F.D.I.C. v. Waggoner

• Decision Date: 23 August 1993
• Docket Number: No. 92-1925,92-1925
• Citation: 999 F.2d 826
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION as receiver for Liberty Federal Savings and Loan Association, Plaintiff-Appellee, v. Jack WAGGONER, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 826

999 F.2d 826

FEDERAL DEPOSIT INSURANCE CORPORATION as receiver for

Liberty Federal Savings and Loan Association, Plaintiff-Appellee, v. Jack WAGGONER, Defendant-Appellant.

No. 92-1925.

United States Court of Appeals, Fifth Circuit.

Aug. 23, 1993.

John L. Foster, Minton, Burton, Foster & Collins, Austin, TX, for defendant-appellant.

E. Whitney Drake, Special Counsel, F.D.I.C., Washington, DC, for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, HIGGINBOTHAM, and EMILIO M. GARZA, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

The FDIC sued Jack Waggoner on a promissory note. The district court granted the FDIC summary judgment and Waggoner appeals. Because three notes were tied together by their terms and in the note case when the FDIC arrived, the principle of D'Oench, Duhme does not bar consideration of all three in determining whether personal liability was created. We find that under Texas law the extension and renewal of a note without personal liability does not create personal liability unless the parties intended a novation. There is no evidence that a novation was intended, and reading the instruments together, we conclude that Waggoner is not personally liable.

I.

In 1985, Waggoner executed two notes payable to Liberty Federal Savings and Loan in the amounts of $255,000.00 and $305,000.00, but the notes disclaimed any personal liability of Waggoner:

Except as provided in this paragraph, there shall be no personal liability on Maker, his personal representatives, heirs or assigns hereunder, or under any other instrument evidenced by this Note, or executed in connection herewith, and Payee and any subsequent holder hereof will look solely to the collateral described in the Security Agreement and will not seek any money judgment against Maker, his personal representatives, heirs or assigns, in the event of default in the payment of indebtedness evidenced hereby or in the event of any default hereunder or under any instrument evidencing or securing payment of this Note.

In the event of default, Waggoner risked only the collateral he pledged. The collateral was outlined in separate security agreements and consisted of Waggoner's interest in two limited partnerships. The original notes came due in 1986 but were not paid. Waggoner and Liberty then executed a single promissory note for $588,359.32, evidencing the debt of the two unpaid notes, including as a part of its principal, unpaid interest from the original notes. In banking parlance, the two notes were "rolled over and consolidated." The consolidated note recited that it was a renewal and extension of the original notes, but did not repeat the language restricting the liability of Waggoner contained in the original notes.

Sometime in late 1986 or early 1987, the FSLIC was appointed receiver for Liberty, and on July 26th, 1987, a security agreement was executed between Waggoner, Liberty and the FSLIC. In 1989, as required by Congress, the FDIC took over as receiver of Liberty. ¹ In 1990, the FDIC sued on the consolidated note seeking to recover from Waggoner individually. The FDIC had all three notes in its possession at the time it brought suit. In its motion for summary judgment, the FDIC argued that under D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), ² Waggoner cannot point to the original notes as evidence of his contention that he had no personal liability or that, in any event, under Texas contract law the terms of the consolidated note supersede the terms of the original notes.

Waggoner also moved for summary judgment, denying that D'Oench, Duhme controls, because the FDIC had all the notes in its possession and the original notes are referenced in the body of the consolidated note. Second, Waggoner argued that under Texas law the original notes and consolidated notes must be read together, because there are no contradicting terms. So read, Waggoner argues he had no personal liability. The district court held that D'Oench, Duhme controlled and granted summary judgment for the FDIC. We reverse and render judgment for Waggoner.

II.

D'Oench, Duhme "bars defenses or claims against the FDIC that are based on unrecorded or secret agreements that alter the terms of facially unqualified obligations." FDIC v. Hamilton, 939 F.2d 1225, 1228 (5th Cir.1991) (citing D'Oench, Duhme, 315 U.S. at 460, 62 S.Ct. at 680, 86 L.Ed. at 965). The doctrine "attempts to ensure that FDIC examiners can accurately assess the condition of a bank based on its books." Bowen v. FDIC, 915 F.2d 1013, 1016 (5th Cir.1990). It protects against "scheme[s] or agreement[s] which would tend to either deceive or mislead the creditors of the bank or bank examiners." Hamilton, 939 F.2d at 1228; see also Bowen, 915 F.2d 1013.

The notes in this case, however, are not unrecorded or secret. The original notes were both recorded and in the bank's records, and the consolidated note sued on here specifically references the two original notes. In fact, the FDIC produced the original notes during discovery. "The doctrine of D'Oench, Duhme has not been read to mean that there can be no defenses at all to attempts by the FDIC to collect on promissory notes." FDIC v. Laguarta, 939 F.2d 1231, 1237 (5th Cir.1991); see also FDIC v. McClanahan, 795 F.2d 512, 515 (5th Cir.1986). Rather, "[i]t only bars those defenses of which FDIC could not have been put on notice by reviewing records on file with the bank." RTC v. Sharif-Munir-Davidson Development Corp., 992 F.2d 1398 (5th Cir.1993); see also Laguarta, 939 F.2d at 1237. These notes are not the kind of secret agreements or side dealings rejected by D'Oench, Duhme. The FDIC's argument that D'Oench, Duhme prevents consideration of the terms of the two original notes, is in effect, that D'Oench, Duhme is a parole evidence rule. This contention takes the doctrine too far. We conclude that the district court erred in interpreting D'Oench, Duhme to bar the use of the original notes from Waggoner's defense.

III.

With no federal bar to consideration of all three notes, the liability imposed is a question of state law, specifically the effect of the consolidated note upon Waggoner's personal liability. Texas law provides that "[w]hen one or more of the instruments involved in a transaction are promissory notes, the rule of incorporation by reference applies so that the instruments will be read together whether or not they expressly refer to one another." Meisler v. Republic of Texas Sav. Ass'n, 758 S.W.2d 878, 884 (Tex.App.--Houston 1988, no writ); see also Estrada v. River Oaks Bank & Trust Co., 550 S.W.2d 719, 726 (Tex.Civ.App.--Houston 1977, writ ref'd n.r.e.). The original two notes affirmatively rejected personal liability. The consolidated note did not. Read together, Waggoner is not personally liable for the underlying debt. The question in this case therefore reduces to whether the original notes and the consolidated note are part of the same transaction. In other words, the renewal and extension of the original notes can only result in Waggoner being personally liable if the parties intended a novation of the debts evidenced by the first two notes.

A novation is "the creation of a new contract in place of the old one." Crook v. Zorn, 95 F.2d 782, 783 (5th Cir.1938). The elements of a novation are (1) a previous, valid obligation; (2) an agreement of the parties to a new contract; (3) the extinguishment of the old contract; and (4) the validity of the new contract. E.g., Mandell v. Hamman Oil and Refining Co., 822 S.W.2d 153, 163 (Tex.App.--Houston 1991, writ denied). The validity of the first two notes is not disputed. Nor do the parties question that the renewal and extension of the prior notes by the consolidated note created a new and valid contract. See, e.g., Schwab v. Schlumberger Well Surveying Corp., 145 Tex. 379, 198 S.W.2d 79, 82 (1946); McNeill v. Simpson, 39 S.W.2d 835, 835-36 (Tex.Comm'n App.1931, judgment adopted); Summit Bank v. The Creative Cook, 730 S.W.2d 343, 346 (Tex.App.--San Antonio 1987, no writ); Priest v. First Mortgage Co., 659 S.W.2d 869, 871 (Tex.App.--San Antonio 1983, writ ref'd n.r.e.). The creation of a new contract, however, does not automatically work a novation. There remains the question of whether the new contract extinguished the old; that is, whether the consolidated note extinguished the debt evidenced by the two original notes. ³

Under Texas law,

[i]t is well settled that the giving of a new note for a debt evidenced by a former note does not extinguish the old note unless such is the intention of the parties. Nor is there a presumption of the extinguishment of the original paper by the execution and delivery of a new note. The burden of proving a novation is on the person asserting it.

Villarreal v. Laredo National Bank, 677 S.W.2d 600, 607 (Tex.App.--San Antonio 1984, writ ref'd n.r.e.); see also Schwab, 198 S.W.2d at 82; Bank of Austin v. Barnett, 549 S.W.2d 428, 430 (Tex.Civ.App.--Austin 1977, no writ). "In general the renewal merely operates as an extension of time in which to pay the original indebtedness." Schwab, 198 S.W.2d at 82. A novation can be demonstrated "like any other ultimate fact, [through] inference from the acts and conduct of the parties and other facts and circumstances." Chastain v. Cooper & Reed, 152 Tex. 322, 257 S.W.2d 422, 424 (1953).

A novation may arise from an inconsistency between the two contracts. In other words, "substitution of a new agreement occurs when a later agreement is so inconsistent with a former agreement that the two cannot subsist together." Scalise v. McCallum, 700 S.W.2d 682, 684 (Tex.App.--Dallas 1985, writ ref'd n.r.e.); see also Chastain, 257 S.W.2d at 424; Willeke v. Bailey, 144 Tex. 157, 189 S.W.2d 477, 479 (1945). Here, the original notes and the consolidated note are not inconsistent. Much of the language in the...