                                 United States Court of Appeals,

                                          Fifth Circuit.

                                          No. 91–3094.

 PREMIER BANK, NATIONAL ASSOCIATION, Successor in Interest to and Formerly Known
as Louisiana National Bank of Baton Rouge, Plaintiff–Appellant,

                                                v.

    Robert H. MOSBACHER, Srcretary of the Department of Commerce of the USA, et al.,
Defendants–Appellees.

                                         April 29, 1992.

Appeal from the United States District Court for the Middle District of Louisiana.

Before REAVLEY, JOLLY and HIGGINBOTHAM, Circuit Judges.

       REAVLEY, Circuit Judge:

       Premier Bank, N.A. (Premier) sued the Economic Development Administration (EDA) of the

United States Department of Commerce to collect on EDA's guarantee of a loan that Premier's

predecessor made to Louisiana Chemical Polymers, Inc. (Polymers) and its president, William J.

McFerrin. The district court found that Premier breached the Guarantee Agreement by modifying

McFerrin's obligations on the loan, and that this breach released EDA from its obligation as

guarantor. We affirm.



                                       I. BACKGROUND

       Polymers purchased two adjacent tracts in Baton Rouge, Louisiana, in November 1985.

Louisiana National Bank, Premier's predecessor, made a $4,450,000 loan to Polymers (the

Premier/IRB Loan), through an industrial revenue bond issued by the Louisiana Public Facilities

Authority, to finance this purchase. Premier also pro vided a second loan for $2,550,000 (the

Premier/EDA Loan) to finance Polymers' conversion of a plastics plant located on one of the tracts

into a chemical processing facility. Polymers and McFerrin were co-obligors on the Premier/EDA

Loan note. The parties executed these loan agreements on November 18, 1985. On November 20,

EDA offered to guarantee eighty percent of the Premier/EDA Loan. Premier, Polymers, and
McFerrin accepted this offer, and the parties executed a Guarantee Agreement on November 22,

1985.



        Polymers and McFerrin defaulted on both Loans, and Polymers filed bankruptcy on June 7,

1988, placing EDA at risk on its guarantee of the Premier/EDA Loan. EDA, however, suspected that

Premier had breached the terms of the Guarantee Agreement by making incomplete and incorrect

representations in connection with its application for EDA's guarantee. So in December 1988 EDA

asked the United States Office of the Inspector General (OIG) to audit Premier's performance of its

obligations under the Guarantee Agreement. The OIG began this audit on January 9, 1989.



        On April 13, 1989, Premier sent a letter to EDA demanding payment under the Guarantee

Agreement. EDA received this letter the following day. As required in Paragraph 9.1 of the General

Terms and Conditions of the Guarantee Agreement, Premier attached to its demand letter Premier's

plan for obtaining maximum recovery on the Loan. Premier noted in this "recovery plan" that,

because Polymers filed for Chapter 11 bankruptcy relief, Premier's "options in administering this loan

are limited by the bankruptcy code." Because of this limitation, combined with appraisal results

showing Polymers' assets to be most valuable as a going concern, Premier's recovery plan proposed

the complete sale of Polymers and its assets to a third party. The recovery plan briefly outlined the

process that Premier intended to follow in effectuating this sale. Premier's demand letter also

instructed EDA that, according to the Guarantee Agreement, EDA had sixty days from its receipt of

Premier's demand to either: (a) require Premier to conduct the liquidation of the security, or (b) pay

Premier the amount due.



        Michael Oberlitner, Director of EDA's Liquidation Division, responded to Premier's demand

on May 3, 1989, with a letter informing Premier that EDA "is unable to act upon the request for

payment" until completion of the OIG's audit. On May 23, 1989, Premier sent a letter to Oberlitner

in which Premier informed Oberlitner that the Guarantee Agreement did not give EDA the right to
delay its response to Premier's demand because of an ongoing OIG audit, and that EDA's proper

response was due by June 13, 1989, sixty days after EDA received Premier's demand letter. The

parties subsequently exchanged numerous letters, but EDA neither instructed Premier to conduct the

liquidation nor paid the demand by June 13.



       In the meantime, Premier filed claims and sought a valuation of Polymers' assets in Polymers'

bankruptcy proceeding. Premier's role in this proceeding was complicated by its conflicting interests

in obtaining from the sale of Polymers' assets the maximum recovery on both the Premier/IRB Loan

and the Premier/EDA Loan. So Premier requested EDA to join the bankruptcy proceeding to ensure

protection of EDA's interests, but EDA declined and instructed Premier that Premier was obligated

to protect EDA's interests on EDA's behalf. On August 10, 1989, Premier filed a motion to join EDA

in the bankruptcy court, but that court ruled that EDA was not an indispensable party and denied the

motion.



       On October 24, 1989, more than six months after EDA received Premier's demand for

payment, Premier filed this suit against EDA. In its complaint, Premier alleged that EDA had failed

to respond to Premier's demand as required by the Guarantee Agreement, and thus EDA had forfeited

"its rights to require Premier to liquidate any collateral securing the indebtedness and/or to deny

Premier's demand for payment...." Premier prayed for a judgment against EDA in the amount of

eighty percent of all amounts due under the Loan.



       While this suit was pending, Polymers' bankrupt cy proceeding continued. On January 18,

1990, the bankruptcy court confirmed a plan (the Bankruptcy Plan) that called for Polymers to sell

all of its assets and pay Premier $2.6 million, in exchange for which Premier was to release "any and

all claims" that Premier had against Polymers, Polymers' assets, or McFerrin. The bankruptcy court

attributed $755,740 of the $2.6 million to Polymers' assets that secured the Premier/EDA Loan, and

the remainder to the security for the Premier/IRB Loan. EDA was notified of the Bankruptcy Plan
on that day and, although it questioned whether the Plan would effect a release of EDA's liability, it

is not clear whether EDA expressly objected to the Plan.



       Pursuant to the Bankruptcy Plan, Premier and McFerrin executed a document entitled

"Release Agreement and Covenant Not to Sue" (the Release Agreement) on February 2, 1990. In

the Release Agreement, Premier released McFerrin from liability for any and all claims that Premier

may have had from the Premier/IRB Loan, and covenanted not to sue on any claim that Premier may

have had against McFerrin on the Premier/EDA Loan. In return, McFerrin paid the $2.6 million to

Premier and released any and all claims arising out of the two loans that he may have had against

Premier. The Release Agreement includes four provisions that are particularly important to this case.

First, the Agreement states:



       It is understood by Premier that McFerrin's acceptance of [Premier's release of claims
       associated with the Premier/IRB Loan] is in no way an acknowledgement by McFerrin that
       any such claim ever existed or exists, and to the extent that any such claim does exist without
       knowledge of McFerrin, McFerrin expressly denies any liability with respect thereto.

Second, the Agreement provides that "Premier does not intend this covenant not to sue [on the

Premier/EDA Loan] to be a novation of the Premier/EDA Loan, and Premier specifically reserves its

rights against all other endorsers, suret ies, guarantors and collateral for the Premier/EDA Loan."

Third, the Agreement provides that "McFerrin specifically reserves his rights to establish that he is

entitled to a full release of all claims of Premier and EDA on the Premier/EDA Loan." Finally, after

referring to Premier's pending suit against EDA, the Agreement states: "McFerrin does not hereby

admit liability to the EDA and specifically denies liability to the EDA."



       On February 6, 1990, EDA informed Premier that EDA was exercising its right under

Paragraph 13 of the Guarantee Agreement to terminate its obligation because Premier had breached

the Agreement by making incorrect or incomplete representations in its guarantee application.1 EDA

   1
    Paragraph 13 of the General Terms and Conditions of the Guarantee Agreement provides in
part that:
based these allegations on preliminary reports that it received from the OIG. The OIG did not

complete its audit of Premier's performance until March 3, 1990.



       EDA first learned the details of the Release Agreement on May 10, 1990. On July 3, EDA

filed a third party complaint against McFerrin and amended its answer to Premier's complaint to assert

as an affirmative defense the allegation that Premier had breached the Guarantee Agreement by

releasing McFerrin from his obligations under the Premier/EDA Loan without first obtaining EDA's

consent. Premier and EDA filed cross motions for summary judgment on this affirmative defense,

and the district court orally granted EDA's motion and denied Premier's on December 7, 1990. On

December 21, the district court entered final judgment for EDA and dismissed this case with

prejudice.



       On appeal, Premier argues that the district court erred in granting summary judgment for EDA

because: (1) the evidence supports Premier's contention that it did not breach the Guarantee

Agreement by entering into the Release Agreement with McFerrin; and (2) in any event, EDA's

failure to respond to Premier's demand for payment as the Guarantee Agreement requires released

Premier from its obligation to obtain EDA's consent to the Release Agreement.



                                         II. DISCUSSION

A. STANDARD OF REVIEW

       Questions involved in our interpretation of the parties' contract are questions of law. In re

Stratford of Texas, Inc., 635 F.2d 365, 368 (5th Cir.1981). We review the facts by considering the


                     "EDA may, at its option and without further cause, terminate all or part of
               EDA's obligation under this Guaranty Agreement (and, if EDA has made any
               payments hereunder, may recover such payments) if [Premier] has:

                       13.1 Made any incorrect or incomplete representation in any material
                       respect to EDA in connection with the Application for this Guaranty;

                       13.3 Failed to comply with all of the material provisions of this ...
                       Agreement...."
record de novo and applying the same standards that guided the district court. Washington v. Allstate

Ins. Co., 901 F.2d 1281, 1286 (5th Cir.1990). EDA is entitled to summary judgment if it

demonstrates by pleadings, depositions, answers to interrogatories, admissions, and affidavits that

there is no genuine issue of material fact and that it is entitled to a judgment as a matter of law.

FED.R.CIV.P. 56(c). We draw all inferences most favorable to Premier to determine whether a

rational trier of fact could find in Premier's favor. Washington, 901 F.2d at 1286. If so, a genuine

issue exists, making summary judgment improper.



B. PREMIER'S BREACH OF THE GUARANTEE AGREEMENT

        Paragraph 7.2 of the Guarantee Agreement provides that Premier shall not "agree to any

modification of any obligation of any party to any agreement related to the [Premier/EDA] Loan,

without the prior written consent of EDA." The district court found that Premier failed to comply

with Paragraph 7.2 when it entered into the Release Agreement without first obtaining EDA's

consent, and that Paragraph 13 thus allowed EDA to terminate its obligations under the Agreement.

Premier argues that the district court erred for three reasons.



        First, Premier contends that its execution of the Release Agreement did not constitute a failure

to comply with Paragraph 7.2 because the Release Agreement did not in any way modify McFerrin's

liability to EDA. Premier relies on the Restatement of Security's provision that:



                Where the creditor releases a principal, the surety is discharged, unless

                (a) the surety consents to remain liable notwithstanding the release, or

                (b) the creditor in the release reserves his rights against the surety.

RESTATEMENT OF SECURITY § 122 (1941) (emphasis added). Comment d to this section explains

that, when the creditor reserves its rights against the surety while releasing the principal, the surety's

right of subrogation against the principal is "technically preserved." Thus, Premier argues, Premier

preserved EDA's rights against McFerrin by reserving its own rights against EDA under the
Guarantee Agreement. As a result, there was no modification for which EDA's consent was

necessary.



         We reject this argument because Premier specifically agreed to stricter restraints on

modification than those provided by Section 122. Paragraph 7.2 unambiguously obligates Premier

to obtain EDA's written consent prior to agreeing "to any modification of any obligation of any party

to any agreement" related to the Premier/EDA Loan. Whether Premier effectively preserved EDA's

rights against McFerrin under Section 122 is irrelevant to the question of whether Premier complied

with Paragraph 7.2. Premier modified McFerrin's obligations under the Premier/EDA Loan by

covenanting not to sue him on that Loan. Because it did not first obtain EDA's consent, Premier

failed to comply with Paragraph 7.2.



       Second, Premier argues that, as a compensated surety, EDA must show that it suffered

prejudice or injury from Premier's modification of the Loan before EDA can be released from its

obligations; and, even then, EDA is released only to the extent of that prejudice. Basic Asphalt and

Constr. Corp. v. Parliament Ins. Co., 531 F.2d 702, 703 (5th Cir.1976); Development Corp. of

America v. United Bonding Ins. Co., 413 F.2d 823, 826 (5th Cir.), cert. denied, 396 U.S. 957, 90

S.Ct. 430, 24 L.Ed.2d 422 (1969). Whether the alteration resulted in prejudice is a factual question

that precludes summary judgment. Basic Asphalt, 531 F.2d at 703. Premier contends that EDA

cannot show prejudice from Premier's release of McFerrin because, under Section 122, Premier

preserved EDA's rights against McFerrin by expressly reserving it's own rights against EDA.



        We do not agree with Premier that EDA was required to show that it was prejudiced by

Premier's modification of the Premier/EDA Loan. The prescript ion against modification that this

court dealt with in Basic Asphalt and Development Corp. of America was imposed by general surety

law. But Premier's obligation to obtain EDA's consent before agreeing "to any modification of any

obligation of any party to any agreement related to" the Premier/EDA Loan arose from the Guarantee
Agreement and not merely from general surety law. This same Agreement, in Paragraph 13, gave

EDA the right, "at its option and without further cause," to terminate its obligations if Premier "failed

to comply with [the Agreement's] material provisions."2 The Agreement does not require EDA to

show prejudice before asserting this right, and we think that the "without further cause" language

forecloses the possibility of such a requirement.



         Finally, Premier contends that a fact issue exists whether EDA impliedly consented to

Premier's modification of McFerrin's obligations.        Premier cites this court's statement that a

guarantor's consent to the alteration of the principal's obligations "need not be in writing, and indeed

... may be found in the guarantor's course of conduct." United States v. Vahlco Corp., 800 F.2d 462,

468 (5th Cir.1986) (footnotes omitted) (applying Texas law). Premier argues that, after Polymers

filed bankruptcy, EDA told Premier that EDA wanted no input in Premier's decisions, that Premier

was to "do it all," and that EDA would evaluate Premier's actions after Premier demanded payment.

Thus, Premier contends, an issue exists whether EDA by its course of conduct granted Premier the

authority to do whatever was necessary to obtain maximum recovery of the Loan, including its

execution of the Release Agreement. But Vahlco's implied consent rule is inapplicable in this case

because the Guarantee Agreement specifically required Premier to obtain EDA's "prior written

consent." We thus reject Premier's contention that the existence of a factual issue over whether EDA

impliedly consented to the modification of McFerrin's obligations precluded summary judgment.



        In summary, we agree with the district court's decision that, regardless of whether Premier

   2
     We agree with the district court's express holding that Paragraph 7.2 is a "material provision,"
because EDA's opportunity to consent (or refuse to consent) to any modification of agreements
related to the Premier/EDA Loan was essential to EDA's ability to protect its interests as
guarantor of that Loan. See Macktal v. Secretary of Labor, 923 F.2d 1150, 1156 n. 25 (5th
Cir.1991) (defining a "material term" as one "that a party could not customarily change in a
private agreement without the consent of the other parties to the agreement"). Premier argues
that, because it preserved all of EDA's rights against McFerrin when it executed the Release
Agreement, its breach of Paragraph 7.2 was not "material." But EDA's right to terminate its
obligations under Paragraph 13 depends not on whether Premier's breach was material (i.e.,
prejudicial to EDA), but whether the provision with which Premier failed to comply was material.
We agree with the district court that it was.
preserved EDA's rights against McFerrin or whether EDA was prejudiced by Premier's execution of

the Release Agreement, Premier failed to comply with Paragraph 7.2 by modifying McFerrin's

obligations without obtaining EDA's prior written consent.



C. EDA's PRIOR BREACH OF THE GUARANTEE AGREEMENT

       Premier contends that its failure to comply with Paragraph 7.2 did not release EDA from its

obligation as guarantor because EDA had already breached the Guarantee Agreement by failing to

respo nd to Premier's demand for payment as required. The district court rejected this argument,

stating simply: "although [Premier] argues that the EDA had previously violated the provisions of

the Agreement because of its non-payment, the court finds otherwise."



       Paragraph 9 of the Guarantee Agreement sets forth the parties' obligations in the event of the

borrowers' default. Under Paragraph 9.1, Premier was required to submit a reasonably detailed

recovery plan with its demand for payment, as well as all documents and certifications that EDA may

require evidencing



Premier's compliance with the Guarantee Agreement. Paragraph 9 then provides:



       9.2 EDA shall within sixty (60) days after receipt of such demand either (i) elect, by written
             notice to [Premier], to require that [Premier] conduct the liquidation of the security
             before being entitled to payment from EDA under this Guaranty Agreement, or (ii)
             pay to [Premier] the amount due at the date of such payment.

       9.3 In the event that EDA elects to have the liquidation effected by [Premier] hereunder,
               [Premier] shall: (i) conduct such liquidation in accordance with the plan submitted
               by [Premier] and approved by EDA, (ii) submit monthly reports to EDA as to the
               progress of such liquidation, (iii) promptly report to EDA all material events in the
               course of such liquidation, and (iv) account to EDA as to the proceeds of such
               liquidation and expenses attributable thereto. EDA retains the option to modify any
               election made hereunder as to all or any part of the security. EDA shall not be
               obligated to make payment hereunder to [Premier] until the liquidation of the
               proceeds of all security for the Loan has been completed to its reasonable satisfaction,
               and shall then be obligated to pay to [Premier] that portion of the Loan guaranteed
               hereunder after the deduction of all proceeds of such liquidation less reasonable
               expenses attributable thereto.
       Premier contends that the Guarantee Agreement required EDA to respond to Premier's

demand within sixty days in one of three ways. Paragraph 9.2 provided the two options of: (1)

requiring that Premier conduct the liquidation; or (2) paying the amount then due. Paragraph 13

provided EDA with the third option, under specified circumstances, of terminating its obligations.

But EDA did not elect either of these options, and instead simply informed Premier that EDA was

unable to respond until the OIG completed its audit.



       We recognize that EDA was in a difficult situation. It could not require Premier to conduct

the liquidation because the bankruptcy court was already doing this and, in any event, EDA was

unsatisfied with the recovery plan that Premier submitted. And EDA did not want to pay the demand

or terminate its obligations until it learned for certain from the OIG audit whether Premier had

breached its obligations under the Guarantee Agreement. EDA's failure to respond, however, placed

Premier in the equally difficult situation of deciding how to proceed in Polymers' bankruptcy

proceeding without the benefit of knowing EDA's position on its guarantee. But regardless of the

relative difficulties of the parties' situations, the question is whether EDA breached the Guarantee

Agreement by failing to respond to Premier's demands as required, and, if so, whether this breach

released Premier from its obligation to obtain EDA's consent before modifying McFerrin's obligations.



        We decide that EDA breached the Guarantee Agreement by failing to respond to Premier's

demand as Paragraph 9.2 requires, and we reject all of EDA's arguments to the contrary. We further

decide t hat this breach was material. EDA's failure to respond deprived Premier of the timely

payment or instructions to liquidate for which Premier bargained. As a result, Premier had to appear

in the ongoing bankruptcy proceeding without the benefit of knowing whether it should protect

EDA's interest as guarantor or protect only its own interests in light of EDA's refusal to pay.



       We agree, however, with EDA that Premier affirmed the Guarantee Agreement and bound

itself to the Agreement's terms by its conduct subsequent to EDA's breach. After EDA's failure to
respond to Premier's demand, Premier continued to pay EDA its quarterly guarantee fees, continued

to assert (as it still asserts) that it has always been in full compliance with the Guarantee Agreement,

and ultimately sued EDA for specific performance of the Guarantee Agreement. When one party

materially breaches a contract, the non-breaching party may elect to either rescind the agreement or

demand performance and sue for damages. By choosing to demand performance, as Premier did, the

non-breaching party remains obligated to fulfill its promises in the agreement. See H.B. Zachry Co.

v. Travelers Indem. Co., 391 F.2d 43, 48 (5th Cir.1968); Topps Chewing Gum, Inc. v. Imperial Toy

Corp., 686 F.Supp. 402, 408–09 (E.D.N.Y.1988), aff'd, 895 F.2d 1410 (2d Cir.1989). Thus,

Premier's conduct subsequent to EDA's failure to respond to Premier's demand prevents Premier from

being released from its obligations under the Agreement.



        Premier argues that EDA's breach is a basis not only for rescission of the contract, but also

for finding that EDA is estopped from relying on Premier's subsequent breach to deny Premier's claim.

Premier finds support for its estoppel argument in ITT Industrial Credit Co. v. D.S. America, Inc.,

674 F.Supp. 1330, 1341 (N.D.Ill.1987). We find estoppel to be inapplicable to this case.3 "The

doctrine o f equitable estoppel precludes a litigant from asserting a claim or defense which might


   3
    Our application of estoppel principles to the present facts is limited by the fact that the
guarantor in this case is an agency of the United States government. "Traditionally, equitable
estoppel did not lie against the government." Moody v. United States, 783 F.2d 1244, 1246 (5th
Cir.1986). Other circuits have allowed estoppel against the government when the facts satisfied
the traditional elements of estoppel and exhibited "affirmative misconduct" by a government
employee. United States v. Lair, 854 F.2d 233, 237–38 (7th Cir.1988); Portmann v. United
States, 674 F.2d 1155, 1167 (7th Cir.1982); T.R.W., Inc. v. Federal Trade Com., 647 F.2d 942,
951 (9th Cir.1981). This court has yet to decide the issue. See Moody, 783 F.2d at 1246 & n. 2
(declining to decide whether affirmative misconduct would permit estoppel because four
traditional elements were not met).

                The Supreme Court has also declined to decide whether estoppel may ever be
        asserted against the government, even when the facts demonstrate "affirmative
        misconduct" on the government's part. Schweiker v. Hansen, 450 U.S. 785, 789, 101
        S.Ct. 1468, 1471, 67 L.Ed.2d 685 (1981). The Court has made clear that "the
        Government may not be estopped on the same terms as any other litigant." Heckler v.
        Community Health Services, Inc., 467 U.S. 51, 60–61, 104 S.Ct. 2218, 2224, 81 L.Ed.2d
        42 (1984). In Heckler, the Court noted that the party asserting estoppel against the
        government must at least "demonstrat[e] that the traditional elements of an estoppel are
        present." Id. We find that Premier has failed to make this demonstration.
otherwise be available to him against another party who has detrimentally altered her position in

reliance on the former's misrepresentation or failure to disclose some material fact." Portmann, 674

F.2d at 1158. To begin with, we find it difficult to conceive how EDA's failure to respond as required

could amount to a misrepresentation or omission of material fact. Even if we agreed with Premier

that EDA's failure precluded EDA from denying its obligation to pay, thus allowing Premier to rely

on EDA's payment under the Guarantee Agreement, this would not excuse Premier's subsequent

breach of that Agreement. And Premier could not have acted in reliance on the belief that EDA had

terminated its obligations under the Agreement, because Premier continued to pay the guarantee fees

and sued for specific performance of the Agreement. We find the doctrine of equitable estoppel

inapplicable to this breach of contract dispute.



       In summary, we find that EDA materially breached the Guarantee Agreement by failing to

respond to Premier's demand for payment as that Agreement required, but Premier elected to affirm

and continue the contract and thus remained bound to its terms. Premier's subsequent breach is thus

not excused by that of EDA.



       AFFIRMED.



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