1

United States Court of Appeals,

Fifth Circuit.

No. 93-5262.

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-AppelleeAppellant,

v.

Rory S. McFARLAND, et al., Defendants,

Rose Long McFarland, Co-trustee, Defendant-Appellant.

Premier Venture Capital Corp., Third Party Defendant-Appellee,

David L. Jump, Third Party Defendant Intervenor-PlaintiffAppellee.

Oct. 5, 1994.

Appeals from the United States District Court for the Western

District of Louisiana.

Before REYNALDO G. GARZA, SMITH and PARKER, Circuit Judges.

ROBERT M. PARKER, Circuit Judge:

This suit concerns the FDIC's attempt to recover from viable

loans found in a failed bank's portfolio. Two related appeals

emerged from one trial and one memorandum opinion of the district

court.

Rose Long McFarland appeals the district court's enforcement

under 12 U.S.C. § 1823(e) of a continuing guaranty agreement which

she contends was released prior to the FDIC's acquisition of the

notes which it secured. Concluding that § 1823 does not apply to

the release, we reverse the district court's decision holding Rose

McFarland liable under her continuing guaranty. FDIC appeals the

district court's ruling that a special mortgage held by the failed

bank as collateral did not cover oil and gas produced from lands
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that were previously part of the lease but were declared subject to

a different lease prior to the time the bank took the lease as

collateral. Finding no error in the district court's resolution of

this issue, we affirm.

I. THE RELEASE

A.

Rose McFarland executed a Continuing Guaranty Agreement of

$450,000, dated September 4, 1980, guarantying all debts and

liabilities to the Bank of Commerce (BOC) incurred by her son, Rory

McFarland. In January 1981, a bank officer wrote a letter to Rory

Mcfarland, advising him that the bank had misplaced Rose

McFarland's Guarantee Agreement and requesting a replacement

guaranty, which they provided. The letter was found in the bank's

files after FDIC took control.

In the early 1980's, Rory Mcfarland obtained the three loans

from the BOC that are the subject of this suit. One of the loans

was made to New Age Industries, Inc. and Rory Mcfarland in solido,

and was secured by a lien on equipment and Rose McFarland's

continuing guaranty. The other two loans were made to Rory

Mcfarland personally and secured primarily by an interest Rory

Mcfarland held in some offshore minerals, a pledge of life

insurance on Rory Mcfarland's life, and Rose McFarland's continuing

guaranty. In 1985 these loans were restructured and increased.

The New Age loan was not involved in the restructuring. Rory

Mcfarland paid a 17 origination fee, an increased rate of interest,

and agreed to the cancellation of a $500,000 line of credit which
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he had previously received from the bank, in return for the release

of Rose McFarland's Guaranty Agreement and an increased loan

balance. Two of the bank officers wrote Rory Mcfarland a letter

dated April 2, 1985, delineating the terms of his re-structured

loan and stating the bank's agreement to release Rose McFarland

from the 1980 Guaranty Agreement. Rory Mcfarland was to sign and

return if he agreed to the terms, which he did. At approximately

the same time, the bank returned an executed copy of the Guaranty

Agreement to Rory Mcfarland and he destroyed it.

The minutes of the Directors Loan Committee reflect that on

March 8, 1985 two loans were approved for Rory Mcfarland and his

$500,000 line of credit was canceled. The listed collateral

included a requirement that Rose McFarland's Guaranty agreement be

increased to $1,750,000. On March 15, 1985 the Officer's Loan

Committee approved the same package. Rory Mcfarland refused this

loan structure and continued to negotiate, finally agreeing to the

terms set forth in the April 2, 1985 letter. The promissory notes,

executed by Rory Mcfarland on April 5, 1985, list the collateral

for the notes and there is no reference in either note to a

Guaranty by Rose McFarland. The minutes from the Director's Loan

committee held on April 30, 1985 note the new renewal loans to Rory

Mcfarland and list collateral for the loan, which did not include

the guarantee.

On June 13, 1986 the bank was closed and FDIC was appointed

receiver. In an assignment dated January 1991, the FDIC as

Receiver assigned Rory Mcfarland's notes to FDIC in its corporate
 

112 U.S.C. § 1823(e) provides: "No agreement which tends to

diminish or defeat the interest of the Corporation in any asset

acquired by it under this section or section 1821 of this title,

either as security for a loan or by purchase or as receiver, of

any insured depository institution, shall be valid against the

Corporation unless such agreement (1) is in writing, (2) was

executed by the depository institution and any person claiming an

adverse interest thereunder, including the obligor,

contemporaneously with the acquisition of the asset by the

depository institution, (3) was approved by the board of

directors or its loan committee, which approval shall be

reflected in the minutes of said board or committee, and (4) has

been, continuously, from the time of its execution, an official

record of the depository institution." 

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capacity, stating that the assignment was effective as of June 13,

1986.

At the time FDIC examined the bank records to determine the

value of the Rory Mcfarland loan asset, the records included the

letter requesting a replacement of Rose McFarland's continuing

guaranty, an executed copy of Rose McFarland's Guaranty Agreement,

the letter releasing it, the minutes of the Loan Committees listed

above, and a "Relationship Report" (summary of customer's

indebtedness) for Rory Mcfarland dated October 15, 1985 (6 months

after the release) which still listed Rose McFarland's Guaranty as

collateral for Rory Mcfarland's notes.

Rory Mcfarland defaulted and Rose McFarland did not pay

anything on the disputed Guaranty. FDIC-Corporate brought this

suit. After bench trial, the district court held that 12 U.S.C. §

1823(e) applied to the release and found that the release failed to

meet the requirements of § 1823(e),1 so the bank's release of Rose

McFarland's Guaranty was not valid against FDIC. Specifically, the

district court found that the release was not executed by Rose
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McFarland and that the bank's loan committee minutes do not

"reflect" the release.

B.

The district court decided this case after conducting a bench

trial. Our standard of review for bench trials is well

established: findings of fact are reviewed for clear error; legal

issues de novo. Seal v. Knorpp, 957 F.2d 1230, 1233 (5th

Cir.1992). The district court held that 12 U.S.C. § 1823(e)

precluded Rose McFarland from raising the release agreement as a

defense against FDIC. We review de novo the applicability of §

1823(e) to this case.

 Section 1823 is the statutory counterpart to D'Oench, Duhme

& Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942).

Courts often consider the D'Oench, Duhme doctrine and § 1823(e) in

tandem, looking to the common law when construing the statute.

Beighley v. FDIC, 868 F.2d 776, 784 (5th Cir.1989). Section

1823(e) and D'Oench, Duhme basically prohibit the enforcement

against the FDIC of undisclosed agreements that would tend to

diminish the FDIC's interest in an asset acquired from the failed

bank. The purpose behind § 1823(e) and D'Oench, Duhme is to allow

federal and state bank examiners to rely on a bank's records in

evaluating the bank's assets, ensuring mature consideration of

unusual loan transactions by senior bank officials, and preventing

fraudulent insertion of new terms, with collusion of bank

employees, when the bank appears headed for failure. Langley v.

FDIC, 484 U.S. 86, 91-92, 108 S.Ct. 396, 401, 98 L.Ed.2d 340
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(1987).

The purposes of § 1823 and D'Oench, Duhme are not implicated

in the agreement to release Rose McFarland's guaranty. There was

no question of collusion, fraud, or bad faith. There was no

undisclosed or secret agreement. Rather, the release of Rose

McFarland's guaranty was negotiated at arm's length in conjunction

with the renewal of two of Rory Mcfarland's loans, and the release

is reflected in the loan documents. At least with respect to the

renegotiated loans, the release of Rose McFarland's guaranty with

respect to these two loans falls within an exception to the

D'Oench, Duhme doctrine recognized in this circuit.

This Court has held that D'Oench, Duhme does not apply where

the agreement which the FDIC seeks to avoid is spelled out in the

loan agreement. FDIC v. Laguarta, 939 F.2d 1231 (5th Cir.1991);

see also FDIC v. Waggoner, 999 F.2d 826, 828 (5th Cir.1993). We

have come close to explicitly applying this principle to § 1823(e)

as well. See Bank One Texas National Association v. Morrison, 26

F.3d 544, 551 (5th Cir.1994) (stating that "[t]he integrated loan

documents which evidence the parties agreement satisfy the

notoriety requirements of D'Oench, Duhme and § 1823(e)"). Other

courts have applied this principle to 1823(e). E.g., Commerce

Federal Sav. Bank v. FDIC, 872 F.2d 1240 (6th Cir.1989); Riverside

Park Realty Co. v. FDIC, 465 F.Supp. 305, 313 (M.D.Tenn.1978); see

also, Howell v. Continental Credit Corp., 655 F.2d 743 (7th

Cir.1981) (holding that neither D'Oench, Duhme nor § 1823 applies

where "the document FDIC seeks to enforce is one ... which facially
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manifests bilateral obligations and serves as the basis of the

lessee's defense"). We agree with the Sixth Circuit that "The

language of 1823(e), which provides that "[n]o agreement which

tends to diminish or defeat the right, title or interest of the

[FDIC] in any asset acquires by it under this section ... shall be

valid against the Corporation,' indicates that it applies only to

an action or defense which is anchored in an agreement separate and

collateral from the instrument which the FDIC is seeking to

protect." Commerce Federal Savings Bank v. FDIC, 872 F.2d at 1244.

We hold that 12 U.S.C. § 1823(e) applies only to separate and

collateral agreements; not to agreements found in the loan

documents themselves.

In the instant case, the agreement to release Rose McFarland

was contained in the loan agreement, executed by the bank and Rory

Mcfarland and maintained in the bank's files. The terms of the

loan renewals were set out in a letter from the president and

executive vice president of the bank to Rory Mcfarland. Rory

Mcfarland was to sign the letter and return it if he agreed to the

terms. Rory Mcfarland signed and returned the letter and the notes

were executed under the terms set out in the letter, not the terms

reflected in the minutes of either the Directors Loan Committee or

the Officers Loan Committee.

The fact that the release is not evidenced on the promissory

note does not mean that it is not contained in the loan documents.

Laguarta rejects the notion that the "loan documents" includes only

the promissory note. Laguarta, 939 F.2d at 1239. The letter from
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the bank's officers setting out the terms of the loan, which was

signed by the bank and Rory Mcfarland and maintained in the bank's

files, is clearly one of the loan documents and is not collateral

to the renewal note. See id. The release of Rose McFarland's

guaranty is therefore effective against the FDIC at least with

respect to the two renegotiated loans.

C.

The New Age loan was executed before the release of Rose

McFarland's guaranty and was not renegotiated, so the release is

not a part of the loan documents of that loan. However, it is well

established that § 1823 does not apply to every inquiry concerning

an asset. FDIC v. Merchants Nat'l Bank of Mobile, 725 F.2d 634,

639 (11th Cir.1984), cert. denied, 469 U.S. 829, 105 S.Ct. 114, 83

L.Ed.2d 57 (1984). The "no asset" exception to D'Oench, Duhme and

§ 1823(e) is widely recognized. See, e.g., FDIC v. Zook Bros.

Constr. Co., 973 F.2d 1448, 1452 (9th Cir.1992); Commerce Federal

Savings Bank v. FDIC, 872 F.2d at 1244; Beighley v. FDIC, 868 F.2d

776; FDIC v. P.L.M. International, Inc., 834 F.2d 248 (1st

Cir.1987); Howell v. Continental Credit Corp., 655 F.2d 743; cf.

Langley, 484 U.S. at 93-94, 108 S.Ct. at 399 (implying that where

the instrument is rendered void rather than merely voidable before

being acquired by the FDIC, the instrument is not an asset

protected by § 1823(e)). The "no asset" exception is generally

defined as precluding the application of 1823(e) where "the parties

contend that no asset exists or an asset is invalid and that such

invalidity is caused by acts independent of any understanding or
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side agreement." FDIC v. Merchants Nat'l Bank, 725 F.2d at 639

(quoted in FDIC v. Blue Rock Shopping Center, 766 F.2d 744, 753

(3rd Cir.1985); and FDIC v. Nemecek, 641 F.Supp. 740, 742

(D.Kan.1986)).

The "no asset" exception has been applied in a variety of

circumstances. It has been applied by courts in cases where it has

been determined that the asset was invalid for fraud, see Gunter v.

Hutcheson, 674 F.2d 862, 867 (11th Cir.1982), cert. denied, 459

U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982), or for the breach of

bilateral obligations contained in the asset, see Howell, 655 F.2d

at 746-48. Additionally, the exception has been applied where the

asset had been voided by the judgment of a court prior to the date

that the FDIC acquired the assets of the bank, see Grubb v. FDIC,

868 F.2d 1151 (10th Cir.1989), and where the asset had been

discharged by the payment and cancellation of the underlying debt

before the FDIC obtained the assets of the bank, see FDIC v.

Bracero & Rivera, Inc., 895 F.2d 824 (1st Cir.1990); Commerce

Federal Savings Bank v. FDIC, 872 F.2d at 1245; and FDIC v. Prann,

694 F.Supp. 1027 (D.Puerto Rico 1988). The exception has also been

invoked where, prior to the FDIC acquiring the bank's assets, the

asset was extinguished by the bank's failure to comply with state

law notice requirements for the sale of collateral. FDIC v.

Percival, 752 F.Supp. 313 (D.Neb.1990) (guaranty obligation was

extinguished prior to the FDIC acquiring the underlying notes when

the bank violated Neb.U.C.C. § 9-504(3) by selling other collateral

without notice to the guarantor).
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The "no asset" exception will not, however, be applied where

the agreement is not reflected in the official records of the bank.

An overriding concern of § 1823 and D'Oench is that FDIC be able to

rely on the official records of the bank. Therefore, when a

defendant seeks to apply the "no asset" exception based on an

unrecorded agreement, the exception will not apply. "Congress did

not intend that Sec. 1823(e) be avoided in this manner;

[defendant's] construction would drain substantial vitality from

Sec. 1823(e) ... by throwing into question the very records of the

bank that the statute entitles the FDIC to consider and rely upon."

FDIC v. Merchants Nat'l Bank, 725 F.2d at 639 (quoted in P.L.M.

International, 834 F.2d 248); but see FDIC v. Nemecek, 641 F.Supp.

740, 742-43 (holding § 1823(e) inapplicable even though accord and

satisfaction apparently was not in writing or in the bank's files).

FDIC cites numerous opinions of this and other circuits

holding that a release of an obligation must conform to the

requirements of 1823(e) to be enforceable against the FDIC; but

these are not cases where the "no asset" exception would apply. In

the cases cited by FDIC, either the agreement could not clearly be

determined from the bank's records or the agreement was still

executory when FDIC acquired the asset. See RTC v. McCrory, 951

F.2d 68 (5th Cir.1992) (agreement not continuously maintained as an

official bank record); FSLIC v. Kroenke, 858 F.2d 1067 (5th

Cir.1988) (oral agreement); FDIC v. Hoover-Morris Enterprises, 642

F.2d 785, 787-88 (5th Cir.1981) (unexecuted oral agreement); FDIC

v. Singh, 977 F.2d 18 (1st Cir.1992) (release not clear from bank's
 

2FDIC also cited FDIC v. Cremora Co., 832 F.2d 959, 962 (6th

Cir.1987), which held that a partnership agreement not meeting

requirements of § 1823(e) was not effective against FDIC. Its

relevance to the "no asset" exception is elusive. 

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records); FDIC v. Zook Bros., 973 F.2d at 1451 (release not in

bank's official files); FDIC v. Wright, 942 F.2d 1089 (7th

Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 1937, 118 L.Ed.2d

544 (1992) (appellate court concluded release was not in bank's

files, despite FDIC's concession it was); FDIC v. Manatt, 922 F.2d

486 (8th Cir.1991) (accord and satisfaction still executory when

FDIC acquired note), cert. denied, 501 U.S. 1250, 111 S.Ct. 2889,

115 L.Ed.2d 1054; FDIC v. Virginia Crossings Partnership, 909 F.2d

306 (8th Cir.1990) (undisclosed side agreement); FDIC v. P.L.M.

Int'l, Inc., 834 F.2d at 253 (undisclosed side agreement); Public

Loan Co. v. FDIC, 803 F.2d 82 (3rd Cir.1986) (oral accord &

satisfaction); FDIC v. de Jesus Valez, 678 F.2d 371 (1st Cir.1982)

(letter agreement kept in presidents safe rather than in bank's

files); but see F.D.I.C. v. Krause, 904 F.2d 463 (8th Cir.1990)

(holding defense based on accord and satisfaction not noted on the

promissory note or in the board's minutes barred by § 1823(e)

without stating whether agreement clearly reflected in bank's

official records).2

 Under the circumstances of this case, Rose McFarland should

not be precluded from availing herself of the "no asset" exception

to § 1823(e). Rose McFarland's guaranty was not listed as

collateral on the note and it was never mentioned in the minutes of

either loan committee in connection with the New Age loan. The
 

3Rose McFarland argued that the district court's findings

that the release was not executed in conformance with § 1823(e)

and that board approval was not reflected in the minutes were

clearly erroneous; that 1991 amendments to § 1823(e) could not

be applied retroactively to allow FDIC in its capacity as

receiver protection under § 1823(e); and that the district court

failed to give proper weight to the FDIC's statements in another

case that Rose McFarland's guaranty had been released. Because

we have determined that § 1823 and D'Oench, Duhme do not apply in

this case, we need not evaluate these issues. 

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guaranty could only be connected to the New Age loan after it was

discovered in a search of the bank's official files. That same

search would reveal that the guaranty had been released. Under

these circumstances, there is no "understanding or side agreement"

of the type that could have caused the FDIC to be misled. We

therefore hold that the "no asset" exception to § 1823(e) and

D'Oench, Duhme applies in this case, reverse the decision of the

district court, and hold that the release of Rose McFarland's

guaranty is effective against the FDIC.3

II. THE LEASE

A.

Two of the notes that were described above were secured by a

mortgage on "State Lease 340." The mortgage was granted in 1984.

That lease describes the covered property as "all of the property

... belonging to the State of Louisiana." The southern or seaward

boundary of the lease is described as "the extreme southern or

seaward boundary of ... Louisiana."

When the lease was granted by the State of Louisiana in 1936,

it was the State's position that its seaward boundary extended

three leagues (about nine miles) from shore. In 1950 the Supreme
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Court held that Louisiana's seaward boundary extended no further

than its ordinary low-water mark and that the United States owned

the lands and minerals underlying the Gulf in the case of United

States v. State of Louisiana, 339 U.S. 699, 70 S.Ct. 914, 94 L.Ed.

1216 (1950). In 1953, the Congress passed the Submerged Lands Act,

43 U.S.C. § 1301 et seq., which granted states a three-mile belt

offshore and the Outer Continental Lands Act, 43 U.S.C. § 1331 et

seq., which validated leases previously granted by states on

property outside the three-mile belt. This validation resulted in

the creation of a separate lease by the Department of the Interior

referred to as "OCS 310".

David Jump and Premier Venture Capital Corp., judgment

creditors of Rory Mcfarland, who recorded their judgments after the

recordation date of the FDIC's mortgage, argue that FDIC's mortgage

does not cover Rory Mcfarland's interest in OCS 310, and so does

not secure Rory Mcfarland's debt to FDIC and is available to cover

their judgments. The trial court agreed with Jump, et al., saying

that the lease language describing the area to be covered as the

Louisiana boundary must be understood as the Louisiana boundary in

1984 when the mortgage was executed. The trial court also found

that the mortgage recorded by FDIC, describing the leased area as

ending at the Louisiana boundary was not sufficient to put Jump, et

al. as third parties on notice that OCS 310 was mortgaged. FDIC

appeals.

B.

 Interpretation of a contract and the determination of
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ambiguity are questions of law, which this Court reviews de novo.

FDIC v. Brants, 2 F.3d 147 (5th Cir.1993). Fact questions arising

out of extrinsic evidence are reviewed under the clearly erroneous

standard. National Union Fire Insurance Co. v. Circle, Inc., 915

F.2d 986 (5th Cir.1990).

FDIC argues that we should consider extrinsic evidence

admitted by the district court regarding the intentions of the

parties. We disagree. The language in the mortgage unambiguously

describes the property covered as ending at the Louisiana boundary.

That alone decides the case. The trial court, perhaps out of an

abundance of caution, looked at the extrinsic evidence and still

found no basis for FDIC's claim to OCS 310, but there was no need

to do so. We therefore AFFIRM the district court's holding that

the notes acquired by FDIC are not secured by a mortgage on OCS

310.