[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,<SUP>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.<SUP>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.<SUP>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.<SUP>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.<SUP>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

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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