                 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


     1
      The 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).
     2
      The 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




     3
      The 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

       4
        All 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.




     5
      We need not consider Waggoner's alternative argument that
the FDIC is not the holder of the note.

                                  11
