D'Oench, Duhme & Co. v. Federal Deposit Insurance Corp.

Supreme Court of the United States · 1942 · Federal Courts

Federal CourtsFDICfederal questionfederal policyestoppelsecret agreementaccommodation notebank examination

Facts

Petitioner executed notes to a bank so the bank could carry them and avoid showing past-due defaulted bonds among its assets, with an understanding reflected in receipts that the notes would not be called for payment and interest payments would be repaid. Petitioner's president knew the notes were used to keep the bank's paper appearing live and made interest payments for that purpose. The FDIC later insured the bank and eventually acquired the renewal note as collateral for a large loan made in connection with assumption of the bank's deposit liabilities. The FDIC had no knowledge of the secret receipts or side agreement until after it demanded payment.

Issue

Whether the maker of a note given to a bank under a secret agreement that it would not be enforced may assert want of consideration and the side agreement as defenses against the FDIC, where the note was allowed to remain as an apparent bank asset and thereby had the capacity to mislead banking authorities and the FDIC.

Rule

As a matter of federal law, a maker who lends himself to a scheme or arrangement whereby banking authorities or the FDIC are or are likely to be misled by a note carried as a genuine bank asset cannot assert a secret agreement or lack of consideration to defeat the FDIC's rights. The test is whether the note was designed to deceive the creditors or the public authority, or would tend to have that effect; actual loss, actual deception, or commission of a penal offense is not required.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Toledo, Nora Bennett signed a $40,000 note payable to Riverbend Trust Bank after the bank's vice president told her the note was only to keep delinquent commercial loans from appearing on the bank's books. The bank gave Nora a separate signed memo stating the note would never be collected, and Nora later made two small interest payments so the note would continue to look current. After the bank failed, the FDIC, unaware of the memo, acquired the note while protecting insured deposit liabilities.

If the FDIC sues Nora on the note, which argument gives the strongest basis for recovery under the governing federal rule?

Explanation. The majority held that, as a matter of federal law, a maker who lends herself to a scheme or arrangement by which banking authorities or the FDIC are or are likely to be misled cannot assert a secret agreement or want of consideration against the FDIC. Actual intent to deceive the FDIC specifically is unnecessary, and the rule does not depend on holder-in-due-course status or on whether the side agreement was oral or written if it was undisclosed and allowed the note to appear genuine.