Second, the common law D'Oench, Duhme doctrine does not operate to bar the assertion of plaintiff's or Venture Corporation's claims because, first, both agreements are clear and explicit written agreements carried on the books of Gibraltar. Moreover, neither the Homeowner's Association nor Venture Corporation is an obligor seeking to assert a claim or defend against the effort of the RTC to collect on an obligation. The parties were not in a lending relationship with Gibraltar Savings. They are creditors of the receivership, not obligors. Though this distinction may be irrelevant for the application of the statute, D'Oench is a rule of equitable estoppel which has consistently been applied to those in a lending relationship with a bank. Disregarding this limitation on the application of the D'Oench doctrine would be an unwarranted extension of D'Oench's application.
Lastly, D'Oench, Duhme and § 1823(e) do not together form a greater bar to the assertion of "side agreements" than each alone. Despite the breadth and admitted harshness of the bar created by D'Oench and its statutory counterpart, the bar is limited by both the terms of the statute and the scope of the common law doctrine. Section 1823(e) does not apply where there is no particular asset to be diminished; D'Oench, Duhme does not apply where the party asserting the claim is a creditor in a non-lending transaction.
This case presents the rare situation in which neither the Homeowner's Association nor Venture Corporation is an obligor of the bank, and the agreements they seek to assert do not affect the RTC's interest in a particular asset. The Court therefore declines to extend D'Oench and § 1823(e) to bar the assertion of the joint venture and settlement agreements at issue in this case.
A. Overview of D'Oench and 12 U.S.C. § 1823(e)
At the outset, the Court notes that this case presents unusual facts in the context of the application of the D'Oench, Duhme doctrine and its statutory counterpart. Though the parties have argued the motion extensively, both orally and in their briefs, neither party has been able to point the Court to factually analogous cases in which D'Oench, Duhme and § 1823(e) were either held to bar claims such as plaintiff's or crossclaimant's, or held not to bar such claims. In addition, though the Court's own research has unearthed a large body of case law which discusses D'Oench and § 1823(e), very few cases provide guidance for their application to the two agreements at issue in this case: a joint venture agreement and a settlement agreement. Moreover, these classic D'Oench cases do not directly indicate whether the common law bar should apply against parties who are in no sense obligors of the bank and are not involved in a lending transaction. Given courts' expansive interpretation of D'Oench and § 1823(e), it is difficult to discern the true limits of the protection afforded the federal banking authorities. Therefore, prior to addressing the specific arguments relied on by the parties, the Court provides an overview of the D'Oench doctrine and § 1823(e).
1. The D'Oench, Duhme Doctrine
The D'Oench, Duhme doctrine is a federal common law rule of equitable estoppel which precludes obligors from asserting against the FDIC/RTC, as the basis for a defense or an affirmative claim, a secret, side agreement which is not reflected in the records of the bank and therefore may mislead bank examiners concerning the value of written loan obligations. Federal Deposit Ins. Corp. v. Zook Bros. Constr. Co., 973 F.2d 1448, 1450 (9th Cir. 1992). The doctrine originated in the namesake case of D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp., 315 U.S. 447, 86 L. Ed. 956, 62 S. Ct. 676 (1942) in which the Supreme Court held that a borrower was precluded from defending against the FDIC on the basis that a secret, unrecorded side agreement allegedly altered the terms of an obligation carried on the books of the bank. 315 U.S. at 460.
The Supreme Court based the rule of equitable estoppel upon the "federal policy to protect respondent [FDIC], and the public funds which it administers against misrepresentation as to the securities or other assets in the portfolios of banks which respondent insures or to which it makes loans." D'Oench, Duhme, 315 U.S. at 457; see also, Federal Sav. & Loan Ins. Corp. v. Gemini Management, 921 F.2d 241, 244 (9th Cir. 1990). The Court went on to note:
Plainly one who gives such a note to a bank with a secret agreement that it will not be enforced must be presumed to know that it will conceal the truth from the vigilant eyes of the bank examiners . . . The test is whether the note was designed to deceive the creditors or the public authority, or would tend to have that effect. It would be sufficient in this type of case that the maker lent himself to a scheme or arrangement whereby the banking authority on which [the FDIC] relied was likely to be misled.
D'Oench, Duhme, 315 U.S. at 460.
Thus, to invoke the D'Oench rule of equitable estoppel it is sufficient to show that the agreement relied upon was not within the bank's records, and that the party seeking to invoke the agreement lent himself to a scheme or arrangement likely to mislead the banking examiners. See, Federal Deposit Ins. Corp. v. Murphy, 93 C.D.O.S. 9096, 9098 (9th Cir. Dec. 10, 1993) (D'Oench requires a clear and explicit written obligation and that a party lend himself to a scheme by which banking authorities are likely to be misled); Gemini, 921 F.2d at 244 (banking authorities misled since agreement to fund project not in the files of bank; defendant lent himself to the agreement through failure to insist that agreement to fund be stated explicitly in loan documents).
The purpose of the D'Oench doctrine's bar to the assertion of secret, side agreements, whether as the basis for a defense or a counterclaim, is threefold. First, D'Oench serves "'to allow federal and state bank examiners to rely on a bank's records in evaluating the worth of the bank's assets.'" Gemini, 921 F.2d at 245 (quoting Langley v. FDIC, 481 U.S. at 91); see also, Zook Bros., 973 F.2d at 1451. Second, D'Oench favors the "'interests of depositors and creditors of a failed bank, who cannot protect themselves . . . over the interests of borrowers who can.'" In re Century Centre Partners, 969 F.2d 835, 839 (9th Cir. 1992), cert. denied, 125 L. Ed. 2d 690, 113 S. Ct. 2997 (citing FDIC v. McCullough, 911 F.2d 593, 600 (11th Cir. 1990)). Since the party to an agreement can presumably ensure that the bank properly record all of the terms of the agreement, D'Oench ultimately penalizes the borrowers who are at fault rather than innocent creditors and depositors. See, e.g., Gemini, 921 F.2d at 245 (borrower's failure to insure that terms of loan were explicitly written on paper was negligent).
Third, D'Oench provides an incentive to bank officials to give mature consideration to unusual lending agreements in order to prevent fraudulent transactions. FDIC v. Murphy, 93 C.D.O.S. at 9098 (citing Langley v. FDIC, 484 U.S. 86, 91, 98 L. Ed. 2d 340, 108 S. Ct. 396 (1987)).
Since the creation of the D'Oench rule of equitable estoppel, courts have continuously expanded the doctrine to protect the federal banking authorities, justifying the expansion as furthering the goals of the doctrine. First, courts consistently apply D'Oench to bar agreements asserted against the FSLIC as well as the FDIC, see, e.g., Gemini, 921 F.2d 241, and more recently the RTC. See, Resolution Trust Corp. v. Murray, 935 F.2d 89 (5th Cir. 1991).
Courts have found no reason to distinguish among these institutions when carrying out their statutory duties. Furthermore, the doctrine has been extended to bar claims against the FDIC in its capacity as receiver in addition to its corporate capacity, again because the policies behind the doctrine are equally impacted by the banking authorities acting in either capacity. See, e.g., Federal Deposit Ins. Corp. v. First National Finance, 587 F.2d 1009, 1012 (9th Cir. 1978).
The more controversial extensions of the D'Oench doctrine have been on different fronts, however. First, many courts have held D'Oench to bar both counterclaims asserted against the FSLIC/FDIC as well as affirmative defenses to collection on a note held by the FSLIC/FDIC. See, FDIC v. Murphy, 93 C.D.O.S. at 9098 (citing Gemini, 921 F.2d 241 (9th Cir. 1990)). Courts reason that, logically, parties should not be permitted to assert a cause of action that would be barred if framed as an affirmative defense. See, e.g., Kilpatrick v. Riddle, 907 F.2d 1523 (5th Cir. 1990). Second, the doctrine has been held to bar affirmative claims sounding in tort as well as contract because tort claims, such as fraud, often relate to a secret, side agreement that would otherwise be barred as an unrecorded condition to some written obligation. See, e.g., Beighley v. Federal Deposit Ins. Corp., 868 F.2d 776, 783-84 (5th Cir. 1989) (D'Oench barred affirmative claims such as fraud arising out of alleged oral promise to finance future loans); see also, Vernon v. Resolution Trust Corp., 907 F.2d 1101, 1107 (11th Cir. 1990) (tort claim not barred by D'Oench where plaintiff not an obligor asserting a claim related to a specific obligation) ("Vernon I").
Finally, courts have carved out exceptions to the D'Oench estoppel that also are consistent with the purposes of the doctrine. See, Vernon I, 907 F.2d at 1106, n.4 (only three situations where D'Oench fails to bar a defense). First, D'Oench has been held inapplicable where the borrower is completely innocent of any intentional or negligent wrongdoing. Federal Deposit Ins. Corp. v. Meo, 505 F.2d 790 (9th Cir. 1974) (purchaser of stock, unaware that stock order was improperly executed, not estopped by D'Oench).
Second, D'Oench does not bar the "assertion of defenses based on a bilateral obligation which appears in the bank's records." Gemini, 921 F.2d at 245 (quoting FDIC v. Two Rivers Assoc., 880 F.2d at 1275); see also, Howell v. Continental Credit Corp., 655 F.2d 743, 746-47 (7th Cir. 1981) (D'Oench not applicable if side agreement facially manifests bilateral obligations). Third, courts have developed a "no asset" exception to D'Oench, which applies where the borrower asserts that no asset exists or that the asset is invalid due to acts independent of any side agreement. See, Zook Bros., 973 F.2d at 1452-53 (discussing "no asset" exception to § 1823(e) and D'Oench).
2. 12 U.S.C. Section 1823(e)
Congress partially codified the D'Oench doctrine in the Federal Deposit Insurance Act of 1950, section 2(e), 12 U.S.C. section 1823(e). As amended, § 1823 (e) provides:
No agreement which tends to diminish or defeat the interest of the Corporation [FDIC] in any asset acquired by it under this section or section 1821 of this title, either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the Corporation unless such agreement--