A federal court in Orlando, Florida recently decided that the D’Oench, Duhme doctrine stops claims for breach of a joint venture agreement. So does D’Oench’s statutory supplement, Section 13(e) of the Federal Deposit Insurance Act (also referred to as 12 USC §1823(e)). The decision: ORL, LLC v. Hancock Bank (PDF).
Backstory: ORL, LLC v. Hancock Bank
A pair of real estate development companies borrowed money from a pair of banks (Peoples First Community Bank and Colonial Bank). They used the money to buy land and construct a condominium project called the Blue Heron Beach Resort. Some of the borrowers’ principals guaranteed the loans too.
As the borrowers encountered trouble, the banks agreed to modify some terms of the loan documents. One of the banks also agreed to provide purchase money “end-loans” to the buyers purchasing completed condominium units from the borrowers.
Unfortunately, the banks ran into trouble too. Colonial failed. Then Peoples First failed too. The FDIC was appointed as receiver for each bank. The FDIC sold the Peoples First loan to Hancock Bank under a Purchase and Assumption Agreement.
When things promised by the banks didn’t happen, the borrowers and guarantors sued Hancock. (To avoid too much repetition, from here on in I’m going to refer to the borrowers and guarantors together collectively as just the borrowers). Many of the borrowers’ claims against Hancock were based on things that Colonial allegedly did, or didn’t, do under the Colonial loan. But before the borrowers could hold Hancock responsible for the alleged transgressions of Colonial, the borrowers needed to somehow tie Hancock to Colonial. So, the borrowers claimed that Hancock’s predecessor–Peoples First–was in a joint venture with Colonial. And under the joint venture, Hancock would be vicariously liable for things Colonial did and didn’t do.
But the borrowers left something important out of their complaint against Hancock: a written joint venture agreement, or at least allegations that there was a written joint venture agreement.
Hancock’s D’Oench, Duhme Arguments
Hancock’s lawyers recognized that as the FDIC’s assignee Hancock could use D’Oench, Duhme and Section 13(e) against the borrowers’ claims that hinged on the joint venture. So, citing the absence of a written joint venture agreement, D’Oench, and Section 13(e), they asked Judge Patricia Fawsett to dismiss the borrowers’ lawsuit.
The Borrowers’ D’Oench, Duhme Opposition
The borrowers urged Judge Fawsett to deny Hancock’s request for two reasons:
- The loan documents were among Peoples First’s records when Peoples First failed. So D’Oench’s and Section 13(e)’s written agreement requirements were satisfied
- Hancock had waived the defenses like D’Oench, Duhme and Section 13(e) under the Purchase and Assumption Agreement
Judge Fawsett’s Decision
Judge Fawsett agreed with Hancock. She dismissed the borrowers’ claims.
- Although Peoples First, and later Hancock, may have had the Colonial loan documents in their respective records, those records didn’t include a joint venture agreement between Peoples First and Colonial. If the alleged joint venture lacked a written agreement satisfying the 4 Requirements, the borrowers could not hold Hancock liable as Colonial’s joint venturer. Paraphrasing Judge Fawsett:
[E]ven if Hancock’s files contain a copy of the Colonial loan documents as the borrowers suggest the borrowers’ claims are nonetheless subject to dismissal under the D’Oench doctrine because the Complaint does not allege the existence of a written agreement between Peoples First and Colonial establishing the joint venture relationship
- And Hancock didn’t waive defenses like D’Oench, Duhme and Section 13(e) under the Purchase and Assumption Agreement either. The borrowers cited a 1992 decision where the judges considered a waiver under a Purchase and Assumption Agreement. But in that case the purchasing bank agreed to assume liabilities for claims certified by the receiver to be valid and enforceable obligations, regardless of whether they were reflected on the books of the failed bank as of Appointment Date. But in this case Judge Fawsett observed:
In the present case, no provision of the Purchase and Assumption Agreement states that Hancock agreed to assume any liabilities that were not reflected in the written records of Peoples First
Conclusions and Observations
- This case is unusual because the suspect agreement that gets D’Oenched isn’t between the failed bank and the borrower. Instead it was, at least allegedly, between the failed bank and a third-party (who, incidentally, was a bank that later failed too)
- And though Judge Fawsett dismissed the borrowers’ lawsuit, she dismissed it for now without prejudice. That means the borrowers can amend their complaint and keep the lawsuit going for at least a little while longer. Judge Fawsett may even let them just allege a 4 Requirements complaint joint venture agreement exists and allow the borrowers to look for it in discovery