Discovery of Loss-Share Payments in Litigation: Public Policy

By: Scott J. Kennelly & Janet C. Owens

Financial institutions seeking to challenge discovery relating to Loss-Share Agreements and payments from the FDIC should be able to do so on the grounds of relevance, as we previously discussed . A second argument against such discovery is based on the public policy underlying Loss-Share Agreements.

Reducing a creditor’s claim based on the amount that it paid to acquire the loan would greatly prejudice the ability of the FDIC to attract purchasers of the assets of failed banks. Loss-Share Agreements were introduced in the early 1990’s in a period in which the FDIC had a record amount of assets in liquidation that it was unable to market. By agreeing to bear a portion of the credit loss associated with the failed bank’s assets, Loss-Share Agreements promoted transactions where buyers were otherwise not willing to risk their own capital and balance sheets by acquiring failed banks with a potentially large amount of “toxic assets.” Loss sharing encourages bidding based on an accurate valuation of assets, and thus allows FDIC to maximize the bank’s value while at the same time disposing its assets efficiently.