Last month, the Federal Deposit Insurance Corporation reported that 470 financial institutions have failed since 2007. It is no wonder, then, that many institutions are embroiled in litigation involving loans made by failed banks and subsequently assigned to them by the FDIC. Borrowers often try to raise defenses against the acquiring institutions based on allegations that the officers of the failed bank entered into agreements with the borrower that would preclude the foreclosure action or deficiency litigation brought by the successor institution. These agreements are often not reflected in the records of the failed bank, which are now maintained by the acquiring institution. One tool that successor institutions may use to combat these defenses is to claim the protection of FDIC special powers.
FDIC “special powers” or “superpowers” derive from the United States Supreme Court decision in D’Oench, Duhme & Co. v. FDIC and its statutory counterpart, 12 U.S.C. § 1823(e). The “D’Oench Doctrine” was created to protect federal bank regulatory institutions from unwritten arrangements borrowers may have had with failed institutions that would mislead banking authorities when evaluating the institution’s assets and liabilities. Under the D’Oench Doctrine and Section 1823(e), federal banking regulators assuming control of a failed bank are only bound by fully and properly documented agreements in the failed bank’s records. Section 1823(e) provides that an agreement is only enforceable against the FDIC if it:
- is in writing;
- 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;
- 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
- has been, continuously, from the time of its execution, an official record of the depository institution.
Thus, alleged “agreements” (the term has been interpreted broadly) that are not found on the face of written obligations or in official bank records cannot be enforced against the FDIC and its assignees. Instead, the FDIC can assert the protections of these special powers, barring claims and defenses based on any unrecorded or secret agreements between borrowers and failed institutions. Such powers have been held to bar claims and defenses alleging bad faith, estoppel, waiver, fraudulent inducement, and equitable subordination, among others. Courts have determined that it is irrelevant whether the FDIC or the assignee had knowledge of the allegations upon which those claims and defenses are based.