When a lender fails, a borrower's litigation defenses may be '(D'Oench) Duhmed.'

• Author: Grossman, Gregory S.

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As the recession unfolded, causing a record number of bank failures, veteran bank lawyers pulled out their old research files, dusty from the days of the S&L crisis in the 1980s and early 1990s, to refresh their recollection on the D'Oench Duhme doctrine.

The D'Oench Duhme doctrine is both a common law and statutory doctrine that is available to certain federal regulatory agencies and their assignees when dealing with the loans of a failed lender. At its core, the D'Oench Duhme doctrine applies to loans of failed federally regulated banks which are enforced by either the FDIC in its capacities as insurer or receiver for the failed bank, or successor banks which purchase such loans from the failed bank through the FDIC. The D'Oench Duhme doctrine is most easily understood as operating similarly to the so-called "Banking Statutes of Fraud," such as F.S. [section] 687.0304, which preclude affirmative claims seeking to enforce oral credit agreements. However, the D'Oench Duhme doctrine is broader than such statutes because it operates not only against affirmative claims, but also against defenses and affirmative defenses raised against the enforcement of a loan by a borrower and/or guarantor. Thus, the D'Oench Duhme doctrine is simultaneously a powerful weapon for regulatory agencies and the successors to failed lenders and devastating to borrowers and guarantors asserting affirmative defenses that would normally constitute fact issues to preclude summary judgment in favor of the agency or successor.

The D'Oench Duhme doctrine has essentially three preconditions that must be met: 1) the party seeking to invoke the doctrine must be either a regulatory agency, such as the FDIC, or an assignee who purchases the debt instrument from a failed bank through the FDIC; 2) the party seeking to invoke the doctrine must be confronting a claim or defense alleged by the borrower or guarantor which is in turn based upon a "secret agreement" between the borrower and the bank, and; 3) the "secret agreement" was either unwritten, or, if written, fails to meet the requirements of the common law or 12 U.S.C. [section] 1823(e), and enforcement of the secret agreement would fundamentally diminish the interest of the agency in the debt instrument.

Florida courts have applied the D'Oench Duhme doctrine to preclude claims, defenses, and affirmative defenses in which the three preconditions described above are satisfied. For the most part, Florida courts' construction of the D'Oench Duhme doctrine is similar to that of other state and federal courts. However, in certain respects, Florida courts' D'Oench Duhme doctrine jurisprudence has either blazed its own trail, or Florida courts have not had an opportunity to address certain issues, leaving the doctrine's application in Florida unique.

The Common Law D'Oench Duhme Doctrine

In 1942, the Supreme Court decided D'Oench Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676 (1942). In D'Oench Duhme, the U.S. Supreme Court held that the FDIC, as receiver for a failed bank, could enforce promissory notes on which the failed bank was the payee, notwithstanding a secret agreement between the bank and the obligor that the bank would not enforce the note. (1)

In D'Oench Duhme, the FDIC was appointed as receiver for the failed bank, and brought an action against the maker on the note. The maker asserted an affirmative defense that the note was given without consideration. The failed bank had purchased bonds from the maker. After the issuer of the bonds defaulted, the failed bank and D'Oench Duhme entered into an agreement whereby the company executed a note payable to the bank but with the understanding that the principal of the note would not be collected, although interest payments made by the maker would be repaid and credited to the note. The purpose of this arrangement was to help the bank to conceal certain irregularities from the bank's examiners.

The Court rejected the maker's defense and held that the maker was estopped to rely upon such a defense because the obligor deliberately entered into an agreement which, though not in itself a direct violation of a federal banking statute at the time of the making of the note, would tend to mislead the banking authorities. (2) The maker was "presumed to know" that its actions would mislead bank examiners, especially since the maker made the interest payments on the notes, which fostered an appearance that the notes were enforceable. (3)

The estoppel doctrine fashioned by the court contains three principal elements: 1) a secret agreement, broadly defined; 2) an inchoate injury or damage requirement; and 3) an emphasis on objective conditions and not the subjective state of mind of the debtor. (4) Still, the essence of the case may be boiled down to one overarching principle: When, a party, however innocently, has entered into an agreement not explicitly reflected in the records of the bank, such an agreement is not enforceable against a federal regulatory agency. (5)

Since the decision, courts have expanded the doctrine beyond the narrow facts of the case, applying it, for example, to the FDIC as receiver and to other federal banking agencies acting in other capacities. (6) The 11th Circuit, for example, has applied it both to the FSLIC and the FDIC in both corporate and receiver capacities. (7) The doctrine has also been broadened to prohibit affirmative claims against federal banking agencies. (8) Moreover, assignee banks that purchase loans from federal regulatory agencies acting as receiver for a failed bank may also assert the doctrine. (9)

The original doctrine and its subsequent expansion serve two public policies. First, they allow federal and state bank examiners to rely on a bank's records in evaluating the bank's assets. (10) Second, they ensure mature consideration of unusual loan transactions by senior bank officials, and, coextensively, to prevent the fraudulent insertion of new terms, with the collusion of bank employees, when a bank appears headed for failure. (11)

Statutory D'Oench Duhme: 12 U.S.C. [section] 1823(e)

Eight years after D'Oench...