FDIC Stay of Litigation Powers
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.
Practical Example
How could this affect you? Imagine you're a contractor or an architect with unpaid fees. You record a mechanics lien against the project to secure your claim. You're not the only one who's not paid; the owner defaults under their construction loan too.
Then
you sue to foreclose your mechanics lien. The owner's bank sues to
foreclose their mortgage. And you and the bank cross-sue each other.
You claim your mechanics lien is senior to the bank's mortgage, and the
bank claims their mortgage is senior to your mechanics lien. This is
going to go on for a while. Then the bank fails and the FDIC get appointed as their receiver. Not long after that the FDIC gets substituted for the bank in the foreclosure case and they file a motion asking the judge to stay the case. The judge, reading the Praxis case or one like it, grants that motion and imposes the stay of about 90 days. Maybe this happens at an early stage of the case while you're still exchanging documents. But maybe it happens on the eve of the clerk of the court's foreclosure sale!
It can take a long time to foreclose a mechanics lien and see some cash. If a failed bank's involved, it might take up to 90 days longer.
Upcoming Posts
In upcoming posts we're going to talk about more of the FDIC's extraordinary powers. Specifically how the FDIC can:
- Extend statutes of limitation
- Revive claims after the statute of limitations on them has already expired
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
