Gens v. Resolution Trust Corp.

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 96-2009

IN RE HELEN D. GENS, d/b/a
HELEN GENS AND ASSOCIATES,

Appellant,

v.

RESOLUTION TRUST CORPORATION
(FEDERAL DEPOSIT INSURANCE CORPORATION),

Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Reginald C. Lindsay, U.S. District Judge]

Before

Selya, Circuit Judge,

Cyr, Senior Circuit Judge,

and Stahl, Circuit Judge.

Richard H. Gens for appellant.

Barbara R. Sarshik, Counsel, FDIC, with whom Ann S. DuRoss,

Assistant General Counsel, FDIC, Thomas L. Hindes, Senior Counsel,

FDIC, Joseph G. Butler, and Barron & Stadfeld were on brief for

appellee.

May 5, 1997

CYR, Senior Circuit Judge. Chapter 11 debtor-in-
CYR, Senior Circuit Judge.

possession Helen D. Gens ("Gens") challenges a bankruptcy court

order which allowed the Federal Deposit Insurance Corporation

("FDIC") to amend its proof of claim following the bar date for

filing claims. We affirm.

I
I

BACKGROUND
BACKGROUND

In July 1988, Gens executed a promissory note ("the

Gens Note") payable to U.S. Funding Inc. of America ("U.S.

Funding") in the principal amount of $70,000, by signing it both

in her "individual" capacity and in her representative capacity

as trustee for the Old Jail Trust ("Trust"). The Gens Note was

secured by a third mortgage on real property in Barnstable,

Massachusetts, owned by the Trust ("the Barnstable Property").

Although the Barnstable Property was subject to two prior

mortgages, U.S. Funding and Gens allegedly arranged for $36,000

of the $70,000 in loan proceeds to be used to satisfy the

preexisting second mortgage. U.S. Funding promptly assigned the

Gens Note to Key Financial Services ("Key"), which assigned it to

Home Owners Savings Bank ("Home Owners").

In October 1989, Home Owners commenced suit against Key

in federal district court, alleging that the purchase-sale

agreement, whereby Home Owners acquired the Gens Note from Key,

had been induced by fraud or that Key had breached its title-

insurance provisions. Home Owners demanded either rescission or

damages for breach of contract.

2

The Trust defaulted on the Gens Note in or about

January 1990 and the first mortgagee foreclosed on the Barnstable

Property. The foreclosure sale resulted in no surplus for

application to any junior lien, including the third mortgage

securing the Gens Note. In September 1990, Home Owners was

declared insolvent and the Resolution Trust Corporation ("RTC")

was appointed receiver. RTC designated Knutson Mortgage

Corporation ("Knutson") as its servicing agent on the Gens Note,

and gave Knutson a limited power of attorney.

Meanwhile, in the ongoing federal action brought by

Home Owners against Key, the district court entered partial

summary judgment for RTC and Home Owners, finding that Key had

breached the purchase-sale agreement. The attendant district

court order directing Key to repurchase the Gens Note never

became final, however, apparently because RTC and Key were unable

to agree upon a repurchase price.

Gens commenced a voluntary chapter 11 proceeding in

September 1993, but failed to schedule the Gens Note as a

liability. Knutson, as RTC's agent, filed a proof of claim

("POC") in relation to the Gens Note in December 1993 ("original

POC"), well before the May 16, 1994 bar date for filing claims.

The original POC incorrectly listed Knutson itself as the

creditor, failed to disclose that Knutson was the authorized RTC

servicing agent, mischaracterized the claim as secured, and

mistakenly identified February 24, 1989 (rather than July 1988)

as the date Gens incurred the Gens Note obligation.

3

Almost seven months after the bar date, Knutson filed

an amended POC in relation to the Gens Note, correctly listing

RTC as the creditor, but still (i) failing to disclose that

Knutson was RTC's agent, and (ii) incorrectly characterizing the

claim as "secured." Knutson eventually submitted additional

amended POCs correcting these deficiencies.

Gens objected to the original and amended POCs,

asserting inter alia judicial estoppel and discharge of the note,

see Mass. Gen. Laws Ann. ch. 106, 3-606. While these

objections were pending, FDIC, successor to RTC, was substituted

as the creditor on all POCs filed by Knutson. Ultimately, the

objections to the original and amended POCs were rejected by the

bankruptcy court and the district court affirmed.

II
II

DISCUSSION
DISCUSSION

A. Judicial Estoppel
A. Judicial Estoppel

The companion doctrines of judicial estoppel and

election of remedies1 essentially preclude a party from asserting

a legal or factual position "inconsistent" with its position in a

prior proceeding. See Patriot Cinemas, Inc. v. General Cinema

Corp., 834 F.2d 208, 212 (1st Cir. 1987). The estoppel defense

advanced by Gens is predicated entirely on the contract-

rescission claim Home Owners asserted in the federal court action

1The "election of remedies" defense likewise derives from
the equitable doctrine of estoppel. See Butcher v. Cessna

Aircraft Co., 850 F.2d 247, 248 (5th Cir. 1988), cert. denied,

489 U.S. 1067 (1989); In re Leonardi's Int'l, Inc., 123 B.R. 668,

669 (Bankr. S.D. Fla. 1991).

4

against Key, alleging inter alia that Key had made material

misrepresentations in negotiating the purchase-sale agreement.

Implicit in Home Owners' demand for rescission of the purchase-

sale agreement was its averment that Key's fraud rendered the

purchase-sale agreement voidable ab initio, and therefore that

Home Owners never became a "holder" of the Gens Note. See, e.g.,

In re Southern Indus. Banking Corp., 46 B.R. 306, 313 (Bankr.

E.D. Tenn. 1985) ("A party to a transaction induced by fraud may

elect between two remedies he may treat the contract as

voidable and sue for the equitable remedy of rescission or he may

sue for damages at law under the tort theory of 'deceit.'").

In January 1992, the district court awarded summary

judgment to RTC on its contract claim. Gens now contends,

therefore, that FDIC is estopped from asserting a claim under the

Gens Note in her bankruptcy proceeding, since its POC is legally

and factually inconsistent with the litigation position adopted

by Home Owners in the district court action, namely, that Home

Owners never became a holder of the Gens Note because the

purchase-saleagreementwasrescindablefromitsinception.Wedisagree.2

2Although Gens argues that the bankruptcy court decision
must be reviewed de novo, we have yet to determine the exact

standard for reviewing applications of the doctrine of judicial
estoppel. See Desjardins v. Van Buren Community Hosp., 37 F.3d

21, 23 (1st Cir. 1994) (expressly reserving question); cf.

McNemar v. Disney Store, Inc., 91 F.3d 610, 613 (3d Cir. 1996)

(adopting "abuse of discretion" standard), cert. denied, 117 S.

Ct. 958 (1997); Data Gen. Corp. v. Johnson, 78 F.3d 1556, 1565

(Fed. Cir. 1996) (same); Yanez v. United States, 989 F.2d 323

(9th Cir. 1993) (same). "In reality, judicial estoppel is not
extrinsically a matter of fact or law; the issues that arise may
turn out to be ones of raw fact, abstract law, or something in
between, e.g., the application of a general standard to a known

5

Judicial estoppel is not implicated unless the first

forum accepted the legal or factual assertion alleged to be at

odds with the position advanced in the current forum:

[W]here a party assumes a certain position in
a legal proceeding, and succeeds in

maintaining that position, he may not
thereafter, simply because his interests have
changed, assume a contrary position,
especially if it be to the prejudice of the
party who has acquiesced in the position
formerly taken by him. . . . Judicial
estoppel should be employed when a litigant
is "playing fast and loose with the courts,"
and when "intentional self-contradiction is
being used as a means of obtaining unfair

advantage in a forum provided for suitors
seeking justice."

Patriot Cinemas, 834 F.2d at 212 (emphasis added) (citations

omitted).3 Similarly, the primary purpose served by the

set of facts." Desjardins, 37 F.3d at 23. It is not necessary

to determine the precise standard of review at this juncture,
however, since the bankruptcy court ruling would be affirmed even
on plenary review. See id.

3See United States v. Levasseur, 846 F.2d 786, 793 (1st

Cir.) (estoppel applies where party previously "obtained a
litigation benefit"), cert. denied, 488 U.S. 894 (1988); see also

Continental Ill. Corp. v. Commissioner, 998 F.2d 513, 518 (7th

Cir. 1993), cert. denied, 510 U.S. 1041 (1994) (party must have

"sold" its position to prior tribunal); Wang Lab., Inc. v.

Applied Computer Sciences, Inc., 958 F.2d 355, 358 (Fed. Cir.

1992); In re A. Barletta & Sons, Inc., 185 B.R. 976, 980 (Bankr.

M.D. Pa. 1995); In re Pierce Packing Co., 169 B.R. 421, 429-30

(Bankr. D. Mont. 1994); In re UNR Indus., Inc., 143 B.R. 506, 526

(Bankr. N.D. Ill. 1992), vacated on other grounds, 173 B.R. 149

(N.D. Ill. 1994); Phillips v. FDIC (In re Phillips), 124 B.R.

712, 719 (Bankr. W.D. Tex. 1991); In re Merritt Logan, Inc., 109

B.R. 140, 147-48 (Bankr. E.D. Pa. 1990); cf. also Crown Life Ins.

Co. v. American Nat'l Bank and Trust Co. of Chicago, 35 F.3d 296,

299 (7th Cir. 1994) ("An election of remedy occurs only when a
party accepts the benefit of pursuing the initial remedy.");
Leonardi's Int'l, Inc., 123 B.R. at 669 ("An election . . .

between legally inconsistent remedies can be made at any time
prior to the entry of [final] judgment."); Collumb v. Wyatt (In

re Wyatt), 6 B.R. 947, 951-52 (Bankr. E.D.N.Y. 1980) ("'The

6

"election of remedies" doctrine is "to prevent double [viz.,

sequential] recoveries for the same wrong." Tavormina v. Fir,

Inc. (In re Alchar Hardware Co.), 764 F.2d 1530, 1534 (11th Cir.

1985).

Contrary to Gens' contention, RTC permissibly displaced

its contract-rescission claim by moving for partial summary

judgment on its alternative claim that Key had breached the

purchase-sale agreement. See Fed. R. Civ. P. 8(e)(2) ("A party

may also state as many separate claims [in its complaint] . . .

as the party has[,] regardless of consistency . . . .").4 Under

an express provision in the purchase-sale agreement, the

exclusive remedy for its breach was the repurchase of the Gens

Note by Key upon demand by Home Owners. Thus, unlike a

rescindment, which necessarily presumes a disaffirmance of the

purchase-sale agreement by Home Owners ab ovo, the RTC breach-of-

contract claim implicitly acknowledged a valid contract whereby

Home Owners became the holder of the Gens Note until Key

repurchased the Note. Accordingly, the current FDIC litigation

purpose of [the] doctrine [of election of remedies] is not to
prevent recourse to any remedy, but to prevent double redress
for a single wrong.'") (citation omitted).

4See, e.g., Desjardins, 37 F.3d at 23 ("There are many

situations, especially at the outset of litigation, where a party
is free to assert a position from which it later withdraws or
even to assert, in the alternative, two inconsistent positions of
its potential claims and defenses."); Fort Vancouver Plywood Co.

v. United States, 860 F.2d 409, 415 (Fed. Cir. 1988) ("With the

enactment of the Federal Rules of Civil Procedure, the
traditional election doctrine was relaxed."); Grogan v. Garner,

806 F.2d 829, 838 (8th Cir. 1986) ("[T]he doctrine [of election]
is remedial, and neither it nor the federal rules of pleading
require an election of substantive theories.").

7

position is not inconsistent with that advanced by its

predecessor, RTC, since Home Owners and RTC failed to persuade

the district court that the purchase-sale agreement was voidable,

hence invalid from its inception.5

B. Validity of Knutson Authorization
B. Validity of Knutson Authorization

Next, Gens contends that the original and amended POCs

submitted by RTC are invalid because Knutson was not authorized

to act as agent for RTC. See Fed. R. Bankr. P. 3001(b) ("A proof

of claim shall be executed by the creditor or the creditor's

authorized agent . . . ."); see also Fed. R. Bankr. P.

9010(a)(2). Gens asserts that it would have demonstrated, at an

evidentiary hearing, that RTC regulations, see 12 C.F.R.

1606.4; see also 12 U.S.C. 1441a(n)(6), presumptively

disqualified Knutson from serving as an RTC agent because, as an

affiliate of Home Owners, presumably it was complicit in whatever

financial misfeasance or malfeasance led to the Home Owners

insolvency. As the bankruptcy court aptly noted, however, Gens

lacked standing to challenge Knutson's agency status.

The RTC regulation pursuant to which Knutson was

5Furthermore, RTC had a legal obligation to file a POC
against the Gens estate in order to preserve the position of Home
Owners, which then held an unsecured claim against Gens.
Finally, should Key repurchase the Gens Note, FDIC would realize
no double recovery, since Key would become the claim holder of
record. See Fed. R. Bankr. P. 3001(e)(2).

The "election of remedies" argument fails for yet another
reason. Since the Trust and Gens did not default on the Gens
Note until January 1990, Home Owners had no available remedy
against Gens in 1989 when it filed its complaint against Key.
The 1990 default by the Trust and Gens thus constituted a legal
wrong distinct and severable from the breach of contract by Key.

8

designated is designed (i) to "ensure that contractors [hired by

RTC] meet minimum standards of competence, integrity, fitness,

and experience and are held to the highest standards of ethical

conduct in performing services for RTC," (ii) to prevent "the

direct or indirect use of information gained through performance

of a contract . . . for personal gain not contemplated by the

contract," and (iii) to preclude "the use of personal

relationships or improper influence to gain unfair competitive

advantage in obtaining contracts with the RTC." 12 C.F.R.

1606.1. The RTC regulation thus identifies two conceivable

classes of intended beneficiaries: (1) competing contractors

which are unfairly denied RTC contract bids; and (2) the

taxpaying public, which may be harmed by RTC revenue losses

resulting from "insider" conflicts of interest.

Gens plainly cannot qualify under the first

classification, as she is not a competing contractor. See, e.g.,

New Hampshire Right to Life Political Action Comm. v. Gardner, 99

F.3d 8, 15 (1st Cir. 1996) ("[U]nder the principle of jus tertii,

the plaintiff ordinarily 'must assert [her] own legal rights and

interests, and cannot rest [her] claim to relief on the legal

rights or interests of third parties.'") (citation omitted).

Moreover, no standing is conferred upon Gens, individually, by

the generalized taxpayer benefit theme which actuates the second

classification. See Libertad v. Welch, 53 F.3d 428, 436 (1st

Cir. 1995) (noting that claimant normally may not adjudicate

"abstract questions of wide public significance which amount to

9

generalized grievances more appropriately addressed by the

legislature"). Nothing in the statute, the RTC regulation or the

attendant case law remotely suggests that Congress or the agency

itself intended to confer standing on chapter 11 debtors to

enforce the RTC regulation.6 See, e.g., Dubois v. United States

Dep't of Agric., 102 F.3d 1273, 1281 (1st Cir. 1996) (to

demonstrate "standing," complainant must establish, inter alia,

that her claim does not fall "outside the zone of interests

protected by the specific law invoked") (quoting Allen v. Wright,

468 U.S. 737, 751 (1984)); Benjamin v. Aroostook Med. Ctr., Inc.,

57 F.3d 101, 104 (1st Cir. 1995).7

C. Amendments to Original POC
C. Amendments to Original POC

Gens next contends that the bankruptcy court erred in

permitting RTC to amend its original POC (i.e., December 1993),

which incorrectly stated that Knutson was the claim holder,

without disclosing that it was acting as RTC's agent. Gens

represents that she reasonably believed Knutson held no valid

6Furthermore, even assuming she had standing, Gens has
alleged no facts suggesting that Knutson contributed either to
Home Owners' insolvency or to any "substantial loss" occasioned
RTC.

7Gens argues that the POCs filed by Knutson were invalid
because they were not signed by RTC's attorney. See Fed. R.

Bankr. P. 9010(a); 9011(a). But see Fed. R. Bankr. P. 3001(b)

(POC may be signed by creditor or its authorized agent); compare,

e.g., Official Bankruptcy Form 1 (providing space for attorney

signature) with Official Bankruptcy Form 10 (POC form providing

no attorney-signature line). We need not resolve the present
claim, however, since Gens concededly failed to raise it in the
bankruptcy court. See Juniper Dev. Group v. Kahn (In re

Hemingway Transp., Inc.), 993 F.2d 915, 935 (1st Cir.), cert.

denied, 510 U.S. 914 (1993).

10

claim in its own right. Further, she argues, since RTC failed to

file a POC in its own name prior to the bar date, there was no

timely POC to be amended.

A bankruptcy court ruling allowing an amendment to a

POC is reviewed for abuse of discretion, under three criteria:

First, the proposed amendment must not be a

veiled attempt to assert a distinctly new
right to payment as to which the debtor
estate was not fairly alerted by the original
proof of claim. Second, the amendment must

not result in unfair prejudice to other
holders of unsecured claims against the
estate. Third, the need to amend must not be

the product of bad faith or dilatory tactics
on the part of the claimant.

Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.), 954

F.2d 1, 10 (1st Cir. 1992) (citations omitted) (emphasis added).

Leave to amend a POC should be "freely given when justice so

requires." See Fed. R. Bankr. P. 7015.8 The bankruptcy court

did not abuse its discretion.

First, in order to "fairly alert" the debtor estate, a

POC need only "provide[] adequate notice of the existence,

nature, and amount of the claim as well as the creditor's intent

to hold the estate liable." Unioil, Inc. v. H.E. Elledge (In re

Unioil, Inc.), 962 F.2d 988, 992 (10th Cir. 1992). The original

POC, accompanied by a copy of the Gens Note, see Fed. R. Bankr.

P. 3001(c), met the general notice requirement. As Knutson was

8Bankruptcy Rule 7015 makes Fed. R. Civ. P. 15 (governing
amendments to complaints) applicable in adversary proceedings.
Although this case arose as a contested matter, rather than an
adversary proceeding, Fed. R. Bankr. P. 9014 permits Bankruptcy
Rule 7015 to be applied in contested matters. In re Stavriotis,

977 F.2d 1202, 1204 (7th Cir. 1992).

11

duly authorized to file the original POC for RTC, see supra

Section II.B, the mere failure to disclose Knutson's agency

status in no sense affected the validity of the claim itself. As

the Tenth Circuit correctly recognized in Unioil, a simple

substitution of the real party in interest (viz., RTC) for a

related party mistakenly listed in the original POC (viz.,

Knutson qua agent) represents a proper ground for amendment. See

Unioil, 962 F.2d at 992 (permitting amendment where a trustee

(rather than the trust) was incorrectly listed as creditor).9

Second, Gens points to no unfair prejudice from any

deficiency in the original POC. See Hemingway Transp., 954 F.2d

at 10; see also Unioil, 962 F.2d at 993 (noting that party

opposing amendment must show actual prejudice). Instead, she

suggests simply that allowing the RTC amendment prejudices

unsecured creditors, who may receive less under any

reorganization plan than would have been received were the FDIC

claim not allowed. But the standard Gens proposes would preclude

virtually any amendment, since it dispenses with the requirement

that the debtor or trustee show "unfair" prejudice. Thus,

something more than mere creditor disappointment is required to

preclude amendment. See In re Stoecker, 5 F.3d 1022, 1028 (7th

9Nor would the two remaining defects in the original POC bar
amendment. First, as trustee for the Old Jail Trust, Gens had
every reason to know that the original characterization of the
POC, as "secured," was mistaken, since the first mortgagee
already had foreclosed on the Barnstable Property securing the
Gens Note. Second, the mistaken date assigned to the underlying
debt instrument was a minor defect, given that the Gens Note
itself was attached to the POC.

12

Cir. 1993); In re Outdoor Sports Headquarters, Inc., 161 B.R.

414, 422 (Bankr. S.D. Ohio 1993); In re Brown, 159 B.R. 710, 716

n.5 (Bankr. D.N.J. 1993); In re Dietz, 136 B.R. 459, 468-69

(Bankr. E.D. Mich. 1992).

Gens neither alleged nor demonstrated that any creditor

acted in detrimental reliance on any representation or omission

in the original POC. See, e.g., Brown, 159 B.R. at 716

(permitting POC amendment from unsecured to secured, given that

"no evidence has been offered that anyone relied to their

detriment upon the claims as originally filed"). Nor did Gens

allege either bad faith or dilatory motive. Moreover, these RTC

amendments occurred long before the formulation of a chapter 11

plan. See Holstein v. Brill, 987 F.2d 1268, 1270 (7th Cir. 1993)

(characterizing confirmation of debtor plan as "passing

milestone" that makes it more likely POC amendment may be

prejudicial).

To be sure, Knutson demonstrated considerable laxity in

executing its agency responsibilities, especially its seven-month

delay in submitting amended proofs of claim. Were there some

showing in these circumstances that RTC gained a strategic

advantage or that other parties in interest were unfairly

prejudiced, the case for disallowance of the amended POCs would

have been much stronger. Absent any such showing, however, the

court did not abuse its discretion in permitting RTC to amend its

original POC. "It is well accepted that the bankruptcy court is

guided by the principles of equity, and that the court will act

13

to assure that ' . . . substance will not give way to form, [and]

that technical considerations will not prevent substantial

justice from being done.'" Pepper v. Litton, 308 U.S. 295, 305

(1939) (citation omitted).

D. Impairment of Collateral
D. Impairment of Collateral

Lastly, Gens challenges the bankruptcy court ruling

dismissing her "impairment of collateral" defense without first

affording her an evidentiary hearing. She claimed that a prior

holder of the Gens Note presumably U.S. Funding used

$36,000 of the loan proceeds to pay off the preexisting second

mortgage on the Barnstable Property, but failed to obtain and

record the mortgage discharge. Thus, the mortgage securing the

Gens Note remained third in priority, rather than climbing to

second priority.

Pursuant to Mass. Gen. Laws. Ann. ch. 106, 3-

606(1)(b), "[t]he holder discharges any party to the [negotiable]

instrument to the extent that without such party's consent the

holder . . . unjustifiably impairs any collateral for the

instrument given by or on behalf of the party or any person

against whom he has a right of recourse." An impairment of

collateral may result if the conduct of the holder of a

collateralized negotiable instrument unjustifiably diminishes the

physical value of the collateral, releases the collateral to the

principal obligor before the loan is repaid, or fails to perfect

its security interest in the collateral. See Rose v. Homsey, 197

N.E.2d 603, 605-06 (Mass. 1964); see also Hawaii Broad. Co. v.

14

Hawaii Radio, Inc., 919 P.2d 1018, 1029 (Haw. Ct. App. 1996);

White v. Household Fin. Corp., 302 N.E.2d 828, 835 (Ind. Ct. App.

1973). Nevertheless, in most jurisdictions a party asserting an

"impairment of collateral" defense must prove she signed the

negotiable instrument (viz., promissory note) merely as an

accommodation party for the principal debtor, rather than as a

borrower. See James A. White & Robert S. Summers, Uniform

Commercial Code 13-16 (3d ed. 1988).10

An accommodation maker is one "who signs the

[negotiable] instrument in any capacity for the purpose of

lending [her] name to another party to it," Mass. Gen. Laws.

Ann. ch. 106, 3-415(1). Frequently, accommodation parties sign

debt instruments to enable the principal obligor to obtain a loan

which would not have been granted absent the accommodation.

Although an accommodation party is liable to the lender under the

debt instrument, her liability is that of a surety only. Id.

cmt. 1. Thus, the accommodation maker reasonably expects that if

called upon for payment following the principal obligor's

default, she will be subrogated to the lender's rights against

the principal obligor, including the right of recourse against

10The latent confusion in this regard stems from the broad
language in U.C.C. 3-606, which refers to "any party to the

[negotiable] instrument." See FDIC v. Blue Rock Shopping Ctr.,

Inc., 766 F.2d 744, 749 (3d Cir. 1985) (outlining caselaw split).

We have found no Massachusetts case which determines whether a
nonaccommodation obligor on a promissory note may also invoke the
U.C.C. 3-606 defense. Since Gens and the bankruptcy court
implicitly accepted the majority rule that Gens must establish
accommodation status and because we affirm on an alternative
ground, we need not address the unresolved Massachusetts-law
question.

15

any collateral securing the underlying debt instrument. See id.

cmt. 5; see also FDIC v. Blue Rock Shopping Ctr., Inc., 766 F.2d

744, 749 (3d Cir. 1985); accord Restatement of Security 104,

141 (1941). Therefore, to the extent the holder of the debt

instrument unjustifiably devalues or releases the collateral, or

fails to perfect its rights in the collateral against third

parties, the right of recourse may be diminished, thereby

entitling the accommodation maker to a commensurate discharge

from liability under the debt instrument. See Blue Rock Shopping

Ctr., 766 F.2d at 751.

The bankruptcy court considered Gens' second signature

conclusive evidence that she had signed the Gens Note in her

"individual" capacity, that is, as a principal coborrower rather

than an accommodation maker. It also concluded that the purport

of Gens' second signature on the Gens Note was not rendered

ambiguous, either by the anterior designation of the Trust as the

sole "Borrower" or the failure to designate a "Co-borrower."

Citing considerable case authority, Gens maintains that

all accommodation makers necessarily sign promissory notes either

in their "individual" or "representative" capacities.

Consequently, she argues, these designations cannot conclusively

resolve a signatory's accommodation status.11 Since the Gens

Note must therefore be considered facially ambiguous, Gens argues

11See, e.g., FDIC v. Trans Pacific Indus., Inc., 14 F.3d 10,

12 (5th Cir. 1994) (rejecting FDIC's "attempts to nullify the
import" of the "borrower" identification block in promissory
note, which reflected corporation as sole borrower and did not
designate corporate officer as coborrower).

16

that a hearing should have been conducted to consider parol

evidence that the parties to the Gens Note (viz., U.S. Funding,

the Trust, and Gens) all understood that Gen's second signature

was intended only as an accommodation endorsement. See, e.g.,

Mass. Gen. Laws. Ann. ch. 106, 3-415(3) (expressly allowing

parol evidence of accommodation status except as to holders-in-

due-course); United Beef Co. v. Childs, 27 N.E.2d 962, 964 (Mass.

1940) (same); see also Butler v. Nationsbank, 58 F.3d 1022, 1027

(4th Cir. 1995) (outlining multi-factored, intent-based "purpose"

and "proceeds" tests for determining accommodation status); First

Dakota Nat'l Bank v. Maxon, 534 N.W.2d 37, 41-42 (S.D. 1995)

(same).12

12FDIC counters that 12 U.S.C. 1823(e) (codification of
D'Oench Duhme doctrine) barred parol evidence of Gens'

accommodation status, or that FDIC's status as a federal or state
holder in due course barred Gens from invoking the U.C.C. 3-606
defense. See Mass. Gen. Laws. Ann. ch. 106, 3-415(3) ("As

against a holder in due course and without notice of the
accommodation oral proof of the accommodation is not admissible
to give the accommodation party the benefit of discharges
dependent on his character as such."). Since FDIC's right to
invoke either doctrine in this case is open to serious question,
we express no opinion on its contentions. See, e.g., O'Melveny &

Myers v. FDIC, 512 U.S. 79 (1994) (generally discouraging

adoption of federal common-law rules especially protective of
FDIC); Varel v. Banc One Capital Partners, Inc., 55 F.3d 1016,

1021 (5th Cir. 1995) (D'Oench inapplicable where issue is not the

enforceability of a secret, unwritten side agreement, but whether
to allow parol evidence concerning the intendment of an ambiguous
written contract provision); Capitol Bank and Trust Co. v. 604

Columbus Ave. Realty Trust (In re 604 Columbus Ave. Realty

Trust), 968 F.2d 1332, 1350-51 (1st Cir. 1992) (holding that FDIC

is not entitled to federal holder-in-due-course status when
acting in its capacity as receiver); Calaska Partners Ltd. v.

Corson, 672 A.2d 1099, 1104 (Me. 1996) (FDIC as receiver of bulk

purchaser not a holder in due course under state law); Mass. Gen.
Laws. Ann. ch. 106, 3-302(3) (denying holder-in-due-course
status to party who acquired note "as part of a bulk
transaction").

17

Even were we to assume arguendo that Gens was entitled

to an evidentiary hearing to determine whether she signed the

Gens Note as an accommodation maker, she failed to set forth

allegations which would establish the second essential element in

her affirmative defense a cognizable "impairment" of the

collateral. See RTC v. Feldman, 3 F.3d 5, 9 (1st Cir. 1993)

(appellate court may affirm on any ground supported by record),

cert. denied, 510 U.S. 1163 (1994). As her section 3-606 defense

is founded exclusively on the claim that her subrogation rights

were frustrated, supra, Gens was required to do more than prove

that U.S. Funding or another holder failed to obtain and record a

mortgage discharge.13

Section 3-606 plainly requires evidence that the

holder's dereliction actually resulted in a loss to the

accommodation party. See Mass. Gen. Laws. Ann. ch. 106, 3-606

("The holder discharges any party to the instrument to the extent

. . . the holder . . . unjustifiably impairs [the] collateral . .

13Citing Providence, Fall River & Newport Steamboat Co. v.

Massachusetts Bay S.S. Corp., 38 F.2d 674 (D. Mass. 1930), Gens

contends that the holder's mere failure to record a mortgage
discharge warrants her total release from liability because the
Barnstable Property obviously was of sufficient value to satisfy
the Gens Note in July 1988, and the holder's failure to perfect
its security interest unquestionably increased her risk of loss

without her consent, even if no actual loss occurred. Since the

cited case predates the adoption of the Massachusetts Uniform
Commercial Code in 1958, it is both legally and factually
inapposite. See id. at 675 (noting that the court was "dealing

not with the question how far a surety who has guaranteed the
performance of a contract is released by subsequent alterations
in it by the contracting parties, but with a change made by the
creditor in the state of facts on which an independent contract
of guaranty rests"); cf. infra note 14.

18

. .").14 Gens alleged no facts which would demonstrate any

actual diminution of her subrogation rights. See FDIC v. Blanton,

918 F.2d 524, 530 (5th Cir. 1990) (burden of proof is on party

alleging discharge).

First, she did not allege that any creditor obtained a

14Although we have found no Massachusetts case precisely in
point, the clear majority trend among U.C.C. jurisdictions is to
require the accommodation maker to prove actual loss from the
impairment. See, e.g., Alcock v. Small Bus. Admin., 50 F.3d

1456, 1462 (9th Cir. 1995) ("A clear majority of state courts
place the burden on the guarantor to prove actual prejudice and

limit the discharge to the extent of the impairment
demonstrated.") (emphasis added); Myers v. First State Bank of

Sherwood, 732 S.W.2d 459, 461 (Ark.) ("[T]he surety must prove

two elements in order to be entitled to a discharge 'that the
holder of the note was responsible for the loss or impairment of
the collateral, and the extent to which the impairment results in

loss.'") (emphasis added) (quoting Van Balen v. Peoples Bank &

Trust Co., 626 S.W.2d 205, 209-10 (Ark. Ct. App. 1981)), modified

on other grounds, 741 S.W.2d 624 (Ark. 1987); Bank South v.

Jones, 364 S.E.2d 281, 285 (Ga. Ct. App. 1987) ("[A] failure to

perfect a lien on pledged corporate stock [does not] effect a
discharge where it was shown that the stock had no value at the
time the action [to collect on the debt] was commenced."); Hurt

v. Citizens Trust Co., 196 S.E.2d 349, 351 (Ga. Ct. App. 1973)

(noting that appellant has "not shown how the failure to record
the leases and assignments resulted in any damage")); Rempa v.

LaPorte Prod. Credit Ass'n, 444 N.E.2d 308, 313 (Ind. Ct. App.

1983) (see infra); T.O. Stanley Boot Co. v. Bank of El Paso, 847

S.W.2d 218, 223 (Tex. 1992) ("If the creditor breaches his duty,
the surety is discharged on the note to the extent of his
loss."); Century 21 Prods., Inc. v. Glacier Sales, 875 P.2d 1238,

1242 (Wash. Ct. App. 1994) ("Should a creditor impair the
collateral, the surety will be discharged to the extent he is
harmed by the impairment."), rev'd on other grounds, 918 P.2d 168

(Wash. 1996); see generally Carolyn Edwards, Impairment of

Collateral Under Section 3-606 of the Uniform Commercial Code, 12

U. Dayton L. Rev. 509, 522 n.81 (1987) ("A number of courts have
concluded that an unjustifiable impairment of collateral includes
a failure to perfect a security interest if such failure results
in a loss to the surety as subrogee."); cf. also Revised U.C.C.

3-605(f) (discharge for impairment of collateral only "to the
extent the impairment causes the party asserting discharge to pay
more than that party would have been obliged to pay . . . if
impairment had not occurred.").

19

superior right of recourse against the Barnstable Property due to

the fact that the preexisting second mortgage was never

discharged of record. In addition, the auction sale of the

Barnstable Property conducted pursuant to the first-mortgage

foreclosure resulted in no surplus for application to any junior

lien, including the second mortgage. Accordingly, the record can

support no finding that any junior lien was impaired.

Consequently, Gens' liability would not have been affected even

if she had been able to establish that she signed the Gens Note

as an accommodation maker. See, e.g., Rempa v. LaPorte Prod.

Credit Ass'n, 444 N.E.2d 308, 313 (Ind. Ct. App. 1983) ("Thus,

where the party asserting the impairment establishes that the

creditor did not perfect its lien but fails to establish the

extent to which that failure resulted in loss, the party has

failed to establish its affirmative defense of pro tanto

release.").15

III
III

CONCLUSION
CONCLUSION

15Moreover, Gens merely alleged that no mortgage discharge
was recorded. She did not allege that the $36,000, see supra p.

2, was never applied to the preexisting second mortgage.
Therefore, assuming the underlying debt was in fact fully paid,
it would seem extremely unlikely that the mortgagee or any of its
assignees could have asserted a viable right to recourse against
the Barnstable Property. See, e.g., Beaton v. Land Court, 326

N.E.2d 302, 307 (Mass.) (noting that "a court acting under
general principles of equity jurisprudence has broad power to
reform, rescind, or cancel written instruments, including
mortgages," and that the discharging party could simply have
brought suit to compel the mortgagee to cancel the note and
"issue a discharge of mortgage in a form appropriate for
recording"), appeal dismissed, 423 U.S. 806 (1975).

20

Accordingly, the district court judgment is affirmed

and costs are awarded to the appellee.

SO ORDERED.
SO ORDERED.

21