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. Continue Reading
A panel of Illinois Appellate Court justices recently reminded contractors: if you want to get paid, comply with your contract. That reminder—along with some other interesting things to remember—comes in this decision: Kasinecz v. Duffy (PDF).
Kasinecz v. Duffy Backstory
Kasinecz v. Duffy starts as an owner and prime contractor contract to renovate a building. Their contract says that interim—monthly—payments are due from owner to contractor “upon invoicing.”
As often happens, as the renovation work progresses, things start to go badly, fostering suspicion, polarizing owner from contractor, and vice-versa. A principal polarizing force: the owner’s response to contractor payment requests—the owner stops paying. The owner contends that the contractor hasn’t submitted invoices as the contract requires, and so the owner isn’t obliged to to pay. Payments stop. The contractor gathers-up tools, equipment, and material, then abandons the work still in progress.
Departed and still unpaid, the Contractor sues the owner:
At a bench trial, Judge Bonnie Wheaton hears evidence and decides for the owner. She finds the contractor breached the contract first, by insisting on payment but not submitting the contractually mandated invoices. The contractor appeals. Continue Reading
This afternoon, the Illinois House voted to pass (PDF) HB3636, a bill to amend the Illinois Mechanics Lien Act and overturn the Illinois Supreme Court’s Cypress Creek v. LaSalle Bank (PDF) on the priority of construction mortgages vs. mechanics liens.
Already passed by the Illinois Senate, this bill now goes to Governor Quinn for him to consider—the last stop before it can become law.
Want more on what HB3636 does, why, and how it might affect you? Navigate to this video and press play.
Jurors awarded this $169M verdict (PDF) against three former IndyMac Bank executives for originating dubious construction and development loans. It happened last Friday in Los Angeles at the US District Court for the Central District of California.
$169M Verdict Against Former Indyac Bank Executives
In their original complaint (PDF), the FDIC alleged:
- That the former bank executives were too permissive in underwriting and originating a host of development and construction loans
- Their permissiveness was negligent
- And their permissiveness breached the fiduciary duty of care each executive owed to the bank before it failed
The jurors agreed with the FDIC on the 21 loans that went to trial. The result: a verdict for the FDIC on every count—and, in one combination or another, against each former executive respectively—totaling about $169M in damages.
The US Supreme Court just issued another decision reaffirming that the Federal Arbitration Act compels state—as well as federal—courts to recognize and enforce contractual arbitration provisions, even when the focus of the litigants’ dispute is violation of state law. The decision: Nitro-Lift v. Eddie Lee.
Do you get a headache trying to navigate through the Illinois Supreme Court’s Cypress Creek decision on mechanic lien vs. mortgage priority and Illinois House Bill 3636 to seeking to overturn that decision? Here’s relief.
The Illinois House Judiciary Committee held hearings on House Bill 3636 yesterday in Chicago. At hearings last spring the committee asked stakeholders and witnesses to return later and explain—simply—what the Cypress Creek decision does, what House Bill 3636 proposes to change, and the effect those changes would have. And because it’s impossible to simply explain using only words, the Illinois Bankers Association produced and presented this video at yesterday’s hearing…..
Personal disclaimer: I worked on production of this video and presented in testimony before the committee yesterday.
In Episode 1 of Fraud Claim Killer we talked about how the contractual non-reliance clause just became a lot more potent in the Schrager v. Bailey (PDF) decision. And at the end I promised to fill you in on:
- Limits on non-reliance clauses
- When judges are reluctant to enforce them
- What makes them reluctant
- Tips to make your non-reliance clause useful and enforceable
Non-Reliance clauses: language in a contract where one (or more) of the parties affirms that in making their decision to enter into the contract, they’re relying exclusively on what’s written on the paper in the contract, and nothing else. Why have them? To cut off claims. Particularly the kind that involve a lot of “he said, she said” About what one side said they’d do, or wouldn’t do, but what they’re alleged to have said didn’t make it into the contract. It’s a situation that comes up most often in misrepresentation claims.
Judges have long enforced non-reliance clauses to nip misrepresentations claims in the bud and early in a case. But that’s usually been in securities fraud cases. Recently though, a panel of Illinois Appellate Court judges expanded non-reliance clause enforcement far beyond securities cases, in a way that suggests they’ll be just as potent in contracts used in the design and construction industries. The decision: Schrager v. Bailey (PDF), where the judges applied a non-reliance clause to summarily dismiss misrepresentation claims in a legal malpractice case.
The recent trouble surrounding banks in Greece got NPR’s Planet Money team to produce piece on how to stop a bank run. There’s 3 traditional tools. To learn about them we have to go back to the bank failures in the Great Depression and before. The story starts at this laundromat, once the Bronx branch of the Bank of the United States, site of a 1930 bank and continues in this podcast…….
A federal court in Milwaukee recently decided that the subsidiary of a failed bank, not the receiver for the failed bank itself, may also use the D’Oench, Duhme doctrine and 12 USC § 1823(e) to stop claims by a borrower and developer fostered by a construction loan that went very badly. The decision: SJ Properties Suites v. Specialty Finance Group, LLC (PDF).
Backstory: SJ Properties Suites v. Specialty Finance Group, LLC
Silverton Bank in Atlanta, Georgia had a wholly owned subsidiary called Specialty Finance Group, LLC (the “Lender”). The Lender focused on acquisition, development, and construction lending to hotel and other hospitality developers. One borrower was SJ Properties Suites for a project in Milwaukee, Wisconsin.