The D’Oench Duhme doctrine defeats a trustee’s fraudulent transfer suit against the FDIC even if the failed bank was not a party to the required “secret agreement,” according to Chicago Bankruptcy Judge Donald R. Cassling.
The case involved an equipment leasing company that fraudulently financed the same equipment several times with different lenders. One lender was a bank later taken over by the FDIC.
The scam involved an agreement between the leasing company and an affiliate that allowed the same equipment to be used in multiple financings. The failed bank was not a party to the agreement, and the agreement between the leasing company and its affiliate obviously was not among the bank’s books and records.
The leasing company’s trustee sued the FDIC to recover payments of debt service, claiming they were part of fraudulent transfers with actual intent to hinder, delay or defraud under both Section 548(a)(1)(a) and similar provisions in Illinois law.
In an opinion on Nov. 21, Judge Cassling dismissed the suit by invoking D’Oench Duhme and 12 U.S.C. § 1823(e).
D’Oench Duhme, a 1942 decision by the Supreme Court, evolved from the federal common law of equitable estoppel designed to protect the FDIC by rendering an agreement between a bank and its borrower unenforceable if the agreement was not in the bank’s books and records.
Given that the case before him did not involve a secret agreement between the bank and the borrower, Judge Cassling surveyed authority and held that that doctrine applied “even though the secret agreement in D’Oench was between the borrower and the failed bank.”
Judge Cassling also based his opinion on 12 U.S.C. § 1823(e), which provides that no agreement “which tends to diminish” the interest of the FDIC will be enforceable against the FDIC unless it was in writing and approved by the bank.
Judge Cassling said that courts disagree on whether Section 1823(e) superseded D’Oench Duhme. With no authority from the Seventh Circuit on the question, Judge Cassling said that the “case law surrounding each has become so enmeshed with one another that it is difficult to determine where D’Oench ends and the statute begins.”
The trustee relied on a 1993 Colorado district court decision holding that Section 1823(e) applies only if the bank was a party to the secret agreement. Judge Cassling said he “strongly rejects” the notion that the bank must be a party to the secret agreement, adding that “there does not appear to be any requirement explicitly stated in either D’Oench or in Section 1823(e) mandating that the acquired bank be a party to the secret agreement,” even though many or “perhaps most” cases invoking the defense entail situations where the bank and borrower were parties to the agreement.