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August 2016
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BUSINESS LAW TODAY
The Continuing Relevance of FIRREA’s
Jurisdictional Bar to Post Receivership Claims
By John D. Finerty, Jr. and Tanya Salman
The 2008 credit market collapse and ensuing foreclosure crisis are fading to the dark
recesses of our memories. Likewise, claims
against banks that arose years ago as the
housing market cleared are also resolving.
One enduring defense, however, is the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 or “FIRREA.”
Under FIRREA, “no court shall have jurisdiction over . . . any claim relating to any
act or omission of a bank” under control of
the FDIC. This is an affirmative defense in
litigation that Congress created in response
to the savings and loan crisis of the 1980s.
It enables the Federal Deposit Insurance
Corporation (FDIC) to wind up the affairs
of failed financial institutions. Specifically,
FIRREA allows successor banks to avoid
liability for the wrongful acts of lending institutions they buy out of receivership.
Here’s how the FIRREA defense works.
The defense arises when a bank is sued
over the assets, such as a loan, of a bank
that it acquired out of receivership from the
FDIC. Receivership is akin to bankruptcy
in that it provides an orderly process to
honor the debts and obligations of a failed
bank while minimizing the impact on the
bank’s stakeholders (i.e., creditors, customers, and employees). This process helps
prevent runs on banks and public panic
when a lender cannot meet its obligations.
Typically, when a bank or other insured
lending institution fails, the FDIC steps in
to operate the bank and insure its deposit.
In that case, the FDIC also is entitled to receive loan payments made to failed lenders
by its customers. The FDIC however does
not operate failed banks permanently; it
seeks to sell the loans and deposits to other
solvent banks. Those banks “stand in the
shoes” of the FDIC and receive protections
under FIRREA against future claims by the
failed lender’s customers.
FIRREA sets out a mandatory administrative process that customers must follow
to assert claims against failed banks and the
entities that purchase their assets from the
FDIC. This administrative process allows
the FDIC to quickly resolve such claims
without unduly burdening the courts. See
12 U.S.C. §§ 1821(d)(3)-(13). Examples of
claims include promises of loan modifications made by the failed lender that were
not completed prior to receivership; claims
for partially disbursed loan proceeds; and,
false or mistaken credit reports to the bureaus. Therefore, under FIRREA if a borrower’s claim arises out of the acts of a
lender in or that was in FDIC receivership,
the borrower/claimant must first exhaust
the FIRREA procedure. Borrowers that
sue in court without first allowing FDIC review, should quickly meet a motion to dismiss. As recent cases show, the act remains
quite relevant today.
A leading case on FIRREA is Rundgren
v. Washington Mutual Bank, FA, 760 F.3d
1056 (9th Cir. 2014). In Rundgren, the
Ninth Circuit affirmed dismissal against
JPMorgan Chase Bank, and held that “a
claimant cannot circumvent the exhaustion
requirement by suing the purchasing bank
based on the conduct of the failed institution.” In that case, the Rundgrens attempted
to refinance a loan with Washington Mutual (WaMu) on their home in Hawaii. When
their refinancing failed and they faced
foreclosure, they sued WaMu and alleged
that WaMu falsified their loan application,
highly exaggerated their income and assets without their knowledge, misled them
as to the terms of the note, secured a false
appraisal, and rushed them through the
signing process, among other things. But
WaMu had been acquired by Chase after
the Office of Thrift Supervision seized its
assets and placed WaMu into the receivership with the FDIC. The court held there
was no jurisdiction to sue Chase because
Published in Business Law Today, August 2016. © 2016 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any
portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written
consent of the American Bar Association.
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the Rundgrens had not exhausted the FDIC
claims process against WaMu. As such, the
Ninth Circuit affirmed the dismissal, and
Chase was free to foreclose.
Other circuits, including the Seventh Circuit and the District of Columbia Circuit,
have similarly held that the application of
the FIRREA administrative exhaustion requirement is based on the entity responsible
for the wrongdoing, not the entity named
as the defendant. Westberg v. FDIC, 741
F.3d 1301, 1306 (D.C. Cir. 2014); Farnik v.
FDIC, 707 F.3d 717, 723 (7th Cir. 2013);
Vill. of Oakwood v. State Bank & Trust Co.,
539 F.3d 373, 386 (6th Cir. 2008); Am. First
Fed., Inc. v. Lake Forest Park, Inc., 198 F.3d
1259, 1263 n.3 (11th Cir. 1999); see also
Aber-Shukofsky v. JP Morgan Chase & Co.,
755 F. Supp. 2d 441, 450 (E.D.N.Y. 2010);
Constas v. JP Morgan Chase Bank, N.A.,
No. 3:11cv0032, 2012 U.S. Dist. LEXIS
85339, at *12-13 (D. Conn. June 20, 2012).
Attempts to avoid FIRREA’s broad administrative review requirements by alleging claims based only upon the successor
entity’s wrongful conduct also have failed.
See Lazarre v. JPMorgan Chase Bank,
N.A., 780 F.Supp. 2d 1320, 1325 (S.D. Fla.
2011). In Lazarre, a consumer sued Chase
for Fair Credit Reporting Act (FCRA) violations after Chase acquired WaMu. The
consumer alleged that an identity thief had
improperly opened a WaMu account in his
name. After buying WaMu’s assets from
the FDIC, Chase reported the fraudulent
activity to a consumer reporting agency
and, as a result, others banks closed the
consumer’s accounts. The consumer filed
a lawsuit against Chase but without first
pursuing FIRREA remedies. He alleged
that Chase had violated the FCRA by mishandling the fraud claim and reporting to
the consumer reporting agency—events
that occurred after Chase acquired the account from WaMu. Chase moved to dismiss. The consumer argued that because
his claims arose from Chase’s failures
and not WaMu’s, FIRREA did not apply.
The Lazarre court disagreed and held that
Chase’s alleged failures related to WaMu’s
initial act—WaMu’s opening of the account. Therefore, the Lazarre court found
FIRREA applied and dismissed the claim
for lack of subject jurisdiction.
Despite FIRREA’s broad reach, the particular facts of each case are still important to determine the scope of the defense.
Courts have held that only claims against
depository institutions for which the FDIC
has been appointed receiver can be processed by the administrative system set
forth in FIRREA and thus subject to the
FIRREA defense. In Am. Nat’l Ins. Co.
v. FDIC, 642 F.3d 1137, 1143 (DC Cir.
2011), the DC Circuit found that claims
that a third-party bank pressured the FDIC
to acquire WaMu, a failed bank, were actually claims against the third party—not the
FDIC as receiver or the failed bank, and
therefore, were not subject to FIRREA’s
administrative process. The court stated,
“[w]here a claim is functionally, albeit not
formally, against a depository institution
for which the FDIC is receiver,” it falls under FIRREA.
For more information, please contact
John D. Finerty, Jr. at jdfinerty@
michaelbest.com or (414) 225-8269;
or Tanya Salman at tmsalman@
michaelbest.com or (608) 283-0122.
Published in Business Law Today, August 2016. © 2016 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any
portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written
consent of the American Bar Association.
2