FDIC Contract Repudiation Powers
In the last bank insolvency post I introduced you to some of the extraordinary powers of the Federal Deposit Insurance Corporation (the "FDIC") when they are appointed as receiver or conservator to resolve a failed bank. Today we're going to focus on the FDIC's extraordinary power to repudiate contracts that the failed bank is party to.
Receiver Only
But first, a preliminary note. From here on out, I'm only going to refer to the FDIC as receiver for a failed bank. They're also sometimes appointed as the conservator under the Federal Deposit Insurance Act (the "FDI Act"). But that's not as often, and for our purposes, the difference doesn't really matter. Plus I'll wager that you get almost as tired of reading "receiver or conservator" as I get of writing it.
Contract Repudiation Power
Under Section 11(e) of the FDI Act, after being appointed receiver of a failed bank, the FDIC may unilaterally repudiate contracts that the bank was a party to on the Appointment Date. This is like when a debtor in a bankruptcy rejects a contract. But there's important differences. It's especially different if you, or someone else involved in your construction project, is the borrower under a repudiated loan agreement. Think of contract rejection in bankruptcy as getting hit by a truck. For reasons we discuss here, and will discuss in the next posts, FDIC repudiation of a contract affecting your project (think loan agreement here) is a locomotive coming along and hitting that truck.Which Contracts May the FDIC Repudiate
The FDIC may repudiate any contract they want, as long as the FDIC, in their own discretion, decides that both:- Continuing to perform under the contract will be burdensome for the FDIC, and
- Repudiation will promote the orderly administration of the failed bank's affairs
How Does the FDIC Repudiate
Usually they just send a repudiation letter. Really! Imagine letters like these:- To an owner from the FDIC as receiver for the now failed construction lender: "We're repudiating your construction loan agreement. Don't expect any more money from us to pay the contractor's applications for payment." Imagine how the prime contractor and architect react when they hear. Imagine how the owner's junior and mezzanine lenders react when they hear this.
- To the owner whose principal post-completion tenant is the bank the FDIC was just appointed as receiver for: "We're repudiating that lease the bank made with you before we took over. We won't be moving in. We won't be paying rent." Imagine how the owner's construction and permanent lenders react when they hear.
- To the contractor, architect, engineer, or other design professional whose revolving line of credit lender just got resolved: "We're repudiating your revolving line of credit. Yes, we're not going to fund any more loan proceeds. We understand that it's going to be tough to pay your employees, rent, and material vendors. But we're confident you'll find a way." Imagine how subcontractors and suppliers react when loan proceeds aren't available to pay them.
- To the owner who posted a stand-by letter of credit to local government as security for ensuring that infrastructure improvements get completed (e.g., roads, intersections and stop lights, sewers): "We're repudiating the letter of credit we issued to the Village of Mayberry. If you don't finish the stoplight at the corner of Maple and Elm, we're not paying. We're copying the Village on this. Expect them to call asking for a substitute. Hopefully there's another lender who will issue one. Hopefully we don't take them over soon too."
- To the junior lender or mezzanine lender right after the FDIC resolves a senior lender: "We're repudiating that inter-creditor agreement the senior lender signed. Some of the things we promised in there to do, we may not do any of them. And we're also repudiating the senior loan agreement. That means we're not funding any more construction costs. That might affect the value of your collateral." The FDIC doesn't usually repudiate inter-creditor agreements. But there's really nothing to stop them if they change their minds either.
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
Thank you for your blog, it's very helpful. Where in the code and/or case law does it state that the FDIC can partially repudiate a contract. Thank you in advance for your response.
Kirstin