Rogers Towers: Use of FDIC Special Powers: Knowledge by the FDIC or its Assignees is Irrelevant

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” (the term has been interpreted broadly) with failed banks. The policy underlying this bar is to prevent such parties from basing claims or defenses against the FDIC or its successors on schemes or arrangements likely to mislead banking regulators when evaluating the assets of the failed bank (e.g., an arrangement that was not properly documented in the failed bank’s records).

Even if the FDIC or successor institution knew of the unrecorded scheme or agreement at the time of acquisition, the protection afforded by the D’Oench Doctrine and Section 1823(e) is unaffected. Courts have refused to hold such knowledge against the acquiring institution unless that knowledge is reflected in a written agreement that satisfies the requirements of the D’Oench Doctrine and Section 1823(e). As the United States Supreme Court has said, “[a]n agreement that meets [the requirements set forth in Section 1823(e)] prevails even if the FDIC did not know of it; and an agreement that does not meet them fails even if the FDIC knew. It would be rewriting the statute to hold otherwise.”

The filing of a lawsuit prior to the FDIC’s takeover of the failed acquisition does not change the analysis, nor do the legal pleadings of the suit qualify as part of the bank records for purposes of the analysis. Courts do not want parties to avoid the effect of the D’Oench Doctrine merely by making the FDIC aware of secret agreements prior to a bank’s failure. The FDIC and successor institutions are only responsible for conditions contained in the failed bank’s files, which meet Section 1823(e)’s requirements, regardless of any level of knowledge as to unrecorded conditions.