Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

In the last bank failure post we focused on the basics of statutes of limitation - what they do and how they work. Today we're going to talk about how, after they get appointed as receiver for a failed bank, the Federal Deposit Insurance Corporation (the "FDIC") can extend the statute of limitations on claims they inherit from the failed bank.

The FDIC gets the power to extend statutes of limitation under Section 11(d)(14) of the Federal Deposit Insurance Act (the "FDI Act").

Here's what the FDIC can do.....

1. Defer the Start of Limitations Period

Recall from the last bank insolvency post that the first critical element affecting the statute of limitations is identifying when the "limitations period" begins to run (i.e., the first time the thumb presses down on the stopwatch's start/stop button to start the dial going round). Well, Section 11(d)(14) re-sets when the dial on the stopwatch starts. Ordinarily, the day the limitations period starts to run ("LP Start Date") is:

• For a breach of contract claim, the day when someone breaches the applicable contract.
• For most tort claims, the day when the victim first knows, or reasonably should have known, that someone's tortious conduct injured them.

But under Section 11(d)(14), the limitations period begins to run on the later of the following:

• The day the FDIC gets appointed as receiver for the failed bank "Appointment Date")
• The day when the claim "accrues" under state law. That's often the LP Start Date.

Often the limitations period on claims that the FDIC inherits from a failed bank won't start running until Appointment Date. If the limitations period stopwatch already started running on the claim before Appointment Date, once the bank fails and the FDIC is appointed as receiver, the dial on the stopwatch is re-set to zero.  It then begins running again, but it starts counting from Appointment Date.

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In the last bank insolvency post we talked about how after being appointed as receiver for a failed bank, the Federal Deposit Insurance Corporation (the "FDIC") may unilaterally insist on a stay of proceedings involving the bank (e.g., lawsuits).  Now we're going to focus on how the FDIC can extend statutes of limitation on the claims against people like you, and, in some cases, even revive claims after the statute of limitations has expired.

The "Limitations Period"

Before you really appreciate how extraordinary the FDIC's power to extend statutes of limitation really is, first you must understand what a statute of limitations is and how it works.  A statute of limitations sets a deadline for you to sue someone, or for someone to sue you.  Lawyers often call this the "limitations period".  If you don't sue someone before the limitations period expires, the person you sue can stop your lawsuit.  Or, if you're on the receiving end and get sued after the limitations period expires, the statute of limitations may be a defense against the lawsuit.  You may even be able to use the statute of limitations to get the lawsuit against you summarily dismissed at an early stage, instead of enduring discovery, trial, appeals, and the distraction and legal fees that go with them.

There are three critical elements affecting the limitations period:

• When does the limitations period begin to run?  Think of this as a thumb pressing the start/stop button on a stopwatch that starts dial sweeping around the face

• How long does the limitations period last (i.e., when does it expire)?  Think of this as the number of times the sweeping dial must go around the face of the stopwatch before the thumb presses the start/stop button again, stops the sweeping dial, and announces "all finished"!

• What can suspend the running of the limitations period? Think of this as intermediate events that sometimes make the thumb press the start/stop button and temporarily stop the dial from rotating around the face before it rotates enough times to be "all finished"
  

When A Claim "Accrues"

For most claims, the thumb doesn't start the limitations period until the claim "accrues".  Usually a claim accrues when you recognize, or reasonably should have recognized, that something someone else did has injured you (i.e., you suffer damages). 

But different types of claims accrue, and the limitations periods on those claims start, at different times.  For instance, the case of Hermitage Corporation v. Contractors Adjustment Company recognizes that most tort claims (e.g., negligence) accrue, and the limitations period starts to run, when the victim of the negligence knows, or reasonably should have known, that they suffered injury because of someone else's negligence.  But a claim for breach of contract accrues, and the limitations period on that claims starts running, when the contract is breached, regardless of whether the victim of the breach knows of the breach or has any way of knowing that the breach will injure them.   

Upcoming Posts 

In the next bank insolvency post we'll talk about:

• How the Federal Deposit Insurance Act postpones when a claim accrues
• How that postponement allows the FDIC to extend the limitations period on the claims of failed banks that the FDIC takes over as the failed bank's receiver 

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I now often hear sentiments of discontent and alienation.  You may not agree. But I haven't yet heard anyone express it as colorfully as Jonathan Swift almost 300 years ago:

By this means the wealth of a nation, that used to be reckoned by the value of land, is now computed by the rise and fall of stocks: and although the foundation of credit be still the same, and upon a bottom that can never be shaken, and although all interest be duly paid by the public, yet, through the contrivance and cunning of stock-jobbers, there has been brought in such a complication of knavery and cozenage, such a mystery of iniquity, and such an unintelligible jargon of terms to involve it in, as were never known in any other age or country in the world.

                                                                          -- Jonathan Swift
                                                                             The Examiner
                                                                             No. XIII, Thursday, November 2, 1710

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In the last post on bank insolvency we talked about how the Federal Deposit Insurance Corporation (the "FDIC") sets the priorities for paying out claims against failed banks how the bank's creditors can set their allowed claims off against the FDIC's pursuit of loan repayment. 

Today we're going to take a break from how the FDIC repudiates contracts and claims for repudiation damages.  We're going to focus on another one of the FDIC's extraordinary powers - imposing a stay on proceedings (i.e., court cases) the failed bank is involved in.  The FDIC gets this power under Section 11(d)(12) of the Federal Deposit Insurance Act.

Mandatory Stay of Proceedings

After the FDIC is appointed as receiver or conservator of a failed bank, they may request a stay in any judicial action, or proceeding, that the bank is a party to, or becomes a party to.  The stay may last 90 days if the FDIC is appointed as receiver, and 45 days if they're appointed as conservator.

According to at least one judicial decision, Praxis Properties, Inc. v. Colonial Savings Bank S.L.A, the judge hearing the case must grant the stay.  It's mandatory.  They don't have any basis or discretion to deny the stay, regardless of how compelling the reasons for making an exception.  And the stay applies to all parties in the proceeding, not just the bank and the parties adverse to the bank.

Duration of the Stay

But according to the Praxis case, the stay doesn't last for that long.  The 90 (or 45) days begins on the day the FDIC gets appointed as receiver (or conservator) for the failed bank, not when the FDIC asks the judge to stay the case or when the judge grants that request.  So if the FDIC waits until the Appointment Date plus 80 days to ask for a stay, the stay only lasts for ten more days.

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In the last bank insolvency post we talked about limits on claims against the estate of a failed bank after the Federal Deposit Insurance Corporation (the "FDIC") takes over as the bank's receiver.  Today we're going to talk about:

• The priority of which claims the FDIC pays in what order from the assets of the failed bank's estate
   
• What's likely to be left in the estate when the FDIC gets around to paying your repudiation damage claims
   
• What claims you can set-off against the FDIC when they come after you, as a former borrower with a principal and interest balance still outstanding on your loan

Claim Allowance and Payment

We've already talked some about how the FDIC denies claims in the last post.  Once they allow a claim, the FDIC issues the claim holder a Certificate of Award, sometimes called a Receiver's Certificate, in the amount of their allowed claim.  Payment on a claim, or part of a claim, is called a Dividend.  Sometimes the FDIC will pay an advance Dividend if they expect a good recovery of money into the receivership estate.  But, generally, because of the priorities we'll talk about below, the FDIC doesn't pay much in the way of Dividends. 

 

Claim Priority

Assume for the moment that despite the strict limits on your claims for damages after the FDIC repudiates your loan - regardless of whether it's a construction loan, a revolving line of credit, or some other type of loan - the FDIC ultimately allows a pretty substantial claim against the failed bank's receivership estate.  You're not out of the woods or into the money quite yet.  You're probably a long way from there.  You see even though the FDIC has allowed your repudiation damages claim, whether you see any cash depends on:

• The priority of your claim (i.e., of all the people the failed bank owes money to, how far back are you in the queue of those asking for payment), and

• Whether there is any money left when you get to the head of the queue?

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