A federal court in Puerto Rico recently decided that the D’Oench, Duhme doctrine applies to deny claims for breach of informal employment contracts by former employees of failed banks. And D’Oench’s statutory supplement, Section 13(e) of the Federal Deposit Act (the “FDI Act”, also referred to as 12 USC §1823(e)), applies too. The decision: Ortiz-Hernandez v. WesternBank of Puerto Rico (PDF).
Backstory: Ortiz-Hernandez v. WesternBank of Puerto Rico
Rafael Ortiz-Hernandez worked as an employee for Westernbank of Puerto Rico. He resigned in the spring of 2008 and, as part of his departure, entered into a severance contract with the bank. The severance contract didn’t mention a Christmas bonus (the employee had traditionally received a $13,000 bonus each Christmas from the bank). Despite the omission, the employee claimed that bank executives assured him he would still receive $13,000 as a bonus the following Christmas. The assurances weren’t written. When Christmas arrived, the bank paid him less than $13,000 as a bonus. So, the employee sued the bank for the remainder of his bonus.
But, while the employee’s lawsuit was pending, the bank failed. The FDIC was appointed to serve as the bank’s receiver. The FDIC repudiated the employee’s contract, at least the part related to the Christmas bonus. Presumably the employee submitted an administrative claim against the receivership estate for his bonus. And when the FDIC denied that claim, the lawsuit resumed. The FDIC then asked the judge hearing the case, Chief Judge Jose Antonio Fusté, to dismiss the employee’s lawsuit.
FDIC’s Motion to Dismiss
The FDIC urged Judge Fusté to dismiss the employee’s lawsuit because:
- The agreement to pay the $13,000 bonus didn’t comply with the 4 Requirements of Section 13(e)
- Being unwritten and informal, the bonus agreement is unenforceable post-failure against the FDIC under the D’Oench, Duhme doctrine
Employee’s Counter-Arguments Why Section 13(e) and D’Oench Shouldn’t Apply
The employee argued that Section 13(e) and D’Oench shouldn’t apply because Section 11(d)(6) of the FDI Act (also known as 12 USC §1821(d)(6)) allows those on the receiving end of a contract repudiation to submit a claim for damages they suffer as a consequence of the repudiation. Essentially, the employee argued that Section 13(e) and D’Oench are subordinate to Section 11(d)(6).
Judge Fusté’s Decision
Judge Fusté agreed with the FDIC and dismissed the employee’s lawsuit. He found that both Section 13(e) and the D’Oench, Duhme doctrine would operate to deny enforcement of the bonus assurances. He observed that Section 13(e) and D’Oench aren’t subordinate to Section 11(d)(6). The reason: Section 11(e) of the FDI Act specifically requires repudiation claims to comply with Section 13(e). Those that don’t are to be denied. Because the bank executives didn’t comply with the writing requirement of Section 13(e), and because the unwritten bonus agreement wasn’t recorded among the bank official records where it would be visible to banking regulators, the bonus assurance is unenforceable post-failure against the FDIC.
Conclusions and Observations
- Despite the split among federal circuit courts of appeal on whether Section 13(e) has supplanted and retired the D’Oench, Duhme doctrine, Judge Fusté cited both in his decision
- Section 13(e) and the D’Oench, Duhme doctrine aren’t just for denying enforcement of informal loan terms and modifications anymore. If you’re making agreements with, or relying on assurances from, a bank – regardless of whether it’s related to a loan – you ignore the 4 Requirements at your peril