Federal Superpowers in Failed Banking Litigation: the D'oench Duhme Doctrine
| Publication year | 1991 |
| Pages | 427 |
1991, March, Pg. 427. Federal Superpowers in Failed Banking Litigation: The D'Oench Duhme Doctrine
In other parts of the country such as Texas, the legal aspects of failed financial institutions and resulting FDIC-RTC ("Federal Deposit Insurance Corporation-Resolution Trust Company") receiverships have been somewhat more developed than in Colorado. Well-recognized in such locations is a doctrine known as the D'Oench Duhme (as in "dench doom") doctrine. It has not been widely reported in federal or state cases within the Tenth Circuit, but will soon be better known.
The D'Oench Duhme doctrine severely restricts the legal defenses available in defending against a lawsuit by the FDIC and certain others. The doctrine states that when the FDIC is suing (as a successor to a failed bank or savings bank) to collect on a written instrument or other obligation, the defendants may not oppose such a suit because of unwritten agreements or verbal misrepresentations which were made by the failed institution.
This article traces the evolution and scope of the D'Oench Duhme and related doctrines in both their common law and statutory forms.
The FDIC and the RTC serve as receivers for failed bank and thrift institutions, respectively. The FDIC provides limited insurance for deposits in both banks and thrifts. One of the duties of the FDIC is to maximize payments to the depositors of a failed bank or thrift.
One way is by FDIC management or ownership of the failed institution, a variant of the way the FDIC acquired the stock of Continental Illinois Bank & Trust and later began to dispose of such ownership.(fn1) Sometimes the FDIC employs private banks to handle such asset management.(fn2)
Another way is to liquidate the assets of the failed institution and pay the depositors their insured amounts, covering any insured shortfall with insurance funds. This second alternative does not promote the utmost confidence in the banking system when accounts are frozen, checks are returned unpaid, and there is significant disruption of the financial machinery. Depositors may wait months to recover the insured portion of their funds, while uninsured funds may be lost forever.(fn3)
As a result, the FDIC or RTC, whenever feasible, has utilized a third method---a "purchase and assumption" transaction---which involves arranging for another banking institution to "purchase" the failed bank and reopen it without interrupting banking operations and with no loss to depositors. The newest, still developing method is for the FDIC or RTC to use private banks as interim managers and de facto receivers and liquidators, all the while continuing the search for buyers for the entire institution or individual assets.
Of the 169 bank failures in 1990, 148 were handled by purchase and assumption, only 20 by liquidation and only one by FDIC capital infusion, with or without FDIC ownership.(fn4)
In a purchase and assumption deal, a receiver is appointed and the receiver solicits bids from banks for the purchase of the failed bank and assumption of its liabilities. These bids hopefully represent the going concern value of the failed institution. If the bid is accepted, the purchasing bank agrees with the receiver to buy the assets and assume the liabilities of the failed bank.(fn5)
The implementation of the purchase and assumption transaction can be difficult. There is an obvious need for secrecy
Michael W. Lillie, Denver, is in private practice. One of his areas of specialization is financial institution transactions and litigation.
Since the purchasing bank cannot quickly evaluate its risks, the purchase and assumption agreement often provides that the purchasing bank need only purchase those assets which are of the highest banking quality. The remaining assets are returned to the receiver, resulting in the assumed liabilities exceeding the purchased assets. To make up the difference, the FDIC purchases the returned assets from the receiver, which in turn transfers the FDIC payments to the purchasing bank. The FDIC then attempts to collect on the returned assets to minimize the loss to the insurance fund.
If all goes well, the purchase and assumption arrangement benefits all parties. The FDIC minimizes its loss, the purchasing bank receives a new investment and expansion opportunity at low risk, and the depositors of the failed bank are protected from the closing and liquidation procedure.(fn8)
It is in this general context that the D'Oench Duhme doctrine arises. This usually occurs when the FDIC or RTC sues borrowers or other persons liable on debts and the defendants to such a claim assert various defenses which are not apparent on the face of the instrument being sued upon.
D'Oench Duhme & Co. v. FDIC(fn9) was decided by the U.S. Supreme Court in 1942, almost fifty years ago. A defendant denied liability to the FDIC on a promissory note on the grounds that the payee bank had agreed that the note would never be enforced. The agreement that the note would not be enforced was in writing, but was not in the bank's files.
Justice Douglas, writing for the majority, found in legislation a strong federal policy to protect the FDIC and its public funds from any such agreements.(fn10) The FDIC's relationship with the bank was premised on its determination of the bank's solvency; therefore, such agreements tended to distort any such determination.
Justice Douglas concluded specifically that no requirement of a showing of actual deception of the FDIC or injury to the FDIC was needed for such agreements to be ignored. Moreover, there was no need to show intent to deceive on the part of the defendant, since the mere "tendency" of any such arrangement to violate federal policy is sufficient to estop the defendant from raising such arrangement as a defense.(fn11) Justice Douglas stated:
The test is whether the note was designed to deceive the creditors or the public authority or would tend to have that effect. It would be sufficient in this type of case that the maker lent himself to a scheme or arrangement whereby the banking authority on which respondent relied in insuring the bank was or was likely to be misled.(fn12)
In 1950, a statutory version of the D'Oench Duhme doctrine was enacted. Since amended as part of the FIRREA legislation,(fn13) 12 U.S.C. § 1823(e) says that no agreement can be relied on unless it is in writing, executed, properly approved by the board of directors of the depository institution or its loan committee and has been continuously an official record of the bank since executed.(fn14) In 1988, also as part of FIRREA, Congress enacted identical provisions for the benefit of the newly created "bridge banks" discussed above.(fn15)
After § 1823(e) was enacted in 1950, there were numerous federal cases applying the legislation, some of...
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