June 16, 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.

Tenth Circuit: Petition for Review From Order of FDIC Denied

The Tenth Circuit published its opinion in Frontier State Bank v. Federal Deposit Insurance Corp. on Wednesday, December 26, 2012.

In 2002, Frontier State Bank (Frontier) began using a “leverage strategy” under which it funded long-term investments with short-term borrowing to generate profits from the difference (“spread”) between long-term and short-term interest rates. This strategy caused significant concern for bank examiners at the Federal Deposit Insurance Corporation (FDIC). After raising the issue with Frontier several times and being dissatisfied with Frontier’s response, the FDIC sought a cease-and-desist order to keep it from executing its leverage strategy in an unsafe or unsound manner. After a hearing, an ALJ concluded Frontier had engaged in unsafe or unsound practices and recommended a cease-and-desist order that addressed specific issues. The FDIC Board adopted the ALJ’s proposed order and Frontier filed a petition for review with the Tenth Circuit, contending the Board’s order was arbitrary and capricious.

In its order, the Board imposed a 10% tier 1 leverage capital ratio. The Tenth Circuit held that it could not review this part of the order because decision-making on a capital requirement was committed to the FDIC’s sole discretion by the International Lending Supervision Act of 1983. The court had no meaningful standard to use to review the Board’s decision. The court held that the other challenged items in the order were all supported by the ALJ’s findings and his conclusions were reasonable so the Board’s order was not arbitrary or capricious. The court denied Frontier’s petition for review.

Tenth Circuit: FDIC Bank Account Determinations Not Arbitrary or Capricious and Followed Controlling Regulations

The Tenth Circuit Court of Appeals issued its opinion in Aviva Life and Annuity Co. v. FDIC on Tuesday, August 16, 2011.

The Tenth Circuit affirmed the district court’s decision. Petitioner contends that the FDIC acted arbitrarily and capriciously in rendering insurance determinations concerning certain bank accounts of Petitioner. Specifically, Petitioner claims that the FDIC made the determinations without the appropriate review, and urges the court to “ascertain whether the agency examined the relevant data and articulated a rational connection between the facts found and the decision made. . . . Presumably, they mean to say that the extrinsic evidence allegedly considered by the FDIC in forming its intermediate determinations constitutes ‘relevant data’ and that it was incumbent upon the FDIC to explain how this data can be harmonized with the final insurance determination.”

However, the Court found that, because the FDIC “ultimately concluded the deposit account records clearly and unambiguously indicated the Challenged Accounts were owned in the manner of ‘corporate accounts,’ the FDIC’s controlling regulations expressly prohibited it from considering any ‘other records on the manner in which the funds [were] owned.'” The extrinsic evidence analysis sought by Petitioner was therefore not “relevant data” for purposes of the FDIC’s final insurance determination. “The absence of any discussion pertaining to this evidence in the FDIC’s final determination is unsurprising given the regulations, and in no way arbitrary or capricious.”