Opinion ID: 522905
Heading Depth: 1
Heading Rank: 2

Heading: Setoff as to the Fictitious Loans4

Text: 14 The district court found setoff proper by TNB because the Gunther and Bell loans were based on fraud. The GBSB's officers induced TNB to participate in the loans with misrepresentations. The court found that the statements made by the president of GBSB that the signatures of Bell and Gunther on their respective loan documents, security agreements, and supporting documents were genuine and that the collateral had been personally inspected by the officers of GBSB were material and fraudulent. The court further found that TNB's reliance on the statements was justified making setoff before insolvency appropriate. 15 FDIC seeks to have the setoff invalidated under D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). The statutory codification of D'Oench, Duhme at 12 U.S.C. Sec. 1823(e) applies to an agreement which tends to diminish or defeat the right, title or interest of the [FDIC] in any asset acquired by it under this section, either as security for a loan or by purchase.... TNB's asserted setoff tends to diminish FDIC's right to collect on the obligations it seeks to enforce against TNB. Thus, the question before us is whether the setoff is based on an agreement within the meaning of Sec. 1823(e). 16 The meaning of agreement in the statute was clarified in Langley v. Federal Deposit Insurance Corp., 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987). In Langley, the Supreme Court applied Sec. 1823(e) to bar the defense that a note which FDIC sought to enforce had been procured by fraud in the inducement. Recalling that D'Oench, Duhme itself dealt with a note whose maker lent himself to a scheme or arrangement whereby the banking authority ... was likely to be misled, the Court reasoned: 17 Certainly, one who signs a facially unqualified note subject to an unwritten and unrecorded condition upon its repayment has lent himself to a scheme or arrangement that is likely to mislead the banking authorities, whether the condition consists of performance of a counterpromise (as in D'Oench, Duhme ) or of the truthfulness of a warranted fact. 18 Langley, 484 U.S. at ----, 108 S.Ct. at 402. We find no relevant distinction between this case and Langley. TNB seeks to set off these two loans on the ground that fraudulent representations by GBSB's officers induced TNB to participate in the fictitious transactions. As in Langley, those fraudulent representations were part of an agreement within the meaning of Sec. 1823(e). TNB failed to get the representations in writing. Therefore, D'Oench, Duhme, as codified in Sec. 1823(e), bars TNB from asserting a setoff based on those representations. 19 TNB cannot escape the statutory bar by arguing that it was the fictitious loans underlying the loan participation agreements that were likely to mislead bank examiners. Under the teaching of Langley, the unrecorded representations by GBSB officers are part of the agreement relevant to application of Sec. 1823(e). By failing to get the representations in writing, TNB participated in an arrangement likely to mislead FDIC. That the agency was also misled by the fictitious underlying loans does not change the analysis. 5 20