Rights and Remedies of Depositors and Other Creditors of Failed Federally Insured Depository Institutions
| Publication year | 1990 |
| Pages | 6 |
August, 1990
Peter W. Billings Sr., J.
Between 1984 and 1990, 12 state chartered banks were closed by the Utah Department of Financial Institutions and four Utah based savings and loan associations, both state and federally chartered, were also closed or a conservator appointed.
Prior to 1989, the rights and remedies of depositors and other creditors of financial institutions whose deposits were insured by a federal agency depended on whether the institution was state or federally chartered and whether it was a bank or a savings and loan association. If a national bank, the National Bank Act applied and all creditors shared pro rata in the distribution of the failed bank's assets. If a state chartered bank, state law governed, and in Utah, §7-2-15 Utah Code Ann. gave priority to claims of depositors before those of other creditors. Section 7-2-6 of the Utah Code provides for administrative determination of claims against a failed institution, subject to court review under §7-2-2.
As to a failed savings and loan association, the Federal Savings and Loan Insurance Corporation ("FSLIC"), as insurer of its deposits, took the position that rights of creditors were to be determined by FSLIC, under regulations issued by the Federal Home Loan Bank Board, with appeal to that Board and judicial review under the Federal Administrative Procedure Act. (5 U.S.C. 704 et seq.) This position was upheld by the Fifth Circuit in North Mississippi Savings & Loan Association v. Hudspeth, 756 F.2d 1096 (1985). In 1987, the Ninth Circuit, in Morrison-Knudsen v. C.H.G. International, Inc., 811 F.2d 1209, refused to follow Hudspeth, but remanded the matter to the district court to determine if the doctrine of exhaustion of administrative remedies would be appropriate.
This conflict[1] between the Fifth and Ninth Circuits was resolved by the Supreme Court of the United States in March 1989 in Coit Independent Joint Venture v. FSLIC, 489 U.S __, 103 L.Ed.2d 602. The Coit case arose as a lender liability action by Coit against a savings and loan association. When the savings and loan association was declared insolvent and FSLIC named as its receiver, FSLIC was substituted as defendant and it removed the case to the federal district court, which followed the Hudspeth doctrine and dismissed the case for lack of subject matter jurisdiction. In an opinion by Justice O'Conner, the Supreme Court held that Congress had not granted FSLIC adjudicatory powers and that creditors of the insolvent savings and loan association were entitled to de novo consideration of their claims in federal court.
The Supreme Court further rejected the exhaustion of administrative remedies argument on the ground the Federal Home Loan Bank Board regulations did not place a clear and reasonable time limit within which FSLIC must act on a creditor's claim; so Coif could not be required to exhaust the FSLIC administrative procedures.[2]
As matters stood in mid-1989, there was no statute or regulation determining creditors' rights against failed savings and loan associations. The FDIC's duties, rights and obligations as receiver of state chartered banks was governed by state law, with only such federal law exceptions as the use of a purchase and assumption arrangement with another bank to assume deposit liabilities, the use of a bridge bank for similar purposes, defenses pursuant to 12 U.S.C. § 1823(e)[3] and the Federal Common Law ' D'Oench Doctrine, resort to federal jurisdiction under 12 U.S.C. §1819 and the protection provided by the Federal Tort Claims Act.
In that background and with the increasing economic problems resulting from the savings and loan "crisis, " Congress enacted and the President signed the "Financial Institutions Reform, Recovery and Enforcement Act" on August 9, 1989. This Act is better known by its acronym, FIR-REA. With respect to the handling of claims of depositors and other creditors of both banks and savings and loan associations, the important aspects of FIRREA are the substantial amendments to §§11, 12 and 13 of the Federal Deposit Insurance Act (12 U.S.C. §§1821, 1822 and 1823) and the application of those provisions to the Resolution Trust Corporation[4] [hereinafter RTC], the newly created substitute for FSLIC as receiver or conservator of savings and loan associations failing between January 1, 1989, and August 9, 1992.[5]
I. CLAIMS PROCEDURE UNDER FIRREA
FIRREA amended 12 U.S.C. §1821 to provide an exclusive procedure for determination of claims against an insolvent federally insured bank or savings and loan association and corrected the defects the Supreme Court found in Coit. A new statutory claims procedure was established that must be followed before resort to the courts, pending actions against the institution are stayed, no attachment or execution may issue against any assets in the possession of the receiver, and no court has jurisdiction over any claim against the institution or its assets, except as provided in the new statute.
Payment of insured deposits[6] is treated under FIRREA separately from claims of other creditors of the institution and is governed by subsection (f) of §1821. It applies whether deposits are paid in cash or by assumption of the deposit liability by another insured depository institution. Payment of the insured portion of the deposit liability is to be made by the FDIC as insurer "as soon as possible" and upon such payment, the FDIC is subrogated to the rights of the depositor against the institution and its assets. (12 U.S.C. § 1821(g)(1)).
The FDIC is authorized to establish procedure for the determination of disputed deposit claims, with judicial review of the FDIC's determination under the Administrative Procedure Act by the Court of Appeals for the District of Columbia or the Court of Appeals for the Circuit in which the principal place of business of the depository institution is located. Such review must be sought within sixty (60) days after final determination by the FDIC as insurer. If the receiver has been appointed by the state supervisory authority, the rights of depositors and other creditors are to be determined in accordance with state law. The statute (§ 1821(g)(4)) is not clear whether the reference to state law is substantive or procedural as well. In either event, §7-2-15 of the Utah Code would apply as to the priority of deposit liabilities.
The procedure on claims of other creditors of the closed institution is set forth in subsection (d) of § 1821 [7] The receiver must promptly publish Notice to creditors to present claims within ninety (90) days after publication. Publication must be three (3) times in monthly intervals. The receiver must also mail a similar Notice to all creditors shown on the institution's book and records.
The FDIC is authorized to prescribe regulations meeting the statutory requirements regarding the allowance or disallowance of claims. The claim must be allowed to disallowed within one hundred eighty (180) days of receipt of the claim. In the event of disallowance, the notice to the claimant must state each reason for disallowance and the procedures for agency review or judicial determination of the claim.
No court may review the receiver's determination to disallow a claim [§ 1821 (d)(5)(E)]. Instead, the claimant may sue on the claim in a de novo proceeding in the United States District Court for the District of Columbia or the United States District Court where the institution's principal place of business is located.[8] The claimant has the alternative to seek further administrative review of the claim if the FDIC agrees. Such further...
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