WASHINGTON - A federal appeals court here has made it substantially more difficult for the Federal Deposit Insurance Corp. to fend off lawsuits against failed banks and thrifts.
The U.S. Court of Appeals for the District of Columbia ruled Aug. 1 that the agency can use the so-called D'Oench Duhme doctrine only to void secret deals involving a failed institution's assets.
Fraud claims are not covered, the court said.
The decision stunned banking lawyers, who said the court reversed 52 years of precedent.
"It is going to turn a lot of years of jurisprudence on its head," said John Bloss, an attorney who assisted the plaintiff. "In this area of law, it is definitely a big case."
"I take this as an invitation to the U.S. Supreme Court," said Michael Crotty, deputy general counsel at the American Bankers Association. "Take this one up, guys."
FDIC spokesman Alan Whitney said the agency believes the court erred and it may request a rehearing. He declined to comment further.
D'Oench Duhme is a legal doctrine combining a 1942 U.S. Supreme Court decision and a 1950 law, both of which gave the FDIC the power to void secret deals that would drain a failed bank's assets.
The doctrine is intended to force banks to make all agreements in writing, thus giving examiners a true picture of the institution's financial condition.
Since 1950, the courts have expanded the doctrine to include all oral agreements, regardless of whether the value of an asset is involved.
The expansion of D'Oench has worried several lawmakers, who have introduced legislation to restrict the legal doctrine.
The court's Aug. 1 decision could make moot those efforts. The court said that while the FDIC can continue to void a bank's unwritten promise to forgive a loan, it no longer can raise D'Oench to ward off fraud suits.
"The banking agencies have used an expansive reading of D'Oench over the years to knock out claims against banks in receivership," said Frank J. Eisenhart, a law partner at Dechert, Price & Rhoads in Washington. "Now, they will have a tougher time doing that."
Mr. Eisenhart said he expects the other federal appeals courts will accept this court's reasoning.
The case began in 1989, when Thomas Murphy paid $515,000 for a partnership share in a Florida golf resort development. The project went bankrupt, prompting Mr. Murphy to sue the developers and Southeast Bank.
He charged the bank secretly controlled the development and was thus responsible for fraudulent statements about the project's financial condition.