The Florida Bar
www.floridabar.org
The Florida Bar Journal
January, 2013 Volume 87, No. 1
When a Lender Fails, a Borrower’s Litigation Defenses May Be “(D’Oench) Duhmed”

by Gregory S. Grossman and Daniel M. Coyle

Page 18

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. §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. §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. §1823(e)
Eight years after D’Oench Duhme was decided, Congress codified the doctrine in §2(13)(e) of the Federal Deposit Insurance Act, enacted as 12 U.S.C. §1823(e)(1). From 1950 to 1989, despite the expansion of the common law D’Oench Duhme doctrine to provide greater protection to the FDIC and other agencies, the statutory codification of D’Oench Duhme “remained true to the limited facts of the original case and underwent no significant changes until 1989.”12

However, in 1989, §1823(e) was amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which expanded the federal banking agencies’ power to regulate the industry.13 Section 1823(e) now reads, in pertinent part, as follows:

(e) Agreements against interests of Corporation

(1) In general

No agreement which tends to diminish or defeat the interest of the Corporation in any asset acquired by it under this section or section 1821 of this title, either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the Corporation unless such agreement—

(A) is in writing,

(B) was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution,

(C) was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the minutes of said board or committee, and

(D) has been, continuously, from the time of its execution, an official record of the depository institution.

The Relationship Between §1823(E) and the Common Law D’Oench Duhme Doctrine
Because both §1823(e) and the common law D’Oench Duhme promote the right of agencies and their assignees to rely upon the written records of the failed bank, “[o]ver the years, the case law surrounding the common law doctrine and the statute . . . has cross-pollinated such that it is very difficult to decide where the statute ends and D’Oench begins.”14

For example, §1823(e) contains more stringent requirements for an agreement to be enforceable. Whereas, under common law D’Oench Duhme, the agreement must be executed by the failed bank, §1823 requires additionally that the agreement was approved by a board or committee and that the executed agreement was continuously an official record of the failed bank.15

However, §1823(e) is narrower in focus because it requires the presence of an “agreement” and an “asset.”16 Specifically, it provides that “[n]o agreement which tends to diminish or defeat the interest of the [c]orporation in any asset acquired by it under this section or section 1821 of this title, either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the [c]orporation unless….”17

Thus, the protection of the common law D’Oench Duhme doctrine can be described as broader, but more shallow, while the protection provided by §1823(e) can be described as narrower, but deeper.18 Other commentators are of the opinion that the statutory scheme “makes the common law principle both more encompassing and more precise.”19

Another component of the relationship between the common law doctrine and §1823(e) is the question of whether §1823(e) in its current form preempts the common law doctrine. While common law D’Oench Duhme and §1823(e) D’Oench Duhme provide similar protections, debate persists as to whether common law D’Oench Duhme is preempted by FIRREA, or if common law D’Oench Duhme still has continuing vitality separate and apart from, but alongside, §1823(e).20 In those jurisdictions in which the common law D’Oench Duhme doctrine and the statute co-exist, “defenses premised upon §1823(e) and D’Oench Duhme are usually construed in tandem.”21

However, perhaps the answer to this question is not as crucial as it seems at first blush in the context of a borrower or guarantor attempting to escape its obligations under the written loan documents. This is because, in most cases, the distinction between the two doctrines is not analyzed and becomes irrelevant, since in principle the animating spirit of the two doctrines is the same. In the case of most defenses and claims raised by borrowers and guarantors, the requirements of neither the common law nor the statutory doctrine are met.22 Thus it is irrelevant which is employed.23

D’Oench Duhme in Current Practice
The D’Oench Duhme doctrine now stands for the proposition that a regulatory agency, whether acting as an insurer or as a receiver, or its assignee, will not be bound by an obligation that does not meet the requirements recited in the statute (and the common law, depending upon the jurisdiction).24 As stated by the 11th Circuit in Baumann v. Savers Fed. Sav. & Loan Association, 934 F.2d 1506, 1514-15 (11th Cir. 1991):

As discussed above, the Court in D’Oench held that in litigation between a bank customer and the FDIC, as successor in interest to a bank, the customer may not rely on agreements outside the documents contained in the bank’s records to defeat a claim of the FDIC…. [A] private party may not enforce against a federal deposit insurer any obligation not specifically memorialized in a written document such that the agency would be aware of the obligation when conducting an examination of the institution’s records. McCullough, 911 F.2d at 600.

Courts also apply the D’Oench Duhme doctrine broadly. For example, the word “agreement” has been construed by the Supreme Court to encompass more than just an express promise to perform an act in the future.25 Courts also apply the D’Oench Duhme doctrine to preclude claims, defenses, and affirmative defenses based upon agreements which do not meet the D’Oench Duhme doctrine’s requirements, regardless of how borrowers or guarantors choose to title such claims, defenses, and affirmative defenses.26

The D’Oench Duhme Doctrine in Florida
Florida state and federal courts have generally followed the pattern described above. Thus, in Florida state and federal courts, a regulatory agency or its assignee will not be found to be aware of, or subject to, a purported agreement between a failed bank and a borrower and/or guarantor unless that agreement complies with the requirements of the D’Oench Duhme doctrine.27 The agreement must be memorialized and signed by the bank and the writing must satisfy all four of the requirements listed in §1823(e).28

Florida state and federal courts recognize that the FDIC and those that succeed the failed institution obtain the protections of the common law D’Oench Duhme doctrine and §1823(e).29

Similarly as described above, Florida courts construe the term “secret agreement” to encompass more than an express promise to perform an act in the future, and have held that a regulatory agency or assignee is entitled to judgment as a matter of law despite a borrower’s attempts to sidestep the doctrine by artfully pleading secret agreements as variously labeled affirmative defenses and/or claims, such as fraud, misrepresentation, and estoppel. For example, in Madonna Corp. v. Federal Deposit Insurance Corporation, 563 So. 2d 763 (Fla. 2d DCA 1990), the Second District held that the ability of the FDIC to foreclose a mortgage held by a bank could not be defeated by an alleged oral agreement between the mortgagor and the bank officer wherein the officer allegedly agreed to accept mortgagor’s deed in lieu of foreclosure. Similarly, in Smania v. Mundaca Inv. Corp., 629 So. 2d 242, 243 n.3 (Fla. 3d DCA 1990), the Third District concluded that counterclaims alleging fraud in the inducement, failure of consideration, unfair and deceptive trade practices, and breach of warranty were barred as a matter of law, even if the bank fraudulently induced the customer into signing the note. Specifically, the court held that §1823(e) barred the customer from relying on the bank’s misrepresentations as a defense to payment on the note and that the D’Oench Duhme doctrine applies even where the customer is completely innocent of any bad faith, recklessness, or negligence.30 Other district courts of appeal in Florida have reached similar conclusions.31

The only major difference between the application of the D’Oench Duhme doctrine in Florida and the application of the D’Oench Duhme doctrine in most other jurisdictions is that the 11th Circuit follows the minority view that the common law D’Oench Duhme doctrine continues to exist co-extensively with §1823(e), O’Melveny notwithstanding.32

At this time, neither the Florida Supreme Court nor Florida appellate court have explicitly considered the issue of the continuing vitality vel non of the common law doctrine after O’Melvney. While, all post-O’Melvney opinions in which the D’Oench Duhme doctrine was raised have held that it was not implicated, the courts’ consideration of the issue indicates that the prevailing view is that the common law doctrine has survived (even if these statements are arguably dicta).33 For example, in Kasket v. Chase Manhattan Mort’g Corp., 695 So. 2d 431 (Fla. 4th DCA 1997), while the Fourth District ultimately decided that neither the D’Oench Duhme doctrine nor §1823(e) applied because the basis of the borrowers’ position related to mistakes on the face of truth in lending statements, the court considered both the common law doctrine and §1823(e) to be potentially applicable.

Instead, the entire body of Florida case law concerning the D’Oench Duhme doctrine is pre-O’Melvney and treats the common law doctrine and the statutory doctrine in tandem.34 In these cases, the courts were simply concerned with whether the doctrine applied at all, given that the claims and defenses raised by the borrowers in these cases did not implicate the subtle distinctions between common law D’Oench Duhme and §1823(e). Thus, the issue of the continuing vitality of the common law doctrine in light of the revision of §1823(e) by FIRREA was not discussed in any of these opinions. Until a Florida appellate court revisits the issue in light of O’Melvney, as in the 11th Circuit, an agency or an assignee bank may argue that it is entitled to judgment as a matter of law in reliance upon the common law doctrine and §823(e).

Conclusion
The D’Oench Duhme doctrine is a powerful weapon for agencies and their successors to failed lenders and devastating to borrowers and guarantors asserting affirmative defenses that would normally constitute fact issues that would preclude summary judgment in favor of the agency or successor. Unlike Banking Statute of Frauds statutes, such as F.S. §687.0304, the D’Oench Duhme doctrine applies to bar both counterclaims and affirmative defenses when an agency or assignee can demonstrate an entitlement to assert the doctrine and that the borrower’s or guarantor’s affirmative claims and/or defenses are based upon secret agreements which cannot meet the doctrine’s threshold requirements. Available to both practitioners representing banking regulatory agencies and assignee banks, the D’Oench Duhme doctrine can provide entitlement to judgment as a matter of law when such a client confronts affirmative claims and/or defenses that fall within its broad parameters, regardless of a borrower’s or guarantor’s attempts at artful pleading.


1 D’Oench Duhme & Co. v. FDIC, 315 U.S. 447 (1942).

2 Id. at 460-61.

3 Id. at 454.

4 W. Robert Gray, Limitations on the FDIC’s D’Oench Doctrine of Federal Common-Law Estoppel: Congressional Preemption and Authoritative Statutory Construction, 31 S. Tex. L. Rev. 245, 250 (1990).

5 Chris Atkinson, Defensing the Indefensible: Exceptions to D’Oench and 12 U.S.C. §1823(e), 63 Fordham L. Rev. 1337, 1357 (1995).

6 FDIC v. Noel, 177 F.3d 911, 917-18 (10th Cir. 1999); Kilpatrick v. Riddle, 907 F.2d 1523, 1528 (5th Cir. 1990).

7 FSLIC v. Two Rivers Assocs., 880 F.2d 1267, 1274, 1276-77 (11th Cir. 1989).

8 Villafane-Neriz v. FDIC, 20 F.3d 35, 40 (1st Cir. 1994).

9 See, e.g., NCNB Texas Nat. Bank v. Johnson, 11 F.3d 1260 (5th Cir. 1994); Fleet Bank of Maine v. Steeves, 785 F. Supp. 209 (D. Me. 1992); Caires v. JP Morgan Chase Bank, 745 F. Supp. 2d 40 (D. Conn. 2010); Beal Bank, SSB v. Pittorino, 177 F.3d 65 (1st Cir. 1999); UMLIC-Nine Corp. v. Lipan Springs Dev. Corp., 168 F.3d 1173 (10th Cir. 1999); New Rock Asset Partners, L.P. v. Preferred Entity Advancements, Inc., 101 F.3d 1492 (3d Cir. 1996).

10 See Langley v. Federal Deposit Ins. Corp., 484 U.S. at 91-93 (1987).

11 Id.

12 Robert B. Markworth, Survival of the Federal Common Law D’Oench Doctrine?, 1 N.C. Banking Inst. 436, 437 (1997).

13 See Pub. L. No. 101-73, §217(4), 103 Stat. 183, 256 (1989).

14 In re NBW Commercial Paper Litig., 826 F. Supp. 1448, 1457 (D.D.C. 1992).

15 See, e.g., Lassiter v. RTC, 610 So. 2d 531, 535-38 (Fla. 5th DCA 1992) (holding that the loan approval letter and escrow instructions in this case were not “secret agreements” and, therefore, the common law D’Oench Duhme doctrine did not apply, and remand was necessary to determine applicability of §1823(e)).

16 See 12 U.S.C. §1823(e). Since this article construes the D’Oench Duhme doctrine in the context of a lender/borrower relationship, this issue is not typically relevant as the allegations which usually comprise the fraud/misrepresentation/estoppel/contract concern an alternative agreement with terms more favorable to the borrower that is asserted as a defense to payment or foreclosure or any other action that can be taken regarding the collateral for the loan.

17 Id. (emphasis added).

18 Marsha Hymanson, Borrower Beware: D’Oench Duhme and Section 1823 Overprotect the Insurer When Banks Fail, 62 S. Cal. L. Rev. 253, 272 (1988).

19 W. Robert Gray, Limitations on the FDIC’s D’Oench Doctrine of Federal Common Law Estoppel: Congressional Preemption and Authoritative Statutory Construction, 31 S. Tex. L. Rev. 245, 300 (1990), citing FDIC v. O’Neil, 809 F.2d 350, 353 (7th Cir. 1987) (Posner, J.).

20 See O’Melveny & Myers v. FDIC, 512 U.S. 79 (1994) (not specifically addressing the question as to §1823(e), but holding that that FIRREA is a comprehensive statutory scheme); Murphy v. FDIC, 61 F.3d 34, 40 (D.C. Cir. 1995) (holding that FIRREA preempted D’Oench Duhme under the reasoning of O’Melvney); Hess v. FDIC, 519 U.S. 1087 (1997) (vacating Motorcity of Jacksonville, Ltd. By & Through Motorcity of Jacksonville, Inc. v. Se. Bank, N.A., 83 F.3d 1317 (11th Cir. 1996) pursuant to the Court’s previous decision in Atherton v. FDIC, 519 U.S. 213, 231 (1997) (Motor City I); FDIC v. Deglau, 207 F.3d 153, 171 (3d Cir. 2000) (holding that FIRREA preempted common law D’Oench Duhme); cf. Motorcity of Jacksonville, Ltd. v. Se. Bank N.A., 120 F.3d 1140 (11th Cir. 1997) (en banc) (holding that the common law D’Oench Duhme doctrine was not statutorily abrogated by the Federal Deposit Insurance Act of 1950 or FIRREA) (cert. den., 120 F.3d 1140) (Motor City II).

21 Federal Deposit Ins. Corp. v. McCullough, 911 F.2d 593, 598 n.4 (11th Cir. 1990).

22 Chris Atkinson, Defensing the Indefensible: Exceptions to D’Oench and 12 U.S.C. §1823(e), 63 Fordham L. Rev. 1337, 1356 (1995).

23 Id.

24 RTC v. Dunmar Corp., 43 F.3d 587, 593 (11th Cir. 1995).

25 Langley v. FDIC, 484 U.S. 86, 108 S. Ct. 396 (1987) (holding “agreement” encompassed assertions by the borrowers that the bank made certain warranties regarding the land, the truth of which was a condition to performance of the borrowers’ obligation to repay the loan).

26 See, e.g., id. (affirmative defense of misrepresentations by bank to borrowers about the size and type of real property conveyed); Firstsouth F.A. v. Aqua Constr., Inc., 858 F.2d 441, 443 (8th Cir. 1988) (affirmative defense of breach of oral side agreement); Bryan v. Bartlett, 435 F.2d 28, 34-35 (8th Cir.), cert. den., 402 U.S. 915 (1970) (affirmative defense of lack of consideration); FDIC v. Timbalier Towing Co., 497 F. Supp. 912, 922 (N.D. Ohio 1980) (affirmative defense of fraud where borrower asserted he never received full amount of note); D’Oench Duhme & Co. v. FDIC, 315 U.S. 447, 62 S. Ct. 676, (1942) (affirmative defense of failure of consideration); Sunchase Apts. v. Sunbelt Service Corp., 596 So. 2d 119, 124 (Fla. 1st DCA 1992) (affirmative defense of estoppel); Victor Hotel Corp. v. FCA Mort’g. Corp., 928 F.2d 1077 (11th Cir. 1991) (affirmative defense of breach of contract); Federal Deposit Ins. Corp. v. Fisher, 727 F. Supp. 1306 (D. Minn. 1989) (affirmative defense of novation); State Street Capital Corp. v. Gibson Tile, Inc., 1998 WL 907027 (N.D. Tex. 1998) (affirmative defenses of unclean hands and failure to mitigate damages); Mainland Sav. Ass’n v. Riverfront Associates, Ltd., 872 F.2d 955 (10th Cir. 1989) (affirmative defenses of set-off and breach of the implied covenant of good faith and fair dealing).

27 See First Union Nat. Bank of Florida v. Hall, 123 F.3d 1374, 1379-1380 (11th Cir. 1997).

28 FDIC v. Diamond C. Nurseries, Inc., 629 So. 2d 157 (Fla. 4th DCA 1993) (emphasis added).

29 See, e.g., Smania v. Mundaca Inv. Corp., 629 So. 2d 242 (Fla. 3d DCA 1993); Sunchase Apts. v. Sunbelt Service Corp., 596 So. 2d 119, 124 (Fla. 1st DCA 1992); First Union Nat. Bank of Florida v. Hall, 123 F.3d 1374 (11th Cir. 1997) (extending D’Oench Duhme protection to a bank that acquired assets of an insolvent bank); Victor Hotel Corp. v. FCA Mortgage Corp., 928 F.2d 1077, 1083 (11th Cir. 1991) (extending D’Oench Duhme protection to a subsidiary of a savings and loan under receivership of FSLIC).

30 Id.

31 See FDIC v. Diamond C Nurseries, Inc., 629 So. 2d 157 (Fla. 4th DCA 1993) (holding that an unrecorded satisfaction of a mortgage securing a loan from a bank taken over by the FDIC was not sufficiently documented in the failed bank’s records to bar foreclosure, based upon the D’Oench Duhme doctrine); Sunchase Apts. v. Sunbelt Service Corp., 596 So. 2d 119, 124 (Fla. 1st DCA 1992) (holding that the borrower could not prevail as a matter of law on its affirmative defense of estoppel).

32 See Motorcity II, 120 F.3d 1140. Specifically, as mentioned above, the Supreme Court vacated Motorcity I in Hess on the basis of the opinion in Atherton, which held that there was no federal common law standard after FIRRA providing a standard of care for officers and directors of federally insured savings institutions. In Motorcity II, the 11th Circuit considered whether FIRREA abrogated the common law D’Oench Duhme doctrine and specifically held that it did not. See also Gulfstream Development Group, LLC v. Schwartz, 2009 WL 1107751 *3 (M.D. Fla., April 2, 2009) (noting that 12 U.S.C. §1823 is the “statutory counterpart” to D’Oench Duhme). Accordingly, in the 11th Circuit, “defenses premised upon §1823(e) and D’Oench Duhme [continue to be] … construed in tandem.” Federal Deposit Ins. Corp. v. McCullough, 911 F.2d 593, 598 n.4 (11th Cir. 1990); Bauman v. Savers Fed. Sav. & Loan Assoc., 934 F.2d 1506, 1515 (11th Cir. 1991) (same).

33 Kasket v. Chase Manhattan Mort’g Corp., 695 So. 2d 431 (Fla. 4th DCA 1997).

34 See Smania v. Mundaca Inv. Corp., 629 So. 2d 242 (Fla. 3d DCA 1993); Sunchase Apts. v. Sunbelt Service Corp., 596 So. 2d 119, 124 (Fla. 1st DCA 1992).

Gregory S. Grossman is a founding shareholder at Astigarraga, Davis, Mullins & Grossman, P.A. His practice focuses on creditors’ rights, including bankruptcy and insolvency litigation, restructurings, and litigation involving the Uniform Commercial Code.

Daniel M. Coyle is an associate at Astigarraga, Davis, Mullins & Grossman, P.A. His practice focuses on creditors’ rights, including bankruptcy and secured transactions.

[Revised: 01-28-2013]