The FDIC's D'Oench, Duhme Use Restriction Policy
In the last bank insolvency post I promised to tell you about the Federal Deposit Insurance Corporation's (the "FDIC") policy restricting use of the D'Oench, Duhme doctrine and Section 13(e) of the Federal Deposit Insurance Act (the "FDI Act"). That's our topic today. The D'Oench, Duhme Policy As the last banking failure crisis progressed through the early 1990s, it became obvious that although the FDIC had the right to use D'Oench and Section 13(e), it wasn't always the right thing to do. In some cases the outcome, at the very least, looked unfair or inequitable to whomever got D'Oenched. And sometimes it really was.
The FDIC recognized this problem and responded in 1997 with a policy officially known as the:
Statement of Policy Regarding Federal Common Law and Statutory Provisions Protecting FDIC, as Receiver or Corporate Liquidator, Against Unrecorded Agreements or Arrangements of a Depository Institution Prior to Receivership
But here we just call it the "Policy". Under the Policy, FDIC personnel must use extra care when deciding whether to D'Oench someone. And even more critically, in select situations, the Policy requires FDIC personnel to get approval from headquarters in Washington, DC before D'Oenching a borrower, a guarantor, or someone else with a claim against a failed bank's receivership estate.
The message from headquarters: Be judicious about using D'Oench, Duhme and Section 13(e). Just because we have the right to do it, doesn't mean it will always be the right thing for us to do.
Where the Policy Applies
So what are the select situations that require Washington approval?
- Pre-Failure Vendors: Businesses who provide goods or services to the failed bank before the Appointment Date. Examples that specifically affect the construction industry:
- A claim for payment by a landscaper who planted trees around the bank's parking lot before the bank fails. They have no contract for planting the trees in the bank's records. But there's trees around the parking lot and no record of any payment
- A claim for payment by a contractor for work to renovate property the bank owns (e.g., a bank branch, a "REO" property taken back in foreclosure). When the bank fails, the contractor's completed 90% of the work, but the bank still owes more than 50% of the contract price
- A claim for payment by a landscaper who planted trees around the bank's parking lot before the bank fails. They have no contract for planting the trees in the bank's records. But there's trees around the parking lot and no record of any payment
- Diligent Parties: A borrower (or guarantor) who takes all reasonable steps to document and record their pre-Appointment Date loan modification with the bank and there's no evidence that the borrower participated in any dubious activity that would deceive banking regulators. Examples include:
- Where a loan modification isn't included in the bank's official records, but the borrower can show, by clear and convincing evidence, that an authorized bank representative properly signed the agreement
- Where the borrower diligently insists that the bank's board of directors, or loan committee, minutes, show approval of a loan modification agreement in an apparently arms-length transaction. But because the borrower has no control over how the bank's board or loan committee operate, they're unsuccessful in ensuring the minutes reflect approval
- Where a loan modification isn't included in the bank's official records, but the borrower can show, by clear and convincing evidence, that an authorized bank representative properly signed the agreement
- Integral Documents: Where multiple documents in the failed bank's files indicate an agreement under the terms asserted by a borrower or guarantor, but some of those documents aren't in the bank's official records that banking examiners usually review
- Non-Lending Claims: Where a banking transaction isn't related to a specific current, or former, bank asset. Also where the FDIC proposes to use D'Oench or Section 13(e) against a tort claim (e.g., negligence, misrepresentation, or tortious interference with business relationships) and the claim is unrelated to a loan, other ordinary banking transaction, or transaction creating, or designed to create, an asset of the failed bank
- Bilateral Obligations: Where an agreement that the FDIC tries to enforce imposes obligations on both the borrower and the failed bank, and the borrower claims that the bank breached that agreement
- Statutory Defenses: Where the FDIC proposes to use D'Oench or Section 13(e) to foil statutory defenses to repayment of a loan. Examples:
- Using D'Oench or Section 13(e) against mechanics lien claims, even if all elements of those lien claims aren't reflected in the bank's records
- But using D'Oench or Section 13(e) against statutory defenses based on a misrepresentation or omission by the bank (e.g., unfair or deceptive trade practice statutes) doesn't usually need Washington approval
- Using D'Oench or Section 13(e) against mechanics lien claims, even if all elements of those lien claims aren't reflected in the bank's records
Policy Limits
While the Policy can help you as a borrower, guarantor, vendor, etc., don't count on it too much.
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The Policy isn't the law. It's just the FDIC's 1997 statement of how they plan to exercise their discretion as a part of the executive branch of the government. The FDIC made the Policy. They can change it, or get rid of it, too. And keep in mind that the FDIC issued the Policy in February of 1997, when the Bank Insurance Fund and Savings Association Insurance Fund were each pretty well stocked. Only six banks failed in the twelve months before issuing the Policy, and only one bank failed in the twelve months after issuing the Policy. That's a far cry from the 130 bank failures so far this year and the Bank Insurance Fund's current $8.2B deficit
- The Policy applies to only the FDIC. It does not require anyone else to get Washington approval before using the D'Oench, Duhme doctrine or Section 13(e). That includes those people who buy loans from the FDIC and then try to collect on them. But though the Policy doesn't affect buyers, their asset purchase agreements may require them to get FDIC appoval before using the D'Oench, Duhme doctirine or Section 13(e)
Conclusion
The Policy tempers how the FDIC uses the D'Oench, Duhme doctrine and Section 13(e) of the FDI Act. But it's no assurance they won't use it against you. And it doesn't prevent someone else - a loan buyer - from using those foils against you. Of course that's good news if you're the one who bought the loan and you're trying to neutralize defenses that a borrower, guarantor, or the like is trying to use against your collection efforts.
Upcoming Posts
The next bank insolvency post will be the last on the D'Oench, Duhme doctrine and its companions. It will be a recap and summary of the D'Oench posts and some final thoughts and suggestions:
- For borrowers, guarantors, and the like: how you can avoid trouble with D'Oench and and its companions
- For loan buyers: how you can maximize the advantages that D'Oench and its companions give you
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
