Opinion ID: 2070228
Heading Depth: 1
Heading Rank: 4

Heading: Prior DEPCO Cases

Text: This Court has addressed substantially similar circumstances in Rhode Island Depositors Economic Protection Corp. v. Washington County Land Co., 694 A.2d 720 (R.I.1997) (per curiam). In Washington County Land Co., the borrowers had also entered into a loan agreement with RICCU to finance a real estate project on which they owed an outstanding balance on the note. As in this case, DEPCO had assumed the note and brought suit to collect on the balance. The borrowers asserted that RICCU's failure to continue to fund the project was a material breach of the loan agreement that provided a complete defense to DEPCO's claim for payment on the note. Id. at 721. We agreed with DEPCO that once the automatic stay of RICCU's banking activities was issued by the Governor on January 1, 1991, neither the receiver for RICCU nor DEPCO had any authority or obligation to continue to fund the note and to provide those funds to Washington's land development project. Id. Thus, the borrowers' defense was precluded. The defendants argued here, and the trial justice agreed, that Washington County Land Co. is distinguishable because the borrowers in Washington County Land Co. asserted that the breach by the lender was a complete defense to DEPCO's claim for payment on the note, 694 A.2d at 721, whereas here defendants argued that their equitable recoupment defense served to reduce the amount recoverable by DEPCO by the amount of damages that defendants allegedly suffered as a result of the breach by RICCU or the Receiver. [4] In response, DEPCO argued that it is subject only to real defenses and to claims arising from agreements that are `supported by an explicit writing in the failed institution's records or by an express written agreement between the banking institution and the claimant, [5] citing several cases to support its position, specifically, Rhode Island Depositors Economic Protection Corp. v. Duguay, 715 A.2d 1278, 1280 (R.I.1998) (per curiam); Rhode Island Depositors Economic Protection Corp. v. Rignanese, 714 A.2d 1190, 1194 (R.I.1998); Rhode Island Depositors Economic Protection Corp. v. Ryan, 697 A.2d 1087, 1091 (R.I.1997); Rhode Island Depositors Economic Protection Corp. v. NFD Co., 687 A.2d 452, 454 (R.I.1997) (per curiam). Here, however, the trial justice found that recoupment is a real defense that could be used not to absolve defendants of liability but rather a defense by which defendants are entitled to recoup from [DEPCO] damages that reduced the amount owed to zero. Real defenses are those claims and defenses that render the underlying loan agreement void and not merely voidable. Duguay, 715 A.2d at 1280. Real defenses are defenses against the note such as infancy; incapacity, duress, or illegality of the transaction that renders the party's obligation a nullity; fraud in the factum; and discharge in bankruptcy. Ryan, 697 A.2d at 1092. It is our opinion that the defense of recoupment cannot be considered a real defense that renders the underlying loan agreement void. Moreover, to allow a setoff or a recoupment would contravene the intent of the Legislature in enacting the DEPCO statute, which allows DEPCO to assume all, none, or any portion of the liabilities of an eligible institution. Section 42-116-6(b). In this case, the transfer agreement from the receiver for RICCU to DEPCO provides that DEPCO shall not assume or be or become liable with respect to any setoff or counterclaim or other claim or liability,  for any other debts or liabilities of, or claims against, the Institutions or Receiver whatsoever. Therefore, the trial justice erred in treating the recoupment defense raised by defendants in this case differently from defenses that have been raised by other defendants in cases discussed ante. Because we hold that the defendants could not claim a recoupment defense, we need not reach the issue, raised by DEPCO, of whether the guarantors appropriately mitigated damages. For these reasons, we sustain DEPCO's appeal and reverse the judgment of the Superior Court, to which we return the papers in the case with our direction to enter judgment for DEPCO.