John v. Resolution Trust Corp., 94-1043

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Writing for the CourtBefore CUMMINGS, CUDAHY and RIPPLE; CUMMINGS
Citation39 F.3d 773
PartiesGeorge JOHN and Sandra John, Plaintiffs-Appellants, v. RESOLUTION TRUST CORPORATION, Receiver of Germania Bank, a Federal Savings Bank, Defendant-Appellee.
Docket NumberNo. 94-1043,94-1043
Decision Date08 November 1994

William L. Berry (argued), Dunham, Boman & Leskera, Belleville, IL, for plaintiffs-appellants.

Donald L. Smith (argued), Hoagland, Fitzgerald, Smith & Pranaitis, Alton, IL, for defendant-appellee.

Before CUMMINGS, CUDAHY and RIPPLE, Circuit Judges.

CUMMINGS, Circuit Judge.

The walls of the residence at 408 Bauer Lane, Collinsville, Illinois were cracking as the house was sinking into the ground. Germania Savings and Loan Association ("Germania") plastered over cracks in the exterior walls to conceal the subsidence before selling the house. The issue presented in this case is whether the doctrine of D'Oench estoppel 1 bars the buyers, George and Sandra John, from recovering for fraud against Germania's successor, the Resolution Trust Corporation ("RTC").


On January 10, 1985, George P. John and Sandra J. John purchased this residential real estate parcel from Germania. The Johns made the purchase pursuant to a one-page printed form real estate sales contract with a one-page amendment. The amendment stated that the buyer was to pay a down payment of $17,920 at closing and obtain a V.A. loan in the amount of $44,000 for a total purchase price of $61,920. Germania thus was merely the seller, and did not provide any of the financing for the purchase.

After moving onto the property, the Johns discovered damage to the walls and foundations which they determined to be evidence of mine subsidence. The Johns concluded that the damage existed prior to their purchase of the house and that Germania had concealed the problem.

On September 27, 1989, the Johns filed an action against Germania in the Circuit Court for the Third Judicial Circuit, Madison County, Illinois. While discovery was proceeding in that action, Germania was declared insolvent and the RTC was appointed as receiver on July 26, 1991. After the Third Judicial Circuit substituted the RTC as a party in interest, the Johns filed a claim with the RTC for property damage and loss of value of property resulting from the intentional fraud by Germania's employees. The RTC denied the Johns' claim on February 22, 1993.

On March 12, 1993, the Johns filed their complaint in the present action in the United States District Court for the Southern District of Illinois pursuant to 12 U.S.C. Sec. 1821. The complaint alleged that Germania failed The RTC moved for summary judgment, asserting that the Johns were estopped by the D'Oench doctrine and 12 U.S.C. Sec. 1823(e) from pursuing their claims. The district court granted summary judgment in favor of the RTC on December 3, 1993, holding that Germania's false representations and concealment were "side agreements ... barred by the D'Oench, Duhme doctrine, and its partial codification, 12 U.S.C. Sec. 1823(e)." We disagree and reverse.

                to disclose and concealed from the Johns material facts concerning prior subsidence and subsidence damage and "falsely represented to the Plaintiffs that the property was in good condition."   The Johns sought relief for fraud and under the Illinois Consumer Fraud and Deceptive Business Practices Act, Chap. 121 1/2, Sec. 262, et seq., Ill.Rev.Stat

The D'Oench doctrine began as a variety of federal common law equitable estoppel intended to protect the FDIC by making "secret side agreements" between bank employees and borrowers unenforceable against the FDIC once it had stepped into the failed bank's shoes. In D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956, the defendant, a securities dealer, sold bonds to the Belleville, Illinois Bank and Trust. When the bond issuer later defaulted, the securities dealer issued notes to the bank for the face value of the bonds so that the bank would not have to show the past due bonds in its records. The Bank agreed never to call the notes and to refund interest payments which the defendant periodically made to perpetuate the fiction that the notes were viable bank assets.

The Belleville bank eventually became insolvent and the FDIC attempted to collect on the notes. The Supreme Court held that because of his participation in the deceptive scheme, the defendant was estopped from asserting against the FDIC defenses of lack of consideration and the agreement with the bank. The Court noted a "federal policy to protect respondent [FDIC], and the public funds which it administers, against misrepresentations as to the securities or other assets in the portfolios of the banks which respondent insures or to which it makes loans." Id. at 457, 62 S.Ct. at 679. The specific intent to defraud the FDIC was not required for the estoppel to apply:

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 respondent relied in insuring the bank was or was likely to be misled. Id. at 460, 62 S.Ct. at 680.

In 1950, Congress partially codified a version of the common law D'Oench doctrine. 12 U.S.C. Sec. 1823(e) currently reads:

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--

(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.

12 U.S.C. Sec. 1821(d)(9)(A), which became effective in September 1989, extends Sec. 1823(e) to bar certain affirmative claims against the FDIC or the RTC as receiver:

... any agreement which does not meet the requirements set forth in section 1823(e) of this title shall not form the basis of, or substantially compromise, a claim against the receiver or the corporation.

I. Sec. 1823(e)

By its language Sec. 1823(e) applies only to conventional loan activities. See Du Pont v. FDIC, 32 F.3d 592 (D.C.Cir.1994) (Sec. 1823(e) does not apply to claim arising out of the bank's administration of an escrow agreement); Thigpen v. Sparks, 983 F.2d 644 (5th Cir.1993) (Sec. 1823(e) does not apply to a claim arising from a bank's sale of an asset in a non-banking transaction).

The difficulty in applying Sec. 1823(e) beyond the confines of conventional loan transactions is illustrated by the present case involving a home sale. Section 1823(e) requires an identifiable "asset" which is acquired by the bank and then transferred to the regulatory agency, and to which the unenforceable agreements must relate. In this case, only if the money received by Germania from the Johns were treated as the asset would the transaction fit into the framework of Sec. 1823(e). But Sec. 1823(e) further requires that the RTC have "acquired" this same asset after being appointed as receiver for Germania. In the present case this occurred six years after the sale was completed. As the Fifth Circuit demonstrated more fully in Thigpen, Sec. 1823(e) cannot sensibly be read to cover agreements relating to the sale of assets in a non-loan transaction. Id. at 647.

Similarly, the only sensible reading of Sec. 1821(d)(9)(A) must limit its scope to the loan-related transactions covered by Sec. 1823(e). If "agreements" in Sec. 1821(d)(9)(A) reached beyond the limitations of Sec. 1823(e), the section would mean that, for example, trade creditors could only enforce agreements with the bank against the RTC if the bank's board of directors had approved and recorded the deals. Id. at 649. Such a reading would turn Sec. 1821(d)(9)(A) into "a meat-axe for avoiding debts incurred in the ordinary course of business." Id. Such was surely not the intent of Congress. The RTC's reliance on Sec. 1823(e) as a rationale for summary judgment is thus misplaced.

II. The common law D'Oench doctrine

Having found that its statutory incarnations do not cover this non-loan transaction, we must determine whether the common law D'Oench doctrine operates to bar the Johns' claim. The common law D'Oench doctrine and its statutory counterparts are frequently analyzed together and likely serve identical aims (Justice Scalia relied on D'Oench in his analysis of the scope of Sec. 1823(e) in Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340). The two, however, may not be co-extensive. The common law doctrine, because it is "based on the concept of equitable estoppel," is narrower than Sec. 1823(e) which "makes the fault of the party asserting the unwritten agreement irrelevant." Du Pont v. FDIC, 32 F.3d 592, 597 (D.C.Cir.1994).

Courts have split over whether the common law D'Oench doctrine is also broader than Sec. 1823(e) and extends to non-loan transactions. See Du Pont, 32 F.3d 592 (common law D'Oench doctrine and statutes are not co-extensive but neither bars suit based on bank's administration of non-written escrow agreement); Alexandria Associates, Ltd. v. Mitchell Co., 2 F.3d 598, 599 (5th Cir.1993) ("D'Oench does not apply to the instant non-banking transactions, which were sales of partnership interests in real estate development partnerships"); Vernon v. RTC, 907 F.2d 1101, 1107 (11th Cir.1990) (D'Oench does not apply where "app...

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