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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 three 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 unless 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.

I.
In 1985, Waggoner executed two notes payable to Liberty
Federal Savings and Loan 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 assigns 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, as
2

required by Congress, the FDIC took over as receiver of Liberty.1
In 1990, the FDIC sued on the consolidated note seeking to recover
from 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 Waggoner 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 for 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 terms
1The 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).
2The 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

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." Hamilton, 939 F.2d at 1228; see 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 on promissory notes." FDIC 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 which FDIC could not have been put on notice by
reviewing records on file with the bank." RTC v. Sharif-Munir-
Davidson 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.
4

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. Civ. 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 therefore 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." Crook 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.
5

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
two 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. See, 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 adopted); Summit 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.3
3The 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

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 extension of time in which to pay the original
indebtedness." Schwab, 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 and other facts and
circumstances." Chastain 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." Scalise 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 original notes. Moreover, the consolidated note involves no
new money. The FDIC's contention that the consolidated note
7

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 court still refused to fund a novation. Id. 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 Vivion v. Grelling,
837 S.W.2d 255 (Tex. App.--Eastland 1992, writ denied), affirmed a
finding of novation where the second note did not refer to the
first and the two notes "differed in a number of material aspects."
Id. at 257. See also Lawler v. Lomas & Nettleton Mortgage
4All 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

Investors, 691 S.W.2d 593, 594-95 (Tex. 1985) (pointing 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 one 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 contention, 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. Barnett 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.
9

The FDIC presented no evidence, aside from the notes
themselves, to 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
not 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. See, e.g., Consolidated Engineering Co., Inc.
v. Southern 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 renewed and extended.
That is, there was no novation 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 of
10

intention to create a novation. We therefore reverse and render
judgment in favor of Waggoner.5
REVERSED and RENDERED.
5We need not consider Waggoner's alternative argument that
the FDIC is not the holder of the note.
11