D’Oench Duhme Doctrine

D'Oench Duhme doctrine is a banking rule that prevents a borrower or guarantor from entering into an agreement with an insolvent or failed bank when a federal government insurer is attempting to collect a loan. The D’Oench Duhme doctrine specifically applies to unrecorded or nonwritten agreements made by banks before they failed.

D’Oench Duhme is a common law doctrine, and was created in 1942 by the United States Supreme Court after the case of D'Oench, Duhme & Co., Inc. v. FDIC. The D’Oench Duhme doctrine prevents banks from making secret deals in order to deceive bank regulators. Banking regulators, such as the Federal Deposit Insurance Corporation (FDIC), rely on a bank’s written records in order to determine the bank’s assets and liabilities accurately. Specifically, the side agreements were prevented from being recognized because they could undermine a regulator’s ability to collect the full amount of the loan owed to the failed bank now under receivership.

D’Oench Duhme was officially codified in 1989 after the passage of Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The doctrine was modified to allow regulators to ignore agreements – not just secret agreements – that are determined to have pushed a bank into insolvency. In order to be upheld, agreements had to be in writing, approved by the bank’s board or loan committee, and kept in the bank’s official records.

For example, a bank that is regulated by the United States government provides a loan to a software company. The software company is developing a new technology that it thinks will generate a substantial amount of revenue, but cost overruns resulted in the company being unable to make its loan payments. The bank worked with the company to modify the terms of the loan, but soon after this modification was complete, the bank became insolvent. The FDIC acted as the receiver for the insolvent bank, and noted that the agreement between the bank and the software company was not in writing. Under the D’Oench Duhme doctrine, the FDIC could require the software company to pay the original, full amount of the loan.