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

     Fred  Galves

     Minnesota Law Review
     University of Minnesota
     June 1996, vol.80, iss.6,  pg.1323

     Phone: (612) 625-8034
     Minnesota Law Review
     University of Minnesota Law School
     229 19th Ave. South
     Minneapolis, MN 55455
     REF: ULRP007048

     ABSTRACT:
     The late 1980s and early 1990s saw a rash of financial
     institution failures rivaled only by the failures of the
     Great Depression. Bailing out those federallyinsured
     financial institutions has cost American taxpayers billions
     of dollars. Because of a special commonlaw doctrine and
     complementary federal statute, the cost of those failures
     also has fallen on many borrowers and creditors of those
     failed institutions. The special commonlaw doctrine and
     statute allow the federal government, standing in the shoes
     of the failed financial institution in litigation to collect
     the institution's assets and pay its creditors, and to avoid
     most claims and defenses to which the institution otherwise
     would be subject. The growth in failed bank litigation
     during the last decade has revealed the severe inequities of
     the doctrine and statute as applied against innocent
     borrowers and creditors and has renewed interest in their
     reform.

     The Supreme Court created the equitable D'Oench, Duhme
     doctrine in 1942 to protect federal bank regulators from
     secret agreements between a financial institution that
     misrepresents the state of the institution's loan portfolio
     and its borrowers. The doctrine allows the federal
     government to avoid a borrower's defense based on that
     secret agreement and thus to collect the full amount of the
     debt owed to the failed financial institution. In 1950,
     Congress codified the doctrine in 12 U.S.C. § 1823(e) by
     creating a statutory "safe harbor," allowing a borrower to
     enforce a side agreement if that agreement meets certain
     requirements. Until the bank failures of the late 1980s,
     courts applied the doctrine and its statutory counterpart
     consistent with their equitable estoppel underpinnings. As
     failed bank litigation began to grow, however, both courts
     and Congress expanded the application of the doctrine and
     statute, such that they now act in tandem to bar most
     otherwise legitimate claims and defenses of innocent
     borrowers and creditors.

     In his Article, Professor Galves calls for sweeping reform
     of the D'Oench doctrine and § 1823(e). The Article traces
     the history and development of the doctrine and statute and
     thoroughly explores the boundaries of their current
     application. After summarizing and critiquing various reform
     proposals, Professor Galves analyzes the prospects for and
     content of needed legislative reform, using a current Senate
     reform proposal as a starting point. Professor Galves
     concludes by proposing a disclosure and filing system
     designed to address the federal government's need for
     regulatory accuracy and efficiency and the borrower's need
     to ensure the enforceability of a side agreement with a
     financial institution. His proposal may be used in the
     current doctrinal environment or in addition to legislative
     reform to reduce the inequities of the doctrine and
     statute's current application and protect innocent borrowers
     and creditors of failed financial institutions.

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