Federal Deposit Insurance Corporation v. Katzowitz et al

Filing 64

OPINION AND ORDER denying 49 Motion for Summary Judgment; denying 52 Sealed Motion. Signed by District Judge Patrick J. Duggan. (MOre)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
FEDERAL DEPOSIT INSURANCE
CORPORATION as receiver for CITIZENS
Case No. 10-11057
STATE BANK,
Plaintiff,
Honorable Patrick J. Duggan
v.
A. LEWIS KATZOWITZ and JOSEPH P.
ZADA,
Defendants.
/
OPINION AND ORDER
At a session of said Court, held in the U.S.
District Courthouse, Eastern District
of Michigan, on February 3, 2012.
PRESENT:

THE HONORABLE PATRICK J. DUGGAN
U.S. DISTRICT COURT JUDGE

In this action, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for
Citizens State Bank (“Citizens”), seeks to collect a debt allegedly owed by Dr. Abraham
Katzowitz. Presently before the Court are cross-motions for summary judgment filed by
the FDIC and Katzowitz pursuant to Federal Rule of Civil Procedure 56. This matter has
been fully briefed, and the Court heard oral argument on December 19, 2011. For the
reasons stated below, the Court denies both motions.
I. Factual and Procedural Background
The loan at issue is one of several related transactions involving Defendant Joseph
Zada. Zada had previously obtained a number of loans through Community Central Bank,
a bank located in Mount Clemens, Michigan. Loan officers Christopher Olzem and
Douglas Dunkelberg assisted Zada in these transactions. When Olzem and Dunkelberg

left Community Central Bank and moved to Citizens, Zada began borrowing from
Citizens. Katzowitz asserts that during 2004, Zada reached a statutory lending limit of
$3.5 million and could not borrow additional funds through Citizens.1 Katzowitz claims
that to circumvent this limit, Olzem and Dunkelberg colluded with Zada to allow him to
obtain loans from Citizens through third parties. Zada introduced Olzem and Dunkelberg
to three wealthy individuals who participated in the loan transactions: Walter Zaremba,
Sergei Fedorov, and Katzowitz. Zaremba borrowed $1.85 million from Citizens, while
Fedorov and Katzowitz each borrowed $2.25 million. The proceeds of each loan were
advanced to Zada. The loan to Katzowitz is the subject of this action.2
The Katzowitz loan closed on June 29, 2004. On this date, Katzowitz executed a
promissory note in favor of Citizens in the amount of $2.25 million. Citizens designated
this Loan Number 20302. The six-month loan required five monthly interest payments,
with a final principal and interest payment of $2,264,062.50 due on December 29, 2004.
Katzowitz has admitted that he signed this promissory note. Katzowitz Dep. 25:18-26:4,
Oct. 22, 2008.
As security for this loan, Katzowitz granted Citizens a mortgage on a home and two
vacant lots located in Clinton Township, Michigan. Katzowitz and Zada also signed a
“Commercial Security Agreement” granting Citizens a security interest in a horse, an

1

The FDIC disputes this, pointing to subsequent loans Citizens made to Zada on October
28, 2005 and February 27, 2006, totaling over $1.3 million.

2

The Fedorov loan is the subject of a separate lawsuit pending in the Eastern District of
Michigan. The Court is unaware of any litigation pertaining to the Zaremba loan.
2

assignment of a $950,000 insurance policy on the horse, and an assignment of “precious
jewelry.”3 Zada, who apparently owned the jewelry and the horse, was designated the
“Grantor” of the security interest, while Katzowitz was the “Borrower.”
Katzowitz signed a “Disbursement Request and Authorization” stating that the loan
proceeds of $2.25 million should be disbursed via “wire transfer.” FDIC Br. Supp. Mot.
Summ. J. Ex. D at 1. This document does not specify the account into which the funds are
to be transferred. Citizens deposited the loan proceeds into an account held by Zada.
Zada began making the monthly payments, and Citizens forwarded communications
to him pertaining to this loan, although it appears that some correspondence was also sent
to Katzowitz. Klieman Dep. 87:12-24, Mar. 18, 2011. It is unclear whether Katzowitz
may have directed Citizens to forward loan-related correspondence to Zada. Klieman
Dep. 86:15-87:2. At any rate, Zada failed to make all of the scheduled payments, and
Citizens granted a series of short-term extensions to the loan. Katzowitz denies signing
any modification agreements, and claims that he was unaware of the loan’s delinquency.
As of early 2005, the loan still had not been repaid. Citizens rarely allowed interestonly loans on a long-term basis, and wished to “term out” the loan by refinancing the
interest-only loan with a traditional loan that required principal and interest payments over
a fixed time period. Loan Committee meeting minutes and Board meeting minutes reflect
that the proposed loan modification would “term out” Loan Number 20302.
On March 30, 2005, several loan documents were executed to accomplish the “term

3

The same jewelry also secured Citizens’ other outstanding loans to Zada.
3

out” of Katzowitz’s 2004 loan. See Katzowitz Br. Supp. Mot. Summ. J. Ex. H. Katzowitz
claims that his signatures on these documents were forged.4 The documents related to this
loan include a promissory note, a Disbursement Request and Authorization, a Commercial
Security Agreement, and a Business Entity Affidavit. Citizens referred to the loan as Loan
Number 21403. The note calls for 60 monthly payments of principal and interest. In the
Security Agreement, Katzowitz is the “Grantor” of the security interest, while Zada is not
a party, even though the agreement purports to grant an interest the same collateral as the
previous Security Agreement. The Disbursement Request and Authorization provides the
following disbursement instructions:
Amount paid on Borrower’s account: $2,174,977.40
$2,174,977.40 Payment on Loan # 20302
Id. at 3. The documents stated that the purpose of the loan was to “term out existing note
used for working capital and investment purposes.” Id. In Citizens’ records, Loan
Number 20302 was designated “paid off” effective March 30, 2005. Katzowitz Br. Supp.
Mot. Summ. J. Ex. W. The original promissory note was marked “paid” and delivered to
Zada. Klieman Aff. ¶ 7. Zada began making the payments to Citizens on the 2005 loan,
but at some point, he failed to make the scheduled payments.
In January 2007, Citizens hired Edward Klieman as Senior Vice President and Senior
Loan Officer. Klieman was told that his top priority was to collect on the loans to Zada

4

The FDIC has not stipulated to the fact that Katzowitz’s signature was forged, although
Citizens’ internal investigation appears to have concluded that this was the case. It is not
clear who may have forged the signatures; the parties speculate that Olzem, Dunkelberg,
Zada, or even Zada’s assistant may have done so.
4

and the individuals Zada was involved with, including Katzowitz, Zaremba, and Fedorov.
At that time, these outstanding loans totaled more than $8 million. Klieman Dep. 18:519:6. Klieman investigated the matter and discovered a number of irregularities that he
believed violated typical commercial lending practices. Klieman also raised questions
concerning the collateral securing these loans, citing the lack of an independent appraisal
for the jewelry and his extensive (but unsuccessful) efforts to locate the horse.
By the time Klieman conducted his investigation, Olzem and Dunkelberg had left
Citizens. Olzem had obtained a position as a loan officer at another bank, and in April
2007, Zada sought a loan from that bank to pay off his Citizens loans. Zada wished to
obtain the jewelry securing his Citizens loans and use it to secure the new loan. He
negotiated a forbearance agreement with Citizens providing for the release of the jewelry
upon payment of $1 million. As part of this forbearance agreement, three additional
horses were pledged as collateral to secure Katzowitz’s loan. Zada subsequently made the
$1 million payment, and the jewelry was released to him. This payment was applied to
Zada’s loans.
On July 14, 2008, Citizens filed this action in Macomb County Circuit Court against
Katzowitz and Zada, seeking to collect on the 2005 loan, which was the later of the two
loan transactions. The Complaint asserts the following claims: foreclosure of mortgage
(Count I); breach of promissory note (Count II); breach of security agreement (Count III);
claim and delivery (Count IV); and fraudulent misrepresentation (Count V). Sometime
during the summer of 2008, however, Klieman discovered the allegedly forged signatures
on the 2005 loan documents and informed his superiors of this. Citizens amended its
5

Complaint, seeking to recover on the 2004 loan instead.
On December 18, 2009, Citizens was closed by The Michigan Office of Financial
and Insurance Regulation. The FDIC was named receiver and was later substituted for
Citizens in this suit as the real party in interest. The FDIC removed the suit to this Court
pursuant to 12 U.S.C. § 1819(b)(2)(B). A consent judgment entered on December 13,
2011 resolved the FDIC’s claims against Zada. Katzowitz and the FDIC have now filed
motions for summary judgment.
II. Standard of Review
Summary judgment is appropriate when “there is no genuine dispute as to any
material fact and the moving party is entitled to judgment as a matter of law.” Fed. R. Civ.
P. 56(a). The central inquiry is “whether the evidence presents a sufficient disagreement
to require submission to a jury or whether it is so one-sided that one party must prevail as
a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S. Ct. 2505,
2512 (1986). After adequate time for discovery and upon motion, Rule 56 mandates
summary judgment against a party who fails to establish the existence of an element
essential to that party’s case and on which that party bears the burden of proof at trial. See
Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986).
The movant has an initial burden of showing “the absence of a genuine issue of
material fact.” Id. at 323, 106 S. Ct. at 2553. Once the movant meets this burden, the
non-movant must come forward with specific facts showing that there is a genuine issue
for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct.
1348, 1356 (1986). To demonstrate a genuine issue, the non-movant must present
6

sufficient evidence upon which a jury could reasonably find for the non-movant; a
“scintilla of evidence” is insufficient. Liberty Lobby, 477 U.S. at 252, 106 S. Ct. at 2512.
The court must accept as true the non-movant’s evidence and draw “all justifiable
inferences” in the non-movant’s favor. Id. at 255, 106 S. Ct. at 2513. “A party asserting
that a fact cannot be or is genuinely disputed must support the assertion by: (A) citing to
particular parts of materials in the record . . . or (B) showing that the materials cited do not
establish the absence or presence of a genuine dispute, or that an adverse party cannot
produce admissible evidence to support the fact.” Fed. R. Civ. P. 56(c)(1).
III. Katzowitz’s Motion for Summary Judgment
A. Lack of Consideration
Katzowitz argues that the promissory note is unenforceable for lack of consideration
because Citizens deposited the loan proceeds into Zada’s account. “That the consideration
for a promise may inure to one other than the promisor . . . is a well-established principle
of contract law.” Highland Park v. Grant-Mackenzie Co., 366 Mich. 430, 446-47, 115
N.W.2d 270, 278 (Mich. 1962). Stated differently, “‘[t]he benefit rendered need not be to
the party contracting, but may be to anyone else at his procurement or request.’” Id. at
447, 115 N.W.2d at 278 (quoting Sanford v. Huxford, 32 Mich. 313, 315 (Mich. 1875)).
Katzowitz specifically authorized distribution of the funds via wire transfer. Although the
loan documents do not identify Zada’s account as the proper destination for the funds, they
also do not identify Katzowitz’s account. The loan documents are ambiguous with respect
to this term, but ambiguity does not necessarily preclude enforcement of a contract. See
City of Grosse Pointe Park v. Mich. Mun. Liab. & Prop. Pool, 473 Mich. 188, 201, 702
7

N.W.2d 106, 114-15 (Mich. 2005). When interpreting contract terms, a court’s primary
responsibility “is to ascertain and enforce the intent of the parties.” Fed. Ins. Co. v.
Hartford Steam Boiler Inspection & Ins. Co., 415 F.3d 487, 495 (6th Cir. 2005). Courts
must give due regard “to the purpose sought to be accomplished by the parties as indicated
by the language used, read in the light of the attendant facts and circumstances.” City of
Grosse Pointe Park, 473 Mich. at 200-01, 702 N.W.2d at 114.
The Court concludes that Citizens’ distribution of the funds to Zada was consistent
with the terms of the parties’ contract. Zada introduced Katzowitz to the loan officers at
Citizens, pledged the “vast majority of the security” for the loan, and signed documents at
the closing. Katzowitz Br. 1-2; Katzowitz Dep. 28:9-18. The circumstances indicate that
Zada was no mere bystander, but rather, the driving force behind this loan transaction. It
is not surprising that he would receive the loan proceeds, and Katzowitz testified that his
understanding of the transaction was that the money would go to Zada, and would be “for
[Zada]’s use.” Katzowitz Dep. 21:15-19. Citizens performed in a manner consistent with
that understanding, and there is no indication that any of the parties expected otherwise.
Because Citizens provided a benefit to Zada in exchange for Katzowitz’s promissory note,
the Court concludes that consideration was not lacking.
Katzowitz relies on Thomas v. Leja, 187 Mich. App. 418, 468 N.W.2d 58 (Mich. Ct.
App. 1991), for the proposition that a promissory note is unenforceable where the lender
fails to distribute funds to the borrower. Thomas, however, did not involve distribution of
loan proceeds to a third party. Rather, the borrower rescinded the loan transaction, and the
lender never distributed the funds to any party. Id. at 420, 468 N.W.2d at 59. In such a
8

case, the lack of a bargained-for exchange is clearly fatal to the formation of a contract.
Here, Citizens’ payment of the loan proceeds to Zada was adequate consideration for
Katzowitz’s promise.
Katzowitz asserts that the loan documents’ integration clauses preclude reliance on
his unexpressed “understanding” of the loan transaction. Generally, “an integration clause
in a written contract conclusively establishes that the parties intended the written contract
to be the complete expression of their agreement.” Wonderland Shopping Ctr. Venture,
L.P. v. CDC Mortg. Capital, Inc., 274 F.3d 1085, 1095 (6th Cir. 2001). Michigan law,
however, “permits the use of extrinsic evidence to dispose of a potential ambiguity, to
prove the existence of a potential ambiguity, or to indicate the actual intent of the parties
where an actual ambiguity exists.” Id. Here, even though both Katzowitz and Zada signed
loan documents at the closing, the parties’ contract fails to specify the account into which
the loan proceeds would be deposited. To resolve this ambiguity, the Court must attempt
to give effect to the parties’ intent. See Fed. Ins. Co., 415 F.3d at 495. Katzowitz testified
that he expected that the funds would go to Zada, Katzowitz Dep. 21:15-19, and the Court
does not believe it would be improper to consider this testimony.5
B. Discharge
Katzowitz argues that Citizens discharged the loan, as its records indicate that the
loan was “paid off.” Michigan law provides for the discharge of an obligation arising

5

The Court notes that the circumstances surrounding the transaction are not inconsistent
with disbursement of the loan proceeds to Zada. Thus, Katzowitz’s testimony regarding
his understanding of the transaction is not the only evidence that the parties intended Zada
to receive the loan proceeds; it simply reinforces this conclusion.
9

from a negotiable instrument:
A person entitled to enforce an instrument, with or without consideration, may
discharge the obligation of a party to pay the instrument (i) by an intentional
voluntary act, such as surrender of the instrument to the party, destruction,
mutilation, or cancellation of the instrument, cancellation or striking out of the
party’s signature, or the addition of words to the instrument indicating
discharge, or (ii) by agreeing not to sue or otherwise renouncing rights against
the party by a signed writing.
Michigan Compiled Laws § 440.3604(1). Citizens’ records make clear that the 2004 loan
was marked as “paid” based on application of the proceeds of the 2005 loan to the existing
balance. The 2004 loan was “paid off” on the same day the 2005 loan was originated, and
the 2005 loan disbursement instructions state: “$2,174,977.40 Payment on Loan # 20302.”
Katzowitz argues that the 2005 loan transaction was a fraud, due to his forged signature on
the loan documents. If that transaction was fraudulent, however, it could not discharge his
obligations under the 2004 promissory note. Fraud or mistake cannot discharge a party’s
obligation, as such a cancellation is neither intentional nor voluntary. See Ohio Cas. Ins.
Co. v. Yaklich, 768 P.2d 1274, 1275 (Colo. Ct. App. 1989).
C. Forgery
Katzowitz asserts that Citizens’ role in the alleged loan document forgery renders the
2004 note unenforceable. The Court concludes that genuine issues of fact preclude such a
finding at this time. First, the parties do not agree that the 2005 loan documents contain
forged signatures. Katzowitz claims that he did not sign these documents and Klieman
apparently concluded likewise, but the evidence is not “so one-sided that one party must
prevail as a matter of law.” Liberty Lobby, 477 U.S. at 251-52, 106 S. Ct. at 2512. Even if
the signature was forged, Katzowitz has failed to present anything more than speculation
10

as to the identity of the person responsible. He believes that Olzem and Dunkelberg were
responsible, but it is altogether possible that Zada or an associate of his forged Katzowitz’s
signature. Given the lack of evidence presented, the Court cannot conclude as a matter of
law that Citizens’ role in the alleged forgery renders the 2004 loan unenforceable. A party
seeking summary judgment must show the absence of a genuine issue of material fact, and
Katzowitz has failed to carry his burden here.
D. Violation of Statute and Public Policy
Katzowitz contends that the purpose of the 2004 loan was to circumvent statutory
lending limits on the amount of money Citizens could loan to Zada, and therefore, the loan
is void as a violation of statute and public policy. Courts will not enforce contracts that
are contrary to statute or public policy. Sands Appliance Servs. v. Wilson, 463 Mich. 231,
239, 615 N.W.2d 241, 246 (Mich. 2000). This principle, however, is “applied with
caution and only in cases plainly within the reasons on which that doctrine rests.” Terrien
v. Zwit, 467 Mich. 56, 66 n.9, 648 N.W.2d 602, 608 n.9 (Mich. 2002). Katzowitz points to
several unusual characteristics of this loan, but he has failed to establish beyond dispute
that its purpose was to circumvent statutory lending limits. First, Katzowitz has not set
forth facts or legal authority sufficient for the Court to determine the applicable lending
limit. His briefs imply that the limit was approximately $3.5 million, but provide no legal
authority in support of this assertion.6 Michigan statute imposes lending limits, calculated

6

Katzowitz refers to regulations published by the United States Treasury Department’s
Office of the Comptroller of the Currency, Katzowitz Br. Supp. Mot. Summ. J. 10 (citing
12 C.F.R. § 32.5), but it is not clear that these regulations govern state banks such as
Citizens. See 12 C.F.R. § 32.1(c)(1) (“This part applies to all loans and extensions of
11

as follows:
Except as otherwise provided in this section or by order or declaratory ruling of
the commissioner, the total loans and extensions of credit and leases by a bank
to a person at no time shall exceed 15% of the capital and surplus of the bank,
except that upon approval by 2/3 vote of its board of directors the limit may be
increased to not to exceed 25% of the capital and surplus of the bank.
Michigan Compiled Laws § 487.14202(1). This statute limits loans to one person based
on a bank’s capitalization. Because there is no evidence of Citizens’ capitalization before
the Court, the lending limit cannot be determined. Although Klieman’s affidavit indicates
that Citizens’ loans to Zada reached the applicable limit in 2004, Klieman Aff. ¶ 6g, there
is also evidence indicating that Citizens subsequently loaned Zada an additional $1.3
million. See FDIC Response Br. Ex. Q. The Court is unaware of any evidence
demonstrating that Zada had paid down his outstanding loan balances before obtaining
these new loans; this calls into question Katzowitz’s assertion that Zada had reached the
lending limit. Because a genuine dispute of fact remains as to whether the Katzowitz loan
was actually intended to circumvent statutory lending limits, the Court cannot conclude at
this time that the loan is unenforceable.
E. Disposition of Collateral
Katzowitz asserts that Citizens may not obtain a deficiency judgment because it
released to Zada the jewelry that served as collateral for the loan. In response, the FDIC
claims that Katzowitz waived this argument by failing to raise it as an affirmative defense
in his Answer. The Answer, however, incorporates the defenses raised by Fedorov in the

credit made by national banks and their domestic operating subsidiaries.”).
12

related suit. These include the failure to mitigate damages and an assertion that Citizens’
conduct bars its claims. The Court accordingly concludes that Katzowitz has not waived
his argument based on Citizens’ disposition of collateral.
The FDIC contends that the promissory note and security agreement provide Citizens
with the right to release collateral, and the Court agrees. The note states:
Lender may renew or extend (repeatedly and for any length of time) this loan
or release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender’s security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone.
FDIC Br. Supp. Mot. Summ. J. A at 2. The Commercial Security Agreement, which also
specifically addresses the parties’ rights with respect to the collateral, provides:
Borrower waives any defense that may arise because of any action or inaction
of Lender, including without limitation any failure of Lender to realize upon
the Collateral or any delay by Lender in realizing upon the Collateral; and
Borrower agrees to remain liable under the Note no matter what action Lender
takes or fails to take under this Agreement.
FDIC Br. Supp. Mot. Summ. J. Ex. C at 1. These provisions plainly allowed Citizens to
release the jewelry to Zada without obtaining authorization from Katzowitz.
Katzowitz asserts that Citizens failed to dispose of the collateral in a commercially
reasonable manner, and this obligation cannot be waived. See Michigan Compiled Laws
§§ 440.9602(g), 440.9610(2); Honor State Bank v. Timber Wolf Constr. Co., 151 Mich.
App. 681, 391 N.W.2d 442 (Mich. Ct. App. 1986). Even if Katzowitz establishes that
Citizens’ release of the jewelry to Zada was unreasonable, he is mistaken in concluding
that such action would completely bar a deficiency judgment. Rather, he would be entitled
to a reduction of the deficiency. See Michigan Compiled Laws § 440.9626(1)(c) (limiting

13

deficiency to the amount by which the obligation exceeds the proceeds that would have
been realized if the secured party had disposed of the collateral properly). The Court
therefore concludes that Citizens’ allegedly wrongful disposition of collateral does not bar
the FDIC’s claims.
IV. The FDIC’s Motion for Summary Judgment
A. Breach of Promissory Note
The FDIC argues that it has established a prima facie case of breach of a promissory
note. The parties do not dispute that the promissory note is a negotiable instrument. The
FDIC asserts that it is entitled to enforce this instrument pursuant to Michigan Compiled
Laws § 440.3301. Under this statute, the following persons may enforce an instrument:
“(i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has
the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to
enforce the instrument pursuant to section 3309 or 3418(4).” It cannot be disputed that the
FDIC is not a holder of the note. “To be a holder, a person must be in possession of an
instrument which is issued or endorsed to him or his order.” Fifth Third Bank, N.A. v.
Dziersk, 12 F.3d 600, 604 (6th Cir. 1993) (citing UCC § 1-201(20)). The FDIC has
admitted that it does not possess the original note. FDIC Resp. to Req. Admis. ¶¶ 11. For
the same reason, the FDIC is not a nonholder in possession of the instrument. Thus, the
FDIC can only enforce the instrument if it is entitled to do so under sections 3309 or 3418
of the statute. Section 3309 provides for enforcement of an instrument where the
instrument was stolen, destroyed, or cannot be obtained through service of process, but the
FDIC has not established any of these circumstances. Rather, Klieman indicated that
14

Citizens marked the note as “paid” and sent it to Zada. Klieman Aff. ¶ 7. Section 3418
allows a person to enforce an instrument where the instrument “is paid or accepted by
mistake and the payor or acceptor recovers payment or revokes acceptance.” The FDIC
has not established that Citizens’ transfer of the note to Zada was the result of mistake, or
that Citizens recovered payment or revoked acceptance of an instrument. The Court
therefore cannot conclude as a matter of law that the FDIC is entitled to enforce the
promissory note under Michigan Compiled Laws § 440.3301.
B. Breach of Contract
The FDIC asserts that Katzowitz breached the loan contract by failing to make the
required payments. Under Michigan law, “the essential elements of a valid contract are
(1) parties competent to contract, (2) a proper subject matter, (3) a legal consideration, (4)
mutuality of agreement, and (5) mutuality of obligation.” Thomas, 187 Mich. App. at 422,
468 N.W.2d at 60.
Katzowitz claims that the purpose of the loan was to circumvent statutory lending
limits, and he has presented evidence supporting this claim. Klieman’s investigation led
him to conclude that Olzem and Dunkelberg had used loans to third parties to indirectly
advance funds to Zada, effectively circumventing lending limits. Klieman Dep. 262:25263:4. As the FDIC correctly notes, however, the actions of Olzem and Dunkelberg are
not necessarily be attributable to Citizens. The Michigan Supreme Court has recently
summarized the principles of respondeat superior liability:
An employer is generally liable for the torts its employees commit within the
scope of their employment. It follows that an employer is not liable for the
torts . . . committed by an employee when those torts are beyond the scope of
15

the employer’s business. This Court has defined “within the scope of
employment” to mean “engaged in the service of his master, or while about his
master’s business.” Independent action, intended solely to further the
employee’s individual interests, cannot be fairly characterized as falling within
the scope of employment. Although an act may be contrary to an employer’s
instructions, liability will nonetheless attach if the employee accomplished the
act in furtherance, or the interest, of the employer’s business.
Hamed v. Wayne County, 490 Mich. 1, 10-11, 803 N.W.2d 237, 244 (Mich. 2011)
(footnotes and citations omitted). The evidence indicates that Citizens’ board of directors
was unaware of the true nature of the Katzowitz loan.7 Klieman testified that at the time
the Katzowitz, Fedorov, and Zaremba loans were made, “[t]he board of directors was not
aware that these were third-party loans to Joseph Zada.” Klieman Dep. 51:3-5. It is
unclear, however, whether Olzem and Dunkelberg’s actions were taken “in furtherance” of
Citizens’ business. One might generally presume that a loan officer promotes the bank’s
interests by making loans. Yet the irregularities in the loans involving Zada, when
considered in light of the history of dealings between Zada, Olzem, and Dunkelberg,
suggest more than a mere business relationship. Zada also allegedly paid for Olzem and
Dunkelberg to vacation at his Florida home, Katzowitz Br. Supp. Mot. Summ. J. Ex. L at
4, indicating that Olzem and Dunkelberg may have derived considerable personal benefit
from their actions. The Court believes that a genuine dispute of fact remains with respect
to whose interests Olzem and Dunkelberg were actually attempting to serve by making the
loan to Katzowitz. This dispute must be resolved for the Court to determine whether the
loan contract was in fact illegal, and therefore, unenforceable.

7

Both Olzem and Dunkelberg served on the board, but they apparently did not inform the
other board members of the details of these transactions.
16

C. Applicability of 18 U.S.C. § 1823(e)
The FDIC contends that 12 U.S.C. § 1823(e) bars Katzowitz from asserting defenses
based on the alleged scheme between Zada, Olzem, and Dunkelberg. The Court disagrees.
The statute, which partially codified the holding of D’Oench, Duhme & Co. v. FDIC, 315
U.S. 447, 62 S. Ct. 676 (1942), provides:
No agreement which tends to diminish or defeat the interest of the [FDIC] in
any asset acquired by it . . . shall be valid against the [FDIC] unless such
agreement (A) is in writing,
(B) 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,
(C) 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 or committee, and
(D) has been, continuously, from the time of its execution, an official
record of the depository institution.
12 U.S.C. § 1823(e).
The FDIC reads the statute too broadly, as by its terms, it applies only to agreements
which tend to diminish or defeat the FDIC’s interest in an asset. “It is well established that
‘section 1823(e) does not apply to every inquiry concerning an asset.’” Commerce Fed.
Sav. Bank v. FDIC, 872 F.2d 1240, 1244 (6th Cir. 1989) (quoting FDIC v. Merchants
Nat’l Bank of Mobile, 725 F.2d 634, 639 (11th Cir. 1984)). “‘Section 1823(e) does not . . .
protect [the] FDIC against all defenses.’” Id. (quoting FDIC v. Blue Rock Shopping Ctr.,
Inc., 766 F.2d 744, 753 (3rd Cir. 1985)) (alteration in original). The statute “applies only
to an action or defense which is anchored in an agreement separate and collateral from the
instrument which the FDIC is seeking to protect.” Id. “In contrast, however, the statute

17

‘does not apply when . . . the parties contend that no asset exists . . . and that such
invalidity is caused by acts independent of any understanding or side agreement.’” Id. at
1245 (quoting Merchants, 725 F.2d at 639) (omissions in original). Nor does it apply
“when the court determines if an asset is invalid for fraud or for breach of bilateral
obligations contained in the asset.” Merchants, 725 F.2d at 639 (citations omitted).
Katzowitz does not assert a defense based on a side agreement; rather, he contends that the
loan itself is void because it was illegal. Such a defense plainly falls outside the scope of §
1823(e). The Court concludes that § 1823(e) does not bar Katzowitz’s defenses.
D. Effect of the Forged Documents
The FDIC argues that if the 2005 loan documents were forged, as Katzowitz asserts,
this loan could not operate to discharge the 2004 loan. This is correct, and the Court has
addressed this argument above in the context of Katzowitz’s motion. The Court therefore
declines to elaborate further here, except to note that this argument cannot justify granting
summary judgment in the FDIC’s favor. Although the 2004 loan could not have been
discharged by fraud, this does not mean that the 2004 loan is necessarily enforceable. If
the 2004 loan is subsequently found to be unenforceable due to illegality, the FDIC’s
claim fails irrespective of any forgery in the 2005 loan documents.
E. Foreclosure
The FDIC seeks a judgment of foreclosure on the mortgage granted by Katzowitz.
As the Court has noted above, genuine disputes of fact remain as to the enforceability of
the underlying loan obligation. A judgment of foreclosure would therefore be improper at
this time.
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V. Conclusion
Based on the evidence and arguments presented by the parties, the Court concludes
that genuine disputes of fact preclude summary judgment in this case.
Accordingly,
IT IS ORDERED that Katzowitz’s motion for summary judgment is DENIED;
IT IS FURTHER ORDERED that the FDIC’s motion for summary judgment is
DENIED.
s/PATRICK J. DUGGAN
UNITED STATES DISTRICT JUDGE
Copies to:
Shawn Y. Grinnen, Esq.
Thomas G. Costello, Esq.
Mark E. Merlanti, Esq.

Daniel G. LeVan, Esq.

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