April 21, 2019

Tenth Circuit: FDIC Exclusively Holds Claims Against Failed Bank’s Holding Company

The Tenth Circuit Court of Appeals issued its opinion in Barnes v. Harris on Tuesday, April 21, 2015.

The Barnes Banking Company (“bank”) began engaging in risky lending practices in the 2000s, leading to its ultimate demise in January 2010. The FDIC was appointed as receiver. In January 2012, J. Canute Barnes filed a derivative shareholder complaint in Utah state court against Barnes Bancorporation (“holding company”), parent of the bank, alleging breach of fiduciary duty. Attached to the Utah complaint was a demand letter alleging the bank was the holding company’s sole asset. The initial complaint stated the defendants were sued in their capacity as officers and directors of the holding company and not the bank. The FDIC filed a motion to intervene in state court, arguing it possessed sole statutory authority under FIRREA to assert the derivative claims at issue. The FDIC then removed the case to federal court.

The district court granted a motion to amend the complaint to include two additional shareholders, W. King Barnes and Robert Jones. Plaintiffs filed a motion to remand to state court, arguing the FDIC was not a party to the case because it had not filed a pleading, which motion was denied. Plaintiffs then moved to dismiss the FDIC for failure to state a claim. The FDIC filed its own motion to dismiss, and defendants moved for judgment on the pleadings. The district court denied plaintiffs’ motion to dismiss, granted in part the motions filed by defendants and the FDIC, and dismissed most of plaintiffs’ claims with prejudice while allowing some to be re-pled. Plaintiffs’ second amended complaint attempted to re-describe the bank as the holding company’s “primary asset,” but the focus of the complaint was still the harm suffered by the bank’s failure. The second amended complaint also alleged the bank received a $9 million tax return, which should have been in part distributed to the holding company, and that the holding company misused $265,000 by paying insurance premiums and retaining counsel. Both FDIC and defendants moved to dismiss the second complaint, which the district court granted. Plaintiffs appealed.

The Tenth Circuit first considered the district court’s jurisdiction. Through FIRREA, the FDIC is deemed a party, and the case is deemed to arise under federal law. The district court therefore had jurisdiction to hear the complaints. Plaintiffs argue the FDIC lacked jurisdiction because it never filed a pleading. The Tenth Circuit found the case on which plaintiffs relied inapposite to that assertion. Because FDIC was permitted to intervene in state court, it became a party to the proceeding, and jurisdiction was exclusive in the district court under FIRREA.

The Tenth Circuit proceeded to examine the merits. Once the FDIC is appointed as a receiver, FIRREA grants it all rights, powers, and privileges of the bank with respect to the assets of the bank, including those of the holding company. The question of whether FIRREA applies to cases in which a breach of fiduciary duty suit is brought against a bank holding company’s officers after the bank has gone into receivership was one of first impression in the Tenth Circuit. The Tenth Circuit examined similar cases from other jurisdictions, as well as Utah corporate law, and determined that FIRREA applies. The majority of plaintiffs’ claims were derivative, reaching the holding company only because of the harms of the bank. Those claims belong to the FDIC.

The Tenth Circuit found similarly that the $9 million tax return belonged exclusively to the bank and therefore the FDIC was the only party entitled to the return. The tax refund due from a joint return generally belongs to the company responsible for the losses that formed the basis for the return, and due to the receivership, the entire refund belongs to the FDIC.

Finally, the Tenth Circuit addressed the claims that the holding company misused $265,000 by using the funds to pay insurance premiums and legal fees. The Tenth Circuit, like the district court, found these claims inadequately pleaded. Plaintiffs were in a privileged position and could have examined the holding company’s records to find support for their claims. Plaintiffs further failed to explain how the expenditures constituted an actionable wrong. The Tenth Circuit upheld the district court’s dismissal of this claim.

Expressing sympathy for the plaintiffs’ position, the Tenth Circuit recognized the broad scope of the FDIC’s authority in dealing with the aftermath of a bank failure, and admonished bank holding company shareholders to take action prior to the bank’s collapse to stave off the collapse and protect their assets. The Tenth Circuit affirmed the district court.

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