When a bank fails and the FDIC repudiates a construction loan—ending further “draws” or disbursements—the borrowers can’t setoff damages they suffer because of repudiation to reduce the amount of debt they owe under the loan. That’s what a panel of judges from the US Court of Appeals for the 11th Circuit decided in Placida v. FDIC.
Placida v. FDIC Backstory
This case starts with a construction loan from Freedom Bank to borrower, project owner, and developer Placida Professional Center, LLC. The loan documents comprise a promissory note, a construction loan agreement, a mortgage against the project, and personal guarantees from two of the borrower’s principals.
Freedom Bank fails while construction is still underway, and while one of the borrower’s monthly draw requests is still pending. Then—about a week after appointment as Freedom Bank’s receiver—the FDIC repudiates the construction loan under 12 USC § 1821(e). The result: as Freedom Bank’s successor, the receiver will not fund any more draws, including the one that was pending on the Appointment Date. With the flow of monthly construction loan disbursements cut off, the project soon grinds to a halt as unpaid builders and suppliers stop providing work and material and start recording mechanics lien claims against the project.
The borrower files administrative claims with the receiver for:
- Damages caused by loan repudiation, and
- A declaratory judgment, declaring that the note, the mortgage, and each guarantee is “of no further force or effect”
The receiver denies the borrower’s administrative claims and sends the borrower a notice of denial. That notice explains how the borrower may seek judicial review of the claim denial: file a lawsuit in federal court. And the notice also identifies the borrower’s deadline for filing that lawsuit.
The borrower files that lawsuit in the Middle District of Florida. About three months later, the receiver sells the loan to a joint venture limited liability company composed—60/40—of the FDIC and a private investor. Then the case goes to trial before Judge James S. Moody, Jr.
At trial, Judge Moody:
- Dismisses the borrower’s declaratory judgment claim. He holds that 12 USC § 1821(j)—prohibiting courts from restraining or affecting the receiver’s powers or functions—denies subject matter jurisdiction to his district court to hear this case and review the receiver’s denial of the borrower’s declaratory judgment claim
- Finds that repudiation of the construction loan caused the borrower to suffer $960,000 in damages
- Holds that the borrower may set those repudiation damages off against the debt the borrower still owes under the repudiated construction loan, regardless of who now holds the loan—the receiver or the purchasing joint venture
- Finds that the borrower is also entitled to $193,175 in attorneys fees under a combination of attorneys fee clauses in the note and mortgage and § 57.105(7), Florida Statutes
Both discontent, the borrower and the receiver each appeal to the 11th Circuit.
Subject Matter Jurisdiction Under 12 USC § 1821(d)(6)
The first issue on appeal: whether the United States District Court has subject matter jurisdiction to review the receiver’s denying the declaratory judgement (that after the receiver repudiating the loan documents, they are no longer enforceable). The answer starts with 12 USC § 1821(d)(13)(D), where Congress divests all courts of jurisdiction to hear claims against failed banks and failed bank receivers until after the claimant has both: (a) filed administrative claims with the receiver and (b) exhausted the receiver’s administrative claim process. Here, the borrower did both before filing their complaint.
The receiver counters, arguing that even if the borrower satisfies the administrative claim exhaustion requirement, 12 USC § 1821(j) still prohibits the district court from hearing the case. Generally, § 1821(j) prohibits any court from restraining, or affecting, a failed bank receiver’s powers or functions. Here, the receiver contends that Judge Moody reviewing denial of the borrower’s declaratory judgment claim would affect and restrain the receiver’s powers and functions, violating § 1821(j).
But the judges hearing this appeal disagree. They observe that although § 1821(j) generally stops courts from affecting or restraining the receiver, § 1821(j) also has an exception to that general rule. And within that exception is 12 USC § 1821(d)(6). Section 1821(d)(6) specifically allows courts to judicially review a failed bank receiver’s denial of administrative claims, after the claimant exhausts the administrative claims process.
Here, the borrower filed administrative claims with the receiver, exhausted the administrative claims process, and emerged with their declaratory judgment claim denied. By doing that, the appellate judges hold the borrower paid the price of admission to judicial review and—under § 1821(d)(6)—Judge Moody has subject matter jurisdiction to hear the case and review that denial. The judges emphasize that not only would denying jurisdiction defy § 1821(j)’s statutory exception for post-exhaustion judicial review of administrative claim denials, denying jurisdiction is also constitutionally suspect (raising concern about denying the borrower due process of law under the Fifth Amendment). So, the appellate judges remand review of declaratory judgment denial back to Judge Moody to consider on the merits.
No Repudiation Damages Setoff
Next, the appellate judges hold that the borrower cannot set their repudiation damages off against debt owed under the now-repudiated construction loan. They observe that:
- The borrower’s repudiation damages claims qualify as general unsecured claims against Freedom Bank’s receivership estate. Under 12 USC § 1821(d)(11)—setting the priority hierarchy for paying the estate’s creditors—general unsecured claims enjoy the junior-most priority (entitled to only a pro rata share of the estate’s assets remaining for distribution after allowed claims of other creditors in more senior classes are paid in full)
- Allowing the borrower to set their repudiation damages off—dollar-for-dollar—against debt owed under the repudiated construction loan would promote the borrower’s repudiation damages claim above the general unsecured class, defying the priority hierarchy that Congress set in § 1821(d)(11)
Unable to allow promotion that defies the priorities Congress set, the appellate judges reverse, holding that the borrower cannot setoff repudiation damages they suffered off against the debt they still owe under the construction loan.
Receivership Certificates for Repudiation Damages
While the borrower can’t setoff repudiation damages against debt owed under the loan, the receiver must still pay repudiation damages. The appellate judges note that the receiver may decide how to pay those damages. The receiver may pay in cash, or in receivership certificates (representing an allowed claim for a proportionate share along with other allowed claims against money available, if any, for distribution to the receivership estate’s general unsecured creditors). The receiver decides how they want to pay.
Attorney’s Fee Award
The appellate judges also reverse the borrower’s attorney’s fee and cost award. The note and mortgage each have an attorneys fee clause that allows the lender to recover attorneys fees and costs in cases to collect under either of those loan documents. The judges acknowledge that § 57.105(7), Florida Statutes, makes those clauses reciprocal—if a lender is entitled to attorneys fees and costs for collecting under those loan documents, then a borrower who successfully resists collection is entitled to their attorneys fees and costs too. But in this case, the receiver doesn’t seek to collect under either loan document, and the borrower doesn’t oppose collection. So, the appellate judges hold that the attorneys fee clauses in the loan documents don’t apply, and reverse the borrower’s fee and cost award.
Observations and Lessons
- If you want a court to hear your claim against a failed bank or that bank’s receiver, you must first file an administrative claim with the FDIC, exhaust that claims process, and timely file a lawsuit in the right United States District Court. (Though § 1821(d)(13)(D) defers when subject matter jurisdiction vests in the district courts, § 1821(j) does not deny it completely.)
- You cannot set your repudiation damages off against debt you owe under a loan from a failed bank
- The FDIC decides how to pay your allowed repudiation damages claim. Whether it’s cash now, or receivership certificates (that you may later be able to redeem for cash later), is up to the FDIC
- An attorneys fee clause in your loan documents—or other contracts for that matter—doesn’t ensure that you’re entitled to recover your fess and costs, even if you’re the “prevailing” litigant. That also depends on the particular language of the fee clause, the claims and defenses in your case, and the—usually state—law that governs