The opinion of the court was delivered by: PRATT
JOHN H. PRATT, UNITED STATES DISTRICT JUDGE
The Federal Deposit Insurance Corporation ("FDIC") brings this action to collect on promissory notes signed by certain former partners of the law firm of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey ("Finley Kumble").
The promissory notes secured loans that the National Bank of Washington ("NBW") made in 1986 to the Finley Partners to enable them to purchase stock in the Merchant Bank of California. After Finley Kumble declared bankruptcy, certain of the Finley Partners defaulted on their loans and NBW filed lawsuits in the Superior Court for the District of Columbia against defendants to collect on their promissory notes.
On August 10, 1990, the Office of the Comptroller of the Currency declared the NBW insolvent, closed the Bank, and appointed the Federal Deposit Insurance Corporation ("FDIC") as Receiver. The FDIC then removed these cases to federal court on September 7, 1990 and moved for summary judgment against each defendant on the grounds that the Federal Deposit Insurance Act of 1950, § 13(e), 64 Stat. 889, as amended, 12 U.S.C. § 1823(e) (hereinafter § 1823(e)) provides special protections for the FDIC which bar all of the Finley Partners' defenses as a matter of law.
I. Defendants' Defense of Economic Duress
The Finley Partners argue that the FDIC's motion for summary judgment should be denied because their defense of economic duress survives the effects of § 1823(e). They concede that § 1823(e) operates to place the FDIC in the position of a holder in due course, taking promissory notes free of personal defenses. They argue, however, that § 1823(e) does not extinguish real defenses set forth in the Uniform Commercial Code ("UCC") and that their economic duress defense constitutes such a real defense.
Defendants are correct that § 1823(e) bars personal defenses but not real defenses. The section provides that an agreement or condition
"which tends to diminish or defeat the interest of the Corporation" shall not be enforceable against the FDIC unless it meets a number of specific requirements. 12 U.S.C. § 1823(e) (emphasis added). As the Supreme Court explained in Langley v. FDIC, a real defense renders an instrument entirely void, leaving no interest that could be "'diminished or defeated.'" 484 U.S. 86, 93-94, 98 L. Ed. 2d 340, 108 S. Ct. 396, (1987). In contrast, personal defenses render a note voidable but not void. A bank holding a voidable note has and can transfer to the FDIC voidable title, which is enough to constitute "interest" in the note within the meaning of § 1823(e). See id. at 94.
Thus, if the Finley Partners' economic duress defense constitutes a real defense, then their promissory notes were void from the beginning. Asserting such a real defense could not "diminish or defeat" any interest of the FDIC because the FDIC did not have any interest to start with. On the other hand, if the Finley Partners' economic duress defense is a personal defense, then the FDIC received voidable title to the promissory notes from the NBW, which constitutes "interest" under § 1823(e). Asserting a defense against this interest, therefore, would "diminish or defeat" an interest of the FDIC, and § 1823(e) would prevent the defendants from asserting the defense.
The main legal question, then, is whether economic duress is a personal defense that rendered NBW's title to the promissory notes voidable, or a real defense that rendered its title entirely void. The Finley Partners suggest that duress of any nature constitutes a real defense, citing UCC § 3-305(2)(b) and several cases from outside of the District of Columbia. A careful reading of the UCC and its Official Commentary reveals that it does not make such a blanket classification.
First, § 3-305(2)(b) provides that holders in due course take free of all defenses except for "(b) such other incapacity, or duress, or illegality of the transaction, as renders the obligation of the party a nullity." (emphasis added). The words "such" and "as" indicate that the section is not stating that any type of duress renders an obligation to be a nullity. Rather, it suggests that only those types of duress that are so severe as to render it a nullity stand as exceptions to the rule that holders in due course take free of defenses.
Of course, the question left open is what type of duress is severe enough to render it a nullity. Neither UCC § 3-305(2)(b) nor the Official Comment attempt to establish a rule governing which types of duress render a transaction void as opposed to merely voidable. Instead, Official Comment 6 declares that "all such matters are therefore left to the local law." Further supporting this point is the Commentary of Chancellor William D. Hawkland on UCC § 3-305(2)(b): "Unlike the case of infancy, these three defenses [incapacity, duress, illegality] may be raised only if state statutory or case law makes the transaction void from the outset and not merely voidable." Hawkland UCC Series § 3-305:05 (emphasis added). Finally, as defendants acknowledge when they cite Sind v. Pollin, 356 A.2d 653 (D.C. 1976) for the District of Columbia's test for duress, federal courts follow state law precedent when deciding legal issues, which are not precluded by federal law, in the context of § 1823(e) cases. See Federal Sav. and Loan Ins. Corp. v. Ziegler, 680 F. Supp. 235, 237 (E.D.La. 1988)("In order for duress to vitiate consent, the duress must be 'of such a nature as to cause a reasonable fear of unjust and considerable injury to a party's person, ...