FDIC Claim Priority, Payments, and Setoffs: Who Gets Paid First After A Bank Fails
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
.jpg)
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?
Under the 1993 National Depositor Preference Amendment to the Federal Deposit Insurance Act found in Section 11(d)(11) of the Federal Deposit Insurance Act, the FDIC pays out allowed claims in the following order. Everyone in each claim group must get paid in full before anyone in the next group down gets paid.
- 1st Administrative Expenses - These are the FDIC's expenses as receiver for the failed bank, payment of professionals who operate work for the bank after appointment (e.g., lawyers, accountants, consultants).
- 2nd Depositor Claims - These are deposits at the bank when the FDIC gets appointed as receiver. The biggest claim holder here is usually the FDIC because they pay depositors' deposit insurance claims, up to the deposit insurance limit, very quickly; usually long before all of the failed bank's assets are marshaled and liquidated. So the FDIC steps into the shoes of the depositors' claims against the estate to the extent the FDIC has paid-off depositors. Lawyers call this subrogation. The FDIC pays the depositor in full up to the deposit insurance limit. In exchange, the FDIC gets the depositor's claim against the failed bank's estate. Then the FDIC gets the depositor's claim against the failed bank's estate. The first money that comes into the estate - principal and interest from loans to borrowers - goes to pay off those claims. This depositor group also includes claims for the parts of deposits that exceed the FDIC insurance. The individuals and organizations still hold these claims and wait stand-by for dividends on them.
- 3rd Other Senior and General Claims - These are the many and diverse other claims against the estate of the failed bank. They include things like your claim for contract repudiation damages. The amount of any money left to pay these claims is usually modest.
- 4th Subordinated Obligations - There's usually no money left to pay these claims.
- 5th Bank Shareholder Claims - There's usually no money left to pay these claims either.
.jpg)
There's usually hardly anything left when after paying the FDIC's administrative expenses and the depositors. That leaves a lot of people who're still hungry without much left on the bank's carcass. You may see some Dividend on a portion of your allowed repudiation claim. And I may finally see the Chicago Cubs win a Word Series in my lifetime too.
Claim Setoff
Well if I'm not going to see any cash, why bother with a claim you may ask. Good question. As I've mentioned before and will talk about more in future posts, the FDIC or someone they sell your loan to, is going to want you to pay them back the principal you already borrowed and interest on that principal. According to at least two judicial decisions, FDIC v. Craft and FDIC v. Parkway Executive Office Center, you can set-off your allowed repudiation damages claim against the FDIC's loan repayment claims against you. If you had uninsured deposits at the bank (i.e., deposits that exceed the FDIC insurance limits), you can set them off too. Sure, a set-off isn't cash in your hand, but still beats a sharp stick in your eye.
Traditionally, set-off is only allowed between the original debtor and original creditor. You may be able to set repudiation damage claims off against loan debt when the FDIC holds the loan, but odds are you won't be able to setoff the same way against a purchaser who buys the loan from the FDIC .
Upcoming Posts
In upcoming posts we'll talk about some of the FDIC's other extraordinary powers. Specifically, their powers to (1) impose a stay on litigation involving the failed bank and (2) extend and even revive, the statutes of limitations on the failed bank's claims against you and others.
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
