FDIC Loss-Share Agreements: Branch Banking & Trust Company v. Kraz, LLC

By Scott J. Kennelly and Janet C. Owens

There is a common misconception among borrowers that the application of Loss-Share Agreements may result in “windfalls” to institutions that acquire assets of failed banks from the FDIC. They reason that the acquiring institution will receive both reimbursement for its losses from the FDIC and recovery from the borrowers.” However, this inaccurately depicts how Loss-Share Agreements operate.

Florida’s Second District Court of Appeal’s decision in Branch Bank and Trust Company v. Kraz , LLC provides a thorough and instructive explanation of this issue.

There, BB&T purchased Kraz, LLC’s commercial construction loan from the FDIC, which was acting as the receiver of the failed bank that originated the loan. The Loss-Share Agreement between BB&T and the FDIC provided for a stated percentage by the FDIC for BB&T’s losses on the loan, as well as a sharing of a percent of BB&T’s net recovery on that loan with the FDIC. At the conclusion of the foreclosure trial, the trial court, among other things, ordered BB&T to credit the principal of the loan with the Loss-Share payments that BB&T had allegedly received on the loan pursuant to the Loss-Share Agreement.