LOS ANGELES
www.dailyjournal.com
WEDNESDAY, JUNE 8, 2011
The ‘D’Oench Duhme Doctrine’ —
A Friend in Deed to a Lender in Need
By Martin W. Taylor
Daily Journal Staff Writer
T
he recent real estate crash and related
financial crisis have spawned substantial litigation over the enforcement
of defaulted loans, including a plethora of
guaranty collection actions. A significant
portion of that litigation has involved loans,
which have been acquired by financial institutions, funds and other investors from the
Federal Deposit Insurance Corp. (FDIC), as
the receiver for all of the failed banks. What
seems to be a prevalent, if not a natural reaction by borrowers and guarantors to these
enforcement actions, is for the defendants
to assert, either as an affirmative defense or
as a counter-claim, factually based claims
that there were promises made or agreements entered into, whether verbally or in
writing, between the failed institution and
the defendants that now have the effect of
“exonerating” them, whether by contract or
equitable estoppel. Whether these claims
have merit or not, these types of factually
based arguments turn ordinary and otherwise relatively efficient and quantifiable
collection actions into long, drawn-out and
expensive affairs; often times with uncertain results at the hands of a jury — all to
the chagrin of the lender. This frustration
may, however, be avoided by the savvy
lender that is able to employ the D’Oench
Duhme Doctrine.
The doctrine was created by the U.S. Supreme Court’s decision in D’Oench, Duhme
& Co. v. FDIC in 1942, which provided that
the FDIC has the power to bar defenses
based on secret side agreements with the
failed institution in subsequent actions to
collect on a loan. D’Oench, Duhme & Co
(DDC) had sold a number of bonds to a local bank in Belleville, Illinois in the 1920s.
When the bond issuers subsequently defaulted as the depression loomed, the bank
asked DDC to sign a $5,000 promissory
note to minimize the effect of the defaulted
bonds to the bank. The bank assured DDC
that it would only look to the bonds for
ultimate payment and gave DDC a receipt
on which were written the words “this note
is given with the understanding that it will
not be called for payment....” The bank then
charged off the note in 1935 without any
attempt to collect it.
After the bank failed in 1938, the FDIC
sued DDC to collect on that previously discharged promissory note. Although DDC
immediately and confidently produced
the receipt in defense of that collection,
the Court held that DDC was nonetheless
liable under the note because the FDIC
must be protected from “secret agreements”
as those misrepresentations constituted
agreements subject to the D’Oench Duhme
Doctrine); claims based on commitment
letters (Fleet Bank of Maine v. Prawer, the
borrower could not use the bank’s breach
of the fully executed commitment letter,
which provided that the bank would refinance the loan, as that commitment letter
didn’t satisfy the requirements of Section
This powerful doctrine not only protects the (Federal Deposit
Institute Corp.), it appears to also protect a wide variety of
interested parties
between banks and borrower parties not
privy to regulators during regular bank
examinations. The receipt, which was not
attached to the note, constituted that type of
agreement. Thus even though there really
was an agreement between the failed bank
and the borrower (which the borrower most
assuredly had relied upon in signing the
note) that agreement was still unenforceable, as against the FDIC and the borrower
had to pay.
The D’Oench Duhme Doctrine was later
codified as part of the Financial Institutions
Reform, Recovery, and Enforcement Act
(FIRREA) in 1989. Pursuant to 12 U.S.C.
Section 1823(e), in order for any agreement
between a failed bank and borrower to be
valid and enforceable against the FDIC, it
must have been in writing; fully and contemporaneously executed by the parties;
officially approved by the financial institution (i.e., by its board or its credit committee), which approval must be reflected in
the official records of the institution (e.g.,
the board’s or committee’s minutes); and
maintained from the date of execution as
an official record of the institution. Section
1823(e) effectively expanded the D’Oench
Duhme Doctrine by not only barring “secret
side agreements,” but also barring enforcement of any contract term that does not
meet the statute’s strict documentation,
approval and recordation requirements.
The courts have further expanded the
reach of the D’Oench Duhme Doctrine,
allowing it to be applied to bar a variety of
defenses and claims by borrowers and others, including fraudulent misrepresentation
claims (Langley v. FDIC, claims of misrepresentation by bank officers were barred
1823(e)); claims based on bank’s failure
to approve leases (RTC v. Sharif-MunirDavidson, borrower’s claims that defaults
under the loan were actually caused by the
failed bank’s improper withholding of lease
approvals were barred because those duties
were not specified in any loan document);
and claims based on setoff (Fleet Bank of
Maine v. Steeves, the borrower’s was barred
from asserting a claim of set off against
the collection of one loan based on what
appeared to be otherwise actual breaches
by the bank on another loan to borrower
because the loans were not tied together in
any way, either by loan documentation or
in the official bank records).
This powerful doctrine not only protects
the FDIC, it appears to also protect a wide
variety of interested parties, including:
the FDIC, other federal banking agencies,
assignees, and successors-in-interest of
the FDIC, subsidiaries of failed financial
institutions, and third parties involved in
purchase and assumption agreements with
the FDIC. Given the broad scope and applicability of the doctrine, any person who
has acquired, or is thinking of acquiring,
loans from the FDIC will want to understand the doctrine and carefully analyze and
explore whether it can be applied to prevent
defenses and claims that would otherwise
result in expensive, time consuming and
uncertain litigation.
Martin W. Taylor is a partner
in the Orange County office
of Troutman Sanders LLP. His
practice focuses on finance,
with an emphasis on real estate secured financing, including construction, office, retail,
hotel and resort.
Reprinted with permission from the Daily Journal. ©2011 Daily Journal Corporation. All rights reserved. Reprinted by Scoop ReprintSource 1-800-767-3263