NCLC REPORTS

Consumer Credit and Usury Edition

Volume 27
January/February 2009

Developments and Ideas For the Practice of Consumer Law

and Enforcement Act (FIRREA).2 One of the goals of

Special Issue on Bank Insolvencies: Bars FIRREA “is to enable the receiver to efficiently determine
creditors’ claims and preserve assets of the failed institution
to Jurisdiction and to Claims and Defenses without being burdened by complex and costly litigation.”3
• The legal landscape Today, the U.S. banking system faces another enormous
• The administrative claims process, stays, exhaustion, and crisis, this time triggered by the faulty mortgage loans it made
the jurisdictional bar or purchased over the last several years. Once again, the law
• Practice Q & A triggered by bank failures stirs.
• What claims or defenses survive FDIC receivership When a bank closes, a special administrative regime gov-
• New cases on claims that survive bank insolvency erns the resolution of issues raised by the failure, including
• New NCLC web pages: bank failures, lender bankrupt- the payment of depositors, general creditors and others, and
cies, and crisis-driven loan modification programs the sale of the bank’s assets and liabilities. The FDIC acts as
the failed bank’s receiver when it intends to liquidate the in-
Bank Insolvency: Navigating Potential Bars stitution, take control of its assets and liabilities, and close the
bank’s affairs.4
to Jurisdiction and to Certain Claims and Within a reasonable time following its appointment as a
Defenses receiver, the FDIC may repudiate contracts and leases made
Twenty-five banks failed in 2008 alone, including IndyMac by the failed bank that it believes are burdensome.5 The stat-
Bank and Washington Mutual Bank, the two largest failures ute also creates a claims process that bank “creditors” must utilize
in history. Of these, twenty-one closed just since July. In to seek payment from the bank’s assets or the FDIC insurance
contrast, twenty-seven banks closed between 2000 and 2008.1 fund to cover some or all of their losses.6 Finally, the law grants
Once the Federal Deposit Insurance Corporation (FDIC) the FDIC potential safeguards against certain claims and de-
takes over a bank, two critical questions arise for those fenses raised by consumers who entered into loans with the
homeowners who have or have had contractual or other rela- bank prior to its failure.
tionships with the institution: Must consumers exhaust the The article will first address the claims procedure and re-
FDIC administrative claims process to preserve their right to lated jurisdictional concerns and then discuss what causes of
seek court review of claims and defenses? And do consumer action and/or defenses survive the special FDIC shields
claims and defenses to lender or servicer wrongdoing survive against liability issues. CAUTION: The research performed for
special protections available to the FDIC? In other words, this article was not exhaustive due to the sheer volume of cases. Practi-
homeowners face two separate and distinct legal issues: tioners should take care to review relevant authority in your jurisdiction.
• Subject matter jurisdiction of the court to entertain a
consumer’s suit and
• If the court has jurisdiction, special defenses to the The Administrative Claims Process, Stays,
homeowner’s causes of action that the FDIC can raise. Exhaustion, and the Jurisdictional Bar
The provisions relating to the FDIC administrative claims
procedure appear in 12 U.S.C. § 1821(d). Once the FDIC as-
The Legal Landscape sumes a receivership role over a failed bank, it must mail a
As a result of the dramatic bank failures of the Great notice to “creditors” shown on the institution’s books or of
Depression of the 1930s, the federal government created the which it becomes aware, advising them to present claims with
FDIC. In doing so, Congress sought to promote stability proof to the receiver by a date specified in the notice (no less
and confidence in the banking system, to insure deposits, and than 90 days from the date the notice is also published).7
to keep open the channels of trade and commerce. As an-
other wave of bank failures hit the country in the 1980s, 2 Pub. L. No. 101-73, 103 Stat. 183 (1989) (appearing in scattered sections of
Congress overhauled the legal regime governing failed banks the United States Code).
and the authority of federal receivers over those entities 3 National Union Fire Ins. Co. v. City Sav. Bank, F.S.B., 28 F.3d 376, 388 (3d

when it passed the Financial Institutions Reform, Recovery Cir. 1994).

4 Patricia A. McCoy, Banking Law Manual §§ 15.03, 1504 (Lexis Pub. 2004)

(detailed description of the powers and duties of the FDIC in its receiver
role).
5 12 U.S.C. § 1821(e). See also McCoy, supra note 4, at § 16.03.
1For a chart of bank failures, see National Consumer Law Center’s website: 6 12 U.S.C. § 1821(d)(3).

www.consumerlaw.org/issues/financial_distress/content/failed_bank. This 7 12 U.S.C. §§ 1821(d)(3)(B)(i), 1821(d)(3)(C). All statutory citations are to

chart includes the bar dates for filing claims and links to the FDIC website 12 U.S.C., unless otherwise noted. The courts apply varying definitions of
for more information about each bank. “creditor” in this context. Compare National Union Fire Ins. Co., 28 F.3d at

NCLC REPORTS CONSUMER CREDIT AND USURY EDITION 2009 15

The FDIC has 180 days to decide whether to allow or disal- court for the district within which the depository institution’s
low each claim.8 principal place of business is located or the United States
Statutes of limitations are tolled by filing the claim, if a District Court for the District of Columbia.19 Alternatively,
suit had not been initiated before the bank closed.9 More- the claimant may continue any pending case that had been
over, the filing of a claim does not prejudice the right of the stayed during the FDIC’s review of a claim.20
claimant to continue any action filed before the appointment Section 1821(d) includes a jurisdictional bar. Except as
of the receiver.10 Thus, the FDIC’s determination of a timely provided elsewhere in section 1821(d) (i.e., the claims proce-
claim should be treated as a non-binding adjudication.11 dure), no court shall have jurisdiction over: “i) any claim or
If a claim is not filed by the original bar date, the FDIC action for payment from, or any action seeking a determina-
will disallow it. That decision generally is not reviewable.12 tion of rights with respect to, the assets of any depository in-
For potential claimants who did not receive notice from the stitution for which the Corporation has been appointed a re-
FDIC, the statute permits late filing as long as a claim is filed ceiver, including assets which the Corporation may acquire
in time to permit payment.13 from itself as such receiver; or ii) any claim relating to any act
Cases filed before the bank failure will be stayed as to all or omission of such institution or the Corporation as re-
parties for up to 90 days, upon the request of the receiver.14 ceiver.” Courts consistently hold that this provision requires
Upon the FDIC’s request, some courts also have issued stays exhaustion of the administrative claim process.21
up to an additional 180 days to coincide with the claim de- Courts have struggled with constitutional due process
termination timeframe.15 This extended stay is discretion- problems that arise when judicial review of a cause of action
ary.16 Practitioners may wish to argue that it should not ap- is denied in certain circumstances. Examples of these in-
ply to non-bank third parties since the causes of action stances include: 1) where the claim arises against the FDIC
against those parties are not “assets” of the failed bank sub- itself as receiver after the claims filing date has passed; 2)
ject to the receivership or are not claims relating to the acts where the FDIC never notified a known creditor, thereby
or omissions of the failed institution or the FDIC.17 preventing it from filing a timely claim; and 3) where the
Claimants may seek judicial review of the agency’s deci- FDIC was not aware of the potential creditor and never sent
sion on the claim by requesting an administrative review or notice. Applying the jurisdictional bar to prevent a party
filing suit within 60 days after the end of the 180-day period from raising a claim affirmatively or defensively if the admin-
or from the date of disallowance.18 If the claimant then ini- istrative process does not apply to that particular type of
tiates a lawsuit, the case must be filed in the federal district case22 or the party did not receive notice from the FDIC be-
fore the bar date23 should be a violation of due process.
387–388 (applying Bankruptcy Code definitions to find that a creditor’s
claim is any affirmative action asserting a right to payment, a broad defini-
tion) with Bolduc v. Beal Bank, SSB, 994 F. Supp. 82, 90–91 (D.N.H. 1992)
(holding that a mortgagor is a debtor of a failed bank, not a creditor; finding
Practice Q & A
that the mortgagors received no notice from the FDIC regarding the claims Q. Should homeowners file claims with the FDIC if
process and were not barred from filing an affirmative case in the defensive they receive notice of the bar date from the FDIC?
posture of stopping a foreclosure in a non-judicial foreclosure state; apply-
ing due process standards and ruling that since they received no notice to file A. Yes, or the claim likely is forever barred, even if the
a claim, they cannot be prevented from raising defenses in their action to homeowner filed suit before the bank failure.
stop the foreclosure sale) and Scott v. RTC (In re Scott), 157 B.R. 297, 310–
312 (Bankr. W.D. Tex. 1993), vacated due to settlement, 162 B.R. 1004 (W.D. Tex.
1994) (ruling that a debtor of the failed bank is not a “creditor” since §
1821(d)(3)(B) refers to those entities that extended credit to the bank, not
those who owe the bank). This disagreement among the courts has impor-
tant consequences because the jurisdictional bar in § 1821(d)(13)(D) may not 19 Id.
apply at all if the homeowner is not a “creditor.” See also discussion in notes 20 12 U.S.C. § 1821(d)(6)(A)(ii).
21 and 22, infra. 21 See. e.g., Village of Oakwood, 539 F.3d at 385–385 (citing decisions from
8 12 U.S.C. § 1821(d)(5)(A). the D.C., 1st, 3d, 4th, 5th, and 8th Circuits). Differences among the circuits
9 12 U.S.C. § 1821(d)(5)(F). have arisen on the issue of whether the jurisdictional bar applies to the same
10 Id. or a larger set of claims as those which are subject to the administrative
11 12 U.S.C. §§ 1821(d)(5)(F)(ii) (no prejudice to continue a pending case), process. See National Union Fire Ins. Co., 28 F.3d at 385–386, n.8 (holding that
1821(d)(6) (permitting judicial review or an administrative appeal of claims the jurisdictional bar in § 1821(d)(13)(D) covers a broader group of cases
after the 180-day period passes or after disallowance). See also Rosa v. RTC, than those that must go through the administrative process and addressing
938 F.2d 383, 397 (3d Cir. 1991). certain constitutional issues triggered by this analysis; citing cases that hold
12 12 U.S.C. § 1821(d)(5)(C). the opposite—that the set of cases under each of these provisions is co-
13 12 U.S.C. §§ 1821(d)(3)(C)(ii); 1821(d)(5)(C)(ii). extensive).
14 12 U.S.C. § 1821(d)(12). 22 See, e.g. Rosa, 938 F.2d at 394–395 (beneficiaries of failed bank’s ERISA
15 See, e.g., Marquis v. FDIC, 965 F.2d 1148, 1154–1155 (1st Cir. 1992) (hold- plan seeking to prevent the RTC’s termination of the plan not governed by
ing that the 90-day stay provision in the Act does not prevent the court from the claims procedure and not barred).
ordering a longer stay; ruling against the FDIC’s position that the case 23 See, e.g., National Union Fire Ins. Co., 28 F.3d at 388–390 (due process is sat-

should, instead, be dismissed; finding that the FDIC must show good cause isfied where the insurance company’s declaratory judgment action based
for extending the 90-day stay but suggesting that courts would likely grant upon its rescission of the policy is barred even though it had no notice of
the extended stay in the majority of cases). But see Marc Development, Inc. the bar date and the claims process may not have applied to its case but
v. FDIC, 992 F.2d 1503, 1507 (10th Cir. 1993) (holding that courts may not where it could raise rescission as an affirmative defense if the RTC sued to
extend the 90-day stay because the statute does not authorize it), vacated due to enforce the policy; counterclaims barred); FDIC v. DiStefano, 839 F. Supp.
settlement, 12 F.3d 948 (10th Cir. 1993). 110 (D.R.I. 1993) (interpreting §§ 1821(d)(3)(C)(ii) and 1821(d)(5)(C)(ii) to
16 Marquis, 965 F.2d at 1154–1155. require the FDIC to send a claims notice to newly discovered claimants and
17 See 12 U.S.C. § 1821(d)(13)(D). The requirement that the mandatory 90- permitting time to file an administrative claim, thus avoiding a constitutional
day stay apply to all parties should not apply to all parties in the case if a problem; recoupment claims up to the amount sought not barred); Bolduc v.
court is inclined to grant an extended stay. This is so because § 1821(d)(12) Beal Bank, SSB, 994 F. Supp. 82, 90–91 (D.N.H. 1992) (characterizing an af-
only applies to the mandatory stay. firmative case to stop a foreclosure as defensive and holding defenses of
18 12 U.S.C. § 1821(d)(6)(A). ECOA, TILA, undue influence, and invalid endorsement not barred).

16 NCLC REPORTS CONSUMER CREDIT AND USURY EDITION 2009

Q. Should homeowners file claims with the FDIC if A. According to the FDIC, if a class action is pending
they have not received notice of the bar date from the against a bank on the date of its failure, counsel for the class
FDIC? must file a claim for each named plaintiff or risk the later
A. If the homeowner has an attorney and is aware of the dismissal of those claims for failure to exhaust the adminis-
bank’s closure, the more prudent course of action is to notify trative process. The FDIC suggests that putative class mem-
the FDIC of any causes of action against the bank. The bers must file claims as well (a near impossibility, unless they
agency should send a letter within 30 days of “discovery” are sent individual notices).30
with a bar date and a claim form.24 The homeowner then However, section 1821(d) and due process concerns
can file a timely claim. If the homeowner was unrepresented weigh against the FDIC’s position for several reasons. First,
during the receivership period and did not file a claim (be- once the FDIC is aware of “creditors” of the bank, it “shall”
cause, of course, she did not receive notice from the FDIC), send notice within 30 days of discovery of their names and
defenses to a subsequent foreclosure or a suit on the debt addresses.31 The FDIC itself likely can determine the names
should be preserved. Affirmative claims should survive as and addresses by reviewing the class definition and the failed
well if there is no other forum available to obtain the relief bank’s records related to those class members. In addition, if
sought. (See discussion of the due process concerns above.) a claimant files a claim after the bar date, the claim cannot be
disallowed on that basis if the claimant did not receive notice
Q. If the assignee purchased the loan before the bank
of the appointment of the receiver in time to file timely and
failure, does the jurisdictional bar apply to claims based
if payment of the claim is still possible.32 Finally, the exhaus-
upon the bank’s behavior?
tion requirement only applies if the procedures elsewhere in
A. The answer to this should be no. Arguably, the adminis- section 1821(d) are followed.33 A due process issue arises if
trative process does not apply to claims involving assets that putative class members do not receive notice, do not file
were not owned by the bank at the time it failed.25 In this in- claims, and the FDIC later seeks dismissal of the class claims
stance, it is extremely unlikely that the FDIC would send the on the ground that the class members failed to exhaust the
homeowner a notice of the right to file a claim. Without claims process. The constitutional cases discussed earlier
such a notice, there should be no bar. On the other hand, should be reviewed to attack the FDIC’s position.34
the bar also applies to “any claim relating to any act or omis- One court implicitly approved of the procedure outlined
sion of such institution.”26 This provision may capture af- in the FDIC’s letter, although its validity apparently was not
firmative causes of action raised against the assignee that are challenged.35 Despite the fact that the letter discourages the
based upon the bank’s behavior.27 filing of class claims, practitioners nevertheless may choose
Q. Must the homeowner use the FDIC claim form or to file both separate claims for the named plaintiffs and a
can a letter suffice? class claim. If the latter is disallowed, the FDIC should be in
A. There is nothing in the statute that mandates that a par- a much weaker position if it challenges the class claims once
ticular form be used (and there are no regulations).28 How- the litigation proceeds.
ever, a recent case held that letters sent to the FDIC by
counsel did not constitute a claim as they did not “contain
enough identifying information on the nature of the claim to What Claims or Defenses Survive FDIC
constitute a proper administrative claim under FIRREA.”29 Receivership?
Important to the court was the fact that the named plaintiff Assuming that jurisdiction is not a problem, whether a
received notice from the FDIC and a copy of a claim form claim or defense survives the FDIC receivership depends on
but failed to use it. a number of factors: 1) whether the bank actually failed; 2)
Q. What is the FDIC’s position on class claims? for claims and defenses arising from the loan origination,
whether the bank owned the mortgage and note at the time it
closed; 3) for claims and defenses arising out of the bank’s
24 12 U.S.C. § 1821(d)(3)(C)(ii). There is an arguement that the claims process servicing activities, whether the bank serviced the mortgage
is rendered inadequate by the lack of a reasonable time limit on the FDIC’s
ability to require a potential claimant to submit to the claims process. See Coit
Independence Joint Venture v. FSLIC, 489 U.S. 561 (1989)( no obligation to
exahaust where there is no time limit for the disposition of claims). The 30 Claire L. McGuire, Senior Counsel at the FDIC, stated in a letter to NCLC

FDIC process does not suffer from this defect since the FDIC must review a dated September 2, 2008: “Each claimant against a failed bank must file an
claim within 180 days. However, if the FDIC can send a claim form and new individual proof of claim. A representative may file a claim on behalf of a
bar date at any time, even after distribution of assets to other creditors, in or- claimant so long as he or she submits a written power of attorney along with
der to coerce a claimant to enter into unfair settlements, the exhaustion the claim. Proof of each claim must be filed in order for the FDIC to evalu-
reqirement should not apply. under the Coit rationale. Id. at 586-87. Thanks ate the claim. Thus, each member of a class in a class action lawsuit must file
to Michael Malakoff and Erin Brady for bringing Coit to our attention. an individual claim that meets these requirements.” This letter is available at:
25 12 U.S.C. §§ 1821(d)(2) (powers of the receiver involve liquidating the www.consumerlaw.org/issues/financial_distress/failed_banks.shtml.
bank and selling its assets), 1821(d)(3)(B) (notice goes to “creditors” of the 31 12 U.S.C. § 1821(d)(3)(C)(ii).

failed bank). 32 12 U.S.C. § 1821(d)(5)(C)(ii).

26 12 U.S.C. § 1821(d)(13)(D)(ii). 33 12 U.S.C. § 1821(d)(13)(D) (“except as otherwise provided in this section”).
27 The resolution of this discussion may depend on whether your court sides See also National Union Fire Ins. Co., 28 F.3d at 385–386 (stating that §
with the decisions holding that the bar in § 1821(d)(13)(D) covers the same 1821(d)(13)(D) “is not viewed in isolation, but with reference to the adminis-
claims that are subject to the administrative procedure or with the courts trative claims procedure of FIRREA set out in § 1821(d)(3), (d)(5) and
finding that § 1821(d)(13)(D) reaches a broader universe of causes of action (d)(6)”).
than those subject to the claims process. See discussion in note 21, supra. 34 See note 23, supra, cases cited therein and any subsequent history. See also
28 12 U.S.C. § 1821(d)(3)(B) says only that creditors must present their claims Rosa v. RTC, 938 F.2d 383, 396–397 (3d Cir. 1991). None of these cases
with proof. struggled with this exact issue.
29 Yang. v. Home Loan Funding, Inc. 2009 WL 179689 at *5 (E.D. Cal. Jan. 35 Yang. v. Home Loan Funding, Inc. 2009 WL 179689 at *5–6 (E.D. Cal.

23, 2009). Jan. 23, 2009).

NCLC REPORTS CONSUMER CREDIT AND USURY EDITION 2009 17

account at the time it failed; and 4) whether the cause of ac- Joslin v. Shareholder Services Group, 948 F. Supp. 627 (S.D.
tion is of a type that survives the FDIC receivership. Tex. 1996) (where stock certificates could not be legally
pledged as security for a loan note held by a bank that later
Did the Bank Actually Fail? failed, the FDIC never acquired the asset (the security inter-
This is the first question to ask if it appears that the FDIC est in the stock certificates) and a subsequent purchaser of a
was involved in a bank’s business. The Federal Deposit In- promissory note could not enforce the security agreement).
surance Act (FDIA) gives the FDIC “open” bank powers to Integon Life Ins. Corp. v. Southmark Heritage Retirement Corp.,
assist banks to stay solvent or to negotiate reorganizations or 813 F. Supp. 783 (N.D. Ala. 1992) (suit to quiet title; parcels
sales of the bank and its assets and liabilities.36 The FDIC of land sold before the savings and loan bank failed were not
used this authority in 2008 to orchestrate the sale of Wacho- assets of the receivership, so § 1823(e) did not apply).
via Bank, N.A. and to avoid placing the bank in receiver- Alaska Southern Partners v. Prosser, 972 P.2d 161 (Alaska
ship.37 The most reliable way to determine if the bank went 1999) (loan satisfied before the bank failure could not be an
into the FDIC receivership is to check the FDIC Failed Bank asset subject to the FDIC receivership and was not enforce-
List38 and the NCLC Failed Bank Chart.39 able by a subsequent buyer).
If the bank did not fail, as in the case of Wachovia Bank,
then the issues discussed below do not arise.40 Homeowner Joslin v. Bengal Chef, Inc., 715 So. 2d 1266 (La. Ct. App.
claims and defenses against the bank will not be affected by 1997) (guarantors on loan note owed to a bank who could
the law surrounding bank failures, though the private pur- prove that they were released from their guarantees before
chase and sale agreements between the companies involved the bank failed were not liable to the successor of the FDIC;
may affect these issues.41 since the FDIC could not enforce the guarantee, neither
could the purchaser).
Did the Bank Own the Mortgage and Note at the Time It Applying these rulings to the mortgage loan context, if
Failed? the bank did not own the mortgage loan at the time it closed,
This question is critical to claims and defenses arising then the consumer should be free to raise those claims and
from the loan origination. In recent years, mortgage lenders, defenses against the current holder. This conclusion is good
including banks, sold most of their loan portfolios into the news for homeowners and their advocates. ONE CAVEAT:
secondary market, often via securitization arrangements. As Must the homeowner nevertheless exhaust the FDIC claims
a result, many mortgage loans would not be assets acquired by process when the case against the current holder is grounded
the FDIC when it became the receiver of the bank that in “any act or omission of such institution”?43 The answer
originated the loan. ought to be no, unless the FDIC sends the homeowner no-
The statutory provision that frees the FDIC from certain tice of her right to file a claim with a bar date. Otherwise,
claims and defenses that the homeowner may wish to raise is due process concerns arise, as noted above.
codified at 12 U.S.C. § 1823(e). It applies to any “agreement
which tends to diminish or defeat the interest of the [FDIC] Did the Bank Service the Loan at the Time It Closed?
in any asset acquired by it under this section”(emphasis added). If the homeowner’s complaint against the bank arose
When the FDIC did not acquire the asset at issue, the few from its behavior while servicing the loan, this question takes
courts addressing this situation hold that section 1823(e) on significance. If the bank committed servicing abuses and
does not affect claims or defenses to bank behavior.42 These then sold its servicing rights (an asset) before it failed, the
cases are listed below. FDIC has no right to that asset upon the bank’s closure.
Hence, the homeowner can raise bank servicing abuses
against the mortgage holder for whom the bank serviced the
36 12 U.S.C. § 1823(c).
37 FDIC Press Release, Citigroup Inc. to Acquire Banking Operations of
loan under agency or joint liability theories, if applicable,
Wachovia (Sept. 29, 2008), available at with the caveats mentioned in the previous section of this ar-
www.fdic.gov/news/news/press/2008/pr08088.html (Wells Fargo out-bid ticle. In addition, the holder’s own actions and a new ser-
Citigroup, though the sale may be disputed). vicer’s culpability for its own actions are not affected by the
38 Go to www.fdic.gov/bank/individual/failed/banklist.html.
39www.consumerlaw.org/issues/financial_distress/content/failed_banks/fail bank insolvency.
ed-banks.pdf. How about the scenario where the bank was still servicing
40 E-mail from David Wall, Senior Legal Counsel, FDIC (Oct. 6, 2008) (on the loan at the time it closed? Since the servicing rights are a
file at NCLC). receivership asset, the injured homeowner must file a claim
41 These Purchase and Assumption Agreements are available at NCLC’s

website, www.consumerlaw.org/issues/financial_distress/failed_banks.shtml.
with the FDIC, upon notice from the FDIC. The home-
42 12 U.S.C. § 1823(e)(1) states in full: owner also may file a lawsuit against the mortgage holder, if
No agreement which tends to diminish or defeat the interest of the she can establish separate, independent grounds of liability
Corporation in any asset acquired by it under this section or section other than the mortgage holder’s derivative liability for the
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
acts of the servicer.
the Corporation unless such agreement—A) is in writing, (B) was
executed by the depository institution and any person claiming an Does the Homeowner’s Cause of Action Survive the FDIC
adverse interest thereunder, including the obligor, contemporane-
ously with the acquisition of the asset by the depository institution, Receivership?
(C) was approved by the board of directors of the depository insti- Two separate sources provide special defenses to the fed-
tution or its loan committee, which approval shall be reflected in eral agencies responsible for insuring banks and thrifts. First,
the minutes of said board or committee, and (D) has been, con- there is the “D’Oench doctrine,” first articulated by the Su-
tinuously, from the time of its execution, an official record of the
depository institution.
43 12 U.S.C. § 1821(d)(13)(D)(ii).

18 NCLC REPORTS CONSUMER CREDIT AND USURY EDITION 2009

preme Court in the 1942 case D’Oench, Duhme & Co. v. FDIC, documents included warning printed in bold below signature
which prevents borrowers from asserting “secret side agree- line stating: “Do not sign this if it contains blank spaces.”).47
ments” with bank officers as a defense against obligations
being administered by the FDIC.44 Second, there is a special Good Faith and Fair Dealing
statute, 12 U.S.C. § 1823(e), sometimes imprecisely referred Connecticut Bank & Trust Co v. Lee, 1992 WL 228093
to as a statutory codification of D’Oench.45 (Conn. Super. Ct. Sept. 8, 1992) (unpublished) (special de-
There are dozens of cases holding that certain claims and fense of breach of good faith and fair dealing does not im-
defenses survive an FDIC receivership because the doctrines plicate D’Oench, as defense is not based upon unrecorded side
in D’Oench, Duhme or section 1823(e) do not apply or for agreement but is derived from the note itself).48
other reasons. Those cases are listed in NCLC’s Cost of Credit
at § 10.7.8. Practitioners should carefully review these deci- Failure of Consideration and Fraud
sions as the courts are not always consistent. One important DIC v. O’Flahaven, 857 F. Supp. 154 (D.N.H. 1994) (failure
question is whether an entity (the assignee) that purchases of consideration defense based upon non-disbursement of
loans from the FDIC stands in the same protected shoes. funds is not barred because fact of whether or not funds
The courts are split with the majority in favor.46 were disbursed should be contained in bank records); Cinco
The causes of action that survive include: Enterprises, Inc. v. Benso, 995 P.2d 1080 (Okla. 1999) (state law
defense of failure of consideration available to avoid liability
• Breach of fiduciary duty; on certain notes; no secret agreement barring defense under
• Fraud in the factum; either D’Oench or § 1823(e)); Bank of New Glarus v. Swartwood,
• Negligent representation; 297 Wis. 2d 458, 725 N.E.2d 944 (Wis. Ct. App. 2006)
• Claims based on the actions of the FDIC itself; (D’Oench does not bar a failure of consideration defense
• State consumer fraud (UDAP) claims; based upon non-disbursement of funds).49
• Breach of duty of good faith and fair dealing;
• Breach of contract; Economic Duress
• Truth in Lending rescission; Desmond v. FDIC, 798 F. Supp. 829 (D. Mass. 1992) (refus-
• ECOA; ing to dismiss duress categorically as a viable claim; stating
• Statute of limitations; that while claim or defense of duress will not always survive,
• Negligent infliction of emotional distress; it does so in this case because duress relating to lawyer’s con-
• Release; flict of interest was “external” and therefore peripheral to
• Equitable defenses such as laches; agreement and did not involve any side agreement); This-
• Failure of consideration; tlethwaite v. FDIC (In re Pernie Bailey Drilling Co.), 111 B.R. 565
• Economic duress; (Bankr. W.D. La. 1990) (economic duress defense is not
• Wrongful acceleration and unreasonable sale at foreclo- barred by § 1823(e) because defense goes to underlying valid-
sure; and ity of agreement and is not barred by D’Oench because “[o]ne
• Defense based on alleged alteration of documents. who executes an instrument under duress may not lend him-
This is a partial listing and NCLC’s Cost of Credit § 10.7.8 (3d self to a scheme or arrangement likely to mislead banking au-
ed. 2005 and 2008 Supp.) should be consulted. thorities”). Cf. RTC v. Ruggiero, 756 F. Supp. 1092 (N.D. Ill.
1991) (suggesting that defense of economic duress negates
“requisite contract-formative intent” so as to render an
New Case Law on Claims That Survive Bank agreement void and thus unreachable by D’Oench, but finding
Insolvency it unnecessary to address question of whether defense is
The following cases dealing with claims that survive bank covered since standard of legal duress was not satisfied),
insolvency are too recent to appear in NCLC’s 2008 Supple- aff ’d, 977 F.2d 309 (7th Cir. 1992). But see Bell & Murphy &
ment to Cost of Credit (3d ed. 2005), and will be added to a Assocs., Inc. v. Interfirst Bank Gateway, 894 F.2d 750 (5th Cir.
new Fourth Edition to be released later this summer. 1990); RTC v. A.W. Assocs., Inc., 869 F. Supp. 1503 (D. Kan.
1994) (economic duress, even if proven, would only render
Fraud in the Factum agreement voidable and not void, so D’Oench doctrine ap-
Fraud in the factum, which is deemed to render an in- plies); FDIC v. Betancourt, 865 F. Supp. 1035 (S.D.N.Y. 1994);
strument entirely void ab initio, is defined as “the sort of First City, Texas-Beaumont, N.A. v. Treece, 848 F. Supp. 727
fraud that procures a party’s signature to an instrument with- (E.D. Tex. 1994); Federal Sav. & Loan Ins. Corp. v. Maio, 736 F.
out knowledge of its true nature or contents.” Langley v. Supp. 1039 (N.D. Cal. 1989).50
FDIC, 484 U.S. 86 (1987). It is to be distinguished from
fraud in the inducement, which is not an exception to Wrongful Acceleration and Unreasonable Sale at
D’Oench. But cf. Bank of New Glarus v. Swartwood, 297 Wis. 2d Foreclosure
458, 725 N.E.2d 944 (Wis. Ct. App. 2006) (promissory note Cf. Communication Systems, Inc. v. Ironwood Corp., 930 F. Supp.
executed with loan amounts left blank does not support fraud 1162 (S.D. Tex. 1996) (because acceleration clause in note is
in the factum exception to D’Oench, especially where loan not “agreement” within meaning of D’Oench or § 1823(e) it is
admissible to show when assignee’s cause of action accrued).
44 315 U.S. 447 (1942).
45 Most courts have held that a flexible “super holder in due course” or
“federal holder in due course” doctrine no longer exists. See NCLC, The 47 NCLC’s Cost of Credit Ch. 7, note 705 (3d ed. 2005 and 2008 Supp.).
Cost of Credit: § 10.7 (3d ed. 2005 & 2008 Supp.). 48 Id. at note 709.
46 See discussion in NCLC’s Cost of Credit § 10.7.6.2 (3d ed. 2005 & 2008 49 Id. at note 710.

Supp.). 50 Id. at note 711.

NCLC REPORTS CONSUMER CREDIT AND USURY EDITION 2009 19

 NCLC REPORTS NCLC REPORTS
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zation which represents the interests of low-income consumers, publishes
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rate editions: Bankruptcy & Foreclosures (ISSN 1054-3775); Consumer Credit &
Usury (ISSN 0890-2615), Debt Collection & Repossessions (ISSN 0890-2607); and
Deceptive Practices & Warranties (ISSN 0890-0973). Each edition is published six
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NCLC REPORTS is sent free to every neighborhood legal services office
funded by the Legal Services Corp. Other individuals and institutions may
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Visit our website: www.consumerlaw.org
Copyright ©2009 by the National Consumer Law Center, Inc.

But see FDIC v. Bathgate, 27 F.3d 850 (3d Cir. 1994) (wrongful loan modifications. Go to www.consumerlaw.org and click
acceleration defense barred where it depends upon allega- on “Lenders in Financial Distress.” This brings you to a
tions relating to an unrecorded agreement).51 choice of the following three topics:

Equal Credit Opportunity Act Failed Bank Pages

FDIC v. Piccolo, 1994 WL 32488 (Conn. Super. Ct. June 28, The “Failed Banks” pages include a Failed Bank Chart
1994) (ECOA counterclaim survives based upon CMF Vir- that lists the date of closure and the claims bar date. Click
ginia Land, L.P. v. Brinson, 806 F. Supp. 90 (E.D. Va. 1992) and on the bank name and obtain more details from the FDIC
upon fact that counterclaim is supported by signature and website. Articles by NCLC staff and others are also posted
thus not premised upon unwritten agreement). Cf. Cadle Co. v. here. This page also includes all the Purchase and Assump-
Newhouse, 300 A.D.2d 526, 756 N.Y.S.2d 48 (2002) (D’Oench tion Agreements available from the FDIC. When the FDIC
inapplicable as ECOA claim involved guaranty executed two orchestrates a sale of one bank to another before the trou-
years prior to subject loan).52 bled bank fails (as in the Wachovia to Wells Fargo deal) or
sells some or all of a failed bank’s assets and liabilities (as has
Defense Based on Alleged Alteration of Documents been the case for most of the banks closed since 2008), the
Cf. FDIC v. Kagan, 871 F. Supp. 1522 (D. Mass. 1995) (ma- parties enter into a P&A agreement. Important provisions in
terial alteration of guarantee performed without knowledge this document address which assets and liabilities are trans-
or authorization forms basis of allowable fraud in the factum ferred, which remain with the FDIC, and whether borrower
defense); Haines Pipeline Constr., Inc. v. Exline Gas Systems, Inc., claims and/or defenses are explicitly waived. Until recently,
921 P.2d 955 (Okla. Civ. App. 1996) (alteration defense based the FDIC website only included the WAMU P&A. Others
not upon an “agreement” but upon acts performed without are now available on this page as a result of a NCLC FOIA
debtor-president’s consent that exonerated him from liability, request sent to the FDIC.
according to state law, on an altered guaranty; therefore, §
1823(e) does not apply). But see FDIC v. Gilbert, 9 F.3d 393
Lender Bankruptcy Pages
(5th Cir. 1993) (“alteration of a document, standing alone,
The Lender Bankruptcy pages focus on chapter 11 lender
does not preclude” doctrine of estoppel; here, alteration in
and servicer bankruptcies. Judges’ orders pertaining to claim
the form of changes to repayment provisions initialed by
bar dates, transfer of assets, confirmation of plan, as well as
parties could not be asserted as a defense to the note). 53
voluntary petitions and chapter 11 plans are included on
these pages.
New NCLC Web Pages: Bank Failures,
Loan Modification Site
Lender Bankruptcies, and Crisis-Driven Within the last year, several loan modification and refi-
Loan Modification Programs nance programs have emerged in an effort to minimize the
NCLC recently added extensive information to its website number of foreclosures. NCLC created a Loan Modification
related to bank failures, lender bankruptcies, and crisis-driven site to provide a more comprehensive understanding of what
the industry and government are doing to combat the rising
51 Id. at note 713. tide of foreclosures. This site includes a chart that summarizes
52 Id. at note 722. the industry and government sponsored loan modification
53 Id. at note 732.
programs and contains links to relevant source documents.

20 NCLC REPORTS CONSUMER CREDIT AND USURY EDITION 2009