Federal Deposit Insurance Corp. v. Hadid
947 F.2d 1153 (1991)
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Rule of Law:
Under the parol evidence rule, when a written agreement is fully integrated, extrinsic evidence of a prior or contemporaneous oral agreement is inadmissible to vary or contradict the terms of the writing. Furthermore, under District of Columbia law, a contractual provision for attorneys' fees based on a percentage of recovery is enforceable only as an indemnity for reasonable fees actually incurred, up to the contractual percentage.
Facts:
- National Bank of Washington (NBW) made two loans to corporations owned by Dr. P.S. Prasad, which were secured by stock in McDowell Enterprises, Inc.
- After the corporations defaulted, NBW demanded repayment in August 1987.
- Dr. Prasad proposed restructuring the loans, with Mohamed An-war M. Hadid, a creditworthy customer of NBW, becoming a new guarantor.
- On November 30, 1987, the parties executed two formal, written Renewal and Extension Agreements, and Hadid signed new guarantees for the loans.
- One of the written agreements explicitly provided that the bank's pledge agreement giving it a security interest in the McDowell stock 'shall remain in full force and effect.'
- Hadid later claimed that during negotiations, the parties made a contemporaneous oral agreement stating his guarantee would be null and void if he were not given control of the McDowell stock.
- The borrowers defaulted again, and NBW sought to enforce the guarantees against Hadid.
Procedural Posture:
- National Bank of Washington (NBW) filed suit against Mohamed An-war M. Hadid in federal district court to collect on his guarantees of two promissory notes.
- A jury trial was held, and the jury returned a verdict in favor of Hadid, crediting his testimony about a conflicting oral agreement.
- NBW filed a motion for judgment notwithstanding the verdict (JNOV), arguing that the parol evidence rule barred consideration of the oral agreement.
- The district court granted NBW's motion, set aside the jury verdict, and entered judgment against Hadid for the amount of the notes plus 15% in attorneys' fees.
- After NBW was declared insolvent, the Federal Deposit Insurance Corporation (FDIC) was substituted as the plaintiff.
- Hadid, as appellant, appealed the district court's judgment to the U.S. Court of Appeals for the Fourth Circuit, with the FDIC as appellee.
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Issue:
Does the parol evidence rule bar evidence of an alleged oral agreement that would nullify a written loan guarantee, when that oral agreement directly contradicts the terms of a fully integrated written loan extension agreement?
Opinions:
Majority - Niemeyer, Circuit Judge
Yes, the parol evidence rule bars evidence of the alleged oral agreement. The court first determines as a question of law whether a written agreement is fully integrated, meaning it is the complete and final expression of the parties' deal. The district court's finding that the Renewal and Extension Agreements were fully integrated was not clearly erroneous, given that the sophisticated business parties, represented by counsel, had reduced all other aspects of their complex transaction to formal written documents. One would expect that an agreement regarding control of the primary collateral would also have been written if it were intended to be binding. Even if the agreements were not fully integrated, the alleged oral agreement, which would give Hadid control over the McDowell stock, directly contradicts the express written term that NBW's security interest in and possession of the stock 'shall remain in full force and effect.' Therefore, evidence of the oral agreement is inadmissible as a matter of law.
Analysis:
This decision reaffirms the significance of the parol evidence rule in providing certainty and predictability to written commercial contracts. It clarifies that the determination of whether a contract is integrated is a threshold question of law for the court, not a question of fact for the jury, thereby limiting a jury's ability to alter the terms of a written agreement based on disputed testimony. This serves to protect the integrity of written instruments from subsequent claims of conflicting oral understandings. The case also provides a clear application of District of Columbia's specific rule on attorneys' fees, treating percentage-based fee clauses as an indemnification provision subject to a reasonableness standard, rather than as an enforceable liquidated damages clause.
