D'Oench, Duhme & Co., Inc. v. Federal Deposit Insurance Corporation
315 U.S. 447 (1942)
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Rule of Law:
Under federal common law, a party who enters into a secret agreement with a bank that would tend to deceive banking authorities is estopped from asserting that agreement as a defense against the Federal Deposit Insurance Corporation (FDIC) when the FDIC seeks to enforce a note.
Facts:
- In 1926, D'Oench, Duhme & Co. (petitioner) sold bonds to the Belleville Bank & Trust Co. that later defaulted.
- To enable the bank to avoid showing past-due bonds on its books, D'Oench executed promissory notes to the bank.
- A secret side agreement existed, evidenced by receipts, stating that the notes would not be called for payment.
- D'Oench's president knew the purpose of the notes was to misrepresent the bank's assets and made periodic interest payments to keep the notes appearing 'live'.
- In 1933, D'Oench executed the renewal note for $5,000 that is the subject of this suit.
- On January 1, 1934, the Federal Deposit Insurance Corporation (FDIC) insured the Belleville Bank.
- In 1938, the FDIC acquired the note as part of the collateral for a loan it made to facilitate the assumption of the bank's liabilities by another institution.
- The FDIC was unaware of the secret agreement not to enforce the note until after it made a demand for payment in 1938.
Procedural Posture:
- The FDIC (respondent) sued D'Oench, Duhme & Co. (petitioner) in the U.S. District Court for the Eastern District of Missouri to enforce a promissory note.
- The District Court, applying Illinois law, found for the FDIC, holding that D'Oench was estopped from asserting the defense of want of consideration.
- D'Oench appealed to the U.S. Court of Appeals for the Eighth Circuit.
- The Court of Appeals affirmed the District Court's judgment, applying 'general law' to determine that Illinois law controlled and that the FDIC was equivalent to a holder in due course.
- The U.S. Supreme Court granted certiorari to address the choice-of-law issues raised in light of Klaxon Co. v. Stentor Electric Mfg. Co.
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Issue:
Does federal law prevent the maker of a promissory note from asserting a defense of no consideration against the Federal Deposit Insurance Corporation (FDIC), when the maker knowingly participated in a scheme to misrepresent the bank's assets to public authorities?
Opinions:
Majority - Justice Douglas
Yes, federal law prevents the maker of the note from asserting this defense. A federal policy, implicit in the Federal Reserve Act, protects the FDIC from misrepresentations regarding the assets of banks it insures. One who lends himself to a scheme that would tend to deceive banking authorities is estopped from asserting a defense based on that scheme against the FDIC. The test is not whether the maker intended to deceive the FDIC specifically or committed a crime, but whether the note was designed to deceive creditors or public authorities, or would tend to have that effect. Allowing such a secret agreement as a defense would enable the maker to defeat the purpose of the statute by taking advantage of a fraudulent arrangement.
Concurring - Justice Frankfurter
Yes, the petitioner is liable, but there is no need to create a new rule of federal common law. The outcome is the same regardless of whether Illinois or Missouri state law applies. Under Illinois law, the FDIC would be treated as a holder in due course and could recover. Under modern Missouri law, the petitioner would be estopped from asserting the defense of no consideration because it participated in a scheme to deceive banking authorities. Since the result is compelled by settled state law doctrines, the Court should not reach to create a federal rule based on a statute enacted after the deceptive transaction began.
Concurring - Justice Jackson
Yes, federal law prevents the defense, and it is crucial to recognize this rule as a matter of federal common law. Because the FDIC is a federal agency suing under a federal statute that deems such suits to 'arise under the laws of the United States,' Erie R. Co. v. Tompkins does not apply. In cases involving federal questions where Congress has not provided a specific rule, federal courts must fashion federal common law to effectuate the policy of the federal statute. The need to protect a national banking institution like the FDIC from deceptive schemes requires a uniform federal rule of estoppel, not a rule that varies from state to state.
Analysis:
This decision established the seminal 'D'Oench, Duhme doctrine,' a powerful federal common law rule of estoppel protecting the FDIC from secret or unwritten side agreements that misrepresent a bank's assets. It significantly strengthened the FDIC's power as a receiver by allowing it to rely on the bank's official records. Furthermore, Justice Jackson's concurrence provided an influential justification for the creation of federal common law in non-diversity cases to protect unique federal interests and programs, shaping post-Erie federal jurisprudence. The doctrine's core principle was later codified by Congress in 12 U.S.C. § 1823(e).
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