FDIC Statute of Limitations Extension Example #1
In the last bank insolvency post I promised to give you some hypothetical examples of how the Federal Deposit Insurance Corporation's (the "FDIC") power to extend statutes of limitation works. Here's the first. The second comes tomorrow.Example #1 - FDIC vs. Prime Contractor
Imagine a prime contractor working on an office building project in my hometown - Chicago. They have a prime construction contract with the owner (from here on in I call this owner the "original owner" because there's going to later owners that come along later).
The original owner gets a loan from a bank to pay for part of the construction. As security for repayment of the loan, the bank takes (1) a mortgage against the building, (2) a collateral assignment of the tenants' rents, and, most importantly for us, (3) a collateral assignment of the original owner's rights under the prime construction contract, including the warranties.
During construction some of the curtain wall subcontractor's workers don't comply with all of the manufacturer's instructions for installing parts of the curtain wall panels. This creates gaps in the joints between some of the curtain wall panels allowing water and air to seep into the interior of the building.
A couple of months after the prime contractor substantially completes the project, some tenants complain to the original owner about water and drafts coming into their premises. Based on the tenant's complaints and the reports of consultants that the original owner hired, the original owner discovers that the gaps in the curtain wall joints are the likely source of the problem. The day the original owner discovers that is the original LP Start Date.
So
the original owner asks the prime contractor to come back and correct
the curtain wall gaps. The prime contractor, along with the curtain
wall subcontractor, comes back to fix the gaps. They correct some,
but not all.Meanwhile, the original owner has serious financial problems. The bank threatens to foreclose, but ultimately the they accept the original owner's deed-in-lieu of foreclosure and become the new owner of the project. The bank also invokes its collateral assignment of the prime contract so they now hold the prime contractor's warranties.
But the bank has little time to focus on dealing with the curtain wall problem. They have their own financial problems. Repairing the curtain wall goes to the back burner for another 2 years.
Then, a little more than 3 years after the LP Start Date, the bank fails and the FDIC is appointed as the bank's receiver. In the confusion while the FDIC wades through the paper and marshals the bank's assets, the curtain wall problem gets overlooked for another year. The FDIC asks the prime contractor to repair the curtain wall gaps, but the prime contractor says it's been too long; they refuse. Finally, more than 4 years after the original LP Start Date, the FDIC sues the prime contractor alleging claims for breach of warranty and the tort of negligence. What damages do they ask for? For starters, the cost to repair the gaps in the curtain wall and the interior.
Re-Setting When the Limitations Period Starts Running
The Illinois limitations period on construction defects is 4 years that start on the original LP Start Date. Noticing that the FDIC filed their complaint after this deadline expired, the prime contractor's lawyer asks the judge to dismiss the FDIC's lawsuit.
But the FDIC's lawyer mentions Section 11(d)(14) of the Federal Deposit Insurance Act (the "FDI Act") to the judge. And after reviewing Section 11(d)(14), the judge decides that the limitations periods on the FDIC's claims haven't expired. They were close to expiring when the FDIC got appointed as the failed bank's receiver. But, under Section 11(d)(14),
the start of the 4 year limitations periods got postponed and re-set. Before the FDIC became the bank's receiver the limitations periods started on the original LP Start Date (when the original owner first discovered that the curtain wall gaps were causing problems) and lasted for 4 years. But, when the FDIC got appointed as the bank's receiver, Section 11(d)(14) moved the start of the limitations periods (a) from the original LP Start Date to (b) the Appointment Date - a movement of more than 3 years after the original LP Start Date. So the FDIC's deadline for filing their lawsuit became 4 years after the Appointment Date. The FDIC filed their complaint well before that deadline.
Extending the Limitations Period
The judge also notices that Section 11(d)(14) not only moves the date when the limitations periods start to run, it also extend the limitations period on the FDIC's breach of warranty claims too. Under Section 11(d)(14), expiration of the limitations period on the FDIC's breach of warranty claim (a kind of sub-category of a breach of contract claim) is extended to 6 years after the Appointment Date. Based on the timeline above and extension of the limitations period to 6 years, the FDIC filed their lawsuit before the limitations period expired regardless of whether the limitations period started (a) back at the original LP Start Date or (b) at the Appointment Date.
Note that Section 11(d)(14) doesn't extend the length of the limitations period on the FDIC's negligence claim. Under Section 11(d)(14), the limitations period on the FDIC's tort claims (including negligence) is the longer of:
- 3 years after the
Appointment Date, or
- The number of years allowed under the Illinois statute of limitations - 4 years - after the Appointment Date
- For breach of warranty - within 6 years after both (a) the original LP Start Date and (b) the Appointment Date
- For negligence - within 4 years after the Appointment Date
In the next bank insolvency post I'll give you the second example. In that one the FDIC extends the limitations period on claims against a surety under a performance bond.
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
