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FEDERAL DEPOSIT INS. v. MM & S PARTNERS

December 6, 1985

FEDERAL DEPOSIT INSURANCE CORPORATION, PLAINTIFF,
v.
MM & S PARTNERS, ET AL., DEFENDANTS.



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

MEMORANDUM OPINION

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.

FACTS

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.

DISCUSSION

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 ...


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