Federal Deposit Insurance Corporation, in Its Corporatecapacity As Assignee of the Commonwealth Bank,plaintiff-appellant, v. Richard M. Plato, Individually and D/b/a the Mcmicken Group,et al., Defendants,richard M. Plato, Etc. and Henry Vanderkam, Etc.,defendants-appellees, 981 F.2d 852 (5th Cir. 1993)

The Federal Deposit Insurance Corporation (FDIC) appeals from the district court's judgment against the FDIC as plaintiff and for Richard Plato and Henry Vanderkam (d/b/a the McMicken Group) as counter-plaintiffs. We reverse in all significant respects and remand to the district court.

In 1985, Plato, Vanderkam, and Richard Fuqua¹  ("the buyers"), all attorneys, began negotiations with C.E. Vetco Services, Inc. (C.E. Vetco), to purchase an oil coating facility in Houston, Texas. On March 20, 1985, the parties entered into a tentative agreement to agree.²  In an addendum to this preliminary agreement, the buyers agreed to post a $350,000 irrevocable standby letter of credit³  in favor of C.E. Vetco as earnest money for the proposed purchase. The buyers obtained financing for the letter of credit from Commonwealth Bank (Commonwealth), a Texas institution. The buyers completed and signed an application for the letter of credit in the amount of $350,000 on April 29, 1985. Commonwealth approved the application and C.E. Vetco was listed as the beneficiary of the letter of credit, which was to be in force through June 24, 1985. The letter of credit contained the following condition precedent: Commonwealth would pay C.E. Vetco $350,000 if C.E. Vetco presented the letter of credit and certified that the buyers had failed to comply with the terms of the March 24th agreement to agree. The buyers also signed a blank promissory note for $350,000, executed a related security agreement, and provided various assets as collateral. It was the mutual understanding of Commonwealth and the buyers that the bank was authorized to complete the blank promissory note in the event that C.E. Vetco properly presented the letter of credit for payment.

The next day, on April 30, 1985, the parties finalized their negotiations and entered into a purchase and sale agreement. The parties agreed to close the deal on or before June 24, 1985. Notably, Vetco, Inc., the parent corporation of C.E. Vetco, was substituted in place of its subsidiary as the named seller in the agreement.⁴  Included in the final agreement was a provision similar to the one in the agreement to agree, which referred to a $350,000 letter of credit. This provision, however, referred to a letter of credit on behalf of Vetco, Inc., rather than C.E. Vetco, even though the latter was the only named beneficiary in the March 20th agreement to agree and the April 29th letter of credit.⁵ 

Sometime after April 30, 1985, Commonwealth--at the request of an official of Vetco, Inc., William Becker--altered certain terms of both the application and letter of credit itself. The beneficiary of the letter of credit was changed from C.E. Vetco Services, Inc., to Vetco, Inc. Commonwealth also changed the terms of the condition precedent in the application for the letter of credit: rather than requiring C.E. Vetco to present the letter of credit and certify that the buyers had breached the March 20th agreement to agree, the altered letter of credit required Vetco, Inc. to present the letter of credit and certify that the buyers were in breach of the April 30th purchase and sell agreement. These changes were in keeping with the substitution of Vetco, Inc. for C.E. Vetco as the named seller in the final purchase and sell agreement. Furthermore, the expiration date was changed from June 24, 1985, to June 28, 1985. A comparison of the original and altered versions of the two letters of credit indicates that Commonwealth simply whited out the altered portions of the original letter and typed over them.⁶ 

In the following months, the buyers failed to carry through with their obligations set forth in the purchase and sale agreement. On June 24, 1985, Vetco, Inc. responded by presenting the letter of credit to Commonwealth for payment. After Vetco, Inc. certified that the buyers had breached the purchase and sale agreement, Commonwealth paid Vetco, Inc. $350,000 according to the terms of the altered letter of credit. Commonwealth then unilaterally completed the promissory note that the buyers had signed in blank. The buyers initially did not dispute the propriety of Commonwealth's payment of the letter of credit and consequent activation of the promissory note. Indeed, over the next few months, the buyers actually made numerous payments on the note. They also executed an extension of the loan in the form of a second promissory note.⁷  However, by early 1986, the buyers fell behind in their payments and eventually defaulted on the note. At the time of the default, Vanderkam had paid the sum of $134,419, which included the liquidation of his collateral. Commonwealth also possessed Plato's collateral, 50,000 shares of preferred stock issued by Tejas Oil and Gas, Inc.

Commonwealth proceeded to file suit in Texas state court for the unpaid balance of the second promissory note. It was at this point that the buyers claim that they first discovered that Commonwealth had altered the original letter of credit. The buyers proceeded to file a counterclaim against Commonwealth for return of the payments made on the note and for return of all remaining collateral that had been pledged as security for the letter of credit. On April 29, 1989, Commonwealth was declared insolvent and the FDIC was appointed as receiver. All non-performing assets, including the buyers' $350,000 promissory note, were assigned to the FDIC in its corporate capacity. The FDIC was also substituted as plaintiff and counterdefendant in Commonwealth's pending state court suit against the buyers. The FDIC subsequently removed the action to federal court. In addition to its claim for the unpaid balance of the note, the FDIC also sought quantum meruit damages, claiming that the buyers had been unjustly enriched by Commonwealth's five-day extension of the expiration of the letter of credit.

After a two day bench trial, the district court entered judgment against the FDIC on its claims and for the buyers on their counterclaims. The district court found that Commonwealth, without authorization from the buyers, had materially altered the original application and letter of credit, which absolved the buyers of liability for their default on the promissory note. The district court also rejected the FDIC's contention that the buyers ratified the altered application and letter of credit by making payments on the promissory note; in this regard, the court specifically found that the buyers made the payment without any knowledge that any alteration had occurred. The court also held that the FDIC was not entitled to quantum meruit damages under well-established equity principles; the court imputed Commonwealth's "unclean hands" to the FDIC. Finally, the district court summarily rejected the FDIC's argument that it should prevail under either the holder-in-due-course or D'Oench Duhme doctrines. The court not only entered a "take nothing" judgment for the FDIC on its claim, but also ordered the FDIC to pay Vanderkam $134,419 and return Plato his 50,000 shares of stock. The court thereafter denied the FDIC's joint motion, pursuant to Federal Rules of Civil Procedure 59 and 60, for relief from judgment and a new trial.II.

On appeal, the parties have raised myriad issues relating to liability and damages with respect to the FDIC's claims and the buyer's counterclaim. Because we believe that the district court committed error by summarily rejecting the FDIC's assertion of the D'Oench Duhme doctrine,⁸  we need not address the bulk of issues on appeal, as our holding regarding D'Oench is dispositive of them.⁹  Because we reverse the district court as a matter of law, we need not address any of the court's fact-findings that are challenged by the parties on appeal.

The district court rejected the FDIC's invocation of D'Oench with the following conclusory statement: "D'Oench Duhme, involving attempts by borrowers to avoid payment of promissory notes by asserting oral side agreements with the lender, is clearly inapplicable to the case at bar." The FDIC argues that the district court misunderstood D'Oench. The FDIC specifically contends not only that this case does in fact involve an "oral side agreement," but also that even if it did not D'Oench would still apply. We agree on both counts.

We have carefully examined the buyers' original and altered applications for the letter of credit filed with Commonwealth, as well as the two promissory notes (the first signed in blank by the buyers and later filled in by Commonwealth) and the security agreement governing the collateral provided to secure the promissory note. Nowhere in the applications is there any cross-reference to any promissory note. Indeed, the extensive boilerplate language appears to constitute a discrete bilateral contract between the applicant and the bank; no promissory note is contemplated by its terms. Furthermore, nowhere in the promissory notes or security agreement is there a cross-reference to either the applications for the letter or credit or the letter of credit itself. In particular, the promissory note simply states that it is " [f]or value received"; it also contains standard boilerplate governing repayment and default. The security agreement likewise contains boilerplate and simply states that the $350,000 of indebtedness being secured with collateral was for the purpose of "personal indebtedness."

Thus, the promissory notes are facially distinct from the applications for the letter of credit. Cf. FDIC v. Philadelphia Gear Corp., 476 U.S. 426, 428, 106 S. Ct. 1931, 1933, 90 L. Ed. 2d 428 (1986) ("Although the face of the note did not so indicate, both Orion and Penn Square understood that nothing would be considered due on the note, and no interest charged by Penn Square, unless Philadelphia Gear presented drafts on the standby letter of credit after nonpayment by Orion."). The only nexus between the promissory note and security agreement, on the one hand, and the application and letter of credit, on the other hand, is a parol agreement between Commonwealth Bank and the buyers entered into at the time that the application for the letter of credit was submitted in April 1985. While a strong case can be made that Commonwealth and the buyers mutually understood that the promissory note applied only to the letter of credit transaction, such a claim is simply not actionable under D'Oench and § 1823(e), which mandate that such collateral agreements must be in explicit written form.¹⁰  As has been repeatedly recognized, the common rationale of D'Oench and § 1823(e) is to facilitate to the maximum degree the FDIC's ability to assess the condition of an insolvent bank solely based on its written records. "The doctrine means that the government has no duty to compile oral histories of the bank's customers and ... officers." See Bowen v. FDIC, 915 F.2d 1013, 1016 (5th Cir. 1990). In this case, FDIC auditors found a promissory note that made no reference to any other agreement. Because the promissory note was facially unrelated to the letter of credit transaction, D'Oench forecloses any claim by the appellees that the promissory note is invalid.

Alternatively, even if we were to agree with the appellees that no unrecorded, oral agreement is at issue in the instant case, there is an alternative reason for reversing the district court on D'Oench grounds. As the FDIC correctly contends, the district court erred by limiting D'Oench to "oral side agreements." In its expansive evolution since 1942, the D'Oench doctrine and its statutory analogue have been applied to a wide variety of circumstances besides collateral oral agreements not evident in a failed bank's records. See FDIC v. Hamilton, 939 F.2d 1225, 1228 (5th Cir. 1991); see generally, Note, Borrower Beware: D'Oench, Duhme and Section 1823 Overprotect the Insurer When the Bank Fails, 62 S.Cal. L. Rev. 253 (1988). While most of that evolution has occurred in the lower courts, even the Supreme Court has applied D'Oench and § 1823(e) to tortious conduct committed by a failed financial institution. See Langley v. FDIC, 484 U.S. 86, 108 S. Ct. 396, 98 L. Ed. 2d 340 (1987) (failed bank's fraudulent misrepresentation and inducement trumped by D'Oench) . In fact, the Supreme Court implied that only a species of tort actually rendering a contract void ab initio--e.g., "fraud in the factum"--would prevent a court from applying D'Oench. See id. at 94. Plato and Vanderkam argue that "fraud in the factum" occurred in the present case.

We disagree.¹¹  Commonwealth's actions consisted of the alteration of the buyer's application and the letter of credit. While possibly a "material" alteration,¹²  Commonwealth's unilateral changes hardly were injurious to the buyers. The substitution of Vetco, Inc. as the letter's beneficiary--merely substituting the parent corporation for its subsidiary--and the corresponding change in the condition precedent were simply nominal alterations contemplated by the express language of the purchase and sale agreement. Furthermore, the extension of the expiration date by five days in no way prejudiced the buyers.¹³  It is not as if Commonwealth's alterations increased the amount or terms of repayment. Appellees appear to be clinging to a technicality in the hope of extinguishing their otherwise lawfully incurred debt.

Furthermore, even if Commonwealth's actions did constitute "material alteration" as that term is commonly understood, numerous courts, including this court, have addressed the question of whether D'Oench or § 1823(e) is operative when a failed financial institution materially altered, or wrongly augmented, the terms of a partially completed instrument or document. See, e.g., FDIC v. Caporale, 931 F.2d 1 (1st Cir. 1991); FSLIC v. Murray, 853 F.2d 1251 (5th Cir. 1988); FDIC v. Morrison, 816 F.2d 679 (6th Cir. 1987); FDIC v. McClanahan, 795 F.2d 512 (5th Cir. 1986); FDIC v. Hatmaker, 756 F.2d 34 (6th Cir. 1985). Such cases have relied on a well-recognized component of the larger D'Oench doctrine--that when a party "lent himself" to a scheme that could mislead federal bank examiners, whether or not done unwittingly, he cannot circumvent D'Oench by arguing that the failed bank wrongly altered or augmented an incomplete instrument which he signed. See D'Oench, 315 U.S. at 460, 62 S. Ct. at 680; Caporale, 931 F.2d at 2 ("By signing blank notes, the Caporales 'lent themselves' to a scheme that could mislead bank examiners."); McClanahan, 795 F.2d at 515 (same). In the instant case, the buyers--all sophisticated attorneys--should have foreseen the consequences of signing a blank promissory note.¹⁴ 

Accordingly, we REVERSE not only the district court's entry of a take-nothing judgment on the FDIC's claim, but also the court's order that the FDIC must return to Vanderkam the $134,419 that he had previously paid on the note and return to Plato his 50,000 shares of stock given as collateral. We AFFIRM the district court's judgment on the FDIC's claim only insofar as it refused to award quantum meruit damages. We REMAND for the entry of judgment (including, if and to the extent allowed under law, interest, costs, and attorneys fees). Costs of this appeal shall be borne by the appellees.