FDIC's D'Oench, Duhme Doctrine: Statutory Companion - Another Thing To Wreck Your Loan Work-Out or Restructuring
In the last bank insolvency post we talked about the genesis of the D'Oench, Duhme doctrine. That's the rule allowing the Federal Deposit Insurance Corporation (the "FDIC") to disregard select agreements between borrowers and guarantors on one side and their banks on the other. Those are agreements struck before the bank fails and goes into FDIC receivership. Today I'm going to introduce you to the first of D'Oench, Duhme's companions - Section 13(e) of the Federal Deposit Insurance Act ("FDI Act"), a/k/a 12 U.S.C. ยง1823. The U.S. Supreme Court justices created the D'Oench, Duhme doctrine in one of their decisions. Section 13(e) essentially puts it into a federal statute.
What Kinds of Agreements Are They Talking About?
Before we get started, you've probably noticed a lot of the talk about how the D'Oench, Duhme doctrine and its companions focus on "agreements." You may ask yourself: "what kind of agreements are they talking about?" Well, it's usually the kinds of agreements you often see in "work-outs" - loan modifications and other other debt restructuring transactions. Now those aren't the only "agreements" affected by the D'Oench, Duhme doctrine and its companions. But more on that later.
D'Oench, Duhme's Statutory Companion
After the D'Oench, Duhme decision, Congress amended the FDI Act to add Section 13(e) imposing mandatory requirements. And the FDIC is free to disregard nearly all pre-Appointment Date agreements modifying a loan or guaranty that don't comply with Section 13(e)'s requirements.
What does Section 13(e) require? With few obscure exemptions, each agreement must be:- Written
- Signed by both (a) the bank and (b) the borrower and other obligors (e.g., guarantors) at the same time the bank acquires the asset (i.e., the promissory note). To satisfy this requirement, it's probably prudent to use a replacement, or amended and restated, promissory note as part of your work-out. Just be sure that you get your former note back as part of that deal too
- Approved by the bank's board of directors or loan committee
- Loan committee or board approval must be reflected respectively in the the board's, or loan committee's, minutes
- Continuously maintained (i.e., starting right when first signed) among the bank's official records
These are the "4 Requirements". And agreements that don't comply with each of the 4 Requirements aren't enforceable against the FDIC. Miss one during your work-out and you can probably kiss it good bye if your bank later fails. With D'Oench, Duhme and Section 13(e) on their side, the FDIC doesn't need to honor your work-out deal!
Borrowers and guarantors are wise to heed Judge Sam A. Crow's remarks in Adams v. Walker:
Unrecorded agreements - those rooted in the loose soil of casual transactions as much from as those that spring from the malodorous loam of outright fraud - are a threat the the ecology of the banking system that we can ill-afford. To check the growth of these hardy perennials, D'Oench forces borrowers to bear the risk that their unorthodox plants will bear no fruit.
When negotiating and documenting loan modifications, prudent borrowers and guarantors must be vigilant to ensure that they themselves, and their banks, comply with the requirements imposed under the D'Oench, Duhme rule and Section 13(e). The risks are high for those who don't.
Like the four from Entourage, even though Section 13(e) of the FDI Act and the D'Oench, Duhme rule usually appear together, they are separate and distinct. Just because you satisfy one doesn't mean that you satisfy the other. Crossing either one is likely to doom your work-out if your bank fails. Check both!Upcoming Posts
There's still a lot more to the D'Oench, Duhme rule and its companions. Here's what's coming next:
- What qualifies as an "agreement" vulnerable to D'Oench, Duhme and its companions is broader than you think. It's not just documents that start with the words Agreement or Contract at the top of the first page
- We'll identify some of the others who can use D'Oench, Duhme and its companions against borrowers and guarantors. D'Oench, Duhme, it's not just for the FDIC anymore.
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