In
D’Oench, Duhme & Co. v. FDIC,
In the past decade an ever-increasing number of financial institutions have encountered significant difficulty maintaining solvency. As more and more of these institutions became insolvent, two federal agencies, the FDIC and its counterpart in the savings and loan industry, the Federal Savings and Loan Insurance Corporation (“FSLIC”), have been required to assume the responsibility for the assets and liabilities of these institutions. With the increased involvement of these two agencies in untangling the web created by failed institutions and by financial arrangements gone awry has come a concomitant need to determine the applicability and breadth of the defenses precluded by the Supreme Court’s D’Oench decision.
In this case, we are called upon once again to make that determination. Concluding that the body of case law developed by D’Oench and its progeny effectively bars the defenses sought by appellant in this case, we affirm the judgment of the district court.
I. BACKGROUND
In August 1985, appellant Robert McCullough orally agreed to acquire several *595 pieces of property owned by Charles Little and financed through Twin City FSB (“Old Twin City”). As part of this agreement, it was understood that McCullough would assume Little’s debt of $1,030,000.00 being held by Old Twin City, and that in consideration, several pieces of Alabama real estate then owned by Little and mortgaged to Old Twin City would be transferred to McCullough. As an additional portion of this transaction, Little and Billy Lewis, Old Twin City’s chief executive officer, orally promised to transfer other property— namely, (1) 486 acres of real estate in Cov-ington County, Alabama, that were mortgaged to Old Twin City, and (2) various oil leases that were pledged to Old Twin City — to McCullough as part of their agreed-upon deal. It is this latter oral promise, which has gone unfulfilled, which is the focal point of this litigation.
Both Little and Lewis were anxious to consummate the oral arrangement as quickly as possible. Lewis knew that federal bank examiners would soon be arriving at Old Twin City. Given the serious financial difficulties that Little had been experiencing, Lewis knew that Old Twin City’s loans to Little would be viewed as presenting an unacceptable credit risk. Thus, it was imperative to Lewis that the transfer of Little’s indebtedness be conducted expeditiously. The parties agreed that once the necessary paperwork was executed to reflect McCullough’s assumption of the loan, they would conduct a formal closing at a later date to remedy any deficiencies in the paperwork.
Once the transaction had been formally approved by Old Twin City, the parties hurried to execute the necessary papers to evidence McCullough and his wife’s assumption of Little’s indebtedness. Although these papers reflected that portion of the August agreement concerning the Old Twin City note, the mortgages held by Old Twin City on various pieces of property, and various rent assignments, the papers made no mention of the earlier oral agreement that the McCulloughs were to receive title to the 486 acres of property in Covington County or that the oil leases pledged to Old Twin City were to be transferred to the McCulloughs.
After execution of the papers, confusion reigned. Despite repeated requests to obtain formal notification from Old Twin City that title to the various properties had been transferred to him and that the proper documentation was complete, McCullough never received proper documentation. Additionally, although Little continued to receive rental payments from the properties transferred to McCullough, the checks issued by Little reflecting receipt of the rental payments were rejected for insufficient funds.
To rectify these problems, McCullough again met with Little and Lewis at the Old Twin City offices on May 21, 1986. As McCullough recounts in his affidavit, he commenced the meeting by informing Lewis and Little of the problems he had been experiencing:
I told Mr. Lewis that I was completely disgusted with the entire transaction. I told him that I had been promised that the transaction would be properly closed as soon as possible after the examiners had left Twin City Savings Bank, that the rents on the properties would be coming to me and that they would be adequate to cover the lease payments. Instead, several months had passed and I had no evidence that the property had ever been promised to me, there had never been a proper loan closing, I had seen no title insurance, the oil leases had not been assigned to me and I had up to that time received no rent.
McCullough assured Lewis that he intended to fulfill his obligations as soon as he received all of the proper paperwork from Little and the terms of the assumed note were renegotiated to reflect more favorable terms. Little’s attorney explained to McCullough that the reason that McCullough had not received the closing papers (e.g., the deeds and title policies) was because Old Twin City had not yet signed documents releasing Little from the indebtedness.
When Lewis agreed to issue the releases to Little, Little’s attorney provided what *596 were represented to be the proper documents transferring title to McCullough. McCullough accepted the documents without reviewing them. These papers made no mention of the Covington County acreage or the oil leases. Erroneously thinking that he had worked out his difficulties, McCullough returned home and issued a check to Old Twin City bringing the loan current. His problems with Old Twin City, however, continued unabated. Some time later, McCullough realized that he still had not received title to the 486 acres in Cov-ington County and the oil leases that had been promised. Additionally, despite assurances to the contrary from Old Twin City, McCullough’s requests for an amended note and mortgage as had been agreed upon during the May 21, 1986, conference went unanswered. Moreover, in October 1986, McCullough was informed that Little had declared bankruptcy and that, contrary to his earlier understandings, Little’s interest in the 486 acres and oil leases had never been transferred.
On January 31, 1987, McCullough made his final payment to Old Twin City. With that payment, he informed the bank that he would make no further payments until he received an amended mortgage and note, the title to the 486 acres in Covington County and the promised assignment of the oil leases. Although Old Twin City did provide McCullough with an amended note, his other requests went unanswered.
On August 20, 1987, Old Twin City was declared insolvent and was placed in receivership by the Federal Home Loan Bank Board (“FHLBB”). The FHLBB appointed the FSLIC as receiver for the bank and directed the FSLIC to organize Twin City Savings, FSA (“New Twin City”). The FSLIC was further instructed to conduct a purchase and assumption transaction whereby New Twin City purchased substantially all of the assets and assumed substantially all of the liabilities of Old Twin City, including the note, mortgage and assignment of rents executed by McCullough.
Finding the McCullough note to be significantly in arrears, New Twin City instituted this litigation to recover on the note.
II. PROCEEDINGS BELOW
In the district court, the McCulloughs 2 defended against New Twin City’s suit by raising a multitude of defenses. They argued that the note and mortgage should be considered void because Little and Old Twin City had fraudulently induced them to assume Little’s prior indebtedness. They contended that had they known that Little and Old Twin City would not convey to them the Covington County property and the oil leases, they would never have agreed to the transaction. Relying upon similar grounds, they argued that the transaction should be declared void due to a failure of consideration. In addition, the McCulloughs claimed that the mortgage being sued upon was legally insufficient because the notarization was not conducted in accordance with Alabama law. 3
On cross motions for summary judgment, the district court granted judgment to New Twin City. The district court held that the
D’Oench
doctrine applied to the FSLIC and to successors of the FSLIC who obtain the assets of a failed bank, and that the
D’Oench
doctrine precluded the McCul-loughs’ defense premised upon unconsummated, oral side agreements. Additionally, the district court, following a recent Fifth Circuit case,
FSLIC v. Murray,
The district court also rejected the McCulloughs’ argument that the mortgage in this case should be declared void because it was acknowledged by a notary public who was not present at the signing of the mortgage. Instead, the district court ruled that, under Alabama law, the bank had an equitable mortgage in the property.
III. CONTENTIONS
On appeal, the McCulloughs argue that the district court made a fundamental error in rejecting their defenses to the note. They contend that, under the circumstances of this case, the principles underlying the D’Oench doctrine are inapplicable to their defenses of failure to perform a condition precedent, failure of consideration, and fraudulent inducement. The federal common law protections emanating from D’Oench and its progeny, they assert, do not properly extend to either (1) the FSLIC as a receiver for a failed savings and loan or (2) successors of the FSLIC who obtain the assets of the failed savings and loan.
The McCulloughs further contend that, under the facts of this case, New Twin City was not entitled to an equitable mortgage. They note that it is uncontested that the mortgage in this case was not properly witnessed or acknowledged under Alabama law. Arguing that they provided sufficient facts to establish that Old Twin City engaged in fraud, they claim that New Twin City, as the successor to Old Twin City’s rights, cannot call upon equity to protect its interest.
IV. RELEVANT SUBSEQUENT EVENTS •
Since the district court’s ruling on New Twin City’s motion for summary judgment, several significant occurrences have transpired which simplify our discussion of many of the issues in this case. As a result, prior to embarking into an analysis of the various arguments raised by the appellants, some discussion of these occurrences and their relevance to this litigation is in order.
A. Identifying the Real Party in Interest
Subsequent to the date that the district court issued its opinion, motions have been filed by various federal entities seeking to substitute themselves for New Twin City Bank. Accordingly, we deem it advisable as a preliminary matter to determine exactly who, at this point, is the real plaintiff party in interest and appellee in this litigation.
New Twin City Bank commenced this litigation against the appellants and was the plaintiff party on November 9, 1988, when the district court issued its ruling on the outstanding motions for summary judgment. The appellants, rather than immediately appealing the district court’s ruling, timely filed a motion for reconsideration with the district court. This motion was denied on March 3, 1989.
On November 9,1988, the same date that the district court issued its ruling in favor of New Twin City Bank, the FHLBB determined that New Twin City, following in the footsteps of its predecessor, Old Twin City, was insolvent. The FSLIC again was appointed receiver. On December 9, 1988, with the appellants’ motion for reconsideration still pending in the district court, the FSLIC filed a motion to substitute itself as party plaintiff in lieu of New Twin City. This motion was granted on December 14, 1988, two and one-half months prior to the denial of appellants’ motion for reconsideration.
Thus, notwithstanding the fact that the FSLIC had not yet entered the litigation at the time the district court issued its ruling on New Twin City’s motion for summary judgment, the FSLIC as receiver for New Twin City was the actual plaintiff party at the time the district court issued its
final
order in this case denying the outstanding motion for reconsideration.
See Griggs v. Provident Consumer Dis
*598
count Co.,
Indeed, a parallel can be drawn between the proceedings in this case, and those found in
FSLIC v. Two Rivers Associates,
New Sunrise brought suit in state court to enforce the promissory notes and foreclose the mortgages. The state court issued a partial summary judgment finding the notes and mortgages valid and in default, and directed a public sale of the properties if the debt was not satisfied within three days. Simultaneously, the state court granted a motion allowing the debtors to file amended answers.
The debtors filed amended answers, and also moved for reconsideration of the grant of summary judgment. While the motion for reconsideration was pending, the FHLBB determined that New Sunrise was insolvent and appointed the FSLIC as receiver for the purpose of liquidating New Sunrise’s assets and making payments of its liabilities.
Before the state court ruled on the motion to reconsider, the FSLIC was substituted for New Sunrise in the case and the case was removed to federal court. When reanalyzing the issues on summary judgment, both the district court and a panel of this court reviewed the case from the perspective of the FSLIC, and not New Sunrise, being the proper party in interest.
Hence, we need not on this appeal determine whether the district court was correct in following those courts that have held that successors to the FSLIC or the FDIC are entitled to the same common law defenses as may be asserted by the FSLIC or the FDIC.
See, e.g., Porras v. Petroplex Savings Ass’n,
B. D’Oench Doctrine Protections Extend to the FSLIC as Receiver
Given that we have identified the FSLIC as the real party in interest at the time of the district court’s final judgment, the next question to be addressed is whether the FSLIC as receiver for a failed savings and loan institution is entitled to rely upon the
D’Oench
doctrine and raise federal common law defenses to defeat state law claims of fraudulent inducement and failure of consideration when suing upon a note in default. Although not published until after briefs were filed with this court, a panel of this court has recently resolved this issue in the affirmative, holding that the FSLIC in its capacity as receiver is entitled to raise federal common law defenses premised upon
the. D’Oench
doctrine.
Two Rivers Associates,
In reaching this conclusion, the
Two Rivers Associates
court first observed that the policy reasons underlying the Supreme Court’s decision in
D’Oench
leading to the development of a federal common law es-toppel defense for the FDIC were equally applicable to the FSLIC: “since the FSLIC has parallel duties and power with respect to savings and loans as the FDIC has with banks, the federal policy should protect the FSLIC to the same extent it protects the FDIC.”
Two Rivers Associates,
V. APPLICATION OF THE D’OENCH DOCTRINE BARS THE MCCUL-LOUGHS’ DEFENSES TO THE NOTE
Having determined that the FSLIC was the real party in interest at the time of the district court’s final judgment and that the FSLIC even in its receivership capacity is entitled to raise federal common law defenses derived from D’Oench, we now turn to the precise scope of those defenses.
Although the precise claim that was defeated in
D’Oench
addressed a private party’s claim premised upon a secret agree
*600
ment that a note need not be repaid, the policy considerations leading to the development of federal common law in
D’Oench
have resulted in extension of the
D’Oench
estoppel doctrine well beyond that precise factual setting. Borrower defenses premised upon other purported, unwritten statements leading to claims of fraudulent inducement or failure of consideration are now also generally precluded by
D’Oench
and its progeny.
See, e.g., FSLIC v. Murray,
Whether a borrower’s defense is barred by the
D’Oench
doctrine depends upon whether the purported agreement relied upon by the private party was ever memorialized in writing or otherwise made explicit such that the FSLIC or the FDIC would have knowledge of the bank’s obligations during an evaluation of the bank’s records.
5
See Two Rivers Associates,
On the other hand, if side agreements or other inducements cannot be determined by a review of the bank’s files, then it cannot be said, without additional proof, that the FSLIC or the FDIC was aware of the additional commitments allegedly made by the bank. Given federal policy favoring reasonable reliance upon existing bank records evidencing all of the bank’s existing commitments,
see Two River Associates,
While on its face, such a policy may appear inequitable to those parties relying upon a bank’s unrecorded promises or arrangements, it must be recalled that a party who accedes to a bank’s oral inducements. without memorializing the same is, to at least some extent, responsible. Because such a party “lent himself to a scheme or arrangement whereby the banking authority ... was likely to be misled,” that party cannot rely upon that same scheme or arrangement to defend against the banking authority’s subsequent actions.
See Langley v. FDIC,
Looking to the facts of this ease, it is readily apparent that the FSLIC was entitled to avail itself of the
D’Oench
doctrine. To put the FSLIC on notice that a bank had promised to convey additional property in consideration for the execution of the note, mortgage and rent assignments, the borrower must be able to point to documents that “clearly manifest[ed] the bilateral nature of the [parties’] rights and obligations.”
Two Rivers Associates,
The McCulloughs argue that two documents in the bank files manifest the obligation to transfer the additional property. The first document, a memorandum given to McCullough in August 1985, was written prior to the execution of the relevant note, mortgage and rent assignment, and merely alludes to “new appraisals” and a “transfer of oil runs.” Subsequently, when the note, mortgage and rent assignments at issue in this case were executed, it is undisputed that these documents contained no reference to either the Covington County property or to the oil leases. Thus, even if we were to assume that the vague allusions in the August memorandum could be construed as evidence that at one point in time there was discussion of possibly transferring some undefined “oil runs,” we nonetheless conclude that there is no
explicit documentation
evidencing Old Twin City’s
obligation
to transfer specific properties to the McCulloughs.
See Two Rivers Associates,
Finally, it must be noted that McCullough is at least partially responsible for the predicament in which he finds himself. McCullough was active throughout the actual negotiations leading up to the consummation of the deal at issue and could easily have insisted that inclusion of the Coving-ton County property and the oil leases be made explicit in the papers.
See Two Rivers Associates,
Accordingly, we conclude that the McCul-loughs’ defenses of failure to perform a condition precedent, failure of consideration, and fraudulent inducement all are *602 barred by the FSLIC’s invocation of the D’Oench doctrine.
VI. APPLICATION OF D’OENCH DOCTRINE BARS MCCULLOUGH’S DEFENSE TO THE MORTGAGE
The McCulloughs’ last defense concerns a legal insufficiency in the mortgage that was executed to secure the now defaulted note. Although facially appearing to be a valid, legal mortgage, the parties agree that the mortgage was not witnessed or acknowledged in proper fashion. At the time that the mortgage was signed, the notary whose signature appears on the mortgage was, in fact, not present. Under Alabama law, the McCulloughs argue, this flaw renders the mortgage insufficient to pass legal title to the real estate described in the mortgage.
See Central Bank of the South v. Dinsmore,
Although the error in acknowledgement might render the mortgage voidable were this suit involving two private parties litigating under state law, we conclude that the FSLIC’s federal common law defenses bar the McCulloughs’ claim of improper notarization. On its face, the mortgage appears valid. As such, it would have been impossible for the bank examiners to have had any suspicions concerning the legal sufficiency of the mortgage during an examination of Old Twin City’s records. Additionally, the flaw in the mortgage is one that the McCulloughs could have easily guarded against by merely waiting to sign the mortgage until a notary’s presence was secured. Because the McCulloughs were aware that the document they signed was a mortgage, we are constrained to conclude that the McCulloughs lent themselves to a scheme or arrangement (i.e., that the mortgage would be signed without the presence of a notary and that a notary would later affix her signature) that was likely to mislead the banking authorities (by leading them to believe that the mortgage was legally valid). 7 Accordingly, the, McCul-loughs’ claim is barred by the D’Oench doctrine.
In concluding that application of the
D’Oench
doctrine in this case is appropriate, we observe that application of federal common law cannot be viewed as being inconsistent with the settled expectations of individuals engaging in transactions under state law.
See Gunter,
We have noted on prior occasions that, in application, the federal common law defenses available to the FDIC are analogous
*603
to the defenses that could be raised by a holder in due course under state law.
See FDIC v. Gulf Life Ins. Co.,
Drawing upon this analogy, several circuits have concluded that the FDIC and the FSLIC, regardless of whether operating in a corporate or receiver capacity, are clothed under federal common law with the same defenses that would be accorded a holder in due course under state law.
See, e.g., Campbell Leasing, Inc. v. FDIC,
[Providing FSLIC with at least the status of a holder in due course promotes the necessary uniformity of law in this area while it counters individual state laws that would frustrate a basic FSLIC objective: promoting confidence and stability in financial institutions. See United States v. Kimbell Foods, Inc.,440 U.S. 715 , 728-29,99 S.Ct. 1448 , 1458-59 [59 L.Ed.2d 711 ] (1979); Gunter,674 F.2d at 868-69 . Moreover, clothing FSLIC with at least holder in due course status does not trample commercial expectations of note makers such as appellants. See Kimbell Foods,400 U.S. at 729 ,99 S.Ct. at 1459 . A maker must anticipate that his note may be transferred to a holder in due course; the maker therefore suffers no prejudice if the FSLIC is granted those rights. See Wood,758 F.2d at 161 ; Gunter,674 F.2d at 872 .
‡ s|c >}C }}C >}! }¡c
Finally, a uniform rule such as this serves the goals of predictability and rationality more effectively than the alternative of invalidating individual defenses as they arise. Establishing at least holder in due course status for FSLIC allows it, the public and the courts to draw on a well-developed body of commercial law when determining which state law defenses are clearly unenforceable against FSLIC.
Were we to accord FSLIC with holder in due course status in this case,
10
it is readily
*604
apparent that the McCulloughs’ claim concerning the improper acknowledgment would fail under Alabama law. For one thing, as a holder in due course, the FSLIC could not be said to have had notice of the irregularity of which the McCulloughs now complain.
See
1975 Ala.Code § 7-3-304(4)(d). More significantly, the McCulloughs’ claim concerning an irregularity in the mortgage is not cognizable against a holder in due course.
See, e.g., Colburn,
VII. CONCLUSION
For all of the reasons discussed above, the judgment of the district court is affirmed.
AFFIRMED.
Notes
. In D’Oench, the FDIC had brought suit in its corporate capacity to collect on an overdue note that it had acquired. Defending against the FDIC's suit, the party having executed the note averred that it had arranged a special, side agreement with the bank which had originally been a party to the note that the note would never be called for payment.
. Although only Robert McCullough was actively involved in the negotiations with Little and Old Twin City, both he and his wife were signatories to the note and mortgage.
. The McCulloughs raised several other defenses not relevant here including a contention that the sued-upon promissory note, mortgage, and assignment were void because at the time they were transferred to McCullough, Old Twin City was not qualified to do business in Alabama under Alabama law, 1975 Ala.Code § 10-2A-247. This defense was wholly without merit. 1975 Ala.Code § 5-16-39;
see also Midwest Homes Acceptance Corp. v. Langdon,
. Since this appeal was docketed, the FSLIC has been abolished by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA”), Pub.L. No. 101-73, § 401(a); 103 Stat. 183, 354 (1989) and the FDIC has been substituted in place of FSLIC. For all practical purposes, this substitution has no bearing upon our analysis of the issues presented. Although the FSLIC as receiver was never entitled to rely upon the statutory defenses that the FDIC is entitled to raise,
see
12 U.S.C. § 1823(e),
as amended by
FIRREA, Pub.L. No. 101-73, § 217(4),
. Under this inquiry, it is irrelevant whether the FSLIC or FDIC has knowledge of the unrecorded agreement or scheme at the time it
acquires
the note.
Two Rivers Associates,
. There may be instances in which the borrowers are wholly innocent of any misconduct and, additionally, cannot be said to have lent themselves to arrangements that might deceive the banking authorities.
See, e.g., FDIC v. Meo,
. The McCulloughs make no argument that the bank was guilty of fraud in the factum — i.e., that they were fraudulently led to believe that the mortgage they were signing was not a legal document — and that a notary, had she been present, would have prevented such a fraud from occurring. Although it is possible that a claim of fraud in the factum would survive FSLIC’s invocation of the
D’Oench
doctrine,
see Langley,
. Were it the case that the acknowledgement flaw in the mortgage resulted in the mortgage being void, then we recognize that a serious argument could be made that federal common law would provide no respite for FSLIC. In such an instance, the instrument possessed by FSLIC would be wholly without legal consequence, "thus leaving no ‘right, title or interest’ that could be ‘diminished or defeated.’ ”
Langley,
. In both
Gulf Life
and
Gunter,
we analyzed the appropriateness of according the FDIC with federal common law defenses by examining the three factors identified in
United States v. Kimbell Foods,
. Because the note and mortgage were acquired through a bulk transfer, the FSLIC could not be considered a holder in due course under
*604
state law.
See
1975 Ala.Code § 7-3-302. This fact, however, is inconsequential to the determination that the FSLIC should be treated as a holder in due course under
federal common law. Campbell Leasing,