Two conflicting federal appeals court decisions issued last week have rekindled the controversy over the government's power to void oral contracts made by banks and thrifts before failure.
The U.S. Court of Appeals for the 11th Circuit unanimously ruled Aug. 20 that Congress left intact the so-called D'Oench Duhme legal doctrine when it passed the thrift bailout law in 1989.
The Atlanta court's decision represents a win for the Federal Deposit Insurance Corp., which relies on D'Oench to protect the insurance fund from ailing institutions that make unwritten deals with borrowers or vendors.
But on the same day a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit in San Francisco contradicted the Atlanta appeals court's ruling.
The San Francisco court, by a 2-to-1 vote in Ledo v. Summers, ruled that recent Supreme Court decisions question the authority on which D'Oench rests.
It said Atherton v. FDIC, which involved the burden of proof the government must meet in director and officer liability suits, undermined the same legal authority backing D'Oench.
In light of the Atherton decision, the Supreme Court in January asked the Atlanta appeals court to rehear its case, Motorcity v. FDIC. The appeals court did but did not change its opinion.
In the Motorcity case, a car dealership owner sued Southeast Bank NA, which was seized by the FDIC, for breach of contract. In the second case, Ledo Financial Corp. sought the repayment of a $500,000 loan to a thrift taken over by the FDIC.
An FDIC spokesman said the agency has not decided whether to appeal the San Francisco court's ruling. Attorneys for Motorcity said they have not made a decision on an appeal either.
"I think the FDIC is going to try to avoid a Supreme Court ruling, because quite frankly I think they would lose," said Ronald R. Glancz, a partner here with the Venable law firm.
But Lawrence F. Bates, a partner with Hughes, Hubbard & Reed here and outside counsel to the FDIC, disagreed. "It just seems like the Supreme Court is going to have to make a decision," he said.
The Supreme Court is considering whether to hear a third D'Oench case, Young v. FDIC.
Separately, the U.S. Court of Appeals for the Sixth Circuit in Cincinnati has sided with the FDIC in its dispute with a controversial Michigan banker.
The court said the FDIC rightfully denied two applications for deposit insurance by the proposed Bank of Michigan in 1993 and 1995, because its largest shareholder and vice president, Stanford C. Stoddard, had mixed personal and business assets at his former bank, Michigan National Bank- Detroit.