UNITED STATES COURT OF APPEALS

For the Fifth Circuit

No. 93-2689

DON M. KENNEDY, ET AL.,

Plaintiffs,

DON M. KENNEDY and

J.F.F., LTD.,

Plaintiffs-Appellants,

versus

MAINLAND SAVINGS ASSOCIATION,

ET AL.,

Defendants,

SOUTHWEST FEDERAL SAVINGS

ASSOCIATION,

Defendant-Appellee.

Appeal from the United States District Court

For the Southern District of Texas

(December 21, 1994)

Before REAVLEY, DAVIS and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

Appellants J.F.F., Ltd. ("JFF") and Don M. Kennedy ("Kennedy")

are appealing a judgment entered against them on a promissory note

executed by JFF and guaranteed by Kennedy. The note and guaranty

--

originally associated with a 1985 agreement to develop and build an

apartment complex in Houston

-- were transferred several times due

to savings & loan failures; t hey now are held by appellee, the

Resol ution Trust Corporation as receiver for Southwest Federal1 As the chronology below shows, the district court granted JFF

and Kennedy's motion for new trial on April 21, 1992 and requested

further briefing from the parties. On January 22, 1993, the court

issued a memorandum concluding that its October 23, 1991 summary

judgment against JFF and Kennedy should be reinstated. The court

issued an order reinstating the October 23, 1991 judgment as of

January 22, 1993.

2 As will be detailed below, Lamar is the predecessor to

appellee RTC/Southwest Federal. Lamar was the original lender and

payee on the note and guaranty that are the subjects of this

appeal.

2 Savings Association ("RTC/Southwest Federal"). The district court

below entered summary judgment in favor of appellee RTC/Southwest

Federal on the note and gua ranty on October 23, 1991. 1 JFF and

Kennedy appeal, and we AFFIRM.

FACTUAL AND PROCEDURAL BACKGROUND

The following chronology descri bes the long and convoluted

history of this case:

! Prior to June 1985 : JFF, Kennedy, Lamar Savings As s ociation

("Lamar") 2 and Mainland Savings Association ("Mainland") jointly

agree to develop and build an apartment complex on a tract of land

in Houston. JFF, a Texas limited partnership, was to own the land

and u ltimately the apartment complex. JFF purchases the raw land

from Mainland, with Mainland making a first lien acquisition loan

of $1,064,500 to JFF.

! June 5, 1985 : Lamar, Mainland, JFF and Kennedy execute a two-page

agreement ("the letter agreement"), which provided in full:

"This letter shall evidence our mutual understanding in

regard to the following matters:

"I. [Mainland] has, as of this date, made a $1,064,500.00

loan to [JFF] secured by various liens agains t certain

real property located in Harris County, Texas ...3

"II. [Lamar] has of this date made a $1,200,000.00 loan

to JFF secured by a subordinate lien against the property

and additionally secured by a Guaranty Agreement executed

by [Kennedy].

"III. Lamar has agreed to lend to JFF within the next

twelve months those sums Lamar de ems necessary and

appropriate to construct an apartment pro ject on the

Property, subject to the following conditions:

"a. Lamar shall determine the size of the Project based

on its long range economic viability as determined in an

acceptable appraisal of the proposed Project, which

appraisal shall be paid for by J.F.F.

"b. The proposed Project and Loan must meet Lamar's

normal and customary underwriting standards and practices

and comply with all r egulations applicable to Lamar,

J.F.F. and the Project.

"c. A portion of the Loan proceeds shall be used to

discharge in full the Original Mainland Loan and the

Original Lamar Loan as well as discharge all obligations

contained in any instruments securing said loans.

"d. The completion of construction of the proposed

Project shall be personally guaranteed by Kennedy.

"e. J.F.F. and Kennedy shall execute such instruments as

Lamar deems necessary to properly and adequately

document, evidence and secure the new Loan.

"IV. Mainland has agreed in the event the Loan

contemplated in paragraph III above is made by Lamar to

J.F.F., Mainland will purchase such Loan from Lamar for

an amount equal to the outstanding indebtedness upon the

earlier of (i) substantial completion o f the proposed

Project; or (ii) an Event of Default under any of the

instruments evidencing and/or securing the subject Loan."

Thus, on June 5, 1985, Lamar provided JFF and Kennedy with an

interim loan of $1,200,000, creating the debt that forms the basis

of this appeal. JFF signed the promissory note for "$1,200,000 or

so much hereof as may be advanced." Kennedy signed th e note as a

payment guarantor and also contemporaneously executed a separate,

six-page guaranty agreement.4

! June-December 1985 : The financing for the development scheme

started unraveling early on. It appears that Mainland's financial

difficulties caused Mainland to back out of its commitment to

purchase the construction loan that was to be provided by Lamar to

JFF. That in turn led Lamar to refuse to go forward with its

commitment to provide the construction loan to JFF.

! January 9, 1986 : Lamar notifies Kennedy and JFF that the note is

in default and gives notice of acceleration.

! January 27, 1986 : JFF and Kennedy sue Lamar and Mainland in Texas

state court, seeking monetary dam ages and alleging breach of

contract, fraud, failure of condition pr ecedent, failure of

consi deration and breach of fiduciary duty. JFF and Kennedy also

seek to rescind the entire transaction, including the note and

guaranty, and a declaratory judgment determining the rights of the

parties. (These claims will hereinafter be referred to collectively

as "the breach of contract claims").

! March 7, 1986 : Lamar answers and as serts (1) a counterclaim

against JFF and Kennedy to co llect on the note and guaranty, and

(2) a cross-claim against Mainland for breach of contract.

! April 4, 1986 : Mainland is declared insolvent and the FSLIC is

appointed as receiver.

! May 1, 1986 : The FSLIC as receiver for Main land intervenes and

removes the case to federal court.

! September 11, 1986 : The federal district court (2) dismisses JFF

and Kennedy's claims against Mainland, (2) dismisses Lamar's crossclaim against Mainland, and (3) remands the part of the case not3 The dismissals of JFF and Kennedy's claims against Mainland

and Lamar's cross-claim against Mainland were not appealed and are

now final.

4 According to the acquisition agreement, the only liabilities

of Lamar tha t Old Southwest agreed to assume were Lamar's

"liabilities to Depositors with respect to their Deposits," and the

secured liabilities of Lamar, "to the extent of the value of the

security."

5 relating to Mainland (including JFF and Ken nedy's breach of

contract claims against Lamar and Lamar' s claim against JFF and

Kennedy on the note and guaranty) back to state court. 3

! May 18, 1988 : Lamar is declared insolvent and placed into

receivers hip with the FSLIC as receiver. Simultaneously with the

receivership, the FSLIC (as receiver for Lamar) enters into an

a cquisition agreement with the "acquiring association," Southwest

Savings Association ("Old Southwest"). Pursuant to the acquisition

agreement, Old Southwest purchases "all of [Lamar]'s assets that

the Receiver owns or holds and any of [Lamar]'s assets hereafter

acquired by the receiver." Thus, Lamar's claim on the note and

guaranty against JFF and Kennedy are transferred to Old Southwest.

But Old Southwest does not assume liability for any general

unsecured claims against Lamar, 4 such as JFF and Kennedy's breach

of contract claims connected with the 1985 letter agreement. After

the split of Lamar's assets and liabilities, such unsecured claims

may be asserted only against the FSLIC as receiver for Lamar.

! June 13, 1988 : The FSLIC as receiver for Lamar intervenes as a

defendant and once again removes the case to federal court.

According to the FSLIC's petition in intervention:5 JFF and Kennedy take the position that the broad language of

this order inadvertently dismissed the entire case. We hold that it

did not. As all parties concede, this dismissal was to effectuate

the settlement of JFF and Kennedy's claims against the FSLIC/FDIC.

6 "[FSLIC] is now the receiver of [Lamar] and, pursuant to

an acquisition agreement ... [Old Southwest] is now the

owner of the loan in issue and any related security and

collateral interests. Pursuant to the terms of the

acquisition agreement, no related liabilities or potential liabilities of [Lamar] were transferred to [Old

Sou thwest]. As a result, [the FSLIC] is now the proper

party-defendant with respect to the claims, demands and

causes of action pertaining to the loan transaction which

have been asserted by [Kennedy and JFF] against Lamar."

! May 11, 1989 : The dist rict court re-aligns the parties: Old

Southwest is joined as plaintiff. JFF & Kennedy are defendants and

third-party plaintiffs. The FSLIC (as receiver for Lamar) is a

third-party defendant.

! August 9, 1989 : FIRREA is enacted, abolishing FSLIC; all

liabilities against the FSLIC (including JFF and Kennedy's breach

of contract claims against Lamar) become liabilities of the FSLIC

Resolution Fund, which is managed by the FDIC.

! November 14, 1989 : JFF and Kennedy enter into a stipulation of

dismissal of the breach of contract claims by JFF and Kennedy

against the government successor to Lamar (FSLIC Resolution Fund,

managed by the FDIC).

! November 21, 1989 : The federal district court enters an "Order

of Dismissal" in connection with the FDIC's settlement with JFF and

Kennedy. The order states that "this cause

... is dismissed on the

merits without prejudice to the right of counsel of record to move

for reinstatement ...[if] final approval of the settlement [can]

not be obtained." 5The intent by the distric t court to dismiss only these claims is

evident in the record; the order was entered one week after the

stipulation was filed, and the order states that "an amicable

settlement has been reached."

7 ! June 15, 1990 : Old Southwest is placed into receivership with the

RTC as receiver. Simultaneously with the receivership, the RTC (as

receiver for Old Southwest) enters into an purchase and assumption

agreement with a new "acquiring association," South west Federal

Savings Association ("Southwest Federal"). The purchase and

assumption agreement splits Old Southwest's assets and liabilities,

with most of the assets being transferred to Southwest Federal and

most liabilities remaining with the RTC as receiver for Old

Southwest. Thus, the note signed by JFF and guaranteed by Kennedy

is transferred to Southwest Federal.

! November 8, 1990 : Southwest Federal, "a transferee of assets from

the [RTC as receiver for Old Southwest]" moves the district court

to substitute Southwest Federal as plaintiff only in the place of

Old Southwest. "Southwest Federal is now the owner and holder of

all interests of Lamar and Old Southwest in the loan and guaranty,

as well as all claims which Lamar and Old Southwest had against the

defendants [JFF and Kennedy]."

! July 1991 : Southwest Federa l is declared insolvent and the RTC

is appointed as receiver. The appellee, RTC as receiver for

Southwest Federal, thus acquires all the assets that Southwest

Federal had (including the note signed by JFF, guaran teed by

Kennedy and originally held by the now-defunct Lamar).

! July 12, 1991 : The district court issues a memorandum granting6 See D'Oench, Duhme & Co. v. FDIC

, 315 U. S. 447 (1942); 12

U.S.C. § 1823.

8 RTC/Southwest Federal's motion for summary judgment on the note and

guaranty against JFF and Kennedy. Also on July 12, 1991, the

district court denies JFF and Kennedy's motion to dismiss for lack

of subject matter jurisdiction in connection with the November 21,

1989 order.

! October 23, 1991 : The district court enters judgment in favor of

RTC/Southwest Federal against JFF and Kennedy for all amounts due

under the note and guaranty.

! April 21, 1992 : The district court grants a new trial to Kennedy

and JFF, thus vacating the summary judgment granted on July 12,

1991 and entered on October 23, 1991. The court orders parties to

brief two issues:

(1) wh ether (a) F DIC v. Laguarta

, 939 F.2d 1231, 1239 (5th Cir.

1991); (b) th e D'Oench, Duhme doctrine 6 or (c) the holder in due

course doctrine may be applied where "there exists a written

agreement contained in the files of the institution that would tend

to reduce or offset the amount due under a variable interest note,

and where the note makes no reference to that agreement; and

(2) whether Southwest Federal Savings Association assu m ed any

liability under the 1985 letter agreement, "if it is indeed a

liability," when it purchased the assets originally held by Lamar

Savings Association, "and if it did not, what are the ramifications

of the FDIC's previous dismissal?"7 Our disposition of this appeal makes it unnecessary for us to

consider whether either the D'Oench, Duhme doctrine or the federal

holder in due course doctrine applies to this case. We therefore do

9 ! January 22, 1993 : The district court issues a second memorandum,

concluding th at the July 12, 1991 summary judgment should be

r einstated, and enters an order reinstating the October 23, 1991

judgment effective as of January 22, 1993.

! August 11, 1993 : The district court den ies JFF and Kennedy's

motion for new trial.

! September 7, 1993 : JFF and Kennedy file notice of appeal to this

Court.

DISCUSSION

In support of its motion for summary judgment, a ppellee

RTC/Southwest Federal established that appellant JFF executed and

delivered an unconditional promissory note to Lamar in the amount

of $1.2 million on June 5, 1985. To secure payment of the note,

appellant Kennedy gave Lamar an unconditional guaranty of all

amounts due under the note. JFF failed to make the payments

required under the terms of the note, and Kennedy defaulted on the

guaranty. RTC/Southwest Federal is and was the owner and holder of

the note and guaranty, which it acquired pursuant to a purchase and

assumption agreement dated June 15, 1990. At the time of appellee's

motion for summary judgment, there remained due under the note the

principal sum of $1.2 million, plus accrued, unpaid interest,

attorney's fees and cost s. These facts are undisputed, and they

establish RTC/Southwest Federal's right to judgment as a matter of

law. 7not decide whether either doctrine would bar JFF and Kennedy from

asserting a valid defense to nonperformance under the note and

guaranty, because we hold that JFF and Kennedy cannot establish

such a valid defense.

10 Appellants JFF and Kennedy argue that they can assert the 1985

letter agreement as a defense to excuse their nonperformance under

the note and guaranty. They claim that their nonpayment on the note

was excused as a matter of law by Lamar's prior breach of the

letter ag reement, in which Lamar promised to make a construction

loan to JFF. The letter agreement recited that part of the

construction loan was to be used to discharge the $1,200,000

interim loan that Lamar made to JFF "as well as discharge all

obligat ions contained in any instruments securing said loans."

Because Lamar failed to make the construction loan, appellants

argue, they are excused from failing to repay the interim loan debt

evidenced by the note.

We find no merit in appellants' arguments. The language of the

1985 letter agreement provides no basis for using Lamar's liability

(on its separate but related obligation to provide the construction

financing) as an offset to JFF and Kennedy's obligations. The

letter agreement simply does not make payment of JFF's note, or

performance on Kennedy's guaranty, contingent on the funding of an

additional loa n. In addition, the note and guaranty contain

unconditional language and do not ref er to the letter agreement.

The statement in the letter agreement that the proceeds of any

future loan would be used to disc harge the note was merely a

recitation for Lamar's benefit and protection, meaning that the8 We agree that JFF and Kennedy at one point may have possessed

affirmative breach of contract damage claims against Lamar in

con nection with Lamar's failure to provide the promised

c onstruction financing. Such claims, if found to be valid, mi ght

have operated as a set-off that would have reduced appellants'

11 loan proceeds were not to be expended for the borrower's own

purpose; it does not make liability on the note and guaranty

conditional. JFF and Kennedy can point t o no explicit written

language in the 1985 letter agreement by which Lamar agreed that if

it did not provide the construction loan, JFF and Kennedy were

excused from their obligations under the note and guaranty. Thus,

JFF and Kennedy's attempted defense fails. Whatever liabilities

Lamar had on the letter agreement ultimately ended up as

liabilities of the FSLIC that were dismissed on November 21, 1989.

Appellee RTC/Southwest Federal acquired the note and guaranty free

o f any such liability. "The purchaser of an asset from a f ailed

institution is not liable for the conduct of the receiver or

[failed] institution unless the l iability is transferred and

assumed." Nashville Lodging, Inc. v. RTC , 839 F. Supp. 58, 62 (D.

D.C. 1993)(citing First Ind. Fed. Sav. Bank v. FDIC

, 964 F.2d 503,

508 (5th Cir. 1992); Trigo v. FDI C , 847 F.2d 1499 (11th Cir.

1988)). The federal receiver such as the FSLIC or RTC has the power

to sell an asse t such as JFF's note while retaining a related

liability, and no liability is transferred to an assuming

institution such as Old Southwest absent an express transfer.

Nashville Lodging , 839 F.Supp. at 62. In such a case, the debtor

has "no right of set-off or recoupment agains t amounts currently

owed under the loan" transferred. 8 Id ; see also Texas Refrigerationliability on the note and g uaranty. However, any such "set-off"

breach of contract claims were separated from the note and guaranty

on May 18, 1988 when Lamar went into receivership and Lamar's

assets and liabilities were split. After May, 18, 1988, JFF and

Kennedy could pursue their breach of contract claims only against

the FSLIC (later the FDIC), because Old Southwest did not assume such liabilities when it purchased Lamar's assets.

Th ose breach of contract claims against the FDIC were

voluntarily dismissed on November 21, 1989 as the result of a

settlement between the defendant FDIC and the plain tiffs JFF and

Kennedy.

wjl\opin\93-2689.opn

ace 12 Supply v. FDIC

, 953 F.2d 975, 984 (5th Cir. 1992)(holding that

FDIC's role in assuming some of failed institution's liabilities

rather than passing them on to bridge bank "is not prohibited, and,

indeed, even seems to have the Supreme Court's blessing.")(citing

Coit Ind. Joint Venture v. FSLIC

, 489 U.S. 561 (1989)). Therefore,

we AFFIRM the summary judgment granted below in favor of

RTC/Southwest Federal for all amo unts due under the note and

guaranty.