In previous posts, we introduced the protections afforded the FDIC by the D’Oench Doctrine and 12 U.S.C. § 1823(e), which bar claims and defenses against the FDIC and its assignees by private parties based on improperly documented agreements with failed banks. Parties sometimes attempt to get around the special powers hurdle by challenging the breadth of the term “agreement.” Examples of “agreements” commonly raised include promises or conditions regarding extension of a promissory note’s maturity date, waiver of fees or interest, and release of guarantors. Courts have held that the term “agreement” is quite broad and should be liberally construed; thus, claims or defenses based on a wide variety of oral promises and collateral writings which do not comply with Section 1823(e) requirements are barred.
In Langley v. FDIC, the borrowers argued that the failed bank made oral misrepresentations regarding the acreage of the land for which they were borrowing money to purchase. After the bank failed and the FDIC took over, the borrowers tried to use those misrepresentations as a defense, arguing that the D’Oench Doctrine and Section 1823(e) did not apply because the term “agreements” only encompassed express promises made regarding future actions, not misrepresentations or fraud. The United States Supreme Court rejected that argument, finding that a component of an agreement necessarily includes any conditions upon performance of an obligation.
The Supreme Court made it clear that the term “agreement” as used in D’Oench, Duhme & Co. v. FDIC and Section 1823(e) encompasses both explicit promises and unrecorded conditions, and to interpret it more narrowly would disserve the purpose of the D’Oench Doctrine and 12 U.S.C. § 1823(e). Misrepresentations and warranties made to the borrower are included in the definition of “agreement” and therefore must meet the requirements of Section 1823(e). “Agreement” also encompasses implied obligations that arise from prevailing banking customs (e.g., breach of the implied covenant of good faith and fair dealing), if such customs do not appear in the official bank records or on the face of the documents, despite any possible inequity that may result. The “agreement” does not have to be between the bank and borrower to qualify, either; misrepresentations by third parties are also encompassed.
In determining whether a claim or defense is based on an “agreement,” the focus ultimately is not on any specific statement of agreement or understanding between the bank and borrower, but rather on the policy that the FDIC’s interest (or that of a successor institution) should not be impaired based upon conditions affecting the enforcement of a loan or obligation that do not appear within the files of the failed bank. Courts have consistently held that they have no discretion to balance equities in deciding whether to enforce the special powers protections. In fact, the Supreme Court specifically refused to incorporate an equitable exception into the plain language of Section 1823(e). It also stated that the FDIC’s knowledge of an alleged unrecorded agreement is irrelevant to the application of FDIC special powers.