[Federal Register Volume 62, Number 27 (Monday, February 10, 1997)]
[Notices]
[Pages 5984-5988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3190]
[[Page 5984]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
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
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Statement.
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SUMMARY: The FDIC has adopted a statement of policy which sets forth
when the FDIC will assert the federal common-law doctrine enunciated by
the Supreme Court in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942)
and when the FDIC will assert the statutory protections set forth in 12
U.S.C. 1821(d)(9)(A) and 1823(e).
EFFECTIVE DATE: February 4, 1997.
FOR FURTHER INFORMATION CONTACT: Charlotte Kaplow, Counsel (202-736-
0248), Legal Division, Federal Deposit Insurance Corporation, 550 17th
Street, N.W., Washington, D.C. 20429.
Introduction
The protection of the FDIC against unrecorded agreements or
arrangements between a federally-insured depository institution
(institution) and third parties is among the most important, long-
standing, and powerful protections afforded the FDIC acting in either
its corporate liquidator capacity (FDIC/Corporate) or in its capacity
as a receiver for a failed institution (FDIC/Receiver). This statement
of policy is intended to inform persons doing business with an
institution of the circumstances in which: (1) The statutory provisions
(12 U.S.C. 1821(d)(9)(A), 1823(e)); and (2) the rule enunciated by the
Supreme Court in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942),
will be asserted by the FDIC to bar certain agreements or arrangements
entered into with the institution prior to receivership. Published as
an addendum are ``Guidelines For Use of D'Oench and Statutory
Provisions'' (Guidelines), which are discretionary and evolving by
nature but nevertheless will serve to moderate the circumstances in
which the FDIC will exercise these protections.
Background
More than fifty years ago, the Supreme Court in D'Oench first
recognized a federal policy of protecting FDIC/Corporate from
unrecorded schemes or arrangements that would tend to mislead banking
authorities. The Court articulated a rule of law prohibiting a party
who had lent himself or herself to such a scheme or arrangement from
asserting against the FDIC an unrecorded agreement. This rule of law,
as it subsequently has been applied by the courts, is referred to as
the ``D'Oench doctrine''.
In 1950, Congress enacted section 13(e), codified at 12 U.S.C.
1823(e) (section 1823(e)), as part of the Federal Deposit Insurance Act
of 1950, ch. 967, Section 2[13](e), 64 Stat. 889 (81st Cong., 2d Sess.
1950). The strict approval and recording requirements of section
1823(e) supplemented the protection afforded by the D'Oench doctrine.
In 1982, this section was reenacted by Congress as part of the Garn-St.
Germain Depository Institution Act of 1982, Pub. L. 97-320, Section
113(m), 96 Stat. 1474. Both before and after 1982 the federal courts of
appeals and federal district courts consistently construed section
1823(e) and the D'Oench doctrine in tandem.
In August 1989, as part of the Financial Institution Reform,
Recovery and Enforcement Act (FIRREA), Public Law 101-73, 103 Stat.
183, Congress expanded section 1823(e) to cover defenses raised against
the FDIC in its receivership capacity, the newly created Resolution
Trust Corporation (in its corporate and receivership capacities) and
bridge banks. In relevant part, section 1823(e) now provides:
No agreement which tends to diminish or defeat the interest of the
[FDIC] in any asset acquired by it under this section or section 1821
of this title, either as security for a loan or by purchase or as
receiver of any insured depository institution, shall be valid against
the [FDIC] unless such agreement--
(A) Is in writing,
(B) Was executed by the depository institution and any person
claiming an adverse interest thereunder, including the obligor,
contemporaneously with the acquisition of the asset by the depository
institution,
(C) Was approved by the board of directors of the depository
institution or its loan committee, which approval shall be reflected in
the minutes of said board or committee, and
(D) Has been, continuously, from the time of its execution, an
official record of the depository institution.
12 U.S.C. 1823(e)
In addition, FIRREA added a new provision, section 11(d)(9)(A)
(codified at 12 U.S.C. 1821(d)(9)(A) (section 1821(d)(9)(A)), which
states, in relevant part, that ``any agreement which does not meet the
requirements set forth in section 1823(e) * * * shall not form the
basis of, or substantially comprise, a claim against the receiver or
the [FDIC in its corporate capacity].''
In the FDIC's view, Congress intended that sections 1823(e) (as
amended by FIRREA) and 1821(d)(9)(A) should be interpreted in a manner
consistent with the policy concerns underlying the D'Oench doctrine.
Accordingly, subject to the Guidelines,1 these sections bar claims
that do not meet the enumerated recording requirements set forth in
section 1823(e), regardless of whether a specific asset is involved, to
the same extent as such claims would be barred by the D'Oench doctrine.
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\1\ The Guidelines have been in effect since late 1994.
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More specifically, the statutory definition of the scope of
agreements to which section 1823(e) applies--i.e., those agreements
``which tend[] to diminish or defeat the interest of the [FDIC] in any
asset acquired by it'' (section 1823(e))--is not a ``requirement'' that
section 1823(e) imposes on those agreements, which if not ``met''
renders section 1821(d)(9) inapplicable. There is no reason to suppose
that Congress intended the scope of section 1821(d)(9)(A) to be
coextensive with that of section 1823(e).
Section 1823(e) applies only with respect to agreements that
pertain to assets held by the FDIC because the function of that section
is to bar certain defenses to the FDIC's collection on such assets.
Section 1821(d)(9)(A)'s function, in contrast, is to bar certain
affirmative claims against the FDIC. It does so in order to affect
primary conduct by providing an incentive for parties contracting with
institutions to document their transactions thoroughly. That in turn:
(1) Allows federal and state bank examiners to rely on an institution's
records in evaluating its worth; and (2) ensures mature consideration
of unusual banking transactions by senior bank or thrift officials and
prevents the fraudulent insertion of new terms when an institution
appears headed for failure. Cf. Langley v. FDIC, 484 U.S. 86, 91-92
(1987).
In interpreting the meaning of ``agreement'' in section 1823(e)
prior to its amendment in 1989, the Supreme Court in Langley held that
it would disserve the policies recognized in D'Oench to interpret
section 1823(e) in a more restricted manner than D'Oench itself: ``We
can safely assume that Congress did not mean `agreement' in section
1823(e) to be interpreted so much more narrowly than its permissible
meaning as to disserve the
[[Page 5985]]
principle of the leading case applying that term to FDIC-acquired
notes.'' Langley, 484 U.S. at 92-93. In the same way, it would disserve
the policies recognized in D'Oench and Langley to interpret section
1821(d)(9)(A) more narrowly than D'Oench has been applied in so-called
no-asset cases.2
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\2\ Two courts of appeals have applied section 1821(d)(9)(A) in
a more constricted manner. See John v. RTC, 39 F.3d 773, 776 (7th
Cir. 1994); and Thigpen v. Sparks, 983 F.2d 644 (5th Cir. 1993).
Both of these cases involved pre-FIRREA facts and, consequently, as
discussed infra, sections 1821(d)(9)(A) and 1823(e) (as amended by
FIRREA) were inapplicable. Moreover, in any future case involving
similar post-FIRREA facts, any decision to raise the statutory
protections would have to be authorized pursuant to the Guidelines,
which were not in use at the time these cases were litigated.
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Nevertheless, as reflected in the Guidelines, the FDIC, as a matter
of policy, will not seek to bar claims which by their very nature do
not lend themselves to the enumerated requirements of section 1823(e).
To that end, the FDIC will continue to assert the protections of the
D'Oench doctrine and FIRREA (sections 1821(d)(9)(A), 1823(e)) only in
accordance with the Guidelines.
The FDIC has also determined, after careful consideration, that
sections 1823(e) (as amended by FIRREA) and 1821(d)(9)(A) cannot be
applied retroactively to alleged agreements or arrangements entered
into before the enactment of FIRREA on August 9, 1989. Following the
Supreme Court's decision in Landgraf v. USI Film Products, 511 U.S.
244, 114 S. Ct. 1483 (1994), the courts of appeals that have addressed
the issue have concluded that sections 1821(d)(9) and 1823(e) (as
amended by FIRREA) do not apply in cases where the transactions at
issue occurred before FIRREA's enactment.3
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\3\ See Oklahoma Radio Assocs. v. FDIC, 987 F.2d 685, 695-96,
motion to vacate denied, 3 F.3d 1436 (10th Cir. 1993); Murphy v.
FDIC, 38 F.3d 1490, 1501 (9th Cir. 1994) (en banc) (noting FDIC's
concession in that regard).
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No provision within FIRREA addresses the temporal reach of section
1821(d)(9) or section 1823(e)(as amended by FIRREA). If the courts were
to apply those provisions to agreements made before the statute was
enacted, that would alter the rights possessed by the parties to such
agreements.4 Under the principles articulated by the Supreme Court
in Landgraf, Congress must therefore be presumed to have intended for
those provisions to apply only with respect to agreements made after
the enactment of FIRREA.5 Thus, because the statutory provisions
establish ``a categorical recording scheme'' (see Langley, 484 U.S. at
95) and D'Oench is an equitable doctrine (id. 93-95), sections
1821(d)(9)(A) and 1823(e) (as amended by FIRREA) cannot be applied
retroactively.
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\4\ Before FIRREA, a borrower could assert an affirmative claim
against the FDIC or FSLIC, or a defense against FDIC/Receiver or the
FSLIC, based on a written agreement that failed to meet the
contemporaneous-execution, approval, and recording requirements of
section 1823(e), so long as the borrower had not lent himself to an
arrangement or scheme likely to mislead bank examiners. D'Oench, 315
U.S. at 460.
\5\ The retroactivity of FIRREA, however, is not determined on
an all-or-nothing basis. There is no ``reason to think that all the
diverse provisions of the [statute] must be treated uniformly for''
purposes of the retroactivity analysis. Landgraf v. USI Film Prods.,
511 U.S. at 280, 114 S. Ct. at 1505. Moreover, ``[t]he conclusion
that a particular rule operates `retroactively' comes at the end of
a process of judgment concerning the nature and extent of the change
in the law and the degree of connection between the operation of the
new rule and a relevant past event.'' Landgraf, 511 U.S. at 270, 114
S. Ct. at 1499.
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Accordingly, the statement of policy announces that the FDIC will
assert the D'Oench doctrine for pre-FIRREA claims to the extent section
1823(e) (as it existed prior to FIRREA) is inapplicable but the claim
nevertheless runs afoul of the D'Oench doctrine. For claims that relate
to agreements or arrangements entered into after the effective date of
FIRREA, the FDIC will apply only sections 1823(e) (as amended by
FIRREA) and section 1821(d)(9)(A) to bar claims not entered into in
accordance with the enumerated requirements of section 1823(e) (as
amended by FIRREA). In either case, these protections will be asserted
only in keeping with the Guidelines.
FDIC Statement of Policy
1. Because sections 1821(d)(9)(A) and 1823(e) (as amended by
FIRREA) do not apply to agreements entered into before the effective
date of FIRREA (August 9, 1989), such agreements are governed by pre-
FIRREA law, including section 1823(e) and the D'Oench doctrine.
2. Agreements made after the enactment of FIRREA are governed by
sections 1821(d)(9)(A) and 1823(e) (as amended by FIRREA).
3. This statement of policy does not supersede the FDIC's Statement
of Policy Regarding Treatment of Security Interests After Appointment
of the FDIC as Conservator or Receiver of March 23, 1993 (58 FR 16833).
By order of the FDIC Board of Directors.
Dated at Washington, DC, this 4th day of February, 1997.
Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
Addendum--FDIC Guidelines for Use of D'Oench and Statutory
Provisions
1. Purpose. To set forth guidelines for the use of the D'Oench
doctrine and in 12 U.S.C. 1821(d)(9)(A), 1823(e) (statutory
provisions).
2. Scope. This directive applies to all Service Centers and
Consolidated Offices, to all future Servicers and, to the extent
feasible, to all current Servicers.
3. Responsibility. It is the responsibility of the FDIC Regional
Directors of the Division of Resolutions and Receiverships (DRR) and
Regional Counsel of the Legal Division (Legal) to ensure compliance
with applicable directives by all personnel in their respective service
centers.
4. Background
a. D'Oench Doctrine
In an effort to protect the federal deposit insurance funds and the
innocent depositors and creditors of insured financial institutions
(institution(s)), the Supreme Court in the case of D'Oench, Duhme & Co.
v. FDIC, 315 U.S. 447 (1942) adopted what is commonly known as the
D'Oench doctrine. This legal doctrine provides that a party who lends
himself or herself to a scheme or arrangement that would tend to
mislead the banking authorities cannot assert defenses and/or claims
based on that scheme or arrangement.
b. Sections 1821(d)(9)(A) and 1823(e)
In 1950, Congress supplemented the D'Oench doctrine with 12 U.S.C.
1823(e) which bars any agreement which ``tends to diminish or defeat
the interest of the [FDIC] in any asset'' unless the agreement
satisfies all four of the following requirements: (1) It is in writing;
(2) it was executed by the depository institution and any person
claiming an adverse interest under the agreement contemporaneously with
the acquisition of the asset; (3) it was approved by the board of
directors of the institution or its loan committee as reflected in the
minutes of the board or committee; and (4) it has been continuously an
official record of the institution.
In FIRREA, Congress added 12 U.S.C. 1821(d)(9)(A) which protects
the FDIC against all claims which do not meet the enumerated
requirements of section 1823(e).
c. Policy Considerations
The D'Oench doctrine and the statutory provisions embody a public
policy designed to protect diligent creditors and innocent depositors
from bearing the losses that would result if claims and defenses based
on undocumented agreements could be enforced against a failed
institution. The requirement that any arrangement or agreement with a
failed institution must
[[Page 5986]]
be in writing allows banking regulators to conduct effective
evaluations of open institutions and the FDIC to accurately and quickly
complete resolution transactions for failed institutions. This
requirement also places the burden of any losses from an undocumented
or ``secret'' arrangement or agreement on the parties to the
transaction, who are in the best position to prevent any loss.
Although the D'Oench doctrine and the statutory provisions
generally promote essential public policy goals, overly aggressive
application of the specific requirement of these legal doctrines could
lead to inequitable and inconsistent results in particular cases. In
order to ameliorate this possibility, the FDIC has undertaken
development of these guidelines and procedures to promote the exercise
of sound discretion in the application of D'Oench or the statutory
provisions.
5. Guidelines
These guidelines are intended to aid in the review of matters where
the assertion of D'Oench or the statutory provisions is being
considered. The examples given are intended to give clear direction as
to when particular issues must be referred. In particular, if the use
of D'Oench or the statutory provisions is proposed in a DRR--Operations
matter within the categories set forth below, the matter and
recommendation must be referred to the Associate Director--Operations
for approval through the procedures contained in section 6.
In the great majority of cases, however, it is anticipated that no
resort to Washington should be necessary. It is only in the categories
of cases highlighted in the guidelines that Washington approval must be
obtained.
a. Pre-Closing Vendors
D'Oench or the statutory provisions shall not be used as a defense
against claims by vendors who have supplied goods and/or services to
failed institution pre-closing when there is clear evidence that the
goods/services were received. In such case, D'Oench or the statutory
provisions shall not be asserted whether or not there are written
records in the institution's files confirming a contract for the goods
and/or services.
This does not mean that D'Oench or the statutory provisions may
never be asserted against a vendor, but only that each claim must be
examined carefully on its facts. When there is no evidence that goods
or services were received by the failed institution or in other
appropriate circumstances, the defenses may be asserted after approval
by Washington.
Examples Requiring Washington Approval:
1. Landscaping service filed claim for planting trees around the
institution's parking lot. There is no contract for planting trees
in the books and records of the institution, but there are trees
around the parking lot and no record of any payment. In this
example, Washington approval must be obtained before asserting
D'Oench or the statutory provisions.
2. A contingency fee attorney is unable to produce any
contingency fee agreement, but there is evidence in the files that
this attorney has been paid for his collection work for the past 20
years and his name appears on the court records for collection
matters for which he has not been paid. In this example also,
Washington approval must be obtained before asserting D'Oench or the
statutory provisions.
3. Contractor has construction contract with institution to
renovate any property owned by the institution. At the time the
institution fails, the contractor has completed 90% of the contract
and is owed about 50% of the contract price. Here too, Washington
approval must be obtained before asserting D'Oench or the statutory
provisions.
b. Diligent Party
D'Oench or the statutory provisions may not be asserted without
Washington approval where the borrower or claimant took all reasonable
steps to document and record the agreement or understanding with the
institution and there is no evidence that the borrower or claimant
participated in some activity that could likely result in deception of
banking regulators, examiners, or the FDIC regarding the assets or
liabilities of the institution. In particular, Washington approval is
required before D'Oench or the statutory provisions may be asserted
where the agreement is not contained in the institution's records, but
where the borrower or claimant can establish by clear and convincing
evidence that the agreement was properly executed by the depository
institution through an officer authorized by the board of directors to
execute such agreements, as reflected in the minutes of the board.
Cases involving ``insiders'' of the depository institution require
particularly careful review because of the greater opportunities of
such parties to manipulate the inclusion of ``agreements'' within the
institution's records.
Further, where it is clear that a borrower or claimant has been
diligent in insisting on a written document in an apparently arms-
length transaction, and had no control over the section 1823(e)
requirement that the transaction be reflected in the Board of
Directors' or Loan Committee minutes, assertion of the statutory
provisions solely because the transaction is not reflected in those
minutes may not be appropriate. In such cases, Washington approval must
be obtained before asserting D'Oench or the statutory provisions.
Examples Requiring Washington Approval:
1. Plaintiff sells a large parcel of land to the borrower of the
failed institution and the property description in the failed
institution's Deed of Trust mistakenly includes both the parcel
intended to be sold and a parcel of property not included in the
sale. Prior to the appointment of the receiver, the institution
agrees orally to amend the Deed of Trust, and indeed sends a letter
to the title company asking for the amendment. However, there is
nothing in the books and records of the institution to indicate the
mistake. The institution fails and the Deed of Trust has never been
amended. The borrower defaults and the FDIC attempted to foreclose
on both parcels. In this example, Washington approval must be
obtained before asserting D'Oench or the statutory provisions.
2. A limited partnership applies for refinancing. A commitment
letter is issued by the institution to fund a non-recourse permanent
loan which requires additional security of $1 million from a non-
partner. The Board of Directors minutes reflects that approval is
for a nonrecourse loan, however, the final loan documents, including
the note, do not contain the nonrecourse provisions. The institution
fails, the partnership defaults and it is determined that the
collateral plus the additional collateral is approximately $3
million less than the balance of the loan. In a suit by the FDIC for
the deficiency, Washington approval must be obtained before
asserting D'Oench or the statutory provisions.
3. A borrower completes payment on a loan, and he has cancelled
checks evidencing that his loan has been paid off. The institution's
records, however, do not document that the final payment has been
tendered. The institution fails and the FDIC seeks to enforce the
note. Washington approval must be obtained before asserting D'Oench
or the statutory provisions.
However, if it is clear that the borrower or claimant participated in
some fraudulent or other activity which could have resulted in
deception of banking regulators or examiners, then D'Oench or the
statutory provisions may be asserted without prior approval from
Washington.
Examples Not Requiring Washington Approval:
1. Borrower signs a note with several blanks including the
amount of the loan. An officer of the institution fills in the
amount of the loan as $40,000. Bank fails, loan is in default, the
FDIC sues to collect $40,000 and the borrower claims that he or she
only borrowed $20,000. There is nothing in the institution's books
and records to indicate the $20,000 amount, and, in fact, the
institution's books and records evidence
[[Page 5987]]
disbursement of $40,000. D'Oench or the statutory provisions may be
asserted.
2. Guarantor, an officer of the borrower corporation, signs a
guaranty for the entire amount of a loan to the corporation. At the
time of the institution's failure, the loan is in default and the
corporation is in Chapter 7 bankruptcy. FDIC files suit against the
guarantor for the entire amount of the loan. The guarantor claims
that he has an agreement with the institution that he is only liable
for the first $25,000. There is no record in the institution's files
of such an agreement. Again, D'Oench or the statutory provisions may
be asserted.
Where the specific facts of a case raise any question as to whether
D'Oench or the statutory provisions should be asserted, Washington
approval must be obtained before asserting D'Oench or the statutory
provisions.
c. Integral Document
If there are documents in the books and records of the institution
which indicate an agreement under the terms asserted by the claimant or
borrower, the use of D'Oench or the statutory provisions must be
carefully evaluated. Particular care must be taken before challenging a
claim or defense solely because it fails to comply with the 1823(e)
requirement that the agreement be reflected in the minutes of the Board
of Directors or Loan Committee. While any number of cases have held
that the terms of the agreement must be ascertainable on the face of
the document, in some circumstances it may be appropriate to consider
all of the failed institution's books and records in determining the
agreement, not just an individual document. Where the records of the
institution provide satisfactory evidence of an agreement, Washington
approval must be obtained before asserting D'Oench or the statutory
provisions.
Examples Requiring Washington Approval:
1. Note in failed institution's file is for one year term on its
face. However, the loan application, which is in the loan file, is
for five years renewable at one year intervals. The borrower also
produces a letter from an officer of the institution confirming that
the loan would be renewed on a sixty month basis with a series of
one year notes. In this example, Washington approval must be
obtained before asserting D'Oench or the statutory provisions.
2. Debtor executes two notes with the proviso that there is no
personal liability to the debtor beyond the collateral pledged. When
the notes become due they are rolled over and consolidated into one
note which recited that it is a renewal and extension of the
original notes but does not contain the express disclaimer of
personal liability. All three notes are contained together in one
loan file. Here, all of the notes should be considered as part of
the institution's records. In this example also, Washington approval
must be obtained before asserting D'Oench or the statutory
provisions.
d. No Asset/Transactions Not Recorded in Ordinary Course of Business
The use of D'Oench or the statutory provisions should be limited in
most circumstances to loan transactions and other similar ordinary
banking transactions. If the ordinary banking transaction is not
related to specific current or former assets, Washington approval must
be obtained before asserting D'Oench or the statutory provisions in
such cases. The application of D'Oench or the statutory provisions also
should be carefully considered before it is asserted in opposition to a
tort claim, such as negligence, misrepresentation or tortious
interference with business relationships, where the claim is unrelated
to a loan or ordinary banking transaction or to a transaction creating
or designed to create an asset. Washington approval must be obtained
before asserting D'Oench or the statutory provisions in such cases.
Examples Requiring Washington Approval:
1. Three years before failure the institution sells one of its
subsidiaries. The institution warrants that the subsidiary has been
in ``continuous and uninterrupted status of good standing'' through
the date of sale. The buyer in turn attempts to sell the subsidiary
and discovers that the subsidiary's charter has been briefly
forfeited. The prospective buyer refuses to go through with the sale
and the original buyer sues the institution for breach of warranty.
FDIC is appointed receiver. This transaction does not involve a
lending or other banking financial relationship between the
institution and the buyer. In addition, the subsidiary is not an
asset on the books of the institution at the time of the
receivership. In this example, Washington approval must be obtained
before asserting D'Oench or the statutory provisions.
2. In the case described above in the diligent party section,
where the property description in the failed institution's Deed of
Trust mistakenly includes a parcel not included in the sale, the
parcel at issue is not an actual asset of the failed institution and
the assertion of D'Oench or the statutory provisions is not be
appropriate. Here too, Washington approval must be obtained before
asserting D'Oench or the statutory provisions.
However, if a claim arises out of an asset which was involved in a
normal banking transaction, such as a loan, D'Oench or the statutory
provisions would be properly asserted against such a claim despite the
fact that the asset no longer exists. For example, collection on the
asset does not preclude the use of D'Oench or the statutory provisions
in response to claims by the former debtor related to the transaction
creating the asset.
Example Not Requiring Washington Approval:
1. A borrower obtains a loan from an institution, secured by
inventory and with an agreement that allows the institution to audit
the business. The business fails, the institution sells the
remaining inventory, and applies the proceeds of the sale to the
business's debt. Borrower sues the institution for breach of oral
agreements, breach of fiduciary duty, and negligence in performance
of audits of the business. Borrower then pays off remaining amount
of loan and continues the lawsuit. The institution subsequently
fails. Despite borrower's argument that there is no asset involved
since the debt has been paid, assertion of D'Oench or the statutory
provisions would be appropriate.
e. Bilateral Obligations
The facts must be examined closely in matters where the agreement
which the FDIC is attempting to enforce contains obligations on both
the borrower or claimant and the failed institution and the borrower or
claimant is asserting that the institution breached the agreement. If
the failed institution's obligation is clear on the face of the
agreement and there are documents supporting the claimed breach which
are outside the books and records of the institution, Washington
approval must be obtained before asserting D'Oench or the statutory
provisions.
f. Statutory Defenses
The appropriateness of using D'Oench or the statutory provisions to
counter statutory defenses should be evaluated on a case by case basis.
Although many such defenses may be based on an agreement that is not
fully reflected in the books and records of the institution, a careful
analysis should be made before asserting D'Oench or the statutory
provisions. In such cases, Washington approval must be obtained before
asserting D'Oench or the statutory provisions.
The clearest examples of situations where assertion of D'Oench or
the statutory provisions may be appropriate occur where the opposing
party is relying on a statutory defense based upon some
misrepresentation or omission by the failed institution. Examples of
this type of statute are unfair trade practice statutes.
On the other hand, application of D'Oench or the statutory
provisions may not be appropriate to oppose claims based on mechanics
lien statutes or statutes granting other recorded property rights. The
fact that all elements of those liens may not be
[[Page 5988]]
reflected in the books and records of the institution should not
control the application of D'Oench or the statutory provisions.
In analyzing the propriety of asserting the D'Oench or the
statutory provisions, at least the following three general factors
should be considered in preparation for seeking approval from
Washington:
* To what extent is the purpose of the statute regulatory,
rather than remedial? If the statute simply imposes regulatory or
mandatory requirements for a transaction, such as a filing
requirement or maximum fee for services, assertion of D'Oench or the
statutory provisions is unlikely to be successful.
* To what extent is the application of the statute premised upon
facts that are not reflected in the books and records of the
institution? If the state statute requires the existence and/or
maintenance of certain facts, but those facts are not recorded in
the institution's records, then D'Oench or the statutory provisions
may be applicable.
* To what extent do the facts involve circumstances where the
opposing party failed to take reasonable steps to document some
necessary requirement or participated in some scheme or arrangement
that would tend to mislead the banking authorities.
Examples Requiring Washington Approval:
1. A priority dispute arises involving a mechanic's lien against
property on which the FDIC is attempting to foreclose. An attempt to
persuade a court that the mechanic's lien is a form of secret
agreement under D'Oench, which, if given priority over the interests
of the FDIC, will tend to diminish or defeat the value of the asset
may not be appropriate. In this example, Washington approval must be
obtained before asserting D'Oench or the statutory provisions.
2. State law requires insurance companies doing business in the
state to deposit funds with the Commissioner of Insurance. Further,
the law provides that the deposit cannot be levied upon by creditors
or claimants of the insurance company. An insurance company
purchases a certificate of deposit from an institution and assigns
it to the Commissioner. At the same time a document is executed
entitled ``Requisition to the Bank'' which states that the
institution would not release the CD funds without authorization of
the Commissioner. Subsequently the insurance company borrows money
from the institution. After the loan goes into default, the
institution does not roll the CD over, but rather credits the
proceeds to the loan account. The institution then fails and the
Commissioner files a proof of claim with the FDIC seeking payment on
the CD. The FDIC may not defend the suit by claiming that the
assignment documents did not meet the requirements of section
1823(e). In this example, Washington approval must be obtained
before asserting D'Oench or the statutory provisions.
3. The FDIC attempts to collect on a note which the failed
institution acquired from a mortgage broker. The note is at a 15%
interest rate and the mortgage broker charged six and one half
points. State law provides that interest shall be no more than 13%
and that no more than one point may be charged. The FDIC may not
defend the borrower's counterclaim of a usurious loan by asserting
D'Oench or the statutory provisions. Here too, Washington approval
must be obtained before asserting D'Oench or the statutory
provisions.
g. Section 1823(e)'s Contemporaneous Requirement
This requirement of section 1823(e) may not be asserted to
invalidate a good faith workout or loan modification agreement where
the sole issue is whether the contemporaneous requirement of section
1823(e) is met. Where there is an agreement which otherwise satisfies
the remaining requirements of the statute, but was not executed
contemporaneously with the acquisition of the asset, in most
circumstances the statutory provisions should not be asserted. This
applies only to workouts or loan modifications done by the failed
institution prior to receivership. The assertion of the section 1823(e)
contemporaneous requirement should be considered principally where the
facts demonstrate that the workout or restructure was entered into in
bad faith and in anticipation of institution failure.
Washington approval must be obtained before asserting D'Oench or
the statutory provisions in these cases.
6. Procedures To Obtain Washington Approval
DRR Operations: When facts involving the possible assertion of
D'Oench or the statutory provisions arise, Legal should be consulted.
When the assertion of D'Oench or statutory provisions requires
Washington approval, as outlined above, prior approval must be received
from the Deputy Director--Operations or his designee in Washington in
all such cases. Such approval must be obtained by preparation of a
memorandum identifying the facts of the case forwarded through Legal
Division procedures to the Deputy Director--Operations or his designee.
DRR Asset Management: When facts involving the possible assertion
of D'Oench or the statutory provisions arise, Legal should be
consulted. When the assertion of D'Oench or the statutory provisions
requires Washington approval, as outlined above, Legal Division
procedures should be followed for referral to Washington. Washington
Legal will consult with Washington DRR where appropriate.
Legal: Each attorney must carefully review the facts of each
instance where the assertion of D'Oench or the statutory provisions is
being considered under revised Litigation Procedure 3 (LP 3). All cases
requiring consultation or approval within these Guidelines and/or PS
must be referred to Washington pursuant to LP3 procedures.
These Guidelines are intended only to improve the FDIC's review and
management of utilization of D'Oench or the statutory provisions. The
Guidelines do not create any right or benefit, substantive or
procedural, that is enforceable at law, in equity, or otherwise by any
party against the FDIC, its officers, employees, or agents, or any
other person. The Guidelines shall not be construed to create any right
to judicial review, settlement, or any other right involving compliance
with its terms.
[FR Doc. 97-3190 Filed 2-7-97; 8:45 am]
BILLING CODE 6714-01-P