What You Need To Know When Litigating For or Against the FDIC

What You Need To Know When Litigating For or Against the FDIC

 
Written by Teresa Zink for HB Litigation Conferences LLC
 
This is the first of four posts covering the presentations of Stinson Morrison Hecker partner Michael Tucci and Kilpatrick Stockton partner Rex Veal delivered on January 15, 2009, a the “FDIC & The New Banking Crisis” conference in Washington, DC. Both men held positions at the FDIC and the Resolution Trust Corporation.   Copies of their presentations are available in video, audio and text for a fee. Send inquiries to info@litigationconferences.com.   
 
Invariably when he is working for a client in litigation with the FDIC, Stinson Morrison Hecker partner Michael Tucci says “four words come out at some point in time. Those four words are, ‘They can't do that.’ My response is virtually always, ‘Unfortunately, they can.’”
 
Tucci, who is a former Senior Counsel to the Resolution Trust Corporation (RTC) and Senior Attorney with the Federal Deposit Insurance Corporation (FDIC) joined Kilpatrick Stockton partner Rex Veal in a panel discussion on the FDIC’s special powers at HB Litigation Conference’s program on The FDIC and The New Banking Crisis in mid-January. Veal is a former FDIC Associate General Counsel and served as Special Counsel to the RTC prior to going into private practice in 1990. Both men were members of the five person S&L Management Group at the FDIC which was responsible for drafting many of the provisions of the FIRREA, which established many of the powers still employed by the FDIC in handling failing banks.
 
“Laying aside the specifics of the statutes and the case law, there are a couple of things that you should take away from all of this,” Veal told the assembled attorneys. “As lawyers one of the most important things we are going to have to deal with in these situations, probably in most situations, but clearly when we are dealing with failed banks, is our client’s expectations, regardless of whether we are litigating for or against the FDIC.”
 
Expectation Management
 
“If you are representing clients who are litigating against the FDIC, you should understand that your client’s expectations are probably going to be unreasonable,” he said. “These statutes, first FIRREA and then the Improvements Act, were written in a time of crisis. They were written to give the agency an extremely large stick.”
 
Often the biggest hurdle, said Veal, is clients who “come in and just cannot believe that this is where things are.” Business is not going to operate as normal and expectations have to be adjusted. One of the key requirements, “regardless of which side of the fence you are on, particularly in today’s environment, is patience.” Stays, the claims process, potentially an approval process all take time, “You just need to be prepared to exercise some patience,” he says.
 
Borrowers also have to realize “this is not your old lender.” Handshake deals and verbal agreements no longer apply. “If you are representing a borrower, you are going to have to come forward with a plan and be proactive.”
 
On the other side, if you are representing an agency, Veal says, there is a new phenomenon emerging which can be described as the “It’s not my fault, it’s the economy” defense. He predicts that judges will be “bending over backwards to try to help folks because there is not an alternative out there. They ostensibly did everything they were supposed to do. They were paying their loan and the floor fell out from under them. They just can't make their payments now and it is not fair.”
 
According to Veal, “In the last 18 months essentially we are seeing where everybody stands after they got caught when the music stopped. Whether that is the banks who didn’t get their loans sold into a securitization before the music stopped and they got stuck with them, or whether it is the borrowers who were a little too aggressive in accepting loans that were going to have resets that they couldn’t possibly manage to afford. Just as a general practice tip, patience and understanding the timing that your clients are going to be going into with respect to these matters is very important.”
 
What are the FDIC’s special powers?  In his opening comments at the conference, co-chair Scott H. Christensen of Hughes Hubbard & Reed explained that the FDIC functions in three distinct legal capacities, in a corporate capacity providing assistance to open banks, as a receiver and as a conservator of failed banks. The FDIC’s powers differ based on the capacity in which it is operating.