To finance the purchase of land in Louisiana, petitioners
borrowed money from a bank insured by the Federal Deposit Insurance
Corporation (FDIC) and, in consideration for the loan, executed a
note, a collateral mortgage, and personal guarantees. When
petitioners failed to pay an installment due on a renewal of the
note, the bank filed suit for principal and interest in a Louisiana
court, which suit was removed on diversity grounds to Federal
District Court. Petitioners alleged, as a defense against the
bank's claim, that the land purchase and their note had been
procured by the bank's misrepresentations overstating the amount of
land and mineral acres in the tract, and falsely stating that there
were no outstanding mineral leases on the property. No references
to the alleged representations appeared in the documents executed
by petitioners, in the bank's records, or in the minutes of the
bank's board of directors or loan committee. While the suit was
pending, a Louisiana official closed the bank because of its
unsound condition, and appointed the FDIC as receiver. The FDIC
ultimately acquired petitioners' note, and was substituted as a
plaintiff in this lawsuit. The District Court granted summary
judgment for the FDIC, and the Court of Appeals affirmed, holding
that the word "agreement" in a provision of the Federal Deposit
Insurance Act of 1950, 12 U.S.C. § 1823(e), encompassed the kinds
of material terms or warranties asserted by petitioners in their
misrepresentation defense and, because § 1823(e)'s requirements
were not met, the defense was barred. Section 1823(e) provides that
no "agreement" tending to diminish or defeat the FDIC's "right,
title or interest" in any asset acquired by the FDIC under the
section shall be valid against the FDIC unless it shall have been
(1) in writing, (2) executed contemporaneously with the bank's
acquisition of the asset, (3) approved by the bank's board of
directors or loan committee and reflected in the minutes of the
board or committee, and (4) continuously, from the time of its
execution, an official record of the bank.
Held: A condition to payment of a note, including the
truth of an express warranty, is part of the "agreement" to which
the requirements of § 1823(e) attach. Because the representations
alleged by petitioners
Page 484 U. S. 87
constituted such a condition and did not meet the statute's
requirements, they cannot be asserted as a defense here. Pp.
484 U. S.
90-96.
(a) The word "agreement" in § 1823(e) is not limited to an
express promise to perform an act in the future. The essence of
petitioners' defense is that the bank made certain warranties
regarding the land, the truth of which was a condition to
performance of their obligation to repay the loan. As used in
commercial and contract law, the term "agreement" often has a wider
meaning than a promise, and embraces such a condition upon
performance. This common meaning of the word "agreement" must be
assigned to its usage in § 1823(e) if that section is to fulfill
its intended purposes of allowing 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 the collusion of bank employees, when a bank appears
headed for failure.
Cf. D'Oench, Duhme & Co. v. FDIC,
315 U. S. 447. Pp.
484 U. S.
90-93.
(b) There is no merit to petitioners' argument that, even if a
misrepresentation concerning an existing fact can sometimes
constitute an agreement covered by § 1823(e), it at least does not
do so when the misrepresentation was fraudulent and the FDIC had
knowledge of the asserted defense when it acquired the note.
Neither fraud in the inducement nor the FDIC's knowledge thereof is
relevant to the section's application. No conceivable reading of
the word "agreement" in § 1823(e) could cause it to cover a
representation or warranty that is bona fide, but to exclude one
that is fraudulent. The bank's alleged misrepresentations here did
not constitute fraud in the factum, which would render the note
void and take it out of § 1823(e), but instead constituted only
fraud in the inducement, which rendered the note voidable, but not
void. The bank therefore had and could transfer to the FDIC
voidable title, which was enough to constitute "title or interest"
in the note for the purpose of § 1823(e). Even if this Court had
the power to engraft an equitable exception upon the statute's
plain terms, the equities petitioners invoke are not the equities
the statute regards as predominant. Pp.
484 U. S.
93-96.
792 F.2d 541, affirmed.
SCALIA, J., delivered the opinion for a unanimous Court.
Page 484 U. S. 88
JUSTICE SCALIA delivered the opinion of the Court.
Petitioners W. T. and Maryanne Grimes Langley seek reversal of a
decision by the United States Court of Appeals for the Fifth
Circuit granting the Federal Deposit Insurance Corporation (FDIC)
summary judgment on its claim for payment of a promissory note
signed by petitioners. 792 F.2d 541 (1986). The Fifth Circuit
rejected petitioners' contention that a defense of
misrepresentation of existing facts is not barred by 12 U.S.C.
§1823(e), because such a representation is not an "agreement" under
that section. We granted certiorari to resolve a conflict in the
Courts of Appeals. 479 U.S. 1028 (1987).
Compare Gunter v.
Hutcheson, 674 F.2d 862, 867 (CA11),
cert. denied,
459 U.S. 826 (1982);
FDIC v. Hatmaker, 756 F.2d 34, 37
(CA6 1985) (dictum).
I
The Langleys purchased land in Pointe Coupee Parish, Louisiana,
in 1980. To finance the purchase, they borrowed $450,000 from
Planters Trust & Savings Bank of Opelousas, Louisiana, a bank
insured by the FDIC. In consideration for the loan, they executed a
note, a collateral mortgage, and personal guarantees. The note was
renewed several times, the last renewal being in March 1982, for
the principal amount of $468,124.41.
In October, 1983, after the Langleys had failed to pay the first
installment due on the last renewal of the note, Planters brought
the present suit for principal and interest in a Louisiana state
trial court. The Langleys removed the suit, on grounds of
diversity, to the United States District Court for the Middle
District of Louisiana, where it was consolidated with a suit by the
Langleys seeking more than $5 million in damages from Planters and
others. The Langleys alleged as one of the grounds of complaint in
their own suit, and as a defense against Planters' claim in the
present suit, that the
Page 484 U. S. 89
1980 land purchase and the notes had been procured by
misrepresentations. In particular, they alleged that the notes had
been procured by the bank's misrepresentations that the property
conveyed in the land purchase consisted of 1,628.4 acres, when in
fact it consisted of only 1,522, that the property included 400
mineral acres, when in fact it contained only 75, and that there
were no outstanding mineral leases on the property, when in fact
there were. [
Footnote 1] No
reference to these representations appears in the documents
executed by the Langleys, in the bank's records, or in the minutes
of the bank's board of directors or loan committee.
In April, 1984, the FDIC conducted an examination of Planters
during which it learned of the substance of the lawsuits with the
Langleys, including the allegations of Planters'
misrepresentations. On May 18, 1984, the Commissioner of Financial
Institutions for the State of Louisiana closed Planters because of
its unsound condition and appointed the FDIC as receiver. The FDIC
thereupon undertook the financing of a purchase and assumption
transaction pursuant to 12 U.S.C. § 1823(c)(2), in which all the
deposit liabilities and most of the assets of Planters were assumed
by another FDIC-insured bank in the community. Because the amount
of the liabilities greatly exceeded the value of the assets, the
FDIC paid the assuming bank $36,992,000, in consideration for which
the FDIC received,
inter alia, the Langleys' March, 1982,
note.
In October, 1984, the FDIC was substituted as a plaintiff in
this lawsuit, and moved for summary judgment on its claim. The
District Court granted the motion,
615 F.
Supp. 749
Page 484 U. S. 90
(WD La.1985), and was sustained on appeal. The Fifth Circuit
held that the word "agreement" in 12 U.S.C. § 1823(e) encompassed
the kinds of material terms or warranties asserted by the Langleys
in their misrepresentation defenses and, because the requirements
of § 1823(e) were not met, those defenses were barred. 792 F.2d at
545-546. We granted the Langleys' petition for certiorari on the
issue whether, in an action brought by the FDIC in its corporate
capacity for payment of a note, § 1823(e) bars the defense that the
note was procured by fraud in the inducement even when the fraud
did not take the form of an express promise.
II
The Federal Deposit Insurance Act of 1950, § 13(e), 64 Stat.
889, as amended, 12 U.S.C. § 1823(e), provides:
"No agreement which tends to diminish or defeat the right, title
or interest of the Corporation [FDIC] in any asset acquired by it
under this section, either as security for a loan or by purchase,
shall be valid against the Corporation unless such agreement (1)
shall be in writing, (2) shall have been executed by the bank and
the person or persons claiming an adverse interest thereunder,
including the obligor, contemporaneously with the acquisition of
the asset by the bank, (3) shall have been approved by the board of
directors of the bank or its loan committee, which approval shall
be reflected in the minutes of said board or committee, and (4)
shall have been, continuously, from the time of its execution, an
official record of the bank."
A
Petitioners' principal contention is that the word "agreement"
in the foregoing provision encompasses only an express promise to
perform an act in the future. We do not agree.
As a matter of contractual analysis, the essence of petitioners'
defense against the note is that the bank made certain
Page 484 U. S. 91
warranties regarding the land, the truthfulness of which was a
condition to performance of their obligation to repay the loan.
See 1 A. Corbin, Contracts § 14, p. 31 (1963) ("[T]ruth
[of the warranty] is a condition precedent to the duty of the other
party");
accord, 5 S. Williston, Contracts § 673, pp.
168-171 (3d ed.1961); J. Murray, Contracts § 136, pp. 275-276 (2d
rev. ed.1974). As used in commercial and contract law, the term
"agreement" often has "a wider meaning than . . . promise,"
Restatement (Second) of Contracts § 3, Comment a (1981), and
embraces such a condition upon performance. The Uniform Commercial
Code, for example, defines agreement as "the bargain of the parties
in fact as found in their language or by implication from other
circumstances. . . ." U.C.C. § 1-201(3), 1 U.L.A. 44 (1976). Quite
obviously, the parties' bargain cannot be reflected without
including the conditions upon their performance, one of the two
principal elements of which contracts are constructed.
Cf.
E. Farnsworth, Contracts § 8.2, p. 537 (1982) ("[P]romises, which
impose duties, and conditions, which make duties conditional, are
the main components of agreements"). It seems to us that this
common meaning of the word "agreement" must be assigned to its
usage in § 1823(e) if that section is to fulfill its intended
purposes.
One purpose of § 1823(e) is to allow federal and state bank
examiners to rely on a bank's records in evaluating the worth of
the bank's assets. Such evaluations are necessary when a bank is
examined for fiscal soundness by state or federal authorities,
see 12 U.S.C. §§ 1817(a)(2), 1820(b), and when the FDIC is
deciding whether to liquidate a failed bank,
see §
1821(d), or to provide financing for purchase of its assets (and
assumption of its liabilities) by another bank,
see §§
1823(c)(2), (c)(4)(A). The last kind of evaluation, in particular,
must be made
"with great speed, usually overnight, in order to preserve the
going concern value of the failed bank and avoid an interruption in
banking services."
Gunter v. Hutcheson, 674 F.2d at 865. Neither the FDIC
nor
Page 484 U. S. 92
state banking authorities would be able to make reliable
evaluations if bank records contained seemingly unqualified notes
that are in fact subject to undisclosed conditions.
A second purpose of § 1823(e) is implicit in its requirement
that the "agreement" not merely be on file in the bank's records at
the time of an examination, but also have been executed and become
a bank record "contemporaneously" with the making of the note, and
have been approved by officially recorded action of the bank's
board or loan committee. These latter requirements ensure mature
consideration of unusual loan transactions by senior bank
officials, and prevent fraudulent insertion of new terms, with the
collusion of bank employees, when a bank appears headed for
failure. Neither purpose can be adequately fulfilled if an element
of a loan agreement so fundamental as a condition upon the
obligation to repay is excluded from the meaning of
"agreement."
That "agreement" in § 1823(e) covers more than promises to
perform acts in the future is confirmed by examination of the
leading case in this area prior to enactment of § 1823(e) in 1950.
In
D'Oench, Duhme & Co. v. FDIC, 315 U.
S. 447 (1942), the FDIC acquired a note in a purchase
and assumption transaction. The maker asserted a defense of failure
of consideration (that is, the failure to perform a promise that
was a condition precedent to the maker's performance), based on an
undisclosed agreement between it and the failed bank that the note
would not be called for payment. The Court held that this "secret
agreement" could not be a defense to suit by the FDIC, because it
would tend to deceive the banking authorities.
Id. at
315 U. S. 460.
The Court stated that, when the maker "lent himself to a
scheme
or arrangement whereby the banking authority . . . was likely
to be misled," that scheme or arrangement could not be the basis
for a defense against the FDIC.
Ibid. (emphasis added). We
can safely assume that Congress did not mean "agreement" in §
1823(e) to be interpreted so much more narrowly than its
Page 484 U. S. 93
permissible meaning as to disserve the principle of the leading
case applying that term to FDIC-acquired notes. Certainly, one who
signs a facially unqualified note subject to an unwritten and
unrecorded condition upon its repayment has lent himself to a
scheme or arrangement that is likely to mislead the banking
authorities, whether the condition consists of performance of a
counterpromise (as in
D'Oench., Duhme) or of the
truthfulness of a warranted fact.
B
Petitioners' fallback position is that, even if a
misrepresentation concerning an existing fact can sometimes
constitute an agreement covered by § 1823(e), it at least does not
do so when the misrepresentation was fraudulent and the FDIC had
knowledge of the asserted defense at the time it acquired the note.
We conclude, however, that neither fraud in the inducement nor
knowledge by the FDIC is relevant to the section's application.
No conceivable reading of the word "agreement" in § 1823(e)
could cause it to cover a representation or warranty that is bona
fide, but to exclude one that is fraudulent. Petitioners
effectively acknowledge this when they concede that the fraudulent
nature of a
promise would not cause it to lose its status
as an "agreement."
See supra at
484 U. S. 89, n.
1. The presence of fraud could be relevant, however, to another
requirement of § 1823(e), namely, the requirement that the
agreement in question "ten[d] to diminish or defeat the right,
title or interest" of the FDIC in the asset.
Respondent conceded at oral argument that the real defense of
fraud in the factum -- that is, the sort of fraud that procures a
party's signature to an instrument without knowledge of its true
nature or contents,
see U.C.C. § 3-305(2)(c), Comment 7, 2
U.L.A. 241 (1977) -- would take the instrument out of § 1823(e),
because it would render the instrument entirely void,
see
Restatement (Second) of Contracts § 163 and Comments a, c;
Farnsworth § 4.10, at 235, thus leaving
Page 484 U. S. 94
no "right, title or interest" that could be "diminish[ed] or
defeat[ed]."
See Tr. of Oral Arg. 24-25, 27-30.
Petitioners have never contended, however, nor could they have
successfully, that the alleged misrepresentations about acreage or
mineral interests constituted fraud in the factum. It is clear that
they would constitute only fraud in the inducement, which renders
the note voidable but not void.
See U.C.C. § 3-201(1), 2
U.L.A. 127; Restatement (Second) of Contracts § 163, Comment c;
Farnsworth § 4.10, at 235-236. The bank therefore had and could
transfer to the FDIC voidable title, which is enough to constitute
"title or interest" in the note. This conclusion is not only
textually compelled, but produces the only result in accord with
the purposes of the statute. If voidable title were not an
"interest" under § 1823(e), the FDIC would be subject not only to
undisclosed fraud defenses, but also to a wide range of other
undisclosed defenses that make a contract voidable, such as certain
kinds of mistakes and innocent but material misrepresentations.
See Restatement (Second) of Contracts §§ 152-153, 164.
Finally, knowledge of the misrepresentation by the FDIC prior to
its acquisition of the note is not relevant to whether § 1823(e)
applies. Nothing in the text would support the suggestion that it
is: an agreement is an agreement whether or not the FDIC knows of
it, and a voidable interest is transferable whether or not the
transferee knows of the misrepresentation or fraud that produces
the voidability.
See Farnsworth § 11.8, at 780-781;
cf. U.C.C. § 3-201(1), 2 U.L.A. 127. Petitioners are
really urging us to engraft an equitable exception upon the plain
terms of the statute. Even if we had the power to do so, the
equities petitioners invoke are not the equities the statute
regards as predominant. While the borrower who has relied upon an
erroneous or even fraudulent unrecorded representation has some
claim to consideration, so do those who are harmed by his failure
to protect himself by assuring that his agreement is approved and
recorded in accordance with the statute. Harm to the
Page 484 U. S. 95
FDIC (and those who rely upon the solvency of its fund) is not
avoided by knowledge at the time of acquiring the note. The FDIC is
an insurer of the bank, and is liable for the depositors' insured
losses whether or not it decides to acquire the note.
Cf.
12 U.S.C. § 1821(f). The harm to the FDIC caused by the failure to
record occurs no later than the time at which it conducts its first
bank examination that is unable to detect the unrecorded agreement
and to prompt the invocation of available protective measures,
including termination of the bank's deposit insurance.
See
§ 1818 (1982 ed. and Supp. IV). Thus, insofar as the recording
provision is concerned, the state of the FDIC's knowledge at that
time is what is crucial. But as we discussed earlier,
see
supra, at
484 U. S. 92, §
1823(e) is meant to ensure more than just the FDIC's ability to
rely on bank records at the time of an examination or acquisition.
The statutory requirements that an agreement be approved by the
bank's board or loan committee and filed contemporaneously in the
bank's records assure prudent consideration of the loan before it
is made, and protect against collusive reconstruction of loan terms
by bank officials and borrowers (whose interests may well coincide
when a bank is about to fail). Knowledge by the FDIC could
substitute for the latter protection only if it existed at the very
moment the agreement was concluded, and could substitute for the
former assurance not at all.
The short of the matter is that Congress opted for the certainty
of the requirements set forth in § 1823(e). An agreement that meets
them prevails even if the FDIC did not know of it; and an agreement
that does not meet them fails even if the FDIC knew. It would be
rewriting the statute to hold otherwise. Such a categorical
recording scheme is, of course, not unusual. Under Article 9 of the
U.C.C., for example, a filing secured creditor prevails even over
those unrecorded security interests of which he was aware.
See,
e.g., Rockwell Int'l Credit Corp. v. Valley Bank, 109 Idaho
406, 408-409, 707 P.2d 517, 519-520 (Ct.App.1985);
Bloom
Page 484 U. S. 96
v. Hilty, 427 Pa. 463, 471, 234 A.2d 860, 863-864
(1967); 9 R. Anderson, Uniform Commercial Code § 9-312:74, p. 298
(3d ed.1985); J. White & R. Summers, Uniform Commercial Code §
25-4, p. 1037 (2d ed.1980).
"
* * * *"
A condition to payment of a note, including the truth of an
express warranty, is part of the "agreement" to which the writing,
approval, and filing requirements of 12 U.S.C. § 1823(e) attach.
Because the representations alleged by petitioners constitute such
a condition, and did not meet the requirements of the statute, they
cannot be asserted as defenses here. The judgment of the Court of
Appeals is
Affirmed.
[
Footnote 1]
The Langleys also alleged certain other misrepresentations by
Planters, including that the Langleys would have no personal
liability on the notes, that Planters would provide another
purchaser for the land as soon as the sale to the Langleys was
closed, and that no payments would be due until the property was
resold. The Langleys concede that 12 U.S.C. § 1823(e) bars these
other misrepresentations from being asserted as defenses to FDIC's
suit on the note, because they were promissory in nature. Brief for
Petitioners 12.