By Scott J. Kennelly and Janet C. Owens
We have previously posted about some of the protections available under FIRREA to the FDIC as Receiver of a failed bank, including the FDIC’s power to enforce contracts of the failed bank under 12 U.S.C. § 1821. A recent decision out of the 9 th Circuit, however, suggests that FIRREA may not protect the FDIC and its assignees from all liability stemming from contractual obligations acquired from the failed institution.
In Bank of Manhattan v. FDIC , the FDIC was appointed Receiver of First Heritage Bank. The assets acquired by the Receiver included Heritage’s interest in a Participation Agreement with Professional Business Bank (“PBB”). The Receiver sold Heritage’s interest in the Participation Agreement to Commerce First Financial (“CFF”). However, the Receiver did not first get PBB’s consent, even though the Participation Agreement prohibited Heritage from transferring its participation interest without PBB’s consent and provided PBB a right of first refusal if Heritage received an offer from a third party. When the borrower of the underlying loan defaulted, CFF brought an action against PBB (which subsequently was acquired by Bank of Manhattan) to enforce the Participation Agreement. PBB/Bank of Manhattan filed a counterclaim against CFF, as well as a third-party complaint against the FDIC alleging that it breached the contract by failing to satisfy the Participation Agreement’s pre-receivership contractual provisions.
The FDIC argued that FIRREA’s provision that permits the FDIC to transfer any asset or liability of the failed bank freed the FDIC from complying with any pre-receivership contractual provisions relating to such a transfer. The 9 th Circuit disagreed, however, distinguishing its prior decisions regarding the FDIC’s authority under 12 U.S.C. § 1821(d) on the basis that this dispute involved contractual and not statutory transfer limits. The 9 th Circuit ultimately found that FIRREA does not preempt pre-receivership contractual limitations, and the FDIC is required to follow the provisions of Section 1821(e) should it wish to repudiate pre-receivership contracts. Accordingly, the 9 th Circuit found that the FDIC was not entitled to immunity from breach of contract actions for violation of the pre-receivership contractual provisions where it did not follow the repudiation provisions of Section 1821(e), and affirmed the trial court’s judgment against the FDIC for breach of the Participation Agreement.
This decision could be read as at odds with related decisions from other jurisdictions, but lenders in any jurisdiction should be prudent and aware of this potential pitfall when evaluating contractual obligations acquired from the FDIC as Receiver.