ABA Section of Business Law
ABA Section of Business Law
Business Law Today
November/December 1999
The Fat Cat in the Hat
A tale of banks, bankers and regulators
By EDWARD C. BREWER III
Brewer is an assistant professor at Salmon P. Chase College of Law, Northern Kentucky University, in Highland Heights. Parts of this article were written during the heyday of the failed-bank era.
Sylvia Crutcher looked up from a stack of papers to see who was knocking at the door to her office. Across the wide expanse of walnut, expensive rugs and bookshelves, the last draped with festive greenery to mark the holiday season, she saw her newest associate, Bob Miller.
"Hello, Bob, come in," Crutcher said. Miller had a large envelope in his hand, and seeing that, Crutcher asked, "Have we gotten the bank’s discovery on the counterclaim in the Scott Hardware litigation? Tim Harvey said he would be sending it over earlier this week, and here it is the day before Christmas. I had hoped it wouldn’t come."
"No, Sylvia. I called Tim a few minutes ago, since you wanted the discovery before you left town. He said he wouldn’t be handling the case after all, that we should be getting something from the FDIC."
"The FDIC?"
"This envelope just came by express mail. The FDIC is moving to intervene, and they have filed a motion to dismiss the counterclaim." Miller sat down in the nearest wing chair. "Sylvia, I drafted the Scott answer just like the one we had used in the Union Bank v. Hernandez litigation last month. Defenses based on an oral contract to extend the loan and fraudulent interference with business, and a counterclaim based on fraud and standard lender-liability theories. But the FDIC’s brief says the bank — and they got its name wrong in the first place — is not subject to those defenses or to the counterclaim. They have even cited a recent case."
"What do they call the bank?" Crutcher asked.
"The ‘New Farmers Bank,’" replied Miller. "Sylvia, I was just over there at lunch, depositing my paycheck, and there’s no ‘New Farmers Bank’ downtown. It’s the same old Farmers Bank we’ve always had."
"Let me see the motion and brief," Crutcher asked, leaning forward to receive the sheaf of papers from Miller. She glanced at the brief’s table of contents, and then began scanning the double-spaced paragraphs. There was a factual statement in which the FDIC made reference to the motion for leave to intervene, and stated that the "New Farmers Bank" was being established as a bridge bank to receive the assets of the Farmers Bank, which had recently failed and gone into receivership.
A series of citations that Crutcher had not seen in years appeared before her: D’Oench, Duhme & Co. v. FDIC , 315 U.S. 447 (1942); FIRREA and 12 U.S.C. § 1823; FDIC v. Wood , 758 F.2d 156 (6th Cir. 1985). All stood for the proposition that the FDIC had the position of a "super-holder-in-due-course" from a failed bank, and was not subject to defenses or counterclaims unless the basis for them was contained in the written records of the bank. The recent case that Miller had referred to, Beal Bank SSB v. Pittorino , 177 F.3d 65 (1st Cir. 1999), held that the defense of estoppel is barred by D’Oench, Duhme and Section 1823.
Crutcher had a current research file on defenses in failed-bank litigation, and knew that the FDIC’s brief, like most briefs that anyone files, told its side of the story but no more. The status of the common-law D’Oench, Duhme doctrine was in doubt since the Supreme Court had held that there is no federal common law of banking in Atherton v. FDIC , 519 U.S. 213, 217-26 (1997) and O’Melveny & Myers v. FDIC, 512 U.S. 79, 85-87 (1994). In fact she had seen two recent articles to that effect, Barbara A. Bailey, Comment, Giving D’Oench Its Due: A Comment on the D’Oench, Duhme Doctrine After O’Melveny & Myers v. FDIC , 28 Ariz. St. L.J. 1259 (1997); and David F. D’Alessandris, Murphy v. FDIC: Is the D’Oench, Duhme Doctrine Doomed? , 50 Consumer Fin. L. Q. Rep. 3 (1996). At least two courts had noted that a circuit split was developing, between the D.C., 8th and 9th circuits, holding that Section 1823(e) preempts D’Oench, Duhme, and the 4th and 11th circuits, holding that it does not. State Street Capital Corp. v. Gibson Tile Inc., 1998 WL 907027 (N.D. Tex. Dec. 16, 1998); Rankin v. Toberoff, 1998 WL 370305 (S.D.N.Y. June 30, 1998).
Another circuit split had developed over whether the common-law and statutory rules apply to the FDIC, depending on whether the agency has acted in its receivership or corporate capacity. See FDIC v. Houde, 90 F.3d 600, 605 n.5 (1st Cir. 1996).
Then there was the nature of the defense or counterclaim being asserted by the borrower. The First Circuit itself had held in Bolduc v. Beal Bank SSB, 167 F.3d 667 (1st Cir. 1999), that recoupment and mutual mistake, respectively, are not barred by the defenses, although the Pittorino panel had not distinguished that earlier decision. Several courts had held that the borrower may sue for a "freestanding tort" not related to a regular banking transaction, or for negligent impairment of collateral. Bufman Organization v. FDIC, 82 F.3d 1020 (11th Cir. 1996); E.I. du Pont de Nemours & Co. v. FDIC , 310 U.S. App. D.C. 157, 45 F.3d 458 (1995) (Ginsburg, J.) (on rehearing); New Connecticut Bank & Trust Co. v. Stadium Management Corp. , 132 B.R. 205 (D. Mass. 1991).
So maybe the FDIC’s position was not so strong as it always seemed to believe. "No, this area remains fertile ground for litigation, so there’s life in these borrowers yet," thought Crutcher. "But I don’t want to ruin Bob’s holiday on the night before Christmas."
"Well, Bob," Crutcher said with a sigh, "this is a really unfortunate development for Scott Hardware. The bank’s failed, and the FDIC is taking over."
"What?" Miller exclaimed. "We’ve been banking there ever since I was a child! How can the bank fail?"
"I suppose it may have been that new vice president that Scott Hardware was dealing with. I didn’t like him from the beginning, always seemed up to something, and the Scotts’ experience with him confirmed my suspicions. But I hadn’t thought that he could bring down the whole bank in just three years’ time. He must have done more damage than we thought."
Crutcher continued thumbing through the brief, and then turned to the motion for intervention. "Yes, it’s all there. Right there, in black and white. We’ll be litigating against the ‘New Farmers Bank,’ and then what we knew as the old Farmers Bank’s assets will probably be sold to one of these new mega-banks that are popping up everywhere."
"I guess you’ve seen some of these before," Miller said. "How does this work?"
"Dozens," said Crutcher, "from when I was a senior associate and junior partner. I did most of the heavy lifting on those cases. Back in the late 1980s and early 1990s, banks and savings and loans were failing left and right. The only thing worse was the Great Depression, and there was a lot of soul-searching and blame-casting about what happened. Bank officers and law firms were sued in tort and regulatory litigation, and some of them went to prison. The FDIC took over the failed banks and set up bridge banks to receive the assets, including loan obligations like Scott Hardware’s. Debtors who hadn’t memorialized their understandings with loan officers were required to pay debts according to the original terms when the bank went belly-up.
"I hadn’t thought that your generation of lawyers would ever see this kind of thing. But I guess that even today, we can expect to see the occasional bank failure, and you’ll need to know about it to have a career as a commercial litigator. This is not fatal to Scott Hardware’s counterclaim, but we have a tough row to hoe, and you will need my research file on ‘Defenses in failed bank litigation.’"
"Where do we go from here?" asked Miller, a nervous expression crossing his face for a moment.
Crutcher turned in her chair to look out the window, where the lowering sun was beginning to cast long shadows across the courthouse. "Bob," she said, having caught the associate’s concern before he could conceal it, "you need to get home to your family so you can celebrate the holiday, and I need to take my own family to my parents’ next week. But I think I can tell you enough about the FDIC’s brief and how we’re going to respond to it, that you can enjoy yourself, and then prepare the brief while I’m gone. We’ll need to explain the matter to the Scotts after I get back, but there’s no reason to tell them about it tonight."
"That’ll work," he said, "since I was planning to be in here next week anyway."
"Let me start out by explaining to you where the FDIC is coming from, and then I’ll turn to what we need to say in our response." Leaning back in her chair, and with a hint of reminiscence in her voice, she continued:
"That’s about it," concluded Crutcher, smiling as she saw Miller relax. "OK?"
"Sounds like a winner to me," said Miller, who had begun to feel a little better about the defenses and counterclaim for Scott Hardware. "I’ll have a draft waiting for you when you get back to the office."
"Have a good holiday, Bob," said Crutcher, "and I’ll see you the first week of January."
