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

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In the last bank insolvency post I mentioned that not only can the Federal Deposit Insurance Corporation (the "FDIC") extend statutes of limitation, they can even revive some claims after the limitations period has already expired.  "You've got to be kidding me!!" you say.  I kid you not.

Under Section 11(d)(14)(C) of the Federal Deposit Insurance Act (the "FDI Act"), once the FDIC is appointed as receiver for the failed bank, the FDIC can revive the claims by the bank even if the statute of limitations on those claims already expired before the Appointment Date.  In L-3 Communications v. Clevenger, one judge suggests that Section 11(d)(14)(C), represents Congress's unambiguous intent to preempt state statutes of limitation and allow the FDIC to revive certain claims even after the limitations period has already expired.   

But Congress qualified and limited the FDIC's ability to revive claims too. It's not open season on statutes of limitation.

First Limitation: Limited Kinds of Claims

The FDIC can only revive claims arising from:

• Fraud
  
• Intentional misconduct resulting in unjust enrichment
• Intentional misconduct resulting in substantial loss to the bank
  

The judges in at least one decision, FDIC v. Henderson, re-affirmed that these limits mean what they say.  They don't include claims like breach of contract and negligence, the kind of claims most often found in construction disputes. 

Limitation 2: Resurrect Within A Limited Time

The FDIC can reach back in time and resurrect dead claims.  But they can't reach back too far.  The limitations period must have expired within 5 years before the Appointment Date. If the limitations period expired more than 5 years before the Appointment Date, the FDIC can't resurrect it.  The body of the claim can be dead, but it can't be completely cold.

Practical Application

After the Appointment Date, the FDIC can reach back and resurrect dead claims as long as they're the right kinds of claims and they haven't been dead for too long.  But fraud and the kinds of intentional misconduct don't really happen that often in construction disputes on a large enough scale regardless of what hostile litigants like to believe against each other.  Moreover, claims like fraud are especially hard to allege and prove in court.

One scenario that comes to mind is where a contractor over-states costs working on a "cost-plus" priced contract.  The original owner loses the project when their bank forecloses and succeeds to the original owner's rights to the project and under the construction contract.  The bank discovers the fraud and prepares to sue the contractor.  But bank personnel lose track of the fraud claim and the limitations period expires before they can re-focus and file a complaint.  The contractor's "off the hook".   Or so they think. 

But in fewer than 2 years after the limitations period expires, the banks fails and the FDIC takes over as receiver.  One of the receivership personnel discovers some memos in the bank's records about the potential fraud claims.  Seizing the potential to garner more money for the receivership estate (possibly big money from punitive damages that a fraud claim can fetch), the FDIC decides to sue the contractor and use Section 11(d)(14)(C) as a riposte to what they expect will be the contractor's statute for limitations defense.

Upcoming Posts

In upcoming bank insolvency posts we'll talk about how the FDIC isn't obliged to honor informal deals - like maturity extensions and payment suspensions - that borrowers make with their banks before the bank fails and how that can really hurt a borrower after the Appointment Date.