Legal Definitions - D'Oench Duhme doctrine

The D'Oench Duhme doctrine is a legal principle that prevents a borrower from using certain unwritten or unofficial agreements as a defense or claim against a federal agency that has taken over a failed financial institution. Its primary purpose is to protect federal agencies, such as the Federal Deposit Insurance Corporation (FDIC), when they step in to manage the assets and liabilities of a failed bank.

This doctrine ensures that these agencies can rely on the official, written records of the bank and are not surprised by hidden liabilities or agreements that were not properly documented. Essentially, it prevents borrowers from asserting claims or defenses based on "secret" or "side" agreements made with the original bank that are not part of the bank's formal records.

For a borrower to successfully assert a claim or defense based on an agreement with the original bank against the federal successor, that agreement must have met very strict criteria:

• It had to be in writing.
• It had to be signed by both the bank and the borrower at the time the loan was made.
• It had to be officially approved by the bank's board of directors or loan committee.
• It had to be made a permanent part of the bank's official records.

If an agreement does not meet all these conditions, the borrower is generally prevented from using it to challenge the federal agency's actions.

Examples of the D'Oench Duhme Doctrine in Action:

• Oral Agreement for Loan Forgiveness: Imagine a small business owner who takes out a loan from a local bank. The loan officer verbally assures the owner that if the business meets certain community service goals, a portion of the loan principal will be forgiven. This promise is never put into writing, nor is it approved by the bank's loan committee or recorded in any official bank documents. If the bank later fails and the FDIC takes over its assets, the business owner cannot claim the promised loan forgiveness against the FDIC. The D'Oench Duhme doctrine would prevent this defense because the agreement was an unwritten, unapproved "side agreement" that the federal agency could not have discovered from the bank's official records.

• Undocumented Collateral Release: A real estate developer pledges several properties as collateral for a construction loan from a regional bank. During a casual conversation, the bank's loan officer informally agrees that if the developer sells one specific property, the bank will release its lien on another, more valuable property, even though the original loan agreement does not mention this condition. This informal agreement is never documented in the bank's official records or approved by its board of directors. If the bank subsequently fails and the FDIC becomes the receiver, the developer cannot compel the FDIC to release the lien on the second property based on this informal understanding. The D'Oench Duhme doctrine applies because the agreement to release the lien was not officially documented and approved, making it a "secret" agreement from the perspective of the federal agency.

• Unrecorded Promise of Future Financing: A farmer secures a loan from a community bank, and the bank president verbally assures him that the bank will provide additional financing for a new equipment purchase next year, regardless of market conditions. This promise is not included in the loan documents, board minutes, or any other official bank records. A few months later, the bank experiences financial difficulties and is taken over by the FDIC. When the farmer approaches the FDIC for the promised additional financing, the D'Oench Duhme doctrine would prevent the farmer from enforcing this verbal promise against the FDIC. The federal agency is only bound by agreements that were properly documented and approved by the failed bank, not by unrecorded assurances.