Opinion ID: 691111
Heading Depth: 2
Heading Rank: 1

Heading: D'Oench, Duhme and Sec. 1823(e)

Text: 12 The RTC argues that Brookside's suit is barred by the D'Oench, Duhme estoppel doctrine, and by 12 U.S.C. Sec. 1823(e). 13 In D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), a securities dealer sold bonds to a bank. The issuer of the bonds later defaulted on the payments. To allow the bank not to carry any past-due bonds on its books, the securities dealer executed promissory notes to the bank. The receipts for the notes, signed by the bank's president, stated that the notes would not be called for payment and that interest paid would be refunded. In a purchase and assumption transaction, the Federal Deposit Insurance Company (FDIC) later acquired from the bank a $5000 note, executed by the securities dealer in renewal of the original notes. When the FDIC demanded payment on the $5000 note, the maker claimed that he owed nothing because of the bank's agreement not to call the original notes. The FDIC had been unaware of the receipts until after it demanded payment. Id. at 454, 62 S.Ct. at 678. 14 Citing a federal policy to protect [the FDIC] and the public funds which it administers against misrepresentations as to the securities or other assets in the portfolios of the banks which [the FDIC] insures or to which it makes loans, id. at 457, 62 S.Ct. at 679, the Supreme Court held that the undisclosed agreement not to demand payment would not be allowed as a defense. Id. at 461, 62 S.Ct. at 681. If the secret agreement were allowed as a defense in this case the maker of the note would be enabled to defeat the purpose of the statute [creating the FDIC] by taking advantage of an undisclosed and fraudulent agreement ... which the maker of the note made possible. Id. The D'Oench, Duhme doctrine thus is a principle of equitable estoppel that permits bank examiners to rely on the records of a bank in evaluating the bank's financial condition, by protecting the bank authorities from suits founded on undisclosed conditions or deceptive documents. See FDIC v. Zook Bros. Constr. Co., 973 F.2d 1448, 1450-51 (9th Cir.1992); Federal Sav. & Loan Ins. Corp. v. Gemini Management, 921 F.2d 241, 245 (9th Cir.1990). 15 Congress codified the policy embodied in the D'Oench, Duhme holding in 12 U.S.C. Sec. 1823(e), which  'makes the common law principle both more encompassing and more precise.'  RTC v. Midwest Fed. Sav. Bank, 36 F.3d 785, 795 (9th Cir.1994) (as amended) (quoting FDIC v. O'Neil, 809 F.2d 350, 353 (7th Cir.1987)). Section 1823(e) provides: 16 No agreement which tends to diminish or defeat the interest of the Corporation in any asset acquired by it under this section ... either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the Corporation unless such agreement-- 17 (1) is in writing, 18 (2) 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, 19 (3) 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 20 (4) has been, continuously, from the time of its execution, an official record of the depository institution. 21 12 U.S.C. Sec. 1823(e) (Supp. V 1994). Congress extended the statute's protections to the RTC in 1989, before the RTC acquired Southwest. 12 U.S.C. Sec. 1441a(b)(4)(A) (Supp. V 1994). 22 The Supreme Court most recently discussed the D'Oench, Duhme doctrine and Sec. 1823(e) in Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987). The Langleys executed notes to a bank in consideration for a loan to purchase real estate. When the bank filed suit for principal and interest after the Langleys missed a payment, they alleged as a defense that the notes were procured by the bank's misrepresentations regarding the size and other conditions of the property. The Langleys also filed their own suit, with the alleged misrepresentations as one of the grounds of the complaint. None of the representations appeared in the bank's records. The FDIC subsequently was appointed receiver and substituted as plaintiff in the suit. Id. at 88-89, 108 S.Ct. at 399-400. 23 The Supreme Court granted certiorari on the issue whether fraud in the inducement was barred as a defense against the FDIC under Sec. 1823(e), even when the fraud did not take the form of an express promise. Id. at 90, 108 S.Ct. at 401. Analyzing the meaning of secret agreement in D'Oench, Duhme, the Court held that unrecorded conditions on a note that consisted of the truthfulness of a warranted fact (the bank's representations as to the size and other conditions of the property) were an arrangement likely to mislead the banking authorities, and thus could not be asserted against the FDIC. Id. at 92-93, 108 S.Ct. at 401-02. 24 Langley's analysis expands D'Oench, Duhme estoppel and the statutory bar to suit of Sec. 1823(e) to situations such as the one in this case. See Century Centre Partners Ltd. v. FDIC, 969 F.2d 835, 838 (9th Cir.1992) (as amended) (misrepresentations inducing the execution of a note constitute D'Oench, Duhme agreement), cert. denied, --- U.S. ----, 113 S.Ct. 2997, 125 L.Ed.2d 690 (1993). Brookside's allegations echo those of the debtors in Langley. Brookside alleges that its purchase of the condominiums, which involved the making of the note and the deed of trust, was procured by the bank officers' misrepresentations about the value of the condominiums. The RTC answers that those misrepresentations constitute the kind of secret agreement that the D'Oench, Duhme doctrine and Sec. 1823(e) decline to enforce. 1 25 Despite the considerable surface similarity to Langley, however, there is a distinction between the facts in that case and the facts in issue here. In Langley, the debtors first asserted the misrepresentations as a defense to avoid their obligation on the note. The Supreme Court held that the misrepresentations constituted a secret agreement under the statute and D'Oench, Duhme, because the debtors' claim that the note was obtained by fraudulent misrepresentations as to the value of the real estate contradicted what the bank records indicated when the bank's assets, which included the note, were transferred to the FDIC as receiver. The Court reasoned that debtors who signed a note subject to unwritten and unrecorded conditions lent themselves to a scheme likely to mislead the banking authorities, who would have relied on the bank's records in taking the note at its full face value. Id. at 93, 108 S.Ct. at 402. The Court concluded that Sec. 1823(e) barred the Langleys' defense. 26 In this case, however, unlike the situation in Langley, no enforceable note existed when the RTC took over Southwest in September of 1989. The note and deed of trust were no longer on Southwest's books, as they were extinguished before the RTC acquired the bank's assets. Instead, Southwest owned the condominiums themselves, acquired at the foreclosure sale six months earlier. Brookside argues that because the note had been extinguished before the RTC took Southwest over as receiver, and because Brookside's suit does not challenge the RTC's right, title, or interest in the condominiums, no related asset existed when the RTC took over, and so neither the common law nor the statute bars its suit. 27 Brookside's argument might have some force where Sec. 1823(e) is concerned. In Murphy v. FDIC, 38 F.3d 1490, 1500 (9th Cir.1994), an en banc panel of this court found that the reference in Sec. 1823(e) to an agreement which tends to diminish or defeat the [banking authority's] right title or interest ... in any asset acquired by it (emphasis added) limits the statute's application to an agreement affecting the federal banking authority's interest in an asset of the bank. Murphy concluded that Sec. 1823(e) did not bar the enforcement of letters of credit that did not meet the statute's recording requirements, because a letter of credit was not an asset of the bank, but a liability. Id. at 1500-01. If Murphy can be extended outside the context of letters of credit or other liabilities of the bank, to establish that Sec. 1823(e) applies to bar suit only when the alleged secret agreement affects the value of a specific asset of the bank acquired by the banking authority, then the statute does not bar Brookside's suit. See John v. RTC, 39 F.3d 773, 776 (7th Cir.1994) (Section 1823(e) requires an identifiable 'asset' which is acquired by the bank and then transferred to the regulatory agency, and to which the unenforceable agreements must relate.); E.I. du Pont de Nemours & Co. v. FDIC, 32 F.3d 592, 597 (D.C.Cir.1994) (Sec. 1823(e) contemplates secret agreements diminishing the FDIC's interest in an asset); FDIC v. Bracero & Rivera, Inc., 895 F.2d 824, 830 (1st Cir.1990) (note discharged by acts independent of alleged secret agreement (payment and cancellation of underlying debt) before FDIC obtained it, is not an asset, so Sec. 1823(e) does not apply); Commerce Fed. Sav. Bank v. FDIC, 872 F.2d 1240, 1242-43, 1246 (6th Cir.1989) (deed of trust securing note that was paid in full, independently of any secret agreement, before FDIC acquired bank is presumed extinguished even absent final written release; FDIC thus acquired no asset and Sec. 1823(e) did not bar suit for declaratory relief and penalties for failure to release). 28 We need not decide, however, whether to extend Murphy out of the context of letters of credit to require a specific asset before the statutory bar to suit may be invoked. We conclude instead that the D'Oench, Duhme doctrine bars Brookside's suit against the RTC. D'Oench, Duhme expresses a federal policy to protect the RTC from misrepresentations concerning the assets of insured banks. When a debtor asserts a secret agreement not in the records of the bank, whether to avoid enforcement of a note or in a suit such as this one based on fraud in the inducement of an obligation, the D'Oench, Duhme policy favors the interests of bank examiners, as well as the agency that insures the bank, over debtors, who can protect themselves against harm by making sure all of the terms of their agreements are in writing. See Century Centre, 969 F.2d at 839; In re NBW Commercial Paper Litig., 826 F.Supp. 1448, 1462 (D.D.C.1992) (D'Oench, Duhme places the risk on borrowers if they do not get all of the terms of their agreements in writing.... [The question is,] could the party have taken reasonable steps to protect themselves through some form of written agreement?). 29 This is the same policy underlying Sec. 1823(e). While the statute's precise reference to an asset acquired by the RTC may limit its applicability to a secret agreement implicating the value of an asset of the bank, see Murphy, 38 F.3d at 1500, we decline to so limit the common-law doctrine. 2 Viewed in the light of the policies underlying D'Oench, Duhme, the unusual posture of this lawsuit--the fact that the note had been satisfied before the lawsuit was filed--should not exempt it from the reach of the common-law doctrine. If the note and deed of trust had still been on the bank's books when the RTC took over, the note would qualify as a specific asset of the bank whose value was affected by the alleged secret agreement. Under those circumstances, Brookside's suit would certainly be barred under both the statute and the common law. Why should it make any difference for D'Oench, Duhme analysis that Brookside filed this suit after the condominiums were repossessed? 30 Allowing such a distinction to strip the banking authority of D'Oench, Duhme protection would give debtors a message: If you relied on unrecorded representations when you borrowed from the bank, wait until your note is extinguished--or extinguish it yourself by paying it off--before you file suit. It does not make sense, in the light of D'Oench, Duhme policy, to allow the doctrine's applicability to hinge on a procedural technicality easily manipulable by debtors. See Hall v. FDIC, 920 F.2d 334, 339 (6th Cir.1990) (if the debtor, seeking to avoid the bar of D'Oench, Duhme, quickly pays off a loan before FDIC files suit so that FDIC will no longer have an interest in an asset, D'Oench, Duhme should still apply to bar suit), cert. denied, 501 U.S. 1231, 111 S.Ct. 2852, 115 L.Ed.2d 1020 (1991). 31 Brookside's allegations describe just the sort of secret agreement in relation to a loan that Langley found violated the public policy behind the statute and the D'Oench, Duhme doctrine. It should not make a difference, in deciding whether to apply D'Oench, Duhme equitable estoppel, that the note was not in the bank's assets at the moment the RTC took over. The failure to record the appraisal condition for executing the note prevented bank examiners from detecting the unrecorded agreement, and deprived the bank's board or loan committee of the opportunity to make a prudent evaluation of whether to approve the loan. Langley, 484 U.S. at 95, 108 S.Ct. at 403. This is consistent with the general rule that the bar to suit applies even when the banking authority knew of the secret agreement before it took the bank over (because, for example, the defense based on the secret agreement was raised, or the lawsuit alleging the secret agreement had been filed, before the bank failed, as in Langley ). The proper focus under D'Oench is whether the agreement, at the time it was entered into, would tend to mislead the public authority. Timberland Design, Inc., v. First Serv. Bank for Sav., 932 F.2d 46, 50 (1st Cir.1991) (emphasis added). 32 Because D'Oench, Duhme, unrestricted by the language of the statute requiring an asset, is nothing more than the policies which created it, NBW Commercial Paper, 826 F.Supp. at 1461, we hold that the common-law doctrine applies to bar suit even when the RTC does not acquire a specific asset whose value is affected by the alleged secret agreement. 33 Our decision is consistent with other appellate cases holding that banking authorities were entitled to invoke the protection of D'Oench, Duhme estoppel against suit based on a secret agreement, even when the federal banking authority did not rely on any specific asset when it took over a bank. As the Eleventh Circuit stated: 34 Appellant's primary argument on appeal is that the D'Oench doctrine does not apply to bar the instant claim because the secret agreement upon which appellant relies relates to a liability of the bank rather than to a specific asset of the bank which has been acquired by the FDIC. We can discern nothing in the purpose of the D'Oench doctrine which would support appellant's proposed limitation of the doctrine. Moreover, every circuit court of appeals which has expressly addressed this argument has rejected it. 35 OPS Shopping Center, Inc. v. FDIC, 992 F.2d 306, 309 (11th Cir.1993) (footnote omitted). 3 36 Nor does this case involve what other circuits have called a free-standing tort claim, which may be maintained against the federal banking authority even though the claim may not be revealed by examination of the bank's records. See E.I. du Pont du Nemours & Co. v. FDIC, 32 F.3d 592, 599 (D.C.Cir.1994); Vernon v. FDIC, 981 F.2d 1230, 1233-34 (11th Cir.1993). A free-standing tort claim, such as a slip and fall, does not relate to ordinary banking transactions, and so will not usually be recorded in the documents inspected by bank examiners. See Motorcity of Jacksonville, Ltd. v. Southeast Bank N.A., 39 F.3d 292, 298 (11th Cir.1994) (free-standing tort is one not related to matters normally reflected in the records of regular banking transactions). In contrast, Brookside's claim relates directly to one of the most regular of banking transactions: the making of a loan for the purchase of real estate. Had Brookside insisted that its reliance on the false appraisal be made a part of the loan-sale documents, the discrepancy between the fraudulent appraisal value and the actual appraisals would have been subject to scrutiny by bank board members and bank examiners. It is highly unlikely that under those circumstances the fraudulent scheme could have been accomplished, or that it would not have been discovered before the RTC acquired the assets of the bank. 37 Under these circumstances, there is a choice as to who must bear the loss, the public fisc or Brookside. Because the latter could have protected itself by insisting that the secret agreement--the false appraisal--be incorporated in the loan documentation, we hold that D'Oench, Duhme, bars Brookside's lawsuit. As Judge Lamberth states in his scholarly opinion in NBW Commercial Paper: 38 D'Oench determines, as between two innocents (the FDIC and the wronged bank customer) who should bear the cost of the failed bank's wrongs. If the customer bears the slightest blame--by failing to protect himself by getting an agreement in writing, then the scale tips in favor of the FDIC and D'Oench bars the claim or defense. 39 NBW Commercial Paper, 826 F.Supp. at 1467. 40