("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
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
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
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
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
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
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
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.