IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 92-1925

FEDERAL DEPOSIT INSURANCE,

CORPORATION as receiver for

Liberty Federal Savings and

Loan Association,

Plaintiff-Appellee,

versus

JACK WAGGONER,

Defendant-Appellant.

Appeal from the United States District Court

for the Northern District of Texas

August 23, 1993

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

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 thr ee 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 unle ss 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.2 I.

In 1985, Waggoner executed two notes payable to Liberty

Federal Savings and L oan 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 assign s 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, as1 The Financial Institutions Reform, Recovery and Enforcement

Act of 1989 ("FIRREA") transferred FSLIC's functions to FDIC.

See Federal Sav. & Loan Ins. Corp. v. Griffin , 965 F.2d 691, 695

(5th Cir. 1991), cert. denied , 112 S.Ct. 1163 (1992).

2 The FDIC also relied on 12 U.S.C. § 1823(e) which is

essentially a codification of D'Oench, Duhme

. Bowen v. FDIC , 915

F.2d 1013, 1015 n.3 (5th Cir. 1990).

3 required by Congress, the FDIC took over as rece iver of Liberty. 1

In 1990, the FDIC sued on the consolidated note seeking to recover

f rom 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 (1942), 2 Waggon er 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 f or 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 terms4

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." H amil ton , 939 F.2d at 1228; s ee 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 o n promissory notes." F DIC 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 wh ich FDIC could not have been put on notice by

reviewing records on file with the bank." R TC v. Sharif-MunirDavidson 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.5

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. Ci v. 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 theref ore 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." C rook 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.3 The FDIC relies on the proposition that where renewal notes

are involved, the holder may sue based upon either the renewal

note or the original note. See, e.g.

, Thompson v. Chrysler First

Business Credit Corp. , 840 S.W.2d 25 (Tex. App.-- Dallas 1992, no

writ). The holder may sue under either note because both

represent the same underlying obligation. But as the court in

Thompson explained, "[t]his rule holds true unless there has been

a proven novation." Id . at 29. "Obviously, if there is a proven

novation, the new note supersedes the old." Id . n.3. Thus, this

principle sheds no light on whether there has been a novation and

is inconsistent with the FDIC's position on that question.

6 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

t wo 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. S ee, e.g.

, Schwab v.

Schlumberger Well Surveying Corp. , 198 S.W.2d 79, 82 (Tex. 1946);

McNeill v. Simpson , 39 S.W.2d 835, 835-36 (Tex. Comm'n App. 1931,

judgment a dopted); S ummit 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. 37

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 exte nsion of time in which to pay the original

indebtedness." S chwab

, 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 an d other facts and

circumstances." C hastain v. Cooper & Reed

, 257 S.W.2d 422, 424

(Tex. 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." S calise 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

, 189 S.W.2d

477, 479 (Tex. 1945). Here, the original notes and the

consolidated note are not inconsistent. Much of the language in

the consolidated note is taken verbatim from the original notes and

the consolidated note states that it is a renewal and extension of

the origina l notes. Moreover, the consolidated note involves no

new money. The FDIC's contention that the consolidated note4 All three notes provide for interest

at the same rate of interest per annum on a day-to-day basis

as two percent (2%) in excess of the prime rate (being the

interest rate quoted from time to time for prime commercial

loans not exceeding ninety (90) day maturities which is not

necessarily the lowest rate quoted at any given time) quoted

by First City National Bank of Houston, Houston, Texas, but

in no event less than twelve and one-half percent (12-1/2%)

per annum and in no event greater than the maximum allowed

by law.

8 involves new debt is unavailing. While the later note does state

that $28,359.32 "evidences new indebtedness," it immediately

explains that this amount is "the sum advanced this date to Maker

by Payee to pay interest due under the terms of the $305,000.00

Note and the $255,000.00 Note

. " (emphasis added). As explained,

the two prior notes were rolled over and consolidated.

In Cherry v. Berg

, 508 S.W.2d 869 (Tex. Civ. App.-- Corpus

Christi 1974, no writ), the second note, like the consolidated note

here, recited that it was given in renewal and extension of the

unpaid balance on the first note. Although the interest rates

differed on the two notes, 6% on the first and 10% on the second,

the c ourt still refused to fund a novation. I d

. at 73. In this

case, the first two notes and the consolidated note provide for a

variable rate of interest, but the notes use identical language to

explain the applicable rate. 4 The case for a novation is weaker

here than in Cherry

. In contrast, the court in V ivion v. Grelling

,

837 S.W.2d 255 (Tex. App.--Eastland 1992, writ denied), affirmed a

finding of novation where the second no te did not refer to the

first and the two notes "differed in a number of material aspects."

Id

. at 257. S ee also Lawler v. Lomas & Nettleton Mortgage9

Investors

, 691 S.W.2d 593, 594-95 (Tex. 1985) (pointi ng to

difference in terms between original note and renewal note, supreme

court held that two notes reflected separate obligations).

In Bank of Austin v. Barnett

, 549 S.W.2d 428 (Tex. Civ. App.--

Austin 1977, no writ), the maker of several promissory notes

asserted a novation against the bank, the inverse of this case.

The bank made several loans to a collector of oil paintings. The

first was evidenced by a purchase money note secured by the four

paintings purchased with the proceeds. The second was also a

purchase money note secured by a single painting. A third loan was

evidenced by a note listing the remainder of the debtor's

paintings as collateral. Thereafter, in a series of confusing

transactions, the notes were renewed and combined several times.

On at least o ne occasion, the list of collateral did not include

all of the paintings used for collateral in the original three

notes. The debtor therefore argued that the bank, through the

renewals, intended to relinquish some of the paintings as security.

The court rejected this conte ntion, concluding that the evidence

was insufficient to show an intent "to release the original

indebtedness as well as the collateral securing such indebtedness."

Id

. at 430. B arnett is this case with the shoe on the other foot.

Just as there was no intent to release the bank's original security

in Barnett

, there is also no evidence to show an intent to

relinquish Waggoner's original protection against personal

liability.10

The FDIC presented no evidence, aside from the notes

themselves, t o support a finding that the parties intended a

novation. Waggoner, however, denied any intent to create a

novation in his affidavit submitted in support of his motion for

summary judgment. He contended that both parties, instead, agreed

n ot to change the status of his personal liability. He also

offered Liberty's actions in support this assertion. Despite the

fact that the collateral was inadequate to cover the loan, Liberty

made no efforts to collect from Waggoner individually for over two

years. The parties' actions can be strong evidence of their

contract's meaning. S ee, e.g.

, Consolidated Engineering Co., Inc.

v. So uthern Steel Co. , 699 S.W.2d 188, 193 (Tex. 1985). We need

not rely on these facts, however, because there is no evidence that

the parties intended by the consolidated note to work a novation--

and create an obligation that did not earlier exist. The FDIC had

the burden on this issue.

Concluding that there was no novation has the practical effect

of adding terms to the consolidated note that were not recited by

that instrument. This is a by-product of Texas law that requires

a melding of all the writings describing the underlying debt in the

absence of proof that a novation was intended. The consolidated

note did not recite that the prior debt was extinguished. It did

not stand silent on the point. Rather, it r enewed and extended

.

That is, there was no nova tion and we must meld the three

instruments. When we do, Waggoner has no personal liability. In

sum, the FDIC failed to produce evidence creating a fact issue of5 We need not consider Waggoner's alternative argument that

the FDIC is not the holder of the note.

11 intention to create a novation. We therefore reverse and render

judgment in favor of Waggoner. 5

REVERSED and RENDERED.