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; they now are held by appellee, the
Resolution Trust Corporation as receiver for Southwest Federal
Savings Association ("RTC/Southwest Federal"). The district court
below entered summary judgment in favor of appellee RTC/Southwest
Federal on the note and guaranty on October 23, 1991.1 JFF and
Kennedy appeal, and we AFFIRM.
FACTUAL AND PROCEDURAL BACKGROUND
The following chronology describes the long and convoluted
history of this case:
! Prior to June 1985: JFF, Kennedy, Lamar Savings Association
("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 ultimately 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 against certain
real property located in Harris County, Texas ...
1
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
"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 deems necessary and
appropriate to construct an apartment project 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 regulations 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 of 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 the note as a
payment guarantor and also contemporaneously executed a separate,
six-page guaranty agreement.
3
! 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 damages and alleging breach of
contract, fraud, failure of condition precedent, failure of
consideration 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 asserts (1) a counterclaim
against JFF and Kennedy to collect 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 Mainland 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 cross-
claim against Mainland, and (3) remands the part of the case not
4
relating to Mainland (including JFF and Kennedy'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
receivership with the FSLIC as receiver. Simultaneously with the
receivership, the FSLIC (as receiver for Lamar) enters into an
acquisition 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:
3
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 that 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
"[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
Southwest]. 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 district 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."5
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
! 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," Southwest 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 Federal 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, guaranteed by
Kennedy and originally held by the now-defunct Lamar).
! July 12, 1991: The district court issues a memorandum granting
The intent by the district 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
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) whether (a) FDIC v. Laguarta, 939 F.2d 1231, 1239 (5th Cir.
1991); (b) the D'Oench, Duhme doctrine6 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 assumed 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?"
6
See D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942); 12
U.S.C. § 1823.
8
! January 22, 1993: The district court issues a second memorandum,
concluding that the July 12, 1991 summary judgment should be
reinstated, and enters an order reinstating the October 23, 1991
judgment effective as of January 22, 1993.
! August 11, 1993: The district court denies 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, appellee
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 costs. These facts are undisputed, and they
establish RTC/Southwest Federal's right to judgment as a matter of
law.7
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
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 agreement, 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
obligations 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 loan. In addition, the note and guaranty contain
unconditional language and do not refer to the letter agreement.
The statement in the letter agreement that the proceeds of any
future loan would be used to discharge the note was merely a
recitation for Lamar's benefit and protection, meaning that the
not 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
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 to 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
of any such liability. "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." 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. FDIC, 847 F.2d 1499 (11th Cir.
1988)). The federal receiver such as the FSLIC or RTC has the power
to sell an asset 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 against amounts currently
owed under the loan" transferred.8 Id; see also Texas Refrigeration
8
We agree that JFF and Kennedy at one point may have possessed
affirmative breach of contract damage claims against Lamar in
connection with Lamar's failure to provide the promised
construction financing. Such claims, if found to be valid, might
have operated as a set-off that would have reduced appellants'
11
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 amounts due under the note and
guaranty.
liability on the note and guaranty. 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.
Those 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 plaintiffs JFF and
Kennedy.
wjl\opin\93-2689.opn
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