Banks and Banking- Housing and Home Finance – Scope of Insurance Coverage of Banks Under National Housing Act

Borrower executed a promissory note to dealer payee, who assigned it to defendant bank. After default by borrower, plaintiff United States paid to defendant the unpaid balance in accordance with the terms of their insurance contract under Title I of the National Housing Act. The note was then transferred to plaintiff for collection. In an action by the United States against the borrower for the amount due, it was held that the note could not be enforced because of fraudulent misrepresentation by the dealer in acquiring the note, of which the insured bank and transferee government had constructive knowledge. Plaintiff then commenced the present action against the bank to recover the money paid under the insurance contract, alleging breach of warranty that the note qualified for insurance. On appeal from a judgment for plaintiff, held, affirmed. A note which is unenforceable against the borrower is not eligible for insurance when its invalidity results from fraudulent acts by a dealer who is authorized by the lending institution to obtain the note. Citizens National Trust and Savings Bank of Los Angeles v. United States, (9th Cir. 1959) 270 F. (2d) 128.