The Federal Deposit Insurance Corp. or its assignee cannot employ the D’Oench Duhme doctrine to enforce an agreement that reaffirmed a discharged debt but was not approved by the bankruptcy court as required by Section 524(c), the Tenth Circuit held in an April 13 opinion.
Deriving its name from a 1942 Supreme Court decision, D’Oench Duhme is a powerful weapon in the hands of the FDIC. Having evolved from the federal common law of equitable estoppel and now codified at 12 U.S.C. § 1823(e), the doctrine makes an agreement between a bank and its borrower unenforceable if the agreement was not in the bank’s books and records or was not made according to proper bank procedures.
Under Section 524(c), an agreement to reaffirm a discharged debt is enforceable only if it is approved by the court before the discharge is granted and if the parties have complied with complex disclosure and procedural requirements.
In the case before the Tenth Circuit, the debtor signed a note reaffirming a debt to the bank that had been discharged several years before. The bank was taken over by the FDIC. After the FDIC sold the loan, the buyer brought suit to enforce the note and the accompanying security agreement. The buyer, as an assignee of the FDIC, contended that D’Oench Duhme made the note enforceable despite noncompliance with Section 524(c).
In a nonprecedential opinion, the Sixth Circuit cited Langley v. FDIC, 484 U.S. 86 (1987), for the proposition that while “void” agreements are not enforceable under D’Oench Duhme, merely “voidable” agreements can be enforced by the FDIC.
The question, therefore, was whether a reaffirmation agreement in violation of Section 523(c) is void or voidable.
For several reasons, the appeals court decided that invalid reaffirmation agreements are void and thus unenforceable despite D’Oench Duhme.
The Sixth Circuit cited the Ninth Circuit Bankruptcy Appellate Panel’s holding that invalid reaffirmation agreements are “void and unenforceable” rather than merely voidable.
Another distinction, the court said, is whether the agreement can be ratified by the debtor. In the case of an “improperly reaffirmed debt,” the circuit said that the obligation “is not subject to ratification,” because bankruptcy court approval had to occur before discharge.
Further evidence that improper reaffirmation agreements are void comes from the language of the statute, which says that an agreement is unenforceable if the consideration, “in whole or in part, is based on a debt that is dischargeable,” the appeals court said.