What You Need To Know When Litigating For or Against the FDIC: Part 3 of 4

What You Need To Know When Litigating For or Against the FDIC: Part 3 of 4

 
Written by Teresa Zink for HB Litigation Conferences LLC
 
This is the third 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.   
 
Enforcement
 
The FDIC may also enforce any contract, or require performance under a contract, even if the contract contains a default provision, or ipso facto clause, that would normally be triggered by the insolvency of one of the parties. According to Veal “It doesn’t excuse performance on either side for any other reason. It just says that they can enforce the contract if they choose.”
 
“You still get paid whatever the contract says you are supposed to get paid. You can still expect performance from the receiver at least until it decides to repudiate the contract, but you can't walk away from the contract because it is bad for you and you just got lucky that the party on the other side became insolvent,” Veal explained.
 
Repudiation
 
The converse to the enforcement power is the right of the receiver or the conservator to repudiate a contract, Veal explained. “Essentially there is authority to repudiate any contract to which the institution was a party which the conservator or receiver determines to be burdensome to the administration of the estate.” 
 
He added, “There is not really going to be any judicial second guessing with respect to whether or not the contract is in fact burdensome or whether or not it in fact will promote the orderly administration of the institutions affairs. The agency is going to have a lot of discretion in making those determinations.”
 
“If you are representing someone who has a contract with the failed bank, the first thing you want to do is get your hands on a copy of the purchase agreement to try and see if your client’s contract is in fact been assumed by the new institution,” Veal urges. “Oftentimes that will not be abundantly clear and oftentimes you will not be able to get a straight answer on that issue until you get a repudiation notice.”
 
Further he notes, because the purchase agreements on assisted sales are often made under accelerated timetables and pressure, “they often are not particularly long.” Therefore. “There are going to be open points and issues with respect to what the contracts say or what they intended. At the end of the day, unfortunately, as a creditor or a claimant or somebody on the outside looking in, you don’t have a lot of ability to argue about what they say or don’t say if the assuming bank and the FDIC agree on what they say.” It a contract is repudiated, damages are very limited Veal adds, “limited to actual direct compensatory damages” determined as of the date of the appointment.
 
Essentially that means punitive damages are off the table as are compensation for such claims as lost profits. Tucci added that he expects some litigation over the question of how repudiation impacts a securitization, since securitizations “are sort of master contracts that have different pieces.” According to Tucci, “the question then becomes, ‘to what degree can the FDIC repudiate part of a contract and leave the rest of the contract in place?’  That quite frankly is what it is going to try to do.”