by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

BANKING; FEDERAL RECEIVERS; D'OENCH DOCTINE: D'Oench doctrine bars all evidence to the effect that the term "base rate" in a promissory note was intended to mirror the state prime rate. FDIC vs. Suna Associates, Inc. 80 F3d 681 (2nd Cir. 1996) The note set the interest rate at "a rate one ... percent per annum floating above Bank's base rate as same may change from time to time." Appellants sought to offer oral evidence of contemporaneous statements by bank officers to the effect that the interest rate would be based on the "New York prime rate" - a rate set by major New York banks. Apparently appellants would have shown that the term "New York prime" had specific meaning.

The evidence also showed that the lender routinely had followed New York prime in setting its base rate in the past, but that after the loan was made, under pressure from the FDIC, the lender stopped following New York.

Held: Evidence inadmissable. The court cited the statutory codification of the D'Oench doctrine 12 U.S.C. 1823(e)(1) that, in essence, prevents parole evidence from altering the rights and obligations of the parties to any notes or other documents of insured institutions that pertain to assets acquired by the FDIC. It concluded that the express language of the note, together with the relevant case law compelled the conclusion that parole evidence cannot vary the terms of the note. The court observed that the provision for the calculation of interest at a rate 1% per annum floating above the bank's base rate as in effect from time to time placed the borrower on notice that the base rate could change and in no way restricted the method of calculation of the base rate. It commented that the borrower, prior to signing the note, was free to bargain for language that would have limited changes in the base rate to calculation by a particular method.

The court further considered the appellants' argument that they fit within the innocent borrower defense articulated by the Ninth Circuit in FDIC v. Meo, 505 F.2d 790 (9th Cir.1974). In fact, as the court acknowledged, it is unlikely that such defense is still viable even in the Ninth Circuit following Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987). See Inn at Saratoga, 60 F.3d at 83 (questioning the viability of the Meo "innocent borrower" defense and collecting cases). In Meo, the Ninth Circuit refused to grant the FDIC protection under the D'Oench doctrine from defenses raised by an innocent borrower. The Meo Court found that "appellant was a completely innocent party with respect to the bank's improper execution of [a] stock sale agreement" and held that "a bank borrower who was neither a party to any deceptive scheme involving, nor negligent with respect to, circumstances giving rise to the claimed defense to his note is not estopped from asserting such defense against the bank's receiver."

The court in the instant case commented that the borrowers here were hardly the equivalent of Mr. Meo. By executing a note that they now assert did not contain the full agreement of the parties, borrowers, sophisticated investors, were arguably negligent and certainly not innocent.

Comment 1: Veteran D'Oench observers will not be surprised by this case. But it might be a good one to pull out for client education sometime. Like many DIRT readers, the editor has been in situations in which clients and lenders become very impatient while lawyers wrangle over precise articulation of the agreement in loan documents. One frequently hears the refrain "Everyone knows what that language means . . .," usually accompanied by some comment about lawyers building up their fees and obstructing deals.

Events like the lending crisis of the 1980's provide the crucible that tests the value of careful lawyering. In the case of D'Oench defenses, the instruments mean what they say, not what "everybody knows" they mean.

Comment 2: Someone once asked a DIRT lawyer why she insisted that the documents be so exact. She answered: The word is: "precise."

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