What You Need To Know When Litigating For or Against the FDIC: Part 4 of 4

 

Further, Veal added, “essentially now that depositor preference is the law, if you have a general unsecured claim in the vast majority of these receiverships, you are really going to have nothing. Maybe the balance sheets aren’t as bad as they look, but if you assume that all of the administrative expenses get paid, all of the depositor claims a hundred percent and not just the insured amount but all of the depositor claims get paid, the chances that there is going to be much left over for other creditors that aren’t secured is fairly remote and certainly at best it is going to be cents on the dollar.”

 

“One of the difficult things is that it is going to be extremely hard to figure out whether or not it is worth anything when you are initially dealing with these claims,” he explained. While it is a fairly simple thing to get a claim filed, “The critical point will come 180 days later, maybe a little earlier when the agency says, ‘Yes, we agree you have a claim,’ or, ‘No, you don’t have a claim.’

At that point your client is going to have to decide whether to spend any more money or not.”

 

 

While not technically an FDIC special power, Tucci said something clients have been asking him about is the issue of setoffs and loan participations. “The scenario is this: bank fails. The failed bank has a $2 million loan with a particular customer. That customer also has $2 million on deposit at the institution. Well, the loan has been participated to another institution. Let’s say that $1 million has been participated to the other institution. What the prudent borrower does at that point, because let’s say it is a situation where not all of the deposits are being transferred to the acquiring institution, only the insured deposits are being transferred. The prudent borrower comes in and says, ‘I want to do a setoff,’ because in that way it can actually obtain 100 percent of the benefit of its deposit whereas if it doesn’t do the setoff then it gets its insured deposit and a receiver certificate for the remainder.”

 

According to Tucci, “The setoff right is fairly clear in the law. The setoff right belongs to the customer in this case especially if the loan is not in default. If it is in default, the bank may have the right as well. So it does the setoff and it reduces its liability on the loan to zero. You have the participating bank out there with $1 million participation. Logic would suggest that the FDIC would owe that participating bank the million dollars on the loan participation. Unfortunately, every case that has determined this issue has said, ‘No, you get a receiver certificate for the million dollars for the loan participation.’ And as we just went through, that receiver certificate is worth zero. So the FDIC has basically been paid off in full. The participant bank has taken a 100 percent hit on that loan.”

 

Tucci said he still has a question as to what impact depositor preference has on that kind of claim. “Does the participant bank have some sort of subrogation argument that it could make that it should be treated as a priority claim?  I think that there is going to be litigation there because there are lots and lots and lots of loan participations out there.”