Monday, July 8, 2013

FYI: 1st Cir Affirms Summary Judgment Against Borrower Under D'Oench Doctrine/FIRREA

The U.S. Court of Appeals for the First Circuit recently upheld an award of summary judgment in favor of the Federal Deposit Insurance Corporation as receiver of a failed bank under the D'Oench Doctrine and FIRREA, ruling that borrowers had no defense to repayment of a commercial line of credit loan because they had failed to produce a written agreement showing that repayment of the loan was contingent upon the bank's funding of a separate loan to third parties. 


The Court also ruled that the borrowers could not maintain their counterclaim against the receiver in light of the FDIC's "no-value" determination that the failed bank's estate had no assets with which to satisfy claims of general unsecured creditors, such as borrowers' counterclaim, even if they prevailed. 


A copy of the opinion is available at:


Defendants-borrowers ("Borrowers") took out a $700,000 business line of credit loan from a bank and defaulted on the loan a short time later.  The bank subsequently brought a collection action against Borrowers in commonwealth court in Puerto Rico.  Borrowers counterclaimed, asserting damages of over $50 million and claiming in part that repayment of the line of credit was contingent on the bank's financing of a commercial development project that would have allowed third parties to purchase commercial property from Borrowers.


During the pendency of the collection action, the bank became insolvent, and plaintiff Federal Deposit Insurance Corporation ("FDIC") was appointed receiver of the failed bank (the "Receiver").  The Receiver removed the action to federal court, eventually obtaining summary judgment in its favor.  In granting the Receiver summary judgment, the district court noted the absence of any dispute over Borrowers' obligation to repay the line of credit, finding nothing in the record indicated that Borrowers' repayment obligation was conditional under the alleged third-party financing agreement. The lower court also dismissed Borrowers' counterclaim for lack of subject-matter jurisdiction, concluding that Borrowers had failed to take timely action on their disallowed administrative claim against the Receiver. 


Borrowers appealed, arguing in part that summary judgment on the collection action was improper, because factual disputes remained as to the repayment obligation, and that they had satisfied all applicable requirements for pursuing their claim.  


The First Circuit affirmed, reasoning that: (1) Borrowers' assertions as to the alleged financing agreement could not overcome the requirement that agreements must be in writing in order to be enforceable against the FDIC; and (2) the FDIC's determination that the failed bank's estate lacked sufficient funds with which to pay general unsecured claims effectively rendered Borrowers' counterclaim moot. 


As you may recall, 12 U.S.C. § 1823(e)(1) bars enforcement of unwritten agreements against the FDIC, providing:  "No agreement which tends to diminish or defeat the interest of the [FDIC] in any asset acquired by it . . . as receiver of any insured depository institution, shall be valid against the [FDIC] unless such agreement – (A) is in writing . . . [and] . . . (D) has been, continuously, from the time of its execution, an official record of the depository institution."  12 U.S.C. § 1823(e)(1)(codifying the  so-called "D'Oench Doctrine" established in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942)).


In addition, a federal district court lacks jurisdiction over a disallowed claim against the receiver unless the claimant either requests administrative review of the disallowed claim, or files or continues an action in district court within 60 days of the notice of disallowance.  See 12 U.S.C. § 1821(d)(6), (d)(13)(D).   


Noting initially that Section 1823(e) barred Borrowers' defense to the collection action, as they could produce no written documentation to support their assertion that repayment was contingent on the bank's funding of the construction project under the alleged financing agreement, the First Circuit pointed out that Borrowers failed to identify any material fact that would warrant reversal of the lower court's grant of summary judgment.


Next, turning to Borrowers' counterclaim, the First Circuit pointed out that, shortly after the lower court's ruling that it lacked subject matter jurisdiction over the counterclaim because Borrowers had failed to take action on their claim within 60 days of the Receiver's disallowance of their administrative claim, the FDIC published notice of its determination that the failed bank had insufficient assets to pay any claims of general unsecured creditors. 


As the Court observed, for Borrowers, such a "no-value" determination would mean that there were no assets in the receivership estate to pay Borrowers' counterclaim even if they prevailed.   Accordingly, the First Circuit explained that the FDIC's so-called "no-value determination" precluded any relief for Borrowers by which they could satisfy the constitutional case or controversy requirement.  The Court also agreed with the Receiver, observing that "even if 'some theoretical case or controversy exists,' dismissal of the counterclaim would still be warranted as a matter of prudential mootness."


Consequently, the First Circuit affirmed the lower court's judgments, but on different grounds with respect to the counterclaim.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois


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