Page 14 - John Hundley 2013

FIRREA Bars Suit Against Failed Bank’s Successor

A borrower may not sue a failed bank’s successor for alleged interest rate violations by the failed
bank, the Seventh Circuit held recently.

Interpreting the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), the court
rejected an attempt to impose upon MB Financial liability for alleged acts and omissions of the InBank
before it was shut down by the Federal Deposit Insurance Corp. (FDIC) and state officials. Farnik v.
FDIC, 707 F.3d 717 (7th Cir. 2013).

Under FIRREA, courts lack authority to adjudicate claims against institutions for which the FDIC is
the receiver unless the claims are first submitted to FDIC or unless they identify the successor bank’s
independent wrongdoing as the basis for relief, the court said. Noting that plaintiffs’ attacks on the
interest rates arose from the alleged wrong-doing of the failed bank before the FDIC receivership, and
that there was no evidence FDIC had transferred liability for such claims to the successor bank, the
court remanded the appeal with instructions for the District Court to dismiss the case for lack of
subject matter jurisdiction.

Suit Against FDIC Is Barred, Court Holds

A demand that the FDIC compensate bank owners for requiring capital infusion into a failing bank
was a claim for money damages not permitted by the federal Administrative Procedure Act (“APA”),
the Seventh Circuit held recently.

Ruling in Veluchamy v. FDIC, 706 F.3d 810 (7th Cir. 2013), the court also held that FIRREA
barred a claim against the FDIC for refusing to allow the bank to redeem the notes through which the
capital was raised.

In Veluchamy, bank owners claimed that FDIC misled them into believing a $30 million capital
infusion would be sufficient, and then shut the bank down when they failed to comply with a later
demand for an additional $70 million. They first demanded that FDIC in its corporate capacity
compensate them for the $30 million they had infused. Ruling that this demand was in essence one
for money damages, the court held it to be jurisdictionally barred under § 702 of the APA (5 U.S.C. §
702) which does not permit suits for money damages.

The court also ruled that the owners’ claims against FDIC as receiver were barred because they
were not really claims against the failed bank. Rather, the court said, in contesting
FDIC’s refusal to allow the bank to redeem the notes owners were challenging
FDIC’s actions as a bank regulator. “[T]he real target of Appellants’ claim, dressed
in FIRREA clothing, is the FDIC-as-regulator, not the Bank”, the court said, holding
that the relevant portion of FIRREA only permitted claims premised on the
depository institution’s actions or inactions. Moreover, “it is also hard to see how
responsible bank regulators could approve the retirement of capital by a critically
undercapitalized bank on the brink of collapse so that the FDIC, taxpayers, and those with legitimate
claims against the Bank would be left picking up the extra tab”, it said.

- John T. Hundley, jhundley@lotsharp.com, 618-242-0246
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