $750,000 in loan proceeds was disbursed to allow

Nenni Builders to refinance the acguisition of the land and to

allow it to begin construction on the homes. On February 8,

1989, Nenni Builders closed on the sale of the first house.

$123,062.50 from the sale of this house was paid to the bank.

Although Nenni Builders reguired approximately $40,000 to

complete construction of the remaining homes, the Bank refused to

disburse any additional funds. As a result, the houses were not

completed, the note was not repaid and Nenni Builders went into

default.

Mr. Nenni claims that a bank official told him that neither

he nor his wife would be reguired to guarantee the 1988 loan.

Although he admits signing the 1988 loan documents, including the

note and the 1988 guarantee, he claims that he never reviewed

them and, therefore, did not know that he and his wife were

4 guaranteeing the 1988 loan. Finally, Mr. and Mrs. Nenni both

claim that they did not read the 1987 guarantees and did not

understand that the guarantees could apply to subseguent loans

made to Nenni Builders by the bank.

____________________________ DISCUSSION

I STANDARD OF REVIEW

Summary judgment should be entered only "if the pleadings,

depositions, answers to interrogatories and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party

is entitled to judgment as a matter of law." Fed. R. Civ. P.

56(c). An issue of fact is genuine if the evidence, when viewed

in the light most favorable to the party opposing summary

judgment, would "permit a rational fact finder to resolve the

issue in favor of either party." Medina-Munoz v. R.J. Reynolds

Tobacco Company,

(1st Cir. 1990) (citations

omitted); Anderson v. Liberty Lobby, Inc.,

(1986). A fact is material if it affects the outcome of the

suit. Anderson,

; Garside v. Osco Drug, Inc.,

(1st Cir. 1990) (guoting Mack v. Great Atlantic &

Pacific Tea C o .,

(1st Cir. 1989)).

5 If the party seeking summary judgment establishes initially

that there are no material facts in dispute, the party opposing

summary judgment "must set forth specific facts showing that

there is a genuine issue for trial." Fed. R. Civ. P. 56(e). A

mere denial of liability or an unsupported assertion that factual

disputes exist is insufficient to avoid summary judgment.

Instead, a party opposing summary judgment must produce hard

evidence. Evidence which is "merely colorable or not

significantly probable" will not preclude summary judgment.

Griggs-Ryan v. Smith,

(1st Cir. 1990) (guoting

Anderson,

-50).

Applying these standards to the present case, I conclude

that there are material facts in dispute. Accordingly, the FDIC

is not entitled to judgment as a matter of law.

II. CHOICE OF LAW

_____ As a threshold matter, I must determine whether this action

is governed by state or federal law.

Subject matter jurisdiction in this action is based upon

(b) (2) (A) .1 Accordingly, the action is governed by

(b) (2) (D) provides an exception to Section 1819(b)(2)(A) jurisdiction when the FDIC is acting in its capacity as a receiver and only the interpretation of state law

6 federal law because it is "deemed to arise under the laws of the

United States." Id.; D'Oench Duhme & Co. v. FDIC,

(1942) (Jackson, J., concurring); FDIC v. P.L.M. Int'l,

Inc.,

(1st Cir. 1987); Santoni v. FDIC,

(1st Cir. 1982). When applying federal common law,

the United States Supreme Court and the First Circuit Court of

Appeals have counseled judges that "federal law is no

jurisdictional chameleon, changing complexion to match that of

each state wherein lawsuits happen to be commenced because of the

accidents of service of process and of the application of venue

statutes." Santoni,

(guoting D'Oench Duhme &

C o .,

(Jackson, J., concurring)). Thus, in the

context of a case such as the present one, a court should employ

rules of decision which are consistent with the federal policies

underlying the FDIC Act. Adams v. Madison Realty & Dev., Inc.,

(3rd Cir. 1991); FDIC v. Alvarez Lau ,

(D.P.R. 1988); FDIC v Tito Castro Const.,

(D.P.R. 1982).

is necessary to decide the claim. However, the exception is inapplicable because the FDIC properly relies on federal law to respond to many of plaintiffs' contentions. See, e.g., Caoizzi v. FDIC. 937 F .2d 8, 10-11 (1st Cir. 1991).

7 Nevertheless, when an issue may properly be decided either

way without adversely affecting important federal policies, it is

appropriate as a matter of federal common law to look for

guidance from the law of the state which the parties presumably

intended to govern their agreement. Kamen v. Kemper Fin. Serv.,

Inc., 111 S. C t . 1711, 1717 (1991); see also D'Oench Duhme & Co.,

(Jackson, J., concurring) ("no doubt many

guestions as to the liability of parties to commercial paper

which comes into the hands of the corporation will best be solved

by applying local law with reference to which the makers and the

insured bank presumably contracted"). But cf. FDIC v. Singh,

(1st Cir. 1992) (without discussing impact on federal

policy, court applied Massachusetts law to construe contract

because the contract provided that it should be construed in

accordance with Massachusetts law). Thus, I will rely on state

law for guidance in interpreting and enforcing the contracts at

issue in this litigation where such law is not in conflict with

important federal policies.

Ill. THE GUARANTEES

The Nennis make several arguments in support of their claim

that the guarantees are unenforceable. First, they argue that

the guarantees were intended to support an entirely different loan and that the guarantees had no effect once that loan was

fully satisfied. I reject this contention because it is

contradicted by the plain language of the guarantees. Pursuant

to the guarantees, the Nennis' obligations to guarantee debts of

Nenni builders are "continuing" and "shall apply regardless of

how long before or after the date hereof, any liability was or is

incurred." Moreover, the guarantees specify that they may be

terminated and thus rendered inapplicable to future debts only by

written notice of termination. Continuing guarantees are notper

se unenforceable. See, e.g.. Brown Burnell Co. v. Beliste,

(1929); see also Zanditon v. Feinstein,

(1st Cir. 1988) (applying Massachusetts law). Thus,

because the Nennis failed to revoke the 1987 guarantees in

writing, the guarantees are valid and enforceable against them

unless the Nennis and the bank reached an enforceable agreement

to the contrary.

The Nennis' attempt to escape the plain language of the 1987

guarantees by claiming that they never read them. Mr. Nenni

makes a similar argument with respect to the 1988 guarantee.

However, a mere failure to read an agreement before signing it

does not excuse the signatory's obligation to abide by the terms

of the agreement. Karlberq European Tanspa v. JK-Josef Kratz Vertriebsqesellschaft mbH,

(E.D. 111.

1985) (citing Calimari & Perillo, Law of Contracts,

§§ 9-42 to 9-46 (2d ed. 1977)); cf. In Re 604 Columbus Av e .

Realty Trust,

(1st Cir. 1992) (in a case

of fraud in factum, even where there is an apparently valid

signature, the FDIC could not acguire rights to enforce an

agreement). Accordingly, I reject this argument.

The Nennis also argue that the guarantees are unenforceable

because bank officials told them that they would not be reguired

to personally guarantee the 1988 loan. Such oral promises are

unenforceable against the FDIC pursuant to the common law D 'Oench

Doctrine and its statutory counterpart,

(e).

Timberland Design, Inc. v. First Serv. Bank for Sav.,

(1st Cir. 1991); Queen v. First Serv. Bank for Sav.,

(Bkrtcy D.N.H. 1991). Thus, this argument is also

unavailing.

More troubling is the Nennis' argument that the guarantees

cannot be enforced because the 1988 loan documents provide that

the Nennis were not reguired to personally guarantee the 1988

loan. In support of this argument, the Nennis rely on the

commitment. Specifically, they contend that because the

commitment omits any reference to guarantees, the commitment

10 reflects an agreement by the parties that guarantees would not be

reguired.

The FDIC makes several arguments in response to this

contention.2 First, it argues that the commitment was

extinguished pursuant to the doctrine of merger when the loan

agreement was signed. In making this argument, the FDIC relies

upon paragraph 7.03 of the loan agreement which provides that

"[t]his agreement, and the various loan and security agreements

contemplated hereby, constitute the complete understanding

between the parties and may not be changed except by subseguent

agreement in writing signed by the parties." While this

provision might well have extinguished the commitment if it had

been signed at a different time and place from the construction

loan agreement, that is not what happened here. Instead, the

commitment was signed contemporaneously with the loan agreement.

Under these circumstances, I cannot accept the FDIC's argument

that the parties to the loan agreement intended to extinguish a

commitment which was signed only seconds before the loan

agreement itself. Thus, I reject the FDIC's merger argument and

2Notably, the FDIC has not argued that the commitment is unenforceable against the FDIC because it was not approved by the bank's board of directors or its loan committee as reguired by

(e). See, e.g., FDIC v. Rivera-Arrovo,

(1st Cir. 1990) .

11 conclude that the commitment was part of the loan agreement.

See, e.g., Kentucky Fried Chicken Corp. v. Collectramatic, Inc.,

(1988) (a merger clause results in the

merger of only those agreements which the parties intend to

integrate into the final agreement).

The FDIC next argues that if the commitment was not

extinguished, it must be interpreted together with the other loan

documents. See, e.g., Beliak v. Franconia College,

(1978); Rivier College v. St. Paul Fire Ins. Co.,

(1978). When this is done, the FDIC contends, it

becomes evident that notwithstanding the commitment, the parties

intended the 1988 loan to be subject to personal guarantees.

While I accept the FDIC's interpretive premise, I cannot conclude

that the loan documents unambiguously support its position on the

merits.

As I have previously noted, the commitment was signed at the

closing, rather than days or weeks in advance of the closing, as

is typically the case with commitment letters. Moreover, the

commitment does not state that it is only a summary containing

some, but not all, of the important loan terms. To the contrary,

the commitment identifies certain security which will be reguired

from the borrowers and states that additional security or

12 conditions would be required only "if the bank discovers

additional relevant facts." Thus, standing alone, the commitment

does not require personal guarantees.

The note, contrary to the commitment, expressly provides for

personal guarantees. The other loan documents are silent on the

subject. Thus, I am confronted with loan documents which are in

direct and irreconcilable conflict on an issue which is material

to the FDIC's motion for summary judgment. In the face of such

ambiguity, I must leave the interpretation of the contract to the

trier of fact. In Re Newport Plaza Assoc, v. Durfee Attleboro

Bank, 1993 U.S. A p p . LEXIS 2289, at *10 (1st Cir. Feb. 16, 1993).

But c f . Singh,

(court found no ambiguity

precluding summary judgment where a note provided for limited

recourse against note-makers but guarantees signed by note-makers

provided for personal liability). Accordingly, the FDIC's motion

for partial summary judgment will be denied.

Having denied the FDIC's motion for summary judgment, I need

not consider the rest of the Nennis' claims. I do so now in an

effort to assist the parties in focusing their efforts on the

limited number of issues which remain for trial.

13 IV. DISBURSEMENT OF FUNDS

The Nennis argue that they are not liable on the guarantees

because the bank materially breached its obligations on the 1988

loan when it forced Nenni Builders into default by failing to

properly disburse the proceeds of the loan. To the extent that

this argument is based upon oral agreements with bank officials,

the Nennis are estopped from proceeding by D 'Oench and

(e). However, as I discuss below, neither D 'Oench nor

(e) bars the Nennis from pursuing this argument to

the extent that it is based upon implied contract terms which are

made a part of the loan contract by operation of law.

A. The Duty To Perform Essential But Undefined Duties Reasonably

The FDIC concedes that the 1988 loan was intended to provide

a revolving line of credit. However, the FDIC has failed to

identify terms in the loan documents which describe the way in

which the revolving line of credit was intended to function.

Where a binding contract makes no mention of an essential

term, the court will supply a term which is reasonable under the

circumstances. Cole v. Combined Ins. Co. of Am.,

(1983); Restatement (Second) of Contracts, §204 (1981). The

FDIC apparently contends that the Nennis are barred from invoking

14 this accepted legal principle by D 'Oench and

(e).

I reject this contention.

The bank's obligation in this case to disburse funds under

the line of credit in a reasonable manner was not based upon any

oral understanding of the parties. Rather, the obligation

existed by operation of law when the bank and Nenni Builders

failed to specify in the loan documents how the revolving line of

credit was to work. The FDIC has failed to identify any

authority which suggests that D 'Oench and

(e)

sweeps so broadly as to preclude arguments based upon implied

contract terms which exist by operation of the law. Moreover,

the only reported decisions I have discovered on this point reach

a contrary conclusion. See, e.g., Texas Refrigeration Supply,

Inc. v. FDIC,

(5th Cir. 1992) (claims based

upon contract terms implied by operation of law are not barred by

D 'Oench); FSLIC v. Mackie,

(5th Cir. 1992)

(a duty of good faith and fair dealing is deemed by law to be

part of every contract and is not barred by D 'Oench); New Bank of

New England v. Callahan,

(D.N.H. 1992) (claim

based on an obligation arising from state law are presumed to be

a part of every contract and are not barred by D 'Oench); FDIC v.

P.P.S. Assoc.. No. 5:91-CV-00518 EBB,

*5 (D. Conn.

15 Sept. 25, 1992) (good faith and fair dealing claim not precluded

by D 'Oench) .

B. Good Faith and Fair Dealing

The Nennis assert that the manner in which the loan proceeds

were disbursed also violated the bank's implied duty of good

faith and fair dealing. The FDIC again seeks to invoke D 'Oench

and

(e) as a bar to recovery.

An implied duty of good faith and fair dealing exists in

every New Hampshire contract by operation of law. Centronics

Corp. v. Gericom Corp.,

(1989); Restatement

(Second) of Contracts §205 (1981). Because this duty exists by

operation of law and not by any secret agreement among the

parties, D 'Oench and

(e) do not bar the Nennis

from proceeding on this theory.

In summary, to the extent that the Nennis argue that their

obligations under the guarantees are excused because of the

bank's failure to fulfill implied terms in the loan agreement

which are part of the agreement by operation of law, I hold that

such claims are not barred by D 'Oench or

(e) .

16 CONCLUSION

The FDIC's motion for partial summary judgment is denied.

However, the Nennis do not dispute the default by Nenni Builders.

Thus, the only liability issues which remain for trial are as

follows: (1) whether the Nennis are not bound by the 1987 and

1988 guarantees because the loan documents provided that

guarantees would not serve as security for the 1988 loan; (11)

whether the default by Nenni Builders is excused because of the

bank's breach of its implied obligation to disburse funds under

the revolving line of credit in a reasonable manner; and (ill)

whether the default by Nenni Builders is excused because the

manner in which the bank disbursed funds under the revolving line

of credit breached the bank's obligation of good faith and fair

dealing.

SO ORDERED.

Paul Barbadoro United States District Judge

March 12, 1993

cc: David Rayment, Esg. Gerard LaFlamme, Esg. Peter Rotch, Esg.

17