Bulletin: NY000079

Dear Associates:

Over the past several years, many of the assets of insolvent lending institutions have been disposed of by the FDIC and the Resolution Trust Corporation (RTC) in an attempt to resolve the financial crisis that gripped the banking industry in the late 80's and early 90's. The transfer of these assets is winding down and the title insurance community has, for the most part, established underwriting guidelines for such transfers. But a recent New York Supreme Court case, FDIC vs. DeGuardiola, which appeared in the New York Law Journal on January 5, 1995, reemphasizes the concerns that the title industry has when dealing with the FDIC or RTC.

One of those concerns involves what is known as the D'Oench Duhme Doctrine. In 1942, in a case entitled D'Oench Duhme and Company vs. FDIC 325 US 447 (1942), the United States Supreme Court held that secret agreements designed to deceive creditors or the public authority or which would tend to have such an effect could not be asserted as a defense against the FDIC suing in its corporate capacity to enforce a note. The decision in D'Oench Duhme was subsequently codified into law. The resulting statute, 12 U.S.C. Sec. 1823(e) provides as follows:

"No agreement which tends to diminish or defeat the interest of the Corporation in any asset acquired by it under this Section or under Section 1821 of this title, either as security for a loan or as a receiver of any insured depository institution, shall be valid against the Corporation unless such agreement -

1. is in writing;

2. was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution;

3. was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the Minutes of said board or committee; and

4. has been, continuously, from the time of its execution, an official record of the depository institution."

All four of the above requirements must be met in order to defeat the rights of the FDIC.

In DeGuardiola, a banking institution known as Goldome entered into an equity line of credit agreement in 1988 ("the 1988 note") with the defendant, Robert DeGuardiola and his wife, Joanne, in which it loaned them $180,000.00, and took back a security interest in the shares of stock and proprietary leases covering three (3) cooperative apartment units. Under the note which the defendants signed, the lender had the right to accelerate payment upon a default and to declare the full amount of principal and interest immediately due and payable.

Goldome already held a first lien on these shares resulting from a $210,000.00 loan it made to the defendants in 1984 ("the 1984 note"). Subsequently, in 1990, the defendants defaulted on the 1988 note. An officer of Goldome wrote to the defendants and advised that the bank would forego its rights to foreclose, if, among other things, the proceeds of sale of one of the units (hereafter referred to as Unit 10C) were used to pay off the 1984 note and one-third of the 1988 note. The letter further indicated that the bank would agree not to seek a deficiency judgment on the 1988 note.

The bank's agreement was confirmed in an affidavit that was submitted by one of its officers in a separate action (Davenport vs. DeGuardiola, N.Y. Supreme Ct., N.Y. County, Index No. 63297/85) which resulted in an order directing the sale of Unit 10C free and clear of a lien placed on the unit by the ex-wife of defendant Robert DeGuardiola.

At the closing of the court ordered sale of Unit 10C in February 1991, the proceeds of sale were dispersed in accordance with Goldome's request, and the bank delivered UCC-3 termination statements, extinguishing its security interest in the shares and the proprietary leases to the three units, and effectively waiving its rights to the remaining balance due on the 1988 note.

Thereafter, in May 1991, the Superintendent of Banking took over possession of Goldome's assets and the FDIC was appointed as Receiver of the property of Goldome. In 1994, the FDIC sent a notice of default to the defendants contending that there remained a balance due on the 1988 note, and moved for summary judgment in lieu of a complaint on the note. It relied upon the provisions of 12 U.S.C. Sec. 1823(e), and it took the position that the bank's agreement was not reflected in the Minutes of the meetings of the bank's board of directors, nor did they reflect an agreement to satisfy the note. Consequently, such agreement(s) could not be used to defeat its claims for payment on the 1988 note.

The defendants argued to the contrary, saying that the note was satisfied as part of the sale of Unit 10C, that Goldome had agreed, in a sworn affidavit and in earlier written correspondence, to release defendants from liability, and that since the agreement that FDIC was attempting to set aside was a matter of public record, Sec. 1823(c) did not apply.

The Court found the defendants' arguments to be unpersuasive. It said that in the Davenport case, all that was decided was that Unit 10C could be sold free of any lien of the ex-wife of Robert DeGuardiola. It did not address the propriety of the bank's agreement with the defendants. The Court further stated that "even if the agreement is part of the public record or FDIC has knowledge of the side agreement", it cannot defeat the claim of the FDIC, since if the agreement would diminish the interest of the FDIC, it must be part of the official record of the bank and be reflected in the Minutes of its board of directors. Finally, the Court held that the bank officer's affidavit did not meet the strict requirement of Section 1823(e) that the agreement be reflected in the Minutes of the Board.

Although the Court denied FDIC's motion for summary judgment, it did so without prejudice to renewal of the motion pending completion of limited discovery granted to the defendants to require FDIC to review all the records of Goldome's board of directors to determine if there was any reference to the note at issue in the case.

From a title perspective, there are instances that arise in dealing with lending institutions in which we should exercise great care. For example, where the lender, as in DeGuardiola, has agreed to settle or reduce the amount to be paid on a mortgage note, or has subordinated its mortgage to another mortgage or lien which would otherwise be junior in priority, and that lender later becomes insolvent, its prior actions may not suffice to defeat a claim made by the FDIC or RTC, unless such agreement complies with 12 U.S.C. Sec. 1823(e).

Should you have any questions regarding the DeGuardiola decision, or wish to discuss the applicability of D'Oench Duhme to a particular situation, please contact Company Counsel.