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Ninth Circuit Rules FDIC Has Liability in Failed Bank Contract Breach – Glass & Goldberg | Financing, Property & Bankruptcy Law
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Ninth Circuit Rules FDIC Has Liability in Failed Bank Contract Breach

Ninth Circuit Rules FDIC Has Liability in Failed Bank Contract Breach The Ninth Circuit has ruled that the Federal Deposit Insurance Corporation (“FDIC”) can be held liable for breaching a contract that a bank executed prior to the bank’s failure and subsequent receivership.

In its March 4, 2015, ruling in Bank of Manhattan v. Federal Deposit Insurance Corporation, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s decision that, as receiver for a closed bank, the FDIC does not have statutory immunity from liability for a breach of contractual obligations that bank owed to another bank.

The dispute arose from a participation agreement that Professional Business Bank (”PBB”) made with First Heritage Bank, N.A., when PPB sold interest in a loan it made to Al’s Garden Art, Inc. Under the agreement, Heritage was barred from transferring its interest in the loan without prior written consent from PBB. In addition, the agreement stipulated that PBB could repurchase Heritage’s interest if Heritage received a bona fide offer from a third party.

Following that agreement, Bank of Manhattan acquired PBB. Heritage failed and the FDIC was appointed as receiver for all Heritage assets. Under 12 U.S.C. §1821(d)(2)(A) of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”), the FDIC also became successor in interest to all Heritage’s assets and liabilities.

The FDIC sold Heritage’s interest in the PBB loan to Commerce First Financial, Inc. (“CFF”) without allowing PBB to repurchase Heritage’s interest and did not seek PBB’s written consent. Al’s Garden Art then defaulted on the loan. CFF filed suit against PBB and PBB countersued. PBB also filed a third party complaint against the FDIC, alleging it was liable for breaching the participation agreement between PBB and Heritage. The FDIC argued in a motion to dismiss that FIRREA preempted PBB’s claims and that it had no duty to comply with agreements made to PBB prior to Heritage’s receivership.

The district court dismissed the FDIC’s claim, ruling that FIRREA did not provide any immunity to the FDIC from breach of contract claims. The court granted summary judgment to PBB and the FDIC appealed.

Applying its prior ruling in Sharpe v. FDIC, and the D.C. Circuit’s reasoning in Waterview Management Co. v. FDIC, the Ninth Circuit found that, “while section 1821(d)(2)(G)(i)(II) preempts state statutes requiring prior approval or consent for the transfer of receivership assets, it does not extend to the sphere of private contracts. Instead, section 1821(e) governs the FDIC’s treatment of assets burdened by pre-receivership contractual limitations. Should the FDIC violate pre-receivership contracts rather than repudiate them under section 1821(e), Sharpe and Waterview make clear that section 1821(d)(2)(G)(i)(II) does not afford the agency immunity from subsequent actions for breach of contract.”

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