Hughes Hubbard attorneys Dennis Klein and Scott Christensen provided an overview of the regulatory and legal issues involved with the crisis in the banking industry during a Nov. 19, 2008 teleconference. Klein has been representing various federal banking agencies since 1987 and has worked on nearly every major bank failure over the past 20 years. Christensen has represented the FDIC in receivership litigation, is a member of the firm’s financial litigation task force, and has experience representing clients in complex business litigation. Klein and Christensen also are chairing live program in Washington, D.C. More info at http://litigationconferences.com/?p=829. In the meantime, here is an excerpt from the recorded session in which Klein discusses the FDIC’s so-called special powers.
“When the FDIC does get involved in litigation, aside from all the jurisdictional issues and the claims process . . . there are really four basic special powers they have.”
“The first is that they can enforce any existing contracts that have terminated as a result of the appointment of a receiver. It is not infrequent to have what they call ipso facto clauses in contracts whereby a default is the appointment of the FDIC as receiver and therefore an acceleration provision is triggered. That obviously causes problems for the FDIC because then the FDIC isn’t given an opportunity to determine whether or not it wants to be bound by the contract or not. What happened, as in FIRREA, there is a special provision in there that says that despite ipso facto clauses or any termination of a contract as a result of receiver, the FDIC has essentially the ability to ignore that provision and enforce the contract. That is 1821(e)(13)(A) for those of you who are following the statute.”
“The second power they have is they can do the opposite. Sometimes they can do both. They can repudiate a contract. Sometimes you have a contract which has an ipso facto clause; they decide they want to ignore it and they want to enforce the contract and then later they change their mind and they decide that they want to repudiate the contract. They have the power to repudiate the contract under 1821(e)(5). The question is, ‘How long do they have to repudiate the contract?’ The answer is, ‘A reasonable time.’ That is dependent on the contract and the circumstances. I think there are guidelines in there. Ninety days I think is pretty safe, but I’ve seen them farther out than that. At one point that was an issue in litigation. I don’t think it is anymore.”
“The third power is 1823(e) power. That is what the common law you might have heard about being referred to as the D’Oench Doctrine or the D’Oench Duhme Doctrine. What that basically says is that the FDIC is basically only bound by agreements that are in writing and the books and records of the banks. It prevents secret agreements from being enforced against the FDIC. I am really simplifying this because there are a lot of cases in connection with this. People have held seminars on the 1823(e) power and what falls under it and what doesn’t.”
“Essentially it is the scenario to deal with the situation where Joe goes to the bank and he borrows $5,000 and the bank documents that he executes say that he has to pay this $5,000 back over five years at a 10 percent interest rate. But Joe is a good friend with the loan officer and the loan officer says, ‘Look, just execute the documents and you really don’t need to pay this off. We are just giving you the money,’ or, ‘You can pay this off over 20 years even though it says 10 years.’”
“Then what happens is the bank fails and then the FDIC comes in and it sues Joe because he is not paying onto the loan. Joe comes in and says, ‘I had an agreement with the loan officer that was separate from the document that said I didn’t have to pay the document according to its terms.’ In those situations the FDIC raises the 1823(e) power and Joe is out of luck. He has to pay according to the document.”
“The fourth power of the FDIC is 1821(j) and that is the anti-injunction provision which is really an extraordinarily useful power because if you want to sue the FDIC and stop the FDIC from doing something, you can’t do it. In fact, not only can you not do it because of 1821(j) which says no one can get an injunction against the FDIC, but you can sue the FDIC and then you have to go through the claims process and then you have to wait until the FDIC determines your claim.”
“If you want quick action, people thought they could circumvent the claims process by filing injunctions, but that doesn’t work. There is no injunction allowed against the FDIC. That gives the FDIC an incredible amount of leverage in connection with this. There is a lot of litigation in connection with the repudiation power.”
The teleconference was produced by HB Litigation Conferences LLC, formerly Mealey’s Conferences. To obtain a copy of the CD containing the audio and accompanying materials, write to email@example.com.