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

Repudiation is a Breach of Contract

The borrowers sued for breach of contract, alleging that post-repudiation failure to fund future disbursement is a breach of contract.  As we've talked about before, repudiation is a breach of contract.  But breach by repudiation is an exceptional kind of breach: Section 11(e) of the Federal Deposit Insurance Act of 1950 (the "FDI Act") limits damages to those that are actual, direct, and compensatory.  That's often much less than the counterparty on the receiving end of a repudiation would be entitled to if the breach were not by repudiation and were it not the FDIC, acting as the failed bank's receiver, doing the repudiating.

Wrongful Repudiation or Repudiation Damages

In the complaint the borrowers and guarantors don't sue for "wrongful repudiation."  The caption to the complaint's third claim says "Wrongful Repudiation of Loans."  But when you read further down, the borrowers don't reproach the FDIC, or anyone else, for "wrongfully repudiating" their loan contracts.  Instead, they claim:

The FDIC failed and refused to compensate their actual, direct, and compensatory damages caused by repudiation of the loans

This lawsuit isn't really for wrongful repudiation.  The borrowers don't allege that their loans will not burden the receiver or that their repudiation won't promote the orderly administration of the receivership estate.  Their issue is not with the fact that the receiver repudiated their loans, it's with the amount of their allowed claims in the wake of repudiation. 

So if you're waiting for an answer to the question of whether you can sue the FDIC for wrongful repudiation, you're going to have to keep waiting.  I guess the answer is yes.  You can sue anyone for anything.  The question really is can you sue successfully and will the damages you get satisfy your expectations going in.  You're going to have to keep waiting for that answer.   

Debt Forgiveness

One other important thing: in the complaint the borrowers also ask the judge to discharge their debt to the receiver or subsequent acquirer of their loans. They don't want the just the remote odds of payment on a junior  priority claim against the failed bank's receivership estate.  They want more than just setting their repudiation damage claims off against the receiver and any purchaser who buys their loans from the FDIC.  In response to repudiation of their loans and cutting-off post-Appointment Date funding, the borrowers want their debts forgiven. 

The FDI Act doesn't provide for that. And granting that request could undermine the FDIC's role in stabilizing the banking system and maximizing recoveries for the Bank Insurance Fund.  We'll see what kind of legs that request has.    

Other Issues

Reading the complaint reveals some other issues:

• The borrowers sued the US government, not the FDIC.  Section 9(a) of the FDI Act confers on the FDIC the power to sue and be sued.  And the United States government enjoys sovereign immunity.  This could become a problem for the borrowers
   
• The borrowers sued in the Court of Claims.  Section 11(d)(6)(A)(ii) of the FDI Act says that people not satisfied with the outcome of the FDIC administrative claims process may sue in:
  
  
  • The US District Court for the district the failed bank's principal place of business was located in (PDF-Map), or
     
  • The US District Court for the District of Columbia

This suggests that the Court of Claims may not be the right place for these borrowers to sue. This too could become a problem for them.