E. J. Sebastian Associates, a South Carolina General Partnership v. Resolution Trust Corporation, as Receiver of Standard Federal Savings Bank, Columbia, South Carolina, and Standard Federal Savings Bank, Formerly Known as Standard Federal Savings & Loan Association

Citations: 43 F.3d 106; 1994 U.S. App. LEXIS 36689Docket: 94-1679

Court: Court of Appeals for the Fourth Circuit; December 28, 1994; Federal Appellate Court

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E.J. Sebastian Associates filed a lawsuit against the Resolution Trust Corporation (RTC), acting as receiver for Standard Federal Savings Bank, alleging breach of contract and seeking compensation in quantum meruit for services provided before the bank was taken over by RTC. Sebastian claimed it was owed a commission of $220,000, derived from its efforts that resulted in Standard Federal raising $22 million in new capital. The RTC denied Sebastian's claim, citing the D'Oench Doctrine and Section 1823(e) as barriers due to the absence of a written contract.

The district court agreed with the RTC and granted summary judgment, ruling that Sebastian's claims were unenforceable. However, upon review, the Court of Appeals found this decision to be erroneous, emphasizing the need for further factual development before dismissing Sebastian's claims. The appellate court highlighted that both parties acknowledged the existence of an oral contract and that Sebastian had fulfilled its obligations. The case was reversed and remanded for further consideration. The D'Oench Doctrine, originating from a precedent involving undisclosed agreements in banking transactions, was central to the RTC's argument against the enforceability of the claim.

The Supreme Court established a public policy aimed at safeguarding the FDIC and the public from misleading agreements regarding the assets of insured institutions. This led to a federal rule barring borrowers from using unrecorded side agreements to alter the terms of apparent obligations to banks, with a focus on whether such notes were intended to deceive creditors or authorities. Congress codified the D'Oench Doctrine in Section 1823(e), stipulating that any agreement affecting the FDIC's interest in an asset must be written, executed contemporaneously with the asset acquisition, approved by the institution's board or loan committee, and officially recorded. Section 1823(e) is aligned with the D'Oench Doctrine's principles, as confirmed in various court cases. The Supreme Court outlined two main purposes for Section 1823(e): it allows bank examiners to reliably assess a bank's assets and ensures that agreements are properly documented and approved to prevent fraudulent alterations during financial distress. The applicability of the D'Oench Doctrine and Section 1823(e) is questioned in the current case as the claim involves a service contract rather than a loan. The traditional application of the D'Oench Doctrine involves disputes over oral agreements that contradict written loan contracts, whereas the current claim does not challenge any prior written agreement.

The application of the D'Oench Doctrine and Section 1823(e) to contracts for services raises significant questions about compliance requirements for service providers to banks. Specifically, it is unclear whether all suppliers must meet the stringent criteria of Section 1823(e) to ensure payment if a bank fails before they are compensated. The Fifth Circuit noted that including non-banking transactions under the D'Oench Doctrine could overwhelm bank officials due to the vast amount of information generated in these transactions. Consequently, the court concluded that the district court improperly granted summary judgment based on the existing facts. While the court did not rule out the applicability of Section 1823(e) and the D'Oench Doctrine in this case, it remanded the matter for further factual development and a determination of the doctrines' applicability. The district court's order was therefore reversed and the case remanded.