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United States District Court, Northern District of Illinois, E.D

December 6, 1985


The opinion of the court was delivered by: Grady, District Judge.


In September 1984, Continental Illinois National Bank & Trust Co. of Chicago ("Continental") conveyed its interest under certain loan documents to the Federal Deposit Insurance Corporation ("FDIC"). The FDIC acquired these documents pursuant to 12 U.S.C. § 1823(c)(1)(A) as part of a plan of assistance to prevent Continental's demise. See Memorandum of Plaintiff FDIC in Support of Motion for Summary Judgment, Exh. H.

In the instant case, the FDIC seeks to recover on a note and guaranty signed by the defendants which the FDIC acquired as a part of this plan of assistance. The defendants have raised six affirmative defenses and a five-count counterclaim, generally premised on the argument that Continental agreed to alter the terms of the written note, or by its conduct waived certain terms, and, therefore, the FDIC, as Continental's assignee, is estopped from enforcing the written terms of the loan documents. In response, the FDIC argues that under 12 U.S.C. § 1823(e), the doctrine announced in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and federal common law, the defendants may not assert these defenses against it. Because the FDIC is immune to such defenses, it argues that summary judgment should be granted in its favor on both its action and defendants' counterclaim against it and Continental. For the reasons given below, we agree that the defendants may not assert these defenses against the FDIC, but continue its motion for summary judgment.


The FDIC and defendants agree to the following facts. There are six defendants: (1) MM & S Partners ("MM & S"), a general partnership; MM & S' three general partners, (2) Mehl MM & S Limited, (3) Smith MM & S Limited, and (4) Patrick D. Maher, (5) Robert L. Mehl, and (6) Jordan Smith. On or about May 7, 1980, MM & S entered into a credit agreement with Continental, by which the bank provided the partnership with a line of credit not to exceed $10 million. Pursuant to that 1980 credit agreement, the partnership executed a promissory note, and, subsequently, MM & S drew upon the line of credit. Two years later, the credit agreement was amended to increase the line of credit to $20 million; MM & S executed another promissory note and drew on the line of credit. Finally, on or about March 22, 1983, the 1982 credit agreement was further amended by an agreement titled Amended and Restated Agreement ("Restated Agreement"). Pursuant to the Restated Agreement, MM & S executed a promissory note in the amount of $23 million, and the partnership's line of credit was again increased. On the same day, defendants Maher, Mehl and Smith executed a guaranty by which they guaranteed the full and prompt payment of all of MM & S' obligations to the bank.

Since that date, MM & S has not paid the amounts stated in the Restated Agreement to be due on certain dates, and Continental has declared the outstanding principal of and all accrued interest on the 1983 note to be immediately due and payable. It notified the partnership of its alleged default, has demanded payment in full, and MM & S has not paid the sum declared to be owing. Continental has also notified the guarantors of MM & S' default and the acceleration of the partnership's indebtedness and have demanded payment in full, but the guarantors have not paid.

The defendants add to this scenario two disputed fact assertions: Continental, either by agreement or conduct, excused the defendants from meeting certain terms in the Restated Agreement, and the FDIC was aware of this excuse when it purchased the loan documents. Specifically, the defendants allege that Continental "understood" that defendants would be using the money to purchase oil and gas properties, and "represented" to defendants that it would not require MM & S to make payments at the times or in the amounts stated in the Restated Agreement. First Affirmative Defense, ¶ 2. Continental further "represented" that it would accept, in full satisfaction of MM & S' obligations under the Restated Agreement, the proceeds of sales of MM & S' assets. Id., ¶ 3.

Relying on Continental's understandings, agreements and representations, defendants allege that they performed certain acts, such as selling the partnership's assets and providing Continental with additional collateral. Id., ¶¶ 4, 5. Continental has accepted defendants' payments not made in accordance with the terms of the Restated Agreement, and the FDIC "had knowledge" of Continental's conduct. Id., ¶ 8.

Based on these additional fact allegations, defendants argue that Continental waived MM & S' compliance with the written terms of the Restated Agreement, and the FDIC is barred by Continental's waiver. Id. This waiver concept is rephrased in defendants' other affirmative defenses and counterclaim counts to allege estoppel and breach of contract.


The FDIC argues that even if defendants' additional factual allegations are true (which it disputes), it cannot be bound by Continental's agreements or conduct for two reasons. First, 12 U.S.C. § 1823(e) prevents a debtor from asserting an agreement between him and the bank from which the FDIC purchased the note unless certain requirements are met, and these requirements were admittedly not met here. Second, even if § 1823(e) does not apply, under D'Oench, the defendants still cannot utilize these defenses, even if the FDIC knew of Continental's conduct.

In response, the defendants argue that § 1823(e) does not apply because their defenses are based on Continental's conduct, not an "agreement," and, under federal common law, they may assert such a defense if the FDIC had actual knowledge of the defenses when it purchased the defendants' note. Because recent cases on these two points are somewhat contradictory, we must look at the law in some detail.

D'Oench, § 1823(e) and Federal Common Law

In 1942, the Supreme Court decided D'Oench. There, the FDIC sought to enforce a note, and the maker argued that he was not liable because the note was an accommodation paper, given without consideration and upon an understanding that it would not be collected. Applying federal common law, the Court held that the maker could not use this defense, because, although he had not known that the note would be used to deceive the FDIC, by his actions he had "lent himself" to the bank's scheme to make the FDIC believe that the note was good and owing. Since it is a federal policy to protect the institution of banking from secret agreements, the maker could not assert the agreement not to pay and lack of consideration as defenses. D'Oench, 315 U.S. at 461-62, 62 S.Ct. at 681.

Subsequent to this decision, Congress codified the case in § 1823(e). FDIC v. Van Laanen, 769 F.2d 666, 667 (10th Cir. 1985) (§ 1823(e) codification of D'Oench); FDIC v. Blue Rock Shopping Center, 766 F.2d 744, 753 (3d Cir. 1985) (same); Howell v. Continental Credit Corp., 655 F.2d 743, 746 (7th Cir. 1981) (same). Section 1823(e) states:

(e) Agreements against interests of Corporation

    No agreement which tends to diminish or defeat the
  right, title or interest of the Corporation in any
  asset acquired by it under this section, either as
  security for a loan or by purchase, shall be valid
  against the Corporation unless such agreement (1)
  shall be in writing, (2) shall have been executed by
  the bank and the person or persons claiming an
  adverse interest thereunder, including the obligor,
  contemporaneously with the acquisition of the asset
  by the bank, (3) shall have been approved by the
  board of directors of the bank or its loan committee,
  which approval shall be reflected in the minutes of
  said board or committee, and (4) shall have been,
  continuously, from the time of its execution, an
  official record of the bank.

Thus, if a maker tries to defend by asserting an agreement between him and the bank altering the written terms of a note, unless that agreement meets all four requirements of § 1823(e), the defense is so frivolous as to merit the sanction of attorney's fees. Van Laanen, 769 F.2d at 667.

Under § 1823(e) and D'Oench it is irrelevant whether the FDIC actually knows that an agreement not meeting the section's four requirements exists. FDIC v. Investors Associates X., Ltd., 775 F.2d 152, 155-56 (6th Cir. Oct. 23, 1985); FDIC v. Merchants National Bank of Mobile, 725 F.2d 634, 640 (11th Cir.), cert. denied, ___ U.S. ___, 105 S.Ct. 114, 83 L.Ed.2d 57 (1984); FDIC v. de Jesus Velez, 678 F.2d 371, 375 (1st Cir. 1982); FDIC v. First Mortgage Investors, 485 F. Supp. 445, 451 (E.D.Wis. 1980). This is because D'Oench is "essentially premised upon the proposition that a wrongdoer or one who lends himself to aid a fraudulent scheme should not be able to defend his actions based upon events emanating out of a transaction which violates public policy." Investors Associates, at 155-56. Therefore, "[r]egardless of the FDIC's knowledge of the circumstances surrounding the transaction, the fraudulent scheme is still contrary to public policy and the wrongdoer still should not be able to benefit from something that transpired during the course of such a scheme." Id. at 6. See also First Mortgage Investors, 485 F. Supp. at 451.

Also, usually the FDIC open-bank division examiners visit insured banks, especially failing ones. If the closed-bank division, which determines whether to purchase failing banks' assets, were held to the open-bank division's knowledge, "the protection of Sec. 1823(e) would be lost. . . . The resulting uncertainty would undercut FDIC's ability to value assets quickly and precisely. . . ." Merchants National Bank, 725 F.2d at 640.

Thus, the need for certainty and the conclusive presumption of maker knowledge that he is deceiving the FDIC when he knows his collateral agreement has not met § 1823(e) standards makes FDIC knowledge irrelevant, and, therefore, if a maker's defenses are based on a collateral agreement, the defenses must fail.*fn1 In contrast, § 1823(e) does not apply if the defenses do not arise out of such an agreement. FDIC v. Leach, 772 F.2d 1262, 1267 (6th Cir. 1985); Blue Rock, 766 F.2d at 753; FDIC v. Hatmaker, 756 F.2d 34 (6th Cir. 1985); FDIC v. Gulf Life, 737 F.2d 1513 (11th Cir. 1984); Howell, 655 F.2d at 746.*fn2 As to defenses not arising out of a collateral agreement, general federal common law appears to apply, and there is support for the proposition that actual FDIC knowledge can permit a maker to raise the defenses. Gulf Life, 737 F.2d at 1513. See FDIC v. Wood, 758 F.2d 156, 162 (6th Cir. 1985); Gunter v. Hutchinson, 674 F.2d 862, 873 (11th Cir. 1982), cert. denied, 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982).

Therefore, the fundamental issue in this case is whether the defendants' defenses arise out of a collateral agreement they made with Continental (known or unknown to the FDIC at the time of purchase), or whether the defenses are sufficiently removed from any agreement to permit their assertion.

Agreement or conduct

Defendants argue that at least their waiver and estoppel defenses are outside the collateral agreement they allegedly made with Continental (they therefore appear to concede that that part of their defenses and counterclaim based upon the agreement are barred). They reason that because these two defenses do not depend on mutual assent, but rather focus on Continental's conduct, the defenses are not agreement based, and, therefore, are not precluded. Gulf Life appears to be squarely on point and supports their position.

In Gulf Life, the defendant issued two creditor life insurance policies to two banks which insured the bank's borrowers, with the banks as beneficiaries. The banks paid the defendant premiums out of the money they received from the debtors. In practice, the defendant only received 35 percent of the premiums, with the rest distributed among the bank officers and employees who sold the insurance to the debtors. The policies, however, indicated that the bank would refund 100 percent of the premiums if the loans were terminated before all the premiums were paid. The FDIC was appointed receiver for the banks and purchased in its corporate capacity certain of the banks' assets, including the two policies. It then sued the defendant for 100 percent of the amount of unearned premiums due the debtors on approximately 300 prematurely terminated loans. The defendant argued that it was liable for only 35 percent of the refunds, since it received only 35 percent of the premiums. Gulf Life, 737 F.2d at 1516.

The defendant apparently had no documents meeting § 1823(e)'s requirements supporting its position, but the court stated that § 1823(e) did not apply to its waiver, estoppel and unjust enrichment defenses:

  Section 1823(e) by its terms protects the FDIC from
  "agreement[s]" not satisfying the section's
  requirements. Because Gulf Life's theories of waiver,
  estoppel, and unjust enrichment are not doctrines
  based on the parties' mutual assent, section 1823(e)
  is inapplicable to these defenses.


In reaching this conclusion, the court relied upon an earlier Eleventh Circuit decision, Gunter. In Gunter, the plaintiffs took out a loan with a bank and executed a promissory note. They then used the funds to purchase a controlling interest in a second bank, which failed. The lending bank also failed, and the FDIC purchased the note. The plaintiffs sued the FDIC for rescission, claiming that their purchase of the stock and consequent execution of the note were induced by the lending bank's fraudulent misrepresentations concerning the financial health of the second bank. The FDIC counterclaimed for payment on the note. The court stated that § 1823(e) did not apply because the default did not arise from an agreement: the plaintiffs were not asserting a modifying side agreement, but rather were claiming that the original loan agreement was invalid. Gunter, 674 F.2d at 867. See also Howell, 655 F.2d at 747 (when maker's defense is based on original terms of written agreement, defense not barred).

Here, the FDIC tries to distinguish Gulf Life by arguing that the waiver and estoppel defenses here are based on mutual assent, since Continental's conduct flows directly from an alleged understanding or agreement to alter the terms of the written loan agreement. It distinguishes Gunter by pointing out that the defendants here are not claiming that the original terms of the Restated Agreement were invalid at the time they were agreed to, but only that subsequent conduct altered those terms.*fn3

We agree that Gunter (and Howell) are distinguishable because the defenses here are not based upon the terms contained in the Restated Agreement. Gulf Life, however, is not distinguishable: defendants here are claiming waiver and estoppel, just as the defendant did in Gulf Life. The FDIC's argument here that defendants' assertion of these defenses is just a specious rephrasing of their agreement-based defense would be equally applicable to the defendant in Gulf Life. While the court in Gulf Life never discussed this point, obviously the banks' retention of 65 percent of the premiums resulted from an unwritten agreement with the defendant permitting them to do so. Therefore, if Gulf Life was decided correctly, defendants here should be permitted to raise defenses based upon Continental's conduct.

We believe that Gulf Life was incorrectly decided. Under the circumstances of these note enforcement cases, waiver and estoppel theories, although technically based on the banks' conduct, really are arguments that a partially performed agreement should lie outside the reach of § 1823(e). The defendants' answer and counterclaim here are, as is indicated supra at 3, filled with references to Continental's "representations," "understandings," and unwritten "agreements" not to enforce the written terms of the Restated Agreement. Their "conduct" based allegations are merely assertions that Continental and defendants performed part of their oral agreement.

In FDIC v. Vogel, 437 F. Supp. 660 (E.D.Wis. 1977) (cited with approval in Howell, 655 F.2d at 747), the court stated that partial performance cannot be used to make an agreement enforceable under § 1823(e): "To judicially engraft an exception based on partial performance of an oral contract with the closed bank or detrimental reliance on an oral promise made by the closed bank is simply to ignore the clear phrasing of the statute." Vogel, 437 F. Supp. at 663. In First Mortgage Investors, the court held that the defendant could not raise against the FDIC estoppel and waiver defenses based on the bank's conduct:

  To permit the wrongdoing or waiver of [the bank] to
  affect the FDIC would deprive the FDIC of the
  benefits of section 1823(e). This Court will not and
  does not interpret section 1823(e) to give effect to
  the validity of secret agreements when the party bank
  acts wrongfully or in contravention of the
  agreement. . . . The defense of estoppel is purely

First Mortgage Investors, 485 F. Supp. at 454.

We believe that the best explanation of which defenses are barred by § 1823(e) is found in Hatmaker. There, the court found that the defendant could not use a fraud in the inducement defense under § 1823(e) because, unlike Gunter, the bank's fraud went to its future conduct. When a bank makes false statements, not related to a promise, to induce a party to execute a note, such as misrepresenting that it is in sound financial condition, then no side agreement exists, and § 1823(e) is inapplicable. When, however, the bank promises to perform in the future, for example, promising to lend the maker more money in the future, the promise does constitute a side agreement, governed by § 1823(e). The court must look at the "essence" of the maker's defense to determine whether the defense really involves a side agreement:

  We would be allowing [the defendant] to make an "end
  run" around section 1823(e) if we allowed him to
  avoid the effect of section 1823(e) by dressing his
  breach of the oral agreement up in the garb of fraud
  in the inducement.

Hatmaker, 756 F.2d at 37.

Here, defendants are dressing their breach of oral agreement defense up in the garb of waiver and estoppel. The essence of their defense is that Continental collaterally agreed not to enforce the written terms of the Restated Agreement. See First Affirmative Defense, ¶¶ 2, 3, 5; Counterclaim, ¶¶ 9, 10, 14, 19, 23. That is why one of their affirmative defenses (Third) and three of their four counterclaim counts (Counts I-III) are based explicitly on Continental's alleged breach of their collateral agreement. Defendants have relied upon the same facts to support their breach of contract claims and to support their waiver and estoppel claims. See First through Third Affirmative Defense (all rely exclusively on factual allegations asserted in ¶¶ 1-8 of the First Affirmative Defense). Therefore, we hold as a matter of law that defendants cannot use any of these three defenses (breach of the collateral agreement, waiver or estoppel), whether raised as affirmative defenses or in their counterclaim.

Federal Common Law

Alternatively, even if technically § 1823(e) or D'Oench does not apply to the fact situation alleged by defendants, we believe that federal common law and the federal banking policy evinced in § 1823(e) and D'Oench would preclude assertion of the defendants' defenses under the circumstances of this case.

D'Oench and § 1823(e) demonstrate that there is a policy in federal banking law to the effect that the FDIC should not be bound by anything outside a bank's loan documents when it purchases those documents. See D'Oench, 315 U.S. at 457, 62 S.Ct. at 679 (federal policy to protect FDIC and the public funds which it administers against misrepresentations in the portfolio of banks); Van Laanen, 769 F.2d at 667 (same). Typically, the FDIC must move quickly in buying a bank's assets, and it should not be obliged to rummage through a bank's records to find the hidden value of the notes. See Wood, 758 F.2d at 161. See also Harrison, 735 F.2d at 412-13 n. 6 (federal policy to promote stability of nation's banking system by facilitating FDIC's smooth acquisition of assets).*fn4 Therefore, the policy supporting FDIC protection in collateral agreement situations applies equally to all situations in which the maker's defense is based on something, representations or conduct, outside of the note itself.

From one perspective, it may seem harsh to charge a debtor with obligations his lender cannot enforce against him, especially when the debtor acted in good faith and the FDIC knew of the actual facts when it purchased his note. But the inequity of this result in a non-agreement situation is no more inequitable than in an agreement or scheme situation. Yet, under D'Oench and § 1823(e), FDIC knowledge and maker good faith are irrelevant.

Here, just as in D'Oench and § 1823(e) situations, the defendants knew that their claim not to be bound by the written terms of the Restated Agreement was not supported or memorialized in any loan document meeting § 1823(e)'s requirements. We believe the principles behind D'Oench and § 1823(e) extend beyond agreement situations and cover bank conduct situations as well.

Effect of Bar of Defense

Since defendants cannot use breach of collateral agreement, waiver or estoppel arguments against the FDIC's enforcement of their note and guaranty, and they have admitted that the agreement, note and guaranty sued upon is genuine and outstanding, it appears not only that their defenses and counterclaim should be dismissed, but that summary judgment should be granted in the FDIC's favor as well. But we will give the defendants a last opportunity to raise any defense outside the three barred by our ruling today.


Summary judgment is granted in favor of the FDIC to the extent that defendants seek to assert defenses or claims based upon a collateral agreement with Continental, waiver or estoppel. Defendants are given until December 23, 1985, to file a memorandum pointing out what fact issues remain which preclude complete summary judgment in the FDIC's favor. If defendants do not file a memorandum by December 23, 1985, the FDIC will be granted summary judgment on its claim, and the FDIC should submit an order to that effect by January 9, 1986, indicating the amount owed by the defendants, including any interest and attorneys fees due. If fees are claimed, a separate fee petition should be filed by January 9, 1986. Defendants will have until January 21, 1986, to file a memorandum contesting the amount asserted to be due in the FDIC's order. A status hearing will be set to discuss any remaining claims by the defendants against Continental.

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