BELL & MURPHY AND ASSOCIATES, INC., ET AL., PETITIONERS V. FEDERAL
DEPOSIT INSURANCE CORPORATION, ETC., ET AL.

   No. 89-1893

   In The Supreme Court Of The United States

   October Term, 1990

   On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Fifth Circuit

   Brief For The United States In Opposition

            TABLE OF CONTENTS
   Question Presented
   Opinions below
   Jurisdiction
   Statement
   Argument
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. A1-A9) is reported
at 879 F.2d 754.  The order and judgment of the district court (NCNB
Br. in Opp. App. A76-A77) are unreported.

                             JURISDICTION

   The judgment of the court of appeals (Pet. App. A10) was entered on
February 21, 1990.  The petition for a writ of certiorari was filed on
May 22, 1980.  The jurisdiction of this Court is invoked under 28
U.S.C. 1254(1).

                          QUESTION PRESENTED

   Whether the court of appeals correctly held that petitioners may
not pursue a claim for relief based on an unrecorded side agreement
with a failed bank.

                               STATEMENT

   1. When Bell & Murphy and Associates, Inc. (Bell & Murphy), a
company engaged in the oil and gas industry, experienced severe
financial difficulties in 1985, the company sought assistance from
First RepublicBank Dallas (First Republic).  Petitioners (Bell &
Murphy and four of its employees) allege that, on account of the
duress engendered by the company's financial problems, they agreed to
a plan proposed by bank officer Charles Jobe.  Under Jobe's plan, Bell
& Murphy surrendered its accounts receivable and funds from its
pension and profit sharing plans to First Republic, and the bank
agreed to extend existing corporate loans and to honor certain
checking account overdrafts.  The agreement allegedly was embodied in
a letter signed by Jobe, but neither the letter nor any reference to
the agreement was reflected in the bank's books and records.  Pet.
App. A4.

   In April 1988, petitioners filed suit against First Republic and
Jobe in Texas state court, alleging that Jobe had coerced them into
entering into the agreement through fraudulent misrepresentations and
that the bank had breached its obligations under the terms of the
agreement.  In July 1988, First Republic was declared insolvent by the
Comptroller of the Currency and respondent Federal Deposit Insurance
Corporation was appointed receiver.  Respondent NCNB Texas National
Bank was then selected by the FDIC to serve as the manager of the
"bridge bank" and thus to acquire a portion of the assets and
liabilities of the failed bank.  Pet. App. A4.

   The FDIC and NCNB subsequently intervened as defendants in
petitioners' action against First Republic and removed it to federal
district court.  The defendants then moved to dismiss the action,
arguing that, under D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942),
petitioners are barred from asserting any claims arising out of First
Republic's alleged secret promise to make future loans.  The district
court agreed and dismissed the action for failure to state a claim.
NCNB Br. in Opp. App. 76-77.

   2. The court of appeals affirmed, also relying on D'Oench, Duhme.
In that case, the court of appeals explained, "the Court fashioned a
common law rule of estoppel precluding a borrower from asserting
against the FDIC defenses based upon secret or unrecorded 'side
agreements' that altered the terms of facially unqualified
obligations." Pet. App. A5.  /1/ The purpose of the rule against the
enforcement of side agreements is "'to protect . . . (the FDIC) and
the public funds which it administers, against misrepresentations as
to . . . the assets in the portfolios of the banks which . . . (the
FDIC) insures or to which it makes loans.'" Ibid.  (quoting 315 U.S.
at 457).  The court of appeals accordingly recognized that, since
petitioners allege that they sustained damages in connection with an
unrecorded side agreement, their claim is barred under D'Oench, Duhme
in the absence of an exception to its rule against enforcing
unrecorded side agreements.  The court held, contrary to petitioners'
contentions, that no differences between this case and D'Oench, Duhme
justify the creation of an exception here.

   The court first rejected petitioners' claim that this case is
distinguishable because no "specific asset" of the FDIC was diminished
in value as a result of their claim.  In D'Oench, Duhme, the FDIC
sought to collect on a note that it had obtained from a bank, and the
defendant resisted on the ground that the bank had secretly agreed
never to enforce the note;  thus, a specific asset (the note) would
have had no value under the side agreement.  Here, petitioners
contend, there is no specific asset that would be diminished in value
-- although the total value of the bank's assets would, of course, be
diminished to the extent that petitioners collect on their claims --
and that D'Oench, Duhme is distinguishable on that ground.  The court
of appeals held "this inventive argument to be meritless in light of
our recent holding in Beighley (v. FDIC, 868 F.2d 776 (5th Cir.
1989),) that the D'Oench, Duhme rule bars affirmative claims based
upon unrecorded agreements to extend future loans." Pet. App. A6-A7.
The court explained that the reason for the holding in D'Oench, Duhme
was that bank examiners must be able to ascertain a bank's assets from
its records.  Since the agreement on which petitioners base their
claims "was not contained in Republic's records, * * * it could not
have been discovered by bank examiners and is not enforceable against
the FDIC." Id. at A7.

   The court of appeals next rejected petitioners' argument "that the
D'Oench, Duhme rule bars only claims or defenses based upon illegal
side agreements entered into for the purpose of deceiving banking
authorities." Pet. App. A7.  The court noted that although the obligor
in D'Oench, Duhme was a knowing participant in a fraudulent scheme,
this Court stated that even a borrower who was "very ignorant and
ill-informed of the transaction" and did not "intend() to deceive any
person" would be precluded from relying on unrecorded side agreements.
 Ibid. (quoting 315 U.S. at 458-459).  Relying on Langley v. FDIC, 484
U.S. 86, 94 (1987), the court of appeals concluded that "(t)he
D'Oench, Duhme doctrine * * * favors the interests of depositors and
creditors of a failed bank, who cannot protect themselves from secret
agreements, over the interests of borrowers, who can." Pet. App. A7.
Because petitioners could have protected themselves by insisting that
the bank properly record the alleged side agreements, but did not, the
court of appeals held that petitioners are estopped from asserting any
claim arising out of the secret agreement.  Id. at A7-A8.

   The court of appeals also rejected petitioners' claim that they may
enforce the unrecorded agreement under Howell v. Continental Credit
Corp., 655 F.2d 743 (7th Cir. 1981), because it was a valid "bilateral
agreement." The court noted that Howell involved a "properly recorded
agreement," while "the alleged bilateral agreement which (petitioners)
seek() to enforce against the FDIC is unrecorded." Pet. App. A8, A9.
/2/

                               ARGUMENT

   The decision below is correct and does not conflict with any
decision of this Court or another court of appeals.  Review by this
Court is particularly unwarranted on account of the 1989 amendments to
the national banking laws, which confirm that unrecorded side
agreements are not enforceable.

   1. The court of appeals applied D'Oench, Duhme in a straightforward
manner, and correctly concluded that its rule is applicable in this
case because the alleged agreement that petitioners seek to enforce
was never recorded in the bank's books and records.  Petitioners
suggest, almost in passing, that the court of appeals erred in
distinguishing this case from Howell on the basis that the agreement
in that case had been recorded, alleging that the evidence here did
not show that the agreement was unrecorded.  Pet. 27.  But the court
of appeals found that the agreement "was not contained in Republic's
records" (Pet. App. A7) and the district court likewise dismissed on
the basis of D'Oench, Duhme (NCNB Br. in Opp. App. A76-A77).  There is
no warrant for this Court to reconsider the factual findings of the
two lower courts.

   Petitioners primarily renew their contention (Pet. 12-21), which
the court of appeals termed "inventive" (Pet. App. A6), that the rule
against the enforcement of unrecorded side agreements should not be
applied in this case because no "specific asset" (but, instead, the
failed bank's total assets) would be affected.  As the court of
appeals held, petitioner's alleged distinction makes no sense.  The
essence of the holding in D'Oench, Duhme is that a person dealing with
an institution insured by the FDIC may not assert a claim or defense
against the FDIC based upon an unrecorded side agreement with a failed
bank because the agreement may have had the effect of deceiving the
banking authorities, and there is no reason why it should matter
whether the side agreement compromises specific assets or the total
assets of a failed bank.  As this Court recognized in Langley, bank
examiners must be able "to rely on a bank's records in evaluating the
worth of the bank's assets," and when evaluating a failing bank they
must make decisions "with great speed." 484 U.S. at 91.  There is no
room in this process for the enforcement of secret agreements.
Accordingly, no court has held that there is merit to the distinction
petitioner suggests.  To the contrary, as the court of appeals stated
(Pet. App. A6-A7), the court in Beighley specifically held that
"affirmative claims based upon unrecorded agreements to extend future
loans" are barred.

   Petitioners also contend (Pet. 21-27) that their side agreement
should be enforceable in the absence of a showing that they were at
fault, by which they mean that they affirmatively intended to deceive
bank examiners or negligently entered into such a scheme.  Whether
someone intended to deceive banking authorities is not, however, the
relevant inquiry.  To the contrary, what matters is whether the
unrecorded agreement could have had the effect of misleading other
borrowers or bank examiners, as the court of appeals concluded.  By
failing to ensure that the agreement was recorded, Bell & Murphy "lent
(itself) to a scheme or arrangement whereby the banking authority . .
. was likely to be misled." Langley, 484 U.S. at 92 (quoting D'Oench,
Duhme, 315 U.S. at 460).  /3/

   2. In any event, review is not warranted because of changes in the
banking laws enacted by Congress through the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103
Stat. 183.  As the court of appeals noted (see Pet. App. A6 and note
1, supra), prior to 1989, 12 U.S.C. 1823(e) applied only when the FDIC
was acting in its corporate capacity and not when it is acting as a
receiver.  But Section 1823(e) was amended in 1989 to apply as well
when, as here, the FDIC is acting "as receiver of any insured
depository institution." In addition, Congress added 12 U.S.C.
1821(d)(9)(A), which states that "any agreement which does not meet
the requirements set forth in section 1823(e) of this title shall not
form the basis of, or substantially comprise, a claim against the
receiver or the Corporation." /4/ Section 212, 103 Stat. 231.

   Petitioners acknowledged in the court of appeals that the side
agreement they seek to enforce "might not meet all the requirements of
Section 1823(e)." NCNB Br. in Opp. App. A108.  Indeed, of the four
requirements set forth in that provision (see note 1, supra), the
agreement appears only to satisfy the requirement that it be "in
writing." The side agreement plainly fails to meet the fourth
requirement of Section 1823(e) -- that the agreement "has been,
continuously, from the time of its execution, an official record of
the depository institution." Accordingly, in the future there will be
no question that claims such as those brought by petitioners are
barred.

                              CONCLUSION

   The petition for a writ of certiorari should be denied.

   Respectfully submitted.

   KENNETH W. STARR

      Solicitor General

   ALFRED J.T. BYRNE

      General Counsel

   MARK I. ROSEN

      Deputy General Counsel

   ANN S. DUROSS

      Assistant General Counsel

   JOAN E. SMILEY

      Senior Counsel

   SHARON POWERS SIVERTSEN

      Counsel Federal Deposit Insurance Corporation

   SEPTEMBER 1990

   /1/ The result in that case, the court noted, was "later ratified"
by Congress when it enacted 12 U.S.C. 1823(e).  Section 1823(e)
provides that "(n)o agreement which tends to diminish or defeat the
interest of the Corporation in any asset acquired by it * * * shall be
valid against the Corporation unless such agreement (1) is in writing,
(2) was executed * * * contemporaneously with the acquisition of the
asset by the depository institution, (3) was approved by the board of
directors of the depository institution or its loan committee * * * ,
and (4) has been, continuously, from the time of its execution, an
official record of the depository institution." Financial Institutions
Reform, and Enforcement Act of 1989, Pub. L. No. 101-73, Section 217,
103 Stat. 256.  The court added that, prior to the 1989 amendment of
Section 1823(e), the FDIC could not "rely upon the enumerated
requirements of section 1823(e) where, as here, it acts as receiver
rather than in its corporate capacity." Pet. App. A6.  The court
stated that the FDIC "is nonetheless entitled to the protection of the
common law D'Oench, Duhme rule." Ibid.

   /2/ In addition, the court held, relying on FSLIC v. Murray, 853
F.2d 1251 (5th Cir. 1988), that petitioners may not pursue their claim
against NCNB because, as a bridge bank, it is entitled to
holder-in-due-course status.  The court explained that "failure to
extend D'Oench, Duhme's protection to bridge banks would undermine the
effectiveness of bridge banks as a means of continuing the normal
banking operations, and thereby protecting the depositors and
creditors, of a failed bank." Pet. App. A9.  Petitioners have not
challenged that holding.  Nor did they appeal from the district
court's judgment in favor of Jobe, the bank officer who allegedly
fraudulently induced them to enter into the agreement.  Id. at A4 n.2.

   /3/ Petitioners allege (Pet. 21) a conflict with FDIC v. Meo, 505
F.2d 790, 793 (9th Cir. 1974), where a defendant who was "innocent of
any wrongdoing or negligence" was not barred from asserting a defense
in an action by the FDIC to collect on a note.  However, that case is
very different from this case.  In Meo, the defendant gave the bank
the note in return for shares of the bank's common stock, but the bank
failed to issue common stock to the defendant.  When the FDIC
subsequently sought to enforce the note, the court allowed the
defendant to assert failure of consideration as a defense.  While the
court's decision contains broad language, it has never been applied to
permit anyone to pursue a claim based on an unrecorded side agreement.
 To the contrary, the Ninth Circuit has construed Meo narrowly.  See
FDIC v. Bank of San Francisco, 817 F.2d 1395, 1398-1399 (1987);  FDIC
v. First Nat'l Finance Co., 587 F.2d 1009, 1011-1012 (1978).

   /4/ In addition, Congress added 12 U.S.C. 1821(n)(4)(I), which
expressly extends the same protections to bridge banks.  Section 214,
103 Stat. 249.