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1997 Survey of Rhode Island Law: Cases: Agency Law

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Roger Williams University Law ReviewVolume 3 | Issue 2 Article 5Spring 19981997 Survey of Rhode Island Law: Cases: AgencyLawWilliam J. Powers IVRoger Williams University School of LawFollow this and additional works at: http://docs.rwu.edu/rwu_LRThis Survey of Rhode Island Law is brought to you for free and open access by the Journals at DOCS@RWU. It has been accepted for inclusion inRoger Williams University Law Review by an authorized administrator of DOCS@RWU. For more information, please contact mwu@rwu.edu.Recommended CitationPowers, William J. IV (1998) "1997 Survey of Rhode Island Law: Cases: Agency Law," Roger Williams University Law Review: Vol. 3:Iss. 2, Article 5.Available at: http://docs.rwu.edu/rwu_LR/vol3/iss2/5SURVEY SECTIONAgency Law. Rhode Island Depositors Economic Protection Corp.v. Ryan, 697 A.2d 1087 (R.I. 1997). Where a defendant partici-pated in a scheme designed to forward funds to an ineligible bor-rower, the defendant will be held personally liable for the notewhen bank records contained no written agreement memorializingthe alleged agency relationship between the defendant and a thirdparty.FACTS AND TRAVELOn August 5, 1988, P. Alan Ryan (Ryan) signed a promissorynote in favor of Davisville Credit Union (Davisville). 1 The notewas in the amount of $1.6 million dollars. Davisville subsequentlyfailed because of unsound lending practices, and the Rhode IslandDepositors Economic Protection Corporation (DEPCO) became thebeneficiary to Davisville's rights under the note.2 On May 23,1994, DEPCO sought to collect on the note and filed a complaint inRhode Island Superior Court. DEPCO alleged that the defendantdefaulted on the note and that Ryan was obligated under the note'sterms to pay the principal and interest plus costs.3BACKGROUNDRyan, the defendant, claimed that because he was an agent ofthe principal actor, David LaRoche (LaRoche), he was not obli-gated to the terms of the note.4 Ryan conceded that "the note itselfdid not reveal any agency status, but he maintained that DEPCOwas chargeable with notice of the agency relationship on the basisof other documents in Davisville's loan file."5 Ryan contended thatthe documents created a genuine issue of material fact aboutwhether he had signed the note as an agent. Ryan claimed thisprecluded the disposition of the case by summary judgment at thetrial level.61. See Rhode Island Depositors Economic Protection Corp. v. Ryan, 697 A.2d1087, 1089 (R.I. 1997).2. See id.3. See id.4. See id.5. Id.6. See id.3871998] 387388 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 3:387Ryan admitted that he had participated in a plan to enableLaRoche to evade adhering to the maximum borrowing limit estab-lished by Davisville for individual debtors. 7 According to Ryan, thetransaction was designed to allow "Davisville to loan money toRyan for LaRoche's benefit."" In addition, Ryan claimed thatDavisville was aware of the agency relationship that existed be-tween Ryan and LaRocheY In support of his allegations that thedebtor on the note was in fact LaRoche, Ryan identified lending-procedure irregularities in several documents in the loan file thathe claimed revealed the true nature of the loan. 10 At the triallevel, the judge ruled that Ryan would survive summary judgmentbecause he alleged sufficient facts to establish a basis for his de-fense. 1 ' However, the trial judge further determined that "none ofthe facts presented by the defendant, separately or cumulatively,is enough to put a subsequent holder of the note on notice of anyagency relationship."12 Ryan, however, had two defenses availableagainst DEPCO. These defenses were based on (1) the federalholder-in-due-course doctrine13 and (2) the D'Oench, Duhmedoctrine. 147. See id. at 1090.8. Id.9. Ryan contended that Davisville officials told him that he "was not respon-sible for the loan and... would never be responsible for the loan since [he] was notthe borrower." Id.10. Ryan alleged that at the time he signed the note, his annual income was$36,000, he had never completed a loan application, he had never provided Davis-vile with any financial information and he had never signed a purchase-and-saleagreement for the property that was mortgaged as part of the transaction. See id.The property in question consisted of forty-three waterfront lots in Portsmouth,Rhode Island, which Ryan owned for fifteen minutes-just long enough to sign thenote and mortgage before deeding the property by quitclaim deed back to LaRoche.Ryan also contended that the address on the note was the address of LaRoche. Seeid.11. See id.12. Id.13. See id. at 1091. The court treated DEPCO and FDIC similarly as theyboth essentially perform the same function. Cf O'Melveny & Myers v. FDIC, 512U.S. 79 (1994) (leaving it up to individual states to supplement a federal statutoryregulation that is comprehensive and detailed). But see Resolution Trust Corp. v.A.W. Assoc., Inc., 869 F. Supp. 1503, 1510 (D. Kan. 1994).14. See Ryan, 697 A.2d at 1091 (citing D'Oench, Duhme & Co. v. FDIC, 315U.S. 447 (1942)).1998] SURVEY SECTION 389Federal Holder-in-Due Course DoctrineTraditionally a state law concept, the federal holder-in-duecourse doctrine' 5 allows an entity such as DEPCO to hold a note inthe regular course of business. DEPCO would not ordinarily berelegated to determining its status as a creditor under the UniformCommercial Code Rhode Island General Laws title 6A.16 However,in order to facilitate its function as a federal-depository agency,1 7DEPCO is afforded the protection of UCC regulation.' 8 The fed-eral holder-in-due-course doctrine extends to the regulatory agencythe protection from personal defenses normally enjoyed by aholder-in-due-course under state law, but does not extend to theagency protection from real defenses.' 9 Ryan asserted only per-sonal defenses. 20Although Ryan argued that DEPCO knew or should haveknown of his agency relationship with LaRoche, the documentationin his loan file alone was insufficient to persuade the court to cre-15. See Gunter v. Hutcheson, 674 F.2d 862 (11th Cir. 1982), cert. denied, 459U.S. 826 (1982).16. R.I. Gen. Laws §§ 6AI-101 to -9-507 (1956) (1992 Reenactment) (adoptingthe Uniform Commercial Code).17. The function of an agency such as the FDIC, or DEPCO in the presentcase, is to pay the depositors of the failed institution. This is accomplishedthrough a purchase and assumption transaction whereby:the receiver of the failed bank transfers the assets and liabilities of thefailed bank to another, solvent bank. In order to shield the acquiringbank from loss that may result from the acquisition of high-risk assetssuch as defaulted loans, the acquiring bank is permitted to return assetsthat are not of the highest quality. The FDIC as corporate insurer thenpurchases the returned assets from the receiver, who in turn forwards themoney to the acquiring bank. In essence, the FDIC makes good on riskyassets of the failed bank, thus allowing the assets and money transferredto the acquiring bank to equal or exceed the assumed liabilities. TheFDIC then attempts to collect on the assets returned by the acquiringbank in order to minimize loss to the insurance fund.Ryan, 697 A.2d at 1091-92.18. See R.I. Gen. Laws §§ 6A-3-302 to -305 (1956) (1992 Reenactment) (settingforth qualifications and rights of a holder-in-due-course in Rhode Island).19. See Ryan, 697 A.2d at 1092. Personal defenses consist of, but are not lim-ited to: (1) failure of consideration, (2) nondelivery and (3) fraud in the induce-ment. See 11 Am. Jur. 2d Bills and Notes § 654 (1963). Real defenses consist of: (1)infancy, (2) incapacity, duress or illegality of the transaction that renders theparty's obligation a nullity, (3) fraud in the factum and (4) discharge in bank-ruptcy. See R.I. Gen. Laws § 6A-3-305(2) (1956).20. The defendant sought to avoid liability on the note, which he admittedsigning, on the basis of an unrecorded agency agreement. See Ryan, 697 A.2d at1093.390 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 3:387ate an agency relationship among the parties. 21 The defendant'sposition was essentially that, because his "straw-man" status inrelation to LaRoche was arguably discernable on close inspection ofthe bank records, a factual question was created concerningwhether DEPCO had notice of the alleged agency relationship. 22The court found it reasonable that DEPCO would rely on the loandocuments as they existed in Davisville's file obligating Ryan toassume responsibility for the note.23The D'Oench, Duhme DoctrineSecond, the defendant argued that his agency relationshipwith LaRoche was memorialized in writing within the meaning ofsection 42-116-23 of the Rhode Island General Laws.24 TheD'Oench, Duhme doctrine is similar to the federal holder-in-due-course doctrine in that the FDIC2 5 is presumably on notice of writ-ten agreements contained in the official records of a failed bank.The two doctrines diverge, however, in two separate situations. 26First, section 42-116-23 does not require actual notice on the part21. The court noted that DEPCO could not be charged with knowledge of adefense merely because that information was contained in the files. See id. at 1094(citing FDIC v. Wood, 758 F.2d 156, 162 (6th Cir. 1985)).22. See id.23. See id.24. Certain Agreements. No agreement which tends to diminish or defeat theinterest of the corporation in any asset acquired by it under this chapter shall bevalid against the corporation unless such agreement:(a) Is in writing;(b) Was executed by the eligible institution and any person claiming anadverse interest thereunder, including the obligor, contemporaneouslywith the acquisition of the asset by the eligible institution;(c) Was approved by the board of directors of the eligible institution or itsloan committee; which approval shall be reflected in the minutes of theboard or committee; and(d) Has been, continuously, from the time of its execution, an official rec-ord of the eligible institution.R.I. Gen. Laws § 42-116-23 (1956) (1993 Reenactment). This statute contains sub-stantially the same language as that found in Rhode Island General Laws § 19-12-13 (1956) (1995 Reenactment) (Rhode Island's receivership statute). Both statutesessentially replicate 12 U.S.C. § 1823(e) of the Federal Deposit Insurance Corpora-tion Act, which codifies the federal common-law doctrine that originated inD'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942).25. In this case, DEPCO is substituted for FDIC.26. See Ryan, 697 A.2d at 1094-95.19981 SURVEY SECTIONof DEPCO.27 If the agreement in contention satisfies the statute'sfour prongs, then DEPCO's lack of knowledge will not defeat aclaim based on the agreement. 28 The defendant argued that hisagency relationship was reflected in various documents executedat the closing and these documents, taken together, constituted awritten agreement within the meaning of section 42-116-23.29Furthermore, the defendant contended that the trial judge erred inrequiring a "specific written document evidencing the agreement"because the statute does not require a specific written document.30The court, however, relied on Langley v. Federal Deposit InsuranceCorp.,31 which required adherence to the specific writing require-ment in 12 U.S.C. § 1823(e).32 The court went on to equate thereceivership statute,33 which requires a specific writing,34 to theDEPCO statute35 because the two statutes are ostensibly a carboncopy of one another.36 The court and the statute, therefore, re-quired the defendant to point to a specific writing in order to evi-dence the relationship which he so fervently relied on, and Ryanwas unable to do soYCONCLUSIONIn dismissing both of Ryan's defenses, the court strictly ad-hered to the statutory requirements set forth by the federal holder-in-due-course doctrine and the D'Oench, Duhme doctrine. Para-27. See id. at 1095.28. See id.29. See id.30. Id.31. 484 U.S. 86 (1987).32. See id. (citing the Federal Deposit Insurance Act of 1950, 12 U.S.C.§ 1823(e), which essentially provides that no agreement tending to diminish or de-feat the FDIC's "right title or interest" in any asset acquired by the FDIC underthe section shall be valid against the FDIC unless it shall have been (1) in writing,(2) executed contemporaneously with the bank's acquisition of the asset, (3) ap-proved by the bank's board of directors or loan committee and reflected in the min-utes of the board or committee and (4) continuously, from the time of its execution,an official record of the bank).33. See R.I. Gen. Laws § 19-12-13 (1956) (1989 Reenactment).34. See Paradis v. Greater Providence Deposit Corp., 677 A.2d 1340 (R.I.1996).35. See R.I. Gen. Laws § 42-116-23 (1956) (1993 Reenactment).36. See Ryan, 697 A.2d at 1095.37. Ryan admitted that, had such a writing been placed in the file, it wouldhave frustrated the purpose of the transaction which was to "pull the wool overeveryone's eyes." Id.392 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 3:387mount to the defendant's agency claim was the relationship thatexisted between himself, LaRoche and Davisville. In order to es-tablish the necessary underpinnings of this unorthodox deal, Ryanportrayed himself as an innocent pawn in a high-stakes game ofundercapitalized finance. 3S In attempting to create this portrait,Ryan himself became so intertwined in the incestuous fact patternthat his alleged naivete became highly suspect. Missing from thepurported agreement, however, was written evidence of this rela-tionship. The inability to point to a specific written document, aswell as the protection DEPCO held under the federal holder-in-duecourse doctrine, was decisive in the court's conclusion that Ryanwas liable on the note.William J. Powers, IV38. See id. at 1090.

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1997 Survey of Rhode Island Law: Cases: Agency Law

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