Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

Pronunciation

D'Oench and Duhme aren't words you hear every day.  For years I wondered how to pronounce them.  Those years started around 1996 when bank failure litigation was waning and those words were on fewer lips.  With plenty of other urgent things to do, confirming the correct pronunciation of D'Oench and Duhme stayed on my back-burner until last year.  If you've been wondering like I was, you're in luck.  You don't have to wait because I'll give you the proper pronunciations right now.  

D'Oench is pronounced "dench".  It rhymes with "bench".  And it sounds just like the name of the British actress, Dame Judi Dench, who currently portrays James Bond's boss "M".

Duhme is pronounced "doom", as in "we're doomed!!" and Thulsa Doom, Arnold's antagonist in Conan The Barbarian.

And when the D'Oench, Duhme doctrine, or one of its companions, sticks it to a borrower, guarantor, or the like, it's called getting "D'Oenched".  And now to the story of the first people who got D'Oenched...  

The D'Oench, Duhme Backstory:

• D'Oench, Duhme & Company, Inc. (the "securities broker") was a St. Louis securities broker and dealer.  In the 1920's they sold bonds to the Belleville Bank & Trust Company of Belleville, Illinois (the "bank")
   
• After the bond issuers defaulted on their payments, the bank asked the securities broker to sign a $5,000 promissory note (the "Note") so the bank could avoid showing the bonds as a non-performing "asset" on the bank's books.  $5,000 was a lot of money in 1926
   
• The bank promised to credit any payments that came in on the past due bonds against the outstanding balance of the Note
   
• The securities dealer's President signed the Note
   
• The bank gave the securities dealer a receipt for the Note.  The receipt included special terms that said:

  This note is given with the understanding it will not be called for payment. All interest payment so be repaid.

• The President of the securities dealer knew that (a) he was signing the Note to help the bank keep the defaulted bonds from dragging down the of the bank's assets, and (b) the purpose of the periodic interest payments on the Note was to "to keep the Note alive"
   
• Regardless of the periodic interest payments, the bank "charged-off" the Note in 1935
   
• In 1938 the bank got into serious financial trouble that forced them to borrow money from the FDIC in order to stay in business.  The Note was among the collateral the bank pledged to the FDIC as security for repayment of that loan
   
• But the loan from the FDIC was in vain. Before the Note was paid-off, then the bank failed and the FDIC stepped in as receiver for the bank 
   
• Then the FDIC - in its "corporate" capacity as the insurer of bank deposits, as opposed to its role as the bank's receiver - acquired the Note in a Purchase and Assumption Transaction
    
• Even though the bank charged the Note off in 1935, the FDIC still demanded payment from securities dealer
   
• The securities dealer responded, arguing that the special terms on the receipt for the Note were a complete defense to payment
   
• The dispute wound its way through the courts until it arrived at the U.S. Supreme Court in late 1941

The Supreme Court's Decision:

In their decision, the Justices:

• Agreed with the FDIC and rejected the securities dealer's argument that the special terms on the receipt made the Note unenforceable
   
• Emphasized specific language in the National Banking Act (the law initially creating the FDIC) prohibiting misrepresentation of bank assets. Based on that prohibition, the Justices recognized a general Congressional policy of protecting the FDIC.  And one of the things the FDIC needs protecting from most is secret agreements that:
  
  
  • Banking regulators wouldn't usually notice during regular bank examinations (and the FDIC wouldn't easily notice after being appointed as a failed bank's receiver), and
     
  • Could undermine the value of a bank's assets (e.g., promissory notes, other loans papers and documents) because, if enforced, a secret agreement makes it more difficult to enforce the loan and collect principal and interest
     
  These "secret agreements" are suspect because they could mislead banking regulators into thinking a bank is solvent when it really isn't or more solvent than it really is.  And they could also mislead the FDIC, and post-Appointment Date potential loan purchasers, into over-valuing loans that the FDIC inherits as receiver of a failed bank.

• Explained that the special terms on the receipt qualified as a prohibited secret agreement and that by giving the Note and accepting the receipt, the securities dealer lent itself to a scheme that had the effect of misleading banking regulators. Their indulgence in allowing the bank to maintain the Note as an asset amounted to continuing permission to mislead state bank-examining authorities, and the FDIC as both the bank's insurer and lender.
   
• Decided that the the securities dealer should not be able to use the special terms on the Note receipt as a defense against the FDIC's efforts to collect on the Note
   
• Allowed the FDIC to go ahead and collect on the Note against the securities dealer. As bad as this decision was for the securities dealer, they were still a lot better off in March 1942 owing $5,000 in St. Louis than fighting under General MacArthur on Bataan.  There's D'Oenched, and then there's Doomed.

In the Wake of D'Oench, Duhme

The rule emerging from the D'Oench, Duhme decision is that secret agreements that may mislead banking regulators or the FDIC when they respectively examine an operating bank or take stock of the assets in a failed one, don't apply against  the FDIC.  But the D'Oench, Duhme decision was just the first step in a series of judicial decisions and new federal statutes that would refine and expand the FDIC's extraordinary powers.  We'll talk about many of them in upcoming posts, including:

• Codification of the D'Oench, Duhme doctrine in Section 13(e) of the Federal Deposit Insurance Act
   
• What qualifies as a "secret agreement" that may mislead banking regulators.  And how what qualifies as a secret agreement has expanded over the years to include a lot more than what you probably think of as an "Agreement"
   
• How borrowers, guarantors, and the like can get D'Oenched regardless of:
  
  
  • Whether they intended to mislead banking regulators, the FDIC, or anyone else
     
  • Whether they had any idea there was anything wrong with what they did
     
  • Whatever someone from the bank said or promised them and how reasonably they relied
     
• How buyers and assignees of loans from the FDIC may also use D'Oench, Duhme and its companions against borrowers, guarantors, and the like
   
• Suggestions on how, when working-out or restructuring a loan, you can lower the odds that you, or someone you know, gets D'Oenched