The D’Oench, Duhme doctrine and Section 13(e) of the Federal Deposit Insurance Act (a/k/a 12 U.S.C. §1823(e)) were active in Sacramento late last month to deny a borrower’s claim for reformation of her loan documents. The decision: Magdaleno v. IndyMac Bancorp, Inc. (PDF).
Backstory: Magdaleno v. IndyMac Bancorp, Inc.
Catalina Magdelano borrowed money from IndyMac. Her mortgage broker assured her that the interest rate on her loan would be a 30-year fixed rate with interest at 1% per year. But the documents for the loan set an adjustable rate starting at 1% per year, with a 9.950% maximum. Then IndyMac failed and the FDIC was appointed as IndyMac’s conservator. Ultimately, the FDIC transferred the borrower’s loan to a new lender: OneWest Bank.
Reformation Under California Civil Code §3399
In her lawsuit against the new lender, the borrower asked Judge Frank Damrell to reform the loan documents under California Civil Code §3399 to reflect the terms that she claims her mortgage broker assured her of.
D’Oench, Duhme and Reformation
The new lender urged Judge Damrell not to reform the loan documents. They argued that under the D’Oench, Duhme doctrine and Section 13(e), assurances from the mortgage broker qualify as secret agreements that are not enforceable against the FDIC, or the FDIC’s successors.
Judge Damrell’s Decision
Judge Damrell agreed with the new lender: D’Oench, Duhme and Section 13(e) stop the borrower from reforming her loan documents. And on that, Judge Damrell dismissed the borrower’s reformation claim without leave to amend.