1 FLBJ and Premier were formerly Federal Land Bank of New

Orleans and Ouachita National Bank, respectively. FCBT was

substituted as plaintiff after it purchased this claim from REW

Enterprises, Inc, which originally filed this suit in its capacity

as receiver of FLBJ.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

No. 93-3829

 

REW ENTERPRISES, INC. as RECEIVER

for FEDERAL LAND BANK OF JACKSON,

Plaintiff-Appellee/CrossAppellant,

versus

PREMIER BANK, N.A.,

DefendantAppellant/Cross-Appellee.

 

Appeal from the United States District Court

for the Middle District of Louisiana

 

(March 27, 1995)

Before POLITZ, Chief Judge, and HIGGINBOTHAM and DeMOSS, Circuit

Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

The Farm Credit Bank of Texas seeks to recover a payment made

by the Federal Land Bank of Jackson to Premier Bank.1 FCBT seeks

to rescind the payment transaction as ultra vires or as payment of

a thing not due under Louisiana law. Premier claims that FCBT is

equitably estopped from relying on an ultra vires claim. Premier

also counterclaims for recoupment. 
 

2 The 1987 Agricultural Credit Act, effective January 6,

1988, significantly changed the organization of the Farm Credit

System. The relevant events in this case occurred before January

6, 1988; accordingly, we apply the law in effect before the 1987

Act.

2

The district court granted summary judgment for FCBT on the

ultra vires claim and against Premier on the recoupment claim. It

also held that FCBT abandoned its alternative state law claims.

Premier appeals the district court's grant of summary judgment, and

FCBT cross-appeals the ruling that it abandoned its alternative

state law claims. We affirm in part and reverse and remand in

part.

I.

Thomas A. Grant, Suzanne Brunazzi Grant, and James C. Steele

purchased timber land in northeast Louisiana with a $15 million

loan from FLBJ. In 1983, the Grants and Steele submitted the loan

application to Lawrence Bingham, President of the Federal Land Bank

Association of Monroe. Federal land banks may generally lend only

through federal land bank associations. 12 U.S.C. § 2020 (1982).2

Bingham signed the loan on behalf of the Federal Land Bank of New

Orleans, FLBJ's predecessor. The loan was secured by a mortgage on

the purchased acreage, which then had an appraised value of $36

million. 

A payment was to come due on January 1, 1985, and in the fall

of 1984, the Grants and Steele approached A. J. Burns, Bingham's

successor as President of the Monroe Association, about their

expected inability to pay. The parties agreed that Burns would
3

seek FLBJ's approval for a reamortization of the principal amount.

Burns also agreed to provide a letter of credit to a commercial

lender to secure a loan whose proceeds would be applied to the

interest portion of the loan payment. The Ouachita National Bank

agreed. ONB lent the Grants and Steele approximately $1.5 million

upon receipt of a standby letter of credit and upon taking a

mortgage on additional collateral, namely, 2,000 acres of the

borrowers' unencumbered real property. Burns signed the letter of

credit on behalf of FLBJ. The letter of credit required FLBJ to

repay the loan in the event of default by the Grants and Steele.

The proceeds from the ONB loan were used to pay the interest due on

the FLBJ loan.

The Grants and Steele defaulted on the ONB loan, and ONB

called the letter of credit. Only then did Burns tell FLBJ

officers that there was a letter of credit. FLBJ officers decided

to honor the letter, but asked Burns to negotiate a thirty-day

extension. ONB agreed to the extension. FLBJ then honored the

letter of credit, and ONB released its mortgage on the additional

collateral. At FLBJ's request, the Grants and Steele executed a

promissory note for the amount FLBJ paid to ONB, and FLBJ took a

first lien on the additional collateral.

Burns was fired from the Monroe Association and later pleaded

guilty to a violation of 18 U.S.C. § 1018 in connection with his

issuance of the letter of credit. Ben Marshall, the loan officer

at ONB, pleaded guilty to falsifying bank records.
4

Six months after FLBJ honored the letter of credit, the Grants

and Steele defaulted on the promissory note. On May 20, 1988, the

Farm Credit Administration closed FLBJ due to its insolvency, and

REW was appointed as its receiver. REW transferred to FCBT the

mortgagee rights in the additional collateral as well as in the

collateral securing the original $15 million loan. On February 26,

1992, FCBT instituted foreclosure proceedings and at the sheriff's

sale bought all of the property except approximately 1,000 acres of

the additional collateral that it claims are contaminated with

dioxins. FCBT then resold the property for approximately $22.5

million. The parties disagree on how much of that amount can be

attributed to the additional collateral.

REW also sued to recover the payment made to ONB on the letter

of credit. It then transferred its interest in the lawsuit to FCBT

in consideration for FCBT's assumption of FLBJ's bond indebtedness.

II.

Before Congress enacted the 1987 Agricultural Credit Act, see

supra note 2, the Farm Credit System was organized into twelve

areas known as farm credit districts. In each district, three

distinct Farm Credit System banks served the needs of farmers: (1)

a federal land bank, which made long-term real estate mortgage

loans through federal land bank associations; (2) a bank for

cooperatives, which made loans to agricultural, aquatic, and rural

utility cooperatives; and (3) a federal intermediate credit bank,

which funded the short- and intermediate-term loans made by
5

production credit associations. Federal land banks were authorized

to make loans only through federal land bank associations. 12

U.S.C. § 2020 (1982). Borrowers were required to apply for a loan

at a land bank association and were also required to buy stock in

the association. Id. §§ 2020, 2034(a). Section 2014 gave federal

land banks the authority to "make or participate with other lenders

in long-term real estate mortgage loans in rural areas . . . and

make continuing commitments to make such loans under specified

circumstances, or extend other financial assistance of a similar

nature to eligible borrowers, for a term of not less than five nor

more than forty years." Federal land banks were also authorized to

"[e]xercise . . . all such incidental powers as may be necessary or

expedient to carry on the business of the bank." Id. § 2012(21).

FCBT argues that issuance of a letter of credit was outside

the statutory powers of a land bank. The district court agreed,

holding that issuance of a standby letter of credit was not

"necessary or expedient in the conduct of the business of the bank"

because the business of the bank included only long-term lending

against real estate security. We agree.

Congress created federal land banks for the sole purpose of

providing long-term real estate mortgage loans. A rural borrower

could seek short-term credit from banks for cooperatives or

production credit associations. In fact, in 1971, Congress amended

the Farm Credit Act to give banks for cooperatives and production

credit associations the power to issue guaranties, instruments

similar in function to letters of credit. Farm Credit Act of 1971,
6

Pub. L. No. 92-181, § 2.15, 1971 U.S.C.C.A.N. (85 Stat.) 655, 677.

Farm Credit Administration regulations provided that banks for

cooperatives could issue letters of credit. 12 C.F.R. § 614.4810.

These powers, granted to institutions charged with providing shortterm secured and unsecured credit, were never expressly conferred

on land banks. The implication we draw from the structure of the

Farm Credit System and from the language of the statute is that

Congress could have authorized land banks to issue letters of

credit, but chose not to. Because land banks were not authorized

by statute to issue letters of credit, to do so was an ultra vires

act. 

When FLBJ decided to ask for an extension of time to pay the

letter of credit, it was seeking to ratify an action it was not

statutorily empowered to take. There is no evidence in the record

that the board attempted to disavow the letter or that it paid the

letter to settle what surely would have escalated to a significant

controversy had it not paid. Rather, the extension stated that ONB

was to consider it "as an amendment to our Irrevocable Letter of

Credit No. 1, dated December 31, 1984. . . . All terms and

conditions of the original Letter of Credit shall remain in force

and will not be affected by this amendment except as referenced

above in the expiration date." In short, we are not confronted

with the authority of the board to settle a claim arising from an

ultra vires act. We have before us only the unauthorized issuance

and payment of a letter of credit. The act of FLBJ's board in

honoring the letter of credit was an ultra vires act. 
7

Premier argues that because national banks have the power to

issue letters of credit, 12 C.F.R. § 7.7016, by analogy, so should

land banks. Premier's argument is not persuasive. National banks

are engaged in the general business of banking -- that is, they

provide both long- and short-term credit. National banks are

empowered "to carry on the business of banking." 12 U.S.C. § 24

(emphasis added). Banks in the Farm Credit System, by contrast,

engaged in only those banking activities necessary to carry out

their specific mission, which, in the case of land banks, was

making long-term real estate mortgage loans. In other words, land

banks exercised only those powers "necessary or expedient to carry

on the business of the bank." 12 U.S.C. § 2012(21) (1982)

(emphasis added). The distinction between "the business of

banking" and "the business of the bank" illustrates the reason why

national banks have the power to issue letters of credit while land

banks do not. The difference in the language is not, as Premier

suggests, insignificant.

Premier also asserts that the letter of credit falls within

the bank's incidental powers because it benefited FLBJ by enabling

it to keep "a major loan in the current and 'healthy' category on

the bank's books." This argument is without merit. As a result of

the letter of credit, all of the monies paid to FLBJ from the ONB

loan were ultimately returned to ONB, with interest, such that FLBJ

itself funded the Grants and Steele's installment. 
8

III.

A.

By honoring the letter of credit, FLBJ committed an ultra

vires act. However, Premier claims FCBT is estopped from

rescinding the transaction because, as a rule, an ultra vires claim

cannot be pleaded by one who obtains benefits from the act and

induces the adverse party to take measures detrimental to it. See

7A William M. Fletcher, Fletcher Cyclopedia of the Law of Private

Corporations §§ 3407-3409 (perm. ed. rev. vol. 1989). Premier's

predecessor, ONB, detrimentally relied on the actions of FLBJ by

releasing its mortgage on the additional collateral. FLBJ

benefitted by obtaining an interest in the additional collateral.

Though these benefits might otherwise support estoppel,

estoppel is not permitted against the government. See Office of

Personnel Management v. Richmond, 496 U.S. 414, 419 (1990) (OPM);

INS v. Hibi, 414 U.S. 5, 8 (1973) (per curiam); Federal Crop Ins.

Corp. v. Merrill, 332 U.S. 380, 384 (1947); see also David K.

Thompson, Note, Equitable Estoppel of the Government, 79 Colum. L.

Rev. 551, 551 (1979) (Equitable Estoppel). The Court in Merrill

stated the rule as follows: "Whatever the form in which the

Government functions, anyone entering into an arrangement with the

Government takes the risk of having accurately ascertained that he

who purports to act for the Government stays within the bounds of

his authority." 332 U.S. at 384. 

The Merrill doctrine vindicates two central policies. The

first is protection of the public fisc. To allow an assertion of
9

estoppel against the government would be to "invite endless

litigation over both real and imagined claims of misinformation by

disgruntled citizens, imposing an unpredictable drain on the public

fisc." OPM, 496 U.S. at 433. There is no risk to the public fisc

here because FLBJ was privately funded. The second "policy" is

simply a sensitivity to separation of powers. We must give

"respect for congressional intent within our constitutional system

of allocated powers." McCauley v. Thygerson, 732 F.2d 978, 982

(D.C. Cir. 1984). Estopping an agency from disavowing an

unauthorized act would validate the "agency's improper infringement

of the authority of a coordinate branch." Equitable Estoppel,

supra, at 565. It would permit "government employees to

'legislate' by misinterpreting or ignoring an applicable statute or

regulation." Portmann v. United States, 674 F.2d 1155, 1159 (7th

Cir. 1982). 

B.

While the Merrill doctrine erects a high wall against the

assertion of estoppel, it does so only to protect government

entities. Whether an entity is governmental for purposes of

estoppel does not turn on its label, such as agency,

instrumentality, or private corporation, but rather on

congressional intent. See McCauley, 732 F.2d at 982; Equitable

Estoppel, supra, at 565-67. 

In Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95

(1941), the Court had to determine whether the land bank was

required to pay a sales tax imposed by the North Dakota
10

legislature. The Court concluded that Congress could

"constitutionally immunize from state taxation activities in

furtherance of the lending functions of federal land banks." Id.

at 99. The state had argued that the bank's business of lending

money was essentially a private function. The Court rejected this

argument: "Through the land banks the federal government makes

possible the extension of credit on liberal terms to farm

borrowers. . . . They are `instrumentalities of the federal

government, engaged in the performance of an important governmental

function.'" Id. at 102 (quoting Federal Land Bank v. Priddy, 295

U.S. 229, 231 (1935)); see also 12 U.S.C. § 2011 (1982) (federal

land banks are "federally chartered instrumentalities of the United

States").

Premier argues that while a land bank may be immune from

taxation based on its status as a federal instrumentality, that

immunity does not insulate it from principles of equitable

estoppel. It is true that national banks, as federal

instrumentalities, are not subject to state taxes but are subject

to estoppel defenses. See First Agric. Nat'l Bank v. State Tax

Comm'n, 392 U.S. 339, 340-43 (1968); Department of Employment v.

United States, 385 U.S. 355, 360 (1966). We also recognize that

the rule that federal instrumentalities are immune from state

taxation is a unique rule, clothed in pedigree. See McCulloch v.

Maryland, 17 U.S. (4 Wheat.) 316 (1819). However, the language of

Bismarck is broad, stretching beyond the limits of immunity from

taxation to the broader governmental function of land banks and the
 

3 We decide today only that a pre-1987 Act land bank is not

subject to an equitable estoppel defense. Whether or not a land

bank could be considered a government actor for due process

purposes, Federal Tort Claims Act purposes, or any other purpose is

an issue we leave for another day. Cf. Mendrala v. Crown Mortgage

Co., 955 F.2d 1132, 1138-39 (7th Cir. 1992) (holding that Federal

Home Loan Mortgage Corporation was not an agency for purposes of

Federal Tort Claims Act but was sufficiently governmental to be

immune from an estoppel defense); LPR Land Holdings v. Federal Land

Bank, 651 F. Supp. 287, 292 (E.D. Mich. 1987) (holding that land

banks are not government actors for purpose of due process

challenge).

11

federal agricultural banking system in general: "Through the land

banks the federal government makes possible the extension of credit

on liberal terms to farm borrowers." 314 U.S. at 102. The Farm

Credit Act limits the functions of land banks to long-term lending.

To permit lending outside that function would thwart that statutory

purpose. Because the relevant inquiry is not what label can be

attached to land banks but rather what Congress intended, we hold

that Premier may not assert an estoppel defense against FCBT.3

This conclusion fits with the limited number of decisions that

have considered the issue. In Williams v. FLBJ, 954 F.2d 774 (D.C.

Cir.), cert. denied, 113 S. Ct. 299 (1992), Katherine Williams and

her mother, Elizabeth Saunders, used their plantation as security

for a loan of $1.3 million. Some six years after obtaining the

loan, Williams and Saunders wanted to sell the plantation to Duncan

Williams for $1.45 million or about $999 per acre and reduce their

debt to approximately $400,000. The land bank association, on

behalf of the land bank and at the direction of the Farm Credit

System Capital Corporation, rejected the proposal. After the death

of her mother and less than one month after their first proposal,
 

4 The Williams court used the term "federal agency" in

describing the land bank. See 954 F.2d at 778. Since application

of the Merrill doctrine turns on congressional intent rather than

whether an institution can be considered a federal agency, we

decline to decide whether a land bank is a federal agency.

12

Williams submitted another proposal to sell the plantation and an

adjoining tract for $1.6 million or $903 per acre and extinguish

her debt. This time, the land bank association approved the offer

on behalf of the land bank. The sale closed, and Williams paid off

the loan.

Williams filed suit against the land bank association, the

land bank, and the Capital Corporation, alleging various torts and

breaches of contract related to the two proposals. In defense, the

banks alleged they were required by regulation to reject Williams

and Saunders' first proposed borrowing because it would exceed

eighty-five percent of the appraised value of the real estate

security. 

Williams responded that the banks could not invoke the eightyfive percent rule because they had ignored it in the past. The

court rejected this argument, finding that estoppel would allow

continued violations. Id. at 778.4 "The extreme judicial

reluctance to apply estoppel against the government arises out of

a concern that otherwise negligent or dishonest officials could

bring about violations of law by making misrepresentations.

[Williams'] proposed rule would engender illegality on a far

greater scale, and for far less equitable justification." Id.

(citation omitted). 
13

In Mendrala v. Crown Mortgage Co., 955 F.2d 1132 (7th Cir.

1992), the Mendralas borrowed $110,000 from Crown Mortgage Company

to finance the purchase of an apartment building. The loan

application form disclosed that the Federal Home Loan Mortgage

Corporation would be involved and had to approve the loan. At

closing, the Mendralas "executed an Estoppel Certificate which

certified the validity and enforceability of the loan documents in

order 'to induce [FHLMC] . . . to accept an assignment of [the]

Note and Mortgage.'" Id. at 1133. Without the Mendralas'

permission, Crown added a "lockout" provision to the loan

documents. Under this provision, the Mendralas could not prepay

the loan for five years. Four years after obtaining the loan, the

Mendralas requested and received a pay-off statement from Crown.

The Mendralas then paid the balance of the loan. When FHLMC

learned of the attempted prepayment, it advised Crown to return the

Mendralas' check. The check was returned, but the Mendralas

stopped paying monthly installments on the loan. The Mendralas

filed suit against Crown and the FHLMC alleging breach of contract,

slander of title, and fraudulent alteration of the note. The

Mendralas also sought to quiet title, cancel the note, and release

the mortgage of record. The FHLMC filed a counterclaim for

foreclosure.

The district court dismissed the Mendralas' tort claims on the

grounds that it lacked subject matter jurisdiction. The court

reasoned that FHLMC's activity fell within the intentional tort

exception to the waiver of sovereign immunity contained in the
14

Federal Tort Claims Act. The court of appeals reversed, holding

that the FHLMC was not an agency under the FTCA and, therefore, was

"prima facie suable under its enabling statute." Id. at 1134. 

Despite its holding that the FHLMC was not an agency for FTCA

purposes, the court invoked the Merrill doctrine and held that

FHLMC could not be bound by Crown's unauthorized conduct. The

court concluded that the FHLMC had "a public statutory mission: to

maintain the secondary mortgage market and assist in meeting lowand moderate-income housing goals. Holding the FHLMC responsible

for the unauthorized actions of an entity such as Crown would

thwart its congressional purpose." Id. at 1140-41 (footnote

omitted). This conclusion, the Mendrala court held, was

strengthened by the fact that the unauthorized act was committed by

a separate entity and not by an employee of the FHLMC. Id. at

1141.

This case is similar to both Williams and Mendrala. As in

Williams, upholding the letter of credit transaction would permit

a land bank to continue to violate its enabling statute. As in

Mendrala, to bind FLBJ to Burns's unauthorized issuance of the

letter of credit would impede the bank's statutory mission to

provide farmers with long-term real estate credit on favorable

terms. See also Greene County Nat'l Farm Loan Ass'n v. Federal

Land Bank, 152 F.2d 215, 220 (6th Cir. 1945), cert. denied, 328

U.S. 834 (1946).
 

5 The Supreme Court has never squarely decided whether

affirmative misconduct can serve as a basis for avoiding the

Merrill doctrine. This court expressed similar uncertainty in

Premier Bank v. Mosbacher, 959 F.2d 562, 569 n.3 (5th Cir. 1992).

However, since at least one panel in this circuit has recognized

this exception, we too will assume that affirmative misconduct is

an exception to the Merrill doctrine.

15

IV.

Premier claims that even if the Merrill doctrine applies in

this case, FCBT should still be estopped from asserting ultra vires

because FLBJ's actions fall into an affirmative misconduct

exception.5 Under this exception, a party may be entitled to

equitable relief against the government if it establishes that the

government engaged in affirmative misconduct. See United States v.

Lair, 854 F.2d 233, 237-38 (7th Cir. 1988). To qualify as

affirmative misconduct, a "party must allege more than mere

negligence, delay, inaction, or failure to follow an internal

agency guideline." Fano v. O'Neill, 806 F.2d 1262, 1265 (5th Cir.

1987). In Fano, an alien claimed that he lost an opportunity to

obtain permanent residence in the United States because the

Immigration and Naturalization Service failed to act quickly enough

on his application for permanent resident status. Fano claimed

that the INS failed to follow its own internal directive and,

therefore, was estopped from denying him permanent resident status.

The court, recognizing that agencies are normally immune from such

estoppel arguments, nevertheless reversed the lower court's grant

of summary judgment on the grounds that Fano's allegation that the

INS acted "willfully, wantonly, recklessly, and negligently" was
16

sufficient to fall within the affirmative misconduct exception.

Id. at 1265-66.

For Premier to prevail under this theory, we would have to

impute Burns's act of issuing the letter of credit to FLBJ.

However, in FDIC v. Langley, 792 F.2d 547, 549 (5th Cir. 1986), we

held that land bank association officers are not agents of land

banks in disbursing the proceeds of a loan. When Burns issued the

letter of credit to the Grants and Steele, he was not acting as the

agent of FLBJ.

Premier argues that Burns is an employee of the land bank

because FLBJ claimed that Burns was an employee in separate

litigation. In this separate suit, FLBJ sought to recover under a

fidelity bond for losses resulting from Burns's unauthorized

conduct. Because the fidelity bond covers the entire Farm Credit

System, specific institutional employee designations lacked

consequence. As such, the designation has little significance

here.

Next, Premier argues that by asking for a thirty-day extension

and then honoring the letter of credit, FLBJ itself committed

affirmative misconduct. However, Premier argues in its brief

nothing more than that FLBJ's acts "definitely went beyond mere

negligence." This type of conclusory allegation will not suffice

to overcome the Merrill rule. The Supreme Court has counseled that

courts should be cautious in recognizing exceptions to the Merrill

doctrine. OPM, 496 U.S. at 422. There is no suggestion that FLBJ

officers deliberately induced ONB to release its mortgage on the
17

additional collateral by honoring a letter of credit it thought

unenforceable.

Finally, Premier argues that the Merrill doctrine does not

apply to preclude its assertion of estoppel because FLBJ was acting

in its proprietary capacity. Under this purported exception,

government activities that are undertaken primarily for the

commercial benefit of the government are subject to estoppel. See

FDIC v. Harrison, 735 F.2d 408, 411 (11th Cir. 1984); United States

v. Florida, 482 F.2d 205, 209 (5th Cir. 1973). This argument is

sunk by Bismarck:

The argument that the lending functions of the federal

land banks are proprietary rather than governmental

misconceives the nature of the federal government with respect

to every function which it performs. The federal government

is one of delegated powers, and from that it necessarily

follows that any constitutional exercise of its delegated

powers is governmental. It also follows that, when Congress

constitutionally creates a corporation through which the

federal government lawfully acts, the activities of such

corporation are governmental.

314 U.S. at 102 (citations omitted). While the force of this

language undoubtedly is limited to the case's land bank facts, see

supra note 3, its continued applicability has yet to be questioned.

V.

Because the letter of credit transaction was ultra vires and

FCBT is not estopped from so claiming, we must next decide to what

extent FCBT should recover. Premier counterclaimed for recoupment.

"Recoupment is the act of rebating or recouping a part of a claim

upon which one is sued by means of a legal or equitable right

resulting from a counterclaim arising out of the same transaction."
18

Howard Johnson, Inc. v. Tucker, 157 F.2d 959, 961 (5th Cir. 1946)

(citation and internal quotation marks omitted); see also

University Medical Ctr. v. Sullivan (In re University Medical

Ctr.), 973 F.2d 1065, 1079-80 (3d Cir. 1992). Recoupment differs

from setoff in that "setoff is a counter demand which a defendant

holds against a plaintiff arising out of a transaction extrinsic of

plaintiff's cause of action." Howard Johnson, 157 F.2d at 961.

Premier claims a right to recoup the money that FCBT recovered when

it sold the additional collateral and the money that FLBJ received

when ONB loan proceeds were used to pay interest on the FLBJ loan.

FCBT argues that Premier is not entitled to recoupment because

FCBT purchased only the claim from REW and not any liabilities.

"The purchaser of an asset from a failed institution is not liable

for the conduct of the receiver or [failed] institution unless the

liability is transferred and assumed." Kennedy v. Mainland Sav.

Ass'n, 41 F.3d 986, 990 (5th Cir. 1994) (citation and internal

quotation marks omitted); see also First Indiana Fed. Sav. Bank v.

FDIC, 964 F.2d 503, 506-07 (5th Cir. 1992); Trigo v. FDIC, 847 F.2d

1499, 1503 (11th Cir. 1988). Premier's claim for the money paid to

FLBJ is a general claim properly asserted against FLBJ's receiver,

REW. See Kennedy, 41 F.3d at 990-91. However, Premier may

maintain its claim to recoup the amount FCBT recovered when it sold

the additional collateral. 

Although FCBT did not assume the general liabilities of FLBJ,

it did purchase the mortgagee rights to the additional collateral.

FCBT's argument that when it purchased this ultra vires claim, it
19

only assumed FLBJ's bond indebtedness and not liability for

recoupment misconceives the remedy. In determining the

availability of recoupment, we do not look to the liabilities FCBT

assumed when it purchased this ultra vires claim but to the

original letter of credit transaction. Premier's claim of

recoupment for the amount that FCBT recovered in its sale of the

additional collateral arises out of the same transaction as the

ultra vires claim. But for FLBJ's payment of the letter of credit,

Premier would not have released its interest in the additional

collateral. 

Because an ultra vires contract is null and void, the remedy

for rescission of that contract is to put the parties in the

position they would have occupied had the unlawful agreement not

been made. See Fletcher, supra, § 3571. Accordingly, Premier may

recoup the amount FCBT recovered on the sale of the additional

collateral. This adjustment ensures that FCBT does not receive a

windfall as a result of its rescission of the ultra vires contract.

The record indicates that the parties disagree as to the

amount that should be apportioned to the additional collateral;

therefore, we must remand to give the district court the

opportunity to make findings on this issue.

VI.

In its cross-appeal, FCBT claims that the district court erred

in dismissing its state law claims as abandoned. FCBT had planned

to pursue these claims if its ultra vires claim did not succeed.
20

Because we have affirmed the district court's determination that

the transaction was ultra vires and FCBT will recover the letter of

credit payment less any recoupment, we find resolution of this

issue to be unnecessary. 

AFFIRMED IN PART, REVERSED AND REMANDED IN PART.