Federal Deposit Insurance v. McFarland

United States Court of Appeals,
Fifth Circuit.
No. 93-5262.
FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee-
Appellant,
v.
Rory S. McFARLAND, et al., Defendants,
Rose Long McFarland, Co-trustee, Defendant-Appellant.
Premier Venture Capital Corp., Third Party Defendant-Appellee,
David L. Jump, Third Party Defendant Intervenor-Plaintiff-
Appellee.
Oct. 5, 1994.
Appeals from the United States District Court for the Western
District of Louisiana.
Before REYNALDO G. GARZA, SMITH and PARKER, Circuit Judges.
ROBERT M. PARKER, Circuit Judge:
This suit concerns the FDIC's attempt to recover from viable
loans found in a failed bank's portfolio. Two related appeals
emerged from one trial and one memorandum opinion of the district
court.
Rose Long McFarland appeals the district court's enforcement
under 12 U.S.C. § 1823(e) of a continuing guaranty agreement which
she contends was released prior to the FDIC's acquisition of the
notes which it secured. Concluding that § 1823 does not apply to
the release, we reverse the district court's decision holding Rose
McFarland liable under her continuing guaranty. FDIC appeals the
district court's ruling that a special mortgage held by the failed
bank as collateral did not cover oil and gas produced from lands
1
that were previously part of the lease but were declared subject to
a different lease prior to the time the bank took the lease as
collateral. Finding no error in the district court's resolution of
this issue, we affirm.
I. THE RELEASE
A.
Rose McFarland executed a Continuing Guaranty Agreement of
$450,000, dated September 4, 1980, guarantying all debts and
liabilities to the Bank of Commerce (BOC) incurred by her son, Rory
McFarland. In January 1981, a bank officer wrote a letter to Rory
Mcfarland, advising him that the bank had misplaced Rose
McFarland's Guarantee Agreement and requesting a replacement
guaranty, which they provided. The letter was found in the bank's
files after FDIC took control.
In the early 1980's, Rory Mcfarland obtained the three loans
from the BOC that are the subject of this suit. One of the loans
was made to New Age Industries, Inc. and Rory Mcfarland in solido,
and was secured by a lien on equipment and Rose McFarland's
continuing guaranty. The other two loans were made to Rory
Mcfarland personally and secured primarily by an interest Rory
Mcfarland held in some offshore minerals, a pledge of life
insurance on Rory Mcfarland's life, and Rose McFarland's continuing
guaranty. In 1985 these loans were restructured and increased.
The New Age loan was not involved in the restructuring. Rory
Mcfarland paid a 17 origination fee, an increased rate of interest,
and agreed to the cancellation of a $500,000 line of credit which
2
he had previously received from the bank, in return for the release
of Rose McFarland's Guaranty Agreement and an increased loan
balance. Two of the bank officers wrote Rory Mcfarland a letter
dated April 2, 1985, delineating the terms of his re-structured
loan and stating the bank's agreement to release Rose McFarland
from the 1980 Guaranty Agreement. Rory Mcfarland was to sign and
return if he agreed to the terms, which he did. At approximately
the same time, the bank returned an executed copy of the Guaranty
Agreement to Rory Mcfarland and he destroyed it.
The minutes of the Directors Loan Committee reflect that on
March 8, 1985 two loans were approved for Rory Mcfarland and his
$500,000 line of credit was canceled. The listed collateral
included a requirement that Rose McFarland's Guaranty agreement be
increased to $1,750,000. On March 15, 1985 the Officer's Loan
Committee approved the same package. Rory Mcfarland refused this
loan structure and continued to negotiate, finally agreeing to the
terms set forth in the April 2, 1985 letter. The promissory notes,
executed by Rory Mcfarland on April 5, 1985, list the collateral
for the notes and there is no reference in either note to a
Guaranty by Rose McFarland. The minutes from the Director's Loan
committee held on April 30, 1985 note the new renewal loans to Rory
Mcfarland and list collateral for the loan, which did not include
the guarantee.
On June 13, 1986 the bank was closed and FDIC was appointed
receiver. In an assignment dated January 1991, the FDIC as
Receiver assigned Rory Mcfarland's notes to FDIC in its corporate
3
capacity, stating that the assignment was effective as of June 13,
1986.
At the time FDIC examined the bank records to determine the
value of the Rory Mcfarland loan asset, the records included the
letter requesting a replacement of Rose McFarland's continuing
guaranty, an executed copy of Rose McFarland's Guaranty Agreement,
the letter releasing it, the minutes of the Loan Committees listed
above, and a "Relationship Report" (summary of customer's
indebtedness) for Rory Mcfarland dated October 15, 1985 (6 months
after the release) which still listed Rose McFarland's Guaranty as
collateral for Rory Mcfarland's notes.
Rory Mcfarland defaulted and Rose McFarland did not pay
anything on the disputed Guaranty. FDIC-Corporate brought this
suit. After bench trial, the district court held that 12 U.S.C. §
1823(e) applied to the release and found that the release failed to
meet the requirements of § 1823(e),1 so the bank's release of Rose
McFarland's Guaranty was not valid against FDIC. Specifically, the
district court found that the release was not executed by Rose
1
12 U.S.C. § 1823(e) provides: "No agreement which tends to
diminish or defeat the interest of the Corporation in any asset
acquired by it under this section or section 1821 of this title,
either as security for a loan or by purchase or as receiver, of
any insured depository institution, shall be valid against the
Corporation unless such agreement (1) is in writing, (2) 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, (3) was approved by the board of
directors or its loan committee, which approval shall be
reflected in the minutes of said board or committee, and (4) has
been, continuously, from the time of its execution, an official
record of the depository institution."
4
McFarland and that the bank's loan committee minutes do not
"reflect" the release.
B.
The district court decided this case after conducting a bench
trial. Our standard of review for bench trials is well
established: findings of fact are reviewed for clear error; legal
issues de novo. Seal v. Knorpp, 957 F.2d 1230, 1233 (5th
Cir.1992). The district court held that 12 U.S.C. § 1823(e)
precluded Rose McFarland from raising the release agreement as a
defense against FDIC. We review de novo the applicability of §
1823(e) to this case.
Section 1823 is the statutory counterpart to D'Oench, Duhme
& Co. v. FDIC, 315 U.S. 447, 62 S. Ct. 676, 86 L. Ed. 956 (1942).
Courts often consider the D'Oench, Duhme doctrine and § 1823(e) in
tandem, looking to the common law when construing the statute.
Beighley v. FDIC, 868 F.2d 776, 784 (5th Cir.1989). Section
1823(e) and D'Oench, Duhme basically prohibit the enforcement
against the FDIC of undisclosed agreements that would tend to
diminish the FDIC's interest in an asset acquired from the failed
bank. The purpose behind § 1823(e) and D'Oench, Duhme is to allow
federal and state bank examiners to rely on a bank's records in
evaluating the bank's assets, ensuring mature consideration of
unusual loan transactions by senior bank officials, and preventing
fraudulent insertion of new terms, with collusion of bank
employees, when the bank appears headed for failure. Langley v.
FDIC, 484 U.S. 86, 91-92, 108 S. Ct. 396, 401, 98 L. Ed. 2d 340
5
(1987).
The purposes of § 1823 and D'Oench, Duhme are not implicated
in the agreement to release Rose McFarland's guaranty. There was
no question of collusion, fraud, or bad faith. There was no
undisclosed or secret agreement. Rather, the release of Rose
McFarland's guaranty was negotiated at arm's length in conjunction
with the renewal of two of Rory Mcfarland's loans, and the release
is reflected in the loan documents. At least with respect to the
renegotiated loans, the release of Rose McFarland's guaranty with
respect to these two loans falls within an exception to the
D'Oench, Duhme doctrine recognized in this circuit.
This Court has held that D'Oench, Duhme does not apply where
the agreement which the FDIC seeks to avoid is spelled out in the
loan agreement. FDIC v. Laguarta, 939 F.2d 1231 (5th Cir.1991);
see also FDIC v. Waggoner, 999 F.2d 826, 828 (5th Cir.1993). We
have come close to explicitly applying this principle to § 1823(e)
as well. See Bank One Texas National Association v. Morrison, 26
F.3d 544, 551 (5th Cir.1994) (stating that "[t]he integrated loan
documents which evidence the parties agreement satisfy the
notoriety requirements of D'Oench, Duhme and § 1823(e)"). Other
courts have applied this principle to 1823(e). E.g., Commerce
Federal Sav. Bank v. FDIC, 872 F.2d 1240 (6th Cir.1989); Riverside
Park Realty Co. v. FDIC, 465 F. Supp. 305, 313 (M.D.Tenn.1978); see
also, Howell v. Continental Credit Corp., 655 F.2d 743 (7th
Cir.1981) (holding that neither D'Oench, Duhme nor § 1823 applies
where "the document FDIC seeks to enforce is one ... which facially
6
manifests bilateral obligations and serves as the basis of the
lessee's defense"). We agree with the Sixth Circuit that "The
language of 1823(e), which provides that "[n]o agreement which
tends to diminish or defeat the right, title or interest of the
[FDIC] in any asset acquires by it under this section ... shall be
valid against the Corporation,' indicates that it 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." Commerce Federal Savings Bank v. FDIC, 872 F.2d at 1244.
We hold that 12 U.S.C. § 1823(e) applies only to separate and
collateral agreements; not to agreements found in the loan
documents themselves.
In the instant case, the agreement to release Rose McFarland
was contained in the loan agreement, executed by the bank and Rory
Mcfarland and maintained in the bank's files. The terms of the
loan renewals were set out in a letter from the president and
executive vice president of the bank to Rory Mcfarland. Rory
Mcfarland was to sign the letter and return it if he agreed to the
terms. Rory Mcfarland signed and returned the letter and the notes
were executed under the terms set out in the letter, not the terms
reflected in the minutes of either the Directors Loan Committee or
the Officers Loan Committee.
The fact that the release is not evidenced on the promissory
note does not mean that it is not contained in the loan documents.
Laguarta rejects the notion that the "loan documents" includes only
the promissory note. Laguarta, 939 F.2d at 1239. The letter from
7
the bank's officers setting out the terms of the loan, which was
signed by the bank and Rory Mcfarland and maintained in the bank's
files, is clearly one of the loan documents and is not collateral
to the renewal note. See id. The release of Rose McFarland's
guaranty is therefore effective against the FDIC at least with
respect to the two renegotiated loans.
C.
The New Age loan was executed before the release of Rose
McFarland's guaranty and was not renegotiated, so the release is
not a part of the loan documents of that loan. However, it is well
established that § 1823 does not apply to every inquiry concerning
an asset. FDIC v. Merchants Nat'l Bank of Mobile, 725 F.2d 634,
639 (11th Cir.1984), cert. denied, 469 U.S. 829, 105 S. Ct. 114, 83
L. Ed. 2d 57 (1984). The "no asset" exception to D'Oench, Duhme and
§ 1823(e) is widely recognized. See, e.g., FDIC v. Zook Bros.
Constr. Co., 973 F.2d 1448, 1452 (9th Cir.1992); Commerce Federal
Savings Bank v. FDIC, 872 F.2d at 1244; Beighley v. FDIC, 868 F.2d
776; FDIC v. P.L.M. International, Inc., 834 F.2d 248 (1st
Cir.1987); Howell v. Continental Credit Corp., 655 F.2d 743; cf.
Langley, 484 U.S. at 93-94, 108 S.Ct. at 399 (implying that where
the instrument is rendered void rather than merely voidable before
being acquired by the FDIC, the instrument is not an asset
protected by § 1823(e)). The "no asset" exception is generally
defined as precluding the application of 1823(e) where "the parties
contend that no asset exists or an asset is invalid and that such
invalidity is caused by acts independent of any understanding or
8
side agreement." FDIC v. Merchants Nat'l Bank, 725 F.2d at 639
(quoted in FDIC v. Blue Rock Shopping Center, 766 F.2d 744, 753
(3rd Cir.1985); and FDIC v. Nemecek, 641 F. Supp. 740, 742
(D.Kan.1986)).
The "no asset" exception has been applied in a variety of
circumstances. It has been applied by courts in cases where it has
been determined that the asset was invalid for fraud, see Gunter v.
Hutcheson, 674 F.2d 862, 867 (11th Cir.1982), cert. denied, 459
U.S. 826, 103 S. Ct. 60, 74 L. Ed. 2d 63 (1982), or for the breach of
bilateral obligations contained in the asset, see Howell, 655 F.2d
at 746-48. Additionally, the exception has been applied where the
asset had been voided by the judgment of a court prior to the date
that the FDIC acquired the assets of the bank, see Grubb v. FDIC,
868 F.2d 1151 (10th Cir.1989), and where the asset had been
discharged by the payment and cancellation of the underlying debt
before the FDIC obtained the assets of the bank, see FDIC v.
Bracero & Rivera, Inc., 895 F.2d 824 (1st Cir.1990); Commerce
Federal Savings Bank v. FDIC, 872 F.2d at 1245; and FDIC v. Prann,
694 F. Supp. 1027 (D.Puerto Rico 1988). The exception has also been
invoked where, prior to the FDIC acquiring the bank's assets, the
asset was extinguished by the bank's failure to comply with state
law notice requirements for the sale of collateral. FDIC v.
Percival, 752 F. Supp. 313 (D.Neb.1990) (guaranty obligation was
extinguished prior to the FDIC acquiring the underlying notes when
the bank violated Neb.U.C.C. § 9-504(3) by selling other collateral
without notice to the guarantor).
9
The "no asset" exception will not, however, be applied where
the agreement is not reflected in the official records of the bank.
An overriding concern of § 1823 and D'Oench is that FDIC be able to
rely on the official records of the bank. Therefore, when a
defendant seeks to apply the "no asset" exception based on an
unrecorded agreement, the exception will not apply. "Congress did
not intend that Sec. 1823(e) be avoided in this manner;
[defendant's] construction would drain substantial vitality from
Sec. 1823(e) ... by throwing into question the very records of the
bank that the statute entitles the FDIC to consider and rely upon."
FDIC v. Merchants Nat'l Bank, 725 F.2d at 639 (quoted in P.L.M.
International, 834 F.2d 248); but see FDIC v. Nemecek, 641 F. Supp.
740, 742-43 (holding § 1823(e) inapplicable even though accord and
satisfaction apparently was not in writing or in the bank's files).
FDIC cites numerous opinions of this and other circuits
holding that a release of an obligation must conform to the
requirements of 1823(e) to be enforceable against the FDIC; but
these are not cases where the "no asset" exception would apply. In
the cases cited by FDIC, either the agreement could not clearly be
determined from the bank's records or the agreement was still
executory when FDIC acquired the asset. See RTC v. McCrory, 951
F.2d 68 (5th Cir.1992) (agreement not continuously maintained as an
official bank record); FSLIC v. Kroenke, 858 F.2d 1067 (5th
Cir.1988) (oral agreement); FDIC v. Hoover-Morris Enterprises, 642
F.2d 785, 787-88 (5th Cir.1981) (unexecuted oral agreement); FDIC
v. Singh, 977 F.2d 18 (1st Cir.1992) (release not clear from bank's
10
records); FDIC v. Zook Bros., 973 F.2d at 1451 (release not in
bank's official files); FDIC v. Wright, 942 F.2d 1089 (7th
Cir.1991), cert. denied, --- U.S. ----, 112 S. Ct. 1937, 118 L. Ed. 2d
544 (1992) (appellate court concluded release was not in bank's
files, despite FDIC's concession it was); FDIC v. Manatt, 922 F.2d
486 (8th Cir.1991) (accord and satisfaction still executory when
FDIC acquired note), cert. denied, 501 U.S. 1250, 111 S. Ct. 2889,
115 L. Ed. 2d 1054; FDIC v. Virginia Crossings Partnership, 909 F.2d
306 (8th Cir.1990) (undisclosed side agreement); FDIC v. P.L.M.
Int'l, Inc., 834 F.2d at 253 (undisclosed side agreement); Public
Loan Co. v. FDIC, 803 F.2d 82 (3rd Cir.1986) (oral accord &
satisfaction); FDIC v. de Jesus Valez, 678 F.2d 371 (1st Cir.1982)
(letter agreement kept in presidents safe rather than in bank's
files); but see F.D.I.C. v. Krause, 904 F.2d 463 (8th Cir.1990)
(holding defense based on accord and satisfaction not noted on the
promissory note or in the board's minutes barred by § 1823(e)
without stating whether agreement clearly reflected in bank's
official records).2
Under the circumstances of this case, Rose McFarland should
not be precluded from availing herself of the "no asset" exception
to § 1823(e). Rose McFarland's guaranty was not listed as
collateral on the note and it was never mentioned in the minutes of
either loan committee in connection with the New Age loan. The
2
FDIC also cited FDIC v. Cremora Co., 832 F.2d 959, 962 (6th
Cir.1987), which held that a partnership agreement not meeting
requirements of § 1823(e) was not effective against FDIC. Its
relevance to the "no asset" exception is elusive.
11
guaranty could only be connected to the New Age loan after it was
discovered in a search of the bank's official files. That same
search would reveal that the guaranty had been released. Under
these circumstances, there is no "understanding or side agreement"
of the type that could have caused the FDIC to be misled. We
therefore hold that the "no asset" exception to § 1823(e) and
D'Oench, Duhme applies in this case, reverse the decision of the
district court, and hold that the release of Rose McFarland's
guaranty is effective against the FDIC.3
II. THE LEASE
A.
Two of the notes that were described above were secured by a
mortgage on "State Lease 340." The mortgage was granted in 1984.
That lease describes the covered property as "all of the property
... belonging to the State of Louisiana." The southern or seaward
boundary of the lease is described as "the extreme southern or
seaward boundary of ... Louisiana."
When the lease was granted by the State of Louisiana in 1936,
it was the State's position that its seaward boundary extended
three leagues (about nine miles) from shore. In 1950 the Supreme
3
Rose McFarland argued that the district court's findings
that the release was not executed in conformance with § 1823(e)
and that board approval was not reflected in the minutes were
clearly erroneous; that 1991 amendments to § 1823(e) could not
be applied retroactively to allow FDIC in its capacity as
receiver protection under § 1823(e); and that the district court
failed to give proper weight to the FDIC's statements in another
case that Rose McFarland's guaranty had been released. Because
we have determined that § 1823 and D'Oench, Duhme do not apply in
this case, we need not evaluate these issues.
12
Court held that Louisiana's seaward boundary extended no further
than its ordinary low-water mark and that the United States owned
the lands and minerals underlying the Gulf in the case of United
States v. State of Louisiana, 339 U.S. 699, 70 S. Ct. 914, 94 L. Ed.
1216 (1950). In 1953, the Congress passed the Submerged Lands Act,
43 U.S.C. § 1301 et seq., which granted states a three-mile belt
offshore and the Outer Continental Lands Act, 43 U.S.C. § 1331 et
seq., which validated leases previously granted by states on
property outside the three-mile belt. This validation resulted in
the creation of a separate lease by the Department of the Interior
referred to as "OCS 310".
David Jump and Premier Venture Capital Corp., judgment
creditors of Rory Mcfarland, who recorded their judgments after the
recordation date of the FDIC's mortgage, argue that FDIC's mortgage
does not cover Rory Mcfarland's interest in OCS 310, and so does
not secure Rory Mcfarland's debt to FDIC and is available to cover
their judgments. The trial court agreed with Jump, et al., saying
that the lease language describing the area to be covered as the
Louisiana boundary must be understood as the Louisiana boundary in
1984 when the mortgage was executed. The trial court also found
that the mortgage recorded by FDIC, describing the leased area as
ending at the Louisiana boundary was not sufficient to put Jump, et
al. as third parties on notice that OCS 310 was mortgaged. FDIC
appeals.
B.
Interpretation of a contract and the determination of
13
ambiguity are questions of law, which this Court reviews de novo.
FDIC v. Brants, 2 F.3d 147 (5th Cir.1993). Fact questions arising
out of extrinsic evidence are reviewed under the clearly erroneous
standard. National Union Fire Insurance Co. v. Circle, Inc., 915
F.2d 986 (5th Cir.1990).
FDIC argues that we should consider extrinsic evidence
admitted by the district court regarding the intentions of the
parties. We disagree. The language in the mortgage unambiguously
describes the property covered as ending at the Louisiana boundary.
That alone decides the case. The trial court, perhaps out of an
abundance of caution, looked at the extrinsic evidence and still
found no basis for FDIC's claim to OCS 310, but there was no need
to do so. We therefore AFFIRM the district court's holding that
the notes acquired by FDIC are not secured by a mortgage on OCS
310.
14