OCI Mortgage Corp. v. Marchese

• Decision Date: 15 February 2000
• Docket Number: (AC 18909)
• Citation: 56 Conn. App. 668,745 A.2d 819
• Court: Connecticut Court of Appeals
• Parties: OCI MORTGAGE CORPORATION v. CAROLE N. MARCHESE ET AL.

56 Conn. App. 668

745 A.2d 819

OCI MORTGAGE CORPORATION v. CAROLE N. MARCHESE ET AL.

(AC 18909)

Appellate Court of Connecticut.

Argued October 19, 1999.

Officially released February 15, 2000.

Lavery, Schaller and Hennessy, Js. Matthew J. Broder, for the appellants (named defendant et al.).

Matthew B. Woods, for the appellee (plaintiff).

Opinion

LAVERY, J.

The defendants Carole N. Marchese and Anthony Marchese (defendants) appeal from a judgment of foreclosure rendered in favor of the plaintiff on the basis of the trial court's sustaining of the plaintiffs objections to an attorney trial referee's report. The defendants claim that the trial court improperly based its conclusion on the rationale that the D'Oench, Duhme doctrine and 12 U.S.C. § 1823 (e) bar the defendants' claims of setoff and payment of their mortgage. We agree with the defendants and reverse the judgment of the trial court.

The following facts and procedural history are set forth in OCI Mortgage Corp. v. Marchese, 48 Conn. App. 750, 751-52, 712 A.2d 449 (1998): "The defendants ... executed a promissory note in the amount of $220,000, payable to Community Federal Savings and Loan Association (CFSLA), and secured by a mortgage on property that the defendants owned in Southport. While the note was still outstanding, the defendant Carole N. Marchese lent CFSLA $900,000 pursuant to a subordinated debenture agreement. Thereafter, Carole N. Marchese and CFSLA agreed that the defendants' mortgage note would be paid by applying CFSLA's interest payments on the debenture to the defendants' monthly mortgage payments.

"In October, 1989, CFSLA defaulted on its interest payments. Subsequently, the defendants formally demanded full payment on the debenture and informed CFSLA of their intention to exercise their right to set off the mortgage. By December, 1989, however, CFSLA was declared insolvent and the Resolution Trust Corporation (RTC) was appointed as its receiver in bankruptcy. The RTC assigned the defendants' mortgage and loan documents to Fairfield Affiliates, the original plaintiff here. Fairfield Affiliates then assigned the defendants' note and mortgage to OCI Mortgage Corporation (OCI) and OCI was substituted as the plaintiff.

"The trial court referred the case to an attorney trial referee. After the trial concluded, the attorney trial referee filed her report, in which she recommended that judgment enter in favor of the defendants. Specifically, the attorney trial referee found that the RTC knew about the agreements between CFSLA and the defendants, and that `[a]ll subsequent assignees of the [defendants'] mortgage note ... including the plaintiff, OCI, accepted assignment of the note with notice of the $900,000 debt owed to the defendants, as well as the defendants' claim of set-off and payment.'

"The plaintiff moved to correct various portions of the attorney trial referee's report. The attorney trial referee, however, denied the majority of the plaintiffs requests. The plaintiff then filed exceptions to the attorney trial referee's report, as well as an objection to the acceptance of the report.

"The trial court sustained the plaintiffs objection to the acceptance of the attorney trial referee's report. The court ruled that, pursuant to 12 U.S.C. § 1823 (e), the RTC is entitled to the same protection as the Federal Deposit Insurance Corporation (FDIC). According to 12 U.S.C. § 1823 (e), `[n]o agreement which tends to diminish or defeat the interest of the [FDIC] in any asset acquired by it ... as receiver of any depository institution, shall be valid against the [FDIC] unless such agreement ... [is] executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with acquisition of the asset by the depository institution.' The court concluded that because the execution of the defendants' mortgage and the execution of the subordinated debenture agreement were not contemporaneous, the subordinated debenture agreement was not valid against the RTC, and, therefore, it was not valid against the RTC's assignees. The trial court remanded the case to the attorney trial referee, directing the referee to `proceed in a manner not inconsistent with' the trial court's memorandum of decision." The decision was appealed to this court. We dismissed the appeal, concluding that the trial court's remanding of the case to the trial referee for further proceedings did not constitute an appealable final judgment. OCI Mortgage Corp. v. Marchese, supra, 48 Conn. App. 755. On October 5, 1998, the parties entered into a stipulation, the purpose of which was to allow a final judgment to enter from which a valid appeal would be taken. On October 7, 1998, the trial court rendered a judgment of strict foreclosure in accordance with the stipulation. The defendants appealed a second time to this court with the appeal now properly before us.

I

The defendants' contentions focus on the application of a principle first stated in the seminal case of D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp., 315 U.S. 447, 62 S. Ct. 676, 86 L. Ed. 956 (1942), then codified and expanded at 12 U.S.C. § 1823 (e). We refer to the D'Oench, Duhme & Co. decision and § 1823 (e) throughout this opinion collectively as the D'Oench, Duhme doctrine. Specifically, the defendants argue that the D'Oench, Duhme doctrine does not bar their defenses of setoff and payment of their mortgage.

The D'Oench, Duhme doctrine arises when a bank fails through imprudent loans, rapid withdrawals of funds by depositors or other means. Subsequently, the FDIC becomes a receiver of the bank and assumes all the legal responsibilities of the failed institution, including the right to pursue and defend claims and liabilities of the failed bank.¹ Bank examiners rely on the written records of the bank to value outstanding loans. This process must be conducted very quickly, often within days or even hours, to manage the bank's assets as quickly and efficiently as possible. One of the FDIC's key responsibilities arising from these timepressured efforts is to collect on unpaid loan obligations in an effort to meet the bank's liabilities.² See F. Galves, "Might Does Not Make Right: The Call for Reform of the Federal Government's D'Oench, Duhme and 12 U.S.C. § 1823 (e) Superpowers in Failed Bank Litigation," 80 Minn. L. Rev. 1323, 1339-40 (1996).

It is against a background similar to the present case that the D'Oench, Duhme & Co. decision came to pass. D'Oench, Duhme and Company sold bonds to Belleville Bank and Trust Company, upon which D'Oench, Duhme and Company ultimately defaulted. D'Oench, Duhme & Co. v. Federal Deposit Ins. Corp., supra, 315 U.S. 454. To protect its image and to hide the past due bonds, D'Oench, Duhme and Company issued promissory notes to the bank to cover the value of the defaulted bonds. Id. The parties understood in a side agreement that the notes would never be collected. Id. The FDIC later obtained the notes from the failing Belleville Bank and Trust Company and attempted to collect, and D'Oench, Duhme and Company claimed that the note was unenforceable due to lack of consideration. Id., 456. The Supreme Court barred the defense reasoning that secret agreements should be banned where "the maker lent himself to a scheme or arrangement whereby the banking authority on which [the FDIC] relied in insuring the bank was or was likely to be misled." Id., 460. Subsequent to the D'Oench, Duhme & Co. decision, Congress passed the Federal Deposit Insurance Act, § 2 (13) (e) of which was codified at 12 U.S.C. § 1823 (e). Section 1823 (e), which codified and partially expanded the D'Oench, Duhme & Co. decision, now stands as its statutory counterpart.

The legislative history shows that § 1823 (e) was enacted with humble aspirations. While seeking to change "simultaneously" in § 1823 (e) to "contemporaneously" as the statute now reads, one Representative noted: "[T]his whole [§ 1823 (e)] as amended applies only to future agreements.... It was never the intention of Congress to give to the Corporation a stronger position than that of the bank, and the adoption of the amendment, my amendment is offered to prove that heretofore it was the intent of Congress that any agreement in the absence of fraud, was binding on the Corporation." 96 Cong. Rec. 10,731-32 (1950), remarks of Representative Francis Walter.

This doctrine remained a modest one until the early 1980s, when, occasioned by the rise of bank failures, the application of the D'Oench, Duhme doctrine mushroomed. Today, the doctrine has assumed draconian proportions and virtually assures that the FDIC can recover note payments from debtors regardless of otherwise valid defenses that would have existed before the bank's failure. The D'Oench, Duhme doctrine now prohibits claims and defenses such as: accord and satisfaction, breach of condition precedent, breach of fiduciary duty, conspiracy, constitutional challenge, deceptive trade practice, failure of consideration, fraudulent inducement, laches, mitigation of damages, mutual mistake, negligence and unjust enrichment, to name a few. See 11 Am. Jur. 2d, Banks and Financial Institutions § 1095 (1997); F. Galves, supra, 80 Minn. L. Rev. 1375-78 (listing these and other claims and defenses).

As a result, the doctrine has received significant criticism amongst the judiciary for its harshness against unwitting debtors. See, e.g., Federal Deposit Ins. Corp. v. Bathgate, 27 F.3d 850, 877 (3d Cir. 1994)(D'Oench, Duhme doctrine and § 1823 [e] can lead to what might be considered harsh result); Federal Deposit Ins. Corp. v. Kasal, 913 F.2d 487, 492 (8th Cir. 1990), cert. denied, 498 U.S. 1119, 111 S. Ct. 1072, 112 L. Ed. 2d 1178 (1991) (similar); In re NBW Commercial Paper Litigation, 826 F. Sup. 1448, 1476 (D.D.C. 1992) (court not ignorant of unusual results that D'Oench, Duhme doctrine generates, nor is court enamored of...