FDIC's Loan Buyers, Assignees, and Transferees Can Use The D'Oench, Duhme Doctrine Too

Posted on October 22, 2009 by Joshua Glazov
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Money Exchange.JPGIn the last bank insolvency post we talked about what kinds of things are considered "agreements" that the Federal Deposit Insurance Corporation (the "FDIC") can ignore under the D'Oench, Duhme doctrine and Section 13(e) of the Federal Deposit Insurance Act ("FDI Act"), a/k/a 12 U.S.C. ยง1823. I also promised to tell you about who else, besides the FDIC, may use D'Oench, Duhme and its companions against borrowers and guarantors.

The answer: the FDIC's assignees - the people who buy loans from the FDIC out of a failed bank's receivership estate.

Assets The FDIC Transfers

After getting appointed as receiver for a failed bank, the FDIC usually transfers the bank's assets. The primary assets are:

  • Promissory notes and other loan documents the bank holds, along with

  • The accompanying borrower obligations to repay the principal, plus interest and fees (wrapped-up together, "loans")

Who Does The FDIC Transfer Loans To?

  • A separate part of the FDIC - the FDIC acting in their corporate capacity that insures bank deposits and regulates banks, as opposed to their receivership capacity where they arrange for the sale or liquidation of a failed bank

  • Another bank that buys the loans through a Purchase and Assumption Transaction

    • Vulture Crew.jpg
  • Some other private buyer. Examples include:

    • Companies who specialize in buying loans at a discount from the FDIC and then collecting more than the purchase price from the borrower and guarantors - "vulture funds"

    • Companies in the "loan-to-own" business. They see holding the loan as a way to ultimately acquire property pledged as collateral for the payment under the loan (e.g., real estate, stock, a patent, a copyright). These companies buy the loan from the FDIC (or someone who bought the loan from the FDIC, including a vulture fund), expecting the borrower to default. Then they get the property through foreclosure.

    Because these transfers usually involve selling a loan to a buyer, I call all of these transferees "buyers", even if they don't actually buy the loan for cash.

Buyers Can Use D'Oench Too

Many federal judges have decided that in addition to the FDIC, buyers may also use the D'Oench, Duhme doctrine and Section 13(e) to neutralize many of the defenses and counterclaims that borrowers and guarantors raise to oppose collection on loans. This allows buyers to performing expedited and summary due diligence on the loans they're buying (we'll talk in future posts about buyers' need for expedited and summary due diligence). Here's a list of some of those decisions:

Borrowers and guarantors must recognize that it's not just the FDIC who can D'Oench their defenses and counterclaims. Buyers usually recognize this. And they factor it into the price they pay to buy a loan.

Coming Up Next

In the next installment of our series on bank failures and the FDIC's extraordinary powers, we'll focus on the federal holder in due course rule. This rule makes the FDIC into a holder in due course of promissory notes that they inherit as the receiver for a failed bank. Like the D'Oench, Duhme doctrine, the federal holder in due course rule gives even more special powers to the FDIC and buyers. And because of that, it's controversial. We'll take up how federal holder in due course rule works and the controversy it arouses in the next few posts.
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