May 25, 2017

Certain claims against successor banks may not receive a day in court

The 2008 financial crisis resulted in the failure of hundreds of banks in the United States. Many of these failures led to the Federal Deposit Insurance Company (FDIC) being appointed receiver for these insolvent institutions. Among the hardships incurred by banks that have since purchased distressed assets from the FDIC are lawsuits based on the pre-receivership actions or omissions of the failed banks. Yet, these successor banks have an effective defense to such claims that continues to be applied and upheld by courts across the country. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) provides the FDIC with statutory authority to administer claims against insolvent banks for which it has been appointed receiver. Accordingly, judicial review of such claims is limited, and a party wishing to pursue a claim against a failed depository institution or its assets must first raise the claim with the FDIC. Specifically, the United States Code states:

No court shall have jurisdiction over (i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the FDIC has been appointed receiver, including assets which the FDIC may acquire from itself as such receiver; or (ii) any claim relating to any act or omission of such institution or the FDIC as receiver.

In Perik v. JPMorgan Chase Bank, N.A., the Illinois Appellate Court noted the statutory language that bars judicial review of any “claim” relating to any act or omission of a failed bank, holding that, when presented with an action on a claim relating to the pre-receivership acts of a failed bank, a trial court’s only recourse is to dismiss the action for lack of jurisdiction. So, in instances where the FDIC has been appointed receiver, the claimant must first exhaust the FDIC’s administrative remedies before asserting a claim in a court of competent jurisdiction.

As noted by the Appellate Court, the FIRREA administrative exhaustion requirement is based, not on the entity named as defendant, but on the actor responsible for the alleged wrongdoing. To this end, FIRREA provides that the FDIC, as a failed bank’s receiver, may allow or disallow claims asserted against the bank. Additionally, to ensure such claims are resolved quickly and efficiently, FIRREA establishes strict administrative prerequisites and deadlines that claimants must follow to lodge their claims and challenge any denials.

Moreover, even if a successor bank assumed a failed bank’s liabilities (which would require an analysis of the contractual documents related to the asset purchase in question), any “claims” against the successor bank stemming from the pre-receivership acts or omissions of the failed institution would still be subject to FIRREA’s exhaustion requirement. (See Wiley v. Urban P’ship Bank.). Accordingly, a claimant’s failure to exhaust these administrative remedies will render a court without jurisdiction to hear such claims.

Contact the Chuhak & Tecson banking law attorneys for more information regarding the prerequisites claimants must follow. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Amanda E. Losquadro, Principal

This alert originally appeared in the Summer 2017 Banking Focus newsletter.