A federal appeals court in Atlanta has given new life to the government's authority to void oral contracts made by subsequently failed banks and thrifts.
The U.S. Court of Appeals for the 11th Circuit has ruled that Congress did not eliminate the so-called D'Oench Duhme legal doctrine when it passed the thrift bailout law in 1989.
The May 8 decision contradicts an August 1995 ruling by the U.S. Court of Appeals for the District of Columbia, which severely restricted the Federal Deposit Insurance Corp.'s ability to overturn oral contracts.
"The 11th Circuit has recognized that the D'Oench doctrine is alive and kicking," said Larry Bates, a partner at the Washington law firm of Hughes, Hubbard & Reed. "This certainly will be helpful for the FDIC. It helps them overcome a lot of lender liability defenses."
The legal doctrine gets its name from D'Oench, Duhme & Co., one of the original parties to the 1942 Supreme Court decision that established the FDIC's authority. The power is intended to protect the insurance fund from banks that make secret deals with borrowers or vendors. The legal doctrine says the FDIC has to recognize only written agreements by subsequently failed banks. Oral contracts do not have to be honored.
The agency often uses the doctrine to fight off borrowers who claim the bank told them not to worry about repaying their loans. Under D'Oench, the FDIC can ask a court to dismiss these claims because they are not in writing.
FDIC spokesman Robert Garsson praised the ruling. "It is a confirmation of what we understand the D'Oench doctrine to be," he said.
Michael Crotty, deputy general counsel at the American Bankers Association, said he believes the U.S. Supreme Court will eventually settle the legal uncertainty created by the two court decisions.
"There is a clear conflict between the circuits on the continuing existence of the D'Oench Duhme doctrine," he said. "It looks like a suitable candidate for Supreme Court review."
The 11th Circuit case stems from a 1989 suit against the now-defunct Southeast Bank by a car dealership in Jacksonville, Fla. The FDIC claimed D'Oench Duhme prevented the car dealer from suing Southeast for breach of contract. The court concurred.