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Construction Law Today

How Does D’Oench, Duhme Affect Fraud Claims

Posted in Construction Finance and Insolvency, D'Oench, Duhme, FDIC & Bank Failures

Gaming Chip of the Northern Winz CasinoThe D’Oench, Duhme doctrine is active again, this time barring guarantors’ fraud claims and defenses in Minnesota.

Outsource Services Management, LLC v. Ginsburg

Earlier this month, Judge Donovan Frank applied the D’Oench, Duhme doctrine’s statutory companion, Section 13(e) of the Federal Deposit Insurance Act, a/k/a 12 U.S.C. §1823(e), to dismiss fraud claims and defenses alleged by a group of investors who guaranteed a construction loan for the construction of the Northern Winz Casino in Box Elder, Montana.  The case: Outsource Services Management, LLC v. Ginsburg (PDF).

Backstory

  • A borrower and group of guarantors borrowed money from BankFirst for the construction of the casino.  BankFirst representatives made numerous representations about timing and funding to the borrower and guarantors that the borrower and guarantors relied in deciding to go forward with the project, including putting their own money in and promising to repay the BankFirst loan
  • Problems arose.  In their wake: construction delays, late casino opening, and poorer than expected casino performance.  The borrower defaulted on the loan.  BankFirst sued the borrower and guarantors to recover principal, interest, and other costs
  • BankFirst South Dakota Branch BuildingThe borrower and guarantors defended and counter-sued BankFirst alleging that BankFirst representatives intentionally and materially misled (i.e., defrauded) them about the loan, and, therefore, the guarantors’ guarantees should be rescinded
  • Then BankFirst failed.  The FDIC became receiver for BankFirst and sold select rights under the loan to Outsource Services Management, LLC, d/b/a Presidium Asset Solutions (the “Successor Lender”) under an Assignment and Assumption Agreement
  • Under the Assignment and Assumption Agreement, the FDIC didn’t transfer certain liabilities to the Successor Lender.  So, the guarantors asserted their misrepresentation allegations as (a) a defense against the Successor Lender’s efforts to collect on the loan and (b) counterclaims for damages against the FDIC, as receiver for BankFirst
  • The FDIC and the Successor Lender asked Judge Frank to summarily dispose of the guarantors’ defenses and counterclaims based alleged misrepresentations by BankFirst representatives

FDIC and Successor Lender’s Arguments for Summary Judgment

Among the many reasons they cited, the FDIC and Successor Lender suggested that because assurances from BankFirst representatives to the borrower and guarantors were informal (i.e., not in the loan documents or guarantees and didn’t comply with the other 4 Requirements), under Section 13(e), the guarantors can’t enforce those assurances as a defense against the Successor Lender’s efforts to collect under the loan or as counterclaims against the FDIC as receiver for BankFirst.

Judge Donovan Frank of MinnesotaJudge Frank’s Decision

Judge Frank agreed with the Successor Lender and the FDIC – because of Section 13(e), the guarantors can’t continue to assert pre-Appointment Date misrepresentations by BankFirst personnel as a defense against the Successor Lender, or as a claim for damages against the FDIC.   He specifically mentioned that the Successor Lender, as the FDIC’s assignee, may also use Section 13(e) against the guarantors’ fraud allegations.

Judge Frank granted summary judgment against the guarantors resulting in:

  • A judgment of $14,738,359.65, plus daily interest and fees for the Successor Lender against the guarantors
  • Dismissal of the guarantors’ misrepresentation (i.e., fraud) claims

Other Observations

Other interesting things about this decision:

  • The FDIC didn’t argue that under the FDIC failed bank administrative claims process under 12 USC §§1821(d)(3)-(d)(9), Judge Frank didn’t have subject matter jurisdiction to hear the guarantors’ misrepresentation claims
  • Another reason for ruling against the guarantors: the loan documents contradicted the misrepresentations that the guarantors alleged they relied on and loan agreement and each guarantee included a merger and integration clause saying that those documents superseded any other oral, or written, agreements, assurances, or representations
  • Another reason for ruling against the guarantors: the alleged misrepresentations weren’t included in a written agreement signed by representatives of both the borrower and BankFirst, as required by Minnesota’s “statute of frauds” for Credit Agreements.  Several other states have statutes like this too.  They essentially privatize the D’Oench, Duhme doctrine and Section 13(e).  So, under these statutes, banks can enjoy immunity against alleged casual agreements and assurances without failing or going into receivership

Conclusion: D’Oench, Duhme is Active Once Again and Neutralizes Fraud

Word "fraud" in scope crosshairs

This decision is just one example of how, as litigation over delinquent loans formerly held by failed banks proliferates, we’re going to see more of the D’Oench, Duhme doctrine and Section 13(e). They put powerful weapons in the arsenal of the FDIC and those who buy loans from failed bank receiverships.  Those weapons allow both to summarily dispose of borrowers’ and guarantors’ defenses and counterclaims; even fraud is in their crosshairs.  Borrowers and guarantors need to keep that in mind when considering settlements and restructuring, as well as when planning litigation strategy and tactics in cases involving failed bank loans.