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

In our quarterly newsletter yesterday, my firm published When the FDIC Takes Over a Failed Bank: Business Pitfalls and Opportunities.  It's a brief introduction to how the FDIC taking over a bank affects:

• The failed bank's borrowers (including owners with construction loans and design professionals and contractors with revolving lines of credit)
   
• The customers of those borrowers
   
• The businesses who buy loans from the receivership estates of failed banks   

The newsletter also includes additional articles that will interest you too, among them:

• Landlords in the Lurch: Tips for Discouraging Tenant Defaults
   
• Finding Optimism in the Private Equity and Venture Capital Markets
   
• Health Care Reform: Where Do We Go from Here?
   
• The New Art of Selling (Without Selling)

 

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When the Federal Deposit Insurance Corporation (the “FDIC”) becomes the receiver for a failed bank, there’s usually a lot of lawsuits by, and against, the bank pending in state court. And there's often post-Appointment Date lawsuits filed in state court against the FDIC as receiver too.  Under Section 9(b)(2) of the Federal Deposit Insurance Act (the "FDI Act"), also known as 12 U.S.C. §1219(b)(2) (the “removal statute”), the FDIC may remove (i.e., transfer) most of those cases from state to federal court.

Most FDIC Cases are Eligible for Removal

With limited exception, under the removal statute, any case where the FDIC is a party is considered to arise under federal law.  And the FDIC may remove lawsuits arising under federal law to federal court.

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In the last bank failure post I promised a recap and wrap up on the D'Oench, Duhme doctrine and Section 13(e) of the Federal Deposit Insurance Act. Well, here it is:

• A recap of the D'Oench rule
   
• A brief explanation why federal judges and Congress created, expanded, and maintain the rule
   
• Practical observations on how to avoid trouble

Rule Recap

The best recap of the rule in D'Oench, Duhme and Section 13(e) is this paraphrase from Judge Phyllis Kravitch's decision in Baumann v. Savers Federal & Loan Association:

In a lawsuit over the enforcement of an "agreement" originally between a bank and a private party, the private party can't enforce against the bank's receiver any obligation that's isn't specifically memorialized in a written document that the bank's primary regulator would be aware of when examining the bank's records

Interested in more details of how this rule works? Just go to the TOPICS on the right sidebar of this page and click on D'Oench, Duhme.

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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.

 

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This afternoon I had the opportunity to present Fortifying Your Work-Out Against Future Bank Failure to Chicago's South Side Business Association (SSBA). The Grand Ballroom at 6351 South Cottage Grove Avenue in Chicago hosted the event. The SSBA is composed of many south side business owners, professionals, real estate developers, architects, engineers, contractors, and lenders. The seats were filled and the audience asked a lot of questions, most about how a bank failure could affect their business and how they could find opportunities from bank failures too.

If you'd like copies of the handouts from this presentation, just click here.

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In the last bank insolvency post, I promised to fill you in on the disagreement among federal judges about whether the D'Oench, Duhme doctrine and the federal holder in due course rule (the "FHDC Rule") are still alive after the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") became law amending Section 13(e) of the Federal Deposit Insurance Act (the "FDI Act"). The chart below will help you keep track of which judges say yes and which ones say no.

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In the last bank insolvency post, we covered why it's good to be the holder in due course (an "HDC") of a promissory note. And I promised to explain why it's even better if you're the Federal Deposit Insurance Corporation (the "FDIC"), or someone who buys a promissory note from them. Why? Because they get to use the federal holder in due course rule (the "FHDC Rule"). Today we'll talk about why the FHDC Rule is better.

Relaxed Holder In Due Course Requirements for the FDIC

In the general HDC post we identified the four statutory requirements you must satisfy to qualify as an HDC under state law. But in some of their decisions, federal judges created the FHDC Rule relaxing those requirements for the FDIC. So, if the FDIC doesn't satisfy each statutory requirement, they may still be an HDC of the notes they get from a failed bank. Paraphrasing one panel of federal judges summing up the FHDC Rule:

We have also held that where state law precludes the FDIC, when acting in its corporate capacity, from attaining HDC status, application of state law frustrates the objectives of the FDIC's federal program. State law is therefore inapplicable. Therefore, even if, as is argued by the borrower, Ohio laws stops the FDIC from attaining HDC status, the FDIC may still take the note as an HDC. When the FDIC, in its corporate capacity, as part of a Purchase and Assumption Transaction, acquires a note in good faith, and without actual knowledge of any personal defense against the note, the FDIC takes the note free of all defenses that would not prevail against an HDC

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If you're looking for a great way to roll into Thanksgiving this year, forget preparing turkey and stuffing a day early! Instead, drop by the Chicago Bar Association where I'll be speaking about the FDIC's D'Oench, Duhme powers at lunchtime.

• Topic: D'Oench, Dhume, Section 13(e) of the Federal Deposit Insurance Act, and How They Affect Real Estate Workouts
• Where: Chicago Bar Association, 321 South Plymouth Court, Chicago, Illinois
• When: Wednesday, November 25, 2009, 12:15 PM to 1:30 PM Central Time
• Food and Beverage: Lunch will be served
• CLE credit: Yes!
• Cost: CBA members: $9.50. Non-members and guests: $12

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To paraphrase Mel Brooks: "It's good to be a holder in due course!"

In the last bank insolvency post, we talked about how the buyers and assignees of loans from the Federal Deposit Insurance Corporation (the "FDIC") use the D'Oench, Duhme doctrine, and Section 13(e) of the Federal Deposit Insurance Act ("FDI Act"), a/k/a 12 U.S.C. §1823, to neutralize many of the defenses that borrowers and guarantors raise against repaying loans after a bank fails. Add one more: the federal holder in due course rule (the "FHDC Rule").

The Federal Holder In Due Course Rule

The FHDC Rule is the second, and last, of D'Oench, Duhme's companions. Like the D'Oench, Duhme doctrine and Section 13(e), the FHDC Rule neutralizes many defenses that borrowers and guarantors raise in their post-bank failure attempts to avoid re-paying loans. But the FHDC Rule is separate from, and operates independent of, D'Oench, Duhme and Section 13(e). Critically, D'Oench and Section 13(e) apply only where an "agreement" hurts the FDIC. But the FHDC Rule foils borrowers' and guarantors' defenses even when there is no agreement. For example, when the amount of interest on a loan is usurious.

Holder In Due Course Basics

First, we must start with the basics of holder in due course law before we get into how the FDIC (and buyers of loans from their failed bank receiverships) use the FHDC Rule against borrowers and guarantors. So, basic holder in due course law is our topic for this post. I promise to keep it short. In the next bank insolvency post, we'll talk about special federal rules that make it easier for the FDIC, and loan buyers, to qualify as holders in due course.

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In 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. §1823. 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")

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In the last bank insolvency post I mentioned that what qualifies as an "agreement" vulnerable to the D'Oench, Duhme doctrine and its companions includes a lot more than what you probably think. If I say "agreement," you probably see a stack of 8.5" x 11" paper with "Agreement" or "Contract" at the top of the first page. When it comes to deciding whether D'Oench and its companions apply, "agreement" means a lot more. After the Federal Deposit Insurance Corporation (the "FDIC") gets appointed receiver for a failed bank, they can use D'Oench and its companions to classify all sorts of other defenses, claims, and counterclaims that borrowers and guarantors raise when trying to avoid paying a loan as "agreements." And "agreements" that don't satisfy each of the 4 Requirements - as identified in Section 13(e) of the Federal Deposit Insurance Act ("FDI Act"), a/k/a 12 U.S.C. §1823 - won't help borrowers or guarantors avoid paying on a loan the FDIC inherits from a failed bank.

Enough of the lead-in. You probably want to know what are these other things that get treated as agreements and then get D'Oenched? Below are some prime examples:

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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. §1823. 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.

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In the last bank insolvency post we talked about how the Federal Deposit Insurance Corporation (the "FDIC") can revive limitations periods even after they expire. Today we'll talk about another of the FDIC's extraordinary powers - the D'Oench, Duhme doctrine and it's companions.

D'Oench, Duhme gets its name from the 1942 U.S. Supreme Court decision in D'Oench, Duhme & Co., Inc. v. FDIC.  After the FDIC takes over as receiver of a failed bank, that decision, along with many that follow it, spells doom for many a borrower.  

In a nutshell, after the FDIC gets appointed as receiver for a failed bank, the D'Oench, Duhme doctrine and its companions allow the FDIC to ignore select pre-Appointment Date agreements and deals between bank representatives on one side and their borrowers and guarantors on the other.  Agreements that commonly fall victim are debt work-outs and restructurings that often include features like:

• Extending a promissory note's maturity date
   
• Reducing an interest rate
   
• Suspending, deferring, or reducing principal payments, and even interest payments
   
• Waiving fees and other payments (e.g., prepayment premiums)
   
• Waiving non-money defaults
   
• Waiving or reducing so-called "default interest" at higher than original rate
   
• Releasing guaranties

The FDIC refusing to honor these kinds of agreements can doom borrowers, guarantors, and the projects they're working on.  It doesn't matter if they're an owner under a construction loan or a contractor subcontractor, material supplier, or design professional under a working capital loan or line of credit.

As you learn about what D'Oench, Duhme can do, you'll recognize that it's a boon for whomever buys the affected loans from the FDIC.  It's meant to work that way.  More on that in future posts.

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